-----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, SHgPLXsNMDyz/LfOVGk953PN8c+gBKGkwf8J3myKR2Aq6Uf9lNNn9kc4wQXMV0Z6 KF7J05NK4rMfUu+9dPde1A== 0000927356-98-001916.txt : 19981118 0000927356-98-001916.hdr.sgml : 19981118 ACCESSION NUMBER: 0000927356-98-001916 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98751031 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 INT'L 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 September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission file number 0-27512 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 10, 1998: 25,689,881 CSG SYSTEMS INTERNATIONAL, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 INDEX
PAGE NO. ---------- Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997.............................................. 3 Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1998 and 1997........................... 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997.................................. 5 Notes to Condensed Consolidated Financial Statements............... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 8 Part II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................... 18 Signatures......................................................... 19 Index to Exhibits.................................................. 20
2 CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
September 30, December 31, 1998 1997 -------------- ------------- ASSETS (unaudited) Current assets: Cash and cash equivalents................................................................. $ 36,204 $ 20,417 Accounts receivable- Trade- Billed, net of allowance of $1,986 and $1,394........................................ 58,342 44,678 Unbilled............................................................................. 1,788 2,080 Other................................................................................ 1,514 1,400 Deferred income taxes..................................................................... 458 443 Other current assets...................................................................... 3,046 2,664 -------------- ------------- Total current assets..................................................................... 101,352 71,682 -------------- ------------- Property and equipment, net of depreciation of $21,929 and $16,343........................ 23,089 17,157 Software, net of amortization of $34,860 and $34,104...................................... 9,957 1,959 Noncompete agreements and goodwill, net of amortization of $23,564 and $19,490............ 8,997 13,938 Client contracts and related intangibles, net of amortization of $16,305 and $12,822...... 61,157 64,640 Deferred income taxes..................................................................... 14,182 6,909 Other assets.............................................................................. 2,651 3,064 -------------- ------------- Total assets............................................................................ $ 221,385 $ 179,349 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt...................................................... $ 15,750 $ 6,750 Customer deposits......................................................................... 9,476 7,002 Trade accounts payable.................................................................... 10,203 11,795 Accrued liabilities....................................................................... 20,709 11,023 Deferred revenue.......................................................................... 18,235 10,619 Conversion incentive payments............................................................. 23,981 17,768 Accrued income taxes...................................................................... 6,522 3,207 -------------- ------------- Total current liabilities................................................................ 104,876 68,164 -------------- ------------- Non-current liabilities: Long-term debt, net of current maturities................................................. 114,750 128,250 Deferred revenue.......................................................................... 740 7,789 Conversion incentive payments............................................................. - 8,232 -------------- ------------- Total non-current liabilities............................................................ 115,490 144,271 -------------- ------------- Stockholders' equity (deficit): 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; 25,649,968 shares and 25,479,968 shares outstanding...................................... 257 255 Common stock warrants; 1,500,000 warrants issued and outstanding......................... 26,145 26,145 Additional paid-in capital................................................................ 117,763 112,870 Deferred employee compensation............................................................ (402) (636) Notes receivable from employee stockholders............................................... (489) (685) Cumulative translation adjustments........................................................ 165 (1) Treasury stock, at cost, 33,000 shares and zero shares.................................... (97) - Accumulated deficit....................................................................... (142,323) (171,034) -------------- ------------- Total stockholders' equity (deficit)..................................................... 1,019 (33,086) -------------- ------------- Total liabilities and stockholders' equity (deficit)..................................... $ 221,385 $ 179,349 ============== =============
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 share and per share amounts)
Three months ended Nine months ended ----------------------------- --------------------------- September 30, September 30, September 30, September 30, 1998 1997 1998 1997 -------------- -------------- -------------- ------------ Total revenues....................................................... $ 63,461 $ 43,278 $ 167,013 $ 122,890 Expenses: Cost of revenues: Direct costs...................................................... 27,302 18,128 73,300 54,962 Amortization of acquired software................................. - 2,892 - 8,668 Amortization of client contracts and related intangibles.......... 1,402 1,023 3,646 3,069 -------------- -------------- -------------- ------------ Total cost of revenues........................................ 28,704 22,043 76,946 66,699 -------------- -------------- -------------- ------------ Gross margin........................................................ 34,757 21,235 90,067 56,191 -------------- -------------- -------------- ------------ Operating expenses: Research and development.......................................... 6,972 5,677 20,278 16,331 Selling and marketing............................................. 3,004 2,776 8,040 7,877 General and administrative: General and administrative....................................... 5,841 5,394 17,059 14,181 Amortization of noncompete agreements and goodwill............... 1,346 1,731 4,034 5,194 Stock-based employee compensation................................ 74 86 222 373 Depreciation...................................................... 2,064 1,831 5,894 5,051 -------------- -------------- -------------- ------------ Total operating expenses...................................... 19,301 17,495 55,527 49,007 -------------- -------------- -------------- ------------ Operating income..................................................... 15,456 3,740 34,540 7,184 -------------- -------------- -------------- ------------ Other income (expense): Interest expense.................................................. (2,473) (938) (7,481) (2,195) Interest income................................................... 617 290 1,750 667 Other............................................................. (24) 21 (98) 352 -------------- -------------- -------------- ------------ Total other................................................... (1,880) (627) (5,829) (1,176) -------------- -------------- -------------- ------------ Income before income taxes, extraordinary item and discontinued operations........................................... 13,576 3,113 28,711 6,008 Income tax (provision) benefit...................................... - - - - -------------- -------------- -------------- ------------ Income before extraordinary item and discontinued operations......... 13,576 3,113 28,711 6,008 Extraordinary loss from early extinguishment of debt................ - (577) - (577) -------------- -------------- -------------- ------------ Income from continuing operations.................................... 13,576 2,536 28,711 5,431 Gain from disposition of discontinued operations.................... - 7,922 - 7,922 -------------- -------------- -------------- ------------ Net income........................................................... $ 13,576 $ 10,458 $ 28,711 $ 13,353 ============== ============== ============== ============ Basic net income per common share: Income before extraordinary item and discontinued operations........ $ 0.53 $ 0.12 $ 1.12 $ 0.24 Extraordinary loss from early extinguishment of debt................ - (0.02) - (0.02) Gain from disposition of discontinued operations.................... - 0.31 - 0.31 -------------- -------------- -------------- ------------ Net income ......................................................... $ 0.53 $ 0.41 $ 1.12 $ 0.53 ============== ============== ============== ============ Weighted average common shares...................................... 25,626,249 25,509,522 25,567,054 25,497,146 ============== ============== ============== ============ Diluted net income per common share: Income before extraordinary item and discontinued operations........ $ 0.51 $ 0.12 $1.09 $ 0.23 Extraordinary loss from early extinguishment of debt................ - (0.02) - (0.02) Gain from disposition of discontinued operations.................... - 0.30 - 0.31 -------------- -------------- -------------- ------------ Net income ......................................................... $ 0.51 $ 0.40 $ 1.09 $ 0.52 ============== ============== ============== ============ Weighted average common shares...................................... 26,415,533 26,285,581 26,401,348 25,958,546 ============== ============== ============== ============
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)
Nine months ended ---------------------------- September 30, September 30, 1998 1997 ------------- ------------- Cash flows from operating activities: Net income...................................................................... $ 28,711 $ 13,353 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation................................................................... 5,894 5,051 Amortization................................................................... 9,274 17,720 Deferred income taxes.......................................................... (4,980) (3,817) Stock-based employee compensation.............................................. 222 373 Extraordinary loss from early extinguishment of debt........................... - 577 Gain from disposition of discontinued operations............................... - (7,922) Changes in operating assets and liabilities: Trade accounts and other receivables, net.................................... (13,351) (7,411) Other current and noncurrent assets.......................................... (857) (819) Accounts payable and other liabilities....................................... 12,934 3,501 ------------- ------------- Net cash provided by operating activities.................................. 37,847 20,606 ------------- ------------- Cash flows from investing activities: Purchases of property and equipment, net......................................... (11,781) (7,892) Acquisition of assets............................................................ (5,974) (106,226) Additions to software............................................................ (1,410) (9,796) Proceeds from disposition of discontinued operations............................. - 8,654 Payments of conversion incentive payments........................................ (2,019) - ------------- ------------- Net cash used in investing activities...................................... (21,184) (115,260) ------------- ------------- Cash flows from financing activities: Proceeds from issuance of common stock........................................... 3,499 623 Repurchase of common stock....................................................... (2) (24) Payments on notes receivable from employee stockholders.......................... 50 - Proceeds from long-term debt..................................................... - 150,000 Payments on long-term debt....................................................... (4,500) (32,500) Payment of deferred financing costs.............................................. - (3,181) ------------- ------------- Net cash provided by (used in) financing activities........................ (953) 114,918 ------------- ------------- Effect of exchange rate fluctuations on cash...................................... 77 (450) ------------- ------------- Net increase in cash and cash equivalents......................................... 15,787 19,814 Cash and cash equivalents, beginning of period.................................... 20,417 6,134 ------------- ------------- Cash and cash equivalents, end of period.......................................... $ 36,204 $ 25,948 ============= ============= Supplemental disclosures of cash flow information: Cash paid during the period for- Interest...................................................................... $ 6,756 $ 1,878 Income taxes.................................................................. $ 1,591 $ 2,678
Supplemental disclosure of noncash investing and financing activities: During September 1997, the Company granted 1.5 million common stock warrants, valued at $26.1 million, and recorded a liability for $26.0 million for conversion incentive payments as part of the purchase price for the SUMMITrak asset acquisition. During July 1998, the Company assumed liabilities of $1.3 million as part of the purchase price for the USTATS asset acquisition. 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, 1998, 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, 1997, filed with the Securities and Exchange Commission. The results of operations for the three and nine months ended September 30, 1998, are not necessarily indicative of the results for the entire year ending December 31, 1998. 2. 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. For all periods presented, dilutive potential common shares consisted entirely of stock options. The dilutive potential common shares from Common Stock Warrants are excluded from the diluted net income per common share calculation as the events necessary to allow the exercise of the warrants had not been satisfied as of September 30, 1998 or September 30, 1997. For the three and nine month periods ended September 30, 1998 and 1997, the weighted average diluted potential common shares from Common Stock Warrants excluded from diluted net income per common share are as follows: For the Three For the Nine Months Ended Months Ended ------------- ------------ September 30, 1998.................. 667,493 650,652 September 30, 1997.................. 38,573 12,858 3. COMPREHENSIVE INCOME In 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components in a financial statement for the period in which they are recognized. The Company's comprehensive income was as follows (in thousands): Three months ended Nine months ended September 30, September 30, ------------------- ------------------ 1998 1997 1998 1997 -------- --------- -------- -------- Net income $ 13,576 $ 10,458 $ 28,711 $ 13,353 Foreign currency translation adjustments 97 (200) 166 (704) -------- --------- -------- -------- Comprehensive income $ 13,673 $ 10,258 $ 28,877 $ 12,649 ======== ========= ======== ======== 6 4. LEGAL PROCEEDINGS In October 1996, a former senior vice president of CSG Systems filed a lawsuit against the Company and certain of its officers in the District Court of Arapahoe County, Colorado. The suit claimed that certain amendments to stock agreements between the plaintiff and the Company were unenforceable, and that the plaintiff's rights were otherwise violated in connection with those amendments. The plaintiff was seeking damages of approximately $2.0 million, and in addition, sought to have such damages trebled under certain Colorado statutes that the plaintiff claimed were applicable. In June 1998, the Company settled this matter, the effect of which was not material to the Company. 5. ASSET ACQUISITION On July 30, 1998, the Company acquired substantially all of the assets of US Telecom Advanced Technology Systems, Inc. (USTATS) for approximately $6.0 million in cash and assumption of certain liabilities of approximately $1.3 million. USTATS, a South Carolina-based company, specializes in open systems, client/server customer care and billing systems serving the telecommunications markets. The cash portion of the purchase price was paid out of corporate funds. The total purchase price of $7.3 million has been allocated to the technology and software acquired and will be amortized over its expected useful life of five years. 6. RECLASSIFICATION OF PRIOR PERIOD AMOUNTS Certain December 31, 1997 amounts have been reclassified to conform with the September 30, 1998 presentation. 7. ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET EFFECTIVE In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" (SFAS No. 133). The Statement establishes accounting and reporting standards requiring every derivative instrument, as defined, to be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal quarters for all fiscal years beginning after June 15, 1999. Adoption of the Statement is not expected to have a significant effect on the Company's consolidated financial statements. 7 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 ended September 30, Nine months ended September 30, ---------------------------------------- ------------------------------------------- 1998 1997 1998 1997 ----------------- ------------------ -------------------- ------------------ % of % of % of % of Amount Revenue Amount Revenue Amount Revenue Amount Revenue ------- ------- ------- ------- -------- ------- -------- ------- Total revenues......................... $63,461 100.0% $43,278 100.0% $167,013 100.0% $122,890 100.0% Expenses: Cost of revenues: Direct costs........................ 27,302 43.0 18,128 41.9 73,300 43.9 54,962 44.7 Amortization of acquired software... - - 2,892 6.7 - - 8,668 7.1 Amortization of client contracts and related intangibles............ 1,402 2.2 1,023 2.4 3,646 2.2 3,069 2.5 ------- ------- ------- ------- -------- ------- -------- ------- Total cost of revenues........... 28,704 45.2 22,043 51.0 76,946 46.1 66,699 54.3 ------- ------- ------- ------- -------- ------- -------- ------- Gross margin......................... 34,757 54.8 21,235 49.0 90,067 53.9 56,191 45.7 ------- ------- ------- ------- -------- ------- -------- ------- Operating expenses: Research and development............ 6,972 11.0 5,677 13.1 20,278 12.2 16,331 13.3 Selling and marketing............... 3,004 4.7 2,776 6.4 8,040 4.8 7,877 6.4 General and administrative: General and administrative ........ 5,841 9.2 5,394 12.5 17,059 10.2 14,181 11.6 Amortization of noncompete agreements and goodwill........... 1,346 2.1 1,731 4.0 4,034 2.4 5,194 4.2 Stock-based employee compensation.. 74 0.1 86 0.2 222 0.1 373 0.3 Depreciation........................ 2,064 3.3 1,831 4.2 5,894 3.5 5,051 4.1 ------- ------- ------- ------- -------- ------- -------- ------- Total operating expenses......... 19,301 30.4 17,495 40.4 55,527 33.2 49,007 39.9 ------- ------- ------- ------- -------- ------- -------- ------- Operating income....................... 15,456 24.4 3,740 8.6 34,540 20.7 7,184 5.8 ------- ------- ------- ------- -------- ------- -------- ------- Other income (expense): Interest expense.................... (2,473) (3.9) (938) (2.1) (7,481) (4.5) (2,195) (1.8) Interest income..................... 617 0.9 290 0.7 1,750 1.0 667 0.6 Other............................... (24) - 21 - (98) - 352 0.3 ------- ------- ------- ------- -------- ------- -------- ------- Total other...................... (1,880) (3.0) (627) (1.4) (5,829) (3.5) (1,176) (0.9) ------- ------- ------- ------- -------- ------- -------- ------- Income before income taxes, extraordinary item and discontinued operations............ 13,576 21.4 3,113 7.2 28,711 17.2 6,008 4.9 Income tax (provision) benefit...... - - - - - - - - ------- ------- ------- ------- -------- ------- -------- ------- Income before extraordinary item and discontinued operations......................... 13,576 21.4 3,113 7.2 28,711 17.2 6,008 4.9 Extraordinary loss from early extinguishment of debt............. - - (577) (1.3) - - (577) (0.5) ------- ------- ------- ------- -------- ------- -------- ------- Income from continuing operations...... 13,576 21.4 2,536 5.9 28,711 17.2 5,431 4.4 Gain from disposition of discontinued operations............ - - 7,922 18.3 - - 7,922 6.5 ------- ------- ------- ------- -------- ------- -------- ------- Net income............................. $13,576 21.4% $10,458 24.2% $ 28,711 17.2% $ 13,353 10.9% ======= ======= ======= ======= ======== ======= ======== =======
8 THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Revenues. Total revenues for the three months ended September 30, 1998, increased 46.6% to $63.5 million, from $43.3 million for the three months ended September 30, 1997, 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, 1998, increased 51.2% to $49.6 million, from $32.8 million for the three months ended September 30, 1997. Of the total increase in revenue, approximately 60% resulted from an increase in the number of customers of the Company's clients which were serviced by the Company and approximately 40% was due to increased revenue per customer. Customers serviced as of September 30, 1998, and 1997, respectively, were 27.2 million and 20.7 million, an increase of 31.6%. 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, 1998 through September 30, 1998, the Company converted and processed approximately 1.9 million additional customers on its systems. Revenue per customer increased due primarily to (i) the 15-year Tele-Communications, Inc. (TCI) processing contract (the TCI Contract) executed in September 1997, (ii) increased usage of ancillary services by clients, and (iii) price increases included in client contracts. Revenues from software and related product sales and professional consulting services for the three months ended September 30, 1998, increased 32.3% to $13.8 million, from $10.5 million for the three months ended September 30, 1997. This increase relates primarily to the continued growth of the Company's software products and related product sales. Amortization of Acquired Software. Amortization of acquired software decreased to zero for the three months ended September 30, 1998, from $2.9 million for the three months ended September 30, 1997, due to acquired software from the Company's leveraged buy-out of CSG Systems, Inc. (the Acquisition) in November 1994 becoming fully amortized as of November 30, 1997. Amortization of Client Contracts and Related Intangibles. Amortization of client contracts and related intangibles for the three months ended September 30, 1998, increased 37.0% to $1.4 million, from $1.0 million for the three months ended September 30, 1997. The increase in expense is due primarily to amortization of the value assigned to the TCI Contract, offset by a decrease due to client conversion methodologies from the Acquisition becoming fully amortized as of November 30, 1997. Gross Margin. Gross margin for the three months ended September 30, 1998, increased 63.7% to $34.8 million, from $21.2 million for the three months ended September 30, 1997, due primarily to revenue growth. The gross margin percentage increased to 54.8% for the three months ended September 30, 1998, compared to 49.0% for the three months ended September 30, 1997. The overall increase in the gross margin percentage is due primarily to the increase in revenues while the combined amount of amortization of acquired software and amortization of client contracts and related intangibles decreased. Research and Development Expense. Research and development (R&D) expense for the three months ended September 30, 1998, increased 22.8% to $7.0 million, from $5.7 million for the three months ended September 30, 1997. As a percentage of total revenues, R&D expense decreased to 11.0% for the three months ended September 30, 1998, from 13.1% for the three months ended September 30, 1997. During the three months ended September 30, 1997, the Company capitalized software development costs of approximately $2.9 million, which consisted of $2.8 million of internal development costs and $0.1 million of purchased software. The Company did not capitalize any software development costs during the three months ended September 30, 1998. As a result, total R&D development expenditures (i.e., the total R&D costs expensed, plus the capitalized development costs) for the three months ended September 30, 1998 and 1997, were $7.0 million, or 11.0% of total revenues, and $8.5 million, or 19.6% of total revenues, respectively. The 9 overall decrease in the R&D expenditures between periods is due primarily to effective control of development costs, primarily the reduction of third-party, contracted programming services. Selling and Marketing Expense. Selling and marketing (S&M) expense for the three months ended September 30, 1998, increased 8.2% to $3.0 million, from $2.8 million for the three months ended September 30, 1997. As a percentage of total revenues, S&M expense decreased to 4.7% for the three months ended September 30, 1998, from 6.4% for the three months ended September 30, 1997. The overall decrease in S&M expenses as a percentage of total revenues is due primarily to increased revenues, while controlling S&M costs. General and Administrative Expense. General and administrative (G&A) expense for the three months ended September 30, 1998, increased 8.3% to $5.8 million, from $5.4 million for the three months ended September 30, 1997. As a percentage of total revenues, G&A expense decreased to 9.2% for the three months ended September 30, 1998, from 12.5% for the three months ended September 30, 1997. The increase in G&A expenses relates primarily to the continued expansion of the Company's administrative staff and other administrative costs to support the Company's overall growth. The decrease in G&A expenses as a percentage of total revenues is due primarily to increased revenues, while controlling G&A costs. Amortization of Noncompete Agreements and Goodwill. Amortization of noncompete agreements and goodwill for the three months ended September 30, 1998, decreased 22.2%, to $1.3 million, from $1.7 million for the three months ended September 30, 1997. The decrease in amortization expense is due primarily to a write-down of certain intangible assets in the fourth quarter of 1997. Depreciation Expense. Depreciation expense for the three months ended September 30, 1998, increased 12.7% to $2.1 million, from $1.8 million for the three months ended September 30, 1997. The increase in expense relates to capital expenditures made during the last six months of 1997 and the first nine months of 1998 in support of the overall growth of the Company, consisting principally of computer hardware and related equipment and statement processing equipment and related facilities. Operating Income. Operating income for the three months ended September 30, 1998, was $15.5 million or 24.4% of total revenues, compared to $3.7 million or 8.6% of total revenues for the three months ended September 30, 1997. 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 the Acquisition 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, 1998 and 1997, excluding Acquisition Charges of $2.1 million and $5.4 million, was $17.5 million or 27.6% of total revenues, and $9.2 million or 21.2% 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, 1997, 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, 1998, increased 163.6% to $2.5 million, from $0.9 million for the three months ended September 30, 1997, with the increase attributable primarily to the financing of the Company's acquisition of the SUMMITrak assets in September 1997. Interest Income. Interest income for the three months ended September 30, 1998, increased 112.8% to $0.6 million, from $0.3 million for the three months ended September 30, 1997, with the increase attributable primarily to an increase in operating funds available for investment. Extraordinary Loss From Early Extinguishment Of Debt. In September 1997, the Company recorded an extraordinary charge of $0.6 million for the write-off of deferred financing costs related to retirement of it's outstanding bank indebtedness of $27.5 million in conjunction with financing for the SUMMITrak asset acquisition. 10 Gain From Disposition of Discontinued Operations. The gain from disposition of discontinued operations of $7.9 million for the three months ended September 30, 1997 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, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Revenues. Total revenues for the nine months ended September 30, 1998, increased 35.9% to $167.0 million, from $122.9 million for the nine months ended September 30, 1997, 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 nine months ended September 30, 1998, increased 39.4% to $133.5 million, from $95.8 million for the nine months ended September 30, 1997. Of the total increase in revenue, approximately 62% resulted from an increase in the number of customers of the Company's clients which were serviced by the Company and approximately 38% was due to increased revenue per customer. 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 January 1, 1998 through September 30, 1998, the Company converted and processed approximately 6.1 million additional customers on its systems. Revenue per customer increased due primarily to (i) the TCI Contract executed in September 1997, (ii) increased usage of ancillary services by clients, and (iii) price increases included in client contracts. Revenues from software and related product sales and professional consulting service for the nine months ended September 30, 1998, increased 23.4% to $33.5 million, from $27.1 million for the nine months ended September 30, 1997. This increase relates to the continued growth of the Company's software products and related product sales and professional consulting services. Amortization of Acquired Software. Amortization of acquired software decreased to zero for the nine months ended September 30, 1998, from $8.7 million for the nine months ended September 30, 1997, due to acquired software from the Acquisition in November 1994 becoming fully amortized as of November 30, 1997. Amortization of Client Contracts and Related Intangibles. Amortization of client contracts and related intangibles for the nine months ended September 30, 1998, increased 18.8% to $3.6 million, from $3.1 million for the nine months ended September 30, 1997. The increase in expense is due to amortization of the value assigned to the TCI Contract, offset by a decrease due to client conversion methodologies from the Acquisition becoming fully amortized as of November 30, 1997. Gross Margin. Gross margin for the nine months ended September 30, 1998, increased 60.3% to $90.1 million, from $56.2 million for the nine months ended September 30, 1997, due primarily to revenue growth. The gross margin percentage increased to 53.9% for the nine months ended September 30, 1998, compared to 45.7% for the nine months ended September 30, 1997. The overall increase in the gross margin percentage is due primarily to the increase in revenues while the amount of amortization of acquired software and amortization of client contracts and related intangibles decreased, and to a lesser degree, the improvement in the gross margin percentage for 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. R&D expense for the nine months ended September 30, 1998, increased 24.2% to $20.3 million, from $16.3 million for the nine months ended September 30, 1997. As a percentage of total revenues, R&D expense decreased to 12.2% for the nine months ended September 30, 1998, from 13.3% for the nine months ended September 30, 1997. During the nine months ended September 30, 1997, the Company capitalized software development costs of approximately $9.7 million, which consisted of $8.4 million of internal development costs and $1.3 million of purchased software. The Company capitalized third party, contracted costs of approximately $1.4 million during the nine months ended September 30, 1998, related primarily to enhancements to existing products. As a result, total R&D development expenditures (i.e., the total R&D costs expensed, plus the capitalized development costs) for the nine months ended September 30, 1998 and 1997, were $21.7 million, or 13.0% of total revenues, and $24.7 million, or 20.1% of total revenues, respectively. The overall decrease in the R&D 11 expenditures between periods is due primarily to effective control of development costs, primarily the reduction of third-party, contracted programming services. Selling and Marketing Expense. S&M expense for the nine months ended September 30, 1998, increased 2.1% to $8.0 million, from $7.9 million for the nine months ended September 30, 1997. As a percentage of total revenues, S&M expense decreased to 4.8% for the nine months ended September 30, 1998, from 6.4% for the nine months ended September 30, 1997. The overall decrease in S&M expenses as a percentage of total revenues is due primarily to increased revenues, while controlling S&M costs. General and Administrative Expense. G&A expense for the nine months ended September 30, 1998, increased 20.3% to $17.1 million, from $14.2 million for the nine months ended September 30, 1997. As a percentage of total revenues, G&A expense decreased to 10.2% for the nine months ended September 30, 1998, from 11.6% for the nine months ended September 30, 1997. The increase in G&A expenses relates primarily to the continued expansion of the Company's administrative staff and other administrative costs to support the Company's overall growth. The decrease in G&A expenses as a percentage of total revenues is due primarily to increased revenue, while controlling G&A costs. Amortization of Noncompete Agreements and Goodwill. Amortization of noncompete agreements and goodwill for the nine months ended September 30, 1998, decreased 22.3%, to $4.0 million, from $5.2 million for the nine months ended September 30, 1997. The decrease in amortization expense is due primarily to a write-down of certain intangible assets in the fourth quarter of 1997. Depreciation Expense. Depreciation expense for the nine months ended September 30, 1998, increased 16.7% to $5.9 million, from $5.1 million for the nine months ended September 30, 1997. The increase in expense relates to capital expenditures made throughout 1997 and the first nine months of 1998 in support of the overall growth of the Company, consisting principally of computer hardware and related equipment and statement processing equipment and related facilities. Operating Income. Operating income for the nine months ended September 30, 1998, was $34.5 million or 20.7% of total revenues, compared to $7.2 million or 5.8% of total revenues for the nine months ended September 30, 1997. The increase between years relates to the factors discussed above. Operating income for the nine months ended September 30, 1998 and 1997, excluding Acquisition Charges of $6.2 million and $16.4 million, was $40.7 million or 24.4% of total revenues, and $23.6 million or 19.2% of total revenues, respectively. Interest Expense. Interest expense for the nine months ended September 30, 1998, increased 240.8% to $7.5 million, from $2.2 million for the nine months ended September 30, 1997, with the increase attributable primarily to the financing of the Company's acquisition of the SUMMITrak assets in September 1997. Interest Income. Interest income for the nine months ended September 30, 1998, increased 162.4% to $1.8 million, from $0.7 million for the nine months ended September 30, 1997, with the increase attributable primarily to an increase in operating funds available for investment and an increase in interest charges on aged client accounts. Extraordinary Loss From Early Extinguishment Of Debt. In September 1997, the Company recorded an extraordinary charge of $0.6 million for the write-off of deferred financing costs related to retirement of it's outstanding bank indebtedness of $27.5 million in conjunction with financing for the SUMMITrak asset acquisition. Gain From Disposition of Discontinued Operations. The gain from disposition of discontinued operations of $7.9 million for the nine months ended September 30, 1997 relates to the Company's divestiture of it's remaining investment in Anasazi Inc. in September 1997 for $8.6 million in cash. 12 Major Clients - ------------- During the nine months ended September 30, 1998 and 1997, revenues from TCI represented approximately 36.3% and 28.0% of total revenues, and revenues from Time Warner Cable and its affiliated companies (Time Warner) represented 16.3% and 19.2% of total revenues, respectively. The increase in the TCI percentage between periods relates primarily to the additional TCI customers converted to the Company's systems as a result of the 15-year TCI Contract executed in September 1997. The decrease in the Time Warner percentage between periods results from a larger total revenue base for the Company, as total revenues from Time Warner increased between periods. The Company has separate processing agreements with multiple affiliates of Time Warner and provides products and services to them under separately negotiated and executed contracts. Income Taxes - ------------ At September 30, 1998, the Company 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 approximately $14.6 million. The Company has recorded a valuation allowance of approximately $48.5 million against the remaining net deferred tax assets since realization of these future benefits is not sufficiently assured as of September 30, 1998. 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 1998, the Company expects to pay U.S. income taxes and realize additional deferred tax assets in 1998. As a result, the Company does not expect income tax expense for 1998 to be significant. Liquidity and Capital Resources - ------------------------------- As of September 30, 1998, the Company's principal sources of liquidity included cash and cash equivalents of $36.2 million. The Company also has a revolving credit facility in the amount of $40.0 million, of which there were no borrowings outstanding. The Company's ability to borrow under the revolving credit facility is subject to maintenance of certain levels of eligible receivables. At September 30, 1998, all of the $40.0 million revolving credit facility was available to the Company based on the current level of eligible receivables. The revolving credit facility expires in September 2002. As of September 30, 1998 and December 31, 1997, respectively, the Company had $58.3 million and $44.7 million in net trade accounts receivable, an increase of $13.6 million, with the increase primarily a result of the Company's revenue growth. The Company's 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 billing for the period (including non-revenue items) divided by the average net trade accounts receivable balance for the period. Some of the Company's most recent DBO calculations are as follows: For the Month For the Quarter Ended Ended ------------- --------------- September 30, 1998..... 46 53 June 30, 1998.......... 54 58 March 31, 1998......... 59 59 December 31, 1997...... 58 54 During the nine months ended September 30, 1998, the Company generated $37.8 million of net cash flow from operating activities. Cash generated from these sources and the proceeds of $3.5 million from the issuance of common stock through the Company's stock incentive plans were used to (i) fund capital 13 expenditures of $11.8 million, (ii) fund additions to software of $1.4 million, (iii) fund the acquisition of assets of US Telecom Advanced Technology Systems, Inc. for $6.0 million, (iv) pay conversion incentive payments of $2.0 million, and (v) repay long-term debt of $4.5 million. Earnings from continuing operations (before extraordinary item) before interest, taxes, depreciation and amortization (EBITDA) for the nine months ended September 30, 1998 was $49.0 million or 29.3% of total revenues, compared to $30.3 million or 24.7% of total revenues for the nine months ended September 30, 1997. 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. The Company financed the SUMMITrak asset acquisition with a $150.0 million term credit facility in September 1997. In December 1997, the Company made an optional principal payment on the term credit facility of $15.0 million. Interest rates for the term and revolving credit facilities are chosen at the option of the Company and are based on the LIBOR rate or the prime rate, plus an additional percentage spread, with the spread dependent upon the Company's leverage ratio. For the three months ended March 31, 1998, the spread on the LIBOR rate and prime rate was 1.0 percent and 0 percent, respectively. Based on the Company's leverage ratio as of March 31, 1998, the spread on the LIBOR rate was reduced to 0.75 percent, effective April 1, 1998. The 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 loan agreement, is under 1.50. As of September 30, 1998, the leverage ratio was 1.85. The purchase price for the SUMMITrak assets acquired in September 1997 included up to $26.0 million in conversion incentive payments. The timing of the conversion incentive payments is based upon the achievement of certain milestones by TCI and the Company, as specified in the SUMMITrak asset acquisition agreement. The milestones are based principally upon the number of TCI's customers converted to, and the total number of TCI customers processed on, the Company's customer care and billing system. Total payments as of September 30, 1998 have been approximately $2.0 million. Based on the conversions performed to date and the future conversions scheduled as of September 30, 1998, the Company expects to pay the remaining $24.0 million to TCI within the next 12 months. On July 30, 1998, the Company acquired substantially all of the assets of US Telecom Advanced Technology Systems, Inc. (USTATS) for approximately $6.0 million in cash and assumption of certain liabilities of approximately $1.3 million. USTATS, a South Carolina-based company, specializes in open systems, client/server customer care and billing systems serving the telecommunications markets. The Company intends to use the acquired technology and software to i) enhance its current service-bureau telephony customer care and billing system, and ii) provide a customer care and billing system for the domestic and international competitive local exchange carrier (CLEC) and incumbent local exchange carrier (ILEC) markets. The cash portion of the purchase price was paid out of corporate funds. The total purchase price of $7.3 million has been allocated to the technology and software acquired and will be amortized over its expected useful life of five years. The Company continues to make significant investments in capital equipment, facilities, and research and development. The Company had no significant capital commitments as of September 30, 1998. The Company believes that cash generated from operations, together with the current cash and cash equivalents and the amount available under the revolving credit facility, will be sufficient to meet its anticipated cash requirements for operations, income taxes, debt service, conversion incentive payments and capital expenditures for both its short and long-term purposes. 14 Year 2000 - --------- The Company's business is dependent upon various computer software programs and operating systems that utilize dates and process data beyond the year 2000. The Company's actions to address the risks associated with the year 2000 are as follows: The Company's State of Readiness - -------------------------------- The Company has established a corporate program to coordinate its year 2000 (Y2K) compliance efforts across all business functions and geographic areas. The scope of the program includes addressing the risks associated with the Company's i) information technology (IT) systems (including the Company's products and services), ii) non-IT systems that include embedded technology (e.g., buildings, plant, equipment and other infrastructure), and iii) significant vendors and their Y2K readiness. The Company is utilizing the following steps in executing its Y2K compliance program: 1) awareness, 2) assessment, 3) renovation (including upgrades and enhancements to the Company's products), 4) validation and testing, and 5) implementation. The Company has completed the awareness and assessment steps for all areas. IT Systems. The renovation step has been substantially completed for all mission critical IT systems and products, and the Company now is focusing its efforts on validation and testing. The Company's most significant renovation effort involved its core product, CCS. CCS utilizes one subroutine for calculating dates, with the various computer programs within CCS with date dependent calculations accessing this subroutine. As a result, all date calculations are performed in one location. The renovation of this subroutine and the related interfaces to the various date dependent programs has been completed. The Company is now testing CCS and its related software products (e.g., ACSR, ACSR Telephony, etc.) using its standard testing methodologies, while adding date simulation to specifically address the Y2K risk. Such date simulation considers pre-2000, cross over, and post-2000 time frames, including year 2000 leap year considerations. The Company believes it will be 80-90% completed with its testing for CCS and related software products by December 31, 1998, with the remaining testing expected to be done by the end of the first quarter of 1999. Implementation into the production environment is expected to occur shortly after testing is completed. For the Company's non-CCS related software products, no renovation is believed necessary as the products are relatively new and were designed to be Y2K compliant. The Company plans to test these products with similar date simulation techniques discussed above to ensure they are Y2K compliant. Such testing is expected to be substantially completed by the end of 1998. Non-IT Systems. The Company expects to have all of its mission critical non-IT systems Y2K compliant by the end of the first quarter of 1999. The Company is currently formulating its testing and implementation plans for its mission critical non-IT systems. Significant Vendors. As part of the Company's Y2K compliance program, the Company has contacted its significant vendors to assess their Y2K readiness. For all mission critical third party software embedded in or specified for use in conjunction with the Company's IT systems and products, the Company's communications with the vendors indicates that the vendors believe they will be Y2K compliant by the end of 1998. Such third party software is being tested in conjunction with the testing of the IT systems and products discussed above. All other significant vendors (including the Company's vendor who provides data processing services for CCS) have indicated they will be Y2K compliant by the end of 1998, except for one of the Company's vendors which provides data lines access for CCS. This vendor indicates that it expects to be Y2K compliant by the end of the first quarter of 1999. There can be no assurance that i) the Company's significant vendors will succeed in their Y2K compliance efforts, or ii) the failure of vendors to address year 2000 compliance will not have a material adverse effect on the Company's business or results of operations. 15 The Costs to Address the Company's Year 2000 Issues - --------------------------------------------------- Since inception of its program in 1995 through September 30, 1998, the Company has incurred and expensed costs of approximately $2.3 million related to Y2K compliance efforts. The total estimated costs to complete the Company's Y2K compliance effort are approximately $1.6 million. The estimated costs to complete, which does not include any costs which may be incurred by the Company if its significant vendors fail to timely address Y2K compliance, is based on currently known circumstances and various assumptions regarding future events. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. The Risks of the Company's Year 2000 Issues - ------------------------------------------- The Company's failure to timely resolve the Y2K risks could result in system failures, the generation of erroneous information, and other significant disruptions of business activities, including among others, access to CCS and the use of related software products, and timely printing and delivery of clients' customers' statements. Although the Company believes it will be successful in its Y2K compliance efforts, there can be no assurance that the Company's systems and products contain all necessary date code changes. In addition, the Company's operations may be at risk if its vendors and other third parties fail to adequately address the Y2K issue or if software conversions result in system incompatibilities with these third parties. To the extent that either the Company or a third-party vendor or service provider on which the Company relies does not achieve Y2K compliance, the Company's results of operations could be materially adversely affected. Furthermore, it has been widely reported that a significant amount of litigation surrounding business interruption will arise out of Y2K issues. It is uncertain whether, or to what extent, the Company may be affected by such litigation. As is the case with many software companies and service providers, if the Company's current or future clients experience significant business interruptions due to their failure to achieve Y2K compliance, the Company's results of operations could be materially adversely affected. There can be no assurance that the Company's current or future clients will adequately and successfully address their Y2K risk and not experience any business interruptions. The Company's Contingency Plan - ------------------------------ The Company has not yet developed a comprehensive contingency plan to address the situation that may result if the Company or its vendors are unable to achieve Y2K compliance for its critical operations. During the fourth quarter of 1998 and the first quarter of 1999, based upon the status of the Company's Y2K compliance efforts at that time and the Company's perceived risks to critical business operations, the Company plans to evaluate what areas the Company believes a contingency plan may be necessary, and execute such contingency plan if warranted. The i) inability to timely implement a contingency plan, if deemed necessary, and ii) the cost to develop and implement such a plan, may have a material adverse effect on the Company's results of operations. Certain Factors That May Affect Future Results of Operations - ------------------------------------------------------------ Except for statements of existing or historical facts, the foregoing discussion of Y2K consists of forward-looking statements and assumptions relating to forward-looking statements, including without limitation the statements relating to future costs, the timetable for completion of Y2K compliance efforts, potential problems relating to Y2K, the Company's state of readiness, third party representations, and the Company's plans and objectives for addressing Y2K problems. Certain factors could cause actual results to differ materially from the Company's expectations, including without limitation i) the failure of vendors and service providers (such as the vendors of data processing services and data lines access for CCS and providers of third party software) to timely achieve Y2K compliance, ii) system incompatibilities with third parties resulting from software conversions, iii) the Company's systems and products not containing all necessary date code changes, iv) the failure of existing or future clients to achieve Y2K compliance, v) potential litigation arising out of Y2K issues, the risk of which may be greater for information technology based service providers such as the Company, vi) the failure of the Company's validation and testing phase to detect operational problems internal to the 16 Company, in the Company's products or services or in the Company's interface with service providers, vendors or clients, whether such failure results from the technical inadequacy of the Company's validation and testing efforts, the technological infeasibility of testing certain non-IT systems, the perceived cost-benefit constraints against conducting all available testing, or the unavailability of third parties to participate in testing, or vii) the failure to timely implement a contingency plan to the extent Y2K compliance is not achieved. 17 CSG SYSTEMS INTERNATIONAL, INC. PART II. OTHER INFORMATION Item 1-5. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 2.19C Sixth Amendment to Restated and Amended CSG Master Subscriber Management System Agreement Between CSG Systems, Inc. and TCI Cable Management Corporation, dated July 22, 1998. 2.19D* Seventh Amendment to Restated and Amended CSG Master Subscriber Management System Agreement Between CSG Systems, Inc. and TCI Cable Management Corporation, dated September 8, 1998. 2.19E Eighth Amendment to Restated and Amended CSG Master Subscriber Management System Agreement Between CSG Systems, Inc. and TCI Cable Management Corporation, dated September 25, 1998. 2.19F* Eleventh Amendment to Restated and Amended CSG Master Subscriber Management System Agreement Between CSG Systems, Inc. and TCI Cable Management Corporation, dated September 30, 1998. 10.40C* First Amendment to Amended and Restated Services Agreement between CSG Systems, Inc. and First Data Technologies, Inc., dated July 8, 1998. 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. (b) Reports on Form 8-K None __________________ * 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 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 16, 1998 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) 19 CSG SYSTEMS INTERNATIONAL, INC. INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- 2.19C Sixth Amendment to Restated and Amended CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and TCI Cable Management Corporation, dated July 22, 1998. 2.19D* Seventh Amendment to Restated and Amended CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and TCI Cable Management Corporation, dated September 8, 1998. 2.19E Eighth Amendment to Restated and Amended CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and TCI Cable Management Corporation, dated September 25, 1998. 2.19F* Eleventh Amendment to Restated and Amended CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and TCI Cable Management Corporation, dated September 30, 1998. 10.40C* First Amendment to Amended and Restated Services Agreement between CSG Systems, Inc. and First Data Technologies, Inc., dated July 8, 1998. 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. __________________ * 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. 20 EX-2.19C 2 SIXTH AMENDMENT TO RESTATED & AMENDED MASTER EXHIBIT 2.19C SIXTH AMENDMENT TO RESTATED AND AMENDED CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT BETWEEN CSG SYSTEMS, INC. AND TCI CABLE MANAGEMENT CORPORATION This Sixth Amendment (the "Amendment") is executed this 22/nd/ day of July, 1998, and is made by and between CSG Systems, Inc., a Delaware corporation ("CSG") and TCI Cable Management Corporation ("Customer"). CSG and Customer entered into a certain Restated and Amended CSG Master Subscriber Management System Agreement dated August 10, 1997, a First Amendment thereto dated June 29, 1998, a Second Amendment thereto dated January 9, 1998, a Third Amendment thereto dated ____________, a Fourth Amendment thereto dated ____________, and a Fifth Amendment dated ____________ (collectively, the "Agreement"), and now desire to amend the Agreement in accordance with the terms and conditions set forth in this Amendment. If the terms and conditions set forth in this Amendment shall be in conflict with the Agreement, the terms and conditions of this Amendment shall control. Any terms in initial capital letters or all capital letters used as a defined term but not defined in this Amendment, shall have the meaning set forth in the Agreement. Upon execution of this Amendment by the parties, any subsequent reference to the Agreement between the parties shall mean the Agreement as amended by this Amendment. Except as amended by this Amendment, the terms and conditions set forth in the Agreement shall continue in full force and effect according to their terms. CSG AND CUSTOMER AGREE AS FOLLOWS: 1. IN ADDITION TO THE SYSTEM SITES CURRENTLY USING THE CSG ON-LINE SYSTEM, CUSTOMER DESIRES TO HAVE AN ADDITIONAL SYSTEM SITE USING SUCH SYSTEM. AS A RESULT, THE AGREEMENT IS HEREBY AMENDED TO ADD THE FOLLOWING AS A SYSTEM SITE USING THE CSG ON-LINE SYSTEM: SYSTEM SITE ESTIMATED CONVERSION DATE ESTIMATED NUMBER OF ----------- ------------------------- ------------------- SUBSCRIBERS ----------- Ellensburg, WA (existing system site owned 8,000 by another cable operator) THIS AMENDMENT IS EXECUTED ON THE DAY AND YEAR FIRST SHOWN ABOVE. CSG SYSTEMS, INC. ("CSG") TCI CABLE MANAGEMENT CORPORATION ("CUSTOMER") BY: /s/ JOSEPH T. RUBLE BY: /s/ ANN MONTGOMERY ---------------------------- --------------------------------- NAME: JOSEPH T. RUBLE NAME: ANN MONTGOMERY -------------------------- ------------------------------- TITLE: V.P. & GENERAL COUNSEL TITLE: SENIOR V.P. FULFILLMENT SVCS ------------------------- ------------------------------ EX-2.19D 3 SEVENTH AMENDMENT TO RESTATED & AMENDED CSG EXHIBIT 2.19D Pages where confidential treatment has been requested are stamped "Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission," and places where information has been redacted have been marked with (***). SEVENTH AMENDMENT TO RESTATED AND AMENDED CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT BETWEEN CSG SYSTEMS, INC. AND TCI CABLE MANAGEMENT CORPORATION This Seventh Amendment (the "Amendment") is executed this 8th day of September, 1998, and is made by and between CSG Systems, Inc., a Delaware corporation ("CSG") and TCI Cable Management Corporation ("Customer"). CSG and Customer entered into a certain Restated and Amended CSG Master Subscriber Management System Agreement dated August 10, 1997, which has subsequently been amended pursuant to separately executed amendments (collectively, the "Agreement"), and now desire to amend the Agreement in accordance with the terms and conditions set forth in this Amendment. If the terms and conditions set forth in this Amendment shall be in conflict with the Agreement, the terms and conditions of this Amendment shall control. Any terms in initial capital letters or all capital letters used as a defined term but not defined in this Amendment, shall have the meaning set forth in the Agreement. Upon execution of this Amendment by the parties, any subsequent reference to the Agreement between the parties shall mean the Agreement as amended by this Amendment. Except as amended by this Amendment, the terms and conditions set forth in the Agreement shall continue in full force and effect according to their terms. CSG AND CUSTOMER AGREE AS FOLLOWS: 1. THE DEFINITION OF "PRODUCTS" AND ALL REFERENCES THERETO IN THE AGREEMENT SHALL BE AMENDED TO INCLUDE CSG'S INFO EXPRESS SOFTWARE, WHICH ALLOWS END- USER CUSTOMERS TO PERFORM CERTAIN ROUTINE FUNCTIONS WITHOUT HAVING TO SPEAK TO ONE OF CUSTOMER'S CUSTOMER SERVICE REPRESENTATIVES. 2. SCHEDULE D SHALL BE AMENDED TO INCLUDE THE FOLLOWING FEES FOR INFO EXPRESS: SOFTWARE LICENSE FEES: - ---------------------- (***) Local Info Express License fee $(***) per IVR (minimum initial purchase of 50 licenses) . Third party hardware and software is additional SOFTWARE LICENSE ANNUAL MAINTENANCE FEES: 20% of License fee - ----------------------------------------- SOFTWARE LICENSE AND MAINTENANCE PAYMENT TERMS: - ----------------------------------------------- (for initial purchase of 50 licenses and related First year maintenance Fees) . $(***) due upon Execution of this Agreement . $(***) due on November 1, 1998 . Subsequent annual software maintenance Fees due on anniversary date of software license. "Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission." INSTALLATION SERVICES: - ---------------------- Includes: $(***) per IVR Installation . Installation of application on IVR . Configuration of application software . Configuration of CSG intelligent router . Configuration of EIS Gateway . Performance Testing ADDITIONAL CONSULTING OR TRAINING SERVICES: - ------------------------------------------- (fees set forth in Schedule D). INFO EXPRESS COMPONENT DELIVERY DATES: - -------------------------------------- . The following modules will be delivered by August 1, 1998- Account Balance Appointment Confirmation . The following modules will be delivered by October 1, 1998- Set Top Box Re-authorization Inbound Outage Notification . The following module will be delivered by November 1, 1998- Work Order Close Out . The following module will be delivered by March 31, 1999- Credit Card Payment PRODUCT DELIVERY PENALTIES: - --------------------------- Should any of the following modules not be delivered as referenced above, Customer will have the right to discontinue use of all of CSG's Local Info Express Services and receive a full refund of license fees and prorated maintenance fees or negotiate to use a subset of CSG's Local Info Express Services at mutually agreed upon fee not to exceed $(***) per ARU/Info Express. . Account Balance . Appointment Confirmation . Set Top Box Re-authorization . Inbound Outage Notification . Work Order Close Out THIS AMENDMENT IS EXECUTED ON THE DAY AND YEAR FIRST SHOWN ABOVE. CSG SYSTEMS, INC. ("CSG") TCI CABLE MANAGEMENT CORPORATION ("CUSTOMER") BY: /s/ JOSEPH T. RUBLE BY: /s/ SCOTT D. BESSELIEVRE ---------------------------- ------------------------------------- NAME: JOSEPH T. RUBLE NAME: SCOTT D. BESSELIEVRE -------------------------- ----------------------------------- TITLE: V.P. & GENERAL COUNSEL TITLE: EXECUTIVE DIRECTOR, CUSTOMER OPS ------------------------- ---------------------------------- EX-2.19E 4 EIGHTH AMENDMENT TO RESTATED & AMENDED CSG EXHIBIT 2.19E EIGHTH AMENDMENT TO RESTATED AND AMENDED CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT BETWEEN CSG SYSTEMS, INC. AND TCI CABLE MANAGEMENT CORPORATION This Eighth Amendment (the "Amendment") is executed this 25th day of September, 1998, and is made by and between CSG Systems, Inc., a Delaware corporation ("CSG") and TCI Cable Management Corporation ("Customer"). CSG and Customer entered into a certain Restated and Amended CSG Master Subscriber Management System Agreement dated August 10, 1997, which has subsequently been amended pursuant to separately executed amendments (collectively, the "Agreement"), and now desire to amend the Agreement in accordance with the terms and conditions set forth in this Amendment. If the terms and conditions set forth in this Amendment shall be in conflict with the Agreement, the terms and conditions of this Amendment shall control. Any terms in initial capital letters or all capital letters used as a defined term but not defined in this Amendment, shall have the meaning set forth in the Agreement. Upon execution of this Amendment by the parties, any subsequent reference to the Agreement between the parties shall mean the Agreement as amended by this Amendment. Except as amended by this Amendment, the terms and conditions set forth in the Agreement shall continue in full force and effect according to their terms. CSG AND CUSTOMER AGREE AS FOLLOWS: 1. The following shall be added to Section 7 (CSG/(R)/ Vantage Fees) of Schedule D: CSG will allocate Customer's Vantage CPU overage minutes such that the allocation for all System Sites will be combined and based on Customer's total enterprise-wide Vantage used, not on each System Site's usage and allotment. THIS AMENDMENT IS EXECUTED ON THE DAY AND YEAR FIRST SHOWN ABOVE. CSG SYSTEMS, INC. ("CSG") TCI CABLE MANAGEMENT CORPORATION ("CUSTOMER") BY: /s/ JOSEPH T. RUBLE BY: /s/ JERRY KULIN ---------------------------- --------------------------------------- NAME: JOSEPH T. RUBLE NAME: JERRY KULIN -------------------------- ------------------------------------- TITLE: V.P. & GENERAL COUNSEL TITLE: EXE. DIRECTOR, CUST. BILLING SYST. ------------------------- ------------------------------------ EX-2.19F 5 ELEVENTH AMENDMENT TO RESTATED & AMENDED CSG EXHIBIT 2.19F Pages where confidential treatment has been requested are stamped "Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission," and places where information has been redacted have been marked with (***). ELEVENTH AMENDMENT TO RESTATED AND AMENDED CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT BETWEEN CSG SYSTEMS, INC. AND TCI CABLE MANAGEMENT CORPORATION This Eleventh Amendment (the "Amendment") is executed this 30 day of September, 1998, and is made by and between CSG Systems, Inc., a Delaware corporation ("CSG") and TCI Cable Management Corporation ("Customer"). CSG and Customer entered into a certain Restated and Amended CSG Master Subscriber Management System Agreement dated August 10, 1997, which has subsequently been amended pursuant to separately executed amendments (collectively, the "Agreement"), and now desire to amend the Agreement in accordance with the terms and conditions set forth in this Amendment. If the terms and conditions set forth in this Amendment shall be in conflict with the Agreement, the terms and conditions of this Amendment shall control. Any terms in initial capital letters or all capital letters used as a defined term but not defined in this Amendment, shall have the meaning set forth in the Agreement. Upon execution of this Amendment by the parties, any subsequent reference to the Agreement between the parties shall mean the Agreement as amended by this Amendment. Except as amended by this Amendment, the terms and conditions set forth in the Agreement shall continue in full force and effect according to their terms. CSG AND CUSTOMER AGREE AS FOLLOWS: 1. FOR THE FEES SET FORTH BELOW, AND IN ACCORDANCE WITH THE TERMS AND CONDITIONS SET FORTH IN THE AGREEMENT (INCLUDING, BUT NOT LIMITED TO, SCHEDULE C), CSG HEREBY GRANTS TO CUSTOMER ONE THOUSAND ONE HUNDRED (1,100) - ---------- ADDITIONAL LICENSES OF ACSR, WHICH CUSTOMER MAY USE AT SYSTEM SITES THAT ARE TO BE DETERMINED WITH DELIVERY TO FOLLOW UPON NOTIFICATION. AS A RESULT, EXHIBIT C-1 IS HEREBY AMENDED TO INCREASE THE NUMBER OF ACSR WORKSTATIONS TO SIX THOUSAND ONE HUNDRED (6,100). 2. ACSR PERPETUAL LICENSE FEES --------------------------- 1,100 WORKSTATIONS $(***)* ($(***) PER WORKSTATION) *INVOICE DATE (PAYMENTS DUE NET FORTY-FIVE (45) DAYS). SEPTEMBER 30, 1998 $(***) ACSR ANNUAL MAINTENANCE FEES ---------------------------- TWENTY PERCENT (20%) OF LICENSE FEES INVOICE DATE (PAYMENTS DUE NET FORTY-FIVE (45) DAYS) DAYS. SEPTEMBER 30, 1998 $(***) (AND ANNUALLY THEREAFTER ON THE ANNIVERSARY OF THE LICENSE GRANT) THIS AMENDMENT is executed on the day and year first shown above. CSG SYSTEMS, INC. ("CSG") TCI CABLE MANAGEMENT CORPORATION ("CUSTOMER") BY: /s/ JOSEPH T. RUBLE BY: /s/ ANN MONTGOMERY ---------------------------- --------------------------------- NAME: JOSEPH T. RUBLE NAME: ANN MONTGOMERY -------------------------- ------------------------------- TITLE: V.P. & GENERAL COUNSEL TITLE: SENIOR V.P. FULFILLMENT SVCS ------------------------- ------------------------------ EX-10.40C 6 FIRST AMENDMENT TO AMENDED & RESTATED SERVICE EXHIBIT 10.40C Pages where confidential treatment has been requested are stamped "Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission," and places where information has been redacted have been marked with (***). FIRST AMENDMENT TO AMENDED AND RESTATED SERVICES AGREEMENT BETWEEN CSG SYSTEMS, INC. AND FIRST DATA TECHNOLOGIES, INC. THIS FIRST AMENDMENT (the "First Amendment") is executed this 8th day of July, 1998, and is made by and between CSG Systems, Inc., a Delaware corporation ("CSG") and First Data Technologies, Inc., a Delaware corporation ("FDT"). RECITALS A. The Parties entered into a certain Amended and Restated Services Agreement dated December 31, 1996 (the "Services Agreement"). B. CSG desires to increase its CPU MIPS utilization in 1998 in excess of (***) percent ((***)%). C. CSG desires FDT to provide CSG with Additional Services to enable CSG to increase its CPU MIPS utilization in 1998 in excess of (***) percent ((***)%). D. The Services Agreement requires that in the event of such an increase, that the Parties amend the Services Agreement. NOW THEREFORE, in consideration of the premises and the mutual covenants, conditions and agreements hereinafter expressed, the Parties hereto agree as follows: 1. If the terms and conditions set forth in this First Amendment shall be in conflict with the Services Agreement, the terms and conditions of this First Amendment shall control. Any terms in initial capitalized letters or all capitalized letters used as a defined term but not defined in this First Amendment, shall have the meaning set forth in the Services Agreement. Except as amended by this First Amendment, the terms and conditions set forth in the Services "Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission." Agreement shall continue in full force and effect according to their terms. 2. The assumptions listed in Note 1 of Schedule 1.27 are deleted and ------------- replaced with the following: 1. Assumptions. All pricing assumes the volumes, numbers, dollar amounts and ----------- levels (as applicable) of each of the FDT Services and Performance Criteria as of the Effective Date, with the following exceptions, each of which shall be deemed to be as follows: Base CPU MIPS: (***) Assigned CPU MIPS as of January 1, 1997: (***) Assigned CPU MIPS as of January 1, 1998: (***) Modems and Controllers as of January 1, 1997: $(***) annually; $(***) monthly 3. The fees relating to CPU MIPS set forth on page 7 of Schedule 1.27 are deleted and replaced with the following: - -------------
- ---------------------------------------------------------------------------------------------------- FDT Services Unit 1997 1998 1999 2000 2001 Comments - ---------------------------------------------------------------------------------------------------- Base CPU MIPS MIP/month $(***) $(***) $(***) $(***) $(***) Notes 1,2 - ---------------------------------------------------------------------------------------------------- Assigned CPU MIPS MIP/month $(***) $(***) $(***) $(***) $(***) Notes 1,2 that Exceed the Number of Base CPU MIPS - ---------------------------------------------------------------------------------------------------- CPU Incremental MIPS MIP/month $(***) $(***) $(***) $(***) $(***) Notes 1,2 - ----------------------------------------------------------------------------------------------------
4. In accordance with Section 2.15 and Note 2 of Schedule 1.27, ------------- in calendar year 1998, CSG may increase its assignment of Assigned CPU MIPS in excess of (***) percent ((***)%). CSG shall notify FDT of any such increases at least one hundred twenty (120) days prior to the date upon which CSG desires such increases to be effective, it being understood that such increases shall be effective on the first day of the month following the expiration of such notice period. In 1998, (***) percent ((***)%) of the Assigned CPU MIPS equals (***) ((***) x (***) = (***)). In 1998 only, the monthly fee per CPU MIPS in excess of (***) shall be $(***). In 1998 only, the monthly fee per CPU MIPS in excess of (***) but up to and including (***) shall be $(***). In 1999 and subsequent years, CSG shall pay the fees for CPU MIPS in accordance with Schedule 1.27, ------------- with the following exception: CSG shall pay the fees for the number of Assigned CPU MIPS that exceed (***) but that are less than or equal to the total "Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission." number of Assigned CPU MIPS as of January 1, 1999 at the monthly rate of $(***). 5. A new Section C is added to Note 2 of Schedule 1.27 to read as ------------- follows: C. Additional Examples. ------------------- (1) As of January 1, 1998, the number of Assigned CPU MIPS equals (***). On March 12, 1998, CSG notifies FDT to increase its assignment of Assigned CPU MIPS to (***). FDT shall implement such increase on August 1, 1998. The monthly CPU MIPS charge for August, 1998 shall be calculated as follows: ((***) x $(***)) + (((***) - (***) x ($(***))) + (((***) - (***)) x $(***))) $(***) + $(***) + $(***) = $(***) (2) As of January 1, 1999 and January 1, 2000, the number of Assigned CPU MIPS equals (***). On October 19, 1999, CSG notifies FDT to increase its assignment of Assigned CPU MIPS to (***). FDT shall implement such increase on March 1, 2000. The monthly CPU MIPS charge for March, 2000 shall be calculated as follows: ((***) x $(***)) + (((***) - (***)) x $(***))) + (((***) - (***)) x $(***))) + (((***) - (***)) x $(***))) $(***) + $(***) + (***) + $(***) = $(***) (3) As of January 1, 1999 and January 1, 2000, the number of Assigned CPU MIPS equals (***). On October 14, 1999, CSG notifies FDT to decrease its assignment of Assigned CPU MIPS to (***). FDT shall implement such decrease on March 1, 2000. The monthly CPU MIPS charge for March, 2000 shall be calculated as follows: ((***) x $(***)) + (((***) - (***)) x $(***))) + (((***) - (***)) x $(***))) $(***) + $(***) + $(***) = $(***) 6. In example "a" to Note 2(A)(2) of Schedule 1.27, the two ------------- appearances of the term "(***) MIPS" shall each be replaced with the phrase "(***) CPU MIPS". 7. In the second paragraph of Note 2(B)(2) of Schedule 1.27, the ------------- phrase "Assigned CPU MIPS Charge" shall be replaced with the phrase "Base CPU MIPS Charge". 8. In the first paragraph of Note 2(B)(3) of Schedule 1.27, the ------------- phrase "CPU Base MIPS" shall be replaced with the phrase "CPU MIPS". "Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission." 9. In the first paragraph of Note 2(B)(3) of Schedule 1.27, the ------------- term "MIPS" shall be replaced with the term "CPU MIPS". 10. In the second paragraph of Note 2(B)(3) of Schedule 1.27, the -------------- term "MIPS" shall be replaced with the term "CPU MIPS". 11. In the first paragraph of Note 2(B)(4) of Schedule 1.27, the ------------- phrase "CPU Base MIPS" shall be replaced with the phrase "CPU MIPS". 12. In the second paragraph of Note 2(B)(4) of Schedule 1.27, the ------------- phrase "Assigned CPU MIPS Charge" shall be replaced with the phrase "Base CPU MIPS Charge". 13. In Note 4 of Schedule 1.27, each appearance of the phrase "CPU ------------- Base MIPS" shall be replaced with the phrase "CPU MIPS". 14. The multiprocessor computer platform to be installed in 1998 initially will be physically partitioned into two (2) systems. CSG shall be responsible for paying for only the CPU MIPS assigned to it. Upon CSG's request, FDT will add capacity or additional engines to either system. CSG shall notify FDT of any such request at least one hundred twenty (120) days prior to the date upon which CSG desires such additional capacity or engines to be effective, it being understood that such additions shall be effective on the first day of the month following the expiration of such notice period, provided the Parties can reach agreement pursuant to the procedures set forth in Section ------- 2.15. If FDT adds additional engines to either system or an agreement is - ---- reached to repartition, then FDT will establish a new CPU MIPS rating for the systems. 15. Note 11 of Schedule 1.27 is deleted and replaced with the ------------- following: 11. FICHE ----- A. Increases. --------- (1) During each calendar year during the Term, CSG may increase its volume of Fiche FDT Services in any calendar month by no more than (***) percent ((***)%) based on the average monthly volume of Fiche FDT Services during the prior calendar year. CSG shall notify FDT of such increases at least sixty (60) days prior to the date upon which CSG desires such increase to be effective, it being understood that such increases shall be effective on the first day of the month following the expiration of such notice period. (2) Except as set forth in Note 11(A)(3) of this Schedule 1.27, ------------- during each calendar year during the Term, requests by CSG to increase its volume of Fiche FDT Services in any calendar month in excess of twenty (***) ((***)%), based on the average monthly volume of Fiche FDT Services "Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission." during the prior calendar year, shall be addressed as an Additional Service. CSG shall notify FDT of such increases at least sixty (60) days prior to the date upon which CSG desires such increase to be effective, it being understood that such increases shall be effective on the first day of the month following the expiration of such notice period, provided the Parties can reach agreement pursuant to the procedures set forth in Section 2.15. ------------ (3) Notwithstanding Note 11(A)(2) of this Schedule 1.27 or Section ------------- ------- 2.15, during calendar year 1998, CSG may increase its volume of ---- Fiche FDT Services in any calendar month by more than (***) percent ((***)%) based on the average monthly volume of Fiche FDT Services during calendar year 1997 ((***)). CSG shall notify FDT of such increases at least sixty (60) days prior to the date upon which CSG desires such increase to be effective, it being understood that such increases shall be effective on the first day of the month following the expiration of such notice period. Increases in CSG's Fiche FDT Services under this Note 11(A)(3) shall not be addressed as an Additional Service. B. Decreases. --------- (1) Except as set forth in Note 11(B)(2) of this Schedule 1.27, ------------- during each calendar year during the Term, CSG may decrease the volume of Fiche FDT Services in any calendar month by no more than (***) percent ((***)%), based on the average volume of Fiche FDT Services during the prior calendar year. CSG shall notify FDT of any such decreases at least sixty (60) days prior to the date upon which CSG desires such decreases to be effective, it being understood that such decreases shall be effective on the first day of the month following the expiration of such notice period. (2) Notwithstanding Note 11(B)(1) of Schedule 1.27, during any ------------- calendar year during the Term, CSG may decrease the volume of Fiche FDT Services in any calendar month by more than (***) percent ((***)%), based on the average volume of Fiche FDT Services during the prior calendar year, provided that CSG shall -------- pay to FDT, in addition to the fees associated with the actual Fiche FDT Services, the following additional payment (if any): (((***) x volume of Fiche FDT Services during the prior calendar year) - (actual volume of Fiche FDT Services during such calendar year)) x (Applicable Fiche FDT Services Charges x (***)) "Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission." FDT shall invoice CSG on the tenth (10th) day of January of the following calendar year for any amount owed for the foregoing additional payment. Each such invoice shall be due and payable within fourteen (14) days following receipt. CSG shall notify FDT of any such decreases at least sixty days prior to the date upon which CSG desires such decreases to be effective, it being understood that such decreases shall be effective on the first day of the month following the expiration of such notice period. (3) If CSG notifies FDT to decrease the volume of Fiche FDT Services, and CSG subsequently fails to be in a position whereby FDT could implement such decrease (either in whole or in part) without disrupting CSG's business, in addition to any of the charges set forth in Schedule 1.27, CSG shall pay to FDT, as applicable: (a) ------------- if FDT has Fiche FDT Services capacity available, the costs (as set forth herein) associated with CSG's use of Fiche FDT Services in excess of the Fiche FDT Services level that CSG instructed FDT to decrease CSG's volume to, and (b) FDT's costs of maintaining or implementing CSG's volume of Fiche FDT Services in excess of the level of Fiche FDT Services that CSG instructed FDT to decrease CSG's volume to. C. Examples. -------- (1) The monthly average of Fiche FDT Services during calendar year 1997 is (***). On March 12, 1998, CSG notifies FDT that its average monthly volume of Fiche FDT Services will increase to (***). FDT shall implement such increase on June 1, 1998. On June 24, 1998, CSG notifies FDT that its average monthly volume of Fiche FDT Services shall increase to (***). Note 11(A)(2) of Schedule 1.27 is inapplicable. ------------- FDT shall implement such increase on September 1, 1998. (2) The monthly average of Fiche FDT Services during calendar year 1998 is (***). On March 12, 1999, CSG notifies FDT that its average monthly volume of Fiche FDT Services will increase to (***). FDT shall implement such increase on June 1, 1999. On June 24, 1999, CSG notifies FDT that its average monthly volume of Fiche FDT Services shall increase to (***). Note "Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission." 11(A)(3) of Schedule 1.27 is inapplicable. The parties shall ------------- proceed under Section 2.15 to determine whether FDT would ------------ provide CSG such additional Fiche FDT Services as an Additional Service. (3) The monthly average of Fiche FDT Services during calendar year 1997 is (***). On March 12, 1998, CSG notifies FDT that its average monthly volume of Fiche FDT Services will decrease to (***). FDT shall implement such decrease on June 1, 1998. On June 24, 1998, CSG notifies FDT that its average monthly volume of Fiche FDT Services shall decrease to (***). FDT shall implement such increase on September 1, 1998. (4) The monthly average of Fiche FDT Services during calendar year 1998 is (***). On March 12, 1999, CSG notifies FDT that its average monthly volume of Fiche FDT Services will decrease to (***). FDT shall implement such decrease on June 1, 1999. Throughout calendar year 1999, the actual volume of Fiche FDT Services is (***), which consisted of (***) masters and (***) duplicates. On January 10, 2000, CSG shall not pay to FDT any additional payment pursuant to Note 11(b)(2) of this Schedule 1.27 since the value is ------------- negative as set forth below: (((***) x (***)) - ((***))) x ((***) x (***)) ((***) - (***)) x (***) = N/A (5) The monthly average of Fiche FDT Services during calendar year 1998 is (***). On March 12, 1999, CSG notifies FDT that its average monthly volume of Fiche FDT Services will decrease to (***). FDT shall implement such decrease on June 1, 1999. Throughout calendar year 1999, the actual volume of Fiche FDT Services is (***), which consisted of (***) masters and (***) duplicates. On January 10, 2000, CSG shall pay to FDT the following additional payment: (((***) x (***)) - (***)) x (((***)/(***)) x (***))) ((***) - (***)) x ((***) x (***)) (***) x (***) = $(***) "Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission." 16. The fees relating to Tape Upgrade set forth on page 7 of Schedule 1.27 are deleted and replaced with the following: - -------------
- --------------------------------------------------------------------------------------------------- FDT Services Unit 1997 1998 1999 2000 2001 Comments - --------------------------------------------------------------------------------------------------- Tape Upgrade monthly $(***) $(***) $(***) $(***) $(***) Notes 1, 4, 12 - ---------------------------------------------------------------------------------------------------
17. The following additional note shall be added to the end of Schedule 1.27: - ------------- 12. TAPE UPGRADE. Notwithstanding Note 4 of this Schedule 1.27, effective ------------ ------------- March 8, 1998, the monthly fee for Tape Upgrade shall be $(***). The increase in price reflects the provision by FDT as an Additional Service of sixteen (16) Timberlines for an additional $(***) per month, it being understood that if CSG terminates this Agreement for its convenience pursuant to Section 11.4, CSG ------------ shall pay to FDT in addition to the Termination for Convenience Fee, the additional fees incurred by FDT associated with FDT obtaining such additional sixteen (16) Timberlines. THIS FIRST AMENDMENT is executed as of the date and year first shown above. CSG SYSTEMS, INC. ("CSG") FIRST DATA TECHNOLOGIES, INC. ("FDT") By: /s/ John Johnson By: /s/ Guy Battista ------------------- --------------------- Title: V.P. Operations Title: Senior V.P./ CIO ----------------- ------------------ Name: John Johnson Name: Guy Battista ----------------- ------------------ EX-27.01 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 36,204 0 60,328 1,986 0 101,352 45,018 21,929 221,385 104,876 114,750 0 0 257 762 221,385 0 167,013 0 76,946 20,278 0 7,481 28,711 0 28,711 0 0 0 28,711 1.12 1.09
EX-99.01 8 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER 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. NET LOSSES Although the Company recorded net income for the three months ended June 30, 1998, March 31, 1998 and September 30, 1998, the Company has recorded annual net losses since inception (October 17, 1994) through December 31, 1997. These net losses have resulted from several factors, including: (i) amortization of intangible assets (acquired software, client contracts and related intangibles, and noncompete agreements and goodwill); (ii) charge for purchased research and development; (iii) charge for impairment of software development costs; (iv) charge for impairment of intangible assets; (v) interest expense; (vi) stock- based employee compensation expense; (vii) extraordinary losses from early extinguishment of debt; and (viii) discontinued operations. There can be no assurance that the Company will achieve or sustain profitability in the future. RELIANCE ON CCS The Company derived approximately 76.7% and 77.3% of its total revenues from its primary product, Communications Control System (CCS), and related products and services in the years ended December 31, 1997 and 1996, respectively. CCS and related products and services are expected to provide the substantial majority of the Company's total revenues in the foreseeable future. The Company's results will depend upon continued market acceptance of CCS and related products and services, as well as the Company's ability to continue to adapt and modify them to meet the changing needs of its clients. Any reduction in demand for CCS would have a material adverse effect on the financial condition and results of operations of the Company. DEPENDENCE ON MAJOR CLIENTS During the nine months ended September 30, 1998 and 1997, revenues from TCI represented approximately 36.3% and 28.0% of total revenues, and revenues from Time Warner represented 16.3% and 19.2% of total revenues, respectively. As a result of the TCI Contract, revenues derived from TCI are expected to increase as a percentage of revenue. Loss of all or a significant part of the business of either TCI or Time Warner would have a material adverse effect on the financial condition and results of operations of the Company. REQUIREMENTS OF THE TCI CONTRACT The TCI Contract requires the conversion of a significant number of additional TCI customers onto the Company's customer care and billing system. The TCI Contract provides 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 video industry. If an audit determines the Company is not providing such an innovation and it fails to do so within the schedule required by the contract, then TCI could be released from its exclusivity obligation to the extent necessary to obtain the innovation from a third party. To fulfill the TCI Contract and to remain competitive, the Company believes it will be required to develop new and advanced features to existing products and services, new products and services, and new technologies, all of which will require substantial research and development. TCI also would have the right to terminate the TCI Contract in the event of certain defaults by the Company. The termination of the TCI Contract or of any of TCI's commitments under the contract would have a material adverse effect on the financial condition and results of operations of the Company. RENEWAL OF TIME WARNER CONTRACTS The Company provides services to Time Warner under multiple, separate contracts with various Time Warner affiliates. These contracts are scheduled to expire at various times. The failure of Time Warner to renew contracts representing a significant part of its business with the Company would have a material adverse effect on the financial condition and 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 effect on the results of operations of the Company. DEPENDENCE ON CABLE TELEVISION INDUSTRY The Company's business is concentrated in the cable television industry, making the Company susceptible to a downturn in that industry. During the years ended December 31, 1997 and 1996, the Company derived 73% and 77%, respectively, of its revenues from companies in the U.S. cable television 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. 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 depends upon continued market acceptance of its current products, including CCS and related products and 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. 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. 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. CONVERGING COMMUNICATIONS MARKETS The Company's growth strategy is based in large 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 products and services, 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. 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. CLIENT FAILURE TO RENEW OR UTILIZE CONTRACTS 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. Many of the Company's contracts do not require clients to make any minimum purchases, and contracts are cancelable by clients under certain conditions. 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. Only one of those executive officers is party to an employment agreement with the Company, and such 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 skilled in these areas is intense. The Company may not be successful in attracting and retaining the personnel it requires. 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. Fluctuations in quarterly results may result in volatility in the market price of the Company's Common Stock. DEPENDENCE ON PROPRIETARY TECHNOLOGY The Company relies on a combination of trade secret and copyright laws, patents, 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. 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 EURO 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, 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 that may 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 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. YEAR 2000 The Company's business is dependent upon various computer software programs and operating systems that utilize dates and process data beyond the year 2000. If the actions taken by the Company to mitigate its risks associated with the year 2000 are inadequate, there could be a material adverse effect on the financial condition and results of operations of the Company. See "Year 2000" in Management's Discussion and Analysis of Financial Condition and Results of Operations for additional discussion of the Company's efforts concerning year 2000 compliance. RELATIONSHIP WITH FIRST DATA CORPORATION The Company has entered into a data processing services agreement with FDC. The Company is dependent upon FDC to perform these services for the operation of CCS. The inability of FDC to perform these services satisfactorily could have a material adverse effect on the financial condition and results of operations of the Company. The existing agreement is scheduled to expire in December 2001. -----END PRIVACY-ENHANCED MESSAGE-----