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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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Commission file number 0-22409
LHS GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 58-2224883
(State or other (I.R.S. Employer
jurisdiction of incorporation) Identification No.)
Six Concourse Parkway
SUITE 2700
ATLANTA, GEORGIA 30328
(Address of principal executive offices)
(770) 280-3000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant (assuming, for purposes of this calculation, without conceding,
that all executive officers and directors are "affiliates") was $1,076,687,760
at March 13, 1998, based on the closing sales price of $89.75 per share for the
Common Stock on such date on the Nasdaq National Market.
The number of shares of the registrant's Common Stock outstanding at March
13, 1998 was 25,756,010.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically identified portions of the 1998 Annual Report to Stockholders
are incorporated by reference in Part II.
Specifically identified portions of the Proxy Statement for the 1998 Annual
Meeting of Stockholders to be held on May 26, 1998 are incorporated by reference
in Part III.
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LHS GROUP INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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ITEM PAGE
NUMBER NUMBER
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PART I
1. BUSINESS 1
2. PROPERTIES 10
3. LEGAL PROCEEDINGS 10
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 10
4(A) EXECUTIVE OFFICERS OF THE REGISTRANT 10
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 11
6. SELECTED FINANCIAL DATA 11
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
7(A) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 18
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 18
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 19
11. EXECUTIVE COMPENSATION 19
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 19
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 19
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS
ON FORM 8-K 20
SIGNATURES 22
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PART I
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document, in the 1997 LHS Group
Inc. Annual Report and in documents incorporated by reference herein may
constitute forward-looking statements for purposes of the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended, and as
such may involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of LHS Group Inc.
("LHS" or the "Company") to be materially different from future results,
performance or achievements expressed or implied by such forward-looking
statements. The words "expect," "anticipate," "intend," "plan," "believe,"
"seek," "estimate," and similar expressions are intended to identify such
forward-looking statements. The Company's actual results may differ materially
from the results anticipated in these forward-looking statements due to a
variety of factors, including without limitation those discussed in "Factors
Affecting Future Performance" in Item 7 hereof. All written or oral forward-
looking statements attributable to the Company are expressly qualified in their
entirety by these cautionary statements.
ITEM 1. BUSINESS.
INTRODUCTION
LHS provides client/server-based billing and customer care solutions to
providers of wireless and wireline telecommunications services ("carriers") in
the Americas, Europe and Asia. The Company's products enable carriers to
compete more effectively in a rapidly growing telecommunications market. The
Company's Business Support and Control System ("BSCS") software is a scaleable,
modular billing and customer care solution that can be implemented quickly and
can support innovative marketing and pricing of telecommunications services.
BSCS has been licensed to approximately 100 carriers in over 50 countries and
supports approximately 11.5 million subscribers.
The Company completed its initial public offering of Common Stock on May
21, 1997, raising $70.6 million in net proceeds.
INDUSTRY BACKGROUND
TELECOMMUNICATIONS INDUSTRY
For most of this century, telecommunications carriers around the world
provided wireline services in heavily regulated environments. Often
characterized by monopoly dominance, the telecommunications industry offered
basic telephony services and underwent little change. More recently, however,
the deregulation of the telecommunications industry coupled with the development
and widespread adoption of new wireless communications services, such as paging
and analog and digital cellular telephony, has resulted in significant growth in
the number of new carriers and in the overall size of the telecommunications
services market. As existing carriers attempt to maintain market share in their
traditional markets while simultaneously entering new markets, and as new
entrants seek to capture market share in wireline and wireless markets,
telecommunications markets worldwide have become increasingly competitive and
dynamic.
Governments around the world are relaxing regulatory constraints on the
telecommunications industry. Within the United States, deregulation commenced
in the long distance market with the breakup of AT&T in 1984 and the subsequent
entry of additional long distance carriers. In 1994, the U.S. government
similarly allowed new competitors to enter the cellular industry, which
developed in the 1980's and was initially structured as a duopoly in each
service area, by auctioning significant radio spectrum for digital cellular, PCS
and other services to new carriers. More recently, the
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Telecommunications Act of 1996 has increased competition across U.S. markets by
allowing new and existing local and long distance wireline, wireless and cable
TV companies to provide competing services. As a result of these trends, the
number of wireless and wireline carriers in the U.S. market has increased and is
expected to continue to increase.
Outside the United States, deregulation and privatization are also
resulting in the emergence of new carriers, increased competition and the
broader availability of telecommunications services. The general trend toward
deregulation and the adoption in 1996 of less stringent uniform regulatory
schemes within wireline markets of the European Community, along with continued
growth in European wireless markets, are expected to increase the number and
types of services offered and to intensify competition within wireless and
wireline markets across Europe. In Asia, increased competition is expected in
both wireless and wireline markets as many nations deregulate and privatize
their national telecommunications carriers and allow new carriers to offer
services to meet the demands of a rapidly growing population. Further
accelerating these trends in the telecommunications industry, more than 60
member nations of the World Trade Organization reached an agreement in February
1997 to substantially deregulate the majority of the world's telecommunications
markets beginning in 1998. These trends are expected to result in established
and emerging carriers introducing service offerings in telecommunications
markets worldwide, thus increasing overall competition.
In conjunction with deregulation, advances in telecommunications technology
have significantly stimulated the growth in the number of carriers as well as in
the types of services offered. In the wireless sector, the trend in technology
has been to migrate from analog to digital, with digital technologies promising
carriers and consumers lower infrastructure costs, greater privacy, fraud
protection and new, enhanced features. Most established carriers using older
analog cellular standards such as AMPS (Americas and Asia), NMT (Europe and
Asia) and TACS (Europe) are expanding their networks to include digital
standards. Although the GSM digital standard and its derivatives have gained
widespread acceptance, particularly among carriers in Europe and Asia, other
digital cellular and PCS standards such as TDMA (U.S.) and CDMA (U.S., Canada
and Asia) are being deployed rapidly. These rapid changes in telecommunications
technology have created significant market opportunities for new and existing
carriers, resulting in greater competition and a wider range of service
offerings for consumers.
As competition intensifies, telecommunications carriers increasingly
differentiate their service offerings, not only on the basis of pricing and
reliability, but also by offering value added features, bundling multiple
services and marketing innovative, targeted rate and service plans. Carriers
are utilizing technology advancements to compete by offering service features in
addition to basic telephony, including voice mail, call forwarding, caller
identification, fax and data transmission. As carriers established in one
market attempt to enter other formerly distinct markets in wireline, wireless,
satellite and Internet services, many are bundling multiple services in order to
successfully retain existing customers and to attract new customers.
Increasingly, carriers are relying on innovative marketing of rate and service
plans to successfully segment and attract potential customers.
To compete effectively, carriers require business systems which enable
innovative and flexible marketing and support multiple service offerings. These
systems, which provide billing and customer handling, or "customer care," have
become critical to the business success of carriers. Billing systems are no
longer a back-office operation focused simply on billing and invoicing.
Carriers today demand that billing and customer care systems provide innovative
and flexible marketing of services, robust customer management capabilities,
subscriber data and feedback and service plan flexibility in addition to the
rating, invoicing and collection features provided by yesterday's billing
systems. Increasingly, billing and customer care systems are deployed by
carriers as a strategic business weapon.
BILLING AND CUSTOMER CARE SYSTEMS
Billing systems for telecommunications services were first developed to
meet the needs of large monopoly carriers, and offered a simple, single-service
billing function, including rate tariffing and
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invoicing. These systems lacked advanced customer care functionality, which
typically provides the initial establishment of customer accounts, assignment of
phone numbers, issuance and reporting of calling card usage, maintenance of
customer history, directory listings, and generation and management of marketing
feedback. While sufficient for the regulated environment in which carriers then
operated, these early billing systems typically were mainframe-based, were built
around proprietary, closed hardware and software platforms, and were inflexible
and costly to maintain.
The rapid advance of telecommunications technology, the deregulation of
markets around the globe and the increasing importance of reducing time-to-
market have motivated carriers to install, maintain and update advanced billing
and customer care systems. These systems are essential for both existing and
emerging carriers to compete effectively as they seek to introduce new services,
enter new markets and offer a high level of customer service. In some cases,
carriers may choose to outsource the fulfillment of these billing and customer
care activities to service bureaus for financial or other business reasons.
Regardless of whether carriers rely on a purchased solution operated internally
or on an outsourced solution from a service bureau provider, a strong market
opportunity exists for a billing and customer care solution which provides the
following benefits:
FLEXIBILITY. Carriers need billing and customer care solutions which
enable innovative, sophisticated and dynamic marketing and pricing of
telecommunications services.
RAPID TIME-TO-MARKET. Carriers entering new markets for telecommunications
services place a significant premium on rapid launch of services and,
accordingly, require billing and customer care solutions which can be
implemented quickly.
PROVEN TRACK RECORD. With little margin for error in a very competitive
environment, carriers are seeking billing and customer care solutions with a
proven track record to minimize deployment risk during the critical launch of
new services.
SCALEABILITY. Carriers are seeking solutions that will scale with
subscriber growth to avoid service billing and collection disruption and to
minimize recurring staff training and billing and customer care system
investments.
MULTIPLE SERVICE SUPPORT. As established carriers enter new markets,
billing and customer care solutions must support multiple telecommunications
services and standards. A common billing and customer care solution supporting
wireline, wireless, Internet and satellite offerings will enable innovative
marketing of multiple services with centralized customer billing.
INTERNATIONAL SUPPORT. As carriers are entering new geographic markets,
billing and customer care solutions must increasingly support multiple languages
and currencies while providing consistent functionality across diverse market
environments.
THE LHS SOLUTION
The Company believes that it currently meets, and will continue to meet,
the needs of a wide variety of carriers with its BSCS software product and the
broad range of comprehensive customization, installation and maintenance
services offered by the Company. BSCS offers the following features and
benefits:
. FLEXIBLE SOLUTION. The BSCS system can be tailored to each
carrier's particular needs in order to keep pace with a highly
competitive, dynamic market for telecommunications services. BSCS
enables carriers to dynamically update rate and pricing plans tailored
to time of day, day of week, previous usage levels, call destinations,
credit characteristics and numerous other marketing parameters.
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. OPEN, CLIENT/SERVER BASED ARCHITECTURE. BSCS supports
multiple hardware platforms and operating systems, enabling carriers
to benefit from continued advances in technology. As a packaged
application customized to meet the needs of each particular carrier,
BSCS offers carriers rapid installation relative to complete custom
solutions and is more flexible than in-house legacy mainframe
solutions. BSCS's client/server architecture enables efficient
integration with best-of-breed financial, human resources, operational
and other software applications and provides scaleability as a
carrier's subscriber base grows.
. MODULAR CONFIGURATION. The BSCS architecture offers carriers
efficient, rapid customization and cost effective implementation. The
Company's modular architecture provides carriers with the flexibility
to modify or add BSCS functions with little or no impact to unmodified
portions of the product, allowing carriers to easily tailor BSCS to
meet their unique system requirements.
. MULTIPLE SERVICES AND NETWORK TECHNOLOGY SUPPORT. BSCS is architected
to support multiple telecommunications technology standards with
minimal modification to the software's core billing and customer care
functionality. The Company's products support all wireline and
wireless technologies. The Company's BSCS products currently support
the GSM, CDMA, TDMA and AMPS wireless standards as well as satellite,
wireline, Internet and additional paging standards.
. COMPREHENSIVE INTERNATIONAL SOLUTION. BSCS is a global solution that
supports multiple currencies and requirements of different geographic
markets. The product currently supports billing and customer care in
the English, French, German, Italian, Spanish, Indian, Russian,
Polish, Czech, Chinese, Japanese, Korean and Portuguese languages.
. COMPLETE CUSTOMER SERVICES. In addition to the BSCS software, the
Company provides carriers with a complete customer solution, including
initial customization and installation and ongoing maintenance,
upgrades and customer support. LHS offers carriers the choice of
initial installation directly from the Company or through leading
systems integrators. Ongoing maintenance and customer support is
offered at varying levels of service and priced to meet the needs of
the carrier.
THE LHS STRATEGY
To maintain its position among providers of client/server-based billing and
customer care solutions for the global telecommunications industry, the
Company's strategies include:
. LEVERAGE WIRELESS POSITION TO PENETRATE OTHER MARKETS. LHS currently
has a significant installed base of wireless customers utilizing the
BSCS billing and customer care system and, as a result, the Company
intends to compete for new wireless installations worldwide. The
Company believes there is a significant market opportunity to become a
leading provider of client/server-based billing and customer care
solutions for the growing number of carriers which offer multiple
telecommunications services. In 1997, LHS modified its BSCS product to
support not only carriers that compete in GSM wireless markets, but
also other digital wireless, analog wireless, wireline, satellite,
paging and Internet service markets. To reach this goal, the Company
recently introduced BSCS Version 5.0 initially focusing on wireline
opportunities in Europe to take advantage of the Company's strong
reputation and resources in that region and the impending deregulation
of European wireline markets.
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. MAINTAIN A LEADING BILLING AND CUSTOMER CARE SOLUTION. The BSCS
product is currently deployed on a client/server technology platform,
providing significant billing and customer care functionality. The
Company will continue to improve product functionality by offering
prepayment, discounting, promotional and other marketing capabilities.
To ensure that its products keep pace with information technology
advances, the Company will develop support for Windows NT server
software and will continue to adopt leading database and client
technologies.
. EXPAND GLOBALLY. Through its regional offices, LHS intends to expand
its marketing focus to be well-positioned for global growth in demand
for billing and customer care solutions. The Company will continue to
deploy software development, sales, service and management resources
to its regional offices in Frankfurt, Germany; Atlanta, United States;
and Kuala Lumpur, Malaysia and will continue to customize its products
to support additional languages and currencies.
. DEVELOP AND MAINTAIN CUSTOMER RELATIONS. The Company believes that the
development of long-term customer relations will result in continuing
business, a strong reputation for LHS within the telecommunications
industry and direction for future product development. LHS will hold
management, consulting and sales staff accountable for the quality of
relations with specific customers, each of which will be assigned a
dedicated contact person within the Company.
. LEVERAGE THIRD-PARTY RELATIONSHIPS. The Company seeks to maintain its
relationships with leading systems integrators such as Andersen
Consulting, Cap Gemini and Logica as well as with leading vendors of
telecommunications equipment. Many of these systems integrators and
equipment vendors operate on a global basis across wireless, wireline
and other communications technology lines, and the Company expects
these relationships to facilitate the Company's penetration of non-
wireless and non-European markets.
BSCS ARCHITECTURE
The Company's BSCS product is a client/server application that supports
industry standard technologies. The product currently supports the UNIX
operating system and Oracle relational database software as well as hardware
from Hewlett-Packard, IBM, Sun and DEC on the server side, and supports
Microsoft Windows and Windows NT operating systems and standard PC hardware on
the client side. BSCS leverages leading commercial database technology to
provide support for symmetric multiprocessing and large database capability.
Client applications are written in Centura and Visual C++ languages, while
server applications are developed in C, C++ and PL/SQL. BSCS supports TCP/IP,
X.25, HTTP and other standard network communications protocols.
The Company's development group maintains close contact with operators,
service providers, standards committees, integrators and technology suppliers to
keep abreast of industry and technology changes. LHS's Web Service Center
employees a multi-tier architecture in supporting distributed applications
deployed via the Internet. LHS is continuing its advanced technology by
employing component object technology within the BSCS product set. BSCS is
currently implemented in a two-tier architecture for optimal performance,
scaleability and functionality.
PRODUCTS
The Company derives a significant portion of its revenues from licensing
its BSCS software to telecommunications carriers. The BSCS software is
structured in a kernel/non-kernel hierarchy: the kernel comprises the set of
core software modules common to all BSCS configurations, while nonkernel modules
primarily provide interface functions. Kernel and non-kernel modules can be
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customized to meet individual carrier requirements. Kernel and non-kernel
software modules are organized as follows:
CUSTOMER CARE ADMINISTRATION - This module enables carrier customer service
representatives to establish and maintain subscriber contact by creating and
maintaining account information that tracks initial service requests through
service activation and service termination. This module also supports
registration of the customer data, maintenance of subscriber service and feature
profiles, provisioning, sales of services and equipment, administration of
contracts, initiation of on-demand bills, complaint tracking, adjustment
processing and bill and payment inquiries. The Company's BSCS products provide
a customer service feature that enables carrier service representatives to
quickly make a variety of changes to a customer's account with a few simple
keyboard strokes. These include adding discount or promotion plans, credit or
debit adjustments to multiple accounts at once based on specific selection
criteria such as rate plans, service, and customer groups.
NETWORK RESOURCE ADMINISTRATION - After a carrier customer service
representative has initiated a subscriber's account, this module is utilized to
assign subscribers a telephone number. This module also maintains the inventory
of network resources applicable to the services supported by the system,
including telephone numbers and network devices. Facilities are provided to
monitor the level of network resource inventory and to distribute the resources
to sales channels.
CARRIER ADMINISTRATION - In order to assign a long distance carrier, the
customer service representative utilizes this Carrier Administration module. In
addition, this module provides roaming agreement maintenance, generates roaming
bills, enables reconciliation of incoming roaming calls and supports long
distance interconnect traffic settlement.
SERVICES AND TARIFFS ADMINISTRATION - This module allows a carrier to
develop innovative marketing and billing plans through use of tariff tables for
multiple services which can reflect usage-sensitive or flat rate charging. This
module enables service-specific usage, one-time and recurring charges, volume
and free usage discounting, rate plan queries, processed calls monitoring,
tailored tariffing, roaming charges and competitor tariff analysis.
EVENT PROCESSING - This module allows carriers to rate calls as subscriber
call records are received. Validation and pricing of call detail records are
performed in this module, which also provides on-line monitoring of credit
limits and customer rate plan optimization. The module has been designed to
provide near real-time rating over an entire subscriber base.
BILL PROCESSING - In order for carriers to process bills, this module
calculates all bill charges and creates the services invoice on a periodic
basis. Key functions include tax calculation, discounting, late fee
calculations, invoice scheduling, general ledger postings and revenue reporting.
The module supports multiple currencies and multiple languages. The Company's
BSCS products provide a revenue assurance feature that permits the carrier to
track the processing of all data applicable to a bill to assure charges are
billed correctly.
FINANCIAL ADMINISTRATION - This module reconciles billing with a carrier's
financial records and statements in addition to handling payments from
customers. Payment processing, accounts receivable and general ledger posting
activities are enabled by this module. Payments may be made via cash, credit
card transaction, direct debit transaction or lock-box bank transfer. The
module also supports advance payments, deposits, bad debt write-offs,
adjustments, corrections and account query. Delinquent accounts can be
automatically identified to be "hotlined" suspended, deactivated, or written-
off. A sales administration function maintains sales force data and enables
sales tracking for commission processing.
A number of customizable non-kernel interface modules are included within
BSCS to enable close integration with a carrier's network and business
infrastructure. These non-kernel modules are
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organized as follows: Call Record Input, which receives, edits, authenticates
and formats call detail records into a standard event record that may be used in
downstream BSCS functions such as event and bill processing; Activation, which
activates, deactivates and modifies a subscriber's equipment and services at the
switch; Authentication, which provides an interface to a central repository of
subscriber authentication keys. used in a validation algorithm to determine
whether a subscriber should have network access; Payment Processing, which
encompasses the acceptance, validation, and automated entry of payments and Bill
Formatting, which provides carriers with the flexibility to define their own
bill format, printing and delivery mechanism.
SERVICES
The Company derives significant revenues from project consulting undertaken
to customize BSCS for particular carriers. LHS offers carriers the choice of
initial installation directly from the Company or through leading systems
integrators, including Andersen Consulting, Cap Gemini Sogeti S.A., Danet GmbH,
Digital Equipment Corporation, Electronic Data Systems Corporation, Hewlett-
Packard Company, IBM Corp. and Logica plc. The first phase of a project
typically consists of an analysis to identify and specify BSCS system tailoring
requirements and to define the overall project and budget. The second phase
involves customization to modify BSCS non-kernel modules to meet the resulting
system specifications for that carrier. The resulting custom BSCS solution is
then tested and installed in the carrier's information and telecommunications
infrastructure. Project duration, from initial analysis through implementation
and acceptance, typically ranges from six to twelve months. As of December 31,
1997, the Company employed 411 projects and services personnel compared to 195
at December 31, 1996.
After installation, LHS maintains close ongoing contact with the carrier,
even on projects developed through a systems integrator, by holding LHS
management, consulting and sales personnel accountable for the quality of
relations with specific customers, by assigning a consulting and sales contact
to each customer, and through control over BSCS upgrades and maintenance. As a
result, the Company is often well-positioned to earn substantial revenues from
additional customization of the BSCS product after installation and additional
revenues from maintenance agreements as a carrier's subscriber base and service
offerings continue to grow and change,
The total value of an initial contract for BSCS software and services
typically ranges from $1 million to $5 million, depending on the size of the
carrier, the number of subscribers in service with the carrier, the number and
type of telecommunications services supported by BSCS, and the scope of
customization and installation requirements. Maintenance pricing is based on
the level of service desired by the customer and typically varies from 10% to
35% of the license fee per year.
PRODUCT DEVELOPMENT
The Company directs its product development efforts toward refining and
enhancing BSCS. Significant emphasis is placed on the Company's compliance with
world-wide development standards and quality benchmarks during product
development. Processes used by the Company in product development have ISO 9001
certification.
Development efforts in the past year have resulted in expanding BSCS to
support AMPS, CDMA, SMR (special mobile radio), satellite, Microsoft Commercial
Internet Solutions and wireline services. In addition, development delivered a
Web Service Center product for deploying customer care targeted for dealers and
subscribers via an Internet connection. One management structure has recently
been constituted to direct all development activities focusing on world-wide
product leadership in the customer care and billing arena. Some of the short-
term focus areas are local number portability, dual-node handsets, call analysis
and data services. The Company's longer-term objectives include working with
OOT (object oriented technology) to expand BSCS into a multi-tier architecture
to support distributed computing and open application interfaces. The Company's
development staff consisted of 216
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employees as of December 31, 1997 and 182 employees as of December 31, 1996 See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Factors Affecting Future Performance-Unification of American
and European/Asian Product Lines" and "-Dependence on New Products;
Technological Change."
MARKETING AND SALES
The Company's marketing efforts are focused on targeting key carriers in
each geographical market through advertising in telecommunications industry
publications, participation in trade shows, presentations at technical
conferences and other initiatives. The Company's sales strategy relies on
direct and indirect channels of distribution for its products. Under its direct
sales approach, the Company develops relationships with carriers through a
consultative, problem-solving sales process and works closely with those parties
to define and determine how their needs can be fulfilled by the Company's
products. The Company had a sales organization of 41 employees as of December
31, 1997 compared to 32 employees at the end of 1996 and intends to expand its
direct sales operations based in Frankfurt, Germany; Atlanta, United States;
Zurich, Switzerland; and Kuala Lumpur, Malaysia. Due to the sophisticated
nature of the Company's products and services, the duration of a sales cycle can
range from as short as thirty days to as long as one year or more. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Performance-Fluctuations in Quarterly
Operating Results."
Because third parties play an important role in the general deployment of
information technology with carriers, the Company has developed a number of
indirect sales channels. These indirect channels, through systems integrators
and telecommunications equipment vendors, are built on relationships and
references developed through cross-selling and problem-solving. LHS markets its
products through a number of systems integrators, particularly for systems
serving larger carriers. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors Affecting Future
Performance-Reliance on Third Party Relationships."
The Company announced during 1997 the implementation of a service bureau
offering whereby LHS would provide billing and customer care services to
interested customers in exchange for a transaction based fee rather than
requiring the customer to purchase a license to BSCS.
CUSTOMERS
BSCS has been licensed to approximately 100 carriers in more than 50
countries supporting a total of approximately 11.5 million subscribers. Much of
the Company's early growth was accomplished by focusing on GSM-based wireless
carriers in Europe. LHS plans to continue its recent expansion beyond the
European wireless market and to serve wireless and wireline carriers around the
world.
The Company had only one customer that accounted for more than 10% of its
total revenue in 1997. o.tel.o communications GmbH ("o.tel.o") represented
approximately 12% of total revenue in 1997. o.tel.o purchased BSCS 5.0/5.1 to
support their wireline business. The revenue recognized from o.tel.o represents
license fees, implementation and customization services.
COMPETITION
The market for telecommunications billing and customer care systems is
highly competitive, and the Company expects this competition to increase. The
Company competes with independent providers of billing systems and services,
such as Alltel Information Systems, Inc. ("Alltel"), AMDOCS, Inc. ("AMDOCS"),
Kenan Systems Corporation ("Kenan") and Cincinnati Bell Information Systems,
Inc. ("CBIS") in the Americas and Kingston-SCL and SEMA Group internationally,
with systems integrators and with internal billing departments of larger
telecommunications carriers. The Company anticipates
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continued growth and competition in the telecommunications industry and the
entrance of new competitors into the billing and customer care systems market in
the future.
The principal competitive factors in the Company's market include
responsiveness to carrier needs, timeliness of implementation, quality and
reliability of products, price, project management capability and technical
expertise. The Company believes that its ability to compete depends in part on
a number of competitive factors, including the development by others of software
that is competitive with the Company's products and services, the price at which
others offer competitive software and services, the extent of competitors'
responsiveness to customer needs and the ability of the Company's competitors to
hire, retain and motivate key personnel. The Company competes with a number of
companies that have longer operating histories, larger customer bases,
substantially greater financial, technical, sales, marketing and other
resources, and greater name recognition than the Company. Current and potential
competitors have established, and may establish in the future, cooperative
relationships among themselves or with third parties to increase their ability
to address the needs of the Company's prospective customers. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. As a result, the Company's competitors may be able to
adapt more quickly than the Company to new or emerging technologies and changes
in customer requirements, or to devote greater resources to the promotion and
sale of their products. There can be no assurance that the Company will be able
to compete successfully with existing or new competitors. Failure by the
Company to adapt to emerging market demands and to compete successfully with
existing and new competitors could have a material adverse effect on the
Company's business, results of operations and financial condition.
In addition, as the Company expands, it will market its products and
services to carriers in markets not currently served by the Company. Upon its
entrance into these markets, the Company may encounter new competitors, many of
which have significantly greater financial, technical, personnel and marketing
resources than the Company. There can be no assurance that the Company will be
able to properly identify and address the demands for these new markets or that
the Company can continue to be competitive in its current markets Failure by
the Company to maintain its competitiveness in current or new markets could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Part II, Item 7, Factors Affecting Future
Performance-Highly Competitive Market; Competition."
PROPRIETARY RIGHTS AND LICENSES
LHS does not currently hold any patents and relies upon a combination of
statutory and common law copyright, trademark and trade secret laws, customer
licensing agreements, employee and third party non-disclosure agreements and
other methods to establish and maintain its proprietary rights to its products.
The Company believes that because of the rapid pace of technological change in
the communication and software industries, the legal protections for its
products are less significant factors in the Company's success than the
knowledge, ability and experience of the Company's employees and the timeliness
and quality of support services provided by LHS.
LHS generally enters into confidentiality agreements with its employees,
consultants, and current and potential clients and limits access to, and
distribution of, its proprietary information. Use of the Company's software
products is usually restricted to specified locations and is subject to terms
and conditions prohibiting unauthorized reproduction or transfer of the software
products. The Company also seeks to protect the source code of its software as
a trade secret and as a copyrighted work. See "Part II, Item 7, Affecting
Future Performance-Risks Associated with Intellectual Property."
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EMPLOYEES
As of December 31, 1997, the Company employed a total of 742 employees.
None of the Company's employees is represented by a labor union. The Company
has experienced no work stoppages and believes that its employee relations are
good.
ITEM 2. PROPERTIES
LHS leases office space in Atlanta, United States; Frankfurt, Germany;
Kuala Lumpur, Malaysia; Stockholm, Sweden; Zurich, Switzerland and Hong Kong for
customer support and sales operations. The Atlanta and Frankfurt offices are
also used for software development, and the Atlanta office is the Company's
corporate headquarters. The Company believes that its facilities are adequate
for its current needs and that suitable additional space will be available as
required.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings that the Company believes
will have a material adverse effect on its financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's fiscal year ended December 31, 1997.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers of the Company who are not
directors of the Company is set forth below.
Dr. Hansjorg Beha, age 48, has served as Executive Vice President of
Technology since joining LHS in December 1997. Dr. Beha has held several senior
technology positions in the United States and Europe. During 1995 and 1996, Dr.
Beha was the Chairman of the Board of Directors of Ibcom, H.E., a Swiss company
which filed for bankruptcy in 1996. He was senior vice president and corporate
information officer of the Sandoz Group, a software company, in Switzerland from
1992 to 1995. Before joining Sandoz, he was director and head of information
systems of the Daimler Benz Group in Stuttgart from 1989 to 1992. Dr. Beha
oversees the Company's worldwide research/product development, testing, custom
development, and product management activities.
Dr. Joachim Hertel, age 45, is one of the founders of the Company and
served as Executive Vice President-Technology of the Company from October 1990
to February 28, 1998 when he resigned and became a technology consultant to the
Company. Prior to joining the Company, Dr. Hertel worked as an Architect and
Designer with IBM from 1985 to 1990 and as an Architect and Designer with SAP, a
software provider, from 1982 to 1985.
Erik Froberg, age 40, has served as Executive Vice President of the Company
and President and Chief Executive Officer of LHS Holding Germany GmbH, a
subsidiary of the Company, since August 1996. Prior to joining LHS, Mr. Froberg
was employed by Cap Gemini Sweden AB, a systems integrator, from 1985 to 1996
and last served as Executive Vice President and Division Manager for Utilities
and Telecom.
Bruce T. Leonard, age 47, has served as Chief Operating Officer of the
Company since August 1997 and as President since February 1998. Prior to joining
LHS, Mr. Leonard was president of the EDS Personal Communications strategic
business unit in Boston from 1992 to 1997 and was chief executive officer and
president of China Management Systems, EDS Taiwan, from 1988 to 1992.
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Mr. Leonard began his career with the General Motors Truck and Bus Division in
1971 and has also served as head of GM's Commercial Vehicles and Engineering
unit in the United Kingdom.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Information relating to the market for the Company's Common Stock and
related stockholder matters will be set forth under the caption "Corporate
Information -- Common Stock" in the Company's 1998 Annual Report to
Stockholders. Such information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information relating to selected financial data of the Company will be set
forth under the caption "Selected Financial Data" in the 1998 Annual Report to
Stockholders. Such information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Information relating to Management's Discussion and Analysis of Financial
Condition and Results of Operations shall be set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the 1998 Annual Report to Stockholders, except for the discussion
of "Factors Affecting Future Performance" set forth herein.
FACTORS AFFECTING FUTURE PERFORMANCE
DEPENDENCE ON NEW PRODUCTS; TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions, evolving industry
standards and changing customer needs. The introduction of products embodying
new technologies and the emergence of new industry and technology standards can
render existing products obsolete and unmarketable in short periods of time.
The Company expects other vendors to continually introduce new products and
services, as well as enhancements to their existing products and services, which
will compete with the products and services offered by the Company. As a
result, the life cycles of the Company's products are difficult to estimate.
The Company believes that its future success will depend in large part on its
ability to maintain and enhance its current product and service offerings and to
continually develop and introduce new products and services that will keep pace
with technological advances and satisfy evolving customer requirements. In
addition, the Company plans to introduce billing and customer care solutions for
carriers providing services in telecommunications markets different from those
the Company has traditionally supported. There can be no assurance that the
Company will be successful in developing and marketing these new products and
services or that its current or new products and services will adequately meet
the demands of its current or new markets. Because it is generally not possible
to predict the time required and costs involved in reaching certain research,
development and engineering objectives, actual development costs could exceed
budgeted amounts and estimated product development schedules could require
extensions. Further, there can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products and services. If the Company is
unable to develop and introduce new products and services in a timely manner, or
if a new release of a product does not achieve market acceptance, the Company's
business, operating results and financial condition will be materially adversely
affected.
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MANAGEMENT OF GROWTH
The Company has expanded its operations rapidly over the past two years,
placing significant demands on its administrative, operational and financial
personnel and systems. Additional expansion by the Company may further strain
its management, operational, financial, reporting and other systems and
resources. There can be no assurance that the Company's systems, resources,
procedures, controls and existing space will be adequate to support such
expansion of the Company's operations. The Company's future operating results
will substantially depend on the ability of its officers and key employees to
manage changing business conditions and to implement and improve its management,
operational, financial control and other reporting systems. In addition, the
Company's future operating results are dependent on its ability to attract,
train and retain qualified consulting, technical, sales, financial, marketing
and management personnel. Failure to hire, train or retain qualified personnel
necessary to keep pace with the Company's development of products and services
could have a material adverse effect on the Company's business, results of
operations and financial condition. Continued expansion will require the
Company's management to: enhance management information and reporting systems;
standardize BSCS installation methodologies; further develop its infrastructure;
jointly develop and coordinate strategies, functions and product development
among its Americas, European and Asian operations and continue to maintain
customer satisfaction. If the Company is unable to respond to and manage
changing business conditions, the quality of the Company's products and
services, its ability to retain key personnel and its business, results of
operations and financial condition could be materially adversely affected.
DEVELOPING TELECOMMUNICATIONS MARKET AND NEW CARRIERS
The Company provides customized billing and customer care solutions to
telecommunications carriers in the wireline and wireless markets. Although
these markets have experienced significant growth and have been characterized by
increased deregulation and competition in recent years, there can be no
assurance that such trends will continue at similar rates or that the Company
will be able to effectively market and sell its products and services in such
markets. In addition, many of the new entrants in the telecommunications market
are companies that lack significant financial and other resources. To cultivate
relationships with such new market entrants, the Company may be required to
offer alternative pricing arrangements, which may provide for deferred payments.
However, there can be no assurance that the Company will be able to develop such
relationships or that new carriers that become customers of the Company will
gain market acceptance for their telecommunications services. If the Company
permits customers that may not have adequate financial resources to pay the
Company for its services on a deferred basis, the Company may ultimately be
unable to collect payments for such services. Because the Company has been
dependent historically on a limited number of long-term customer relationships,
the failure of the Company to develop relationships with, make sales to, or
collect payments from, new telecommunications carriers and failure of the
Company's customers to compete effectively in the telecommunications market
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, the telecommunications market
is experiencing some consolidations and formations of alliances among
established carriers. A consolidation or alliance affecting one of the
Company's customers may result in such customer shifting to another billing
system, which may have a material adverse effect on the Company's business,
results of operations and financial condition.
RELIANCE ON SIGNIFICANT NEW CUSTOMERS
Historically, the Company has relied on a limited number of customers for a
substantial portion of its revenues. o.tel.o accounted for 12% of the Company's
total revenues in 1997. In addition, the Company had two customers that
accounted for 12% and 10% of the Company's total revenues in 1996. The Company
does not believe that any of the foregoing customers, which were significant in
previous years, will account for more than 10% of the Company's total revenues
in any future year. The Company has historically depended on, and expects to
continue to depend on, large contracts from significant
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customers, which can cause its revenues and earnings to fluctuate between
quarters based on the timing of orders and installation of the Company's BSCS
product by these customers. Although the Company believes that it has good
relationships with its established customers and has in the past received
revenues from repeat business with established customers, these customers
generally have acquired fully-paid licenses for their installed systems and none
of the Company's major customers has any obligation to purchase additional
products or services. The Company expects that its current customers will not
enter into further agreements with the Company which will account for 10% or
more of the Company's total revenues in any future year. Consequently, failure
by the Company to develop relationships with significant new customers would
have a material adverse effect on the Company's business, results of operations
and financial condition. Additionally, the acquisition by a third party of one
of the Company's major customers could result in the loss of that customer,
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
INITIAL MARKET ENTRY RISKS; CUSTOMER EXPECTATIONS
The Company intends to pursue an aggressive expansion strategy for its
product and service offerings to carriers in new geographic markets and to
carriers providing telecommunications services in markets different from those
the Company has traditionally supported. This strategy has certain inherent
risks which the Company believes are unique to the industry in which the Company
competes and which arise from, among other things, the characteristics of the
Company's targeted customer base in these markets. When the Company enters a
new market and begins to develop a relationship with a new customer, the
Company's initial performance and initial market perception are critical to the
Company's future prospects in that new market. Although the Company believes
that its strategy for new market entry and its preparations for such entry will
enable it to perform to the satisfaction of customers in a new market, there can
be no assurance that a new customer will be satisfied with the Company's
products or services or that the Company will be able to successfully establish
itself in any such new market.
RELIANCE ON THIRD-PARTY RELATIONSHIPS
The Company currently relies on a number of consulting and systems
integration firms to enhance its marketing, sales and customer support efforts,
particularly with respect to installation and support of its product, lead
generation and assistance in the sales process. An integral factor in the
Company's growth strategy is the continuing development of relationships with
such firms and the Company's ability to successfully leverage such relationships
through joint marketing and sales efforts in order to generate new business
opportunities. There can be no assurance that the Company will be able to
continue to successfully leverage these relationships in the future. The
failure by the Company to maintain joint marketing and sales efforts with
consulting and systems integration firms in the future would have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company currently derives revenues from projects in which it serves as
subcontractor to a consulting or systems integration firm that products a
variety of information technology products and services to end-user customers.
In such instances, the Company is highly dependent upon such firms for product
installation and BSCS end-user training. Although the Company seeks to maintain
close relationships with consulting and systems integration firms, many such
firms have similar, and often more established, relationships with the Company's
principal competitors. The Company has no exclusive agreements with any of
these firms, and there can be no assurance that such firms, many of which have
significantly greater financial, technical, personnel and marketing resources
than the Company, will not discontinue or reduce their relationships with the
Company, develop their own products and services in competition with the
Company, or develop relationships with companies that offer products that
compete with the Company's solutions. If the Company is unable to develop and
maintain effective, long-term relationships with these firms or if these firms
fail to meet the needs of the Company's customers, the Company's business will
be adversely affected. In addition, the failure of the consulting or systems
integration firm or another subcontractor to perform to the satisfaction of the
customer may adversely
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affect the Company's relationship with the customer and could adversely affect
the perception of the Company in the market.
The Company had historically entered into contracts with a limited number
of third parties that provided such third parties with the Company's kernel
source code and the right to market and sell independently modified versions of
the Company's products. As a result, certain carriers in the United States
experienced difficulties with the Company's software due primarily to the
inability of these third parties to properly install the Company's software and
adapt it for use by such carriers. In those instances, the reputation and
credibility of the Company and its products were damaged and the Company may
have lost the confidence of the affected carriers. The Company has since
terminated all third-party rights that allowed access to the Company's kernel
source code and permitted the subsequent modification and resale of that source
code. However, there can be no assurance that there will be no further damage
to the Company's reputation and credibility in the United States. Any further
damage could have a material adverse effect on the Company's business, results
of operations and financial condition.
HIGHLY COMPETITIVE MARKET; COMPETITION
The market for telecommunications billing and customer care systems is
highly competitive, and the Company expects this competition to increase. The
Company competes with independent providers of billing systems and services,
such as Alltel, AMDOCS, Kenan, CBIS in the Americas and Kingston-SCL and SEMA
Group internationally, with systems integrators and with internal billing
departments of larger telecommunications carriers. The Company anticipates
continued growth and competition in the telecommunications industry and the
entrance of new competitors into the billing and customer care systems market in
the future.
The Company believes that its ability to compete depends in part on a
number of competitive factors, including the development by others of software
that is competitive with the Company's products and services, the price at which
others offer competitive software and services, the extent of competitors'
responsiveness to customer needs and the ability of the Company's competitors to
hire, retain and motivate key personnel. The Company competes with a number of
companies that have longer operating histories, larger customer bases,
substantially greater financial, technical, sales, marketing and other
resources, and greater name recognition than the Company. Current and potential
competitors have established, and may establish in the future, cooperative
relationships among themselves or with third parties to increase their ability
to address the needs of the Company's prospective customers. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. As a result, the Company's competitors may be able to
adapt more quickly than the Company to new or emerging technologies and changes
in customer requirements, or to devote greater resources to the promotion and
sale of their products. There can be no assurance that the Company will be able
to compete successfully with existing or new competitors. Failure by the
Company to adapt to emerging market demands and to compete successfully with
existing and new competitors would have a material adverse effect on the
Company's business, results of operations and financial condition.
In addition, as the Company expands, it will market its products and
services to carriers in markets not currently served by the Company. Upon its
entrance into these markets, the Company may encounter new competitors, many of
which have significantly greater financial, technical, personnel and marketing
resources than the Company. There can be no assurance that the Company will be
able to properly identify and address the demands for these new markets or that
the Company can continue to be competitive in its current markets. Failure by
the Company to maintain its competitiveness in current or new markets would have
a material adverse effect on the Company's business, results of operations and
financial condition.
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DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of its key management, sales, product development and operational personnel,
including Hartmut Lademacher, Chairman of the Board and Chief Executive Officer,
and on the Company's ability to continue to attract, motivate and retain highly
qualified employees, including technical, managerial and sales and marketing
personnel. Additionally, the Company expects to continue to expand the number
of employees engaged in sales, marketing and product development. However,
competition in the recruitment of highly qualified personnel in the software and
telecommunications services industry is intense. The inability to hire and
retain qualified personnel or the loss of the services of key personnel could
have a material adverse effect upon the Company's current business, new product
development efforts and future business prospects. If such personnel do not
remain active in the Company's business, the Company's operations could be
materially adversely affected. The Company does not currently maintain key
person insurance coverage for any of its employees.
INTERNATIONAL RISKS
The Company began its operations in Germany in 1990 and continues to
conduct a substantial portion of its business outside of the Americas. In 1996
and 1997, the Company's sales outside the Americas represented 68% and 58% of
the Company's total revenues, respectively. Although the Company intends to
continue to expand its operations within the Americas, European and Asian
operations are expected to continue to account for a majority of its revenues
for the foreseeable future. The Company's business outside the United States
may be subject to unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs of localizing products for foreign countries, lack
of acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in managing international operations,
availability of trained personnel to install and implement the Company's
systems, political instability, potentially adverse tax obligations,
restrictions on the repatriation of earnings and the burdens of complying with a
wide variety of foreign laws and regulations. In addition, the laws of some
foreign countries do not protect the Company's intellectual property rights to
as great an extent as do the laws of the United States. There can be no
assurance that such factors will not have a material adverse effect on the
Company's revenues outside the Americas or its overall financial performance.
RISKS ASSOCIATED WITH CUSTOMER DEMAND FOR FINANCING
Certain of the Company's potential customers may require financing to fund
purchases of the Company's products. The Company's ability to increase its
sales to start-up telecommunications carriers with limited financial resources
in the future will depend significantly upon its ability to obtain orders from,
maintain relationships with, provide support to, and arrange financing for these
customers. As a result, the inability of any customer to finance its purchases
of the Company's products may materially adversely affect the Company's
business, operating results and financial condition. Some of the Company's
competitors have the capital resources to provide vendor financing.
Historically, the Company has not had the capital resources to make arrangements
for financing its customers' purchases. There can be no assurance that the
Company can successfully implement a vendor financing program.
POTENTIAL YEAR 2000 PROBLEMS
It is possible that LHS's currently installed computer systems, software
products or other business systems, or those of LHS's suppliers or customers,
will not always accept input of, store, manipulate and output dates in the years
1999, 2000 or thereafter without error or interruption. LHS has conducted a
review of its business systems, including its computer systems, to attempt to
identify ways in which its systems could be affected by problems in correctly
processing date information. In addition, LHS is querying its customers and
suppliers as to their progress in identifying and addressing problems that their
computer systems will face in correctly processing date information as the year
2000 approaches and is reached. However, there can be no assurance that LHS
will identify all date-handling problems in its business systems or those of its
customers and suppliers in advance of their occurrence or that LHS will be
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able to successfully remedy problems that are discovered. The expenses of LHS's
efforts to identify and address such problems, or the expenses or liabilities to
which LHS may become subject as a result of such problems, could have a material
adverse effect on LHS's results of operations and financial condition.
CURRENCY FLUCTUATIONS
A significant portion of the Company's revenues are denominated in the
German Deutsche Mark and, to a lesser extent, the Swiss Franc and the Malaysian
Ringgit. Fluctuations in exchange rates between the U.S. Dollar and the German
Deutsche Mark may have a material adverse effect on the Company's business,
results of operations and financial condition, particularly its operating
margins, and could also result in exchange losses. Foreign currency transaction
gains and losses are a result of the Company transacting business in certain
foreign locations in currencies other than the functional currency of the
location. The Company attempts to balance revenues and expenses in each
currency to minimize net foreign currency risk. To the extent that the Company
is unable to balance revenues and expenses in each currency, fluctuations in the
value of the currencies in which the Company conducts its business relative to
the functional currency have caused and will continue to cause currency
transaction gains and losses. The impact of future exchange rate fluctuations
on the Company's results of operations cannot be accurately predicted. To date,
the Company has not sought to hedge the risks associated with fluctuations in
exchange rates but may undertake such transactions in the future. There can be
no assurance that any hedging techniques implemented by the Company in the
future would be successful or that the Company's business, results of operations
and financial condition will not be materially adversely affected by exchange
rate fluctuations.
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY
The Company regards its software products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark and
trade secret laws, customer licensing agreements, employee and third-party
nondisclosure agreements and other methods to protect its proprietary rights.
These laws and contractual provisions provide only limited protection of the
Company's proprietary rights. The Company has no patents or patent applications
pending and has no registered trademarks or copyrights. Despite the Company's
efforts to protect its proprietary rights, it may be possible for a third party
to copy or otherwise obtain and use the Company's technology without
authorization or to develop similar technology independently. Furthermore, the
laws of certain countries in which the Company sells its products do not protect
the Company's software and intellectual property rights to the same extent as do
the laws of the United States. If unauthorized copying or misuse of the
Company's products were to occur to any substantial degree, the Company's
business, results of operations and financial condition could be materially
adversely affected. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology.
Although the Company has not received any notices from third parties
alleging infringement claims, there can be no assurance that third parties will
not claim that the Company's current or future products infringe the proprietary
rights of others. The Company expects that software developers will
increasingly be subject to such claims as the number of products and competitors
providing products and services to the telecommunications industry grows. Any
such claim, with or without merit, could result in costly litigation, require
significant management resources, cause product shipment delays, require the
Company to enter into royalty or licensing agreements or cause the Company to
discontinue the use of the challenged trades name, service mark or technology,
any of which could have a material adverse effect on the Company's business,
results of operations and financial condition. Furthermore, such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all.
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PRODUCT LIABILITY
The software developed and utilized by the Company in providing its
products and services may contain undetected errors. Although the Company
engages in extensive testing of its software prior to introducing the software
onto a customer's network, there can be no assurance that errors will not be
found in software after the commencement of its use. The Company's license
agreements with its customers generally contain provisions designed to limit the
Company's exposure to potential product liability claims, such as disclaimers of
warranties and limitations on liability for special, consequential and
incidental damages. In addition, the Company's license agreements generally
limit the amounts recoverable for damages to the amounts paid by the licensee to
the Company for the product or service giving rise to the damages claimed.
Although the Company has not experienced any product liability claims to date,
the sale and support of products by the Company may result in the Company being
subject to such claims. The Company has product liability insurance which it
believes is satisfactory to cover potential product liability claims; however, a
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
CONCENTRATION OF STOCK OWNERSHIP
As of March 1, 1997, the Company's executive officers and directors and
their affiliates together owned approximately 14,092,781 shares (approximately
54%) of the outstanding Common Stock (as determined in accordance with rules of
the Securities and Exchange Commission). Further, the Company's executive
officers and directors and their affiliates held options to acquire an
additional 1,295,458 shares of Common Stock at exercise prices ranging from
$5.30 to $47.50 per share. These additional shares, together with the
outstanding shares currently owned, would represent beneficial ownership of
approximately 56% of the Common Stock, after giving effect to the exercise of
those options. Additionally, substantially all such persons have granted
Hartmut Lademacher the right to vote, through as late as December 31, 1999, all
shares of Common Stock owned by them. As a result, Mr. Lademacher, voting in
any election of directors through December 31, 1999, may be able to elect all
directors nominated for election and may be able to determine the outcome of
certain corporate actions requiring stockholder approval regardless of how the
other stockholders of the Company may vote. This concentration of ownership may
have the effect of delaying or preventing a change in control of the Company.
ANTI-TAKEOVER CONSIDERATIONS
The Board of Directors has the authority to issue up to 225,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares, without any further vote
or action by the stockholders. The rights of the holders of Common Stock will
be subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current plans to issue shares of
preferred stock. Certain provisions of the Company's Certificate of
Incorporation and By-Laws and the Delaware General Corporation Law could delay
or make more difficult a merger, tender offer or proxy contest involving the
Company. Furthermore, the Company's Board of Directors is divided into three
classes with only one class being elected each year, and directors may only be
removed by the affirmative vote of 80% or greater of all classes of voting
stock, which factors may also have the effect of delaying, deterring or
preventing a change of control of the Company. In addition, pursuant to the LHS
Group Inc. Stock Incentive Plan, all stock options granted to employees become
automatically vested and exercisable upon certain triggering events leading up
to a change of control. This vesting and the dilutive effect that the exercise
of a large number of options would have on the Company's Common Stock may have
the effect of delaying or preventing a change of control of the Company.
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POSSIBLE VOLATILITY OF MARKET PRICE
There may be significant volatility in the market price of the Common
Stock. The stock market has from time to time experienced significant price and
volume fluctuations, which have particularly affected the market prices of the
stocks of high technology and telecommunications companies and which may be
unrelated to the operating performance of such companies. Factors such as
actual or anticipated operating results, growth rates, changes in estimates by
analysts, market conditions in the industry, announcements by competitors,
regulatory actions and general economic conditions will vary from period to
period. As a result of these factors, the Company's operating results from time
to time may be below the expectations of public market analysts and investors.
Any such event would likely have a material adverse effect on the market price
of the Common Stock.
GOVERNMENT REGULATION
Currently, the Company's business is not subject to direct government
regulation; however, the Company's existing and potential customers are subject
to extensive regulation in many jurisdictions. Regulatory changes which affect
the Company's existing and potential customers could have a material adverse
effect on the business, results of operations and financial condition of the
Company.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Future sales of Common Stock could adversely affect the market price of the
Common Stock. Several of the Company's principal stockholders hold a
significant portion of the outstanding Common Stock, and a decision by one or
more of these stockholders to sell their shares could adversely affect the
market price of the Common Stock. Additionally, the Company filed a
Registration Statement on Form S-8 on June 11, 1997 to register 4,686,000 shares
of Common Stock that are issuable upon the exercise of outstanding stock options
or that are available for issuance pursuant to the Company's Stock Incentive
Plan.
Certain stockholders of the Company are entitled to certain demand and
piggyback registration rights with respect to the shares which they own. Once
registered such shares will be generally eligible for immediate sale in the
public market. Public sales of a significant number of such shares could have a
material adverse effect on the market price of the Common Stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company are
incorporated herein by reference from the 1998 Annual Report to Stockholders:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31, 1997,
1996, and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995
-18-
<PAGE>
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the directors of the Company will be set forth
under the captions "Proposal 1 -- Election of Directors--Information Regarding
Nominees and Continuing Directors" in the Company's Proxy Statement for the 1998
Annual Meeting of Stockholders (the "1998 Proxy Statement"). Such information
is incorporated herein by reference. Pursuant to Instruction 3 to Item 401(b)
of Regulation S-K and General Instruction G(3) to Form 10-K, information
relating to the executive officers of the Company who are not directors of the
Company is set forth in Part I. Item 4(a) of this report under the caption
"Executive Officers of the Registrant," and information relating to the
executive officers of the Company who are also directors of the Company is
included in the 1998 Proxy Statement under the caption "Proposal 1 -- Election
of Directors--Information Regarding Nominees and Continuing Directors". Such
information is incorporated herein by reference. Information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, by directors and executive officers of the Company and beneficial
owners of more than 10% of the Company's Common Stock will be set forth under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
1998 Proxy Statement. Such information is incorporated herein by reference.
The 1998 Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation will be set forth under the
captions "Proposal 1 -- Election of Directors -- Director Compensation,"
"Executive Compensation, Report of the Compensation Committee of the Board of
Directors; Stock Performance Graph"; and "Compensation Committee Interlocks and
Insider Participation" in the 1998 Proxy Statement. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding ownership of the Company's Common Stock by certain
persons will be set forth under the caption "Stock Ownership" in the 1998 Proxy
Statement. Such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and transactions between the
Company and certain non-employee directors of the Company will be set forth
under the captions "Proposal 1--Election of Directors--Director Compensation and
"--Compensation Committee Interlocks and Insider Participation" and "Certain
Transactions" in the 1998 Proxy Statement. Such information is incorporated
herein by reference.
-19-
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of LHS Group Inc., included
in the 1998 Annual Report to Stockholders, are incorporated by reference in Part
II, Item 8:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997, and 1996
Consolidated Statements of Income for the years ended December 31, 1997,
1996, and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of LHS Group Inc.
is set forth on page 23 hereof:
Schedule II -- Valuation and Qualifying Accounts
All other schedules to the combined financial statements are omitted as
they are not required under the related instructions or are inapplicable, or
because the required information is included in the consolidated financial
statements or related notes thereto.
3. EXHIBITS
The following exhibits either (i) are filed herewith or (ii) have
previously been filed with the Securities and Exchange Commission and are
incorporated herein by reference to such prior filings. Previously filed
registration statements or reports which are incorporated herein by reference
are so identified. The Company will furnish any exhibit upon request to Dr.
Wolf J. Gaede, Six Concourse Parkway, Suite 2700, Atlanta, Georgia 30328. There
is a charge of $.50 per page to cover expenses of copying and mailing.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
3.1 Certificate of Incorporation, as amended. (Incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1
(File No. 333-22195)).
3.2 By-Laws. (Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 333-22195)).
4.1 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)).
-20-
<PAGE>
10.1 Preferred Stock Purchase Agreement dated December 22, 1995 among the
Company, General Atlantic Partners 23, L.P. and GAP Coinvestment
Partners, L.P. (Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No. 333-22195)).
10.2 Common Stock Purchase Agreement dated July 15, 1996 among the
Company, General Atlantic Partners 31, L.P. and GAP Coinvestment
Partners, L.P. (Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (File No. 333-22195)).
10.3 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)).
10.4 Credit line of DM5,000,000 from BHF-Bank to LHS Holding Germany GmbH
dated March 19, 1996. (Incorporated by reference to Exhibit 10.5 to
the Company's Registration Statement on Form S-1 (File No. 333-
22195)).
10.5* Employment Agreement dated as of April 14, 1997, between Hartmut
Lademacher and LHS Group Inc. (Incorporated by reference to Exhibit
10.6 to the Company's Registration Statement on Form S-1 (File No.
333-22195)).
10.6* Employment Agreement dated as of April 14, 1997, between Dr. Joachim
Hertel and LHS Group Inc. (Incorporated by reference to Exhibit 10.7
to the Company's Registration Statement on Form S-1 (File No. 333-
22195)).
10.7* Contract for Employment dated May 21, 1996, between Erik Froberg and
LHS Holding Germany GmbH. (Incorporated by reference to Exhibit 10.8
to the Company's Registration Statement on Form S-1 (File No. 333-
22195)).
10.8* Employment Agreement dated August 28, 1996, between Jerry W. Braxton
and LHS Group Inc. -filed herewith.
10.9* Employment Agreement dated September 26, 1996, between Dr. Wolf J.
Gaede and LHS Group Inc. -filed herewith.
10.10* Employment Agreement dated January 1, 1998, between Dr. Hansjorg
Beha and LHS Group, Inc. -filed herewith.
10.11* Employment Agreement dated July 22, 1997, between Bruce T. Leonard
and LHS Group Inc. - filed herewith.
10.12* LHS Group Inc.'s 1996 Stock Incentive Plan (Incorporated by
reference to Exhibit 4(c) to the Company's Registration Statement on
Form S-8/File No. 333-28985)
13.1 Portions of the Company's 1988 Annual Report to Stockholders
expressly incorporated by reference herein from the following
sections of the Annual Report: Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and Results of
Operations; Consolidated Financial Statements of LHS Group Inc.
and Corporate Information --Common Stock.
21.1 List of Subsidiaries. (Incorporated by reference to Exhibit 21.1 to
the Company's Registration Statement on Form S-1 (File No. 333-
22195)).
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
- --------
* Management contract of compensatory plan.
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company in the quarter
ended December 31, 1997.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf on March 20, 1998 by the undersigned, thereunto duly organized.
LHS GROUP INC
BY: /s/ Hartmut Lademacher
-----------------------
Hartmut Lademacher
Chairman of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities indicated on March 20, 1998.
SIGNATURE TITLE
--------- -----
/s/ Hartmut Lademacher Chairman of the Board and
------------------------- Chief Executive Officer
Hartmut Lademacher (Principal Executive Officer)
/s/ Jerry W. Braxton Executive Vice President,
------------------------- Chief Financial Officer, Treasurer and
Jerry W. Braxton Director (Principal Financial and
Accounting Officer)
/s/ Dr. Wolf J. Gaede Executive Vice President, General Counsel,
------------------------- Secretary and Director
Dr. Wolf J. Gaede
/s/ Ulf Bohla Director
-------------------------
Ulf Bohla
/s/ William E. Ford Director
-------------------------
William E. Ford
/s/ William O. Grabe Director
-------------------------
William O. Grabe
/s/ George F. Schmitt Director
-------------------------
George F. Schmitt
-22-
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
LHS GROUP INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- -------------------------- ------------ ---------- ---------- ---------- ----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------- ------------ ----------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for Doubtful Accounts $ 200 $ 1,036 $ - $ - $ 1,236
Valuation Allowance for Deferred Taxes - - - - -
Year ended December 31, 1996:
Allowance for Doubtful Accounts - 200 - - 200
Valuation Allowance for Deferred Taxes 139 - - (139)(1) -
Year ended December 31, 1995:
Allowance for Doubtful Accounts - - - - -
Valuation Allowance for Deferred Taxes - 139 - - 139
</TABLE>
(1) Elimination of valuation reserve due to the realization of the tax benefit
of the associated net operating loss
-23-
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
--------------------
This employment agreement ("Agreement") is made and entered into this 17th day
of April, 1996 between LHS Group Inc. (hereinafter referred to as "Employer")
and Jerry Braxton (hereinafter referred to as "Employee").
WITNESSETH:
In consideration of the mutual covenants and agreements contained herein, the
parties hereby agree as follows:
1. EMPLOYMENT -- Employer agrees to employ Employee in the position of Chief
----------
Financial Officer. Employee accepts employment with Employer upon the terms and
conditions set forth in this agreement. During the term of this Agreement,
Employee agrees to be a full-time employee of Employer and devote his full and
exclusive time, energy and skill to the business and affairs of his employment
with Employer.
2. TERM OF EMPLOYMENT -- The initial term of this Agreement commences on the
------------------
28th day of August, 1996, and shall continue until terminated as provided in
this Paragraph 2.
(a) TERMINATION BY EMPLOYER -- This Agreement may be terminated by Employer
-----------------------
at any time for any reason. In the event this Agreement is terminated by
Employer, Employee may be entitled to receive severance benefits in accordance
with the provisions set forth in Paragraph 5.
(b) TERMINATION BY EMPLOYEE -- This Agreement may be terminated by Employee
-----------------------
at any time for any reason..
(c) DEATH OF EMPLOYEE -- This agreement shall terminate immediately upon
-----------------
the death of Employee.
3. COMPENSATION -- Employer agrees to pay Employee a base salary of One
------------
Hundred and Fifty Thousand Dollars ($175,000) per year. At the end of 1996, and
at the end of each year thereafter, Employer agrees to review Employee's
performance and adjust Employee's base salary based on its assessment of his
performance.
(a) Employee shall be entitled to an annual incentive bonus of up to
$50,000. The actual bonus may be lower depending on the performance of both the
Employee and the Employer.
<PAGE>
(b) Employer shall also offer Employee the option to purchase 200,000
shares of common stock at an exercise price of $5 per share. The options are to
be issued and exercised in accordance with the terms and provisions of the Stock
Option Plan 1996. The parties agree that they will execute the necessary legal
documents to permit Employee's exercise of his stock options at the appropriate
time. The options shall vest ratably over a 60 month period beginning with the
end of the first month following the month of effective employment.
(c) Employer shall pay to Employee a monthly automobile allowance of
$1,025.
4. EMPLOYEE BENEFITS
-----------------
(a) GENERAL -- Except as provided in this Agreement, Employee shall be
-------
entitled to participate in all employee welfare and benefit programs maintained
by Employer to the same extent and under the same conditions as other employees
of Employer, including medical, dental, and life insurance and 401(k) plan.
(b) VACATION -- Employee shall be entitled to twenty (20) days of paid
--------
vacation each year. Vacation pay shall accrue on a prorated basis during the
year. Any vacation which has been earned but not taken as of December 31 shall
be forfeited unless Employee is specifically requested by Employer to delay
taking the vacation for the benefit of Employer. In such cases, the vacation
will be allowed to be carried over to no later than March 31 of the following
year. If Employee's employment is terminated during the year, she shall be
entitled to be paid any accrued but unused vacation pay for the year.
5. SEVERANCE BENEFITS - In the event Employer terminates Employee's
------------------
employment without cause (as defined below), Employee shall be entitled to a
severance payment equal to the lesser of six (6) months of Employee's annual
base salary at the time of termination or Employees attainment of substitute
full time employment. Any such severance payments shall be paid in equal monthly
instalments during the severance period.
In the event Employer terminates Employee's employment with cause, Employee
shall not be entitled to severance benefits. For purposes of this Paragraph,
"cause" is defined as (I) any conduct by Employee involving moral turpitude,
(ii) any dishonesty by Employee in the performance of his duties for Employer,
including his knowing failure to disclose or stop the dishonesty of others; and
(iii) any act or omission by Employee that has the potential of injuring the
reputation of Employer. Employer may set off against amounts owed to Employee
any losses Employer sustains as a result of the facts or actions that constitute
cause for Employee's termination.
In the event Employee terminates his employment with Employer, he shall not
be entitled to severance benefits beyond those described in Paragraph 2(b).
<PAGE>
6. MISCELLANEOUS
-------------
(a) YEAR -- All references to the term "year" in this Agreement mean
----
"calendar year" unless otherwise stated.
(b) NOTICE -- The references to the notice periods of certain "days"
------
contained in Paragraphs 2(a), 2(b) and 6(e) shall mean calendar days. Any notice
provided for in this Agreement shall be delivered to Employee at the most recent
address of Employee listed in Employer's then current employment records. Notice
to Employer shall be delivered to the following address: 400 Perimeter Center
Terrace, Suite 575, Atlanta, Georgia 30346.
(c) WAIVER -- The waiver by any party to this Agreement of a breach of
------
any of the provisions contained herein shall not operate or be construed as a
waiver of any subsequent breach.
(d) SEVERABILITY -- The invalidity or unenforceability of any particular
------------
provision of this Agreement shall not affect the other provisions of this
Agreement and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision was omitted ab initio.
(e) DISPUTES AND GOVERNING LAW -- Employer and Employee agree that any
--------------------------
dispute arising in connection with, or relating to, this Agreement or the
termination of this Agreement, to the maximum extent allowed by applicable law,
shall be subject to resolution through informal methods and, failing such
efforts, through arbitration. Either party may notify the other party of the
existence of a dispute by written notice to the address indicated above in
Paragraph 6(b). The parties shall thereafter attempt in good faith to resolve
their differences within thirty 30) days after the receipt of such notice. If
the dispute cannot be resolved within the 30-day period, either party may file a
written demand for arbitration with the other party. The arbitration shall
proceed in accordance with the terms of the Federal Arbitration Act and the
rules and procedures of the American Arbitration Association. A single
arbitrator shall be appointed through the American Arbitration Association's
procedures to resolve the dispute.
The parties agree that in the event arbitration is necessary, the laws of
the State of Georgia and any applicable federal law shall apply. The place of
the arbitration shall be Atlanta, Georgia.
The award of the arbitrator shall be binding and conclusive upon the
parties. Either party shall have the right to have the award made the judgement
of a court of competent jurisdiction in the State of Georgia.
(f) ENTIRE AGREEMENT AND AMENDMENT -- This Agreement constitutes the
------------------------------
entire understanding among the parties with respect to the employment of
Employee by Employer and shall supersede any prior agreements and understandings
among the parties
<PAGE>
with respect to such subject matter, provided, however, that this Agreement
shall not be deemed to supersede or affect any other agreement, arrangement,
commitment or understanding by and between Employer and Employee not
establishing or governing the employment relationship between them. This
Agreement may not be modified or amended except in writing signed by all of the
parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
Employer: Employee:
LHS GROUP INC. JERRY BRAXTON
By:/s/ Hartmut Lademacher /s/ Jerry Braxton
----------------------- -------------------
Hartmut Lademacher, Chief Executive Officer Jerry Braxton
<PAGE>
EXHIBIT 10.9
EXECUTIVE EMPLOYMENT AGREEMENT
This employment agreement (the "Agreement") is made and entered into this 26th
day of September 1996 between LHS Group Inc. (hereinafter referred to as
"Employer") and Wolf Gaede (hereinafter referred to as "Executive").
---------
PREAMBLE
Employer is totally aware of Executive's situation regarding his position in his
partnership and the termination situation (expiry date according to the
partnership agreement is the end of 1997). Nevertheless, the employer wants to
hire the Executive under all circumstances. Executive is willing to try to
negotiate an earlier termination date with his partnership.
WITNESSETH:
-----------
In consideration of the mutual covenants and agreements contained herein, the
parties hereby agree as follows:
1. EMPLOYMENT
Employer agrees to employ Executive in LHS Group Inc. in the position of
the Executive Vice President and acting as General Counsel of LHS group
worldwide.
Employer, furthermore, agrees to employ Executive at the same time also
as Chief Executive Officer ("CEO") of one of its subsidiaries in the US,
which subsidiary will be an operational entity within LHS group, if such
subsidiary exists besides LHS Communications System Inc.
<PAGE>
The Executive shall upon signature serve as a member of the Board of
Directors of LHS Group Inc. Employer shall always make sure that Executive
can serve as a Director of Employer's Board during his employment as
General Counsel.
Executive accepts employment with Employer upon the terms and conditions
set forth in this Agreement. Executive agrees to be a full-time employee
of Employer and devote his full and exclusive time, energy and skill to the
business and affairs of his employment with Employer (see also 5.).
If Executive cannot get a visa permission for the U.S. this Agreement
shall bind also LHS Holding Germany GmbH and Executive shall serve in the
above-mentioned positions from Europe and travel to the U.S.
2. TERM OF EMPLOYMENT
The initial term of this Agreement commences -- upon request of the
Executive -- on the 1st day of January, 1997, or on any date thereafter,
but on the 1st day of November, 1997 at the latest, and shall continue
until terminated as provided in this Paragraph 2.
(a) Termination by Employer -- This Agreement cannot be terminated by
Employer during the first two years of employment. Thereafter,
Employer may terminate it at any time for any reason upon ninety (90)
days written notice to Executive. In the event this Agreement is
terminated by Employer without Cause, Executive shall be entitled to
receive a severance payment equal to six (6) months of Executive's
then monthly base salary.
<PAGE>
The severance payment shall be made at the last day of employment of
the Executive.
(b) Termination by Executive -- This Agreement may be terminated by
Executive at any time for any reason upon ninety (90) days written
notice to Employer. Executive agrees that Employer shall be entitled,
at its sole discretion, to waive the referenced ninety-day notice and
to accept and treat Executive's notice of termination as an immediate
termination of this Agreement by Executive: provided, that if such
waiver occurs, Executive shall be entitled to receive his salary
through the ninety-day notice.
(c) Termination for Cause -- The Executive's employment under this
Agreement may be terminated at any time during the employment period
for Cause by action of the Employer after the Employer has given
written notice to the Executive to cure any misbehavior within an
adequate period of time combined with the announcement otherwise to
terminate the Employment for Cause.
As used in this Agreement, the term "Cause" shall mean any of the
-----
following events:
(i) the Executive's conviction of or plea of guilty or nolo
----
contendere, no contest or the equivalent to a felony or
----------
misdemeanor involving moral turpitude or a felony or misdemeanor
which results in a term of imprisonment;
<PAGE>
(ii) the Executive's willful gross misconduct, or grossly neglect of
duties or failure to act that is substantially material injurious
to the business of Employer.
(d) In the event of termination for Cause, Executive shall not be entitled
to any payment except for compensation accrued as of such termination
date.
(e) If the Executive dies, his employment under this Agreement shall be
deemed to cease as of the date of his death, and his rights pursuant
to Paragraph 3a) and b) shall cease as of the last day of the third
(3rd) month after his death occurs except for compensation accrued as
of such last day of the third (3rd) month after his death occurs.
(f) In the event Executive becomes disabled during the employment period,
all compensation shall cease during the period of disability,
provided, however, that if the monthly disability benefit which
Executive is paid as a salaried employee is less than the salary
provided for in Paragraph 3. during such time, Employer shall pay such
deficiency on a monthly basis. Disability for purposes hereof shall
mean a physical or mental injury or disease which renders Executive
unable to perform the essential functions of his position as assigned
to him by Employer pursuant to this Agreement as determined in good
faith. These disability payments will cease if the disability
continues for more than ninety (90) consecutive days at which point
this Agreement will terminate.
<PAGE>
3. EMPLOYMENT PERIOD COMPENSATION
(a) For services rendered by the Executive hereunder, the Employer shall
pay him a base salary (the "Salary") during the employment period at
------
the rate of $350,000 per contract year. The Salary shall be payable
in twelve equal installments at the end of a month. The Employer
shall review the Salary annually and, may increase the Salary. The
Employer shall consider increases in the cost of living as well as
performance for the basis of determining increases.
Employer shall pay the first yearly Salary in the amount of
US$350.000,00 immediately upon signature of this Agreement and without
any deduction to Executive. This Agreement is conditioned upon that
payment. This payment shall serve as security for the paragraph below.
If Executive starts employmentship he immediately shall pay to
Employees the amount which equals the base to be paid for a one year
base salary by Employees on behalf of Executive from the amount of
$350.000,00.
In case the employment -- for whatever reason -- does not start
according to Paragraph 2 sentence 1, the first payment of US$
350.000,00 shall be deemed to be a compensation for the "loss of
employment", which compensation is not repayable to and may not be
reclaimed by Employer for whatever reason, with one exception: If the
non-start of employment is caused by Executive's willful gross
misconduct Executive shall repay the amount of US$ 350.000,00.
The aforementioned compensation payment does not prevent Executive
from claiming further damages suffered.
<PAGE>
If Executive terminates the Agreement during the fist six months of
employment, repayment of the remaining payment of US$ 450.000,00 shall
be made by Executive, otherwise not.
(b) Executive shall be entitled to a partition in any bonus plan(s) and
any other employee welfare and benefit programs of LHS Group Inc. and
LHS group companies. Regardless any (existing) bonus plans(s)
Employer hereby guarantees to Executive a bonus scheme of at least US$
100,000 per year reachable for Executive by 100% performance according
to Employers bonus plan for the first three years of the employment.
This bonus is payable in equal monthly payments starting with
employment. Employer guarantees a bonus of $50,000 for the first six
months of employment.
(c) Employer shall offer and hereby offers Executive 150.000 stock options
of LHS Group Inc. at a strike price of not more than US$ 6.
Paragraph. 3(a) sub-sections 3, 4 and 5 shall apply by way of analogy.
In any case, Executive has the right to exercise the 5 years ratable
stock options in total if and after the current CEO of Employer,
Hartmut Lademacher, resigned either from his position as CEO of LHS
Group Inc. or from his position as Director of the Board of LHS Group
Inc. Executive has the same right in case of any change of control in
LHS Group Inc.
(d) The Executive is authorized to incur reasonable expenses in connection
with performing his duties under this Agreement, including expenses
for entertainment, travel and similar items.
<PAGE>
(e) The Executive shall be entitled to twenty five (25) days paid vacation
each calendar year. Unused vacation may be carried over to the
subsequent year or bought by the Executive.
(f) Employer shall provide Executive at his choice with an American or
German model automobile with a value of up to Fifty Thousand Dollars
($50,000) and shall pay or shall reimburse the Executive for the
reasonable expenses incident to the operation of use of such
automobile and incurred in connection with performing his duties under
this Agreement.
(g) The Employer shall provide full premium health coverage for the
Executive, his spouse and his dependent children. The coverage will
include 100% reimbursement for medical, dental and vision care during
the period of employment according to Employer's health care plan.
(h) In recognition of the Executive's need to relocate from his current
residence, the Employer shall pay to Executive a relocation allowance
in form of a lump sum of $75,000. In addition, Employer shall
compensate the Executive for travel costs to Germany with his family
once per year of employment.
4. CONFIDENTIALITY
(a) The Executive hereby acknowledges that (i) his employment will bring
him into contact with many confidential matters of the Employer (the
"Confidential Information"); (ii) such Confidential Information
-------------------------
constitutes a
<PAGE>
valuable, special and unique asset of the Employer and (iii) the
services to be performed by the Executive under this Agreement are of
a unique and intellectual character.
(b) In recognition of the foregoing, the Executive covenants and agrees
that:
(i) the Executive will not use, divulge, publish or otherwise reveal,
either directly or through another, Confidential Information of
the Employer; and
(ii) the Executive agrees that he will not publish, or otherwise
publicly disclose any Confidential Information without the prior
written consent thereto and review thereof.
5. ADMISSION(S) TO THE BAR(S)
The Executive may keep his existing and may apply for any new admission to
the bar(s) as an attorney-at-law in any place of the world. He may also
work in this capacity. This may, however, not affect the fulfillment of
his duties under this Agreement in a severe manner.
6. APPLICABLE LAW/VENU
This Agreement shall be governed by and construed in accordance with German
Law, except for the International Private Law. Venue for all disputes is
Frankfurt am Main, Germany or, at the choice of Executive, the seat of
Employer.
<PAGE>
7. SEVERABILITY
The encalidity or unenforceability of any particular provision of this
Agreement shall not affect the other provisions of this Agreement and this
Agreement shall be construed in all respects as if such valid or
unenforceable provision was omitted ab initio.
8. ENTIRE AGREEMENT AND AMENDMENT
This Agreement constitutes the entire understanding among the parties with
respect to the employment of Executive by Employer and shall supersede any
prior agreements and understanding among the parties with respect to such
subject matter. This Agreement may not be modified or amended except in
writing signed by all of the parties hereto.
Frankfurt/Atlanta
LHS GROUP INC.:
By: /s/ Hartmut Lademacher /s/ Dr. Wolf J. Gaede
---------------------- ---------------------
Hartmut Lademacher Executive
LHS Holding Germany GmbH
By: /s/ Hartmut Lademacher
----------------------
Hartmut Lademacher
<PAGE>
EXHIBIT 10.10
Anlage 1
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EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), is made effective as of January
1, 1998, by and between Dr. H. Beha ("Employee"), and LHS GROUP INC.
("Company"), a Delaware corporation. Because Company desires to employ Employee
and because Employee desires to be employed by Company, both parties, in
consideration of the mutual and exchanged promises and agreements contained
herein and of wages paid and services rendered hereunder, hereby agree as
follows:
SECTION 1. EMPLOYMENT.
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Subject to the terms contained in this Agreement, Company hereby employs
Employee and Employee hereby accepts such employment starting January 1, 1998.
Employee will be a Member of the Executive Management Committee. Employee shall
serve as Senior Vice President - Technology or in a similar position and shall
perform all duties assigned by senior management of LHS. Employee shall, at the
direction of Company, work in the United States or in Europe. His
responsibilities, however, are worldwide and will require extensive traveling,
which Employee hereby consents to. Employee shall devote his full business time
and best efforts exclusively to rendering services on behalf of Company. He
shall not be engaged in any other business while he is employed by Company
pursuant to this Agreement. Employee's employment with Company hereunder shall
be for no fixed period of time and may be terminated at any time, with or
without cause, in accordance with the terms of Section 4 ("Termination").
SECTION 2. COMPENSATION.
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(a) Salary. During Employee's employment hereunder, Employee shall be paid
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an annual salary by Company of three hundred thousand U.S. Dollars ($
300,000.00), less all applicable withholding for taxes. Employee's salary will
be reviewed annually.
(c) Bonus. Employee is entitled to an annual bonus based upon both
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Employee's and Company's performance. The payment and amount of the bonus is in
the sole discretion of Company's management.
<PAGE>
SECTION 3. ADDITIONAL EMPLOYMENT BENEFITS.
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(a) Fringe Benefits. Company shall provide Employee with the standard
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fringe benefits, such as medical insurance and short term disability, that it
provides as a regular business practice to full-time salaried employees of
Company. Company shall have the right to modify, replace, withdraw or defer any
fringe benefit provided to full-time salaried employees of Company at any time.
Fringe benefits are provided and administered to Employee according to the
principles valid for senior management of Company.
(b) Vacation. Employee is entitled to 30 working days vacation annually.
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(c) Moving Allowance. Company shall pay for Employee's move to the United
----------------
States a sum of up to fifty thousand U.S. Dollars ($ 50,000.00) against invoices
during the first six months of employment.
(d) Stock Option. Employee shall be entitled to 300,000 (three hundred
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thousand) stock options granted by LHS Group Inc. pursuant to LHS Group Inc.'s
Stock Option Plan on the first working day of Employee's services to Company
hereunder.
(e) Employee is entitled to a car allowance.
SECTION 4. TERMINATION.
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Notwithstanding anything contained herein to the contrary, this Agreement
may be terminated at any time by either party in accordance with the following
terms:
(a) Death. In the event of Employee's death, this Agreement shall terminate
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immediately and Company shall be obligated to Employee's family or estate only
for pro-rated salary and bonus actually earned or accrued as of the date of
Employee's death.
(b) Termination. Subject to Section 1, Company may terminate Employee's
-----------
employment at any time with or without cause. In case termination is for cause,
it shall have immediate effect. In case termination is without cause, it shall
be effected by providing Employee with written notice at least twelve (12)
months to the end of a calendar month. Company may, at its sole discretion,
elect to pay Employee salary, in lieu of any part, or all, of the notice period
and relieve Employee from his duties. If Company terminates Employee's
employment hereunder, Company shall be obligated to pay Employee's pro-rated
salary only through the actual effective date of termination and shall have no
other payment obligation under this Agreement. If Employee is relieved from his
duties during the termination period, any claims for salary shall be diminished
by earnings achieved by the Employee during such relieve time.
(c) Resignation. Employee may resign from employment hereunder at any time
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by providing Company with written notice at least twelve (12) months to the end
of a calendar month. Company may, at its sole discretion, elect to pay Employee
salary, in lieu
<PAGE>
of any part, or all, of the notice period and relieve Employee from his duties.
Clause (b) Sentence 6 applies by way of analogy.
SECTION 5. CONDITIONS OF EMPLOYMENT.
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(a) In accordance with the Immigration Reform Control Act of 1986, Employee
shall provide Company with documents demonstrating his identity and
authorization to work in the United States. If Employee fails to provide said
documents to Company, the Company's offer of employment pursuant to this
Agreement will be null and void.
(b) Employee shall sign an I-9 form within the first three days of his
employment.
SECTION 6. NON-DISCLOSURE OF CONFIDENTIAL INFORMATION.
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(a) Definitions
The following definitions shall apply to this Agreement:
(i) "Trade Secrets" means all secret, proprietary or confidential
information regarding Company or its business, and Company's affiliates and
their business, including any and all information not generally known to, or
ascertainable by, persons not employed by Company, the disclosure or
knowledge of which would permit those persons to derive actual or potential
economic value therefrom or to cause economic or financial harm to Company.
Such information shall include, but not be limited to, financial
information, strategic plans and forecasts, marketing plans and forecasts,
customer lists, mailing lists, computer software (including without
limitation, source code, object code and manuals), customer billing or order
information, technical information regarding Company's products or services,
prices offered to or paid by customers, purchase and supply information,
current and future development and expansion or contraction plans of
Company, sales and marketing plans and techniques, information concerning
personnel assignments and operations of Company and matters concerning the
financial affairs, future plans and management of Company. "Trade Secrets"
shall not include information that has become generally available to the
public by the act of one who has the right to disclose such information
without violating a legal right of Company or Company's affiliates.
(ii) "Confidential Information" means information, other than Trade Secrets,
which relates to Company or Company's affiliates, Company's or Company's
affiliates' activities, Company's or Company's affiliates' business or
Company's or Company's affiliates' suppliers or customers that is not
generally known by persons not employed by Company and which is nor has been
disclosed to Employee or of which Employee became aware as a consequence of
or through his relationship with Company. "Confidential Information" shall
not include information that has
<PAGE>
become generally available to the public by the act of one who has the right
to disclose such information without violating any legal right of Company or
Company's affiliates'.
(iii) "Document" means originals or copies of handbooks, manuals, files,
memoranda, correspondence, notes, photographs, slides, overheads, audio or
visual tapes, cassettes, or disks, and records maintained on computer or
other electronic media.
(b) Covenant Regarding Non-Disclosure of Trade Secrets or Confidential
Information
Employee covenants and agrees that:
(i) during his employment with Company he will not use or disclose any Trade
Secrets or Confidential Information of Company other than as necessary in
connection with the performance of his duties as an employee of Company, and
(ii) for a period of two (2) years immediately following the termination of
his employment with Company, Employee shall not, directly or indirectly,
transmit or disclose any Trade Secret or Confidential Information of Company
to any person and shall not make use of any such Trade Secret or
Confidential Information, directly or indirectly, for himself or others,
without the prior written consent of Company, except for a disclosure that
is required by any law or order, in which case Employee shall provide
Company prior written notice of such requirement and an opportunity to
contest such disclosure. However, to the extent that such information is a
"trade secret" as that term is defined under a state or federal law, this
Paragraph 5(b) is not intended to, and does not, limit Company's rights or
remedies thereunder and the time period for prohibition on disclosure for
use of such information is until such information becomes generally known to
the public through the act of one who has the right to disclose such
information without violating a legal right of Company.
(c) Return of Information
Employee agrees that he shall return all Trade Secrets, Confidential
Information or other property of Company immediately upon the termination of his
employment with Company, including all handbooks, training materials, reports,
policy statements, research, programs, customer lists, mailing lists and other
documents provided by Company or acquired by Employee as a result of his
employment with Company, and all copies thereof.
<PAGE>
SECTION 7. INVENTIONS AND OTHER DEVELOPMENTS.
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All inventions, formulas, techniques, processes, concepts, systems and
programs, mailing lists and customer lists and compilations, whether or not
patented or patentable, made or conceived, individually or in conjunction with
others, by Employee during the term of his employment with Company that relate
to activities or proposed activities of Company or that result from work
performed by Employee for Company and the sole and exclusive property of
Company. Employee further agrees that, upon request by Company, he will assign
title to any such inventions, formulas, techniques, processes, concepts, systems
and programs, and lists and compilations to Company and will sign any and all
documents necessary to effect such assignment.
SECTION 8. NON-SOLICITATION OF CUSTOMER COVENANT.
--------- -------------------------------------
To protect the Trade Secrets, Confidential Information and goodwill of
Company, Employee agrees that, during his employment and for a period of one (1)
year immediately following that termination of his employment with Company, he
will not, without the prior written permission of Company, directly or
indirectly, for himself or on behalf of any other person, partnership, firm or
corporation, solicit, divert away, take away or attempt to solicit or take away
any Customer, or Potential Customer, of Company for purposes of providing or
selling products or services that are competitive with those provided by
Company, if Company is then still engaged in the provision or sale of that type
of good or service. For purposes of this covenant, "Customer" means any
individual or entity to whom Company has provided goods or services and with
whom Employee had, alone or in conjunction with others, Material Contact during
the one (1) year prior to the termination of Employee's employment and
"Potential Customer" means any individual or entity to whom Company has actively
sought to sell products or services within the one (1) year immediately prior to
the termination of Employee's employment and with whom Employee had Material
Contact on Company's behalf during that same time period. For purposes of this
covenant, Employee had "Material Contact" with a customer if
(i) Employee had business dealings with the customer on Company's behalf,
(ii) Employee was responsible for supervising or coordinating the dealings
between the customer and Company, or
(iii) Employee obtained Trade Secrets or Confidential Information (such terms
having the same meanings as defined in Paragraph 6 above, but in each case
relating to the customer or Potential Customer) about the customer as a
result of Employee's association with Company.
SECTION 9. NON-RECRUITMENT OF EMPLOYEES COVENANT.
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Employee agrees that he will not, for so long as he is employed by Company,
and for a period of one (1) year immediately following the termination of his
employment,
<PAGE>
solicit or induce, or attempt to solicit or induce, any employee of the Company
to terminate his or her relationship with Company or to enter into an employment
relationship with Employee or with any other person or entity other than
Company.
SECTION 10. RELIEF.
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Employee acknowledges that the covenants and promises contained in Sections
6, 7, 8 and 9 of this Agreement are reasonable and a necessary means of
protecting and preserving Company's goodwill and its interest in the
confidentiality and proprietary value of its Trade Secrets and Confidential
Information. Employee further acknowledges that the same are a reasonable and
necessary means of protecting Company from unfair competition by Employee.
Employee agrees that any breach of these covenants or promises will leave
Company with no adequate remedy at law and will cause Company to suffer
irreparable damage and injury. Employee further agrees that any breach of these
covenants or promises will entitle Company to injunctive relief in any court of
competent jurisdiction without the necessity of posting and bond. Employee also
agrees that any such injunctive relief shall be in addition to any damages that
may be recoverable by Company as a result of such breach. Employee agrees that
he will be liable to Company for all reasonable attorney's fees and expenses
which may be incurred by Company in enforcing its rights hereunder.
Employee further agrees that no failure or delay by Company in exercising,
enforcing or asserting any rights, power or privilege hereunder shall operate as
a waiver hereof, nor shall any single or partial exercise thereof preclude any
other or further exercise of any such right, power or privilege.
SECTION 11. RIGHTS TO MATERIALS AND RETURN OF MATERIALS.
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All records, files, software, memoranda, reports, price lists, customer
lists, drawings, plans, sketches, documents, technical information, information
on the use, development and integration of software, and the like (together with
all copies of such documents and things) relating to the business of Company,
which Employee shall use or prepare or come in contact with in the course of, or
as a result of, his employment shall, as between the parties to this Agreement,
remain the sole property of Company. Laptop computers, software and related
data, information and things provided to Employee by Company or obtained by
Employee, directly or indirectly, from Company, also shall remain the sole
property of Company. Upon the termination of his employment or upon the prior
demand of Company, he shall immediately return all such materials and things to
Company and shall not retain any copies or remove or participate in removing any
such materials or things from the premises of Company after termination or
Company's request for return.
SECTION 12. COMPLIANCE WITH POLICIES AND LAWS.
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(a) Policies. Employee agrees to be bound by any and all current and
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future Company policies, work rules or standards of conduct and pledges to
observe order and discipline of work.
<PAGE>
(b) Laws. Employee agrees to abide by the applicable laws and exercise
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good judgment in the best interest of Company.
SECTION 13. MISCELLANEOUS.
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(a) Severability. The covenants set forth in this Agreement shall be
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considered and construed as separate and independent covenants. Should any part
or provision of any covenant be held invalid, void or unenforceable in any court
of competent jurisdiction, such invalidity, voidness or unenforceability shall
not render invalid, void or unenforceable any other part or provision of this
Agreement. If any portion of the foregoing provisions is found to be invalid or
unenforceable by a court of competent jurisdiction because of its duration, the
territory, the definition of activities or the definition of information covered
is invalid or unreasonable in scope, the invalid or unreasonable term shall be
redefined, or a new enforceable term provided, such that the intent of Company
and Employee in agreeing to the provisions of this Agreement will not be
impaired and the provision in question shall be enforceable to the fullest
extent of the applicable laws.
(b) Waiver. The waiver by any party to this Agreement of a breach of any
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of the provisions of this Agreement shall not operate or be construed as a
waiver of any other or subsequent breach.
(c) Governing Law. This Agreement shall be deemed to be made in and shall
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in all respects be interpreted, construed and governed by and in accordance with
the laws of the State of Georgia (without giving effect to the conflict of law
principles thereof). No provision of this Agreement or any related documents
shall be construed against, or interpreted to the disadvantage of, any party
hereto by any court or any governmental or judicial authority by reason of such
party having, or being deemed to have, structured or drafted such provision.
(d) Entire Agreement. This Agreement is intended by the parties hereto to
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be the final expression of their agreement with respect to the subject matter
hereof and this is the complete and exclusive statement of the terms of their
agreement, notwithstanding any representations, statements or agreements to the
contrary heretofore made. This Agreement supersedes any former agreements
governing the same subject matter. This Agreement may be modified only by a
written instrument signed by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
LHS GROUP INC. EMPLOYEE
By: /s/ Hartmut Lademacher /s/ Dr. Beha
-------------------------
Title: CEO
----------------------
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
This employment agreement ("Agreement") is made and entered into this
22nd day of July, 1997 between LHS Group Inc. (hereinafter referred to as
"Employer") and Bruce Leonard (hereinafter referred to as "Employee").
WITNESSETH:
In consideration of the mutual covenants and agreements contained herein, the
parties hereby agree as follows:
1. EMPLOYMENT -- Employer agrees to employ Employee in the position of Chief
----------
Operating Officer. Employee accepts employment with Employer upon the terms and
conditions set forth in this agreement. During the term of this Agreement,
Employee agrees to be a full-time employee of Employer and devote his full and
exclusive time, energy and skill to the business and affairs of his employment
with Employer.
2. TERM OF EMPLOYMENT -- The initial term of this Agreement commences on the
------------------
11th day of August, 1997, and shall continue until terminated as provided in
this Paragraph 2.
(a) Termination by Employer After the first anniversary of this Agreement,
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the Agreement may be terminated by Employer at any time for any reason upon
ninety (90) days written notice to Employee.
(b) Termination by Employee After the first anniversary of this
-----------------------
Agreement, the Agreement may be terminated by Employee at any time for any
reason upon ninety (90) days written notice to Employer. Employee agrees that
Employer shall be entitled, at its sole discretion, to waive the referenced
ninety-day notice and to accept and treat Employee's notice of termination as an
immediate termination of the Agreement by Employee provided that if such waiver
occurs, Employee shall be entitled to receive his base salary through the
ninety-day notice period.
(c) Disability of Employee -- Notwithstanding and without limiting the
----------------------
parties' respective rights under this Paragraph 2, this Agreement shall
terminate automatically at the time the Employee shall have been disabled for a
period of six (6) consecutive months. For purposes of this Paragraph 2(c), the
term "disabled" shall mean the determination by Employer of Employee's
inability, in the good faith opinion of Employer after securing objective
professional medical advice, to perform all of his usual functions as Chief
Operating Officer of the Employer, the reason for which is inability is a
physical or mental infirmity of the Employee from which the Employee is not
likely to recover in the then-foreseeable future to the point of being able to
perform all of his usual functions as Chief Operating Officer of the Employer.
The parties agree
<PAGE>
that the Employee may request at his expense a second medical opinion. In the
event any dispute arises in connection with the determination of Employee's
disability, the parties agree to have such dispute resolved through the dispute
resolution provisions outlined in Paragraph 6(a).
Employer agrees to continue to pay Employee's base salary during any period in
which Employee has been certified by a medical professional to be disabled;
provided, however, that in no event shall such payments continue beyond the date
Employee is no longer disabled or six (6) consecutive months of disability,
whichever is shorter.
(d) Death of Employee -- This agreement shall terminate immediately upon
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the death of Employee.
3. COMPENSATION -- Employer agrees to pay Employee a base salary of
------------
$300,000 per year.
(a) Employee shall be entitled to an annual incentive bonus of up to
$200,000. The actual bonus may be lower depending on the performance of both the
Employee and the Employer.
(b) Employer shall also offer Employee the option to purchase 400,000
shares of LHS Group Inc. common stock at an exercise price equal to the closing
price of the stock on the NASDAQ stock exchange on August 11, 1997 (date of
hire). The options are to be issued and exercised in accordance with the terms
and provisions of the LHS Group Inc. Stock Option Plan.
4. EMPLOYEE BENEFITS
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(a) General -- Except as provided in this Agreement, Employee shall be
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entitled to participate in all employee welfare and benefit programs maintained
by Employer to the same extent and under the same conditions as other employees
of Employer, including medical, dental, and life insurance and 401(k) plan.
(b) Vacation -- Employee shall be entitled to twenty (20) days of paid
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vacation each year. Vacation pay shall accrue on a prorated basis during the
year. Any vacation which has been earned but not taken as of December 31 shall
be forfeited unless Employee is specifically requested by Employer to delay
taking the vacation for the benefit of Employer. In such cases, the vacation
will be allowed to be carried over to no later than March 31 of the following
year. If Employee's employment is terminated during the year, he shall be
entitled to be paid any accrued but unused vacation pay for the year.
<PAGE>
5. RELOCATION
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Employer agrees to pay up to a maximum of $50,000 in costs to relocate
employee and his family to the Atlanta area. The payment of those costs and the
types of costs to be paid for or reimbursed by Employer is detailed in the LHS
Group Inc. relocation policy.
6. MISCELLANEOUS
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(a) Year -- All references to the term "year" in this Agreement mean
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"calendar year" unless otherwise stated.
(b) Notice -- The references to the notice periods of certain "days"
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contained in Paragraphs 2(a), 2(b) and 6(e) shall mean calendar days. Any notice
provided for in this Agreement shall be delivered to Employee at the most recent
address of Employee listed in Employer's then current employment records. Notice
to Employer shall be delivered to the following address: 6 Concourse Parkway,
Suite 2700, Atlanta, Georgia 30328.
(c) Waiver -- The waiver by any party to this Agreement of a breach of
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any of the provisions contained herein shall not operate or be construed as a
waiver of any subsequent breach.
(d) Severability -- The invalidity or unenforceability of any particular
------------
provision of this Agreement shall not affect the other provisions of this
Agreement and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision was omitted ab initio.
(e) Disputes and Governing Law -- Employer and Employee agree that any
--------------------------
dispute arising in connection with, or relating to, this Agreement or the
termination of this Agreement, to the maximum extent allowed by applicable law,
shall be subject to resolution through informal methods and, failing such
efforts, through arbitration. Either party may notify the other party of the
existence of a dispute by written notice to the address indicated above in
Paragraph 6(b). The parties shall thereafter attempt in good faith to resolve
their differences within thirty 30) days after the receipt of such notice. If
the dispute cannot be resolved within the 30-day period, either party may file a
written demand for arbitration with the other party. The arbitration shall
proceed in accordance with the terms of the Federal Arbitration Act and the
rules and procedures of the American Arbitration Association. A single
arbitrator shall be appointed through the American Arbitration Association's
procedures to resolve the dispute.
The parties agree that in the event arbitration is necessary, the laws of
the State of Georgia and any applicable federal law shall apply. The place of
the arbitration shall be Atlanta, Georgia.
The award of the arbitrator shall be binding and conclusive upon the
parties. Either party shall have the right to have the award made the judgement
of a court of competent jurisdiction in the State of Georgia.
<PAGE>
(f) Entire Agreement and Amendment -- This Agreement constitutes the
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entire understanding among the parties with respect to the employment of
Employee by Employer and shall supersede any prior agreements and understandings
among the parties with respect to such subject matter, provided, however, that
this Agreement shall not be deemed to supersede or affect any other agreement,
arrangement, commitment or understanding by and between Employer and Employee
not establishing or governing the employment relationship between them. This
Agreement may not be modified or amended except in writing signed by all of the
parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
Employer: Employee:
LHS GROUP INC. BRUCE LEONARD
By: /s/ Hartmut Lademacher /s/ Bruce Leonard
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Hartmut Lademacher, Chairman and CEO Bruce Leonard
<PAGE>
LHS GROUP INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands, except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA
Total revenues $105,411 $56,864 $26,967 $20,722 $6,712
Earnings before interest and taxes $ 16,440 $ 5,581 $ 1,217 $ 4,182 $ 287
Net earnings $ 11,208 $ 3,420 $ 284 $ 3,043 $ 195
Net earnings per share(1):
Basic $ 0.52 $ 0.22 $ 0.02 $ 0.29 $ 0.03
Diluted $ 0.46 $ 0.17 $ 0.02 $ 0.29 $ 0.03
CONSOLIDATED BALANCE SHEET DATA
Total assets $127,223 $43,819 $24,462 $14,006 $2,147
Long-term obligations $ 731 $ 1,360 $ 399 $ 372 $ 151
Total stockholders' equity $ 92,549 $12,325 $ 9,933 $ 3,770 $ 681
</TABLE>
(1) See Note 2 of the Notes to Consolidated Financial Statements.
<PAGE>
LHS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Total revenues increased 85.4% to $105.4 million in the year ended
December 31, 1997 from $56.9 million in the year ended December 31, 1996.
License revenues increased 62.2% to $38.4 million in 1997 from $23.7 million in
1996, while service revenues increased 101.9% to $67.0 million from $33.2
million. The increase in total revenues was primarily due to increased market
penetration of the Company's products and services and the successful releases
of BSCS in Europe, Asia and the Americas. Revenues from the Company's Americas
customers accounted for $44.6 million or 42.3% of 1997 revenues compared to
$18.1 million or 31.9% of 1996 revenues. Revenues from the Company's European
customers accounted for $48.6 million or 46.1% of revenues in 1997 compared to
$32.5 million or 57.1% of 1996 revenues. Revenues from the Company's Asian
customers accounted for $12.2 million or 11.6% of 1997 revenues compared to $6.3
million or 11.0% of 1996 revenues.
License revenues decreased as a percentage of total revenues to 36.5% in
1997 from 41.7% in 1996, while service revenues increased as a percentage of
total revenues to 63.5% from 58.3%. This change in the mix of revenues was
primarily due to an increase in the level of customization and production
support required by customers following implementation combined with increased
software maintenance and end-user training provided to 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
1997, o.tel.o communications GmbH, an LHS customer in Europe, accounted for 12%
of total revenues while Aerial Communications, an LHS customer in the Americas,
and Swiss Telecom, an LHS customer in Europe, accounted for 12% and 10%,
respectively, of total revenues in 1996.
COST OF SERVICES. Cost of services increased as a percentage of total revenues
to 44.9% in the year ended December 31, 1997 from 33.6% in the year ended
December 31, 1996. Costs of services increased 147.7% to $47.3 million in 1997
from $19.1 million in 1996, primarily due to compensation expense associated
with increased staffing for new projects in Europe, the Americas and Asia, an
increase in the use of outside consultants and systems integrators and the up-
front costs of training newly hired LHS employees on implementation of the BSCS
software product. Cost of services consists primarily of salaries and benefits
of those employees associated with the installation and implementation of the
BSCS software product and other support activities. It also includes third-party
costs associated with systems integrators and, to a lesser extent, costs related
to providing software maintenance and end-user training to customers.
SALES AND MARKETING. Sales and marketing expenses decreased as a percentage of
total revenues to 8.0% in the year ended December 31, 1997 from 13.5% in the
year ended December 31, 1996 although sales and marketing expenses actually
increased to $8.5 million in 1997 from $7.7 million in 1996. The increase in
sales and marketing expenses was principally due to growth in the number of
worldwide sales and marketing personnel responsible for developing business,
particularly in Europe and Asia and, to a lesser extent, increased participation
in trade shows and other marketing activities. Sales and marketing expenses
consist primarily of the salaries, benefits and travel expenses of those
employees responsible for acquiring new business and maintaining existing
customer relationships, as well as marketing expenses related to trade
publications, advertisements and trade shows.
<PAGE>
LHS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
RESEARCH AND DEVELOPMENT. Research and development expenses decreased as a
percentage of total revenues to 18.7% in the year ended December 31, 1997 from
28.6% in the year ended December 31, 1996. This decrease in research and
development costs as a percentage of revenues was primarily attributable to
efficiency increases and productivity improvements in 1997 as a result of
leveraging the infrastructure that was built in 1995 and 1996. These expenses
increased 21.2% to $19.7 million in 1997 from $16.2 million in 1996. This
increase was principally due to increases in the number of personnel associated
with the development of BSCS Version 5.0 in both the Americas and Europe and the
initial design and development of a new version of BSCS in the Americas in the
latter half of 1997. Research and development expenses are comprised of salaries
and benefits of the employees involved in product and enhancement development.
All development costs are expensed by the Company as incurred.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased to
12.8% of total revenues in the year ended December 31, 1997 from 14.6% in the
year ended December 31, 1996. These expenses increased 63.0% to $13.5 million in
1997 from $8.3 million in 1996. This increase was principally due to increases
in the number of administrative personnel and increases in office rent and other
expenses incurred as a result of the general growth of the Company's business.
General and administrative expenses consist primarily of salaries and benefits
of management and administrative personnel, general office administration
expenses such as rent and occupancy, telephone expenses and other supply costs,
and fees for legal, accounting and other professional services.
INCOME TAXES. The provision for income taxes increased to 40.0% of earnings
before income taxes in the year ended December 31, 1997 from 37.9% of earnings
before income taxes in the year ended December 31, 1996. The higher effective
tax rate in 1997 is principally the result of greater income from certain
European countries with higher statutory tax rates.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Total revenues increased 110.9% to $56.9 million in the year ended
December 31, 1996 from $27.0 million in the year ended December 31, 1995.
License revenues increased 73.6% to $23.7 million in 1996 from $13.7 million in
1995, while service revenues increased 149.1% to $33.2 million from $13.3
million. The increase in total revenues was primarily due to market acceptance
of the Company's products and services in the Americas, successful release of
BSCS Version 4.0 in Europe in early 1996 and the establishment of the Company's
Asian operations in early 1996. Revenues from the Company's Americas customers
accounted for $18.1 million or 31.9% of 1996 revenues compared to $945 thousand
or 3.5% of 1995 revenues. Revenues from the Company's European customers
accounted for $32.5 million or 57.1% of revenues in 1996 compared to $23.8
million or 87.8% of 1995 revenues. Revenues from the Company's Asian customers
accounted for $6.3 million or 11.0% of 1996 revenues compared to $2.3 million or
8.7% of 1995 revenues.
License revenues decreased as a percentage of total revenues to 41.7% in
1996 from 50.6% in 1995, while service revenues increased as a percentage of
total revenues to 58.3% from 49.4%. This change in the mix of revenues is
primarily due to the increased level of customization and production support
requirements of customers following implementation.
<PAGE>
LHS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COST OF SERVICES. Cost of services decreased as a percentage of total revenues
to 33.6% in the year ended December 31, 1996 from 35.8% in the year ended
December 31, 1995. Costs of services increased 97.9% to $19.1 million in 1996
from $9.7 million in 1995, 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 increased as a percentage of
total revenues to 13.5% in the year ended December 31, 1996 from 9.1% in the
year ended December 31, 1995. These expenses increased 211.7% to $7.7 million in
1996 from $2.5 million in 1995. This increase was principally due to growth in
the number of worldwide sales and marketing personnel responsible for developing
business, particularly in the Americas.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased as a
percentage of total revenues to 28.6% in the year ended December 31, 1996 from
36.0% in the year ended December 31, 1995. This decrease in research and
development costs as a percentage of revenues was primarily a result of
leveraging the infrastructure that was built. These expenses increased 67.1% to
$16.2 million in 1996 from $9.7 million in 1995. This increase was principally
due to increases in the number of personnel associated with the continued
development of BSCS Version 4.0 and the initial design and development of
Version 5.0. In addition, the Company's decision in late 1995 to modify its
existing software kernel for use in the Americas necessitated the establishment
of two separate research and development efforts in 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expenses remained
constant at 14.6% of total revenues in 1996 and 1995. These expenses increased
111.0% to $8.3 million in 1996 from $3.9 million in 1995. This increase was
principally due to increases in the number of administrative personnel required
to staff the Americas operation as well as increases in office rent and other
expenses incurred as a result of the general growth of the Company's business.
INCOME TAXES. The provision for income taxes decreased to 37.9% of earnings
before income taxes in the year ended December 31, 1996 from 74.3% of earnings
before income taxes in the year ended December 31, 1995. The higher effective
tax rate in 1995 resulted in large part from the Company's inability to
recognize the benefit of net operating losses in the United States and greater
income from certain European countries with higher statutory tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $12.5 million in 1997 and $3.5
million in 1995 while net cash used by operating activities aggregated $4.8
million in 1996. The net cash used by operating activities in 1996 was primarily
the result of the increased use of working capital required to fund the new
business opportunities in the Americas and Asia. The increase in cash provided
by operations in 1997 was primarily the result of increased earnings combined
with minimal working capital requirements.
The Company invested $5.1 million and $4.2 million in furniture, fixtures
and equipment during 1997 and 1996, respectively. These investments are
primarily for computer equipment and improvements to new leased office space
required to accommodate the growth in employees.
<PAGE>
LHS GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
In May 1997, the Company sold 4,865,000 shares of its Common Stock in an
Initial Public Offering ("IPO") in which it received approximately $70.6
million, net of $7.2 million in costs of the offering. Of the $70.6 million, the
Company had $49.6 million invested in investment grade debt securities at
December 31, 1997, $3.7 million of which had remaining terms of slightly more
than 1 year.
In December 1995, the Company sold $20.0 million of preferred stock to
General Atlantic Partners and its affiliates. Of the $20.0 million of proceeds,
net of $434,000 in costs of the offering, $14.6 million was distributed to LHS
stockholders as part of the reorganization that created the LHS Group Inc.
holding company. Additionally, in June 1996, the Company repurchased shares of
common stock from one of its stockholders for $10.0 million, of which $4.0
million was paid to the stockholder in 1997, and simultaneously sold an equal
number of shares of common stock to other stockholders of the Company for $10.0
million.
The Company has a short-term overdraft facility with a bank which provides
for borrowings of up to $2.4 million and bears interest at 7.5% per annum. At
December 31, 1997 no borrowings were outstanding under this facility.
At December 31, 1997, the Company did not have any material commitments for
capital expenditures. The Company believes that the net proceeds from the sale
of its common stock in 1997 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.
YEAR 2000 RISKS AND UNCERTAINTIES
It is possible that the Company's currently installed software products,
computer systems or other business systems, or those of the Company's suppliers
or customers, will not always accept input of, store, manipulate and output
dates in the years 1999, 2000 or thereafter without error or interruption. The
Company has conducted reviews of its products and business systems, including
its computer systems, to attempt to identify ways in which they could be
affected by problems in correctly processing date information, and currently
believes that its products and systems will correctly process date information
in such years. There can be no assurance that the Company will identify all
date-handling problems in its products and systems or those of its customers and
suppliers in advance of their occurrence or that the Company will be able to
successfully remedy problems that are discovered. The expense of the Company's
efforts to identify and address such problems, or the expense or liability to
which the Company may become subject as a result of such problems, could have a
material effect on its results of operations and financial condition.
FORWARD-LOOKING STATEMENTS
Portions of this report may contain forward-looking statements that involve a
number of risks and uncertainties. Among the factors that could cause actual
results to differ materially are the following: the Company's ability to develop
and introduce new products and services that will keep pace with technological
advances and satisfy evolving customer requirements; the Company's ability to
hire and train qualified personnel and further develop its infrastructure;
changes in the telecommunications industry; and other risk factors listed from
time to time in the Company's SEC filings and other announcements.
<PAGE>
LHS GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
(In thousands of U.S. Dollars,
except share and per share data) 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
License $ 38,439 $23,701 $13,654
Service 66,972 33,163 13,313
- ---------------------------------------------------------------------------
Total 105,411 56,864 26,967
Cost of services 47,325 19,107 9,653
- ---------------------------------------------------------------------------
Gross margin 58,086 37,757 17,314
Operating expenses:
Sales and marketing 8,454 7,653 2,455
Research and development 19,682 16,236 9,714
General and administrative 13,510 8,287 3,928
- ---------------------------------------------------------------------------
41,646 32,176 16,097
- ---------------------------------------------------------------------------
Earnings before interest and taxes 16,440 5,581 1,217
Interest expense (income), net (2,238) 77 110
- ---------------------------------------------------------------------------
Earnings before income taxes 18,678 5,504 1,107
Income taxes 7,470 2,084 823
- ---------------------------------------------------------------------------
Net earnings $ 11,208 $ 3,420 $ 284
===========================================================================
Net earnings per share:
Basic $ 0.52 $ 0.22 $ 0.02
===========================================================================
Diluted $ 0.46 $ 0.17 $ 0.02
===========================================================================
Shares used in per share calculation (Note 2)
Basic 21,453 15,500 14,243
===========================================================================
Diluted 24,582 20,000 14,342
===========================================================================
</TABLE>
See accompanying notes.
<PAGE>
LHS GROUP INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year ended December 31
(In thousands of U.S. Dollars,
except share and per share data) 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,867 $ 4,289
Short-term marketable securities 45,907 -
Trade accounts receivable, net of allowance
for doubtful accounts of $1,236 and $200 25,135 22,415
Unbilled receivables 11,910 6,073
Prepaid expenses 2,330 2,505
- ------------------------------------------------------------------------------------------------
Total current assets 113,149 35,282
Furniture, fixtures and equipment:
Computer equipment 6,720 4,431
Furniture and fixtures 4,726 3,755
Other 3,828 3,240
- ------------------------------------------------------------------------------------------------
15,274 11,426
Allowance for depreciation and amortization (6,404) (4,304)
- ------------------------------------------------------------------------------------------------
8,870 7,122
Deferred taxes 1,083 1,187
Long-term marketable securities 3,653 -
Other 468 228
- ------------------------------------------------------------------------------------------------
Total assets $ 127,223 $ 43,819
================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ - $ 1,914
Accounts payable 6,747 2,572
Accrued expenses and other liabilities 14,192 8,747
Deferred revenues 4,553 8,931
Amount due to former shareholder - 4,000
Income taxes payable 5,396 3,730
Deferred income taxes 3,055 240
- ------------------------------------------------------------------------------------------------
Total current liabilities 33,943 30,134
Long-term obligations 731 1,360
Stockholders' equity:
Series A convertible preferred stock ($.01 par value), 225,000 shares
authorized, issued and outstanding (none outstanding in 1997) - 2
Common stock ($.01 par value) 40,000,000 shares authorized;
25,265,355 and 15,550,000 shares issued and outstanding 253 156
Additional paid-in-capital 79,697 6,374
Retained earnings 17,509 6,301
Accumulated translation adjustments (4,910) (508)
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 92,549 12,325
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $127,223 $43,819
================================================================================================
</TABLE>
See accompanying notes.
<PAGE>
LHS GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A
Convertible
(In thousands of Preferred Stock Common Stock Additional
U.S. Dollars, except Share --------------------------------------- Paid-in Retained Translation Treasury Total
share data) Capital Shares Amount Shares Amount Capital Earnings Adjustment Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ 983 - $ - - $ - - $ 2,597 $ 190 $ - $ 3,770
Issuance of share
capital 300 - - - - - - - - 300
Issuance of preferred
stock - 225,000 2 - - 19,564 - - - 19,566
Reclassification of
share capital
to common stock (155) - - 15,500,000 155 - - - - -
Distribution of share
capital (1,128) - - - - (13,454) - - - (14,582)
Translation adjustment - - - - - - - 595 - 595
Net earnings - - - - - - 284 - - 284
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 - 225,000 2 15,500,000 155 6,110 2,881 785 - 9,933
Repurchase of shares
of common stock - - - (1,861,560) - (9,981) - - (19) (10,000)
Issuance of common
stock - - - 1,861,560 - 9,981 - - 19 10,000
Exercise of stock
options - - - 50,000 1 264 - - - 265
Translation adjustment - - - - - - - (1,293) - (1,293)
Net earnings - - - - - - 3,420 - - 3,420
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 - 225,000 2 15,550,000 156 6,374 6,301 (508) - 12,325
Issuance of common
stock, net of
costs of issuance - - - 4,865,000 49 70,581 - - - 70,630
Conversion of
preferred stock
into common - (225,000) (2) 4,500,000 45 (43) - - - -
Exercise of stock
options - - - 350,355 3 1,854 - - - 1,857
Tax benefit relating
to stock options - - - - - 931 - - - 931
Translation adjustment - - - - - - - (4,402) - (4,402)
Net earnings - - - - - - 11,208 - - 11,208
- -----------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 $ - - $ - $25,265,355 $253 $ 79,697 $17,509 $(4,910) $ - $ 92,549
==================================================================================================================================
</TABLE>
See accompanying notes.
<PAGE>
LHS GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
(In thousands of U.S. Dollars) 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 11,208 $ 3,420 $ 284
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,072 1,474 1,226
Provision for deferred income taxes 3,754 (492) (932)
Changes in operating assets and liabilities:
Trade accounts receivable (5,881) (15,269) (2,418)
Unbilled receivables (6,315) (6,335) 773
Amounts due from stockholders 297 (154)
Prepaid expenses (245) (2,141) (125)
Accounts payable 4,405 37 1,118
Accrued expenses and other liabilities 5,860 6,196 392
Deferred revenues (4,068) 5,358 2,873
Income taxes payable 1,666 2,632 493
- -------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 12,456 (4,823) 3,530
INVESTING ACTIVITIES
Additions of furniture, fixtures and equipment (5,064) (4,221) (1,768)
Purchase of investments (49,560)
Other (240) 264 (360)
- -------------------------------------------------------------------------------------
Net cash used in investing activities (54,864) (3,957) (2,128)
FINANCING ACTIVITIES
Proceeds from issuance of share capital 300
Proceeds from issuance of preferred stock 19,566
Proceeds from issuance of common stock 72,487 10,265
Purchase of treasury stock (6,000)
Dividends and distribution of share capital (14,582)
Proceeds from bank borrowings 450 1,912
Repayment of bank borrowings (1,661) (1,833) (836)
Repayment to former shareholder (4,000)
Other (629) 64
- -------------------------------------------------------------------------------------
Net cash provided by financing activities 66,197 2,946 6,360
Effect of exchange rate differences on cash (211) (77) 64
- -------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 23,578 (5,911) 7,826
Cash and cash equivalents at beginning of period 4,289 10,200 2,374
- -------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 27,867 $ 4,289 $ 10,200
=====================================================================================
ADDITIONAL CASH FLOW INFORMATION
Cash paid for interest $ 148 $ 167 $ 204
=====================================================================================
Cash paid for income taxes $ 1,386 $ 260 $ 465
=====================================================================================
</TABLE>
See accompanying notes.
<PAGE>
LHS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All U.S. Dollar amounts in the notes to the
consolidated financial statements are expressed in thousands)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The consolidated financial statements include the
accounts of LHS Group Inc. and its wholly-owned subsidiaries ("LHS Group" or
the "Company"). Prior to December 1995, the companies comprising the LHS Group
operated under the common control of individual stockholders. The accompanying
financial statements have been presented on a consolidated basis as if the
reorganization described in Note 2 occurred January 1, 1995. Significant
intercompany accounts and transactions have been eliminated in preparing the
accompanying financial statements.
BUSINESS ACTIVITY AND BASIS OF REVENUE RECOGNITION The Company provides
scaleable client/server-based billing and customer care solutions to carriers in
the global telecommunications industry. Solutions based on the Company's
software products enable carriers to offer flexible, customer-tailored, cost-
effective billing and customer care services in the wireless and wireline
telecommunications markets. LHS configures its proprietary software tools to
give each carrier a flexible and cost-effective billing solution tailored to
specific network technology and marketing needs.
The Company derives revenues from license fees and fees for its services.
License revenues consist of license fees for the Company's client/server-based
software and service revenues consist of fees for implementation, customization
and production support services. License revenues for one-time licenses without
customization are recognized upon delivery of the software to the customer
unless the Company has significant related obligations remaining or the
collectibility of the receivable is doubtful. When significant obligations
remain after the software product has been delivered or the collectibility of
the receivable is considered doubtful, revenue is not recognized until such
obligations have been completed or are no longer significant and the
collectibility of the receivable is no longer doubtful. Both service and license
revenues on long-term projects for the implementation and customization of the
software are recognized over the term of the contract on the percentage of
completion method of accounting, based on hours worked on a project compared to
hours expected to be worked. Invoices on contracts where implementation and
customization services are included are sent to customers upon the achievement
of certain milestones included in the contract with the customer. Additional
license revenues are realized and recognized only when the Company is notified
that the number of customer subscribers supported by the BSCS software exceeds
the number of subscribers for which the customer is currently licensed. The
Company invoices the customer and recognizes the revenue at the time of
notification by the customer. If the maximum number of customer subscribers
covered by the license is never reached, no additional revenue is recognized,
realized or invoiced to the customer. The typical BSCS license is perpetual and
is non-refundable by the Company. Service revenues also includes, to a lesser
extent, maintenance fees which are recognized ratably over the term of the
maintenance contract and fees for training which are recognized as the training
is performed.
CASH EQUIVALENTS The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
MARKETABLE DEBT SECURITIES Management determines the appropriate classification
of debt securities at the time of purchase and reevaluates such designation as
of each balance sheet date. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost.
<PAGE>
LHS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The amortized cost of debt securities classified as held-to-maturity is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in interest income from investments. Interest and
dividends are included in interest income from investments. Realized gains and
losses, and declines in value judged to be other-than-temporary are included in
net securities gains (losses). The cost of securities sold is based on the
specific identification method.
FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment are stated
at cost. Depreciation and amortization is provided over the estimated useful
lives of the assets or the term of the lease on a straight-line basis.
Depreciation and amortization expense for the years ended December 31, 1997,
1996 and 1995 was $2,072, $1,474 and $1,226, respectively.
SOFTWARE DEVELOPMENT COSTS Software development costs incurred to develop new
versions of the software or to enhance the core software are expensed as
incurred.
TRANSLATION OF FOREIGN CURRENCIES All assets and liabilities are translated
into U.S. Dollars using the exchange rate in effect at the balance sheet date.
All revenue, costs and expenses are translated using an average exchange rate.
The gains and losses of foreign subsidiaries resulting from the change in
exchange rates from year to year have been reported separately as a component of
stockholders' equity. The effect on the statements of income of transaction
gains and losses is insignificant for all years presented.
INCOME TAXES The Company accounts for income taxes under the liability method.
Under the liability method, deferred income taxes are recorded to reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting and the amounts used for income tax
purposes.
CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the
Company to concentrated credit risks consists primarily of cash and trade
receivables. The Company maintains cash and cash equivalents with various
financial institutions. The Company policy is designed to limit exposure to any
one institution. A significant percentage of the Company's receivables are
concentrated in a relatively few number of customers. (Refer to Note 8.)
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of financial instruments
such as cash, accounts receivable and accounts payable approximate their fair
value based on the short-term maturities of these instruments. The carrying
value of bank debt approximates fair value based on quoted market prices for the
same or similar issues as well as the current rates offered to the Company. (See
Note 3 for fair value disclosures regarding marketable debt securities.)
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS Certain prior year balances were reclassified to conform to
the current year presentation.
<PAGE>
LHS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. CAPITALIZATION
INITIAL PUBLIC OFFERING In May 1997, the Company sold 4,865,000 shares of its
Common Stock in an Initial Public Offering ("IPO") in which it received
approximately $70,600 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.
CORPORATE REORGANIZATION Effective December 22, 1995, the stockholders of the
companies comprising the LHS Group exchanged their shareholdings for cash of
$14,580 and 15,500,000 shares of the common stock of LHS Group Inc. (a newly
formed company). LHS Group Inc. also issued 225,000 shares of Series A
Convertible Preferred Stock ("Preferred Stock") with a par value of $.01 per
share to a previously unrelated third party for $20,000. The proceeds of the
preferred stock offering, net of approximately $434 in issuance costs, were used
to finance the acquisition of the shareholdings.
On October 16, 1996, the Company effected a 20-for-1 common stock split.
The share and per share amounts in the financial statements have been
retroactively adjusted for the stock split.
PREFERRED STOCK The board of directors of the Company is authorized to issue up
to 225,000 shares of preferred stock, par value $.01 per share, in one or more
series and to fix the powers, voting rights, designations and preferences of
each series. During 1995, the board of directors authorized for issuance 225,000
shares of Preferred Stock ranking senior to common stock. The Preferred Stock
ranks senior to common stock and is entitled to dividends, if declared by the
board of directors, in an amount equal to the pro rata share that would have
been received had the Preferred Stock been converted to common stock. Upon
liquidation, holders of Preferred Stock, on an equal basis, are entitled to
receive the preference value of $88.89, plus accumulated and unpaid dividends,
if any, before any distribution or payment is made to the holders of common
stock. No dividends have been declared or paid on Preferred Stock.
The holders of Preferred Stock have the right to vote at special or annual
meetings of stockholders on all matters entitled to be voted on by holders of
common stock voting together as a single class with other shares entitled to
vote thereon. With respect to such vote, each share of Preferred Stock shall
entitle the holder to cast that number of votes per share as would be cast had
the Preferred Stock been converted to Common Stock at the Conversion Ratio.
At the time of the IPO, the holders of Preferred Stock converted each share
of Preferred Stock into 20 shares of common stock.
PER SHARE DATA 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
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to SFAS 128 requirements. Retroactive
effect has been given to share and per share amounts for the stock split as
noted above.
<PAGE>
LHS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In addition, in February 1998, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 98 ("SAB 98"), which revised the guidance
for earnings per share calculations in an IPO. As a result of SAB 98, the
company restated its 1997, 1996 and 1995 earnings per share calculation by
excluding the effect of cheap stock, which was included in the calculation of
weighted shares outstanding for the period prior to the public offering.
Diluted EPS for the year ended December 31, 1997 includes the effect of
options to purchase 1,432,202 shares of common stock and 32,813 shares of
restricted common stock. Diluted EPS also includes the weighted average effect
of the conversion of Preferred Stock into Common Stock prior to the IPO. The
effect was to increase diluted weighted average shares outstanding by 1,664,384
in 1997, 4,500,000 in 1996, and 98,630 in 1995. Options to purchase 912,000
shares of common stock at prices ranging from $40 to $60 per share were
outstanding during 1997 and options to purchase 2,904,500 shares were
outstanding during 1996 at prices ranging from $5.30 to $16.75 per share, 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.
3. MARKETABLE DEBT SECURITIES
The following is a summary of investments in marketable debt securities that the
Company has classified as held-to-maturity securities at December 31, 1997:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- ------------------------------------------------------------------------------
U.S Treasury securities
and obligations of U.S.
Government agencies $ 6,720 $ 7 $ - $ 6,727
U.S. Corporate securities 42,840 79 (28) 42,891
- ------------------------------------------------------------------------------
$49,560 $86 $(28) $49,618
==============================================================================
The amortized cost and estimated fair value of debt securities held-to-
maturity at December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the issuers
of the securities may have the right to prepay obligations without prepayment
penalties.
Amortized Estimated
Cost Fair Value
- ------------------------------------------------------------------
Due in one year or less $45,907 $45,965
Due after one year through five years 3,653 3,653
- ------------------------------------------------------------------
$49,560 $49,618
==================================================================
4. DEBT
At December 31, 1997, the Company had a short-term overdraft facility with a
bank under which it could borrow up to $2,420. At December 31, 1997 no
borrowings were outstanding under these facilities.
<PAGE>
LHS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Leases
LHS Group leases certain of its office buildings from a company which is
partially owned by one of the LHS executives and shareholders under an operating
lease agreement which expires in 2006. The lease agreement requires monthly
rental payments of $32 adjusted annually for inflation.
Rental expense under all operating leases totaled $3,903, $1,982 and $1,583
for the years ended December 31, 1997, 1996 and 1995, respectively.
Telecommunications equipment in the amount of $581 was acquired under capital
lease arrangements. Future minimum lease payments are as follows:
Capital Operating
Leases Leases Total
- ---------------------------------------------------------------------------
1998 $ 142 $ 4,232 $ 4,374
1999 142 4,016 4,158
2000 142 3,914 4,056
2001 125 3,212 3,337
2002 - 1,437 1,437
Thereafter - 1,430 1,430
- ---------------------------------------------------------------------------
Total future minimum lease payments 551 $18,241 $18,792
================
Less amounts representing interest (88)
------
Present value of net minimum lease payments $ 463
======
6. INCOME TAXES
The Company and each of its consolidated subsidiaries file separate tax returns.
For financial reporting, the Company and consolidated subsidiaries calculate
their respective tax liabilities on a separate return basis which are combined
in the accompanying consolidated financial statements.
The provision for income taxes consists of the following:
Year ended December 31
1997 1996 1995
- ---------------------------------------------------------------------------
Currently payable income taxes:
U.S. federal $ 931 $1,143 $ -
Foreign 3,620 1,433 1,755
Deferred income taxes:
U.S. federal (390) (230) (139)
Foreign 3,309 (262) (793)
- ---------------------------------------------------------------------------
$7,470 $2,084 $823
===========================================================================
<PAGE>
LHS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The tax benefits associated with employee stock options reduce taxes
currently payable as shown above by $931 in 1997. Such benefits are credited to
additional paid-in capital when realized.
The net deferred income tax asset (liability) consists of the following:
December 31
1997 1996
- -----------------------------------------------------------
Deferred tax assets:
Deferred revenue $ 524 $ 1,449
Research & development tax credit 381
Net operating loss carryforward 165 1,058
Accrued vacation and bonuses 1,303 43
Other 357 202
Valuation allowance - -
- -----------------------------------------------------------
2,730 2,752
Deferred tax liabilities:
Unbilled receivables (1,598) (1,083)
Warranty expenses (205) (661)
Depreciation expense (54) (61)
Tax on foreign differences (2,845) -
- ------------------------------------------------------------
(4,702) (1,805)
- -----------------------------------------------------------
$(1,972) $ 947
===========================================================
The reconciliation of income tax expense computed using the statutory tax
rates in the United States to the income tax expense recognized in the financial
statements is as follows:
Year ended December 31
1997 1996 1995
- ----------------------------------------------------------------------------
Tax at statutory rates $6,351 $1,871 $ 399
Differences resulting from higher
tax rates in foreign countries 1,119 213 285
Tax benefit of net operating loss
not recognized - - 139
- ----------------------------------------------------------------------------
$7,470 $2,084 $ 823
============================================================================
The Company has foreign net operating loss carryforwards for tax purposes
of approximately $400. Such net operating losses can be carried forward
indefinitely.
<PAGE>
LHS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. RELATED PARTY TRANSACTIONS
The Company leases office space and housing space for certain of its employees
from partnerships consisting in part of one of the Company's directors. During
the years ended December 31, 1997, 1996 and 1995, the Company made lease
payments totaling $387, $437 and $437, respectively, to the partnerships.
The Company periodically charters the use of an aircraft owned by a
director of the Company. During the year ended December 31, 1997, the Company
paid approximately $114 for use of the aircraft.
8. MAJOR CUSTOMERS
In 1997, one customer accounted for 12% of revenues; in 1996, two customers
accounted for 12% and 10% of revenues; and in 1995, three customers accounted
for 14%, 10% and 10% of revenues.
9. RETIREMENT PLANS
The Company maintains the LHS Communications Systems, Inc. 401(k) Plan.
Employees age 21 or older are eligible to participate in the quarter following
their date of hire and to elect to defer a percentage of his/her salary. The
Company has the discretion to make contributions to the 401(k) plans. During
1997, the Company made matching contributions to the Plan of $248.
10. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
The Company has a nonqualified Stock Incentive Plan (the "Plan") under
which stock options, restricted stock and other stock-based awards may be
granted to certain officers, directors, key employees and non-employee
directors. Awards may be granted under the Plan for up to 4,000,000 shares of
common stock. All options are exercisable over a five-year period with 25%
vesting on the first anniversary of the grant date and the remaining 75% vesting
ratable over 48 months. The terms of the options are 10 years from the date of
the grant at which time all unexercised options expire and are again available
for future grant.
<PAGE>
LHS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Pro forma information regarding net earnings and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to December 31, 1994 under the fair value method of that Statement. The fair
value for options granted in 1996 was estimated at the date of grant using a
minimum value option pricing model with the following assumptions: risk-free
interest rates of 6.3%; no anticipated dividends; and a weighted-average
expected life of the option of seven years. In 1997, the fair value for options
granted was estimated at the date of grant using the Black-Scholes option
pricing model with the following assumptions: volatility .904; average risk-free
interest rate of 6.2%; no anticipated dividends; and a weighted-average expected
life of the option of five years.
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The weighted average
grant date fair value of options granted during 1996 using the minimum value
option pricing model was $1.79. The weighted average grant date fair value of
options granted during 1997 using the Black-Scholes option pricing model was
$30.76.
For purposes of SFAS 123 pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period as follows:
1997 1996
- ---------------------------------------------
Pro forma net earnings $8,966 $3,078
=============================================
Basic earnings per share $ 0.42 $ 0.20
=============================================
Diluted earnings per share $ 0.36 $ 0.15
=============================================
There is no effect on the year ended December 31, 1995 as all options were
issued during 1996 and 1997.
Prior to 1996, no stock options were issued by the Company. A summary of
the Company's stock option activity, and related information for the years ended
December 31, 1996 and 1997 follows:
Number of Weighted Average
Shares Issued Price Per Share
- --------------------------------------------------------------------------------
Outstanding as of January 1, 1996 - -
Granted 2,954,500 $ 5.39
Exercised (50,000) 5.30
- --------------------------------------------------------------------------------
Outstanding as of December 31, 1996 2,904,500 5.39
Granted 1,086,500 42.38
Exercised (350,355) 5.30
Cancelled (318,313) 6.26
- --------------------------------------------------------------------------------
Outstanding as of December 31, 1997 3,322,332 17.41
================================================================================
Exercisable as of December 31, 1996 13,352 $ 5.30
================================================================================
Exercisable as of December 31, 1997 449,666 $ 5.43
================================================================================
<PAGE>
LHS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding stock options outstanding as of December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------
Number of Weighted Average Number of Weighted Average
Exercise Price Options Contractual Life (Years) Options Exercise Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 5.00-$10.00 2,233,832 8.72 444,666 $ 5.30
$15.00-$20.00 129,000 9.18 5,000 16.75
$25.00-$30.00 47,500 9.55 - -
$40.00-$45.00 304,000 9.91 - -
$45.01-$50.00 587,000 9.65 - -
$50.01-$60.38 21,000 9.55 - -
- ----------------------------------------------------------------------------------------------
3,322,332 9.03 449,666 $ 5.43
==============================================================================================
</TABLE>
11. GEOGRAPHIC INFORMATION
Information about the Company's operations by geographic area is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Americas $ 44,569 $ 18,115 $ 945
Europe 48,612 32,495 23,722
Asia Pacific 12,230 6,254 2,300
- ----------------------------------------------------------------------------------------------------
Total in financial statements $ 105,411 $ 56,864 $ 26,967
====================================================================================================
Earnings (loss) before interest
and taxes:
Americas $ 7,843 $ 914 $ (454)
Europe 4,161 957 420
Asia Pacific 4,436 3,710 1,251
- ----------------------------------------------------------------------------------------------------
Total in financial statements $ 16,440 $ 5,581 $ 1,217
====================================================================================================
Identifiable assets:
Americas $ 25,344 $ 14,656 $ 6,264
Europe 27,737 26,541 18,033
Asia Pacific 5,095 2,410
Corporate Headquarters 69,047 212 165
- ----------------------------------------------------------------------------------------------------
Total in financial statements $ 127,223 $ 43,819 $ 24,462
====================================================================================================
</TABLE>
The European operations of the Company incurred substantial development costs in
connection with the establishment of the Americas and Far East operations in
1995 and 1996.
<PAGE>
LHS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
12. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for years
beginning after December 15, 1997. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt the new
requirements retroactively in 1998. Management has not completed its review of
SFAS 131, but does not anticipate that the adoption of this statement will have
a significant effect on the Company's reported segments.
In October 1997, the AICPA issued Statement of Position No. 97-2, "Software
Revenue Recognition," which changes the requirements for revenue recognition
effective for transactions that the Company will enter into beginning January 1,
1998. The implementation of these new requirements is not expected to have a
significant effect on the financial statements of the Company.
13. UNAUDITED QUARTERLY INFORMATION
<TABLE>
<CAPTION>
Quarter Ended
- -------------------------------------------------------------------------------------------------------
March 31, 1997 June 30, 1997 Sept. 30, 1997 Dec. 31, 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $20,886 $23,312 $28,886 $32,328
Gross margin 11,342 13,294 15,907 17,544
Net earnings 1,152 2,041 3,734 4,281
Net earnings per share (diluted) $ .06 $ .09 $ .14 $ .16
- -------------------------------------------------------------------------------------------------------
March 31, 1996 June 30, 1996 Sept. 30, 1996 Dec. 31, 1996
- -------------------------------------------------------------------------------------------------------
Revenues $ 6,756 $10,953 $18,954 $20,201
Gross margin 4,779 7,181 12,262 13,535
Net earnings (loss) (799) (195) 2,403 2,011
Net earnings (loss)
per share (diluted) $ (.04) $ (.01) $ .12 $ .10
</TABLE>
<PAGE>
LHS GROUP INC.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
LHS Group Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of LHS Group Inc.
and Subsidiaries (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. 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 consolidated financial position of LHS Group Inc.
and Subsidiaries at December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Atlanta, Georgia
February 6, 1998
<PAGE>
COMMON STOCK The Company's stock began trading on the NASDAQ National Market
System on May 16, 1997, and on the Frankfurt Neuer Markt Exchange on May 21,
1997. The following table sets forth, for the fiscal quarters indicated, the
high and the low sale prices of the Company's common stock as reported by NASDAQ
since the Company's Initial Public Offering. There were X,XXX holders of record
of the Company's common stock on Month XX, 1998.
1997 High Low
- ------------------------------------------------
First Quarter NA NA
Second Quarter $44.50 $16.00
Third Quarter $61.50 $43.13
Fourth Quarter $65.75 $38.75
- ------------------------------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report on Form 10-K
of LHS Group Inc. of our report dated February 6, 1998, included in the 1997
Annual Report to Stockholders of LHS Group Inc.
Our audits also included the financial statement schedule of LHS Group Inc.
listed in Item 14 (a). This schedule is the responsibility of LHS Group Inc.'s
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-28985) pertaining to the LHS Group Inc. 1996 Stock Incentive
Plan of our report dated February 6, 1998 with respect to the consolidated
financial statements of LHS Group Inc. incorporated herein by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedule included in this Annual Report on Form 10-K for the year
ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 27,867
<SECURITIES> 45,907
<RECEIVABLES> 26,371
<ALLOWANCES> 1,236
<INVENTORY> 0
<CURRENT-ASSETS> 113,149
<PP&E> 15,274
<DEPRECIATION> 6,404
<TOTAL-ASSETS> 127,223
<CURRENT-LIABILITIES> 33,943
<BONDS> 359
0
0
<COMMON> 253
<OTHER-SE> 92,296
<TOTAL-LIABILITY-AND-EQUITY> 127,223
<SALES> 105,411
<TOTAL-REVENUES> 105,411
<CGS> 47,325
<TOTAL-COSTS> 88,971
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,238)
<INCOME-PRETAX> 18,678
<INCOME-TAX> 7,470
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,208
<EPS-PRIMARY> .52
<EPS-DILUTED> .46
</TABLE>
