<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
-----------------
(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---- ----
COMMISSION FILE NUMBER 000-22409
LHS GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2224883
(State 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
--- ---
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 $1,233,729,038 at
March 15, 1999, based on the closing sales price of $37.50 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 15,
1999 was 52,951,879.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically identified portions of the 1999 Annual Report to Stockholders
are incorporated by reference in Part II.
Specifically identified portions of the Proxy Statement for the 1999 Annual
Meeting of Stockholders to be held on June 7, 1999 are incorporated by reference
in Part III.
<PAGE>
LHS GROUP INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
-----------------
ITEM PAGE
NUMBER NUMBER
- --------------------------------------------------------------------------------
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 19
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 20
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 20
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 21
11. EXECUTIVE COMPENSATION 21
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 21
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 21
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K 22
SIGNATURES 27
<PAGE>
PART I
ITEM 1. BUSINESS.
Introduction
LHS Group Inc. ("LHS" or the "Company") 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. Approximately 134 BSCS installations
support a total of 24.9 million subscribers worldwide.
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,
analog cellular, digital telephony, and satellite communications 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 by auctioning
significant radio spectrum for digital telephony, PCS and other services to new
carriers. More recently, the 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. Although the Telecommunications Act of 1996 has not increased
competition to the extent anticipated when the Act was passed, as a result of
deregulation, 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.
-1-
<PAGE>
In conjunction with deregulation, advances in telecommunications technology
have 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 building new networks that utilize digital standards. Although
the GSM digital standard and its derivatives have gained widespread acceptance
and continue to expand, particularly among carriers in Europe and Asia, other
digital telephony 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 into
convergent offerings to 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 that 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 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:
-2-
<PAGE>
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 BSCS and its other software products
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.
. 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
-3-
<PAGE>
software's core billing and customer care functionality. BSCS currently
supports the GSM, CDMA, TDMA and AMPS wireless standards as well as
satellite, wireline, and ERMES 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
Czech, Chinese, English, French, German, Hebrew, Indian, Italian,
Japanese, Korean, Polish, Portuguese, Russian, and Spanish 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. To reach this goal, during 1998, the Company introduced BSCS
Version 5.2. BSCS 5.2 was first released in the Americas, where new
features were added to support activation and maintenance of fleets and
talkgroups to support Motorola's iDEN(R)technology, GSM closed user
groups, and other broadcast/dispatch technologies. Additional
enhancements include increased scaleability and performance improvements
in the rating and billing and promotion and discount modules. BSCS 5.2E
was also released for the European and Asian markets, where new features
were added to support additional wireline voice and data services,
advanced cross-product discount and promotion functionality, and
increased scaleability. As discussed below, in the first quarter of
1999, the Company released its first application utilizing its new
object oriented Targys technology, which is based on a multi-tiered
architecture.
. 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 to meet demands from the
market place. To ensure that its products keep pace with information
technology advances, the Company will continue to leverage leading
information technologies within our product offerings.
. 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 various local sales and project offices
within the three regions, and will continue to customize its products to
support additional languages and currencies.
-4-
<PAGE>
. 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, Logica, CGI Group, and debis Systemhaus, leading
vendors of telecommunications equipment, such as Ericsson, and
international telecommunications service providers, such as Telecom
Italia Mobile, Bell Atlantic Global Wireless, and France Telecom. Many
of these systems integrators, equipment vendors and service providers
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 new Targys technology is based on a multi-tiered,
component-based architecture employing Java as the implementation language.
Targys allows plug-and-play interoperability with other software that supports
CORBA 2, an industry standard introduced by the Object Management Group.
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.
Products
BSCS
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 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
-5-
<PAGE>
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 this module enables
general ledger posting activities. 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 as suspended, deactivated, or written-off. A sales administration
function maintains sales force data and enables sales tracking for commission
processing.
Customizable Interface Modules - 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
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.
-6-
<PAGE>
Infocell Converge
On June 11, 1998, the Company acquired LHS InfoCell, Inc. (formerly known as
InfoCellular, Inc.). LHS InfoCell is a wholly owned subsidiary of the Company,
with its principal offices located near Boston in Marlborough, Massachussetts.
LHS InfoCell develops, markets and sells customer acquisition and point-of-sale
solutions to telecommunications service providers in North and Latin America. In
the future, the Company intends to expand the market for LHS InfoCell's products
and services to Europe and Asia as well.
LHS InfoCell's primary software product is InfoCell Converge. InfoCell
Converge is a client/server based customer acquisition and point-of-sale
application that includes functionality for customer acquisition, inventory
management, order interfaces, cash management, reference management and
inventory management.
Targys - The Millenium Series
During the first quarter of 1999, the Company announced the release of its
new Targys object oriented technology. The Company's Targys technology is based
on a muti-tiered, component-based architecture employing Java as its
implementation language. Targys allows plug-and-play interoperability with other
software that supports CORBA 2, an industry standard introduced by the Object
Management Group. The Company expects the following six Targys applications to
be available during 1999 to replace existing on-line modules of BSCS in versions
5.2 and higher: Customer Inquiry; Order Management; Customer Care; Customer
Self-Care (Web Service Center); Corporate Account; and, Back Office. The
Customer Inquiry application is already in use at Swisscom AG Mobile, Bern,
Switzerland.
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, Electronic Data Systems
Corporation, Logica plc, CGI Group, and debis Systemhaus. 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, 1998, the Company employed 520 projects and services
personnel compared to 411 at December 31, 1997.
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
-7-
<PAGE>
by the customer and is calculated as a percentage of
the applicable standard BSCS object code license fee in effect at the beginning
of each annual maintenance period.
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. In 1998, the Company's technology group received worldwide ISO 9001
certification.
Development efforts in the past year resulted in new releases of BSCS that
added new features to support activation and maintenance of fleets and
talkgroups to support Motorola's iDEN(R) technology, GSM closed user groups,
increased scaleability, performance enhancements to the rating and billing and
promotion and discount modules, and support of additional wireline functionality
and data services in the European version of BSCS. Development efforts in the
past year also resulted in the release of the Company's new Targys technology in
early 1999, as described above.
Some of the Company's short-term focus areas are local number portability,
dual-mode handsets, call analysis and data services. The Company will continue
to utilize available technology to provide its clients and integrators with the
best solutions. In keeping with that philosophy the Company adheres to an open
interface strategy and continues to endorse object oriented programming
technology. The Company's development staff consisted of 442 employees as of
December 31, 1998, compared to 216 employees as of December 31, 1997 See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Performance-We must adopt to changes in
technology, products, industry standards and customer needs."
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 92 employees as of December
31, 1998 compared to 41 employees at the end of 1997, and intends to expand its
direct sales operations at various locations, including Frankfurt, Germany;
Stockholm, Sweden; Atlanta, Miami and Boston, United States; Zurich,
Switzerland; Kuala Lumpur, Malaysia; Hong Kong, China; and New Delhi, India. 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."
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- Our success is dependent on our relationships with consulting firms
and systems integration firms."
-8-
<PAGE>
Customers
BSCS has been licensed to approximately 134 carriers in more than 70
countries, and supports a total of approximately 24.8 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 no customers that accounted for more than 10% of its total
revenue in 1998.
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"), Kingston-SCL and SEMA Group, 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 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
- -- The telecommunications billing and customer care systems industry is very
competitive."
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
-9-
<PAGE>
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. 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 - We have only limited protection of our proprietary rights and
technology."
Employees
As of December 31, 1998, the Company employed a total of 1,141 employees.
None of the Company's employees are 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, Miami, Boston and San Francisco, United
States; Frankfurt, Germany; Kuala Lumpur, Malaysia; Stockholm, Sweden; Zurich,
Switzerland; New Delhi, India; Sao Paulo, Brazil; 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, 1998.
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.
Jon Limbird, age 46, has served as Executive Vice President of Corporate
Development since January 1, 1999, and recently was appointed to the newly
created position of Executive Vice President, Customer Engineering. Mr Limbird
has been with the Company since 1996. During his three years with the Company,
he
-10-
<PAGE>
has held the positions of Vice President of Operations, Vice President of
Research & Development, and Senior Vice President Product Management. Prior to
joining LHS, Mr. Limbird was employed at Data General Corporation from 1980
until 1996 where he served as General Manager and Director of the North America
Systems Integration business unit. Mr. Limbird oversees the Company's customer
engineering and custom software development activities.
Stefan Sieber, age 39, has served as Executive Vice President and Chief
Divisional Officer since February 1999. Mr. Sieber joined LHS in 1995 as
Managing Director of LHS Projects. He was then promoted to Vice President and
General Manager of LHS Asia Pacific in May 1996, Senior Vice President in
October 1997, and served in such capacity until January 1999. Prior to joining
LHS, Mr. Sieber was Managing Director, Wireless Business Europe for EDS from
1994 to 1995, Managing Director of Unicom Germany from 1991 to 1994, and held
several positions in business development, marketing, and research and
development for RWE Germany. Mr. Seiber oversees the Company's worldwide sales,
marketing and project management activities.
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 1999 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 1999 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 "Risk Factors Affecting Future Performance". Such information is incorporated
herein by reference.
RISK FACTORS AFFECTING FUTURE PERFORMANCE
We must adapt to changes in technology, products, industry standards and
customer needs.
The telecommunications industry is characterized by rapidly changing
technology and evolving industry standards. Also, customer needs frequently
change, and competitors constantly introduce new products and services. To be
successful, we must:
. use leading technologies effectively;
. continue developing our technical expertise;
. enhance our existing products and services;
. develop new products and services; and
. meet changing customer needs on a timely and cost-effective basis.
-11-
<PAGE>
If we fail to do any of these things, our customers may choose to purchase
products and services from our competitors.
We continually introduce our products and services into new markets. If our
products do not adequately meet the demands of these new markets, we could
experience decreased revenues. We could experience difficulties in the
development of products and services for new and existing markets that could
delay or prevent the successful development, introduction and marketing of these
products and services. Our failure to develop and introduce new products and
services in a timely manner, or the lack of success of a new release of a
product in the market, would likely result in a material adverse effect on our
business, operating results and financial condition.
We cannot assure you that we will effectively manage our growth.
Over the last three years, we have greatly expanded our operations, placing
considerable demand on our administrative, operational and financial personnel
and systems. Further expansion may place additional strains on our resources. To
address these expansion issues, we may have to make substantial expenditures and
devote further management time and resources to:
. improve or replace our management information, financial and other
reporting systems;
. standardize BSCS installation methods;
. further develop our infrastructure;
. develop and coordinate strategies, operations and product development
among our operations in the Americas, Europe and Asia;
. maintain customer satisfaction;
. manage changing business conditions; and
. recruit, train and retain qualified consulting, technical, sales,
financial, marketing and management personnel.
We cannot assure you that our existing resources, systems and space will be
able to adequately support our further expansion. Our failure to respond
appropriately to growth and change would likely result in a material adverse
effect on the quality of our services, our ability to retain key personnel and
our business.
We depend on large contracts from a limited number of customers.
We provide customized billing and customer handling systems to
telecommunications carriers in the wireline and wireless markets. Although no
single customer accounted for more than 10% of our revenues in 1998, we have
traditionally relied upon, and expect to continue to rely upon, large contracts
from a limited number of customers. This can cause our revenues and earnings to
fluctuate between quarters based on the timing of orders and realization of
revenues from these orders.
Some of the telecommunications industry's established carriers are forming
alliances, while others are consolidating. If a consolidation or alliance
involves one of our customers, that customer may switch to another billing
system. In addition, none of our major customers has any obligation to purchase
additional products or services from us. The loss of one or more of our major
customers because of industry consolidation or otherwise would likely result in
a material adverse effect on our business, operating results and financial
condition.
Our success depends on developing relationships with new customers in a very
competitive telecommunications market.
The wireline and wireless markets have grown significantly and become much
more competitive in recent years. This growth may not continue, and we may not
be able to successfully market and sell our
-12-
<PAGE>
products in these competitive markets. It is critical to our continued success
that we develop relationships with new customers. Our failure to develop
relationships with new customers, or the failure of our customers to compete
effectively in the telecommunications market, would likely result in a material
adverse effect on our business, operating results and financial condition.
Many of our potential customers are new entrants in the telecommunications
market and lack significant financial and other resources. We may be required to
offer them alternative pricing arrangements, including deferred payments, if we
want these new market entrants to be our customers. We may not be able to
develop customer relationships with these new entrants, but even if we do, there
is no guarantee that these customers will be successful. If they are not
successful, they may reduce or discontinue their purchases from us. If we have
permitted customers to pay us on a deferred basis, we may be unable to collect
payments from these customers. Any one of these factors could have a material
adverse effect on our business, operating results and financial condition.
We cannot assure you that expansion of our products and services into new
geographic markets and applications will be successful.
We plan to continue expanding our products and services into new geographic
markets and to carriers offering new applications of their telecommunications
services. Our failure to successfully establish ourselves in new markets would
likely result in a material adverse effect on our business.
Our success is dependent on our relationships with consulting firms and
systems integration firms.
Consulting firms and systems integration firms help us with marketing,
sales, lead generation, customer support and installation of our products. In
order to grow successfully, we must maintain our relationships with these firms
and generate new business opportunities through joint marketing and sales with
them.
We also serve as subcontractor to consulting firms and systems integration
firms where those firms provide information technology to end-user customers. In
these cases we depend heavily on these firms to install our products and to
train end-users to use our products. Incorrect product installation, failure to
properly train the end-user, or general failure of the firm to satisfy the
customer could have a negative effect on our relationships with the contracting
firm and the customer. Such problems could damage our reputation and the
reputation of our products and services.
Obstacles we may encounter to forging long-term relationships with
consulting and systems integration firms include:
. we have no exclusive agreements with any consulting and systems
integration firms;
. many consulting and systems integration firms have more established
relationships with our principal competitors; and
. many consulting and systems integration firms have the resources to
compete with us by developing their own products and services.
These firms may discontinue their relationships with us and/or develop
relationships with our competitors. Our inability to establish and maintain
effective, long-term relationships with these firms, and their failure to meet
the needs of our customers, would likely adversely affect our business.
Prior to 1996, we had contracts pursuant to which we gave certain systems
integration firms our kernel source code and the right to market and sell
versions of our products that these firms independently modified. A few U.S.
carriers had problems with our products as modified and installed by these
firms. This damaged our reputation and credibility and that of our products, and
we may have lost the confidence
-13-
<PAGE>
of the affected carriers. Although we have terminated all of these types of
contracts, we cannot assure you that there will not be further damage to our
reputation and credibility in the U.S. that could have a material adverse effect
on our business.
The telecommunications billing and customer care systems industry is very
competitive.
The telecommunications billing and customer care systems industry is very
competitive. We expect competition to increase in the future.
Some of the independent providers we compete with are:
. Alltel
. AMDOCS
. CBIS
. ITDS
. Kenan
. Kingston-SCL
. SEMA Group
We also compete with systems integrators and internal billing departments of
larger telecommunications carriers.
Many of our competitors have advantages over us, including:
. longer operating histories;
. larger customer bases;
. substantially greater financial, technical, sales, marketing and other
resources; and
. greater name recognition.
Our current and potential competitors have established, and may continue to
establish in the future, cooperative relationships among themselves or with
third parties to increase their ability to compete with us. In addition,
competitors may be able to adapt more quickly than us to new or emerging
technologies and changes in customer needs, or to devote more resources to
promoting and selling their products. New competitors or alliances among
competitors could also result in these competitors quickly gaining significant
market share.
We believe that our ability to compete successfully in our markets is
affected by these principal factors:
. development of competing software and services;
. price of competing software and services;
. responsiveness to customer needs; and
. hiring, retaining and motivating key personnel.
Our failure to adapt to market demands and to compete successfully with
existing and new competitors would have a material adverse effect on our
business.
As we expand, we will market our products and services to carriers in
markets that we do not currently serve. We may encounter new competitors upon
entry into these markets that may have greater financial, technical, personnel
and marketing resources than we do. We cannot assure you that we will be able to
successfully identify and address the demands for these new markets or that we
can continue to
-14-
<PAGE>
compete effectively in our current markets. Our failure to maintain our
competitiveness in current or new markets would have a material adverse effect
on our business, operating results and financial condition.
Our success depends upon our ability to attract and retain key personnel.
Our future success depends in large part on the continued service of our key
management, sales, product development and operational personnel, including
Hartmut Lademacher, Chairman of the Board and Chief Executive Officer. Since it
is our goal to continue our expansion, our success also depends on our ability
to attract and retain highly qualified technical, managerial, sales and
marketing personnel. Competition is intense for the recruitment of highly
qualified personnel in the software and telecommunications services industry. We
may not be able to successfully retain or integrate existing personnel or
identify and hire additional personnel. Our inability to hire and retain
qualified personnel would likely have a material adverse effect upon our current
business, new product development efforts and future business prospects. We do
not currently maintain key person insurance coverage for any of our employees.
The success of our international business operations is subject to many
uncertainties.
We conduct a substantial portion of our business outside of the Americas. In
each of 1997 and 1998, our sales outside the Americas represented approximately
60% of our total revenues. We expect a majority of our revenues to continue to
be provided from our European and Asian operations. Our international business
may be adversely affected by the following:
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. difficulties in customizing our products for use in foreign countries;
. longer accounts receivable payment cycles;
. difficulties in managing international operations;
. availability of trained personnel to install and implement our 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 our
intellectual property rights to as great an extent as the laws of the United
States. There can be no assurance that such factors will not have a material
adverse effect on our international revenues and earnings or our overall
financial performance.
If we cannot provide financing for potential customers, we may not get their
business.
Certain of our potential customers may require financing to fund purchases
of our products. In particular, our ability to increase sales to start-up
telecommunications carriers with limited financial resources in the future will
depend significantly upon our ability to arrange financing for these customers.
We may not be able to successfully implement a vendor financing program for
these customers or to assist them in obtaining alternative financing for our
products. In such event, we will have decreased revenues.
Failure to obtain year 2000 compliance may negatively affect our business.
The term "Year 2000 issue" is used to describe the various problems that may
result from the improper processing of dates and date-sensitive calculations by
computers and other machinery as the year 2000 is approached and reached. These
problems could result in a system failure or miscalculations
-15-
<PAGE>
causing disruptions of our operations, including an inability to process
transactions, send invoices, or engage in similar normal business activities.
Although we believe that our internal systems and software products are Year
2000 compliant, we are vulnerable to the risk that our customers, government
agencies, significant suppliers and other third parties will not be able to
remedy their own Year 2000 issues. We rely, both domestically and
internationally, upon government agencies, utility companies, telecommunication
service companies and other service providers outside of our control. Such
suppliers, governmental agencies, or other third parties or our customers may
suffer a Year 2000 business disruption. Such failures could have a material
adverse effect on our business, operating results and financial condition.
We have not developed a contingency plan to address the results of our
analysis of the most reasonably likely worst case Year 2000 scenarios.
Consequently, we are not able to determine at this time whether the consequences
of Year 2000 failures will have a material impact on our operations, but they
may.
Exchange rate fluctuations between the u.s. dollar and other currencies in
which we do business may result in currency translation losses.
A significant portion of our revenues are denominated in the German Deutsche
Mark. We also have revenues denominated in the Swiss Franc and the Malaysian
Ringgit. The value of the German Deutsche Mark against the Euro was fixed upon
the introduction of the Euro in January 1, 1999. Consequently, fluctuations in
exchange rates between the U.S. Dollar and the Euro may have a material adverse
effect our business, operating results and financial condition and could also
result in significant exchange losses. Foreign currency transaction gains and
losses are a result of transacting business in certain foreign locations in
currencies other than the functional currency of the location. We attempt to
balance our revenues and expenses in each currency to minimize net foreign
currency risk. To the extent that we are unable to balance revenues and expenses
in a currency, fluctuations in the value of the currency in which we conduct our
business relative to the functional currency have caused and will continue to
cause currency transaction gains and losses. We cannot accurately predict the
impact of future exchange rate fluctuations on our results of operations.
We have not sought to hedge the risks associated with fluctuations in
exchange rates but may undertake such transactions in the future. Any hedging
techniques which we implement in the future may not be successful, and exchange
rate losses could be exacerbated by hedging techniques that we use.
Our European operations expose us to heightened euro conversion risks.
Because of our significant operations in Europe, we are particularly exposed
to risks resulting from the conversion by certain European Union member states
of their respective currencies to the Euro as legal currency on January 1, 1999.
The conversion rates between such European Union member states' currencies and
the Euro have been fixed by the European Union's council; however, the mandatory
switch to the Euro will not occur until June 30, 2002. We will be modifying our
software during the period of conversion to the Euro and intend to complete such
work and have our products Euro compliant by such time. Risks to us related to
the conversion of the Euro include:
. effects on pricing due to increased cross-border price transparency;
. costs of modifying information systems, including both software and
hardware;
. costs of modifying our software products to accommodate Euro conversion;
. costs of relying upon third parties whose systems also require
modification;
. changes in the conduct of business; and
. changes in the currency exchange rate.
-16-
<PAGE>
The actual effects of the Euro conversion could have a material adverse
effect on our business, operating results and financial condition.
We have only limited protection of our proprietary rights and technology.
We rely 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 our
proprietary rights and technology. These laws and contractual provisions provide
only limited protection. We have no patents or patent applications pending, no
copyrights and only a limited number of registered trademarks. It may be
possible for a third party to copy or otherwise obtain and use our technology
without authorization or to develop similar technology independently. Also, the
laws of certain countries in which we sell our products do not offer as much
protection of our proprietary rights as the laws of the United States.
Unauthorized copying or misuse of our products or proprietary rights could have
a material adverse effect on our business, operating results and financial
condition.
We may not be successful in avoiding claims that we infringe others'
proprietary rights.
Many patents, copyrights and trademarks have been issued in the general
areas of information and telecommunications. We expect that software developers
will be increasingly subject to infringement claims as the number of products
and competitors providing products and services to the telecommunications
industry grows. Third parties may claim that our current or future products
infringe their proprietary rights. Infringement claims, with or without merit,
could
. result in costly litigation;
. require significant management resources;
. cause product shipment delays;
. require us to enter into unfavorable royalty or licensing agreements; or
. cause us to discontinue the use of the challenged trade name, service
mark or technology.
Consequently, infringement claims could have a material adverse effect on our
business, operating results and financial condition.
Our software may contain undetected errors.
The software that we have developed and licensed to our customers may
contain undetected errors. Although we test our software prior to installing it
in a customer's network, we may discover errors after the installation. The cost
to fix the errors or to develop the software further could be high. These errors
may subject us to product liability claims. We have not experienced any product
liability claims to date, but we may be subject to such claims in the future. We
have insurance that would cover certain of these claims; however, a successful
product liability claim brought against us could have a material adverse effect
on our business, operating results and financial condition.
Our stock ownership is highly concentrated.
Our executive officers, directors and their affiliates beneficially own
approximately 23.1 million shares (approximately 44%) of the outstanding common
stock. Also, our executive officers and directors and their affiliates hold
options to acquire an additional 1.3 million shares of common stock. If
exercised, these options, taken with the shares owned, would give the directors,
officers and their affiliates beneficial ownership of approximately 46% of our
common stock.
-17-
<PAGE>
Substantially all such persons and certain other significant stockholders
have granted Hartmut Lademacher the right to vote, through December 31, 1999,
all shares of common stock owned by them. As a result, Mr. Lademacher may be
able to exert significant influence over the election of directors and the
outcome of certain corporate actions requiring stockholder approval. This
concentration of ownership may have the effect of delaying or preventing a
change in control.
Certain measures that we have adopted may have anti-takeover effects.
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 stockholder
action. 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 could discourage or
make difficult the acquisition of a majority of our outstanding voting stock by
a third party.
Certain provisions of our 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 us. In addition, our 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 more of all
classes of voting stock. Also, pursuant to our Stock Incentive Plan, all stock
options granted to employees automatically vest and become exercisable upon
certain triggering events leading up to a change of control. These factors may
have the effect of delaying or preventing a change of control.
The market price of our common stock may be volatile.
There may be significant volatility in the market price of our common stock.
The stock market has from time to time experienced significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. Factors such as the following will vary from period to period:
. actual or anticipated operating results;
. growth rates;
. changes in estimates by analysts;
. industry conditions;
. competitors' announcements;
. regulatory actions; and
. general economic conditions.
As a result of these and other factors, our 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 of our customers could negatively affect us.
Currently, our business is not subject to direct government regulation;
however, our existing and potential customers are subject to extensive
regulation in many jurisdictions. Regulatory changes which affect our existing
and potential customers could have a material adverse effect on our business,
operating results and financial condition.
-18-
<PAGE>
Additional shares will become eligible for sale in the future.
The market price of our common stock could drop as a result of sales of
large numbers of shares in the market, or the perception that such sales could
occur. Several of our principal stockholders hold a significant portion of the
outstanding common stock.
We have approximately 52.9 million shares of common stock outstanding.
Approximately 38.9 million of these shares are freely transferable without
restriction or further registration under the Securities Act of 1933, except for
any shares purchased by our "affiliates," as defined in Rule 144 under the
Securities Act. Approximately 14 million of the shares of common stock
outstanding are "restricted securities" as defined in Rule 144. These shares may
be sold in the future without registration under the Securities Act to the
extent permitted by Rule 144 or an exemption under the Securities Act. In
addition, we have registered under the Securities Act 16 million shares of
common stock issuable under our Long-Term Incentive Plan.
Certain of our stockholders are entitled to demand and piggyback
registration rights with respect to the shares that they own. Once registered,
such shares generally will be eligible for immediate sale in the public market.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document, in the 1998 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 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. Our 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 above in "Factors Affecting Future Performance". All written or oral
forward-looking statements attributable to us are expressly qualified in their
entirety by these cautionary statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A significant portion of the Company's operations consist of software
license sales and software implementation, support and project consulting
services in foreign countries, primarily in Europe (including Eastern Europe),
Asia and Latin America. As a result, the Company's financial results could be
significantly affected by factors such as changes in foreign currency exchange
rates when the Company is paid in foreign currencies and weak economic
conditions in the foreign markets in which the Company licenses and implements
its software products. The Company's operating results are affected by changes
in exchange rates between the U.S. Dollar and the German Deutsche Mark, Swiss
Franc, and Malaysian Ringitt. When the U.S. Dollar strengthens against these
foreign currencies, the value of our non-functional currency revenues decreases.
When the U.S. Dollar weakens, the value of our functional currency revenues
increases. Overall, the Company is a net receiver of currencies other than the
U.S. Dollar and, as such, the Company benefits from a weaker U.S. Dollar and is
adversely affected by a stronger U.S. Dollar relative to major currencies
worldwide. However, the Company believes that its exposure to foreign currency
exchange rate risk at December 31, 1998 was not material.
The Company does not engage in trading market risk sensitive instruments.
The Company also does not purchase for investment, hedging or for purposes
"other than trading", instruments that are likely to expose it to market risk,
whether interest rate, foreign currency exchange, commodity price or equity
-19-
<PAGE>
price risk. The Company has issued no debt instruments, entered into no forward
or futures contracts, purchased no options and entered into no swaps.
The Company's interest income and expense are most sensitive to changes in
the general level of U.S. interest rates. In this regard, changes in the U.S.
interest rates affect the interest earned on the Company's cash equivalents and
short-term investments. To mitigate the impact of fluctuations in U.S. interest
rates, the Company generally maintains the majority of its investments in fixed
rate debt instruments. Because the Company has no loans or credit facilities
outstanding, it is not exposed to interest rate risk in connection with its
operating expenses.
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, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998,
1997, and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997, and 1996
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
-20-
<PAGE>
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 1999
Annual Meeting of Stockholders (the "1999 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 1999
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 1999 Proxy Statement. Such
information is incorporated herein by reference. The 1999 Proxy Statement will
be filed with the Securities and Exchange Commission within 120 days after
December 31, 1998.
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" and "--Compensation Committee Interlocks and Insider
Participation" in the 1999 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 1999 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 1999 Proxy Statement. Such information is incorporated
herein by reference.
-21-
<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 1999 Annual Report to Stockholders, are incorporated by reference in
Part II, Item 8:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998, and 1997
Consolidated Statements of Income for the years ended December 31, 1998,
1997, and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997, and 1996
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 24 hereof:
Schedule II -- Valuation and Qualifying Accounts
All other schedules to the consolidated 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 Scott A.
Wharton, Corporate Secretary, 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 4.1 to the Company's Registration Statement
on Form S-8 (File No. 333-57269)).
3.2 By-Laws, as amended - filed herewith.
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)).
-22-
<PAGE>
10.1 Registration Rights Agreement dated July 15, 1996 among the
Company, General Atlantic Partners 23, L.P., General Atlantic
partners 31, L.P., GAP Coinvestment Partners, L.P. and the other
stockholders named therein. (Incorporated by reference to Exhibit
10.4 to the Company's Registration Statement on Form S-1 (File
No. 333-22195)).
*10.2 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)).
*10.3 Employment Agreement dated August 28, 1996, between Jerry
W. Braxton and LHS Group Inc. (Incorporated by reference to
Exhibit 10.8 to the Company's 1998 Annual Report on Form 10-K).
*10.4 Revised Employment Agreement dated January 6, 1999 between Dr.
Wolf J. Gaede and LHS Group Inc. filed herewith.
*10.5 LHS Group Inc. 1998 Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 99.1 to the Company's Registration Statement
on Form S-8 (File No. 333-57269)).
*10.6 LHS Group Inc. Amended and Restated Stock Incentive Plan
(Incorporated by reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-8 (File No. 333-57269)).
13.1 Portions of the Company's 1998 Annual Report to Stockholders
expressly incorporated by reference herein from the following
sections of the Annual Report: Corporate Information -- Common
Stock; Selected Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of Operations; and
Consolidated Financial Statements of LHS Group Inc.
21.1 List of Subsidiaries - filed herewith.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
* Management contract or 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, 1998.
-23-
<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, 1998:
Allowance for Doubtful Accounts $1,236 $3,427 $ - $(1,347)(1) $ 3,316
Valuation Allowance for Deferred Taxes - - - - -
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)(2) -
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Elimination of valuation reserve due to the realization of the tax benefit
of the associated net operating loss
24
<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 30, 1999 by the undersigned, thereunto duly organized.
LHS GROUP INC.
BY: /s/ Harmut Lademacher
--------------------------------------
Hartmut Lademacher
Chairman of the Board of Directors and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Hartmut Lademacher, Jerry W. Braxton and Scott A.
Wharton, and each of them, with the power to act without the other, as his true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file any of
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or his or their substitutes, may lawfully do or cause to
be done by virtue hereof.
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 30, 1999.
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 Director
Jerry W. Braxton (Principal Financial and Accounting Officer)
25
<PAGE>
/s/ Dr. Wolf J. Gaede Executive Vice President, 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
26
<PAGE>
EXHIBIT 3.2
BY-LAWS
of
LHS GROUP INC.
(A Delaware Corporation)
________________________
ARTICLE I
DEFINITIONS
-----------
As used in these By-laws, unless the context otherwise requires, the term:
1.1 "Assistant Secretary" means an Assistant Secretary of the Corporation.
1.2 "Assistant Treasurer" means an Assistant Treasurer of the Corporation.
1.3 "Board" means the Board of Directors of the Corporation.
1.4 "By-laws" means the initial by-laws of the Corporation, as amended
from time to time.
1.5 "Certificate of Incorporation" means the initial certificate of
incorporation of the Corporation, as amended, supplemented or restated from time
to time.
1.6 "Chairman" means the Chairman of the Board of Directors of the
Corporation.
1.7 "Chief Executive Officer" means Chief Executive Officer of the
Corporation.
1.8 "Common Stock" means the Common Stock, par value $.0l per share, of
the Corporation.
1.9 "Corporation" means LHS Group Inc.
1.10 "Directors" means directors of the Corporation.
1.11 "Entire Board" means all directors of the Corporation in office,
whether or not present at a meeting of the Board, but disregarding vacancies.
1.12 "GAP Coinvestment" means GAP Coinvestment Partners, L.P., a New York
limited partnership.
<PAGE>
1.13 "GAP LP" means General Atlantic Partners 23, L.P., a Delaware limited
partnership.
1.14 "General Atlantic Directors" has the meaning set forth in Section
3.2(b) of these By-Laws.
1.15 "General Atlantic Stockholders" means GAP LP, GAP Coinvestment and
any Permitted Transferee of either of them to whom shares of Preferred Stock
and/or shares of Common Stock issuable upon conversion of shares of Preferred
Stock are transferred in accordance with the Stockholders Agreement.
1.16 "Major Stockholders" means Joachim Hertel, Hartmut Lademacher,
Manfred Hellwig, Rainer Zimmerman, Dieter Pfisterer, Eberhard Czempiel, Otto
Wipprecht, Jurgen Spengler, William Bobb and Wolf Gaede and any Permitted
Transferee thereof to whom shares of Common Stock are transferred in accordance
with the Stockholders Agreement.
1.17 "General Corporation Law" means the General Corporation Law of the
State of Delaware, as amended from time to time.
1.18 "Major Stockholder Directors" has the meaning set forth in Section
3.2(b) of these By-laws.
1.19 "Office of the Corporation" means the executive office of the
Corporation, anything in Section 131 of the General Corporation Law to the
contrary notwithstanding.
1.20 "Permitted Transferee" has the meaning set forth in Section 2.2 of
the Stockholders Agreement.
1.21 "Preferred Stock" means the Series A Convertible Preferred Stock, par
value $.01 per share, of the Corporation.
1.22 "President" means the President of the Corporation.
1.23 "Secretary" means the Secretary of the Corporation.
1.24 "Stockholders" means stockholders of the Corporation.
-2-
<PAGE>
1.25 "Stockholders Agreement" means the Stockholders Agreement, dated
December 22, 1995, among the Corporation, GAP LP, GAP Coinvestment and the
stockholders listed on Schedule 1 thereto.
1.26 "Subsidiary" means, as to the Corporation, a corporation,
partnership, limited liability company or other entity of which shares of stock
or other ownership interests having ordinary voting power (other than stock
having such power only by reason of the happening of a contingency) to elect a
majority of the board of directors (or persons performing similar functions) of
such corporation, partnership, limited liability company or other entity are at
the time owned, or the management of which is otherwise controlled, directly or
indirectly through one or more intermediaries, or both, by the Corporation.
1.27 "Treasurer" means the Treasurer of the Corporation.
1.28 "Vice President" means a Vice President of the Corporation.
ARTICLE 2
STOCKHOLDERS
------------
2.1 Place of Meetings. Every meeting of stockholders shall be held at the
-----------------
office of the Corporation or at such other place within or without the State of
Delaware as shall be specified or fixed in the notice of such meeting or in the
waiver of notice thereof.
2.2 Annual Meeting. A meeting of stockholders shall be held annually for the
--------------
election of Directors and the transaction of such other proper business at such
time, date and place as may be determined by the Board by resolution and
designated in the notice of meeting.
2.3 Other Special Meetings. A special meeting of stockholders, unless
----------------------
otherwise prescribed by statute, may be called at any time by the Board or by
the President or by the Secretary.
-3-
<PAGE>
2.4 Fixing Record Date. For the purpose of (a) determining the stockholders
------------------
entitled (i) to notice of or to vote at any meeting of stockholders or any
adjournment thereof, (ii) to express consent to corporate action in writing
without a meeting or (iii) to receive payment of any dividend or other
distribution or allotment of any rights, or to exercise any rights in respect of
any change, conversion or exchange of stock; or (b) any other lawful action, the
Board may fix a record date, which record date shall not precede the date upon
which the resolution fixing the record date was adopted by the Board and which
record date shall not be (x) in the case of clause (a) (i) above, more than
sixty (60) nor less than ten (10) days before the date of such meeting, (y) in
the case of clause (a) (ii) above, more than ten (10) days after the date upon
which the resolution fixing the record date was adopted by the Board and (z) in
the case of clause (a) (iii) or (b) above, more than ten (10) days prior to such
action. If no such record date is fixed:
2.4.1 the record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business
on the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the
day on which the meeting is held;
2.4.2 the record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no
prior action by the Board is required under the General Corporation Law, shall
be the first day on which a signed written consent setting forth the action
taken or proposed to be taken is delivered to the Corporation by delivery to
its registered office in the State of Delaware, its principal place of
business, or an officer or agent of the Corporation having custody of the book
in which proceedings of meetings of stockholders are recorded; and when prior
action by the Board is required under the General Corporation Law, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the
-4-
<PAGE>
close of business on the date on which the Board adopts the resolution taking
such prior action; and
2.4.3 the record date for determining stockholders for any purpose
other than those specified in Sections 2.4.1 and 2.4.2 shall be at the close
of business on the day on which the Board adopts the resolution relating
thereto.
When a determination of stockholders entitled to notice of or to vote at any
meeting of stockholders has been made as provided in this Section 2.4, such
determination shall apply to any adjournment thereof unless the Board fixes a
new record date for the adjourned meeting. Delivery made to the Corporation's
registered office in accordance with Section 2.4.2 shall be by hand or by
certified or registered mail, return receipt requested.
2.5 Notice of Meetings of Stockholders. Except as otherwise provided in
----------------------------------
Sections 2.4 and 2.6 hereof, whenever under the provisions of any statute, the
Certificate of Incorporation or these By-laws, stockholders are required or
permitted to take any action at a meeting, written notice shall be given to each
stockholder at his or her address as it appears on the records of the
Corporation, stating the place, date and hour of the meeting and, in the case of
a special meeting, the purpose or purposes for which the meeting is called.
Unless otherwise provided by any statute, the Certificate of Incorporation or
these By-laws, a copy of the notice of any meeting shall be given by registered
or certified first class mail, return receipt requested, telecopier, courier
service, overnight mail or personal delivery, not less than ten (10) nor more
than sixty (60) days before the date of the meeting, to each stockholder
entitled to notice of or to vote at such meeting. All such notices shall be
deemed to have been given when delivered by hand, if personally delivered; when
delivered by courier or overnight mail, if delivered by commercial courier
service or overnight mail; five days after deposit in the United States mail,
postage prepaid, if mailed; and when receipt is mechanically acknowledged, if
-5-
<PAGE>
telecopied. An affidavit of the Secretary or an Assistant Secretary or of the
transfer agent of the Corporation that the notice required by this Section 2.5
has been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
2.6 Waivers of Notice. Whenever the giving of any notice is required by
-----------------
statute, the Certificate of Incorporation or these By-laws, a waiver thereof, in
writing, signed by the stockholder or stockholders entitled to said notice,
whether before or after the event as to which such notice is required, shall be
deemed equivalent to notice. Attendance by a stockholder at a meeting shall
constitute a waiver of notice of such meeting except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business on the ground that the meeting has
not been lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice unless so required by statute, the
Certificate of Incorporation or these By-laws.
2.7 List of Stockholders. The Secretary shall prepare and make, or cause to
--------------------
be prepared and made, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, the stockholder's
agent, or attorney, at the stockholder's expense, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least five (5) days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. The
Corporation shall maintain the stockholder list in
-6-
<PAGE>
written form or in another form capable of conversion into written form within a
reasonable time. Upon the willful neglect or refusal of the Directors to produce
such a list at any meeting for the election of Directors, they shall be
ineligible for election to any office at such meeting. The stock ledger shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list of stockholders or the books of the Corporation, or to vote in
person or by proxy at any meeting of stockholders.
2.8 Quorum of Stockholders; Adjournment.
-----------------------------------
2.8.1 Except as otherwise provided by any statute, the Certificate of
Incorporation or these By-laws, the holders of a majority of all outstanding
shares of stock entitled to vote at any meeting of stockholders, present in
person or represented by proxy, shall constitute a quorum for the transaction of
any business at such meeting. When a quorum is once present to organize a
meeting of stockholders, it is not broken by the subsequent withdrawal of any
stockholders. Shares of its own stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in the
election of directors of such other corporation is held, directly or indirectly,
by the Corporation, shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
-------- -------
Corporation to vote stock, including but not limited to its own stock, held by
it in a fiduciary capacity.
2.8.2 The holders of a majority of the shares of stock present in
person or represented by proxy at any meeting of stockholders, including an
adjourned meeting, whether or not a quorum is present, may adjourn such meeting
to another time and place. When a meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting if the time and place thereof
are announced at the meeting at which the adjournment is taken, and at the
adjourned meeting any business may be transacted that might have been transacted
at the meeting as originally called. If, however, the adjournment is for more
than thirty days, or if after the adjournment a new record date is
-7-
<PAGE>
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 Voting; Proxies. Unless otherwise provided in the Certificate of
---------------
Incorporation, every stockholder of record shall be entitled at every meeting of
stockholders to one vote for each share of capital stock standing in his or her
name on the record of stockholders determined in accordance with Section 2.4
hereof. If the Certificate of Incorporation provides for more or less than one
vote for any share on any matter, each reference in the By-laws or the General
Corporation Law to a majority or other proportion of stock shall refer to such
majority or other proportion of the votes of such stock. The provisions of
Sections 212 and 217 of the General Corporation Law shall apply in determining
whether any shares of capital stock may be voted and the persons, if any,
entitled to vote such shares; but the Corporation shall be protected in assuming
that the persons in whose names shares of capital stock stand on the stock
ledger of the Corporation are entitled to vote such shares. Holders of
redeemable shares of stock are not entitled to vote after the notice of
redemption is mailed to such holders and a sum sufficient to redeem the stocks
has been deposited with a bank, trust company, or other financial institution
under an irrevocable obligation to pay the holders the redemption price on
surrender of the shares of stock. At any meeting of stockholders (at which a
quorum was present to organize the meeting), all matters, except as otherwise
provided by statute or by the Certificate of Incorporation or by these By-laws,
shall be decided by a majority of the votes cast at such meeting by the holders
of shares present in person or represented by proxy and entitled to vote
thereon, whether or not a quorum is present when the vote is taken. All
elections of Directors shall be by written ballot unless otherwise provided in
the Certificate of Incorporation. In voting on any other question on which a
vote by ballot is required by law or is demanded by any stockholder entitled to
vote, the voting shall be by ballot. Each ballot shall be signed by the
stockholder voting
-8-
<PAGE>
or the stockholder's proxy and shall state the number of shares voted. On all
other questions, the voting may be viva voce. Each stockholder entitled to vote
---- ----
at a meeting of stockholders or to express consent or dissent to corporate
action in writing without a meeting may authorize another person or persons to
act for such stockholder by proxy. The validity and enforceability of any proxy
shall be determined in accordance with Section 212 of the General Corporation
Law. A stockholder may revoke any proxy that is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or by delivering a proxy in accordance with applicable law bearing a later
date to the Secretary.
2.10 Voting Procedures and Inspectors of Election at Meetings of
-----------------------------------------------------------
Stockholders. The Board, in advance of any meeting of stockholders, may appoint
one or more inspectors to act at the meeting and make a written report thereof.
The Board may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at
a meeting, the person presiding at the meeting may appoint, and on the request
of any stockholder entitled to vote thereat shall appoint, one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspectors shall (a) ascertain the number of
shares outstanding and the voting power of each, (b) determine the shares
represented at the meeting and the validity of proxies and ballots, (c) count
all votes and ballots, (d) determine and retain for a reasonable period a record
of the disposition of any challenges made to any determination by the
inspectors, and (e) certify their determination of the number of shares
represented at the meeting and their count of all votes and ballots. The
inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of their duties. Unless otherwise provided by the
Board, the date and time of the opening and the closing
-9-
<PAGE>
of the polls for each matter upon which the stockholders will vote at a meeting
shall be determined by the person presiding at the meeting and shall be
announced at the meeting. No ballot, proxies or votes, or any revocation thereof
or change thereto, shall be accepted by the inspectors after the closing of the
polls unless the Court of Chancery of the State of Delaware upon application by
a stockholder shall determine otherwise.
2.11 Organization. At each meeting of stockholders, the Chairman, or in the
------------
absence of the Chairman the President, or in the absence of the President a Vice
President, and in case more than one Vice President shall be present, that Vice
President designated by the Board (or in the absence of any such designation,
the most senior vice President, based on age, present), shall act as chairman of
the meeting. The Secretary, or in his or her absence one of the Assistant
Secretaries, shall act as secretary of the meeting. In case none of the
officers above designated to act as chairman or secretary of the meeting,
respectively, shall be present, a chairman or a secretary of the meeting, as the
case may be, shall be chosen by a majority of the votes cast at such meeting by
the holders of shares of capital stock present in person or represented by proxy
and entitled to vote at the meeting.
2.12 Order of Business. The order of business at all meetings of
-----------------
stockholders shall be as determined by the chairman of the meeting, but the
order of business to be followed at any meeting at which a quorum is present may
be changed by a majority of the votes cast at such meeting by the holders of
shares of capital stock present in person or represented by proxy and entitled
to vote at the meeting.
2.13 Written Consent of Stockholders Without a Meeting. Unless otherwise
-------------------------------------------------
provided in the Certificate of Incorporation, any action required by the General
Corporation Law to be taken at any annual or special meeting of stockholders may
be taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding
-10-
<PAGE>
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered (by registered or
certified first class mail, return receipt requested, telecopier, courier
service, overnight mail or personal delivery) to the Corporation by delivery to
its registered office in the State of Delaware, its principal place of business,
or an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Every written consent
shall bear the date of signature of each stockholder who signs the consent and
no written consent shall be effective to take the corporate action referred to
therein unless, within sixty (60) days of the earliest dated consent delivered
in the manner required by this Section 2.13, written consents signed by a
sufficient number of holders to take action are delivered to the Corporation as
aforesaid. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE 3
Directors
---------
3.1 General Powers. Except as otherwise provided in the Certificate of
--------------
Incorporation, the business and affairs of the Corporation shall be managed by
or under the direction of the Board. The Board may adopt such rules and
regulations, not inconsistent with the Certificate of Incorporation or these By-
laws or applicable laws, as it may deem proper for the conduct of its meetings
and the management of the Corporation. In addition to the powers expressly
conferred by these By-laws, the Board may exercise all powers and perform all
acts that are not required, by these By-laws or the Certificate of Incorporation
or by statute, to be exercised and performed by the stockholders.
3.2 Number; Qualification; Term of Office.
-------------------------------------
-11-
<PAGE>
(a) The number of Directors shall be fixed initially by the
incorporator and may thereafter be changed from time to time by action of the
stockholders or by action of the Board; provided, however, that the Board shall
-------- -------
initially consist of not less than one (1) nor greater than five (5) members;
and provided further, that after the date upon which the Corporation commences
-------- -------
its initial offer for sale of Common Stock pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended, the Board shall be
increased as soon as possible after such date to not less than seven (7)
members. Directors need not be stockholders. Each Director shall hold office
until a successor is elected and qualified or until the Director's death,
resignation or removal.
(b) Notwithstanding anything to the contrary contained in these By-
laws, (i) the Major Stockholders shall be entitled to designate three (3)
individuals to serve as members of the Board (collectively, the "Major
Stockholder Directors") and (ii) the General Atlantic Stockholders shall be
entitled to designate two (2) individuals to serve as members of the Board
(collectively, the "General Atlantic Directors").
3.3 Election. Directors shall, except as otherwise required by statute or by
--------
the Certificate of Incorporation, be elected by a plurality of the votes cast at
a meeting of stockholders by the holders of shares of stock entitled to vote in
the election.
3.4 Resignation. Any Director may resign at any time by written notice to
-----------
the Corporation. Such resignation shall take effect at the time therein
specified, or if the time is not specified, it shall take effect immediately
upon its receipt, and, unless otherwise specified in such resignation, the
acceptance of such resignation shall not be necessary to make it effective.
3.5 Removal. Subject to the provisions of Section 141(k) of the General
-------
Corporation Law, (a) any or all of the Major Stockholder Directors may be
removed with or without cause by vote of the holders of a majority of the shares
of stock then entitled to vote at an election of Directors and (b) any or all of
the General Atlantic Directors may be removed with or without cause by vote of
the holders of a majority of the shares of stock then entitled to
-12-
<PAGE>
vote at an election of Directors, provided that, in the case of subsection (b),
--------
such majority must include all of the shares of stock then held by the General
Atlantic Stockholders.
3.6 Compensation. Each Director, in consideration of his or her service as
------------
such, shall be entitled to receive from the Corporation such amount per annum or
such fees for attendance at Directors' meetings, or both, as the Board may from
time to time determine, together with reimbursement for the reasonable out-of-
pocket expenses, if any, incurred by such Director in connection with the
performance of his or her duties. Each Director who shall serve as a member of
any committee of Directors in consideration of serving as such shall be entitled
to such additional amount per annum or such fees for attendance at committee
meetings, or both, as the Board may from time to time determine, together with
reimbursement for the reasonable out-of-pocket expenses, if any, incurred by
such Director in the performance of his or her duties. Nothing contained in
this Section 3.6 shall preclude any Director from serving the Corporation or its
Subsidiaries in any other capacity and receiving proper compensation therefor.
3.7 Newly Created Directorships and Vacancies. Unless otherwise provided in
-----------------------------------------
the Certificate of Incorporation, newly created Directorships resulting from an
increase in the number of Directors and vacancies occurring in the Board for any
other reason, including the removal of Directors without cause, may be filled by
(a) the affirmative votes of a majority of the Directors then in office although
less than a quorum or by the sole remaining Director or (b) a plurality of the
votes cast by the holders of shares of capital stock entitled to vote in the
election at a special meeting of stockholders called for that purpose; provided,
--------
however, that (a) if a vacancy occurs on the Board by reason of the death,
- -------
removal or resignation of a Major Stockholder Director, then the Major
-13-
<PAGE>
Stockholders shall be entitled to designate the individual to fill such vacancy
and (b) subject to Section 3.8 hereof, if a vacancy occurs on the Board by
reason of the death, resignation or removal of a General Atlantic Director, then
the General Atlantic Stockholders shall be entitled to designate the individual
to fill such vacancy. A Director elected to fill a vacancy shall be elected to
hold office until a successor is elected and qualified, or until such Director's
earlier death, resignation or removal.
3.8 Termination of Certain General Atlantic Rights. Notwithstanding anything
----------------------------------------------
to the contrary contained in these By-laws, (a) from and after the date that the
General Atlantic Stockholders own shares of Preferred Stock and/or Common Stock
and/or other securities of the Corporation convertible into or exchangeable for
voting capital stock of the Corporation that in the aggregate represent (after
giving effect to any adjustments) greater than 5% but less than or equal to 10%
of the total number of shares of Common Stock outstanding (on an as converted
basis), then (i) at the request of the Chairman, one General Atlantic Director
designated by the General Atlantic Stockholders in accordance with Section
3.2(b)(ii) hereof shall immediately resign from the Board and the rights of the
General Atlantic Stockholders under Section 3.7 hereof with respect to the
replacement of such General Atlantic Director shall terminate and (ii) the
General Atlantic Stockholders shall be entitled thereafter to designate one (1)
General Atlantic Director for election or removal pursuant to Section 3.2(b)(ii)
or Section 3.7 hereof, (b) from and after the date that the General Atlantic
Stockholders own shares of Preferred Stock and/or Common Stock and/or other
securities of the Corporation convertible into or exchangeable for voting
capital stock of the Corporation that in the aggregate represent (after giving
effect to any adjustments) 5% or less of the total number of shares of Common
Stock outstanding (on an as converted basis, then (i) at the request of the
Chairman, any General Atlantic Director designated by the General Atlantic
Stockholders in accordance with Section 3.2(b)(ii) hereof shall immediately
resign from the Board and
-14-
<PAGE>
the rights of the General Atlantic Stockholders under Section 3.7 with respect
to the replacement of such General Atlantic Director shall terminate and (ii)
the General Atlantic Stockholders shall not be entitled to designate any General
Atlantic Directors for election or removal pursuant to Section 3.2(b)(ii) or
Section 3.7 hereof and (c) from and after the date upon which the Corporation
commences its initial offer for sale of Common Stock pursuant to an effective
registration statement filed under the Securities Act of 1933, as amended, (i)
at the request of the Chairman, any General Atlantic Director designated by the
General Atlantic Stockholders in accordance with Section 3.2(b)(ii) hereof shall
immediately resign from the Board and the rights of the General Atlantic
Stockholders under Section 3.7 with respect to the replacement of such General
Atlantic Director shall terminate and (ii) the General Atlantic Stockholders
shall not be entitled to designate any General Atlantic Directors for election
or removal pursuant to Section 3.2(b)(ii) or Section 3.7 hereof.
3.9 Times and Places of Meetings. The Board may hold meetings, both regular
----------------------------
and special, either within or without the State of Delaware. The times and
places for holding meetings of the Board may be fixed from time to time by
resolution of the Board or (unless contrary to a resolution of the Board) in the
notice of the meeting.
3.10 Annual Meetings. On the day when and at the place where the annual
---------------
meeting of stockholders for the election of Directors is held, and as soon as
practicable thereafter, the Board may hold its annual meeting, without notice of
such meeting, for the purposes of organization, the election of officers and the
transaction of other business. The annual meeting of the Board may be held at
any other time and place specified in a notice given as provided in Section 3.12
hereof for special meetings of the Board or in a waiver of notice thereof.
-15-
<PAGE>
3.11 Regular Meetings. Regular meetings of the Board may be held without
----------------
notice at such times and at such places as shall from time to time be determined
by the Board.
3.12 Special Meetings. Special meetings of the Board may be called by the
----------------
Chairman, the President or the Secretary or by any two or more Directors then
serving on at least one day's notice to each Director given by one of the means
specified in Section 3.15 hereof other than by mail, or on at least three days'
notice if given by mail. Special meetings shall be called by the Chairman,
President or Secretary in like manner and on like notice on the written request
of any two or more of the Directors then serving.
3.13 Telephone Meetings. Directors or members of any committee designated by
------------------
the Board may participate in a meeting of the Board or of such committee by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this Section 3.13 shall constitute
presence in person at such meeting.
3.14 Adjourned Meetings. A majority of the Directors present at any meeting
------------------
of the Board, including an adjourned meeting, whether or not a quorum is
present, may adjourn such meeting to another time and place. At least one day's
notice of any adjourned meeting of the Board shall be given to each Director
whether or not present at the time of the adjournment, if such notice shall be
given by one of the means specified in Section 3.15 hereof other than by mail,
or at least three days' notice if by mail. Any business may be transacted at an
adjourned meeting that might have been transacted at the meeting as originally
called.
3.15 Notice Procedure. Subject to Sections 3.12 and 3.18 hereof, whenever,
----------------
under the provisions of any statute, the Certificate of Incorporation or these
By-laws, notice is required to be given to any Director, such notice shall be
deemed given effectively if given in person or by telephone, by mail addressed
to such Director at such
-16-
<PAGE>
Director's address as it appears on the records of the Corporation, with postage
thereon prepaid, or by telegram, telex, telecopy or similar means addressed as
aforesaid.
3.16 Waiver of Notice. Whenever the giving of any notice is required by
----------------
statute, the Certificate of Incorporation or these By-laws, a waiver thereof, in
writing, signed by the person or persons entitled to said notice, whether before
or after the event as to which such notice is required, shall be deemed
equivalent to notice. Attendance by a person at a meeting shall constitute a
waiver of notice of such meeting except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting has not been lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the Directors or a committee of Directors
need be specified in any written waiver of notice unless so required by statute,
the Certificate of Incorporation or these By-laws.
3.17 Organization. At each meeting of the Board, the Chairman, or in the
------------
absence of the Chairman the President, or in the absence of the President a
chairman chosen by a majority of the Directors present, shall preside. The
Secretary shall act as secretary at each meeting of the Board. In case the
Secretary shall be absent from any meeting of the Board, an Assistant Secretary
shall perform the duties of secretary at such meeting; and in the absence from
any such meeting of the Secretary and all Assistant Secretaries, the person
presiding at the meeting may appoint any person to act as secretary of the
meeting.
3.18 Quorum of Directors. The presence in person of a majority of the entire
-------------------
Board shall be necessary and sufficient to constitute a quorum for the
transaction of business at any meeting of the Board, but a majority of a smaller
number may adjourn any such meeting to a later date.
-17-
<PAGE>
3.19 Action by Majority Vote. Except as otherwise expressly required by
-----------------------
statute, the Certificate of Incorporation or these By-laws, the act of a
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board. Notwithstanding anything to the contrary
contained in these By-laws, the Board shall not take, approve or otherwise
ratify at a meeting or in writing any of the following actions except with the
consent of at least a majority of the entire Board, which majority shall
include, without limitation, at least one General Atlantic Director:
(a) any transaction of merger, consolidation, amalgamation,
recapitalization or other form of business combination with respect to the
Corporation or any of the Subsidiaries;
(b) any sale, conveyance, lease, transfer or other disposition of all
or substantially all of the consolidated assets of the Corporation or any of the
Subsidiaries (other than the sale of software products by the Company or any of
the Subsidiaries in the ordinary course of business);
(c) institution of any voluntary bankruptcy or other liquidation or
dissolution proceedings by the Corporation or any of the Subsidiaries;
(d) any issuance of or agreement to issue any shares of capital stock
of the Corporation or any of the Subsidiaries or rights of any kind convertible
into or exchangeable for, any shares of capital stock of the Corporation or any
of the Subsidiaries, or any option, warrant or other subscription or purchase
right with respect to shares of capital stock;
(e) any declaration or making of dividend payments or other payment
or distribution on account of shares of capital stock;
(f) any changes in accounting principles of the Corporation or any of
the Subsidiaries, including any change in the criteria for evaluating the
Corporation's or
-18-
<PAGE>
any of the Subsidiaries' financial conditions and results of operations, and any
changes in the Corporation's or any of the Subsidiaries' auditors; and
(g) any material amendment, modification or restatement of the
Certificate of Incorporation or By-laws or any material amendment or
modification of this Section 3.19.
3.20 Action Without Meeting. Unless otherwise restricted by the Certificate
----------------------
of Incorporation or these By-laws, including, without limitation, Section 3.19
hereof, any action required or permitted to be taken at any meeting of the Board
or of any committee thereof may be taken without a meeting if all Directors or
members of such committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
or committee.
ARTICLE 4
COMMITTEES OF THE BOARD
-----------------------
The Board may, by resolution passed by a vote of the entire Board, designate
one or more committees, each committee to consist of one or more of the
Directors of the Corporation. The Board may designate one or more Directors as
alternate members of any committee to replace absent or disqualified members at
any meeting of such committee. If a member of a committee shall be absent from
any meeting, or disqualified from voting thereat, the remaining member or
members present and not disqualified from voting, whether or not such member or
members constitute a quorum, may, by a unanimous vote, appoint another member of
the Board to act at the meeting in the place of any such absent or disqualified
member. Any such committee, solely to the extent specifically provided in a
resolution of the Board passed as aforesaid, shall have and may exercise all the
powers and authority of the Board in the management of the business and affairs
of the Corporation, and may authorize the seal of the Corporation to be
impressed on all papers that may require it, but no such committee shall have
the power or authority
-19-
<PAGE>
of the Board in reference to amending the Certificate of Incorporation, amending
these By-laws in accordance with Article 13 hereof, adopting an agreement of
merger or consolidation under Section 251 or 252 of the General Corporation Law,
selling, leasing or exchanging all or substantially all of the Corporation's
property and assets, dissolving or revoking the dissolution of the Corporation
or approving any of the actions set forth in Section 3.19(a)(g). Such committee
or committees shall have such name or names as may be determined from time to
time by resolution adopted by the Board. Unless otherwise specified in the
resolution of the Board designating a committee, at all meetings of such
committee a majority of the total number of members of the committee shall
constitute a quorum for the transaction of business, and the vote of a majority
of the members of the committee present at any meeting at which there is a
quorum shall be the act of the committee. Each committee shall keep regular
minutes of its meetings. Unless the Board otherwise provides, each committee
designated by the Board may make, alter and repeal rules for the conduct of its
business. In the absence of such rules each committee shall conduct its business
in the same manner as the Board conducts its business pursuant to Article 3 of
these By-laws.
ARTICLE 5
OFFICERS
--------
5.1 Positions. The officers of the Corporation shall be a Chairman, a
---------
President, a Secretary, a Treasurer and such other officers as the Board may
appoint, including one or more Vice Presidents and one or more Assistant
Secretaries and Assistant Treasurers, who shall exercise such powers and perform
such duties as shall be determined from time to time by the Board. The Board
may designate one or more Vice Presidents as Executive Vice Presidents and may
use descriptive words or phrases to designate the standing, seniority or areas
of special competence of the Vice Presidents
-20-
<PAGE>
elected or appointed by it. Any number of offices may be held by the same person
unless the Certificate of Incorporation or these By-laws otherwise provide.
5.2 Appointment. The officers of the Corporation shall be chosen by the
-----------
Board annually or at such other time or times as the Board shall determine.
5.3 Compensation. The compensation of all officers of the Corporation shall
------------
be fixed by the Board. No officer shall be prevented from receiving a salary or
other compensation by reason of the fact that the officer is also a Director.
5.4 Term of Office. Each officer of the Corporation shall hold office until
--------------
such officer's successor is chosen and qualifies or until such officer's earlier
death, resignation or removal. Any officer may resign at any time upon written
notice to the Corporation. Such resignation shall take effect at the date of
receipt of such notice or at such later time as is therein specified, and,
unless otherwise specified, the acceptance of such resignation shall not be
necessary to make it effective. The resignation of an officer shall be without
prejudice to the contract rights of the Corporation, if any. Any officer
elected or appointed by the Board may be removed at any time, with or without
cause, by vote of a majority of the entire Board. Any vacancy occurring in any
office of the Corporation shall be filled by the Board. The removal of an
officer without cause shall be without prejudice to the officer's contract
rights, if any. The election or appointment of an officer shall not of itself
create contract rights.
5.5 Fidelity Bonds. The Corporation may secure the fidelity of any or all of
--------------
its officers or agents by bond or otherwise.
5.6 Chairman. The Chairman shall preside at all meetings of the Board and
--------
shall exercise such powers and perform such other duties as shall be determined
from time to time by the Board.
5.7 Chief Executive Officer and President. The Chief Executive Officer of the
-------------------------------------
Corporation shall have general supervision over the business of the Corporation,
subject,
-21-
<PAGE>
however, to the control of the Board and any duly authorized committee of
Directors. The Chief Executive Officer shall preside at all meetings of the
stockholders and at all meetings of the Board at which the Chairman is not
present. The Chief Executive Officer may sign and execute in the name of the
Corporation deeds, mortgages, bonds, contracts and other instruments except in
cases in which the signing and execution thereof shall be expressly delegated by
the Board or by these By-laws to some other officer or agent of the Corporation
or shall be required by statute otherwise to be signed or executed and, in
general, the Chief Executive Officer shall perform all duties incident to the
office of Chief Executive Officer of a corporation and such other duties as may
from time to time be assigned to the Chief Executive Officer by the Board. The
Chief Executive Officer shall also serve as President of the Corporation, unless
the Chief Executive Officer appoints another individual to serve as President of
the Company. In the event the Chief Executive Officer and President are not the
same person, the Chief Executive Officer will assign specific tasks to such
President, and the President shall perform all duties incident to the office of
the president of a corporation and such other duties that may from time to time
be assigned to the President by the Chief Executive Officer or the Board.
5.8 Vice Presidents. At the request of the Chief Executive Officer, or, in
---------------
the Chief Executive Officer's absence, at the request of the Board, the Vice
Presidents shall (in such order as may be designated by the Board or, in the
absence of any such designation, in order of seniority based on duration of term
in office) perform all of the duties of the Chief Executive Officer or President
and, in so performing, shall have all the powers of, and be subject to all
restrictions upon, the Chief Executive Officer or President. Any Vice President
may sign and execute in the name of the Corporation deeds, mortgages, bonds,
contracts or other instruments, except in cases in which the signing and
execution thereof shall be expressly delegated by the Board or by these By-laws
to some other officer or agent of the Corporation, or shall be required by
statute
-22-
<PAGE>
otherwise to be signed or executed, and each Vice President shall perform such
other duties as from time to time may be assigned to such Vice President by the
Board or by the Chief Executive Officer.
5.9 Secretary. The Secretary shall attend all meetings of the Board and of
---------
the stockholders and shall record all the proceedings of the meetings of the
Board and of the stockholders in a book to be kept for that purpose, and shall
perform like duties for committees of the Board, when required. The Secretary
shall give, or cause to be given, notice of all special meetings of the Board
and of the stockholders and shall perform such other duties as may be prescribed
by the Board or by the President, under whose supervision the Secretary shall
be. The Secretary shall have custody of the corporate seal of the Corporation,
and the Secretary, or an Assistant Secretary, shall have authority to impress
the same on any instrument requiring it, and when so impressed the seal may be
attested by the signature of the Secretary or by the signature of such Assistant
Secretary. The Board may give general authority to any other officer to impress
the seal of the Corporation and to attest the same by such officer's signature.
The Secretary or an Assistant Secretary may also attest all instruments signed
by the President or any Vice President. The Secretary shall have charge of all
the books, records and papers of the Corporation relating to its organization
and management, shall see that the reports, statements and other documents
required by statute are properly kept and filed and, in general, shall perform
all duties incident to the office of Secretary of a corporation and such other
duties as may from time to time be assigned to the Secretary by the Board or by
the President.
5.10 Treasurer. The Treasurer shall have charge and custody of, and be
---------
responsible for, all funds, securities and notes of the Corporation; receive and
give receipts for moneys due and payable to the Corporation from any sources
whatsoever; deposit all such moneys and valuable effects in the name and to the
credit of the
-23-
<PAGE>
Corporation in such depositories as may be designated by the Board; against
proper vouchers, cause such funds to be disbursed by checks or drafts on the
authorized depositaries of the Corporation signed in such manner as shall be
determined by the Board and be responsible for the accuracy of the amounts of
all moneys so disbursed; regularly enter or cause to be entered in books or
other records maintained for the purpose full and adequate account of all moneys
received or paid for the account of the Corporation; have the right to require
from time to time reports or statements giving such information as the Treasurer
may desire with respect to any and all financial transactions of the Corporation
from the officers or agents transacting the same; render to the President or the
Board, whenever the President or the Board shall require the Treasurer so to do,
an account of the financial condition of the Corporation and of all financial
transactions of the Corporation; exhibit at all reasonable times the records and
books of account to any of the Directors upon application at the office of the
Corporation where such records and books are kept; disburse the funds of the
Corporation as ordered by the Board; and, in general, perform all duties
incident to the office of Treasurer of a corporation and such other duties as
may from time to time be assigned to the Treasurer by the Board or the
President.
5.11 Assistant Secretaries and Assistant Treasurers. Assistant Secretaries
----------------------------------------------
and Assistant Treasurers shall perform such duties as shall be assigned to them
by the Secretary or by the Treasurer, respectively, or by the Board or by the
President.
ARTICLE 6
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
---------------------------------------------
6.1 Checks, Drafts, Etc. All checks, drafts and other orders for the payment
-------------------
of money out of the funds of the Corporation and all evidences of indebtedness
of the Corporation shall be signed on behalf of the Corporation in such manner
as shall from time to time be determined by resolution of the Board.
-24-
<PAGE>
6.2 Deposits. The funds of the Corporation not otherwise employed shall be
--------
deposited from time to time to the order of the Corporation with such banks,
trust companies, investment banking firms, financial institutions or other
depositaries as the Board may select or as may be selected by an officer,
employee or agent of the Corporation to whom such power to select may from time
to time be delegated by the Board.
ARTICLE 7
STOCK
-----
7.1 Certificates Representing Shares. The shares of capital stock of the
--------------------------------
Corporation shall be represented by certificates in such form (consistent with
the provisions of Section 158 of the General Corporation Law) as shall be
approved by the Board. Such certificates shall be signed by the Chairman, the
President or a Vice President and by the Secretary or an Assistant Secretary or
the Treasurer or an Assistant Treasurer, and may be impressed with the seal of
the Corporation or a facsimile thereof. The signatures of the officers upon a
certificate may be facsimiles, if the certificate is countersigned by a transfer
agent or registrar other than the Corporation itself or its employee. In case
any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon any certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, such
certificate may, unless otherwise ordered by the Board, be issued by the
Corporation with the same effect as if such person were such officer, transfer
agent or registrar at the date of issue.
7.2 Transfer of Shares. Transfers of shares of capital stock of the
------------------
Corporation shall be made only on the books of the Corporation by the holder
thereof or by the holder's duly authorized attorney appointed by a power of
attorney duly executed and filed with the Secretary or a transfer agent of the
Corporation, and on surrender of the certificate or certificates representing
such shares of capital stock properly endorsed for
-25-
<PAGE>
transfer and upon payment of all necessary transfer taxes. Every certificate
exchanged, returned or surrendered to the Corporation shall be marked
"Cancelled," with the date of cancellation, by the Secretary or an Assistant
Secretary or the transfer agent of the Corporation. A person in whose name
shares of capital stock shall stand on the books of the Corporation shall be
deemed the owner thereof to receive dividends, to vote as such owner and for all
other purposes as respects the Corporation. No transfer of shares of capital
stock shall be valid as against the Corporation, its stockholders and creditors
for any purpose, except to render the transferee liable for the debts of the
Corporation to the extent provided by law, until such transfer shall have been
entered on the books of the Corporation by an entry showing from and to whom
transferred.
7.3 Transfer and Registry Agents. The Corporation may from time to time
----------------------------
maintain one or more transfer offices or agents and registry offices or agents
at such place or places as may be determined from time to time by the Board.
7.4 Lost, Destroyed, Stolen and Mutilated Certificates. The holder of any
--------------------------------------------------
shares of capital stock of the Corporation shall immediately notify the
Corporation of any loss, destruction, theft or mutilation of the certificate
representing such shares, and the Corporation may issue a new certificate to
replace the certificate alleged to have been lost, destroyed, stolen or
mutilated. The Board may, in its discretion, as a condition to the issue of any
such new certificate, require the owner of the lost, destroyed, stolen or
mutilated certificate, or his or her legal representatives, to make proof
satisfactory to the Board of such loss, destruction, theft or mutilation and to
advertise such fact in such manner as the Board may require, and to give the
Corporation and its transfer agents and registrars, or such of them as the Board
may require, a bond in such form, in such sums and with such surety or sureties
as the Board may direct, to indemnify the Corporation and its transfer agents
and registrars against any claim that may be made against any of them on account
of the continued existence of any such certificate so alleged to have been
-26-
<PAGE>
lost, destroyed, stolen or mutilated and against any expense in connection with
such claim.
7.5 Rules and Regulations. The Board may make such rules and regulations as
---------------------
it may deem expedient, not inconsistent with these By-laws or with the
Certificate of Incorporation, concerning the issue, transfer and registration of
certificates representing shares of its capital stock.
7.6 Restriction on Transfer of Stock. A written restriction on the transfer
--------------------------------
or registration of transfer of capital stock of the Corporation, if permitted by
Section 202 of the General Corporation Law and noted conspicuously on the
certificate representing such capital stock, may be enforced against the holder
of the restricted capital stock or any successor or transferee of the holder,
including an executor, administrator, trustee, guardian or other fiduciary
entrusted with like responsibility for the person or estate of the holder.
Unless noted conspicuously on the certificate representing such capital stock, a
restriction, even though permitted by Section 202 of the General Corporation
Law, shall be ineffective except against a person with actual knowledge of the
restriction. A restriction on the transfer or registration of transfer of
capital stock of the Corporation may be imposed either by the Certificate of
Incorporation or by an agreement among any number of stockholders or among such
stockholders and the Corporation. No restriction so imposed shall be binding
with respect to capital stock issued prior to the adoption of the restriction
unless the holders of such capital stock are parties to an agreement or voted in
favor of the restriction.
ARTICLE 8
INDEMNIFICATION
---------------
8.1 Indemnity Undertaking. To the extent not prohibited by law, the
---------------------
Corporation shall indemnify any person who is or was made, or threatened to be
made, a party to any threatened, pending or completed action, suit or proceeding
(a "Proceeding"),
-27-
<PAGE>
whether civil, criminal, administrative or investigative, including, without
limitation, an action by or in the right of the Corporation to procure a
judgment in its favor, by reason of the fact that such person, or a person of
whom such person is the legal representative, is or was a Director or officer of
the Corporation, or is or was serving in any capacity at the request of the
Corporation for any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise (an "Other Entity"), against
judgments, fines, penalties, excise taxes, amounts paid in settlement and costs,
charges and expenses (including attorneys' fees and disbursements). Persons who
are not Directors or officers of the Corporation may be similarly indemnified in
respect of service to the Corporation or to an Other Entity at the request of
the Corporation to the extent the Board at any time specifies that such persons
are entitled to the benefits of this Article 8.
8.2 Advancement of Expenses. The Corporation shall, from time to time,
-----------------------
reimburse or advance to any Director or officer or other person entitled to
indemnification hereunder the funds necessary for payment of expenses, including
attorneys' fees and disbursements, incurred in connection with any Proceeding,
in advance of the final disposition of such Proceeding; provided, however, that,
-------- -------
if required by the General Corporation Law, such expenses incurred by or on
behalf of any Director or officer or other person may be paid in advance of the
final disposition of a Proceeding only upon receipt by the Corporation of an
undertaking, by or on behalf of such Director or officer (or other person
indemnified hereunder), to repay any such amount so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right of appeal that such Director, officer or other person is not
entitled to be indemnified for such expenses.
8.3 Rights Not Exclusive. The rights to indemnification and reimbursement or
--------------------
advancement of expenses provided by, or granted pursuant to, this Article 8
shall not be deemed exclusive of any other rights to which a person seeking
indemnification or
-28-
<PAGE>
reimbursement or advancement of expenses may have or hereafter be entitled under
any statute, the Certificate of Incorporation, these By-laws, any agreement, any
vote of stockholders or disinterested Directors or otherwise, both as to action
in his or her official capacity and as to action in another capacity while
holding such office.
8.4 Continuation of Benefits. The rights to indemnification and
------------------------
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Article 8 shall continue as to a person who has ceased to be a Director or
officer (or other person indemnified hereunder) and shall inure to the benefit
of the executors, administrators, legatees and distributees of such person.
8.5 Insurance. The Corporation shall have power to purchase and maintain
---------
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of an Other Entity, against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
Corporation would have the power to indemnify such person against such liability
under the provisions of this Article 8, the Certificate of Incorporation or
under Section 145 of the General Corporation Law or any other provision of law.
8.6 Binding Effect. The provisions of this Article 8 shall be a contract
--------------
between the Corporation, on the one hand, and each Director and officer who
serves in such capacity at any time while this Article 8 is in effect and any
other person indemnified hereunder, on the other hand, pursuant to which the
Corporation and each such Director, officer or other person intend to be legally
bound. No repeal or modification of this Article 8 shall affect any rights or
obligations with respect to any state of facts then or theretofore existing or
thereafter arising or any proceeding
-29-
<PAGE>
theretofore or thereafter brought or threatened based in whole or in part upon
any such state of facts.
8.7 Procedural Rights. The rights to indemnification and reimbursement or
-----------------
advancement of expenses provided by, or granted pursuant to, this Article 8
shall be enforceable by any person entitled to such indemnification or
reimbursement or advancement of expenses in any court of competent jurisdiction.
The burden of proving that such indemnification or reimbursement or advancement
of expenses is not appropriate shall be on the Corporation. Neither the failure
of the Corporation (including its Board of Directors, its independent legal
counsel and its stockholders) to have made a determination prior to the
commencement of such action that such indemnification or reimbursement or
advancement of expenses is proper in the circumstances nor an actual
determination by the Corporation (including its Board of Directors, its
independent legal counsel and its stockholders) that such person is not entitled
to such indemnification or reimbursement or advancement of expenses shall
constitute a defense to the action or create a presumption that such person is
not so entitled. Such a person shall also be indemnified for any expenses
incurred in connection with successfully establishing his or her right to such
indemnification or reimbursement or advancement of expenses, in whole or in
part, in any such proceeding.
8.8 Service Deemed at Corporation's Request. Any Director or officer of the
---------------------------------------
Corporation serving in any capacity (a) another corporation of which a majority
of the shares entitled to vote in the election of its directors is held,
directly or indirectly, by the Corporation or (b) any employee benefit plan of
the Corporation or any corporation referred to in clause (a) shall be deemed to
be doing so at the request of the Corporation.
8.9 Election of Applicable Law. Any person entitled to be indemnified or to
--------------------------
reimbursement or advancement of expenses as a matter of right pursuant to this
Article 8 may elect to have the right to indemnification or reimbursement or
advancement of
-30-
<PAGE>
expenses interpreted on the basis of the applicable law in effect at the time of
the occurrence of the event or events giving rise to the applicable Proceeding,
to the extent permitted by law, or on the basis of the applicable law in effect
at the time such indemnification or reimbursement or advancement of expenses is
sought. Such election shall be made, by a notice in writing to the Corporation,
at the time indemnification or reimbursement or advancement of expenses is
sought; provided, however, that if no such notice is given, the right to
-------- -------
indemnification or reimbursement or advancement of expenses shall be determined
by the law in effect at the time indemnification or reimbursement or advancement
of expenses is sought.
ARTICLE 9
BOOKS AND RECORDS
-----------------
9.1 Books and Records. There shall be kept at the principal office of the
-----------------
Corporation correct and complete records and books of account recording the
financial transactions of the Corporation and minutes of the proceedings of the
stockholders, the Board and any committee of the Board. The Corporation shall
keep at its principal office, or at the office of the transfer agent or
registrar of the Corporation, a record containing the names and addresses of all
stockholders, the number and class of shares held by each and the dates when
they respectively became the owners of record thereof.
9.2 Form of Records. Any records maintained by the Corporation in the
---------------
regular course of its business, including its stock ledger, books of account,
and minute books, may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, microphotographs, or any other information storage device,
provided that the records so kept can be converted into clearly legible written
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
-31-
<PAGE>
9.3 Inspection of Books and Records. Except as otherwise provided by law,
-------------------------------
the Board shall determine from time to time whether, and, if allowed, when and
under what conditions and regulations, the accounts, books, minutes and other
records of the Corporation, or any of them, shall be open to the stockholders
for inspection.
ARTICLE 10
SEAL
----
The corporate seal shall have inscribed thereon the name of the Corporation,
the year of its organization and the words "Corporate Seal, Delaware." The seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
otherwise reproduced.
ARTICLE 11
FISCAL YEAR
-----------
The fiscal year of the Corporation shall be fixed, and may be changed, by
resolution of the Board.
ARTICLE 12
PROXIES AND CONSENTS
--------------------
Unless otherwise directed by the Board, the Chairman, the President, any Vice
President, the Secretary or the Treasurer, or any one of them, may execute and
deliver on behalf of the Corporation proxies respecting any and all shares or
other ownership interests of any Other Entity owned by the Corporation
appointing such person or persons as the officer executing the same shall deem
proper to represent and vote the shares or other ownership interests so owned at
any and all meetings of holders of shares or other ownership interests, whether
general or special, and/or to execute and deliver consents respecting such
shares or other ownership interests; or any of the aforesaid officers may attend
any meeting of the holders of shares or other ownership interests of such Other
Entity and thereat vote or exercise any or all other powers of the Corporation
as the holder of such shares or other ownership interests.
-32-
<PAGE>
ARTICLE 13
AMENDMENTS
----------
These By-laws may be altered, amended or repealed by a vote of the holders of
shares of stock entitled to vote in the election of Directors or by a vote of
the Board; provided, however, that (a) so long as the General Atlantic
-------- -------
Stockholders are entitled to designate in accordance with Section 3.2(b)(ii)
hereof a General Atlantic Director to serve as a member of the Board, Sections
3.2, 3.5, 3.7, 3.8, 3.19, 3.20 and Article 4 and Article 13 shall not be
materially altered, amended or repealed by (i) the Board without the consent of
one General Atlantic Director or (ii) the stockholders unless such alteration,
amendment or repeal shall have been approved by the General Atlantic
Stockholders and (b) so long as the General Atlantic Stockholders are entitled
to designate in accordance with Section 3.2(b)(ii) hereof a General Atlantic
Director to serve as a member of the Board, subject to subsection (a) above,
these By-laws shall not be materially altered, amended or repealed by the Board
without the consent of one General Atlantic Director. Any By-laws adopted,
altered or amended by the Board in accordance with the Certificate of
Incorporation and this Article 13 may be altered, amended or repealed by the
stockholders entitled to vote thereon only to the extent and in the manner
provided in the Certificate of Incorporation and this Article 13.
-33-
<PAGE>
EXHIBIT 10.4
TERMINATION OF INITIAL EMPLOYMENT
----------------------------------
AGREEMENT AND ESTABLISHMENT
---------------------------
OF REVISED EMPLOYMENT AGREEMENT
-------------------------------
WHEREAS, LHS Group Inc. ("Employer") and Dr. Wolf Gaede ("Employee")
entered into an Employment Agreement dated September 26, 1996 ("Initial
Employment Agreement"); and
WHEREAS, Employer and Employee wish to terminate the Initial Employment
Agreement and enter into this Revised Employment Agreement; and
IN CONSIDERATION OF the mutual payments, covenants and agreements described
below, and in consideration of other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Employer and Employee
agree as follows:
1. Termination of Employee's Initial Employment Agreement: Employer and
------------------------------------------------------
Employee agree to terminate Employee's Initial Employment Agreement and enter
into this Revised Employment Agreement pursuant to Paragraph 8 of the Initial
Employment Agreement, effective January 1, 1999. Employee further agrees to
resign his position as General Counsel effective March 31, 1999. After March
31, 1999, the General Counsel will report to the undersigned as CLO. Employee
understands that, as a consequence of the termination of his Initial Employment
Agreement, he has forfeited any and all rights to receive any future
compensation, consideration and benefits thereunder, except as specifically
provided for in this Revised Employment Agreement. Employer agrees that
Employee has no further obligations to Employer pursuant to the Initial
Employment Agreement, except as specifically provided in this Revised Employment
Agreement.
Revised Employment Agreement: Employer agrees to continue to employ
----------------------------
Employee as Chief Legal Officer ("CLO") and Executive Vice President from
January 1, 1999 through December 31, 1999 ("Employment Period"). During the
Employment Period, Employee will only perform such duties as are specifically
assigned to Employee by the Chief Executive Officer from time to time. Employee
accepts employment with Employer during the Employment Period under the terms
and conditions set forth in this Revised Employment Agreement. Employee agrees
to resign his employment with Employer, effective at the conclusion of the
Employment Period.
Employee will be given access to an office at Employer's Atlanta, Georgia
headquarters through June 30, 1999. After June 30, 1999, Employee shall no
longer have access to an assigned office at Employer's Atlanta, Georgia
headquarters or other locations. After June 30, 1999, Employee shall perform any
assigned duties at such location or locations as are determined by the Chief
Executive Officer.
Nothing in this Revised Employment Agreement is intended to affect
Employee's status as a Director of Employer. Employee shall continue to hold
office as a Director of Employer until a successor is elected and qualified, or
until his death, resignation, or
<PAGE>
removal in accordance with the Certificate of Incorporation and By-Laws of LHS
Group Inc.
3. Compensation and Benefits:
----------------------------
(a) Salary: From January 1999 through December 1999, Employee shall
------
be paid $29,166.67 per month, payable at the end of each month, subject to
applicable deductions and withholdings as directed by Employee or required by
law.
(b) Stock Options: During the Employment Period, Employee shall be
-------------
entitled to continue to vest in remaining unvested stock options in accordance
with the March 1, 1998, Vesting Schedule Amendment between Employer and
Employee, and shall be entitled to exercise such stock options in accordance
with his Employee Non-Qualified Stock Option Agreement and the LHS Group Inc.
Stock Incentive Plan 1996.
(c) Employee Benefits: During the Employment Period, Employee shall be
-----------------
entitled to continue to participate in Employer's employee welfare and benefit
plans to the same extent and under the same conditions as other employees of
Employer.
(d) Vacation Pay: Employee shall not be entitled to any vacation pay
------------
during the Employment Period.
4. Confidentiality: Except as required by law, the parties agree to
---------------
maintain as confidential, and to not disclose, discuss, or communicate or
publish in any manner, the terms or conditions of this Revised Employment
Agreement.
5. Employer's Confidential Information: Employee hereby acknowledges that
------------------------------------
his employment will require access to the trade secrets and other proprietary
and confidential information of Employer ("Confidential Information"), and that
such Confidential Information constitutes a valuable, special and unique asset
of Employer. Employee agrees that during the term of this Revised Employment
Agreement, and for a period of two (2) years thereafter, he shall not use,
divulge, publish or otherwise reveal, directly or indirectly, the Confidential
Information of Employer, without Employer's prior written approval.
6. Miscellaneous Provisions:
------------------------
(a) Waiver: The waiver by any party to this Revised Employment
------
Agreement of a breach of any of the provisions contained herein shall not
operate or be construed as a waiver of any subsequent breach.
(b) Severability: The invalidity or unenforceability of any
------------
particular provision of this Revised Employment Agreement shall not affect the
other provisions of this Revised Employment Agreement, and this Revised
Employment Agreement shall be
2
<PAGE>
construed in all respects as if such invalid or unenforceable provision was
omitted ab initio.
(c) Governing Law: This Revised Employment Agreement shall be governed
-------------
by the substantive laws of Germany.
(d) Notice: Any notice provided for in this Revised Employment
------
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: Attn: Chief Executive Officer, 6
Concourse Parkway, Suite 2700, Atlanta, Georgia 30328.
(e) Entire Agreement and Amendment: This Revised Employment
------------------------------
Agreement constitutes the entire understanding between the parties with respect
to the employment of Employee by Employer and shall supersede any prior
agreements and understandings between 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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the 6th
day of January 1999.
LHS GROUP INC. EMPLOYEE
By: /s/ Hartmut Lademacher By: /s/ Dr. Wolf J. Gaede
----------------------------- ---------------------
Hartmut Lademacher Dr. Wolf J. Gaede
Chairman of the Board and CEO
3
<PAGE>
EXHIBIT 13.1
PORTIONS OF LHS'S 1998 ANNUAL REPORT TO STOCKHOLDERS
----------------------------------------------------
<PAGE>
CORPORATE INFORMATION COMMON STOCK
COMMON STOCK LHS' common stock began trading on the Nasdaq National Market on
May 16, 1997 under the symbol "LHSG." The common stock began trading on the
Frankfurt Neuer Markt Exchange on May 21, 1997 under the symbol "LHI." The
following table sets forth, for the fiscal quarters indicated, the high and low
sales prices of LHS' common stock as reported by Nasdaq since the company's IPO.
As of March 15, 1999, LHS had 52,951,879 shares outstanding. There were 37
holders of record of the Company's common stock on March 15, 1999.
<TABLE>
<CAPTION>
1998 HIGH LOW
- ---- ---- ---
<S> <C> <C>
First Quarter $50.38 $25.50
Second Quarter 73.75 44.50
Third Quarter 76.50 43.94
Fourth Quarter 57.38 36.75
1997
- ----
First Quarter NA NA
Second Quarter $22.25 $ 9.38
Third Quarter 30.75 21.56
Fourth Quarter 37.88 19.38
</TABLE>
The Company has not declared or paid any cash dividends on its common stock
since 1994. The Company currently intends to retain its future earnings, if any,
to fund the development and growth of its business and therefore does not
anticipate paying any cash dividends in the foreseeable future.
On June 11, 1998, the Company issued 117,885 shares of common stock that are
unregistered. In consideration of the issuance of such shares, the Company
received all stock in InfoCellular, Inc. The unregistered LHS shares were issued
in accordance with Rule 506 of the Securities Act.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31
(In thousands, except per share data) 1998 1997 1996 1995 1994
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA
Total revenues $163,182 $105,411 $56,864 $26,967 $20,722
Earnings before interest and taxes $ 29,823 $ 16,440 $ 5,581 $ 1,217 $ 4,182
Net earnings per share:(2)
Basic $ 0.33 $ 0.26 $ 0.11 $ 0.01 $ 0.14
Diluted $ 0.32 $ 0.23 $ 0.09 $ 0.01 $ 0.14
CONSOLIDATED BALANCE SHEET DATA
Total assets $188,545 $127,223 $43,819 $24,462 $14,006
Long-term obligations $ 239 $ 731 $ 1,360 $ 399 $ 372
Total stockholders' equity $145,858 $ 92,549 $12,325 $ 9,933 $ 3,770
(1) See Note 2 of the Notes to Consolidated Financial Statements
(2) The 1998 amount includes a one-time charge relating to the write off of
in-process research and development of $8.2 million.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
In June 1998, the Company acquired the stock of Infocellular, Inc.
("InfoCellular") for $8,484, paid by the issuance of 117,885 shares of Common
Stock and $1,327 in cash. InfoCellular, which operates as a wholly-owned
subsidiary of the Company, is engaged in the business of providing point of sale
and customer acquisition software and related services to telecommunication
service providers.
This acquisition was accounted for under the purchase method of accounting and
in accordance with Accounting Principles Board Opinion No. 16, "Accounting for
Business Combinations." The Company allocated the cost of the acquisition to the
assets acquired and the liabilities assumed based on their estimated fair values
using valuation methods that were appropriate at the time. The acquired
intangible assets included in-process technology projects, among other assets,
which were related to research and development that had not reached
technological feasibility and for which there was no alternative future use. The
Company recorded a one time charge relating to the write-off of in-process
research and development of $8.2 million for the year ended December 31, 1998,
in accordance with applicable accounting pronouncements.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Total revenues increased 54.8% to $163.2 million in the year ended
December 31, 1998 from $105.4 million in the year ended December 31, 1997.
License revenues increased 73.7% to $66.8 million in 1998 from $38.4 million,
while service revenues increased 43.9% to $96.4 million from $67.0 million for
the same period. Total revenues increased primarily due to the addition of new
customers and increased implementation and support revenue from existing
customers.
License revenues increased as a percentage of total revenues to 40.9% in 1998
from 36.5% in 1997, while service revenues decreased as a percentage of total
revenues to 59.1% from 63.5% for the same period. This change in the mix of
revenues was primarily due to increased license sales from our distribution
partners during 1998.
No individual customer accounted for more than 10% of total revenues in 1998.
Cost of Services. Cost of services decreased as a percentage of total
revenues to 36.7% in the year ended December 31, 1998 from 44.9% in the year
ended December 31, 1997. Costs of services increased 26.7% to $60.0 million in
1998 from $47.3 million in 1997, primarily due to compensation expense
associated with increased staffing for new projects in Europe, the Americas and
Asia and the initial costs of training newly hired employees on the
implementation of the BSCS software. This increase was partially offset by an
increase in the productivity and efficiency of the implementation and services
functions. Cost of services consists primarily of salaries and benefits of those
employees associated with the installation of the BSCS software and other
product support activities. It also includes third-party costs associated with
systems integrators and 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 7.2% in the year ended December 31, 1998 from 8.0% in the
year ended December 31, 1997 although sales and marketing expenses actually
increased to $11.7 million in 1998 from $8.5 million in 1997. The increase in
sales and marketing expenses was principally due to the growth in the number of
worldwide sales and marketing personnel responsible for developing business,
particularly in Europe and Asia and increased participation in trade shows and
other worldwide 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.
Research and Development. Research and development expenses increased as a
percentage of total revenues to 22.4% in the year ended December 31, 1998 from
18.7% in the year ended December 31, 1997. This increase in research and
development costs as a percentage of revenues was principally due to increases
in the number of personnel associated with the development of new releases of
BSCS in both the Americas and Europe. 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
10.4% of total revenues in the year ended December 31, 1998 from 12.8% in the
year ended December 31, 1997. These expenses increased 25.7% to $17.0 million
in 1998 from $13.5 million in 1997. 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 was 49.5% and 40.0% of earnings
before income taxes for the years ended December 31, 1998 and 1997,
respectively. The effective tax rate was higher than the statutory tax rate of
34% primarily because of the non-deductible write-off of in-process research and
development in 1998 and higher tax rates in foreign countries in 1998 and 1997.
In-Process Research and Development. During 1998, the Company completed the
acquisition of InfoCellular and, in conjunction with this acquisition, the
Company allocated a portion of the purchase price to in-process research and
development. Since the date of acquisition, the Company has used the acquired
in-process technology to develop new product offerings and enhancements, which
will become part of the Company's suite of products when completed. The Company
currently expects to complete the development of the remaining research and
development projects referred to as Brookfield and Cohasset. Upon completion,
the Company intends to offer these products to its customers.
The nature of the efforts required to develop and integrate the acquired
in-process technology into commercially viable products or features and
functions within the LHS suite of existing products principally relate to the
completion of all planning, designing and testing activities that are necessary
to establish that the products can be produced to meet design requirements,
including functions, features and technical performance requirements. The
Company currently expects that products utilizing the acquired in-process
technology will be successfully developed, but there can be no assurance that
commercial viability of any of these products will be achieved. Furthermore,
future developments in the software industry, changes in technology, changes in
other products and offerings or other developments may cause the Company to
alter or abandon product plans.
Failure to complete the development of these projects in their entirety, or
in a timely manner, could have a material, adverse impact on the Company's
financial condition and results of operations. No assurance can be given that
actual revenues and operating profit attributable to acquired in-process
research and development will not deviate from the projections used to value
such technology. Ongoing operations and financial results for the acquired
technology, and the Company as a whole, are subject to a variety of factors
which may not have been known or estimable at the date of such transaction, and
the estimates discussed below should not be considered the Company's current
projections for operating results for the acquired assets or licensed technology
or the Company as a whole.
The fair value of the in-process technology was based on analyses of the
markets, projected cash flows and risks associated with achieving such projected
cash flows. In developing these cash flow projections, revenues were estimated
based on relevant factors, including aggregate revenue growth rates for the
business as a whole, individual service offering revenues, characteristics of
the potential market for the service offerings and the anticipated life of the
underlying technology. Operating expenses and
<PAGE>
resulting profit margins were estimated based on the characteristics and cash
flow generating potential of the acquired in-process research and development.
The Company assumed material net cash inflows would commence in 1999.
Appropriate adjustments were made to operating income to derive net cash flow,
and the estimated net cash flows of the in-process technologies were then
discounted to present value using a rate of return that the Company believes
reflects the specific risk/return characteristics of the research and
development projects. The selection of discount rates for application was based
on the consideration of: (i) the weighted average cost of capital, which
measures a company's cost of debt and equity financing weighted by the
percentage of debt and percentage of equity in its target capital structure;
(ii) the corresponding weighted average return on assets which measures the
after-tax return required on the assets employed in the business weighted by
each asset group's percentage of the total asset portfolio; and (iii) venture
capital required rates of return which typically relate to equity financing for
relatively high-risk business projects. The risk adjusted discount rate utilized
in the valuation analysis of the acquired in-process technology was 20%.
Revenues attributable to the acquired in-process technology were assumed to
increase between the first three years of the six-year projection period at
annual rates of 46% to 569% before decreasing over the remaining years at rates
of 3% to 40% as other products are released into the marketplace. Projected
annual revenue attributable to the product ranged from $1.6 million to $15.7
million over the term of the projection. This projection was based on the
aggregate revenue growth rate for the business as a whole, individual product
revenues, anticipated growth rates for the billing software market, anticipated
product development and product introduction cycles, and the estimated life of
the underlying technology. Projected revenues from the in-process research and
development were assumed to peak during 2000, and decline from 2001 to 2003 as
other new products are expected to enter the market.
Gross profit was assumed to increase in the first three years of the
projection period at annual rates of 46% to 569% before decreasing over the
remaining years at rates of 3% to 40%, resulting in annual gross profits that
ranged from $1.0 million to $10.2 million over the term of the projection.
Operating profit was assumed to increase in the first three years of the
projection from $0.01 million to $5.6 million before decreasing over the
remaining years at rates of 3% to 40%, resulting in annual operating profits
that ranged from $0.01 million to $5.6 million over the term of the projection.
The in-process research and development acquired from InfoCellular
consisted of the Brookfield and Cohasset technology. These new releases of the
Converge software product include new features that will provide for the ability
to recognize/accommodate multi-language and multi-currency operations and
functionality that extends beyond the basic level of POS functionality. The
Company estimated that this project was approximately 80% complete at the date
of acquisition. At the date of valuation, the expected cost to complete these
projects was approximately $1.1 million. As of December 31, 1998, approximately
$0.9 million had been incurred since the date of acquisition. The Company
estimates that projects will be completed by the end of the third quarter of
1999. The remaining efforts to complete the project are primarily the
construction and testing of the software. The research and development risks
associated with these projects primarily relate to delays due to unanticipated
architectural constraints and unplanned resource assignment changes to
accommodate customer requests.
There can be no assurance that the Company will not incur additional
charges in subsequent periods to reflect costs associated with these
transactions or that the Company will be successful in its efforts to integrate
and further develop these technologies.
<PAGE>
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.
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 implementation effort and production support required
by customers following implementation combined with increased software
maintenance and end-user training provided to customers.
During 1997, o-tel-o, 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% of total revenues
in 1996, respectively.
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.
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.
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. 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 a
new release of BSCS in both the Americas and Europe and the initial design and
development of another release of BSCS in the Americas in the latter half of
1997.
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.
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.
<PAGE>
Liquidity and Capital Resources
Net cash provided by operating activities totaled $22.0 million in 1998 and
$12.5 million in 1997 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 and 1998 was primarily the result of increased
earnings and decreased use of net working capital.
The Company invested $9.5 million, $5.1 million and $4.2 million in furniture,
fixtures and equipment during 1998, 1997 and 1996, respectively. These
investments were primarily for computer hardware and software and improvements
to new leased office space required to accommodate the growth in the number of
employees.
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. During 1997 and 1998, the Company also
received proceeds from the exercise of employee stock options.
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, 1998, no borrowings were outstanding under this facility.
At December 31, 1998, the Company did not have any material commitments for
capital expenditures. The Company believes that its 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 Issues
Introduction
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's legacy computer hardware and software have historically used only
two digits to identify the year in a date, often meaning that the computer will
fail to distinguish dates in the "2000's" from dates in the "1900's". These
problems may also arise from other sources, such as the use of special codes and
conventions in software that make use of the date field. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. The Company may be
affected by the Year 2000 issue in two ways: through its software products and
its operations.
Given the fact that Company is engaged in the business of software development
and because the Company was founded in the early 1990's, after the Year 2000
issue had begun to surface within the computer industry, the Company believes
that any Year 2000 issues that arise with its software products are not
material. However, the Company believes that the Year 2000 issue could
negatively impact the Company's operations as a result of Year 2000 disruptions
suffered by the Company's significant suppliers, domestic and international
government agencies, and other third parties.
State of Readiness
Based on its ongoing internal assessment of Year 2000 issues, the Company
believes that its internal IT systems, non-IT systems, and software currently
offered to its customers are Year 2000 compliant. Nevertheless, the Year 2000
issue could negatively affect the demand for the Company's products and the
spending habits of our customers. The Company cannot be certain that software
licensed by its customers in the past is fully Year 2000 compliant, but the
Company is not aware of any material Year 2000 problems with any software
licensed to and currently in use by its customers. The Company is addressing
such issues with existing customers on a case-by-case basis to ensure that there
are no significant Year 2000 issues with earlier versions of the Company's
software products. The Company also is upgrading its software products so that
current, Year 2000 compliant versions of embedded third party software will be
available to its customers. The Company is not aware of any Year 2000 issues
with its customers that cannot be remedied or that could have a material adverse
impact on the Company's financial condition or results, or overall trends in
results, of operations.
Many hardware, operating system and application products developed by third
parties interact or operate with the Company's software products. In addition,
customers or others may modify our software products after they have been
installed. The Company cannot assess the Year 2000 readiness of these hardware
and software products, operating systems or modified hardware and software
products and operating systems. If these products are not Year 2000 compliant,
it could adversely affect the performance and functionality of the Company's
applications that work with these products. While the Company would not be
responsible for these Year 2000 problems, the Company is unable to assess the
effect they may have on the Company's business, financial condition and results
of operations.
The Company principally relies on software products to support our internal
accounting, payables and invoicing operations. While these software products
have been or are in the process of being tested for Year 2000 compliance, the
Company also relies on third party systems developed by others for many of the
Company's critical internal operations. In addition, the Company's internal
operations may also be affected by Year 2000 issues affecting third parties with
whom we have relationships, including vendors such as utilities, distributors,
banks. A Year 2000 problem affecting our systems or those of third parties that
the Company relies upon may have a material adverse effect on the Company's
business, financial condition and results of operations.
<PAGE>
The Company has assembled a Year 2000 taskforce consisting of representatives
from our development, information systems, facilities and finance departments to
assess the Year 2000 readiness of the Company's internal operations and the
readiness of third parties on which the Company relies. The taskforce has
identified and assessed the Year 2000 readiness of most of the material
information technology and non-information technology systems used internally as
part of the Company's operations, but such work is ongoing. The taskforce has
tested or will test these systems where feasible and practicable. We expect
testing to be complete by mid-1999. The Company believes the taskforce to have
appropriate plans in place to achieve timely Year 2000 readiness for the
Company's internal systems. However, the Company's ongoing assessment program
may in the future reveal Year 2000 issues that are not currently identified or
fully understood.
Costs
The Company has not incurred any material costs solely in connection with
remedying Year 2000 issues arising in connection with either internal systems or
its own software products and does not anticipate incurring any material costs
in connection with remedying such Year 2000 issues in the future. Although the
Company has not incurred expenses for the purpose of addressing Year 2000 issues
in connection with its own software products, the Company has, as part of its
ongoing R & D efforts, incurred immaterial costs to ensure that its software
products are Year 2000 compliant.
Risks
Although the Company's internal systems and software products are Year 2000
compliant, the Company is vulnerable to the risk that government agencies,
significant suppliers and other third parties will not be able to remedy their
own year 2000 issues. The Company relies, both domestically and
internationally, upon government agencies, utility companies, telecommunication
service companies and other service providers outside of the Company's control.
There is no assurance that such suppliers, governmental agencies, or other third
parties will not suffer a year 2000 business disruption. Such failures could
have a material adverse affect on the Company's operations.
The Company currently believes that its most reasonably likely worst case Year
2000 scenario would involve the temporary interruption of electric power,
telephone or other utility supplies to our offices or our support operations
facilities due to a failure of a utility supplier to be Year 2000 compliant. In
addition, despite assurances and testing, it is also possible that our internal
systems or those of our customers and suppliers may not be Year 2000 ready.
In addition, "business interruption" litigation may arise out of the Year 2000
issue. The Company is not currently aware of any possible claim against it
arising from instances of business interruption. The Company currently believes
that its hardware and software products are Year 2000 compliant, but cannot
ensure such compliance for software products that were designed exactly to
customer specifications to interface with their other internal systems.
Consequently, the Company cannot assure that all of these customers are aware of
the Year 2000 issue or that they have adopted appropriate corrective solutions,
and will therefore not bring Year 2000-related claims against the Company which,
with or without merit, could be time consuming and expensive for the Company to
defend or resolve.
Based on currently available information, management does not believe that the
Year 2000 matters discussed above relating to internal systems and software
products sold to customers will have a material adverse impact on the Company's
financial condition or overall trends in results of operations; however, it is
uncertain to what extent the Company may be affected by such matters. In
addition, there can be no assurance that the failure to ensure Year 2000
capability by a supplier, government agency or another third party would not
have a material adverse impact on the Company.
Contingency Plans
-2-
<PAGE>
Through the first half of 1999, the Company intends to develop a contingency
plan based on the results of its analysis of the most reasonably likely worst
case Year 2000 scenarios. Because the Company believes that its internal systems
are Year 2000 compliant, the Company's contingency plan will primarily focus on
addressing the possible issues that might arise as a result of Year 2000
business disruptions suffered by third parties. However, due to the general
uncertainty inherent in the Year 2000 problem, in the Company's case resulting
primarily from the uncertainty of the Year 2000 readiness of third parties, the
Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the company's operations.
Forward-Looking Statements
The foregoing discussion contains forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. The
words "may", "would", "could", "will", "expect", "estimate", "anticipate",
"believe", "intends", "plans" and similar expressions and variations thereof are
intended to identify forward-looking statements. Management cautions that these
statements represent projections and estimates of future performance and involve
certain risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors including, without limitation, rapid and significant
technological developments that could delay the introduction of improvements in
existing products or of new products; any dependencies on any proprietary
technologies (which may be independently developed by competitors); dependence
on a small number of large customers; potential fluctuation in financial results
as a result of an inability to make sales to large customers; competition from
existing companies as well as new market entrants; and dependence on key
personnel.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
Report of Independent Auditors
The Board of Directors
LHS Group Inc.
We have audited the accompanying consolidated balance sheets of LHS Group Inc.
and Subsidiaries (the "Company") as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
February 12, 1999
Atlanta, Georgia
F-1
<PAGE>
LHS Group Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
----------------------------------
<S> <C> <C>
(In thousands of U.S. Dollars,
except share data)
Assets
Current assets:
Cash and cash equivalents.......................................... $ 42,084 $ 27,867
Short-term marketable debt securities.............................. 62,218 45,907
Trade accounts receivable, net of allowance for
doubtful accounts of $3,316 and $1,236........................... 60,860 37,045
Prepaid expenses and other current assets.......................... 3,976 2,330
----------------------------------
Total current assets................................................ 169,138 113,149
Furniture, fixtures and equipment:
Computer equipment................................................. 10,039 6,720
Purchased computer software........................................ 7,267 1,904
Furniture and fixtures............................................. 6,861 4,726
Other.............................................................. 2,601 1,924
----------------------------------
26,768 15,274
Allowance for depreciation and amortization......................... (11,179) (6,404)
----------------------------------
15,589 8,870
Deferred income taxes............................................... 914 1,083
Long-term marketable debt securities................................ - 3,653
Intangible assets net of accumulated amortization of $396........... 2,066 -
Other............................................................... 838 468
----------------------------------
Total assets........................................................ $188,545 $127,223
==================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable................................................... $ 7,523 $ 6,747
Accrued expenses and other liabilities............................. 15,796 14,192
Deferred revenues.................................................. 6,095 4,553
Income taxes payable............................................... 8,907 5,396
Deferred income taxes.............................................. 4,127 3,055
----------------------------------
Total current liabilities........................................... 42,448 33,943
Other long-term obligations......................................... 239 731
Stockholders' equity:
Common stock ($.01 par value) 200,000,000 shares authorized;
52,625,677 and 50,530,710 shares issued and outstanding........... 526 505
Additional paid-in-capital......................................... 110,583 79,445
Retained earnings.................................................. 34,858 17,509
Accumulated other comprehensive income............................. (109) (4,910)
----------------------------------
Total stockholders' equity.......................................... 145,858 92,549
----------------------------------
Total liabilities and stockholders' equity.......................... $188,545 $127,223
==================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
LHS Group Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
(In thousands of U.S. Dollars, except per share data)
Revenues:
License.................................................... $ 66,780 $ 38,439 $23,701
Service.................................................... 96,402 66,972 33,163
-----------------------------------------------------------
Total....................................................... 163,182 105,411 56,864
Cost of services............................................ 59,953 47,325 19,107
-----------------------------------------------------------
Gross margin................................................ 103,229 58,086 37,757
Operating expenses:
Sales and marketing........................................ 11,700 8,454 7,653
Research and development................................... 36,530 19,682 16,236
General and administrative................................. 16,976 13,510 8,287
Cost of purchased in-process research and development
related to computer software technology................... 8,200 - -
-----------------------------------------------------------
73,406 41,646 32,176
-----------------------------------------------------------
Earnings before interest and taxes.......................... 29,823 16,440 5,581
Interest (income) expense, net.............................. (4,557) (2,238) 77
-----------------------------------------------------------
Earnings before income taxes................................ 34,380 18,678 5,504
Income taxes................................................ 17,031 7,470 2,084
-----------------------------------------------------------
Net earnings................................................ $ 17,349 $ 11,208 $ 3,420
===========================================================
Net earnings per share:
Basic...................................................... $ 0.33 $ 0.26 $ 0.11
Diluted.................................................... $ 0.32 $ 0.23 $ 0.09
===========================================================
Shares used in per share calculation (Note 2)
Basic...................................................... 51,799 42,906 31,000
===========================================================
Diluted.................................................... 54,495 49,164 40,000
===========================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
LHS Group Inc.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Series A
Convertible Accumulated
Preferred Stock Common Stock Additional Other
---------------------------------- Paid-in Retained Treasury Comprehensive Total
Shares Amount Shares Amount Capital Earnings Stock Income Equity
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands of U.S. Dollars, except share data)
Balance December 31, 1995................ 225,000 $ 2 31,000,000 $310 $ 5,955 $ 2,881 $ - $ 785 $ 9,933
Comprehensive income:
Net earnings........................... - - - - - 3,420 - - 3,420
Translation adjustment................. - - - - - - - (1,293) (1,293)
------------
2,127
Repurchase of shares of common stock.... - - (3,723,120) - (9,963) - (37) - (10,000)
Issuance of common stock................ - - 3,723,120 - 9,963 - 37 - 10,000
Exercise of stock options............... - - 100,000 1 264 - - - 265
----------------------------------------------------------------------------------------
Balance December 31, 1996................ 225,000 2 31,100,000 311 6,219 6,301 - (508) 12,325
Comprehensive income:
Net earnings........................... - - - - - 11,208 - - 11,208
Translation adjustment................. - - - - - - - (4,402) (4,402)
------------
6,806
Issuance of common stock, net of costs
of issuance............................ - - 9,730,000 97 70,533 - - - 70,630
Conversion of preferred stock into
common................................. (225,000) (2) 9,000,000 90 (88) - - - -
Exercise of stock options............... - - 700,710 7 1,850 - - - 1,857
Tax benefit relating to stock options... - - - - 931 - - - 931
----------------------------------------------------------------------------------------
Balance December 31, 1997................ - - 50,530,710 505 79,445 17,509 - (4,910) 92,549
Comprehensive income:
Net earnings........................... - - - - - 17,349 - - 17,349
Translation adjustment................. - - - - - - - 4,801 4,801
------------
22,150
Issuance of common stock in connection
with business acquisition.............. - - 117,885 1 7,022 - - - 7,023
Exercise of stock options............... - - 1,977,082 20 13,955 - - - 13,975
Tax benefit relating to stock options... - - - - 10,161 - - - 10,161
----------------------------------------------------------------------------------------
Balance December 31, 1998................ - $ - 52,625,677 $526 $110,583 $34,858 $ - $ (109) $145,858
========================================================================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
LHS Group Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
(In thousands of U.S. Dollars)
Operating activities
Net earnings................................................ $ 17,349 $ 11,208 $ 3,420
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 4,265 2,072 1,474
Provision for deferred income taxes....................... 1,229 3,754 (492)
Write-off of in-process research and development related 8,200 - -
to computer software technology..........................
Changes in operating assets and liabilities:
Trade accounts receivable................................ (20,647) (12,196) (21,604)
Amounts due from stockholders............................ - - 297
Prepaid expenses and other current assets................ (135) (245) (2,141)
Accounts payable......................................... 189 4,405 37
Accrued expenses and other liabilities................... (1,317) 5,860 6,196
Deferred revenues........................................ 1,323 (4,068) 5,358
Income taxes payable..................................... 11,548 1,666 2,632
-----------------------------------------------------------
Net cash provided by (used in) operating activities......... 22,004 12,456 (4,823)
Investing activities
Additions of furniture, fixtures and equipment.............. (9,452) (5,064) (4,221)
Purchase of investments..................................... (13,879) (49,560) -
Acquisition of business, net of cash acquired............... (2,955) - -
Other....................................................... (444) (240) 264
-----------------------------------------------------------
Net cash used in investing activities....................... (26,730) (54,864) (3,957)
Financing activities
Proceeds from issuance of common stock...................... 13,975 72,487 10,265
Purchase of treasury stock.................................. - - (6,000)
Proceeds from bank borrowings............................... - - 450
Repayment of bank borrowings................................ - (1,661) (1,833)
Repayment to former shareholder............................. (4,000) -
Other....................................................... (612) (629) 64
-----------------------------------------------------------
Net cash provided by financing activities................... 13,363 66,197 2,946
Effect of exchange rate differences on cash................. 5,580 (211) (77)
-----------------------------------------------------------
Increase (decrease) in cash and cash equivalents............ 14,217 23,578 (5,911)
Cash and cash equivalents at beginning of period............ 27,867 4,289 10,200
-----------------------------------------------------------
Cash and cash equivalents at end of period.................. $ 42,084 $ 27,867 $ 4,289
===========================================================
Additional cash flow information
Cash paid for interest...................................... $ 112 $ 148 $ 167
===========================================================
Cash paid for income taxes.................................. $ 698 $ 1,386 $ 260
===========================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements
December 31, 1998
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"). 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 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 and production
support services. The typical BSCS license is perpetual and non-refundable by
the Company.
The Company's customers often require significant customization of the software
products and, therefore, the license and service fees are recognized as long
term contracts in conformity with Accounting Research Bulletin ("ARB") No. 45
"Long Term Construction Type Contracts", Statement of Position ("SOP") 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" and SOP 97-2 "Software Revenue Recognition" For long term contracts,
revenue is recognized using the percentage of completion method of accounting
based on hours worked on the project compared to the total hours expected to be
worked through completion. Revenue related to ongoing production support
services following the completion of the initial production launch of the
software is recognized as the work is performed. Revenue from maintenance
services are recognized ratably over the term of the maintenance contract.
Deferred revenue represents cash collections from customers in advance of the
performance of the work.
License revenues for one-time licenses without significant 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 doubtful,
revenue is not recognized until such obligations have been completed and the
collectibility of the software is no longer doubtful.
Additional license revenues are recognized and realized only when the Company is
notified that the number of customer subscribers supported by the software
exceeds the number of subscribers for which the customer is currently licensed.
Losses on long-term contracts are recognized in the period that the anticipated
loss is identified.
F-6
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Business Activity and Basis of Revenue Recognition (continued)
In accordance with the provisions of ARB No. 45, SOP 81 and SOP 97-2 trade
accounts receivable includes amounts earned by the Company but not yet billed to
the customer as stipulated based on milestones defined in certain contracts. At
December 31, 1998 and 1997, trade accounts receivable includes $10,823 and
$8,062 of unbilled receivables.
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.
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, 1998,
1997, and 1996 was $4,265, $2,072, and $1,474 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.
F-7
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
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. Due to the
size and terms of certain customer contracts and the industry in which the
Company competes, trade accounts receivable include amounts due from certain
customers that are considered significant in relation to total trade accounts
receivable.
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.
2. Capitalization
Initial Public Offering
In May, 1997, the Company sold 9,730,000 shares of its Common Stock in an
Initial Public Offering ("IPO") in which it received approximately $70,630 in
net proceeds. At the completion of the offering, 225,000 shares of the
Company's Series A Convertible Preferred Stock were converted into 9,000,000
shares of Common Stock.
Common Stock
Effective May of 1998, the Company amended its certificate of incorporation to
increase the authorized Common Stock to 200,000,000 shares, and effected a 2-
for-1 Common Stock split. All common share and per common share amounts have
been adjusted for all periods to reflect the stock split.
F-8
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements (continued)
2. Capitalization (continued)
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 initial public offering, the holders of Preferred Stock
converted each share of Preferred Stock into 40 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 of Financial Accounting Standards 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 the SFAS 128
requirements. Retroactive effect has been given to share and per share amounts
for the stock split as noted above.
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 and 1996 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 years ended December 31, 1998 and 1997 includes the effect
of options to purchase 2,639,029 and 2,864,404 shares of common stock and 56,235
and 65,626 shares of restricted common stock respectively. Diluted EPS in 1997
and 1996 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 3,328,768 in 1997 and 9,000,000
in 1996. Options to purchase 627,000 shares of common stock at prices ranging
from $51.00 to $66.12 were outstanding during 1998 and options to purchase
1,824,000 shares of common stock at prices ranging from $20 to $30 per share
were outstanding during 1997 and options to purchase 5,809,000 shares were
outstanding during 1996 at prices ranging from $2.65 to $8.37 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.
F-9
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements (continued)
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:
<TABLE>
<CAPTION>
Gross
Amortized Unrealized Gross Unrealized Estimated
Cost Gains Losses Fair Value
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
Obligations of U.S. Government agencies.. $20,739 $28 $ (2) $20,765
U.S. Corporate Securities................ 41,479 26 (26) 41,479
-----------------------------------------------------------------------------
$62,218 $54 $(28) $62,244
=============================================================================
December 31, 1997
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
=============================================================================
</TABLE>
The amortized cost and estimated fair value of debt securities held-to-maturity
at December 31, 1997, by contractual maturity are shown below. All debt
securities held-to-maturity at December 31, 1998 are due in one year or less.
Expected maturities will differ from contractual maturities because the issues
of the securities may have the right to prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------------------------------------
<S> <C> <C>
December 31, 1997
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
======================================
</TABLE>
4. Acquisition
In June 1998, the Company acquired the stock of Infocellular, Inc.
("Infocellular") for $8,484, paid by the issuance of 117,885 shares of Common
Stock and $1,327 in cash. Infocellular, which operates as a wholly-owned
subsidiary of the Company, is engaged in the business of providing point of sale
and customer acquisition software and related services to telecommunication
service providers. The purchase price was allocated as follows:
<TABLE>
<S> <C>
Purchased in-process research and development related to $ 8,200
computer software technology.............................
Fully developed computer software technology.............. 500
Current assets............................................ 1,327
Furniture and fixtures.................................... 716
Other assets.............................................. 127
Other intangible assets................................... 500
Current liabilities....................................... (4,348)
Goodwill.................................................. 1,462
-------------------
Total purchase price...................................... $ 8,484
===================
</TABLE>
F-10
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements (continued)
4. Acquisition (continued)
The acquisition was accounted for as a purchase and the results of
Infocellular's operations have been included in the consolidated financial
statements of LHS Group Inc. effective June 11, 1998. Goodwill recorded in
connection with this acquisition is being amortized over five years.
The valuations of core and developed technologies and in-process research and
development were based on the present value of estimated future cash flows over
the lesser of: (i) five years or (ii) the period in which the product is
expected to be integrated into an existing LHS product. The resulting values
were reviewed for reasonableness based on the time and cost spent on the effort,
the complexity of the development effort and, in the case of in-process
development projects, the stage to which it had progressed. For in-process
research and development, the valuation was reduced for the core technology
component of such product and the percentage of product development remaining at
the acquisition date. The resulting in-process research and development amount
of $8,200 is reflected as a charge in the 1998 statement of operations. No
income tax benefit was recognized on the write-off of the purchased in-process
research and development related to computer software technology because the
merger was structured as tax free to the selling shareholders and the write-off
of this asset and the amortization of the other intangibles will not be
deductible for federal income tax purposes.
The following table summarizes pro forma unaudited results of operations as if
the acquisition was concluded on January 1, 1997. The adjustments to the
historical data reflects the amortization of goodwill and intangibles. This
unaudited pro forma financial information is not necessarily indicative of what
the combined operations would have been if LHS had control of Infocellular for
the periods presented.
<TABLE>
<CAPTION>
1998 1997
--------------------------------------
<S> <C> <C>
Revenues.......................................... $164,896 $110,361
Earnings before interest and taxes................ 36,296 5,500
Net earnings...................................... 24,227 1,016
Earnings Per share:
Basic........................................... $ 0.47 $ 0.02
Diluted......................................... $ 0.44 $ 0.02
</TABLE>
5. Debt
The Company had a short-term credit facility with a bank which expired on
December 31, 1998 under which it could borrow up to $3,000 at 7.5% per annum. At
December 31, 1998, the Company had $2,300 of outstanding letters of credit.
Outstanding letters of credit incur a fee of 1.5% of the amount outstanding. No
other borrowings were outstanding under the facility at December 31, 1998 or
1997.
F-11
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements (continued)
6. Leases
LHS Group leases certain of its office buildings from a Company related through
common ownership under an operating lease agreement which expires in 2003. The
lease agreement requires monthly rental payments of $32 adjusted annually for
inflation. Rental expenses under all operating leases totaled $5,720, $3,903,
and $1,982 for the years ended December 31, 1998, 1997 and 1996, respectively.
Telecommunications equipment in the amount of $598 was acquired under capital
lease arrangements. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Total
----------------------------------------------------------
<S> <C> <C> <C>
1999...................................... $142 $ 6,774 $ 6,916
2000...................................... 142 5,561 5,703
2001...................................... 135 4,721 4,856
2002...................................... - 1,285 1,285
2003...................................... - 216 216
----------------------------------------------------------
Total future minimum lease payments....... 419 $18,557 $18,976
====================================
Less amounts representing interest........ (79)
-------------------
Present value of net minimum lease
payments................................. $340
===================
</TABLE>
7. 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:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C>
Currently payable income taxes:
U.S. federal............................. $ 3,061 $ 931 $1,143
Foreign.................................. 12,729 3,620 1,433
Deferred income taxes (credit):
U.S. federal............................. (360) (390) (230)
Foreign.................................. 1,601 3,309 (262)
-----------------------------------------------------------
$17,031 $7,470 $2,084
===========================================================
</TABLE>
F-12
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
The net deferred income tax asset (liability) consists of the following:
<TABLE>
<CAPTION>
December 31
1998 1997
---------------------------------------
Deferred tax assets:
<S> <C> <C>
Deferred revenue.................................. $ - $ 524
Research and development tax credit............... 914 381
Net operating loss carryforward................... - 165
Accrued vacation and bonuses...................... 916 1,303
Tax on foreign differences........................ 86 357
Warranty expense.................................. 322 -
Allowance for doubtful accounts................... 419 -
Other............................................. 564 -
Valuation allowance............................... - -
---------------------------------------
3,221 2,730
Deferred tax liabilities:
Unbilled receivables.............................. (1,075) (1,598)
Warranty expenses................................. - (205)
Depreciation expense.............................. - (54)
Tax on foreign differences........................ (5,359) (2,845)
---------------------------------------
(6,434) (4,702)
---------------------------------------
$(3,213) $(1,972)
=======================================
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31
1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rates............................. $11,689 $6,351 $1,871
Differences resulting from higher tax rates in
foreign countries................................. 2,564 1,119 213
Non-deductible write off of in-process research
and development................................... 2,778 - -
---------------------------------------------------------
$17,031 $7,470 $2,084
=========================================================
</TABLE>
During 1998 and 1997, the Company received $66,500 and $10,387 million in tax
deductions from the exercise of nonqualified employee stock options of which
$10,161 and $931 was realized and recognized as a reduction to taxes currently
payable and an increase to equity. At December 31, 1998 and 1997, the Company
had tax net operating loss carryovers of $58,908 and $6,486 which is primarily
the result of the tax deductions from the exercises of the nonqualified stock
options. The benefit of the tax net operating loss carryovers will be credited
to additional paid-in-capital when realized.
F-13
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements (continued)
8. 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, 1998, 1997, and 1996, the Company made lease
payments totaling $382, $387, and $437, respectively, to the partnerships. The
Company periodically charters the use of an aircraft owned by a director of the
Company. During the years ended December 31, 1998 and 1997, the Company paid
approximately $103 and $114 for its use of the aircraft.
9. Major Customers
No customer accounted for more than 10% of revenues in 1998 while in 1997, one
customer accounted for 12% of revenues and in 1996 two customers accounted for
12% and 10% of revenues.
10. 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
1998 and 1997, the Company made matching contributions to the Plan of $520 and
$248, respectively.
11. 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
Statement of Financial Accounting Standards 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,
because 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 16,000,000 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.
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 models
with the following assumptions: volatility of .904; average risk-free interest
rate of 6.2%; no anticipated dividends; and a weighted-average expected life of
the option of five years. In 1998, the fair value for options granted was
estimated at the date of grant using the Black Scholes option pricing models
with the following assumptions: volatility of .800; average risk-free interest
rate of 5.44%; no anticipated dividends; and a weighted-average expected life of
the option of five years.
F-14
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements (continued)
11. Stock Option Plan (continued)
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 the year 1996 using the minimum
value option pricing model was $1.79. The weighted average grant date fair value
of options granted during 1997 and 1998 using the Black-Scholes option pricing
model was $30.76 and $28.29, respectively.
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:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Pro forma net earnings........... $6,961 $8,966 $3,078
Basic earnings per share......... $ 0.13 $ 0.21 $ 0.10
Diluted earnings per share....... $ 0.13 $ 0.18 $ 0.08
</TABLE>
A summary of the Company's stock option activity, and related follows:
<TABLE>
<CAPTION>
Weighted
Number of Average Price
Shares Issued per Share
-----------------------------------------
<S> <C> <C>
Outstanding as of January 1, 1996.................. - $ -
Granted........................................... 5,909,000 2.70
Exercised......................................... (100,000) 2.65
---------------------------------------
Outstanding as of December 31, 1996................ 5,809,000 2.70
Granted........................................... 2,173,000 21.19
Exercised......................................... (700,710) 2.65
Cancelled......................................... (636,626) 3.13
---------------------------------------
Outstanding as of December 31, 1997................ 6,644,664 8.70
Granted........................................... 2,346,500 41.74
Exercised......................................... (1,977,082) 7.07
Cancelled......................................... (611,695) 8.86
---------------------------------------
Outstanding as of December 31, 1998................ 6,402,387 $21.19
=======================================
Exercisable as of December 31, 1998................ 759,388 $ 5.76
=======================================
Exercisable as of December 31, 1997................ 899,332 $ 2.72
=======================================
</TABLE>
F-15
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements (continued)
11. Stock Option Plan (continued)
Information regarding stock options outstanding as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------- --------------------------------------
Weighted Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.65 2,553,250 7.8 $ 2.65 634,981 $ 2.65
$8.00 - 8.38 144,775 8.2 8.17 12,699 8.18
$12.50 15.00 71,094 8.5 14.26 7,343 15.00
$21.91 30.19 1,514,789 8.8 24.12 103,628 23.65
$34.88 51.31 1,701,479 9.2 39.11 737 35.03
$54.12 66.12 417,000 9.5 58.99
- -------------------------------------------------------------------------- --------------------------------------
$2.65 - 66.12 6,402,387 8.5 $21.19 759,388 $ 5.76
========================================================================== ======================================
</TABLE>
12. Segment Information
In accordance with the requirements of SFAS 131, the following disclosure
represents the information used by management when evaluating the operating
performance of its operating segments. The information reviewed by management
includes the operating revenue from external customers and identifiable assets
for the Company's three geographic areas, the Americas, Europe and Asia-Pacific:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Americas................................. $ 66,742 $ 44,569 $18,115
Europe................................... 78,516 48,612 32,495
Asia-Pacific............................. 17,924 12,230 6,254
---------------------------------------------------------
Total in financial statements............. $163,182 $105,411 $56,864
=========================================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Long-lived assets:
Americas $11,223 $ 3,496
Europe 6,589 5,212
Asia 681 630
------- -------
7,270 5,842
------- -------
Total $18,493 $ 9,330
======= =======
</TABLE>
F-17
<PAGE>
LHS Group Inc.
Notes to Consolidated Financial Statements (continued)
13. Impact of Recently Issued Accounting Standards
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). The Company
reported comprehensive income in its statement of stockholders' equity. The
adoption of SFAS 130 resulted in revised and additional disclosures but had no
effect on the financial position, results of operations, or liquidity of the
Company.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way 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 issued to shareholders.
Operating segments are components of an enterprise about which separate
financial information is available which is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
adopted SFAS 131 in 1998, and the effect of the adoption was not material to the
consolidated financial statements. (see Note 12).
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
requires the recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the planned
use of the derivative and the resulting designation. The Company is required to
implement the statement in the first quarter of the year 2000. The Company has
not used derivative instruments and believes the impact of adoption of this
statement will not have significant effect on the financial statements.
The American Institute of Certified Public Accountants issued SOP 97-2, SOP 98-4
and SOP 98-9 to clarify guidance on applying generally accepted accounting
principles to software transactions and to provide guidance on when revenue
should be recognized and in what amounts for licensing, selling, leasing, or
otherwise marketing computer software. The Company adopted this guidance during
1997. Such adoption had no effect on the Company's methods of recognizing
revenue.
14. Unaudited Quarterly Information
<TABLE>
<CAPTION>
Quarter ended
-----------------------------------------------------------------------------
March 31, 1998 June 30, 1998 Sept. 30, 1998 Dec. 31, 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues................................. $33,165 $37,779 $43,904 $48,334
Gross margin............................. 20,279 23,358 27,949 31,643
Net earnings (loss)...................... 4,463 (2,105) 7,034 7,957
Net earnings (loss) per share
Basic................................. $ 0.09 $ (0.04) $ 0.13 $ 0.15
Diluted............................... $ 0.08 $ (0.04) $ 0.13 $ 0.15
-----------------------------------------------------------------------------
Quarter ended
-----------------------------------------------------------------------------
March 31, 1997 June 30, 1997 Sept. 30, 1997 Dec. 31, 1997
-----------------------------------------------------------------------------
Revenues................................. $20,886 $23,312 $28,886 $32,327
Gross margin............................. 11,342 13,294 15,907 17,543
Net earnings............................. 1,152 2,041 3,734 4,281
Net earnings per share
Basic................................. $ 0.03 $ 0.05 $ 0.08 $ 0.09
Diluted............................... $ 0.03 $ 0.04 $ 0.07 $ 0.08
</TABLE>
F-17
<PAGE>
EXHIBIT 21.1
Subsidiaries
LHS Holding Germany GmbH
LHS Verwaltungs GmbH
LHS Verwaltungs GmbH & Co. Projekt KG zur Durcfuhrung
LHS AG
LHS Nordic AB
LHS France S.A.
LHS Asia/Pacific Sdn Bhd
LHS Hong Kong Limited
LHS Communications Systems, Inc.
LHS do Brazil Ltda.
<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 12, 1999, included in the 1998
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 Statements
(Form S-8 No. 333-28985 and Form S-8 No. 333-57269) of our report dated February
12, 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, 1998.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 42,048
<SECURITIES> 62,218
<RECEIVABLES> 60,860
<ALLOWANCES> 3,316
<INVENTORY> 0
<CURRENT-ASSETS> 169,138
<PP&E> 26,768
<DEPRECIATION> 11,179
<TOTAL-ASSETS> 188,545
<CURRENT-LIABILITIES> 42,448
<BONDS> 239
0
0
<COMMON> 526
<OTHER-SE> 145,332
<TOTAL-LIABILITY-AND-EQUITY> 188,545
<SALES> 163,182
<TOTAL-REVENUES> 163,182
<CGS> 59,953
<TOTAL-COSTS> 133,359
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,557)
<INCOME-PRETAX> 34,380
<INCOME-TAX> 17,031
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,349
<EPS-PRIMARY> .33
<EPS-DILUTED> .32
</TABLE>
