-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FvfA49cqS9y7Mswf7Jv+U5BEOdNL+6PAZ17wpglhz+69/nPAp6fFIUWvpr3l8hUp PcrMzKTVpK9b1gRwJdKbFA== 0000899243-01-501258.txt : 20010815 0000899243-01-501258.hdr.sgml : 20010815 ACCESSION NUMBER: 0000899243-01-501258 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CSG SYSTEMS INTERNATIONAL INC CENTRAL INDEX KEY: 0001005757 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 470783182 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27512 FILM NUMBER: 1711278 BUSINESS ADDRESS: STREET 1: 7887 EAST BELLEVIEW AVE STREET 2: SUITE 1000 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037962850 MAIL ADDRESS: STREET 1: 7887 E. BELLVIEW AVE. STREET 2: SUITE 1000 CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-Q 1 d10q.txt FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission file number 0-27512 CSG SYSTEMS INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 47-0783182 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 7887 EAST BELLEVIEW, SUITE 1000 ENGLEWOOD, COLORADO 80111 (Address of principal executive offices, including zip code) (303) 796-2850 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] No [ ] Shares of common stock outstanding at August 9, 2001: 53,216,397 ---------- CSG SYSTEMS INTERNATIONAL, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001 INDEX
PAGE NO. -------- Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000.................................................................. 3 Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2001 and 2000 ............................................... 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000................................................ 5 Notes to Condensed Consolidated Financial Statements............................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 16 Part II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders................................ 17 Item 6. Exhibits and Reports on Form 8-K................................................... 17 Signatures......................................................................... 18 Index to Exhibits.................................................................. 19
2 CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 2001 2000 ------------ ----------- (UNAUDITED) ASSETS ------ Current assets: Cash and cash equivalents $ 31,436 $ 32,751 Short-term investments.................................................................. 24,096 10,982 --------- -------- Total cash, cash equivalents and short-term investments.............................. 55,532 43,733 Accounts receivable- Trade- Billed, net of allowance of $5,217 and $5,001...................................... 101,181 128,902 Unbilled........................................................................... 20,597 4,306 Other................................................................................ 2,994 1,259 Deferred income taxes................................................................... 4,078 3,247 Other current assets.................................................................... 7,802 7,507 --------- -------- Total current assets................................................................. 192,184 188,954 Property and equipment, net of depreciation of $49,032 and $42,457......................... 39,145 36,630 Software, net of amortization of $36,627 and $39,112....................................... 3,354 4,284 Goodwill, net of amortization of $3,637 and $4,883......................................... 1,532 1,894 Client contracts and related intangibles, net of amortization of $28,718 and $28,855....... 66,190 52,368 Deferred income taxes...................................................................... 43,368 47,331 Other assets............................................................................... 521 628 --------- -------- Total assets......................................................................... $ 346,294 $332,089 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Current maturities of long-term debt.................................................... $ 32,500 $ 25,436 Client deposits......................................................................... 13,095 12,391 Trade accounts payable.................................................................. 12,264 14,850 Accrued employee compensation........................................................... 19,210 19,147 Deferred revenue....................................................................... 28,568 8,172 Accrued income taxes.................................................................... 1,772 15,633 Other current liabilities............................................................... 14,930 12,008 --------- -------- Total current liabilities............................................................ 122,339 107,637 --------- -------- Non-current liabilities: Long-term debt, net of current maturities............................................... 13,000 32,820 Deferred revenue........................................................................ 307 463 --------- -------- Total non-current liabilities........................................................ 13,307 33,283 --------- -------- Stockholders' equity: Preferred stock, par value $.01 per share; 10,000,000 shares authorized; zero shares issued and outstanding.................................................... - - Common stock, par value $.01 per share; 100,000,000 shares authorized; 53,172,490 shares and 52,530,203 shares outstanding................................... 573 543 Common stock warrants; zero and 2,000,000 warrants outstanding.......................... - 17,430 Additional paid-in capital.............................................................. 247,019 180,750 Accumulated other comprehensive income (loss): Unrealized gain (loss) on short-term investments, net of tax.......................... 7 (350) Cumulative translation adjustments.................................................... (799) (654) Treasury stock, at cost, 4,110,986 shares and 1,830,986 shares.......................... (156,692) (71,497) Accumulated earnings.................................................................... 120,540 64,947 --------- -------- Total stockholders' equity........................................................... 210,648 191,169 --------- -------- Total liabilities and stockholders' equity........................................... $ 346,294 $332,089 ========= ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3
CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ---------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2001 2000 2001 2000 ------------ ----------- ----------- ----------- Revenues: Processing and related services.......................... $ 83,469 $ 72,921 $ 162,567 $ 143,548 Software and professional services....................... 36,617 23,141 71,618 44,577 ------------ ----------- ----------- ----------- Total revenues........................................ 120,086 96,062 234,185 188,125 ------------ ----------- ----------- ----------- Cost of Revenues: Cost of processing and related services.................. 29,862 26,315 58,377 52,085 Cost of software and professional services............... 14,093 9,903 27,372 20,419 ------------ ----------- ----------- ----------- Total cost of revenues................................ 43,955 36,218 85,749 72,504 ------------ ----------- ----------- ----------- Gross margin (exclusive of depreciation)..................... 76,131 59,844 148,436 115,621 ------------ ----------- ----------- ----------- Operating expenses: Research and development................................. 13,566 10,366 25,177 20,254 Selling, general and administrative...................... 13,111 11,084 26,651 21,172 Depreciation............................................. 3,518 2,962 6,868 5,774 ------------ ----------- ----------- ----------- Total operating expenses.............................. 30,195 24,412 58,696 47,200 ------------ ----------- ----------- ----------- Operating income............................................. 45,936 35,432 89,740 68,421 ------------ ----------- ----------- ----------- Other income (expense): Interest expense........................................ (813) (1,482) (1,895) (3,023) Interest and investment income, net..................... 887 1,355 1,834 2,618 Other................................................... (4) (24) (23) (17) ------------ ----------- ----------- ----------- Total other........................................... 70 (151) (84) (422) ------------ ----------- ----------- ----------- Income before income taxes................................... 46,006 35,281 89,656 67,999 Income tax provision..................................... (17,479) (13,295) (34,063) (25,704) ------------ ----------- ----------- ----------- Net income................................................... $ 28,527 $ 21,986 $ 55,593 $ 42,295 ============ ========== ========== =========== Basic net income per common share: Net income available to common stockholders.............. $ 0.54 $ 0.42 $ 1.06 $ 0.81 ============ ========== ========== =========== Weighted average common shares........................... 52,867 52,158 52,668 52,007 ============ ========== ========== =========== Diluted net income per common share: Net income available to common stockholders.............. $ 0.52 $ 0.39 $ 1.01 $ 0.74 ============ ========== ========== =========== Weighted average common shares........................... 54,915 56,910 55,025 56,870 ============ ========== ========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4
CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (in thousands) SIX MONTHS ENDED ---------------------------- JUNE 30, JUNE 30, 2001 2000 ------------ ----------- Cash flows from operating activities: Net income................................................................................... $ 55,593 $ 42,295 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation............................................................................... 6,868 5,774 Amortization............................................................................... 3,931 3,663 Loss on short-term investment.............................................................. 655 - Deferred income taxes...................................................................... 2,916 2,671 Stock-based employee compensation.......................................................... - 45 Changes in operating assets and liabilities: Trade accounts and other receivables, net................................................ 9,695 (13,432) Other current and noncurrent assets...................................................... (470) (1,643) Accounts payable and accrued liabilities................................................. 4,313 (1,477) ------------ ----------- Net cash provided by operating activities............................................. 83,501 37,896 ------------ ----------- Cash flows from investing activities: Purchases of property and equipment.......................................................... (9,370) (11,513) Purchases of short-term investments.......................................................... (33,690) - Proceeds from sale of short-term investments................................................. 20,494 - Acquisitions of and investments in client contracts.......................................... (1,274) - ------------ ----------- Net cash used in investing activities................................................. (23,840) (11,513) ------------ ----------- Cash flows from financing activities: Proceeds from issuance of common stock....................................................... 13,039 9,100 Proceeds from exercise of stock warrants..................................................... 24,000 - Repurchase of common stock................................................................... (85,195) (2,987) Payments on notes receivable from employee stockholders...................................... - 44 Payments on long-term debt................................................................... (12,756) (11,000) ------------ ----------- Net cash used in financing activities................................................. (60,912) (4,843) ------------ ----------- Effect of exchange rate fluctuations on cash................................................... (64) (462) ------------ ----------- Net increase (decrease) in cash and cash equivalents........................................... (1,315) 21,078 Cash and cash equivalents, beginning of period................................................. 32,751 48,676 ------------ ----------- Cash and cash equivalents, end of period....................................................... $ 31,436 $ 69,754 ============ =========== Supplemental disclosures of cash flow information: Cash paid during the period for- Interest.................................................................................. $ 1,305 $ 3,140 Income taxes.............................................................................. $ 33,125 $ 14,865 Noncash operating and investing activities: During the six months ended June 30, 2001, the Company acquired certain client contract rights valued at approximately $15.0 million in exchange for the performance of certain future services.
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 CSG SYSTEMS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED 1. GENERAL The accompanying condensed consolidated financial statements at June 30, 2001, and for the three and six months then ended, are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange Commission (the Company's 2000 10-K). The results of operations for the three and six months ended June 30, 2001, are not necessarily indicative of the results to be expected for the entire year ending December 31, 2001. 2. STOCKHOLDERS' EQUITY Common Stock Warrants. On February 28, 2001, AT&T exercised its rights under the Warrants to purchase 2.0 million shares of the Company's Common Stock at an exercise price of $12 per share, for a total exercise price of $24.0 million. Immediately following the exercise of the Warrants, the Company repurchased the 2.0 million shares for $37.00 per share (approximately the closing price on February 28, 2001) for a total repurchase price of $74.0 million, pursuant to the Company's stock repurchase program. As a result, the net cash outlay paid to AT&T for this transaction was $50.0 million, which was paid by the Company with available corporate funds. After this transaction, AT&T no longer has any warrants or other rights to purchase the Company's Common Stock. Stock Repurchase Program. In August 1999, the Company's Board of Directors approved a stock repurchase program which authorized the Company at its discretion to purchase up to a total of 5.0 million shares of its Common Stock from time-to-time as market and business conditions warrant. This program represents approximately 10% of the Company's outstanding shares. During the three months ended June 30, 2001, the Company did not repurchase any shares under the program. During the three months ended March 31, 2001, the Company repurchased 2.28 million shares under the program for approximately $85.2 million (a weighted-average price of $37.37 per share), including the 2.0 million shares repurchased as part of the AT&T warrant exercise discussed above. As of June 30, 2001, the Company has purchased a total of 4.03 million shares for approximately $156.5 million (a weighted-average price of $38.88 per share) since the program was announced in 1999. The repurchased shares are held as treasury shares. Income Tax Benefit from Exercise of Stock Options. Income tax benefits associated with nonqualified stock options and disqualifying dispositions of incentive stock options reduced accrued income taxes by $10.9 million and $1.2 million for the three months ended June 30, 2001 and 2000, and $11.8 million and $6.2 million for the six months ended June 30, 2001 and 2000, respectively. Such benefits were recorded as an increase to additional paid-in capital and are included in net cash provided by operating activities in the Company's Condensed Consolidated Statements of Cash Flows. 3. NET INCOME PER COMMON SHARE Basic net income per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per common share is consistent with the calculation of basic net income per common share while giving effect to dilutive potential common shares outstanding during the period. Basic and diluted earnings per share (EPS) are presented on the face of the Company's Condensed Consolidated Statements of Income. No 6 reconciliation of the EPS numerators is necessary as net income is used as the numerator for each period presented. The reconciliation of the EPS denominators is as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------------- 2001 2000 2001 2000 ------------------------------------------------------- Basic common shares outstanding................... 52,867 52,158 52,668 52,007 Dilutive effect of common stock options........... 2,048 2,471 1,886 2,582 Dilutive effect of common stock warrants.......... - 2,281 471 2,281 ------ ------ ------ ------ Diluted common shares outstanding................. 54,915 56,910 55,025 56,870 ====== ====== ====== ======
Common Stock options of 123,400 shares and 92,000 shares for the three months ended June 30, 2001 and 2000, and 407,400 and 92,000 shares for the six months ended June 30, 2001 and 2000, respectively, have been excluded from the computation of diluted EPS because the exercise prices of these options were greater than the average market price of the common shares for the respective periods. 4. COMPREHENSIVE INCOME The Company's components of comprehensive income were as follows (in thousands):
Three Months Ended Six Months Ended June 30, June 30, ---------------------------------------- 2001 2000 2001 2000 ---------------------------------------- Net income............................................... $28,527 $21,986 $55,593 $42,295 Other comprehensive income (loss), net of tax, if any: Foreign currency translation adjustments................. 14 (300) (145) (403) Reclassification adjustment for loss included in net income................................................... --- --- 335 --- Unrealized gain (loss) on short-term investments......... (5) --- 22 --- ------- ------- ------- ------- Comprehensive income..................................... $28,536 $21,686 $55,805 $41,892 ======= ======= ======= =======
5. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141). SFAS 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations". SFAS 141 introduces a single-method approach to accounting for business combinations, requiring the use of the purchase method and eliminating the use of the pooling-of-interests approach. In addition, SFAS 141 changes the criteria for the separate recognition of intangible assets in a business combination. SFAS 141 is effective for all business combinations initiated after June 30, 2001, and for all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supercedes APB Opinion No. 17, "Intangible Assets". SFAS 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in the financial statements upon their acquisition. SFAS 142 also addresses how goodwill and other intangibles should be accounted for after 7 they have been initially recognized in the financial statements. SFAS 142 is required to be applied by the Company beginning January 1, 2002 to all goodwill and other intangible assets recognized in the financial statements at that date. Goodwill and intangible assets acquired after June 30, 2001, are subject immediately to the nonamortization and amortization provisions of SFAS 142. The Company expects to adopt SFAS 141 and 142 on January 1, 2002. The adoption of SFAS 141 and 142 is not expected to have a significant effect on the Company's consolidated financial statements. 8 CSG SYSTEMS INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth certain financial data and the percentage of total revenues of the Company for the periods indicated (in thousands):
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------------------------- --------------------------------------- 2001 2000 2001 2000 ----------------- ----------------- ----------------- ------------------ % OF % OF % OF % OF AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE ------ ------- ------ ------- ------ ------- ------ ------- Revenues: Processing and related services $ 83,469 69.5% $ 72,921 75.9% $162,567 69.4% $143,548 76.3% Software and professional services 36,617 30.5 23,141 24.1 71,618 30.6 44,577 23.7 -------- ----- -------- ----- -------- ----- -------- ----- Total revenues 120,086 100.0 96,062 100.0 234,185 100.0 188,125 100.0 -------- ----- -------- ----- -------- ----- -------- ----- Cost of Revenues: Cost of processing and related services 29,862 24.9 26,315 27.4 58,377 24.9 52,085 27.7 Cost of software and professional services 14,093 11.7 9,903 10.3 27,372 11.7 20,419 10.8 -------- ----- -------- ----- -------- ----- -------- ----- Total cost of revenues 43,955 36.6 36,218 37.7 85,749 36.6 72,504 38.5 -------- ----- -------- ----- -------- ----- -------- ----- Gross margin (exclusive of depreciation 76,131 63.4 59,844 62.3 148,436 63.4 115,621 61.5 -------- ----- -------- ----- -------- ----- -------- ----- Operating expenses: Research and development 13,566 11.3 10,366 10.8 25,177 10.8 20,254 10.8 Selling, general and administrative 13,111 10.9 11,084 11.5 26,651 11.4 21,172 11.2 Depreciation 3,518 2.9 2,962 3.1 6,868 2.9 5,774 3.1 -------- ----- -------- ----- -------- ----- -------- ----- Total operating expenses 30,195 25.1 24,412 25.4 58,696 25.1 47,200 25.1 -------- ----- -------- ----- -------- ----- -------- ----- Operating income 45,936 38.3 35,432 36.9 89,740 38.3 68,421 36.4 -------- ----- -------- ----- -------- ----- -------- ----- Other income (expense): Interest expense (813) (0.7) (1,482) (1.6) (1,895) (0.8) (3,023) (1.6) Interest and investment income, net 887 0.7 1,355 1.4 1,834 0.8 2,618 1.4 Other (4) - (24) - (23) - (17) - -------- ----- -------- ----- -------- ----- -------- ----- Total other 70 - (151) (0.2) (84) - (422) (0.2) -------- ----- -------- ----- -------- ----- -------- ----- Income before income taxes 46,006 38.3 35,281 36.7 89,656 38.3 67,999 36.2 Income tax provision (17,479) (14.5) (13,295) (13.8) (34,063) (14.6) (25,704) (13.7) -------- ----- -------- ----- -------- ----- -------- ----- Net income $ 28,527 23.8% $ 21,986 22.9% $ 55,593 23.7% $ 42,295 22.5% ======== ===== ======== ===== ======== ===== ======== =====
9 THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 Revenues. Total revenues for the three months ended June 30, 2001, increased 25.0% to $120.1 million, from $96.1 million for the three months ended June 30, 2000. Revenues from processing and related services for the three months ended June 30, 2001, increased 14.5% to $83.5 million, from $72.9 million for the three months ended June 30, 2000. Of the total increase in these revenues, approximately 83% resulted from an increase in the number of customers of the Company's clients which were serviced by the Company and approximately 17% was due to increased revenue per customer. Customers served were as follows (in thousands): As of June 30, ------------------------------------------- 2001 2000 Increase ------------------------------------------- Video................... 35,830 32,864 2,966 Internet................ 2,640 1,453 1,187 Telephony............... 738 217 521 ------ ------ ----- Total................... 39,208 34,534 4,674 ====== ====== ===== The increase in the number of customers serviced was due to the conversion of additional customers by new and existing clients to the Company's systems, and internal customer growth experienced by existing clients. From July 1, 2000 through June 30, 2001, the Company converted and processed approximately 3.0 million new customers on its systems, including approximately 1.6 million for the second quarter of 2001. As of June 30, 2001, the Company had a total conversion backlog of approximately 3.2 million customers, which are expected to be converted to the Company's processing system during the remainder of 2001. Total annualized processing revenue per video and Internet account was as follows: For the three months ended June 30, -------------------------------------- Increase 2001 2000 (Decrease) -------------------------------------- Video account................ $8.70 $8.44 3.1% Internet account............. $4.96 $5.31 (6.6%) The change in processing revenues per account relates primarily to (i) changes in the usage of ancillary services by clients, (ii) the introduction of new products and services and the clients use of these products and services, and (iii) price changes included in client contracts (e.g., price escalators for inflationary factors, tiered pricing, etc.). Revenues from software and professional services for the three months ended June 30, 2001, increased 58.2% to $36.6 million, from $23.2 million for the three months ended June 30, 2000. The Company sells its software products and professional services principally to its existing client base to (i) enhance the core functionality of its service bureau processing application, (ii) increase the efficiency and productivity of its clients' operations, and (iii) allow clients to effectively rollout new products and services to new and existing markets. The increase in revenue between periods relates to the continued demand for the Company's existing software products and services to meet the changing needs of the Company's client base. Cost of Processing and Related Services. Processing costs as a percentage of related processing revenues were 35.8% for the three months ended June 30, 2001, compared to 36.1% for the three months ended June 30, 2000. The costs as a percentage of related revenues remained relatively unchanged between periods as the Company continues to (i) focus on cost controls and cost reductions within its core processing business, and (ii) experience better overall leveraging of its processing costs as a result of the continued growth of the customer base processed on the Company's systems. 10 Cost of Software and Professional Services. The cost of software and professional services as a percentage of related revenues was 38.5% for the three months ended June 30, 2001, compared to 42.8% for the three months ended June 30, 2000. The improvement between periods relates primarily to better overall leveraging of costs as a result of higher software and professional services revenues for the quarter. Gross Margin. Overall gross margin for the three months ended June 30, 2001, increased 27.2% to $76.1 million, from $59.8 million for the three months ended June 30, 2000, due primarily to revenue growth. The overall gross margin percentage increased to 63.4% for the three months ended June 30, 2001, compared to 62.3% for the three months ended June 30, 2000. The overall increase in the gross margin percentage is due primarily to the increase in gross margin for software and professional services due to the factors discussed above. Research and Development Expense. Research and development (R&D) expense for the three months ended June 30, 2001, increased 30.9% to $13.6 million, from $10.4 million for the three months ended June 30, 2000. As a percentage of total revenues, R&D expense increased to 11.3% for the three months ended June 30, 2001, from 10.8% for the three months ended June 30, 2000. The Company did not capitalize any software development costs during the three months ended June 30, 2001 and 2000. The overall increase in the R&D expenditures between periods is due primarily to increased efforts on several products which are in development and enhancements of the Company's existing products. The Company's development efforts for the second quarter of 2001 were focused primarily on the development of products to: . address the international customer care and billing system market, . increase the efficiencies and productivity of its clients' operations, . address the systems needed to support the convergence of the communications markets, . support a web-enabled, customer self-care and electronic bill presentment/payment application, and . allow clients to effectively rollout new products and services to new and existing markets, such as residential telephony, High-Speed Data/ISP and IP markets. The Company expects its development efforts to focus on similar tasks through the remainder of 2001. Selling, General and Administrative Expense. Selling, general and administrative (SG&A) expense for the three months ended June 30, 2001, increased 18.3% to $13.1 million, from $11.1 million for the three months ended June 30, 2000. The increase in SG&A expense relates primarily to sales and administrative costs to support the Company's overall growth and its international business expansion. As a percentage of total revenues, SG&A expense decreased to 10.9% for the three months ended June 30, 2001, from 11.5% for the three months ended June 30, 2000. The decrease in SG&A expenses as a percentage of total revenues is due primarily to revenues increasing at a faster pace than the SG&A expenses. Depreciation Expense. Depreciation expense for the three months ended June 30, 2001, increased 18.8% to $3.5 million, from $3.0 million for the three months ended June 30, 2000. The increase in expense relates to capital expenditures made during the last six months of 2000 and the first six months of 2001 in support of the overall growth of the Company, consisting principally of (i) computer hardware and related equipment, (ii) statement processing equipment, and (iii) facilities and internal infrastructure expansion. Depreciation expense for all property and equipment is reflected separately in the aggregate and is not included in the other components of operating expenses. Operating Income. Operating income for the three months ended June 30, 2001, was $45.9 million or 38.3% of total revenues, compared to $35.4 million or 36.9% of total revenues for the three months ended June 30, 2000. The increase between periods relates to the factors discussed above. Interest Expense. Interest expense for the three months ended June 30, 2001, decreased 45.1% to $0.8 million, 11 from $1.5 million for the three months ended June 30, 2000, with the decrease due primarily to scheduled principal payments on the Company's long-term debt and a decrease in interest rates. The balance of the Company's long-term debt as of June 30, 2001, was $45.5 million, compared to $70.0 million as of June 30, 2000, a decrease of $24.5 million. Income Tax Provision. For the three months ended June 30, 2001, the Company recorded an income tax provision of $17.5 million, or an effective income tax rate of approximately 38%, which represents the Company's estimate of the effective book income tax rate for 2001. The Company's effective income tax rate for 2000 was also approximately 38%. As of June 30, 2001, management continues to believe that sufficient taxable income will be generated to realize the entire benefit of the Company's deferred tax assets. The Company's assumptions of future profitable operations are supported by its strong operating performances over the last several years. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 Revenues. Total revenues for the six months ended June 30, 2001, increased 24.5% to $234.2 million, from $188.1 million for the six months ended June 30, 2000. Revenues from processing and related services for the six months ended June 30, 2001, increased 13.2% to $162.6 million, from $143.5 million for the six months ended June 30, 2000. Of the total increase in these revenues, approximately 85% resulted from an increase in the number of customers of the Company's clients which were serviced by the Company and approximately 15% was due to increased revenue per customer. From July 1, 2000 through June 30, 2001, the Company converted and processed approximately 3.0 million new customers on its systems, including approximately 2.0 million for the six months ended June 30, 2001. Total annualized processing revenue per video and Internet account was as follows: For the six months ended June 30, ------------------------------------ Increase 2001 2000 (Decrease) ------------------------------------ Video account...................... $8.57 $8.38 2.3% Internet account................... $4.95 $5.38 (8.0%) The change in processing revenues per account relates primarily to (i) changes in the usage of ancillary services by clients, (ii) the introduction of new products and services and the clients use of these products and services, and (iii) price changes included in client contracts (e.g., price escalators for inflationary factors, tiered pricing, etc.). Revenues from software and professional services for the six months ended June 30, 2001, increased 60.7% to $71.6 million, from $44.6 million for the six months ended June 30, 2000. The Company sells its software products and professional services principally to its existing client base to (i) enhance the core functionality of its service bureau processing application, (ii) increase the efficiency and productivity of its clients' operations, and (iii) allow clients to effectively rollout new products and services to new and existing markets. The increase in revenue between periods relates to the continued demand for the Company's existing software products and services to meet the changing needs of the Company's client base. Cost of Processing and Related Services. Processing costs as a percentage of related processing revenues were 35.9% for the six months ended June 30, 2001, compared to 36.3% for the six months ended June 30, 2000. The costs as a percentage of related revenues remained relatively unchanged between periods as the Company continues to (i) focus on cost controls and cost reductions within its core processing business, and (ii) experience better overall leveraging of its processing costs as a result of the continued growth of the customer base processed on the Company's systems. 12 Cost of Software and Professional Services. The cost of software and professional services as a percentage of related revenues was 38.2% for the six months ended June 30, 2001, compared to 45.8% for the six months ended June 30, 2000. The improvement between periods relates primarily to better overall leveraging of costs as a result of higher software and professional services revenues for the period. Gross Margin. Overall gross margin for the six months ended June 30, 2001, increased 28.4% to $148.4 million, from $115.6 million for the six months ended June 30, 2000, due primarily to revenue growth. The overall gross margin percentage increased to 63.4% for the six months ended June 30, 2001, compared to 61.5% for the six months ended June 30, 2000. The overall increase in the gross margin percentage is due primarily to the increase in gross margin for software and professional services due to the factors discussed above. Research and Development Expense. R&D expense for the six months ended June 30, 2001, increased 24.3% to $25.2 million, from $20.3 million for the six months ended June 30, 2000. As a percentage of total revenues, R&D expense remained unchanged at 10.8% for the six months ended June 30, 2001 and 2000. The Company did not capitalize any software development costs during the six months ended June 30, 2001 and 2000. The overall increase in the R&D expenditures between periods is due primarily to increased efforts on several products which are in development and enhancements of the Company's existing products. The Company's development efforts for the six months ended June 30, 2001 were focused primarily on the development of products to: . address the international customer care and billing system market, . increase the efficiencies and productivity of its clients' operations, . address the systems needed to support the convergence of the communications markets, . support a web-enabled, customer self-care and electronic bill presentment/payment application, and . allow clients to effectively rollout new products and services to new and existing markets, such as residential telephony, High-Speed Data/ISP and IP markets. Selling, General and Administrative Expense. SG&A expense for the six months ended June 30, 2001, increased 25.9% to $26.7 million, from $21.2 million for the six months ended June 30, 2000. The increase in SG&A expense relates primarily to sales and administrative costs to support the Company's overall growth and its international business expansion. As a percentage of total revenues, SG&A expense increased to 11.4% for the six months ended June 30, 2001, from 11.2% for the six months ended June 30, 2000. Depreciation Expense. Depreciation expense for the six months ended June 30, 2001, increased 18.9% to $6.9 million, from $5.8 million for the six months ended June 30, 2000. The increase in expense relates to capital expenditures made during 2000 and the first six months of 2001 in support of the overall growth of the Company, consisting principally of (i) computer hardware and related equipment, (ii) statement processing equipment, and (iii) facilities and internal infrastructure expansion. Depreciation expense for all property and equipment is reflected separately in the aggregate and is not included in the other components of operating expenses. Operating Income. Operating income for the six months ended June 30, 2001, was $89.7 million or 38.3% of total revenues, compared to $68.4 million or 36.4% of total revenues for the six months ended June 30, 2000. The increase between periods relates to the factors discussed above. Interest Expense. Interest expense for the six months ended June 30, 2001, decreased 37.3% to $1.9 million, from $3.0 million for the six months ended June 30, 2000, with the decrease due primarily to scheduled principal payments on the Company's long-term debt and a decrease in interest rates. Interest and Investment Income, Net. Interest and investment income, net for the six months ended June 30, 13 2001, decreased 29.9% to $1.8 million, from $2.6 million for the six months ended June 30, 2000, with the decrease due primarily to the Company recording a charge of $0.6 million for an "other-than-temporary" decline in market value for a short-term investment. Income Tax Provision. For the six months ended June 30, 2001, the Company recorded an income tax provision of $34.1 million, or an effective income tax rate of approximately 38%, which represents the Company's estimate of the effective book income tax rate for 2001. The Company's effective income tax rate for 2000 was also approximately 38%. Financial Condition, Liquidity and Capital Resources As of June 30, 2001, the Company's principal sources of liquidity included cash, cash equivalents and short-term investments of $55.5 million. The Company also has a revolving credit facility in the amount of $40.0 million, of which there were no borrowings outstanding as of June 30, 2001. The Company's ability to borrow under the revolving credit facility is subject to maintenance of certain levels of eligible receivables. At June 30, 2001, all of the $40.0 million revolving credit facility was available to the Company. The revolving credit facility expires in September 2002. As of June 30, 2001 and December 31, 2000, respectively, the Company had $101.2 million and $128.9 million in net billed trade accounts receivable. The decrease between periods relates primarily to the collection (in January 2001) of a large receivable from a software transaction that was outstanding at yearend. The payment terms on this transaction were scheduled three weeks across yearend to assist a client in its capital planning. The Company's billed trade accounts receivable balance includes billings for several non-revenue items, such as postage, communication lines, travel and entertainment reimbursements, sales tax, and deferred items. As a result, the Company evaluates its performance in collecting its accounts receivable through its calculation of days billings outstanding (DBO) rather than a typical days sales outstanding (DSO) calculation. DBO is calculated based on the billings for the period (including non-revenue items) divided by the average net billed trade accounts receivable balance for the period. The Company's DBO calculations for the quarters ended June 30, 2001 and 2000 were 52 days and 53 days, respectively. The Company's target range for DBOs is 55 to 60 days. As of June 30, 2001 and December 31, 2000, respectively, the Company had $20.6 million and $4.3 million of unbilled trade receivables. The increase in the unbilled trade receivables between periods relate primarily to the timing of billings on items for which revenue was recognized in the three months ended June 30, 2001. Approximately 80 percent of the June 30, 2001 unbilled trade receivables balance is due to be billed and paid by mid-October 2001. The Company's net cash flows from operating activities for the six months ended June 30, 2001 and 2000 were $83.5 million and $37.9 million, respectively. The increase of $45.6 million between periods relates to (i) an increase in net cash flows from operations of $15.5 million and (ii) an increase in the net changes in operating assets and liabilities of $30.1 million. The increase in the net changes in operating assets and liabilities relates primarily to the large decrease in December 31, 2000 billed accounts receivable, for the reasons stated above. The Company's cash flows from operating activities would have been approximately $46.6 million for the six months ended June 30, 2001 if the receivable for the large software transaction mentioned above would have been collected in the fourth quarter of 2000 rather than in the first quarter of 2001. The Company's net cash flows used in investing activities totaled $23.8 million for the six months ended June 30, 2001, compared to $11.5 million for the six months ended June 30, 2000, an increase of $12.3 million. The increase between periods relates primarily to net purchases of short-term investments of $13.2 million during the six months ended June 30, 2001, with no comparable activity during the six months ended June 30, 2000. During the third quarter of 2000, the Company began investing its excess cash balances in various low-risk, short- term investments. 14 The Company's net cash flows used in financing activities was $60.9 million for the six months ended June 30, 2001, compared to $4.8 million for the six months ended June 30, 2000, an increase of $56.1 million. The increase between periods relates to (i) an increase in stock repurchases of $82.2 million, as discussed below, and (ii) an increase in debt payments of $1.8 million. This increase is offset by an increase in proceeds between periods of $27.9 million from the exercise of stock options and warrants. Earnings before interest, taxes, depreciation and amortization (EBITDA) for the six months ended June 30, 2001 was $99.6 million, or 42.5% of total revenues, compared to $77.5 million, or 41.2% of total revenues for the six months ended June 30, 2000. EBITDA is presented here as a measure of the Company's debt service ability and is not intended to represent cash flows for the periods in accordance with generally accepted accounting principles. Interest rates for the Company's long-term debt and revolving credit facility are chosen at the option of the Company and are based on the LIBOR rate or the prime rate, plus an additional spread, with the spread dependent upon the Company's leverage ratio. As of June 30, 2001, the spread on the LIBOR rate and the prime rate was 0.50% and 0%, respectively. As of June 30, 2001, the entire amount of the debt was under either three-month or six-month LIBOR contracts with an overall weighted average interest rate of 4.77% (i.e., LIBOR at 4.27% plus spread of 0.50%). This compares to an overall weighted average interest rate of 7.14% at December 31, 2000. On February 28, 2001, AT&T exercised its rights under the Warrants to purchase 2.0 million shares of the Company's Common Stock at an exercise price of $12 per share, for a total exercise price of $24.0 million. Immediately following the exercise of the Warrants, the Company repurchased the 2.0 million shares for $37.00 per share (approximately the closing price on February 28, 2001) for a total repurchase price of $74.0 million, pursuant to the Company's stock repurchase program. As a result, the net cash outlay paid to AT&T for this transaction was $50.0 million, which was paid by the Company with available corporate funds. After this transaction AT&T no longer has any warrants or other rights to purchase the Company's Common Stock. In August 1999, the Company's Board of Directors approved a stock repurchase program which authorized the Company at its discretion to purchase up to a total of 5.0 million shares of its Common Stock from time-to-time as market and business conditions warrant. During the three months ended June 30, 2001, the Company did not repurchase any shares under the program. During the three months ended March 31, 2001, the Company repurchased 2.28 million shares of Common Stock for approximately $85.2 million (a weighted-average price of $37.37 per share), including the 2.0 million shares repurchased as part of the AT&T warrant exercise discussed above. As of June 30, 2001, the Company had purchased a total of 4.03 million shares for approximately $156.5 million (a weighted-average price of $38.88 per share) since the program was announced. The repurchased shares are held as treasury shares. The Company continues to make significant investments in client contracts, capital equipment, facilities, research and development, and at its discretion, may continue to make stock repurchases under its stock repurchase program. In addition, as part of its growth strategy, the Company is continually evaluating potential business and asset acquisitions and plans to expand its international business. The Company had no significant capital commitments as of June 30, 2001. The Company believes that cash generated from operations, together with its current cash, cash equivalents, and short-term investments, and the amount available under its current revolving credit facility, will be sufficient to meet its anticipated cash requirements for operations, income taxes, debt service, capital expenditures, investments in client contracts, and stock repurchases for both its short and long-term purposes. The Company also believes it has significant additional borrowing capacity and could obtain additional cash resources by amending its current credit facility and/or establishing a new credit facility. Forward-Looking Statements This report contains a number of forward-looking statements relative to future plans of the Company and its 15 expectations concerning the customer care and billing industry, as well as the converging telecommunications industry it serves, and similar matters. Such forward-looking statements are based on assumptions about a number of important factors, and involve risks and uncertainties that could cause actual results to differ materially from estimates contained in the forward-looking statements. Some of the risks that are foreseen by management are contained in Exhibit 99.01 of this report. Exhibit 99.01 constitutes an integral part of this report, and readers are strongly encouraged to read that section closely in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations. Dependence on AT&T AT&T completed its merger with Tele-Communications, Inc. (TCI) in 1999 and completed its merger with MediaOne Group, Inc. (MediaOne) in 2000. During the six months ended June 30, 2001 and 2000, revenues from AT&T Broadband and affiliated companies (AT&T) represented approximately 59.6% and 45.3% of total revenues, respectively. The increase in the percentage between periods relates primarily to the timing and the amount of software and services purchased by AT&T. There are inherent risks whenever this large of a percentage of total revenues is concentrated with one client. One such risk is that, should AT&T's business generally decline, it would have a material impact on the Company's results of operations. Contract Rights and Obligations (as amended) The AT&T Contract expires in 2012. The AT&T Contract has minimum financial commitments (based upon processing 13 million wireline video customers) over the term of the contract and includes exclusive rights to provide customer care and billing products and services for AT&T's offerings of wireline video, all Internet/high-speed data services, and print and mail services. During the fourth quarter of 2000, the Company relinquished its exclusive rights to process AT&T's wireline telephony customers, and expects these AT&T customers to be fully converted to another service provider by the end of 2001. The Company does not expect the loss of these customers to have a material impact on the Company's result of operations. Effective April 2001, the Company amended its agreement with AT&T giving the Company certain contractual rights to continue to process certain AT&T customers for a minimum of one year in the event that AT&T divests a portion of its customers to another company. These new rights are co-terminus and are in addition to the existing minimum processing commitments the Company has with AT&T through September 2012. Any such divestitures to a third party would not relieve AT&T of its minimum financial commitments over the term of the contract. It has been recently reported in the public press that AT&T Broadband may be acquired or merged with one or more third parties in a single transaction or a series of transactions. It is impossible and premature at this time to speculate what impact any particular transaction(s) would have on the Company's operations, if any. The Company believes the AT&T Contract would remain in effect in the event there is a change in control of AT&T Broadband. The AT&T Contract contains certain performance criteria and other obligations to be met by the Company. The Company is required to perform certain remedial efforts and is subject to certain penalties if it fails to meet the performance criteria or other obligations. The Company is also subject to an annual technical audit to determine whether the Company's products and services include innovations in features and functions that have become standard in the wireline video industry. The Company expects to perform successfully under the AT&T Contract, and is hopeful that it can continue to sell products and services to AT&T that are in excess of the minimum financial commitments and exclusive rights included in the contract. Should the Company fail to meet its obligations under the AT&T Contract, and should AT&T be successful in any action to either terminate the AT&T Contract in whole or in part, or collect damages caused by an alleged breach, it would have a material adverse impact on the Company's results of operations. A copy of the AT&T Contract and all subsequent amendments are included in the Company's exhibits to its periodic public filings with the Securities and Exchange Commission. These documents are available on the Internet and the Company encourages readers to review those documents for further details. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to the Company's market risks during the six months ended June 30, 2001. See the Company's 2000 10-K for additional discussion regarding the Company's market risks. 16 CSG SYSTEMS INTERNATIONAL, INC. PART II. OTHER INFORMATION Item 1-3. None. Item 4. Submission of Matters to a Vote of Security Holders. (a) The 2001 annual meeting (the "Annual Meeting") of stockholders of CSG Systems International, Inc. was held on June 1, 2001. (b) The following persons were elected as directors at the Annual Meeting: Class I (term expiring in 2004) Janice I. Obuchowski John P. Pogge Rockwell A. Schnabel The following directors' term of office continued after the Annual Meeting: Royce J. Holland Bernard W. Reznicek George F. Haddix Neal C. Hansen Frank V. Sica (c) Votes were cast or withheld at the Annual Meeting as follows: (i) Election of directors: Director For Withheld --------- ---------- -------- Janice I. Obuchowski 44,143,373 377,544 John P. Pogge 44,141,725 379,192 Rockwell A. Schnabel 44,139,470 381,447 (ii) Increase the 1996 Stock Incentive Plan by 3,000,000 shares: For Against Abstain --- ------- ------- 16,698,155 22,994,186 166,087 Item 5. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.44 CSG Systems International, Inc. Stock Option Plan for Non-Employee Directors 99.01 Safe Harbor for Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995-Certain Cautionary Statements and Risk Factors (b) Reports on Form 8-K None 17 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 14, 2001 CSG SYSTEMS INTERNATIONAL, INC. /s/ Neal C. Hansen ----------------------------------- Neal C. Hansen Chairman and Chief Executive Officer (Principal Executive Officer) /s/ Peter E. Kalan ----------------------------------- Peter E. Kalan Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Randy R. Wiese ----------------------------------- Randy R. Wiese Vice President and Controller (Principal Accounting Officer) 18 CSG SYSTEMS INTERNATIONAL, INC. INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- 10.44 CSG Systems International, Inc. Stock Option Plan for Non-Employee Directors 99.01 Safe Harbor for Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995-Certain Cautionary Statements and Risk Factors 19 EX-10.44 3 dex1044.txt STOCK OPTION PLAN Exhibit 10.44 [As amended through April 18, 2001] CSG SYSTEMS INTERNATIONAL, INC. STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1. Purpose. The purpose of the CSG Systems International, Inc. Stock Option Plan for Non-Employee Directors (the "Plan") is to foster and promote the long-term financial success of the Company and thereby increase stockholder value by attracting and retaining as directors of the Company highly qualified persons who are not employees of the Company or a Subsidiary. 2. Certain Definitions. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto. References to a particular section of the Code shall include any regulations issued under such section. "Common Stock" means the Common Stock, $0.01 par value per share, of the Company. "Company" means CSG Systems International, Inc., a Delaware corporation. "Director" means a person then serving as a member of the Board of the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Fair Market Value" means, as determined by the Board, the last sale price of the Common Stock as quoted on the Nasdaq National Market System on the trading day for which the determination is being made, or, in the event that no such sale takes place on such day, the average of the reported closing bid and asked prices on such day, or, if the Common Stock of the Company is listed on a national securities exchange, the last reported sale price on the principal national securities exchange on which the Common Stock is listed or admitted to trading on the trading day for which the determination is being made, or, if no such reported sale takes place on such day, the average of the closing bid and asked prices on such day on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not quoted on such National Market System nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices in the over-the-counter market on the day for which the determination is being made as reported through Nasdaq, or, if bid and asked prices for the Common Stock on such day are not reported through Nasdaq, the average of the bid and asked prices for such day as furnished by any New York Stock Exchange member firm regularly making a market in the Common Stock selected for such purpose by the Board, or, if none of the foregoing is applicable, then the fair market value of the Common Stock as determined in good faith by the Board in its sole discretion. "Stock Option" means an option to purchase Common Stock granted pursuant to the Plan. "Subsidiary" means a corporation, domestic or foreign, of which not less than 50% of the voting shares are held by the Company or by a Subsidiary, whether or not such corporation now exists or hereafter is organized or acquired by the Company or by a Subsidiary. 3. Administration. The Plan shall be administered by the Board, and the Board shall have authority to grant Stock Options to eligible Directors from time to time pursuant to the Plan. Subject to the applicable provisions of the Plan, the Board shall have authority to interpret the provisions of the Plan and to decide all questions of fact arising in the application of such provisions; to select the Directors to whom Stock Options shall be granted; to determine when, whether, and in what amounts Stock Options shall be granted; to determine the amount, terms, and conditions of each Stock Option; to determine the Fair Market Value of the Common Stock from time to time; to authorize persons to execute on behalf of the Company any agreement required to be entered into under the Plan; to adopt, alter, and repeal such administrative rules, guidelines, and practices governing the Plan as the Board from time to time shall deem advisable; and to make all other determinations necessary or advisable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all decisions and determinations made by the Board pursuant to the provisions of the Plan shall be made in the sole discretion of the Board and shall be final and binding on all persons, including but not limited to the Company, the Directors to whom Stock Options are granted, the heirs and legal representatives of such Directors, and the personal representatives and beneficiaries of the estates of such Directors. 4. Common Stock Subject to the Plan. The Company shall reserve and keep available for issuance under the Plan four hundred fifty thousand (450,000) shares of Common Stock, subject to adjustment pursuant to Section 17. Such shares may consist in whole or in part of authorized and unissued shares or treasury shares or any combination thereof. Except as otherwise provided in the Plan, any shares subject to a Stock Option which expires or terminates unexercised as to such shares shall again be available for the grant of Stock Options. 5. Eligibility to Receive Stock Options. Stock Options may be granted under the Plan only to Directors who are not employees of the Company or a Subsidiary on the date of the grant. 6. Stock Options. All Stock Options shall be nonqualified stock options for purposes of the Code. Stock Options shall be evidenced by agreements in such form as the Board shall approve from time to time; such agreements shall contain in substance the following terms and conditions and may contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Board shall deem appropriate: (a) Type of Option. Each option agreement shall identify the Stock Option evidenced thereby as a nonqualified stock option for purposes of the Code. 2 (b) Option Price. Each option agreement shall set forth the number of shares of Common Stock covered by the stock option and the applicable option exercise price per share, which price shall not be less than the Fair Market Value of the Common Stock on the date the Stock Option is granted or less than the par value of the Common Stock. (c) Term. Each option agreement shall state the period or periods of time during which the Stock Option may be exercised, in whole or in part, which shall be such period or periods of time as the Board may determine at the time the Stock Option is granted; provided, that no Stock Option shall be exercisable more than ten years after the date of its grant; and provided further, that each Stock Option shall become and remain exercisable as provided in the option agreement relating to such Stock Option. (d) Payment for Shares. Each option agreement shall provide that the option exercise price per share may be paid to the Company either (i) in cash, (ii) in shares of the Common Stock which already are owned by the option grantee (and have been owned by the option grantee for more than six months prior to the Stock Option exercise date) and which are surrendered to the Company in good form for transfer, or (iii) in any combination of cash and such shares of the Common Stock, except to the extent that the Board may restrict payment in shares of the Common Stock. When payment is made in shares of the Common Stock, the value of such shares for such purpose shall be their Fair Market Value on the Stock Option exercise date. 7. Cessation of Service as a Director. Unless the applicable option agreement provides otherwise, if the grantee of a Stock Option ceases to be a Director for any reason other than retirement from the Board under the circumstances described in Section 8 or death, then each outstanding but unexercised Stock Option held by such grantee shall continue to be exercisable only to the extent that it was exercisable at the time that such grantee ceased to be a Director and only until the earlier of (i) ninety days after such grantee ceased to be a Director or (ii) the expiration of the term of such Stock Option; and to the extent not exercisable or not exercised (if exercisable) by such applicable date, such Stock Option shall terminate and be of no further force or effect. 8. Retirement from Board. Unless the applicable option agreement provides otherwise, if the grantee of a Stock Option ceases to be a Director (other than by reason of death) and at the time of such occurrence (the "Retirement Date") is at least age 65 with ten or more years of service as a Director or is at least age 70 with five or more years of service as a Director, then each outstanding but unexercised Stock Option held by such grantee on the Retirement Date shall continue to be or become exercisable in accordance with its terms until the earlier of (i) five years after the Retirement Date or (ii) the expiration of the term of such Stock Option; and to the extent not exercisable or not exercised (if exercisable) by such applicable date, such Stock Option shall terminate and be of no further force or effect. 3 9. Death. Unless the applicable option agreement provides otherwise, if the grantee of a Stock Option dies, then each outstanding but unexercised Stock Option which had been held by such grantee for at least twelve months as of the date of such grantee's death automatically shall become exercisable in full (if not already exercisable) upon such grantee's death. Each outstanding but unexercised Stock Option which becomes exercisable pursuant to the preceding sentence and each outstanding but unexercised Stock Option held by such grantee which was exercisable on the date of such grantee's death may be exercised by the legal representative of such grantee's estate or by the beneficiaries of such estate to whom such Stock Option is distributed until the earlier of (i) three years after the date of such grantee's death or (ii) the expiration of the term of such Stock Option; and to the extent not exercisable or not exercised (if exercisable) by such applicable date, such Stock Option shall terminate and be of no further force or effect. 10. Acceleration of Exercisability. The Board shall have the authority to accelerate the exercisability of any outstanding Stock Option, subject to any applicable requirements of the Plan, under such circumstances and upon such terms and conditions as the Board shall deem appropriate. 11. General Restrictions. Each Stock Option grant under the Plan shall be subject to the requirement that if at any time the Board shall determine that (i) the listing, registration, or qualification of the shares of Common Stock subject or related thereto upon any securities market or securities exchange or under any state or federal law, (ii) the consent or approval of any governmental regulatory body, or (iii) an agreement by the grantee of such Stock Option with respect to the disposition of the shares of Common Stock subject thereto is necessary or desirable as a condition of, or in connection with, such grant or the issuance of shares of Common Stock thereunder, then such Stock Option grant may not be consummated and any rights under such Stock Option may not be exercised in whole or in part unless and until such listing, registration, qualification, consent, approval, or agreement shall have been effected or obtained upon conditions acceptable to the Board. 12. Rights of a Stockholder. The grantee of a Stock Option shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to such Stock Option unless and until certificates for such shares of Common Stock are issued to such grantee upon the timely and proper exercise of such Stock Option. 13. No Right to Continue as a Director. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any Director the right to continue to serve as a Director of the Company. 14. Indemnification. No member of the Board, and no officer or employee of the Company acting on behalf of the Board, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan; and all members of the Board and each officer or employee of the Company acting on behalf of the Board shall, to the extent permitted by law, be fully indemnified by the Company in respect of any such action, determination, or interpretation. 4 15. Non-Assignability. No Stock Option granted under the Plan shall be assignable or transferable by the grantee thereof except by will, by the laws of descent and distribution, or by such other means (if any) or in such other manner (if any) as the Board may approve from time to time. No right or benefit under the Plan or any Stock Option granted under the Plan shall be liable for the debts, liabilities, or alimony obligations of the person entitled to such right or benefit, either by assignment, attachment, or any other method, and shall not be subject to be taken by the creditors of the person entitled to such right or benefit by any process whatsoever. 16. Nonuniform Determinations. The Board's determinations under the Plan (including but not limited to determinations of the persons to receive Stock Option grants, the amount and timing of such grants, and the terms and provisions of such grants) need not be uniform and may be made by the Board selectively among the Directors who receive, or are eligible to receive, Stock Option grants. 17. Adjustments. In the event of any change in the outstanding shares of Common Stock by reason of a stock dividend or distribution, stock split, recapitalization, merger, reorganization, consolidation, split-up, spin-off, combination of shares, exchange of shares, or other change in corporate structure affecting the Common Stock, the Board shall make appropriate adjustments in (a) the aggregate number of shares of Common Stock (i) reserved for issuance under the Plan and (ii) covered by outstanding Stock Option grants and (b) the exercise price related to outstanding Stock Options; provided, that the number of shares subject to any Stock Option always shall be a whole number. 18. Termination and Amendment. The Board may terminate the Plan or amend the Plan or any portion thereof at any time, including but not limited to amendments to the Plan necessary to comply with the requirements of Section 16(b) of the Exchange Act or applicable regulations thereunder, except that the Board may not increase the maximum number of shares which may be issued under the Plan (other than by way of adjustments made pursuant to Section 17), extend the maximum period during which any Stock Option may be exercised, extend the term of the Plan, decrease the minimum option price to less than the Fair Market Value on the date of the grant of a Stock Option, or change the category of persons eligible to participate in the Plan without stockholder approval if such approval is required by the applicable rules of the Securities and Exchange Commission, the Nasdaq National Market, or any national securities exchange on which the Common Stock is listed. The termination or any amendment of the Plan shall not, without the consent of a Stock Option grantee, adversely affect such grantee's rights under a Stock Option previously granted to such grantee. The Board may amend the terms and conditions of any Stock Option grant previously made, prospectively or retroactively, as long as such amendment is not inconsistent with the terms of the Plan; but, except as otherwise expressly permitted by the Plan and subject to Section 17, no such amendment shall adversely affect the rights of the grantee of such Stock Option without such grantee's consent. 19. Term of Plan. Subject to approval of the Plan by the stockholders of the Company not later than December 31, 1997, the Plan shall become effective on the date on which the Plan is approved and adopted by the Board and shall terminate for purposes of further Stock Option grants 5 on the first to occur of (i) December 31, 2006, or (ii) the effective date of the termination of the Plan by the Board pursuant to Section 18. No Stock Options may be granted under the Plan after the termination of the Plan, but such termination shall not affect any Stock Options outstanding at the time of such termination or the authority of the Board to continue to administer the Plan apart from the making of further Stock Option grants. The Board may grant Stock Options under the Plan prior to approval of the Plan by the stockholders of the Company, but any Stock Options so granted shall be subject in all respects to such approval. Notwithstanding the provisions of any option agreement evidencing a Stock Option granted prior to approval of the Plan by the stockholders of the Company, such Stock Option may not be exercised to any extent prior to such stockholder approval. If such stockholder approval is not given by December 31, 1997, then the Plan and all Stock Options granted thereunder automatically shall terminate and be of no further force or effect at the close of business on December 31, 1997. 20. Governing Law. The Plan shall be governed by and construed in accordance with the laws of Delaware. 6 EX-99.01 4 dex9901.txt FORWARD LOOKING STATEMENTS EXHIBIT 99.01 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 CERTAIN CAUTIONARY STATEMENTS AND RISK FACTORS CSG Systems International, Inc. and its subsidiaries (collectively, the Company) or their representatives from time-to-time may make or may have made certain forward-looking statements, whether orally or in writing, including without limitation, any such statements made or to be made in the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in its various SEC filings or orally in conferences or teleconferences. The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements, so as to ensure to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. ACCORDINGLY, THE FORWARD-LOOKING STATEMENTS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO AND ARE ACCOMPANIED BY THE FOLLOWING MEANINGFUL CAUTIONARY STATEMENTS IDENTIFYING CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS. This list of factors is likely not exhaustive. The Company operates in a rapidly changing and evolving business involving the converging communications markets, and new risk factors will likely emerge. Management cannot predict all of the important risk factors, nor can it assess the impact, if any, of such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those in any forward-looking statements. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT FORWARD-LOOKING STATEMENTS WILL BE ACCURATE INDICATORS OF FUTURE ACTUAL RESULTS, AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER FROM RESULTS PROJECTED IN FORWARD-LOOKING STATEMENTS AND THAT SUCH DIFFERENCES MAY BE MATERIAL. RELIANCE ON CCS The Company derived approximately 75.8% and 78.3% of its total revenues from its primary product, Communications Control System, and related products and services (collectively, "CCS") in the years ended December 31, 2000 and 1999, respectively. CCS is expected to provide the substantial majority of the Company's total revenues in the foreseeable future. The Company continues to develop new products and services to address the evolving needs of its new and existing clients as they roll out new product offerings and enter new markets. A substantial portion of the Company's new products and services require enhancements to the core functionality of CCS. There is an inherent risk of technical problems in maintaining and operating CCS as its complexity is increased. The Company's results will depend upon continued market acceptance of CCS, as well as the Company's ability to continue to adapt, modify, maintain, and operate CCS to meet the changing needs of its clients without sacrificing the reliability or quality of service. Any reduction in demand for CCS would have a material adverse effect on the financial condition and results of operations of the Company. AT&T RELATIONSHIP Contract Rights and Obligations (as amended) The AT&T Contract has an original term of 15 years and expires in 2012. The AT&T Contract includes minimum financial commitments by AT&T over the life of the contract, and as amended, includes exclusive rights for the Company to provide customer care and billing products and services for AT&T's offerings of wireline video, all Internet/high speed data services, and print and mail services. During the fourth quarter of 2000, the Company relinquished its exclusive rights to process AT&T's wireline telephony customers, and expects these AT&T customers to be fully converted to another service provider by the end of 2001. The Company does not expect the loss of these customers to have a material impact on the Company's result of operations. Effective April 2001, the Company amended its agreement with AT&T giving the Company certain contractual rights to continue to process certain AT&T customers for a minimum of one year in the event that AT&T divests a portion of its customers to another company. These new rights are co-terminus and are in addition to the existing minimum processing commitments the Company has with AT&T through September 2012. Any such divestitures to a third party would not relieve AT&T of its minimum financial commitments over the term of the contract. It has been recently reported in the public press that AT&T Broadband may be acquired or merged with one or more third parties in a single transaction or a series of transactions. It is impossible and premature at this time to speculate what impact any particular transaction(s) would have on the Company's operations, if any. The Company believes the AT&T Contract would remain in effect in the event there is a change in control of AT&T Broadband; however, it is impossible to predict how any successor entity(s) to AT&T Broadband would interpret their obligations under the AT&T Contract. It is also impossible to predict what impact any dispute would have on the Company's results of operations or market for its securities. The AT&T Contract contains certain performance criteria and other obligations to be met by the Company. The Company is subject to various remedies and penalties if it fails to meet the performance criteria or other obligations. The Company is also subject to an annual technical audit to determine whether the Company's products and services include innovations in features and functions that have become standard in the wireline video industry. If an audit determines the Company is not providing such an innovation and it fails to do so in the manner and time period dictated by the contract, then AT&T would be released from its exclusivity obligation to the extent necessary to obtain the innovation from a third party. To fulfill the AT&T Contract and to remain competitive, the Company believes it will be required to develop additional features to existing products and services, and possibly in certain circumstances new products and services, all of which will require substantial research and development, as well as implementation and operational aptitude. AT&T has the right to terminate the AT&T Contract in the event of certain defaults by the Company. To date, the Company believes it has complied with the terms of the contract. Should the Company fail to meet its obligations under the AT&T Contract, and should AT&T be successful in any action to either terminate the AT&T Contract in whole or in part, or collect damages caused by an alleged breach, it would have a material adverse impact on the Company's results of operations. Indeed, in the Company's third quarter ended September 30, 2000, AT&T filed a Demand for Arbitration relating to the AT&T Contract, causing a significant drop in the trading price of the Company's Common Stock. A copy of the AT&T Contract and all subsequent amendments (including the amendment executed as part of the agreement to withdraw the Demand for Arbitration) are included in the Company's exhibits to its periodic public filings with the Securities and Exchange Commission. These documents are available on the Internet and the Company encourages readers to review those documents for further details. See the Company's 2000 10-K for additional discussion of the arbitration claim and the Company's business relationship with AT&T. Business Activities and Dependence On AT&T AT&T completed its merger with Tele-Communications, Inc. (TCI) in March 1999 and completed its merger with MediaOne Group, Inc. (MediaOne) in 2000. During the six months ended June 30, 2001 and 2000, revenues from AT&T and affiliated companies represented approximately 59.6% and 45.3% of total revenues, respectively. The increase in the percentage between periods relates primarily to the timing and the amount of software purchases by AT&T. The Company expects to continue to generate a significant portion of its total revenues from AT&T and affiliated companies in the future. There are inherent risks whenever this large of a percentage of total revenues is concentrated with one customer. One such risk is that, should AT&T's business generally decline, it would have a material impact on the Company's results of operations. If the Company were to fail to continue to perform successfully under the AT&T Contract, that would have a material adverse effect on the financial condition and results of operations of the Company. Likewise, if AT&T were to breach its material obligations to the Company, that would have a material adverse effect on the financial condition and results of operations of the Company. 2 Historically, a substantial portion of the Company's revenue growth has resulted from the sale of products and services to AT&T, both of which are in excess of the minimum financial commitments included in the contract. There can be no assurance that the Company will continue to sell products and services to AT&T in excess of the minimum financial commitments included in the contract. RENEWAL OF AOL TIME WARNER CONTRACTS America Online, Inc. ("AOL") and Time Warner completed their merger in 2000, and now operate under the name AOL Time Warner Inc. ("AOL Time Warner"). During the years ended December 31, 2000 and 1999, revenues from AOL Time Warner represented approximately 8.3% and 10.2% of total revenues, respectively. The Company provides services to AOL Time Warner under multiple, separate contracts with various AOL Time Warner affiliates. These contracts are scheduled to expire on various dates. The failure of AOL Time Warner to renew contracts representing a significant part of its business with the Company would have a material adverse impact on the financial condition and results of operations of the Company. It would be premature to predict the impact, if any, the result the AOL Time Warner merger will have on the financial condition or results of operations of the Company. CONVERSION TO THE COMPANY'S SYSTEMS The Company's ability to convert new client sites to its customer care and billing systems on a timely and accurate basis is necessary to meet the Company's contractual commitments and to achieve its business objectives. Converting multiple sites under the schedules required by contracts or business requirements is a difficult and complex process. One of the difficulties in the conversion process is that competition for the necessary qualified personnel is intense and the Company may not be successful in attracting and retaining the personnel necessary to complete conversions on a timely and accurate basis. The inability of the Company to perform the conversion process timely and accurately would have a material adverse impact on the results of operations of the Company. The Company is currently scheduled to convert approximately 3.2 million customers onto its processing system during the remainder of 2001. INDUSTRY CONSOLIDATION AND DEPENDENCE ON VIDEO INDUSTRY - CABLE TELEVISION AND DBS The Company's business is concentrated in the cable television and Direct Broadcast Satellite ("DBS") industries, making the Company susceptible to a downturn in those industries. During the years ended December 31, 2000 and 1999, the Company derived 77.7% and 75.8%, and 16.0% and 15.5% of its total revenues from companies in the U.S. cable television and U.S. and Canadian DBS industries, respectively. A decrease in the number of customers served by the Company's clients, loss of business due to non-renewal of client contracts, industry consolidation, and/or changing consumer demand for services would adversely effect the results of operations of the Company. There can be no assurance that new entrants into the video market will become clients of the Company. Also, there can be no assurance that video providers will be successful in expanding into other segments of the converging communications markets. Even if major forays into new markets are successful, the Company may be unable to meet the special billing and customer care needs of that market. The cable television industry both domestically and internationally is undergoing significant ownership changes at an accelerated pace. One facet of these changes is that cable television providers are consolidating, decreasing the potential number of buyers for the Company's products and services. Seven providers account for over 85% of the U.S. cable television market and two providers account for almost the entire U.S. DBS market. The Company processes and/or provides statement printing for at least a portion of the customers (i) for five of the seven cable television providers, and (ii) for one of the DBS providers. For the six months ended June 30, 2001, approximately 70% of the Company's total revenues were generated from companies under the control of these six providers. Consolidation in the industry may put at risk the Company's ability to 3 leverage its existing relationships. Should this consolidation result in a concentration of cable television customer accounts being owned by companies with whom the Company does not have a relationship, or with whom competitors are entrenched, it could negatively effect the Company's ability to maintain or expand its market share, thereby adversely effecting the results of operations. NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE The market for customer care and billing systems is characterized by rapid changes in technology and is highly competitive with respect to the need for timely product innovations and new product introductions. The Company believes that its future success in sustaining and growing the annual processing revenue per customer account and the software and professional services revenues depends upon continued market acceptance of its current products, including CCS, and its ability to enhance its current products and develop new products that address the increasingly complex and evolving needs of its clients. Substantial research and development will be required to maintain the competitiveness of the Company's products and services in the market. Development projects can be lengthy and costly, and are subject to changing requirements, programming difficulties, a shortage of qualified personnel, and unforeseen factors which can result in delays. In addition, the Company is typically responsible for the implementation of new products, and depending upon the specific product, may also be responsible for operations of the product. There is an inherent risk in the successful implementation and operations of these products as the technological complexity increases. There can be no assurance (i) of continued market acceptance of the Company's current products, (ii) that the Company will be successful in the timely development of product enhancements or new products that respond to technological advances or changing client needs, or (iii) that the Company will be successful in supporting the implementation and/or operations of product enhancements or new products. CONVERGING COMMUNICATIONS MARKETS The Company's growth strategy is based in part on the continuing convergence and growth of the cable television, DBS, telecommunications, and on-line services markets. If these markets fail to converge, grow more slowly than anticipated, or if providers in the converging markets do not accept the Company's solution for combining multiple communications services for a customer, there could be a material adverse effect on the Company's growth. COMPETITION The market for the Company's products and services is highly competitive. The Company directly competes with both independent providers of products and services and in-house systems developed by existing and potential clients. In addition, some independent providers are entering into strategic alliances with other independent providers, resulting in either a new competitor, or a competitor(s) with greater resources. Many of the Company's current and potential competitors have significantly greater financial, marketing, technical, and other competitive resources than the Company, and many already have significant international operations. There can be no assurance that the Company will be able to compete successfully with its existing competitors or with new competitors. ATTRACTION AND RETENTION OF 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 is particularly dependent on its executive officers. The Company believes that its future success also depends on its ability to attract and retain highly skilled technical, managerial, operational, and marketing personnel, including, in particular, additional personnel in the areas of research and development and technical support. Competition for qualified 4 personnel is intense, particularly in the areas of research and development, conversions and technical support. The Company may not be successful in attracting and retaining the personnel it requires, which would adversely effect the Company's ability to meet its commitments and new product delivery objectives. VARIABILITY OF QUARTERLY RESULTS The Company's quarterly revenues and results, particularly relating to software and professional services, may fluctuate depending on various factors, including the timing of executed contracts and the delivery of contracted services or products, the cancellation of the Company's services and products by existing or new clients, the hiring of additional staff, new product development and other expenses, and changes in sales commission policies. No assurance can be given that results will not vary due to these factors. As the Company's overall revenue grows, so too does the risk associated with meeting financial expectations for revenue derived from its software and services offerings. As a result, there is a proportionately increased likelihood that the Company may fail to meet revenue and earnings expectations of the analyst community. With the current volatility of the stock market, should the Company fail to meet analyst expectations by even a relatively small amount it would most likely have a disproportionately negative impact upon the market price for the Company's Common Stock. DEPENDENCE ON PROPRIETARY TECHNOLOGY The Company relies on a combination of trade secret and copyright laws, nondisclosure agreements, and other contractual and technical measures to protect its proprietary rights in its products. The Company also holds a limited number of patents on some of its newer products, and does not rely upon patents as a primary means of protecting its rights in its intellectual property. There can be no assurance that these provisions will be adequate to protect its proprietary rights. Although the Company believes that its intellectual property rights 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. INTERNATIONAL OPERATIONS The Company's business strategy includes a commitment to the marketing of its products and services internationally, and the Company has acquired and established operations outside of the U.S. The Company is subject to certain inherent risks associated with operating internationally. Risks include product development to meet local requirements such as the conversion to the local currency, difficulties in staffing and management, reliance on independent distributors or strategic alliance partners, fluctuations in foreign currency exchange rates, compliance with foreign regulatory requirements, variability of foreign economic conditions, changing restrictions imposed by U.S. export laws, an adverse impact to the Company's overall effective tax rate resulting from (i) operations in foreign countries with higher tax rates than the United States, (ii) inefficient use of foreign tax credits, and (iii) the inability to utilize some or all of losses generated in one or more foreign countries, and competition from U.S.-based companies which have firmly established significant international operations. There can be no assurance that the Company will be able to manage successfully the risks related to selling its products and services in international markets. INTEGRATION OF ACQUISITIONS As part of its growth strategy, the Company seeks to acquire assets, technology, and businesses which would provide the technology and technical personnel to expedite the Company's product development efforts, provide complementary products or services or provide access to new markets and clients. Acquisitions involve a number of risks and difficulties, including expansion into new geographic markets and business areas, the requirement to understand local business practices, the diversion of management's 5 attention to the assimilation of acquired operations and personnel, potential adverse short-term effects on the Company's operating results, and the amortization of acquired intangible assets. SYSTEM SECURITY The end users of the Company's systems are continuously connected to the Company's products through a variety of public and private telecommunications networks. The Company plans to expand its use of the Internet with its product offerings thereby permitting, for example, our clients' customer to use the Internet to review account balances, order services or execute similar account management functions. The Company also operates an extensive internal network of computers and systems used to manage internal communications, financial information, development data and the like. The Company's product and internal communications networks and systems carry an inherent risk of failure as a result of human error, acts of nature and intentional, unauthorized attacks from computer "hackers." Opening up these networks and systems to permit access via the Internet increases their vulnerability to unauthorized access and corruption, as well as increasing the dependency of the systems' reliability on the availability and performance of the Internet's infrastructure. Certain system security and other controls for CCS are reviewed annually by an independent party. The Company periodically undergoes a security review of its internal systems by an independent party, and has implemented a plan intended to limit the risk of an unauthorized access to the networks and systems, including network firewalls, intrusion detection systems and antivirus applications. The method, manner, cause and timing of an extended interruption or outage in the Company's networks or systems is impossible to predict. As a result, there can be no assurances that the Company's networks and systems will not fail, nor that the Company's business recovery plans will adequately mitigate any damages incurred as a consequence. In addition, should the Company's networks or systems be significantly compromised, it would most likely have a material adverse effect on the operations of the Company, including its ability to meet product delivery obligations or client expectations. Likewise, should the Company's networks or systems experience an extended interruption or outage, have their security compromised or data lost or corrupted, it would most likely result in an immediate loss of revenue, as well as damaging the reputation of the Company. Any of these events could have both an immediate, negative impact upon the Company's short term revenue and profit expectations, as well as its long term ability to attract and retain new clients. PRODUCT OPERATIONS AND SYSTEM AVAILABILITY The Company's product operations are run in both mainframe and distributed system computing environments, as follows: Mainframe Environment CCS operates in a mainframe data processing center managed by FDC (the "FDC Data Center"), with end users dispersed throughout the United States and Canada. These services are provided under an agreement with FDC, which was recently extended and is now scheduled to expire June 30, 2005. The Company believes it could obtain mainframe data processing services from alternative sources, if necessary. The Company has a business recovery plan as part of its agreement with FDC should the FDC Data Center suffer an extended business interruption or outage. This plan is tested on an annual basis. Distributed Systems Environment Several of the Company's new product applications operate in a distributed systems environment (also known as "open systems"), running on multiple servers for the benefit of certain clients. The Company recently completed the migration of these distributed systems servers from its own internal data center to the FDC Data Center. Under an agreement with FDC that runs through June 30, 2005, FDC provides the operations monitoring and facilities management services, while the Company provides hardware, operating systems and application support. 6 Typically, these distributed product applications interface to and operate in conjunction with CCS via telecommunication networks. The Company is currently implementing its business recovery plan for these applications. The Company and FDC have extensive experience in running applications within the mainframe computing platform, and only within the last few years began running applications within a distributed systems environment. In addition, the mainframe computing environment and related technology is mature and has proven to be a highly reliable and scaleable computing platform. The distributed systems computing platform is not at the same level of maturity as the mainframe computing platform. In addition, security attacks on distributed systems throughout the industry are more prevalent than on mainframe environments due to the open nature of those systems. The end users of the Company systems are continuously connected to the Company's products through a variety of public and private telecommunications networks, and are highly dependent upon the continued availability of the Company's systems to conduct their business operations. Should the FDC Data Center, or any particular product application or internal system which is operated within the FDC Data Center or the Company's facilities, as well as the connecting telecommunications networks, experience an extended business interruption or outage, it could have an immediate impact to the business operations of the Company's clients, which could have a material adverse impact on the financial condition and results of operations of the Company, as well as negatively affect the Company's ability to attract and retain new clients. 7 -----END PRIVACY-ENHANCED MESSAGE-----