TIDMBILL
RNS Number : 6661P
Billing Services Group Limited
30 March 2009
Not for release, publication or distribution, in whole or in part, in, into or
from any jurisdiction where to do so would constitute a violation of the
relevant laws of such jurisdiction.
March 30, 2009
Billing Services Group Limited
("BSG" or the "Company")
Audited results for the year ended 31 December 2008
SOLID PERFORMANCE CREATES SOUND PLATFORM FOR CURRENT YEAR
BSG, a leading provider of clearing, settlement, payment and financial risk
management solutions to the telecommunications industry, today announces its
audited results for the twelve months ended 31 December 2008.
Financial Highlights
Note: Unless otherwise indicated, the 2007 revenue and EBITDA figures below
exclude the results of the wireless business, which was sold in December 2007
and is accordingly treated as a "discontinued operation" in the accompanying
financial statements. Net income in 2007, however, includes the results of
discontinued operations, under applicable accounting rules.
* Turnover grew by 12% to $142.6 million (2007: $127.5 million).
* EBITDA(1) increased by 23% to $37.2 million (2007: $30.2 million). Excluding
corporate overhead expenses, EBITDA was $41.2 million (2007: $37.5 million).
* Income from continuing operations was $7.9 million (2007: Loss of $6.7 million).
* Net income of $7.9 million or $0.028 per share (2007: $27.4 million or $0.098
per share) was composed of the following:
+--------+--------------+-----+--------+--------+--------------+--+---------+--+-----------+
| $ millions | | | | | 2008 | | 2007 |
+-----------------------+-----+--------+--------+-----------------+---------+--+-----------+
| | | | | | | | |
+--------+--------------------+--------+--------+-----------------+---------+--+-----------+
| Net income (loss) from continuing operations | | $ 7.9 | | $ |
| | | | | (6.7) |
+--------------------------------------------------------------+--+---------+--+-----------+
| Net income from discontinued operations | - | | 5.5 |
+-----------------------------------------------------------------+---------+--+-----------+
| Gain on disposal of wireless business | | - | | 28.6 |
+-----------------------------------------------+-----------------+---------+--+-----------+
| | Total net income | | $ 7.9 | | $ 27.4 |
| | | | | | |
+--------+--------------+-----+--------+--------+--------------+--+---------+--+-----------+
* The Company reduced long-term debt by $18.9 million, or 17%, to $93.6 million
(31 December 2007: $112.5 million), inclusive of all unamortized original issue
discount.
(1)EBITDA (a non-GAAP measure) is computed as earnings before interest expense,
income taxes, depreciation, amortization and other non-cash and/or non-recurring
expenses.
Operational Highlights
* Gained $10.7 million of incremental revenue from enhanced billing services, both
through aggressive recruitment of new customers and volume increases from
historical customers.
* Reduced corporate overhead expenses by $3.3 million as a result of the planned
transition and separation of several senior managers.
Current Trading
* Year-to-date results are in line with expectations.
Commenting on the results, Pat Heneghan, Non-Executive Chairman, said:
"I am pleased to report a solid performance amid economic turbulence.
We have benefited from our tightly focused approach and prudent cost management,
as well from strong growth in our customers' enhanced service offerings, and we
have been able to use our robust cash flow aggressively to pay down a
significant portion of outstanding debt.
Trading to date in 2009 has remained in line with expectations, and we believe
this will be another year of satisfactory performance."
ENQUIRIES:
+----------------------------------------------+---------------------------------+
| Billing Services Group Limited | +1 210 949 7000 |
| Gregory Carter | |
| Norman M Phipps | |
| | |
+----------------------------------------------+---------------------------------+
| Evolution Securities Limited | +44 (0)20 7071 4300 |
| Stuart Andrews | |
| | |
+----------------------------------------------+---------------------------------+
| The Hogarth Partnership | +44 (0)20 7357 9477 |
| Julian Walker | |
+----------------------------------------------+---------------------------------+
NOTE TO EDITORS:
BSG (www.bsgclearing.com) was admitted to the AiM market of the London Stock
Exchange in June 2005 and trades under the symbol BILL. The Company's operating
subsidiary, BSG Clearing Solutions, is the leading provider of third party
clearinghouse services for the North American telecommunications industry. In
addition to the core clearing business, BSG is fast becoming the company of
choice for specialized risk management and credit card processing services
specifically designed for communications providers and e-commerce merchants.
Chief Executive's Statement
As I conclude my first year as Chief Executive Officer, I am extremely proud of
the success our team achieved in 2008. Despite a troubled economy and
accompanying competitive pressures, we
* increased group turnover by 12% through aggressive sales efforts;
* achieved a $3.3 million reduction in corporate overhead expenses through
rationalizing our management structure;
* generated a 23% increase in EBITDA; and
* reduced indebtedness by $18.9 million to $93.6 million, inclusive of all
unamortized original issue discount.
Our success in 2008 reflects a strategy focused on offering high quality
clearinghouse services to the North American telecommunications industry. This
is an industry which we understand, in which we have established ourselves, over
the past two decades, as the leading payment service provider and which knows us
for technological sophistication, efficiency and integrity.
While our core business was largely responsible for the growth in 2008, modest
gains were also achieved in our complementary payment services such as credit
card processing, risk management and Bill2Phone(TM). Bill2Phone(TM) was selected
by a high-profile global communications company to place end-user technical
support charges on the local telephone bill. We remain confident that this
payment alternative will continue to gain attention and acceptance in the
markets we serve, although we do not expect a material financial contribution in
2009.
Current Trading and Prospects
We anticipate that a small percentage of the $10.7 million incremental revenue
recorded in 2008 for enhanced billing services will discontinue in 2009 due to
the short life cycles of the customers' underlying products. We are actively
managing this process, but taking a prudent view, expect a modest reduction in
turnover, and consequently earnings, in the current financial year. We otherwise
expect another satisfactory performance from other components of our business in
2009, and maintain our focus on sales and operations, expense reduction, rapid
debt amortization and all other means to enhance shareholder value.
The Company's trading activities to date in 2009 are in line with management
expectations, and we anticipate achieving another satisfactory performance by
year end.
Gregory Carter
Chief Executive Officer
FINANCIAL REVIEW
Note: Unless otherwise indicated, the 2007 revenue and EBITDA figures below
exclude the results of the wireless business, which was sold in December 2007
and is accordingly treated as a "discontinued operation" in the accompanying
financial statements. Net income in 2007, however, includes the results of
discontinued operations, under applicable accounting rules.
Financial Review of the Twelve Months Ended 31 December 2008
BSG's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The financial
statements should be read in conjunction with the notes incorporated in the
audited financial statements.
Certain Terms
Operating Revenues. North American revenues are derived primarily from fees
charged to wireline service providers for data clearing, financial settlement,
information management, payment and financial risk management, third party
verification and customer service functions.
Cost of Services and Gross Profit. BSG's cost of services primarily includes
fees charged by local exchange carriers ("LECs") for billing and collection
services. Such fees are assessed for each record submitted and for each bill
rendered to end-user customers. BSG charges its customers a negotiated fee for
LEC services. Accordingly, gross profit generated is generally dependent upon
transaction volume, processing fees charged per transaction and any differential
between the LEC fees charged to customers by BSG and the related fees charged to
BSG by LECs.
Cash Operating Expenses. Cash operating expenses include all selling,
marketing, customer service, facilities and administrative costs (including
payroll and related expenses) incurred in support of operations and settled
through the payment of cash.
Depreciation and Amortization. Depreciation expense applies to software,
furniture and fixtures, telecommunications and computer equipment. Amortization
expense relates to definite-lived intangible assets that are amortized in
accordance with SFAS No. 142 "Goodwill and Other Intangible Assets." These
assets consist primarily of contracts with both our customers and the LECs. The
assets are depreciated or amortized over their respective useful lives. In
addition, deferred finance fees are amortized over the term of the related
loans.
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA").
Earnings before interest expense, income taxes, depreciation and amortization, a
non-GAAP metric, is a measurement of profitability often used by investors and
lenders. EBITDA excludes non-cash charges and non-recurring expenses.
Comparison of Results for Year Ended 31 December 2008 to Year Ended 31 December
2007
Operating Revenues. Total revenues of $142.6 million in 2008 were $15.1 million,
or 12%, higher than the $127.5 million of revenues recorded during the year
ended December 31, 2007. The increase in revenues resulted primarily from $10.7
million of year-over-year growth in enhanced billing transaction revenue as well
as LEC rate increases across major geographic areas.
Cost of Services and Gross Profit. The Company's cost of services in 2008 was
$82.6 million, compared to $72.6 million in 2007. The $10.0 million, or 14%,
increase in cost of services reflected higher billing and collection charges
from LECs on expanded transaction volumes related to enhanced services and to
higher unit fees for most LEC services across major geographic areas. The
Company's gross profit was $60.0 million in 2008, compared to $54.9 million in
2007. The Company's gross profit margin in 2008 was 42.1%, compared to 43.1% in
2007. The 1.0 percentage point decrease resulted from a change in revenue
components with proportionately more revenue arising from service offerings with
lower gross margins.
Recurring Cash Operating Expenses. Cash operating expenses were $22.8 million in
2008, compared to $24.7 million in 2007. The $1.9 million, or 8%, improvement
largely resulted from a $3.3 million reduction in corporate overhead costs,
offset by increases in compensation and other non-corporate costs. Cash
operating expenses for corporate overhead were $4.0 million in 2008 and $7.3
million in 2007.
Earnings Before Interest, Taxes, Depreciation, Amortization and Other Non-Cash
and Non-Recurring Expenses ("EBITDA"). The Company generated $37.2 million of
EBITDA in 2008, compared to $30.2 million in 2007. Excluding corporate overhead
expenses, EBITDA was $41.2 million in 2008, compared to $37.5 million in 2007.
Depreciation and Amortization Expense.Depreciation and amortization expense in
2008 totaled $13.7 million, compared to $12.8 million in 2007. The $0.9 million
increase resulted from additional depreciation on assets placed into service
during 2008 and additional amortization of intangibles within a previously
acquired entity. Goodwill was not impaired in either period; however, the
Company made adjustments in both periods to reduce goodwill in connection with
adjustments to liabilities recorded in a previous acquisition, net of related
income taxes. Goodwill was accordingly reduced by $5.3 million in 2008 and $3.6
million in 2007.
FTC Settlement Costs. During 2007, the Company recorded a $5.6 million expense
related to litigation initiated by the U.S. Federal Trade Commission. The
litigation was finalized in 2008 without additional expense. The expense
recorded in 2007 reflects both the settlement amount and related legal expenses.
Due to its non-recurring nature, this expense is not included as a deduction to
earnings for purposes of computing EBITDA.
Impairment Loss. In 2008, the Company recognized a $0.1 million impairment
charge on internally developed software. In 2007, the Company recognized a
comparable $1.3 million charge. Due to their non-recurring nature, these
expenses are not included as deductions to earnings for purposes of computing
EBITDA.
Restructuring Expense. During 2008, the Company recorded $2.8 million of
restructuring charges related to a cost reduction program. Restructuring charges
consisted primarily of severance and related compensation costs paid or reserved
for terminated employees. In 2007, the Company reversed $0.4 million of
restructuring expense based on actual expenditures compared to reserves at
December 31, 2006. Neither the 2008 expenses nor the 2007 reversals are included
as deductions or additions to earnings for purposes of computing EBITDA.
Stock-Based Compensation Expense. Stock-based compensation expense in 2008 was
$0.2 million, compared to $1.4 million in 2007. The reduction in expense in 2008
resulted from (i) the issuance of new options with a substantially lower fair
market value at the grant date than options issued in prior periods; and (ii)
the expiration of options owned by terminated employees. The expense is a
non-cash charge, and it is not included as a deduction to earnings for purposes
of computing EBITDA.
Interest Expense. Interest expense was $10.4 million in 2008, compared to $13.0
million in 2007. Interest expense includes cash payments of interest,
amortization of original issue discount, amortization of deferred finance fees
and debt extinguishment costs. Cash expense in 2008 was $9.1 million, compared
to $11.9 million in 2007. The $2.8 million reduction resulted from lower market
interest rates and lower outstanding debt balances.
Settlement and Mark-to-Market of Derivatives. The Company borrows funds on a
floating rate basis, typically related to the London Interbank Offered Rate
("LIBOR"). As required by its credit agreement, the Company is obligated to
enter into interest rate swap contracts which have the effect of fixing the
interest rate on a portion of outstanding debt. In 2008, the Company incurred a
loss of $0.8 million related to a decline in fair market value of certain
interest rate swap contracts. In 2007, the Company recorded a $3.2 million loss
related to the cancellation of interest rate swap contracts or a decline in
their fair market value. Due to their non-operational nature, the charges in
both periods are not included as deductions to earnings for purposes of
computing EBITDA.
Write-off of Deferred Finance Costs. In 2007, the Company wrote off $3.0
million of deferred finance costs incurred in connection with debt arranged in
2006. Because the cash payment associated with the deferred finance costs was
made in the year the debt was arranged, the write-off is not included as a
deduction to earnings for purposes of computing EBITDA.
Changes in Cash and Working Capital. The Company's unrestricted cash balance
at 31 December 2008 was $27.4 million, compared to $33.1 million at 31 December
2007. The Company's working capital position (net of funded debt) at 31 December
2008 was $7.4 million, compared to $1.2 million at 31 December 2007. The Company
can operate with a small or even negative working capital position, because a
significant portion of its current liabilities would require payment over time,
typically over an 18-month period, only if customers were to reduce
significantly the volume of business done with the Company or terminate their
relationships.
Capital Expenditures. During 2008, the Company recorded $2.8 million of capital
expenditures. Capital expenditures are related to the costs of ongoing software
development projects, purchases of telecommunications and computer equipment and
capitalized interest. Capital expenditures totaled $4.3 million in 2007. The
$1.5 million reduction in capital expenditures during 2008 is largely
attributable to substantial hardware and software purchases made by the Company
in 2007.
Compliance with Credit Agreement Covenants
The Company was in compliance with all covenants under its credit agreement
during 2008.
Cash Flow for the Year Ended 31 December 2008
Cash flow from operating activities. Net cash provided by operating activities
was $6.1 million, largely attributable to $9.3 million of amortization of
intangibles, $7.9 million of net income, a $4.7 million decrease in income taxes
receivable, $4.3 million of depreciation, a $1.8 million increase in trade
accounts payable and $1.4 million of amortization of deferred finance costs,
offset by a $14.4 million decrease in third-party payables, a $5.9 million
decrease in accrued liabilities, a $1.5 million increase in accounts receivable,
a $0.9 million reduction in the provision of deferred taxes and a $0.9 million
decrease in other liabilities.
Cash flow from investing activities. Net cash used in investing activities was
$1.1 million. Net cash used included $2.8 million of capital expenditures offset
by a $1.7 million reduction in advances to customers for purchased receivables.
Cash flow from financing activities. Cash used in financing activities was $10.8
million. Net cash used largely reflected $18.7 million in payments and purchases
on long-term debt (to retire $18.9 million of debt at face value), offset by a
$7.9 million reduction in restricted cash.
**************
A copy of this statement, along with the consolidated financial statements of
Billing Services Group Limited for the years ended December 31, 2008 and 2007
may be found on the Company's website (www.bsgclearing.com) under "AiM Rule 26,"
"Annual Reports & Accounts."
A copy of this statement is also available from BSG's Nominated Advisor at the
address below.
Billing Services Group Limited
c/o Evolution Securities Limited
100 Wood Street
London EC2V 7AN
United Kingdom
This report contains certain "forward-looking" statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this report, the words "anticipate,"
"believe," "estimate," "expect" and "intend" and words or phrases of similar
import, as they relate to the Company or its subsidiaries or Company management,
are intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitation, competitive factors, general economic conditions,
customer relations, relationships with vendors, interest rates, foreign exchange
rates, litigation, governmental regulation and supervision, seasonality, product
introductions and acceptance, technological change, changes in industry
practices, onetime events and other factors described herein and in other
announcements made by the Company. Based upon changing conditions, should any
one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking
statements.
Billing Services Group Limited
Consolidated Balance Sheets
(In thousands, except shares)
+-----------------------------------------------------+-------------+------------+
| | December 31 |
+-----------------------------------------------------+--------------------------+
| | 2008 | 2007 |
+-----------------------------------------------------+-------------+------------+
| Assets | | |
+-----------------------------------------------------+-------------+------------+
| Current assets: | | |
+-----------------------------------------------------+-------------+------------+
| Cash and cash equivalents | $ | $ |
| | 27,354 | 33,129 |
+-----------------------------------------------------+-------------+------------+
| Restricted cash | - | 7,858 |
+-----------------------------------------------------+-------------+------------+
| Accounts receivable | 22,188 | 20,664 |
+-----------------------------------------------------+-------------+------------+
| Purchased receivables | 18,259 | 19,932 |
+-----------------------------------------------------+-------------+------------+
| Income tax receivable | - | 3,414 |
+-----------------------------------------------------+-------------+------------+
| Prepaid expenses and other | 535 | 649 |
| current assets | | |
+-----------------------------------------------------+-------------+------------+
| Deferred taxes - current | 3,752 | 2,534 |
+-----------------------------------------------------+-------------+------------+
| Total current assets | 72,088 | 88,180 |
+-----------------------------------------------------+-------------+------------+
| | | |
+-----------------------------------------------------+-------------+------------+
| Property, equipment and software | 35,352 | 32,683 |
+-----------------------------------------------------+-------------+------------+
| Less accumulated depreciation and | 14,710 | 10,387 |
| amortization | | |
+-----------------------------------------------------+-------------+------------+
| Net property, equipment and software | 20,642 | 22,296 |
+-----------------------------------------------------+-------------+------------+
| | | |
+-----------------------------------------------------+-------------+------------+
| Deferred finance costs, net of accumulated | 971 | 1,336 |
| amortization of $375 | | |
| and $10 at December 31, 2008 and 2007, | | |
| respectively | | |
+-----------------------------------------------------+-------------+------------+
| Intangible assets, net of accumulated | 51,453 | 60,794 |
| amortization of $42,322 and | | |
| $32,981 at December 31, 2008 and 2007, | | |
| respectively | | |
+-----------------------------------------------------+-------------+------------+
| Goodwill | 34,739 | 40,063 |
+-----------------------------------------------------+-------------+------------+
| Other assets | 534 | 408 |
+-----------------------------------------------------+-------------+------------+
| Total assets | $ | $ |
| | 180,427 | 213,077 |
+-----------------------------------------------------+-------------+------------+
Billing Services Group Limited
Consolidated Balance Sheets (continued)
(In thousands, except shares)
+------------------------------------------------------+---------------------+---------------------+
| | December 31 |
+------------------------------------------------------+-------------------------------------------+
| | 2008 | 2007 |
+------------------------------------------------------+---------------------+---------------------+
| Liabilities and shareholders' equity | | |
+------------------------------------------------------+---------------------+---------------------+
| Current liabilities: | | |
+------------------------------------------------------+---------------------+---------------------+
| Trade accounts payable | $ | $ |
| | 13,409 | 11,665 |
+------------------------------------------------------+---------------------+---------------------+
| Third-party payables | 45,247 | 59,655 |
+------------------------------------------------------+---------------------+---------------------+
| Accrued liabilities | 4,923 | 15,701 |
+------------------------------------------------------+---------------------+---------------------+
| Income tax payable | 1,064 | - |
+------------------------------------------------------+---------------------+---------------------+
| Current portion of long-term debt | 8,562 | 11,250 |
+------------------------------------------------------+---------------------+---------------------+
| Total current liabilities | 73,205 | 98,271 |
+------------------------------------------------------+---------------------+---------------------+
| | | |
+------------------------------------------------------+---------------------+---------------------+
| Long-term debt, net of current portion and | 81,769 | 96,783 |
| unamortized original | | |
| issue discount of $3,273 and $4,467 at | | |
| December 31, 2008 and | | |
| 2007, respectively | | |
+------------------------------------------------------+---------------------+---------------------+
| Deferred taxes - noncurrent | 5,428 | 7,385 |
+------------------------------------------------------+---------------------+---------------------+
| Other liabilities | 11,362 | 7,470 |
+------------------------------------------------------+---------------------+---------------------+
| Total liabilities | 171,764 | 209,909 |
+------------------------------------------------------+---------------------+---------------------+
| | | |
+------------------------------------------------------+---------------------+---------------------+
| Commitments and contingencies | | |
+------------------------------------------------------+---------------------+---------------------+
| | | |
+------------------------------------------------------+---------------------+---------------------+
| Shareholders' equity: | | |
+------------------------------------------------------+---------------------+---------------------+
| Common stock, $0.59446 par value; | 166,368 | 166,368 |
| 350,000,000 shares | | |
| authorized and 279,863,248 | | |
| shares issued and outstanding | | |
| at December 31, 2008 and 2007 | | |
+------------------------------------------------------+---------------------+---------------------+
| Additional paid-in capital | (174,611) | (174,824) |
| (deficit) | | |
+------------------------------------------------------+---------------------+---------------------+
| Retained earnings | 19,538 | 11,677 |
+------------------------------------------------------+---------------------+---------------------+
| Accumulated other comprehensive | (2,632) | (53) |
| loss | | |
+------------------------------------------------------+---------------------+---------------------+
| Total shareholders' equity | 8,663 | 3,168 |
+------------------------------------------------------+---------------------+---------------------+
| Total liabilities and shareholders' equity | $ | $ |
| | 180,427 | 213,077 |
+------------------------------------------------------+---------------------+---------------------+
See accompanying notes.
Billing Services Group Limited
Consolidated Statements of Operations
(In thousands, except per share amounts)
+-------------------------------------------------+---------------------------+-------------------------+
| | Years Ended December 31 |
+-------------------------------------------------+-----------------------------------------------------+
| | 2008 | 2007 |
+-------------------------------------------------+---------------------------+-------------------------+
| | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Operating revenues | $ | $ |
| | 142,611 | 127,494 |
+-------------------------------------------------+---------------------------+-------------------------+
| Cost of services | 82,635 | 72,583 |
+-------------------------------------------------+---------------------------+-------------------------+
| Gross profit | 59,976 | 54,911 |
+-------------------------------------------------+---------------------------+-------------------------+
| | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Selling, general, and administrative | 22,769 | 24,662 |
| expenses | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Depreciation and amortization expense | 13,664 | 12,802 |
+-------------------------------------------------+---------------------------+-------------------------+
| FTC settlement costs | - | 5,564 |
+-------------------------------------------------+---------------------------+-------------------------+
| Impairment loss | 120 | 1,307 |
+-------------------------------------------------+---------------------------+-------------------------+
| Restructuring expense | 2,808 | (402) |
+-------------------------------------------------+---------------------------+-------------------------+
| Stock-based compensation expense | 213 | 1,388 |
+-------------------------------------------------+---------------------------+-------------------------+
| Other nonrecurring expenses | 182 | (34) |
+-------------------------------------------------+---------------------------+-------------------------+
| Operating income | 20,220 | 9,624 |
+-------------------------------------------------+---------------------------+-------------------------+
| | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Other income (expense): | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Interest expense, net of $99 | (10,354) | (12,971) |
| and $146 | | |
| capitalized in 2008 and | | |
| 2007, respectively | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Settlement and mark-to-market | (813) | (3,217) |
| of derivatives | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Write-off of deferred finance | - | (2,954) |
| costs | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Interest income | 1,626 | 2,182 |
+-------------------------------------------------+---------------------------+-------------------------+
| Equity in loss from | - | (1,230) |
| investment | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Other income (expense), net | 1,777 | (235) |
+-------------------------------------------------+---------------------------+-------------------------+
| Total other expense, net | (7,764) | (18,425) |
+-------------------------------------------------+---------------------------+-------------------------+
| | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Income (loss) from continuing | 12,456 | (8,801) |
| operations before income taxes | | |
+-------------------------------------------------+---------------------------+-------------------------+
| | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Income tax expense (benefit) | 4,595 | (2,092) |
+-------------------------------------------------+---------------------------+-------------------------+
| Income (loss) from continuing | 7,861 | (6,709) |
| operations | | |
+-------------------------------------------------+---------------------------+-------------------------+
| | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Discontinued operations: | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Income from operations of BSG | - | 5,507 |
| Luxembourg | | |
| (net of tax expense of $0 | | |
| and $470 in 2008 and 2007, | | |
| respectively) | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Gain on disposal (net of | - | 28,568 |
| taxes of $-0-) | | |
+-------------------------------------------------+---------------------------+-------------------------+
| Net income | | $ |
| | $ 7,861 | 27,366 |
+-------------------------------------------------+---------------------------+-------------------------+
Billing Services Group Limited
Consolidated Statements of Operations (continued)
(In thousands, except per share amounts)
+-------------------------------------------------+---------------+-------------------------+
| | Years Ended December 31 |
+-------------------------------------------------+-----------------------------------------+
| | 2008 | 2007 |
+-------------------------------------------------+---------------+-------------------------+
| | | |
+-------------------------------------------------+---------------+-------------------------+
| Net income (loss) per basic and | | |
| diluted share: | | |
+-------------------------------------------------+---------------+-------------------------+
| Continuing operations | $ | $ |
| | 0.028 | (0.024) |
+-------------------------------------------------+---------------+-------------------------+
| Discontinued operations | - | 0.122 |
+-------------------------------------------------+---------------+-------------------------+
| Net income per share | $ | $ |
| | 0.028 | 0.098 |
+-------------------------------------------------+---------------+-------------------------+
| | | |
+-------------------------------------------------+---------------+-------------------------+
| Weighted-average shares outstanding | 279,863 | 279,863 |
+-------------------------------------------------+---------------+-------------------------+
See accompanying notes.
Billing Services Group Limited
Consolidated Statements of Changes in Shareholders' Equity
(In thousands)
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| | Number of | Common | Additional | Retained | Accumulated | Total |
| | Shares | Stock | Paid-In | Earnings (Deficit) | Other Comprehensive | |
| | | | Capital | | Income (Loss) | |
| | | | (Deficit) | | | |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| | | | | | | |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Shareholders' equity, December 31, 2006 | 279,863 | $ 279,863 | $ (171,471) | $ (15,689) | $ 11,203 | $ 103,906 |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Reduction in par value | - | (113,495) | 113,495 | - | - | - |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Stock-based compensation expense recognized in earnings | - | - | 1,388 | - | - | 1,388 |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Distribution in the form of a reduction of capital | - | - | (118,236) | - | - | (118,236) |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Translation adjustment | - | - | - | - | 10,086 | 10,086 |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Transfer of cumulative other comprehensive loss related to translation gains and FASB Statement 158 of BSG Luxembourg | - | - | - | - | (21,169) | (21,169) |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Net income | - | - | - | 27,366 | - | 27,366 |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Derivative loss, net of taxes of $92 | - | - | - | - | (173) | (173) |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Total comprehensive income | | | | | | 16,110 |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Shareholders' equity, December 31, 2007 | 279,863 | 166,368 | (174,824) | 11,677 | (53) | 3,168 |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Stock-based compensation expense recognized in earnings | - | - | 213 | - | - | 213 |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Translation adjustment | - | - | - | - | 9 | 9 |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Net income | - | - | - | 7,861 | - | 7,861 |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Derivative loss, net of taxes of $1,395 | - | - | - | - | (2,588) | (2,588) |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Total comprehensive income | | | | | | 5,282 |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
| Shareholders' equity, December 31, 2008 | 279,863 | $ 166,368 | $ (174,611) | $ 19,538 | $ (2,632) | $ 8,663 |
+-----------------------------------------------------------------------------------------------------------------------+-----------+---------------+--------------------+-------------------------+------------------------+--------------+
See accompanying notes.
Billing Services Group Limited
Consolidated Statements of Cash Flows
(In thousands)
+--------------------------------------------------+--------------------------+--------------------------+
| | Years Ended December 31 |
+--------------------------------------------------+-----------------------------------------------------+
| | 2008 | 2007 |
+--------------------------------------------------+--------------------------+--------------------------+
| Operating activities | | |
+--------------------------------------------------+--------------------------+--------------------------+
| Net income | $ | $ |
| | 7,861 | 27,366 |
+--------------------------------------------------+--------------------------+--------------------------+
| Less income from discontinued operations, net | - | (34,075) |
+--------------------------------------------------+--------------------------+--------------------------+
| Net income (loss) from continuing operations | 7,861 | (6,709) |
+--------------------------------------------------+--------------------------+--------------------------+
| Adjustments to reconcile net income (loss) to | | |
| net cash | | |
| provided by operating activities: | | |
+--------------------------------------------------+--------------------------+--------------------------+
| Depreciation | 4,323 | 4,027 |
+--------------------------------------------------+--------------------------+--------------------------+
| Amortization of intangibles | 9,341 | 8,665 |
+--------------------------------------------------+--------------------------+--------------------------+
| Amortization of deferred finance costs | 1,386 | 721 |
+--------------------------------------------------+--------------------------+--------------------------+
| Write-off of deferred finance costs | | 2,954 |
| | - | |
+--------------------------------------------------+--------------------------+--------------------------+
| Impairment loss | 120 | 1,307 |
+--------------------------------------------------+--------------------------+--------------------------+
| Equity in loss from investment | | 1,230 |
| | - | |
+--------------------------------------------------+--------------------------+--------------------------+
| Stock-based compensation expense | 213 | 1,388 |
+--------------------------------------------------+--------------------------+--------------------------+
| Gain on extinguishment of debt | (83) | |
| | | - |
+--------------------------------------------------+--------------------------+--------------------------+
| Changes in operating assets and liabilities: | | |
+--------------------------------------------------+--------------------------+--------------------------+
| (Increase) decrease in accounts receivable | (1,524) | 1,064 |
+--------------------------------------------------+--------------------------+--------------------------+
| Decrease (increase) in income taxes receivable, | 4,725 | (2,578) |
| net | | |
+--------------------------------------------------+--------------------------+--------------------------+
| (Increase) decrease in prepaid expenses and | (12) | 865 |
| other | | |
| assets | | |
+--------------------------------------------------+--------------------------+--------------------------+
| Increase (decrease) in trade accounts payable | 1,845 | (574) |
+--------------------------------------------------+--------------------------+--------------------------+
| Decrease in third-party payables | (14,408) | (983) |
+--------------------------------------------------+--------------------------+--------------------------+
| (Decrease) increase in accrued liabilities | (5,915) | 618 |
+--------------------------------------------------+--------------------------+--------------------------+
| Provision for deferred taxes | (873) | (1,090) |
+--------------------------------------------------+--------------------------+--------------------------+
| Decrease in other liabilities | (885) | (31) |
+--------------------------------------------------+--------------------------+--------------------------+
| Net cash provided by operating activities | 6,114 | 10,874 |
+--------------------------------------------------+--------------------------+--------------------------+
| | | |
+--------------------------------------------------+--------------------------+--------------------------+
| Investing activities | | |
+--------------------------------------------------+--------------------------+--------------------------+
| Proceeds from sale of BSG Luxembourg, net of | - | 132,749 |
| cash | | |
| retained by BSG Luxembourg | | |
+--------------------------------------------------+--------------------------+--------------------------+
| Purchase of VoiceLog | - | (1,276) |
+--------------------------------------------------+--------------------------+--------------------------+
| Purchase of VeriSign toll clearinghouse | - | (775) |
+--------------------------------------------------+--------------------------+--------------------------+
| Purchases of property, equipment, and software, | (2,789) | (4,327) |
| including | | |
| $99 and $146 of capitalized interest in 2008 | | |
| and 2007, | | |
| respectively | | |
+--------------------------------------------------+--------------------------+--------------------------+
| Net receipts on purchased receivables | 1,673 | 162 |
+--------------------------------------------------+--------------------------+--------------------------+
| Net cash (used in) provided by investing | (1,116) | 126,533 |
| activities | | |
+--------------------------------------------------+--------------------------+--------------------------+
Billing Services Group Limited
Consolidated Statements of Cash Flows (continued)
(In thousands)
+--------------------------------------------------+----------------------------+----------------------------+
| | Years Ended December 31 |
+--------------------------------------------------+---------------------------------------------------------+
| | 2008 | 2007 |
+--------------------------------------------------+----------------------------+----------------------------+
| Financing activities | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Borrowings of long-term debt | $- | $108,000 |
+--------------------------------------------------+----------------------------+----------------------------+
| Payments on long-term debt | (18,640) | (141,063) |
+--------------------------------------------------+----------------------------+----------------------------+
| Distributions paid | | (118,236) |
| | - | |
+--------------------------------------------------+----------------------------+----------------------------+
| Net receipts on BSG Luxembourg receivables | | 1,952 |
| | - | |
+--------------------------------------------------+----------------------------+----------------------------+
| Restricted cash | 7,858 | (6,928) |
+--------------------------------------------------+----------------------------+----------------------------+
| Financing costs | | (1,478) |
| | - | |
+--------------------------------------------------+----------------------------+----------------------------+
| Net cash used in financing activities | (10,782) | (157,753) |
+--------------------------------------------------+----------------------------+----------------------------+
| | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Cash flows provided by discontinued operations: | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Net cash provided by | - | 20,145 |
| operating activities | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Net cash used in | - | (5,446) |
| investing activities | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Net cash used in | - | (2,817) |
| financing activities | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Effect of exchange rate | - | 637 |
| changes on cash | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Net cash provided by discontinued operations | - | 12,519 |
+--------------------------------------------------+----------------------------+----------------------------+
| | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Effect of exchange rate changes on cash | 9 | 5 |
+--------------------------------------------------+----------------------------+----------------------------+
| Net decrease in cash and cash equivalents | (5,775) | (7,822) |
+--------------------------------------------------+----------------------------+----------------------------+
| Cash and cash equivalents at beginning of year | 33,129 | 40,951 |
+--------------------------------------------------+----------------------------+----------------------------+
| Cash and cash equivalents at end of year | $ | $ |
| | 27,354 | 33,129 |
+--------------------------------------------------+----------------------------+----------------------------+
| | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Supplemental cash information | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Cash paid during the year for: | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Interest | | $ |
| | $ 9,073 | 11,896 |
+--------------------------------------------------+----------------------------+----------------------------+
| Taxes | | $ |
| | $ 2,950 | 950 |
+--------------------------------------------------+----------------------------+----------------------------+
| | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Noncash investing and financing activities | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Adjustment to goodwill, third-party payables, | $ | |
| accrued | 5,324 | $ 3,649 |
| liabilities, and other liabilities, net of tax | | |
| effect | | |
+--------------------------------------------------+----------------------------+----------------------------+
| Derivative loss, net of tax benefit of $1,395 | $ | $ |
| and $92 | (2,588) | (173) |
+--------------------------------------------------+----------------------------+----------------------------+
| Purchase price payable for VoiceLog and VeriSign | | $ |
| | $- | (155) |
| toll clearing house | | |
+--------------------------------------------------+----------------------------+----------------------------+
See accompanying notes.
Billing Services Group Limited
Notes to Consolidated Financial Statements
December 31, 2008 and 2007
1. Organization and Summary of Significant Accounting Policies
Organization
Billing Services Group Limited (the "Company" or "BSG Limited") commenced
operations effective with the completion of its admission to AiM (a market
operated by the London Stock Exchange plc) on June 15, 2005. The Company was
formed to succeed to the business of Billing Services Group, LLC and its
subsidiaries. The Company is a leading provider of clearing and settlement,
payment services, and financial risk management solutions to communications
service providers. The Company was incorporated and registered in Bermuda on May
13, 2005.
Principles of Consolidation
The Company's consolidated financial statements include the accounts of the
Company and its subsidiary, Billing Services Group North America, Inc. ("BSG
North America"), and its respective subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly liquid investments with
original maturities of three months or less. The Company holds cash and cash
equivalents at several major financial institutions in amounts which often
exceed Federal Deposit Insurance Corporation insured limits for United States
deposit accounts. The Company has entered into control agreements with its
lenders and certain financial institutions covering certain of its deposit
accounts.
Purchased Receivables
The Company offers participation in advance funding arrangements to certain of
its customers. Under the terms of the arrangements, the Company purchases the
customer's accounts receivable for an amount equal to the face amount of the
call record value submitted to the local exchange carriers ("LECs") by the
Company, less various items, including financing fees, LEC charges, rejects, and
other similar items. The Company advances 15% to 80% of the purchased amount and
charges financing fees at rates up to 8% per annum over prime (prime was 3.25%
per annum at December 31, 2008) to the customer until the funds are received
from the LECs. The face amount of the call record value is recorded as purchased
receivables in the consolidated balance sheets.
Financial Instruments
Due to their short maturity, the carrying amounts of accounts and purchased
receivables, accounts payable, and accrued liabilities approximated their fair
values at December 31, 2008 and 2007. The fair value of long-term debt
approximates its face value and is based on the amounts at which the debt could
be settled (either transferred or paid back) in a current transaction exclusive
of transaction costs.
Concentration of Credit Risk and Significant Customers
At December 31, 2008, ten customers represented approximately 27% of accounts
receivable, and ten customers represented approximately 70% of outstanding
purchased receivables. At December 31, 2007, ten customers represented
approximately 33% of accounts receivable, and ten customers represented
approximately 78% of outstanding purchased receivables. Credit risk with respect
to trade accounts receivable generated through billing services from continuing
operations is limited as the Company collects its fees through receipt of cash
directly from the LECs. The credit risk with respect to the purchase of accounts
receivable is reduced as the Company only advances 15% to 80% of the gross
accounts receivable purchased. Management evaluates accounts receivable balances
on an ongoing basis and provides allowances as necessary for amounts estimated
to eventually become uncollectible. In the event of complete nonperformance of
accounts receivable, the maximum exposure to the Company is the recorded amount
shown on the balance sheet. During the year ended December 31, 2008, twenty
customers represented approximately 46% of consolidated continuing revenues.
During the year ended December 31, 2007, twenty customers represented
approximately 52% of consolidated continuing revenues.
Property, Equipment and Software
Property, equipment and software are primarily composed of furniture and
fixtures, office equipment, computer equipment and software, and leasehold
improvements, including capitalized interest, which are recorded at cost. The
cost of additions and substantial improvements to property and equipment,
including software being developed for internal use, is capitalized. The cost of
maintenance and repairs of property and equipment is charged to operating
expenses. Property, equipment and software are depreciated using the
straight-line method over their estimated useful lives, which range from three
to seven years. Leasehold improvements are depreciated over the shorter of the
lease term or the estimated useful life of the asset. Upon disposition, the cost
and related accumulated depreciation are removed from the accounts, and the
resulting gain or loss is reflected in other income (expense) for that period.
Capitalized Software Costs
The Company capitalizes the cost of internal-use software that has a useful life
in excess of one year. These costs consist of payments made to third parties and
the salaries of employees working on such software development. Subsequent
additions, modifications, or upgrades to internal-use software are capitalized
only to the extent that they allow the software to perform a task it previously
did not perform. Software maintenance and training costs are expensed in the
period in which they are incurred.
The Company also develops software used in providing services. These software
development costs are capitalized once technological feasibility of the software
has been established. Costs incurred prior to establishing technological
feasibility are expensed as incurred. Technological feasibility is established
when the Company has completed all planning and high-level design activities
that are necessary to determine that a product can be produced to meet its
design specifications, including functions, features, and technical performance
requirements. Capitalization of costs ceases when a product is available for
general use.
Completed capitalized software development costs, including capitalized
interest, are transferred to computer software and are then depreciated using
the straight-line method over their estimated useful lives, which generally
range from four to seven years. For the years ended December 31, 2008 and 2007,
the Company capitalized $2.6 million and $2.9 million, respectively, of software
development costs. During 2008 and 2007, the Company transferred $4.2 million
and $20.3 million, respectively, of completed software development costs to
computer software. Additionally, in 2008 and 2007, the Company wrote-off $0.1
million and $1.3 million, respectively, related to the impairment of certain
software. Depreciation expense on completed capitalized software related to
continuing operations was $3.2 million and $3.0 million for the years ended
December 31, 2008 and 2007, respectively. As of December 31, 2008 and 2007, the
Company had undepreciated software costs of $18.5 million and $17.5 million,
respectively, related to continuing operations.
Purchase Accounting
The Company accounts for its business acquisitions under the purchase method of
accounting. The total cost of acquisitions is allocated to the underlying
identifiable net assets, based on their respective estimated fair values
generally resulting from a third-party valuation performed at the Company's
request. The excess of the purchase price over the estimated fair values of the
net assets acquired is recorded as goodwill. Determining the fair value of
assets acquired and liabilities assumed requires management's judgment and often
involves the use of significant estimates and assumptions, including assumptions
with respect to future cash inflows and outflows, discount rates, asset lives,
and market multiples, among other items. In addition, reserves have been
established on the Company's balance sheets related to acquired liabilities
based on assumptions made at the time of acquisition. The Company evaluates the
reserves on a regular basis to determine the adequacies of the amounts.
Goodwill
The Company accounts for goodwill in accordance with Statement of Financial
Accounting Standards No. ("Statement") 142, Goodwill and Other Intangible Assets
("Statement 142"). Statement 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets.
Goodwill represents the excess of the purchase price over the fair value of
identifiable net assets acquired in business combinations. Goodwill is reviewed
annually for potential impairment, or more frequently, if events or changes in
circumstances indicate that the assets might be impaired. An impairment may
exist when the carrying amount of net assets exceeds its implied fair value.
Long-Lived Assets
The Company accounts for the impairment and disposition of long-lived assets in
accordance with Statement 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("Statement 144"). In accordance with Statement 144,
long-lived assets are reviewed when events or changes in circumstances indicate
that their carrying value may not be recoverable. These evaluations include
comparing the future undiscounted cash flows of such assets to the carrying
value. If the carrying value exceeds the future undiscounted cash flows, the
assets are written down to their fair value.
During 2008, the Company evaluated the ongoing value of capitalized software
associated with one of its product offerings. Based on this evaluation, the
Company determined that software with a $0.1 million carrying value was no
longer recoverable, and accordingly recorded an impairment charge of $0.1
million. During 2007, the Company evaluated the ongoing value of capitalized
software associated with another one of its product offerings. Based on this
evaluation, the Company determined that software with a $1.3 million carrying
value was no longer recoverable, and accordingly recorded an impairment charge
of $1.3 million. In both periods, fair value was based on expected future cash
flows to be generated by the product, discounted at the risk-free rate of
interest.
Third-Party Payables
The Company's North American operations provide clearing, settlement, payment,
and financial risk management solutions to telecommunications and other service
providers (customers) through billing agreements with LECs, which maintain the
critical database of end-user names and addresses of the billed parties. The
Company receives individual call records from various telecommunications and
other service providers and processes and sorts the records for transmittal to
various LECs. Invoices to end-users are generated by the LECs, and the collected
funds are remitted to the Company, which in turn remits these funds, net of
fees, reserves, and other charges to its customers.
These reserves represent cash withheld from customers to satisfy future
obligations on behalf of the customers. The obligations consist of bad debt,
sales and excise taxes, and other miscellaneous charges. The Company records
trade accounts receivable and service revenue for fees charged to process the
call records. When the Company collects funds from the LECs, the Company's trade
receivables are reduced by the amount corresponding to the processing fees,
which are retained by the Company.
The remaining funds due to its customers are recorded as liabilities and
reported in third-party payables in the consolidated balance sheets. The Company
also retains a reserve from its customers' settlement proceeds to cover the
LECs' bad debts, billing fees, and sales taxes.
Revenue Recognition
The Company provides its services to telecommunications and other service
providers through billing arrangements with network operators. Within its
clearing and settlement business, the Company recognizes revenue from its
services when its customers' records are processed and accepted by the Company.
For its third-party verification business, the Company recognizes revenue when
services are rendered.
Earnings Per Share
The Company computes earnings per share under the provisions of Statement 128,
Earnings per Share, whereby basic earnings per share is computed by dividing net
income or loss attributable to common shareholders by the weighted average
number of shares of common stock outstanding during the applicable period.
Diluted earnings per share is determined in the same manner as basic earnings
per share except that the number of shares is increased to assume exercise of
potentially dilutive stock options using the treasury stock method, unless the
effect of such increase would be anti-dilutive. For the years ended December 31,
2008 and 2007, the diluted earnings per share amounts equal basic earnings per
share because the exercise price of the outstanding stock options is greater
than the weighted-average market price over the measurement period, or the
exercisability of the outstanding stock options is based upon market conditions
that have not been met as of the end of the reporting year.
Advertising Costs
The cost of advertising is expensed as incurred. The Company incurred $0.1
million and $0.2 million in advertising costs from continuing operations for the
years ended December 31, 2008 and 2007, respectively.
Income Taxes
The Company accounts for income taxes under Statement 109, Accounting for Income
Taxes ("Statement 109"). Under Statement 109, deferred taxes are recognized
using the liability method and tax rates are applied to cumulative temporary
differences based on when and how they are expected to affect the tax return.
The Company is not subject to tax on profits, income or capital gains in
Bermuda. For U.S. tax purposes, the Company has elected to be treated as a
partnership. Subject to local tax regulations, shareholders may be required to
report their allocable share of the Company's income, deductions, gain, or loss
on their respective tax returns.
The Company's U.S. subsidiaries file a consolidated federal income tax return
with their U.S. parent, BSG North America. The U.S. subsidiaries pay their
proportionate share of the taxes to BSG North America, which is ultimately
liable for the payment of the taxes to the Internal Revenue Service. The
Company's other subsidiaries had filed separate income tax returns with the
applicable tax authorities.
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes,
which clarifies the accounting treatment of uncertain tax positions in the
financial statements in accordance with Statement 109. FIN 48 provides guidance
on the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, and required disclosures. The new provision was adopted by the Company
on January 1, 2007, and did not result in recording any additional liability on
its consolidated financial statements.
Stock-Based Compensation
The Company has a stock-based employee compensation plan, which is described
more fully in Note 14. The Company accounts for share-based compensation in
accordance with Statement No. 123(R), Share-Based Payment ("Statement 123(R)"),
using the modified-prospective-transition method. Under that transition method,
compensation cost recognized includes: (a) compensation cost for all share-based
payments granted prior to but not yet vested as of January 1, 2006, based on the
fair value estimated in accordance with the original provisions of Statement
123, and (b) compensation cost for all share-based payments granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of Statement 123(R).
Derivative Instruments and Hedging Activities
Statement 133, Accounting for Derivative Instruments and Hedging Activities,
requires the Company to recognize all of its derivative instruments as either
assets or liabilities in the consolidated balance sheet at fair value. The
accounting for changes in the fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship,
and further, on the type of hedging relationship. For derivative instruments
that are designated and qualify as hedging instruments, the Company must
designate the hedging instrument, based upon the exposure being hedged, as a
fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign
operation. The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management objectives and
strategies for undertaking various hedge transactions. The Company formally
assesses both at inception and at least quarterly thereafter, whether the
derivatives that are used in hedging transactions are highly effective in
offsetting changes in either the fair value or cash flows of the hedged item. If
a derivative ceases to be a highly effective hedge, the Company discontinues
hedge accounting. The Company does not enter into derivative instruments for
speculation or trading purposes. See Notes 8 and 16 for a discussion of the
Company's specific derivative instruments and hedging activities.
Foreign Currency
Results of operations for foreign subsidiaries are translated into U.S. dollars
using the average exchange rates during the year. The assets and liabilities of
those subsidiaries are translated into U.S. dollars using the exchange rates at
the balance sheet date. The related translation adjustments are recorded in a
separate component of shareholders' equity, accumulated other comprehensive
loss. Foreign currency transaction gains and losses are included in operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Standards and Disclosures
In September 2006, the FASB issued Statement 157, Fair Value Measurements
("Statement 157"). Statement 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosure requirements for fair value
measurements. Statement 157 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value. Statement 157 does not
expand the use of fair value in any new circumstances. Effective January 1,
2008, companies will need to apply the recognition and disclosure provisions of
Statement 157 for financial assets and financial liabilities and for
nonfinancial assets and nonfinancial liabilities that are remeasured at least
annually. The effective date in Statement 157 is delayed for one year for
certain nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). The Company's adoption of Statement 157 has had no
impact on its financial position or results of operations.
Statement 141(R), Business Combinations ("Statement 141(R)"), was issued in
December 2007. Statement 141(R) requires that upon initially obtaining control,
an acquirer will recognize 100% of the fair values of acquired assets, including
goodwill, and assumed liabilities, with only limited exceptions, even if the
acquirer has not acquired 100% of its target. Additionally, contingent
consideration arrangements will be fair valued at the acquisition date and
included on that basis in the purchase price consideration and transaction costs
will be expensed as incurred. Statement 141(R) also modifies the recognition for
preacquisition contingencies, such as environmental or legal issues,
restructuring plans, and acquired research and development value in purchase
accounting. Statement 141(R) amends Statement 109, to require the acquirer to
recognize changes in the amount of its deferred tax benefits that are
recognizable because of a business combination either in income from continuing
operations in the period of the combination or directly in contributed capital,
depending on the circumstances. Statement 141(R) is effective for fiscal years
beginning after December 15, 2008. Adoption is prospective and early adoption is
not permitted. The Company expects to adopt Statement 141(R) on January 1, 2009.
Statement 141(R)'s impact on accounting for business combinations is dependent
upon acquisitions following adoption.
Statement 159, The Fair Value Option for Financial Assets and Financial
Liabilities - including an amendment of FASB Statement No. 115 ("Statement
159"), was issued in February 2007. Statement 159 permits entities to choose to
measure at fair value many financial instruments and certain other items that
are not currently required to be measured at fair value. Statement 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. Statement 159 does not affect any
existing accounting literature that requires certain assets and liabilities to
be carried at fair value. Statement 159 does not eliminate disclosure
requirements included in other accounting standards, including requirements for
disclosures about fair value measurements included in Statements 157, Fair Value
Measurements, and 107, Disclosures about Fair Value of Financial Instruments.
Statement 159 is effective as of the beginning of an entity's first fiscal year
that begins after November 15, 2007. The Company's adoption of Statement 159 has
had no material impact on its financial position or results of operations.
In March 2008, the FASB issued Statement 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of Statement 133 ("Statement
161"), which requires enhanced disclosures for derivative and hedging
activities. Statement 161 will become effective with the Company's first quarter
of 2009.
2. Discontinued Operations
On December 19, 2007, the Company sold its wireless data and financial clearing
operations, Billing Services Group Luxembourg S.a.r.l. ("BSG Luxembourg") and
BSG Clearing Solutions Asia Limited and their wholly owned subsidiaries, for
cash of $152.7 million, net of the repayment of the disposed entities'
borrowings under loan agreements, settlement of certain intercompany accounts,
and closing costs. The results of these businesses are accounted for as
discontinued operations in the consolidated statement of operations for 2007.
The gain on sale recorded in discontinued operations was $28.6 million in 2007.
The amount of interest expense allocated to discontinued operations was $6.9
million in the year ended December 31, 2007.
Summarized operating results for the year ended December 31, 2007 for BSG
Luxembourg included revenues of $51.0 million and income, net of taxes, of $5.5
million.
3. Property, Equipment and Software
Property, equipment and software consisted of the following at December 31, 2008
and 2007:
+-----------------------------------------------+-------------+-------------+
| | December 31 |
+-----------------------------------------------+---------------------------+
| | 2008 | 2007 |
+-----------------------------------------------+-------------+-------------+
| | (In thousands) |
+-----------------------------------------------+---------------------------+
| | | |
+-----------------------------------------------+-------------+-------------+
| Furniture and fixtures | $ | $ |
| | 236 | 236 |
+-----------------------------------------------+-------------+-------------+
| Telecommunication equipment | 1,839 | 1,839 |
+-----------------------------------------------+-------------+-------------+
| Computer equipment | 4,000 | 3,784 |
+-----------------------------------------------+-------------+-------------+
| Computer software | 26,628 | 22,424 |
+-----------------------------------------------+-------------+-------------+
| Software development, including $48 and $368 | 477 | 2,228 |
| of | | |
| capitalized interest at December 31, 2008 | | |
| and 2007, | | |
| respectively | | |
+-----------------------------------------------+-------------+-------------+
| Leasehold improvements | 2,172 | 2,172 |
+-----------------------------------------------+-------------+-------------+
| | 35,352 | 32,683 |
+-----------------------------------------------+-------------+-------------+
| Less accumulated depreciation | 14,710 | 10,387 |
+-----------------------------------------------+-------------+-------------+
| Net property, equipment and software | $ | $ |
| | 20,642 | 22,296 |
+-----------------------------------------------+-------------+-------------+
Depreciation expense from continuing operations was $4.3 million and $4.0
million for the years ended December 31, 2008 and 2007, respectively.
4. Goodwill
The Company tests goodwill for impairment using a two-step impairment process.
The first step, used to screen for potential impairment, compares the fair value
of the reporting unit with its carrying amount, including goodwill. If the fair
value of the reporting unit exceeds its carrying value, goodwill of the
reporting unit is considered not impaired, thus the second step of the
impairment test is not necessary. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill impairment test shall be
performed to measure the amount of impairment loss, if any. The second step of
the goodwill impairment test compares the implied fair value of the reporting
unit with the carrying amount of that goodwill. If the carrying amount of the
reporting unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess. The loss
recognized cannot exceed the carrying amount of goodwill. After a goodwill
impairment loss is recognized, the adjusted carrying amount of goodwill becomes
its new accounting basis. Subsequent reversal of a previously recognized
goodwill impairment loss is prohibited once the measurement of that loss is
completed.
In accordance with Statement 142, the Company completed step one of the two-step
goodwill impairment process as of the fourth quarters of 2008 and 2007. No
impairment charges resulted from completion of this test. The Company may incur
impairment charges in the future under Statement 142 to the extent the Company
does not achieve its expected financial performance, and to the extent that
market values and long-term interest rates, in general, decrease and increase,
respectively.
The following table presents the changes in carrying amount of goodwill for the
years ended December 31, 2008 and 2007:
+----------------------------------+--------------------+------------------------+---------------------+
| | United | Europe | Total |
| | States | | |
+----------------------------------+--------------------+------------------------+---------------------+
| | (In thousands) |
+----------------------------------+-------------------------------------------------------------------+
| | | | |
+----------------------------------+--------------------+------------------------+---------------------+
| Balance as of December 31, 2006 | $ | $ | $ |
| | 43,712 | 183,061 | 226,773 |
+----------------------------------+--------------------+------------------------+---------------------+
| Foreign currency | - | 16,509 | 16,509 |
+----------------------------------+--------------------+------------------------+---------------------+
| Reduction in connection with the | - | (199,570) | (199,570) |
| sale | | | |
| of BSG Luxembourg | | | |
+----------------------------------+--------------------+------------------------+---------------------+
| Adjustment | (3,649) | - | (3,649) |
+----------------------------------+--------------------+------------------------+---------------------+
| Balance as of December 31, 2007 | 40,063 | - | 40,063 |
+----------------------------------+--------------------+------------------------+---------------------+
| Adjustment | (5,324) | - | (5,324) |
+----------------------------------+--------------------+------------------------+---------------------+
| Balance as of December 31, 2008 | $ | $ | $ |
| | 34,739 | - | 34,739 |
+----------------------------------+--------------------+------------------------+---------------------+
During 2007, the Company sold BSG Luxembourg, representing its foreign
operations, and removed all of the related goodwill. The Company also made
adjustments to reduce goodwill by $3.6 million, to adjust third-party payables
acquired in a previous acquisition, net of related income taxes. During 2008,
the Company made adjustments to reduce goodwill by $5.3 million to adjust
accrued liabilities and other liabilities acquired in a previous acquisition,
net of related income taxes.
5. Intangible Assets
The Company has definite-lived intangible assets recorded that are amortized in
accordance with Statement 142. These assets consist of local exchange carrier
contracts and customer contracts, which are amortized over their respective
estimated lives. The weighted-average amortization period is approximately 11
years. The Company also has indefinite-lived trademarks recorded that are not
being amortized which are evaluated in accordance with Statement 142. The
following table presents the gross carrying amount and accumulated amortization
for each major class of intangible assets:
+---------------------+-----------+--------------+----------+--------------+--------------+
| | 2008 | | |
| | | 2007 | |
+---------------------+--------------------------+-------------------------+--------------+
| | Gross | Accumulated | Gross | Accumulated | Amortization |
| | Carrying |Amortization |Carrying |Amortization | Period |
| | Amount | | Amount | | |
+---------------------+-----------+--------------+----------+--------------+--------------+
| | (In thousands) | |
+---------------------+----------------------------------------------------+--------------+
| Local | $ | $ | $ | $ | 15 years |
| exchange | 11,310 | 3,801 | 11,310 | 3,047 | |
| | | | | | |
| carrier | | | | | |
| contracts | | | | | |
+---------------------+-----------+--------------+----------+--------------+--------------+
| Customer | 77,065 | 38,521 | 77,065 | 29,934 | 10 years |
| | | | | | |
| contracts | | | | | |
+---------------------+-----------+--------------+----------+--------------+--------------+
| Trademarks | 5,400 | - | 5,400 | - | Indefinite |
+---------------------+-----------+--------------+----------+--------------+--------------+
| | $ | $ | $ | $ | |
| | 93,775 | 42,322 | 93,775 | 32,981 | |
+---------------------+-----------+--------------+----------+--------------+--------------+
Total amortization expense from definite-lived intangibles from continuing
operations was $9.3 million and $8.7 million for the years ended December 31,
2008 and 2007, respectively. The estimate of amortization expense for each of
the five succeeding fiscal years for definite-lived intangibles is $8.7 million
for the years 2009 through 2012 and $7.7 million for the year 2013.
6. Investments
In July 2005, the Company entered into a joint venture with Webpay International
AG for the purpose of further developing a secure payment solution for broadband
service providers and consumers under the brand name of "ClickandBuy." The
Company invested $1.5 million for a 49% share of the joint venture. The
investment was accounted for using the equity method. During 2007, the Company
wrote-off the investment, resulting in a $1.2 million charge to operations.
7. Debt
Long-term debt is as follows:
+-----------------------------------------------+-------------+-------------+
| | December 31 |
+-----------------------------------------------+---------------------------+
| | 2008 | 2007 |
+-----------------------------------------------+-------------+-------------+
| | (In thousands) |
+-----------------------------------------------+---------------------------+
| Term Loan Facility, net of unamortized | $ | $ |
| original issue | 90,331 | 108,033 |
| discount of $3,273 at December 31, 2008 and | | |
| $4,467 | | |
| at December 31, 2007 | | |
+-----------------------------------------------+-------------+-------------+
| Less current portion | 8,562 | 11,250 |
+-----------------------------------------------+-------------+-------------+
| | $ | $ |
| | 81,769 | 96,783 |
+-----------------------------------------------+-------------+-------------+
On December 19, 2007, the Company refinanced its debt and entered into a new
credit agreement totaling $112.5 million. The new credit agreement consists of a
$112.5 million term loan (the "Term Loan Facility"). The Term Loan Facility is
secured by all of BSG North America's assets and guarantees from most of the
Company's subsidiaries. At December 31, 2008 and 2007, borrowings under the Term
Loan Facility were $93.6 million and $112.5 million, respectively.
Loans under the Term Loan Facility were issued net of an original issue discount
of $4.5 million. Interest is charged, at the Company's option, at the U.S. prime
rate plus 3.25% per annum, or the London Interbank Offered Rate ("LIBOR") plus
4.25% per annum. At December 31, 2008, the nominal interest rate on outstanding
loans was 5.75% per annum, but the effective interest rate, including the impact
of interest rate swap contracts (see Note 8) was 8.34% per annum.
The Term Loan Facility requires quarterly principal payments of $2.8 million
through September 2014 and a payment of $36.6 million at its maturity in
December 2014. It also requires mandatory prepayments relating to (i) the excess
of $7.9 million over costs related to settlement with the U.S. Federal Trade
Commission ("FTC") (see Note 12); (ii) 75% of the Company's excess cash flow, as
defined, beginning in 2008; and (iii) certain other occurrences for which
mandatory prepayment is a usual and customary consequence in credit agreements
of this nature. Outstanding loans may be prepaid at any time without any
prepayment premium or penalty.
In connection with the settlement with the FTC, the Company paid $3.6 million
and $2.0 million in 2008 and 2007, respectively, and made a debt repayment of
$2.3 million during 2008. At December 31, 2007, $7.9 million was classified as
restricted cash related to this obligation, which restriction was removed in
2008 as the result of these payments.
During 2008, the Company extinguished $5.0 million of principal amount of debt
through the repurchase of a portion of the Term Loan Facility which resulted in
a gain of $84 thousand, net of accumulated amortization of original issue
discount of $171 thousand.
The credit agreement includes covenants requiring the Company to maintain
certain minimum levels of interest coverage and maximum levels of leverage and
capital expenditures. The agreement also includes various representations,
restrictions, and other terms and conditions which are usual and customary in
transactions of this nature.
Former Borrowing Facilities
In connection with the repayment of certain former borrowings in 2007, the
Company wrote-off its related unamortized deferred finance costs of $3.0 million
and paid prepayment premiums of $0.4 million which are included in write-off of
deferred finance costs and interest expense, respectively, in 2007.
8. Financial Instruments
Interest Rate Swap
In connection with the Term Loan Facility outstanding at December 31, 2008, the
Company entered into a series of interest rate swap contracts during December
2007 for an aggregate notional amount of $75 million. Under the contracts, the
Company will pay fixed rates of 3.91% per annum to 4.18% per annum, thereby
fixing the LIBOR portion of the interest rate on the notional amounts during the
periods indicated below.
+--------------------------+----------------------+------------+
|Contract Notional Amount | Contract Period | Contract |
| | |Fixed Rate |
+--------------------------+----------------------+------------+
| | | |
+--------------------------+----------------------+------------+
| $ 5,000,000 | 12/31/07 to | 4.12% |
| | 12/31/08 | |
+--------------------------+----------------------+------------+
| 15,000,000 | 12/31/07 to | 3.91% |
| | 12/31/09 | |
+--------------------------+----------------------+------------+
| 20,000,000 | 12/31/07 to | 4.00% |
| | 12/31/10 | |
+--------------------------+----------------------+------------+
| 15,000,000 | 12/31/07 to | 4.11% |
| | 12/31/11 | |
+--------------------------+----------------------+------------+
| 20,000,000 | 12/31/07 to | 4.18% |
| | 12/31/12 | |
+--------------------------+----------------------+------------+
| $ 75,000,000 | | |
+--------------------------+----------------------+------------+
Under the contracts, the counterparty will pay the Company a floating rate,
namely LIBOR, on the same notional principal amounts during the same periods.
The applicable margin above LIBOR, as defined in the credit agreement, is not
included in, and will be paid in addition to, the fixed interest rate. As
indicated in the table set forth above, the initial contract, covering a
notional amount of $5 million, expired on December 31, 2008. As of December 31,
2008 and 2007, the contracts, in the aggregate, had a negative value of $4.2
million and $0.3 million, respectively, which was recorded in other liabilities
in the accompanying consolidated balance sheets. The contracts qualify for hedge
accounting, and accordingly, the decline in the contracts' value of $3.9 million
and $0.3 million during the years ended December 31, 2008 and 2007,
respectively, is recorded in accumulated other comprehensive loss, net of tax.
In connection with certain former debt, the Company entered into an interest
rate swap contract in 2006 (the "2006 Swap") for a notional amount of $65
million. The 2006 Swap was canceled on December 14, 2007, and the Company paid
$1.3 million in settlement of this contract. This payment is reflected in
settlement and mark-to-market of derivatives in the accompanying statements of
operations.
Also, in connection with certain former debt, the Company entered into an
interest rate swap contract in 2005 (the "2005 Swap") for a notional amount of
$70 million. The 2005 Swap contract remained in place after the December 19,
2007 refinancing, and it supplemented the contract described above to satisfy
the requirements of the Term Loan Facility. The Company canceled the entire 2005
Swap during 2008, and paid $1.9 million in connection with the cancellation.
This payment is reflected in settlement and mark-to-market of derivatives in the
accompanying consolidated statements of operations. As the 2006 Swap and 2005
Swap did not qualify for hedge accounting, changes in their fair market values
are recorded as expense in the accompanying consolidated statements of
operations. In 2007, the Company recorded a loss of $3.2 million related to the
cancellation of the 2006 Swap and the change in the estimated fair value of the
2005 Swap. In 2008, the Company recorded a loss of $0.8 million related to the
additional decline in value of the 2005 Swap.
As discussed in Note 1, the Company adopted Statement No. 157 effective January
1, 2008. Statement No. 157 establishes a three-tier fair value hierarchy, which
prioritized the inputs used in measuring fair value. These tiers include: Level
1, defined as observable inputs such as quoted prices in active markets; Level
2, defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs
in which little or no market data exists, therefore requiring an entity to
develop its own assumptions. As of December 31, 2008, the Company held one type
of financial instrument subject to valuation under Statement No. 157, interest
rate swaps. The interest rate swaps are included in other liabilities in the
accompanying consolidated balance sheets. Fair value of interest rate swaps is
based on forward-looking interest rate curves as provided by the counterparties,
adjusted for the Company's credit risk and are considered Level 2 inputs.
9. Income Taxes
The components of the Company's income tax expense (benefit) are as follows:
+----------------------------------------------+------------------------+-----------------------+
| | December 31 |
+----------------------------------------------+------------------------------------------------+
| | 2008 | 2007 |
+----------------------------------------------+------------------------+-----------------------+
| | (In thousands) |
+----------------------------------------------+------------------------------------------------+
| Current expense (benefit): | | |
+----------------------------------------------+------------------------+-----------------------+
| Federal | $ | $ |
| | 5,153 | (1,709) |
+----------------------------------------------+------------------------+-----------------------+
| State | 315 | 707 |
+----------------------------------------------+------------------------+-----------------------+
| | 5,468 | (1,002) |
+----------------------------------------------+------------------------+-----------------------+
| | | |
+----------------------------------------------+------------------------+-----------------------+
| Deferred expense (benefit): | | |
+----------------------------------------------+------------------------+-----------------------+
| Federal | (905) | (680) |
+----------------------------------------------+------------------------+-----------------------+
| State | 32 | (410) |
+----------------------------------------------+------------------------+-----------------------+
| | (873) | (1,090) |
+----------------------------------------------+------------------------+-----------------------+
| Total income tax expense (benefit) | $ | $ |
| | 4,595 | (2,092) |
+----------------------------------------------+------------------------+-----------------------+
The income tax provision differs from amounts computed by applying the U.S.
federal statutory tax rate to income from continuing operations before income
taxes as follows:
+----------------------------------------------+------------------------+------------------------+
| | December 31 |
+----------------------------------------------+-------------------------------------------------+
| | 2008 | 2007 |
+----------------------------------------------+------------------------+------------------------+
| | (In thousands) |
+----------------------------------------------+-------------------------------------------------+
| | | |
+----------------------------------------------+------------------------+------------------------+
| Estimated federal tax expense (benefit) at | $ | $ |
| 35% | 4,362 | (3,080) |
+----------------------------------------------+------------------------+------------------------+
| Increases (reductions) from: | | |
+----------------------------------------------+------------------------+------------------------+
| Change in tax rates | | 206 |
| | - | |
+----------------------------------------------+------------------------+------------------------+
| State tax | 226 | 77 |
+----------------------------------------------+------------------------+------------------------+
| Nondeductible items | | 145 |
| | - | |
+----------------------------------------------+------------------------+------------------------+
| Foreign tax rate differential | 75 | 487 |
+----------------------------------------------+------------------------+------------------------+
| Other | (68) | 73 |
+----------------------------------------------+------------------------+------------------------+
| Income tax expense (benefit) | $ | $ |
| | 4,595 | (2,092) |
+----------------------------------------------+------------------------+------------------------+
There are significant differences among the tax laws of the countries in which
the Company was operating, including varying tax rates and deductibility of
certain expenses. The Company is not subject to tax on profits, income, or
capital gains in Bermuda. For U.S. tax purposes, the Company has elected to be
treated as a partnership. Subject to local tax regulations, shareholders may be
required to report their allocable share of the Company's income, deductions,
gain, or loss on their respective tax returns.
Deferred income taxes result from temporary differences between the bases for
financial statement purposes and income tax purposes. The net deferred tax
assets and liabilities reflected in the balance sheets include the following
amounts:
+-----------------------------------------------+-------------+-------------+
| | December 31 |
+-----------------------------------------------+---------------------------+
| | 2008 | 2007 |
+-----------------------------------------------+-------------+-------------+
| | (In thousands) |
+-----------------------------------------------+---------------------------+
| Deferred tax assets: | | |
+-----------------------------------------------+-------------+-------------+
| Reserve for bad debts | $ | $ |
| | 98 | 109 |
+-----------------------------------------------+-------------+-------------+
| Accrued liabilities | 573 | 701 |
+-----------------------------------------------+-------------+-------------+
| State taxes | 400 | 432 |
+-----------------------------------------------+-------------+-------------+
| Stock-based compensation expense | 756 | 718 |
+-----------------------------------------------+-------------+-------------+
| AMT credit carryover | - | 96 |
+-----------------------------------------------+-------------+-------------+
| Capital loss carryover | 122 | - |
+-----------------------------------------------+-------------+-------------+
| Derivatives | 1,487 | 478 |
+-----------------------------------------------+-------------+-------------+
| Intangible assets | 316 | - |
+-----------------------------------------------+-------------+-------------+
| Total deferred tax assets | 3,752 | 2,534 |
+-----------------------------------------------+-------------+-------------+
| | | |
+-----------------------------------------------+-------------+-------------+
| Deferred tax liabilities: | | |
+-----------------------------------------------+-------------+-------------+
| Property, equipment and software | (3,904) | (4,614) |
+-----------------------------------------------+-------------+-------------+
| Intangible assets | - | (1,255) |
+-----------------------------------------------+-------------+-------------+
| Capitalized interest | (1,335) | (1,302) |
+-----------------------------------------------+-------------+-------------+
| Other | (189) | (214) |
+-----------------------------------------------+-------------+-------------+
| Total deferred tax liabilities | (5,428) | (7,385) |
+-----------------------------------------------+-------------+-------------+
| Net deferred tax liabilities | $ | $ |
| | (1,676) | (4,851) |
+-----------------------------------------------+-------------+-------------+
Management is of the opinion that it is more likely than not that the deferred
tax assets will be fully realized.
During 2008 and 2007, the Company's United States-based subsidiaries are
included in the consolidated federal income tax returns of BSG North America.
The tax obligation of the Company's United States-based subsidiaries is paid to
BSG North America, which is ultimately liable for payment of the taxes to the
Internal Revenue Service.
The Company has Texas state net operating loss credit carryforwards of
approximately $0.6 million which will expire in 2026.
The Company adopted FIN 48 in the first quarter of fiscal 2007, and the adoption
of the provision did not have a significant impact on the Company's consolidated
financial statements. During the year ended December 31, 2007, the Company
established a reserve of $0.3 million related to state taxes and during the year
ended December 31, 2008, the Company established a reserve of $0.9 million
related to an adjustment of liabilities assumed in a prior acquisition. The
total reserve as of December 31, 2008 is $1.2 million. The Company does not
expect the recorded liability to change significantly over the next twelve
months. It is the Company's policy to recognize interest and penalties related
to uncertain tax positions in the provision for income taxes in the consolidated
statement of operations. There were no interest or penalties recorded during the
years ended December 31, 2008 or 2007.
The Company's tax returns for 2004 through 2008 tax years generally remain
subject to examination by the federal and most state tax authorities. The
Internal Revenue Service is currently examining the Company's consolidated tax
returns for the years ended December 31, 2004 to 2006.
10. Earnings Per Share
Earnings per share are calculated based on the weighted average number of shares
of the Company's common stock outstanding during the period.
The following is a summary of the elements used in calculating basic and diluted
income per share:
+--------------------------------------------+--------------+-----------------------+
| | December 31 |
+--------------------------------------------+--------------------------------------+
| | 2008 | |
| | | 2007 |
+--------------------------------------------+--------------+-----------------------+
| | (In thousands, except per |
| | share amounts) |
+--------------------------------------------+--------------------------------------+
| Numerator: | | |
+--------------------------------------------+--------------+-----------------------+
| Income (loss) from continuing operations | $ | $ |
| | 7,861 | (6,709) |
+--------------------------------------------+--------------+-----------------------+
| Income from discontinued operations | - | 34,075 |
+--------------------------------------------+--------------+-----------------------+
| Net income | $ | $ |
| | 7,861 | 27,366 |
+--------------------------------------------+--------------+-----------------------+
| | | |
+--------------------------------------------+--------------+-----------------------+
| Denominator: | | |
+--------------------------------------------+--------------+-----------------------+
| Weighted-average shares - basic | 279,863 | 279,863 |
+--------------------------------------------+--------------+-----------------------+
| Effect of diluted securities: | | |
+--------------------------------------------+--------------+-----------------------+
| Options | - | |
| | | - |
+--------------------------------------------+--------------+-----------------------+
| Weighted-average shares - diluted | 279,863 | 279,863 |
+--------------------------------------------+--------------+-----------------------+
| | | |
+--------------------------------------------+--------------+-----------------------+
| Net income (loss) per common share: | | |
+--------------------------------------------+--------------+-----------------------+
| Income (loss) from continuing operations - | $ | $ |
| basic and | 0.028 | (0.024) |
| diluted | | |
+--------------------------------------------+--------------+-----------------------+
| Income from discontinued operations - | - | 0.122 |
| basic and | | |
| diluted | | |
+--------------------------------------------+--------------+-----------------------+
| Net income per share | $ | $ |
| | 0.028 | 0.098 |
+--------------------------------------------+--------------+-----------------------+
Options covering 22,926,566 shares at December 31, 2008 have not been included
in the calculation of earnings per share because these options were not in the
money as calculated over the measurement period during 2008. Options covering
9,641,156 shares at December 31, 2007 have not been included in the calculation
of earnings per share because their exercisability is contingent upon the fair
market value of the Company's common stock increasing to a specific value, which
was not achieved as of December 31, 2007. See Note 14.
11. Commitments
The Company leases certain office space and equipment under various operating
leases. Annual future minimum lease commitments as of December 31, 2008, are as
follows:
+------------------------------------------------------+-----------------+
| | (In thousands) |
+------------------------------------------------------+-----------------+
| Year ending December 31: | |
+------------------------------------------------------+-----------------+
| 2009 | $ |
| | 920 |
+------------------------------------------------------+-----------------+
| 2010 | 926 |
+------------------------------------------------------+-----------------+
| 2011 | 950 |
+------------------------------------------------------+-----------------+
| 2012 | 524 |
+------------------------------------------------------+-----------------+
Rental expense from continuing operations under these operating leases
approximated $0.9 million for each of the years ended December 31, 2008 and
2007.
12. Contingencies
The Company was a co-defendant in a FTC proceeding originally filed in March
2006 against a former customer for allegedly billing unauthorized charges to
consumers. The Company terminated this customer in 2005. In October 2006, the
FTC amended its filing to include the Company. During December 2007, the Company
entered into an agreement with the FTC to settle this litigation in exchange for
a payment of $1.9 million. On March 17, 2008, the presiding court entered an
order approving the settlement agreement, in which the Company did not admit any
violation of law. The Company agreed to implement various compliance polices
designed to attempt to ensure it does not process unauthorized billing of
telecommunication charges by its customers. The 2007 consolidated statement of
operations includes a charge of $5.6 million related to the FTC litigation. As
of December 31, 2007, the Company had remaining accrued liabilities of $1.9
million and $1.4 million for the FTC settlement costs and legal and other costs,
respectively, which were paid during 2008. These amounts are included in the
2007 charge of $5.6 million.
The Company is involved in various other claims, legal actions, and regulatory
proceedings arising in the ordinary course of business. The Company believes it
is unlikely that the final outcome of any of the claims, litigation, or
proceedings to which the Company is a party will have a material adverse effect
on the Company's financial position or results of operations; however, due to
the inherent uncertainty of litigation, there can be no assurance that the
resolution of any particular claim or proceeding would not have a material
adverse effect on the Company's financial position and results of operations for
the fiscal period in which such resolution occurs.
13. Employee Benefit Plans
The Company's subsidiaries participate in 401(k) Retirement Plans (the
"Retirement Plans"), which are offered to eligible employees. Generally, all
employees who are 21 years of age or older and who have completed six months of
service during which they worked at least 500 hours are eligible for
participation in the Retirement Plans. The Retirement Plans are defined
contribution plans, which provide that participants may make voluntary salary
deferral contributions, on a pretax basis, of between 1% and 19% of their
compensation in the form of voluntary payroll deductions, subject to annual
Internal Revenue Service limitations. The Company matches a defined percentage
of a participant's contributions, subject to certain limits, and may make
additional discretionary contributions. During the years ended December 31, 2008
and 2007, the Company's matching contributions from continuing operations
totaled approximately $0.3 million in each period. No discretionary
contributions were made.
14. Stock Option Plans
2005 Stock Option Plans
On June 8, 2005, the Board of Directors adopted the Billing Services Group
Limited Stock Option Plan (the "BSG Plan") and the BSG Clearing Solutions North
America, Inc. Stock Option Plan (the "BSG North America Plan"). Options may have
been granted at the discretion of the remuneration committee to any director or
employee and were generally granted with an exercise price equal to the market
price of the Company's stock at the grant date. Directors may have been granted
options in the BSG Plan and employees may have been granted options in the BSG
North America Plan. Options granted in the BSG North America Plan were
exercisable into shares of the Company. The options that may have been granted
were limited, in the aggregate, to 10% of the issued common shares of capital
stock at the time of grant.
On June 9, 2005, the Board of Directors granted 18,260,447 options at an
exercise price of 74.5 pence, representing the fair market value of the
Company's common stock on the date of grant to selected executives and other key
employees whose vesting was contingent upon meeting an increase in the share
price. These options would have vested when the fair market value of the common
stock reached 149.0 pence, as adjusted for relative changes in capitalization,
but would not have been exercisable unless the holder remained in the employment
of the Company or one of its affiliates for three years from June 2005, or in
the event of a change in control of the Company. Under such circumstances, the
options would have been immediately exercisable subject to the holder being in
the employment of the Company or one of its affiliates. The options had a
contractual life of ten years.
The fair value of the options was generally computed using a Monte Carlo single
option model. This model estimated the probability the options would have vested
and the length of time required to attain the target stock price. The model
projected the path of the Company's stock over ten years following the grant
date, relying upon historical market data for its peers.
The BSG Plan and the BSG North America Plan described above were amended and
restated as set forth below.
2008 Amended and Restated Stock Option Plans
On August 15, 2008, the Board of Directors adopted resolutions to amend and
restate both the BSG Plan and the BSG North America Plan (now, the "Amended and
Restated BSG Plan" and the "Amended and Restated BSG North America Plan,"
respectively).
Options may be granted at the discretion of the remuneration committee to any
director or employee and are generally granted with an exercise price equal to
the market price of the Company's stock at the grant date. Directors may be
granted options in the Amended and Restated BSG Plan and employees may be
granted options in the Amended and Restated BSG North America Plan. Options
granted in the Amended and Restated BSG North America Plan are exercisable into
shares of the Company. The options granted are limited, in the aggregate, to 10%
of the issued common shares of capital stock at the time of grant.
On August 18, 2008, the Board of Directors granted 22,926,566 options at an
exercise price of 10.34 pence, representing the fair market value of the
Company's common stock on the date of grant, to all employees and directors of
the Company. One-quarter of the total number of options vested on the grant
date, and the remaining 75% of options will vest in equal tranches on the first,
second and third anniversary of the grant. Generally, an option is exercisable
only if the holder is in the employment of the Company or one of its affiliates
(or for a period of time following employment subject to the discretion of the
remuneration committee), or in the event of a change in control of the Company.
Upon a change in control, generally, all options vest immediately. The options
have a contractual life of ten years.
The fair value of the options is computed using the Black-Scholes option pricing
model. The weighted-average grant-date fair value of options granted during 2008
amounted to 6.0 pence per share. The following assumptions were used in arriving
at the fair value of options granted during 2008: risk-free interest rate of
3.8%; dividend yield of 0%; expected volatility of 59.7%; and expected lives of
five years and nine months. Risk free interest rates reflect the yield on the
ten-year U.S. Treasury note. Expected dividend yield presumes no set dividend
paid. Expected volatility is based on implied volatility from historical market
data for the Company. The expected option lives are based on a mathematical
average with respect to vesting and contractual terms.
The following is a summary of option activity:
+--------------------------------------------+-------------+---------------+
| | Options | Weighted- |
| | Outstanding | Average |
| | | Exercise |
| | | Price |
+--------------------------------------------+-------------+---------------+
| | | |
+--------------------------------------------+-------------+---------------+
| Options outstanding at December 31, 2006 | 9,641,156 | 75.4 pence |
+--------------------------------------------+-------------+---------------+
| Granted | - | |
+--------------------------------------------+-------------+---------------+
| Exercised | - | |
+--------------------------------------------+-------------+---------------+
| Cancelled | - | |
+--------------------------------------------+-------------+---------------+
| Options outstanding at December 31, 2007 | 9,641,156 | 75.4 pence |
+--------------------------------------------+-------------+---------------+
| Granted | 22,926,566 | |
+--------------------------------------------+-------------+---------------+
| Exercised | - | |
+--------------------------------------------+-------------+---------------+
| Cancelled | 9,641,156 | |
+--------------------------------------------+-------------+---------------+
| Options outstanding at December 31, 2008 | 22,926,566 | 10.34 pence |
+--------------------------------------------+-------------+---------------+
| | | |
+--------------------------------------------+-------------+---------------+
| Options exercisable at December 31, 2008 | 5,731,642 | |
+--------------------------------------------+-------------+---------------+
| | | |
+--------------------------------------------+-------------+---------------+
| Options available for grant at December | 5,059,759 | |
| 31, 2008 | | |
+--------------------------------------------+-------------+---------------+
All options outstanding at December 31, 2007, were canceled in August 2008 as a
result of the adoption of the Amended and Restated BSG Plan and the Amended and
Restated BSG North America Plan.
Of the 22,926,566 options granted during 2008, a total of 20,187,500 were
granted under the Amended and Restated BSG North America Plan and 2,739,066 were
granted pursuant to Amended and Restated BSG Plan.
The weighted-average grant-date fair value of options granted in 2008 was 6.0
pence. As of December 31, 2008, there was $2.0 million of total unrecognized
noncash compensation cost related to nonvested share-based compensation
arrangements granted under the BSG Plan and the BSG North America Plan. That
cost is expected to be recognized during 2009 and 2010.
No options were exercised during 2008 or 2007, and accordingly, there were
neither cash receipts received nor tax benefits realized for the tax deductions
from option exercise.
15. Restructuring Expense and Other Income
Restructuring Expense
In 2006, in response to changing business conditions, the Company implemented a
series of restructuring initiatives to reduce costs and refocus its business
strategy, and accrued $4.5 million through a charge to the consolidated
statement of operations. During 2007, the Company paid for substantially all
restructuring charges accrued at December 31, 2006, and as a result reversed
$0.4 million of such costs included in accrued liabilities at December 31, 2006.
The resulting income is shown in the accompanying consolidated statements of
operations.
In 2008, following disposition of the Company's businesses outside of the United
States, the Company implemented cost reduction actions largely designed to
reduce corporate overhead expenses. In connection with this plan, the Company
recorded a $2.8 million restructuring charge, principally to cover severance and
related compensation costs for terminated employees. Of this amount, $1.7
million was paid during 2008 and $1.1 million is expected to be paid in 2009.
Other Income
Other income for the year ended December 31, 2008 consists primarily of the
reduction of certain accrued liabilities based on changes in the estimation
process.
16. Subsequent Events
In January 2009, the Company repurchased $2.6 million of its debt under the Term
Loan Facility for $2.4 million. In February 2009, the Company made a voluntary
prepayment of $2.0 million of its debt under the Term Loan Facility. At March
15, 2009, total outstanding term debt was $89.0 million, inclusive of all
original issue discount.
During the first quarter of 2009, the Company canceled $22 million of notional
principal amount in interest rate swaps for a cost of $0.8 million. Accordingly,
the table below sets forth the remaining interest rate swaps in place at March
15, 2009.
+------------------+------------------------+------------+
| Contract | Contract Period | Contract |
| Notional Amount | |Fixed Rate |
+------------------+------------------------+------------+
| | | |
+------------------+------------------------+------------+
| $ | 12/31/07 | 4.00% |
| 13,000,000 | to | |
| | 12/31/10 | |
+------------------+------------------------+------------+
| 15,000,000 | 12/31/07 | 4.11% |
| | to | |
| | 12/31/11 | |
+------------------+------------------------+------------+
| 20,000,000 | 12/31/07 | 4.18% |
| | to | |
| | 12/31/12 | |
+------------------+------------------------+------------+
| $ | | |
| 48,000,000 | | |
+------------------+------------------------+------------+
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SEFFLUSUSEID
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