UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Act of 1934
Date of Report (Date of earliest event reported) June 11, 1998
--------------
LHS GROUP INC.
---------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 0-22409 58-2224883
- --------------------------------------------------------------------------------
(STATE OR OTHER JURISDICTION (COMMISSION FILE NUMBER) (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
6 Concourse Parkway, Suite 2700, Atlanta, Georgia 30328
- -------------------------------------------------- -----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code (770)280-3000
--------------
ITEM 2. ACQUISITION OF ASSETS
---------------------
On June 11, 1998, LHS Group Inc. ("LHS")acquired all of the outstanding common
stock (thereby acquiring control of all assets) of InfoCellular, Inc.
("InfoCellular"), a Massachusetts corporation, pursuant to an Agreement and Plan
of Merger dated June 11, 1998 ("Merger Agreement"), among LHS, InfoCellular, and
William Santo, Peter Graffman and Mitchell Wondolowski as Principal Stockholders
of InfoCellular (acting on their own behalf and on behalf of all other
InfoCellular stockholders).
As consideration for the Shares, LHS issued to the Principal Stockholders and
one other stockholder, Venture Capital Fund of New England III, LP ("VCFNE"), a
total of 117,885 shares of LHS' $.01 par value Common Stock ("LHS Stock"), and
paid a total of $1,326,693.30 in cash to VCFNE and all other InfoCellular
stockholders. The total amount of consideration was calculated on the basis of
an agreed purchase price of $9,500,000, which was adjusted prior to closing to
reflect the amount by which certain liabilities exceeded certain assets of
InfoCellular. The amount of LHS Stock paid as consideration for the Shares was
valued by dividing the adjusted purchase price of $8,484.389 by the average of
the closing prices per share for shares of LHS Stock over a ten (10) day period
ending on June 4, 1998 ("Average Price"). The cash consideration represents the
value of the InfoCellular shares which were exchanged for cash consideration
calculated on the basis of the Average Price. LHS used working capital to fund
the cash consideration paid in connection with the acquisition.
InfoCellular is engaged in the business of providing point of sale and
customer acquisition software and related services to telecommunication service
providers. LHS intends to continue to use InfoCellular's business assets in
substantially the manner previously used by InfoCellular. InfoCellular is now a
wholly-owned subsidiary of LHS.
LHS intends to account for the acquisition as a purchase and will include the
results of InfoCellular's operations in its consolidated financial statements as
of June 11, 1998. LHS expects a one-time write off in the quarter ended June
30, 1998, related to purchased research and development acquired and transaction
costs incurred in connection with the acquisition.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial statements of InfoCellular will be provided by amendment within
sixty (60) days of the filing of the initial report in this Form 8-K.
(b) Pro forma financial information will be provided by amendment within sixty
(60) days of the filing of the initial report in this Form 8-K.
(c) Exhibits: See Exhibit Index.
Item 7(b). Pro Forma Financial Statements
The following unaudited pro forma condensed consolidated financial statements of
LHS Group Inc. (LHS) and Infocellular, Inc. (Infocellular) are derived from, and
should be read in conjunction with audited financial statements of Infocellular
filed herein and the audited financial statements of LHS as previously filed on
Form 10-K and unaudited interim financial statements of LHS as previously filed
on Form 10-Q with the Securities and Exchange Commission. The pro forma
condensed consolidated financial statements do not purport to be indicative of
the results of operations or financial position which would have actually been
reported had the acquisition been consummated on the dates indicated, or which
may be reported in the future.
The pro forma balance sheet reflects adjustments as if the acquisition had been
consummated on that date, March 31, 1998.
The pro forma statements of operations reflects adjustments as if the
acquisition had been consummated at the beginning of the period presented.
BALANCE SHEET
(a) To reflect the acquisition by merger of all the outstanding common stock of
Infocellular and the allocation of the purchase price on the basis of the
estimated fair values of the net assets acquired assuming a March 31, 1998
purchase date. The components of the purchase price and its preliminary
allocation to the assets and liabilities are as follows:
Components of purchase price:
Cash $ 1,696,000
Stock (117,885 shares) 7,024,000
Other costs of acquisition 150,000
-----------
Total purchase price $ 8,870,000
===========
Preliminary allocation of purchase price:
Purchased in-process computer software technology $ 8,200,000
Fully developed computer software technology 500,000
Current assets 758,000
Furniture and fixtures 745,000
Other assets 598,000
Current liabilities (3,289,000)
Long-term obligations (104,000)
Goodwill 1,462,000
-----------
Total purchase price $ 8,870,000
===========
The actual purchase price paid at closing, June 11, 1998, was $8.5 million
resulting in goodwill of $1.5 million.
STATEMENTS OF OPERATIONS:
(b) To expense the cost of purchased in-process computer software technology in
accordance with generally accepted accounting principles.
(c) To record the amortization of capitalized developed computer software
technology, goodwill and other minor intangible assets.
No income tax benefit was recognized on the write-off of the purchased in
process computer software technology because the merger was structured as tax
free to the selling shareholders and the write-off of this asset and the
amortization of the other intangibles will not be deductible for federal income
tax purposes.
LHS Group Inc.
Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 1997
(in thousands, except per share data)
(Unaudited)
Historical
------------------------------------
Pro
Forma LHS Group Inc.
LHS Group Inc. Infocellular Inc. Adjustments Pro Forma
--------------- ------------------- ------------------- -----------------
Revenues:
License $ 38,439 $ 2,909 $ 41,348
Service 66,972 2,041 69,013
--------------- -------------------- -----------------
Total 105,411 4,950 110,361
Cost of services 47,325 3,241 50,566
--------------- -------------------- -----------------
Gross margin 58,086 1,709 59,795
Operating expenses:
Sales and marketing 8,454 844 9,298
Research and development 19,682 1,185 20,867
General and administrative 13,510 2,078 15,588
Amortization $ 724 c) 724
Purchased in-process computer
software technology 8,200 b) 8,200
--------------- -------------------- ------------------- -----------------
41,646 4,107 8,924 54,677
--------------- -------------------- ------------------- -----------------
Earnings (loss) before interest and taxes 16,440 (2,398) (8,924) 5,118
Interest expense (income), net (2,238) 50 (2,188)
--------------- -------------------- ------------------ -----------------
Earnings (loss) before income taxes 18,678 (2,448) (8,924) 7,306
Income taxes 7,470 (87) 7,383
--------------- -------------------- ------------------ -----------------
Net earnings (loss) $ 11,208 $ (2,361) $ (8,924) $ (77)
=============== ==================== ================== =================
Earnings (loss) Per Share (1):
Basic $ 0.26 $ (0.00)
=============== =================
Diluted $ 0.23 $ (0.00)
=============== =================
Weighted average number of common shares
used in calculating earnings (loss)
per share of common stock (1):
Basic 42,906 43,024
=============== =================
Diluted 49,164 43,024
=============== =================
See accompanying pro forma adjustments.
(1) The historical results of LHS Group Inc. have been retroactively adjusted
for the 2 for 1 stock split that was effective on May 28, 1998. Pro forma
diluted earnings (loss) per share excludes the effect of outstanding stock
options because the effect is antidilutive.
LHS Group Inc.
Pro Forma Consolidated Statement of Operations
For the Quarter Ended March 31, 1998
(in thousands, except per share data)
(Unaudited)
Historical
---------------------------------------
Pro
Forma LHS Group Inc.
LHS Group Inc. Infocellular Inc. Adjustments Pro Forma
------------------- ------------------- ----------------- ----------------
Revenues:
License $ 14,815 $ 164 $ 14,979
Service 18,350 734 19,084
------------------- ------------------- ----------------
Total 33,165 898 34,063
Cost of services 12,886 1,251 14,137
------------------- ------------------- ----------------
Gross margin 20,279 (353) 19,926
Operating expenses:
Sales and marketing 2,481 96 2,577
Research and development 7,752 328 8,080
General and administrative 3,529 854 4,383
Purchased in-process computer software
technology $ 8,200 b) 8,200
Amortization 181 c) 181
------------------- ------------------- ---------------- ----------------
13,762 1,278 8,381 23,421
------------------- ------------------- ---------------- ----------------
Earnings (loss) before interest and taxes 6,517 (1,631) (8,381) (3,495)
Interest expense (income), net (920) 20 (900)
------------------- ------------------- ----------------- ----------------
Earnings (loss) before income taxes 7,437 (1,651) (8,381) (2,595)
Income taxes 2,974 (45) 2,929
------------------- ------------------- ----------------- ----------------
Net earnings (loss) $ 4,463 $ (1,607) $ (8,381) $ (5,524)
=================== =================== ================= ================
Earnings (loss) Per Share (1):
Basic $ 0.17 $ (0.11)
=================== ================
Diluted $ 0.08 $ (0.11)
=================== ================
Weighted average number of common shares
used in calculating earnings (loss) per
share of common stock (1):
Basic 50,992 51,110
=================== ================
Diluted 53,782 51,110
=================== ================
See accompanying pro forma adjustments.
(1) The historical results of LHS Group Inc. have been retroactively adjusted
for the 2 for 1 stock split that was effective on May 28, 1998.
Pro forma diluted earnings (loss) per share excludes the effect of
outstanding stock options because the effect is antidilutive.
LHS Group Inc.
Pro Forma Condensed Consolidated Balance Sheet
March 31, 1998
(Unaudited)
Historical
----------------------------------
Pro Forma LHS Group Inc.
LHS Group Inc. Infocellular Inc. Adjustments Pro Forma
---------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 21,643 $ 13 $(1,696) a) $ 19,960
Short Term Investments 52,760 - 52,760
Trade accounts receivable, net 30,985 671 31,656
Unbilled receivables 15,549 - 15,549
Prepaid expenses 2,715 74 2,789
-------- ------- --------- --------
Total current assets 123,652 758 (1,696) 122,714
Property, plant & equipment, net 8,773 745 9,518
Purchased developed computer software 500 a) 500
Cost of in-process computer software technology 8,200 a) -
(8,200) a)
Deferred taxes 1,083 - 1,083
Goodwill 1,462 a) 1,462
Other 9,033 98 500 a) 9,631
-------- ------- --------- --------
Total Assets $142,541 $ 1,601 $ 766 $144,908
======== ======= ========= ========
LIABILITIES
Notes payable to bank $ 500 $ 500
Current maturities of long-term debt 729 729
Accounts payable and accrued expenses $ 35,002 2,042 $ 150 a) 37,194
Deferred revenues 6,326 18 6,344
-------- ------- --------- --------
Total current liabilities 41,328 3,289 150 44,767
Long-term obligations 706 324 (220) a) 810
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 258 24 (24) a) 259
1 a)
Additional paid-in capital 82,490 1,031 (1,031) a) 89,513
7,023 a)
Retained earnings (deficit) 21,970 (3,031) 3,031 a) 13,770
(8,200) a)
Treasury stock (36) 36 a) -
Accumulated translation adjustment (4,211) (4,211)
-------- ------- --------- --------
100,507 (2,012) 836 99,331
Total Liabilities and Stockholders' Equity (deficit) $142,541 $ 1,601 $ 766 $144,908
======== ======= ========= ========
See accompanying pro forma adjustments.
ITEM 7(c)
INFOCELLULAR, INC.
FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
INFOCELLULAR, INC.
TABLE OF CONTENTS
Page No.
--------
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheets 2 - 3
Statements of Operations and Retained Earnings
(Accumulated Deficit) 4
Statements of Cash Flows 5
Notes to Financial Statements 6 - 15
SUPPLEMENTARY INFORMATION
Schedule I - Operating Expenses 16
[LETTERHEAD OF PARESKY FLITT & COMPANY]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
InfoCellular, Inc.
Marlborough, Massachusetts
We have audited the accompanying balance sheets of InfoCellular, Inc. as of
March 31, 1998 and 1997, and the related statements of operations and retained
earnings (accumulated deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InfoCellular, Inc. as of March
31, 1998 and 1997 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplementary information on Page 16
is presented for the purpose of additional analysis and is not a required part
of the basic financial statements. Such information has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, is fairly stated in all material respects in relation to the
basic financial statements taken as a whole.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company's significant operating loss and capital
deficiency raise substantial doubt about its ability to continue as a going
concern at March 31, 1998. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Paresky Flitt & Company
PARESKY FLITT & COMPANY
May 15, 1998
INFOCELLULAR, INC.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
1998 1997
------------ -----------
ASSETS
CURRENT ASSETS
Cash (Note 1) $ 12,519 $ 12,368
Accounts receivable - net of allowance
for doubtful accounts of $0 and
$5,144 for 1998 and 1997,
respectively (Note 7) 771,478 1,646,444
Prepaid expenses 63,569 49,013
Deferred tax asset (Note 6) --- 13,200
Due from officers (Note 5) 10,100 10,100
------------ -----------
TOTAL CURRENT ASSETS 857,666 1,731,125
------------ -----------
PROPERTY AND EQUIPMENT (Notes 1 and 4)
Computer equipment 737,140 562,139
Office furniture and equipment 341,236 121,543
Motor vehicle 18,148 18,148
Leasehold improvements 30,308 17,238
------------ -----------
1,126,832 719,068
Accumulated depreciation 381,649 223,267
------------ -----------
NET PROPERTY AND EQUIPMENT 745,183 495,801
------------ -----------
OTHER ASSETS
Note receivable-officer (Notes 5 and 8) 56,505 53,105
Deposits 41,194 11,178
Organization costs (Notes 1 and 2) 556 1,891
------------ -----------
TOTAL OTHER ASSETS 98,255 66,174
------------ -----------
TOTAL ASSETS $ 1,701,104 $ 2,293,100
============ ===========
See accompanying notes and independent auditors' report.
-2-
INFOCELLULAR, INC.
BALANCE SHEETS
MARCH 31, 1998 AND 1997
1998 1997
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CUTTENT LIABILITIES
Note payable - bank (Note 3) $ 500,000 $ 285,000
Current maturities of long-term
debt (Note 4) 728,871 33,644
Accounts payable 401,242 331,349
Accrued expenses 1,290,634 328,664
Unearned revenue (Note 1) 17,869 69,007
Deferred tax liability (Note 6) -- 155,800
---------- ----------
TOTAL CURRENT LIABILITIES 2,938,616 1,203,646
---------- ----------
LONG-TERM LIABILITIES
Long-term debt (Note 4) 125,595 14,918
Dividends payable (Note 8) 198,363 94,479
---------- ----------
TOTAL LONG-TERM LIABILITIES 323,958 109,397
---------- ----------
TOTAL LIABILITIES 3,626,574 1,312,861
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - $.01 par value,
364 shares authorized, issued and
outstanding (274 in 1997) (Note 8) 4 3
Common stock - no par value, 200,000
shares authorized, 1,023 shares
issued, 993 outstanding (1,000 and 970
in 1997) (Notes 5, 8 and 9) 24,825 10,100
Additional paid-in capital (Note 8) 1,031,126 447,011
Retained earnings (accumulated
deficit) (2,580,997) 559,553
---------- ----------
(1,525,042) 1,016,667
Treasury stock - 30 shares
at cost (Note 5) ( 36,428) ( 36,428)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY
(DEFICIT) (1,561,470) 980,239
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $1,701,104 $2,293,100
========== ==========
See accompanying notes and independent auditors' report.
-3-
INFOCELLULAR, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (ACCUMULATED DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
1998 % 1997 %
-------------- ----- ------------- -----
REVENUE (Notes 1 and 7) $ 4,279,115 100.0 $ 5,694,915 100.0
------------- ----- ------------- -----
COST OF GOODS SOLD
Salaries 2,636,060 61.6 1,972,922 34.6
Subcontracting 283,007 6.6 749,397 13.2
Payroll taxes 222,715 5.2 182,822 3.3
Purchases 178,185 4.2 196,256 3.4
Group insurance 140,490 3.3 104,989 1.8
------------- ----- ------------- -----
TOTAL COST OF GOODS SOLD 3,460,457 80.9 3,206,386 56.3
------------- ----- ------------- -----
GROSS PROFIT 818,658 19.1 2,488,529 43.7
OPERATING EXPENSES (Notes 5 and 10) 3,895,634 91.0 1,990,245 34.9
------------- ----- ------------- -----
OPERATING INCOME (LOSS) ( 3,076,976) (71.9) 498,284 8.8
------------- ----- ------------- -----
OTHER INCOME (EXPENSE)
Interest income 3,441 .1 3,590 .1
Interest expense ( 66,514) ( 1.6) ( 36,605) ( .7)
Loss on disposal of
fixed assets ( 39,217) ( .9) --- ---
------------- ----- ------------- -----
TOTAL OTHER INCOME
(EXPENSE) ( 102,290) ( 2.4) ( 33,015) ( .6)
------------- ----- ------------- -----
INCOME (LOSS) BEFORE INCOME TAXES ( 3,179,266) (74.3) 465,269 8.2
INCOME TAXES (Note 6) ( 142,600) ( 3.3) 62,100 1.1
------------- ----- ------------- -----
NET INCOME (LOSS) ( 3,036,666) (71.0) 403,169 7.1
===== =====
DIVIDENDS (Notes 8) 103,884 37,525
RETAINED EARNINGS - BEGINNING 559,553 193,909
------------- -------------
RETAINED EARNINGS (ACCUMULATED
DEFICIT) - ENDING $ ( 2,580,997) $ 559,553
============= =============
See accompanying notes and independent auditors' report.
-4-
INFOCELLULAR, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
1998 1997
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,036,666) $ 403,169
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Bad debts ( 5,144) 5,144
Depreciation 190,116 110,552
Loss on disposal of fixed assets 39,217 ---
Amortization 1,335 1,336
Deferred income taxes ( 142,600) 62,100
Changes in assets and liabilities:
Accounts receivable 874,966 ( 1,104,078)
Costs and estimated earnings
on uncompleted contracts --- 334,381
Prepaid expenses ( 14,556) 2,477
Refundable corporate taxes --- 3,856
Deposits ( 30,016) ---
Accounts payable 69,893 219,321
Accrued expenses 961,970 152,413
Unearned revenue ( 51,138) 47,219
------------- -----------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES ( 1,142,623) 237,890
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment ( 267,871) ( 230,475)
Proceeds from sale of equipment 19,300 ---
------------- -----------
NET CASH USED FOR INVESTING ACTIVITIES ( 248,571) ( 230,475)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Note payable - bank 215,000 ( 5,000)
Proceeds from long-term debt 650,000 21,000
Payments of long-term debt ( 69,095) ( 43,064)
Note receivable - officers ( 3,400) ( 3,400)
Proceeds from issuance of common stock 14,725 ---
Proceeds from issuance of preferred stock 584,115 ---
------------- -----------
NET CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES 1,391,345 ( 30,464)
------------- -----------
TOTAL CHANGE IN CASH 151 ( 23,049)
CASH AT BEGINNING OF PERIOD 12,368 35,417
------------- -----------
CASH AT END OF PERIOD $ 12,519 $ 12,368
============= ===========
See accompanying notes and independent auditors' report.
-5-
INFOCELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of InfoCellular, Inc. is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
who are responsible for their integrity and objectivity. These accounting
policies conform to generally accepted accounting principles and have been
consistently applied in the preparation of the financial statements.
Organization and Business Activity
- ----------------------------------
InfoCellular, Inc., located in Marlborough, Massachusetts, is engaged in the
design and implementation of software for telecommunication carriers located
throughout the world.
Revenue Recognition
- -------------------
Product revenue is recognized when the product is shipped to the customer.
Maintenance and extended support revenue is recognized in the period rendered.
Unearned revenue consists of revenues billed in advance for software and
services not yet delivered.
Revenues from fixed-price contracts are recognized using the percentage-of-
completion method. Contract costs consist of direct labor and other direct
costs. Provisions for any estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, and estimated profitability may result in revisions to costs and
revenue and are recognized in the period in which the revisions are determined.
Cash and Cash Equivalents
- -------------------------
The Company places its cash with high credit quality financial institutions. At
times, such investments may be in excess of Federal Deposit Insurance
Corporation (FDIC) insurance limits.
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
See independent auditors' report.
-6-
INFOCELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Property and Equipment
- ----------------------
Property and equipment are recorded at cost and depreciated using straight-line
rates over the following estimated useful lives:
Years
-----
Computer equipment 2 - 5
Office furniture and equipment 7
Motor vehicle 5
Leasehold improvements 5
Expenditures for betterments and major renewals are capitalized while those for
maintenance, repairs and minor renewals are charged to operations as incurred.
Organization Costs
- ------------------
Legal and accounting costs incurred to incorporate and structure the Company
have been capitalized and are amortized using straight-line rates over a five
year period.
Research and Development Costs
- ------------------------------
The Company classifies the costs of planning, designing, and establishing the
technological feasibility of a computer software product as research and
development costs and charges those costs to expense when incurred. Costs
incurred for documentation, training materials and for packaging the product for
distribution are expensed and charged to cost of sales when revenue is
recognized. Costs of maintenance and customer support are charged to expense
when costs are incurred. Software development costs eligible for capitalization
are insignificant and are expensed as incurred.
Reclassifications
- -----------------
Certain items in the March 31, 1997 financial statements have been reclassified
to conform with the current year presentation.
See independent auditors' report.
-7-
INFOCELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
MACH 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTES 2 - ORGANIZATION COSTS
Organization costs consist of the following at March 31, 1998 and 1997:
1998 1997
------- -------
Organizational costs $ 6,676 $ 6,676
Accumulated amortization 6,120 4,785
------- -------
$ 556 $ 1,891
======= =======
NOTE 3 - NOTE PAYABLE - BANK
At March 31, 1998, InfoCellular had obtained a $500,000 line of credit with
Middlesex Savings Bank. Interest is charged at the bank's prime lending rate
plus 1.5% (10.0% and 9.75% at March 31, 1998 and 1997, respectively) and
borrowings are secured by all the assets of the Company. The line is also
personally guaranteed by one of the Company's stockholders. At March 31, 1998
and 1997 outstanding borrowings totaled $500,000 and $285,000, respectively.
See independent auditors' report.
-8-
INFOCELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 4 - LONG-TERM DEBT
At March 31, 1998 and 1997, long-term debt consists of the following:
1998 1997
------ --------
Notes payable to the Venture Capital
Fund of New England III, L.P., bearing
interest at 10%, due on demand. $650,000 $ ---
Note payable in monthly installments
of $7,366 plus interest at 11%, secured
by furniture and maturing in September,
2000. 192,374 ---
Note payable in monthly installments
of $678 plus interest at 10%, secured
by equipment and maturing in September, 1999. 11,314 17,928
Note payable in monthly installments
of $778 plus interest at 9%, secured
by telephone equipment and maturing in
April, 1998. 778 10,111
Note payable in monthly installments
of $1,389 plus interest at 10%, secured
by all business assets and maturing in
May, 1998. --- 19,444
Note payable in monthly installments
of $364 including interest at 7.75%,
secured by a motor vehicle and maturing
in May, 1997. --- 1,079
------- ------
854,466 48,562
Less current maturities 728,871 33,644
------- ------
$125,595 $ 14,918
======== ========
Approximate future maturities of long-term debt are as follows:
1998 $728,871
2000 82,864
2001 42,731
See independent auditors' report.
-9-
INFOCELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTES 5 - RELATED PARTY TRANSACTIONS
During the year ended March 31, 1995 a consulting agreement was entered into
with an affiliated company. This agreement was for a three year period ending in
September of 1997. For the years ended March 31, 1998 and 1997, InfoCellular
paid its affiliate $38,000 and $55,000, respectively.
The note receivable from an officer at March 31, 1998 and 1997 is for the
purchase of 40 shares of common stock. These shares were re-issued from the
treasury in the year ended March 31, 1995. The note bears interest at 7% and
requires no principal payments until maturity in August 1999. Interest income
from this note for the years ended March 31, 1998 and 1997 was $3,400 per year.
The balance in due from officers of $10,100 at March 31, 1998 and 1997,
represents net advances made to the officers. These amounts are interest-free
and are expected to be repaid within the next year.
Some of the Company's corporate air travel is arranged through a corporation
owned by one of the stockholders. Included in operating expenses at March 31,
1998 and 1997 was $12,364 and $8,139, respectively, of travel paid to this
related party.
NOTE 6 - INCOME TAXES
The provision for (benefit from) income taxes at March 31, 1998 and 1997
consists of the following:
1998 1997
--------- ---------
CURRENT:
Federal $ --- $ ---
State --- ---
--------- ---------
--- ---
--------- ---------
DEFERRED:
Federal (155,800) 69,300
State 13,200 (7,200)
--------- ---------
(142,600) 62,100
--------- ---------
$(142,600) $ 62,100
========= =========
See independent auditors' report.
-10-
INFOCELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 6 - INCOME TAXES (Cont.)
The net deferred tax assets and liabilities in the accompanying balance sheets
include the following amounts.
1998 1997
-------- --------
Federal State Federal State
--------- ------- --------- --------
Deferred tax liability $ --- $ --- $ 155,800 $ ---
========= ======= ========= ========
Deferred tax asset $ --- $ --- $ --- $ 13,200
========= ======= ========= ========
The tax effects of principal temporary differences are as follows:
1998 1997
-------- --------
Federal State Federal State
----------- --------- ----------- ---------
Accounts receivable $ 262,300 $ 73,300 $ 555,100 $ 155,100
Prepaid expenses 21,600 6,000 16,600 4,700
Accumulated
depreciation 46,000 12,900 38,000 10,600
Accounts payable ( 136,400) ( 38,100) ( 112,700) ( 31,500)
Accrued expenses ( 411,600) ( 115,000) ( 111,700) ( 31,200)
Unearned revenue ( 6,100) ( 1,700) ( 23,500) ( 6,600)
Net operating loss ( 919,200) ( 248,200) ( 147,500) ( 33,200)
Research and
development tax
credits ( 97,400) ( 104,300) ( 58,500) ( 81,100)
----------- --------- ----------- ---------
( 1,240,800) ( 415,100) 155,800 ( 13,200)
Valuation allowance 1,240,800 415,100 --- ---
----------- --------- ----------- ---------
$ --- $ --- $ 155,800 $( 13,200)
=========== ========= =========== =========
A valuation allowance was not provided for deferred tax assets at March 31, 1997
as all were expected to be realized in full.
See independent auditors' report.
-11-
INFOCELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 6 - INCOME TAXES (Cont.)
During the years ended March 31, 1998 and 1997, the Company incurred expenses of
$686,590 and $859,978, respectively for research and development. At December
31, 1997, the date of the most recent tax return, the Company had federal
research and development tax credit carryforwards of $89,394 which, if unused,
will expire between 2009 - 2012. The carryforward for state tax purposes was
$96,265. The estimated research and development tax credit for the first
quarter of calender year 1998 is approximately $8,000 for federal tax and state
tax purposes.
NOTE 7 - CONCENTRATION OF CREDIT RISK
For the year ended March 31, 1998 four customers accounted for sales of
$2,679,077 or 63% of total revenues. For the year ended March 31, 1997, three
customers accounted for sales of $2,907,919 or 51% of total revenues.
Accounts receivable potentially subject the Company to concentrations of credit
risk. At March 31, 1998, three customers accounted for 64% of the balance. At
March 31, 1997, four customers accounted for 81% of the balance.
NOTE 8 - STOCKHOLDERS' EQUITY
On September 23, 1994, the Company sold 274 shares of Series A Convertible
Preferred Stock to The Venture Capital Fund of New England, III, L.P. (the
purchaser) for $500,324. The Company incurred expenses of $53,310 directly
related to the issuance and sale of the stock which were deducted from
additional paid-in capital. During fiscal 1998, the Company sold 90 shares of
Series B Convertible Preferred Stock to the purchaser for $600,055. Issuance
expenses of $15,940 were deducted from additional paid-in capital.
The Company also entered into a stock option agreement with the purchaser
whereby the purchaser has been granted the option to purchase 20 shares of
common stock at a price per share of $1,214. The option is exercisable on
September 23, 1998. The purchaser also holds a warrant to purchase 30 shares of
common stock at a price per share of $670. The warrant expires August 20, 2002.
See independent auditors' report.
-12-
INFOCELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 8 - STOCKHOLDERS' EQUITY (Cont.)
During the year ended March 31, 1995, a stockholder of the Company sold seventy
of his 330 shares back to the Company for $85,000. Forty of these shares were
then purchased by the Company's majority stockholder for $48,572.
In accordance with the terms of the Series A and B Convertible Preferred Stock,
the Corporation is accruing dividends at a respective rate of $137 and $1,333
per share. Dividends accrued for the years ended March 31, 1998 and 1997 were
$103,884 and $37,525, respectively.
NOTE 9 - STOCK OPTION PLAN
During the year ended March 31, 1997, the Company adopted an incentive stock
option plan (ISO). The plan provides that shares subject to options shall not
exceed an aggregate of 138 shares of common stock. The ISO plan is established
in accordance with Section 422 of the Internal Revenue Code. All full-time,
salaried employees are eligible to be considered.
Employees must pay the fair market price of $640 per share for the stock or, in
the case of an option granted to a ten percent or more stockholder, 110 percent
of the fair market value per share, determined by the Board, on the date the
option is granted. The plan shall terminate ten years from the effective date.
The stock activity for the ISO common shares during the year ended March 31,
1998 was as follows:
Shares exercisable at March 31, 1997 96.64
Shares granted during the year 77.36
Shares exercised during the year (23.00)
Shares forfeited during the year (23.00)
------
Shares exercisable at March 31, 1998 128.00
======
See independent auditors' report.
-13-
INFOCELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTES 10 - COMMITMENTS
On May 1, 1995, the Company moved its corporate office to Wayland, Massachusetts
and signed a four year operating lease which expires in April, 1999. However, on
July 1, 1997 the Company left this location and moved to Marlborough,
Massachusetts where it signed a five year lease with a base rent of $494,326 per
year plus additional operating costs of at least $29,078 per year. Effective
July 1, 1997, the Wayland office was leased by an unrelated third party. In
order to effectuate this lease InfoCellular agreed to guarantee the rent
obligation of $167,670 per year through April, 1999. Rent charged to operations
was $420,634 and $144,383 for the years ended March 31, 1998 and 1997,
respectively.
The Company leased equipment under a non-cancelable operating lease requiring
fixed monthly payments of $239 through July, 1997. Rent expense under this lease
was approximately $1,000 and $2,900 for the years ended March 31, 1998 and 1997.
Approximately future minimum lease payments on the Marlborough office site are
as follows:
1999 $ 523,400
2000 523,400
2001 523,400
2002 523,400
2003 130,850
NOTE 11 - PROFIT SHARING PLAN
The Company maintains a 401(k) profit sharing plan which covers substantially
all of its' employees. Participants are subject to a five year vesting schedule.
The employer contributions are discretionary and determined annually by the
Board of Directors. There were no contributions for the years ended March 31,
1998 and 1997.
See independent auditors' report.
-14-
INFOCELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 12 - SUPPLEMENTAL CASH FLOWS DISCLOSURES
During the years ended March 31, 1998 and 1997, cash paid for the items
indicated was as follows:
1998 1997
---------- ----------
Interest $ 27,890 $ 36,605
========== ==========
Income taxes $ --- $ ---
========== ==========
NOTE 13 - GOING CONCERN
As shown in the accompanying financial statements, the Company incurred a net
loss of $3,036,666 during the year ended March 31, 1998, and as of that date had
a capital deficiency of $1,561,470. In addition, current liabilities exceed
current assets by $2,080,950, in part due to back payroll taxes owed to federal
and state governments totalling $1,040,000 including penalties and interest.
These factors lead to substantial doubt about the ability of the Company to
continue as a going concern. Management intends to sell the Company during
fiscal 1999.
NOTE 14 - LITIGATION
In the normal course of business, the Company is involved in various lawsuits.
Management is of the opinion that any liability or loss in excess of insurance
coverage resulting from such litigation will not have a material adverse effect
on the financial statements.
NOTE 15 - SUBSEQUENT EVENT
In April, 1998, the Company entered into a non-binding agreement to sell all of
its' outstanding stock and options to LHS Group, Inc. in exchange for LHS stock.
As a measure of good faith, LHS loaned the Company $1,500,000 in April, 1998
under a term-note agreement.
See independent auditors' report.
-15-
SUPPLEMENTARY INFORMATION
INFOCELLULAR, INC.
SCHEDULE I - OPERATING EXPENSES
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
1998 % 1997 %
----------- ----- ----------- ------
Salaries $ 1,668,824 39.0 $ 792,565 13.9
Rent 420,634 9.8 144,383 2.5
Penalties 319,337 7.4 35 ---
Travel 227,266 5.3 167,922 3.0
Depreciation and
amortization 186,310 4.3 111,888 2.0
Payroll taxes 129,519 3.0 53,311 .9
Office supplies 119,543 2.8 130,220 2.3
Trade shows 117,849 2.7 58,016 1.0
Group insurance 105,283 2.5 60,442 1.1
Telephone 95,771 2.2 92,875 1.6
Seminars and conferences 84,944 2.0 25,156 .4
Recruiting 66,711 1.6 19,501 .3
Advertising 61,166 1.4 79,605 1.4
Utilities 49,551 1.2 20,278 .4
Legal and accounting 40,811 1.0 101,238 1.8
Consulting 39,704 .9 69,211 1.2
Motor vehicle expenses 29,607 .7 5,773 .1
Dues and subscriptions 26,671 .6 12,152 .2
Moving 24,218 .6 --- ---
Repairs and maintenance 23,705 .6 5,843 .1
Insurance 21,876 .5 13,704 .2
Postage 19,745 .5 17,805 .3
Miscellaneous 16,589 .4 3,178 .1
Bad debts --- --- 5,144 .1
----------- ----- ----------- -----
$ 3,895,634 91.0 $ 1,990,245 34.9
=========== ===== =========== =====
See independent auditors' report.
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LHS GROUP INC.
By: /s/ Jerry W. Braxton
--------------------
Jerry W. Braxton
Chief Financial Officer
Date: July 20, 1998
EXHIBIT INDEX
Exhibit Page
Number Exhibit Number
- ------- ------- ------
23.1 Consent of Independent Auditors