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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, 1999
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 10, 1999
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Common Stock, $0.01 Par Value 52,977,055 Shares
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LHS GROUP INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
FIRST QUARTER ENDED MARCH 31,
-----------------------------
(UNAUDITED) (UNAUDITED)
------------ ------------
1999 1998
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Revenues
License revenues $ 18,763 $ 14,815
Service revenues 30,565 18,350
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Total 49,328 33,165
Cost of services 16,895 12,886
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Gross margin 32,433 20,279
Operating expenses
Sales and marketing 5,053 2,481
Research and development 11,673 7,752
General and administrative 4,361 3,529
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21,087 13,762
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Earnings before interest and taxes 11,346 6,517
Interest income, net (1,136) (920)
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Earnings before income taxes 12,482 7,437
Income taxes 4,494 2,974
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Net earnings $ 7,988 $ 4,463
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Net earnings per share:
Basic $ 0.15 $ 0.09
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Diluted $ 0.15 $ 0.08
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Shares used in per share calculation:
Basic 52,786 50,205
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Diluted 54,378 52,975
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LHS GROUP INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED)
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ASSETS
Cash and cash equivalents $ 41,651 $ 42,084
Short-term investments 58,813 62,218
Trade accounts receivable, net of allowances
of $3,433 and $3,316 72,687 60,860
Prepaid expenses and other current assets 6,586 3,976
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Total current assets 179,737 169,138
Property, plant & equipment, net 15,660 15,589
Deferred taxes 914 914
Other 6,891 2,904
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Total Assets $ 203,202 $ 188,545
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LIABILITIES
Accounts payable 4,674 7,523
Accrued expenses and other liabilities 18,648 15,796
Income taxes payable 14,155 8,907
Deferred income taxes 4,127 4,127
Deferred revenues 11,054 6,095
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Total current liabilities 52,658 42,448
Long-term obligations 144 239
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Total Liabilities 52,802 42,687
STOCKHOLDERS' EQUITY
Common stock ($.01 par value), 200,000,000
shares authorized; 52,973,599 and
52,625,677 shares issued and outstanding 529 526
Additional paid-in-capital 113,768 110,583
Retained earnings 42,866 34,858
Accumulated translation adjustments (6,763) (109)
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Total Stockholders' Equity 150,400 145,858
Total Liabilities and Stockholders' Equity $ 203,202 $ 188,545
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LHS GROUP INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
THREE MONTHS ENDED MARCH 31,
(UNAUDITED) (UNAUDITED)
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1999 1998
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OPERATING ACTIVITIES
Net earnings $ 7,988 $ 4,463
Adjustments:
Depreciation and amortization 948 548
Change in operating assets and liabilities (10,860) (1,794)
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Net cash provided by (used in) operating activities (1,924) 3,217
INVESTING ACTIVITIES
Additions of leasehold improvements and equipment (822) (451)
Purchase of investments (956) (11,556)
Other 176 (244)
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Net cash used in investing activities (1,602) (12,251)
FINANCING ACTIVITIES
Net proceeds from issuance of capital stock 3,189 2,798
Other (96) 12
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Net cash provided by financing activities 3,093 2,810
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Decrease in cash and cash equivalents (433) (6,224)
Cash and cash equivalents at beginning of period 42,084 27,867
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Cash and cash equivalents at end of period $ 41,651 $ 21,643
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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, 1998.
NOTE 2 - 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 very similar to the previously reported fully diluted earnings per
share. Diluted earnings per share for the quarter ended March 31, 1999 includes
the effect of options to purchase 1,547,091 shares of common stock and 44,641
shares of restricted common stock. Diluted earnings per share for the quarter
ended March 31, 1998 includes the effect of options to purchase 2,727,536
shares of common stock and 63,392 shares of restricted common stock.
NOTE 3 - COMMON STOCK
In 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.
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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 as the merger was structured as tax free to the
selling shareholders.
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.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the Company's
statements of income reflected as a percentage of total revenues.
FIRST QUARTER ENDED MARCH 31,
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(UNAUDITED) (UNAUDITED)
1999 1998
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Revenues
License revenues 38.0% 44.7%
Service revenues 62.0% 55.3%
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Total 100.0% 100.0%
Cost of services 34.3% 38.9%
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Gross margin 65.7% 61.1%
Operating expenses
Sales and marketing 10.2% 7.5%
Research and development 23.7% 23.4%
General and administrative 8.8% 10.6%
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42.7% 41.5%
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Earnings before interest and taxes 23.0% 19.7%
Interest income, net -2.3% -2.8%
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Earnings before income taxes 25.3% 22.4%
Income taxes 9.1% 9.0%
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Net earnings 16.2% 13.5%
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FIRST QUARTER ENDED MARCH 31, 1999 COMPARED TO FIRST QUARTER ENDED MARCH 31,
1998
REVENUES
Total revenues increased 48.7% to $49.3 million in the first quarter
of 1999 from $33.2 million in the first quarter of 1998. License revenues
increased 26.6% to $18.7 million in 1999 from $14.8 million in 1998, while
service revenues increased 66.6% to $30.6 million from $18.4 million. Total
revenues increased due to the addition of new customers and ongoing
implementation and support revenue from existing customers. License revenues
decreased as a percentage of total revenues to 38.0% in 1999 from 44.7% in
1998, while service revenues increased as a percentage of total revenues to
62.0% from 55.3%. This change in mix of revenues is primarily due to the timing
of license tier revenue from subscriber growth, 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 quarter of 1999, the Company had no
customer that accounted for 10% or more of total revenues compared to one
customer in 1998 that accounted for 16% of total revenues.
COST OF SERVICES
Cost of services decreased as a percentage of total revenues to 34.3%
in the first quarter of 1999 from 38.9% in the first quarter of 1998. Cost of
services increased 31.1% to $16.9 million in 1999 from $12.9 million in 1998,
primarily due to compensation expense associated
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with increased staffing for new projects in Europe, the Americas and Asia. This
increase was offset by increased productivity of the implementation and
services functions.
SALES AND MARKETING
Sales and marketing expenses increased as a percentage of total
revenues to 10.2% in the first quarter of 1999 from 7.5% in the first quarter
of 1998. Sales and marketing expenses increased to $5.1 million in 1999 from
$2.5 million in 1998 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 23.7% in the first quarter of 1999 from 23.4% in the first quarter
of 1998. These expenses increased 50.6% to $11.7 million in 1999 from $7.8
million in 1998. This 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 8.8% of total
revenues in the first quarter of 1999 from 10.6% in the first quarter of 1998.
These expenses increased 23.6% to $4.4 million in 1999 from $3.5 million in
1998. 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 36.0% of earnings before income
taxes in the first quarter of 1999 compared to 40.0% in the first quarter of
1998. The decrease in the effective tax rate is due to a reduction of expected
tax payments.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities totaled $1.9 million for the
first three months of 1999 compared to $3.2 million provided by operating
activities for the same period of 1998. The decrease in net cash provided by
operating activities was primarily due to 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 the timing of the invoicing and collection
of receivables.
The Company invested $.8 million and $.5 million in furniture,
fixtures and equipment during the first three months of 1999 and 1998,
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 $1.0 million and $11.6 million in
marketable securities during the first three months of 1999 and 1998,
respectively.
The Company received $3.2 million in proceeds from the issuance of new
shares of common stock to employees who exercised stock options during the
first three months of 1999 compared to $2.8 million received in the first three
months of 1998.
At March 31, 1999, 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.
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Year 2000 Issues
Introduction
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000
is approached and reached. These problems generally arise from the fact that
most of the world's legacy computer hardware and software have historically
used only two digits to identify the year in a date, often meaning that the
computer will fail to distinguish dates in the "2000's" from dates in the
"1900's". These problems may also arise from other sources, such as the use of
special codes and conventions in software that make use of the date field. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company may be affected by the Year 2000 issue in two ways: through its
software products and its operations.
Given the fact that Company is engaged in the business of software development
and because the Company was founded in the early 1990's, after the Year 2000
issue had begun to surface within the computer industry, the Company believes
that any Year 2000 issues that arise with its software products are not
material. However, the Company believes that the Year 2000 issue could
negatively impact the Company's operations as a result of Year 2000 disruptions
suffered by the Company's significant suppliers, domestic and international
government agencies, and other third parties.
State of Readiness
Based on its ongoing internal assessment of Year 2000 issues, the Company
believes that its internal IT systems, non-IT systems, and software currently
offered to its customers are Year 2000 compliant. Nevertheless, the Year 2000
issue could negatively affect the demand for the Company's products and the
spending habits of our customers. The Company cannot be certain that software
licensed by its customers in the past is fully Year 2000 compliant, but the
Company is not aware of any material Year 2000 problems with any software
licensed to and currently in use by its customers. The Company is addressing
such issues with existing customers on a case-by-case basis to ensure that
there are no significant Year 2000 issues with earlier versions of the
Company's software products. The Company also is upgrading its software
products so that current, Year 2000 compliant versions of embedded third party
software will be available to its customers. The Company is not aware of any
Year 2000 issues with its customers that cannot be remedied or that could have
a material adverse impact on the Company's financial condition or results, or
overall trends in results, of operations.
Many hardware, operating system and application products developed by third
parties interact or operate with the Company's software products. In addition,
customers or others may modify our software products after they have been
installed. The Company cannot assess the Year 2000 readiness of these hardware
and software products, operating systems or modified hardware and software
products and operating systems. If these products are not Year 2000 compliant,
it could adversely affect the performance and functionality of the Company's
applications that work with these products. While the Company would not be
responsible for these Year 2000 problems, the Company is unable to assess the
effect they may have on the Company's business, financial condition and results
of operations.
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The Company principally relies on software products to support our internal
accounting, payables and invoicing operations. While these software products
have been or are in the process of being tested for Year 2000 compliance, the
Company also relies on third party systems developed by others for many of the
Company's critical internal operations. In addition, the Company's internal
operations may also be affected by Year 2000 issues affecting third parties
with whom we have relationships, including vendors such as utilities,
distributors, and banks. A Year 2000 problem affecting our systems or those of
third parties that the Company relies upon may have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company has assembled a Year 2000 taskforce consisting of representatives
from our development, information systems, facilities and finance departments
to assess the Year 2000 readiness of the Company's internal operations and the
readiness of third parties on which the Company relies. The taskforce has
identified and assessed the Year 2000 readiness of most of the material
information technology and non-information technology systems used internally
as part of the Company's operations, but such work is ongoing. The taskforce
has tested or will test these systems where feasible and practicable. We expect
testing to be complete by mid-1999. The Company believes the taskforce to have
appropriate plans in place to achieve timely Year 2000 readiness for the
Company's internal systems. However, the Company's ongoing assessment program
may in the future reveal Year 2000 issues which are not currently identified or
fully understood.
Costs
The Company has not incurred any material costs solely in connection with
remedying Year 2000 issues arising in connection with either internal systems
or its own software products and does not anticipate incurring any material
costs in connection with remedying such Year 2000 issues in the future.
Although the Company has not incurred expenses for the purpose of addressing
Year 2000 issues in connection with its own software products, the Company has,
as part of its ongoing R & D efforts, incurred immaterial costs to ensure that
its software products are Year 2000 compliant.
Risks
Although the Company's internal systems and software products are Year 2000
compliant, the Company is vulnerable to the risk that government agencies,
significant suppliers and other third parties will not be able to remedy their
own year 2000 issues. The Company relies, both domestically and
internationally, upon government agencies, utility companies, telecommunication
service companies and other service providers outside of the Company's control.
There is no assurance that such suppliers, governmental agencies, or other
third parties will not suffer a year 2000 business disruption. Such failures
could have a material adverse affect on the Company's operations.
The Company currently believes that the most reasonably likely worst case Year
2000 scenario would involve the temporary interruption of electric power,
telephone or other utility supplies to our offices or our support operations
facilities due to a failure of a utility supplier to be Year 2000 compliant. In
addition, despite assurances and testing, it is also possible that our internal
systems or those of our customers and suppliers may not be Year 2000 ready.
In addition, "business interruption" litigation may arise out of the Year 2000
issue. The Company is not currently aware of any possible claim against us
arising from instances of business interruption. The Company currently believes
that its hardware and software products are Year 2000 compliant, but cannot
ensure such compliance for software products that were designed exactly to
customer specifications to interface with their other internal systems.
Consequently, the Company cannot assure that all of these customers are aware
of the Year 2000 issue or that they have adopted appropriate corrective
solutions, and will therefore not bring Year 2000-related claims against the
Company which, with or without merit, could be time consuming and expensive for
the Company to defend or resolve.
Based on currently available information, management does not believe that the
Year 2000 matters discussed above relating to internal systems and software
products sold to customers will have a material adverse impact on the Company's
financial condition or overall trends in results of operations; however, it is
uncertain to what extent the Company may be affected by such matters. In
addition, there can be no assurance that the failure to ensure Year 2000
capability by a supplier, government agency or another third party would not
have a material adverse impact on the Company.
Contingency Plans
The Company continues to assess its most reasonably likely worst case Year 2000
scenario and the possible effects thereof. At this time, the Company believes
that its most reasonably likely worst case Year 2000
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scenario will involve business disruptions suffered by significant suppliers,
government agencies or other third parties. By the third quarter of 1999, the
Company intends to develop its final contingency plan based on the results of
its analysis of the most reasonably likely worst case Year 2000 scenarios.
Because the Company believes that its internal systems are Year 2000 compliant,
the Company's final contingency plan will primarily focus on addressing the
possible issues that might affect the Company as a result of Year 2000 business
disruptions suffered by third parties. However, due to the general uncertainty
inherent in the Year 2000 problem, in the Company's case resulting primarily
from the uncertainty of the Year 2000 readiness of third parties, the Company
is unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on the company's operations.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 - Bylaws, as amended (incorporated by reference to Exhibit 3.2
to the Company's 1999 Annual Report on Form 10-K (File No.
000-22409)).
*10.7 - Employment Agreement dated March 19, 1999, between Stefan
Sieber and LHS Group Inc., filed herewith.
27 - Financial Data Schedule (for SEC use only)
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* Management contract or compensatory plan.
(b) Reports on Form 8-K
The Company filed one Current Report on Form 8-K on March 1, 1999 to announce
certain consolidated financial information as of, and for the quarter and year
ended, December 31, 1998, and to announce the introduction of its object
oriented, next generation customer care and billing software, "Targys-the
millennium series."
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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 14, 1999 By: /s/ Jerry W. Braxton
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Jerry W. Braxton
Executive Vice President, Chief Financial
Officer, Treasurer and Director (duly
authorized and principal financial and
accounting officer)
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EXHIBIT INDEX
Exhibit No.
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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 - Bylaws, as amended (incorporated by reference to Exhibit 3.2 to the
Company's 1999 Annual Report on Form 10-K (File No. 000-22409)).
10.7 - Employment Agreement dated March 19, 1999, between Stefan Sieber and
LHS Group Inc., filed herewith.
27 Financial Data Schedule (for SEC use only)
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