-----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, AjlTgbtvG97ha+klHEX+JDpp5HzVLjcyCCesJI0Mzc/XLHcO0vB7fLZd0jse/8x0 o3buZMkOpBsgu3lXCWKWUg== 0000927356-97-001398.txt : 19971117 0000927356-97-001398.hdr.sgml : 19971117 ACCESSION NUMBER: 0000927356-97-001398 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD 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: SEC FILE NUMBER: 000-27512 FILM NUMBER: 97721876 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: 5251 DTC PARKWAY SUITE 625 CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-Q 1 CSG SYSTEMS, FORM 10-Q FORM 10-Q 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 September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission file number 0-27512 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 November 12, 1997: 25,475,032 CSG SYSTEMS INTERNATIONAL, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 INDEX
PAGE NO. -------- Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996................................................. 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1997 and 1996.............................. 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996..................................... 5 Notes to Condensed Consolidated Financial Statements.................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 9 Part II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...................................... 16 Signatures............................................................ 17 Index to Exhibits..................................................... 18
2 CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
September 30, December 31, 1997 1996 ------------- ------------ ASSETS (unaudited) ------ Current Assets: Cash and cash equivalents............................................................... $ 25,948 $ 6,134 Accounts receivable- Trade- Billed, net of allowance of $893 and $819........................................... 41,807 33,141 Unbilled............................................................................ 3,307 5,220 Other................................................................................. 1,900 1,342 Deferred income taxes................................................................... 225 45 Other current assets.................................................................... 3,003 2,574 -------- -------- Total current assets................................................................. 76,190 48,456 -------- -------- Property and equipment, net of depreciation of $13,420 and $10,664........................ 15,856 13,093 Investment in discontinued operations..................................................... - 732 Investment in SUMMITrak assets............................................................ 106,226 - Software, net of amortization of $32,004 and $22,924...................................... 14,345 13,629 Noncompete agreements and goodwill, net of amortization of $17,742 and $12,572.................................................................. 20,304 25,730 Client contracts and related intangibles, net of amortization of $11,598 and $8,528................................................................... 6,682 9,752 Deferred income taxes..................................................................... 4,993 1,356 Other assets.............................................................................. 4,801 2,162 -------- -------- Total assets......................................................................... $249,397 $114,910 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Current maturities of long-term debt.................................................... $ 5,000 $ 10,000 Customer deposits....................................................................... 6,878 6,450 Trade accounts payable.................................................................. 7,905 12,620 Accrued liabilities..................................................................... 11,045 8,177 Deferred revenue........................................................................ 4,300 5,384 Accrued income taxes.................................................................... 2,058 945 Other current liabilities............................................................... 469 450 -------- -------- Total current liabilities............................................................ 37,655 44,026 -------- -------- Long-term debt, net of current maturities............................................... 145,000 22,500 Deferred revenue........................................................................ 11,157 6,420 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; 25,520,248 shares and 25,488,876 shares issued and outstanding...................... 255 255 Additional paid-in capital............................................................ 111,942 111,367 Deferred employee compensation........................................................ (810) (1,207) Notes receivable from employee stockholders........................................... (861) (861) Accumulated translation adjustments................................................... (131) 573 Accumulated deficit................................................................... (54,810) (68,163) -------- -------- Total stockholders' equity........................................................... 55,585 41,964 -------- -------- Total liabilities and stockholders' equity........................................... $249,397 $114,910 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Quarter ended Nine months ended ------------------------------ ---------------------------- September 30, September 30, September 30, September 30, 1997 1996 1997 1996 -------------- ------------- ------------- ------------- Total revenues....................................................... $ 43,278 $ 35,320 $ 122,890 $ 92,508 Expenses: Cost of revenues: Direct costs....................................................... 18,128 15,824 54,962 43,024 Amortization of acquired software.................................. 2,892 2,751 8,668 8,252 Amortization of client contracts and related intangibles........... 1,023 1,023 3,069 3,069 ---------- ---------- ---------- --------- Total cost of revenues......................................... 22,043 19,598 66,699 54,345 ---------- ---------- ---------- --------- Gross margin......................................................... 21,235 15,722 56,191 38,163 ---------- ---------- ---------- --------- Operating expenses: Research and development........................................... 5,677 5,514 16,331 14,862 Selling and marketing.............................................. 2,776 2,015 7,877 5,005 General and administrative: General and administrative........................................ 5,394 3,549 14,181 9,977 Amortization of noncompete agreements and goodwill................ 1,731 1,723 5,194 4,662 Stock-based employee compensation................................. 86 98 373 3,472 Depreciation....................................................... 1,831 1,282 5,051 3,718 ---------- ---------- ---------- --------- Total operating expenses....................................... 17,495 14,181 49,007 41,696 ---------- ---------- ---------- --------- Operating income (loss)............................................... 3,740 1,541 7,184 (3,533) ---------- ---------- ---------- --------- Other income (expense): Interest expense................................................... (938) (780) (2,195) (3,390) Interest income.................................................... 290 187 667 672 Other.............................................................. 21 - 352 - ---------- ---------- ---------- --------- Total other.................................................... (627) (593) (1,176) (2,718) ---------- ---------- ---------- --------- Income (loss) before income taxes, extraordinary item and discontinued operations............................................ 3,113 948 6,008 (6,251) Income tax (provision) benefit....................................... - - - - ---------- ---------- ---------- --------- Income (loss) before extraordinary item and discontinued operations... 3,113 948 6,008 (6,251) Extraordinary loss from early extinguishment of debt................. (577) - (577) (1,260) ---------- ---------- ---------- --------- Income (loss) from continuing operations.............................. 2,536 948 5,431 (7,511) Gain from disposition of discontinued operations..................... 7,922 - 7,922 - ---------- ---------- ---------- --------- Net income (loss)..................................................... $ 10,458 $ 948 $ 13,353 $ (7,511) ========== ========== ========== ========= Primary net income (loss) per common and equivalent share: Income (loss) before extraordinary item and discontinued operations.. $ 0.12 $ 0.04 $ 0.23 $ (0.25) Extraordinary loss from early extinguishment of debt................. (0.02) - (0.02) (0.05) Gain from disposition of discontinued operations..................... 0.30 - 0.31 - ---------- ---------- ---------- --------- Net income (loss).................................................... $ 0.40 $ 0.04 $ 0.52 $ (0.30) ========== ========== ========== ========= Weighted average common and equivalent shares used in primary calculation......................................................... 26,285,581 25,486,383 25,755,833 24,822,720 ========== ========== ========== ========== Fully diluted net income (loss) per common and equivalent share: Income (loss) before extraordinary item and discontinued operations.. $ 0.11 $ 0.04 $ 0.23 $ (0.25) Extraordinary loss from early extinguishment of debt................. (0.02) - (0.02) (0.05) Gain from disposition of discontinued operations..................... 0.30 - 0.31 - ---------- ---------- ---------- ---------- Net income (loss).................................................... $ 0.39 $ 0.04 $ 0.52 $ (0.30) ========== ========== ========== ========== Weighted average common and equivalent shares used in fully diluted calculation................................................. 26,544,842 25,486,383 25,842,253 24,822,720 ========== ========== ========== ========== 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, EXCEPT SHARE AMOUNTS)
NINE MONTHS ENDED ------------- ------------- SEPTEMBER 30, SEPTEMBER 30, 1997 1996 ------------ ------------- Cash flows from operating activities: Net income (loss).................................................... $ 13,353 $(7,511) Adjustments to reconcile net income (loss) to net cash provided by operating activities- Depreciation....................................................... 5,051 3,718 Amortization....................................................... 17,720 16,525 Stock-based employee compensation.................................. 373 3,472 Extraordinary loss from early extinguishment of debt............... 577 1,260 Gain from disposition of discontinued operations................... (7,922) - Changes in operating assets and liabilities: Trade accounts receivable, net.................................... (6,861) (6,220) Other receivables................................................. (558) 717 Deferred income taxes............................................. (3,817) (2,327) Other current and noncurrent assets............................... (819) (2,509) Customer deposits................................................. 428 499 Trade accounts payable and accrued liabilities.................... (606) 5,752 Deferred revenue.................................................. 3,668 4,749 Other current liabilities......................................... 19 (6) --------- -------- Net cash provided by operating activities........................ 20,606 18,119 --------- -------- Cash flows from investing activities: Purchases of property and equipment, net............................. (7,892) (3,662) Acquisition of SUMMITrak assets...................................... (106,226) - Acquisition of businesses, net of cash acquired...................... - (3,518) Additions to software................................................ (9,796) (1,048) Proceeds from disposition of discontinued operations................. 8,654 2,000 --------- -------- Net cash used in investing activities............................ (115,260) (6,228) --------- -------- Cash flows from financing activities: Proceeds from issuance of common stock............................... 623 44,804 Purchase and cancellation of common stock............................ (24) (23) Payment of dividends for redeemable convertible preferred stock...... - (4,497) Proceeds from long-term debt......................................... 150,000 - Payments on long-term debt........................................... (32,500) (50,068) Payment of deferred financing costs.................................. (3,181) - --------- -------- Net cash provided by (used in) financing activities.............. 114,918 (9,784) --------- -------- Effect of exchange rate fluctuations on cash.......................... (450) (4) --------- -------- Net increase in cash and cash equivalents............................. 19,814 2,103 Cash and cash equivalents, beginning of period........................ 6,134 3,603 --------- -------- Cash and cash equivalents, end of period.............................. $ 25,948 $ 5,706 ========= ======== Supplemental disclosures of cash flow information: Cash paid (received) during the period for- Interest............................................................ $ 1,878 $ 3,294 Income taxes........................................................ $ 2,678 $ (586) Supplemental disclosure of noncash financing activities: During March 1996, the Company converted 8,999,999 shares of redeemable convertible preferred stock into 17,999,998 shares of common stock. The accompanying notes are an integral part of these condensed consolidated financial statements. 5
CSG SYSTEMS INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL The condensed consolidated financial statements at September 30, 1997, and for the three and nine months then ended are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim period. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, filed with the Securities and Exchange Commission. The results of operations for the three and nine months ended September 30, 1997, are not necessarily indicative of the results for the entire year ending December 31, 1997. 2. STOCKHOLDERS' EQUITY Effective September 19, 1997, the Company acquired certain SUMMITrak assets from Tele-Communications Inc. (TCI) affiliates (Note 5). As part of the acquisition, the Company granted warrants to TCI affiliates to purchase up to 1.5 million shares of the Company's common stock at $24 per share. The right to exercise the warrants is contingent upon the achievement of certain milestones by TCI specified in the SUMMITrak asset purchase agreement. None of the warrants are exercisable as of September 30, 1997. The warrants expire September 19, 2002. The Company completed an initial public offering (IPO) of its common stock in March 1996. The Company sold 3,335,000 shares of common stock at an initial public offering price of $15 per share, resulting in net proceeds to the Company, after deducting underwriting discounts and offering expenses, of approximately $44,794,000. As of the closing of the IPO, all of the 8,999,999 outstanding shares of redeemable convertible Series A Preferred Stock were automatically converted into 17,999,998 shares of common stock. 3. NET INCOME PER SHARE Primary and fully diluted income per common and equivalent share is calculated by dividing net income by the weighted average shares of common stock and common equivalent shares. For the quarter ended September 30, 1997, common equivalent shares consist of stock options. Stock options are excluded from common equivalent shares for the first and second quarters of 1997 as the dilutive effect was not significant. The 1.5 million common stock warrants discussed in Note 2 above are excluded from common equivalent shares as the events necessary to allow the exercise of the warrants had not been satisfied as of September 30, 1997. For the nine months ended September 30, 1996, common equivalent shares include redeemable convertible Series A Preferred Stock, prior to the conversion into common stock in March 1996. Common equivalent shares related to stock options during 1996 were excluded from the weighted average number of shares as the dilutive effect was not significant. 6 4. EXTRAORDINARY LOSS In September 1997, the Company retired it's outstanding bank indebtedness of $27.5 million in conjunction with financing for the SUMMITrak asset acquisition (Note 5). Upon repayment of the outstanding debt, the Company recorded an extraordinary loss of $0.6 million for the write-off of deferred financing costs. In March 1996, the Company used $40.3 million of IPO proceeds to repay a portion of outstanding bank indebtedness. Upon repayment of the indebtedness, the Company recorded an extraordinary loss of $1.3 million for the write-off of deferred financing costs. 5. SUMMITRAK ASSET PURCHASE On August 10, 1997, the Company signed a 15-year exclusive contract with a TCI affiliate to consolidate 13 million TCI subscribers onto the Company's customer care and billing systems (the 15-Year Contract). TCI also purchased certain software products of the Company under the 15-Year Contract. On August 10, 1997, the Company also entered into an agreement with TCI affiliates to acquire certain SUMMITrak assets, a client/server, open systems, in-house customer care and billing system developed by TCI. The SUMMITrak assets purchased consisted primarily of software, hardware, people and intellectual property. Both the SUMMITrak asset purchase agreement and the 15-Year Contract closed and became effective September 19, 1997. The purchase price for the SUMMITrak assets was $106 million in cash at closing, up to $26 million in various contingent payments, and warrants to purchase up to 1.5 million shares of the Company's common stock, with the contingent payments and the right to exercise the warrants based upon the achievement of certain milestones by TCI specified in the SUMMITrak asset purchase agreement. The milestones are based principally upon the timing of conversions and the number of TCI subscribers processed on the Company's customer care and billing systems. The contingent payments due as of September 30, 1997, are not significant. None of the warrants are exercisable as of September 30, 1997. The financial statements at September 30, 1997, reflect only the $106 million cash payment and related transaction costs on a preliminary basis as the total purchase price and the allocation of the purchase price have not been finalized. The Company is evaluating whether the initial purchase price should include the $26 million contingent payments, the value of the warrants granted and certain operating costs related to the SUMMITrak assets acquired. In conjunction with this evaluation, the Company has engaged an independent party to assist in the allocation of the purchase price to the assets acquired. This independent valuation and the Company's internal analysis are expected to be completed in the fourth quarter of 1997, at which time the total purchase price and the appropriate allocation of the purchase price will be reflected in the Company's financial statements. The Company expects that a significant portion of the purchase price will be allocated to in-process research and development (R&D), and accordingly, expensed in the fourth quarter of 1997. The amount to be allocated to in-process R&D is uncertain at this time and is subject to the completion of the valuation currently being performed. It is expected that the excess of the purchase price not allocated to in-process R&D will be allocated to assets that will be amortized over lives ranging from 5 to 15 years. 6. DEBT The SUMMITrak asset acquisition was funded with a $190.0 million debt facility with a bank, which consists of a $150.0 million term facility and a $40.0 million revolving facility. The proceeds from the term facility were used to pay the $106 million purchase price at closing, retire the Company's existing debt of $27.5 million, and pay transaction costs of $3.4 million. The remaining proceeds will be used for general corporate purposes. No amounts were drawn on the revolving facility for the period ended September 30, 1997. Transaction costs include $3.2 million of financing costs, which will amortized over the life of the loan using a method which approximates the effective interest rate method. The new loan agreement requires maintenence of certain financial ratios and contains other restrictive covenants. As of September 30, 1997, the Company was in compliance with all covenants. The loan agreement also restricts the payment of dividends or other types of distributions on any class of the Company's stock unless the Company's leverage ratio, as defined in the loan agreement, is under 1.50. As of September 30, 1997, the leverage ratio was 3.59. Interest expense under the new loan agreement is based on the LIBOR rate or the prime rate, plus an additional percentage spread, with the spread dependent upon the Company's leverage ratio. The scheduled maturities of the new loan agreement for each of the years ending December 31 are (in thousands): 1997.............................. $ - 1998.............................. 7,500 1999.............................. 21,250 2000.............................. 32,500 2001.............................. 38,750 2002.............................. 50,000 -------- $150,000 ======== 7 7. DISCONTINUED OPERATIONS In September 1997, the Company sold its remaining ownership interest in Anasazi Inc., which consisted of convertible preferred stock and stock warrants, for approximately $8.6 million in cash. The carrying value of the Company's investment in Anasazi Inc. was $0.7 million, resulting in a gain on the disposition of $7.9 million. 8. BYTEL ACQUISITION In June 1996, the Company acquired all of the outstanding capital stock of Bytel Limited (Bytel), a United Kingdom-based company which provides customer management software systems to the cable and telecommunications industries in the United Kingdom. The acquisition was accounted for using the purchase method of accounting. The Company's condensed consolidated financial statements include Bytel's results of operations since the acquisition date. 9. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128), which specifies the computation, presentation and disclosure requirements for earnings per share (EPS). SFAS No. 128 is effective for periods ending after December 15, 1997, and requires retroactive restatement of EPS for all prior periods presented. The statement replaces the current "primary earnings per share" computation with a "basic earnings per share" and redefines the "dilutive earnings per share" computation. Adoption of the statement is not expected to have a significant effect on the Company's reported EPS. 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). The Company acquired Bytel Limited (Bytel) on June 28, 1996. The results of Bytel's operations since the acquisition are included in the following table and considered in the discussion of the Company's operations that follow:
Quarter ended September 30, Nine Months ended September 30, ---------------------------------------- ---------------------------------------- 1997 1996 1997 1996 ------------------ ------------------- ------------------- ------------------ % of % of % of % of Amount Revenue Amount Revenue Amount Revenue Amount Revenue -------- ------- -------- ------- -------- ------- -------- ------- Total revenues............................ $ 43,278 100.0 % $35,320 100.0 % $122,890 100.0 % $92,508 100.0 % Expenses: Cost of revenues: Direct costs........................... 18,128 41.9 % 15,824 44.8 % 54,962 44.7 % 43,024 46.5 % Amortization of acquired software...... 2,892 6.7 % 2,751 7.8 % 8,668 7.1 % 8,252 8.9 % Amortization of client contracts and related intangibles.................. 1,023 2.4 % 1,023 2.9 % 3,069 2.5 % 3,069 3.3 % -------- ----- ------- ----- -------- ----- ------- ----- Total cost of revenues............ 22,043 51.0 % 19,598 55.5 % 66,699 54.3 % 54,345 58.7 % -------- ----- ------- ----- -------- ----- ------- ----- Gross margin............................. 21,235 49.0 % 15,722 44.5 % 56,191 45.7 % 38,163 41.3 % -------- ----- ------- ----- -------- ----- ------- ----- Operating expenses: Research and development................ 5,677 13.1 % 5,514 15.6 % 16,331 13.3 % 14,862 16.1 % Selling and marketing................... 2,776 6.4 % 2,015 5.7 % 7,877 6.4 % 5,005 5.4 % General and administrative: General and administrative ............ 5,394 12.5 % 3,549 10.0 % 14,181 11.6 % 9,977 10.8 % Amortization of noncompete agreements and goodwill.......................... 1,731 4.0 % 1,723 4.9 % 5,194 4.2 % 4,662 5.0 % Stock-based employee compensation...... 86 0.2 % 98 0.3 % 373 0.3 % 3,472 3.8 % Depreciation............................ 1,831 4.2 % 1,282 3.6 % 5,051 4.1 % 3,718 4.0 % -------- ----- ------- ----- -------- ----- ------- ----- Total operating expenses............... 17,495 40.4 % 14,181 40.1 % 49,007 39.9 % 41,696 45.1 % -------- ----- ------- ----- -------- ----- ------- ----- Operating income (loss)................... 3,740 8.6 % 1,541 4.4 % 7,184 5.8 % (3,533) (3.8)% -------- ----- ------- ----- -------- ----- ------- ----- Other income (expense): Interest expense........................ (938) (2.1)% (780) (2.2)% (2,195) (1.8)% (3,390) (3.7)% Interest income......................... 290 0.7 % 187 0.5 % 667 0.6 % 672 0.7 % Other................................... 21 - - - 352 0.3 % - - -------- ----- ------- ----- -------- ----- ------- ----- Total other............................ (627) (1.4)% (593) (1.7)% (1,176) (0.9)% (2,718) (3.0)% -------- ----- ------- ----- -------- ----- ------- ----- Income (loss) before income taxes, extraordinary item and discontinued operations............................... 3,113 7.2 % 948 2.7 % 6,008 4.9 % (6,251) (6.8)% Income tax (provision) benefit........... - - - - - - - - -------- ----- ------- ----- -------- ----- ------- ----- Income (loss) before extraordinary item and discontinued operations.............. 3,113 7.2 % 948 2.7 % 6,008 4.9 % (6,251) (6.8)% Extraordinary loss from early extinguishment of debt................... (577) (1.3)% - - (577) (0.5)% (1,260) (1.4)% -------- ----- ------- ----- -------- ----- ------- ----- Income (loss) from continuing operations... 2,536 5.9 % 948 2.7 % 5,431 4.4 % (7,511) (8.2)% Gain from disposition of discontinued operations............................. 7,922 18.3 % - - 7,922 6.5 % - - -------- ----- ------- ----- -------- ----- ------- ----- Net income (loss).......................... $ 10,458 24.2 % $ 948 2.7 % $ 13,353 10.9 % $(7,511) (8.2)% ======== ===== ======= ===== ======== ===== ======= =====
9 THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1996 Revenues. Total revenues for the three months ended September 30, 1997, increased 22.5% to $43.3 million, from $35.3 million for the three months ended September 30, 1996, due to increased revenues from the Company's processing and related services, and increased revenues from software and related product sales and professional consulting services. Revenues from processing and related services for the three months ended September 30, 1997, increased 11.8% to $32.8 million, from $29.3 million for the three months ended September 30, 1996. This increase is due primarily to an increase in the number of customers of the Company's clients which were serviced by the Company, and to a lesser degree, increased revenue per customer. Customers serviced as of September 30, 1997, and 1996, respectively, were 20.7 million and 18.6 million, an increase of 11.2%. The increase in the number of customers was due to internal customer growth experienced by existing clients and the addition of new clients. Revenues from software and related product sales and professional consulting services for the three months ended September 30, 1997, were $10.5 million, compared to $6.0 million for the three months ended September 30, 1996. This increase relates to the introduction of the Company's new software products and professional consulting services in early 1996 with continued growth experienced throughout 1996 and 1997. Gross Margin. Gross margin for the three months ended September 30, 1997, increased 35.1% to $21.2 million, from $15.7 million for the three months ended September 30, 1996, due primarily to revenue growth. The gross margin percentage increased to 49.0% for the three months ended September 30, 1997, compared to 44.5% for the three months ended September 30, 1996. The overall increase in the gross margin percentage is due primarily to i) a favorable change in the sales mix to include more higher-margined software products, ii) the increase in revenues while the amount of amortization of acquired software and amortization of client contracts and related intangibles remained approximately the same, and iii) the improvement in gross margin from processing and related services, due primarily to the increase in revenue per customer while controlling the cost of delivering such services. Research and Development Expense. Research and development (R&D) expense for the three months ended September 30, 1997, increased 3.0% to $5.7 million, from $5.5 million for the three months ended September 30, 1996. As a percentage of total revenues, R&D expense decreased to 13.1% for the three months ended September 30, 1997, from 15.6% for the three months ended September 30, 1996. The Company capitalized software development costs, related to CSG Phoenix(TM), of approximately $2.9 million during the three months ended September 30, 1997, which consisted of internal development costs of $2.8 million and $0.1 million of purchased software. The Company capitalized internal software development costs of approximately $1.0 million in the three months ended September 30, 1996, related primarily to ACSR Telephony and enhancements to CSG VantagePoint(TM). As a result, total R&D expenditures (i.e., the total R&D costs expensed, plus the capitalized internal development costs) for the three months ended September 30, 1997, and 1996, were $8.5 million, or 19.6% of total revenues, and $6.6 million, or 18.6% of total revenues, respectively. The overall increase in the R&D expenditures is due primarily to i) continued efforts on several products which are in development, ii) enhancements of the Company's existing products, and iii) costs of $0.7 million related to SUMMITrak development subsequent to the acquisition of the assets on September 19, 1997. The increased R&D expenditures consist primarily of increases in salaries, benefits, and other programming-related expenses. Selling and Marketing Expense. Selling and marketing expense for the three months ended September 30, 1997, increased 37.8% to $2.8 million, from $2.0 million for the three months ended September 30, 1996. As a percentage of total revenues, selling and marketing expense increased to 6.4% for the three months ended September 30, 1997, from 5.7% for the three months ended September 30, 1996. The increase in expense is due primarily to continued growth of the Company's direct sales force. The Company began building a new direct sales force in mid-1995 and has continued to expand its sales force since that time. General and Administrative Expense. General and administrative (G&A) expense for the three months ended September 30, 1997, increased 52.0% to $5.4 million, from $3.5 million for the three months ended September 30, 1996. As a percentage of total revenues, G&A expense increased to 12.5% for the three months ended September 30, 1997, from 10.0% for the three months ended September 30, 1996. The increase in expense relates primarily to i) the 10 continued development of the Company's management team and related administrative staff, added throughout 1996 and during the first nine months of 1997, to support the Company's overall growth, ii) an increase in facility costs to support employee growth, and iii) one-time expenses of $0.7 million related to the closing of the TCI 15-Year Contract and SUMMITrak asset purchase agreement, as discussed in Note 5 to the financial statements. Depreciation Expense. Depreciation expense for the three months ended September 30, 1997, increased 42.8% to $1.8 million, from $1.3 million for the three months ended September 30, 1996. The increase in expense relates to capital expenditures made throughout 1996 and the first nine months of 1997 in support of the overall growth of the Company. Operating Income. Operating income for the three months ended September 30, 1997, was $3.7 million, compared to $1.5 million for the three months ended September 30, 1996. The increase between years relates to the factors discussed above. The Company incurred certain one-time or acquisition-related charges (Acquisition Charges) in connection with its leveraged buy-out of CSG Systems, Inc. in November 1994. The Acquisition Charges include amortization of acquired software, client contracts and related intangibles, noncompete agreement, goodwill, and stock-based compensation. Operating income for the three months ended September 30, 1997, and 1996, excluding Acquisition Charges of $5.4 million and $5.3 million, was $9.1 million or 21.2% of total revenues, and $6.8 million or 19.3% of total revenues, respectively. See the Company's "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, 1996, for additional discussion regarding the Acquisition Charges and the impact of such charges on operations. Interest Expense. Interest expense for the three months ended September 30, 1997, increased 20.3% to $0.9 million, from $0.8 million for the three months ended September 30, 1996, with the increase attributable to the financing of the Company's acquisition of the SUMMITrak assets. See Note 6 to the Company's financial statements for additional discussion of the new debt. Under the new debt agreement, interest expense for the fourth quarter of 1997, including the amortization of deferred financing costs, is expected to be approximately $3.0 million, assuming no fluctuations in the base interest rates and no prepayments of principal. Extraordinary Loss From Early Extinguishment Of Debt. In September 1997, the Company retired it's outstanding bank indebtedness of $27.5 million in conjunction with financing for the SUMMITrak asset acquisition. Upon repayment of the outstanding debt, the Company recorded an extraordinary loss of $0.6 million for the write-off of deferred financing costs. Gain From Disposition of Discontinued Operations. The gain from disposition of discontinued operations of $7.9 million relates to the Company's divestiture of it's remaining investment in Anasazi Inc. in September 1997 for $8.6 million in cash. NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenues. Total revenues for the nine months ended September 30, 1997, increased 32.8% to $122.9 million, from $92.5 million for the nine months ended September 30, 1996, due to increased revenues from the Company's processing and related services, and increased revenues from software and related product sales and professional consulting services. 11 Revenues from processing and related services for the nine months ended September 30, 1997, increased 14.5% to $95.8 million, from $83.6 million for the nine months ended September 30, 1996. This increase is due primarily to an increase in the number of customers of the Company's clients which were serviced by the Company, and to a lesser degree, increased revenue per customer. The increase in the number of customers was due to internal customer growth experienced by existing clients and the addition of new clients. Revenue per customer increased due primarily to price increases included in client contracts and increased usage of ancillary services by clients. Revenues from software and related product sales and professional consulting services for the nine months ended September 30, 1997, were $27.1 million, compared to $8.9 million for the nine months ended September 30, 1996. This increase relates to the introduction of the Company's new software products and professional consulting services in early 1996 with continued expansion throughout 1996 and 1997, and the inclusion of revenues from Bytel's operations for the nine months ended September 30, 1997, compared to three months of revenues included for Bytel for the nine months ended September 30, 1996. Gross Margin. Gross margin for the nine months ended September 30, 1997, increased 47.2% to $56.2 million, from $38.2 million for the nine months ended September 30, 1996, due primarily to revenue growth. The gross margin percentage increased to 45.7% for the nine months ended September 30, 1997, compared to 41.3% for the nine months ended September 30, 1996. The overall increase in the gross margin percentage is due primarily i) a favorable change in the sales mix to include more higher-margined software products, ii) the increase in revenues while the amount of amortization of acquired software and amortization of client contracts and related intangibles remained approximately the same, and iii) the improvement in gross margin from processing and related services, due primarily to the increase in revenue per customer while controlling the cost of delivering such services. Research and Development Expense. Research and development (R&D) expense for the nine months ended September 30, 1997, increased 9.9% to $16.3 million, from $14.9 million for the nine months ended September 30, 1996. As a percentage of total revenues, R&D expense decreased to 13.3% for the nine months ended September 30, 1997, from 16.1% for the nine months ended September 30, 1996. The Company capitalized software development costs, related to CSG Phoenix, of approximately $9.7 million during the nine months ended September 30, 1997, which consisted of $8.4 million of internal development costs and $1.3 million of purchased software. The Company capitalized internal software development costs of approximately $1.0 million in the nine months ended September 30, 1996, related to primarily to ACSR Telephony and enhancements to CSG VantagePoint. As a result, total R&D expenditures (i.e., the total R&D costs expensed, plus the capitalized internal development costs) for the nine months ended September 30, 1997, and 1996, were $24.7 million, or 20.1% of total revenues, and $15.9 million, or 17.2% of total revenues, respectively. The overall increase in the R&D expenditures is due primarily to i) continued efforts on several products which are in development, ii) enhancements of the Company's existing products, and iii) costs of $0.7 million related to SUMMITrak development subsequent to the acquisition of the assets on September 19, 1997. The increased R&D expenditures consist primarily of increases in salaries, benefits, and other programming-related expenses. Selling and Marketing Expense. Selling and marketing expense for the nine months ended September 30, 1997, increased 57.4% to $7.9 million, from $5.0 million for the nine months ended September 30, 1996. As a percentage of total revenues, selling and marketing expense increased to 6.4% for the nine months ended September 30, 1997, from 5.4% for the nine months ended September 30, 1996. The increase in expense is due primarily to continued growth of the Company's direct sales force. The Company began building a new direct sales force in mid-1995 and has continued to expand its sales force since that time. General and Administrative Expense. General and administrative (G&A) expense for the nine months ended September 30, 1997, increased 42.1% to $14.2 million, from $10.0 million for the nine months ended September 30, 1996. As a percentage of total revenues, G&A expense increased to 11.6% for the nine months ended September 30, 1997, from 10.8% for the nine months ended September 30, 1996. The increase in expense relates primarily to i) the continued development of the Company's management team and related administrative staff, added 12 throughout 1996 and during the first nine months of 1997, to support the Company's overall growth, ii) an increase in facility costs to support employee growth, including the cost of relocating the Company's corporate headquarters from Englewood to Denver, Colorado, iii) one-time expenses of $0.7 million related to the closing of the TCI 15-Year Contract and SUMMITrak asset purchase agreement, and iv) the inclusion of G&A expenses from Bytel's operations for the nine months ended September 30, 1997, compared to three months of G&A expenses included for Bytel for the nine months ended September 30, 1996. Amortization of Noncompete Agreements and Goodwill. Amortization of noncompete agreements and goodwill for the nine months ended September 30, 1997, increased 11.4% to $5.2 million, from $4.7 million for the nine months ended September 30, 1996. The increase in expense relates to amortization of goodwill from the Bytel acquisition and amortization of an additional noncompete agreement acquired in April 1996. Stock-Based Employee Compensation. Stock-based employee compensation of $3.5 million in the nine months ended September 30, 1996, relates to purchases of the Company's common stock through performance stock purchase agreements with executive officers and key employees. During 1995 and 1994, the Company sold common stock to executive officers and key employees pursuant to performance stock agreements. The structure of the performance stock agreements required "variable" accounting for the related shares until the performance conditions were removed on October 19, 1995, thereby establishing a measurement date. The fair value of the stock was estimated by the Company to be $2.75 per share at that date. Prior to the completion of the Company's initial public offering (IPO), the deferred compensation was being recognized as stock-based employee compensation expense on a straight-line basis from the time the shares were purchased through November 30, 2001. Upon the completion of the IPO, shares owned by certain executive officers of the Company were no longer subject to the repurchase option. In addition, the repurchase option for the remaining performance stock shares decreased to 20% annually over a five-year period, commencing on the later of an employee's hire date or November 30, 1994. As a result, approximately $3.2 million of stock-based employee compensation expense was recorded when the IPO was completed in March 1996. The scheduled amortization of the stock-based deferred compensation subsequent to September 30, 1997, is approximately $0.1 million per quarter. Depreciation Expense. Depreciation expense for the nine months ended September 30, 1997, increased 35.9% to $5.1 million, from $3.7 million for the nine months ended September 30, 1996. The increase in expense relates to capital expenditures made throughout 1996 and the first nine months of 1997 in support of the overall growth of the Company. Operating Income. Operating income for the nine months ended September 30, 1997, was $7.2 million, compared to an operating loss of $3.5 million for the nine months ended September 30, 1996. The increase between years relates to the factors discussed above. Operating income for the nine months ended September 30, 1997, and 1996, excluding Acquisition Charges of $16.4 million and $19.1 million, was $23.6 million or 19.2% of total revenues, and $15.6 million or 16.8% of total revenues, respectively. See the Company's "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, 1996, for additional discussion regarding the Acquisition Charges and the impact of such charges on operations. Interest Expense. Interest expense for the nine months ended September 30, 1997, decreased 35.3% to $2.2 million, from $3.4 million for the nine months ended September 30, 1996, with the decrease attributable to i) scheduled principal payments on the Company's long-term debt, ii) the retirement of $40.3 million of long-term debt with proceeds from the IPO in March 1996, and iii) a decrease in interest rates as a result of the Company favorably amending its long-term credit facility with its bank in April 1996. These decreases were offset by an increase in interest expense with the increase attributable to the financing of the Company's acquisition of the SUMMITrak assets. See Note 6 to the Company's financial statements for additional discussion of the new debt. As discussed above, the Company expects interest expense to increase as a result of the new financing. Extraordinary Loss From Early Extinguishment Of Debt. In September 1997, the Company retired it's outstanding bank indebtedness of $27.5 million in conjunction with financing for the SUMMITrak asset acquisition. Upon repayment of the outstanding debt, the Company recorded an extraordinary loss of $0.6 million for the write-off of deferred financing costs. In March 1996, the Company recorded an extraordinary charge of $1.3 million for the write-off of deferred financing costs related to repayment of $40.3 million of long-term debt with IPO proceeds. 13 Gain From Disposition of Discontinued Operations. The gain from disposition of discontinued operations of $7.9 million relates to the Company's divestiture of it's remaining investment in Anasazi Inc. in September 1997 for $8.6 million in cash. General - ------- The Company generates a significant amount of its revenues from Tele- Communications, Inc.'s (TCI) cable television operations. On August 10, 1997, the Company signed a 15-year exclusive contract with a TCI affiliate to consolidate 13 million TCI subscribers onto the Company's customer care and billing systems (the 15-Year Contract). TCI also purchased certain software products of the Company under the 15-Year Contract. On August 10, 1997, the Company also entered into an agreement with TCI affiliates to acquire certain SUMMITrak assets, a client/server, open systems, in-house customer care and billing system developed by TCI. The SUMMITrak assets purchased consisted primarily of software, hardware, people and intellectual property. Both the SUMMITrak asset purchase agreement and the 15-Year Contract closed and became effective September 19, 1997. Currently, the Company has approximately 4 million of TCI's subscribers on its systems. Under the 15-Year Contract, the Company and TCI plan to consolidate the additional 9 million subscribers under an agreed upon conversion schedule. Converting multiple sites under an aggressive time schedule poses certain risks. Factors affecting the conversion schedule include the frequency and severity of database discrepancies, installation of compatible hardware, network and software products, as well as the availability and cooperation of qualified personnel from all the parties involved in the conversion. TCI's minimum financial commitments under the 15-Year Contract are subject to certain performance criteria by the Company. The purchase price for the SUMMITrak assets was $106 million in cash at closing, up to $26 million in various contingent payments, and warrants to purchase up to 1.5 million shares of the Company's common stock, with the contingent payments and the right to exercise the warrants based upon the achievement of certain milestones by TCI specified in the SUMMITrak asset purchase agreement. The milestones are based principally upon the timing of conversions and the number of TCI subscribers processed on the Company's customer care and billing systems. The contingent payments due as of September 30, 1997 are not significant. None of the warrants are exercisable as of September 30, 1997. The financial statements at September 30, 1997, reflect only the $106 million cash payment and related transaction costs on a preliminary basis as the total purchase price and the allocation of the purchase price have not been finalized. The Company is evaluating whether the initial purchase price should include the $26 million contingent payments, the value of the warrants granted and certain operating costs related to the SUMMITrak assets acquired. In conjunction with this evaluation, the Company has engaged an independent party to assist in the allocation of the purchase price to the assets acquired. This independent valuation and the Company's internal analysis are expected to be completed in the fourth quarter of 1997, at which time the total purchase price and the appropriate allocation of the purchase price will be reflected in the Company's financial statements. The Company expects that a significant portion of the purchase price will be allocated to in-process research and development (R&D), and accordingly, expensed in the fourth quarter of 1997. The amount to be allocated to in-process R&D is uncertain at this time and is subject to the completion of the valuation currently being performed. It is expected that the excess of the purchase price not allocated to in-process R&D will be allocated to assets that will be amortized over lives ranging from 5 to 15 years. As previously reported, the Company continues to work with its CSG Phoenix clients to test, identify and resolve incident reports and configuration issues. The Company continues to examine the size and magnitude of these issues, and will have an estimated date for when CSG Phoenix will go into production when that analysis is completed. The Company is in the process of working with its Phoenix clients to coordinate the next steps for both the testing of the product, as well as rescheduling the new, estimated production date. Any statements regarding development and timing of the dates on which CSG Phoenix will go into production at any particular client site are forward-looking statements. The actual timing is subject to delay due to the variety of factors 14 inherent in the development and initial implementation of a new, large and complex software system. Installation is also subject to factors relating to the integration of the new system with the client's existing systems. The Company is evaluating its investment in its various technology assets, including CCS(TM), CSG Phoenix, SUMMITrak, and Bytel's SMS systems, to determine which platform, or combination of platforms, is best equipped to support new products and entrance into new markets. Income Taxes - ------------ At September 30, 1997, management of the Company evaluated its previous operating results, as well as projections for 1997 and 1998, and concluded that it was more likely than not that certain of the Company's deferred tax assets would be realized. Accordingly, the Company has recognized a net deferred tax asset of $5.2 million. The Company has recorded a valuation allowance of approximately $19.0 million against the remaining net deferred tax assets since realization of these future benefits is not sufficiently assured as of September 30, 1997. The Company intends to analyze the realizability of the net deferred tax assets at each future quarterly reporting period. The current quarterly results of operations, as well as the Company's projected results of operations, will determine the required valuation allowance at the end of each quarter. Based on its current projections of operating results for 1997 and 1998, the Company expects to realize additional deferred tax assets in 1997. As a result, the Company does not expect income tax expense for 1997 to be significant. Due primarily to differences in the timing of recognition of the amortization of intangible assets for financial reporting and tax purposes, the Company expects to pay income taxes in 1997. Liquidity and Capital Resources - ------------------------------- As of September 30, 1997, the Company's principal sources of liquidity included cash and cash equivalents of $25.9 million. The Company also has a revolving bank line of credit in the amount of $40.0 million of which there were no borrowings outstanding. The line of credit expires September 18, 2002. During the nine months ended September 30, 1997, the Company generated $20.6 million in net cash flow from operating activities and received $8.6 million from the divestiture of the Company's remaining investment in Anasazi Inc. Cash generated from these sources was used primarily to fund capital expenditures of $7.9 million, additions to software of $9.8 million, and to repay scheduled long-term debt of $5.0 million. The SUMMITrak asset acquisition was funded with a $190.0 million debt facility with a bank, which consisted of a $150.0 million term facility and a $40.0 million revolving facility. The proceeds from the term facility were used to pay the $106 million purchase price at closing, retire the Company's existing debt of $27.5 million, and pay transaction costs of $3.4 million. The remaining proceeds will be used for general corporate purposes. No amounts were drawn on the revolving facility at closing. See Note 6 to the Company's financial statements for additional discussion of the new debt. The new loan agreement restricts, among other things, the payment of dividends or other types of distributions on any class of the Company's stock unless the Company's leverage ratio, as defined in the new loan agreement, is under 1.50. As of September 30, 1997, the leverage ratio was 3.59. The Company believes that cash generated from operations and the amount available under the revolving bank line of credit will be sufficient to meet its anticipated cash requirements for operations (including research and development expenditures), income taxes, debt service, and capital expenditures for both its short and long-term purposes. 15 CSG SYSTEMS INTERNATIONAL, INC. PART II. OTHER INFORMATION Item 1-5. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 11.01 Statement of Net Income Per Common and Equivalent Share. 2.19(1)* Restated and Amended CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and TCI Cable Management Corporation, dated August 10, 1997. 2.20(1) Asset Purchase Agreement between CSG Systems International, Inc. and TCI SUMMITrak of Texas, Inc., TCI SUMMITrak, L.L.C., and TCI Technology Ventures, Inc., dated August 10, 1997. 2.21(1) Contingent Warrant to Purchase Common Stock between CSG Systems International, Inc. and TCI Technology Ventures, Inc., dated September 19, 1997. 2.22(1) Royalty Warrant to Purchase Common Stock between CSG Systems International, Inc. and TCI Technology Ventures, Inc., dated September 19, 1997. 2.23(1) Registration Rights Agreement between CSG Systems International, Inc. and TCI Technology Ventures, Inc., dated September 19, 1997. 2.24(1) Loan Agreement among CSG Systems, Inc. and CSG Systems International, Inc. as co-borrowers, and certain lenders and Banque Paribas, as Agent, dated September 18, 1997. 27.01 Financial Data Schedule (EDGAR Version Only) 99.01 Safe Harbor for Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995- Certain Cautionary Statements and Risk Factors ------------------------ (1) Incorporated by reference to the exhibit of the same number to the Registrant's Current Report on Form 8-K dated October 6, 1997. * Portions of the exhibit have been omitted pursuant to an application for confidential treatment, and the omitted portions have been filed separately with the Commission. (b) Reports on Form 8-K None 16 SIGNATURES - ---------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 14, 1997 CSG SYSTEMS INTERNATIONAL, INC. /s/ Neal C. Hansen ------------------------------------------ Neal C. Hansen Chairman and Chief Executive Officer (Principal Executive Officer) /s/ Greg A. Parker ------------------------------------------ Greg A. Parker Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Randy R. Wiese ------------------------------------------- Randy R. Wiese Controller and Principal Accounting Officer (Principal Accounting Officer) 17 CSG SYSTEMS INTERNATIONAL, INC. INDEX TO EXHIBITS Exhibit Number Description - --------- ----------- 11.01 Statement of Net Income Per Common and Equivalent Share. 2.19(1)* Restated and Amended CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and TCI Cable Management Corporation, dated August 10, 1997. 2.20(1) Asset Purchase Agreement between CSG Systems International, Inc. and TCI SUMMITrak of Texas, Inc., TCI SUMMITrak, L.L.C., and TCI Technology Ventures, Inc., dated August 10, 1997. 2.21(1) Contingent Warrant to Purchase Common Stock between CSG Systems International, Inc. and TCI Technology Ventures, Inc., dated September 19, 1997. 2.22(1) Royalty Warrant to Purchase Common Stock between CSG Systems International, Inc. and TCI Technology Ventures, Inc., dated September 19, 1997. 2.23(1) Registration Rights Agreement between CSG Systems International, Inc. and TCI Technology Ventures, Inc., dated September 19, 1997. 2.24(1) Loan Agreement among CSG Systems, Inc. and CSG Systems International, Inc. as co-borrowers, and certain lenders and Banque Paribas, as Agent, dated September 18, 1997. 27.01 Financial Data Schedule (EDGAR Version Only) 99.01 Safe Harbor for Forward-Looking Statements Under the Private Securities Litigation Reform Act of 1995-Certain Cautionary Statements and Risk Factors __________________ (1) Incorporated by reference to the exhibit of the same number to the Registrant's Current Report on Form 8-K dated October 6, 1997. * Portions of the exhibit have been omitted pursuant to an application for confidential treatment, and the omitted portions have been filed separately with the Commission. 18 EX-11.01 2 STATEMENT OF NET INCOME EXHIBIT 11.01 CSG SYSTEMS INTERNATIONAL, INC. STATEMENT OF NET INCOME PER COMMON AND EQUIVALENT SHARE
Primary Fully Diluted ----------- ------------- For the three months ended September 30, 1997: Weighted average common shares outstanding.............. 25,509,522 25,509,522 Common equivalent shares attributable to outstanding stock options......................................... 776,059 1,035,320 ----------- ----------- Shares used in computation.............................. 26,285,581 26,544,842 =========== =========== Income before extraordinary item and discontinued operations............................................ $ 3,113,000 $ 3,113,000 Extraordinary loss from early extinguishment of debt.... (577,000) (577,000) Gain from disposition of discontinued operations........ 7,922,000 7,922,000 ----------- ----------- Net income.............................................. $10,458,000 $10,458,000 =========== =========== Net income per common and equivalent share: Before extraordinary item and discontinued operations......................................... $ .12 $ .11 Extraordinary loss from early extinguishment of debt.. (.02) (.02) Gain from disposition of discontinued operations...... .30 .30 ----------- ----------- Net income............................................ $ .40 $ .39 =========== =========== For the three months ended September 30, 1996: Weighted average common shares outstanding.............. 25,486,383 25,486,383 ----------- ----------- Shares used in computation.............................. 25,486,383 25,486,383 =========== =========== Net income.............................................. $ 948,000 $ 948,000 =========== =========== Net income per common and equivalent share: Net income............................................ $ .04 $ .04 =========== ===========
EX-27.01 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AS OF SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 25,948 0 47,907 893 0 76,190 29,276 13,420 249,397 37,655 145,000 0 0 255 55,330 249,397 0 122,890 0 66,699 16,331 0 2,195 6,008 0 6,008 7,922 (577) 0 13,353 .52 .52
EX-99.01 4 SAFEHARBOR FOR FORWARD LOOKING STMTS. 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. The Company has recorded net losses since inception (October 17, 1994) through December 31, 1996. These net losses have resulted from several factors, including amortization of intangible assets (acquired software, client contracts and related intangibles, and noncompete agreements and goodwill), interest expense, stock-based employee compensation expense, and loss from discontinued operations. Certain of these factors will continue to affect the Company's results of operations in the future. While the Company has reported net income for the last five quarters ended September 30, 1997, there can be no assurance that the Company will sustain profitability in the future. CCS and related services are expected to provide the substantial majority of the Company's revenues in the foreseeable future. The market for customer management 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 depends upon continued market acceptance of its current products, including CCS and related services, and its ability to enhance its current products and develop new products that address the increasingly complex and evolving needs of its clients. In particular, the Company believes that it must respond quickly to clients' needs for additional functionality and distributed architecture for data processing. Development projects can be lengthy and are subject to changing requirements, programming difficulties, a shortage of qualified personnel, and unforeseen factors which can result in delays. There can be no assurance of continued market acceptance of the Company's current products or 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. As previously reported, the Company continues to work with its CSG Phoenix clients to test, identify and resolve incident reports and configuration issues. The Company continues to examine the size and magnitude of these issues, and will have an estimated date for when CSG Phoenix will go into production when that analysis is completed. The Company is in the process of working with its Phoenix clients to coordinate the next steps for both the testing of the product, as well as rescheduling the new, estimated production date. The Company is using technologies and development tools that are new to the Company in CSG Phoenix. In addition, CSG Phoenix will contain functionality that is new to the Company and may be offered in a variety of configurations in addition to the Company's existing service bureau operations. The actual timing of delivery and implementation is subject to delay due to the variety of factors inherent in the development and initial implementation of a new, large and complex software system. Implementation is also subject to factors relating to the integration of the new system with the client's existing systems. Sales and support of CSG Phoenix will require the Company to develop new capabilities. The failure of the Company to deliver and support the CSG Phoenix product successfully and on time could have a material adverse effect on the financial condition and results of operations of the Company. The Company is evaluating its investment in its various technology assets, including CCS/TM/, CSG Phoenix, SUMMITrak, and Bytel's SMS systems, to determine which platform, or combination of platforms, is best equipped to support new products and entrance into new markets. There can be no assurance that the platform or combination of platforms selected by the Company will be accepted by the Company's existing or potential new clients. Revenues from Time Warner Cable and its affiliated companies (Time Warner) and revenues from Tele-Communications, Inc. (TCI) each represent a substantial percentage of the Company's total revenues. On August 10, 1997, the Company signed a 15-year exclusive contract with a TCI affiliate to consolidate 13 million TCI subscribers onto the Company's customer care and billing systems (the 15-Year Contract). On August 10, 1997, the Company also entered into an agreement with TCI affiliates to acquire certain SUMMITrak assets, a client/server, open systems, in-house customer care and billing system developed by TCI. Both the SUMMITrak asset purchase agreement and the 15-Year Contract closed and became effective September 19, 1997. Currently, the Company has approximately 4 million of TCI's subscribers on its systems. Under the 15-Year Contract, the Company and TCI plan to consolidate the additional 9 million subscribers under an agreed upon conversion schedule. Converting multiple sites under an aggressive time schedule poses certain risks. Factors affecting the conversion schedule include the frequency and severity of database discrepancies, installation of compatible hardware, network and software products, as well as the availability and cooperation of qualified personnel from all the parties involved in the conversion. TCI's minimum financial commitments under the 15-Year Contract are subject to certain performance criteria by the Company. Loss of all or a significant part of the business of either Time Warner or TCI would have a material adverse effect on the financial condition and results of operations of the Company. The Company's quarterly revenues and operating results may fluctuate depending on various factors, including the timing of executed contracts and the delivery of contracted services or products, the timing of conversions to the Company's systems by new and existing clients, the cancellation of the Company's services and products by existing or new clients and related conversions to other systems, the hiring of additional staff, new product development and other expenses, and changes in sales commission policies. No assurance can be given that operating results will not vary due to these factors. Fluctuations in quarterly operating results may result in volatility in the market price of the Company's Common Stock. The Company's business is concentrated in the cable television industry, making the Company susceptible to a downturn in that industry. A decrease in the number of customers served by the Company's clients would result in lower revenues for the Company. In addition, cable television providers are consolidating, decreasing the potential number of buyers for the Company's products and services. Furthermore, there can be no assurance that cable television providers will be successful in expanding into other segments of the converging communications markets. There can be no assurance that new entrants into the cable television market will become clients of the Company. Any adverse development in the cable television industry could have a material adverse effect on the financial condition and results of operations of the Company. The Company's growth strategy is based in large part on the continuing convergence and growth of the cable television, Direct Broadcast Satellite (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 products and services, there could be a material adverse effect on the financial condition and results of operations of the Company. 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. 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. The Company is expanding into new products, services, and markets, which is placing demands on its managerial and operational resources. The inability to manage growth could have a material adverse effect on the financial condition and results of operations of the Company. Substantially all of the Company's revenues are derived from the sale of services or products under contracts with its clients. The Company does not have the option to extend unilaterally the contracts upon expiration of their terms. The Company's contracts typically do not require clients to make any minimum purchases, and contracts are cancelable by clients under certain conditions. The failure of clients to renew or to fully use any contracts, or the cancellation of contracts, could have a material adverse effect on the Company's financial condition and results of operations. The Company's future success depends in large part on the continued service of its key management, sales, product development, and operational personnel. The Company is particularly dependent on its executive officers. Only one of those executive officers is party to an employment agreement with the Company, and that agreement is terminable upon 30 days' notice. The Company believes that its future success also depends on its ability to attract and retain highly skilled technical, managerial, and marketing personnel, including, in particular, additional personnel in the areas of research and development and technical support. Competition for qualified personnel is intense. The Company may not be successful in attracting and retaining the personnel it requires, which could have a material adverse effect on the financial condition and results of operations of the Company. 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. 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. The Company's business strategy includes a commitment to the marketing of its products and services internationally, and the Company has begun to acquire and establish 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, 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, 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. The inability to manage these risks successfully would have a material adverse effect on the financial condition and results of operations of the Company. -----END PRIVACY-ENHANCED MESSAGE-----