Form 10-Q CSG SYSTEMS INTERNATIONA For: Mar 31

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended March 31, 2015

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)

 

 

9555 Maroon Circle

Englewood, Colorado 80112

(Address of principal executive offices, including zip code)

(303) 200-2000

(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   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES   x           NO   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ¨            NO   x

Shares of common stock outstanding at May 4, 2015: 32,750,066

 

 

 

 

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CSG SYSTEMS INTERNATIONAL, INC.

FORM 10-Q for the Quarter Ended March 31, 2015

INDEX

 

 

 

 

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

(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 INCOME - UNAUDITED

(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 COMPREHENSIVE INCOME (LOSS) - UNAUDITED

(in thousands)

 

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 - UNAUDITED

(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 (UNAUDITED)

 

1. GENERAL

We have prepared the accompanying unaudited condensed consolidated financial statements as of March 31, 2015 and December 31, 2014, and for the quarters ended March 31, 2015 and 2014, in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) 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 GAAP for complete financial statements. In the opinion of our management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position and operating results have been included. The unaudited Condensed Consolidated Financial Statements (the “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 (“MD&A”), contained in our Annual Report on Form 10-K for the year ended December 31, 2014 (our “2014 10-K”), filed with the SEC. The results of operations for the quarter ended March 31, 2015 are not necessarily indicative of the expected results for the entire year ending December 31, 2015.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates in Preparation of Financial Statements. The preparation of the accompanying Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our Financial Statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Cash and Cash Equivalents. We consider all highly liquid investments with original maturities of three months or less at the date of the purchase to be cash equivalents. As of March 31, 2015 and December 31, 2014, our cash equivalents consist primarily of institutional money market funds, commercial paper, and time deposits held at major banks.

As of March 31, 2015 and December 31, 2014, we had $5.0 million and $4.7 million, respectively, of restricted cash that serves to collateralize outstanding letters of credit. This restricted cash is included in cash and cash equivalents in our Condensed Consolidated Balance Sheets (“Balance Sheets” or “Balance Sheet”).

Short-term Investments and Other Financial Instruments. Our financial instruments as of March 31, 2015 and December 31, 2014 include cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and debt. Because of their short maturities, the carrying amounts of cash equivalents, accounts receivable, and accounts payable approximate their fair value.

Our short-term investments and certain of our cash equivalents are considered “available-for-sale” and are reported at fair value in our Balance Sheets, with unrealized gains and losses, net of the related income tax effect, excluded from earnings and reported in a separate component of stockholders’ equity. Realized and unrealized gains and losses were not material in any period presented.

Primarily all short-term investments held by us as of March 31, 2015 and December 31, 2014 have contractual maturities of less than two years from the time of acquisition. Our short-term investments as of March 31, 2015 and December 31, 2014 consisted almost entirely of fixed income securities. Proceeds from the sale/maturity of short-term investments for the first quarters of 2015 and 2014 were $49.5 million and $50.9 million, respectively.

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The following table represents the fair value hierarchy based upon three levels of inputs, of which Levels 1 and 2 are considered observable and Level 3 is unobservable, for our financial assets and liabilities measured at fair value (in thousands):

 

Valuation inputs used to measure the fair values of our money market funds were derived from quoted market prices. The fair values of all other financial instruments are based upon pricing provided by third-party pricing services. These prices were derived from observable market inputs.

We have chosen not to measure our debt at fair value, with changes recognized in earnings each reporting period.  The following table indicates the carrying value and estimated fair value of our debt as of the indicated periods (in thousands):

 

The fair value for our credit agreement was estimated using a discounted cash flow methodology, while the fair value for our convertible debt was estimated based upon quoted market prices or recent sales activity, both of which are considered Level 2 inputs.  See Note 4 for discussion regarding the amendment to our credit agreement.

 

Accounting Pronouncement Issued But Not Yet Effective. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606).  This ASU is a single comprehensive model which supersedes nearly all existing revenue recognition guidance under U.S. GAAP.  Under the new guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.  The ASU also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The updated accounting guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2016.  Early adoption is not permitted.  An entity may choose to adopt this ASU either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the standard.  We are currently in the process of evaluating the impact that this new guidance will have on our consolidated financial statements and our method of adoption.

    

3. LONG-LIVED ASSETS

Goodwill. The changes in the carrying amount of goodwill for the first quarter of 2015, were as follows (in thousands):

 

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Other Intangible Assets. Our intangible assets subject to ongoing amortization consist primarily of client contracts and software. As of March 31, 2015 and December 31, 2014, the carrying values of these assets were as follows (in thousands):

 

The total amortization expense related to intangible assets for the first quarters of 2015 and 2014 were $6.9 million and $8.0 million, respectively. Based on the March 31, 2015 net carrying value of our intangible assets, the estimated total amortization expense for each of the five succeeding fiscal years ending December 31 are: 2015 – $25.7 million; 2016 – $18.9 million; 2017 – $15.2 million; 2018 – $12.0 million; and 2019 – $8.3 million.

 

 

4. DEBT

Our long-term debt, as of March 31, 2015 and December 31, 2014, was as follows (in thousands):

 

2015 Credit Agreement. In February 2015, we entered into an amended and restated $350 million credit agreement with several financial institutions (the “2015 Credit Agreement”) to replace the 2012 Credit Agreement.    

 

The 2015 Credit Agreement provides borrowings in the form of:  (i) a $150 million aggregate principal five-year term loan (the “2015 Term Loan”); and (ii) a $200 million aggregate principal five-year revolving loan facility (the “2015 Revolver”).  With the $150 million proceeds from the 2015 Term Loan, we repaid the outstanding $120 million balance from term loan under the 2012 Credit Agreement, resulting in a net increase of available cash by $30 million, a portion of which was used to pay certain fees and expenses in connection with the refinancing.

 

As a result of the 2015 Credit Agreement, we have pledged assets under a security agreement in favor of a financial institution as collateral agent (the “Security Agreement”).  Under the Security Agreement, all of our domestic subsidiaries have pledged substantially all of their assets to secure the obligations under the 2015 Credit Agreement and related security agreement.

 

In conjunction with the closing of the 2015 Credit Agreement, we incurred financing costs of $2.7 million.  When combined with the remaining deferred financing costs for the 2012 Credit Agreement, financing costs of $5.9 have been deferred and are amortized to interest expense using the effective interest method over the related term of the 2015 Credit Agreement, and financing costs of $0.9 million were recorded in interest expense in the first quarter of 2015.

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2010 Convertible Notes.  Upon conversion of the 2010 Convertible Notes, we will settle our conversion obligation as follows: (i) we will pay cash for 100% of the par value of the 2010 Convertible Notes that are converted; and (ii) to the extent the value of our conversion obligation exceeds the par value, we will satisfy the remaining conversion obligation in our common stock, cash or any combination of our common stock and cash

As the result of our declaring a cash dividend in March 2015 (see Note 7), the previous conversion rate for the 2010 Convertible Notes of 42.6404 shares of our common stock for each $1,000 in principal amount of the 2010 Convertible Notes (equivalent to a conversion price of $23.45 per share of our common stock) has been adjusted to 42.8889 shares of our common stock for each $1,000 in principal amount of the 2010 Convertible Notes (equivalent to a conversion price of $23.32 per share of our common stock).

Refer to Note 5 in our 2014 10-K for disclosure of the 2010 Convertible Notes’ three contingent conversion features. As a result of the cash dividend declaration in March 2015, prior to September 1, 2016, holders of the 2010 Convertible Notes can convert their securities at any time the price of our common stock trades over $30.32 per share, or 130% of the $23.32 conversion price (previously $30.49 per share, or 130% of the $23.45 conversion price) for a specified period of time.

As of March 31, 2015, none of the contingent conversion features have been achieved, and thus, the 2010 Convertible Notes are not convertible by the holders.

 

 

5. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Warranties. We generally warrant that our solutions and related offerings will conform to published specifications, or to specifications provided in an individual client arrangement, as applicable. The typical warranty period is 90 days from the date of acceptance of the solution or offering. For certain service offerings we provide a limited warranty for the duration of the services provided. We generally warrant that services will be performed in a professional and workmanlike manner. The typical remedy for breach of warranty is to correct or replace any defective deliverable, and if not possible or practical, we will accept the return of the defective deliverable and refund the amount paid under the client arrangement that is allocable to the defective deliverable. Our contracts also generally contain limitation of damages provisions in an effort to reduce our exposure to monetary damages arising from breach of warranty claims. Historically, we have incurred minimal warranty costs, and as a result, do not maintain a warranty reserve.

Product and Services Indemnifications. Our arrangements with our clients generally include an indemnification provision that will indemnify and defend a client in actions brought against the client that claim our products and/or services infringe upon a copyright, trade secret, or valid patent. Historically, we have not incurred any significant costs related to such indemnification claims, and as a result, do not maintain a reserve for such exposure.

Claims for Company Non-performance. Our arrangements with our clients typically cap our liability for breach to a specified amount of the direct damages incurred by the client resulting from the breach. From time-to-time, these arrangements may also include provisions for possible liquidated damages or other financial remedies for our non-performance, or in the case of certain of our outsourced customer care and billing solutions, provisions for damages related to service level performance requirements. The service level performance requirements typically relate to system availability and timeliness of service delivery. As of March 31, 2015, we believe we have adequate reserves, based on our historical experience, to cover any reasonably anticipated exposure as a result of our nonperformance for any past or current arrangements with our clients.

Indemnifications Related to Officers and the Board of Directors. We have agreed to indemnify members of our Board and certain of our officers if they are named or threatened to be named as a party to any proceeding by reason of the fact that they acted in such capacity. We maintain directors’ and officers’ (D&O) insurance coverage to protect against such losses. We have not historically incurred any losses related to these types of indemnifications, and are not aware of any pending or threatened actions or claims against any officer or member of our Board. As a result, we have not recorded any liabilities related to such indemnifications as of March 31, 2015. In addition, as a result of the insurance policy coverage, we believe these indemnification agreements are not significant to our results of operations.

Legal Proceedings. From time-to-time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. We are not presently a party to any material pending or threatened legal proceedings.

 

 

 

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6. EARNINGS PER COMMON SHARE

Basic and diluted earnings per common share (“EPS”) amounts are presented on the face of the accompanying Income Statements.

No reconciliation of the basic and diluted EPS numerators is necessary as net income is used as the numerators for all periods presented.  The reconciliation of the basic and diluted EPS denominators related to the common shares is included in the following table (in thousands):

 

In March 2015, we received an initial delivery of 1.3 million shares related our accelerated stock repurchase transaction agreement which reduced our weighted average shares outstanding for purposes of calculating basic and diluted EPS for the first quarter of 2015 (see Note 7).

The 2010 Convertible Notes have a dilutive effect only in those quarterly periods in which our average stock price exceeds the current effective conversion price (see Note 4).

The Stock Warrants have a dilutive effect only in those quarterly periods in which our average stock price exceeds the exercise price of $26.68 per warrant (under the treasury stock method), and are not subject to performance vesting conditions (see Note 7).  

Potentially dilutive common shares related to non-participating unvested restricted stock excluded from the computation of diluted EPS, as the effect was antidilutive, were not material in any period presented.    

 

 

7. STOCKHOLDERS’ EQUITY AND EQUITY COMPENSATION PLANS

Stock Repurchase Program. We currently have a stock repurchase program, approved by our Board of Directors (the “Board”), authorizing us to repurchase our common stock from time-to-time as market and business conditions warrant (the “Stock Repurchase Program”). In February 2015, our Board approved a 7.5 million share increase in the number of shares authorized for repurchase under the Stock Repurchase Program, bringing the total number of shares authorized to 42.5 million.  During the first quarter of 2015 we repurchased 0.3 million shares of our common stock for $7.0 million (weighted-average price of $27.06 per share) under a Securities and Exchange Commission (“SEC”) Rule 10b5-1 Plan.  

In March 2015, we entered into an accelerated share repurchase transaction agreement (the “ASR Agreement”) with a counterparty to repurchase $50 million of our common stock.  In March 2015, we paid $50 million to the counterparty and received an initial delivery of 1.3 million shares of our outstanding common stock for an aggregate value of approximately $40 million.  The initial shares were reflected as treasury stock in the period the shares were delivered.  The remaining amount was recorded as a forward contract indexed to our common stock in additional paid in capital.  The final delivery of shares under the ASR Agreement will be based generally upon the daily volume weighted average price of our common stock during the repurchase period.  At settlement, under certain circumstances, the counterparty may be required to deliver additional shares of common stock to us, or under certain circumstances, we may be required to deliver shares of common stock or cash, at our option, to the counterparty.  Final settlement of the transactions under the ASR Agreement is expected to occur no later than December 2015.  The ASR Agreement meets all the applicable criteria for equity classification, and, therefore, is not accounted for as a derivative instrument.  

As of March 31, 2015, the total remaining number of shares available for repurchase under the Stock Repurchase Program totaled 7.3 million shares.

We did not repurchase any shares under our Stock Repurchase Program during the first quarter of 2014.

Stock Repurchases for Tax Withholdings. In addition to the above mentioned stock repurchases, during the first quarters of 2015 and 2014, we repurchased and then cancelled 0.2 million shares of common stock for $5.8 million and 0.2 million shares of common stock for $6.5 million, respectively, in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.

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Cash Dividends.  During the first quarter of 2015, the Board approved a quarterly cash dividend of $0.175 per share of common stock, totaling $5.7 million. During the first quarter of 2014, the Board approved a quarterly cash dividend of $0.150 per share of common stock, totaling $5.1 million.      

Warrants.  In 2014, in conjunction with the execution of an amendment to our current agreement with Comcast Corporation (“Comcast”), we issued stock warrants (the “Warrant Agreement”) for the right to purchase up to approximately 2.9 million shares of our common stock (the “Stock Warrants”) as an additional incentive for Comcast to migrate new customer accounts to ACP. The Stock Warrants have a 10-year term and an exercise price of $26.68 per warrant.          

As of March 31, 2015, approximately 1.0 million Stock Warrants have vested, of which approximately 0.5 million vested in January 2015.  The fair value of the 0.5 million Stock Warrants that vested in January 2015 was $3.7 million at the grant date, as determined using the Black-Scholes option-pricing model.    

Upon vesting, the Stock Warrants are recorded as a client incentive asset with the corresponding offset to stockholders’ equity.  The client incentive asset related to the Stock Warrants is amortized as a reduction in processing and related services revenues over the remaining term of the Comcast amended agreement.  As of March 31, 2015, we recorded a client incentive asset related to these Stock Warrants of $7.3 million and have amortized $0.8 million as a reduction in processing and related services revenues.  

The remaining unvested Stock Warrants will be accounted for as client incentive assets in the period the performance conditions necessary for vesting have been met.  As of March 31, 2015, none of the Stock Warrants had been exercised.

Stock-Based Awards. A summary of our unvested restricted common stock activity during the first quarter of 2015 is as follows (shares in thousands):

 

Included in the awards granted during the first quarter of 2015, are performance-based awards for 0.1 million restricted common stock shares issued to members of executive management, which vest in equal installments over three years upon meeting either pre-established financial performance objectives or pre-established stock price objectives. The performance-based awards become fully vested upon a change in control, as defined, and the subsequent involuntary termination of employment.

All other restricted common stock shares granted during the first quarter of 2015 are time-based awards, which vest annually over      four years with no restrictions other than the passage of time. Certain shares of the restricted common stock become fully vested upon a change in control, as defined, and the subsequent involuntary termination of employment.

We recorded stock-based compensation expense for the first quarters of 2015 and 2014 of $5.1 million and $3.8 million.

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this MD&A should be read in conjunction with the Financial Statements and Notes thereto included in this Form 10-Q and the audited consolidated financial statements and notes thereto in our 2014 10-K.

Forward-Looking Statements

This report contains a number of forward-looking statements relative to our future plans and our expectations concerning our business and the industries we serve.  These forward-looking statements are based on assumptions about a number of important factors, and involve risks and uncertainties that could cause actual results to differ materially from estimates contained in the forward-looking statements.  Some of the risks that are foreseen by management are outlined within Part II Item IA. Risk Factors of this report and in Part I Item 1A. Risk Factors of our 2014 10-K.  Readers are strongly encouraged to review those sections closely in conjunction with MD&A.

Company Overview

We are one of the world’s largest and most established business support solutions providers primarily serving the communications industry.  Our proven approach and solutions are based on our broad and deep experience in serving clients in the communications industry as their businesses have evolved from a single product offering to a highly complex, highly competitive, multi-product service offering.  Our approach has centered on using the best technology for the various functions required to provide world-class solutions.

Our solutions help service providers streamline and scale operations, introduce and adapt products and services to meet changing consumer demands, and address the challenges and opportunities of a dynamically evolving global business environment.  Our broad suite of solutions helps our clients improve their business operations by creating more compelling product offerings and an enhanced customer experience through more relevant and targeted interactions, while at the same time, more efficiently managing the service provider’s cost structure.  Over the years, we have focused our research and development (“R&D”) and acquisition investments on expanding our solution set to address the ever expanding needs of communications service providers to provide a differentiated, real-time, and personal experience for their consumers.  This extensive suite of solutions includes revenue management, content management and monetization, and customer interaction management platforms.  

We generate approximately 65% of our revenues from the North American cable and satellite markets, approximately 25% of our revenues from wireline and wireless communication providers, and the remainder from a variety of other verticals, such as financial services, logistics, and transportation. Additionally, during the first quarter of 2015, we generated approximately 85% of our revenues from the Americas region, approximately 11% of our revenues from the Europe, Middle East and Africa region, and approximately 4% of our revenues from the Asia Pacific region.

We are a S&P Small Cap 600 company.

Management Overview of Quarterly Results

First Quarter Highlights.  A summary of our results of operations for the first quarter of 2015, when compared to the first quarter of 2014, is as follows (in thousands, except per share amounts and percentages):  

 

 

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Revenues.  Our revenues for the first quarter of 2015 were $185.6 million, a decrease of 1% when compared to $188.0 million for the same period in 2014. The year-over-year decrease in revenues can be mainly attributed to foreign currency movements, offset to a certain degree by continued strong processing revenues.

Operating Results.  Operating income for the first quarter of 2015 was $21.9 million, or an 11.8% operating income margin percentage, compared to $20.9 million, or an 11.1% operating income margin percentage for the first quarter of 2014, with the increases a result of lower operating expenses in the first quarter of 2015, which more than offset the decrease in revenues.  

Diluted EPS.  Diluted EPS for the first quarter of 2015 was $0.28, consistent with the first quarter of 2014.  

Cash and Cash Flows.  As of March 31, 2015, we had cash, cash equivalents and short-term investments of $169.9 million, as compared to $201.8 million as of December 31, 2014, with the decrease primarily a result of the $57 million of stock repurchases under our share repurchase program during the quarter, which includes $50 million spent on the ASR Agreement executed in March 2015.  This decrease was offset by $30 million of proceeds from our debt refinancing completed in February 2015.  Our cash flows from operating activities for the first quarter of 2015 were $18.9 million.  See the Liquidity section below for further discussion of our cash flows.

Significant Client Relationships

Client Concentration.  A large percentage of our historical revenues have been generated from our three largest clients, which are Comcast, DISH Network Corporation (“DISH”), and Time Warner Cable, Inc. (“Time Warner”).  Revenues from these clients represented the following percentages of our total revenues for the indicated periods:

The percentages of net billed accounts receivable balances attributable to our largest clients as of the indicated dates were as follows:

See our 2014 10-K for additional discussion of our business relationships and contractual terms with the above mentioned significant clients.

Comcast/Time Warner/Charter Transactions.  In early 2014, Comcast announced its intent to acquire Time Warner.  In conjunction with this transaction, Comcast, Time Warner, and Charter Communications (“Charter”) announced their intention to exchange certain customer accounts amongst them.  Charter currently is our fourth largest client. In April 2015, Comcast announced it had terminated its plans to acquire Time Warner.  Had Comcast’s acquisition of Time Warner, and the related exchange of customer accounts amongst the entities proceeded, the Time Warner and Charter customer accounts, currently being processed on our platform and acquired by Comcast, would have been entitled to more favorable volume pricing terms under our Comcast agreement.  The annual effect of this more favorable pricing was estimated to be between $15 and $20 million.  As a result of this recent announcement to terminate the proposed transactions, we no longer expect the originally anticipated material changes to our revenues from these transactions.

Risk of Client Concentration.  We expect to continue to generate a significant percentage of our future revenues from our largest clients mentioned above.  There are inherent risks whenever a large percentage of total revenues are concentrated with a limited number of clients.  Should a significant client: (i) terminate or fail to renew their contracts with us, in whole or in part, for any reason; (ii) significantly reduce the number of customer accounts processed on our solutions, the price paid for our services, or the scope of services that we provide; or (iii) experience significant financial or operating difficulties, it could have a material adverse effect on our financial condition and results of operations.  

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Critical Accounting Policies

The preparation of our Financial Statements in conformity with accounting principles generally accepted in the U.S. requires us to select appropriate accounting policies, and to make judgments and estimates affecting the application of those accounting policies.  In applying our accounting policies, different business conditions or the use of different assumptions may result in materially different amounts reported in our Financial Statements.

We have identified the most critical accounting policies that affect our financial position and the results of our operations.  Those critical accounting policies were determined by considering the accounting policies that involve the most complex or subjective decisions or assessments.  The most critical accounting policies identified relate to: (i) revenue recognition; (ii) allowance for doubtful accounts receivable; (iii) impairment assessments of goodwill and other long-lived assets; (iv) income taxes; (v) business combinations and asset purchases; and (vi) loss contingencies.  These critical accounting policies, as well as our other significant accounting policies, are discussed in our 2014 10-K.

Results of Operations

Total Revenues.  Total revenues for the first quarter of 2015 were $185.6 million, a 1% decrease when compared to $188.0 million for the first quarter of 2014.  The year-over-year decrease in revenues can be mainly attributed to foreign currency movements, offset to a certain degree by continued strong processing revenues.

The components of total revenues, discussed in more detail below, are as follows (in thousands):

 

We use the location of the client as the basis of attributing revenues to individual countries.  Revenues by geographic regions for the first quarters of 2015 and 2014 were as follows (in thousands):

 

Processing and related services revenues.  Processing and related services revenues for the first quarter of 2015 increased 1% to $143.8 million, from $142.4 million for the first quarter of 2014.  The increase in processing and related services revenues is due mainly to the following key items: (i) growth in our various processing solutions and related ancillary services, including our content monetization platform; and (ii) growth in our international managed services offering.  

Additionally, amortization of our client contracts intangible assets related to investments in client contracts (reflected as a reduction of processing and related services revenues) for the first quarters of 2015 and 2014 were $1.3 million and $1.5 million, respectively.  

Software and Services Revenues.  Software and services revenues for the first quarter of 2015 decreased 9% to $22.6 million, from $24.9 million for the first quarter of 2014. The decrease in software and services revenues can be attributed to foreign currency movements, and to a lesser degree, continued extended sales cycles in our software and professional services business and continued low market demand for large transformational software and service deals, as well as the normal fluctuations in project level work completed between quarters.  

Maintenance Revenues.  Maintenance revenues for the first quarter of 2015 were $19.2 million, an 8% decrease when compared to $20.8 million generated in the first quarter of 2014. This decrease is due mainly to foreign currency movements, and to a lesser degree, timing of maintenance renewals and related revenue recognition and pricing pressures experienced on maintenance renewals.

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Total Expenses.  Our operating expenses for the first quarter of 2015 were $163.7 million, a 2% decrease when compared to $167.1 million for the first quarter of 2014, with the decrease due mainly to foreign currency movements and lower sales, general and administrative (“SG&A”) costs.  

The components of total expenses are discussed in more detail below.

Cost of Revenues.  See our 2014 10-K for a description of the types of costs that are included in the individual line items for cost of revenues.

Cost of Processing and Related Services (Exclusive of Depreciation).  The cost of processing and related services for the first quarter of 2015 increased 1%, to $69.3 million, from $68.4 million for the first quarter of 2014, reflective of the increase in processing revenues.  Total processing and related services cost as a percentage of our processing and related services revenues for the first quarters of 2015 and 2014 were relatively consistent at 48.2% and 48.1%, respectively.  

Cost of Software and Services (Exclusive of Depreciation).  The cost of software and services for the first quarter of 2015 decreased 17%, to $21.1 million, from $25.3 million for the first quarter of 2014. This decrease in cost of software and services is reflective of the lower revenues for the periods, favorable foreign currency movements, and a result of the reassignment of personnel and the related costs previously assigned internally to software and consulting projects to other projects.  

Total software and services cost as a percentage of our software and services revenues for the first quarters of 2015 and 2014 were 93.3% and 101.9%, respectively, with the level and variability of these percentages reflective of the negative impact of two large implementation projects. For the quarter ended March 31, 2014, we incurred a loss of approximately $4 million on a large software and implementation project (expected to be substantially completed in 2019) due to cost overruns. For the quarter ended March 31, 2015, we incurred a loss of approximately $5 million on another large software and services implementation project due to estimated cost overruns. This project is expected to be substantially completed in 2017.

Variability in quarterly revenues and operating results are inherent characteristics of companies that sell software licenses and perform professional services.  Our quarterly revenues for software licenses and professional services may fluctuate, depending on various factors, including the timing of executed contracts and revenue recognition, and the delivery of contracted solutions. However, the costs associated with software and professional services revenues are not subject to the same degree of variability (e.g., these costs are generally fixed in nature within a relatively short period of time), and thus, fluctuations in our cost of software and services as a percentage of our software and services revenues will likely occur between periods.  

Cost of Maintenance (Exclusive of Depreciation).  The cost of maintenance for the first quarter of 2015 increased 18%, to $9.9 million, from $8.4 million for the first quarter of 2014, with the increase mainly attributed to the reassignment of personnel and the related costs to maintenance projects from other projects.  Total cost of maintenance as a percentage of our maintenance revenues for the first quarters of 2015 and 2014 were 51.6% and 40.2%, respectively.  

R&D Expense.  R&D expense for the first quarter of 2015 was $25.7 million, relatively consistent with $25.0 million for the first quarter of 2014. As a percentage of total revenues, R&D expense was 13.9% for the first quarter of 2015 compared to 13.3% for the first quarter of 2014.  

Our R&D efforts are focused on the continued evolution of our solutions that enable service providers worldwide to provide a more personalized customer experience while turning transactions into revenues. This includes the continued investment in our business support solutions aimed at improving a providers’ time-to-market for new offerings, flexibility, scalability, and total cost of ownership.  We expect that our R&D investment activities in the near-term will be relatively consistent with previous quarters, with the level of R&D spend highly dependent upon the opportunities that we see in our markets.

SG&A Expense.  SG&A expense for the first quarter of 2015 decreased 5% to $33.4 million, from $35.3 million for the first quarter of 2014, with the decrease mainly attributed to foreign currency movements and lower sales and marketing costs.  The lower sales and marketing costs in the first quarter of 2015 reflect the financial benefits of the restructuring activities undertaken in 2014.  Additionally, it should be noted that the first quarter of 2014 SG&A expense benefited from a settlement agreement ending litigation that we had asserted against a third party for patent infringement and misappropriation of trade secrets.  In exchange for the release from the lawsuit we initiated, we recorded $3.9 million (net of a time value discount and legal costs incurred) as a reduction of SG&A expenses in that period.   

Our SG&A costs as a percentage of total revenues for the first quarters of 2015 and 2014 were 18.0% and 18.8%, respectively.

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Operating Income. Operating income and operating income margin percentages for the first quarter of 2015 was $21.9 million, or 11.8% of total revenues, compared to $20.9 million, or 11.1% of total revenues for the first quarter of 2014. The increases in operating income and operating income margin percentage are mainly due to the overall reduction in operating expenses discussed above.

Income Tax Provision.  The effective income tax rates for the first quarters of 2015 and 2014 were as follows:

 

 

For the full-year 2015 we are currently estimating an effective income tax rate of 43%, which does not include any benefit from R&D tax credits generated during the year, as they have not yet received Congressional approval.  If enacted prior to the end of the year, we would include those income tax benefits in our 2015 effective income tax rate.

 

Liquidity

Cash and Liquidity

As of March 31, 2015, our principal sources of liquidity included cash, cash equivalents, and short-term investments of $169.9 million, compared to $201.8 million as of December 31, 2014.  We generally invest our excess cash balances in low-risk, short-term investments to limit our exposure to market and credit risks.  

As part of our 2015 Credit Agreement, we have a $200 million senior secured revolving loan facility with a syndicate of financial institutions that expires in February 2020.  As of March 31, 2015, there were no borrowings outstanding on the 2015 Revolver.  The 2015 Credit Agreement contains customary affirmative covenants and financial covenants.  As of March 31, 2015, and the date of this filing, we believe that we are in compliance with the provisions of the 2015 Credit Agreement.  

Our cash, cash equivalents, and short-term investment balances as of the end of the indicated periods were located in the following geographical regions (in thousands):

 

We generally have ready access to substantially all of our cash, cash equivalents, and short-term investment balances, but may face limitations on moving cash out of certain foreign jurisdictions due to currency controls.  As of March 31, 2015, we had $5.0 million of cash restricted as to use to collateralize outstanding letters of credit.

Cash Flows From Operating Activities  

We calculate our cash flows from operating activities in accordance with GAAP, beginning with net income, adding back the impact of non-cash items or non-operating activity (e.g., depreciation, amortization, amortization of OID, impairments, deferred income taxes, stock-based compensation, etc.), and then factoring in the impact of changes in operating assets and liabilities.  See our 2014 10-K for a description of the primary uses and sources of our cash flows from operating activities.  

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Our first quarter of 2015 and 2014 net cash flows from operating activities, broken out between operations and changes in operating assets and liabilities, for the quarters ended are as follows (in thousands):

Cash flows from operating activities for the quarters ended March 31, 2015 and 2014 reflect the negative impacts of the payment of 2014 and 2013 year-end accrued employee incentive compensation. In addition, cash flows from operations for the quarter ended March 31, 2014 was negatively impacted by the increase in the accounts receivable balance primarily related to the timing around certain monthly client payments that were received after the quarter ended.

We believe the above table illustrates our ability to generate recurring quarterly cash flows from our operations, and the importance of managing our working capital items. The variations in our net cash provided by (used in) operating activities are related mostly to the changes in our operating assets and liabilities (related mostly to fluctuations in timing at quarter-end of client payments and changes in accrued expenses), and generally over longer periods of time, do not significantly impact our cash flows from operations.

Significant fluctuations in key operating assets and liabilities between 2015 and 2014 that impacted our cash flows from operating activities are as follows:

Billed Trade Accounts Receivable

Management of our billed accounts receivable is one of the primary factors in maintaining consistently strong quarterly cash flows from operating activities.  Our billed trade accounts receivable balance includes significant billings for several non-revenue items (primarily postage, sales tax, and deferred revenue items).  As a result, we evaluate our performance in collecting our accounts receivable through our calculation of days billings outstanding (“DBO”) rather than a typical days sales outstanding (“DSO”) calculation.  DBO is calculated based on the billings for the period (including non-revenue items) divided by the average monthly net trade accounts receivable balance for the period.  

Our gross and net billed trade accounts receivable and related allowance for doubtful accounts receivable (“Allowance”) as of the end of the indicated quarterly periods, and the related DBOs for the quarters then ended, are as follows (in thousands, except DBOs):

The increase in gross and net billed accounts receivable in the first quarter of 2014 is primarily related to the timing around certain recurring customer payments that were received after the quarter ended.  

As a global provider of software and professional services, a portion of our accounts receivable balance relates to clients outside the U.S.  As a result, this diversity in the geographic composition of our client base may adversely impact our DBOs as longer billing cycles (i.e., billing terms and cash collection cycles) are an inherent characteristic of international software and professional services transactions.  For example, our ability to bill (i.e., send an invoice) and collect arrangement fees may be dependent upon, among other things: (i) the completion of various client administrative matters, local country billing protocols and processes (including local cultural differences), and/or non-client administrative matters; (ii) us meeting certain contractual invoicing milestones; or (iii) the overall project status in certain situations in which we act as a subcontractor to another vendor on a project.

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Unbilled Trade Accounts Receivable

Revenue earned and recognized prior to the scheduled billing date of an item is reflected as unbilled accounts receivable.  Our unbilled accounts receivable as of the end of the indicated periods are as follows (in thousands):

 

The unbilled accounts receivable balances above are primarily the result of several transactions with various milestone and contractual billing dates which have not yet been reached.  Unbilled accounts receivable are an inherent characteristic of certain software and professional services transactions and may fluctuate between quarters, as these type of transactions typically have scheduled invoicing terms over several quarters, as well as certain milestone billing events.

Accrued Employee Compensation

Accrued employee compensation decreased $10.5 million to $40.9 million as of March 31, 2015, from $51.4 million as of December 31, 2014.  This decrease is primarily due to:  (i) the payment of 2014 employee incentive compensation that were fully accrued for at December 31, 2014, offset to a certain degree by the accrual for the 2015 employee incentive compensation; and (ii) the timing of payment of employee wages and other benefits.     

Deferred Revenue

Total deferred revenue (current and non-current) increased $6.2 million to $55.9 million as of March 31, 2015, from $49.7 million as of December 31, 2014, mainly as the result of annual recurring services that are typically billed in the first quarter of each year.

Cash Flows From Investing Activities

Our typical investing activities consist of purchases/sales of short-term investments, purchases of property and equipment, and investments in client contracts, which are discussed below.  

Purchases/Sales of Short-term Investments.  During the first quarters of 2015 and 2014, we purchased $10.1 million and $40.5 million, respectively, and sold (or had mature) $49.5 million and $50.9 million, respectively, of short-term investments. We continually evaluate the appropriate mix of our investment of excess cash balances between cash equivalents and short-term investments in order to maximize our investment returns and will likely purchase and sell additional short-term investments in the future.

Property and Equipment/Client Contracts.  Our capital expenditures for first quarters of 2015 and 2014, for property and equipment, and investments in client contracts were as follows (in thousands):

 

The property and equipment expenditures during the first quarter of 2015 consisted principally of investments in: (i) computer hardware, software, and related equipment; (ii) facilities and internal infrastructure items; and (iii) statement production equipment.

The investments in client contracts for the first quarters of 2015 and 2014 relate to the deferral of costs related to conversion/set-up services provided under long-term processing contracts.

Cash Flows From Financing Activities

Our financing activities typically consist of activities associated with our common stock and our long-term debt.  

Cash Dividends Paid on Common Stock.  During the first quarters of 2015 and 2014, we paid Board approved dividend payments totaling $5.7 million and $5.2 million, respectively.

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Repurchase of Common Stock.  During the first quarter of 2015 we repurchased approximately 0.3 million shares of our common stock under the guidelines of our Stock Repurchase Program for $7.0 million under a SEC Rule 10b5-1 Plan.  Additionally, during the first quarter of 2015, we entered into an ASR Agreement to repurchase $50 million of our common stock, which was paid to a counterparty in March 2015.  We did not make any stock repurchases during the first quarter of 2014.  

Outside of our Stock Repurchase Program, during the first quarters of 2015 and 2014, we repurchased from our employees and then cancelled approximately 0.2 million shares of our common stock during each period for $5.8 million and $6.5 million, respectively, in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.

Long-term Debt.  During the first quarter of 2015, we amended our 2012 Credit Agreement and as a result, we repaid the outstanding principal balance of $120.0 million and borrowed $150.0 million under the 2015 Credit Agreement, resulting in a net increase of available cash of $30 million.  As part of the refinancing, we paid $2.7 million of deferred financing costs.  Additionally, during the first quarters of 2015 and 2014, we made principal repayments of $1.9 million and $3.8 million, respectively.

Capital Resources

The following are the key items to consider in assessing our sources and uses of capital resources:

Current Sources of Capital Resources.

Uses/Potential Uses of Capital Resources. Below are the key items to consider in assessing our uses/potential uses of capital resources:

In February 2015, we announced an increase in our planned share repurchases of up to $150 million under our Stock Repurchase Program over the next three years.  At the same time, our Board approved a 7.5 million share increase in the number of shares authorized for repurchase under the Stock Repurchase Program, bringing the total number of shares authorized to 42.5 million.  Under our Stock Repurchase Program, we may repurchase shares in the open market or in privately negotiated transaction, including through an accelerated stock repurchase plan or under a SEC Rule 10b5-1 plan.  The actual timing and amount of the share repurchases will be dependent on then current market conditions and other business-related factors over the next three years.

In March 2015, we entered into an ASR Agreement with a counterparty to repurchase $50 million of our common stock. The final delivery of shares under the ASR Agreement will be based generally upon the daily volume weighted average price of our common stock during the repurchase period.  At settlement, under certain circumstances, the counterparty may be required to deliver additional shares of common stock to us, or under certain circumstances, we may be required to deliver shares of common stock or cash, at our option, to the counterparty.  Final settlement of the transactions under the ASR Agreement is expected to occur no later than December 2015.

As of March 31, 2015, we had 7.3 million shares authorized for repurchase remaining under our Stock Repurchase Program. Our 2015 Credit Agreement places certain limitations on our ability to repurchase our common stock. Our common stock repurchases are discussed in more detail in Note 7 to our Financial Statements.

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In 2014, in conjunction with the execution of an amendment to our current agreement with Comcast, we issued stock warrants (the “Warrant Agreement”) for the right to purchase up to approximately 2.9 million shares of our common stock (the “Stock Warrants”) as an additional incentive for Comcast to migrate new customer accounts to ACP. Once vested, Comcast may exercise the Stock Warrants and elect either physical delivery of common shares or net share settlement (cashless exercise).  Alternatively, the exercise of the Stock Warrants may be settled with cash based solely on our approval, or if Comcast were to beneficially own or control in excess of 19.99% of the common stock or voting of the Company.  As of March 31, 2015, approximately 1 million Stock Warrants have vested based on the terms of the Warrant Agreement, and none of these Stock Warrants have been exercised to date.    

In summary, we expect to continue to have material needs for capital resources going forward, as noted above. We believe that our current cash, cash equivalents and short-term investments balances and our 2015 Revolver, together with cash expected to be generated in the future from our current operating activities, will be sufficient to meet our anticipated capital resource requirements for at least the next 12 months. We also believe we could obtain additional capital through other debt sources which may be available to us if deemed appropriate.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the potential loss arising from adverse changes in market rates and prices. As of March 31, 2015, we are exposed to various market risks, including changes in interest rates, fluctuations and changes in the market value of our cash equivalents and short-term investments, and changes in foreign currency exchange rates. We have not historically entered into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk.

Market Risk Related to Long-Term Debt. The interest rate on our 2010 Convertible Notes is fixed, and thus, as it relates to our convertible debt borrowings, we are not exposed to changes in interest rates.

The interest rates under our 2015 Credit Agreement are based upon an adjusted LIBOR rate plus an applicable margin, or an alternate base rate plus an applicable margin. Refer to Note 4 to our Financial Statements for further details of our long-term debt.

A hypothetical adverse change of 10% in the March 31, 2015 adjusted LIBOR rate would not have had a material impact upon our results of operations.

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Market Risk Related to Cash Equivalents and Short-term Investments.

Our cash and cash equivalents as of March 31, 2015 and December 31, 2014 were $89.3 million and $81.7 million, respectively. Certain of our cash balances are “swept” into overnight money market accounts on a daily basis, and at times, any excess funds are invested in low-risk, somewhat longer term, cash equivalent instruments and short-term investments. Our cash equivalents are invested primarily in institutional money market funds, commercial paper, and time deposits held at major banks. We have minimal market risk for our cash and cash equivalents due to the relatively short maturities of the instruments.

Our short-term investments as of March 31, 2015 and December 31, 2014 were $80.6 million and $120.1 million, respectively. Currently, we utilize short-term investments as a means to invest our excess cash only in the U.S. The day-to-day management of our short-term investments is performed by a large financial institution in the U.S., using strict and formal investment guidelines approved by our Board. Under these guidelines, short-term investments are limited to certain acceptable investments with: (i) a maximum maturity; (ii) a maximum concentration and diversification; and (iii) a minimum acceptable credit quality. At this time, we believe we have minimal liquidity risk associated with the short-term investments included in our portfolio.

Foreign Currency Exchange Rate Risk.

Due to foreign operations around the world, our balance sheet and income statement are exposed to foreign currency exchange risk due to the fluctuations in the value of currencies in which we conduct business. While we attempt to maximize natural hedges by incurring expenses in the same currency in which we contract revenue, the related expenses for that revenue could be in one or more differing currencies than the revenue stream.

During the first quarter of 2015, we generated approximately 88% of our revenues in U.S. dollars. We expect that, in the foreseeable future, we will continue to generate a very large percentage of our revenues in U.S. dollars.

As of March 31, 2015 and December 31, 2014, the carrying amounts of our monetary assets and monetary liabilities on the books of our non-U.S. subsidiaries in currencies denominated in a currency other than the functional currency of those non-U.S. subsidiaries are as follows (in thousands, in U.S. dollar equivalents):

 

A hypothetical adverse change of 10% in the March 31, 2015 exchange rates would not have had a material impact upon our results of operations based on the monetary assets and liabilities as of March 31, 2015.

 

 

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures

As required by Rule 13a-15(b), our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation as of the end of the period covered by this report of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e). Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Internal Control Over Financial Reporting

As required by Rule 13a-15(d), our management, including the CEO and CFO, also conducted an evaluation of our internal control over financial reporting, as defined by Rule 13a-15(f), to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, the CEO and CFO concluded that there has been no such change during the quarter covered by this report.

 

 

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CSG SYSTEMS INTERNATIONAL, INC.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

From time-to-time, we are involved in litigation relating to claims arising out of our operations in the normal course of business.  We are not presently a party to any material pending or threatened legal proceedings.

 

Item 1A. Risk Factors

Following Comcast’s April 2015 announcement to terminate their acquisition of Time Warner, we have amended the following risk factors, included in Item 1A. Risk Factors in our 2014 10-K, to eliminate the language addressing the proposed acquisition of Time Warner by Comcast, and any related impact to our business:

We Derive a Significant Portion of Our Revenues From a Limited Number of Clients, and the Loss of the Business of a Significant Client Could Have a Material Adverse Effect on Our Financial Position and Results of Operations.

Over the past decade, the worldwide communications industry has experienced significant consolidation, resulting in a large percentage of the market being served by a limited number of service providers with greater size and scale, and there are possibilities of further consolidation. Consistent with this market concentration, we generate over 40% of our revenues from our three largest clients, which are (in order of size) Comcast, DISH, and Time Warner, which each individually accounted for 10% or more of our total revenues. See the Significant Client Relationships section of MD&A in our 2014 10-K for key renewal dates and a brief summary of our business relationship with these clients.

There are inherent risks whenever a large percentage of total revenues are concentrated with a limited number of clients. One such risk is that a significant client could: (i) undergo a formalized process to evaluate alternative providers for services we provide; (ii) terminate or fail to renew their contracts with us, in whole or in part for any reason; (iii) significantly reduce the number of customer accounts processed on our solutions, the price paid for our services, or the scope of services that we provide; or (iv) experience significant financial or operating difficulties. Any such development could have a material adverse effect on our financial position and results of operations and/or trading price of our common stock.

Our industry is highly competitive, and as a result, it is possible that a competitor could increase its footprint and share of customers processed at our expense or a provider could develop their own internal solutions. While our clients may incur some costs in switching to our competitors or their own internally-developed solutions, they may do so for a variety of reasons, including: (i) price; (ii) if we do not provide satisfactory solutions; or (iii) if we do not maintain favorable relationships.

We May Not Realize Our Anticipated Growth With Comcast Related to New Customer Account Migration Opportunities.

In July 2014, we entered into an expanded and extended contract with our largest client, Comcast.  The expanded contract provides the framework for Comcast to consolidate its residential business onto our billing solution.  Under the new agreement, Comcast added approximately two million residential customers onto our billing solution in late 2014.  We believe we have the opportunity to migrate up to an additional eight million Comcast customer accounts that are currently on one of our competitor’s platforms onto our solution over the next few years as part of any future standardization by Comcast of their residential business.  

Although Comcast has expressed to us their intention to consolidate their residential customer accounts to our platform, they have no financial or legal requirement to do so.  The timing of and the number of customer accounts to be migrated to CSG, if any, is at the discretion of Comcast.  There can be no assurances, therefore, as to the timing or the number of any new customer accounts migrated to us by Comcast.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information with respect to purchases of company common stock made during the first quarter of 2015 by CSG Systems International, Inc. or any “affiliated purchaser” of CSG Systems International, Inc., as defined in Rule 10b-18(a)(3) under the Exchange Act.

 

 

Item 3. Defaults Upon Senior Securities

None

 

Item 4. Mine Safety Disclosures

None

 

Item 5. Other Information

None

 

Item 6. Exhibits

The Exhibits filed or incorporated by reference herewith are as specified in the Exhibit Index.

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: May 8, 2015

 

 

 

 

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CSG SYSTEMS INTERNATIONAL, INC.

INDEX TO EXHIBITS

 

 

 

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Pages where confidential treatment has been requested are stamped “Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission,” and places where information has been redacted have been marked with (***).

 

EXHIBIT 10.10

 

 

 

 

 

___________________________________________________________________________________________

 

Dear Sir/Madam:

 

The purpose of this letter agreement (this “Confirmation”) is to confirm the terms and conditions of the Transaction entered into between Royal Bank of Canada (“RBC”) and CSG Systems International Inc. (“Counterparty”) on the Trade Date specified below (the “Transaction”). This Confirmation constitutes a “Confirmation” as referred to in the Agreement specified below.

___________________________________________________________________________________________

 

Disclosure of Agency Relationship

 

RBC has appointed as its agent, its indirect wholly-owned subsidiary, RBC Capital Markets, LLC (“RBCCM”), for purposes of conducting on RBC’s behalf, a business in privately negotiated transactions in options and other derivatives. You hereby are advised that RBC, the principal and stated counterparty in the Transactions, duly has authorized RBCCM to market, structure, negotiate, document, price, execute and hedge transactions in over-the-counter derivative products. RBCCM has full, complete and unconditional authority to undertake such activities on behalf of RBC. RBCCM acts solely as agent and has no obligation, by way of issuance, endorsement, guarantee or otherwise with respect to the performance of either party under the Transaction. The Transaction is not insured or guaranteed by RBCCM.

___________________________________________________________________________________________

 

The definitions and provisions contained in the 2002 ISDA Equity Derivatives Definitions (the “Equity Definitions,” as published by the International Swaps and Derivatives Association, Inc. (“ISDA”)) are incorporated into this Confirmation.

 

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The Transaction shall be the only transaction under the Agreement. If there exists any ISDA Master Agreement between RBC and Counterparty or any other confirmation or other agreement between RBC and Counterparty pursuant to which an ISDA Master Agreement is deemed to exist between RBC and Counterparty, then, notwithstanding anything to the contrary in such ISDA Master Agreement, confirmation or agreement or any other agreement to which RBC and Counterparty are parties, the Transaction shall not be considered a transaction under, or otherwise governed by, such existing or deemed to be existing ISDA Master Agreement.

 

If there is any inconsistency among the Agreement, this Confirmation and the Equity Definitions, the following will prevail for purposes of the Transaction in the order of precedence indicated: (i) this Confirmation; (ii) the Equity Definitions; and (iii) the Agreement.

 

 

General Terms:

 

Valuation Terms:

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Settlement Terms:

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Dividends:

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Share Adjustments:

 

Extraordinary Events:

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(a)Counterparty acknowledges and agrees that the Shares delivered on the Initial Share Delivery Date may be sold short to Counterparty. Counterparty further acknowledges and agrees that RBC may, during (i) the period from the date hereof to a date up to 5 Exchange Business Days following the Valuation Date or, if later, the Scheduled Earliest Acceleration Date, and (ii) the period from and including the first Settlement Valuation Date to and including the last Settlement Valuation Date or such earlier day as elected by RBC and communicated to Counterparty on such day (together, the “Relevant Period”), purchase Shares in connection with the Transaction, which Shares may be used to cover all or a portion of such short sale or may be delivered to Counterparty.  Such purchases will be conducted independently of Counterparty.  The timing of such purchases by RBC, the number of Shares purchased by RBC on any day, the price paid per Share pursuant to such purchases and the manner in which such purchases are made, including without limitation whether such purchases are made on any securities exchange or privately, shall be within the absolute discretion of RBC.  It is the intent of the parties that the Transaction comply with the requirements of Rule 10b5-1(c)(1)(i)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the parties agree that this Confirmation shall be interpreted to comply with the requirements of Rule 10b5-1(c).  Counterparty acknowledges and agrees that (A) Counterparty does not have, and shall not attempt to exercise, any influence over how, when or whether RBC effects any purchases of Shares in connection with the Transaction, (B) during the period beginning on (but excluding) the date of this Confirmation and ending on (and including) the last day of the Relevant Period, neither Counterparty nor its officers or employees shall, directly or indirectly, communicate any information regarding Counterparty or the Shares to any employee of RBC or its Affiliates responsible for trading the Shares in connection with the transactions contemplated hereby (the “Relevant Bank Personnel”), which persons are set forth in Annex B hereto, (C) Counterparty is entering into the Transaction in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b‑5 promulgated under the Exchange Act and (D) Counterparty will not alter or deviate from this Confirmation or enter into or alter a corresponding hedging transaction with respect to the

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Shares.  Counterparty also acknowledges and agrees that any amendment, modification or waiver of this Confirmation must be effected in accordance with the requirements for the amendment of a “plan” as defined in Rule 10b5-1(c) under the Exchange Act.  Without limiting the generality of the foregoing, any such amendment, modification or waiver shall be made in good faith and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5 under the Exchange Act, and no such amendment, modification or waiver shall be made at any time at which Counterparty or any officer or director of Counterparty is aware of any material nonpublic information regarding Counterparty or the Shares.

(b)Counterparty agrees that neither Counterparty nor any of its Affiliates or agents shall engage in any distribution (as such term is used in Regulation M under the Exchange Act) of securities of the Counterparty that would cause Regulation M to be applicable to any purchases of Shares, or any security for which the Shares are a reference security (as defined in Regulation M), by Counterparty or any of its affiliated purchasers (as defined in Regulation M) during the Relevant Period unless Counterparty has provided written notice to RBC of such distribution not later than the Scheduled Trading Day immediately preceding the first day of such distribution. Counterparty acknowledges that such notice may constitute a Regulatory Disruption.

(c)Counterparty shall, at least one day prior to the first day of the Relevant Period, notify RBC of the total number of Shares purchased in Rule 10b-18 purchases of blocks pursuant to the once-a-week block exception contained in Rule 10b-18(b)(4) by or for Counterparty or any of its affiliated purchasers during each of the four calendar weeks preceding the first day of the Relevant Period and during the calendar week in which the first day of the Relevant Period occurs (“Rule 10b-18 purchase”, “blocks” and “affiliated purchaser” each being used as defined in Rule 10b-18).

(d)During the Relevant Period, Counterparty shall (i) not make any public announcement (as defined in Rule 165(f) under the Securities Act of 1933, as amended (the “Securities Act”) of any merger, acquisition, or similar transaction involving a recapitalization relating to Counterparty (other than any such transaction in which the consideration consists solely of cash and there is no valuation period), unless such public announcement is made prior to the opening or after the close of the regular trading session on the Exchange for the Shares; (ii) promptly notify RBC following any such announcement that such announcement has been made, and (iii) promptly deliver to RBC following the making of any such announcement a certificate indicating (A) Counterparty’s average daily Rule 10b-18 purchases (as defined in Rule 10b-18) during the three full calendar months preceding the date of the announcement of such transaction and (B) Counterparty’s block purchases (as defined in Rule 10b-18) effected pursuant to paragraph (b)(4) of Rule 10b-18 during the three full calendar months preceding the date of the announcement of such transaction.  In addition, Counterparty shall promptly notify RBC of the earlier to occur of the completion of such transaction and the completion of the vote by target shareholders.  Counterparty acknowledges that any such public announcement may result in a Regulatory Disruption and may cause the Relevant Period to be suspended.  Accordingly, Counterparty acknowledges that its actions in relation to any such announcement or transaction must comply with the standards set forth in Section 3(a) to the extent applicable.  

(e)Without the prior written consent of RBC, Counterparty shall not, and shall cause its Affiliates and affiliated purchasers (each as defined in Rule 10b-18) not to, directly or indirectly (including, without limitation, by means of a cash-settled or other derivative instrument) purchase, offer to purchase, place any bid or limit order that would effect a purchase of, or commence any tender offer relating to, any Shares (or an equivalent interest, including a unit of beneficial interest in a trust or limited partnership or a depository share) or any security convertible into or exchangeable for Shares during the Relevant Period, except through RBC or an affiliate thereof.  

(a)In addition to the representations, warranties and agreements in the Agreement and those contained elsewhere herein, Counterparty represents and warrants to and for the benefit of, and agrees with, RBC as follows:

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(i)As of the Trade Date, and as of the date of any election by Counterparty of the Share Termination Alternative under (and as defined in) Section 10(a) below, none of Counterparty and its officers and directors is aware of any material nonpublic information regarding Counterparty or the Shares.

(ii)Without limiting the generality of Section 13.1 of the Equity Definitions, Counterparty acknowledges that RBC is not making any representations or warranties or taking any position or expressing any view with respect to the treatment of the Transaction under any accounting standards including ASC Topic 260, Earnings Per Share, ASC Topic 815, Derivatives and Hedging, or ASC Topic 480, Distinguishing Liabilities from Equity and ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity (or any successor issue statements) or under FASB’s Liabilities & Equity Project.

(iii)Without limiting the generality of Section 3(a)(iii) of the Agreement, Counterparty shall not take any action that would cause the Transaction to violate Rule 13e-1 or Rule 13e-4 under the Exchange Act.

(iv)Prior to the Trade Date, Counterparty shall deliver to RBC a resolution of Counterparty’s board of directors authorizing the Transaction and such other certificate or certificates as RBC shall reasonably request.  Counterparty has publicly disclosed its intention to institute a program for the acquisition of Shares.

(v)Counterparty is not entering into this Confirmation to create actual or apparent trading activity in the Shares (or any security convertible into or exchangeable for Shares) or to raise or depress or otherwise manipulate the price of the Shares (or any security convertible into or exchangeable for Shares) or otherwise in violation of the Exchange Act, and will not engage in any other securities or derivative transaction to such ends.  

(vi)Counterparty is not, and after giving effect to the transactions contemplated hereby will not be, required to register as an “investment company” as such term is defined in the Investment Company Act of 1940, as amended.

(vii)On the Trade Date, the Prepayment Date, the Initial Share Delivery Date and the Settlement Date, Counterparty is not, or will not be, “insolvent” (as such term is defined under Section 101(32) of the U.S. Bankruptcy Code (Title 11 of the United States Code) (the “Bankruptcy Code”)) and Counterparty would be able to purchase the Shares hereunder in compliance with the corporate laws of the jurisdiction of its incorporation.

(viii)To the best of the Counterparty’s actual knowledge without any investigation, no state or local (including non-U.S. jurisdictions) law, rule, regulation or regulatory order applicable to the Shares would give rise to any reporting, consent, registration or other requirement (including, without limitation, a requirement to obtain prior approval from any person or entity) as a result of RBC or its affiliates owning or holding (however defined) Shares.

(ix)[Reserved]

(x)Counterparty understands no obligations of RBC to it hereunder will be entitled to the benefit of deposit insurance and that such obligations will not be guaranteed by any affiliate of RBC or any governmental agency.

(b)Each of RBC and Counterparty agrees and represents that it is an “eligible contract participant” as defined in Section 1a(12) of the U.S. Commodity Exchange Act, as amended.

(c)Each of Counterparty and RBC acknowledges that the offer and sale of the Transaction to it is intended to be exempt from registration under the Securities Act, by virtue of Section 4(a)(2) thereof.  Accordingly,

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Each of Counterparty and RBC represents and warrants to the other party that (i) it has the financial ability to bear the economic risk of its investment in the Transaction and is able to bear a total loss of its investment, (ii) it is an “accredited investor” as that term is defined in Regulation D as promulgated under the Securities Act, (iii) it is entering into the Transaction for its own account and without a view to the distribution or resale thereof, and (iv) the assignment, transfer or other disposition of the Transaction has not been and will not be registered under the Securities Act and is restricted under this Confirmation, the Securities Act and state securities laws.

(d)Counterparty agrees and acknowledges that RBC is a “financial institution” and “financial participant”  within the meaning of Sections 101(22), 101(53C) and 101(22A) of the Bankruptcy Code.  The parties hereto further agree and acknowledge that it is the intent of the parties that (A) this Confirmation is a “securities contract,” as such term is defined in Section 741(7) of the Bankruptcy Code, with respect to which each payment and delivery hereunder or in connection herewith is a “termination value,” “payment amount” or “other transfer obligation” within the meaning of Section 362 of the Bankruptcy Code and a “settlement payment,” within the meaning of Section 546 of the Bankruptcy Code and (B) RBC is entitled to the protections afforded by, among other sections, Sections 362(b)(6), 362(o), 546(e), 548(d)(2), 555 and 561 of the Bankruptcy Code.

Counterparty acknowledges and agrees that:

(a)During the Relevant Period, RBC and its Affiliates may buy or sell Shares or other securities or buy or sell options or futures contracts or enter into swaps or other derivative securities in order to adjust its hedge position with respect to the Transaction;

(b)RBC and its Affiliates also may be active in the market for Shares other than in connection with hedging activities in relation to the Transaction;

(c)RBC shall make its own determination as to whether, when or in what manner any hedging or market activities in Counterparty’s securities shall be conducted and shall do so in a manner that it deems appropriate to hedge its price and market risk with respect to the Settlement Price and/or the VWAP Price; and

(d)Any market activities of RBC and its Affiliates with respect to Shares may affect the market price and volatility of Shares, as well as the Settlement Price and/or the VWAP Price, each in a manner that may be adverse to Counterparty.

(a)Alternative Calculations and Payment on Early Termination and on Certain Extraordinary Events.  If either party would owe the other party any amount pursuant to Sections 12.2, 12.3, 12.6, 12.7 or 12.9 of the Equity Definitions or pursuant to Section 6(d)(ii) of the Agreement (a “Payment Obligation”), Counterparty shall have the right, in its sole discretion, to satisfy or to require RBC to satisfy, as the case may be, any such Payment Obligation, in whole or in part, by the Share Termination Alternative (as defined below) by giving irrevocable telephonic notice to RBC, confirmed in writing within one Scheduled Trading Day, no later than 9:30 A.M. New York City time on the Exchange Business Day immediately following the Announcement Date, Early Termination Date or date of cancellation or termination in respect of an Extraordinary Event, as applicable (“Notice of Share Termination”); provided that if RBC would owe Counterparty the Payment Obligation and Counterparty does not elect to require RBC to satisfy such Payment Obligation by the Share Termination Alternative in whole, RBC shall have the right, in its sole discretion, to elect to satisfy any portion of such Payment Obligation that Counterparty has not so elected by the Share Termination Alternative, notwithstanding Counterparty’s failure to elect or election to the contrary; and provided further that Counterparty shall not have the right to so elect (but, for the avoidance of doubt, RBC shall have the

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right to so elect) in the event of (i) an Insolvency, a Nationalization, a Merger Event, a Tender Offer or an Acquisition Transaction, in each case, in which the consideration or proceeds to be paid to holders of Shares consists solely of cash or (ii) an Event of Default in which Counterparty is the Defaulting Party or a Termination Event in which Counterparty is the Affected Party, which Event of Default or Termination Event resulted from an event or events within Counterparty’s control.  Upon such Notice of Share Termination, the following provisions shall apply on the Scheduled Trading Day immediately following the Announcement Date, Early Termination Date or date of cancellation or termination in respect of an Extraordinary Event, as applicable, with respect to the Payment Obligation or such portion of the Payment Obligation for which the Share Termination Alternative has been elected (the “Applicable Portion”):

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(b)Equity Rights.  RBC acknowledges and agrees that this Confirmation is not intended to convey to it rights with respect to the Transaction that are senior to the claims of common stockholders in the event of Counterparty’s bankruptcy.  For the avoidance of doubt, the parties agree that the preceding sentence shall not apply at any time other than during Counterparty’s bankruptcy to any claim arising as a result of a breach by Counterparty of any of its obligations under this Confirmation or the Agreement.  For the avoidance of doubt, the parties acknowledge that this Confirmation is not secured by any collateral that would otherwise secure the obligations of Counterparty herein under or pursuant to any other agreement.

(c)Indemnification.  In the event that RBC or the Calculation Agent or any of their Affiliates becomes involved in any capacity in any action, proceeding or investigation brought by or against any person in connection with any breach (including a breach of representations) of or default under this Confirmation (or the Transactions thereunder) of the other party hereto, Counterparty shall reimburse RBC or the Calculation Agent or such Affiliate for its reasonable and documented legal and other out-of-pocket expenses (including the cost of any investigation and preparation) incurred in connection therewith within 30 days of receipt of notice of such expenses, and shall indemnify and hold RBC or the Calculation Agent or such Affiliate harmless against any losses, claims, damages or liabilities to which RBC or the Calculation Agent or such Affiliate may become subject in connection with any such action, proceeding or investigation.  If for any reason the foregoing indemnification is unavailable to RBC or the Calculation Agent or such Affiliate or insufficient to hold it harmless, then Counterparty shall contribute to the amount paid or payable by RBC or the Calculation Agent or such Affiliate as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of Counterparty and RBC or the Calculation Agent or such Affiliate with respect to such losses, claims, damages or liabilities and any other relevant equitable considerations.  The reimbursement, indemnity and contribution obligations of Counterparty under this Section 10(c) shall be in addition to any liability that Counterparty may otherwise have, shall extend upon the same terms and conditions to the partners, directors, officers, agents, employees and controlling persons (if any), as the case may be, of RBC or the Calculation Agent or such Affiliate and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of Counterparty, RBC or the Calculation Agent any such Affiliate and any such person.  Notwithstanding the foregoing, the indemnity and contribution obligations of Counterparty under this Section 6(c) shall not apply for the benefit of RBC or the Calculation Agent or such Affiliate to the extent that any losses, claims, damages, liabilities or expenses incurred by RBC or the Calculation Agent or such Affiliate result from the gross negligence or bad faith of RBC or the Calculation Agent or a breach by RBC or the Calculation Agent of any of its covenants or obligations. The foregoing provisions shall survive any termination or completion of the Transaction.

(d)Staggered Settlement.  If RBC would owe Counterparty any Shares pursuant to the “Settlement Terms” above, RBC may, by notice to Counterparty on or prior to the Settlement Date (a “Nominal Settlement Date”), elect to deliver the Shares deliverable on such Nominal Settlement Date on two or more dates (each, a “Staggered Settlement Date”) or at two or more times on the Nominal Settlement Date as follows: (i) in such notice, RBC will specify to Counterparty the related Staggered Settlement

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Dates (each of which will be on or prior to such Nominal Settlement Date) or delivery times and how it will allocate the Shares it is required to deliver under “Settlement Terms” above among the Staggered Settlement Dates or delivery times; and (ii) the aggregate number of Shares that RBC will deliver to Counterparty hereunder on all such Staggered Settlement Dates and delivery times will equal the number of Shares that RBC would otherwise be required to deliver on such Nominal Settlement Date.

(e)Transfer and Assignment.  RBC may transfer or assign its rights and obligations hereunder and under the Agreement, in whole or in part, (a) to any of its Affiliates whose obligations are guaranteed by RBC without the consent of Counterparty, or (b) to any third party of equivalent credit quality with the prior written consent of Counterparty, which consent shall not be withheld unreasonably (for the avoidance of doubt, if consenting to such transfer or assignment would cause any reasonable concern of Counterparty with respect to compliance with any legal requirements, Counterparty shall not be required to give such consent).

(f)Amendments to Equity Definitions.  The following amendments shall be made to the Equity Definitions:

(i)Section 11.2(a) of the Equity Definitions is hereby amended by deleting the words “a diluting or concentrative effect on the theoretical value of the relevant Shares” and replacing them with the words “a material economic effect on the relevant Transaction”;

(ii)The first sentence of Section 11.2(c) of the Equity Definitions, prior to clause (A) thereof, is hereby amended to read as follows: ‘(c) If “Calculation Agent Adjustment” is specified as the Method of Adjustment in the related Confirmation of a Share Option Transaction or Share Forward Transaction, then following the announcement or occurrence of any Potential Adjustment Event, the Calculation Agent will determine whether such Potential Adjustment Event has a material economic effect on the Transaction and, if so, will (i) make appropriate adjustment(s), if any, to any one or more of:’ and the portion of such sentence immediately preceding clause (ii) thereof is hereby amended by deleting the words “diluting or concentrative” and the words “(provided that no adjustments will be made to account solely for changes in volatility, expected dividends, stock loan rate or liquidity relative to the relevant Shares)” and replacing such latter phrase with the words “(and, for the avoidance of doubt, adjustments may be made to account solely for changes in volatility, stock loan rate or liquidity relative to the relevant Shares, but not for any event that is based on (a) an observable market, other than the market for Counterparty’s own stock or (b) an observable index, other than an index calculated measured solely by reference to Counterparty’s own operations )”;

(iii)Section 11.2(e)(vii) of the Equity Definitions is hereby amended by deleting the words “diluting or concentrative effect on the theoretical value of the relevant Shares” and replacing them with the words “is the result of a corporate event involving the Issuer or its securities that has a material economic effect of the Transaction or”; and adding the phrase “or the relevant Transaction; provided that such event is not based on (a) an observable market, other than the market for Counterparty’s own stock or (b) an observable index, other than an index calculated measured solely by reference to the Counterparty’s own operations” at the end of the sentence;

(iv)Section 12.6(a)(ii) of the Equity Definitions is hereby amended by (1) deleting from the fourth line thereof the word “or” after the word “official” and inserting a comma therefor, and (2) deleting the semi-colon at the end of subsection (B) thereof and inserting the following words therefor “or (C) at RBC’s option, the occurrence of any of the events specified in Section 5(a)(vii) (1) through (9) of the ISDA Master Agreement with respect to that Issuer”;

(v)Section 12.9(b)(iv) of the Equity Definitions is hereby amended by (A) deleting (1) subsection (A) in its entirety, (2) the phrase “or (B)” following subsection (A) and (3) the phrase “in each case” in subsection (B); and (B) deleting the phrase “neither the Non-Hedging

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Party nor the Lending Party lends Shares in the amount of the Hedging Shares or” in the penultimate sentence; and

(vi)Section 12.9(b)(v) of the Equity Definitions is hereby amended by (1) inserting the following words “; provided that the Non-Hedging Party may make such election only if the Non-Hedging Party represents and warrants to the Hedging Party in writing on the date it notifies the Hedging Party of such election that, as of such date, the Non-Hedging Party is not aware of any material non-public information concerning the Shares and is making such election in good faith and not as part of a plan or scheme to evade compliance with the federal securities laws” at the end of second sentence and (2) deleting clause (X) in the final sentence.

(g)No Netting and Set-off.  Each party waives any and all rights it may have to set off obligations arising under the Agreement and the Transaction against other obligations between the parties, whether arising under any other agreement, applicable law or otherwise.

(h)Disclosure.  Effective from the date of commencement of discussions concerning the Transaction, Counterparty and each of its employees, representatives, or other agents may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the Transaction and all materials of any kind (including opinions or other tax analyses) that are provided to Counterparty relating to such tax treatment and tax structure.

(i)Designation by RBC.  Notwithstanding any other provision in this Confirmation to the contrary requiring or allowing RBC to purchase, sell, receive or deliver any Shares or other securities to or from Counterparty, RBC (the “Designator”) may designate any of its Affiliates (the “Designee”) to deliver or take delivery, as the case may be, and otherwise perform its obligations to deliver, if any, or take delivery of, as the case may be, any such Shares or other securities in respect of the Transaction, and the Designee may assume such obligations, if any.  Such designation shall not relieve the Designator of any of its obligations, if any, hereunder. Notwithstanding the previous sentence, if the Designee shall have performed the obligations, if any, of the Designator hereunder, then the Designator shall be discharged of its obligations, if any, to Counterparty to the extent of such performance.

(j)Right to Extend.  RBC may postpone or add, in whole or in part, any date of valuation, averaging or delivery to the extent RBC reasonably determines in good faith that such postponement or addition is necessary or appropriate to preserve RBC’s commercially reasonable hedging or hedge unwind activity hereunder in light of existing liquidity conditions in the cash market, the stock loan market or other relevant market.

(k)Termination Currency.  The Termination Currency shall be USD.

(l)Wall Street Transparency and Accountability Act.  In connection with Section 739 of the Wall Street Transparency and Accountability Act of 2010 (“WSTAA”), the parties hereby agree that neither the enactment of WSTAA (or any statute containing any legal certainty provision similar to Section 739 of the WSTAA) or any regulation under the WSTAA (or any such statute), nor any requirement under WSTAA (or any statute containing any legal certainty provision similar to Section 739 of the WSTAA) or an amendment made by WSTAA (or any such statute), shall limit or otherwise impair either party’s otherwise applicable rights to terminate, renegotiate, modify, amend or supplement this Confirmation or the Agreement, as applicable, arising from a termination event, force majeure, illegality, increased costs, regulatory change or similar event under this Confirmation, the Equity Definitions incorporated herein, or the Agreement (including, but not limited to, rights arising from Change in Law, Hedging Disruption, Increased Cost of Hedging or Illegality (as defined in the Agreement)).

(m)Additional Termination Event.  It shall constitute an Additional Termination Event with respect to which the Transaction shall be the sole Affected Transaction, Counterparty shall be the sole Affected Party and RBC shall be the party entitled to designate an Early Termination Date pursuant to Section 6(b) of the Agreement if, at any time during the Relevant Period, the price per Share on the Exchange, as

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determined by the Calculation Agent, is at or below the Threshold Price (as provided in Annex B to this Confirmation).

(n)RBC Maximum Share Delivery.  Notwithstanding anything to the contrary in this Confirmation, in no event shall RBC be required to deliver any Shares, or any Shares or other securities comprising Alternative Delivery Units, in respect of the Transaction in excess of the Maximum Number of Shares set forth in Annex B.

(o)Delivery of Cash. For the avoidance of doubt, other than payment of the Prepayment Amount by Counterparty, nothing in this Confirmation shall be interpreted as requiring Counterparty to cash settle the Transaction, except in circumstances where cash settlement is within Counterparty’s control (including, without limitation, where Counterparty timely elects not to receive or deliver Alternative Delivery Units in accordance with Section 6(a)) or in those circumstances in which holders of the Shares would also receive cash.

 

 

 

 

 

 

 

 

 

 

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EACH PARTY HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHTS TO TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS CONFIRMATION OR THE TRANSACTION CONTEMPLATED HEREBY.

12. Confidentiality. Each party agrees, and agrees to cause its affiliates, subsidiaries, officers and directors, to keep this Confirmation and the terms of the Transaction confidential and not to disclose this Confirmation or the terms of the Transaction to any third party except as required by law, rule or regulation of any governmental authority, court or self-regulatory agency and except Counterparty may disclose all or any portion of this Confirmation and the terms of the Transaction in its sole discretion.

 

 

 

 

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Please confirm your agreement to be bound by the terms stated herein by executing the copy of this Confirmation enclosed for that purpose and returning it to us by mail or facsimile transmission to the address for Notices indicated above.

 

 

 

 

 

 

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SC1:3793656.2B

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ANNEX A

COUNTERPARTY SETTLEMENT PROVISIONS

 

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(b)As of or prior to the date of delivery, Counterparty shall enter into a customary and reasonable confidentiality agreement with RBC and any potential purchaser of any such Shares from RBC (or any affiliate of RBC designated by RBC) identified by RBC, and each such person shall be, subject to execution of a reasonably satisfactory confidentiality agreement with Counterparty, afforded a commercially reasonable opportunity to conduct a due diligence investigation with respect to Counterparty customary in scope for private placements of equity securities (including, without limitation, the right to have made available to them for inspection financial and other records, pertinent corporate documents and other information reasonably requested by them).

(c)As of the date of delivery, Counterparty shall enter into an agreement (a “Private Placement Agreement”) with RBC (or any affiliate of RBC designated by RBC) in connection with the private placement of such Shares by Counterparty to RBC (or any such affiliate) and the private resale of such shares by RBC (or any such affiliate), substantially similar to private placement purchase agreements customary for private placements of equity securities of similar size by similar issuers, in form and substance commercially reasonably satisfactory to RBC and Counterparty, which Private Placement Agreement shall include, without limitation, provisions substantially similar to those contained in such private placement purchase agreements relating to the indemnification of, and contribution in connection with the liability of, RBC and its affiliates, and shall provide for the payment by Counterparty of all commercially reasonable fees and expenses in connection with such resale, including all commercially reasonable fees and expenses of counsel for RBC, and, to the extent such private placement agreement requires the delivery of further documentation, to use best efforts to deliver such documentation so long as it is appropriate for a private placement of similar size,

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and shall contain representations, warranties and agreements of Counterparty necessary to establish and maintain the availability of an exemption from the registration requirements of the Securities Act for such resales.

 

(d)Counterparty shall not take or cause to be taken any action that would make unavailable either (i) the exemption set forth in Section 4(a)(2) of the Securities Act for the sale of any Restricted Payment Shares or Make-Whole Payment Shares by Counterparty to RBC or (ii) all exemptions from the registration requirements of the Securities Act for resales of Restricted Payment Shares and Make-Whole Payment Shares by the RBC (or an affiliate of RBC).

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ANNEX B

 

 

B-1

Pages where confidential treatment has been requested are stamped “Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission,” and places where information has been redacted have been marked with (***).

Exhibit 10.22N

 

FOURTEENTH AMENDMENT

TO THE

CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT

BETWEEN

CSG SYSTEMS, INC.

AND

COMCAST CABLE COMMUNICATIONS MANAGEMENT, LLC

 

This FOURTEENTH Amendment (the “Amendment”) is made by and between CSG Systems, Inc. (“CSG”) and Comcast Cable Communications Management, LLC (“Customer”). The Effective Date of this Amendment is the date last signed below (the “Amendment Effective Date”).  CSG and Customer entered into a certain CSG Master Subscriber Management Agreement (CSG document #2501940) effective March 1, 2013 (the “Agreement”) and now desire to amend the Agreement in accordance with the terms and conditions set forth in this Amendment. If the terms and conditions set forth in this Amendment shall be in conflict with the Agreement, the terms and conditions of this Amendment shall control. Any terms in initial capital letters or all capital letters used as a defined term but not defined in this Amendment shall have the meaning set forth in the Agreement. Upon execution of this Amendment by the parties, any subsequent reference to the Agreement between the parties shall mean the Agreement as amended by this Amendment. Except as amended by this Amendment, the terms and conditions set forth in the Agreement shall continue in full force and effect according to their terms.

 

CSG and Customer agree to the following:

 

 

 

Note 1: Design, development and implementation services and lead times will be set forth in a mutually agreeable Statement of Work.

 

The fees set forth in the fee table above are subject to increase pursuant to Section 5.4, Adjustment to Fees, of the Agreement.

 

IN WITNESS WHEREOF the parties hereto have caused this Amendment to be executed by their duly authorized representatives.

 

 

Pages where confidential treatment has been requested are stamped “Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission,” and places where information has been redacted have been marked with (***).

Exhibit 10.22O

FIFTEENTH AMENDMENT

TO THE

CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT

BETWEEN

CSG SYSTEMS, INC.

AND

COMCAST CABLE COMMUNICATIONS MANAGEMENT, LLC

 

 

This FIFTEENTH AMENDMENT (the “Amendment”) is made by and between CSG Systems, Inc. (“CSG”) and Comcast Cable Communications Management, LLC (“Customer”). The Effective Date of this Amendment is the date last signed below.  CSG and Customer entered into a certain CSG Master Subscriber Management System Agreement (CSG document #2501940) with an effective date of March 1, 2013 (the “Agreement”) and now desire to amend the Agreement in accordance with the terms and conditions set forth in this Amendment. If the terms and conditions set forth in this Amendment shall be in conflict with the Agreement, the terms and conditions of this Amendment shall control. Any terms in initial capital letters or all capital letters used as a defined term but not defined in this Amendment shall have the meaning set forth in the Agreement. Upon execution of this Amendment by the Parties, any subsequent reference to the Agreement between the Parties shall mean the Agreement as amended by this Amendment. Except as amended by this Amendment, the terms and conditions set forth in the Agreement shall continue in full force and effect according to their terms.

 

CSG and Customer agree to the following:

 

 

 

Note 1: Design, development, implementation services, lead times and fees for the initial deployment of the QA Refresh Solution are set forth in the delivered SOW (CSG document #2505232) to be covered under ************* ***** or ****** ******* ********** ***** whichever is applicable.

Note 2: Solution Support and Maintenance will commence after the deployment of the QA Refresh Solution. The ******* Solution Support and Maintenance Fee is due to CSG ** ******* *** **** ***** the QA Refresh Solution is provided, with (i) the ***** ******* Solution Support and Maintenance Fee to be invoiced ** ** *** **** *** ** ******* ******** ** **** ********* ** *** ** ******** ** ********** **** *** QA Refresh Solution and ********* ** ******** and (ii) subsequent ******* Solution Support and Maintenance Fees to be invoiced as of the *********** **** ** *** **** **** ******* ********** ** ******** and Maintenance Fee is invoiced.  In consideration of Customer’s payment of the Solution Support and Maintenance Fee, Customer will receive ******** ******* *** *********** ** *** ***** (*) *** ************.  For clarification, CSG will invoice Customer for the period of ***** ** **** ******* ******** ** **** ** *** ******* *** ******* ***********  *** *********** can be refreshed with production configuration and up to ******-**** ******** (******) ******** *** *****.  The plan is to refresh **** ** *** ***** (*) ************ **** * *******.

Note 3:  Notwithstanding the limitation in Section 3.4(d) of the Agreement to utilize ****** ******* ********** *** *********** ******** pursuant to duly executed Statements of Work, the parties agree after **** ** **** **** ****** ******* ********** (to the extent available due to lack of use or amendment to the Agreement) may be utilized to satisfy the ******* Solution Support and Maintenance Fee due for the QA Refresh Solution.  Customer acknowledges that the use and application of ****** ******* ********** is strictly limited to satisfaction of the Solution Support and Maintenance Fee (and, if and as specified in an SOW or LOA, additional Solution Support hours) for the QA Refresh Solution, and ****** ******* ********** may not be applied against any future enhancement or changes to the QA Refresh Solution or any other Product or Service provided or performed by CSG absent an agreement duly executed by each of Customer and CSG.  For clarification, in the event the Parties amend the Agreement to no longer provide for ****** ******* **********, Customer shall pay the ******* Solution Support and Maintenance Fee as provided herein.  In the event the foregoing occurs subsequent to the date of the ***** ****** ******* ** ******* ****, Customer shall be responsible for payment of the ******* **** ** * ******** ***** **** *** ********* **** ** ** ********* ** *** ****** ******* ********** *****.

Note 4:  Provided ****** ******* ********** is available as of the invoice of the ******* Solution Support and Maintenance Fee, after **** ** **** ****** ******* ********** (as available pursuant to Section 3.4(b) of the Agreement) will be applied

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Exhibit 10.22O

 

against and be deemed to pay the Solution Support and Maintenance Fee as of such invoice date.  In the event the ****** ******* ********** is amended during the Term of the Agreement, the current Solution Support and Maintenance Fee (subject to Note 6) will utilize **** ******** (*****) ****** ******* ********** *****.  If ****** ******* ********** is not available at the time the Solution Support and Maintenance Fee is deemed invoiced as per Note 3 above (i.e., Customer has otherwise fully utilized ****** ******* ********** amounts received by CSG for the current ******** **** as of the invoice date or the Parties have amended the Agreement removing the provision and requirements of ****** ******* **********), then Customer shall pay CSG the amount of any such shortfall.  If such shortfall occurs in any ***** ***** **** *** **** ***** of a ******** ****, the additional amount paid by Customer shall be deemed an ******* ******* ** *** **** ****** ******* ********** ******* *******, and Customer’s next ******* ****** ******* ********** payment shall be reduced by the amount of such prior *****’* ********** *******.  If, however, such shortfall occurs in the **** ***** ** * ******** ****, the additional amount paid by Customer shall be deemed a **** ******* ** ******** ** ******* ************ ** *** ******** ******* *** *********** ***, and shall not be applied against or reduce any ****** ******* ********** *** *** ******* *** *** **** ******** ****.  If as of any invoice date of the Solution Support and Maintenance Fee (and/or any overage fees per Note 3 above) ****** ******* ********** has been terminated in accordance with the Agreement, Customer agrees to pay all invoiced fees in accordance with Section 5.2 of the Agreement.  For clarification, in the event the Parties amend the Agreement to no longer provide for ****** ******* **********, Customer shall pay the ******* ******** ******* *** *********** *** as provided herein.  In the event the foregoing occurs subsequent to the date of the ***** ****** ******* ** ******* ****, Customer shall be responsible for payment of the ******* **** ** * ******** ***** **** *** ********* **** ** ** ********* ** the ****** ******* ********** *****.

Note 5:  The fees set forth in the fee table above are subject to increase pursuant to Section 5.4, Adjustment to Fees, of the Agreement.

 

IN WITNESS WHEREOF the parties hereto have caused this Amendment to be executed by their duly authorized representatives.

 

 

 

Pages where confidential treatment has been requested are stamped “Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission,” and places where information has been redacted have been marked with (***).

Exhibit 10.24AP

 

NINETY-FIFTH AMENDMENT

OF THE

CSG MASTER SUBSCRIBER MANAGEMENT SYSTEM AGREEMENT

BETWEEN

CSG SYSTEMS, INC.

AND

TIME WARNER CABLE INC.

 

This Ninety-fifth Amendment (the “Amendment”) is made by and between CSG Systems, Inc., a Delaware corporation (“CSG”), and Time Warner Cable Inc. (“TWC”).  CSG and TWC entered into a certain CSG Master Subscriber Management System Agreement executed March 13, 2003, and effective as of April 1, 2003, as amended (the “Agreement”), and now desire to further amend the Agreement in accordance with the terms and conditions set forth in this Amendment.  If the terms and conditions set forth in this Amendment shall be in conflict with the Agreement, the terms and conditions of this Amendment shall control.  Any terms in initial capital letters or all capital letters used as a defined term but not defined in this Amendment shall have the meaning set forth in the Agreement.  Upon execution of this Amendment by the parties, any subsequent reference to the Agreement between the parties shall mean the Agreement as amended by this Amendment.  Except as amended by this Amendment, the terms and conditions set forth in the Agreement shall continue in full force and effect according to their terms.

 

CSG and TWC agree to the following as of the Effective Date (as defined below):

 

 

CSG shall perform the design and development services for the user interface and implementation of the E911 Enhancement pursuant to that certain Statement of Work between CSG and TWC (CSG document no. 4101309) (the "SOW").  In addition, following implementation of the E911 Enhancement and commencing immediately following Acceptance (as defined in the SOW) of such E911 Enhancement by TWC, CSG shall host and provide Support Services for the E911 Enhancement.  In addition, CSG shall provide up to ****** (**) ***** of support per ***** (the "Support Hours") for the E911 Enhancement (the "E911 Enhancement Support Services") for the ******** Recurring Support Fee specified in Section 2 below, as follows:

 

 

 

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Exhibit 10.24AP

 

 

 

Note 1: Design, development, and implementation of the E911 Enhancement as set forth in that certain Statement of Work (CSG document no. 4101309) by and between TWC and CSG (the “SOW”).

Note 2: Notwithstanding anything in the Agreement to the contrary, the Annually Recurring Support Fee is subject to increase pursuant to Section 5.4 of the Agreement commencing in ****.

Note 3: CSG shall provide Support Services for the E911 Enhancement; problems shall be reported and resolved, in accordance with the priority levels set forth in Section II. of Schedule H of the Agreement.  Support Services shall commence after ********** (as defined in the SOW) by TWC of the E911 Enhancement.  Support Services shall include up to ****** (**) ***** ******* for E911 Enhancement Support Services; any unused Support Hours in any ***** shall accumulate during the ****-******* ******** ******* and may be used by TWC for E911 Enhancement Support Services during such ******** *******; any Support Hours not used within the respective ******** ******* will *** ** ******* **** ** *** ********** ******; any E911 Enhancement Support Services requested by TWC which CSG anticipates will be too substantial to be performed within TWC’s accrued Support Hours, will be submitted to TWC in the form of a quote with estimated hours and fees (at TWC's ****-******* ********* ******** ***), and such work shall be subject to a separate mutually agreed upon Statement of Work.  For avoidance of doubt, any E911 Enhancement Support Services exceeding TWC’s ******* Support Hours and/or accrued Support Hours during the then-current ******** ******* may be billed to TWC only if such additional hours are documented in a mutually agreed Statement of Work.  CSG shall notify TWC when ****** (**%) of the Support Hours for the E911 Enhancement Support Services have been exhausted in any given *****.

Note 4: CSG will host the E911 Enhancement on the CSG hardware used for the OAAT services and hosting described in that certain Fifty-seventh Amendment executed by the parties, effective as of December 21, 2011 (CSG document no. 2309497) (the "OAAT Amendment"), at ** ********** ******* ****; provided, however, that in the event, TWC discontinues use of such OAAT services and hosting, CSG’s hosting of the E911 Enhancement hereunder shall be subject to the parties mutually agreeing in writing to reasonable hosting fees for such hosting services.  In the event CSG and TWC are unable to mutually agree on hosting fees within ****** (**) **** of TWC’s discontinuance of the OAAT services and hosting, CSG may discontinue the hosting and availability of the E911 Enhancement upon ****** (**) days' prior written notice to TWC.

 

 

THIS AMENDMENT is executed and effective as of the day and year last signed below (“Effective Date”).

 

 

2

 

Pages where confidential treatment has been requested are stamped “Confidential Treatment Requested and the Redacted Material has been separately filed with the Commission,” and places where information has been redacted have been marked with (***).

Exhibit 10.24AQ

 

SECOND AMENDMENT

TO THE

AMENDED AND RESTATED PROCESSING AND PRODUCTION SERVICES AGREEMENT

BETWEEN

CSG SYSTEMS, INC.

AND

TIME WARNER CABLE ENTERPRISES LLC

 

This Second Amendment (the “Amendment”) is made by and between CSG Systems, Inc., a Delaware corporation (“CSG”), and Time Warner Cable Enterprises LLC (“TWC”).  CSG and TWC entered into a certain Amended and Restated Processing and Production Services Agreement effective April 30, 2014, as amended (CSG document no. 2505411) (the “Agreement”), and now desire to further amend the Agreement in accordance with the terms and conditions set forth in this Amendment.  If the terms and conditions set forth in this Amendment shall be in conflict with the Agreement, the terms and conditions of this Amendment shall control.  Upon execution of this Amendment by each of CSG and TWC, the effective date of this Amendment is January 1, 2015 (the "Effective Date").  Any terms in initial capital letters or all capital letters used as a defined term but not defined in this Amendment shall have the meaning set forth in the Agreement.  Upon execution of this Amendment by the parties, any subsequent reference to the Agreement between the parties shall mean the Agreement as amended by this Amendment.  Except as amended by this Amendment, the terms and conditions set forth in the Agreement shall continue in full force and effect according to its terms.

 

CSG and TWC agree as follows:

 

 

 

IN WITNESS WHEREOF the parties hereto have caused this Amendment to be executed by their duly authorized representatives as of the date of each signature, effective as of the Effective Date.

 

 

 

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Exhibit 10.24AQ

EXHIBIT a

 

SmartColor***********

 

 

See attached.

 

 

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Exhibit 10.24AQ

 

 

 

EXHIBIT 31.01

CERTIFICATIONS PURSUANT TO

SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Peter E. Kalan, certify that:

 

 

EXHIBIT 31.02

CERTIFICATIONS PURSUANT TO

SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Randy R. Wiese, certify that:

 

 

 

EXHIBIT 32.01

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with the Quarterly Report on Form 10-Q (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title 18 of the United States Code.

Peter E. Kalan, the Chief Executive Officer and Randy R. Wiese, the Chief Financial Officer of CSG Systems International Inc., each certifies that, to the best of his knowledge:

May 8, 2015

/s/ Peter E. Kalan

Peter E. Kalan

President and Chief Executive Officer

May 8, 2015

/s/ Randy R. Wiese

Randy R. Wiese

Executive Vice President and Chief Financial Officer