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 March 31, 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: 0-28268
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
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(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 April 30, 1997
----------------------------- ---------------------------------
Common Stock, $.05 par value 23,374,890 shares
1
USCS INTERNATIONAL, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
Page No.
----------------
Part I. Financial Information
Item 1. Financial Statements 3
Consolidated Condensed Balance Sheets
March 31, 1998 (Unaudited) and December 31, 1997 4
Consolidated Condensed Statements of Operations (Unaudited)
Three months ended March 31, 1998 and 1997 5
Consolidated Condensed Statements of Comprehensive
Income (Unaudited) Three months ended March 31,
1998 and 1997 6
Consolidated Condensed Statements of Cash Flows
(Unaudited) Three months ended March 31, 1998 and 1997 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition, Results of Operations, and Certain
Factors That May Affect Future Results. 9-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
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, 1997, 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 Annual Report to Stockholders and the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. The
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1998.
3
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands except share and per share amounts)
March 31, December 31,
1998 1997
----------- -----------
(unaudited)
ASSETS
Current Assets:
Cash $ 9,503 $ 2,787
Accounts receivable 94,972 97,654
Current portion of net investment in leases 5,966 5,892
Paper products and other inventory 5,238 4,573
Other 7,557 9,853
----------- -----------
Total current assets 123,236 120,759
Property and equipment, net 99,968 101,631
Net investment in leases, net of current portion 4,166 4,686
Other 17,131 11,543
----------- -----------
Total assets $ 244,501 $ 238,619
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 53,602 $ 62,656
Current portion of long-term debt 6,159 3,865
Deferred revenue 6,055 4,529
----------- -----------
Total current liabilities 65,816 71,050
Long-term debt, net of current portion 4,611 5,453
Customer deposits 18,425 18,170
Other liabilities 13,028 12,585
----------- -----------
Total liabilities 101,880 107,258
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Stockholders' Equity:
Preferred Stock, $.05 par value, 10,000,000 shares authorized;
no shares issued and outstanding - -
Common Stock, $.05 par value,
40,000,000 shares authorized; 23,427,582 shares issued and
23,367,866 shares outstanding at March 31, 1998 (unaudited) and
23,427,582 shares issued and 22,947,233 shares outstanding
at December 31, 1997 1,171 1,171
Additional paid-in capital 53,561 56,504
Retained earnings 89,166 82,897
Treasury stock (1,125) (9,047)
Foreign currency translation adjustment (152) (164)
----------- -----------
Total stockholders' equity 142,621 131,361
----------- -----------
Total liabilities and stockholders' equity $ 244,501 $ 238,619
----------- -----------
----------- -----------
4
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands except per share amounts)
Three months ended
March 31,
----------------------------
1998 1997
------------ ------------
Revenue:
Software and services:
Customer management $ 39,679 $ 37,779
Bill processing 32,313 28,398
------------ ------------
Total 71,992 66,177
Equipment sales and services 6,536 4,793
------------ ------------
Total revenue 78,528 70,970
------------ ------------
Cost of revenue:
Software and services:
Customer management 18,637 18,528
Bill processing 23,659 20,860
------------ ------------
Total 42,296 39,388
Equipment sales and services 4,281 2,798
------------ ------------
Total cost of revenue 46,577 42,186
------------ ------------
Gross profit 31,951 28,784
------------ ------------
Operating expenses:
Research and development 8,125 6,871
Selling, general and administrative 13,396 13,265
------------ ------------
Total operating expenses 21,521 20,136
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Operating income 10,430 8,648
Interest expense, net 153 169
------------ ------------
Income before income taxes 10,277 8,479
Income tax provision 4,008 3,426
------------ ------------
Net income $ 6,269 $ 5,053
------------ ------------
------------ ------------
Earnings per share:
Basic $ 0.27 $ 0.22
Diluted $ 0.26 $ 0.21
Weighted average common shares and equivalents:
Basic 23,032 23,096
Diluted 23,761 24,134
5
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
(unaudited)
(In thousands)
Three months ended
March 31,
----------------------
1998 1997
--------- ---------
Net income $ 6,269 $ 5,053
Other comprehensive income:
Foreign currency translation adjustment 12 (67)
--------- ---------
Comprehensive income $ 6,281 $ 4,986
--------- ---------
--------- ---------
6
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
Three months ended
March 31,
---------------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net cash provided by operating activities $ 13,497 $ 7,527
------------ ------------
Cash flows from investing activities:
Capital expenditures, net (5,079) (3,734)
Other (1,600) -
------------ ------------
Net cash used in investing activities (6,679) (3,734)
------------ ------------
Cash flows from financing activities:
Net paydown under revolving credit agreement (4,000) -
Payments on long-term debt (1,975) (1,454)
Proceeds from issuance of long-term debt 7,427 235
Purchases of treasury stock net of issuances (1,554) -
------------ ------------
Net cash used in financing activities (102) (1,219)
------------ ------------
Net increase in cash 6,716 2,574
Cash at January 1 2,787 8,452
------------ ------------
Cash at March 31 $ 9,503 $ 11,026
------------ ------------
------------ ------------
Supplemental Schedule of Noncash Financing Activities:
Contribution of Company shares to 401(k) Retirement Plan $ 6,533 $ -
------------ ------------
------------ ------------
7
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. Treasury Stock
The Company, from time to time, at the authorization of the Board of
Directors, repurchases shares of the Company's common stock to be held
as treasury stock with reservation of such treasury stock for future
issuance under various employee stock purchase and incentive stock
option plans and for distributions to the Company's 401(k) Retirement
Plan.
In March 1998, the Company contributed approximately 312,000 shares of
treasury stock to the Company's 401(k) Retirement Plan. The fair
market value on the date of contribution was $6,533,000.
3. Earnings per Share
The Company has presented earnings per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). All previously reported amounts have been
restated to conform to SFAS 128. Under SFAS 128, basic earnings per
share are computed using the weighted average number of outstanding
registered shares. Diluted earnings per share are computed using
weighted average registered shares and common stock equivalents,
including the net shares issuable upon exercise of stock options when
dilutive.
8
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, the Company is a leading global provider of customer
management software and services to the communications and other service
industries. The Company's revenues are derived primarily from providing
software to cable television and multi-service providers worldwide, as well as
bill processing services to cable television, telecommunications, financial
services, utilities and other service industries. Software and bill processing
services are generally offered to North American cable television providers
under bundled service arrangements. Outside of North America, software is
generally sold exclusive of the bill processing. Most of the Company's revenue
is 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 produced under
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 sells its software and services to cable television and
multi-service providers in North America and the U.K. primarily through a direct
sales force. Outside of North America and the U.K., the Company markets its
software 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 diversification of its customer base, focusing primarily on
international, multi-service, telecommunications and other high-volume markets
because it believes these represent opportunities to grow at rates greater than,
and decrease its dependence upon, the U.S. cable television marketplace.
9
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 (dollars in thousands):
Three months ended
March 31,
-------------------------------------------------------
1998 1997
-------------------------- -------------------------
(unaudited)
Revenue:
Software and services:
Customer management $ 39,679 50.5% $ 37,779 53.2%
Bill processing 32,313 41.2 28,398 40.0
---------- ---------- ---------- ----------
Total 71,992 91.7 66,177 93.2
Equipment sales and services 6,536 8.3 4,793 6.8
---------- ---------- ---------- ----------
Total revenue 78,528 100.0 70,970 100.0
---------- ---------- ---------- ----------
Cost of revenue:
Software and services:
Customer management 18,637 23.7 18,528 26.1
Bill processing 23,659 30.1 20,860 29.4
---------- ---------- ---------- ----------
Total 42,296 53.8 39,388 55.5
Equipment sales and services 4,281 5.5 2,798 3.9
---------- ---------- ---------- ----------
Total cost of revenue 46,577 59.3 42,186 59.4
---------- ---------- ---------- ----------
Gross profit 31,951 40.7 28,784 40.6
---------- ---------- ---------- ----------
Operating expenses:
Research and development 8,125 10.3 6,871 9.7
Selling, general and administrative 13,396 17.1 13,265 18.7
---------- ---------- ---------- ----------
Total operating expenses 21,521 27.4 20,136 28.4
---------- ---------- ---------- ----------
Operating income 10,430 13.3 8,648 12.2
Interest expense 153 .2 169 .3
---------- ---------- ---------- ----------
Income before income taxes 10,277 13.1 8,479 11.9
Income tax provision 4,008 5.1 3,426 4.8
---------- ---------- ---------- ----------
Net income $ 6,269 8.0% $ 5,053 7.1%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The following table sets forth revenue and percentage of revenue by line item
exclusive of a discontinued customer, revenue of a discontinued customer and
total revenue (dollars in thousands):
Three months ended
March 31,
-------------------------------------------------------
1998 1997
-------------------------- -------------------------
(unaudited)
Revenue:
Software and services:
Customer management $ 29,444 37.5% $ 26,789 37.7%
Bill processing 31,566 40.2 28,144 39.7
Equipment sales and services 4,924 6.3 2,770 3.9
--------- --------- --------- ---------
Total 65,934 84.0 57,703 81.3
Discontinued customer 12,594 16.0 13,267 18.7
--------- --------- --------- ---------
Total $ 78,528 100.0% $ 70,970 100.0%
--------- --------- --------- ---------
--------- --------- --------- ---------
10
REVENUE
Revenue is derived primarily from providing customer management software
and services to cable television and multi-service providers in more than 20
countries and from providing bill processing services primarily to
telecommunications companies in the U.S. Software and bill processing services
to cable television and multi-service providers are provided generally under
bundled service arrangements. In addition, the Company sells computer hardware
and associated maintenance and leasing services to cable television service
providers in connection with licensing the Company's software and provides
design, printing and graphics services in connection with its bill processing
services. Most of the software and services revenue is based on the number of
end-users of the services of the Company's clients, the number of bills mailed
and/or the number of images produced under long-term contracts, which usually
have terms ranging from three to seven years. The Company generally recognizes
software and bill processing services revenue (collectively referred to as
"software and services revenue") as services are performed. Certain of the
Company's software licenses provide for fixed or minimum fees. Fixed fees and
the present value of minimum fees under software licenses are recognized as
revenue upon installation. Such amounts have not been material. Most contracts
include provisions for inflation-based adjustments, including changes in paper
costs.
Total revenue increased by 11% to $78.5 million in the first quarter of
1998 from $71.0 million in the comparable quarter in 1997. The increase in the
1998 first quarter over the same period in 1997 was attributable to growth in
revenue from customer management software and services of $1.9 million or 5%,
growth in bill processing of $3.9 million or 14%, and an increase in equipment
sales and services of $1.7 million or 36%.
Telecommunications, Inc. ("TCI") represented approximately 16% of the
Company's revenue in the first quarter of 1998 and 19% in the same period in
1997. 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 that
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, the conversions have begun and it is believed that TCI
and the competitor wish to complete the transfer by the end of 1998.
Additionally, the Company believes that TCI's contract with the competitor
provides financial incentives to TCI for converting subscribers of certain TCI
affiliates, some of whom are currently clients of the Company, to the
competitor's software. Revenue from TCI has declined in absolute dollars from
$13.3 million in the first quarter 1997 to $12.6 million in the first quarter
1998 or 5%, primarily from a reduction in the number of subscribers serviced by
TCI and services purchased by TCI. The number of TCI subscribers no longer on
the Company's software declined by approximately 2.4 million or 22% as of March
31, 1998, compared to December 31, 1997. The actual rate of decline in the
number of TCI subscribers served and revenue derived from TCI cannot be
definitively estimated on a quarter by quarter basis. However, the Company
believes the decline in revenue from TCI will increase throughout the year. 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 loss of TCI business, 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. To the
extent the Company is not successful in generating additional revenue to offset
the expected decline in revenue from TCI, such decline in revenue could have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
11
Customer management software and services revenue, exclusive of revenue
from TCI, increased by 10% to $29.4 million in the first quarter of 1998 from
$26.8 million in the comparable 1997 quarter. Bill processing revenue as a
stand-alone service increased by 12% to $31.6 million in the first quarter of
1998 from $28.1 million in the comparable quarter of the prior year. Equipment
sales and services revenue increased to $4.9 million in the first quarter of
1998 from $2.8 in the first quarter of 1997.
Growth in customer management software and services revenue for the first
quarter of 1998 compared to the same period in 1997, exclusive of revenue from
TCI, came primarily from increases in the number of subscribers of existing and
new clients in the U.S. and international markets, increases in prices allowed
by existing contracts, and migration of clients to higher-priced services.
Growth in bill processing revenue was derived from an increase in the volume of
statements and images produced because of the internal growth of existing
customers and the acquisition of new customers, primarily in telecommunications
and other high- volume markets. The increase in equipment sales and services
revenue was primarily the result of a large equipment sale at the end of the
first quarter of 1998 and increased leasing revenues related to new leasing
transactions which occurred in the latter part of 1997.
Three significant clients, including TCI, accounted for $30.0 million and
$29.5 million or 38% and 42% of total revenue in the first quarter of 1998 and
1997, respectively. See "Certain Factors That May Affect Future Results"
regarding these clients and other factors that may impact future revenue.
COST OF REVENUE AND GROSS PROFIT
Cost of software and services revenue consists primarily of direct labor,
equipment-related expenses, cost of materials such as paper, and facilities
expense. Cost of equipment sales and services revenue consists primarily of
computer hardware purchased for resale or lease and third-party maintenance.
The Company's gross profit margin of approximately 41% in the first quarter
of 1998 was unchanged from the first quarter of 1997. The software and services
gross profit margin increased to 41% in the first quarter of 1998 from
approximately 40% in the same period in 1997. The customer management software
and services gross profit margin increased to 53% in the first quarter of 1998
from 51% in the first quarter of 1997. Bill processing services gross profit
margin of 27% in the first quarter of 1998 equaled the 1997 first quarter gross
margin. The gross profit margin on equipment-related revenue decreased to 35%
in the first quarter of 1998 from 42%.
The gross margin increase in customer management software and services was
attributed to economies of scale associated with increased revenue. Gross
margins on equipment sales and services typically vary based on the mix of
equipment sales and services and underlying demand. The decline in the 1998
first quarter equipment sales and services gross margin in comparison to the
same period in the prior year was attributable to discounting on equipment sales
and increased depreciation expense on leased equipment.
RESEARCH AND DEVELOPMENT
Research and development costs relate primarily to ongoing product
development and consist of personnel costs, consulting, testing, supplies,
facilities and depreciation expenses. Once the product under development
reaches technological feasibility, the development expenditures are capitalized
and amortized.
Research and development expense was $8.1 million or 10% of revenue in the
first quarter of 1998 compared to $6.9 million, also 10% of revenue, for the
same period in 1997. The increased expenditures are attributable to the
Company's commitment to the development of new products and enhancements to
existing products.
12
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance.
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 are an ongoing process, the Company believes, based on current known
information, that it can effectively mitigate any "Year 2000" date issues,
dependent upon cooperation from third parties. However, such modification of
software products, infrastructure-related hardware and software and third-party
products is subject to all the risks of development. If the Company's efforts
and/or third parties are not successful in the timely mitigation of "Year 2000"
issues, the impact on the Company will be significant.
The cost of remediating the Company's "Year 2000" issues has not been
determined; however, management believes that the cost of this effort will not
have a material adverse effect on the Company's results of operations. There
can be no assurance that the software or systems of other companies, on which
certain of the Company's software and systems rely, will be timely converted, or
that a failure to convert by another company will not have a material adverse
effect on the Company.
SELLING, GENERAL AND ADMINISTRATIVE
Selling expenses consist of compensation for sales and marketing personnel
including commissions and related bonuses, travel, trade shows and promotional
expenses. General and administrative expenses consist of compensation for
administration, finance and general management personnel, as well as legal and
accounting fees.
Total selling, general and administrative expenses increased by 1% in the
first quarter of 1998 in comparison to the first quarter of 1997. Selling and
marketing expenditures increased by 4% in the first quarter of 1998 compared to
the first quarter of 1997. As a percentage of revenue, selling and marketing
expenditures decreased by less than 1% in 1998 compared to 1997. General and
administrative expenses for the first quarter decreased approximately 2% in 1998
compared to 1997. As a percentage of revenue, general and administrative
expense in the first quarter of 1998 declined by approximately 1% compared to
the first quarter of 1997. The decline in selling, general and administrative
expense as a percentage of revenue to approximately 17% in the first quarter of
1998 from approximately 19% in the same period in 1997 was due to increased
revenue coupled with cost containment efforts.
INTEREST EXPENSE
Interest expense consists of interest on borrowings under revolving credit
agreements, revenue bonds pertaining to certain of the Company's facilities and
notes and credit agreements related to the Company's leasing subsidiary.
Interest expense for the first quarter of 1998 was unchanged in comparison to
the first quarter of 1997.
INCOME TAXES
The Company's provision for income taxes represents estimated federal,
state and foreign income taxes. The income tax rate for the first quarter of
1998 was 39%, approximately one percentage point lower than the 1997 comparable
quarter. The rate decline is attributable to the mix of foreign and domestic
income and the application of tax reduction strategies.
13
NET INCOME
Net income increased by $1.2 million or 24% in the first quarter of 1998
compared to the same quarter in 1997. Diluted earnings per share for the quarter
were $0.26 per share in 1998 compared to $0.21 per share in 1997. This
represents a 24% increase. Diluted shares used in the calculation decreased by
approximately 2% in the first quarter of 1998 compared to the same period in
1997. The increase in net income for the first quarter of 1998 compared to 1997
is attributable to the factors cited above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition and liquidity remained strong through the
first quarter of 1998. Total long-term debt, including the current portion, was
$10.8 million as of March 31, 1998 compared to $9.3 million at December 31,
1997. Of the debt outstanding at March 31, 1998, $10.1 million pertains to the
Company's leasing subsidiary and is collateralized, without recourse, by rents
receivable. As of March 31, 1998, the Company had an available $50 million line
of credit. There were no borrowings outstanding at March 31, 1998. Total
capital expenditures through the first quarter of 1998 were $5.1 million
compared to $3.7 million in the same period in 1997. The increase is primarily
related to the enhancement and expansion of the Company's bill processing
capabilities. The Company, in 1998, has expended approximately $1.6 million, net
of issuances, for the repurchase of stock. In addition, the Company has issued
approximately 312,000 shares of treasury stock to fund its $6.5 million
obligation to the 401(k) Retirement Plan.
The Company collects from its clients and remits to the U.S. Postal Service
a significant amount of postage. Substantially all contracts allow the Company
to pre-bill and/or require deposits from its clients to mitigate the effect on
cash flow. As of March 31, 1998, accounts receivable were $95.0 million,
including $27.6 million in amounts due from clients for postage.
The Company continues to make significant investments in capital equipment,
facilities, 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.
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 global
communications market, concentration in the cable television market, the
Company's ability to retain existing customers and attract new customers in the
global communications market as well as other high-volume service industries,
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 customers and
general economic factors in the U.S. as well as the international marketplace.
CHANGING COMMUNICATIONS MARKET AND DEVELOPMENT OF SOFTWARE AND SERVICES
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.
14
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.
DEPENDENCE ON THE CABLE TELEVISION MARKET
Although the Company's current strategy is to address the needs of the
global communications market and other high volume service providers, the
Company is highly dependent on the cable television market. For the first
quarter of 1998 and 1997, more than 60% of the Company's revenue was derived
from sales to cable television service providers. Although the cable television
industry outside of North America is generally expanding, the number of
providers of cable television service in the U.S. has been declining, due to
industry consolidation, 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.
CONCENTRATION OF CLIENT BASE
Aggregate revenue from the Company's ten largest clients accounted for
approximately 69% of total revenue for the three months ended March 31, 1998.
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, including TCI, represented approximately 38% and 42% of
total revenue in the first quarter of 1998 and 1997, respectively.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's quarterly and annual operating results may fluctuate from
quarter to quarter and year to year 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.
YEAR 2000 COMPLIANCE
The cost of remediating the Company's "Year 2000" issues has not been
determined; however, management believes that the cost of this effort will not
have a material adverse effect on the Company's results of operations. There
can be no assurance that the software or systems of other companies, on which
certain of the Company's software and systems rely, will be timely converted, or
that a failure to convert by another company will not have a material adverse
effect on the Company. See "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations - Year 2000 Compliance."
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.
15
A client that accounted for approximately 9% of total revenue in the first
quarter of 1998 orally advised the Company more than two years ago that it may
move to an alternate solution for its customer management software requirements.
Through the first quarter of 1998, no transfers of this customer's business to
an alternate solution have been made. The Company believes its relations with
this customer, as well as with its other customers, are good.
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.
ELECTRONIC BILL PRESENTMENT
The Company's bill processing business is dependent on its ability to
design, handle, print and distribute via first class mail paper-based statements
and related materials. A number of companies, many with resources greater than
the Company, are developing and introducing electronic bill presentment services
that could reduce, if not eliminate, the need for paper statements.
The Company has introduced products and has formed alliances with other
companies for the introduction, marketing and deployment of electronic bill
presentment and other electronic services. The maintenance of the Company's
paper statement expertise, successful development and marketing of electronic
services and rate of customer acceptance of such services are all subject to the
technological, competitive and market condition risks discussed in various
sections of "Certain Factors That May Affect Future Results."
CLIENT FAILURE TO RENEW OR UTILIZE CONTRACTS
Substantially all of the Company's revenue is derived from the sale of
services or products under long-term contracts with its clients. The Company
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. See
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations - Revenue."
INTERNATIONAL BUSINESS ACTIVITIES
The Company's strategy to diversify its customer base includes the selling
of its products in a variety of international markets. To date, the Company's
primary customer management software has been installed in more than 20
countries. Generally, the Company operates in U.S. dollars, which reduces but
does not eliminate exposure to the adverse impact of currency fluctuations.
Currently, less than 10% of the Company's customer management software and
services revenue comes from international sources, and 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, including, but not
limited to, specific country, regional or global economic conditions, exchange
rate fluctuation and its impact on liquidity, changes in the national priorities
of any given country and cultural differences. 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.
16
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. There can be
no assurance, however, that such claims, if brought, would not have a material
adverse effect on the Company.
MANAGEMENT OF GROWTH AND ATTRACTION AND RETENTION OF KEY PERSONNEL
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.
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.
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 world-wide 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.
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. Because of the foregoing
reasons, recent trends should not be considered reliable indicators of future
stock prices or financial results.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
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.
The election of directors and ratification of independent accountants
have been submitted to a vote of security holders and are incorporated
herein by reference to the Registrant's Definitive Proxy Statement and
Notice of Annual Meeting of Stockholders dated April 17, 1998, for the
annual meeting of stockholders to be held May 20, 1998.
Item 5. Other information.
None
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.
None
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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: May 8, 1998 By: /s/ DOUGLAS L. SHURTLEFF
-------------------------
Douglas L. Shurtleff
Senior Vice-President of Finance and
Chief Financial Officer
(Principal Financial Officer)
19