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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2002

OR

For the transition period from                   to                  

Commission file number 0-27512

CSG SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

7887 East Belleview, Suite 1000
Englewood, Colorado 80111
(Address of principal executive offices, including zip code)

(303) 796-2850
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YES x NO o

Shares of common stock outstanding at November 11, 2002: 51,695,685.

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CSG SYSTEMS INTERNATIONAL, INC.

FORM 10-Q For the Quarter Ended September 30, 2002

INDEX

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CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.      GENERAL

The accompanying unaudited condensed consolidated financial statements at September 30, 2002 and December 31, 2001, and for the three and nine months ended September 30, 2002 and 2001, have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information, and pursuant to the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the financial position and operating results have been included. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, filed with the SEC (the “Company’s 2001 10-K”). The results of operations for the three and nine months ended September 30, 2002, are not necessarily indicative of the expected results for the entire year ending December 31, 2002.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Postage. The Company passes through to its clients the cost of postage that is incurred on behalf of those clients, and typically requires an advance payment on expected postage costs. These advance payments are included in “client deposits” in the accompanying Condensed Consolidated Balance Sheets and are classified as current liabilities regardless of the contract period. The Company nets the cost of postage against the postage reimbursements, and includes the net amount in processing and related services revenues. The Company has concluded that net treatment of these revenues is appropriate as the Company: (i) generally has little or no credit risk with regard to postage, as the Company requires postage deposits from its clients based on contractual arrangements prior to the mailing of customer statements; (ii) has no discretion over the supplier of postal delivery services; and (iii) is not the primary obligor in the postal delivery service. The total cost of postage incurred on behalf of clients that has been netted against processing and related services revenues for the three months ended September 30, 2002 and 2001 was $36.9 million and $30.9 million, respectively, and for the nine months ended September 30, 2002 and 2001 was $102.1 million and $87.7 million, respectively.

Revenue recognition. As a result of the Kenan Business acquisition (see Note 6), certain of the Company’s software arrangements involve significant production, modification or customization of the software being licensed. As a result, revenues related to these software arrangements are recognized over the course of these arrangements under the percentage-of-completion method of accounting in conformity with: (i) American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” (“SOP 97-2”); (ii) Accounting Research Bulletin (ARB) No. 45, “Long Term Construction Type Contracts” (“ARB 45”); and (iii) SOP 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts” (“SOP 81-1”). Under the percentage-of-completion method of accounting, software license and professional services revenues are recognized as work is performed. The Company typically uses hours performed on the arrangements as the basis to determine the percentage of the work completed. The use of the percentage-of-completion method of revenue recognition requires the Company to make estimates of percentage of project completion. Changes in estimates may result in revisions to revenue recognized in the period in which the revisions are determined. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are determinable. Client payments and billed amounts due from clients in excess of revenue recognized are recorded as deferred revenue. Revenue recognized prior to the scheduled billing date is recorded as unbilled accounts

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receivable. Software arrangements that do not involve significant production, modification or customization of the software being sold are accounted for in accordance with: (i) SOP 97-2; (ii) SOP 98-9, “Software Revenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”); and (iii) SEC Staff Accounting Bulletin No. 101, “Revenue Recognition” (“SAB 101”).

Revenue from professional services billed on a time and materials basis is recognized as the services are performed and amounts due from customers are deemed collectible and are contractually non-refundable. Revenue from fixed price long-term contracts is recognized on the percentage-of-completion method of accounting (as described above) for individual contracts using hours completed as the basis to determine the percentage of the work completed. In instances when the work performed on fixed price agreements is of relatively short duration, or if the Company is unable to make sufficiently accurate estimates of hours to be incurred at the outset of the arrangement, the Company uses the completed contract method of accounting whereby revenue is recognized when the work is completed.

Stock-Based Compensation. The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations, and follows the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).

Reclassification. As a result of the Kenan Business acquisition, the Company’s maintenance and professional services revenues have increased and now exceed certain reporting materiality thresholds. As a result, the Company has included separate captions for maintenance revenue and professional services revenue in the accompanying Condensed Consolidated Statements of Income, as well as separate captions for cost of software and maintenance revenues, and cost of professional services revenue. These items were previously combined with software revenue and the cost of software revenue. The Company does not differentiate between cost of software and cost of maintenance revenues, and therefore, such costs are reported on a combined basis. All prior periods have been reclassified to conform to the September 30, 2002 presentation.

3.      STOCKHOLDERS’ EQUITY

Stock Repurchase Program. In August 1999, the Company’s Board of Directors approved a stock repurchase program which authorized the Company at its discretion to purchase up to a total of 5.0 million shares of its Common Stock from time-to-time as market and business conditions warrant. In September 2001, the Board of Directors amended the program to authorize the Company to purchase up to a total of 10.0 million shares. The quarterly activity for year-to-date September 30, 2002, and since the inception of the stock repurchase program in 1999 is as follows (in thousands, except per share amounts):

At September 30, 2002, the total remaining number of shares available for repurchase under the program totaled approximately 3.7 million shares. Upon acquisition, the repurchased shares have been held as treasury shares.

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2001 Stock Incentive Plan. In September 2001, the Company’s Board of Directors adopted the 2001 Incentive Stock Plan (the “2001 Plan”) whereby 750,000 shares of the Company’s Common Stock were initially reserved for issuance to eligible employees of the Company in the form of nonqualified stock options, stock appreciation rights, stock bonus awards, restricted stock awards, or performance unit awards. In January 2002 and August 2002, the Board of Directors approved an increase of shares reserved for issuance under the 2001 Plan to 2,500,000 and 3,000,000, respectively.

Restricted Stock Grants. During the third quarter of 2002, the Company cancelled options for 2,475,000 shares of the Company’s Common Stock held by key members of management (principally, members of executive management) in a fair value exchange for 715,415 shares of restricted stock, of which 444,582 shares were issued in August 2002, with the remaining 270,833 shares expected to be issued in January 2003. The cancelled stock options in excess of the number of restricted stock grants were returned to the pool of stock options available for future grants. The cancelled stock options had exercise prices substantially greater than the Company's stock price as of the date of the exchange.

Of the restricted stock shares granted, 110,000 of the shares vest 100% one year from the date of the grant, and the remaining 334,582 shares vest 25% annually over the next four years. The Company accounted for the restricted stock grants as fixed awards, and recorded deferred employee compensation (a component of stockholders’ equity) of approximately $5.3 million (weighted-average price of $11.96 per share) as of the grant date. The deferred employee compensation will be amortized to compensation expense on a straight-line basis over the vesting periods of the restricted stock. Compensation expense recognized during the third quarter of 2002 related to these awards was approximately $0.2 million.

The Company issued 444,582 shares of treasury stock to fulfill the restricted stock grants, as opposed to issuing new shares. The difference between the carrying value of the treasury stock issued of approximately $13.8 million (weighted-average price per share of $31.11) and the deferred employee compensation of approximately $5.3 million, or approximately $8.5 million, was recorded as a reduction to accumulated earnings.

As discussed above, the Company intends to issue the remaining 270,833 restricted stock shares in January 2003. Until such shares are issued, an employment agreement, which provides for certain contingent cash bonus rights to a key member of management, will remain in effect. The bonus rights granted in the agreement have attributes similar to a stock appreciation right expected to be settled in the Company’s stock, and as a result, the Company has accounted for this agreement as a variable stock award. Compensation expense recognized during the third quarter of 2002 related to this award was approximately $0.1 million. Compensation expense will become fixed (based on the Company’s stock price at the date of the grant) when the restricted stock shares are granted in January 2003, but will vary until that time.

In conjunction with the issuance of the restricted stock and related cancellation of stock options discussed above, certain other key members of management were offered similar arrangements for certain of their outstanding stock options, but the offers were declined by those individuals. Approximately 500,000 stock options that were subject to the offer of cancellation are now subject to variable accounting until the date the options are exercised, forfeited, or expire unexercised. The exercise prices of the stock options range from approximately $27 to $58 per share, with an overall weighted-average exercise price per share of approximately $35. The Company did not recognize any compensation expense during the third quarter of 2002 related to these stock options under variable accounting as the exercise prices for all of these stock options was substantially higher than the Company’s stock price as of September 30, 2002.

Stock Option Modifications. During the third quarter of 2002, the Company modified the terms of approximately 584,000 outstanding stock options held by key members of management (principally, members other than executive management) to include a provision which allows for full vesting of the stock options upon a change in control of the Company. Unless such an event occurs, the stock options will continue to vest 25% annually over a four-year period, as set forth in the original terms of the option agreements. As of the date of these modifications, the exercise prices of the stock options was substantially higher than the Company’s stock price. As a result, no current or future compensation expense related to these stock options modifications will be recorded.

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Stock Option Grants. During the third quarter of 2002, the Company granted approximately 800,000 stock options to various employees (excludes members of executive management). The stock options vest 25% annually over a four-year period, and were granted with an exercise price equal to the fair market value of the Company’s stock as of the date of the grant. As a result, no current or future compensation expense related to these stock options will be recorded.

A summary of the stock options issued under the Company’s various stock incentive plans and changes during the nine months ended September 30, 2002, are as follows. See the Company’s 2001 10-K for additional discussions of the Company’s stock incentive plans and the activity in those plans.