UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-22409
LHS GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2224883
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SIX CONCOURSE PARKWAY, SUITE 2700
ATLANTA, GA
30328
(Address of principal executive offices)
(Zip Code)
(770) 280-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
Class Outstanding at August 5, 1998
- ------------------------------ ---------------------------------
Common Stock, $0.01 Par Value 52,054,070 Shares
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
LHS GROUP INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
Second Quarter Ended June 30, Six Months Ended June 30,
--------------- -------------- --------------- --------------
1998 1997 1998 1997
--------------- -------------- --------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues
License $ 16,460 $ 8,182 $ 31,275 $ 15,492
Services 21,319 15,130 39,669 28,706
--------------- -------------- --------------- --------------
Total 37,779 23,312 70,944 44,198
Cost of services 14,421 10,018 27,307 19,562
--------------- -------------- --------------- --------------
Gross margin 23,358 13,294 43,637 24,636
Operating expenses
Sales and marketing 2,598 2,112 5,079 4,364
Research and development 8,026 4,212 15,777 8,323
General and administrative 3,712 3,946 7,241 6,961
Cost of purchased in-process computer
software technology 8,200 - 8,200 -
--------------- -------------- --------------- --------------
22,536 10,270 36,297 19,648
Earnings before interest and taxes 822 3,024 7,340 4,988
Interest expense (income) (1,137) (294) (2,056) (270)
--------------- -------------- --------------- --------------
Earnings before income taxes 1,959 3,318 9,396 5,258
Income taxes 4,064 1,277 7,038 2,066
--------------- -------------- --------------- --------------
Net earnings (loss) $ (2,105) $ 2,041 $ 2,358 $ 3,192
============== ============= ============== =============
Net earnings (loss) per share:
Basic $ (0.04) $ 0.05 $ 0.05 $ 0.08
============== ============= ============== =============
Diluted $ (0.04) $ 0.04 $ 0.04 $ 0.07
============== ============= ============== =============
Shares used in per share calculation:
Basic 51,682,794 44,813,098 51,339,022 42,419,846
============== ============= ============== =============
Diluted 51,682,794 47,641,840 54,273,940 45,085,645
============== ============= ============== =============
2
LHS GROUP INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 28,983 $ 27,867
Short-term marketable securities 50,350 45,907
Trade accounts receivable, net of allowances
of $1,849 and $1,236 35,089 25,135
Unbilled receivables 16,775 11,910
Prepaid expenses and other current assets 3,243 2,330
------- --------
Total current assets 134,440 113,149
Property, plant & equipment, net 11,035 8,870
Deferred taxes 1,083 1,083
Other 9,606 4,121
-------- --------
Total Assets $156,164 $127,223
======== ========
LIABILITIES
Accounts payable 4,810 6,747
Accrued expenses and other liabilities 24,090 14,192
Income taxes payable 6,987 5,396
Deferred income taxes 3,055 3,055
Deferred revenues 6,498 4,553
-------- --------
Total current liabilities 45,440 33,943
Long-term obligations 680 731
-------- --------
Total Liabilities 46,120 34,674
STOCKHOLDERS' EQUITY
Common stock ($.01 par value), 200,000,000
shares authorized; 51,957,585 and
50,530,710 shares issued and outstanding 520 505
Additional paid-in-capital 94,976 79,445
Retained earnings 19,866 17,509
Accumulated translation adjustments (5,318) (4,910)
-------- --------
Total Stockholders' Equity 110,044 92,549
Total Liabilities and Stockholders' Equity $156,164 $127,223
======== ========
3
LHS GROUP INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
Six Months Ended June 30,
--------------------------
1998 1997
---- ----
(Unaudited)
OPERATING ACTIVITIES
Net earnings $ 2,358 $ 3,192
Adjustments:
Depreciation and amortization 1,504 755
Write-off of purchased in-process computer software technology 8,200 -
Change in operating assets and liabilities, net of effect
of business acquisition (2,836) (1,538)
------- -------
Net cash provided by operating activities 9,226 2,409
INVESTING ACTIVITIES
Additions of leasehold improvements and equipment (2,953) (1,772)
Purchase of marketable securities (5,229) (11,433)
Acquisition of business, net of cash acquired (2,955) -
Other (1,048) (531)
------- -------
Net cash used in investing activities ($12,185) (13,736)
FINANCING ACTIVITIES
Net proceeds from issuance of capital stock 3,847 70,890
Repayment of bank borrowings - (1,725)
Other 230 (3,736)
------- ------
Net cash provided by financing activities 4,077 65,429
------- ------
Increase in cash and cash equivalents 1,118 54,102
Cash and cash equivalents at beginning of period 27,865 4,289
------- ------
Cash and cash equivalents at end of period $ 28,983 $ 58,391
======== ========
4
NOTES TO CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for fair presentation have been included. For further information,
refer to the consolidated financial statements and footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
NOTE 2 - ACQUISITION
In June 1998, the Company acquired the stock of Infocellular, Inc.
("Infocellular") for $8,484,000, paid by the issuance of 117,885 shares of
Common Stock and $1,327,000 in cash. Infocellular, which operates as a wholly-
owned subsidiary of LHS Group Inc., is engaged in the business of providing
point of sale and customer acquisition software and related services to
telecommunication service providers.
The Company recognized a one-time charge of $8.2 million in the second quarter
ended June 30, 1998 related to the write-off of purchased in-process computer
software technology as required by generally accepted accounting principles. 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.
The acquisition was accounted for as a purchase and the results of
Infocellular's operations have been included in the consolidated financial
statements of LHS Group Inc. effective June 11, 1998. Infocellular's revenues
and operating loss, excluding the one-time charge, included in the consolidated
statements of income (loss) of LHS Group Inc. aggregated $585,000 and $15,000
for both the quarter and six months ended June 30, 1998.
Excluding the results of Infocellular and the one-time charge, earnings before
interest and taxes and net earnings would have been $10.2 million and $6.1
million for the quarter ended June 30, 1998 and $17.6 million and $10.6 million
for the six months ended June 30, 1998, respectively. Earnings per share would
have been $.11 per share and $.19 per share in the quarter and the six months
ended June 30, 1998, respectively.
NOTE 3 - EARNINGS PER SHARE
Earnings per share was computed by dividing net earnings by the weighted
average number of shares of Common Stock outstanding. In 1997, the Financial
Accounting Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effect of options,
warrants and convertible securities. Diluted earnings per share is similar to
the previously reported fully diluted earnings per share. Diluted earnings per
share for the six months ended June 30, 1998 includes the effect of options to
purchase 2,873,889 shares of common stock and 61,029 shares of restricted common
stock. Diluted earnings per share for the quarter and six months ended June 30,
1997 includes the effect of options to purchase 1,366,156 shares and 1,283,797
shares of common stock, respectively, and 96,429 shares and 98,204 shares of
restricted common stock. Diluted earnings per share for the quarter ended June
30, 1998 excludes the effect of stock options and restricted common stock
because they are anti-dilutive. Diluted earnings per share for the quarter and
six month period ended June 30, 1997 includes the weighted average effect of the
conversion of Preferred Stock into 4,500,000 shares of Common Stock prior to the
IPO.
NOTE 4 - INITIAL PUBLIC OFFERING
In May 1997, the Company sold 4,865,000 shares of its Common Stock in an
initial public offering in which it received approximately $70.6 million in net
proceeds. At the completion of the offering, 225,000 shares of the Company's
Series A Convertible Preferred Stock were converted into 4,500,000 shares of
Common Stock.
NOTE 5 - COMMON STOCK
Effective May of 1998, the Company amended its certificate of incorporation
to increase the authorized Common Stock to 200,000,000 shares, and effected a 2-
for-1 Common Stock split. All common share and per common share amounts have
been adjusted for all periods to reflect the stock split.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ACQUISITION
In June 1998, the Company acquired the stock of Infocellular, Inc.
("Infocellular") for $8,484,000, paid by the issuance of 117,885 shares of
Common Stock and $1,327,000 in cash. Infocellular, which operates as a wholly-
owned subsidiary of LHS Group Inc., is engaged in the business of providing
point of sale and customer acquisition software and related services to
telecommunication service providers.
The Company recognized a one-time charge of $8.2 million in the second quarter
ended June 30, 1998 related to the write-off of purchased in-process computer
software technology as required by generally accepted accounting principles. 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.
The acquisition was accounted for as a purchase and the results of
Infocellular's operations have been included in the consolidated financial
statements of LHS Group Inc. effective June 11, 1998. Infocellular's revenues
and operating loss, excluding the one-time charge, included in the consolidated
statements of income (loss) of LHS Group Inc. aggregated $585,000 and $15,000
for both the quarter and six months ended June 30, 1998.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the Company's
statements of income reflected as a percentage of total revenues. These amounts
and the discussion and analysis following exclude the results of Infocellular in
both periods.
Second Quarter Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------- ------------ -------------
Revenues
License 43.4% 35.1% 44.0% 35.1%
Services 56.6% 64.9% 56.0% 64.9%
----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0%
Cost of services 38.3% 43.0% 38.6% 44.3%
----- ----- ----- -----
Gross margin 61.7% 57.0% 61.4% 55.7%
Operating expenses
Sales and marketing 6.7% 9.1% 7.1% 9.9%
Research and development 21.0% 18.1% 22.1% 18.8%
General and administrative 9.8% 16.9% 10.2% 15.7%
----- ----- ----- -----
37.4% 44.1% 39.3% 44.5%
Earnings before interest and taxes 24.3% 13.0% 22.1% 11.3%
Interest expense (income) (3.07)% (1.26)% (2.93)% (0.61)%
----- ----- ----- -----
Earnings before income taxes 27.4% 14.2% 25.0% 11.9%
Income taxes 10.9% 5.5% 10.0% 4.7%
----- ----- ----- -----
Net earnings 16.4% 8.8% 15.0% 7.2%
===== ===== ===== =====
SECOND QUARTER ENDED JUNE 30, 1998 COMPARED TO SECOND QUARTER ENDED JUNE 30,1997
REVENUES
Total revenues increased 59.5% to $37.2 million in the second quarter of
1998 from $23.3 million in the second quarter of 1997. License revenues
increased 97.2% to $16.1 million in 1998 from $8.2 million in 1997, while
service revenues increased 39.2% to $21.1 million from $15.1 million. Total
revenues increased primarily due to the increased market acceptance of the
Company's products in Europe, Asia and the Americas. Revenues from the Company's
European customers accounted for $17.6 million or 47.3% of total revenues in
1998 compared to $11.6 million or 49.9% of total revenues in 1997. Revenues from
Asian customers increased to $4.4 million or 11.8% of total revenues in 1998
from $3.6 million or 15.4% of total revenues in 1997. Revenues from the
Company's Americas customers accounted for $15.2 million or 40.9% of total
revenues in 1998 compared to $8.1 million or 34.7% of total revenues in 1997.
License revenues increased as a percentage of total revenues to 43.4% in 1998
from 35.0% in 1997, while service revenues decreased as a percentage of total
revenues to 56.6% from 64.9%. This
6
change in mix of revenues is primarily due to increased revenues from direct
license sales, licenses sold by partners and customer subscriber increases as
well as the timing of the completion of implementation work on existing
customers and the start of the implementation work on new customers.
Historically, sales to certain of the Company's customers have individually
represented more than 10% of the Company's revenues during a fiscal year. During
the second quarter of 1998, the Company had no customer that accounted for 10%
or more of total revenues compared to two customers in 1997 that accounted for
16% and 10% of total revenues, respectively.
COST OF SERVICES
Cost of services decreased as a percentage of total revenues to 38.3% in
the second quarter of 1998 from 43.0% in the second quarter of 1997. Cost of
services increased 42.2% to $14.2 million in 1998 from $10.0 million in 1997,
primarily due to compensation expense associated with increased staffing for new
projects in Europe, the Americas and Asia. This increase was partially offset by
a reduction in the use of outside contractors and systems integrators to perform
implementation services.
SALES AND MARKETING
Sales and marketing expenses decreased as a percentage of total revenues to
6.7% in the second quarter of 1998 from 9.1% in the second quarter of 1997.
Sales and marketing expenses increased to $2.5 million in 1998 from $2.1 million
in 1997 primarily due to an increase in the number of worldwide sales personnel.
RESEARCH AND DEVELOPMENT
Research and development expenses increased as a percentage of total
revenues to 21.0% in the second quarter of 1998 from 18.1% in the second quarter
of 1998. These expenses increased 85.1% to $7.8 million in 1998 from $4.2
million in 1997. The increase is the result of an increase in the number of
personnel associated with the development of new releases of BSCS in both the
Americas and Europe.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to 9.8% of total revenues in
the second quarter of 1998 from 16.9% in the second quarter of 1997. These
expenses decreased 7.7% to $3.6 million in 1998 from $3.9 million in 1997. This
decrease is principally due to certain nonrecurring relocation and other costs
incurred in the 1997 period.
INCOME TAXES
The provision for income taxes was 40.0% of earnings before income taxes in
the second quarter of 1998 compared to 38.5% in the second quarter of 1997.
7
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Total revenues increased 59.2% to $70.4 million in the first six months of
1998 from $44.2 million in the first six months of 1997. License revenues
increased 99.8% to $31.0 million in 1998 from $15.5 million in 1997, while
service revenues increased 37.3% to $39.4 million from $28.7 million. Total
revenues increased primarily due to the increased market acceptance of the
Company's products in Europe, Asia and the Americas. Revenues from the Company's
European customers accounted for $30.6 million or 43.4% of total revenues in
1998 compared to $22.0 million or 49.7% of total revenues in 1997. Revenues from
Asian customers increased to $8.3 million or 11.8% of total revenues in 1998
from $5.7 million or 12.8% of total revenues in 1997. Revenues from the
Company's Americas customers accounted for $31.5 million or 44.8% of total
revenues in 1998 compared to $16.5 million or 37.5% of total revenues in 1997.
License revenues increased as a percentage of total revenues to 44.0% in 1998
from 35.1% in 1997, while service revenues decreased as a percentage of total
revenues to 56.0% from 64.9%. This change in mix of revenues is primarily due to
increased revenues from direct license sales, licenses sold by partners and
customer subscriber increases as well as the timing of the completion of
implementation work on existing customers and the start of the implementation
work on new customers. Historically, sales to certain of the Company's customers
have individually represented more than 10% of the Company's revenues during a
fiscal year. During the first six months of 1998, the Company had no customer
that accounted for 10% or more of total revenues compared to two customers in
1997 that accounted for 12% and 11% of total revenues, respectively.
COST OF SERVICES
Cost of services decreased as a percentage of total revenues to 38.6% in
the first six months of 1998 from 44.3% in the first six months of 1997. Cost of
services increased 38.7% to $27.1 million in 1998 from $20.0 million in 1997,
primarily due to compensation expense associated with increased staffing for new
projects in Europe, the Americas and Asia.
SALES AND MARKETING
Sales and marketing expenses decreased as a percentage of total revenues to
7.1% in the first six months of 1998 from 9.9% in the first six months of 1997.
Sales and marketing expenses increased to $5.0 million in 1998 from $4.4 million
in 1997 primarily due to an increase in the number of worldwide sales personnel.
RESEARCH AND DEVELOPMENT
Research and development expenses increased as a percentage of total
revenues to 22.1% in the first six months of 1998 from 18.8% in the first six
months of 1998. These expenses increased 86.8% to $15.5 million in 1998 from
$8.3 million in 1997. The increase is the result of an increase in the number of
personnel associated with the development of new releases of BSCS in both the
Americas and Europe.
8
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to 10.2% of total revenues in
the first six months of 1998 from 15.7% in the second quarter of 1997. These
expenses increased 3.0% to $7.2 million in 1998 from $7.0 million in 1997.
INCOME TAXES
The provision for income taxes was 40.0% of earnings before income taxes in
the first six months of 1998 compared to 39.3% in the first six months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $9.2 million for the
first six months of 1998 compared to $2.4 million for the same period of 1997.
The increase in net cash provided by operating activities was the result of the
increased earnings excluding the write-off of the purchased in-process computer
software technology which was partially offset by increased uses of working
capital to fund the new business opportunities in Europe and the Americas. The
increase in trade accounts receivable is due to delays in the collection of
certain receivables. Days sales outstanding at June 30, 1998 of 84 days is
consistent with the end of the first quarter but up from 70 days at the end of
the prior year.
Unbilled receivables have increased from $11.9 million at the end of the
prior year to $15.5 million at the end of the first quarter and $16.8 million at
the end of the second quarter. The increase is due to the timing of the
invoicing of the customer as well as the milestone related payment terms
established with customers with fixed price contracts.
The Company expects the trade accounts receivables and the unbilled
receivables recorded in the balance sheet to be fully realized.
The Company invested $3.0 million and $1.8 million in furniture, fixtures
and equipment during the first six months of 1998 and 1997, respectively. These
investments are primarily for computer equipment and improvements to new leased
office space required to accommodate the growth in employees. The Company also
invested $5.2 million in marketable securities during the first six months of
1998 compared to $11.4 million in the first six months of 1997. The Company also
invested $3.0 million in the acquisition of Infocellular, Inc. during the second
quarter of 1998.
The Company received $3.8 million in proceeds from the issuance of new
shares of common stock to employees who exercised stock options during the first
six months of 1998 compared to the $70.9 million received in the first six
months of 1997 primarily from the issuance of new shares in the initial public
offering. In July 1996, the Company repurchased shares of Common Stock from one
of its stockholders at a price of $10.0 million and simultaneously sold the
Common Stock to a related party for $10.0 million. The final payment of $4.0
million was made to the former stockholder in the first six months of 1997.
At June 30, 1998, the Company did not have any material commitments for
capital expenditures. The Company believes that the net proceeds from the sale
of the Common Stock in the initial public offering combined with existing cash
balances, available credit facilities and funds generated by operations, will be
sufficient to meet its anticipated working capital and capital expenditure
requirements for the foreseeable future.
9
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
3.1 - Registrant's Certificate of Incorporation, as amended (incorporated
by reference from Exhibit 3.1 to the Registrant's Registration Statement on Form
S-1 (File No. 333-22195) filed on February 21, 1997).
3.2 - Bylaws of the Registrant (incorporated by reference from Exhibit 3.2
to the Registrant's Registration Statement on Form S-1 (File No.333-22195) filed
on February 21,1997).
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The Company filed one Current Report on Form 8-K on June 26, 1998 to disclose
the basic terms of the merger agreement between LHS Group Inc. and Infocellular,
Inc. and filed a Current Report on Form 8-K/A on July 20, 1998 to include the
Pro Forma financial statements and the financial statements of Infocellular,
Inc. for the years ended March 31, 1998 and 1997.
10
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.
Date: August 7, 1998 By: /s/ Jerry W. Braxton
--------------------
Jerry W. Braxton
Executive Vice President, Chief Financial
Officer, Treasurer and Director (duly
authorized and principal financial and
accounting officer)
11
EXHIBIT INDEX
Exhibit No.
- -----------
3.1 Registrant's Certificate of Incorporation, as amended (incorpor-
ated by reference from Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (File No. 333-22195) filed on
February 21, 1997).
3.2 Bylaws of the Registrant (incorporated by reference from Exhibit
3.2 to the Registrant's Registration Statement on Form S-1 (File
No.333-22195) filed on February 21,1997).
27 Financial Data Schedule (for SEC use only)
12