Results for Year Ended 06

2nd Apr 2007 07:04

Billing Services Group Limited02 April 2007 Not for release, publication or distribution, in whole or in part, in, into orfrom the United States, Canada, Ireland, Australia or Japan, or any otherjurisdiction where to do so would constitute a violation of the relevant laws ofsuch jurisdiction. 2 April 2007 Billing Services Group Limited ("BSG") Results for the year ended 31 December 2006 BSG, one of the world's leading providers of clearing, settlement, payment andfinancial risk management solutions to the telecommunications industry, todayannounces its audited results for the twelve months ended 31 December 2006. Financial Highlights • Turnover increased by 14% to $179.4 million (2005: $157.3 million). • EBITDA increased by 19% to $49.4 million (2005: $41.3 million) which is set against previous expectations of $44.5 million to $47.5 million. • Pro forma EBITDA of $51.4 million above previous guidance of $47.0 million to $49.0 million. • Refinanced the company's debt with a new $330 million multicurrency credit facility. • Implemented an $8.0 million annualised global cost savings initiative during the third quarter. • Repaid in full all outstanding borrowings ($12.5 million) under the revolving credit facility. Operational Highlights • Signed 72 new LEC billing and ancillary service contracts and renewed 288 existing LEC billing and ancillary service contracts. • Signed 21 new financial and data clearing agreements and renewed 71 financial and data clearing agreements. • Completed the development of the initial advanced payment gateway incorporating Bill2Phone(TM), credit card processing and risk management services with a planned 2007 commercial introduction. • Completed the staffing and build out of the commercial and sales teams across the wireless business (Asia, Europe, Russia, US and South America); and the content, credit card and risk services commercial teams in the wireline business. • Successfully completed the acquisition and integration of United Clearing Plc, a strategic complement to the wireless business with a base of more than 70 financial settlement contracts. • On 30 June, acquired VoiceLog LLC, a leading provider of third party verification services and have subsequently integrated it into wireline operations. Current Trading • Separately announced today was the proposed disposal of the wireless business for a $290 million cash consideration providing for new strategic focus going forward. • Since the start of 2007 the business has signed 28 new wireline, credit card and ancillary service agreements, 19 new VoiceLog contracts, seven new wireless data clearing and seven new wireless financial clearing contracts. Commenting on the preliminary results by Randall W. Brouckman, Chief ExecutiveOfficer of BSG, said: "Since the half year, we have expanded and enhanced our client relationships,dramatically improved our cost base, successfully integrated our variousacquisitions and created a management team imbued with a greater sense ofpurpose. "I am delighted with the progress we have made and to be able to report bothfinancial and operational results above expectations. "We have also today separately announced the conclusion of our strategic reviewand the proposed disposal of our wireless business. Subject to shareholdersupport for this disposal BSG will in the future focus on the wireline business,which has made a strong start to the current year and is well positioned tocapitalize and build on these early successes." Conference Call A conference call with analysts and investors will take place at 0900 hrs BST.The dial-in details are +44 (0) 20 7138 0818. ENQUIRIES: Billing Services Group Ltd + 44 (0)20 7071 4300Randall W. Brouckman, Chief Executive Officer On 2 April 2007 OnlyNorman M. Phipps, Chief Financial Officer Evolution Securities Limited +44 (0)20 7071 4300Fergus MarcroftStuart Andrews The Hogarth Partnership +44 (0)20 7357 9477Julian Walker CHIEF EXECUTIVE'S STATEMENT In my first annual statement as your Chief Executive Officer, I am pleased toreport both financial and operational results above the expectations set forthin July. 2006 has been a year of considerable transition for BSG with the resultantbusiness strongly positioned to continue to take on the challenges of our fastmoving industry landscape. The combination of my previous role as ChiefOperating Officer with that of the Chief Executive office is but one example ofhow we have worked to restructure your company to operate more efficiently andto maximize its true potential. We have successfully: • refinanced the Company's debt; • implemented an annualised $8.0 million global cost saving programme; • augmented the operational business with two smaller complementary acquisitions; • integrated all acquisitions in line with expectations; • enhanced our sales and commercial functions by attracting some of the very best people in our industry; • transitioned our wireline operation from pure LEC clearinghouse to full payment services; and, perhaps most importantly; • maintained our leading industry position in our wireline business. During the year we also initiated a process to review the Company's strategicoptions to ensure that we maximised shareholder value. We have separatelyannounced today the proposed disposal of the wireless business for a $290million cash consideration which will allow for a new strategic focus goingforward. OPERATIONAL REVIEW Acquisitions Our focus in 2006 has been to fully integrate the acquisitions of the previousperiod and to augment the business with appropriate, smaller additions and wehave successfully achieved our objectives in the period. United Clearing Plc We completed the acquisition of United Clearing plc ("United Clearing"), witheffect from 1 March 2006 for financial accounting purposes. With a base of morethan 70 financial settlement contracts, United Clearing increased the momentumof our growing wireless business. United Clearing provides settlement servicesto wireless carriers. Its services are complementary to the clearinghouseservices of BSG Germany, allowing us to realise operational synergies andbroaden our portfolio of services to the global mobile telecommunicationsindustry. The acquisition also makes BSG a world leader in settlement for thetelecommunications industry. VoiceLog, LLC On 30 June, we acquired the third party verification business of VoiceLog, astrategic complement to the company's North American wireline business.VoiceLog's established customer base and great reputation in the industry haveprovided immediate cross selling opportunities and given us access to newmarkets. Its scalable technology and service platform and comprehensive suiteof services expand the scope of our risk management product portfolio andadvanced our migration from a pure LEC clearinghouse to a full service paymentand risk services transaction company. Operational Developments In addition to enhancing our business through acquisitions, we have alsoconcentrated on strengthening relationships with our existing customers. I ampleased to report that during the year we have renewed 288 existing LEC billingand ancillary service contracts and 71 financial and data clearing agreements.In addition, our re-focused sales and marketing teams have further expanded ourblue chip client list, signing 72 new LEC billing and ancillary servicecontracts and 21 new financial and data clearing agreements. We continue to attract some of the leading names in the industry. It is atestament to the technical capabilities and professionalism of our employeesthat we have completed the staffing and build out of the commercial and salesteam across the corporation. We now have fully supported teams across thewireless business (Asia, Europe, Russia, US and South America) and the content,credit card and risk management teams in the wireline business. We have completed the development of our initial payment services platform,Advanced Payment Gateway (APG(TM)), incorporating Bill2Phone(TM), credit cardprocessing and risk management services and commercial introduction occurredlate in quarter one this year. As a leader in the market for third party clearing and settlement services, weremain committed to rapidly developing our technological solutions and meetingcustomer demands. We are currently developing and proceeding with a number of new initiatives todrive growth and ensure we remain a powerful force in the industry. • Advanced Payment Gateway ("APG(TM)") - Our Advanced Payment Gatewaycombines the offerings of Bill2Phone(TM), Credit Card, and Risk ManagementServices. The platform allows merchants to offer multiple payment solutionsthrough a single gateway with consolidated risk management and reporting. APG(TM) can also be used by merchant aggregation distribution channels such asClickandBuy(TM) LLC, PayPal, and others. • Bill2Phone(TM) - Our real-time payment solution that offers onlinemerchants, content aggregators and e-wallet providers the ability to processelectronic payments to consumers' local telephone bill. Since its availabilityon January 15, 2007, BSG has closed five new Bill2Phone(TM) customer contracts. • Credit card processing - Some of our existing customer base alreadyuses and requires credit card billing functionality with integrated riskmanagement services. BSG has added the technology, personnel and businessprocesses to offer these services. • Integrated Risk Services - BSG has combined state-of-the-arttechnology, proprietary and commercial databases, and industry leading expertiseto create the most comprehensive risk management service offering available forcard-not-present merchants. BSG's risk management services are availablethrough simple connectivity to BSG's Advanced Payment Gateway and are commonlybundled with payment transactions. This single integration point provides thebroadest spectrum of risk management tools available in the payments industry.The cornerstone of the risk services offering is the dedicated risk team thatsupports the offering through analytics and risk profiling, allowing merchantsto customize their risk profiles and optimize their revenues. • NRTRDE (Near Real Time Roaming Date Exchange) - NRTRDE is a solutionmandated by the GSM Association for 2008 to address roaming fraud bydistributing call records on a near-real-time basis. BSG is developing a newoffering available in 2007 to address the upcoming needs. • Wireless value added services - BSG has continued to implement andintroduce value added services throughout 2006 including an automated tariffsimulation system that will help carriers understand the impacts and test newwholesale and retail plans; a roaming information system to manage roamingrelationships and information management related to complex roamingarrangements; and a discount management service that provides operationalefficiencies and new capabilities to allow carriers to introduce moresophisticated wholesale rate plans. This will be increasingly important aspotential EU regulations related to roaming are passed. Current Trading and Prospects We have today separately announced the proposed disposal of the wirelessbusiness for a $290 million cash consideration providing for a new strategicfocus going forward. Subject to shareholder support for this disposal, BSG willin the future focus on the North American wireline business. BSG's market-leading wireline business has begun the current year well with 28new wireline, credit card and ancillary service agreements and 19 new VoiceLogcontracts signed to date. The company has introduced the APG(TM) suite of services including the Bill2Phone(TM) solution for content merchants. In its wireless business, BSG has signed seven new data clearing and seven new financial clearing contracts and continues to offer new value added services. Your Board firmly believes that the newly-focused company, with its tightergrowth strategy and clarity, stronger balance sheet and market-leadingtechnology, will be well positioned to capitalize and build on these earlysuccesses. FINANCIAL REVIEW Financial Review of the Twelve Months Ended 31 December 2006 References made to the "company" in respect of dates prior to 15 June 2005include certain predecessor entities and the company's current direct andindirect wholly owned subsidiaries as appropriate. Additionally, the results forthe twelve months ended 31 December 2006 include ten months' operations ofUnited Clearing (acquired 1 March 2006), six months' operations of VoiceLog'sthird party verification business (acquired 30 June 2006) and one month ofoperations of VeriSign's toll clearinghouse (acquired 1 December 2006). BSG's consolidated financial statements are prepared in accordance withgenerally acceptable accounting principles in the United States ("US GAAP").The financial statements included herein should be read in conjunction with thenotes incorporated in the audited financial statements. Statement Summary Revenues. BSG's revenues are derived from its North American clearinghouse andthird-party verification businesses and from its European mobile roamingclearing and financial settlements businesses. North American revenues arederived primarily from fees charged to wireline long distance providers for dataclearing, financial settlement, information management, payment and financialrisk management, third party verification and customer service functions.European revenues largely consist of fees charged to wireless carriers forclearinghouse services related to international roaming charges and thefinancial settlements between roaming carriers. Cost of Services and Gross Profit. BSG's cost of services for its NorthAmerican wireline business primarily includes fees charged by local exchangecarriers ("LECs") for billing and collection services. Such fees are assessedfor each record submitted and for each bill rendered to end-user customers. BSGcharges its customers a negotiated fee for LEC services. Accordingly, grossprofit generated by the North America business is generally dependent upontransaction volume, processing fees charged per transaction and any differentialbetween the LEC fees charged to customers by BSG and the related fees charged toBSG by LECs. There is no material cost of services associated with revenuesfrom the company's European business. Cash Operating Expenses. Cash operating expenses are comprised of all selling,marketing, customer service, facilities and administrative costs (includingpayroll and related expenses) incurred in support of operations and settledthrough the payment of cash. Depreciation and Amortization. Depreciation expense applies to software,furniture and fixtures, telecommunications and computer equipment. Amortizationexpense relates to definite-lived intangible assets that are amortized inaccordance with SFAS No. 142 "Goodwill and Other Intangible Assets." Theseassets consist primarily of contracts with LECS, relationships with customersand trademarks. The assets are depreciated or amortized over their respectiveuseful lives. In additional, deferred finance fees are amortized over the termof the related loans. Comparison of Results for Year Ended 31 December 2006 to Year Ended 31 December2005 Total Revenues. Revenues of $179.4 million in 2006 were $22.1 million, or 14%,higher than in 2005. The increase in revenues was attributable to the inclusionof a full year of revenues from BSG Germany (acquired in August 2005), andrevenues from United Clearing and VoiceLog since their respective acquisition,offset in part by a reduction in revenues in the North American LECclearinghouse business as a result of lower transaction volumes primarilyrelated to a limited number of customers. Cost of Services and Gross Profit. Cost of services of $80.0 million in 2006was $8.6 million, or 10%, lower than in 2005. Gross profit of $99.4 million in2006 was $30.7 million, or 45%, higher than in 2005. The decrease in cost ofservices during 2006 is primarily due to lower LEC fees resulting from lowertransaction volume in the North American LEC clearinghouse business. Theincrease in gross profit is largely attributable to the additional revenue fromacquired businesses, none of which has a material cost of services. Grossmargin rose to 55.4% in 2006, compared to 43.6% in 2005, as a result of thefavorable mix of higher margin business. Cash Operating Expenses. Cash operating expenses of $50.0 million in 2006 were$22.7 million, or 83%, higher than in 2005. The increase in expenses waslargely attributable to the addition of a full year of operating expenses forBSG Germany and the cash expenses of acquired companies since their respectiveacquisition, partially offset by cost savings realized in the fourth quarterfrom personnel reductions and office closures in North America and Europe. Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). Thecompany generated $49.4 million of EBITDA in 2006, compared to $41.3 million in2005. The company's EBITDA in 2006 compared favorably to mid-year guidance of$44.5 million to $47.5 million. On a pro forma basis (as if the company ownedall pre-guidance acquired companies effective 01 January 2006) EBITDA was $ 51.4million, which compares favorably to mid-year guidance of $47 million to $49million. On a pro forma, including all companies acquired for the full yearended 2006, EBITDA was $53.3 million. Of the pro forma EBITDA of $53.3 million,a total of $31.5 million was earned within the wireline businesses and $21.8million within the wireless businesses. Depreciation and Amortization Expense. Depreciation and amortization expense in2006 increased by $8.4 million, or 54%, compared to 2005. The increase wasprimarily due to the inclusion of a full year's charges within BSG Germany andthe expenses of acquired companies subsequent to their acquisition dates.Goodwill was neither amortized nor impaired in either period. Restructuring and Nonrecurring Expenses. During 2006, the company incurred $7.0million of charges related to a cost reduction program and a refocusing of itsbusiness strategy. Restructuring charges of $5.2 million primarily consisted ofseverance and related compensation costs paid to terminated employees and leasetermination fees. Nonrecurring expenses of $1.8 million primarily included feesand expenses paid to professional advisory firms for uncompleted acquisitions.The expenses were not included as a deduction for purposes of calculatingEBITDA. Stock-based Compensation Expense. During 2006, the company adopted FASBStatement No. 123(R), which provides for recognition of non-cash compensationexpense for stock options. Stock-based compensation expense in 2006 was $1.5million. The expense is not included as a deduction for purposes of calculatingEBITDA. Interest Expense. Interest expense of $30.3 million in 2006 included $9.4million of debt extinguishment costs. Interest expense of $15.2 million in 2005included $0.6 million of debt extinguishment costs. The higher interest expenseon borrowed money largely reflects a full year of interest expense on higherdebt balances incurred to finance the acquisition of BSG Germany in August 2005. Write-off of Deferred Finance Costs. In 2006, the company wrote off $12.4million of deferred finance fees incurred in connection with debt arranged in2005. In 2005, the company wrote off $2.7 million of deferred finance feesassociated with debt arranged in 2003. New Debt Facilities In May 2006, the company refinanced its debt by entering into new creditagreements providing $330 million of total borrowing capacity under first-lienand second-lien facilities. The new credit facilities consist of $215 millionin first-lien term loans, $40 million of second-lien term loans, $15 million ofrevolving loan availability and a $60 million uncommitted term loan facilityreserved for future financing requirements. Loans are denominated in both U.S.Dollars and Euros and include various covenants which are usual and customary intransactions of this nature. The company borrowed $255 million at closing to repay all existing debt, to payfees and expenses associated with the refinancing and to supplement workingcapital. Loans outstanding at 31 December 2006 were $252 million. The company was in compliance with all covenants under the credit agreementduring 2006. Changes in Cash BSG's cash balance at 31 December 2006 was $41.9 million compared to $50.4million at 31 December 2005. The $8.5 million decline in cash is largelyattributable to the $19.1 million net loss, $15.3 million of capitalexpenditures, $15.1 million paid for the VoiceLog acquisition and a $12.1million decline in third-party payables in the North American LEC business,offset by $24.1 million in non-cash depreciation and amortization charges, a$12.4 million write-off of deferred finance fees related to debt that wasrefinanced, $10.8 million of net proceeds from financing activities and $7.1million of cash acquired in acquisitions. Fluctuations in daily cash balancesand third-party accounts payable are normal due to the variability of fundscollected from LECs and processed on a daily basis. Capital Expenditures During 2006, the company incurred capital expenditures of $15.3 million,including capitalized interest of $2.2 million. Capital expenditures related tothe costs of ongoing software development projects, purchases oftelecommunications and computer equipment and capitalized interest. Capitalexpenditures of the wireless businesses totaled $8.9 million in 2006, whilecapital expenditures in the wireline businesses were $6.4 million. The companyexpects that capital expenditures for the wireline business will decrease in2007, as the result of completion of certain software development projectsduring the first half of year. Cash Flow for the Year Ended 31 December 2006 Cash flow from operating activities. Net cash provided from operatingactivities was $1.4 million during 2006. Net cash provided was largelyattributable to $24.1 million of non-cash depreciation and amortization and$13.9 million of non-cash amortization of deferred finance costs, offset by a$19.1 million loss, a $12.1 million reduction in third-party payables and a $4.6million reduction in trade accounts payable. Cash flow from investing activities. Cash used in investing activities was$21.6 million during 2006. Net cash used in investing activities included $15.3million of capital expenditures and $15.1 million to purchase VoiceLog, offsetby $7.1 million of cash at acquired companies and a $2.9 million reduction inpurchased receivables. Cash flow from financing activities. Cash provided by financing activities was$10.8 million during 2006. The company's borrowings of $281.9 million under newcredit facilities were offset by $263.4 million of debt payments and $7.8million of financing costs. **************************** A copy of this statement is being sent to all shareholders and copies areavailable from BSG's Nominated Advisor at the address below: Billing Services Group Limitedc/o Evolution Securities Limited100 Wood StreetLondon EC2V 7ANUnited Kingdom Billing Services Group Limited Consolidated Balance Sheets(In thousands, except shares) December 31 2006 2005 --------- ---------Assets Current assets: Cash and cash equivalents $ 41,881 $ 50,347Accounts receivable 30,656 28,541 Purchased receivables 20,094 22,994 Income tax receivable 2,726 2,400 Prepaid expenses and other current assets 1,836 2,198 Deferred taxes - current 1,218 913 --------- ---------Total current assets 98,411 107,393 Property, equipment and software 66,494 43,541 Less accumulated depreciation and amortization 15,074 6,690 --------- ---------Net property, equipment and software 51,420 36,851 Investment at equity 1,230 1,435 Deferred finance costs, net of accumulated amortization of $830 and $2,116 at December 31, 2006 and 2005, respectively 5,959 11,463 Intangible assets, net of accumulated amortization of $38,249 and $20,430 at December 31, 2006 and 2005, respectively 97,990 97,544 Goodwill 226,773 172,862 Other assets 1,200 1,481 --------- ---------Total assets $ 482,983 $ 429,029 ========= ========= Billing Services Group Limited Consolidated Balance Sheets (continued)(In thousands, except shares) December 31 2006 2005 --------- ---------Liabilities and shareholders' equity Current liabilities: Trade accounts payable $ 13,184 $ 17,337Third-party payables 66,074 78,125 Accrued liabilities 20,603 15,322 Current portion of long-term debt 11,011 10,400 Purchase price payable 2,265 -Note payable - 38 --------- ---------Total current liabilities 113,137 121,222 Long-term debt, net of current portion 240,944 211,588 Pension liabilities 5,062 4,284 Deferred taxes - noncurrent 12,699 14,111 Other liabilities 7,235 11,293 --------- ---------Total liabilities 379,077 362,498 Commitments and contingencies Shareholders' equity: Common stock, $1 par value, 350,000,000 shares authorized, 279,863,248 and 254,604,483 shares issued and outstanding at December 31, 2006 and 2005, respectively 279,863 254,604 Additional paid-in capital (deficit) (171,471) (187,733) Retained (deficit) earnings (15,689) 3,411 Accumulated other comprehensive income (loss) 11,203 (3,751) --------- ---------Total shareholders' equity 103,906 66,531 --------- ---------Total liabilities and shareholders' equity $ 482,983 $ 429,029 ========= ========= See accompanying notes. Billing Services Group Limited Consolidated Statements of Operations(In thousands, except per share amounts) Years Ended December 31 2006 2005 ----------- ----------- Operating revenues $ 179,416 $ 157,313Cost of services 80,033 88,665 ----------- -----------Gross profit 99,383 68,648 Selling, general, and administrative expenses 49,998 27,316 Depreciation and amortization expense 24,069 15,627 Restructuring expense 5,200 -Other nonrecurring expenses 1,800 -Stock-based compensation expense 1,523 - ----------- ----------- Operating income 16,793 25,705 Other income (expense): Interest expense, net of $2,152 and $2,057 capitalized in 2006 and 2005, respectively (30,317) (15,228) Write-off of deferred finance costs (12,374) (2,722) Interest income 2,804 2,468 Equity in loss from investment (205) (65) Other income (expense), net 68 (1,187) ----------- -----------Total other expense, net (40,024) (16,734) ----------- ----------- (Loss) income before income taxes (23,231) 8,971 Income tax (benefit) expense (4,131) 3,833 ----------- -----------Net (loss) income $ (19,100) $ 5,138 =========== =========== Net income per share: Basic and diluted $ (0.069) $ 0.025 =========== =========== Weighted average shares outstanding 275,711 208,219 =========== =========== See accompanying notes. Billing Services Group Limited Consolidated Statements of Changes in Shareholders' Equity(In thousands) ------- --------- --------- ---------- --------- ---------- ---------- Number of Members' Common Additional Retained Accumulated Total Shares Capital Stock Paid-In Earnings Other Deficit (Deficit) Comprehensive Income (Loss) ------- --------- --------- ---------- --------- ---------- ---------- Members' equity, December 31, 2004 - $ 34,085 $ - $ - $ 5,387 $ - $ 39,472Exchange of members' interest for common stock 179,591 (34,085) 179,591 (145,506) - - -Distributions - - - (64,186) (7,114) - (71,300) Proceeds from the sales of common stock 75,013 - 75,013 21,959 - - 96,972 Net income - - - - 5,138 - 5,138 Translation adjustment - - - - - (4,269) (4,269) Derivative gain, net of taxes of $278 - - - - - 518 518 ----------Total comprehensive income 1,387 ------- --------- --------- ---------- --------- ---------- ----------Shareholders' equity, December 31, 2005 254,604 - 254,604 (187,733) 3,411 (3,751) 66,531 Issuance of common stock in exchange for shares of United Clearing Limited 25,112 - 25,112 14,723 - - 39,835 Proceeds from the sale of common stock 147 - 147 16 - - 163 Stock-based compensation expense recognized in earnings - - - 1,523 - - 1,523 Adoption of FASB Statement 158, net of taxes of $102 - - - - - 177 177 Net loss - - - - (19,100) - (19,100) Translation adjustment - - - - - 15,295 15,295 Derivative loss, net of taxes of $278 - - - - - (518) (518) ----------Total comprehensive loss (4,323) ------- --------- --------- ---------- --------- ---------- ----------Shareholders' equity, December31, 2006 279,863 $ - $ 279,863 $ (171,471) $ (15,689) $ 11,203 $ 103,906 ======= ========= ========= ========== ========= ========== ========== See accompanying notes. Years Ended December 31 2006 2005 ----------- -----------Operating activities Net (loss) income $ (19,100) $ 5,138Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation 7,064 3,702 Amortization of intangibles 16,895 11,815 Amortization of deferred finance costs 13,919 4,174 Amortization of discount on debt - 803 Paid-in-kind interest on debt 1,490 387 Equity in loss from investment 205 65 Stock-based compensation expense 1,523 -Loss on disposal of assets 7 - Changes in operating assets and liabilities: Decrease in accounts receivables 620 4,078 Increase in income taxes receivable (326) (1,863) Decrease (increase) in prepaid expenses and other assets 580 (1,753) (Decrease) increase in trade accounts payable (4,642) 1,021 Decrease in third-party payables (12,051) (30,140) Increase (decrease) in accrued liabilities 1,410 (5,806) Provision for deferred taxes (2,165) 3,260 (Decrease) increase in other liabilities (4,058) 1,828 ----------- -----------Net cash provided by (used in) operating activities 1,371 (3,291) Investing activities Purchase of BSG Germany (324) (155,557) Cash acquired in purchase of United Clearing, net of cash outlay 7,146 -Purchase of VoiceLog (15,083) -Purchase of VeriSign toll clearinghouse (930) -Adjustments of purchase price of BC Holding I Corporation, net of cash acquired - 103 Purchases of property, equipment and software, including $2,152 and $2,057 of capitalized interest in 2006 and 2005, respectively (15,289) (13,041) Purchase of investment - (1,500) Net receipts on purchased receivables 2,900 3,653 ----------- -----------Net cash used in investing activities (21,580) (166,342) Years Ended December 31 2006 2005 ----------- -----------Financing activities Proceeds from the sales of common stock $ 163 $ 96,972Borrowings of long-term debt 281,900 219,512 Payments on long-term debt (263,354) (88,590) Payments on note payable (38) (90) Distributions paid - (71,300) Financing costs (7,834) (12,757) ----------- -----------Net cash provided by financing activities 10,837 143,747 Effect of exchange rate changes on cash 906 (80) ----------- -----------Net decrease in cash and cash equivalents (8,466) (25,966) Cash and cash equivalents at beginning of year 50,347 76,313 ----------- -----------Cash and cash equivalents at end of year $ 41,881 $ 50,347 =========== =========== Supplemental cash information Cash paid during the year for: Interest $ 18,003 $ 12,030 =========== ===========Taxes $ - $ 2,700 =========== =========== Noncash investing activities Adjustment to goodwill, property, equipment, and software, and accrued liabilities $ 1,221 $ - =========== ===========Noncash financing activities Derivative gain, net of taxes of $278 $ - $ 518 =========== ===========Increase in purchase price payable $ 2,265 $ - =========== ===========Increase in common stock in exchange for shares of United Clearing Limited $ 39,835 $ - =========== =========== See accompanying notes. 1. Organization and Summary of Significant Accounting Policies Organization Calendar Year 2005 Billing Services Group Limited (the "Company" or "BSG Limited") commencedoperations effective with the completion of its admission to AIM (a marketoperated by the London Stock Exchange plc) on June 15, 2005. The Company wasformed to succeed to the business of Billing Services Group, LLC ("BSG LLC") andits subsidiaries. The Company is a leading global provider of clearing andsettlement, payment services, and financial risk management solutions forcommunications service providers. The Company was incorporated and registered inBermuda on May 13, 2005, with the issuance of 12,000 shares of common stock inanticipation of admission to trading on AIM. On May 16, 2005, the Companyentered into a Share Exchange Agreement with BSG LLC and the members of BSG LLCand exchanged 179,579,700 shares of common stock for all of the membershipinterests of BSG LLC, the effectiveness of which was contingent upon the closingof the Company's sale of its common stock and admission to AIM. On June 15,2005, the Company sold 3,012,783 shares and certain of its stockholders sold109,907,550 shares of the Company's common stock at a price per share of 74.5pence ($1.36), generating gross proceeds of $153.6 million, of which$4.1 million was received by the Company. The aggregate proceeds to the Company,net of offering costs, were approximately $1.4 million. On August 15, 2005, theCompany sold 72,000,000 shares of its common stock at a price per share of78 pence ($1.41), generating net proceeds of $95.5 million. Calendar Year 2006 Effective March 1, 2006, the Company completed the acquisition of all of theissued and to-be-issued share capital of United Clearing Limited ("UnitedClearing") by way of an all share transaction. The consideration was the issueof 25,111,759 shares of the Company's common stock. United Clearing is a leadingprovider of financial clearing and settlement solutions to the global mobiletelecommunications market. The acquisition expands the Company's worldwidewireless operations. The results of United Clearing's operations have beenincluded in the Company's consolidated statement of operations since March 1,2006. On June 30, 2006, the Company, through its newly formed subsidiary, BSG TPV, LLC("TPV"), acquired VoiceLog, LLC's third-party verification business in an allcash transaction for $16.4 million, including expenses of $143,000. TPV is aleading provider of third-party verification services. The acquisition wasfinanced from available credit facilities and existing cash resources. Thepurchase expands the market opportunity for the Company's North Americanwireline operations. The results of the acquired TPV business have been includedin the Company's consolidated statement of operations since July 1, 2006. On December 1, 2006, the Company acquired certain assets relating to VeriSign,Inc.'s toll clearinghouse business for a purchase price of $1.9 million. Theacquired assets enable the Company to act as both an aggregator totelecommunications service providers and act as a service provider for otherbilling aggregators. The purchase extends the reach of the Company's NorthAmerican wireline operations. The results of the acquired toll clearinghousebusiness have been included in the Company's consolidated statement ofoperations since December 1, 2006. References made to the "Company" in respect of dates prior to June 15, 2005,include certain predecessor entities and the Company's current direct andindirect wholly owned subsidiaries as appropriate. Principles of Consolidation The accompanying consolidated financial statements include all of the accountsof the Company and the subsidiaries, Billing Services Group North America, Inc.("BSG North America"), Billing Services Group Luxembourg S.a.r.l. ("BSG Lux"),BSG Clearing Solutions Asia Limited, and their respective subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation. The exchange of BSG Limited common stock for the member interests of BSG LLC onJune 15, 2005, has been accounted for as a reorganization of entities undercommon control in a manner similar to a pooling-of-interests. Accordingly, theassets and liabilities of BSG LLC were recorded at their carrying amount in theaccounts of BSG LLC. Under the pooling-of-interest method of accounting, BSGLimited is reporting the results of operations for the period in which thetransfer occurred as though the exchange of equity interests had occurred at thebeginning of the period. Therefore, the results of operations presented for theyear ended December 31, 2005, comprise those of BSG LLC from January 1, 2005 toJune 15, 2005, and those of the combined entities from June 16, 2005 toDecember 31, 2005. Cash and Cash Equivalents Cash and cash equivalents include all cash and highly liquid investments withoriginal maturities of three months or less. The Company holds cash and cashequivalents at several major financial institutions in amounts which oftenexceed Federal Deposit Insurance Corporation ("FDIC") insured limits for UnitedStates deposit accounts. The Company has entered into control agreements withits lenders and certain financial institutions covering certain of its depositaccounts. Purchased Receivables The Company offers participation in advance funding arrangements to certain ofits United States-based customers. Under the terms of the arrangements, theCompany purchases the customer's accounts receivable for an amount equal to theface amount of the call record value submitted to the local exchange carriers("LECs") by the Company, less various items including financing fees, LECcharges, rejects, and other similar items. The Company advances 15% to 80% ofthe purchased amount and charges financing fees at rates up to 4% per annum overprime (12.25% per annum at December 31, 2006) to the customer until the fundsare received from the LECs. The face amount of the call record value is recordedas purchased receivables in the consolidated balance sheets. Financial Instruments Due to their short maturity, the carrying amounts of accounts and purchasedreceivables, accounts payable, and accrued liabilities approximated their fairvalues at December 31, 2006. Concentration of Credit Risk and Significant Customers At December 31, 2006, four customers represented approximately 60% ofoutstanding purchased receivables. At December 31, 2005, one customerrepresented approximately 11% of accounts receivable and four customersrepresented approximately 50% of outstanding purchased receivables. Credit riskwith respect to trade accounts receivable generated through billing services islimited, as the Company collects its fees through receipt of all its customers'cash directly from the LECs with respect to its North American wirelineoperations. Credit risk associated with the Company's remaining trade accountsreceivable is also limited, as the counterparty is generally a multinationalmobile network operator. The credit risk with respect tothe purchase of accounts receivable is reduced as the Company only advances 15%to 80% of the gross accounts receivable purchased. Management evaluates accountsreceivable balances on an ongoing basis and provides allowances as necessary foramounts estimated to eventually become uncollectible. In the event of completenonperformance of accounts receivable, the maximum exposure to the Company isthe recorded amount shown on the balance sheet. During the year ended December31, 2005, one customer represented approximately 10% of consolidated revenuesand 38 customers represented approximately 50% of consolidated revenues. Duringthe year ended December 31, 2005, one customer represented approximately 15% ofconsolidated revenues and 24 customers represented approximately 45% ofconsolidated revenues. The Company is at risk to the extent that cash held at banks in the UnitedStates exceeds the FDIC-insured amounts. The Company minimizes this risk byplacing its cash with higher credit quality financial institutions. Property, Equipment and Software Property, equipment and software are primarily composed of furniture andfixtures, office equipment, computer equipment and software, and leaseholdimprovements, including capitalized interest, which are recorded at cost. Thecost of additions and substantial improvements to property and equipment,including software being developed for internal use, is capitalized. The cost ofmaintenance and repairs of property and equipment is charged to operatingexpenses. Property, equipment and software are depreciated using thestraight-line method over their estimated useful lives, which generally rangefrom three to seven years. Leasehold improvements are depreciated over theshorter of the lease term or the estimated useful life of the asset. Upondisposition, the cost and related accumulated depreciation are removed from theaccounts, 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 lifein excess of one year. These costs consist of payments made to third parties andthe salaries of employees working on such software development. Subsequentadditions, modifications, or upgrades to internal-use software are capitalizedonly to the extent that they allow the software to perform a task it previouslydid not perform. Software maintenance and training costs are expensed in theperiod in which they are incurred. The Company also develops software used in providing services. These softwaredevelopment costs are capitalized once technological feasibility of the softwarehas been established. Costs incurred prior to establishing technologicalfeasibility are expensed as incurred. Technological feasibility is establishedwhen the Company has completed all planning and high-level design activitiesthat are necessary to determine that a product can be produced to meet itsdesign specifications, including functions, features, and technical performancerequirements. Capitalization of costs ceases when a product is available forgeneral use. Capitalized software development costs are depreciated using the straight-linemethod over their estimated useful lives, which generally range from four toseven years. For the years ended December 31, 2006 and 2005, the Companycapitalized $12,489,000 and $10,957,000, respectively, of software developmentcosts. Capitalized software development costs are depreciated upon completion ofthe related software development project. No depreciation expense relating tosuch capitalized costs was recorded during the years ended December 31, 2006 and2005, as the projects are still under development. Purchase Accounting The Company accounts for its business acquisitions under the purchase method ofaccounting. The total cost of acquisitions is allocated to the underlyingidentifiable net assets, based on their respective estimated fair valuesgenerally resulting from a third-party valuation performed at the Company'srequest. The excess of the purchase price over the estimated fair values of thenet assets acquired is recorded as goodwill. Determining the fair value ofassets acquired and liabilities assumed requires management's judgment and ofteninvolves the use of significant estimates and assumptions, including assumptionswith respect to future cash inflows and outflows, discount rates, asset lives,and market multiples, among other items. In addition, reserves have beenestablished on the Company's balance sheets related to acquired liabilitiesbased on assumptions made at the time of acquisition. The Company evaluates thereserves on a regular basis to determine the adequacies of the amounts. Goodwill The Company accounts for goodwill in accordance with Statement of FinancialAccounting Standards ("Statement") 142, Goodwill and Other Intangible Assets.Statement 142 addresses financial accounting and reporting for acquired goodwilland other intangible assets and supersedes APB Opinion No. 17, IntangibleAssets. Statement 142 established new accounting guidelines for goodwill andother intangible assets recorded in business combinations. Goodwill represents the excess of the purchase price over the fair value ofidentifiable net assets acquired in business combinations. Goodwill is reviewedannually for potential impairment, or more frequently, if events or changes incircumstances indicate that the assets might be impaired. An impairment mayexist 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 inaccordance with Statement 144, Accounting for the Impairment or Disposal ofLong-Lived Assets. In accordance with Statement 144, long-lived assets arereviewed when events or changes in circumstances indicate that their carryingvalue may not be recoverable. These evaluations include comparing the futureundiscounted cash flows of such assets to the carrying value. If the carryingvalue exceeds the future undiscounted cash flows, the assets are written down totheir fair value. Third-Party Payables The Company's North American operations provide clearing, settlement, payment,and financial risk management solutions to telecommunications and other serviceproviders (customers) through billing agreements with LECs, which maintain thecritical database of end-user names and addresses of the billed parties. TheCompany receives individual call records from various telecommunications andother service providers and processes and sorts the records for transmittal tovarious LECs. Invoices to end-users are generated by the LECs, and the collectedfunds are remitted to the Company, which in turn remits these funds, net offees, reserves, and other charges to its customers. These reserves represent cash withheld from customers to satisfy futureobligations on behalf of the customers. The obligations consist of bad debt,sales and excise taxes, and other miscellaneous charges. The Company recordstrade accounts receivable and service revenue for fees charged to process andsort the call records. When the Company collects the customers' receivables fromthe LECs, the Company's trade receivables are reduced by the amountcorresponding to the processing fees, which are retained by the Company. The remaining funds due to its customers are recorded as liabilities andreported in third-party payables in the consolidated balance sheets. The Companyalso retains a reserve from its customers' settlement proceeds to cover theLECs' bad debts, billing fees, and sales taxes. Revenue Recognition The Company provides its services to telecommunications and other serviceproviders and recognizes revenue from its services when its customers' recordsare processed and accepted by the Company. 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 netincome or loss attributable to common shareholders by the weighted averagenumber of shares of common stock outstanding during the applicable period.Diluted earnings per share is determined in the same manner as basic earningsper share except that the number of shares is increased to assume exercise ofpotentially dilutive stock options using the treasury stock method, unless theeffect of such increase would be anti-dilutive. For the years ended December 31,2006 and 2005, the diluted earnings per share amounts equal basic earnings pershare because the exercisability of the outstanding stock options is based uponmarket 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 $960,000and $405,000 in advertising costs for the years ended December 31, 2006 and2005, respectively. Income Taxes The Company accounts for income taxes under Statement 109, Accounting for IncomeTaxes. Under Statement 109, deferred taxes are recognized using the liabilitymethod and tax rates are applied to cumulative temporary differences based onwhen and how they are expected to affect the tax return. The Company's U.S. subsidiaries file a consolidated federal income tax returnwith their U.S. parent, BSG North America. The U.S. subsidiaries pay theirproportionate share of the taxes to BSG North America, which is ultimatelyliable for the payment of the taxes to the Internal Revenue Service. TheCompany's other subsidiaries file separate income tax returns with theapplicable tax authorities. Stock-Based Compensation At December 31, 2006, the Company has a stock-based employee compensation plan,which is described more fully in Note 14. Prior to January 1, 2006, the Companyaccounted for its plan under the recognition and measurement provisions of APBOpinion No. 25, Accounting for Stock Issued to Employees, (Opinion 25) andrelated interpretations, as permitted by the Financial Accounting StandardsBoard ("FASB") Statement 123, Accounting for Stock-Based Compensation. Nostock-based employee compensation cost was recognized in the consolidatedstatement of operations for the year ended December 31, 2005, as all optionsgranted had an exercise price equal to the market value of the underlying commonstock on the date of grant. Effective January 1, 2006, the Company adopted thefair value recognition provisions of FASB Statement No. 123(R), Share-BasedPayment, using the modified-prospective-transition method. Under that transitionmethod, compensation cost recognized in 2006 includes: (a) compensation cost forall share-based payments granted prior to, but not yet vested as of, January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of Statement 123, and (b) compensation cost for allshare-based payments granted subsequent to January 1, 2006, based on thegrant-date fair value estimated in accordance with the provisions ofStatement 123(R). Results for prior periods have not been restated. As a result of adopting Statement 123(R) on January 1, 2006, the Company's lossbefore income taxes and net loss for the year ended December 31, 2006, are $1.5million and $1.2 million higher, respectively, than if it had continued toaccount for share-based compensation under Opinion 25. Basic and diluted lossper share for the year ended December 31, 2006, would have been $0.065 if theCompany had not adopted Statement 123(R), compared to reported basic and dilutedloss per share of $0.069. The following table illustrates the effect on net income and earnings per shareif the Company had applied the fair value recognition provisions ofStatement 123 to options granted under the Company's stock option plan in 2005.For purposes of this pro forma disclosure, the value of the options is estimatedusing a Monte Carlo single option model and amortized to expense over theoptions' vesting periods. Year Ended December 31, 2005 ----------- Net income, as reported $ 5,138Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,311) -----------Pro forma net income $ 3,827 =========== Earnings per share: Basic - as reported $ 0.025 ===========Basic - pro forma $ 0.018 =========== Diluted - as reported $ 0.025 ===========Diluted - pro forma $ 0.018 =========== 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 eitherassets or liabilities in the consolidated balance sheet at fair value. Theaccounting for changes in the fair value of a derivative instrument depends onwhether it has been designated and qualifies as part of a hedging relationship,and further, on the type of hedging relationship. For derivative instrumentsthat are designated and qualify as hedging instruments, the Company mustdesignate the hedging instrument, based upon the exposure being hedged, as afair value hedge, cash flow hedge, or a hedge of a net investment in a foreignoperation. The Company formally documents all relationships between hedginginstruments and hedged items, as well as its risk management objectives andstrategies for undertaking various hedge transactions. The Company formallyassesses, both at inception and at least quarterly thereafter, whether thederivatives that are used in hedging transactions are highly effective inoffsetting changes in either the fair value or cash flows of the hedged item. Ifa derivative ceases to be a highly effective hedge, the Company discontinueshedge accounting. The Company does not enter into derivative instruments forspeculation or trading purposes. See Note 8 for a discussion of the Company'sspecific derivative instruments and hedging activities. Foreign Currency Results of operations for foreign subsidiaries are translated into U.S. dollarsusing the average exchange rates during the year. The assets and liabilities ofthose subsidiaries are translated into U.S. dollars using the exchange rates atthe balance sheet date. The related translation adjustments are recorded in aseparate component of shareholders' equity, "accumulated other comprehensiveincome (loss)." Foreign currency transaction gains and losses are included inoperations. Liquidity At December 31, 2006, the Company had a working capital deficit. Managementbelieves the Company will generate sufficient cash flows to fund its operationsthrough December 2007. However, material shortfalls or variances fromanticipated performance or unforeseen expenditures could require the Company toseek alternative sources of capital or to limit expenditures for operating orcapital requirements. If such a shortfall should occur, the Company has theintent and the ability to take the necessary actions to preserve its liquidity. Use of Estimates The preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. Reclassification Certain prior year balances have been reclassified in order to conform to thecurrent financial statement presentation. New Accounting Standards and Disclosures In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), Accountingfor Uncertainty in Income Taxes, which clarifies the accounting treatment ofuncertain tax positions in the financial statements in accordance with FASBStatement 109, Accounting for Income Taxes. FIN 48 provides guidance on thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onde-recognition, classification, interest and penalties, accounting in interimperiods, and required disclosures. It is effective for fiscal years beginningafter December 15, 2006. The new guidance will be effective for the Company onJanuary 1, 2007. The Company is currently evaluating the impact of this standardon its results of operations and its financial position. The Company anticipatesthat the adoption of the provisions of FIN 48 will not have a material impact onits financial statements and will consist of reclassification of certain incometax related liabilities in its financial statements. In September 2006, the FASB issued FASB Statement No. 158, Employers' Accountingfor Defined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements Nos. 87, 88, 106, and 132(R) ("Statement 158"). Statement 158requires plan sponsors of defined benefit pension and other postretirementbenefit plans (collectively, "postretirement benefit plans") to recognize thefunded status of their postretirement benefit plans in the statement offinancial position, measure the fair value of plan assets and benefitobligations as of the date of the fiscal year-end statement of financialposition, and provide additional disclosures. On December 31, 2006, the Companyadopted the recognition and disclosure provisions of Statement 158, and theeffect on the Company's financial condition at December 31, 2006 has beenincluded in the accompanying consolidated financial statements. Statement 158did not have an effect on the Company's consolidated financial condition atDecember 31, 2005. Statement 158's provisions regarding the change in themeasurement date of postretirement benefit plans are not applicable as theCompany already uses a measurement date of December 31 for its pension plan. SeeNote 13 for further discussion of the effect of adopting Statement 158 on theCompany's consolidated financial statements. 2. Acquisitions EDS Interoperator Services On August 15, 2005, the Company, through its newly formed subsidiary, BSG Lux,acquired all of the stock of EDS Interoperator Services GmbH, a German limitedliability company ("BSG Germany") for a purchase price of $184.0 million,including closing costs of $0.8 million. The purchase price was funded through(i) $68.0 million of borrowings under a Euro-denominated credit facility, (ii) substantially all of the proceeds from the sale of 72,000,000 shares of commonstock (see Note 1), and (iii) a net deferred consideration payable of$26.0 million, which was paid in full in 2006. The acquisition was accounted forby the purchase method of accounting and accordingly, the purchase price hasbeen allocated to the assets acquired and liabilities assumed based on theirestimated fair value. The results of operations have been included in theconsolidated statement of operations since August 15, 2005. The transactionresulted in intangible assets having an original value of $176.0 million,consisting of customer contracts of $33.4 million and goodwill of$142.6 million. The following table summarizes the estimated fair values of the assets acquiredand liabilities assumed at the date of purchase: (In thousands) Current assets $ 8,383Property, equipment and software 15,610 Intangible assets 33,429 Goodwill 142,552 ----------Total assets acquired 199,974 Current liabilities assumed 5,379 Other liabilities 10,562 ----------Total liabilities assumed 15,941 ----------Net assets acquired $ 184,033 ========== United Clearing Limited Effective March 1, 2006, the Company completed the acquisition of all of theissued and to be issued share capital of United Clearing Limited, a UnitedKingdom public company, through the issuance of 25,111,759 shares of theCompany's common stock, the payout of $2.2 million for closing costs, and thebuyout of the outstanding United Clearing Limited stock options. The Company'scommon shares issued were recorded based upon their fair market value at theeffective date of the acquisition. The acquisition was accounted for by the purchase method of accounting andaccordingly, the purchase price has preliminarily been allocated to the assetsacquired and liabilities assumed based on their estimated fair value. Theresults of operations have been included in the consolidated statement ofoperations since March 1, 2006. The transaction resulted in intangible assetshaving an original value of $34.8 million, consisting of customer relationshipsof $6.0 million and goodwill of $28.8 million. The following table summarizes the estimated fair values of the assets acquiredand liabilities assumed at the date of purchase: (In thousands) Cash $ 9,399Other current assets 891 Property, equipment and software 808 Intangible assets 5,976 Goodwill 28,753 ----------Total assets acquired 45,827 Current liabilities assumed 3,739 ----------Net assets acquired $ 42,088 ========== VoiceLog, LLC On June 30, 2006, the Company, through its newly formed subsidiary, BSG TPV,LLC, acquired VoiceLog, LLC's third-party verification business for a purchaseprice of $16.4 million, including closing costs of $143,000. At closing, theCompany paid $15.1 million with the remaining amount of $1.3 million payabledependent upon the achievement of minimum revenue levels under one customer'scontract and the finalization of a working capital adjustment. The purchaseprice was paid in cash and was accounted for by the purchase method ofaccounting. Accordingly, the purchase price has preliminarily been allocated tothe assets acquired and liabilities assumed based on their estimated fair value.The results of operations have been included in the consolidated statement ofoperations since July 1, 2006. The transaction resulted in intangible assetshaving an original value of $13.3 million, consisting of customer relationshipsof $6.1 million and goodwill of $7.2 million. The following table summarizes the estimated fair values of the assets acquiredand liabilities assumed at the date of purchase: (In thousands) Current assets $ 1,510Property, equipment and software 1,746 Intangible assets 6,070 Goodwill 7,196 ----------Total assets acquired 16,522 Current liabilities assumed 104 ----------Net assets acquired $ 16,418 ========== VeriSign Toll Clearinghouse Business On December 1, 2006, the Company, through its subsidiary, BSG Clearing SolutionsNorth America LLC, acquired certain assets from VeriSign, Inc. relating to itsLEC toll clearinghouse business for a purchase price of $1.9 million. Thepurchase was accounted for by the purchase method of accounting. Accordingly,the purchase price has preliminarily been allocated to the assets acquired,consisting entirely of customer relationships. The results of operations havebeen included in the consolidated statement of operations since December 1,2006. At closing, the Company paid $0.9 million from existing cash reserves with theremaining amount payable dependent upon the assignment of certain customercontracts to the Company. Included in cash at December 31, 2006, is $0.9 millionof restricted cash relating to the remaining purchase price, which is held in anescrow account. At December 31, 2006, the Company has payables of $2.3 million due to VoiceLog,LLC and VeriSign, Inc. related to the above purchase transactions. The pro forma statement of operations of the Company assuming the acquisitionsdescribed above were all completed on January 1, 2005, is as follows: (Unaudited) 2006 2005 ---------- ---------- (In thousands, except per share amounts) Operating revenues $ 188,822 $ 203,261Operating income 19,475 37,635 Net (loss) income (17,481) 8,296 Net (loss) income per share- basic and diluted (0.062) 0.030 3. Property, Equipment and Software Property, equipment and software consisted of the following at December 31, 2006and 2005: December 31 2006 2005 ---------- ---------- (In thousands) Furniture and fixtures $ 269 $ 178Telecommunication equipment 1,912 1,839 Computer equipment 5,133 2,872 Computer software 22,203 14,926 Software development, including $4,209 and $2,057 of capitalized interest at December 31, 2006 and 2005, respectively 34,689 21,579 Leasehold improvements 2,288 2,147 ---------- ---------- 66,494 43,541 Less accumulated depreciation 15,074 6,690 ---------- ----------Net property, equipment and software $ 51,420 $ 36,851 ========== ========== Depreciation expense was $7,064,000 and $3,702,000 for the years ended December31, 2006 and 2005, 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 valueof the reporting unit with its carrying amount, including goodwill. If the fairvalue of the reporting unit exceeds its carrying value, goodwill of thereporting unit is considered not impaired, thus the second step of theimpairment test is not necessary. If the carrying amount of a reporting unitexceeds its fair value, the second step of the goodwill impairment test shall beperformed to measure the amount of impairment loss, if any. The second step ofthe goodwill impairment test, used to measure the amount of impairment loss,compares the implied fair value of the reporting unit with the carrying amountof that goodwill. If the carrying amount of the reporting unit goodwill exceedsthe implied fair value of that goodwill, an impairment loss is recognized in anamount equal to that excess. The loss recognized cannot exceed the carryingamount of goodwill. After a goodwill impairment loss is recognized, the adjustedcarrying amount of goodwill shall be its new accounting basis. Subsequentreversal of a previously recognized goodwill impairment loss is prohibited oncethe measurement of that loss is completed. In accordance with Statement 142, the Company completed step one of the two-stepgoodwill impairment process as of the fourth quarter of 2006 and 2005. Noimpairment charges resulted from completion of the test. The Company may incurimpairment charges in the future under Statement 142 to the extent the Companydoes not achieve its expected cash flow growth rates, and to the extent thatmarket values and long-term interest rates, in general, decrease and increase,respectively. The following table presents the changes in carrying amount of goodwill in eachof the Company's reportable segments for the years ended December 31, 2006 and2005: United Europe Total States --------- ---------- --------- (In thousands) Balance as of December 31, 2004 $ 36,619 $ - $ 36,619Adjustment (103) - (103) Acquisitions - 142,552 142,552 Foreign currency - (6,206) (6,206) --------- ---------- ---------Balance as of December 31, 2005 36,516 136,346 172,862 Adjustment - (896) (896) Acquisitions 7,196 28,753 35,949 Foreign currency - 18,858 18,858 --------- ---------- ---------Balance as of December 31, 2006 $ 43,712 $ 183,061 $ 226,773 ========= ========== ========= During 2006, the Company made (i) $18.9 million of positive adjustments togoodwill to reflect the impact of foreign currency translations, (ii) $1.2million of negative adjustments to reflect a reclassification of value to fixedassets of BSG Germany, and (iii) $0.3 million of positive adjustments to reflectan increase in the purchase price of BSG Germany. During 2005, the Company made adjustments to goodwill of $6.2 million to reflectthe impact of foreign currency translation and $0.1 million to reflect theimpact of deferred taxes. 5. Intangible Assets The Company has definite-lived intangible assets recorded that continue to beamortized in accordance with Statement 142. These assets consist primarily oflocal exchange carrier contracts, customer contracts, and trademarks, all ofwhich are amortized over their respective estimated lives. The weighted averageamortization period is approximately ten years. The following table presents thegross carrying amount and accumulated amortization for each major class ofdefinite-lived intangible assets: 2006 2005 ---------------- ---------------- --------- Gross Accumulated Gross Accumulated Amortization Carrying Amortization Carrying Amortization Period Amount Amount --------- --------- --------- --------- --------- (In thousands) Local exchange carrier contracts $ 11,310 $ 2,294 $ 11,310 $ 1,539 15 yearsCustomer 8 to 10 contracts 119,529 35,955 101,264 18,891 yearsTrademarks 5,400 - 5,400 - Indefinite --------- --------- --------- --------- $ 136,239 $ 38,249 $ 117,974 $ 20,430 ========= ========= ========= ========= Total amortization expense from definite-lived intangibles was $16,895,000 and$11,815,000 for the years ended December 31, 2006 and 2005, respectively. Theestimate of amortization expense for each of the five succeeding fiscal yearsfor definite-lived intangibles is: 2007 $ 15,771,000 2008 14,374,000 2009 13,005,000 2010 11,652,000 2011 10,680,000 6. Investments In July 2005, the Company entered into a joint venture with Webpay InternationalAG for the purpose of further developing a secure payment solution for broadbandservice providers and consumers under the brand name of "ClickandBuy." TheCompany invested $1.5 million for a 49% share of the joint venture. WebpayInternational AG provides an on-line commerce platform that allows digitalcontent and mobile telecommunications operators to collect payments from theircustomers. The investment is accounted for using the equity method. 7. Debt The components of long-term debt are as follows: December 31 2006 2005 ---------- ---------- (In thousands) U.S borrowings: First Lien Facility $ 101,063 $ 92,500Second Lien Facility 40,000 39,700 Revolving Credit Facility - - European borrowings: First Lien Facility 110,892 -Senior Term Facility - 26,052 Mezzanine Loan Facility - 47,749 Revolving Credit Facility - 2,961 Deferred purchase price payable for acquired business - 13,026 ---------- ---------- 251,955 221,988 Less current portion 11,011 10,400 ---------- ---------- $ 240,944 $ 211,588 ========== ========== On May 5, 2006, the Company refinanced both its U.S. and European debt. TheCompany entered into a new credit agreement totaling $270.0 million and borrowed$255.0 million, using the proceeds to (i) repay $238.0 million under its formercredit agreements, including accrued interest and prepayment premiums; (ii) pay$6.8 million in transaction costs; and (iii) supplement working capital by$10.2 million. The new credit facilities consist of (i) a $215.0 million first lien facility(the "First Lien Facility"), which consists of a separate U.S. borrowercommitment of $105.0 million and a German borrower commitment of $110.0 million,(ii) a $40.0 million second lien facility (the "Second Lien Facility"), and(iii) a $15.0 million revolving credit facility (the "Revolving CreditFacility"). The Revolving Credit Facility matures in 2011; the First LienFacility in 2012; and the Second Lien Facility in 2013. At December 31, 2006,outstanding borrowings were $212.0 million under the First Lien Facility and$40.0 million under the Second Lien Facility. No borrowings were outstandingunder the Revolving Credit Facility at December 31, 2006, and $15.0 million wasavailable for borrowing. Interest rates were as follows at December 31, 2006: --------- --------- ---------- ----------- Base Rate LIBOR(1) EURIBOR (2) Actual Rate at Loans Loans Loans December 31, 2006 --------- --------- ---------- -----------First Lien Facility (U.S.borrowings) Base + 1.5% LIBOR + 2.5% N/A 8.12% First Lien Facility (European borrowings) N/A N/A EURIBOR + 2.5% 5.74% Second Lien Facility Base + 5.0% LIBOR + 6.0% N/A 11.44% Revolving Credit Facility Base + 1.5% LIBOR + 2.5% EURIBOR + 2.5% N/A (1) London Interbank Offered Rates (2) European Interbank Offered Rates Required principal payments under the above facilities are as follows: First Lien Second Lien Total Facility Facility --------- ---------- ---------- (In millions) 2007 $ 11.0 $ - $ 11.0 2008 11.0 - 11.0 2009 11.0 - 11.0 2010 11.0 - 11.0 2011 11.0 - 11.0 Thereafter 157.0 40.0 197.0 ---------- ---------- --------- $ 212.0 $ 40.0 $ 252.0 ========== ========== ========= Compliance There is a prepayment premium of 2% until May 2007 and 1% between May 2007 andMay 2008 under the Second Lien Facility. All loans include mandatory prepaymentprovisions of up to 75% of the Company's excess cash flow, based on specifiedleverage ratios, as defined in the related agreements. The credit agreements include covenants requiring the Company to maintaincertain minimum levels of interest coverage, and maximum levels of leverage andcapital expenditures. The agreements also include various representations,restrictions (including the payment of dividends), and other terms andconditions which are usual and customary in transactions of this nature. The facilities outstanding in the United States and Europe are secured by all ofthe Company's assets with cross guarantees in place from most of the Company'ssubsidiaries. Former Borrowing Facilities In connection with the credit agreements dated as of April 27, 2005 and August15, 2005, certain lending institutions loaned an aggregate amount of $220.0million. The credit facilities consisted of separate facilities for theU.S.-based and Germany-based operations. All loans under the former creditagreements were repaid in full in May 2006 in connection with the Company'srefinancing. Deferred Purchase Price Payable for Acquired Business In connection with the acquisition of BSG Germany, the seller agreed to deferredpurchase price payments. At December 31, 2005, the balance due was $13.0 million(• 11.0 million), which was paid in January 2006 from the proceeds of a facilityagreement with ABRY Mezzanine Partners, L.P. (the "ABRY Facility Agreement"),which the Company entered into in January 2006. The ABRY Facility Agreementprovided for borrowings of $14.4 million. The loan incurred interest at 15% perannum, all of which was paid-in-kind, until it was paid in full from theproceeds of the May 2006 refinancing. The loan would have otherwise been due infull in June 2015, subject to provisions requiring prepayment under certaincircumstances. 8. Financial Instruments Interest Rate Swap In connection with the First Lien and Second Lien Facilities outstanding atDecember 31, 2006, the Company entered into an interest rate swap contract in2006 for a notional amount of $65 million. Effective through August 2009, theCompany will pay a fixed interest rate of 5.249% to the counterparty on anotional principal amount of $65 million, thereby fixing the LIBOR portion ofthe interest rate on that amount. In return, the counterparty will pay theCompany a floating rate, namely LIBOR, on the same notional principal amount.The applicable margin above LIBOR, as defined in the related credit facilityagreements, is not included in, and will be paid in addition to, the fixedinterest rate of 5.249%. As of December 31, 2006, the interest rate swap had anegative value of $335,000 to the Company, which was recorded as an offset toother assets in the accompanying consolidated balance sheet. In connection with former debt, the Company entered into an interest rate swapcontract in 2005 for a notional amount of $70 million. The 2005 interest rateswap contract remained in place after the refinancing, and it supplements thecontract described in the preceding paragraph to satisfy the requirements of theFirst Lien and Second Lien Facilities outstanding at December 31, 2006.Effective through July 2010, the Company will pay a fixed interest rate of4.479% to the counterparty on a notional principal amount of $70 million,thereby fixing the LIBOR portion of the interest rate on that amount. In return,the counterparty will pay the Company a floating rate, namely LIBOR, on the samenotional principal amount. The applicable margin above LIBOR, as defined in therelated credit agreements, is not included in, and will be paid in addition to,the fixed interest rate of 4.479%. At December 31, 2006 and 2005, the estimatedfair value of the interest rate swap was $1,103,000 and $796,000, respectively,which was recorded as other assets in the accompanying consolidated balancesheet. The Company does not enter into derivative instruments for speculation ortrading purposes. All such financial instruments are used to manage interestrate risk. During 2006, it was determined that both interest rate swaps did not qualify forhedge accounting, and, accordingly, the Company recognized in current income thenet change in fair market value of the interest rate swaps. In 2006, the Companyrecorded a gain of approximately $499,000, net of taxes, related to the interestrate swaps. This gain is recorded against interest expense in the accompanyingconsolidated statement of operations. 9. Income Taxes The components of the Company's income tax expense were as follows: December 31, 2006 December 31, 2005 --------------------- ------------------- United United States Foreign Total States Foreign Total -------- -------- -------- -------- ------- -------- (In thousands) Current (benefit) expense: Federal $ (2,726) $ - $ (2,726) $ 419 $ - $ 419Foreign - 852 852 - 26 26 State 155 - 155 128 - 128 -------- -------- -------- -------- ------- -------- (2,571) 852 (1,719) 547 26 573 Deferred (benefit) expense: Federal 2,043 - 2,043 3,349 - 3,349 Foreign - (4,254) (4,254) - (205) (205) State (201) - (201) 116 - 116 -------- -------- -------- -------- ------- -------- 1,842 (4,254) (2,412) 3,465 (205) 3,260 -------- -------- -------- -------- ------- --------Total income tax expense (benefit) $ (729) $ (3,402)$ (4,131) $ 4,012 $ (179) $ 3,833 ======== ======== ======== ======== ======= ======== The income tax provision differs from amounts computed by applying the U.S.federal statutory tax rate to income before income taxes as follows: December 31 2006 2005 ---------- ---------- (In thousands) Estimated federal tax (benefit) at 34% $ (7,899) $ 3,050Increases (reductions) from: U.S. state tax (30) 161 Foreign tax rate differential (1,806) 539 Valuation allowance 4,462 -Interest expense 711 -Other 431 83 ---------- ----------Provision for income tax (benefit) expense $ (4,131) $ 3,833 ========== ========== There are significant differences among the tax laws of the countries in whichthe Company is operating, including varying tax rates and deductibility ofcertain expenses. Deferred income taxes result from temporary differences between the bases forfinancial statement purposes and income tax purposes. The Company adjusteddeferred taxes as of August 15, 2005, to account for the differences resultingfrom the application of purchase accounting to its acquisition of BSG Germany.The net deferred tax assets and liabilities included in the balance sheetsinclude the following amounts: December 31 2006 2005 ---------- --------- (In thousands) Deferred tax assets: Reserve for bad debts $ 275 $ 260Accrued liabilities 424 493 Stock-based compensation 336 -Net operating losses 10,626 1,069 Capital loss 705 -Pensions 802 694 Other 198 236 Valuation allowance (5,166) - ---------- ---------Total deferred tax assets 8,200 2,752 Deferred tax liabilities: Property and equipment (2,008) (6,343) Intangible assets (8,205) (8,575) Software development (7,786) -Capitalized interest (1,214) (732) Derivative (261) (278) Other (207) (22) ---------- ---------Total deferred tax liabilities (19,681) (15,950) ---------- ---------Net deferred tax liabilities $ (11,481) $ (13,198) ========== ========= Management is of the opinion that it is more likely than not that the deferredtax assets will be fully realized. During 2006 and 2005, the Company's United States-based subsidiaries areincluded in the consolidated federal income tax return of BSG North America,formerly known as Thurston Communications Corporation. The tax obligation of theCompany's United States-based subsidiaries is paid to BSG North America, whichis ultimately liable for payment of the taxes to the Internal Revenue Service. The Company has net operating loss carryforwards of approximately $0.6 millionin the United States scheduled to expire in 2026, and $29 million in Germany and$14.5 million in Luxembourg, neither of which imposes a statute of limitations.In addition, there is a $2.3 million capital loss carryforward in the UnitedKingdom that has no statute of limitations. 10. Earnings Per Share Earnings per share are calculated based on the weighted average number of sharesof the Company's common stock outstanding during the period. Weighted averageshares outstanding for the year ended December 31, 2005, assumes thereorganization discussed in Note 1 had occurred on January 1, 2005. The following is a summary of the elements used in calculating basic and dilutedincome per share: December 31 2006 2005 (In thousands, except per share amounts) Numerator: Net (loss) income $ (19,100) $ 5,138 ========== =========== Denominator: Weighted average shares- basic 275,711 208,219 Effect of diluted securities: Options - - ---------- ----------- Weighted average shares- diluted 275,711 208,219 ========== =========== Net (loss) income per share- basic $ (0.069) $ 0.025 ========== ===========Net (loss) income per share- diluted $ (0.069) $ 0.025 ========== =========== Options of 9,641,156 shares and 18,260,447 shares at December 31, 2006 and 2005,respectively, have not been included in the calculation of earnings per sharebecause their exercisability is contingent upon the fair market value of theCompany's common stock increasing to a specific value (see Note 14), which wasnot achieved as of December 31, 2006 or 2005, or the options were not in themoney at December 31, 2006. 11. Commitments The Company leases certain office space and equipment under various operatingleases. The Company also subleases certain of its office space to others undervarious operating leases. Annual future minimum lease commitments as of December31, 2006, are as follows: Facilities and Subleases Net Equipment Commitments Commitments ----------- ---------- ---------- (In thousands) Year ended December 31: 2007 $ 1,792 $ (62) $ 1,730 2008 1,531 - 1,531 2009 1,404 - 1,404 2010 1,387 - 1,387 2011 1,177 - 1,177 Rental expense, net of sublease income, under these operating leasesapproximated $1,390,000 and $1,261,000 for the years ended December 31, 2006 and2005, respectively. 12. Contingencies The Company is involved in various other claims, legal actions, and regulatoryproceedings arising in the ordinary course of business. The Company evaluatedits legal matters and during 2005 accrued $372,000 related to the lower end ofthe range of its assessment of the probable outcomes of these matters. During2006, the Company settled certain claims for $132,000, incurred related legalexpenses of $16,000, and reduced its accrued liability by $224,000. At December31, 2006, the Company had no remaining amount accrued for contingencies. TheCompany 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 materialadverse effect on the Company's financial position or results of operations;however, due to the inherent uncertainty of litigation, there can be noassurance that the resolution of any particular claim or proceeding would nothave a material adverse effect on the Company's results of operations for thefiscal period in which such resolution occurs. 13. Employee Benefit Plans 401(k) Retirement Plan Eligible employees of the Company's U.S. subsidiaries participate in 401(k)Retirement Plans (the "Retirement Plans"). Generally, all employees who are21 years of age or older and who have completed six months of service duringwhich they worked at least 500 hours are eligible for participation in theRetirement Plans. The Retirement Plans are defined contribution plans, whichprovide that participants may make voluntary salary deferral contributions, on apretax basis, of between 1% and 19% of their compensation in the form ofvoluntary payroll deductions, subject to annual Internal Revenue Servicelimitations. The Company matches a defined percentage of a participant'scontributions, subject to certain limits, and may make additional discretionarycontributions. During the years ended December 31, 2006 and 2005, the Company'smatching contributions totaled approximately $371,000 and $296,000,respectively. No discretionary contributions were made. Adoption of Statement 158 On December 31, 2006, the Company adopted the recognition and disclosureprovisions of Statement 158. Statement 158 requires the Company to recognize thefunded status of its pension plan in the December 31, 2006 statement offinancial position, with a corresponding adjustment to accumulated othercomprehensive income, net of tax. The adjustment to accumulated othercomprehensive income at adoption represents the net unrecognized actuarial gainssince the Company acquired BSG Germany in August 2005, pursuant to theprovisions of Statement 87, Employers' Accounting for Pensions. These amountswill be subsequently recognized in net periodic pension cost pursuant to theCompany's accounting policy for amortizing such amounts. Further, actuarialgains and losses that arise in subsequent periods and are not recognized as netperiodic pension cost in the same periods will be recognized as a component ofother comprehensive income (loss). Those amounts will be subsequently recognizedas a component of net periodic pension cost on the same basis as the amountsrecognized in accumulated other comprehensive income (loss) at adoption ofStatement 158. The incremental effects of adopting the provisions of Statement 158 on theCompany's statement of financial position at December 31, 2006 are presented inthe following table. ----------- ----------- ------------- Prior to Effect of As Reported at Adopting Adopting December 31, 2006 Statement158 Statement158 ----------- ----------- ------------- (in thousands) Accrued pension liability $ 5,341 $ (279) $ 5,062Deferred income tax liability - 102 102 Accumulated other comprehensive income, net of tax - 177 177 Included in accumulated other comprehensive income at December 31, 2006, are thefollowing amounts that have not yet been recognized in net periodic pensioncost: Total --------- Unrecognized actuarial gain, net of taxes $ 177 ========= The adoption of Statement 158 had no effect on the Company's consolidatedstatement of income for the year ended December 31, 2006, or for any priorperiod presented, and it will not affect the Company's operating results infuture periods. Pension Plan As part of the acquisition of BSG Germany, the Company assumed a noncontributorydefined benefit retirement plan. The benefits are based on employee's annualcompensation. The plan benefits are paid to BSG Germany employees at least 65years of age that have been employed with the Company a minimum of ten years. Assumptions used in determining the benefit obligations for pension and otherpostretirement plans as of December 31, 2006 and 2005 were as follows: 2006 2005 ---------- ---------- Discount rate 4.25% 4.25% Average compensation increase 2.75% 2.75% (salaried employees only) The following table provides a reconciliation of benefit obligation, planassets, and funded status of the plan as of December 31, 2006 and 2005: 2006 2005 ---------- ---------- (In thousands) Projected benefit obligation $ (5,062) $ (4,284)Plan assets at fair value - - ---------- ----------Net liability on balance sheet $ (5,062) $ (4,284) ========== ========== Net benefit cost for the years ended December 31, 2006 and 2005 included thefollowing components: 2006 2005 ---------- ---------- (In thousands) Service cost on benefits earned during the year $ 290 $ 95 Interest cost on projected benefit obligation 256 82 ---------- ----------Net benefit expense $ 546 $ 177 ========== ========== The Company estimates benefit payments for each of the next five years and inaggregate for the five years thereafter as follows: (In thousands) Fiscal year: 2007 $ 7 2008 10 2009 25 2010 21 2011 30 Thereafter 561 14. Stock Option Plan On June 8, 2005, the Board of Directors adopted the Billing Services GroupLimited Share Option Plan (the "BSG Plan") and the BSG Clearing Solutions NorthAmerica Stock Option Plan (the "BSG North America Plan"). Options may be grantedat the discretion of the remuneration committee to any director or employee andare generally granted with an exercise price equal to the market price of theCompany's stock at the grant date. Directors may be granted options in the BSGPlan and employees may be granted options in the BSG North America Plan. Optionsgranted in the BSG North America Plan are exercisable into shares of theCompany. The options that may be granted are limited to 10% of the issued commonshares of capital at the time of grant and may be granted through June 7, 2015. On June 9, 2005, the Board of Directors granted 18,260,447 options at anexercise price of 74.5 pence, representing the fair market value of theCompany's common stock on the date of grant to selected executives and other keyemployees whose vesting is contingent upon meeting an increase in the shareprice. These options will vest when the fair market value of the common stockreaches 149.0 pence, but will not be exercisable unless the holder remains inthe employment of the Company for three years from June 2005, or in the event ofa change in control of the Company. Upon a change in control, the criteria forvesting and exercise will change to allow the options to vest if the share pricehas increased by that proportion of the 74.5 pence required increase in pricethat equals or exceeds the proportion of the three-year time period, which haselapsed between June 8, 2005, to the change in control event. Under suchcircumstances, the options will be immediately exercisable subject to the holderbeing in the employment of the Company. The options have a contractual life often years. The fair value of the options is generally computed using a Monte Carlo singleoption model. This model estimates the probability the options will vest and thelength of time required to attain the target stock price. The model projects thepath of the Company's stock over ten years following the grant date, relyingupon historical market data for the Company's peers. The following is a summary of option activity: ---------- ----------- Options Weighted Outstanding Average Exercise Price ---------- ----------- Options outstanding at December31, 2004 - -Granted 18,260,447 74.5 penceExercised - -Cancelled - - ---------- -----------Options outstanding at December 31, 2005 18,260,447 74.5 penceGranted 12,000,000 77.9penceExercised - Cancelled (20,619,291) 76.0pence ---------- -----------Options outstanding at December 31, 2006 9,641,156 75.4pence ========== =========== Options exercisable at December 31, 2006 - ========== Options available for grant at December 31, 2006 18,845,169 ========== Of the 12,000,000 options granted during 2006, a total of 3,000,000 were grantedunder the BSG North America Plan and 9,000,000 were granted pursuant toemployment agreements. Of the 9,641,156 options outstanding at December 31,2006, a total of 9,141,156 were issued under stock option plans and 500,000 wereissued pursuant to an employment agreement. The weighted average grant-date fair values of options granted during the years2006 and 2005 were $0.59 and $0.51, respectively. As of December 31, 2006, therewas $2.9 million of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements granted under the Plans. That cost isexpected to be recognized over a period of 2.4 years. No options were exercised during 2006 or 2005, and accordingly there wereneither cash receipts received nor tax benefits realized for the tax deductionsfrom option exercise. 15. Segment Information The FASB issued Statement No. 131, Disclosures about Segments of an Enterpriseand Related Information (Statement 131). This statement requires that publicbusiness enterprises report certain information about operating segments incomplete sets of financial statements of the enterprise and in condensedfinancial statements of interim periods issued to shareholders. It also requiresthat public business enterprises report certain information about their productsand services, the geographic areas in which they operate, and their majorcustomers. The Company provides clearing, settlement, payment, and financial riskmanagement solutions to the telecommunications industry, and has twogeographical reportable operating segments-United States and Europe. The Companyevaluates performance based on business segment operating income beforedepreciation and amortization expense, other noncash expenses, and certainone-time charges. Operating income of segments does not include other expenses,income of investments, interest income, interest expense, or income tax expense. United Europe Totals States --------- --------- --------- (In thousands) 2006 Revenues $ 136,062 $ 43,354 $ 179,416 Selling, general, and administrative expenses: Operating units 18,929 18,346 37,275 Corporate headquarters 9,525 3,198 12,723 --------- --------- ---------Total 28,454 21,544 49,998 Depreciation and amortization 9,854 14,215 24,069 Equity in loss from investment (205) - (205) Operating income before depreciation and amortization expense, restructuring expense, other nonrecurring expenses, and stock-based compensation expense 27,778 21,607 49,385 Identifiable assets 226,210 256,773 482,983 Capital expenditures, including $1,513 of capitalized interest in the United States and $716 of capitalized interest in Europe 6,370 8,919 15,289 2005 Revenues $ 146,002 $ 11,311 $ 157,313 Selling, general, and administrative expenses: Operating units 17,270 3,208 20,478 Corporate headquarters 6,054 784 6,838 --------- --------- ---------Total 23,324 3,992 27,316 Depreciation and amortization 9,920 5,707 15,627 Equity in loss from investment (65) - (65) Operating income before depreciation and amortization expense 34,013 7,319 41,332 Identifiable assets 229,269 199,760 429,029 Capital expenditures, including $2,057 of capitalized interest in the United States and $ - 0 - of capitalized interest in Europe 8,533 4,508 13,041 For the years ended December 31, 2006 and 2005, the Company recorded revenuesfrom transactions for one customer in the United States of $17.9 million, or10%, and $23.2 million, or 15%, respectively, of consolidated revenues. 16. Restructuring and Nonrecurring Expenses In response to changing business conditions, the Company implemented a series ofworldwide restructuring initiatives to reduce costs and refocus its businessstrategy. As a result, the Company recognized $5.2 million of restructuringcharges and $1.8 million of nonrecurring expenses in 2006. At December 31, 2006,a total of $5.8 million had been disbursed in connection with the $7.0 millionaggregate restructuring and nonrecurring charges. The remaining $1.2 million isincluded in accrued liabilities in the accompanying consolidated balance sheet. The $5.2 million of restructuring charge included $4.8 million of severance andrelated compensation costs paid to terminated employees and $0.4 million oflease termination fees. The $1.8 million of nonrecurring expenses primarily included fees and expensespaid to professional advisory firms for services related to uncompletedacquisitions in which the Company has terminated discussion. 17. Subsequent Event During the first quarter of 2007, the Company paid the remaining purchase pricepayable of $1.3 million in connection with its acquisition of VoiceLog, LLC, thethird-party verification business. The remaining purchase price was paid in cashfrom existing cash reserves. This information is provided by RNS The company news service from the London Stock Exchange

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