1
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 MARCH 31, 2000
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 May 1, 2000
----- --------------------------
Common Stock, $0.01 Par Value 59,312,252 Shares
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LHS GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
Revenues
License revenues $ 29,660 $ 21,635
Service revenues 39,793 37,243
----------- -----------
Total 69,453 58,878
Cost of services 23,362 21,636
----------- -----------
Gross margin 46,091 37,242
Operating expenses
Sales and marketing 9,656 7,138
Research and development 14,795 12,845
General and administrative 7,131 5,486
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31,582 25,469
Earnings before interest and taxes 14,509 11,773
Interest income, net (1,490) (1,113)
----------- -----------
Earnings before income taxes 15,999 12,886
Income taxes 5,280 4,654
----------- -----------
Net earnings $ 10,719 $ 8,232
=========== ===========
Net earnings per share:
Basic $ 0.18 $ 0.15
=========== ===========
Diluted $ 0.18 $ 0.14
=========== ===========
Shares used in per share calculation:
Basic 58,612 55,564
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Diluted 60,200 59,279
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LHS GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, DECEMBER 31,
2000 1999
(UNAUDITED)
------------ ------------
ASSETS
Cash and cash equivalents $ 74,716 $ 86,888
Short-term investments 56,128 49,009
Trade accounts receivable, net of allowances
of $4,890 and $4,988 102,653 91,910
Prepaid expenses and other current assets 16,595 14,140
----------- ------------
Total current assets 250,092 241,947
Property, plant & equipment, net 22,360 20,949
Other 26,627 17,666
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Total Assets $ 299,079 $ 280,562
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LIABILITIES
Accounts and notes payable 9,192 9,255
Accrued expenses and other liabilities 19,618 21,211
Income taxes payable 26,961 25,164
Deferred revenues 15,007 15,929
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Total current liabilities 70,778 71,559
Long-term obligations 719 985
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Total Liabilities 71,497 72,544
STOCKHOLDERS' EQUITY
Common stock ($.01 par value), 200,000
shares authorized; 59,062 and 58,363
shares issued and outstanding 590 583
Additional paid-in-capital 156,789 150,922
Retained earnings 79,345 68,626
Accumulated translation adjustments (9,142) (12,113)
----------- ------------
Total Stockholders' Equity 227,582 208,018
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Total Liabilities and Stockholders' Equity $ 299,079 $ 280,562
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LHS GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
2000 1999
(UNAUDITED) (UNAUDITED)
------------ ------------
OPERATING ACTIVITIES
Net earnings $ 10,719 $ 8,232
Adjustments:
Depreciation and amortization 1,834 1,530
Change in operating assets and liabilities (14,939) (10,578)
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Net cash used in operating activities (2,386) (816)
INVESTING ACTIVITIES
Additions of leasehold improvements and equipment (3,018) (1,275)
Sale (purchase) of short-term investments (12,601) (956)
Other -- 176
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Net cash used in investing activities (15,619) (2,055)
FINANCING ACTIVITIES
Net proceeds from issuance of capital stock 5,873 3,208
Other (40) (255)
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Net cash provided by financing activities 5,833 2,953
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(Decrease)/increase in cash and cash equivalents (12,172) 82
Cash and cash equivalents at beginning of period 86,888 46,794
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Cash and cash equivalents at end of period $ 74,716 $ 46,876
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NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated 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, 1999.
NOTE 2 - EARNINGS PER SHARE
Diluted earnings per share for the quarter ended March 31, 2000
includes the effect of options to purchase 1,564,609 shares of common stock and
24,320 shares of restricted common stock. Diluted earnings per share for the
quarter ended March 31, 1999 includes the effect of options to purchase
11,547,091 shares of common stock and 44,641 shares of restricted common stock.
Options to purchase 1,608,812 shares of common stock at prices ranging from
$45.00 to $65.37 were outstanding at March 31, 2000 and options to purchase
3,547,741 shares of common stock at prices ranging from $29.3125 to $66.12 were
outstanding at March 31, 1999, but were not included in the computations of
diluted earnings per share because the options' exercise price was greater than
the average market price of the common shares and, therefore, the effect would
be antidilutive.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements made in this document, other than those concerning
historical information, should be considered forward-looking and subject to
various risks and uncertainties. In particular, statements concerning the
results of ongoing development of new products, the future financial performance
of LHS, and other forward-looking statements are included in this document. Such
forward-looking statements are made pursuant to the `safe-harbor' provisions of
the Private Securities Litigation Reform Act of 1995 and are made based on
management's current expectations or beliefs as well as assumptions made by, and
information currently available to management. For a detailed discussion of
cautionary statements and factors that could cause actual results to differ from
the Company's forward-looking statements, please refer to the Company's filings
with the Securities Exchange Commission, especially in the "Factors Affecting
Future Performance" included in the Management's Discussion and Analysis section
of the Company's Form 10-K for the fiscal year ended December 31, 1999 and in
subsequent filings filed with the Securities Exchange Commission.
ACQUISITION
On June 10, 1999, the Company completed its merger with Priority Call
Management, Inc. ("PCM"), in which PCM became a wholly-owned subsidiary of LHS
Group Inc. The Company exchanged shares of Common Stock for all the outstanding
common shares, preferred shares, and stock options or stock appreciation rights
in PCM. The merger was accounted for under the pooling-of-interests method of
accounting and, accordingly, the accompanying financial statements and footnotes
have been restated to include the operations of PCM for all periods presented.
The Company recorded a charge of $4.3 million in the second quarter ended June
30, 1999 related to direct costs incurred with the merger of PCM. PCM is a
leading provider of network-based solutions that enable telecommunications
providers to offer subscribers a range of enhanced services, including prepaid
calling, credit/debit card calling, enhanced messaging and one-number
"follow-me" services.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the Company's
statements of income reflected as a percentage of total revenues.
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THREE MONTHS ENDED MARCH 31,
2000 1999
(UNAUDITED) (UNAUDITED)
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Revenues
License revenues 42.7% 36.7%
Service revenues 57.3% 63.3%
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Total 100.0% 100.0%
Cost of services 33.6% 36.7%
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Gross margin 66.4% 63.3%
Operating expenses
Sales and marketing 13.9% 12.1%
Research and development 21.3% 21.8%
General and administrative 10.3% 9.3%
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45.5% 43.3%
Earnings before interest and taxes 20.9% 20.0%
Interest income, net (2.1)% (1.9)%
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Earnings before income taxes 23.0% 21.9%
Income taxes 7.6% 7.9%
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Net earnings (loss) 15.4% 14.0%
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FIRST QUARTER ENDED MARCH 31, 2000 COMPARED TO FIRST QUARTER ENDED MARCH 31,
1999
REVENUES
Total revenues increased 18.0% to $69.5 million in the first quarter of
2000 from $58.9 million in the first quarter of 1999. License revenues increased
37.1% to $29.7 million in 2000 from $21.6 million in 1999, while service
revenues increased 6.8% to $39.8 million from $37.2 million. Total revenues
increased primarily due to the addition of new customers and license revenue
from subscriber growth and increased implementation and support revenue from
existing customers. License revenues increased as a percentage of total revenues
to 42.7% in 2000 from 36.7% in 1999, while service revenues decreased as a
percentage of total revenues to 57.3% from 63.3%. This change in mix of revenues
is primarily due to the timing of recurring license revenue from subscriber
growth experienced by existing customers, the completion of implementation work
for existing customers and the start of the implementation work for new
customers.
COST OF SERVICES
Cost of services decreased as a percentage of total revenues to 33.6%
in the first quarter of 2000 from 36.7% in the first quarter of 1999. Cost of
services increased 8.0% to $23.4 million in 2000 from $21.6 million in 1999,
primarily due to compensation expense associated with increased staffing for new
projects in Europe, the Americas and Asia. This increase was offset by increased
productivity of the implementation and services function.
SALES AND MARKETING
Sales and marketing expenses increased as a percentage of total
revenues to 13.9% in the first quarter of 2000 from 12.1% in the first quarter
of 1999. Sales and marketing expenses increased 35.3% to $9.7 million in 2000
from $7.1 million in 1999 primarily due to an increase in the number of
worldwide sales personnel to support revenue and customer growth and
expenditures to support the Alcatel alliance in China.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased as a percentage of total
revenues to 21.3% in the first quarter of 2000 from 21.8% in the first quarter
of 1999. These expenses increased 15.2% to $14.8 million in 2000 from $12.8
million in 1999. This increase is the result of an increase in the number of
personnel associated with the development of new software releases in both the
Americas and Europe, including ongoing development of the Company's new Targys
technology. The Company has implemented its Targys Customer Server and Customer
Inquiry Application for one customer in Europe and one customer in North
America. The Company will continue a phased rollout of additional Targys
applications during the remainder of 2000.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased to 10.3% of total
revenues in the first quarter of 2000 from 9.3% in the first quarter of 1999.
These expenses increased 30% to $7.1 million in 2000 from $5.5 million in 1999.
This increase is principally due to increases in personnel and other expenses
incurred as a result of the general growth of the Company's business.
INCOME TAXES
The provision for income taxes was 33.0% of earnings before income
taxes in the first quarter of 2000 compared to 36.0% in the first quarter of
1999. The decrease in the effective tax rate is due to a reduction of expected
tax rates in certain tax jurisdictions.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities totaled $2.4 million for the
first three months of 2000 compared to $0.8 million for the same period of 1999.
Working capital requirements for the first three months of 2000 increased
compared to the first three months of 1999 due to overall business expansion.
Net cash used in investing activities totaled $15.6 million for the
first three months of 2000 compared to $2.1 million for the first three months
of 1999. The increase is due primarily to the purchase of $12.6 million in
marketable securities in the first three months of 2000 compared to $1.0 million
during the first three months of 1999. Additionally, investment of $3.0 million
in furniture, fixtures and equipment was made during the first three months of
2000 compared to $1.3 million in the first three months of 1999.
Net cash from financing activities totaled $5.8 million for the first
three months of 2000, compared to $3.0 million for the first three months of
1999. The increase is due primarily to the Company's receipt of $5.9 million in
proceeds from the issuance of new shares of common stock to employees who
exercised stock options in the first three months of 2000 compared to $3.2
million in the first three months of 1999.
At March 31, 2000, the Company did not have any material
commitments for capital expenditures. The Company believes that the 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Item 7(A) disclosure made
in the Company's report on Form 10-K for the year ended December 31, 1999.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger by and between LHS Group Inc.,
Priority Call Management, Inc. and Patriot Acquisition Corp.
dated as of April 20, 1999 (Incorporated by reference from
Exhibit 2.1 to the Registrant's Registration Statement on Form
S-4 (File No. 333-77557)).
2.2 Plan and Agreement of Merger, dated as of March 14, 2000, among
LHS Group Inc., Sema Group plc and SG Acquisition Corporation
(Incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K).
2.3 Stock Option Agreement, dated as of March 14, 2000, among LHS
Group Inc. and Sema Group plc (Incorporated by reference to
Exhibit 2.2 to the Company's Current Report on Form 8-K filed
on March 14, 2000).
3.1 Certificate of Incorporation, as amended (Incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (File No. 333-57269)).
3.2 By-Laws, as amended (Incorporated by reference to Exhibit 3.2
to the Company's Form 10-Q for the quarterly period ended June
30, 1999).
4. Specimen Common Stock Certificate. (Incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
S-1 (File No. 333-22195)).
10.1 Registration Rights Agreement dated July 15, 1996 among the
Company, General Atlantic Partners 23, L.P., General Atlantic
Partners 31, L.P., GAP Coinvestment Partners, L.P. and the
other stockholders named therein. (Incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form
S-1 (File 333-22195)).
*10.5 LHS Group Inc. 1998 Employee Stock Purchase Plan (Incorporated
by reference to Exhibit 99.1 to the Company's Registration
Statement on Form S-8 (File No. 333-57269)).
*10.6 LHS Group Inc. Amended and Restated Stock Incentive Plan
(Incorporated by reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-8 (File 333-57269)).
10.7 Employment Agreement dated March 19, 1999, between Stefan
Sieber and LHS Group Inc. (Incorporated by reference to Exhibit
10.7 the Company's Form 10-Q for the quarterly period ended
June 30, 1999).
*10.8 Employment Agreement dated June 23, 1999 between Peter J.
Chambers and LHS Group Inc. (Incorporated by reference to
Exhibit 10.8 to the Company's Form 10-Q for the quarterly
period ended September 30, 1999).
*10.9 Employment Agreement dated July 16, 1999 between Reudiger
Hellmich and LHS Group Inc., and amended on October 6, 1999
(Incorporated by reference to Exhibit 10.9 to the Company's
Form 10-Q for the quarterly period ended September 30, 1999).
*10.10 Employment Agreement dated September 5, 1999 between Gary D.
Cuccio and LHS Group Inc., and amended on October 6, 1999
(Incorporated by reference to Exhibit 10.10 to the Company's
Form 10-Q for the quarterly period ended September 30, 1999).
27 Financial Data Schedule - filed herewith.
* Management contract or compensatory plan.
(b) Reports on Form 8-K
On March 15, 2000 the Company filed a Current Report on Form 8-K to announce
that the Company and Sema Group plc, an English public limited company ("Sema")
had entered into a Plan and Agreement of Merger, dated as of March 14, 2000 (the
"Merger Agreement"). The Merger Agreement sets forth the terms and conditions of
the proposed merger of the Company and a wholly-owned subsidiary of Sema,
pursuant to which the Company will become a subsidiary of Sema (the "Merger").
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: May 12, 2000 By: /s/ Peter J. Chambers
----------------------------
Peter J. Chambers
Executive Vice President and
Chief Financial Officer
(duly authorized and
principal financial and
accounting officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger by and between LHS Group Inc.,
Priority Call Management, Inc. and Patriot Acquisition Corp.
dated as of April 20, 1999 (Incorporated by reference from
Exhibit 2.1 to the Registrant's Registration Statement on Form
S-4 (File No. 333-77557)).
2.2 Plan and Agreement of Merger, dated as of March 14, 2000, among
LHS Group Inc., Sema Group plc and SG Acquisition Corporation
(Incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K).
2.3 Stock Option Agreement, dated as of March 14, 2000, among LHS
Group Inc. and Sema Group plc (Incorporated by reference to
Exhibit 2.2 to the Company's Current Report on Form 8-K filed on
March 14, 2000).
3.1 Certificate of Incorporation, as amended (Incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
on Form S-8 (File No. 333-57269)).
3.2 By-Laws, as amended (Incorporated by reference to Exhibit 3.2 to
the Company's Form 10-Q for the quarterly period ended June 30,
1999).
4 Specimen Common Stock Certificate. (Incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-1
(File No. 333-22195)).
10.1 Registration Rights Agreement dated July 15, 1996 among the
Company, General Atlantic Partners 23, L.P., General Atlantic
partners 31, L.P., GAP Coinvestment Partners, L.P. and the other
stockholders named therein. (Incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1 (File
No. 333-22195)).
*10.5 LHS Group Inc. 1998 Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 99.1 to the Company's Registration Statement
on Form S-8 (File No. 333-57269)).
*10.6 LHS Group Inc. Amended and Restated Stock Incentive Plan
(Incorporated by reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-8 (File No. 333-57269)).
*10.7 Employment Agreement dated March 19, 1999, between Stefan Sieber
and LHS Group Inc. (Incorporated by reference to Exhibit 10.7 the
Company's Form 10-Q for the quarterly period ended June 30,
1999).
*10.8 Employment Agreement dated June 23, 1999 between Peter J.
Chambers and LHS Group Inc. (Incorporated by reference to Exhibit
10.8 to the Company's Form 10-Q for the quarterly period ended
September 30, 1999).
*10.9 Employment Agreement dated July 16, 1999 between Reudiger
Hellmich and LHS Group Inc., and amended on October 6, 1999
(Incorporated by reference to Exhibit 10.9 to the Company's Form
10-Q for the quarterly period ended September 30, 1999).
*10.10 Employment Agreement dated September 5, 1999 between Gary D.
Cuccio and LHS Group Inc., and amended on October 6, 1999
(Incorporated by reference to Exhibit 10.10 to the Company's Form
10-Q for the quarterly period ended September 30, 1999).
27 Financial Data Schedule -- filed herewith.
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* Management contract or compensatory plan.