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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year 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: 0-28536
BILLING CONCEPTS CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 74-2781950
(State of Incorporation) (I.R.S. Employer
Identification No.)
7411 JOHN SMITH DRIVE, SUITE 200, SAN ANTONIO, TEXAS 78229
(Address of Principal Executive Office) (Zip Code)
(210) 949-7000
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's outstanding Common Stock
held by non-affiliates of the Registrant as of December 10, 1999 was
approximately $274,585,893. There were 38,538,371 shares of the Registrant's
Common Stock outstanding as of December 10, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2000
Annual Meeting of Stockholders to be held on March 22, 2000, are incorporated by
reference in Part III hereof.
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BILLING CONCEPTS CORP.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
ITEM PAGE
NUMBER NUMBER
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Index..................................................................... 2
PART I
1. Business.................................................................. 3
2. Properties................................................................ 14
3. Legal Proceedings......................................................... 14
4. Submission of Matters to a Vote of Security Holders....................... 15
PART II
5. Market for the Company's Common Equity and Related Stockholder Matters.... 16
6. Selected Financial Data................................................... 17
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................. 19
7A. Quantitative and Qualitative Disclosure About Market Risk................. 28
8. Financial Statements and Supplementary Data............................... 28
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 49
PART III
10. Directors and Executive Officers of the Company........................... 50
11. Executive Compensation.................................................... 50
12. Security Ownership of Certain Beneficial Owners and Management............ 50
13. Certain Relationships and Related Transactions............................ 50
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 51
Signatures................................................................ 54
2
PART I
ITEM 1. BUSINESS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN "FORWARD-LOOKING" STATEMENTS AS
SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND
INFORMATION RELATING TO THE COMPANY AND ITS SUBSIDIARIES THAT ARE BASED ON THE
BELIEFS OF THE COMPANY'S MANAGEMENT AS WELL AS ASSUMPTIONS MADE BY AND
INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED IN THIS
REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT" AND "INTEND" AND
WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY OR ITS
SUBSIDIARIES OR COMPANY MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT RISKS, UNCERTAINTIES AND
ASSUMPTIONS RELATED TO CERTAIN FACTORS INCLUDING, WITHOUT LIMITATIONS,
COMPETITIVE FACTORS, GENERAL ECONOMIC CONDITIONS, CUSTOMER RELATIONS,
RELATIONSHIPS WITH VENDORS, THE INTEREST RATE ENVIRONMENT, GOVERNMENTAL
REGULATION AND SUPERVISION, SEASONALITY, DISTRIBUTION NETWORKS, PRODUCT
INTRODUCTIONS AND ACCEPTANCE, TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY
PRACTICES, ONETIME EVENTS AND OTHER FACTORS DESCRIBED HEREIN AND IN OTHER
FILINGS MADE BY THE COMPANY WITH THE SECURITIES AND EXCHANGE COMMISSION. BASED
UPON CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED,
BELIEVED, ESTIMATED, EXPECTED OR INTENDED. THE COMPANY DOES NOT INTEND TO UPDATE
THESE FORWARD-LOOKING STATEMENTS.
INTRODUCTION
Billing Concepts Corp. (the "Company" or "BCC") is a business services and
technology company with operations in three principal segments - LEC Billing
("Billing"), Software ("Aptis," Inc.) and Internet. See Note 14 of "Notes to
Consolidated Financial Statements" for certain financial information by business
segment.
LEC BILLING
GENERAL
Billing provides third-party billing clearinghouse and information
management services to the telecommunications industry. The Company maintains
contractual billing arrangements with over 1,300 local telephone companies that
provide access lines to, and collect for services from, end users of
telecommunication services. The Company processes telephone call records and
other transactions and collects the related end-user charges from these local
telephone companies on behalf of its customers. This process is known within the
industry as "Local Exchange Carrier billing" or "LEC billing." Billing's
customers include direct dial long distance telephone companies, operator
services providers, information providers, competitive local exchange companies,
Internet service providers and integrated communications services providers.
In general, the Company performs four types of LEC billing services under
different billing and collection agreements with the local telephone companies.
First, the Company performs direct dial long distance billing, which is the
billing of "1+" long distance telephone calls to individual residential
customers and small commercial accounts. Although such carriers can bill end
users directly, Billing provides these carriers with a cost-effective means of
billing and collecting residential and small commercial accounts through the
local telephone companies. Second, the Company offers zero plus - zero minus LEC
billing services to customers providing operator services largely to the
hospitality, penal and private pay telephone industries. Billing processes
records for telephone calls that require operator assistance and/or alternative
billing options such as collect and person-to-person calls, third-party billing
and calling card billing. Since operator services providers have only the
billing number and not the name or address of the billed party, they must have
access to the services of the local telephone companies to collect their
charges. The Company provides this access to its customers through its
contractual billing arrangements with the local telephone companies that bill
and collect on behalf of these operator services providers. This service is the
original form of local telephone company billing provided by the Company and has
driven the development of the systems and infrastructure utilized by all of the
Company's LEC billing services. Third, the Company performs enhanced LEC billing
services whereby it bills a wide array of charges that can be applied to a local
telephone company telephone bill, including charges for 900 access pay-per-call
transactions, cellular services, paging services, voice mail services, Internet
access, Caller ID and other nonregulated telecommunications equipment. Finally,
in addition to its full-service LEC billing product, Billing also offers billing
management services to customers who have their own billing and collection
agreements with the local telephone companies. These management services may
include data processing, accounting, end-user customer service and
telecommunication tax processing and reporting.
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The Company acts as an aggregator of telephone call records and other
transactions from various sources and, due to its large volume, it receives
discounted billing costs with the local telephone companies and can pass on
these discounts to its customers. Additionally, Billing can provide its services
to those long distance carriers and operator services providers who would
otherwise not be able to make the investments in billing and collection
agreements with the local telephone companies, fees, systems, infrastructure and
volume commitments required to establish and maintain the necessary
relationships with the local telephone companies. The Company is obligated to
pay certain local telephone companies a total of approximately $5.2 million,
$3.4 million and $0.9 million during fiscal 2000, 2001 and 2002, respectively,
for future minimum usage charges under billing and collection agreements that,
unless automatically renewed, expire at varying dates through the end of fiscal
2002. The billing and collection agreements do not provide for any penalties
other than payment of the obligation should the usage levels not be met. The
Company has met all such volume commitments in the past and anticipates
exceeding the future minimum usage volumes with all of these vendors.
INDUSTRY BACKGROUND
Billing clearinghouse and information management services, or LEC billing,
in the telecommunications industry developed out of the 1984 breakup of American
Telephone & Telegraph ("AT&T") and the Bell System. In connection with the
breakup, the local telephone companies that make up the Regional Bell Operating
Companies ("RBOCs"), Southern New England Telephone, Cincinnati Bell and the
General Telephone Operating Companies ("GTE") were required to provide billing
and collections on a nondiscriminatory basis to all carriers that provided
telecommunication services to their end-user customers. Due to both the cost of
acquiring and the minimum charges associated with many of the local telephone
company billing and collection agreements, only the largest long distance
carriers, including AT&T, MCI Telecommunications Corporation, now MCI Worldcom
("MCI"), and Sprint Incorporated ("Sprint"), could afford the option of billing
directly through the local telephone companies. Several companies, including
Billing, entered into these billing and collection agreements and became
aggregators of telephone call records for operator services providers and second
and third-tier long distance carriers, thereby becoming "third-party
clearinghouses."
The operator services industry began to develop in 1986 with deregulation
that allowed a zero-plus call (automated calling card call) or zero-minus call
(collect, third-party billing, operator assisted calling card or
person-to-person call) to be routed away from AT&T to a competitive long
distance services provider. Since a zero-plus or zero-minus call is placed by an
end user whose billing information is unrelated to the telephone being used to
place the call, a long distance carrier would not typically have adequate
information to produce a bill. This information typically resides with the
billed party's local telephone company. In order to bill its telephone call
records, a long distance services provider carrying zero-plus and zero-minus
telephone calls must either obtain billing and collection agreements with the
local telephone companies or utilize the services of a third-party clearinghouse
that has the billing and collection agreements required.
Third-party clearinghouses such as Billing process these telephone call
records and other transactions and submit them to the local telephone companies
for inclusion in their monthly bills to end users. As the local telephone
companies collect payments from end users, they remit them to the third-party
clearinghouses that, in turn, remit payments to their carrier customers.
DEVELOPMENT OF BUSINESS
On August 2, 1996, U.S. Long Distance Corp. ("USLD") distributed to its
stockholders all of the outstanding shares of common stock of the Company (the
"Distribution"), which, prior to the Distribution, was a wholly owned subsidiary
of USLD. Upon completion of the Distribution, BCC became an independent,
publicly held company that owns and operates the billing clearinghouse and
information management services business previously operated by USLD through
certain of its subsidiaries (the "Billing Group"), including Billing Concepts,
Inc., formerly known as Zero Plus Dialing, Inc. ("ZPDI").
In 1988, USLD acquired ZPDI and its billing and collection agreements with
several local telephone companies. USLD used these billing and collection
agreements to bill and collect through the local telephone companies for its own
operator services call record transactions. As USLD's operator services business
expanded, ZPDI entered into additional billing and collection agreements with
other local telephone companies, including the RBOCs, GTE and other independent
local telephone companies. The Company recognized the expense and time related
to obtaining and administering these billing and collection agreements and began
offering its services as a third-party clearinghouse to other operator services
businesses who did not have any proprietary agreements with the local telephone
companies. In 1992, Billing entered into a
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new set of billing and collection agreements with the local telephone companies
and began offering LEC billing services to direct dial long distance services
providers. The Company has billing and collection agreements covering over 1,300
local telephone companies with access lines into approximately 95% of the United
States, Canada and Puerto Rico.
A key factor in the evolution of the Company's business has been the
ongoing development of its information management systems. In 1990, the Company
developed a comprehensive information system capable of processing, tracing and
accounting for telephone call record transactions (see "Business - Operations").
Management believes that this proprietary system provides the Company's
customers with more detailed information and yields a better collection rate
than its competitors. Also in 1990, the Company became the first third-party
billing clearinghouse to finance its customers' accounts receivable (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Advance Funding Program and Receivable Funding Facility"). In 1991,
USLD separated the day-to-day management and operations of the Company from its
long distance and operator services businesses (the "Telecommunications Group").
The purpose of this separation was to satisfy some of the Company's customers
who were also competitors of USLD's long distance and operator services
businesses. These customers had two main concerns: (i) that USLD's long distance
and operator services businesses could gain knowledge of its competitors through
call records processed by Billing and (ii) that Billing was somehow subsidizing
USLD's long distance and operator services businesses with which these customers
compete. Subsequent to the separation, the Billing Group and the
Telecommunications Group operated independently, except for certain corporate
activities conducted by USLD's corporate staff.
In 1993, the Company began to offer billing management services to direct
dial long distance carriers and information services providers who have their
own billing and collection agreements with the local telephone companies. These
customers collect charges directly from the local telephone companies and, for
marketing purposes, may desire to place their own logo, name and customer
service number on the long distance bill page. Billing management services
provided by the Company to such customers may include contract management,
transaction processing, information management and reporting, tax compliance and
customer service.
In 1994, the Company began offering enhanced billing clearinghouse and
information management services to other businesses within the
telecommunications industry. These businesses include telecommunications
equipment providers, information providers and other communication services
providers of non-regulated services and products such as 900 access pay-per-call
transactions, cellular long distance services, paging services, voice mail
services, Internet access, Caller ID and other non-regulated telecommunications
equipment charges. The Company entered into additional billing and collection
agreements with the local telephone companies to process these types of
transactions.
PROCESS
LEC billing refers to billing for transactions that are included in the
monthly local telephone bill of the end user as opposed to a direct bill that
the end user would receive directly from the telecommunications or other
services provider. The Company's customers submit telephone call record data in
batches on a daily to monthly basis, but typically in weekly intervals. The data
is submitted either electronically or via magnetic tape. Billing, through its
proprietary software, processes the telephone call record data to determine the
validity of each record and to include for each record certain telecommunication
taxes and applicable customer identification information and sets up an account
receivable for each batch of call records processed. The Company then submits,
through a third-party vendor, the relevant billable telephone call records and
other transactions to the appropriate local telephone company for billing and
collection. Billing monitors and tracks each account receivable by customer and
by batch throughout the billing and collection process. The local telephone
companies then include these telephone call records and other transactions in
their monthly local telephone bills and remit the collected funds to the Company
for payment to its customers. The complete cycle can take up to 18 months from
the time the records are submitted for billing until all bad debt reserves are
"trued up" with actual bad debt experience. However, the billing and collection
agreements provide for the local telephone companies to purchase the accounts
receivable, with recourse, within a 40 to 90 day period. The payment cycle from
the time call records are transmitted to the local telephone companies to the
initial receipt of funds by the Company is, on average, approximately 55 days.
Approximately 90% of the value of the call records is received in the initial
payments by the local telephone companies.
The Company does not record an allowance for doubtful accounts for LEC
billing trade receivables, but does accrue an estimated liability for end-user
customer service refunds and local telephone company adjustments related to
certain customers. The Company reviews the activity of its customer base to
detect potential losses. If there is uncertainty
5
with an account, the Company can discontinue paying the customer in order to
hold funds to cover future end-user customer service refunds, bad debt and
unbillable adjustments. If a customer discontinues doing business with the
Company, and there are insufficient funds being held to cover future refunds and
adjustments, the Company's only recourse is through legal action. Since these
adjustments are associated with customer receivable activity, the related
accrual is included in the "Accounts payable - billing customers" caption on the
balance sheet. An allowance for doubtful accounts is not necessary for LEC
billing trade receivables since these receivables are collected from the funds
received from the local telephone company before remittance is made to the
customer.
The Company processes the tax records associated with each customer's
submitted telephone call records and other transactions and files certain
federal excise and state and local telecommunications-related tax returns
covering such records and transactions on behalf of many of its customers. The
Company currently submits more than 2,900 tax returns on behalf of its customers
each month.
Billing provides end-user inquiry and investigation (customer service) for
billed telephone call records. This service allows end users to inquire
regarding calls for which they were billed. The Company's customer service
telephone number is included in the local telephone company bill to the end
user, and the Company's customer service representatives are authorized to
resolve end-user disputes regarding such calls.
Billing earns its revenues based on (i) a processing fee that is assessed
to customers either as a fee charged for each telephone call record or other
transaction processed or as percentage of the customer's revenue that is
submitted by the Company to the local telephone companies for billing and
collection and (ii) a customer service inquiry fee that is assessed to customers
either as a fee charged for each record processed by the Company or as a fee
charged for each billing inquiry made by end users. Any charges assessed to the
Company by local telephone companies for billing and collection services are
also included in revenues and are passed through to the customer.
Through its advance funding program, Billing offers its customers the
option to receive, within five days of the customer's submission of records to
Billing, a significant portion of the revenue associated with such records. The
customer pays interest for the period of time between the purchase of records by
the Company and the time the local telephone company submits payment to Billing
for the subject records. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations Advance Funding Program and Receivable
Financing Facility."
OPERATIONS
The Company's LEC billing services are highly automated through the
Company's proprietary computer software and state-of-the-art data transmission
protocols. Except for the end-user inquiry and investigation service (customer
service), the staff required to provide the Company's LEC billing services is
largely administrative and the number of employees is not directly volume
sensitive. Many of Billing's customers submit their records to the Company using
electronic transmission protocols directly into the Company's electronic
bulletin board, which is accessible through the Internet via the Company's
"BCWebTrack" website. These records are automatically accessed by Billing's
proprietary software, processed, and submitted to the local telephone companies
electronically. Upon completion of the billing process, the Company provides
reports through its BCWebTrack website relating to billable records and returns
any unbillable records to its customers electronically through the BCWebTrack
Record Manager.
The Company operates two independent computer systems to ensure continual,
uninterrupted processing of LEC billing services. One system is dedicated to
daily processing activities, and the other serves as a back-up to the primary
system and provides storage for up to 12 months of billing detail, which is
immediately accessible to Billing's customer service representatives who handle
billing inquiries. Detail of records older than 12 months is stored on CD-ROM
and magnetic tape for at least seven years. Since timely submission of call
records to the local telephone companies is critical to prompt collections and
high collection rates, Billing has made a significant investment in computer
systems so that its customers' call records are processed and submitted to the
local telephone companies in a timely manner, generally within 24 hours of
receipt by Billing.
The Company's contracts with its customers provide for the LEC billing
services required by the customer, specifying, among other things, the services
to be provided and the cost and term of the services. Once the customer executes
an agreement, Billing updates tables within each of the local telephone
companies' billing systems to control the type of
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records processed, the products or services allowed by the local telephone
companies, and the printing of the customer's name on the end user's monthly
bill. While these local telephone company tables are being updated, the
Company's technical support staff tests the customer's records through its
proprietary software to ensure that the records can be transmitted to the local
telephone companies.
Billing maintains a relatively small direct sales force of seven people
and accomplishes most of its marketing efforts through active participation in
telecommunications industry trade shows, educational seminars and workshops. The
Company advertises to a limited extent in trade journals and other industry
publications.
CUSTOMERS
The Company provides LEC billing services and direct billing systems sales
and development to the following categories of telecommunications services
providers:
o Interexchange Carriers or Long Distance Companies: Facilities-based
carriers that possess their own telecommunications switching equipment and
networks and provide traditional direct dial telecommunications services.
Certain long distance companies provide operator assisted services as well as
direct dial services. These calls are billed to the end user by the local
telephone company in the case of residential and small commercial accounts.
o Switchless Resellers: Marketing organizations, affinity groups, or even
aggregator operations that buy direct dial long distance services in volume at
wholesale rates from a facilities based long distance company and sell them back
to individual customers at market rates. These calls are billed to the end user
by the local telephone company in the case of residential and small commercial
accounts.
o Operator Services Providers: Carriers who handle "live" operator
assisted or "automated" operator assisted calls from remote locations using a
centralized telecommunications switching device. These calls are billed to local
telephone company calling cards, collect, to third-party numbers or
person-to-person.
o Customer Owned Coin-Operated Telephone Providers: Privately owned,
intelligent pay telephones that handle "automated" operator assisted calls that
are billed to a local telephone company calling card, collect or to a
third-party number.
o Customer Premise Equipment Providers: Carriers who install equipment at
aggregator locations, such as hotels, university dormitories and penal
institutions, which handle calls originated from that location device. These
calls are subsequently billed to local telephone company calling cards, collect,
to third-party numbers or person-to-person.
o Information Providers: Companies that provide various forms of
information, entertainment or voice mail services to subscribers. These services
are typically billed to the end user by the local telephone company based on a
900 pay-per-call or a monthly recurring service fee.
o Competitive Local Exchange Carriers ("CLEC"): Carriers that provide
local exchange services to subscribers who were previously served exclusively by
the incumbent local exchange carrier.
o Incumbent Local Exchange Carrier ("ILEC"): The existing local telephone
company who has previously offered service as a regulated monopoly company.
o Internet Service Providers ("ISP"): Companies that offer Internet access
and Internet-based services.
o Integrated Communications Providers ("ICP"): Carriers who offer multiple
communications services through a combination of owned network facilities and
resale of other network facilities. These multiple services are typically
bundled and priced as a package of services.
o Other Customers: Suppliers of various forms of telecommunications
equipment and pager and cellular telephone companies.
7
COMPETITION
The Company competes with several other billing clearinghouses in
servicing the telecommunications industry. Management believes that Billing is
the largest participant in the third-party clearinghouse industry in the United
States followed by OAN Services, Inc. Management believes that competition among
the clearinghouses is driven by the quality of information reporting, collection
history, the speed of collections and the price of services.
The Company believes that there are several significant challenges that
face potential new entrants in the LEC billing industry. The cost to acquire the
necessary billing and collection agreements is significant, as is the cost to
develop and implement the required systems for processing telephone call records
and other transactions. Additionally, most billing and collection agreements
require a user to make substantial monthly or annual volume commitments. Given
these factors, the average cost of billing and collecting a record could hinder
efforts to compete effectively on price until a new entrant could generate
sufficient volume. The price charged by most local telephone companies for
billing and collection services is based on volume commitments and actual
volumes being processed.
Since most customers in the billing clearinghouse industry are under
contract with Billing or one of its competitors, management believes that the
majority of the existing market may be committed for up to five years. In
addition, a new entrant must be financially sound and have system integrity
because funds collected by the local telephone companies flow through the
third-party clearinghouse, which then distributes the cash to the customer whose
traffic is being billed. Management believes that the Company enjoys a good
reputation within the industry for the timeliness and accuracy of its
collections and disbursements to customers.
The Company believes that the principal competitive factors in its market
include responsiveness to client needs, timeliness of implementation, quality of
service, price, project management capability and technical expertise. The
Company also believes that its ability to compete depends in part on a number of
competitive factors outside its control, including the development by others of
software that is competitive with the Company's services and products, the price
at which competitors offer comparable services and products, the extent of
competitors' responsiveness to customer needs and the ability of the Company's
competitors to hire, retain and motivate key personnel. As a result, the
Company's competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products than can the Company. In
addition, the clearinghouse industry continues to come under pressure from
competitors offering a means of billing end users directly as consumer demand
increases for bundled services that can be directly billed cost-effectively due
to the larger size of such convergent accounts. The ongoing consolidation in the
communications industry is also making it more feasible for the resulting larger
companies to have their own LEC billing agreements or bill consumers directly.
The Company does not currently hold any patents and relies upon a
combination of contractual non-disclosure obligations and statutory and common
law copyright, trademark and trade secret laws to establish and maintain its
proprietary rights to its products. The Company believes that, because of the
rapid pace of technological change in the telecommunications and software
industries, the legal protections for its products are less significant factors
in the Company's success than the knowledge, ability and experience of the
Company's employees, the frequency of product enhancements and the timeliness
and quality of support services provided by the Company. The Company generally
enters into confidentiality agreements with its employees, consultants, clients
and potential clients and limits access to, and distribution of, its proprietary
information.
RESEARCH AND DEVELOPMENT
Billing internally funds research and development activities with respect
to efforts associated with creating new and enhanced billing services products.
Billing is currently exploring customer care software applications that allow
consumers to view their bills and request adjustments or make payments via the
Internet. Research and development expenses in both 1999 and 1998 were $1.2
million compared to $0.6 million in 1997. Billing intends to continue its
research and development efforts in the future and therefore expects that
research and development expenses will remain at levels similar to 1999.
8
SOFTWARE
GENERAL
Aptis develops, markets and supports convergent billing and customer care
software applications. Aptis' customers include Network Service Providers
("NSPs"), Internet Service Providers ("ISPs"), Integrated Communications
Providers ("ICPs") and other providers of enhanced data services via the
Internet. Aptis offers products and services to these companies through
licensing agreements and outsourcing arrangements.
Aptis has developed, and continues to enhance, sophisticated software
applications in order to meet the current and evolving billing requirements of
its customers. The Company's software applications support complex billing of
NSP, ISP and ICP customers in a multi-service environment. Aptis' convergent
billing platform has the capability to produce a single convergent bill whereby
multiple services and products such as local exchange, long distance, wireless
and data communications can be billed directly to the end user under one,
unified billing statement. The software also has the flexibility to be
configured to meet a company's unique business rules and product set.
In addition to its software products, a full range of professional
services are also available through the Company. These services include
consulting, development and systems operations services centered on the Internet
and communications industry and its software products. Aptis also provides
ongoing support, maintenance and training related to customers' billing and
customer care systems. In addition to its software applications and services,
Aptis is a reseller of IBM AS/400 hardware that is used as the hardware platform
to host certain Aptis software applications.
DEVELOPMENT OF BUSINESS
BCC entered the software market in June 1997 in conjunction with the
acquisition of Computer Resources Management, Inc. ("CRM"). At that time the
software division was re-named Billing Concepts Systems, Inc. (`BCS"). CRM had
developed and sold billing applications to the long distance and convergent
services markets. Additionally, in October 1998, BCC acquired Expansion Systems
Corp. ("ESC") and integrated it into BCS. ESC had developed a customer care and
billing application for ISPs that automates the registration of new Internet
subscribers and creates bills for customers' services. In December 1998, BCC
completed the merger of Communications Software Consultants, Inc. ("CommSoft").
CommSoft was an international software development and consulting firm
specializing in the telecommunications industry. In April 1999, BCC announced
that BCS would operate under the name Aptis. Through these actions, Aptis has
expanded its potential markets to include companies focused on providing
sophisticated broadband Internet Protocol ("IP") and enhanced data services.
INDUSTRY BACKGROUND
In the competitive communications marketplace today, companies
increasingly realize the value of a direct customer relationship as a means of
growing its revenues. Many companies who have relied on LEC billing have grown
significantly and are looking to implement solutions that will give them the
option to bill customers themselves. Companies who have systems which bill
customers are looking to replace them with solutions that provide sophisticated
capabilities such as convergent billing and product bundling. The Company
provides such direct billing solutions through its software operations.
Increased competition has ISPs rushing to offer a proliferation of
services that did not exist a few years ago: on-line chat, e-commerce support,
broadband services, Voice over Internet Protocol (VoIP), on-line backup, MP3,
Web site design and marketing and application leasing and maintenance. Several
causes of this rush relate to the facts that customer need is acute and demand
is strong. Also, revenues from traditional dial-up services are dramatically
declining due in part to competition from free services. Bandwidth is difficult
to acquire for smaller ISPs, and their costs are steadily increasing.
9
Adding new service offerings is a necessity to stay in business. Finding a
way to maintain high levels of accessibility to the Internet, developing new
avenues for generating revenue, and streamlining operations to lower costs are
the preeminent management challenges for ISPs. In light of the changing business
environment, ISPs are creating larger, more loyal customer bases and need to be
able to bill them.
New Internet services and the need for innovative billing options also has
added to the demand for customer care and billing systems. IP and enhanced
service providers are faced with commoditization of services, rapid introduction
of new and more complex services and demands to generate more revenues from new
and existing customers. Many of these services are being offered by companies
who already offer other communications and/or enhanced data services and who
want to combine usage onto a single customer account, which is known in the
industry as convergent billing. This demand for convergent billing of Internet,
enhanced data and communications services has driven growth and spending by
Internet and communications companies on customer care and billing solutions.
PRODUCTS AND SERVICES
With the expansion into the software development business in 1997, the
Company broadened its product offerings to include customer care and billing
solutions and entered additional markets not previously served. Aptis ICP TM
(Integrated Communications Product) is the Company's comprehensive software
suite that is a fully integrated, comprehensive and adaptable billing and
customer care solution designed to meet the evolving needs of integrated
communications providers, including and emphasizing the CLEC market and those
companies offering VoIP and/or enhanced data communications. Aptis ICP is a
Web-enabled, remotely accessible software solution that integrates existing
product technology. Aptis ICP has enhanced the convergent architecture model by
providing a common application that provides key functionality in all
communications industry segments and provides tools for order fulfillment,
service assurance and billing and rating. Aptis ICP enables virtually all
communications carriers (facilities-based, competitive, incumbent, resale,
wholesale or any combination) to facilitate growth and market expansion. As an
example, the hierarchical account structure inherent in the system easily
accommodates mergers and acquisitions, new market penetration and large,
multi-level corporate billing. In addition, the common application in Aptis ICP
provides the framework for optional software functionality to be added . Aptis
ICP offers components that deliver enhanced capabilities for every segment of
the communications industry, including Internet, cable television, local, long
distance and wireless. These components may be further customized to achieve
operational goals by adding tools for provisioning, polling, point-of-sale,
facilities inventory management, data transfer interfaces and more. Further,
open application programming interfaces (APIs) provide pre-integration with
other third-party applications.
With the acquisition of ESC in October 1998, Aptis added TotalBill TM to
its product suite. With TotalBill version 3.0, Aptis introduces a broader IP and
data focused product strategy that incorporates distributed server architecture,
multi-platform availability and a host of other features such as upgraded
hierarchical account structures, anytime billing and an automated workflow
engine. TotalBill 3.0 is a browser-based, Oracle billing and customer management
software solution specifically designed for Internet and enhanced data service
providers. Taking full advantage of a distributed server environment, TotalBill
provides separate registration, application, data and reports servers. This
architecture enables distributed workloads, ensures greater scalability and
allows for geographically dispersed service centers and allows Aptis to bring an
innovative measured-service billing solution to the emerging ASP (Application
Service Provider) market. With TotalBill version 3.0, Aptis is updating and
upgrading billing features such as hierarchical and anytime billing.
Hierarchical billing enables service providers the flexibility and scalability
needed to facilitate and manage complex billing scenarios for businesses with
dispersed and growing offices, departments and employees. Anytime billing
enables providers to generate bills via predetermined user intervals or by
individually processing bills on demand in order to meet customized billing
cycles. TotalBill 3.0 also will rate virtually any metered IP service or
scenario, including flat rate, usage based and volume discounting. TotalBill's
innovative standards-based workflow engine acts as a master process control to
provide customized provisioning and interfaces with internal and external
entities. TotalBill's workflow engine allows service providers to automate many
of the processes normally associated with billing and collecting revenues.
Instant-Reg TM, the customer profile management component of TotalBill
3.0, provides a highly flexible customer self-care and provisioning system that
can be incorporated into the provider's existing Internet Web site or in a
portal environment. This feature allows customers to register, self-maintain and
modify their profile, which frees internal resources for other tasks and reduces
expensive customer support costs.
10
With the acquisition of CommSoft in December 1998, Aptis obtained
CommSoft's flagship product, which is an account number based, table-driven
suite of software applications that facilitates the administration of every
aspect of a company's business operations from application to service order, to
billing, and collections. It is a suite of business operation software for local
telephone, long distance, paging, cellular and PCS services. More specifically,
the core modules of the product include Subscriber Management and Billing,
Rating and Call Plans, Customer Care, and Telephone Plant Inventory Systems. In
addition to the billing product, Aptis acquired modules for Carrier Access
Billing, Full Function Accounting and complete Inventory Management. CommSoft's
14 plus years of success with local and wireless telephone companies, coupled
with Aptis' 10 plus years of success, primarily with long distance companies and
CLECs, is a complementary match of experience. By combining CommSoft's menu of
products with those of Aptis, the Company has a broader depth of telecom
functionality to offer its customers.
In 1998, Aptis focused attention on its professional services resources,
growing this staff significantly to support current and new customers. This
organization provides consulting, application development, training, call center
services and back office support to customers in the IP and communications
industry. The organization has entered into a number of long-term arrangements
to provide outsourced services and consulting services to the ICP and TotalBill
customers.
OPERATIONS
Aptis ICP and TotalBill are delivered to customers in a number of ways.
Aptis offers various outsourcing and facilities management options that allow
providers to take advantage of Aptis facilities and resources. In these
situations, the provider would pay a right-to-use fee for access to the
software, and pay for other services on an as-used basis. These arrangements can
include full systems hosting and operations with back office services or any
subset of services. Both applications also may be available to be delivered to
customers to use in their own premises by licensing the applications. Customers
purchase a license that entitles them use of the application in a defined
enterprise, and they acquire their own hardware and operations resources. In
most situations, Aptis provides additional services for the implementation,
conversion and training required to make the application operational from its
professional services staff. If a customer desires some unique enhancements to
the application, professional services staff provides the service at an
additional fee.
Aptis revenues are earned from license fees, right-to-use fees,
maintenance fees, professional services fees and facilities management fees.
License fees and right-to-use fees are based on the modules licensed and the
number of customers supported by the application. Maintenance fees are a
percentage of the total license fees. Professional services fees include time
and materials charges and facilities management fees. Aptis revenues also
include retail sales of IBM AS/400 hardware and operating software.
CUSTOMERS
Aptis provides direct billing systems sales and development to the
following categories of communications services providers:
o Network Service Providers ("NSP"): Companies providing
business-to-business enhanced data services based on next generation network
architecture.
o Internet Service Providers ("ISP"): Companies that offer Internet
access and Internet-based services.
o Integrated Communications Providers ("ICP"): Carriers who offer multiple
communications services through a combination of owned network facilities and
resale of other network facilities. These multiple services are typically
bundled and priced as a package of services.
o Interexchange Carriers or Long Distance Companies: Facilities-based
carriers that possess their own telecommunications switching equipment and
networks and provide traditional direct dial telecommunications services.
Certain long distance companies provide operator assisted services as well as
direct dial services. The local telephone company in the case of residential and
small commercial accounts bills these calls to the end user.
11
o Switchless Resellers: Marketing organizations, affinity groups, or even
aggregator operations that buy direct dial long distance services in volume at
wholesale rates from a facilities based long distance company and sell them back
to individual customers at market rates. The local telephone company in the case
of residential and small commercial accounts bills these calls to the end user.
o Competitive Local Exchange Carriers ("CLEC"): Carriers that provide
local exchange services to subscribers who were previously served exclusively by
the incumbent local exchange carrier.
o Incumbent Local Exchange Carrier ("ILEC"): The existing local
telephone company who has previously offered service as a regulated monopoly
company.
o Wireless Carriers: Carriers that provide direct dial telecommunications
services by means of cellular or PCS technology that is not dependent on
traditional landlines.
o Cable Companies: Facilities-based companies that possess their own
cable networks to provide cable television access and may also offer telephone
and Internet services.
In 1999, an aggressive marketing and advertising campaign was implemented
to increase industry understanding and awareness of Aptis' capabilities and
vision. As a means of highlighting Aptis' expanded capabilities, a new identity,
positioning and messaging were created. This new identity is consistently
pervasive through all advertising and marketing materials. A program designed to
insure high visibility and contact with the industry began in July 1998 and is
supported by advertising, public relations and participation in key industry
events. Aptis added significant direct sales resources to the organization,
industry experience, knowledgeable individuals and strategic partnerships with
other vendors serving the industry. Aptis will continue to pursue key marketing
relationships with companies providing complementary products and services.
Aptis maintains a direct sales force of fifteen people and accomplishes most of
its marketing efforts through active participation in Internet and
communications industry trade shows, educational seminars and workshops. The
Company advertises in trade journals and other industry publications.
Management believes that there is substantial demand by its customers and
potential customers for direct billing products and services that allow them to
bill end users directly for services provided. Aptis plans to focus its
marketing efforts on licensing its state-of-the-art direct billing software to
such customers. The Company has targeted as likely candidates for such direct
billing products and services the following types of customers: network and
enhanced data service providers, Internet service providers, long distance
providers serving commercial accounts, cellular services providers, competitive
local access providers and cable television companies.
COMPETITION
The market for telecommunications billing systems and services is highly
competitive, and Aptis anticipates that this competition will increase. Aptis
competes with both independent providers of billing systems and services and
with the internal billing departments of telecommunications service providers.
Aptis expects that the continued growth and merging of the enhanced data,
Internet and communications industry and the deregulation of other industries
will encourage new competitors to enter the billing market in the future. The
growth in total expenditures on customer care and billing solutions is expected
to increase at significant rates over the next few years. Companies that offer
broad solutions capability have the opportunity to gain significant market share
and establish long-term relationships with industry players. Aptis believes that
the principal competitive factors in its market include responsiveness to client
needs, timeliness of implementation, quality of service, price, project
management capability and technical expertise. Aptis also feels that its ability
to compete depends on a number of competitive factors outside its control. Some
of these factors include the development of software that is competitive with
the Company's services and products, the price at which competitors offer
comparable services and products, the extent of competitors' responsiveness to
customer needs and the ability of the Company's competitors to hire, retain and
motivate key personnel.
Aptis also competes with a number of companies that have substantially
greater financial, technical, sales and marketing resources, as well as greater
name recognition. As a result, the Company's competitors may be able to adapt
more quickly to emerging technologies, changes in customer requirements or to
devote greater resources to the promotion and sale of their products. The
Company does not currently hold any patents and relies upon a combination of
contractual
12
non-disclosure obligations as well as statutory and common law copyright,
trademark and trade secret laws to establish and maintain its proprietary rights
to its products. Aptis believes that because of the rapid pace of technological
change in the enhanced data, Internet, communications and software industries,
the legal protections for its products are less significant factors in the
Company's success than the knowledge, ability and experience of the Company's
employees, the frequency of product enhancements and the timeliness and quality
of support services provided by the Company. The Company generally enters into
confidentiality agreements with its employees, consultants, clients and
potential clients and limits access to, and distribution of, its proprietary
information. Use of the Company's software products is generally restricted to
specified locations and is subject to terms and conditions prohibiting
unauthorized reproduction or transfer of the software products.
RESEARCH AND DEVELOPMENT
Research and development expenses were $4.5 million, $2.1 million and $1.1
million in 1999, 1998 and 1997, respectively. Aptis is actively involved in
ongoing research and development efforts associated with creating new billing
modules and enhanced products related to its convergent billing software
platform for both telecommunications and Internet service providers. Aptis will
continue to significantly increase its investment in research and development
efforts and expects that research and development expenses will be approximately
$9 to $10 million in 2000.
INTERNET
Over the last five years, the Internet and the Worldwide Web have grown at
an explosive rate. The growth of the Internet is a global phenomenon that is
fundamentally changing the way business is conducted. The increase in the number
of Internet users, coupled with the proliferation of new types of on-line and
electronic commerce, or e-commerce, has fueled the emergence of new service
providers such as ISPs and Internet telephony providers. In addition,
traditional telecommunications carriers have entered the Internet market,
providing on-line and e-commerce services to both businesses and consumers. One
of the consequences of the widespread growth and acceptance of Web use is that
consumers are rapidly embracing the ability to pay their bills and conduct other
personal business over the Internet. This trend has generated a growing interest
by large national and regional bill senders to publish their bills
electronically. The Company has embraced the Internet phenomenon and addressed
it in its core LEC billing and Aptis businesses. Additionally, the Company has
invested in acquisition opportunities directly related to the Internet, as
discussed below.
In September 1998, BCC acquired 22% of the capital stock of Princeton eCom
Corporation ("PTC"), formerly known as Princeton Telecom Corporation. PTC,
founded in 1983 by a group of Princeton University professors, is a privately
held company headquartered in Princeton, New Jersey specializing in
comprehensive electronic bill presentment and payment services via the Internet
to financial institutions and large businesses. PTC's services eliminate the
need for companies to generate and mail paper bills as well as the need for
consumers to write and mail paper checks. PTC also provides electronic lockbox
(ELS) and credit card balance transfer services. Through September 30, 1999, the
Company acquired additional shares of PTC common stock, increasing the Company's
ownership to approximately 24% at September 30, 1999. In November 1999, the
Company announced that it recently signed an agreement to increase its ownership
interest in PTC to 27% with an additional equity investment of $2.6 million. The
Company also anticipates additional equity investments in PTC as PTC positions
itself for further growth.
In November 1999, the Company completed the acquisition of FIData, Inc., a
company located in San Antonio, Texas that provides Internet-based automated
loan approval products to the financial services industries. FIData was formed
in 1987 to provide the credit union industry with self-service technology. The
proprietary products of FIData facilitate Internet-based automated approval of
consumer loans. The FIData state-of-the-art technology is easily installed and
may rapidly change a lender's website into an interactive revenue and
self-service center. In addition to credit unions, the FIData products have
application in the banking, insurance, mortgage and retail markets. In
conjunction with the FIData transaction, the Company also completed the
acquisition of a company located in Austin, Texas that is developing an
Internet-based financial services website focused on the credit union industry
and its members.
As of the date of this report, the Company has invested $21.7 million, and
committed an additional $2.6 million of capital resources in the Internet arena
and plans to make further significant investments of capital in Internet-related
operations over the foreseeable future. The Company will continue to review
additional strategic Internet acquisition opportunities that will complement or
enhance its existing operations.
13
EMPLOYEES
At September 30, 1999, the Company had 806 full-time employees and 22
part-time employees, as follows: LEC billing - 395 full-time and 18 part-time;
Aptis - 323 full-time and 4 part-time; Internet - 10 full-time; and corporate
office - 78 full-time employees. None of the Company's employees are represented
by a union. The company believes that its employee relations are good.
ITEM 2. PROPERTIES
At September 30, 1999, the Company occupied approximately 130,000 square
feet of space at 7411 John Smith Drive, San Antonio, Texas, which serves as a
customer service facility for LEC Billing and the corporate and operational
headquarters for the Company's LEC billing and Software divisions. The lease
expires in October 2006 and has certain expansion options, renewal options and
rights of first refusal. At September 30, 1999, the company's LEC billing
operations occupied an additional 26,000 square feet for a customer service
facility located at 10500 Highway 281, San Antonio, Texas, under a lease that
expires in September 2002. The Company has a third LEC billing customer service
facility at 802 N. Carancahua, Corpus Christi, Texas, where it occupied
approximately 29,000 square feet at September 30, 1999, under a lease that
expires in September 2005. The Company's Software operations occupy
approximately 29,000 square feet in Austin, Texas, approximately 54,000 square
feet in Albany, New York and approximately 7,500 square feet in Glendale,
California under leases that expire at varying dates through 2008. The Company's
Internet operations are also headquartered at the leased premises in Austin. In
November 1999, the Company signed an agreement to lease approximately 75,000
square feet of office space in Austin, Texas that will eventually serve as the
headquarters for the Company's Software operations. This lease expires in 2010
and has certain renewal options. The Company believes that its current
facilities are, and its future facilities will be, adequate to meet its current
and future needs.
ITEM 3. LEGAL PROCEEDINGS
A lawsuit was filed on December 31, 1998, in the United States District
Court in San Antonio, Texas by an alleged stockholder of the Company against the
Company and various of its officers and directors, alleging unspecified damages
as a result of alleged false statements in various press releases prior to
November 19, 1998. In September 1999, the U.S. District Court for the Western
District of Texas entered an order and judgment dismissing the plaintiff's
lawsuit. The plaintiff noticed an appeal of that decision on September 29, 1999.
Although no assurances can be given, the Company believes it has meritorious
defenses to this action and intends to defend itself vigorously.
The Company had a $1.0 million default judgment entered against it in
September 1999 as a result of a garnishment action in Wisconsin state court. The
Company was not alleged to have done anything wrong, and its liability is based
solely on a failure by former in-house counsel to timely answer the garnishment
lawsuit. The underlying judgment was against a former customer of the Company.
The class plaintiff's attempt to collect that judgment through moneys held by
the Company on behalf of its former customer gave rise to the garnishment action
against the Company. The Company entered into a Stipulation of Settlement in
this matter which will require a minimum final settlement amount of $0.8
million. During 1999, the Company recorded a charge that it believes is adequate
for the final settlement.
The Company is cooperating with the Federal Trade Commission's ("FTC")
Bureau of Consumer Protection ("BCP") regarding BCP staff requests for industry
and customer specific information from the Company relating primarily to the
alleged cramming of charges for non-regulated telecommunication services by
certain of its customers. Cramming is the addition of charges to a telephone
bill for programs, products or services the consumer did not knowingly
authorize. In connection with the Company's responses to the ongoing
informational requests, the BCP staff has proposed a complaint against the
Company. The BCP staff alleges that it can impose a variety of civil remedies on
the Company, including consumer redress or other equitable relief as well as
restrictions on the way the Company processes charges for enhanced services. The
Company disputes the BCP staff's alleged basis for liability and is reviewing
the BCP staff's allegations to ensure that corrective action has already been
taken. Billing Concepts has and will continue to cooperate and engage the BCP
staff in good faith negotiations. The Company is unable to predict what action,
if any, the FTC will take regarding the BCP staff's proposed complaint or what,
if any, financial impact would result.
14
The Company is involved in various other claims, legal actions and
regulatory proceedings arising in the ordinary course of business. The Company
believes it is unlikely that the final outcome of any of the claims, litigation
or proceedings to which the Company is a party, including those described above,
will have a material adverse effect on the Company's financial position or
results of operations; however, due to the inherent uncertainty of litigation,
there can be no assurance that the resolution of any particular claim or
proceeding would not have a material adverse effect on the Company's results of
operations for the fiscal period in which such resolution occurs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year, no matter was submitted by
the Company to a vote of its stockholders through the solicitation of proxies or
otherwise.
15
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock, par value $0.01 per share (the "Common
Stock"), is quoted on the Nasdaq National Market under the symbol "BILL." The
table below sets forth the high and low bid prices for the Common Stock from
October 1, 1997, through December 10, 1999, as reported by the Nasdaq National
Market. These price quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions.
HIGH LOW
---- ---
Fiscal Year Ended September 30, 1998:
1st quarter $24 11/16 $17 7/8
2nd quarter $30 $22
3rd quarter $29 5/8 $13 1/2
4th quarter $15 3/4 $8 5/16
Fiscal Year Ending September 30, 1999:
1st quarter $17 $10
2nd quarter $11 7/8 $7 15/16
3rd quarter $14 $9 7/8
4th quarter $11 3/16 $4 1/2
Fiscal Year Ending September 30, 2000:
1st quarter (through December 10, 1999) $7 1/8 $4 7/32
STOCKHOLDERS
At December 10, 1999, there were 38,538,371 shares of Common Stock
outstanding, held by 503 holders of record. The last reported sales price of the
Common Stock on December 10, 1999, was $7 1/8 per share.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company presently intends to retain all earnings for the operation
and development of its business and does not anticipate paying any cash
dividends on the Common Stock in the foreseeable future. Furthermore, certain
covenants in various credit agreements of the Company prohibit the payment of
dividends on the Common Stock.
16
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial and other data and pro
forma per share data for the Company. The income statement data for the years
ended September 30, 1999, 1998, 1997, 1996 and 1995, and the balance sheet data
at September 30, 1999, 1998, 1997, 1996 and 1995, presented below are derived
from the audited Consolidated Financial Statements of the Company. The data
presented below for the fiscal years ended September 30, 1999, 1998 and 1997,
should be read in conjunction with the Consolidated Financial Statements and the
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the other financial information included in this
report.
FISCAL YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED INCOME STATEMENT DATA:
Operating revenues ......................................................... $181,324 $176,023 $132,237 $109,421 $ 84,104
Gross profit ............................................................... 71,805 67,845 49,802 39,046 30,578
Advance funding program income ............................................. 3,798 7,919 7,255 6,564 4,582
Advance funding program expense ............................................ 125 126 688 1,367 1,351
Special charges ............................................................ 1,529 2,000 21,252 0 0
Income from operations ..................................................... 23,521 40,266 14,285 29,041 22,486
Net income (5) ............................................................. 15,822 26,703 4,238 18,096 14,253
Basic net income per common share (5) ...................................... $ 0.43 $ 0.74 $ 0.13 -- --
Pro forma basic net income per common share (1) ............................ -- -- -- $ 0.57 $ 0.49
Weighted average common shares outstanding ................................. 37,116 35,844 33,525 -- --
Pro forma weighted average common shares outstanding (1) ................... -- -- -- 31,703 29,137
Diluted net income per common share (5) .................................... $ 0.42 $ 0.71 $ 0.12 -- --
Pro forma diluted net income per common share (1) .......................... -- -- -- $ 0.54 $ 0.45
Weighted average common shares and common share equivalents outstanding .... 37,685 37,488 35,092 -- --
Pro forma weighted average common shares and common share
equivalents outstanding (1) .............................................. -- -- -- 33,275 31,667
SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital ............................................................ $ 73,553 $ 60,247 $ 28,015 $ 13,604 $ 17,361
Total assets ............................................................... 255,079 266,613 171,288 139,286 107,688
Long-term debt and capital leases, less current portion .................... 0 2,468 2,805 5,185 2,365
USLD's investment in and advances to BCC ................................... 0 0 0 0 21,387
Additional paid-in capital (2) ............................................. 63,771 60,028 42,905 19,628 0
Retained earnings (3) ...................................................... 48,213 34,141 7,438 3,200 0
SEPTEMBER 30,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
OPERATING DATA:
EBITDA (4) ................................................................. $ 32,850 $ 47,364 $ 18,352 $ 31,309 $ 23,805
17
(1)The per share and weighted average common shares and common share
equivalents outstanding data for the years ended September 30, 1996 and 1995
is unaudited and presented on a pro forma basis as BCC had no publicly held
common shares outstanding prior to its spin-off from USLD on August 2, 1996.
The number of weighted average common shares outstanding used in the
calculation of the pro forma earnings per share gives effect to the shares
assumed to be issued had the spin-off occurred at the beginning of each
period presented.
(2)Additional paid-in capital for the years ended September 30, 1997 and 1996
was restated to give effect to the one-for-one common stock dividend that was
distributed on January 30, 1998 to stockholders of record on January 20,
1998. No additional proceeds were received on the dividend date and all costs
associated with the share dividend were capitalized as a reduction of
additional paid-in capital.
(3)The Company has never declared cash dividends on its Common Stock, nor does
it anticipate doing so in the foreseeable future.
(4)Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
a profitability/cash flow measurement that is commonly used in the
telecommunications industry. EBITDA is not a financial measure pursuant to
Generally Accepted Accounting Principles ("GAAP"), nor is it acceptable or
considered an alternative measure of cash flows from operations under GAAP or
funds available for dividends, reinvestments or other discretionary uses. For
a presentation of cash flows, including cash flows related to operating
activities, investing activities and financing activities, see the Statements
of Cash Flows included in the Company's Consolidated Financial Statements.
(5)Without the effect of special and certain other charges and excluding its
Internet operations, the Company recorded net income of $21.3 million, $27.9
million and $21.9 million and diluted net income per common share of $0.57,
$0.80 and $0.66 for the years ended September 30, 1999, 1998 and 1997,
respectively.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company, the Notes thereto and the
other financial information included elsewhere in this Report. For purposes of
the following discussion, references to yearly periods refer to the Company's
fiscal years ended September 30.
RESULTS OF OPERATIONS - CONSOLIDATED
The following table presents certain items in the Company's Consolidated
Statements of Income as a percentage of total revenues:
YEAR ENDED SEPTEMBER 30,
1999 1998 1997
---- ---- ----
Operating revenues............................... 100.0% 100.0% 100.0%
Cost of revenues................................. 60.4 61.5 62.3
----- ----- -----
Gross profit..................................... 39.6 38.5 37.7
Selling, general and administrative expenses..... 19.5 13.1 11.4
Research and development......................... 3.2 1.9 1.3
Advance funding program income, net.............. (2.0) (4.4) (5.0)
Depreciation and amortization expense............ 5.1 4.0 3.1
Special charges.................................. 0.8 1.1 16.1
----- ----- -----
Income from operations........................... 13.0 22.8 10.8
Other income, net................................ 2.1 2.5 0.4
----- ----- -----
Income before provision for income taxes......... 15.1 25.3 11.3
Provision for income taxes....................... (6.4) (10.2) (8.0)
----- ----- -----
Net income....................................... 8.7% 15.1% 3.2%
===== ===== =====
The Company's revenues are derived primarily from the provision of billing
clearinghouse and information management services to telecommunications services
providers ("Local Exchange Carrier billing" or "LEC billing") by its LEC billing
division ("Billing"). Through its subsidiary, Aptis, Inc. ("Aptis"), the Company
also operates a software division ("Software") that develops, markets and
supports convergent billing and customer care software applications for
telecommunications and Internet service providers and provides direct billing
outsourcing services. In addition, the Company has Internet operations
("Internet") that include equity interests in Princeton eCom Corporation
("PTC"), formerly known as Princeton Telecom Corporation, and an
Internet-related company located in Austin, Texas. Total revenues for 1999 were
$181.3 million compared to $176.0 million in 1998 and $132.2 million in 1997,
representing increases of 3.0% and 33.1%, respectively. The increase in total
revenues from 1998 was primarily due to the increase in Aptis revenues while the
increase from 1997 was primarily attributable to the increase in LEC billing
revenues. Gross profit margin of 39.6% reported for 1999 compares to 38.5%
achieved in 1998 and 37.7% achieved in 1997. The improvement from year to year
is attributable to the growth of Aptis revenues as a percentage of total
revenues due to the higher margins associated with Aptis sales. The Company's
consolidated gross profit margin could increase in subsequent periods as a
result of an increased contribution of higher gross margin Aptis revenues.
Selling, general and administrative ("SG&A") expenses are comprised of all
selling, marketing and administrative costs incurred in direct support of the
business operations of the Company. SG&A expenses for 1999 were $35.3 million,
or 19.5% of revenues, compared to $23.0 million, or 13.1% of revenues, in 1998,
and $15.1 million in 1997, representing 11.4% of revenues. SG&A expenses as a
percentage of revenues increased from year to year primarily due to the Aptis
operations incurring a higher level of SG&A expenses as a percentage of revenue
than the Company as a whole. This increased level of SG&A for Aptis is necessary
as Aptis builds an infrastructure consistent with expected growth. As the
revenues generated by Aptis operations have increased as a percentage of total
revenue, the overall SG&A percentage has increased accordingly.
Depreciation and amortization expenses are incurred with respect to
certain assets, including computer hardware, software, office equipment,
furniture, leasehold improvements, costs incurred in securing contracts with
local telephone companies, goodwill and other intangibles. Depreciation and
amortization expense as a percentage of revenues was 5.1%,
19
4.0% and 3.1% in 1999, 1998 and 1997, respectively. The increase in the
percentage from year to year is attributable to increased capital expenditures
made in order to provide the infrastructure needed to support the growth of the
Company. These expenditures included the purchase of office furniture, computer
equipment and software and leasehold improvements. Investments in leasehold
improvements increased in connection with the Company's new facility in 1997
that serves as both a customer service center and the corporate and operational
headquarters of the Company and leasing an additional customer service center in
1998. During 1999, 1998 and 1997, the Company recognized $626,000, $625,000 and
$205,000 of amortization expense, respectively, related to goodwill and other
intangibles acquired in connection with the acquisition of CRM in June 1997.
Income from operations was $23.5 million, $40.3 million and $14.3 million
in 1999, 1998 and 1997, respectively. Income from operations for 1999 includes
special charges of $1.5 million of expenses incurred in contemplation of a
proposed separation of the Company's LEC billing and software businesses into
two separate public companies. The proposed separation was terminated in the
fourth quarter of fiscal 1999. Income from operations for 1998 reflects special
charges of $2.0 million during the fourth quarter of 1998 representing
in-process research and development costs acquired in connection with the
acquisition of 22% of the capital stock of PTC. Income from operations for 1997
reflects special charges of $21.3 million incurred in the third quarter of 1997.
The $21.3 million charge includes in-process research and development costs of
$13.0 million acquired in connection with the acquisition of CRM. The remaining
$8.3 million represents accumulated costs associated with the development of a
direct billing system for a service bureau operation. The Company abandoned this
development during the third quarter of 1997. Income from operations, exclusive
of special charges, represented 13.8%, 23.9% and 26.9% of revenues in 1999, 1998
and 1997, respectively. The decrease in income from operations, exclusive of
special charges, as a percentage of revenues from year to year is attributable
to higher SG&A, research and development and depreciation expenses and lower net
advance funding income as a percentage of revenues, offset partly by a higher
gross profit margin.
Net other income of $3.9 million in 1999 compares to net other income of
$4.4 million in 1998 and $0.6 million in 1997. The increase in net other income
for both 1999 and 1998 from 1997 was primarily due to increased interest income
from short-term investments due to higher cash balances. The increase in
interest income for 1999 was offset by the Company's $1.8 million equity in the
loss of its investee, PTC, since the Company's initial investment in September
1998. Interest expense was also lower in 1999 and 1998 due to the paydown of
long-term debt.
The Company's effective tax rate was 42.3% in 1999, 40.3% in 1998 and
71.5% in 1997. The Company's effective tax rate is higher than the federal
statutory rate due to the inclusion of state income taxes (in addition to
federal income taxes) and certain deductions taken for financial reporting
purposes that are not deductible for federal income tax purposes. Exclusive of
nondeductible in-process research and development costs related to the
acquisition of CRM and PTC and nondeductible losses from its Internet
investments, the Company's effective tax rate would have been 39.3%, 38.7% and
41.0% in 1999, 1998 and 1997, respectively.
RESULTS OF OPERATIONS - LEC BILLING
The following table presents the operating results of the Company's LEC
billing division and as a percentage of related revenues for each year:
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
1999 1998 1997
--------- --------- --------- --------- --------- ---------
Operating revenues ......................... $ 138,646 100.0% $ 147,542 100.0% $ 120,451 100.0%
Cost of revenues ........................... 87,763 63.3 92,761 62.9 75,472 62.7
--------- --------- --------- --------- --------- ---------
Gross profit ............................... 50,883 36.7 54,781 37.1 44,979 37.3
Selling, general and administrative expenses 9,873 7.1 7,540 5.1 6,299 5.2
Research and development ................... 1,246 0.9 1,168 0.8 594 0.5
Advance funding program income, net ........ (3,673) (2.6) (7,793) (5.3) (6,567) (5.5)
Depreciation and amortization expense ...... 5,170 3.7 3,999 2.7 2,292 1.9
Special and other charges .................. 4,443 3.3 -- -- --
--------- --------- --------- --------- --------- ---------
Income from operations ................... $ 33,824 24.3% $ 49,867 33.8% $ 42,361 35.2%
========= ========= ========= ========= ========= =========
20
OPERATING REVENUES
LEC billing fees charged by Billing include processing and customer
service inquiry fees. Processing fees are assessed to customers either as a fee
charged for each telephone call record or other transaction processed or as a
percentage of the customer's revenue that is submitted by Billing to local
telephone companies for billing and collection. Processing fees also include any
charges assessed to Billing by local telephone companies for billing and
collection services that are passed through to the customer. Customer service
inquiry fees are assessed to customers either as a fee charged for each record
processed by Billing or as a fee charged for each billing inquiry made by end
users.
Including a bad debt write-off of $3.2 million in 1999, LEC billing
services revenues decreased $12.1 million, or 8.2%, in 1999 from 1998, and
increased $27.1 million, or 22.5%, in 1998 from 1997. The decrease in revenue
from 1998 was attributable to an overall decrease in the number of call records
processed, as well as the $3.2 million charge. The revenue increase from 1997
was primarily attributable to an increase in the number of telephone call
records processed and billed on behalf of direct dial long distance customers.
Despite the overall increase in revenue from 1997, the number of call records
processed for billing during 1998 and 1999 was negatively impacted by "slamming"
and "cramming" issues that have occurred in the long distance industry. Slamming
is defined as the unauthorized and illegal switching of a customer's telephone
service from one carrier to another carrier, while cramming is the practice of a
company billing customers for products and services that the consumer did not
knowingly authorize. These "slamming and cramming" issues have caused some of
the larger Local Exchange Carriers ("LECs") to affect the ability of certain of
Billing's customers to market certain services. Also, as a proactive measure,
Billing has taken action against certain customers that includes, but is not
limited to, the cessation of billing for certain new or existing products.
Management continues to take actions in order to mitigate the effects of
"slamming and cramming" issues on the call record volumes of its current
customer base. These actions have resulted in lower revenues for 1999 and 1998.
Telephone call record volumes were as follows:
YEAR ENDED
SEPTEMBER 30,
------------------
1999 1998 1997
----- ----- -----
(IN MILLIONS)
Direct dial long distance services .............. 599.0 612.6 510.3
Operator services ............................... 97.2 134.6 133.4
Enhanced billing services........................ 4.7 11.4 9.6
Billing management services...................... 230.4 329.1 342.1
Although billing management records decreased significantly from 1997 to
1999, the impact on revenues was minimal because revenue per record for billing
management customers, who have their own billing and collection agreements with
the local telephone companies, is significantly less than revenue per record for
Billing's other customers.
COST OF REVENUES
Cost of revenues includes billing and collection fees charged to Billing
by local telephone companies and related transmission costs, as well as all
costs associated with the customer service organization, including staffing
expenses and costs associated with telecommunications services. Billing and
collection fees charged by the local telephone companies include fees that are
assessed for each record submitted and for each bill rendered to its end-user
customers. Billing achieves discounted billing costs due to its aggregated
volumes and can pass these discounted costs on to its customers.
Including the $3.2 million charge to revenue discussed above, the gross
profit margin for 1999 was 35.2% compared to 37.1% achieved in 1998 and 37.3%
achieved in 1997. The decrease in margin in 1999 from 1998 is primarily
attributable to the $3.2 million charge in 1999. Excluding this charge, gross
profit margin was 36.7% for 1999. The decrease in margin from 1998 was also
attributable to the loss of certain higher margin enhanced billing services
revenues. The decrease in these revenues is the result of actions to reduce the
incidence of slamming and cramming.
21
SELLING, GENERAL AND ADMINISTRATIVE
Including the $3.2 million charge to revenue discussed above and a charge
of $1.2 million to SG&A in 1999 for a legal judgment, SG&A expenses for 1999
were $11.1 million or 8.2% of revenues, compared to $7.5 million, or 5.1% of
revenues in 1998, and $6.3 million in 1997, representing 5.2% of revenues. The
increase in SG&A as a percentage of revenue in 1999 was primarily due to the
overall decrease in revenue as well as the $1.2 million charge. Excluding this
charge and the $3.2 million charge to revenue discussed above, SG&A as a
percentage of revenue in 1999 was 7.1%.
Expenses related to certain corporate functions, such as treasury,
financial reporting, investor relations, legal, payroll, human resources and
management information systems, have not been fully charged to Billing, but are
included in the consolidated results of operations as general corporate
expenses.
RESEARCH AND DEVELOPMENT
Research and development expenses are comprised of the salaries and
benefits of the employees involved in software development and related expenses.
Billing internally funds research and development activities with respect to
efforts associated with creating new and enhanced billing services products.
Research and development expenses in both 1999 and 1998 were $1.2 million
compared to $0.6 million in 1997. Billing intends to continue its research and
development efforts in the future and anticipates spending approximately $1.0
million during 2000 for such expenses.
ADVANCE FUNDING PROGRAM INCOME AND EXPENSE
Advance funding program income was $3.8 million in 1999 compared with $7.9
million in 1998 and $7.3 million in 1997. The year-to-year fluctuations were
primarily the result of the level of customer receivables financed under the
Company's advance funding program (see "Advance Funding Program and Receivable
Financing Facility" below). The quarterly average balance of purchased
receivables was $48.2 million, $83.0 million and $73.6 million in 1999, 1998 and
1997, respectively.
The decrease in advance funding program expense to $0.1 million in both
1999 and 1998 from $0.7 million in 1997 was attributable to the Company
financing all customer receivables during 1999 and 1998 with internally
generated funds rather than with funds borrowed through the Company's revolving
credit facility. The expense recognized during 1999 and 1998 represents unused
credit facility fees and is the minimum expense that the Company could have
incurred during these years.
INCOME FROM OPERATIONS
Including special and other charges, income from operations in 1999 was
$33.8 million, or 25.0% of revenues, compared to income from operations of $49.9
million, or 33.8% of revenues, in 1998 and $42.4 million, or 35.2% of revenues,
in 1997. The decrease in income from operations as a percentage of revenues from
year to year is attributable to lower net advance funding income and higher
operating expenses as a percentage of revenues, as well as a lower gross profit
margin. Excluding the $1.2 million charge to SG&A and the $3.2 million charge to
revenue discussed above, income from operations in 1999 was $38.3 million, or
27.6% of revenues.
22
RESULTS OF OPERATIONS - SOFTWARE
The following table presents the operating results of the Company's
software division and as a percentage of related revenues for each year:
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
1999 1998 1997
-------- -------- -------- -------- -------- --------
Software revenues .......................... $ 19,712 42.9% $ 10,067 35.3% $ 3,327 28.2%
Services revenues .......................... 19,011 41.4 9,589 33.7 4,661 39.6
Hardware revenues .......................... 7,198 15.7 8,825 31.0 3,798 32.2
-------- -------- -------- -------- -------- --------
Total operating revenues ................. 45,921 100.0 28,481 100.0 11,786 100.0
Cost of revenues ........................... 21,756 47.4 15,417 54.1 6,963 59.1
-------- -------- -------- -------- -------- --------
Gross profit ............................... 24,165 52.6 13,064 45.9 4,823 40.9
Selling, general and administrative expenses 10,932 23.8 5,495 19.3 2,015 17.1
Research and development ................... 4,479 9.8 2,109 7.4 1,067 9.1
Depreciation and amortization expense ...... 2,168 4.7 1,380 4.8 494 4.2
Special and other charges .................. 780 1.7 -- -- 21,252 180.3
-------- -------- -------- -------- -------- --------
Income (loss) from operations ............ $ 5,806 12.6% $ 4,080 14.3% $(20,005) (169.7)%
======== ======== ======== ======== ======== ========
In addition to license and maintenance fees charged by Aptis for the use
of its billing software applications, fees are charged on a time and materials
basis for software customization and professional services. Processing fees for
direct billing services provided through Aptis' service bureau are assessed to
customers based on volume. Aptis' revenues also include retail sales of
third-party computer hardware and software.
Aptis revenues increased $17.4 million, or 61.2%, in 1999 from 1998, and
increased $16.7 million, or 141.7%, in 1998 from 1997. The increase in revenues
from the prior years was primarily attributable to the increase in license and
maintenance fees.
COST OF REVENUES
Cost of revenues includes the cost of third-party computer hardware and
software sold, and the salaries and benefits of software development, technical,
service bureau and professional service personnel who generate revenue from
contracted services.
Gross profit margin of 52.6% reported for 1999 compares to 45.9% achieved
in 1998 and 40.9% achieved in 1997. The improvement from year to year is
attributable to the growth of Aptis software license and maintenance fees as a
percentage of total revenues in 1999 and 1998. This growth served to improve
gross margin due to the higher margins associated with such revenues.
SELLING, GENERAL AND ADMINISTRATIVE
Including a bad debt write-off of $0.8 million in 1999, SG&A expenses for
1999 were $11.7 million, or 25.5% of revenues, compared to $5.5 million, or
19.3% of revenues, in 1998, and $2.0 million in 1997, representing 17.1% of
revenues. SG&A expenses as a percentage of revenues increased from the prior
years primarily due to increased expenditures to provide the infrastructure
necessary to support the projected growth of the software business and increased
marketing expenses. The Company expects that marketing expenditures will
continue to significantly increase in light of Aptis' aggressive marketing
campaign.
Expenses related to certain corporate functions, such as treasury,
financial reporting, investor relations, legal, payroll, human resources and
management information systems, have not been fully charged to the Aptis
division, but are included in the consolidated results of operations as general
corporate expenses.
23
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses are comprised of the salaries
and benefits of the employees involved in software development and related
expenses. Aptis is actively involved in ongoing research and development efforts
associated with creating new and enhanced products related to its convergent
billing software platform for both telecommunication and Internet service
providers. Research and development expenses in 1999 were $4.5 million compared
to $2.1 million in 1998 and $1.1 million in 1997. The Company intends to
significantly increase its research and development efforts in the future and
anticipates spending approximately $9 to $10 million during 2000 for such
expenses.
INCOME FROM OPERATIONS
Exclusive of special and other charges, income from operations in 1999 was
$6.6 million, or 14.3% of revenues, compared to income of $4.1 million, or 14.3%
of revenues, in 1998 and income of $1.2 million, or 10.6% of revenues, in 1997.
Income from operations as a percentage of revenues in 1999 reflected higher SG&A
and research and development expenses as a percentage of revenues, which were
offset by a higher gross profit margin. The increase in income from operations
as a percentage of revenues in 1998 from 1997 is attributable to a higher gross
profit margin, offset partly by higher operating expenses as a percentage of
revenues.
RESULTS OF OPERATIONS - INTERNET
The Company began its Internet operations with its initial investment in
PTC in September 1998. During 1999, in addition to recording its equity in the
net loss of PTC of $1.8 million, which is included in "Other Income," the
Company recorded $0.5 million of SG&A and R&D expenses related to its initial
investment in an Internet company located in Austin, Texas.
YEAR 2000 CONTINGENCY
The operation of the Company's business is highly dependent on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including information management services, third-party
billing clearinghouse services (including the advance funding program), direct
billing services and financial reporting, as well as in various administrative
functions. In providing information management, third-party billing
clearinghouse and direct billing services, the Company processes telephone call
records which are date sensitive. The Company also develops, sells and supports
sophisticated billing systems and software (the "Billing Systems") which must be
able to process date-dependent data correctly. Certain of the Billing Systems
sold by the Company have been warranted to process information related to or
including dates that are prior to, on or after January 1, 2000.
The Company has been evaluating its Programs and Systems to identify
potential Year 2000 readiness problems, as well as manual processes, external
interfaces with customers and services supplied by vendors to coordinate Year
2000 compliance and conversion. The Year 2000 problem refers to the limitations
of the programming code in certain existing software programs to recognize
date-sensitive information for the Year 2000 and beyond. Unless modified prior
to December 31, 1999, such systems may not properly recognize such information
and could generate erroneous data or cause a system to fail to operate properly.
The Company filed a Year 2000 Certification Request with ITAA (Information
Technology Association of America) in January 1999. The Company has installed
its Year 2000 compliant Billing Systems in its Service Bureau operation and made
a general release of such Billing Systems available in the second fiscal quarter
of 1999. The Company believes that all significant modifications and
replacements required to make its systems that perform LEC billing Year 2000
compliant were completed during April 1999.
The Company believes that, with modifications to existing software and
conversions to new software, the Year 2000 problem will not pose a significant
operational problem for the Company. However, because the Company's business
relies on processing date-sensitive telephone call records supplied by third
parties, it is possible that non-compliant third-party computer systems may not
be able to provide accurate data for processing through the Company's computer
systems. The Company's business, financial condition and results of operations
could be materially adversely affected by the Year 2000 problem if it or
unrelated parties fail to successfully address this issue.
24
Management of the Company currently anticipates that the total expenses
and capital expenditures associated with its Year 2000 readiness project,
including costs associated with modifying the Programs and Systems and the cost
of purchasing or leasing certain hardware and software, will be approximately $3
million. As of September 30, 1999, the Company has spent approximately $1.5
million on capital expenditures for related hardware and software and incurred
and expensed approximately $1.0 million in personnel and other costs related to
the Year 2000 readiness process. Any additional personnel or other costs related
to this process will be expensed as incurred. The cost of Year 2000 readiness is
the best estimate of Company management and is believed to be reasonably
accurate.
In the event the Company's plan to address the Year 2000 problem was not
successfully implemented, the Company may need to devote more resources to the
process and additional costs may be incurred, which could have a material
adverse effect on the Company's financial condition and results of operations.
Problems encountered by the Company's vendors, customers and other third parties
also may have a material adverse effect on the Company's financial condition and
results of operations.
In the event the Company determines, following the Year 2000 date change,
that its Programs and Systems are not Year 2000 ready, the Company will be
unable to process date-sensitive telephone call records and thus be unable to
provide most of its revenue-producing services, which will have a material
adverse effect on the Company's financial condition and results of operations.
The Company also will likely experience considerable delays in compiling
information required for financial reporting and performing various
administrative functions. In addition, in the event the Company's Billing
Systems are not Year 2000 ready, the Company will be required to devote more
monetary and other resources to achieving such readiness, which could have a
material adverse effect on the Company's financial condition and results of
operations.
The Company has developed a contingency plan for implementation in the
event its Programs and Systems are not Year 2000 ready prior to December 31,
1999. Such contingency plans are modeled upon the Company's Disaster Recovery
Plan. The Disaster Recovery Plan outlines a strategy for reduced continued
operations following a natural disaster that damages the Company's operations
center in San Antonio, Texas.
The above Year 2000 disclosure constitutes a "Year 2000 Readiness
Disclosure" as defined in The Year 2000 Information and Readiness Disclosure Act
(the "Act"), which was signed into law on October 19, 1998. The Act provides
added protection from liability for certain public and private statements
concerning a company's Year 2000 readiness.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance increased to $134.0 million at September 30,
1999, from $121.0 million at September 30, 1998. Large fluctuations in daily
cash balances are normal due to the large amount of customer receivables that
the Company collects on behalf of its LEC billing customers. The Company's
working capital position increased to $73.6 million at September 30, 1999, from
$60.2 million at September 30, 1998, and its current ratio was 1.5:1 and 1.4:1
at September 30, 1999 and 1998, respectively. Net cash provided by operating
activities was $22.1 million, $40.6 million and $30.7 million in 1999, 1998 and
1997, respectively, and primarily reflected net income from 1997 to 1999,
exclusive of special charges.
In December 1996, the Company obtained a $50.0 million revolving line of
credit facility with certain lenders primarily to draw upon to advance funds to
its billing customers prior to collection of the funds from the local telephone
companies. This credit facility terminates on March 20, 2000. Borrowings under
the credit facility are limited to a portion of the Company's eligible
receivables. Management is currently in negotiations with its lenders to renew
the line of credit and expects that the credit facility will be further renewed
with similar or more favorable terms. No amounts were borrowed by the Company
under its credit facility at either September 30, 1999 or 1998. At September 30,
1999, the amount available under the Company's credit facility was $42.0
million.
Under certain of its credit agreements, the Company is prohibited from
paying dividends on its common stock, is required to comply with certain
financial covenants and is subject to certain limitations on the issuance of
additional secured debt. The Company was in compliance with all required
covenants at September 30, 1999 and 1998.
25
Capital expenditures amounted to approximately $9.5 million in 1999 and
related primarily to the purchase of computer equipment and software. The
Company anticipates capital expenditures before acquisitions, if any, of
approximately $8 million in fiscal 2000 largely related to expenditures for
furniture, fixtures, leasehold improvements, computer software and hardware
upgrades. The Company believes that it will be able to fund expenditures with
internally generated funds and borrowings, but there can be no assurance that
such funds will be available or expended.
Effective June 1, 1997, the Company acquired Computer Resources
Management, Inc. ("CRM"), a company that develops software systems for the
direct billing of telecommunications services. An aggregate of $8.5 million cash
and 650,000 shares of the Company's common stock were issued in connection with
this purchase transaction. All of the shares related to the acquisition have
been included in the weighted average shares outstanding for purposes of the
earnings per share calculations. During the third quarter of 1997, the Company
expensed $13.0 million of in-process research and development costs acquired
from the acquisition. The Company granted certain registration rights to and
entered into an employment agreement with the principal of CRM.
In September 1998, the Company acquired a 22% ownership position in PTC,
which is a privately held company headquartered in Princeton, New Jersey
specializing in comprehensive electronic bill presentment and payment services
via the Internet to financial institutions and large businesses. Through
September 30, 1999, the Company acquired additional shares of PTC common stock,
increasing the Company's ownership position to approximately 24% at September
30, 1999. The Company accounts for its investment in PTC under the equity
method. In November 1999, the Company announced that it recently signed an
agreement to increase its ownership interest in PTC to 27% with an additional
equity investment of $2.6 million. The Company also anticipates additional
equity investments in PTC as PTC positions itself for further growth.
Effective October 1, 1998, the Company acquired Expansion Systems
Corporation ("ESC"), a privately held company headquartered in Glendale,
California that develops and markets billing and registration systems to
Internet Service Providers ("ISPs") under its flagship products TOTALBILL and
INSTANTREG. An aggregate of 170,000 shares of the Company's Common Stock was
issued in connection with this transaction.
In December 1998, the Company completed the merger of Communications
Software Consultants, Inc. ("CommSoft") in consideration of 2,492,759 shares of
the Company's common stock. CommSoft was a privately held, international
software development and consulting firm specializing in the telecommunications
industry. The business combination has been accounted for as a pooling of
interests. The consolidated financial statements for periods prior to the
combination have been restated to include the accounts and results of operations
of CommSoft.
In July 1999, the Company acquired a 60% equity interest in an Internet
company located in Austin, Texas that is developing an Internet-based financial
services website focused on the credit union industry and its members. In
November 1999, the Company acquired the remaining 40% of this company through
the related acquisition of FIData, Inc., a company located in San Antonio, Texas
that provides Internet-based automated loan approval products to the financial
services industries. The total consideration for these acquisitions is
approximately $4.0 million in cash, 1,100,000 shares of the Company's common
stock and debt assumption of $0.9 million.
As of the date of this report, the Company has invested $21.7 million, and
committed an additional $2.6 million of capital resources in the Internet arena
and plans to make further significant investments of capital in Internet-related
operations over the foreseeable future. The Company will continue to review
additional strategic Internet acquisition opportunities that will complement or
enhance its existing operations.
The Company's operating cash requirements consist principally of working
capital requirements, requirements under its advance funding program, scheduled
payments of principal on its outstanding indebtedness and capital expenditures.
The Company believes that it has the ability to continue to secure long-term
equipment financing and that this ability, combined with cash flows generated
from operations and periodic borrowings under its receivable financing facility,
will be sufficient to fund capital expenditures, advance funding requirements,
working capital needs and debt repayment requirements for the foreseeable
future.
26
ADVANCE FUNDING PROGRAM AND RECEIVABLE FINANCING FACILITY
Since it generally takes 40 to 90 days to collect receivables from the
local telephone companies, customers can significantly accelerate cash receipts
by utilizing the Company's advance funding program. The Company offers
participation in this program to qualifying customers through its Advance
Payment Agreement. Under the terms of this agreement, the Company purchases the
customer's accounts receivable for an amount equal to the face amount of the
billing records submitted to the local telephone companies by the Company for
billing and collection, less certain deductions. The purchase price is remitted
by the Company to its customers in two payments.
Within five days from receiving a customer's records, an initial payment
is made to the customer based on a percentage of the value of the customer's
call records submitted to the local telephone companies. This percentage is
established by the Advance Payment Agreement and generally ranges between 50%
and 80%. The Company pays the remaining balance of the purchase price upon
collection of funds from the local telephone companies. A portion of the funds
used to make the advance payments may be borrowed under the Company's revolving
line of credit facility. The amount borrowed by the Company under this credit
facility to finance the advance funding program was $0 at September 30, 1999 and
1998.
Service fees charged to customers by the Company are recorded as Advance
Funding Program Income and are computed at a rate above the prime rate on the
amount of advances (initial payments) outstanding to a customer during the
period commencing from the date the initial payment is made until the Company
recoups the full amount of the initial payment from local telephone companies.
The rate charged to the customer by the Company is higher than the interest rate
charged to the Company, in part to cover the administrative expenses incurred in
providing this service. Borrowing costs are computed at a rate below the prime
interest rate and are based on the amount of borrowings outstanding during the
period commencing from the date the funds are borrowed until the loan is repaid
by the Company. Borrowing costs are recorded as Advance Funding Program Expense.
The result of these financing activities is the generation of a net amount of
Advance Funding Program Income that contributes to the net income of the
Company.
As part of the Advance Payment Agreement, the Company contractually
purchases the customer accounts receivable upon which funds are advanced.
Further, the customer may grant a first lien security interest in other customer
accounts and assets and will take other action as may be required to perfect the
Company's first lien security interest in such assets. Under the terms of the
credit facility agreement, the Company is obligated to repay amounts borrowed
whether or not the purchased accounts receivable are actually collected.
SEASONALITY
To some extent, the revenues and call record volumes of most customers
using the LEC billing services of the Company are affected by seasonality. For
example, the Company's direct dial long distance customers use the Company's
services primarily to bill residential accounts, which typically generate a
higher traffic volume around holidays, particularly Thanksgiving, Christmas and
New Year's Day. As a result, direct dial long distance billing revenues for the
Company's first and second fiscal quarters ending December 31 and March 31,
respectively, historically have been higher than other quarters after adjusting
for new business. The seasonal effect caused by the Company's direct dial long
distance customers has been mitigated to some extent, however, as a result of
the Company's business from operator services customers. Typically, the
Company's operator services customers experience decreased call record volumes
in the fall and winter months as pay telephone usage declines due to inclement
weather. Consequently, the Company has historically reported lower operator
services billing revenues in the first and second fiscal quarters. The Company's
software and Internet operations are not significantly affected by seasonality.
EFFECT OF INFLATION
Inflation historically has not been a material factor affecting the
Company's business. Prices charged to the Company by local telephone companies
and third-party vendors for billing, collection and transmission services have
not increased significantly during the past year. General operating expenses
such as salaries, employee benefits and occupancy costs are, however, subject to
normal inflationary pressures.
27
NEW ACCOUNTING STANDARDS
Management of the Company does not anticipate the adoption of any new
accounting standards recently issued by the authoritative bodies will have a
material impact on the Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily through its
portfolio of cash equivalents and short-term marketable securities. The Company
does not believe that it has significant exposure to market risks associated
with changing interest rates as of September 30, 1999 because the Company's
intention is to maintain a liquid portfolio to take advantage of investment
opportunities. The Company does not use derivative financial instruments in its
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company and the related
report of the Company's independent public accountants thereon are included in
this report at the page indicated.
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Report of Independent Public Accountants................................. 29
Consolidated Balance Sheets at September 30, 1999