U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1997
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: 0-28268
USCS INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 94-1727009
- ---------------------------------- ---------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification)
2969 PROSPECT PARK DRIVE,
RANCHO CORDOVA, CALIFORNIA 95670-6148
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (916) 636-4500
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(Former name, former address and former fiscal year, if changed since
last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1997
----------------------------- -------------------------------
Common Stock, $.05 par value 23,165,793 shares
USCS INTERNATIONAL, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
PAGE NO.
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Part I. Financial Information
Item 1. Financial Statements 3
Consolidated Condensed Balance Sheets
September 30, 1997 (Unaudited) and December 31, 1996 4
Consolidated Condensed Statements of Operations (Unaudited)
Three months and Nine months ended September 30, 1997 and 1996 5
Consolidated Condensed Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1997 and 1996 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition, Results of Operations, and Certain Factors
That May Affect Future Results. 8-15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
2
USCS INTERNATIONAL, INC.
PART I- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The following consolidated condensed financial statements, except for the
balance sheet as of December 31, 1996, have been prepared by USCS
International, Inc. (the Company) without audit by independent public
accountants, but in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC) and, in the opinion of the Company,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of results for each period shown. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. The Company believes that the disclosures made are adequate to
make the information presented not misleading. These financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Registration Statement on Form S-1 (Registration
No. 333-3842) declared effective by the SEC on June 20, 1996 and the
Company's Annual Report to Stockholders and the Company's Annual Report on
Form 10-K for the year ended December 31, 1996. The results of operations for
the quarter and nine months ended September 30, 1997 are not necessarily
indicative of the results to be expected for the entire year ending December
31, 1997.
3
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share and per share amounts)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 8,815 $ 8,452
Accounts receivable 80,311 73,458
Current portion of net investment in leases 4,585 4,922
Paper products and other inventory 4,033 4,418
Other 6,570 8,972
------------- ------------
Total current assets 104,314 100,222
Property and equipment, net 96,706 94,350
Net investment in leases, net of
current portion 3,281 6,252
Other 9,683 4,735
------------- ------------
Total assets $ 213,984 $ 205,559
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 48,525 $ 48,975
Current portion of long-term debt 3,992 4,772
Deferred revenue 1,660 9,434
------------- ------------
Total current liabilities 54,177 63,181
Long-term debt, net of current portion 2,079 5,647
Customer deposits 18,176 12,752
Other liabilities 8,627 8,646
------------- ------------
Total liabilities 83,059 90,226
------------- ------------
Stockholders' Equity:
Preferred Stock, $.05 par value,
10,000,000 shares authorized;
no shares issued and outstanding - -
Common Stock, $.05 par value,
Authorized 40,000,000 shares; Issued
and outstanding: 23,257,969 shares
at September 30, 1997 (unaudited) and
23,068,826 shares at December 31, 1996 1,172 1,153
Additional paid-in capital 56,221 53,902
Retained earnings 76,883 60,437
Treasury stock (3,157) -
Foreign currency translation adjustment (194) (159)
------------- ------------
Total stockholders' equity 130,925 115,333
------------- ------------
Total liabilities and stockholders' equity $ 213,984 $ 205,559
------------- ------------
------------- ------------
4
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three months ended Nine months ended
September 30, September 30,
------------------------- ---------------------------
1997 1996 1997 1996
---------- ---------- ----------- -----------
Revenue:
Software and services:
Customer management $ 39,646 $ 37,084 $ 115,080 $ 103,368
Bill processing 28,998 26,056 86,917 72,982
---------- ---------- ----------- -----------
Total 68,644 63,140 201,997 176,350
Equipment sales and services 4,479 6,217 14,794 16,834
---------- ---------- ----------- -----------
Total revenue 73,123 69,357 216,791 193,184
---------- ---------- ----------- -----------
Cost of revenue:
Software and services:
Customer management 17,759 18,601 53,670 55,352
Bill processing 20,923 19,294 62,847 54,129
---------- ---------- ----------- -----------
Total 38,682 37,895 116,517 109,481
Equipment sales and services 2,536 3,749 8,062 10,095
---------- ---------- ----------- -----------
Total cost of revenue 41,218 41,644 124,579 119,576
---------- ---------- ----------- -----------
Gross profit 31,905 27,713 92,212 73,608
---------- ---------- ----------- -----------
Operating expenses:
Research and development 7,323 6,768 22,054 18,301
Selling, general and
administrative 14,799 13,033 42,261 36,111
---------- ---------- ----------- -----------
Total operating expenses 22,122 19,801 64,315 54,412
---------- ---------- ----------- -----------
Operating income 9,783 7,912 27,897 19,196
Interest expense 109 757 464 3,106
---------- ---------- ----------- -----------
Income before income taxes 9,674 7,155 27,433 16,090
Income tax provision 3,883 2,827 10,987 6,356
---------- ---------- ----------- -----------
Net income $ 5,791 $ 4,328 $ 16,446 $ 9,734
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Earnings per share $ 0.24 $ 0.18 $ 0.68 $ 0.44
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Weighted average common
shares and equivalents 24,399 24,154 24,312 22,039
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
5
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine months ended
September 30,
------------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
Net cash provided by operating activities $ 31,564 $ 15,762
----------- -----------
Cash flows from investing activities:
Capital expenditures, net (23,988) (20,042)
Purchase of subsidiary (2,046) -
----------- -----------
Net cash used in investing activities (26,034) (20,042)
----------- -----------
Cash flows from financing activities:
Net paydown under revolving credit
agreement - (28,500)
Payments on long-term debt (4,348) (24,337)
Proceeds from issuance of common stock 2,338 54,286
Repurchase of common stock (3,157) (38)
----------- -----------
Net cash (used) provided by financing
activities (5,167) 1,411
----------- -----------
Net increase (decrease) in cash 363 (2,869)
Cash at January 1 8,452 6,627
----------- -----------
Cash at September 30 $ 8,815 $ 3,758
----------- -----------
----------- -----------
6
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Long-term Debt
The Company has a five-year unsecured revolving credit line,
expiring September 2001, with two banks in the amount of $50
million. Borrowings under the agreement bear interest at the
Company's choice of LIBOR (plus a margin ranging from .55% to
1.25%), the bank's base rate or a quoted rate. Under the borrowing
agreement, the Company is required to maintain certain financial
ratios and meet a net worth test.
2. Stockholders' Equity
In June 1996, the Company completed an initial public offering
(IPO) of its common stock. Upon the close of the IPO, the Company
effected certain stock splits and conversions of its Voting and
Non-Voting Common Stock. All share and per share data have been
restated to reflect the effect of the stock splits.
3. Treasury Stock
In August 1997, the Board of Directors authorized the repurchase of
the Company's common stock to be held as treasury stock with the
reservation of such treasury stock for, among other purposes,
issuance under various employee stock purchase and incentive stock
option plans. As of September 30, 1997, the Company had
repurchased 169,613 shares at an aggregate purchase price of
$3,157,000.
4. Income Tax
Income tax provisions for interim periods are based on estimated
effective annual income tax rates. The Company recognizes deferred
tax assets and liabilities for the expected future tax consequences
of temporary differences between tax bases and financial reporting
bases of assets and liabilities.
5. Earnings per Share
Earnings per share are based on the weighted average number of
shares outstanding and common stock equivalents during the
respective periods, including the assumed net shares issuable upon
exercise of stock options when dilutive. Common and common
equivalent shares issued during the twelve-month period prior to
the IPO are included in the calculations as if they were
outstanding for all periods presented.
Under the recently issued FAS 128, the pro forma basic and diluted
earnings per share, as defined by the statement, would be as
follows:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
Share amounts in (000's) 1997 1996 1997 1996
------------------------ --------- --------- --------- ---------
Basic earnings per share $ 0.25 $ 0.19 $ 0.71 $ 0.47
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding 23,291 22,957 23,180 20,537
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted earnings per share $ 0.24 $ 0.18 $ 0.68 $ 0.45
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares outstanding 24,398 23,966 24,279 21,578
--------- --------- --------- ---------
--------- --------- --------- ---------
7
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations, and Certain Factors that May Affect Future
Results
This Quarterly Report contains forward-looking statements that involve risks
and uncertainties. The statements that are not historical facts or
statements of current status are forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995 and are subject to risks and
uncertainties including, but not limited to, the risks and uncertainties set
forth under the caption "CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS."
The Company's future results may differ significantly from the results and
forward-looking statements discussed in this Report.
Founded in 1969, USCS is a leading global provider of customer care and
billing solutions to the communications industry and other service
industries. USCS operates in one segment with revenue derived primarily from
providing software and bill processing services to cable television and
multi-service providers and bill processing services to telecommunications
companies. Software and bill processing services for cable television and
multi-service providers are generally provided under bundled service
arrangements. Most of the Company's revenue is derived based on the number
of subscribers or end-users of the Company's clients, the number of billing
statements mailed and/or the number of images, generally one-page-side,
produced. Most of the Company's revenue is derived under long-term contracts
with terms ranging from three to seven years. Clients are billed monthly,
generally based on the number of end-users they serve. As a result, a
significant portion of the Company's revenue is recurring and increases as
the service provider's customer base grows. In addition, the Company sells
computer hardware and provides associated maintenance. Leasing is provided as
an alternative to equipment purchases for clients.
The Company provides software and services to North American and U.K. cable
television and multi-service providers primarily through a direct sales
force. Outside of North America and the U.K., the Company markets its
software and services primarily through strategic alliances with companies
specializing in system integration or computer hardware manufacturing that
are capable of providing local sales and support. Building and maintaining
relationships with its clients is an important part of the Company's strategy
because selling cycles can extend a year or longer. The Company has
committed increased resources to the international, multi-service and
telecommunications markets because it believes these represent opportunities
to grow at rates greater than in the U.S. cable television marketplace alone.
8
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
consolidated condensed statements of operations and the percentage of revenue
represented by each line item:
Three months ended Nine months ended
September 30, September 30,
------------------------------------------ ------------------------------------------
1997 1996 1997 1996
------------------- ------------------- ------------------- -------------------
(Dollars in thousands) (Dollars in thousands)
(Unaudited) (Unaudited)
Revenue:
Software and services:
Customer management $39,646 54.2% $37,084 53.5% $115,080 53.1% $103,368 53.5%
Bill processing 28,998 39.7 26,056 37.5 86,917 40.1 72,982 37.8
------- ----- ------- ----- -------- ----- -------- -----
Total 68,644 93.9 63,140 91.0 201,997 93.2 176,350 91.3
Equipment sales and services 4,479 6.1 6,217 9.0 14,794 6.8 16,834 8.7
------- ----- ------- ----- -------- ----- -------- -----
Total revenue 73,123 100.0 69,357 100.0 216,791 100.0 193,184 100.0
------- ----- ------- ----- -------- ----- -------- -----
Cost of revenue:
Software and services:
Customer management 17,759 24.3 18,601 26.8 53,670 24.8 55,352 28.7
Bill processing 20,923 28.6 19,294 27.8 62,847 29.0 54,129 28.0
------- ----- ------- ----- -------- ----- -------- -----
Total 38,682 52.9 37,895 54.6 116,517 53.8 109,481 56.7
Equipment sales and services 2,536 3.5 3,749 5.4 8,062 3.7 10,095 5.2
------- ----- ------- ----- -------- ----- -------- -----
Total cost of revenue 41,218 56.4 41,644 60.0 124,579 57.5 119,576 61.9
------- ----- ------- ----- -------- ----- -------- -----
Gross profit 31,905 43.6 27,713 40.0 92,212 42.5 73,608 38.1
------- ----- ------- ----- -------- ----- -------- -----
Operating expenses:
Research and development 7,323 10.0 6,768 9.8 22,054 10.2 18,301 9.5
Selling, general and administrative 14,799 20.3 13,033 18.8 42,261 19.4 36,111 18.7
------- ----- ------- ----- -------- ----- -------- -----
Total operating expenses 22,122 30.3 19,801 28.6 64,315 29.6 54,412 28.2
------- ----- ------- ----- -------- ----- -------- -----
Operating income 9,783 13.3 7,912 11.4 27,897 12.9 19,196 9.9
Interest expense 109 .1 757 1.1 464 .2 3,106 1.6
------- ----- ------- ----- -------- ----- -------- -----
Income before income taxes 9,674 13.2 7,155 10.3 27,433 12.7 16,090 8.3
Income tax provision 3,883 5.3 2,827 4.1 10,987 5.1 6,356 3.3
------- ----- ------- ----- -------- ----- -------- -----
Net income $ 5,791 7.9% $ 4,328 6.2% $ 16,446 7.6% $ 9,734 5.0%
------- ----- ------- ----- -------- ----- -------- -----
------- ----- ------- ----- -------- ----- -------- -----
9
Revenue. Total revenue increased by 5%, to $73.1 million in the third quarter
of 1997 from $69.4 million in the comparable quarter in 1996. Software and
services, which was 94% of total revenue in the third quarter of 1997 versus
91% in the third quarter of 1996, increased in the third quarter of 1997 by
9% over the prior year quarter. Customer management software and services
revenue, of which a significant majority comes from bundling software with
bill processing services, increased by 7% to $39.6 million in the third
quarter of 1997 from $37.1 million in the 1996 third quarter. Bill processing
services revenue provided primarily to telecommunications companies as a
stand-alone service increased by 11%, to $29 million in the third quarter of
1997 from $26.1 million in the comparable quarter of the prior year.
Equipment sales and services, as expected, declined to $4.5 million in the
third quarter of 1997 compared to $6.2 million in the same quarter of 1996.
As a percentage of revenue, equipment sales and services declined to 6% in
the third quarter of 1997 from 9% in the same quarter of 1996.
Total revenue increased by 12%, to $216.8 million for the nine months ended
September 30, 1997 from $193.2 million in the comparable period in 1996.
Software and services, which was 93% of total revenue for the nine months
ended September 30, 1997 versus 91% for the same period in 1996, increased by
15% in the first nine months of 1997 over the first nine months of 1996.
Customer management software and services revenue increased by 11%, to $115.1
million in the nine months ended September 30, 1997 from $103.4 million for
the same period in 1996. Bill processing services revenue increased by 19%,
to $86.9 million in the first nine months of 1997 from $73.0 million in the
comparable period of the prior year. Equipment sales and services declined to
$14.8 million in the first nine months of 1997 compared to $16.8 million for
the same period in 1996 and decreased to 7% of revenue in 1997 from 9% in the
comparable 1996 period.
During the third quarter, Tele-Communications Inc. ("TCI"), the Company's
largest customer, which accounted for approximately 17% and 18% of the
Company's total revenue in the third quarter and nine-month period ended
September 30, 1997, and 23% and 21% in the same periods in 1996,
respectively, informed the Company that it had entered into a long-term,
exclusive contract to replace the Company's customer management software and
services with those of a competitor. See New Products, Rapid Technological
Changes and Competition under CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
for additional discussion. Exclusive of TCI, total revenue was approximately
$60.7 million, customer management software and services revenue was $29.3
million, bill processing services revenue was $28.8 million and equipment
related revenue was $2.6 million in the third quarter of 1997, which
represent increases of 14%, 16%, 12% and 8% over the same quarter last year,
respectively. Comparable numbers for the nine-month period ended September
30, 1997 were $177.7 million, $82.4 million, $86.1 million and $9.2 million,
which represent increases of 16%, 13%, 20% and 5% over the comparable period
in 1996, respectively.
Growth in revenue in customer management software and services, for the third
quarter and nine months ended September 30, 1997 compared to the same periods
in 1996, came primarily from sales of additional services, increases in the
number of subscribers from the growth of existing clients and addition of new
clients primarily in international markets, and contractually based price
adjustments. The bill processing services revenue increase for the third
quarter and nine-month period ending September 30, 1997, compared to the same
periods in 1996, was attributable to increased statement production from the
addition of new customers, the internal growth of existing customers and from
the sale of additional services.
Cost of Revenue and Gross Profit. The Company's gross profit margin increased
to approximately 44% in the third quarter of 1997 from approximately 40% in
the comparable quarter in 1996. For the nine-month period ending September
30, 1997, the gross profit margin was 43%, compared to 38% for the same
period in 1996. Customer management software and services gross profit
margin increased to approximately 55% in the third quarter of 1997 from 50%
in the comparable quarter in 1996. For the nine-month period ending
September 30, 1997, the gross profit was approximately 53%, compared to 46%
for the same period in 1996. Bill processing services gross profit margin
approximated 28% in the third quarter of 1997, compared to 26% for the same
period in 1996. For the nine-month period ended September 30, 1997, the
gross profit margin approximated 28%, compared to 26% in the same period in
1996. Gross profit margins increased because of economies of scale
associated with overall higher subscriber counts, increased statement
processing volumes, operational efficiencies and increased revenue from
selling additional services. The gross profit margin on equipment-related
revenue increased to approximately 43% in the third quarter of 1997 from 40%
in the comparable quarter in 1996. For the nine-month period ending
September 30, 1997, the gross profit margin was 46%, compared to 40% in the
same period in 1996. The increase in margins is the result of the mix of
declining equipment sales and increasing higher-margin lease revenues.
10
Research and Development. Research and development expense in the third
quarter of 1997 was $7.3 million, an increase of $.5 million, or 7%, over the
comparable quarter in the prior year. For the nine-month period ended
September 30, 1997, research and development expense was $22.1 million,
compared to $18.3 million in the same period in 1996, an increase of 21%.
Research and development expense was 10% of total revenue in the third
quarter of 1997 and 1996, and 10% of total revenue in the first nine months
of 1997, compared to 9% in the first nine months of 1996. The added expense
was incurred for expanding features and functionality, primarily in customer
management software and services.
The Company has identified, assessed and remedied some known "Year 2000" date
issues and is continuing to identify, assess and evaluate the full scope of
this issue as it relates to its software products, infrastructure-related
hardware and software, and third-party products. While identification and
assessment is an ongoing process, the Company believes, based on current
known information, that it can effectively mitigate any "Year 2000" date
issues, dependant upon cooperation from third parties. The Company is
currently assessing the impact of this issue on the Company's financial
position and results of operations.
Selling, General and Administrative. Selling, general and administrative
expenses approximated 20% and 19% of total revenue for the quarter ended
September 30, 1997 and 1996, respectively, and approximated 19% for the
nine-month period ended September 30, 1997 and 1996. Selling, general and
administrative expenses in the third quarter of 1997 increased by
approximately 14% over the comparable quarter in the prior year, and for the
nine-month period ending September 30, 1997 increased by 17% over the same
period in 1996. Sales and marketing increased by 28% in the third quarter of
1997, compared to the first quarter of 1996, and by 25% in the first nine
months of 1997, compared to 1996. This increase is attributable to increased
sales and marketing activities in the domestic and international markets.
General and administrative expenses increased 5% in the third quarter of
1997, compared to the third quarter of 1996, and increased by 12% in the
first nine months of 1997, compared to the same period in 1996, but remained
constant as a percentage of revenue. This increase is attributed to greater
support for the increased sales and marketing activity and support required
for company growth.
Net Income. Net income in the third quarter of 1997 increased by
approximately 34%, to $5.8 million from $4.3 million in the comparable 1996
quarter, and in the nine-month period ended September 30, 1997, net income
increased by 69% to $16.4 million from $9.7 million in the comparable 1996
period. This increase is primarily because of the factors cited above and a
net reduction of interest expense of approximately $.6 million in the third
quarter and $2.6 million in the first nine months of 1997 due to the
retirement of debt primarily through IPO proceeds. Net income per share
increased 33% and 55% in the third quarter and first nine months of 1997,
respectively, versus the comparable periods in 1996. The increase in net
income per share in the third quarter and first nine months of 1997 resulted
from the Company's higher earnings, partially offset by an increase of 1% and
10%, respectively, in the number of shares used in the calculation of
earnings per share.
11
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of financing the Company's growth have been cash provided
by operations, borrowing from banks and financial institutions and the IPO
proceeds. The Company utilized the net proceeds from the IPO to reduce debt
under certain revolving credit agreements and, in combination with positive
cash flow from operations, to prepay insurance company loans in 1996. The
retirement of a majority of the Company's debt allowed the redirection of
cash used for debt service to operations and growth. Cash flow generated
from operations doubled from $15.8 million in the first nine months of 1996
to $31.6 million for the same period in 1997, primarily due to an increase in
earnings and non-cash expenses.
The Company collects from its clients and remits to the U.S. Postal Service a
substantial amount of postage. The majority of contracts allow the Company
to pre-bill and/or require deposits from its clients to mitigate the effect
on cash flow. As of September 30, 1997, 30% of the Company's accounts
receivable represented amounts due from clients for postage. Postage
collections and remittances are not included in the Company's statements of
operations.
At September 30, 1997, the Company had $8.8 million of cash, $80.3 million of
accounts receivable (including postage receivable of $ 23.9 million), $4.6
million of current net investment in leases, and $50.1 million of working
capital. At September 30, 1997, the Company had no borrowings under
unsecured bank credit arrangements with a total borrowing availability of $50
million. Of the $6.1 million of total debt outstanding at September 30, 1997,
$4 million is due over the following 12-month period. Of the total debt
outstanding, $5.2 million pertains to the Company's leasing subsidiary and is
collateralized, without recourse, by rents receivable, and $.9 million is for
bonds collateralized by real estate.
The Company continues to make significant investments in capital equipment
and research and development, as well as to expand into new domestic and
international markets. The Company believes that net cash from operations
and the Company's borrowing availability will be sufficient to support
operations through the next twelve months. The Company, from time to time,
may continue to repurchase shares of its common stock.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, changes in the cable
television market, the Company's ability to retain existing customers and
attract new customers, the Company's continuing ability to develop products
that are responsive to the evolving needs of its customers, increased
competition, changes in operating expenses, changes in government regulation
of the Company's clients and general economic factors.
Dependence on the Cable Television Market
The Company is highly dependent on the cable television market.
Approximately 60% of the Company's revenue was derived from sales to U.S. and
international cable television service providers in the third quarter and
first nine months of 1997 and 1996. The number of providers of cable
television service in the U.S. has been declining, resulting in a reduction
of the number of potential cable television clients in the U.S. As the
number of companies serving the available subscriber base decreases, the loss
of a single client could have a greater adverse impact on the Company than in
the past. Even if the number of clients remains the same, a decrease in the
number of subscribers served by the Company's cable television clients would
result in lower revenue for the Company. Furthermore, a decrease in the
number of cable subscribers or any adverse development in the cable
television market could have a material adverse effect on the financial
condition and results of operations of the Company. Also see "International
Business Activities."
12
Changing Communications Market
The communications market is characterized by rapid technological
developments, changes in client requirements, evolving industry standards and
frequent new product introductions. The Company's future success will depend,
in part, upon its ability to enhance its existing applications, develop and
introduce new products that take advantage of technological advances and
respond promptly to new client requirements and evolving industry standards.
The Company has expended considerable funds to develop products to serve the
changing communications market. If the communications market grows or
converges more slowly than anticipated or the Company's products and services
fail to achieve market acceptance, there could be a material adverse effect
on the financial condition and results of operations of the Company. Further,
the Company's development projects are subject to all of the risks associated
with the development of new software and other products based on innovative
technologies. The failure of such development projects could have a material
adverse effect on the financial condition and results of operations of the
Company.
Variability of Quarterly Operating Results
The Company's quarterly operating results may fluctuate from quarter to
quarter depending on various factors, including the impact of significant
start-up costs associated with initiating the delivery of contracted services
to new clients, the hiring of additional staff, new product development and
other expenses, introduction of new products by competitors, pricing
pressures, the evolving and unpredictable nature of the markets in which the
Company's products and services are sold and general economic conditions.
New Products, Rapid Technological Changes and Competition
The market for the Company's products and services is highly competitive, and
competition is increasing as additional market opportunities arise. The
Company believes its most significant competitors for customer management
software and services are independent providers of such software and services
and in-house systems.
Tele-Communications, Inc. ("TCI"), is the Company's largest customer and
represented approximately 17% and 18% of the Company's revenue in the third
quarter and nine-month period ended September 30, 1997, and 23% and 21% in
the same periods in 1996, respectively. More than two years ago, TCI
announced and began development of an in-house system to replace the
Company's customer management software. On August 11, 1997, TCI informed the
Company that it had agreed to sell its partially developed in-house system to
a competitor and was going to enter into an exclusive long-term contract for
customer management software with such competitor. Under the contract
between TCI and the Company, which expires on December 31, 1999, TCI may
remove subscribers after giving ninety days' notice without significant
economic penalty. Although TCI has not provided the Company with a
definitive schedule for conversion of the TCI subscribers to the competitor's
software, and no subscribers were converted in the third quarter of 1997, it
is believed that the competitor and TCI wish to complete the transfer by the
end of 1998. The Company intends to mitigate the impact of this by
aggressively pursuing other domestic and international opportunities and to
allocate the Company's resources to other existing or new customers. If
these efforts are not fully successful in mitigating the TCI loss, the
Company believes that it has sufficient financial resources and borrowing
ability to meet its obligations and fulfill its customer commitments during
and after the conversion period.
Another client, which accounted for approximately 5% of total revenue in the
third quarter of 1997, orally advised the Company more than a year ago that
it may move to an alternate solution for its customer management software
requirements. Through the third quarter of 1997, no transfers of this
customer's business to this alternate solution have been made.
In addition, competitive factors could influence or alter the Company's
overall revenue mix between customer management software, services, including
bill processing services, and equipment sales and leasing. Any of these
events could have a material adverse effect on the financial condition and
results of operations, including gross profit margins, of the Company.
13
Concentration of Client Base
Aggregate revenue from the Company's ten largest clients accounted for over
two-thirds of total revenue in the third quarter and nine-month period ending
September 30, 1997 and 1996. Loss of all or a significant part of the
business of any of these clients, or a decrease in their respective customer
bases, would have a material adverse effect on the financial condition and
results of operations of the Company. Three of the Company's clients
represented approximately 39% and 47% of total revenue in the third quarter
of 1997 and 1996, respectively, and approximately 41% and 46% in the
nine-month period ending September 30, 1997 and 1996, respectively.
Management of Growth
Management of the Company's growth may place a considerable strain on the
Company's management, operations and systems. The Company's ability to
execute its business strategy will depend in part upon its ability to manage
the demands of a growing business. Any failure of the Company's management
team to effectively manage growth could have a material adverse effect on the
Company's business, financial condition or results of operations.
Client Failure to Renew or Utilize Contracts
A substantial portion of the Company's revenue is derived from the sale of
services or products under long-term contracts with its clients. The Company
typically does not have the unilateral option to extend the terms of such
contracts upon their expiration. In addition, certain of the Company's
contracts do not require clients to make any minimum purchase. Others require
minimum purchases that are substantially below the current level of business
under such contracts and all such contracts are cancelable by clients under
certain conditions. The failure of clients to renew contracts, a reduction in
usage by clients under any contracts or the cancellation of contracts could
have a material adverse effect on the Company's financial condition and
results of operations.
International Business Activities
The Company markets its products in a variety of international markets. To
date, the Company's customer management software has been installed in 20
countries. Approximately 5% of the Company's total revenue came from
international sources in the third quarter and first nine months of 1997 and
1996. The Company is expanding its international presence, primarily through
third-party marketing and distribution alliances. The Company's current and
proposed international business activities are subject to certain inherent
risks. There can be no assurance that such risks will not have a material
adverse effect on the Company's future international sales and, consequently,
the Company's business, operating results and financial condition.
Attraction and Retention of Key Personnel
The Company's future success depends in large part on the continued service
of its key management, sales, product development and operational personnel.
The Company believes that its future success also depends on its ability to
attract and retain skilled technical, managerial and marketing personnel,
including, in particular, additional personnel in the areas of research and
development and technical support. Competition for qualified personnel is
intense. The Company has from time to time experienced difficulties in
recruiting qualified skilled technical personnel. Failure by the Company to
attract and retain the personnel it requires could have a material adverse
effect on the financial condition and results of operations of the Company.
14
Dependence on Proprietary Technology
The Company relies on a combination of patent, trade secret and copyright
laws, nondisclosure agreements, and other contractual and technical measures
to protect its proprietary technology. There can be no assurance that
these provisions will be adequate to protect its proprietary rights.
Although the Company believes that its products and services do not
infringe upon the proprietary rights of third parties, there can be
no assurance that third parties will not assert infringement claims against
the Company or the Company's clients.
The Company has been advised by a cable customer that a third party has
orally asserted that patents held by the third party may be infringed by the
customer's use of interactive computer telephony systems, and that, should it
become necessary, the customer would seek indemnification from the Company.
To the best of the Company's knowledge, no legal proceedings with regard to
this matter have been instituted against the customer or the Company as of
the date of this report. The Company believes that it has a substantial
defense against the third party's patent infringement claims, and the Company
does not believe that efforts by the third party to enforce the patents
against the Company or its clients are likely to have a material adverse
effect on the Company's financial position, results of operations or cash
flows.
Government Regulation
The Company's existing and potential clients are subject to extensive
regulation, and certain of the Company's revenue opportunities may depend on
continued deregulation in the worldwide communications industry. In addition,
the Company's clients are subject to certain regulations governing the privacy
and use of the customer information that is collected and managed by the
Company's products and services. Regulatory changes that adversely affect the
Company's existing and potential clients could have a material adverse effect on
the financial condition and results of operations of the Company.
Possible Volatility of Stock Price
Although the Company believes that it has the product offerings and resources
needed for continuing success, future revenue and margin trends cannot be
reliably predicted and may cause the Company to adjust its operations. The
Company's stock price, like that of other technology companies, is subject to
significant volatility. The announcement of new products, services or
technologies by the Company or its competitors, quarterly variations in the
Company's results of operations, changes in revenue or earnings estimates by the
investment community and speculation in the press or investment community are
among the factors affecting the Company's stock price. In addition, the stock
price may be affected by general market conditions and domestic and
international macroeconomic factors unrelated to the Company's performance. For
the foregoing reasons, recent trends should not be considered reliable
indicators of future stock prices or financial results.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has legal proceedings incidental to its normal
business activities. In the opinion of the Company, the outcome of
the proceedings will not have a material adverse effect on the
Company's consolidated financial position, results of operations or
cash flows.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other information.
In order to give the participants in the Company's Employee Stock
Ownership Plan (ESOP) access to Company stock in their ESOP account in
an orderly phased manner for purposes of self-direction, in July 1997,
the Board of Directors terminated the Company's ESOP effective
January 1, 1997, with distribution of the ESOP assets to take place in
phased quarterly increments. The initial distribution of ESOP assets
to ESOP participants began in August 1997, with a distribution of the
greater of 400 shares or 10% of the shares in each ESOP participant's
account, plus all cash in the account, for a total initial
distribution of 517,968 shares and $578,756 distributed. Rather than
distribute a minimum number of shares in subsequent quarters, the
Company will distribute the entire remaining balance of ESOP assets to
participants in December 1997, a total of 2,935,920 shares and
$97,145. The Company registered the shares in the ESOP pursuant to a
Form S-8 effective November 12, 1996.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 11 Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
The Registrant filed the following report on Form 8K:
Registrant's Press Release, dated as of August 13, 1997, announcing
the authorization of a stock repurchase program.
16
USCS INTERNATIONAL, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USCS INTERNATIONAL, INC.
(Registrant)
Dated: November 7, 1997 By: /s/ DOUGLAS L. SHURTLEFF
------------------------------
Douglas L. Shurtleff
Senior Vice President, Finance
(Chief Financial Officer)
17