-----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, P8dUJiBR2+/t7eJM0oFBlPZTHTJd53bVgoZpV0OvstnSG8QmHiLm0gl7viwTxfzv p84U7Q9Q7B60ydplw9xxaQ== 0000927356-99-001862.txt : 19991117 0000927356-99-001862.hdr.sgml : 19991117 ACCESSION NUMBER: 0000927356-99-001862 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755508 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 FORM 10-Q FOR CSG SYSTEMS INTERNATIONAL 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, 1999 OR [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________ to _______ Commission file number 0-27512 CSG SYSTEMS INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 47-0783182 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 7887 East Belleview, Suite 1000 Englewood, Colorado 80111 (Address of principal executive offices, including zip code) (303) 796-2850 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Shares of common stock outstanding at November 12, 1999: 51,829,926 CSG SYSTEMS INTERNATIONAL, INC. FORM 10-Q For the Quarter Ended September 30, 1999 INDEX
Page No. -------- Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998.................................................... 3 Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1999 and 1998 ................................ 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998................................. 5 Notes to Condensed Consolidated Financial Statements..................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 19 Part II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K......................................... 20 Signatures............................................................... 21 Index to Exhibits........................................................ 22
2 CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
September 30, December 31, 1999 1998 ------------- ------------ ASSETS (unaudited) Current assets: Cash and cash equivalents...................................................................... $ 30,963 $ 39,593 Accounts receivable- Trade- Billed, net of allowance of $3,133 and $2,051.......................................... 70,518 60,529 Unbilled............................................................................... 8,068 2,828 Other...................................................................................... 784 1,179 Deferred income taxes......................................................................... 2,202 1,803 Other current assets.......................................................................... 3,814 2,275 ----------- ------------ Total current assets...................................................................... 116,349 108,207 ----------- ------------ Property and equipment, net of depreciation of $29,427 and $23,765............................... 23,502 24,711 Software, net of amortization of $36,786 and $35,391............................................. 8,016 9,422 Noncompete agreements and goodwill, net of amortization of $28,827 and $24,878................... 3,620 7,596 Client contracts and related intangibles, net of amortization of $23,147 and $17,671............. 55,765 59,791 Deferred income taxes............................................................................ 53,698 59,389 Other assets..................................................................................... 1,483 2,380 ----------- ------------ Total assets.............................................................................. $ 262,433 $ 271,496 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt.......................................................... $ 20,235 $ 19,125 Customer deposits............................................................................. 10,552 10,018 Trade accounts payable........................................................................ 9,778 10,471 Accrued employee compensation................................................................. 13,306 12,276 Deferred revenue.............................................................................. 10,953 13,470 Conversion incentive payments................................................................. - 22,032 Accrued income taxes.......................................................................... 11,675 6,756 Other current liabilities..................................................................... 12,488 7,009 ----------- ------------ Total current liabilities.................................................................. 88,987 101,157 ----------- ------------ Non-current liabilities: Long-term debt, net of current maturities..................................................... 65,765 109,125 Deferred revenue.............................................................................. 701 216 ----------- ------------ Total non-current liabilities.............................................................. 66,466 109,341 ----------- ------------ Stockholders' equity: Preferred stock, par value $.01 per share; 10,000,000 shares authorized; zero shares issued and outstanding ........................................................ - - Common stock, par value $.01 per share; 100,000,000 shares authorized; 51,761,231 shares and 51,465,646 shares outstanding........................................ 521 515 Common stock warrants; 3,000,000 warrants outstanding......................................... 26,145 26,145 Additional paid-in capital.................................................................... 131,502 120,599 Deferred employee compensation................................................................ (108) (328) Notes receivable from employee stockholders................................................... (164) (478) Accumulated other comprehensive income-cumulative translation adjustments..................... 21 38 Treasury stock, at cost, 366,986 shares and 66,000 shares..................................... (6,677) (97) Accumulated deficit........................................................................... (44,260) (85,396) ----------- ------------ Total stockholders' equity ................................................................ 106,980 60,998 ----------- ------------ Total liabilities and stockholders' equity................................................. $ 262,433 $ 271,496 =========== ============ The accompanying notes are an integral part of these condensed consolidated financial statements.
3 CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED (in thousands, except per share amounts)
Three months ended Nine months ended -------------------------------- -------------------------------- September 30, September 30, September 30, September 30, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Total revenues.............................................. $ 84,034 $ 63,461 $ 231,631 $ 167,013 Expenses: Cost of revenues: Direct costs........................................ 32,632 27,302 90,567 73,300 Amortization of client contracts.................... 1,909 1,402 5,569 3,646 ------------- ------------- ------------- ------------- Total cost of revenues........................ 34,541 28,704 96,136 76,946 ------------- ------------- ------------- ------------- Gross margin (exclusive of depreciation)................... 49,493 34,757 135,495 90,067 ------------- ------------- ------------- ------------- Operating expenses: Research and development............................... 8,681 6,972 24,518 20,278 Selling and marketing.................................. 3,825 3,004 10,827 8,040 General and administrative: General and administrative.......................... 6,406 5,841 18,940 17,059 Amortization of noncompete agreements and goodwill.. 1,317 1,346 3,953 4,034 Stock-based employee compensation................... 74 74 220 222 Depreciation........................................... 2,563 2,064 7,467 5,894 ------------- ------------- ------------- ------------- Total operating expenses...................... 22,866 19,301 65,925 55,527 ------------- ------------- ------------- ------------- Operating income........................................... 26,627 15,456 69,570 34,540 ------------- ------------- ------------- ------------- Other income (expense): Interest expense.................................... (1,657) (2,473) (5,690) (7,481) Interest income..................................... 751 617 2,208 1,750 Other............................................... 31 (24) 14 (98) ------------- ------------- ------------- ------------- Total other................................... (875) (1,880) (3,468) (5,829) ------------- ------------- ------------- ------------ Income before income taxes.................................. 25,752 13,576 66,102 28,711 Income tax provision................................... (9,691) - (24,966) - ------------- ------------- ------------- ------------ Net income................................................. $ 16,061 $ 13,576 $ 41,136 $ 28,711 ============= ============= ============= ============ Basic net income per common share: Net income available to common stockholders............. $ 0.31 $ 0.26 $ 0.80 $ 0.56 ============= ============= ============= ============ Weighted average common shares......................... 51,744 51,252 51,673 51,134 ============= ============= ============= ============ Diluted net income per common share: Net income available to common stockholders............ $.0.29 $ 0.26 $ 0.76 $ 0.54 ============= ============= ============= ============ Weighted average common shares......................... 54,536 52,831 54,261 52,803 ============= ============= ============= ============ 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, 1999 1998 ---------------- ---------------- Cash flows from operating activities: Net income.............................................................................. $ 41,136 $ 28,711 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation......................................................................... 7,467 5,894 Amortization......................................................................... 11,773 9,274 Deferred income taxes................................................................ 5,292 (6,388) Stock-based employee compensation.................................................... 220 222 Changes in operating assets and liabilities: Trade accounts and other receivables, net.......................................... (14,918) (13,351) Other current and noncurrent assets................................................ (1,581) (857) Accounts payable and accrued liabilities........................................... 12,311 14,342 ---------------- ---------------- Net cash provided by operating activities........................................ 61,700 37,847 ---------------- ---------------- Cash flows from investing activities: Purchases of property and equipment, net................................................ (6,264) (11,781) Acquisition of assets................................................................... - (5,974) Additions to software................................................................... - (1,410) Conversion and other incentive payments................................................. (23,482) (2,019) ---------------- ---------------- Net cash used in investing activities............................................ (29,746) (21,184) ---------------- ---------------- Cash flows from financing activities: Proceeds from issuance of common stock.................................................. 7,847 3,499 Repurchase of common stock.............................................................. (6,545) (2) Payments on notes receivable from employee stockholders................................. 391 50 Payments on long-term debt.............................................................. (42,250) (4,500) ---------------- ---------------- Net cash used in financing activities............................................ (40,557) (953) ---------------- ---------------- Effect of exchange rate fluctuations on cash............................................... (27) 77 ---------------- ---------------- Net increase (decrease) in cash and cash equivalents....................................... (8,630) 15,787 Cash and cash equivalents, beginning of period............................................. 39,593 20,417 ---------------- ---------------- Cash and cash equivalents, end of period................................................... $ 30,963 $ 36,204 ================ ================ Supplemental disclosures of cash flow information: Cash paid during the period for- Interest............................................................................. $ 5,101 $ 6,756 Income taxes......................................................................... $ 11,743 $ 1,591 Supplemental disclosures of noncash investing activities: 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, 1999, 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, 1998, filed with the Securities and Exchange Commission (the Company's 1998 10-K). The results of operations for the three and nine months ended September 30, 1999, are not necessarily indicative of the results for the entire year ending December 31, 1999. 2. STOCK SPLIT On March 5, 1999, the Company completed a two-for-one stock split, effected as a stock dividend, for stockholders of record on February 8, 1999. Share and per share data for all periods presented herein reflect the effect of the split. 3. STOCKHOLDERS' EQUITY Common Stock Warrants. AT&T holds 3.0 million warrants to purchase the Company's Common Stock at an exercise price of $12 per share. During the three months ended September 30, 1999, 2.6 million Common Stock Warrants became exercisable when (i) the Company processed a total of 13.0 million AT&T customers on its system and (ii) converted additional qualifying AT&T customers to the Company's system in excess of the 13.0 million customers. The remaining 0.4 million warrants are exercisable at various increments as additional qualifying AT&T customers are converted to the Company's system. None of the warrants were exercised as of September 30, 1999. The warrants expire in September 2002. See additional discussion of the Common Stock Warrants in the Company's 1998 10-K. Stock Repurchase Plan. Effective August 4, 1999, the Company's Board of Directors approved a stock repurchase plan which authorized the Company at its discretion to purchase up to a total of 5.0 million shares of its Common Stock from time to time as market and business conditions warrant. This program represents approximately 10% of the Company's outstanding shares. As of September 30, 1999, the Company had repurchased 300,000 shares of Common Stock for approximately $6.5 million (a weighted average price of $21.82 per share). The stock repurchase plan will be in effect until terminated by the Board of Directors of the Company. The stock may be used in connection with stock option and warrant exercises, employee stock purchases, acquisitions, and other corporate purposes. 4. 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 6 to dilutive potential common shares outstanding during the period. The reconciliation of the weighted average common shares outstanding for the earnings per share calculation is as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ----------- ----------- ----------- ------------ Basic common shares outstanding..................... 51,744 51,252 51,673 51,134 Dilutive effect of stock options.................... 1,443 1,579 2,138 1,669 Dilutive effect of stock warrants................... 1,349 --- 450 --- ------ ------ ------ ------ Diluted common shares outstanding................... 54,536 52,831 54,261 52,803 ====== ====== ====== ======
For the three and nine months ended September 30, 1999 and 1998, the weighted average dilutive potential common shares (calculated using the treasury stock method) 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, 1999 and 1998. For the three and nine month periods ended September 30, 1999 and 1998, 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, 1999............................... 184,045 1,377,113 September 30, 1998............................... 1,334,986 1,301,304
For the quarters ended September 30, 1999 and 1998, weighted average outstanding stock options of 2,091,351 and 90,756 have been excluded from the computation of diluted net income per common share because the exercise prices of these options were greater than the average market price of the common shares for the respective quarters. 5. COMPREHENSIVE INCOME The Company's components of comprehensive income were as follows (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- -------------------------------- 1999 1998 1999 1998 --------------- --------------- --------------- --------------- Net income............................... $16,061 $13,576 $41,136 $28,711 Foreign currency translation Adjustments........................... 290 97 (17) 166 --------------- --------------- --------------- --------------- Comprehensive income..................... $16,351 $13,673 $41,119 $28,877 =============== =============== =============== ===============
7 6. RECLASSIFICATION OF PRIOR PERIOD AMOUNTS Certain September 30, 1998 amounts have been reclassified to conform with the September 30, 1999 presentation. 8 CSG SYSTEMS INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth certain financial data and the percentage of total revenues of the Company for the periods indicated (in thousands):
Three months ended September 30, Nine months ended September 30, -------------------------------------------- -------------------------------------------- 1999 1998 1999 1998 -------------------- -------------------- -------------------- -------------------- % of % of % of % of Amount Revenue Amount Revenue Amount Revenue Amount Revenue -------- -------- -------- -------- -------- -------- -------- -------- Total revenues.................... $ 84,034 100.0% $ 63,461 100.0% $231,631 100.0% $167,013 100.0% Expenses: Cost of revenues: Direct costs................. 32,632 38.8 27,302 43.0 90,567 39.1 73,300 43.9 Amortization of client contracts................ 1,909 2.3 1,402 2.2 5,569 2.4 3,646 2.2 -------- -------- -------- -------- -------- -------- -------- -------- Total cost of revenues 34,541 41.1 28,704 45.2 96,136 41.5 76,946 46.1 -------- -------- -------- -------- -------- -------- -------- -------- Gross margin (exclusive of depreciation)................ 49,493 58.9 34,757 54.8 135,495 58.5 90,067 53.9 -------- -------- -------- -------- -------- -------- -------- -------- Operating expenses: Research and development..... 8,681 10.3 6,972 11.0 24,518 10.6 20,278 12.2 Selling and marketing........ 3,825 4.6 3,004 4.7 10,827 4.7 8,040 4.8 General and administrative: General and administrative 6,406 7.6 5,841 9.2 18,940 8.2 17,059 10.2 Amortization of noncompete agreements and goodwill. 1,317 1.6 1,346 2.1 3,953 1.7 4,034 2.4 Stock-based employee compensation............ 74 0.1 74 0.1 220 0.1 222 0.1 Depreciation................. 2,563 3.0 2,064 3.3 7,467 3.2 5,894 3.5 -------- -------- -------- -------- -------- -------- -------- -------- Total operating expenses... 22,866 27.2 19,301 30.4 65,925 28.5 55,527 33.2 -------- -------- -------- -------- -------- -------- -------- -------- Operating income.................. 26,627 31.7 15,456 24.4 69,570 30.0 34,540 20.7 -------- -------- -------- -------- -------- -------- -------- -------- Other income (expense): Interest expense............. (1,657) (2.0) (2,473) (3.9) (5,690) (2.5) (7,481) (4.5) Interest income.............. 751 0.9 617 0.9 2,208 1.0 1,750 1.0 Other........................ 31 - (24) - 14 - (98) - -------- -------- -------- -------- -------- -------- -------- -------- Total other................ (875) (1.1) (1,880) (3.0) (3,468) (1.5) (5,829) (3.5) -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes........ 25,752 30.6 13,576 21.4 66,102 28.5 28,711 17.2 Income tax provision........... (9,691) (11.5) - - (24,966) (10.8) - - -------- -------- -------- -------- -------- -------- -------- -------- Net income........................ $ 16,061 19.1% $ 13,576 21.4% $ 41,136 17.7% $28,711 17.2% ======== ======== ======== ======== ======== ======== ======== ========
9 Three Months Ended September 30, 1999 Compared to Three Months Ended September 30, 1998 Revenues. Total revenues for the three months ended September 30, 1999, increased 32.4% to $84.0 million, from $63.5 million for the three months ended September 30, 1998. Revenues from processing and related services for the three months ended September 30, 1999, increased 30.2% to $64.6 million, from $49.6 million for the three months ended September 30, 1998. Of the total increase in revenue, approximately 69% resulted from an increase in the number of customers of the Company's clients which were serviced by the Company and approximately 31% was due to increased revenue per customer. Customers serviced as of September 30, 1999 and 1998, respectively, were 32.7 million and 27.2 million, an increase of 20.0%. 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, 1999 through September 30, 1999, the Company converted and processed approximately 1.5 million new customers on its systems. Revenues from software and related product sales and professional consulting services for the three months ended September 30, 1999, increased 40.2% to $19.4 million, from $13.9 million for the three months ended September 30, 1998. This increase relates primarily to the continued penetration of sales of the Company's software products and services to the Company's existing client base, as well as sales to new clients. Total annualized domestic revenue per customer account for the third quarter of 1999 was $10.16, compared to $9.14 for the same period in 1998, an increase of 11.1%. Revenue per customer increased primarily due to (i) a greater percentage of processing revenues in 1999 being generated under the AT&T Broadband and Internet Services (BIS) processing contract (the AT&T Contract), (ii) increased usage of ancillary processing services, (iii) price increases included in client contracts, and (iv) increased software sales to new and existing clients. Cost of Revenues. Direct costs as a percentage of related revenues were 38.8% for the three months ended September 30, 1999, compared to 43.0% for the three months ended September 30, 1998. The improvement between periods relates primarily to better overall leveraging of processing costs as a result of the continued growth of the customer base processed on the Company's system. Amortization of client contracts for the three months ended September 30, 1999, increased 36.2% to $1.9 million, from $1.4 million for the three months ended September 30, 1998. The increase in expense is due primarily to an increase in amortization of the value assigned to the AT&T Contract. The value assigned to the AT&T Contract is being amortized over the life of the contract in proportion to the financial minimums included in the contract. Gross Margin. Gross margin for the three months ended September 30, 1999, increased 42.4% to $49.5 million, from $34.8 million for the three months ended September 30, 1998, due primarily to revenue growth. The gross margin percentage increased to 58.9% for the three months ended September 30, 1999, compared to 54.8% for the three months ended September 30, 1998. The overall increase in the gross margin percentage is due primarily to the increase in processing and related services revenue per customer while controlling the cost of delivering such services. Research and Development Expense. Research and development (R&D) expense for the three months ended September 30, 1999, increased 24.5% to $8.7 million, from $7.0 million for the three months ended September 30, 1998. As a percentage of total revenues, R&D expense decreased to 10.3% for the three months ended September 30, 1999, from 11.0% for the three months ended September 30, 1998. The Company did not capitalize any software development costs during the three months ended September 30, 1999 or 1998. The overall increase in the R&D expenditures between periods is due primarily to increased efforts on several products which are in development and enhancements of the Company's existing products. The increased R&D expenditures consist primarily of increases in salaries, benefits, and other programming-related expenses. 10 Selling and Marketing Expense. Selling and marketing (S&M) expense for the three months ended September 30, 1999, increased 27.3% to $3.8 million, from $3.0 million for the three months ended September 30, 1998. As a percentage of total revenues, S&M expense decreased to 4.6% for the three months ended September 30, 1999, from 4.7% for the three months ended September 30, 1998. The overall increase in S&M expenses is due primarily to an increase in (i) the sales staff, (ii) marketing and promotional activities, and (iii) sales commissions resulting from increased sales activities. General and Administrative Expense. General and administrative (G&A) expense for the three months ended September 30, 1999, increased 9.7% to $6.4 million, from $5.8 million for the three months ended September 30, 1998. As a percentage of total revenues, G&A expense decreased to 7.6% for the three months ended September 30, 1999, from 9.2% for the three months ended September 30, 1998. The increase in G&A expenses relates primarily to the continued expansion of the Company's management and 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. Depreciation Expense. Depreciation expense for the three months ended September 30, 1999, increased 24.2% to $2.6 million, from $2.1 million for the three months ended September 30, 1998. The increase in expense relates to capital expenditures made during the last six months of 1998 and the first nine months of 1999 in support of the overall growth of the Company, consisting principally of computer hardware and related equipment and statement processing equipment and related facilities. Depreciation expense for all property and equipment is reflected separately in the aggregate and is not included in the other components of operating expenses. Operating Income. Operating income for the three months ended September 30, 1999, was $26.6 million or 31.7% of total revenues, compared to $15.5 million or 24.4% of total revenues for the three months ended September 30, 1998. The increase between years relates to the factors discussed above. Interest Expense. Interest expense for the three months ended September 30, 1999, decreased 33.0% to $1.7 million, from $2.5 million for the three months ended September 30, 1998, with the decrease attributable primarily to (i) scheduled principal payments on the Company's long-term debt (ii) optional prepayments on long-term debt of $15 million each made on March 31, 1999 and June 30, 1999, and (iii) a decrease in interest rates between periods. Income Tax Provision. As of December 31, 1997, the Company had recorded a valuation allowance against certain deferred tax assets since realization of future tax benefits was not sufficiently assured as of that date. During 1998, the Company realized a portion of the deferred tax assets such that the overall income tax provision for the quarter was zero. During the fourth quarter of 1998, the Company concluded that it was more likely than not that it would realize the entire tax benefit from its deferred tax assets and eliminated the entire valuation allowance as of December 31, 1998. For the three months ended September 30, 1999, the Company recorded an income tax provision of $9.7 million, or an effective income tax rate of approximately 38%, which represents the Company's estimate of the effective book income tax rate for 1999. Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30, 1998 Revenues. Total revenues for the nine months ended September 30, 1999, increased 38.7% to $231.6 million, from $167.0 million for the nine months ended September 30, 1998. Revenues from processing and related services for the nine months ended September 30, 1999, increased 40.2% to $187.2 million, from $133.5 million for the nine months ended September 30, 1998. Of the total increase in revenue, approximately 63% resulted from an increase in the number of customers of the 11 Company's clients which were serviced by the Company and approximately 37% 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, 1999 through September 30, 1999, the Company converted and processed approximately 3.3 million new customers on its systems. Revenues from software and related product sales and professional consulting services for the nine months ended September 30, 1999, increased 32.7% to $44.4 million, from $33.5 million for the nine months ended September 30, 1998. This increase relates primarily to the continued penetration of sales of the Company's software products and services to the Company's existing client base, as well as sales to new clients. Total annualized domestic revenue per customer account for the nine months ended September 30, 1999 was $9.59, compared to $8.53 for the same period in 1998, an increase of 12.4%. Revenue per customer increased primarily due to (i) a greater percentage of processing revenues in 1999 being generated under the AT&T Contract, (ii) increased usage of ancillary processing services, (iii) price increases included in client contracts, and (iv) increased software sales to new and existing clients. Cost of Revenues. Direct costs as a percentage of related revenues were 39.1% for the nine months ended September 30, 1999, compared to 43.9% for the nine months ended September 30, 1998. The improvement between periods relates primarily to better overall leveraging of processing costs as a result of the continued growth of the customer base processed on the Company's system. Amortization of client contracts for the nine months ended September 30, 1999, increased 52.7% to $5.6 million, from $3.6 million for the nine months ended September 30, 1998. The increase in expense is due primarily to an increase in amortization of the value assigned to the AT&T Contract. The value assigned to the AT&T Contract is being amortized over the life of the contract in proportion to the financial minimums included in the contract. Gross Margin. Gross margin for the nine months ended September 30, 1999, increased 50.4% to $135.5 million, from $90.1 million for the nine months ended September 30, 1998, due primarily to revenue growth. The gross margin percentage increased to 58.5% for the nine months ended September 30, 1999, compared to 53.9% for the nine months ended September 30, 1998. The overall increase in the gross margin percentage is due primarily to the increase in processing and related services 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, 1999, increased 20.9% to $24.5 million, from $20.3 million for the nine months ended September 30, 1998. As a percentage of total revenues, R&D expense decreased to 10.6% for the nine months ended September 30, 1999, from 12.2% for the nine months ended September 30, 1998. The Company did not capitalize any software development costs during the nine months ended September 30, 1999. During the nine months ended September 30, 1998, the Company capitalized third party, contracted programming costs of approximately $1.4 million, 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, 1999 and 1998, were $24.5 million, or 10.6% of total revenues, and $21.7 million, or 13.0% of total revenues, respectively. The overall increase in the R&D expenditures between periods is due primarily to increased efforts on several products which are in development and enhancements of the Company's existing products. The increased R&D expenditures consist primarily of increases in salaries, benefits, and other programming-related expenses. Selling and Marketing Expense. S&M expense for the nine months ended September 30, 1999, increased 34.7% to $10.8 million, from $8.0 million for the nine months ended September 30, 1998. As a percentage of total revenues, S&M expense decreased to 4.7% for the nine months ended September 30, 1999, from 4.8% for the nine months ended September 30, 1998. The overall increase in S&M expenses is due primarily to an increase in (i) the sales staff, (ii) marketing and promotional activities, and (iii) sales commission resulting from increased sales activities. 12 General and Administrative Expense. G&A expense for the nine months ended September 30, 1999, increased 11.0% to $18.9 million, from $17.1 million for the nine months ended September 30, 1998. As a percentage of total revenues, G&A expense decreased to 8.2% for the nine months ended September 30, 1999, from 10.2% for the nine months ended September 30, 1998. The increase in G&A expenses relates primarily to the continued expansion of the Company's management and 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. Depreciation Expense. Depreciation expense for the nine months ended September 30, 1999, increased 26.7% to $7.5 million, from $5.9 million for the nine months ended September 30, 1998. The increase in expense relates to capital expenditures made during 1998 and the first nine months of 1999 in support of the overall growth of the Company, consisting principally of computer hardware and related equipment and statement processing equipment and related facilities. Depreciation expense for all property and equipment is reflected separately in the aggregate and is not included in the other components of operating expenses. Operating Income. Operating income for the nine months ended September 30, 1999, was $69.6 million or 30.0% of total revenues, compared to $34.5 million or 20.7% of total revenues for the nine months ended September 30, 1998. The increase between years relates to the factors discussed above. Interest Expense. Interest expense for the nine months ended September 30, 1999, decreased 23.9% to $5.7 million, from $7.5 million for the nine months ended September 30, 1998, with the decrease attributable primarily to (i) scheduled principal payments on the Company's long-term debt (ii) optional prepayments on long-term debt of $15 million each made on March 31, 1999 and June 30, 1999 and (iii) a decrease in interest rates between periods. Income Tax Provision. Due to the factors discussed above, the Company's income tax expense for the first nine months of 1998 was zero. For the nine months ended September 30, 1999, the Company recorded an income tax provision of $25.0 million, or an effective income tax rate of approximately 38%, which represents the Company's estimate of the effective book income tax rate for 1999. Adjusted Results of Operations - ------------------------------ The Company incurred certain one-time or acquisition-related charges (Acquisition Charges) in connection with the CSG Acquisition in November 1994. The Acquisition Charges include amortization of acquired software, client contracts and related intangibles, noncompete agreement, goodwill, and stock- based compensation. These charges totaled $2.0 million and $2.1 for the three months ended September 30, 1999 and 1998, and $6.1 million and $6.2 million for the nine months ended September 30, 1999 and 1998, respectively. The Company's adjusted results of operations excluding the impact of these items are shown in the following table. In addition to the exclusion of these expenses from the calculation, the adjusted results of operations were computed using an effective income tax rate of 38% for all periods, and outstanding shares on a diluted basis. See the Company's "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's 1998 10-K for additional discussion regarding the Acquisition Charges and the impact of such charges on operations.
For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------------------ ------------------------------------ 1999 1998 1999 1998 ----------------- ----------------- ----------------- ----------------- (in thousands, except per share amounts) Adjusted Results of Operations: Operating income.................... $28,655 $17,508 $75,648 $40,696 Operating income margin............. 34.1% 27.6% 32.7% 24.4% Income before income taxes.......... 27,780 15,628 72,180 34,867
13
Net income.......................... 17,224 9,689 44,752 21,618 Earnings per diluted common share... 0.32 0.18 0.83 0.41 Weighted average diluted common shares............................ 54,536 52,831 54,261 52,803
AT&T Contract and Merger - ------------------------ AT&T completed its merger with Tele-Communications, Inc. (TCI) in March 1999 and has consolidated the TCI operations into AT&T Broadband and Internet Services. During the nine months ended September 30, 1999 and 1998, revenues from AT&T and affiliated companies generated under the AT&T Contract represented approximately 47.5% and 36.3% of total revenues, respectively. The AT&T Contract has a 15- year term and expires in 2012. The AT&T Contract has minimum financial commitments over the term of the contract and includes exclusive rights to provide customer care and billing products and services for AT&T's offerings of wireline video, all Internet/high-speed data services, residential wireline telephony services, and print and mail services. The AT&T Contract provides certain performance criteria and other obligations to be met by the Company. The Company is required to perform certain remedial efforts and is subject to certain penalties if it fails to meet the performance criteria or other obligations. The Company is also subject to an annual technical audit to determine whether the Company's products and services include innovations in features and functions that have become standard in the wireline video industry. To date, the Company believes it has complied with the terms of the contract. Since execution of the AT&T Contract in September 1997 through September 30, 1999, the Company has successfully converted approximately 10.4 million AT&T cable television customers onto its system. AT&T has announced its planned efforts to provide convergent communications services in several United States cities during 1999. The Company is participating in those convergent trials and is working closely with AT&T to provide customer care and billing services to customers in those cities. The Company expects to continue performing successfully under the AT&T Contract, and is hopeful that it can continue to sell products and services to the combined entity that are in excess of the minimum financial commitments and exclusive rights included in the contract. See Note 3 to the Condensed Consolidated Financial Statements for discussion regarding the Company's Common Stock Warrants held by AT&T. Liquidity and Capital Resources - ------------------------------- As of September 30, 1999, the Company's principal sources of liquidity included cash and cash equivalents of $31.0 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, 1999, all of the $40.0 million revolving credit facility was available to the Company. The revolving credit facility expires in September 2002. As of September 30, 1999 and December 31, 1998, respectively, the Company had $70.5 million and $60.5 million in net trade accounts receivable, with the increase due primarily to 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 billings for the period (including non-revenue items) divided by the average net trade accounts receivable balance for the period. The Company's DBO calculations for the quarters ended September 30, 1999 and 1998 were 50 days and 53 days, respectively. During the nine months ended September 30, 1999, the Company generated $61.7 million of net cash flow from operating activities. Cash generated from these sources and the proceeds of $7.8 million from the issuance of common stock through the Company's stock incentive plans were used to (i) fund capital expenditures of $6.3 million, (ii) pay conversion and other incentive payments of $23.5 million, (iii) 14 repurchase 300,000 shares of the Company's Common Stock for $6.5 million, and (iv) repay long-term debt of $42.3 million, which includes $11.6 million of scheduled payments and optional prepayments totaling $30.7 million. Earnings before interest, taxes, depreciation and amortization (EBITDA) for the nine months ended September 30, 1999 was $88.2 million or 38.1% of total revenues, compared to $49.0 million or 29.3% of total revenues for the nine months ended September 30, 1998. 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. 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 spread, with the spread dependent upon the Company's leverage ratio. Effective April 1, 1999, the spread on the LIBOR rate and the prime rate was 0.50% and 0%, respectively. As of September 30, 1999, the entire amount of the debt was under a six-month LIBOR contract with an interest rate of 5.68% (i.e., LIBOR at 5.18% plus spread of 0.50%), compared to 5.89% as of December 31, 1998. In December 1997, the Company entered into a three-year interest rate collar with a major bank to manage its risk from its variable rate long-term debt. The underlying notional amount covered by the collar agreement is $63.8 million as of September 30, 1999, and decreases over the three-year term in relation to the originally scheduled principal payments on the long-term debt. Any payment on the 4.9% (LIBOR) interest rate floor, or receipt on the 7.5% (LIBOR) interest rate cap component of the collar, would be recognized as an adjustment to interest expense in the period incurred. There are no amounts due or receivable under this agreement as of September 30, 1999, and the agreement had no effect on the Company's interest expense for 1999 or 1998. The Company was required to make certain monetary conversion incentive payments under the AT&T Contract. AT&T surpassed the milestone of 13 million customers processed on the Company's systems during the quarter ended September 30, 1999. Upon reaching this significant milestone, AT&T was paid its final monetary conversion incentive by the Company. The total monetary conversion incentives paid during 1999 to AT&T was $22.0 million, with 15.3 million of this amount being paid in the current quarter. The amount paid was previously reflected in the Company's consolidated balance sheet as "conversion incentive payments". Additionally, upon reaching this milestone, AT&T earned the right to exercise a certain number of the Company's Common Stock Warrants held by AT&T. See Note 3 to the Company's Condensed Consolidated Financial Statements and the Company's 1998 Form 1998 10-K for additional discussion. Effective August 4, 1999, the Company's Board of Directors approved a stock repurchase plan which authorized the Company at its discretion to purchase up to a total of 5.0 million shares of its Common Stock from time to time as market and business conditions warrant. As of September 30, 1999, the Company had repurchased 300,000 shares of Common Stock for $6.5 million (a weighted average price of $21.82 per share). The Company continues to make significant investments in capital equipment, facilities, research and development, and at its discretion, may continue to make stock repurchases. The Company had no significant capital commitments as of September 30, 1999. The Company believes that cash generated from operations, together with the current cash and cash equivalents and the amount available under its current revolving credit facility will be sufficient to meet its anticipated cash requirements for operations, income taxes, debt service, conversion incentive payments, capital expenditures, and stock repurchases for both its short and long-term purposes. The Company also believes it has significant unused borrowing capacity and could obtain additional cash resources by amending its current credit facility and/or establishing a new credit facility. 15 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, 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 all steps of its program, except where noted in the following sections. Products and Services. ---------------------- Processing and related services. The Company's most significant renovation effort involved its core product, Communications Control System (R) (CCS(R)). 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 has completed the testing of the CCS application using its standard testing methodologies, while adding date simulation to specifically address the Y2K risk. Such date simulation considered pre-2000, crossover, and post year 2000 time frames, including year 2000 leap year considerations. The renovated and tested version of CCS has been implemented into the production environment. As a final verification of Y2K readiness, during November 1999, the Company successfully conducted an IPL (initial program load) of CCS in a crossover and post year 2000 test environment, including leap year considerations. A similar IPL was also successfully performed in early 1999. The Company has also completed its testing of third party interfaces (e.g., addressable devices) to CCS. During October 1999, the Company successfully completed an "end-to-end" Y2K test of the Omaha statement processing center, involving statements with a cycle date of March 19, 2000 being routed from the Y2K test region on the mainframe processor to the statement processing center for printing, insertion and preparation for mailing. Software products. For the Company's software products, no significant renovation was necessary, as the products are relatively new. All mission- critical software products have been tested and implemented into production. Only one of the Company's clients needs to be upgraded from an older, non- Y2K version of an application at this time, with the upgrade scheduled for completion by December 16, 1999. General. As part of its Y2K compliance program plan, the Company developed a process to manage further updates, enhancements, or new releases to any product related software code which had been previously tested and internally verified as Y2K compliant. Only one new release to a previously tested software product still requires final verification. This new release was successfully tested in a post year 2000 test environment prior to placing it into production, and is scheduled for year 2000 crossover and leap year date verification on November 23, 1999 and December 10, 1999, respectively. An older release of this product has already been through such testing, and the Company believes the risk of not timely completing the remaining testing or fixing any problems that may be detected in the final testing is low. The Company has implemented a code "freeze" for all changes to mission- critical product related software effective November 13, 1999. The freeze restricts the introduction of new code functionality into any production environment, except in cases where (i) emergency code fixes are needed, or (ii) a client requests a change and the code impacts only that client. Several CSG clients have conducted tests of the Company's products in conjunction with their own operating environments. Several test phases have been completed (beginning in December 1998), with additional phases continuing into December 1999, including participation by AT&T in such testing. 16 Internal Systems. ----------------- Renovation, testing, and implementation of the Company's significant internal use IT Systems (e.g., payroll systems, accounting systems, etc.) has been completed. The Company has a substantial number of non-IT systems that include embedded technology (e.g., buildings, plant, equipment and other infrastructure) that are owned and managed by the lessors of the buildings in which the Company is located. The Company has sent letters to its lessors requesting certifications of the Y2K compliance of the embedded systems. The Company has received substantially all of the certifications from lessors and will continue to pursue the remaining certifications not yet received. The Company considers these low risk because if any of the systems for which a certification has not yet been received was to fail, it would not impact any mission-critical functions, and/or the systems with the embedded technology could be disengaged and/or overridden. Letters have also been sent to third parties providing other internal non-IT systems with embedded technology (e.g., statement insertion machines, copy machines, etc.). All of these Y2K certifications and/or upgrades have been completed. 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 are fully Y2K compliant. Such third party software was 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 are Y2K compliant. 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 Y2K compliance will not have a material adverse effect on the Company's business or results of operations. The Costs to Address the Company's Year 2000 Issues. Since inception of its program in 1995 through September 30, 1999, the Company has incurred and expensed costs of approximately $3.8 million related to Y2K compliance efforts. The total estimated costs to complete the Company's Y2K compliance effort are approximately $0.4 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 (including public and private infrastructure services, such as electricity, water, gas, transportation, and communications) 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 17 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. In formulating its Contingency Plan, the Company conducted a comprehensive Y2K risk assessment of key business processes and components. This risk assessment focused on; . the progress made to date on the Company's overall Y2K compliance program, . the Company's existing Business Continuity Plans (BCP), . the types of Y2K failures that could be expected, and . the Company's processes and procedures of problem identification and resolution in the event of a Y2K failure As a result of this risk assessment and evaluation, the Company concluded that for the most part, the types of Y2K failures that could happen are of a similar nature as those items currently reported to its Product Support Center today, and therefore, could be adequately identified and resolved using existing problem reporting and recovery procedures, with additions or modifications to these procedures for risks or failures modes specifically identified as unique to Y2K. Over the years, the Company's problem identification and resolution procedures have been formalized and proven effective as a means to provide its clients 24x7 support. The advantages to this approach are as follows; . it allows the Company to leverage the processes, procedures, tools and expertise already in place and thereby maximize efficiency in problem reporting, resolution and internal/external communication during the critical Y2K transition period, . for the Company's clients and vendors, it ensures continuity and minimizes confusion. The Company's clients and vendors are already familiar with these procedures, including the Company contact names and numbers that can be relied upon for corrective action and follow-up. Additions and/or modifications to the Company's existing problem reporting and recovery procedures are included in the Company's Contingency Plan. Highlights or key components of the Company's contingency plan and BCP specifically addressing risks or failures modes specifically identified as unique to Y2K, are as follows: . disaster recovery plans for the CCS mainframe data processing function and statement processing centers . power generation backup at both of its statement processing centers and at two other mission-critical sites (with one of these scheduled for completion in December 1999) . increased paper and envelope inventory at the statement processing centers . alternative telephone services at all mission-critical sites (e.g., cell phones) . a communication "command center", to coordinate status reporting, problem resolution and internal/external communications will be established . a dedicated staff on site for key business processes and support functions, as well as additional staff "on call" to assist if needed. The Company instituted a restricted vacation policy for December 1999 and January 2000 to ensure appropriate and adequate resources are available if needed . a comprehensive list of expected locations and contact numbers at crossover for all key management personnel Although the Company believes it has performed a thorough assessment of its Y2K related risks and believes its Contingency Plan and/or BCP adequately addresses these risks, the (i) inability to timely identify and resolve any Y2K related failure, (ii) inability to implement a contingency plan or BCP, if deemed necessary, and (iii) cost to develop and implement such a plan, may have a material adverse effect on the Company's results of operations. 18 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 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 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. Quantitative and Qualitative Disclosures About Market Risk - ---------------------------------------------------------- There have been no material changes to the Company's market risks during the nine months ended September 30, 1999. See the Company's 1998 10-K for additional discussion regarding the Company's market risks. 19 CSG SYSTEMS INTERNATIONAL, INC. PART II. OTHER INFORMATION Item 1-5. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 2.19J* Thirty-Sixth and Thirty-Eighth Amendments to Restated and Amended CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and TCI Cable Management Corporation. 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 Form 8-K dated July 7, 1999, under Item 5, Other Events, was filed with the Securities and Exchange Commission which included a press release dated July 2, 1999. The press release recommended that its shareholders reject an unsolicited, below- market offer made by Peachtree Partners for up to 1% of CSG Systems International, Inc.'s outstanding shares. __________________ * 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 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 15, 1999 CSG SYSTEMS INTERNATIONAL, INC. /s/ Neal C. Hansen ------------------------------------------ Chairman and Chief Executive Officer (Principal Executive Officer) /s/ Greg A. Parker ------------------------------------------ Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Randy R. Wiese ------------------------------------------ Randy R. Wiese Vice President and Controller (Principal Accounting Officer) 21 CSG SYSTEMS INTERNATIONAL, INC. INDEX TO EXHIBITS Exhibit Number Description - ------- ----------- 2.19J* Thirty-Sixth and Thirty-Eighth Amendments to Restated and Amended CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and TCI Cable Management Corporation. 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. 22 EX-2.19J 2 RESTATED & AMENDED CSG MASTER SUBSCRIBER AGRMT. EXHIBIT 2.19J 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 (***). THIRTY-SIXTH AMENDMENT TO RESTATED AND AMENDED CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT BETWEEN CSG SYSTEMS, INC. AND TCI Cable Management Corporation This Thirty-Sixth Amendment (the "Amendment") is executed this 26th day of August, 1999, 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. Customer desires to obtain from CSG, and CSG is willing to grant to Customer, the right to use CSG Statement Express on an additional (***********************) ((***)) workstations. Therefore, upon the execution of this Amendment and subject to the terms of the Agreement, including, but not limited to, the fees set forth in Schedule D, Customer shall be entitled to use CSG Statement Express on a total of (*****************************************) ((***)) workstations. 2. The following shall apply with respect to the (***********************) ((***)) workstations of Statement Express, as granted under this Amendment: a. The perpetual license fee (**********************). b. (***************) the annual software maintenance fee (*************************). Annual software maintenance (**********************************************), at the rate of $(***) per workstation. c. The fees for implementation services and statement archival are set forth in Schedule D (as amended by the Thirty-Fourth Amendment). 3. As a point of clarification, the statement archival fee, as set forth in the Thirty-Fourth Amendment: a. shall also apply to Customer's Pilot System Site located at Livermore, CA. b. represents a fee that is incremental to the fee set forth in Section 6, Item I.D. of Schedule D (as amended by the Twenty- Seventh Amendment), in the event that Customer also desires to receive CD-ROM Archival. c. includes six (6) months of online statement image storage. 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: EVP of Fulfillment Services and Operations ---------------------- ------------------------------------------ 2
EXHIBIT 2.19J 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 (***). THIRTY-EIGHTH AMENDMENT TO RESTATED AND AMENDED CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT BETWEEN CSG SYSTEMS, INC. AND TCI Cable Management Corporation This Thirty-Eighth Amendment (the "Amendment") is executed this 30th day of September, 1999, 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. Customer is hereby licensed to use (*************************) ((***)) additional workstations of ACSR pursuant to the terms and conditions of the Agreement (as amended), including, but not limited to, the fees set forth below: ACSR ----- Perpetual license for (***) workstations $(***) Price excludes third party software, hardware, implementation, installation and customization. Annual maintenance for (***) workstations: . Initial maintenance period from the date of execution of this Amendment through December 31, 2000 $(***) . Annual maintenance for each subsequent calendar year beginning January 1, 2001 $(***) Implementation includes the implementation services set forth in Exhibit C-3 of the Agreement. The fees for installation services are set forth in Schedule D of the Agreement. 2. Customer is hereby licensed to use (*************************) ((***)) additional workstations of Customer Interaction Tracking (CIT) with CBT pursuant to the terms and conditions of the Agreement (as amended), including, but not limited to, the fees set forth below: CIT with CBT ------------- Perpetual license for (***) workstations $(***) Price includes third party software but excludes hardware, implementation, installation and customization. Annual maintenance for (***) workstations: . Initial maintenance period from the date of execution of this Amendment through December 31, 2000 $(***) . Annual maintenance for each subsequent calendar year beginning January 1, 2001 $(***) Note: Includes third party software maintenance Implementation services will be outlined in a Statement of Work mutually agreed upon and executed by CSG and Customer. Reimbursable Expenses are additional. 3. Customer is hereby licensed to use (**************************) ((***)) additional workstations of Screen Express pursuant to the terms and conditions of the Agreement (as amended), including, but not limited to, the fees set forth below: Screen Express --------------- Perpetual license for (***) workstations $(***) Price excludes third party software, hardware, implementation, installation and customization. Annual maintenance for (***) workstations: . Initial maintenance period from the date of execution of this Amendment through December 31, 2000 $(***) . Annual maintenance for each subsequent calendar year beginning January 1, 2001 $(***) Implementation - per Screen Express Server $(***) Implementation includes the services outlined in paragraph 3 of the Twenty Fifth Amendment to the Agreement. Reimbursable Expenses are additional. 4. Customer is hereby licensed to use the ACSR module of High Speed Data (HSD) on (*************************) ((***)) workstations. Therefore, Schedule C shall be amended to include the ACSR module of HSD which, through the graphical user interface, allows Customer to access subscriber information on CCS as it relates to Customer's offering of high speed data services. All references to the "CCS Products" in the Agreement shall include the ACSR module of HSD. ACSR module of HSD ------------------- Perpetual license for (***) workstations $(***) Price excludes third party software, hardware, implementation, installation and customization 2 * If, between the date of execution of this Amendment and December 31, 2001, Customer desires to receive additional licenses of the ACSR module of HSD, CSG and Customer shall execute separate amendments to the Agreement, in which case such licenses shall be provided for fees which shall not exceed $(***) per workstation. Annual maintenance for (***) workstations: . Initial maintenance period from the date of execution of this Amendment through December 31, 2000 $(***) . Annual maintenance for each subsequent calendar year beginning January 1, 2001 $(***) The implementation of the ACSR module of HSD is included in the ACSR implementation. 5. Along with its license to use the ACSR module for HSD, CSG will provide Customer with its @Home provisioning interface, version 2.2. This interface provides for the sending and receiving of subscriber provisioning and customer care data between @Home and CSG in a near real-time fashion. Enhancements, upgrades, or changes to version 2.2 of the @Home provisioning interface will be outlined in a Statement of Work mutually agreed upon and executed by CSG and Customer. In addition, Schedule D shall be amended to include the following fee for CSG's operation and management of the @Home provisioning interface: . Monthly Operations Fee (per HSD subscriber) $(***) Note 1: The Monthly Operations Fee (****************** ***) from the date of execution of this Amendment (******* *****************). In addition, the total operations fee for CSG's operation and management of the @Home provisioning interface shall not exceed $(***) per calendar year, (************************). Note 2: All costs and performance of the network connection between CSG and @Home are specifically the responsibility of Customer. 6. Upon execution of this Amendment, for the fees set forth below, Customer may access (***) ((***)) additional Vantage database tables containing information about Customer's equipment and internet access methods. Customer may access such additional tables from System Sites at which Customer is licensed to use Vantage. Therefore, Section 7 of Schedule D shall be amended to include the following: High Speed Data Database Tables: ------------------------------- . Monthly Processing and Maintenance Fee (per HSD subscriber) $(***) Note: The start-up fee for the Vantage database tables for all of Customer's @Home System Sites currently utilizing Vantage as of the date of execution of this Amendment shall be $(***). The start-up fee for the Vantage database tables for all of Customer's @Home System Sites that are not currently utilizing Vantage as of the date of execution of this Amendment shall be included in the Vantage One-Time Start-up Fee as set forth in Section 7 of Schedule D. 3 7. Payment Terms ------------- Except as noted in this paragraph 7, the terms and conditions set forth in the Agreement shall apply with respect to products or services provided as part of this Amendment. Payment of the license fees and maintenance fees for the initial maintenance period shall be as follows: . Billable September 30, 1999; Due no later than January 1, 2000 $(***) . Billable November 30, 1999; Due no later than January 15, 2000 $(***) Implementation services will be invoiced upon completion of work. 8. Any services to be provided by CSG in connection with the initial conversion of the @Home subscriber information from Interplex to the CCS HSD data fields shall be set forth in a separately executed Statement of Work. Such conversion services shall be provided by CSG (********************************************************). 9. With respect to Products and Services set forth in this Amendment, CSG and Customer agree that, except as otherwise expressly agreed in writing between the parties, their rights and obligations relating thereto are set forth in the Master Agreement, and the execution of this Amendment and its performance shall not be deemed or construed to alter, impair, create or evidence such rights or obligations. 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: EVP Fulfillment Svcs & Operations ---------------------- --------------------------------- 4 EX-99.01 3 SAFE HARBOR FOR FORWARD LOOKING STATEMENTS Exhibit 99.01 SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 CERTAIN CAUTIONARY STATEMENTS AND RISK FACTORS CSG Systems International, Inc. and its subsidiaries (collectively, the Company) or their representatives from time to time may make or may have made certain forward-looking statements, whether orally or in writing, including without limitation, any such statements made or to be made in the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in its various SEC filings or orally in conferences or teleconferences. The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements, so as to ensure to the fullest extent possible the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995. ACCORDINGLY, THE FORWARD-LOOKING STATEMENTS ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO AND ARE ACCOMPANIED BY THE FOLLOWING MEANINGFUL CAUTIONARY STATEMENTS IDENTIFYING CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS. This list of factors is likely not exhaustive. The Company operates in a rapidly changing and evolving business involving the converging communications markets, and new risk factors will likely emerge. Management cannot predict all of the important risk factors, nor can it assess the impact, if any, of such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those in any forward-looking statements. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT FORWARD-LOOKING STATEMENTS WILL BE ACCURATE INDICATORS OF FUTURE ACTUAL RESULTS, AND IT IS LIKELY THAT ACTUAL RESULTS WILL DIFFER FROM RESULTS PROJECTED IN FORWARD-LOOKING STATEMENTS AND THAT SUCH DIFFERENCES MAY BE MATERIAL. RELIANCE ON CCS - --------------- The Company derived approximately 78% and 77% of its total revenues from its primary product, Communications Control System (CCS), and related products and services in the years ended December 31, 1998 and 1997, 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. REQUIREMENTS OF THE AT&T CONTRACT - --------------------------------- The AT&T Contract requires the conversion of additional AT&T customers onto the Company's customer care and billing system. The AT&T 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 wireline video industry. If an audit determines the Company is not providing such an innovation and it fails to do so in the manner and time period dictated by the contract, then AT&T would be released from its exclusivity obligation to the extent necessary to obtain the innovation from a third party. To fulfill the AT&T Contract and to remain competitive, the Company believes it will be required to develop new and advanced features to existing products and services, as well as new products and services, all of which will require substantial research and development. AT&T also would have the right to terminate the AT&T Contract in the event of certain defaults by the Company. The termination of the AT&T Contract or of any of AT&T's commitments under the contract would have a material adverse effect on the financial condition and results of operations of the Company. AT&T CONTRACT AND MERGER - ------------------------ AT&T completed its merger with TCI in March 1999 and has consolidated the TCI operations into AT&T Broadband and Internet Services (BIS). During the nine months ended September 30, 1999 and 1998, revenues from AT&T and affiliated companies represented approximately 47.5% and 36.3% of total revenues, respectively. The AT&T Contract has minimum financial commitments over the 15- year life of the contract and includes exclusive rights to provide customer care and billing products and services for AT&T's offerings of wireline video, all Internet/high speed data services, residential wireline telephony services, and print and mail services. As discussed above, the AT&T Contract provides certain performance criteria and other obligations to be met by the Company. To date, the Company believes it has complied with the terms of the contract. Since execution of the AT&T Contract in September 1997 through September 30, 1999, the Company has successfully converted approximately 10.4 million AT&T cable television customers onto its system. AT&T has announced its planned efforts to provide convergent communications services in several United States cities during 1999. The Company is participating in those convergent trials and is working closely with AT&T to provide customer care and billing services to customers in those cities. The Company expects to continue performing successfully under the AT&T Contract, but its failure to do so 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 AND DBS INDUSTRIES - ------------------------------------------------- The Company's business is concentrated in the cable television and Direct Broadcast Satellite (DBS) industries, making the Company susceptible to a downturn in those industries. During the years ended December 31, 1998 and 1997, the Company derived 78% and 73%, and 13% and 11% of its total revenues from companies in the U.S. cable television and U.S. DBS industries, respectively. A decrease in the number of customers served by the Company's clients, loss of business due to non-renewal of client contracts, industry consolidation, and/or changing consumer demand for services would adversely effect the results of operations of the Company. There can be no assurance that new entrants into the cable television market will become clients of the Company. Also, there can be no assurance that cable television providers will be successful in expanding into other segments of the converging communications markets. Even if major forays into new markets are successful, the Company may be unable to meet the special billing and customer care needs of that market. The cable television industry is undergoing significant ownership changes at an accelerated pace. In addition, cable television providers are consolidating, decreasing the potential number of buyers for the Company's products and services. Consolidation in the industry may put at risk the Company's ability to leverage its existing relationships. Should this consolidation result in a concentration of cable television customer accounts being owned by companies with whom the Company does not have a relationship, or with whom competitors are entrenched, it could negatively effect the Company's ability to maintain or expand its market share, thereby adversely effecting the results of operations. NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE - ------------------------------------------- The market for customer care and billing systems is characterized by rapid changes in technology and is highly competitive with respect to the need for timely product innovations and new product introductions. The Company believes that its future success in sustaining and growing the annual revenue per customer account 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. 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. Also, the introduction and consumer acceptance of billing statements that are presented and paid electronically over the Internet may happen more rapidly than the Company anticipates. If electronic bill presentation and payment proliferates and the Company is unable to respond with a solution quickly, such failure could have a material adverse effect on the Company's results of operations. 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 solution for presenting multiple communications services on a single bill, 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. ATTRACTION AND RETENTION OF PERSONNEL - ------------------------------------- The Company's future success depends in large part on the continued service of its key management, sales, product development, and operational personnel. The Company is particularly dependent on its executive officers. The Company believes that its future success also depends on its ability to attract and retain highly skilled technical, managerial, and marketing personnel, including, in particular, additional personnel in the areas of research and development and technical support. Competition for qualified personnel is intense, particularly in the areas of research and development and technical support. The Company may not be successful in attracting and retaining the personnel it requires, which would adversely effect the Company's ability to meet its commitments and new product delivery objectives. VARIABILITY OF QUARTERLY RESULTS - -------------------------------- The Company's quarterly revenues and results, particularly relating to software and professional services, may fluctuate depending on various factors, including the timing of executed contracts and the delivery of contracted services or products, the cancellation of the Company's services and products by existing or new clients, the hiring of additional staff, new product development and other expenses, and changes in sales commission policies. No assurance can be given that results will not vary due to these factors. 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, nondisclosure agreements, and other contractual and technical measures to protect its proprietary rights in its products. The Company also holds a limited number of patents on some of its newer products, and does not rely upon patents as a primary means of protecting its rights in its intellectual property. There can be no assurance that these provisions will be adequate to protect its proprietary rights. Although the Company believes that its intellectual property rights do not infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company or the Company's clients. INTERNATIONAL OPERATIONS - ------------------------ The Company's business strategy includes a commitment to the marketing of its products and services internationally, and the Company has acquired and established operations outside of the U.S. The Company is subject to certain inherent risks associated with operating internationally. Risks include product development to meet local requirements such as the conversion to 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 which would provide the technology and technical personnel to expedite the Company's product development efforts, provide complementary products or services or provide access to new markets and clients. Acquisitions involve a number of risks and difficulties, including expansion into new geographic markets and business areas, the requirement to understand local business practices, the diversion of management's 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional discussion of the Company's efforts to address the year 2000 risks. 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. EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AS OF SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 30,963 0 82,503 3,133 0 116,349 52,929 29,427 262,433 88,987 65,765 0 0 521 106,459 262,433 231,631 231,631 96,136 96,136 24,518 0 5,690 66,102 24,966 41,136 0 0 0 41,136 0.80 0.76 * In thousands except per share amounts.
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