AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997
REGISTRATION NO. 333-22195
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LHS GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7371 58-2224883
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
SIX CONCOURSE PARKWAY, SUITE 2700
ATLANTA, GEORGIA 30328
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JERRY W. BRAXTON
CHIEF FINANCIAL OFFICER LHS GROUP INC. SIX CONCOURSE PARKWAY, SUITE 2700
ATLANTA, GEORGIA 30328 (770) 280-3004 (770) 280-3099 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
M. HILL JEFFRIES ALSTON & BIRD LLP JOHN D. CAPERS, JR. KING & SPALDING
1201 WEST PEACHTREE STREET ATLANTA, 191 PEACHTREE STREET ATLANTA,
GEORGIA 30309-3424 (404) 881-7000 GEORGIA 30303-1763 (404) 572-4600
(770) 881-7777 (FAX) (404) 572-5145 (FAX)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PRICE PER OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) SHARE PRICE(2) FEE(3)
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Common Stock, $.01 par value(4)...... 4,600,000 $14.00 $64,400,000 $19,516
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(1) Includes 600,000 shares which the underwriters have the option to purchase
solely to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) A registration fee of $32,803 was paid by the Company with its initial
filing of this Registration Statement on February 21, 1997.
(4) The shares of Common Stock are not being registered for the purpose of
sales outside the United States.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 18, 1997
4,000,000 SHARES
LHS GROUP INC.
[LOGO OF LHS
APPEARS HERE]
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
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Of the 4,000,000 shares of Common Stock offered, 3,200,000 shares are being
offered hereby in the United States and 800,000 shares are being offered in a
concurrent international offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share will be
identical for both offerings. See "Underwriting".
Of the 4,000,000 shares of Common Stock offered, 3,345,000 shares are being
sold by the Company and 655,000 shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders". The Company will not
receive any of the proceeds from the sale of the shares being sold by the
Selling Stockholders.
Prior to the Offerings, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price per share will be between $12.00 and $14.00. For factors to be considered
in determining the initial public offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "LHSG," subject to official notice of issuance.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PROCEEDS TO
INITIAL PUBLIC UNDERWRITING PROCEEDS TO SELLING
OFFERING PRICE DISCOUNT(1) COMPANY(2) STOCKHOLDERS
-------------- ------------ ----------- ------------
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".
(2) Before deducting estimated expenses of $680,000 payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 480,000 shares at the initial public offering
price per share, less the underwriting discount, solely to cover over-
allotments. Additionally, the Company has granted the International
Underwriters a similar option with respect to an additional 120,000 shares
as part of the concurrent international offering. If such options are
exercised in full, the total initial public offering price, underwriting
discount and proceeds to the Company will be $ , $ and
$ , respectively. See "Underwriting".
----------
The shares offered hereby are offered severally by the U.S. Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1997, against payment therefor in immediately
available funds.
GOLDMAN, SACHS & CO.
COWEN & COMPANY
ROBERTSON, STEPHENS & COMPANY
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The date of this Prospectus is , 1997.
I. OUTSIDE FRONT GATE
A. Design:
Conceptual Illustration of a Profile of a Man Talking on a Cellular Phone with
Eyes Looking to the Future.
B. Secondary Images:
Satellite in the Sky.
Telephone Poles in the Background.
[Pictures, map, etc.]
The Company intends to furnish to its stockholders annual reports containing
audited financial statements and quarterly reports containing unaudited
interim financial information for the first three quarters of each year of the
Company.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF
ANY) ALSO MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE
SECURITIES EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
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CREATING BILLING AND CUSTOMER CARE SOLUTIONS FOR AN
EXPANDING TELECOMMUNICATIONS MARKEPLACE
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The Expanding Billing
And Customer Care Industry
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. Deregulation and advances in technology INSIDE LEFT FOLDOUT
have stimulated growth in the number of FRONT COVER: DESIGN TO
carriers and types of services offered. RIGHT OF TEXT
. As competition intensifies, carriers are
increasingly utilizing billing and customer Illustration of a Cellular
care solutions as a strategic weapon. Phone Placed in Front of a
Generic Telephone Statement.
. Carriers need a flexible billing and
customer care solution which can be
implemented quickly to offer dynamic
marketing and pricing services.
. Carriers are seeking a common billing
and customer care solution that will
accommodate subscriber growth, multiple
service offerings and entrance into new
geographic markets.
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CREATING BILLING AND CUSTOMER CARE SOLUTIONS FOR AN
EXPANDING TELECOMMUNICATIONS MARKEPLACE
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The LHS Solution
- -----------------------------
. Flexibility to meet individual carrier INSIDE FRONT FOLDOUT
needs. FRONT COVER: (TWO DESIGNS)
. Open client/server-based architecture.
. Modular configuration for quick, cost Conceptual Illustration of
effective implementation. a Key Unlocking a Software
. Able to support multiple technology Disc. (to the right of "The
standards. LHS Solution").
. Comprehensive international solution.
. Complete customer services. Conceptual Illustration of
Puzzle Pieces Containing a
Pager, Satellite, Phones and an
Internet Image Converging
Together (to the right of "The
LHS Strategy").
The LHS Strategy
- ------------------------------------
. Leverage wireless position to penetrate
other markets.
. Maintain a leading billing and customer
care solution.
. Expand globally.
. Develop and maintain customer relations.
. Leverage third-party relationships.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
(i) all share and per share data in this Prospectus have been adjusted to
reflect (a) a 20-for-1 split of the Common Stock effected on October 16, 1996
and (b) the conversion of all outstanding shares of Series A Convertible
Preferred Stock to Common Stock on the closing date of the Offerings and (ii)
the information in this Prospectus assumes that the Underwriters' over-
allotment options are not exercised. All references to the "Company" and "LHS"
shall mean LHS Group Inc. and its subsidiaries unless the context otherwise
requires. Certain terms used herein are defined under the heading "Glossary".
THE COMPANY
LHS Group Inc. (the "Company" or "LHS") is a leading provider of
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 installed quickly and can
support innovative marketing and pricing of telecommunications services. BSCS
has been licensed to approximately 70 carriers in over 25 countries and
supports approximately 3.5 million subscribers.
The deregulation of telecommunications markets worldwide and rapid advances
in technology have led to a large increase in the number of carriers worldwide,
creating a highly competitive market for telecommunications services. This
increasingly competitive market is motivating carriers to install advanced
billing and customer care systems as they introduce new services and enter new
markets. Carriers demand billing and customer care systems that provide
innovative and flexible marketing of services, robust customer management
capabilities, subscriber data and feedback and service plan flexibility in
addition to basic rating, invoicing and collection features. Increasingly,
billing and customer care systems are being deployed by carriers as a strategic
business weapon.
The Company's objective is to be the leading provider of client/server-based
billing and customer care solutions for the global telecommunications industry.
The Company intends to leverage its significant installed base of European
wireless customers to serve wireline and wireless markets around the world.
Moreover, the Company seeks to continually improve the functionality of its
products, maintain the strong technology position of BSCS and establish long-
term relationships with carriers. The Company intends to leverage its
relationships with leading systems integrators, including Andersen Consulting,
Cap Gemini Sogeti S. A. ("Cap Gemini"), Electronic Data Systems Corporation
("EDS") and Logica plc ("Logica"), and with equipment vendors to more
effectively market its software and services to emerging carriers. Current
customers of the Company include Aerial Communications, Inc. ("Aerial") and
Pacific Bell Mobile Services ("PBMS") in the Americas, Telecom PTT ("Swiss
Telecom") in Europe and Binariang Communications Sdn Bhd ("Binariang") in Asia.
LH Specification Projektberatungsgesellschaft mbH, a predecessor to the
Company, was incorporated under the laws of Germany in 1990 and the Company was
domiciled under the laws of the State of Delaware in December 1995. The
Company's executive offices are located at Six Concourse Parkway, Suite 2700,
Atlanta, Georgia 30328, and its telephone number at that location is (770) 280-
3000.
3
THE OFFERINGS
The offering of 3,200,000 shares of Common Stock initially being offered in
the United States (the "U.S. Offering") and the concurrent offering of 800,000
shares of Common Stock initially being offered outside the United States (the
"International Offering") are collectively referred to herein as the
"Offerings". The closing of the International Offering is conditioned upon the
closing of the U.S. Offering and vice versa. See "Underwriting".
Common Stock offered by the
Company:
U.S. Offering.................... 2,676,000 shares
International Offering........... 669,000 shares
Total........................... 3,345,000 shares
Common Stock offered by the
Selling Stockholders:
U.S. Offering.................... 524,000 shares
International Offering........... 131,000 shares
Total........................... 655,000 shares
Common Stock to be outstanding
after the
Offerings (1).................... 23,395,000 shares
Use of proceeds................... General corporate purposes, including
working capital. See "Use of Proceeds".
Proposed Nasdaq National Market
symbol............................ LHSG
The Company intends to apply to list the Common Stock on the Frankfurt
Stock Exchange.
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(1) Excludes 2,954,500 shares of Common Stock reserved for issuance pursuant to
stock options outstanding as of April 10, 1997.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
-------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------- ------- ------- ------- -------
CONSOLIDATED STATEMENT
OF INCOME DATA:
Total revenues.......... $2,788 $6,712 $20,722 $26,967 $56,864 $ 6,756 $20,886
Earnings (loss) before
interest
and taxes.............. 59 287 4,182 1,217 5,581 (1,237) 1,966
Net earnings (loss)..... $ (17) $ 195 $ 3,043 $ 284 $ 3,420 $ (799) $ 1,154
====== ====== ======= ======= ======= ======= =======
Net earnings (loss) per
share (1).............. $ 0.00 $ 0.03 $ 0.29 $ 0.02 $ 0.16 $ (0.04) $ 0.05
====== ====== ======= ======= ======= ======= =======
Shares used in per share
calculation (1)........ 5,938 7,645 10,421 16,098 21,757 21,757 21,757
AT MARCH 31, 1997
----------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 2,415 $ 42,176
Working capital.......................................... 5,122 44,883
Total assets............................................. 35,918 75,679
Long-term and other obligations.......................... 1,325 1,325
Total stockholders' equity............................... 12,560 52,321
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(1) See Note 2 of Notes to Consolidated Financial Statements for the
determination of the number of shares used in per share calculation.
(2) Pro forma to give effect to the conversion of all outstanding shares of
Series A Convertible Preferred Stock into shares of Common Stock upon
completion of the Offerings and as adjusted to reflect the sale of the
3,345,000 shares of Common Stock offered by the Company hereby (at an
assumed initial public offering price of $13.00 per share, after deducting
the underwriting discount and estimated expenses of the Offerings payable
by the Company). See "Use of Proceeds" and "Capitalization".
4
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be carefully considered in evaluating the Company and
its business before purchasing the Common Stock offered hereby. This
Prospectus contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from the
results reflected in those forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below as well as those discussed elsewhere in this Prospectus.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced fluctuations in its quarterly operating results
and anticipates that such fluctuations will continue and could intensify.
Fluctuations in operating results may result in volatility in the price of the
Company's Common Stock. Although the Company was profitable in each of the
last three quarters, there can be no assurance that the Company's
profitability will continue in the future or that the Company's levels of
profitability will not vary significantly between quarters. The Company's
operating results may fluctuate as a result of many factors, including
lengthening of the sales cycles for new or existing customers, the size,
timing or cancellation of significant client projects and license fees, timing
of new product introductions, customer acceptance of new products, ability of
the Company to hire, train and retain qualified personnel, increased
competition, changes in operating expenses, changes in Company strategy, the
financial performance of the Company's customers, changes in
telecommunications legislation and regulations that may affect the competitive
environment for the Company's products or services, foreign currency exchange
rates and general economic factors.
The Company's expense levels are based in significant part on its
expectations regarding future revenues. The Company's revenues are difficult
to forecast because the market for the Company's products and services is
rapidly evolving and the Company's sales cycle and the size and timing of
significant customer projects and license fees vary substantially among
customers. Accordingly, the Company may be unable to adjust spending in a
timely manner to compensate for any unexpected shortfall in revenues. Any
significant shortfall could therefore have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, the Company hired a significant number of employees in 1995, 1996
and the first quarter of 1997, including several senior executives, and
expects to continue hiring additional consulting, support and development
employees during the remainder of 1997. This significant increase in its work
force has reduced the Company's operating margins in 1995, 1996 and the first
quarter of 1997, and the Company expects that this increase will continue to
affect the Company's operating margins for the short term. In addition, the
Company experienced operating losses in the fourth quarter of 1995 and the
first two quarters of 1996 and operating profits in the last two quarters of
1996 and the first quarter of 1997. There can be no assurance that the Company
can continue to report operating profits, and failure to do so is likely to
have a material adverse effect on the Company's business, financial condition
and Common Stock price. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
DEPENDENCE ON NEW PRODUCTS; TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions, evolving industry
standards and changing customer needs. The introduction of products embodying
new technologies and the emergence of new industry and technology standards
can render existing products obsolete and unmarketable in short periods of
time. The Company expects other vendors to continually introduce new products
and services, as well as enhancements to their existing products and services,
which will compete with the products and services offered by the Company. As a
result, the life cycles of the Company's products are difficult to estimate.
The Company believes that its future success will depend in large part on its
ability to maintain and enhance its current product and service offerings and
to continually develop and introduce new products and services that will keep
pace with technological advances and satisfy
5
evolving customer requirements. In addition, the Company plans to introduce
billing and customer care solutions for carriers providing services in
telecommunications markets different from those the Company has traditionally
supported. There can be no assurance that the Company will be successful in
developing and marketing these new products and services or that its current or
new products and services will adequately meet the demands of its current or new
markets. Because it is generally not possible to predict the time required and
costs involved in reaching certain research, development and engineering
objectives, actual development costs could exceed budgeted amounts and estimated
product development schedules could require extensions. Further, there can be no
assurance that the Company will not experience difficulties that could delay or
prevent the successful development, introduction and marketing of these products
and services. If the Company is unable to develop and introduce new products and
services in a timely manner, or if a new release of a product does not achieve
market acceptance, the Company's business, operating results and financial
condition will be materially adversely affected.
In March 1997, the Company introduced BSCS Version 4.03, which supports
digital and analog wireless standards particular to the Americas market. The
Company currently plans to introduce, by the third quarter of 1997, Version
5.0 of its BSCS product, which will offer billing and customer care solutions
for telecommunications carriers that operate in markets that the Company's
solutions currently do not support. BSCS Version 5.0, will support satellite
and paging standards particular to the Americas market and will improve upon
the overall functionality of BSCS Version 4.03. In addition, the Company plans
to introduce, by the fourth quarter of 1997, a separate Version 5.0 of its
BSCS product in Europe and Asia, which will support wireline, other digital
wireless, analog wireless, satellite and paging standards. Version 5.0 is
crucial to the Company's current and future operations, particularly its
Americas operations. Factors which may cause the events described in the
aforementioned forward-looking statements not to develop as expected are
discussed below.
The introduction of Version 5.0 and the continuing development of leading
technology are subject to significant technical risks which may result in
delays in the development and introduction of new products or enhancements to
existing products. In addition, the Company's scheduled BSCS release dates are
dependent on the Company's ability to successfully attract, train and retain
software developers. Failure by the Company to introduce BSCS Version 5.0 in
the Americas, and to a lesser extent in Europe and Asia, on a timely basis, or
failure of Version 5.0 to gain market acceptance, would have a material
adverse effect on the Company's business, results of operations and financial
condition, especially with respect to the Company's current and future
operations in the Americas. There can be no assurance that the Company will be
able to meet its development schedule and continue to introduce products
acceptable to the market on a timely basis.
MANAGEMENT OF GROWTH
The Company has expanded its operations rapidly over the past two years,
placing significant demands on its administrative, operational and financial
personnel and systems. Additional expansion by the Company may further strain
its management, operational, financial, reporting and other systems and
resources. There can be no assurance that the Company's systems, resources,
procedures, controls and existing space will be adequate to support such
expansion of the Company's operations. The Company's future operating results
will substantially depend on the ability of its officers and key employees to
manage changing business conditions and to implement and improve its
management, operational, financial control and other reporting systems. In
addition, the Company's future operating results are dependent on its ability
to attract, train and retain qualified consulting, technical, sales,
financial, marketing and management personnel. Failure to hire, train or
retain qualified personnel necessary to keep pace with the Company's
development of products and services could have a material adverse effect on
the Company's business, results of operations and financial condition.
Continued expansion will require the Company's management to: enhance
management information and reporting systems; standardize BSCS installation
methodologies; further develop its infrastructure;
6
jointly develop and coordinate strategies, functions and product development
among its Americas, European and Asian operations and continue to maintain
customer satisfaction. If the Company is unable to respond to and manage
changing business conditions, the quality of the Company's products and
services, its ability to retain key personnel and its business, results of
operations and financial condition could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Management".
DEVELOPING TELECOMMUNICATIONS MARKET AND NEW CARRIERS
The Company provides customized software billing and customer care solutions
to telecommunications carriers in the wireline and wireless markets. Although
these markets have experienced significant growth and have been characterized
by increased deregulation and competition in recent years, there can be no
assurance that such trends will continue at similar rates or that the Company
will be able to effectively market and sell its products and services in such
markets. In addition, many of the new entrants in the telecommunications
market are companies that lack significant financial and other resources. To
cultivate relationships with such new market entrants, the Company may be
required to offer alternative pricing arrangements, which may provide for
deferred payments. However, there can be no assurance that the Company will be
able to develop such relationships or that new carriers that become customers
of the Company will gain market acceptance for their telecommunications
services. If the Company permits customers that may not have adequate
financial resources to pay the Company for its services on a deferred basis,
the Company may ultimately be unable to collect payments for such services.
Because the Company has been dependent historically on a limited number of
long-term customer relationships, the failure of the Company to develop
relationships with, make sales to, or collect payments from, new
telecommunications carriers and failure of the Company's customers to compete
effectively in the telecommunications market could have a material adverse
effect on the Company's business, results of operations and financial
condition. In addition, the telecommunications market is experiencing some
consolidations and formations of alliances among established carriers. A
consolidation or alliance affecting one of the Company's customers may result
in such customer shifting to another billing system, which may have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business--Industry Background".
RELIANCE ON SIGNIFICANT NEW CUSTOMERS
Historically, the Company has relied on a limited number of customers for a
substantial portion of its revenues. Aerial and Swiss Telecom accounted for
12% and 10%, respectively, of the Company's total revenues in 1996. In
addition, the Company had three customers that accounted for 14%, 10% and 10%
of the Company's total revenues in 1995. The Company does not believe that any
of the foregoing customers, which were significant in previous years, will
account for more than 10% of the Company's total revenues in any future year.
The Company has historically depended on, and expects to continue to depend
on, large contracts from significant customers, which can cause its revenues
and earnings to fluctuate between quarters based on the timing of orders and
installation of the Company's BSCS product by these customers. Although the
Company believes that it has good relationships with its established customers
and has in the past received revenues from repeat business with established
customers, these customers generally have acquired fully-paid licenses for
their installed systems and none of the Company's major customers has any
obligation to purchase additional products or services. The Company expects
that its current customers will not enter into further agreements with the
Company which will account for 10% or more of the Company's total revenues in
any future year. Consequently, failure by the Company to develop relationships
with significant new customers would have a material adverse effect on the
Company's business, results of operations and financial condition.
Additionally, the acquisition by a third party of one of the Company's major
customers could result in the loss of that customer, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Business--Customers" and Notes 1 and 7
of Notes to Consolidated Financial Statements.
7
INITIAL MARKET ENTRY RISKS; CUSTOMER EXPECTATIONS
The Company intends to pursue an aggressive expansion strategy for its
product and service offerings to carriers in new geographic markets and to
carriers providing telecommunications services in markets different from those
the Company has traditionally supported. This strategy has certain inherent
risks which the Company believes are unique to the industry in which the
Company competes and which arise from, among other things, the characteristics
of the Company's targeted customer base in these markets. When the Company
enters a new market and begins to develop a relationship with a new customer,
the Company's initial performance and initial market perception are critical
to the Company's future prospects in that new market. Although the Company
believes that its strategy for new market entry and its preparations for such
entry will enable it to perform to the satisfaction of customers in a new
market, there can be no assurance that a new customer will be satisfied with
the Company's products or services or that the Company will be able to
successfully establish itself in any such new market.
RELIANCE ON THIRD-PARTY RELATIONSHIPS
The Company currently relies on a number of consulting and systems
integration firms to enhance its marketing, sales and customer support
efforts, particularly with respect to installation and support of its product,
lead generation and assistance in the sales process. An integral factor in the
Company's growth strategy is the continuing development of relationships with
such firms and the Company's ability to successfully leverage such
relationships through joint marketing and sales efforts in order to generate
new business opportunities. There can be no assurance that the Company will be
able to continue to successfully leverage these relationships in the future.
The failure by the Company to maintain joint marketing and sales efforts with
consulting and systems integration firms in the future would have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company currently derives a substantial portion of its revenues from
projects in which it serves as subcontractor to a consulting or systems
integration firm that provides a variety of information technology products
and services to end-user customers. In such instances, the Company is highly
dependent upon such firms for product installation and BSCS end-user training.
Although the Company seeks to maintain close relationships with consulting and
systems integration firms, many such firms have similar, and often more
established, relationships with the Company's principal competitors. The
Company has no exclusive agreements with any of these firms, and there can be
no assurance that such firms, many of which have significantly greater
financial, technical, personnel and marketing resources than the Company, will
not discontinue or reduce their relationships with the Company, develop their
own products and services in competition with the Company, or develop
relationships with companies that offer products that compete with the
Company's solutions. If the Company is unable to develop and maintain
effective, long-term relationships with these firms or if these firms fail to
meet the needs of the Company's customers, the Company's business will be
adversely affected. In addition, the failure of the consulting or systems
integration firm or another subcontractor to perform to the satisfaction of
the customer may adversely affect the Company's relationship with the customer
and could adversely affect the perception of the Company in the market.
The Company had historically entered into contracts with a limited number of
third parties that provided such third parties with the Company's kernel
source code and the right to market and sell independently modified versions
of the Company's products. As a result, certain carriers in the United States
experienced difficulties with the Company's software due primarily to the
inability of these third parties to properly install the Company's software
and adapt it for use by such carriers. In those instances, the reputation and
credibility of the Company and its products were damaged and the Company may
have lost the confidence of the affected carriers. The Company has since
terminated all third-party rights that allowed access to the Company's kernel
source code and permitted the
8
subsequent modification and resale of that source code. However, there can be
no assurance that there will be no further damage to the Company's reputation
and credibility in the United States. Any further damage could have a material
adverse effect on the Company's business, results of operations and financial
condition.
HIGHLY COMPETITIVE MARKET; COMPETITION
The market for telecommunications billing and customer care systems is
highly competitive, and the Company expects this competition to increase. The
Company competes with independent providers of billing systems and services,
such as Alltel Information Systems, Inc. ("Alltel"), American Management
Systems, Inc. ("AMS") and Cincinnati Bell Information Systems, Inc. ("CBIS")
in the Americas and Kingston-SCL and SEMA Group internationally, with systems
integrators and with internal billing departments of larger telecommunications
carriers. The Company anticipates continued growth and competition in the
telecommunications industry and the entrance of new competitors into the
billing and customer care systems market in the future.
The Company believes that its ability to compete depends in part on a number
of competitive factors, including the development by others of software that
is competitive with the Company's products and services, the price at which
others offer competitive software and services, the extent of competitors'
responsiveness to customer needs and the ability of the Company's competitors
to hire, retain and motivate key personnel. The Company competes with a number
of companies that have longer operating histories, larger customer bases,
substantially greater financial, technical, sales, marketing and other
resources, and greater name recognition than the Company. Current and
potential competitors have established, and may establish in the future,
cooperative relationships among themselves or with third parties to increase
their ability to address the needs of the Company's prospective customers.
Accordingly, new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. As a result, the Company's
competitors may be able to adapt more quickly than the Company to new or
emerging technologies and changes in customer requirements, or to devote
greater resources to the promotion and sale of their products. There can be no
assurance that the Company will be able to compete successfully with existing
or new competitors. Failure by the Company to adapt to emerging market demands
and to compete successfully with existing and new competitors would have a
material adverse effect on the Company's business, results of operations and
financial condition.
In addition, as the Company expands, it will market its products and
services to carriers in markets not currently served by the Company. Upon its
entrance into these markets, the Company may encounter new competitors, many
of which have significantly greater financial, technical, personnel and
marketing resources than the Company. There can be no assurance that the
Company will be able to properly identify and address the demands for these
new markets or that the Company can continue to be competitive in its current
markets. Failure by the Company to maintain its competitiveness in current or
new markets would have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--Competition".
UNIFICATION OF AMERICAN AND EUROPEAN/ASIAN PRODUCT LINES
The Company expanded its operations into the Americas for the first time in
late 1995. In connection with this expansion, the Company modified its
existing software kernel for use exclusively in the Americas while continuing
to maintain a separate software kernel which it uses in European and Asian
markets. Although these two software kernels currently comprise separate
software code, they provide similar functionality. The Company intends to
unify the two software kernels into one common kernel in 1998 to avoid further
duplication of its software development efforts. If the Company's efforts to
unify the software kernels are unsuccessful, the Company may be forced to
maintain redundant research and development efforts in Europe and the
Americas, which would adversely affect the Company's business, results of
operations and financial condition. There can be no assurance that the
9
Company will be able to successfully unify these two software kernels or, if
successful, realize any cost savings from such unification. See "Business--
Product Development".
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of its key management, sales, product development and operational personnel,
including Hartmut Lademacher, Chairman of the Board and Chief Executive
Officer, and Dr. Joachim Hertel, Executive Vice President-Technology, and on
the Company's ability to continue to attract, motivate and retain highly
qualified employees, including technical, managerial and sales and marketing
personnel. Additionally, the Company expects to continue to expand the number
of employees engaged in sales, marketing and product development. However,
competition in the recruitment of highly qualified personnel in the software
and telecommunications services industry is intense. The inability to hire and
retain qualified personnel or the loss of the services of key personnel could
have a material adverse effect upon the Company's current business, new
product development efforts and future business prospects. If such personnel
do not remain active in the Company's business, the Company's operations could
be materially adversely affected. The Company does not currently maintain key
person insurance coverage for any of its employees. See "Business--Employees"
and "Management".
INTERNATIONAL RISKS
The Company began its operations in Germany in 1990 and continues to conduct
a substantial portion of its business outside of the Americas. In 1995 and
1996, the Company's sales outside the Americas represented 97% and 68% of the
Company's total revenues, respectively. Although the Company intends to
continue to expand its operations within the Americas, European and Asian
operations are expected to continue to account for a majority of its revenues
for the foreseeable future. The Company's business outside the United States
may be subject to unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs of localizing products for foreign countries, lack
of acceptance of localized products in foreign countries, longer accounts
receivable payment cycles, difficulties in managing international operations,
availability of trained personnel to install and implement the Company's
systems, political instability, potentially adverse tax obligations,
restrictions on the repatriation of earnings and the burdens of complying with
a wide variety of foreign laws and regulations. In addition, the laws of some
foreign countries do not protect the Company's intellectual property rights to
as great an extent as do the laws of the United States. There can be no
assurance that such factors will not have a material adverse effect on the
Company's revenues outside the Americas or its overall financial performance.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 10 of Notes to Consolidated Financial Statements.
RISKS ASSOCIATED WITH CUSTOMER DEMAND FOR FINANCING
Certain of the Company's potential customers may require financing to fund
purchases of the Company's products. The Company's ability to increase its
sales to start-up telecommunications carriers with limited financial resources
in the future will depend significantly upon its ability to obtain orders
from, maintain relationships with, provide support to, and arrange financing
for these customers. As a result, the inability of any customer to finance its
purchases of the Company's products may materially adversely affect the
Company's business, operating results and financial condition. Some of the
Company's competitors have the capital resources to provide vendor financing.
Historically, the Company has not had the capital resources to make
arrangements for financing its customers' purchases. There can be no assurance
that the Company can successfully implement a vendor financing program. See
"Use of Proceeds".
10
CURRENCY FLUCTUATIONS
A significant portion of the Company's revenues are denominated in the
German Deutsche Mark and, to a lesser extent, the Swiss Franc and the
Malaysian Ringgit. Fluctuations in exchange rates between the U.S. Dollar and
the German Deutsche Mark may have a material adverse effect on the Company's
business, results of operations and financial condition, particularly its
operating margins, and could also result in exchange losses. Foreign currency
transaction gains and losses are a result of the Company transacting business
in certain foreign locations in currencies other than the functional currency
of the location. The Company attempts to balance revenues and expenses in each
currency to minimize net foreign currency risk. To the extent that the Company
is unable to balance revenues and expenses in each currency, fluctuations in
the value of the currencies in which the Company conducts its business
relative to the functional currency have caused and will continue to cause
currency transaction gains and losses. The impact of future exchange rate
fluctuations on the Company's results of operations cannot be accurately
predicted. To date, the Company has not sought to hedge the risks associated
with fluctuations in exchange rates but may undertake such transactions in the
future. There can be no assurance that any hedging techniques implemented by
the Company in the future would be successful or that the Company's business,
results of operations and financial condition will not be materially adversely
affected by exchange rate fluctuations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY
The Company regards its software products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark
and trade secret laws, customer licensing agreements, employee and third-party
nondisclosure agreements and other methods to protect its proprietary rights.
These laws and contractual provisions provide only limited protection of the
Company's proprietary rights. The Company has no patents or patent
applications pending and has no registered trademarks or copyrights. Despite
the Company's efforts to protect its proprietary rights, it may be possible
for a third party to copy or otherwise obtain and use the Company's technology
without authorization or to develop similar technology independently.
Furthermore, the laws of certain countries in which the Company sells its
products do not protect the Company's software and intellectual property
rights to the same extent as do the laws of the United States. If unauthorized
copying or misuse of the Company's products were to occur to any substantial
degree, the Company's business, results of operations and financial condition
could be materially adversely affected. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
Although the Company has not received any notices from third parties
alleging infringement claims, there can be no assurance that third parties
will not claim that the Company's current or future products infringe the
proprietary rights of others. The Company expects that software developers
will increasingly be subject to such claims as the number of products and
competitors providing products and services to the telecommunications industry
grows. Any such claim, with or without merit, could result in costly
litigation, require significant management resources, cause product shipment
delays, require the Company to enter into royalty or licensing agreements or
cause the Company to discontinue the use of the challenged trades name,
service mark or technology, any of which could have a material adverse effect
on the Company's business, results of operations and financial condition.
Furthermore, such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all. See "Business--
Proprietary Rights and Licenses".
PRODUCT LIABILITY
The software developed and utilized by the Company in providing its products
and services may contain undetected errors. Although the Company engages in
extensive testing of its software prior to
11
introducing the software onto a customer's network, there can be no assurance
that errors will not be found in software after the commencement of its use.
The Company's license agreements with its customers generally contain
provisions designed to limit the Company's exposure to potential product
liability claims, such as disclaimers of warranties and limitations on
liability for special, consequential and incidental damages. In addition, the
Company's license agreements generally limit the amounts recoverable for
damages to the amounts paid by the licensee to the Company for the product or
service giving rise to the damages claimed. Although the Company has not
experienced any product liability claims to date, the sale and support of
products by the Company may result in the Company being subject to such
claims. The Company has product liability insurance which it believes is
satisfactory to cover potential product liability claims; however, a
successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business, operating results and
financial condition.
CONCENTRATION OF STOCK OWNERSHIP
Following the Offerings, the Company's executive officers and directors and
their affiliates together will beneficially own approximately 19,084,813
shares (approximately 80.5%) of the outstanding Common Stock (as determined in
accordance with rules of the Securities and Exchange Commission (the
"Commission")). In addition to the shares and options exercisable within 60
days of the date of this Prospectus, which have been included in the
calculation of such beneficial ownership, the Company's executive officers and
directors and their affiliates hold options to acquire an additional 1,226,667
shares of Common Stock at an exercise price of $5.30 per share. These
additional shares, together with shares currently beneficially owned, would
represent approximately 81.9% of the Common Stock outstanding after
consummation of the Offerings, after giving effect to the exercise of those
options. Furthermore, substantially all such persons have granted Hartmut
Lademacher the right to vote, through as late as December 31, 1999, all shares
of Common Stock owned by them. As a result, Mr. Lademacher, voting in any
election of directors through December 31, 1999, may be able to elect all
directors nominated for election and may be able to determine the outcome of
certain corporate actions requiring stockholder approval regardless of how the
other stockholders of the Company may vote. This concentration of ownership
may have the effect of delaying or preventing a change in control of the
Company. See "Management" and "Principal and Selling Stockholders".
ANTI-TAKEOVER CONSIDERATIONS
Upon the completion of the Offerings and the conversion of all outstanding
shares of Series A Convertible Preferred Stock to Common Stock, the Board of
Directors will have the authority to issue up to 225,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares, without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance
of preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no current plans to
issue shares of preferred stock. Certain provisions of the Company's
Certificate of Incorporation and By-Laws and the Delaware General Corporation
Law could delay or make more difficult a merger, tender offer or proxy contest
involving the Company. Furthermore, the Company's Board of Directors is
divided into three classes with only one class being elected each year, and
directors may only be removed by the affirmative vote of 80% or greater of all
classes of voting stock, which factors may also have the effect of delaying,
deterring or preventing a change of control of the Company. In addition,
pursuant to the LHS Group Inc. Stock Incentive Plan, all stock options granted
to employees become automatically vested and exercisable upon certain
triggering events leading up to a change of control. This vesting and the
dilutive effect that the exercise of a large number of options would have on
the Company's Common Stock may have the effect of delaying or preventing a
change of control of the Company. See "Description of Capital Stock" and
"Management--Executive Compensation".
12
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offerings, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will
develop or be sustained or that the market price of the Common Stock will not
decline below the initial public offering price. The initial public offering
price of the Common Stock will be determined by negotiations among the
Company, the Selling Stockholders and the representatives of the Underwriters
and may not be indicative of the market price for shares of Common Stock after
the Offerings. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price of the Common
Stock.
POSSIBLE VOLATILITY OF MARKET PRICE
From time to time after the Offerings, there may be significant volatility
in the market price of the Common Stock. The stock market has from time to
time experienced significant price and volume fluctuations, which have
particularly affected the market prices of the stocks of high technology and
telecommunications companies and which may be unrelated to the operating
performance of such companies. Factors such as actual or anticipated operating
results, growth rates, changes in estimates by analysts, market conditions in
the industry, announcements by competitors, regulatory actions and general
economic conditions will vary from period to period. As a result of these
factors, the Company's operating results from time to time may be below the
expectations of public market analysts and investors. Any such event would
likely have a material adverse effect on the market price of the Common Stock.
GOVERNMENT REGULATION
Currently, the Company's business is not subject to direct government
regulation; however, the Company's existing and potential customers are
subject to extensive regulation in many jurisdictions. Regulatory changes
which affect the Company's existing and potential customers could have a
material adverse effect on the business, results of operations and financial
condition of the Company. See "Business--Industry Background".
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Future sales of Common Stock could adversely affect the market price of the
Common Stock. Several of the Company's principal stockholders hold a
significant portion of the outstanding Common Stock, and a decision by one or
more of these stockholders to sell their shares could adversely affect the
market price of the Common Stock. The 4,000,000 shares of Common Stock offered
hereby (plus any shares issued upon exercise of the Underwriters' over-
allotment options) will be freely tradable in the public market without
restriction. The holders of all of the remaining 19,395,000 shares of Common
Stock that will be outstanding upon the completion of the Offerings will enter
into agreements with the Underwriters (the "Lock-up Agreements") which will
provide that, during the period beginning on the date of this Prospectus and
continuing to and including the date 180 days after the date of this
Prospectus, they will not, except in connection with the Offerings or pursuant
to certain other permitted exceptions, offer, sell, contract to sell or
otherwise dispose of, or file a registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), with respect to, any
securities of the Company which are substantially similar to the shares of
Common Stock or which are convertible into or exchangeable for, or represent
the right to receive, shares of Common Stock or securities that are
substantially similar to the Common Stock without the prior written consent of
the representatives of the Underwriters. Upon the expiration of the Lock-up
Agreements, 18,971,480 shares will be eligible for sale pursuant to Rule 144
of the Commission, an additional 781 shares will first become eligible for
sale in each month thereafter through October 2001 and 373,520 shares will
first become eligible for sale in December 1997.
13
The Company intends to file a Registration Statement on Form S-8 as soon as
practicable after the expiration of the Lock-up Agreements to register
4,000,000 shares of Common Stock that are issuable upon the exercise of
outstanding stock options or that are available for issuance pursuant to the
Company's Stock Incentive Plan. Additionally, commencing 180 days after the
completion of the Offerings, certain stockholders of the Company who will
beneficially own in the aggregate 18,971,480 shares of Common Stock as of the
completion of the Offerings will be entitled to certain demand and piggyback
registration rights with respect to such shares. All of such registered shares
generally would then be eligible for immediate sale in the public market.
Public sales of a significant number of such shares could have a material
adverse effect on the market price of the Common Stock. See "Shares Eligible
for Future Sale".
DILUTION
Purchasers of Common Stock in the Offerings will incur immediate and
substantial dilution in the net tangible book value per share of Common Stock
in the amount of $10.76 per share, assuming an initial public offering price
of $13.00 per share. To the extent that outstanding options to purchase Common
Stock are exercised, there will be further dilution. See "Dilution".
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,345,000 shares of
Common Stock being offered by the Company in the Offerings (at an assumed
initial public offering price of $13.00 per share) are estimated to be
$39,761,050 ($47,015,050 if the Underwriters' over-allotment options are
exercised in full), after deduction of the underwriting discount and estimated
offering expenses.
The Company expects to use the net proceeds of the Offerings for working
capital, including approximately $25 million for financing deferred payment
plans for certain of its customers, and for other general corporate purposes.
See "Business--Strategy". Furthermore, from time to time the Company expects
to evaluate possible acquisitions of or investments in businesses, products
and technologies that are complementary to those of the Company, for which a
portion of the net proceeds from the Offerings may be used. There are,
however, no understandings or agreements for any such acquisition or
investment as of the date of this Prospectus. Pending such uses, the Company
intends to invest the net proceeds of the Offerings in short-term, investment
grade, interest bearing instruments. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources".
DIVIDEND POLICY
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.
14
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997,
after giving effect to the conversion of all outstanding shares of Series A
Convertible Preferred Stock to Common Stock upon the completion of the
Offerings, was $12.6 million or $0.63 per share of Common Stock. "Pro forma
net tangible book value" per share represents the amount of total tangible
assets of the Company reduced by the amount of its total liabilities divided
by the total number of shares of Common Stock outstanding. After giving effect
to the net proceeds from the sale of 3,345,000 shares of Common Stock offered
by the Company hereby, the "pro forma as adjusted net tangible book value",
which reflects pro forma net tangible book value after giving effect to the
conversion of all outstanding shares of Series A Convertible Preferred Stock
into Common Stock upon completion of the Offerings, as of March 31, 1997 would
have been $52.3 million or $2.24 per share. This represents an immediate
increase in the pro forma net tangible book value of $1.61 per share to
existing stockholders, including holders of Series A Convertible Preferred
Stock, and an immediate dilution of $10.76 per share to new investors. The
following table illustrates the per share dilution in pro forma net tangible
book value to new investors:
Assumed initial public offering price per share................ $13.00
Pro forma net tangible book value per share before the
Offerings.................................................... 0.63
Increase per share attributable to new investors.............. 1.61
----
Pro forma as adjusted net tangible book value per share after
the Offerings................................................. 2.24
------
Dilution per share to new investors............................ $10.76
======
The following table summarizes as of March 31, 1997, on a pro forma basis,
the differences in the total consideration paid and the average price per
share paid to the Company by existing stockholders, including holders of
Series A Convertible Preferred Stock, and by new investors with respect to the
number of shares of Common Stock purchased from the Company.
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
Existing stockholders...... 20,050,000 85.7% $21,576,720 33.2% $ 1.08
New investors.............. 3,345,000 14.3 43,485,000 66.8 $13.00
---------- ----- ----------- -----
Total..................... 23,395,000 100.0% $65,061,720 100.0%
========== ===== =========== =====
The above discussion and tables assume no exercise of stock options
outstanding as of March 31, 1997. As of March 31, 1997, options for the
purchase of an aggregate of 2,904,500 shares of Common Stock were outstanding.
15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 (i) on a historical basis, (ii) on a pro forma basis after giving
effect to the conversion of all outstanding shares of Series A Convertible
Preferred Stock to Common Stock upon the completion of the Offerings, and
(iii) on a pro forma as adjusted basis to reflect the sale of the 3,345,000
shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $13.00 per share (after deduction of the underwriting
discount and estimated expenses of the Offerings). The information set forth
in the table should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto included elsewhere in this
Prospectus.
MARCH 31, 1997
-----------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------- ------- -----------
(IN THOUSANDS, EXCEPT SHARE
DATA)
Long-term and other obligations.................. $ 1,325 $ 1,325 $ 1,325
Stockholders' equity:
Series A Convertible Preferred Stock, $.01 par
value; 225,000 shares authorized, 225,000
shares issued and outstanding, actual; 225,000
shares authorized, none issued or outstanding,
pro forma and pro forma as adjusted............ 2 -- --
Common Stock, $.01 par value; 40,000,000 shares
authorized; 15,550,000 shares issued and
outstanding, actual; 20,050,000 shares issued
and outstanding, pro forma; 23,395,000 shares
issued and outstanding, as adjusted (1)........ 156 201 234
Additional paid-in-capital....................... 6,374 6,331 46,059
Retained earnings................................ 7,455 7,455 7,455
Accumulated translation adjustments.............. (1,427) (1,427) (1,427)
------- ------- -------
Total stockholders' equity....................... 12,560 12,560 52,321
------- ------- -------
Total capitalization......................... $13,885 $13,885 $53,646
======= ======= =======
- --------
(1) Excludes 2,904,500 shares of Common Stock reserved for issuance pursuant
to stock options outstanding as of March 31, 1997.
16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, notes thereto and other
financial information included elsewhere in this Prospectus. The selected
financial data for each of the three years ended December 31, 1996 are derived
from the consolidated financial statements of the Company which have been
audited by Ernst & Young LLP, independent auditors. The data presented for
each of the years ended December 31, 1992 and December 31, 1993 and the
quarter ended March 31, 1996 and 1997 are derived from unaudited financial
statements, but in the opinion of the Company reflects all adjustments
(consisting of normal recurring adjustments) that the Company considers
necessary for a fair presentation of such information in accordance with
generally accepted accounting principles.
QUARTER ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT
OF INCOME DATA:
Total revenues.......... $2,788 $6,712 $20,722 $26,967 $56,864 $ 6,756 $20,886
Cost of services........ 966 2,531 4,457 9,653 19,107 1,977 9,544
------ ------ ------- ------- ------- ------- -------
Gross profit.......... 1,822 4,181 16,265 17,314 37,757 4,779 11,342
Operating expenses:
Sales and marketing.... 411 630 2,965 2,455 7,653 1,238 2,253
Research and
development........... 995 2,606 5,169 9,714 16,236 3,540 4,111
General and
administrative........ 357 658 3,949 3,928 8,287 1,238 3,012
------ ------ ------- ------- ------- ------- -------
1,763 3,894 12,083 16,097 32,176 6,016 9,376
------ ------ ------- ------- ------- ------- -------
Earnings (loss) before
interest and taxes..... 59 287 4,182 1,217 5,581 (1,237) 1,966
Interest expense, net... 43 58 70 110 77 52 23
------ ------ ------- ------- ------- ------- -------
Earnings (loss) before
income taxes........... 16 229 4,112 1,107 5,504 (1,289) 1,943
Income taxes (credit)... 33 34 1,069 823 2,084 (490) 789
------ ------ ------- ------- ------- ------- -------
Net earnings (loss)..... $ (17) $ 195 $ 3,043 $ 284 $ 3,420 $ (799) $ 1,154
====== ====== ======= ======= ======= ======= =======
Net earnings (loss) per
share (1).............. $ 0.00 $ 0.03 $ 0.29 $ 0.02 $ 0.16 $ (0.04) $ 0.05
====== ====== ======= ======= ======= ======= =======
Shares used in per share
calculation (1)........ 5,938 7,645 10,421 16,098 21,757 21,757 21,757
AT DECEMBER 31, AT MARCH 31,
---------------------------------- ------------
1992 1993 1994 1995 1996 1997
----- ----- ------ ------- ------ -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents...... $ 1 $ 209 $2,374 $10,200 $4,289 $ 2,415
Working capital................ (114) 191 635 5,334 5,148 5,122
Total assets................... 1,192 2,147 14,006 24,462 43,819 35,918
Long-term and other
obligations.................... 96 151 372 399 1,360 1,325
Total stockholders' equity..... 323 681 3,770 9,933 12,325 12,560
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for the
determination of the number of shares used in per share calculation.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Founded in 1990, the Company is a leading provider of client/server-based
billing and customer care solutions to carriers in the global
telecommunications industry. The Company's software products offer carriers
flexible, customer-tailored, cost-effective billing and customer care
solutions. Historically, the Company has focused on the wireless
telecommunications sector, specifically carriers providing services based on
the GSM digital standard. To capitalize on increasing opportunities in the
global telecommunications market, the Company's strategy is to provide billing
and customer care solutions to carriers that provide services in one or more
markets, including other digital and analog wireless, wireline, paging,
satellite and Internet services.
The Company derives revenues from license fees and service fees. The typical
BSCS license is perpetual and is non-refundable by the Company. License
revenues consist solely of license fees for the Company's client/server
software. Service revenues consist of fees for customization, installation and
product support services and, to a lesser extent, maintenance fees and fees
for training. License revenues for one time licenses without customization are
recognized upon delivery of the software to the customer. Revenues from
licenses which require customization of the software are recognized over the
estimated term of the installation of such software based on the percentage of
completion method of accounting. In the event that the maximum number of a
customer's subscribers under a liense agreement is exceeded, the Company
recognizes additional license revenue in the quarter that the customer
notifies the Company of the increase, unless the company has significant
related obligations remaining. If the maximum number of customer subscribers
covered by the license is never reached, no additional revenue is recognized,
realized or invoiced to the customer. Service revenues that relate to
customization and initial installation of BSCS and customization after the
BSCS software has been installed are accounted for over the estimated term of
such service based on the percentage of completion method of accounting.
Maintenance fees are recognized ratably over the term of the maintenance
contract, and fees for training are recognized as the training is performed.
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 that the carrier expects to serve, the
number and type of telecommunications services supported by BSCS and the scope
of customization and installation requirements. Maintenance pricing is based
on the level of service desired by the customer and typically varies from 10%
to 35% of the license fee per year.
FOREIGN CURRENCY EXPOSURE
Sales outside of the United States represent a significant portion of the
Company's total revenues. A substantial amount of the Company's revenues and
costs and expenses are invoiced and paid in currencies other than the U.S.
Dollar, primarily the German Deutsche Mark and to a lesser extent the Swiss
Franc and the Malaysian Ringgit. See "Risk Factors--Currency Fluctuations".
18
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, certain items in
the Company's statement of income reflected as a percentage of total revenues.
QUARTER
YEAR ENDED ENDED MARCH
DECEMBER 31, 31,
------------------- -------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
Revenues:
License revenues........................... 72.5% 50.6% 41.7% 38.9% 35.0%
Service revenues........................... 27.5 49.4 58.3 61.1 65.0
----- ----- ----- ----- -----
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0
Cost of services............................ 21.5 35.8 33.6 29.3 45.7
----- ----- ----- ----- -----
Gross margin................................ 78.5 64.2 66.4 70.7 54.3
Operating expenses:
Sales and marketing........................ 14.3 9.1 13.5 18.3 10.8
Research and development................... 24.9 36.0 28.6 52.4 19.7
General and administrative................. 19.1 14.6 14.6 18.3 14.4
----- ----- ----- ----- -----
58.3 59.7 56.6 89.0 44.9
----- ----- ----- ----- -----
Earnings (loss) before interest and taxes... 20.2 4.5 9.8 (18.3) 9.4
Interest expense, net....................... 0.3 0.4 0.1 0.8 0.1
----- ----- ----- ----- -----
Earnings (loss) before income taxes......... 19.8 4.1 9.7 (19.1) 9.3
Income taxes (credit)....................... 5.2 3.1 3.7 (7.3) 3.8
----- ----- ----- ----- -----
Net earnings (loss)......................... 14.7% 1.1% 6.0% (11.8)% 5.5%
===== ===== ===== ===== =====
QUARTER ENDED MARCH 31, 1997 COMPARED TO QUARTER ENDED MARCH 31, 1996
REVENUES. Total revenues increased 309.1% from $6.8 million in the first
quarter of 1996 to $20.9 million in the first quarter of 1997. Revenues
increased primarily due to the successful introduction of BSCS Version 4.0 in
Europe and the increased market acceptance of the Company's products in the
Americas and Asia. Revenues from the Company's European customers accounted
for $10.2 million or 49.5% of total revenues in the first quarter of 1997
compared to $5.1 million or 74.0% of total revenues in the first quarter of
1996. Revenues from the Company's Americas customers accounted for $8.5
million or 40.6% of total revenues in the first quarter of 1997 compared to
$1.0 million or 15.1% in the first quarter of 1996. Revenues from Asian
customers increased from $700,000 or 10.9% of total revenue in the first
quarter of 1996 to $2.1 million or 9.9% of total revenues in the first quarter
of the 1997.
Service revenues as a percentage of total revenues increased slightly from
61.1% in the first quarter of 1996 to 65.0% in the first quarter of 1997
primarily due to the increased demands of customers for customization of the
billing and customer care software to meet their specific requirements.
COST OF SERVICES. Cost of services increased as a percentage of revenues to
45.7% in the first quarter of 1997 from 29.3% in the first quarter of 1996.
The increase was primarily the result of an increase in the use of outside
consultants and systems integrators. Costs of services increased 482.8% from
$2.0 million in the first quarter of 1996 to $9.5 million in the first quarter
of 1997 primarily due to compensation expense associated with increased
staffing for new projects in Europe, the Americas and Asia and also the higher
costs associated with outside consultants and systems integrators.
SALES AND MARKETING. Sales and marketing expenses decreased as a percentage
of revenues from 18.3% in the first quarter of 1996 to 10.8% in the first
quarter of 1997 while sales and marketing expenses increased from $1.2 million
in the first quarter of 1996 to $2.3 million in the first quarter of 1997.
Although the number of sales and marketing personnel and associated travel
costs increased considerably from the first quarter of 1996 to the first
quarter of 1997 the increase in total revenues
19
was much more significant and, consequently, sales and marketing expenses as a
percentage of total revenues decreased.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased as a
percentage of total revenues from 52.4% in the first quarter of 1996 to 19.7%
in the first quarter of 1997, while the dollar amount increased 16.1% from
$3.5 million in the first quarter of 1996 to $4.1 million in the first quarter
of 1997. The increase in expenses was primarily attributable to the
establishment of the research and development team in the Americas during the
last three quarters of 1996 and the initial design and development of Version
5.0 of the BSCS software in both the Americas and Europe. The Company decided
during 1996 to develop the Americanized version of the software in the
Americas while continuing to develop the European and Asian software in
Germany. Additionally, during the first quarter of 1997, certain research and
development personnel in Europe were used to staff customer projects until
additional projects personnel could be hired and these costs were charged to
costs of services rather than research and development.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
243.3% from $1.2 million in the first quarter of 1996 to $3.0 million in the
first quarter of 1997 but decreased from 18.3% of revenues in first quarter of
1996 to 14.4% in the first quarter of 1997. The increase in the dollar amount
was primarily attributable to increases in the number of administrative
personnel required to staff the Americas operation as well as increases in
office rent and other expenses associated with supporting the growth in the
Company's business.
INCOME TAXES. The provision for income taxes remained relatively stable at
40% of earnings before income taxes in the first quarter of 1997 compared to
38% of earnings before income taxes in the first quarter of 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Total revenues increased 110.9% to $56.9 million in the year ended
December 31, 1996 from $27.0 million in the year ended December 31, 1995.
License revenues increased 73.6% to $23.7 million in the year ended December
31, 1996 from $13.7 million in the year ended December 31, 1995, while service
revenues increased 149.1% to $33.2 million in the year ended December 31, 1996
from $13.3 million in the year ended December 31, 1995. The increase in total
revenues was primarily due to market acceptance of the Company's products and
services in the Americas, successful release of BSCS Version 4.0 in Europe in
early 1996 and the establishment of the Company's Asian operations in early
1996. Revenues from the Company's Americas customers accounted for $18.1
million or 31.9% of 1996 revenues compared to $945,000 or 3.5% of 1995
revenues. Revenues from the Company's Asian customers accounted for $6.3
million or 11.0% of 1996 revenues compared to $2.3 million or 8.7% of 1995
revenues.
License revenues decreased as a percentage of total revenues to 41.7% in the
year ended December 31, 1996 from 50.6% in the year ended December 31, 1995,
while service revenues increased as a percentage of total revenues to 58.3% in
the year ended December 31, 1996 from 49.4% in the year ended December 31,
1995. This change in the mix of revenues is primarily due to the increased
demands of customers for billing and customer care solutions tailored to their
specific needs.
Historically, the Company has relied on a limited number of customers for a
substantial portion of its revenues. Aerial and Swiss Telecom accounted for
12% and 10%, respectively, of the Company's total revenues in 1996. In
addition, the Company had three customers that accounted for 14%, 10% and 10%
of the Company's total revenues in 1995. The Company's concentration of
customers can result in quarterly revenues and earnings fluctuations based on
the timing of orders for, and installation of the BSCS product by, these
customers.
COST OF SERVICES. Cost of services decreased as a percentage of total
revenues to 33.6% in the year ended December 31, 1996 from 35.8% in the year
ended December 31, 1995. Costs of services increased 97.9% to $19.1 million in
the year ended December 31, 1996 from $9.7 million in the year ended December
31, 1995, primarily due to compensation expense associated with increased
staffing for new projects in Europe, the Americas and Asia. Cost of services
decreased as a percentage of
20
service revenues to 57.6% in the year ended December 31, 1996 from 72.5% in
the year ended December 31, 1995, primarily due to a decline in the use of
outside consultants and systems integrators. Cost of services consists
primarily of salaries and benefits associated with customization, installation
and product support activities. It also includes third-party costs associated
with systems integrators and, to a lesser extent, costs related to providing
software maintenance and end-user training to customers.
SALES AND MARKETING. Sales and marketing expenses increased as a percentage
of total revenues to 13.5% in the year ended December 31, 1996 from 9.1% in
the year ended December 31, 1995. These expenses increased 211.7% to $7.7
million in the year ended December 31, 1996 from $2.5 million in the year
ended December 31, 1995. This increase was principally due to growth in the
number of worldwide sales and marketing personnel responsible for developing
business, particularly in the Americas. 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 shows.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased as a
percentage of total revenues to 28.6% in the year ended December 31, 1996 from
36.0% in the year ended December 31, 1995. This decrease in research and
development costs as a percentage of revenues was primarily attributable to
the fact that revenues increased by a much greater percentage than research
and development spending. These expenses increased 67.1% to $16.2 million in
the year ended December 31, 1996 from $9.7 million in the year ended December
31, 1995. This increase was principally due to increases in the number of
personnel associated with the continued development of BSCS Version 4.0 and
the initial design and development of Version 5.0. In addition, the Company's
decision in late 1995 to modify its existing software kernel for use in the
Americas necessitated the establishment of two separate research and
development efforts in 1996. Research and development expenses are comprised
of salaries and benefits of the employees involved in product and enhancement
development. All development costs are expensed as incurred.
GENERAL AND ADMINISTRATIVE. General and administrative expenses remained
constant at 14.6% of total revenues in the years ended December 31, 1996 and
December 31, 1995. These expenses increased 111.0% to $8.3 million in the year
ended December 31, 1996 from $3.9 million in the year ended December 31, 1995.
This increase was principally due to increases in the number of administrative
personnel required to staff the Americas operation as well as increases in
office rent and other expenses incurred as a result of the general growth of
the Company's business. 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 decreased to 37.9% of earnings
before income taxes in the year ended December 31, 1996 from 74.3% of earnings
before income taxes in the year ended December 31, 1995. The higher effective
tax rate in 1995 resulted in large part from the Company's inability to
recognize the benefit of net operating losses in the United States and greater
income from certain European countries with higher statutory tax rates. The
Company currently expects that its future annual tax rates ordinarily will not
exceed 40.0% of earnings before income taxes. However, this statement is a
forward-looking statement and the Company's actual tax rate in any year could
be higher, depending on statutory rate changes and the utilization of certain
net operating loss benefits.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES. Total revenues increased 30.1% to $27.0 million in the year ended
December 31, 1995 from $20.7 million in the year ended December 31, 1994.
License revenues decreased 9.1% to $13.7 million in the year ended December
31, 1995 from $15.0 million in the year ended December 31, 1994,
21
while service revenues increased 133.7% to $13.3 million in the year ended
December 31, 1995 from $5.7 million in the year ended December 31, 1994. In
1995, the Company experienced relatively modest growth in revenues when
compared to prior years principally due to management's significant focus on
establishing operations in the Americas, which resulted in less emphasis on
sales to, and a lengthening of the sales cycle for, the Company's European
customers. Although the Company established operations in the Americas and
Asia in 1995, such operations did not generate any significant revenues in
1995. Revenues from the Company's European customers accounted for $23.7
million or 87.8% of 1995 revenues compared to $20.7 million or 100.0% of 1994
revenues. Revenues from the Company's Americas customers accounted for
$945,000 or 3.5% of revenues in 1995. In addition, in 1995, the Company's
three largest customers accounted for 14%, 10% and 10% of total revenues, and
in 1994 the Company's two largest customers accounted for 15% and 12% of total
revenues.
License revenues decreased as a percentage of total revenues to 50.6% in the
year ended December 31, 1995 from 72.5% in the year ended December 31, 1994,
while service revenues increased as a percentage of total revenues to 49.4% in
the year ended December 31, 1995 from 27.5% in the year ended December 31,
1994. This change in the mix of revenues is due to the increased demands of
customers for billing and customer care solutions tailored to their specific
needs.
COST OF SERVICES. Cost of services increased as a percentage of total
revenues to 35.8% in the year ended December 31, 1995 from 21.5% in the year
ended December 31, 1994. This increase was primarily the result of the shift
in the mix of revenues towards service revenues, which have a higher cost of
revenues than license revenues. Cost of services decreased as a percentage of
service revenues to 72.5% in the year ended December 31, 1995 from 78.2% in
the year ended December 31, 1994, due to increases in service revenues that
offset increases in service staffing. Cost of services increased 116.6% to
$9.7 million in the year ended December 31, 1995 from $4.5 million in the year
ended December 31, 1994. This increase was principally due to increased
staffing for new projects in Europe in 1995 and related compensation expense.
SALES AND MARKETING. Sales and marketing expenses decreased as a percentage
of total revenues to 9.1% in the year ended December 31, 1995 from 14.3% in
the year ended December 31, 1994. These expenses decreased 17.2% to $2.5
million in the year ended December 31, 1995 from $3.0 million in the year
ended December 31, 1994. The decrease in expense was principally due to the
payment in 1994 of approximately $700,000 in sales commissions to establish
new distribution channels, offset by related increases in staffing.
RESEARCH AND DEVELOPMENT. Research and development expenses increased as a
percentage of total revenues to 36.0% in the year ended December 31, 1995 from
24.9% in the year ended December 31, 1994. These expenses increased 87.9% to
$9.7 million in the year ended December 31, 1995 from $5.2 million in the year
ended December 31, 1994, principally due to increased staffing required to
develop BSCS Version 4.0, which was released in early 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased as
a percentage of total revenues to 14.6% in the year ended December 31, 1995
from 19.1% in the year ended December 31, 1994. These expenses remained
constant at $3.9 million in the years ended December 31, 1995 and 1994 as
existing management and administrative staffing was sufficient to support the
increase in revenues in 1995.
INCOME TAXES. The provision for income taxes increased to 74.3% of earnings
before income taxes in the year ended December 31, 1995 from 26.0% of earnings
before income taxes in the year ended December 31, 1994. The high effective
tax rate in 1995 resulted primarily from the Company's inability to recognize
the benefit of net operating losses in the United States. The lower effective
tax rate in 1994 was the result of greater income from certain European
countries with lower statutory tax rates.
22
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly consolidated statement of
income data for each of the nine quarters ended March 31, 1997. This
information has been prepared on the same basis as the audited consolidated
financial statements appearing elsewhere in this Prospectus and includes all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of the information when read in
conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus.
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
License revenues....... $2,334 $3,662 $3,663 $3,995 $2,625 $4,560 $ 8,068 $ 8,448 $ 7,310
Service revenues....... 2,161 2,756 2,897 5,499 4,131 6,393 10,886 11,753 13,576
------ ------ ------ ------ ------ ------ ------- ------- -------
Total revenues....... 4,495 6,418 6,560 9,494 6,756 10,953 18,954 20,201 20,886
Cost of services....... 1,621 1,984 2,144 3,904 1,977 3,772 6,692 6,666 9,544
------ ------ ------ ------ ------ ------ ------- ------- -------
Gross profit........... 2,874 4,434 4,416 5,590 4,779 7,181 12,262 13,535 11,342
Operating expenses:
Sales and marketing.... 566 621 664 604 1,238 2,136 2,009 2,270 2,253
Research and
development............ 1,892 1,763 2,040 4,019 3,540 4,083 3,765 4,848 4,111
General and
administrative......... 851 911 1,032 1,134 1,238 1,192 2,588 3,269 3,012
------ ------ ------ ------ ------ ------ ------- ------- -------
3,309 3,295 3,736 5,757 6,016 7,411 8,362 10,387 9,376
------ ------ ------ ------ ------ ------ ------- ------- -------
Earnings (loss) before
interest
and taxes............. (435) 1,139 680 (167) (1,237) (230) 3,900 3,148 1,966
Interest expense, net.. 4 10 39 57 52 85 24 (84) 23
------ ------ ------ ------ ------ ------ ------- ------- -------
Earnings (loss) before
income taxes.......... (439) 1,129 641 (224) (1,289) (315) 3,876 3,232 1,943
Income taxes (credit).. (325) 834 479 (165) (490) (120) 1,473 1,221 789
------ ------ ------ ------ ------ ------ ------- ------- -------
Net earnings (loss).... $ (114) $ 295 $ 162 $ (59) $ (799) $ (195) $ 2,403 $ 2,011 $ 1,154
====== ====== ====== ====== ====== ====== ======= ======= =======
Net earnings (loss) per
share (1).............. $(0.01) $ 0.02 $ 0.01 $ 0.00 $(0.04) $(0.01) $ 0.11 $ 0.09 $ 0.05
====== ====== ====== ====== ====== ====== ======= ======= =======
Shares used in per
share calculation (1). 12,159 17,257 17,257 17,648 21,757 21,757 21,757 21,757 21,757
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
-------- -------- --------- -------- -------- -------- --------- -------- --------
(AS A PERCENTAGE OF REVENUES)
Revenues:
License revenues....... 51.9% 57.1% 55.8% 42.1% 38.9% 41.6% 42.6% 41.8% 35.0%
Service revenues....... 48.1 42.9 44.2 57.9 61.1 58.4 57.4 58.2 65.0
------ ------ ------ ------ ------ ------ ------- ------- -------
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of services....... 36.1 30.9 32.7 41.1 29.3 34.4 35.3 33.0 45.7
------ ------ ------ ------ ------ ------ ------- ------- -------
Gross margin........... 63.9 69.1 67.3 58.9 70.7 65.6 64.7 67.0 54.3
Operating expenses:
Sales and marketing.... 12.6 9.7 10.1 6.4 18.3 19.5 10.6 11.2 10.8
Research and
development............ 42.1 27.5 31.1 42.3 52.4 37.3 19.9 24.0 19.7
General and
administrative......... 18.9 14.2 15.7 11.9 18.3 10.9 13.7 16.2 14.4
------ ------ ------ ------ ------ ------ ------- ------- -------
73.6 51.3 57.0 60.6 89.0 67.7 44.1 51.4 44.9
------ ------ ------ ------ ------ ------ ------- ------- -------
Earnings (loss) before
interest
and taxes............. (9.7) 17.7 10.4 (1.8) (18.3) (2.1) 20.6 15.6 9.4
Interest expense, net.. 0.1 0.2 0.6 0.6 0.8 0.8 0.1 (0.4) 0.1
------ ------ ------ ------ ------ ------ ------- ------- -------
Earnings (loss) before
income taxes.......... (9.8) 17.6 9.8 (2.4) (19.1) (2.9) 20.4 16.0 9.3
Income taxes (credit).. (7.2) 13.0 7.3 (1.7) (7.3) (1.1) 7.8 6.0 3.8
------ ------ ------ ------ ------ ------ ------- ------- -------
Net earnings (loss).... (2.5)% 4.6% 2.5% (0.6)% (11.8)% (1.8)% 12.7% 10.0% 5.5%
====== ====== ====== ====== ====== ====== ======= ======= =======
- -------
(1) See Note 2 of Notes to Consolidated Financial Statements for the
determination of the number of shares used in per share calculation.
23
The Company has experienced quarterly fluctuations in its operating and
financial results, primarily due to the timing of the introduction of new
releases of its BSCS software, the timing of commencement of new projects and
completion of existing projects, the size of new projects, cancellations of
projects, increases in sales and marketing and operations staff and the start-
up costs associated with the implementation of new operations in the Americas
and Asia. The Company expects quarterly fluctuations to continue as the
Company introduces new software releases and continues its expansion globally
into new telecommunications markets. Quarterly fluctuations may also result
from the timing of introduction of products and services by the Company's
competitors. See "Risk Factors--Fluctuations in Quarterly Operating Results"
and "--Dependence on New Products; Technological Change".
The Company's quarterly revenues have increased throughout 1995, 1996 and
the first quarter of 1997. In the first quarter of 1996, however, revenues
declined due to the completion of a number of large projects in Europe during
1995. In addition, the decrease in revenues was due to a shift in management
focus toward establishing operations in the Americas and Asia and adapting the
Company's GSM-based product to meet the prevailing standards in those markets.
In the second quarter of 1996, the Company did begin to generate significant
revenues from its Americas and Asian operations but such revenues were
primarily derived from contracts for the Company to provide its European, GSM-
based product in these markets. Revenues increased in the second and third
quarters of 1996, due to the commencement of multiple installations of BSCS
Version 4.0, particularly in the Americas. Service revenues, which represented
less than 50% of the Company's revenues in the first three quarters of 1995,
increased to approximately 65% in the first quarter of 1997 primarily due to
increased demands of customers for billing and customer care solutions
tailored to their specific needs.
Cost of services has increased in proportion to the Company's increasing
revenues due to greater costs related to additional personnel, outside
consultants and systems integrators required to meet the increased demands of
customers for billing and customer care solutions tailored to their specific
needs. In the first quarter of 1996, however, cost of services decreased due
to a reduction in the use of systems integrators and outside contractors in
connection with the completion of a number of significant projects in Europe.
Gross profit also increased throughout 1995 and 1996 in proportion to the
Company's revenues, except in the first quarter of 1996. Gross profit
decreased in the first quarter of 1997 due to increased use of outside
consultants and system integrators.
Total operating expenses steadily increased throughout 1995 and 1996 but
decreased in the first quarter of 1997. Sales and marketing expenses, which
were relatively stable through 1995, increased in the first two quarters of
1996 primarily due to significant increases in personnel related to expansion
into the Americas and Asian markets. Research and development expenses
increased dramatically during the fourth quarter of 1995 as the Company
employed additional contract and permanent software developers for the launch
of BSCS Version 4.0 in the Americas and Asia. Research and development
expenses increased in the fourth quarter of 1996 due to further increases in
staffing levels in Atlanta and Frankfurt for the planned launch of BSCS
Version 5.0. Because of the increased demand by certain of the Company's
customers in Europe for customization, certain of the Company's research and
development personnel were assigned to specific customer projects in the first
quarter of 1997. As a result, a portion of the costs associated with those
research and development personnel was allocated to the Company's general cost
of services instead of research and development for such period. General and
administrative expenses increased moderately through the second quarter of
1996. In the second half of 1996, the Company hired additional members of
senior management, particularly in the Americas.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $3.3 million in 1994, $3.2
million in 1995 and $5.5 million in the first quarter of 1997, and net cash
used by operating activities totaled $3.8 million in 1996. Net cash used by
operations in 1996 was primarily the result of the increased use of working
capital to fund the new business opportunities in the Americas and Asia.
24
The Company invested $3.5 million, $1.8 million and $4.0 million in
leasehold improvements during 1994, 1995, and 1996, respectively, and $342,000
during the first quarter of 1997. The higher investments in 1994 compared to
1995 were primarily due to $1.9 million of leasehold improvements to the
Company's European office spaces. The increase from 1995 to 1996 is primarily
the result of growth in the Company's Americas operations which required
significant purchases of furniture and computer equipment.
Since its inception, the Company has financed its growth principally through
cash provided by operations. The Company's only significant external financing
activity to date has been through the sale of $20.0 million of preferred stock
in December 1995 to General Atlantic Partners and its affiliates. Of the $20.0
million of proceeds, net of $434,000 in costs of the offering, $14.6 million
was distributed to LHS stockholders as part of the reorganization that created
the LHS Group Inc. holding company. Additionally, in July 1996, the Company
repurchased shares of Common Stock from one of its stockholders for $10.0
million and simultaneously sold an equal number of shares of Common Stock to
other stockholders of the Company for $10.0 million. See "Certain
Transactions".
Working capital requirements periodically require the Company to borrow on a
short-term basis from the Company's line of credit facilities in Europe which
provide for maximum borrowings of approximately $3.9 million and bear interest
at 8% per annum. The credit facility is renewable on an annual basis. No
borrowings were outstanding under the credit facilities as of March 31, 1997.
At March 31, 1997, the Company did not have any material commitments for
capital expenditures. The Company believes that the net proceeds from the sale
of the Common Stock in the Offerings, combined with existing cash balances,
available credit facilities, and funds generated by operations, will be
sufficient to meet its anticipated working capital and capital expenditure
requirements for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share," ("SFAS 128") which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact of
the adoption of SFAS 128 on the calculation of earnings per share for periods
prior to March 31, 1997 is not expected to be material.
25
BUSINESS
LHS is a leading provider of 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 BSCS software is a scaleable, modular billing and
customer care solution that can be implemented quickly and can support
innovative marketing and pricing of telecommunications services. BSCS has been
licensed to approximately 70 carriers in over 25 countries and supports
approximately 3.5 million subscribers.
The Company's objective is to be the leading provider of client/server-based
billing and customer care solutions for the global telecommunications
industry. The Company intends to leverage its significant installed base of
European wireless customers to serve wireline and wireless markets around the
world. Moreover, the Company seeks to continually improve the functionality of
its products, maintain the strong technology position of BSCS and establish
long-term relationships with carriers. The Company intends to leverage its
relationships with leading systems integrators, including Andersen Consulting,
Cap Gemini, EDS and Logica, and equipment vendors to more effectively market
its software and services to emerging carriers, and to efficiently install the
BSCS solution. Current customers of the Company include Aerial and PBMS in the
Americas, Swiss Telecom in Europe and Binariang in Asia.
INDUSTRY BACKGROUND
TELECOMMUNICATIONS INDUSTRY
For most of this century, telecommunications carriers around the world
provided wireline services in heavily regulated environments. Often
characterized by monopoly dominance, the telecommunications industry offered
basic telephony services and underwent little change. More recently, however,
the deregulation of the telecommunications industry coupled with the
development and widespread adoption of new wireless communications services,
such as paging and analog and digital cellular telephony, has resulted in
significant growth in the number of new carriers and in the overall size of
the telecommunications services market. As existing carriers attempt to
maintain market share in their traditional markets while simultaneously
entering new markets, and as new entrants seek to capture market share in
wireline and wireless markets, telecommunications markets worldwide have
become increasingly competitive and dynamic.
Governments around the world are relaxing regulatory constraints on the
telecommunications industry. Within the United States, deregulation commenced
in the long distance market with the breakup of AT&T in 1984 and the
subsequent entry of additional long distance carriers. In 1994, the U.S.
government similarly allowed new competitors to enter the cellular industry,
which developed in the 1980's and was initially structured as a duopoly in
each service area, by auctioning significant radio spectrum for digital
cellular, PCS and other services to new carriers. More recently, the
Telecommunications Act of 1996 is expected to increase competition across U.S.
markets by allowing new and existing local and long distance wireline,
wireless and cable TV companies to provide competing services. As a result of
these trends, the number of wireless and wireline carriers in the U.S. market
has increased and is expected to continue to increase dramatically.
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 expected adoption in 1998 of uniform regulatory
constraints 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
26
growing population. Further accelerating these trends in the
telecommunications industry, more than 60 member nations of the World Trade
Organization reached an agreement in February 1997 to substantially deregulate
the majority of the world's telecommunications markets beginning in 1998.
These trends are expected to result in established and emerging carriers
introducing service offerings in telecommunications markets worldwide, thus
increasing overall competition.
In conjunction with deregulation, advances in telecommunications technology
have significantly stimulated the growth in the number of carriers as well as
in the types of services offered. In the wireless sector, the trend in
technology has been to migrate from analog to digital, with digital
technologies promising carriers and consumers lower infrastructure costs,
greater privacy, fraud protection and new, enhanced features. Most established
carriers using older analog cellular standards such as AMPS (Americas and
Asia), NMT (Europe and Asia) and TACS (Europe) are expanding their networks to
include digital standards. Although the GSM digital standard and its
derivatives have gained widespread acceptance, particularly among carriers in
Europe and Asia, other digital cellular and PCS standards such as TDMA (U.S.)
and CDMA (U.S., Canada and Asia) are being deployed rapidly. These rapid
changes in telecommunications technology have created significant market
opportunities for new and existing carriers, resulting in greater competition
and a wider range of service offerings for consumers.
As competition intensifies, telecommunications carriers increasingly
differentiate their service offerings, not only on the basis of pricing and
reliability, but also by offering value added features, bundling multiple
services and marketing innovative, targeted rate and service plans. Carriers
are utilizing technology advancements to compete by offering service features
in addition to basic telephony, including voice mail, call forwarding, caller
identification, fax and data transmission. As carriers established in one
market attempt to enter other formerly distinct markets in wireline, wireless,
satellite and Internet services, many are bundling multiple services in order
to successfully retain existing customers and to attract new customers.
Increasingly, carriers are relying on innovative marketing of rate and service
plans to successfully segment and attract potential customers.
To compete effectively, carriers require business systems which enable
innovative and flexible marketing and support multiple service offerings.
These systems, which provide billing and customer handling, or "customer
care," have become critical to the business success of carriers. Billing
systems are no longer a back-office operation focused simply on billing and
invoicing. Carriers today demand that billing and customer care systems
provide innovative and flexible marketing of services, robust customer
management capabilities, subscriber data and feedback and service plan
flexibility in addition to the rating, invoicing and collection features
provided by yesterday's billing systems. Increasingly, billing and customer
care systems are deployed by carriers as a strategic business weapon.
BILLING AND CUSTOMER CARE SYSTEMS
Billing systems for telecommunications services were first developed to meet
the needs of large monopoly carriers, and offered a simple, single-service
billing function, including rate tariffing and 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
27
other business reasons. Regardless of whether carriers rely on a purchased
solution operated internally or on an outsourced solution from a service
bureau provider, a strong market opportunity exists for a billing and customer
care solution which provides the following benefits:
. FLEXIBILITY. Carriers need billing and customer care solutions which
enable innovative, sophisticated and dynamic marketing and pricing of
telecommunications services.
. RAPID TIME-TO-MARKET. Carriers entering new markets for
telecommunications services place a significant premium on rapid launch
of services and, accordingly, require billing and customer care
solutions which can be implemented quickly.
. PROVEN TRACK RECORD. With little margin for error in a very competitive
environment, carriers are seeking billing and customer care solutions
with a proven track record to minimize deployment risk during the
critical launch of new services.
. SCALEABILITY. Carriers are seeking solutions that will scale with
subscriber growth to avoid service billing and collection disruption and
to minimize recurring staff training and billing and customer care
system investments.
. MULTIPLE SERVICE SUPPORT. As established carriers enter new markets,
billing and customer care solutions must support multiple
telecommunications services and standards. A common billing and customer
care solution supporting wireline, wireless, Internet and satellite
offerings will enable innovative marketing of multiple services with
centralized customer billing.
. INTERNATIONAL SUPPORT. As carriers are entering new geographic markets,
billing and customer care solutions must increasingly support multiple
languages and currencies while providing consistent functionality across
diverse market environments.
THE LHS SOLUTION
The Company believes that it currently meets, and will continue to meet, the
needs of a wide variety of carriers with its BSCS software product and the
broad range of comprehensive customization, installation and maintenance
services offered by the Company. BSCS is a proven system which has been
licensed to approximately 70 carriers in more than 25 countries supporting a
total of approximately 3.5 million subscribers. 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 SUPPORT. BSCS is architected to support multiple
telecommunications technology standards with minimal modification to the
software's core billing and customer care functionality. BSCS 4.0
currently supports the GSM, NMT, ERMES, Pocsag and SMR standards. The
BSCS 5.0 versions, scheduled for release by the fourth quarter of 1997,
will also support the CDMA, TDMA and AMPS wireless standards as well as
satellite, wireline, Internet and additional paging standards.
28
. COMPREHENSIVE INTERNATIONAL SOLUTION. BSCS is a global solution that
supports multiple currencies and requirements of different geographic
markets. The product currently supports billing and customer care in the
English, French, German, Italian, Spanish, Indian, Russian, Polish,
Czech and Portuguese languages.
. COMPLETE CUSTOMER SERVICES. In addition to the BSCS software, the
Company provides carriers with a complete customer solution, including
initial customization and installation and ongoing maintenance, upgrades
and customer support. LHS offers carriers the choice of initial
installation directly from the Company or through leading systems
integrators. Ongoing maintenance and customer support is offered at
varying levels of service and priced to meet the needs of the carrier.
THE LHS STRATEGY
To maintain its position as a leading provider 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 believes
it is well positioned to compete for new wireless installations
worldwide. The Company believes there is a significant market
opportunity to become the leading provider of client/server-based
billing and customer care solutions for the growing number of carriers
which offer multiple telecommunications services. LHS will modify its
BSCS product to support not only carriers that compete in GSM wireless
markets, but also other digital wireless, analog wireless, wireline,
satellite, paging and Internet service markets. To reach this goal, the
Company plans to introduce BSCS Version 5.0 and will initially focus on
wireline opportunities in Europe to take advantage of the Company's
strong reputation and resources in that region and the impending
deregulation of European wireline markets.
. MAINTAIN A LEADING BILLING AND CUSTOMER CARE SOLUTION. The BSCS product
is currently deployed on a client/server technology platform, providing
significant billing and customer care functionality. The Company will
continue to improve product functionality by offering prepayment,
discounting, promotional and other marketing capabilities. To ensure
that its products keep pace with information technology advances, the
Company will develop support for Windows NT server software and will
continue to adopt leading database and client technologies.
. EXPAND GLOBALLY. Through its regional offices, LHS intends to expand its
marketing focus to be well-positioned for global growth in demand for
billing and customer care solutions. The Company will continue to deploy
software development, sales, service and management resources to its
regional offices in Frankfurt, Germany; Atlanta, United States; and
Kuala Lumpur, Malaysia and will continue to customize its products to
support additional languages and currencies.
. DEVELOP AND MAINTAIN CUSTOMER RELATIONS. The Company believes that the
development of long-term customer relations will result in continuing
business, a strong reputation for LHS within the telecommunications
industry and direction for future product development. LHS will hold
management, consulting and sales staff accountable for the quality of
relations with specific customers, each of which will be assigned a
dedicated contact person within the Company.
. LEVERAGE THIRD-PARTY RELATIONSHIPS. The Company seeks to maintain its
relationships with leading systems integrators such as Andersen
Consulting, Cap Gemini and Logica as well as with leading vendors of
telecommunications equipment. Many of these systems integrators and
equipment vendors operate on a global basis across wireless, wireline
and other communications technology lines, and the Company expects these
relationships to facilitate the Company's penetration of non-wireless
and non-European markets.
29
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 very large database
capability. Client applications are written in Centura and Visual C++
languages, while server applications are developed in C and SQL. BSCS supports
TCP/IP, X.25, HTTP and other standard network communications protocols.
The Company's development group maintains close contact with carriers,
integrators and technology suppliers to keep pace with technology change. BSCS
is currently implemented in a two-tier architecture for optimal performance,
scaleability and functionality. LHS is also evaluating the potential
development of BSCS on a multi-tier architecture in support of future
distributed computing and application partitioning technologies, as well as
the development of an object-oriented implementation of BSCS for future
deployment.
PRODUCTS
The Company derives a significant portion of its revenues from licensing its
BSCS software to telecommunications carriers. The BSCS software is structured
in a kernel/non-kernel hierarchy: the kernel comprises the set of core
software modules common to all BSCS configurations, while non-kernel modules
primarily provide interface functions. Kernel and non-kernel modules can be
customized to meet individual carrier requirements. The following graphic
depicts the BSCS product architecture and kernel/non-kernel structure:
DESCRIPTION OF ILLUSTRATION
Schematic diagram depicting kernel and non-kernel modules within the BSCS
software product and the interfaces of those modules with network equipment,
subscriber databases, authentication databases, payment systems and bill
delivery systems. Honeycomb background depicts several level and non-kernel
software modules.
30
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.
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.
Financial Administration -- This module reconciles billing with a carrier's
financial records and statements in addition to handling payments from
customers. Payment processing, accounts receivable and general ledger posting
activities are enabled by this module. Payments may be made via cash, credit
card transaction, direct debit transaction or lock-box bank transfer. The
module also supports advance payments, deposits, bad debt write-offs,
adjustments, corrections and account query. A sales administration function
maintains sales force data and enables sales tracking for commission
processing.
A number of customizable non-kernel interface modules are included within
BSCS to enable close integration with a carrier's network and business
infrastructure. These non-kernel modules are 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 suscriber'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.
31
The Company offers two other products within the BSCS suite to
telecommunications carriers. The Company's APSIS product enables carriers
providing GSM-based PCS services to offer integrated smart card based
services. The Intelligent Call Center ("ICC") product is an automatic call
distribution system for customer service call centers. APSIS and ICC together
generated less than 7% of the Company's revenues in 1996, and the Company
expects that together they will contribute less than 5% of the Company's
continuing revenues.
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, CMG Telecommunications
& Utilities B.V., Danet GmbH ("Danet"), Debis Systemhaus GmbH, Digital
Equipment Corporation, EDS, Hewlett-Packard Company, IBM Corp. ("IBM") and
Logica. 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 March 31, 1997, the Company
employed 278 projects and services personnel.
After installation, LHS maintains close ongoing contact with the carrier,
even on projects developed through a systems integrator, by holding LHS
management, consulting and sales personnel accountable for the quality of
relations with specific customers, by assigning a consulting and sales contact
to each customer, and through control over BSCS upgrades and maintenance. As a
result, the Company is often well-positioned to earn substantial revenues from
additional customization of the BSCS product after installation and additional
revenues from maintenance agreements as a carrier's subscriber base and
service offerings continue to grow and change.
The total value of an initial contract for BSCS software and services
typically ranges from $1 million to $5 million, depending on the size of the
carrier, the number of subscribers in service with the carrier, the number and
type of telecommunications services supported by BSCS, and the scope of
customization and installation requirements. Maintenance pricing is based on
the level of service desired by the customer and typically varies from 10% to
35% of the license fee per year.
PRODUCT DEVELOPMENT
The Company directs its product development efforts toward refining and
enhancing BSCS. Significant emphasis is placed on the Company's compliance
with world-wide development standards and quality benchmarks during product
development. Processes used by the Company in product development have ISO
9001 certification.
Development efforts currently in process are focused on providing support
for the AMPS analog wireless standard, European wireline services, radio
dispatch services, Microsoft's management systems suite for Internet service
providers, paging services, CDMA-based PCS and satellite-based wireless
services. The Company is also developing a Web Service Center product, an add-
on module to the Company's core BSCS product that enables carriers to offer
limited, but cost-effective, access via the Internet to the BSCS system. The
Web Service Center will utilize HTML, Java and ActiveX technologies. The
Company's development efforts will be focused on plans to unify the American
and European/Asian versions of the BSCS kernel by 1998. Longer term, the
Company is evaluating the potential development of BSCS on a multi-tier
architecture to support future distributed computing and application
partitioning technologies, as well as the development of an object-oriented
implementation of BSCS for future deployment. The Company's development staff
consisted of 150 employees as of March 31, 1997 and 87 employees as of
December 31, 1995. See "Risk Factors--Unification of American and
European/Asian Product Lines" and "--Dependence on New Products; Technological
Change".
32
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 34 employees as of
March 31, 1997 and intends to expand its direct sales operations based in
Frankfurt, Germany; Atlanta, United States; and Kuala Lumpur, Malaysia. Due to
the sophisticated nature of the Company's products and services, the duration
of a sales cycle can range from as short as thirty days to as long as one year
or more. See "Risk Factors--Fluctuations in Quarterly Operating Results".
Because third parties play an important role in the general deployment of
information technology with carriers, the Company has developed a number of
indirect sales channels. These indirect channels, through systems integrators
and telecommunications equipment vendors, are built on relationships and
references developed through cross-selling and problem-solving. LHS markets
its products through a number of systems integrators, particularly for systems
serving larger carriers. See "Risk Factors--Reliance on Third Party
Relationships".
In addition, the Company is currently exploring a service bureau offering
through third parties to provide billing services to carriers within the U.S.
market. The Company believes that a service bureau offering may be attractive
to these carriers for financial, time-to-market and other reasons.
CUSTOMERS
BSCS has been licensed to approximately 70 carriers in more than 25
countries supporting a total of approximately 3.5 million subscribers. Much of
the Company's early growth was accomplished by focusing on GSM-based wireless
carriers in Europe, and all of the Company's 1994 revenues and 88% of the
Company's 1995 revenues were from European carriers. LHS plans to continue its
recent expansion beyond the European wireless market and to serve wireless and
wireline carriers around the world. In 1996, carriers in Europe, the Americas
and Asia contributed 55%, 33% and 12% of the Company's total revenues,
respectively. The following is an overview of the Company's relationships with
certain selected customers which illustrates the Company's support for
multiple telecommunications standards and its operations in various geographic
markets:
AERIAL COMMUNICATIONS
Aerial was one of the first PCS operators in the United States to offer GSM
based wireless services. Aerial has licenses to provide PCS service in major
trading areas covering 27.3 million people in the United States. The BSCS
software is expected to enable customer service representatives to perform
nationwide activation and allow for the integration of various sub-systems
such as mapping, interactive voice response systems and credit verification
systems. Aerial signed a contract for BSCS in July 1996 and intends to launch
commercial service in mid-1997. Revenues from Aerial accounted for
approximately 12% of the Company's 1996 total revenues.
BINARIANG COMMUNICATIONS
Binariang is a leading provider of multiple telecommunications services,
including wireless, wireline, data and satellite services, in Malaysia.
Binariang entered into an agreement with the Company to license BSCS in June
1995 and launched its commercial services in October 1995. The BSCS product
was enhanced in late 1996 to support wireline services. Binariang currently
utilizes BSCS to send bills and handle customer care for approximately 160,000
wireless subscribers and 30,000 wireline subscribers.
33
PACIFIC BELL MOBILE SERVICES
On November 1, 1996 PBMS became one of the first companies to commercially
launch PCS services in the United States, with licenses covering an area of 34
million people. BSCS was selected to support billing and over-the-air
activation services to give customer representatives easy access to
information that helps them address subscriber requests quickly and
efficiently. PBMS signed an agreement in December 1995 for the BSCS software
license and customization services and launched service in October 1996.
SWISS TELECOM
Swiss Telecom is the monopoly provider of telecommunications services,
including GSM services, in Switzerland. Swiss Telecom was one of the first
customers of BSCS and launched GSM services supported by BSCS in October 1995
after signing an agreement for the Company's software and services in July
1994. Swiss Telecom currently serves a subscriber base of over 400,000 GSM and
paging services customers. The BSCS system is expected to support another
350,000 NMT (analog wireless) subscribers by June 1997. The Company continues
to provide ongoing development and maintenance support services to Swiss
Telecom. Revenues from Swiss Telecom accounted for approximately 10% of the
Company's 1996 total revenues.
In addition, in March 1997, the Company entered into an oral preferred
provider arrangement with Microsoft Corporation to provide billing and
customer care software solutions to Internet Service Providers of the
Microsoft Commercial Internet System. Pursuant to this arrangement, Microsoft
will recommend to its customers certain of the Company's software products
which are compatible with Microsoft's internet service. While the Company is
hopeful that the arrangement will prove beneficial to it and its business, the
Company has not yet generated any revenues from such relationship and any
significant financial benefits from the relationship are yet to be
demonstrated.
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, AMS and CBIS in the Americas and Kingston-SCL and SEMA Group
internationally, with systems integrators and with internal billing
departments of larger telecommunications carriers. The Company anticipates
continued growth and competition in the telecommunications industry and the
entrance of new competitors into the billing and customer care systems market
in the future.
The Company believes that the principal competitive factors in its market
include responsiveness to carrier needs, timeliness of implementation, quality
and reliability of products, price, project management capability and
technical expertise. The Company also 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
34
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 "Risk Factors--Highly
Competitive Market; Competition".
PROPRIETARY RIGHTS AND LICENSES
LHS does not currently hold any patents and relies upon a combination of
statutory and common law copyright, trademark and trade secret laws, customer
licensing agreements, employee and third party non-disclosure agreements and
other methods to establish and maintain its proprietary rights to its
products. The Company believes that because of the rapid pace of technological
change in the communication and software industries, the legal protections for
its products are less significant factors in the Company's success than the
knowledge, ability and experience of the Company's employees and the
timeliness and quality of support services provided by LHS.
LHS generally enters into confidentiality agreements with its employees,
consultants, and current and potential clients and limits access to, and
distribution of, its proprietary information. Use of the Company's software
products is usually restricted to specified locations and is subject to terms
and conditions prohibiting unauthorized reproduction or transfer of the
software products. The Company also seeks to protect the source code of its
software as a trade secret and as a copyrighted work. See "Risk Factors--Risks
Associated with Intellectual Property".
EMPLOYEES
As of March 31, 1997, the Company employed a total of 523 employees. None of
the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and believes that its employee relations are
good.
PROPERTIES
LHS leases office space in Atlanta, United States; Frankfurt, Germany; and
Kuala Lumpur, Malaysia 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. The leases for currently occupied office
space in Atlanta aggregate 40,656 square feet and expire in years 2001 and
2002 while the leases for currently occupied office space in Frankfurt
aggregate 35,984 square feet and expire at various dates through 2002. The
lease payments for these facilities in 1996 aggregated approximately $1.2
million. In January 1997, the Company entered into a five-year lease agreement
for new office space in Atlanta beginning April 15, 1997 with total floor
space of 16,880 square feet. This new space will replace 14,161 square feet of
currently-occupied space in another building. The Company expects to sublease
the currently-occupied space to a new tenant beginning in mid 1997. The
Company also entered into a five-year lease agreement for 33,874 square feet
of new office space in Frankfurt beginning July 1, 1997. This new space will
replace 20,721 square feet of currently-occupied space which is expected to be
either sub-leased or terminated in mid-1997. The Company currently leases
5,304 square feet of office space in Kuala Lumpur.
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.
35
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of
April 1, 1997 are as follows:
NAME AGE POSITION
---- --- --------
Hartmut Lademacher............... 48 Chairman of the Board and Chief
Executive Officer
Jerry W. Braxton................. 50 Executive Vice President, Chief
Financial
Officer, Treasurer and Director
Dr. Wolf J. Gaede................ 40 Executive Vice President, General
Counsel, Secretary and Director
Dr. Joachim Hertel............... 44 Executive Vice President-Technology
Jurgen Doring.................... 52 Executive Vice President
Erik Froberg..................... 39 Executive Vice President
Ulf Bohla (1).................... 53 Director
William E. Ford (2).............. 35 Director
William O. Grabe (2)............. 58 Director
George F. Schmitt (1)............ 53 Director
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
HARTMUT LADEMACHER is one of the founders of the Company and has served as
Chairman of the Board and Chief Executive Officer since the Company's
inception in October 1990. From 1973 to October 1990, Mr. Lademacher was
employed by IBM in Germany where he last served as Manager of Project
Marketing.
JERRY W. BRAXTON has served as the Company's Executive Vice President, Chief
Financial Officer and Treasurer since August 1996 and as a director of the
Company since September 1996. Before joining LHS, Mr. Braxton served as the
Chief Financial Officer for National Data Corporation, a provider of
transaction processing services and software applications systems, from 1992
to 1996. From 1976 to 1992, Mr. Braxton was employed by Contel Corporation, a
telecommunications services provider, where he last served as the Vice
President/Controller and Treasurer.
DR. WOLF J. GAEDE has served as Executive Vice President, General Counsel
and Secretary of the Company since January 1997 and as a director of the
Company since September 1996. From 1991 to January 1997, Dr. Gaede was a
partner with the German law firm of Oppenhoff and Radler. From 1989 to 1991,
Dr. Gaede served with the law firm of Fischotter and Luther in Hamburg,
Germany and the law firm of Fulbright, Jaworski, Reavis & McGrath in New York,
New York. From 1986 to 1989, Dr. Gaede acted as Adjunct Professor at the
University of Hamburg, Germany.
DR. JOACHIM HERTEL is one of the founders of the Company and has served as
Executive Vice President-Technology of the Company since October 1990. Prior
to joining the Company, Dr. Hertel worked as an Architect and Designer with
IBM from 1985 to 1990 and as an Architect and Designer with SAP, a software
provider, from 1982 to 1985.
JURGEN DORING joined LHS in November 1996 as Executive Vice President of the
Company and President and Chief Executive Officer of LHS Communications
Systems, Inc., a subsidiary of the Company. Mr. Doring previously served as
Chief Executive Officer of Danet, Inc., a systems integrator, from 1993 to
1996 and worked in various positions with Danet GmbH in Germany from 1977 to
1993.
36
ERIK FROBERG has served as Executive Vice President of the Company and
President and Chief Executive Officer of LHS Holding Germany GmbH, a
subsidiary of the Company, since August 1996. Prior to joining LHS, Mr.
Froberg was employed by Cap Gemini Sweden AB, a systems integrator, from 1985
to 1996 and last served as Executive Vice President and Division Manager for
Utilities and Telecom.
ULF BOHLA has been a director of the Company since December 1995. He has
been Chairman of the Board of Vebacom GmbH, a telecommunications service
provider, since July 1994. He was General Manager of Telecommunications and
Vice President of International Marketing Operations for IBM Deutschland from
1970 to 1994. While with IBM, Mr. Bohla also acted as Director of the North
German Region.
WILLIAM E. FORD has been a director of the Company since December 1995. Mr.
Ford is a managing member of General Atlantic Partners, LLC ("GAP LLC") and
has been with GAP LLC since July 1991. From August 1987 to July 1991, Mr. Ford
was an associate with Morgan Stanley & Co. Incorporated. Mr. Ford is also a
director of E* Trade Group, an electronic discount brokerage company, Envoy
Corporation, a health insurance claims processing company, and GT Interactive,
Marcam Corporation and SS&C Technologies, all of which are software companies.
WILLIAM O. GRABE has been a director of the Company since December 1995. Mr.
Grabe is a managing member of GAP LLC and has been with GAP LLC since April
1992. Prior to April 1992, Mr. Grabe was a Vice President and General Manager
for IBM. Mr. Grabe is a director of Compuware Corporation, Marcam Corporation,
The Baan Company, The Coda Group PLC and Centura Software, all of which are
software companies, and is also a director of Gartner Group, an information
technology consulting company.
GEORGE SCHMITT has been a director of the Company since October 1996. He has
served as President of Omnipoint Communications, Inc., a PCS carrier, since
October 1995. From November 1994 to September 1995, Mr. Schmitt was the
President and Chief Executive Officer of PCS PrimeCo L.P., a PCS services
provider formed by AirTouch Communications, Bell Atlantic, NYNEX and U.S.
West. From November 1993 to November 1994, Mr. Schmitt was Executive Vice
President of International Operations of AirTouch Communications. From January
1990 to March 1994, he served as Vice President of Pacific Telesis Group, a
predecessor of AirTouch Communications. Mr. Schmitt is also a director of
Objective Systems Integrators, Inc.
BOARD OF DIRECTORS
The Board of Directors consists of seven directors and, pursuant to the
Company's Certificate of Incorporation, the Board of Directors is divided into
three classes as nearly equal in number as possible, with staggered three-year
terms. One class is elected each year. The terms of Messrs. Bohla and Braxton
will expire at the 1998 annual meeting of stockholders, the terms of Messrs.
Grabe and Schmitt will expire at the 1999 annual meeting of stockholders, and
the terms of Messrs. Ford, Gaede and Lademacher will expire at the 2000 annual
meeting of stockholders. Pursuant to the By-Laws of the Company and a
stockholders agreement (the "Stockholders Agreement") among the Company,
General Atlantic Partners 23, L.P. ("GAP 23"), General Atlantic Partners 31,
L.P. ("GAP 31") and GAP Coinvestment Partners, L.P. ("GAP Coinvestment") (GAP
23, GAP 31 and GAP Coinvestment hereinafter being referred to together as the
"General Atlantic Stockholders") and the other stockholders of the Company
(hereinafter being referred to together as the "Major Stockholders"), the
General Atlantic Stockholders have designated two of the members of the Board
of Directors (Messrs. William E. Ford and William O. Grabe) and the Major
Stockholders have designated two members of the Board of Directors (Ulf Bohla
and Hartmut Lademacher). The remaining directors were unanimously elected by
the stockholders. Upon the completion of this offering, the Stockholders
Agreement and the related director designation rights of the General Atlantic
Stockholders and the Major Stockholders will terminate.
37
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee is responsible for reviewing and making
recommendations regarding the Company's independent auditors, the annual audit
of the Company's financial statements and the Company's internal accounting
practices and policies. The Compensation Committee approves compensation
arrangements for officers and key employees of the Company, establishes
general levels of compensation for all other employees of the Company and
administers the Company's Stock Incentive Plan. See "Management--Executive
Compensation--Stock Options".
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1996, all matters concerning executive
officer compensation were addressed by the entire Board of Directors, which
included Hartmut Lademacher, Chairman of the Board and Chief Executive Officer
of the Company, and Jerry Braxton, Executive Vice President, Chief Financial
Officer and Treasurer of the Company. See "Certain Transactions" for a
description of certain transactions between the Company and certain members of
its Board of Directors.
DIRECTOR COMPENSATION
Directors do not receive cash retainers or fees for attendance at meetings
of the Board of Directors or committees of the Board but are reimbursed for
reasonable expenses incurred by them in connection with their attendance at
Board and committee meetings. In lieu of cash compensation, the Company in
1996 granted non-qualified options to purchase 50,000 shares of Common Stock
to each of the seven directors of the Company. The exercise price of all of
these options was $5.30 per share and these options expire in 2006. These
options are immediately exercisable into non-vested restricted shares of
Common Stock. The restrictions on 25% of these restricted shares lapse one
year from the date of the option grant and the restrictions on 1.56% of these
shares lapse on the monthly anniversary of the grant date in each of the
succeeding 48 months.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the amounts paid by the Company during the
year ended December 31, 1996 to the Company's Chief Executive Officer and the
two other most highly compensated executive officers of the Company who earned
salary and bonus in excess of $100,000 during 1996 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------- -------------------
NAME AND PRINCIPAL OTHER ANNUAL SHARES UNDERLYING
POSITION SALARY BONUS COMPENSATION(1) OPTIONS (#)
- -------------------------- -------- ------- -------------- -------------------
Hartmut Lademacher........ $353,870 $ -- $58,341 200,000
Chairman of the Board and
Chief Executive Officer
Dr. Joachim Hertel........ 298,567 -- -- 150,000
Executive Vice President-
Technology
Erik Froberg (2).......... 124,594 37,378 37,871 400,000
Executive Vice President
- --------
(1) Represents the value of personal use of a Company-provided automobile.
(2) Mr. Froberg's employment with the Company commenced on August 12, 1996.
38
STOCK OPTIONS
The following table sets forth information regarding options to purchase
shares of Common Stock granted during the year ended December 31, 1996 to the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------
POTENTIAL
REALIZABLE VALUE AT
PERCENT OF ASSUMED ANNUAL
TOTAL OPTIONS RATES OF STOCK
SHARES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES FOR OPTION TERM(2)
GRANT OPTIONS IN FISCAL EXERCISE EXPIRATION -------------------
NAME DATE GRANTED YEAR PRICE(1) DATE 5% 10%
---- ----- ---------- ------------- -------- ---------- --------- ---------
Hartmut Lademacher...... 6/18/96 50,000 1.9% $ 5.30 6/18/06 $ 166,657 $ 422,342
9/17/96 150,000 5.6 5.30 9/17/06 499,921 1,267,025
Dr. Joachim Hertel ..... 9/17/96 150,000 5.6 5.30 9/17/06 499,921 1,267,025
Erik Froberg ........... 9/17/96 400,000 14.8 5.30 9/17/06 1,333,257 3,378,734
- --------
(1) All options were granted at an exercise price equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
(2) The amounts shown as potential realizable values of the options are based
on assumed annualized rates of appreciation in the price of the Common
Stock of 5% and 10% over the term of the options, as set forth in the
rules of the Commission. Actual gains, if any, on stock option exercises
are dependent upon the future performance of the Common Stock. There can
be no assurance that the potential realizable values reflected in the
table will be achieved. No shares of restricted stock, stock appreciation
rights or other equity-linked securities were granted during the year.
The following table sets forth the number and value of unexercised options
held as of December 31, 1996 by the Named Executive Officers. None of the
Named Executive Officers has exercised any of the options granted to him.
FISCAL YEAR END OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-
UNEXERCISED OPTIONS AT THE-MONEY OPTIONS AT
YEAR END (#) YEAR END ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Hartmut Lademacher.......... 50,000 150,000 $385,000 $1,155,000
Dr. Joachim Hertel.......... -- 150,000 -- 1,155,000
Erik Froberg................ -- 400,000 -- 3,080,000
- --------
(1) There was no public trading market for the Common Stock at December 31,
1996. Accordingly, these values have been calculated based on an assumed
initial public offering price of $13.00 per share less the exercise price
of $5.30 per share.
On October 14, 1996, the Board of Directors adopted and the Company's
stockholders approved the LHS Group Inc. Stock Incentive Plan (the "Incentive
Plan"). Directors, officers, key employees and consultants of the Company and
its affiliates are eligible to receive awards under the Incentive Plan. The
Incentive Plan authorizes the award of stock options, restricted stock grants,
and other rights that relate to or are valued by reference to the Company's
Common Stock or other awards relating to Common Stock. The number of shares
which may be awarded under the Incentive Plan may not exceed 4,000,000 shares
in the aggregate, and over the life of the Incentive Plan no individual may be
awarded stock options to purchase more than 1,000,000 shares. In the event of
certain transactions
39
affecting the number or type of outstanding shares, the number of shares
subject to the Incentive Plan and the number, type and exercise price of
shares subject to outstanding awards shall be appropriately adjusted. The
Compensation Committee of the Board of Directors has been appointed to
administer the Incentive Plan. This Committee determines which individuals are
eligible to receive awards under the Incentive Plan and the amount, price,
timing and other terms and conditions applicable to such awards.
Options awarded under the Incentive Plan may be either incentive stock
options which are intended to satisfy the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or non-qualified stock
options which are not intended to satisfy Section 422 of the Code. Under the
terms of the Incentive Plan, options are granted at an exercise price that is
equal to the fair market value of a share of Common Stock of the Company at
the time the option is granted, unless otherwise determined by the Committee,
but in no event may the exercise price be less than 50% of such fair market
value. The Incentive Plan provides that each option granted becomes
exercisable on the first anniversary of the grant date with regard to 25% of
the shares subject to the option and an additional 1.56% of the shares subject
to the option become exercisable on the first day of each of the succeeding 48
months following such anniversary, unless otherwise determined by the
Committee. Vested options generally expire on the date determined by the
Committee, which shall not be later than the earliest to occur of (i) the
tenth anniversary of the grant date, (ii) the first anniversary of the
participant's termination of employment by reason of death, or (iii) in the
case of incentive stock options, the three month anniversary of the
participant's termination of employment for any other reason.
Under the Incentive Plan, the Committee also may grant awards of Common
Stock or other rights that are payable in, valued by reference to or otherwise
related to shares of Common Stock, which awards and rights shall be subject to
any such conditions and restrictions, including performance objectives, as the
Committee may determine. No options or unvested shares of restricted stock may
be transferred other than by will or the laws of descent and distribution,
unless otherwise provided by the Committee. Upon a Change of Control of the
Company (as defined in the Incentive Plan), all unvested options vest and all
restrictions applicable to restricted stock awards lapse.
EMPLOYMENT AGREEMENTS
Hartmut Lademacher, Chairman of the Board and Chief Executive Officer, and
Dr. Joachim Hertel, Executive Vice President-Technology, have employment
agreements with LHS. Each employment agreement has a stated term of three
years that began on January 1, 1997, but may be terminated at any time by
either party upon 90 days notice to the other party. The agreements provide
for salaries in 1997 of $540,000 for Mr. Lademacher and $480,000 for Dr.
Hertel, which salaries are to be adjusted annually by the Board of Directors
or a committee thereof based on its assessment of the employee's performance.
Each employment agreement further provides that LHS will provide the employee
with an automobile, fund each employee's existing pension plan, pay for
disability insurance and otherwise allow the employee to participate in all
benefit programs offered by the Company. The agreements also contain covenants
relating to (i) the non-disclosure of confidential information; (ii) the
protection of inventions and other developments; (iii) the non-solicitation of
customers; and (iv) the non-recruitment of the Company's employees.
In addition, LHS Holding Germany GmbH, a subsidiary of the Company, entered
into an employment agreement with Erik Froberg on May 21, 1996. The agreement
provides for an annual base salary of 500,000 German Deutsche Marks
(approximately $290,000) with 400,000 Deutsche Marks (approximately $230,000)
as the maximum incentive based bonus. The agreement also grants Mr. Froberg
options to purchase 400,000 shares of Common Stock at an exercise price of
$5.30 per share, which options vest over a five year period. The agreement
requires 12 months notice before either party can terminate Mr. Froberg's
employment.
40
CERTAIN TRANSACTIONS
In connection with the reincorporation of the Company as a Delaware
corporation in December 1995, the Company issued shares of its Common Stock to
ten individuals and paid cash to certain of these individuals as described in
the next paragraph in exchange for their equity interests in various entities
that comprised the business, and that currently are subsidiaries, of the
Company. These individuals include Hartmut Lademacher (3,873,520 shares), Dr.
Joachim Hertel (3,873,520 shares), Manfred Hellwig (2,014,900 shares), Dr.
Rainer Zimmermann (1,861,560 shares), Otto Wipprecht (1,007,480 shares) and
Dr. Wolf Gaede (155,000 shares). Concurrently, the Company sold 193,890 shares
of Series A Convertible Preferred Stock to GAP 23 at a price of $17,234,882
and sold 31,110 shares of Series A Convertible Preferred Stock to GAP
Coinvestment at a price of $2,765,368. Each share of Series A Convertible
Preferred Stock is convertible into 20 shares of Common Stock of the Company,
and all of such shares of Series A Convertible Preferred Stock will be
automatically converted into an aggregate of 4,500,000 shares of Common Stock
upon completion of the Offerings.
In connection with the above transactions, the Company distributed
approximately $14,600,000 of the proceeds from the sale of its Series A
Preferred Stock to the following executive officers, directors and principal
stockholders of the Company in exchange for their equity interests in LHS
Communications Systems, Inc., LHS Germany Holding GmbH and LHS Europe Ltd. and
the forgiveness by those individuals of certain loans to those entities:
Hartmut Lademacher ($3,760,000), Dr. Joachim Hertel ($3,880,000), Mr. Manfred
Hellwig ($1,310,000), Dr. Rainer Zimmermann ($1,190,000), Mr. Otto Wipprecht
($1,400,000) and Dr. Wolf J. Gaede ($100,000). The Company believes that these
exchanges were made for fair value.
In July 1996, the Company repurchased 1,861,560 shares of Common Stock from
one of its stockholders at a price of $10,000,000 and simultaneously sold
1,601,920 shares of Common Stock to GAP 31 at a price of $8,605,514 and
259,640 shares of Common Stock to GAP Coinvestment at a price of $1,394,786.
All of the transactions described above are hereafter referred to collectively
as the "Reorganization". See "Principal and Selling Stockholders".
On December 12 and 13, 1996, Hartmut Lademacher sold an aggregate of 373,520
shares of Common Stock for a purchase price of $16.75 per share to five
investors as follows: 50,000 shares to GAP Coinvestment, 40,000 shares to
Coutts (Jersey) Limited, 120,000 shares to Baan Investment, B.V., 11,999
shares to Technology Crossover Ventures, C.V. and 151,521 shares to Technology
Crossover Ventures, L.P.
In connection with the Reorganization, the Company, the General Atlantic
Stockholders and the Major Stockholders entered into the Stockholders
Agreement and a registration rights agreement (the "Registration Rights
Agreement") which set forth certain rights and obligations of the parties. The
Stockholders Agreement will terminate upon the completion of the Offerings.
The Registration Rights Agreement will continue following the completion of
this offering and is summarized under the heading "Shares Eligible for Future
Sale".
In December 1994, LH Specifications Software Projectberatungsgesellschaft
mbH and LHS-Service Gesellschaft fur DV-Dienstleistungen und Handel mbH paid
one-time dividends in the aggregate amount of approximately $621,000 to
certain executive officers, directors and principal stockholders of the
Company, including Hartmut Lademacher ($155,250), Dr. Joachim Hertel
($155,250) and Manfred Hellwig ($142,830). See "Management--Directors and
Executive Officers" and "Principal and Selling Stockholders". Each of the
above referenced companies is currently an indirect wholly owned subsidiary of
the Company.
A subsidiary of the Company leases office space in Frankfurt, Germany from a
corporation that is owned in part by Hartmut Lademacher (25%), Dr. Joachim
Hertel (25%) and Dr. Rainer Zimmermann (10%), who is an employee and owner of
more than 5% of the Common Stock of the Company. During the years ended
December 31, 1994, 1995, 1996 and the three months ended March 31, 1997, the
Company made lease payments totaling $247,000, $370,000, $370,000 and $85,000,
respectively, to this corporation.
41
In connection with the E-Plus project in Dusseldorf, Germany, a subsidiary
of the Company leases housing space for certain of its employees. This space
is owned by a partnership consisting of three equal partners, Hartmut
Lademacher, Dr. Joachim Hertel and Dr. Rainer Zimmermann. During each of the
years ended December 31, 1994, 1995 and 1996, the Company made lease payments
of approximately $67,000 to the partnership.
Dr. Wolf J. Gaede, who has served since January 1, 1997 as Executive Vice
President, General Counsel and a director of the Company, was previously a
partner with the German law firm of Oppenhoff & Radler, which provides legal
services to the Company. During the years ended December 31, 1994, 1995 and
1996, the Company paid legal fees totaling $121,597, $518,660 and $554,509,
respectively, to Oppenhoff & Radler.
In May 1995, the Company made a loan in the principal amount of $70,000 to
Mr. Otto Wipprecht, an employee of the Company, for personal reasons. Mr.
Wipprecht repaid this loan in full with the market rate of interest in
December 1996. In addition, in April 1996, the Company made a loan in the
principal amount of $250,000 to Mr. William J. Bobb, II, an employee of the
Company, also for personal reasons. Mr. Bobb repaid this loan in full with the
market rate of interest in December 1996.
In October 1996, William O. Grabe, who is a director of the Company, paid
$265,000 to the Company to exercise options for the purchase of 50,000 shares
of Common Stock of the Company. The shares of Common Stock received by him are
restricted shares that may not be sold, pledged or otherwise transferred
except in accordance with the vesting schedule applicable to the options. The
vesting schedule provides that 12,500 of the shares vest on October 18, 1997,
and an additional 781 shares vest on the monthly anniversary of such date in
each subsequent month through October 18, 2001. If Mr. Grabe ceases to be a
director of the Company for any reason, he will forfeit all of his rights to
any unvested shares as of the date he ceases to be a director.
The Company believes that each of the above transactions was on terms no
less favorable to the Company than could have been obtained from unaffiliated
third parties on an arms length basis. The Company subsequently has adopted a
policy requiring that all transactions between the Company and its officers,
directors or other affiliates, or entities in which such person has an
interest, must be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties on an arm's-length basis and must be
approved in advance by a majority of the Company's directors who have no
interest in the transaction.
42
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 1, 1997 and as adjusted to
reflect the sale of shares offered hereby by (i) each person known to the
Company to beneficially own more than 5% of the Common Stock, (ii) each
director and Named Executive Officer, (iii) all directors and executive
officers of the Company as a group and (iv) each Selling Stockholder.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERINGS (1) OFFERINGS (1)
--------------------- SHARES ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
- ------------------------ ---------- ---------- ------- ---------- ----------
5% STOCKHOLDERS:
General Atlantic Partners
LLC (3).................... 6,411,560 32.0% -- 6,411,560 27.4%
Manfred Hellwig (4)........ 2,014,900 13.0 200,000 1,814,900 7.8
Dr. Rainer Zimmermann (5).. 1,861,560 12.0 -- 1,861,560 8.0
Otto Wipprecht (6)......... 1,007,480 6.5 100,000 907,480 3.9
DIRECTORS:
William E. Ford (3)(7)..... 6,461,560 32.2 -- 6,461,560 27.6
William O. Grabe (3)(8).... 6,461,560 32.2 -- 6,461,560 27.6
Hartmut Lademacher (9)..... 15,226,040 97.3 -- 14,066,040 60.1
Wolf J. Gaede (7).......... 205,000 1.3 10,000 195,000 *
Jerry W. Braxton (7)....... 73,333 * -- 73,333 *
Ulf Bohla (7).............. 50,000 * -- 50,000 *
George F. Schmitt (7)...... 50,000 * -- 50,000 *
OTHER NAMED EXECUTIVE
OFFICERS:
Dr. Joachim Hertel (10).... 3,873,520 24.9 300,000 3,573,520 15.3
Erik Froberg............... -- -- -- -- --
All directors and executive
officers
as a group (10
persons) (11).............. 20,049,813 98.4 310,000 19,084,813 80.5
ADDITIONAL SELLING
STOCKHOLDER:
Eberhard Czempiel.......... 464,980 3.0 45,000 419,980 1.8
- --------
*Less than 1%
(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares that such person or group has
the right to acquire within 60 days after April 1, 1997 or with respect
to which such person otherwise has or shares voting or investment power.
Unless otherwise indicated, to the Company's knowledge the named persons
and group have sole voting and investment power over the shares of Common
Stock indicated. For purposes of computing the percentages of outstanding
shares held by each person or group of persons on a given date, shares
which such person or group has the right to acquire within 60 days after
such date are deemed to be outstanding for purposes of computing the
percentage for such person or group but are not deemed to be outstanding
for the purpose of computing the percentage for any other person or
group.
(2) Based on 15,550,000 shares of Common Stock outstanding prior to
completion of the Offerings and 23,395,000 shares of Common Stock
outstanding after the completion of the Offerings.
(3) Includes (i) 193,890 shares of Series A Preferred Stock held by GAP 23,
which shares are convertible into 3,877,800 shares of Common Stock, (ii)
1,601,920 shares of Common Stock held by GAP 31, (iii) 31,110 shares of
Series A Preferred Stock held by GAP Coinvestment, which shares are
convertible into 622,200 shares of Common Stock and (iv) 309,640 shares
of Common
43
Stock held by GAP Coinvestment. The general partner of GAP 31 and GAP 23 is
GAP LLC. The managing members of GAP LLC are Steven A. Denning, David C.
Hodgson, Stephen P. Reynolds, J. Michael Cline, William O. Grabe and
William E. Ford. The managing members of GAP LLC are the general partners
of GAP Coinvestment. Messrs. Ford and Grabe, directors of the Company, are
managing members of GAP LLC and general partners of GAP Coinvestment. Mr.
Ford and Mr. Grabe disclaim beneficial ownership of shares owned by GAP 31,
GAP 23, and GAP Coinvestment, except to the extent of their respective
pecuniary interests therein. The address for GAP 31, GAP 23, GAP
Coinvestment, GAP LLC, Mr. Ford and Mr. Grabe is: c/o General Atlantic
Service Corporation, Three Pickwick Plaza, Greenwich, CT 06830.
(4) The address of Mr. Hellwig is Steuerberatungsgesellschaft mbH,
Marienbader Platz 18, 61348 Bad Homburg v.d.H., Germany.
(5) The address of Dr. Zimmermann is LH Specifications GmbH, Theodor-Heuss-
Ring 52, 63128 Dietzenbach, Germany.
(6) The address of Mr. Wipprecht is LH Specifications GmbH, Theodor-Heuss-
Ring 52, 63128 Dietzenbach, Germany.
(7) Includes options to purchase 50,000 shares of Common Stock of the
Company.
(8) Includes 50,000 restricted shares of Common Stock.
(9) Includes (i) options to purchase 50,000 shares of Common Stock of the
Company and (ii) 11,676,040 shares, the beneficial holders of which have
granted to Mr. Lademacher the right to vote such shares in his
discretion. The voting rights with respect to 1,160,000 of these shares
will expire upon completion of the Offerings and the voting rights with
respect to the remaining 10,516,040 shares expire upon the earlier of (a)
twelve months after the date on which the respective holders sell any of
their shares of Common Stock in the Offerings and (b) December 31, 1999.
The address of Mr. Lademacher is Six Concourse Parkway, Suite 2700,
Atlanta, Georgia 30328.
(10) The address of Dr. Hertel is LHS Group Inc., 6 Concourse Parkway, Suite
2700, Atlanta, Georgia 30328.
(11) Includes options to purchase 323,333 shares of Common Stock.
44
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock, $.01 par value, and 225,000 shares of Preferred Stock, $.01 par
value. After giving effect to the sale of shares in the Offerings and the
conversion of the Series A Convertible Preferred Stock to Common Stock upon
completion of the Offerings, there will be 23,395,000 shares of Common Stock
outstanding (23,995,000 shares if the Underwriters' over-allotment options are
exercised in full), and no shares of Preferred Stock outstanding.
The following summary is subject to and qualified in its entirety by the
provisions of the Company's Certificate of Incorporation, as amended, and By-
Laws, copies of which are included as exhibits to the Registration Statement
of which this Prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
As of April 10, 1997, 15,550,000 shares of Common Stock were issued and
outstanding and were held of record by 16 stockholders. All shares of Common
Stock are entitled to participate in dividends, subject to preference rights
of holders of Preferred Stock, when, as and if declared by the Board of
Directors out of funds legally available therefor; are entitled to participate
equally in the assets of the Company in the event of liquidation, after paying
or setting aside sufficient assets to fully pay the preferential amounts owed
to holders of Preferred Stock; have no liability to further calls or to
assessment by the Company; and have no conversion rights, redemption rights,
or preemptive or preferential rights to subscribe for any additional shares of
any class of capital stock of the Company, whether now or hereafter
authorized. Holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders. Such voting rights are non-
cumulative, so that stockholders holding more than 50% of the outstanding
shares entitled to vote may be able to elect all members of the Board of
Directors. See "Risk Factors--Concentration of Stock Ownership".
PREFERRED STOCK
As of April 10, 1997, 225,000 shares of Series A Convertible Preferred Stock
were issued and outstanding, which shares will be converted into a total of
4,500,000 shares of Common Stock upon completion of the Offerings. Pursuant to
the Certificate of Incorporation, upon conversion of the Series A Convertible
Preferred Stock into shares of Common Stock, the Board of Directors will be
authorized to issue, by resolution and without any action by the stockholders,
up to 225,000 shares of Preferred Stock and may establish the designations,
dividend rights, dividend rate, conversion rights, voting rights, terms of
redemption, liquidation preference, sinking fund terms and all other
preferences, relative rights and limitations of the shares of each series of
Preferred Stock. The terms of any such Preferred Stock could be more favorable
than the terms of the Common Stock, could adversely affect the voting power,
market price and other rights and privileges of the Common Stock, and could
hinder or delay the removal of directors and attempted tender offers, proxy
contests, takeovers or other attempts to change control of the Company, some
or all of which may be desired by holders of the Common Stock.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
The Company's Certificate of Incorporation and By-Laws require the Company
to indemnify the current and former directors and officers of the Company, and
permit the Company to indemnify any current or former employee or agent of the
Company, to the fullest extent permitted by law. The Company's Certificate of
Incorporation eliminates a director's liability for monetary damages for
conduct as a director, unless the elimination of liability is prohibited by
the Delaware General Corporation Law, such as the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or
knowing violation of law. These provisions do not eliminate a director's duty
45
of care. Moreover, the provisions do not eliminate or limit a director's
liability for violation of certain laws, including federal securities laws.
The Company believes that these provisions are helpful to the Company in
attracting and retaining qualified individuals to serve as directors and
officers.
In addition, the Company's Certificate of Incorporation divides the Board of
Directors into three classes of directors serving staggered three-year terms.
As a result, approximately one-third of the Board of Directors will be elected
at each annual meeting of stockholders. The classification of directors,
together with other provisions in the Certificate of Incorporation and By-Laws
that require the affirmative vote of 80% or greater of all classes of voting
stock of the Company to remove a director and that permit the remaining
directors to fill any vacancies on the Board of Directors, will have the
effect of making it more difficult for stockholders to change the composition
of the Board of Directors. As a result, at least two annual meeting of
stockholders may be required for the stockholders to change a majority of the
directors, whether or not such change in the Board of Directors would be
beneficial to the Company and its stockholders and whether or not a majority
of the Company's stockholders believe that such a change would be desirable.
Currently, the terms of Class I directors expire in 1998, the terms of Class
II directors expire in 1999 and the terms of Class III directors expire in
2000.
DELAWARE ANTI-TAKEOVER LAW
The Company is a Delaware corporation that is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"). Under Section 203, certain
"business combinations" between a Delaware corporation whose stock generally
is publicly traded or held of record by more than 2,000 stockholders and an
"interested stockholder" are prohibited for a three-year period following the
date that such stockholder became an interested stockholder, unless (i) the
corporation has elected in its certificate of incorporation not to be governed
by Section 203 (the Company has not made such an election), (ii) the business
combination was approved by the board of directors of the corporation before
such stockholder became an interested stockholder, (iii) upon consummation of
the transaction that made such stockholder an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the commencement of the transaction (excluding
voting stock owned by directors who are also officers or held in employee
benefit plans in which the employees do not have a confidential right to
tender or vote stock held by the plan) or (iv) the business combination is
approved by the board of directors of the corporation and ratified by two-
thirds of the voting stock which the interested stockholder did not own. The
three-year prohibition also does not apply to certain business combinations
proposed by an interested stockholder following the announcement or
notification of certain extraordinary transactions involving the corporation
and a person who had not been an interested stockholder during the previous
three years or who became an interested stockholder with the approval of a
majority of the corporation's directors. The term "business combination" is
defined generally to include mergers or consolidations between a Delaware
corporation and an interested stockholder, transactions with an interested
stockholder involving the assets or stock of the corporation or its majority-
owned subsidiaries, and transactions which increase an interested
stockholder's percentage ownership of stock. The term "interested stockholder"
is defined generally as those stockholders who become beneficial owners of 15%
or more of a Delaware corporation's voting stock, together with the affiliates
or associates of that stockholder.
LISTING
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "LHSG," subject to official notice of issuance.
The Company intends to apply to list the Common Stock on the Frankfurt Stock
Exchange.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is SunTrust
Bank, Atlanta.
46
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market, or the availability of substantial amounts of Common Stock for
sale, could adversely affect prevailing market prices.
Upon completion of the Offerings, the Company will have 23,395,000 shares of
Common Stock outstanding. Of these shares, the 4,000,000 shares sold in the
Offerings will be freely tradable without restriction or further registration
under the Securities Act, except for shares purchased by "affiliates" of the
Company, as such term is defined in Rule 144 under the Securities Act, which
shares generally may be sold only in compliance with Rule 144.
The remaining 19,395,000 shares are "restricted securities" within the
meaning of Rule 144 in that they have not been registered under the Securities
Act. These restricted securities generally will be eligible for sale in the
open market after the Offerings, subject to the 180 day Lock-up Agreements and
the applicable requirements of Rule 144 described below. Of these restricted
securities, 18,971,480 shares will be eligible for sale pursuant to Rule 144
upon the expiration of the Lock-up Agreements, an additional 781 shares will
first become eligible for sale in each month thereafter through October 2001
and 373,520 shares will first become eligible for sale in December 1997. In
addition, the General Atlantic Stockholders and the Major Stockholders have
the right pursuant to the Registration Rights Agreement to cause the Company,
commencing 180 days after the completion of the Offerings, to register under
the Securities Act all or a portion of the restricted shares of Common Stock
then beneficially owned by them, subject to certain conditions described
below, in which event such shares could be sold publicly without restriction
upon the effectiveness of any such registration.
In general, Rule 144 (as amended effective April 29, 1997) provides that
after a period of one year has elapsed between the later of the date on which
restricted securities were acquired from the Company and the date on which
they were acquired from an affiliate of the Company, the holder of such
restricted securities (including an affiliate) is entitled to sell a number of
shares within any three-month period that does not exceed the greater of (i)
one percent of the then outstanding shares of the Common Stock or (ii) the
average weekly reported volume of trading of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 also are subject to
certain requirements pertaining to the manner of such sales, notice of such
sales and the availability of current public information concerning the
Company. Affiliates may sell shares not constituting restricted securities in
accordance with the foregoing volume limitations and other requirements of
Rule 144 but without regard to the one year holding period. Under Rule 144(k)
(as amended effective April 29, 1997), after a period of two years has elapsed
between the later of the date on which restricted securities were acquired
from the Company and the date on which they were acquired from an affiliate, a
holder of such restricted securities who is not an affiliate of the Company at
the time of the sale and has not been an affiliate for at least three months
prior to the sale would be entitled to sell the shares immediately without
regard to the volume limitations and other conditions of Rule 144 described
above.
All of the Company's directors and executive officers and all of the other
stockholders of the Company, who will own in the aggregate 19,395,000 shares
of Common Stock upon completion of the Offerings, will enter into the Lock-up
Agreements with the Underwriters which will provide that for a period of 180
days after the date of this Prospectus, they will not, except in connection
with the Offerings or pursuant to certain other permitted exceptions, offer,
sell, contract to sell or otherwise dispose of, or file a registration
statement under the Securities Act with respect to, any shares of Common Stock
or any securities of the Company that are substantially similar to the Common
Stock or which are convertible into or exchangeable for, or represent the
right to receive, Common Stock or securities that are substantially similar to
the Common Stock without the prior written consent of the representative of
the Underwriters. The Company also has agreed that for a period of 180 days
after the date of this Prospectus, it will not except in connection with the
Offerings, offer, sell, contract to
47
sell or otherwise dispose of, or file a registration statement under the
Securities Act with respect to, any shares of Common Stock or any securities
of the Company that are substantially similar to the Common Stock or which are
convertible into or exchangeable for, or represent the right to receive,
Common Stock (other than pursuant to employee stock plans existing on the date
of this Prospectus) without the prior written consent of the representatives
of the Underwriters.
Upon completion of the Offerings, the Company will have options outstanding
for the purchase of 2,954,500 shares of Common Stock pursuant to the Stock
Incentive Plan and outside of the Stock Incentive Plan, and options for the
purchase of 1,681,500 additional shares of Common Stock remain available for
issuance under the Stock Incentive Plan. The Company intends to file a
Registration Statement on Form S-8 to register under the Securities Act
4,000,000 shares of Common Stock that are issuable upon the exercise of
outstanding stock options and that may be subject to stock options that are
issuable in the future under the Stock Incentive Plan. This registration
statement is expected to be filed as soon as practicable after the expiration
of the Lock-up Agreements and is expected to become effective immediately upon
filing. Shares covered by this registration statement will be eligible for
sale in the public market after the effective date of the registration
statement, subject to Rule 144 limitations applicable to affiliates of the
Company. See "Management--Stock Options".
Pursuant to the Registration Rights Agreement, the Major Stockholders as a
group and the General Atlantic Stockholders as a group each are entitled to
require the Company on up to two occasions (a total of four occasions),
commencing 180 days after the completion of the Offerings, to register under
the Securities Act a number of shares of Common Stock which, upon the sale
thereof pursuant to such registration, will result in net proceeds to the
selling stockholders as a group of more than $10 million. The Major
Stockholders and the General Atlantic Stockholders also are entitled, subject
to certain conditions, to have any shares of Common Stock owned by them
included in certain registration statements filed by the Company under the
Securities Act. Upon completion of the Offerings, the Major Stockholders and
the General Atlantic Stockholders will own a total of 18,971,480 shares of
Common Stock which, subject to the above conditions, will be eligible for
registration and resale beginning 180 days after the completion of the
Offerings.
LEGAL MATTERS
Certain legal matters with regard to the shares of Common Stock offered
hereby will be passed upon for the Company by Alston & Bird LLP, Atlanta,
Georgia. Certain legal matters will be passed upon for the Underwriters by
King & Spalding, Atlanta, Georgia.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
48
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the shares of Common Stock offered hereby. For the purposes hereof, the term
"Registration Statement" means the original registration statement and any and
all amendments thereto. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and
such Common Stock, reference is hereby made to such Registration Statement,
which can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Regional Offices of the Commission at Seven World Trade
Center, New York, New York 10048 and 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material also can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such material also may be accessed electronically
by means of the Commission's home page on the Internet at http://www.sec.gov.
Statements made in this Prospectus as to the contents of any contract or
other document are necessarily summaries of such documents. With regard to
each such contract or other document that is filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description thereof, and each such statement shall be deemed qualified in all
respects by such reference.
49
GLOSSARY OF TERMS
"AMPS" -- Advanced Mobile Phone Service. An analog cellular telephone
service standard utilizing the 800 MHz band, in use in North America,
Australia and other areas.
"ActiveX" -- A collection of applications program interfaces and other
technology developed by Microsoft Corporation which facilitates the
distribution and portability of applications software.
"analog" -- A method of storing, processing and transmitting information by
representing information as a continuously-varying signal.
"C" -- A popular programming language used to create computer applications
software.
"CDMA" -- Code Division Multiple Access. A digital wireless transmission
technology for use in cellular, PCS and other wireless communications systems.
CDMA is a spread spectrum technology in which calls are assigned a pseudo
random code for encoding a digital bit stream onto a radio carrier frequency.
CDMA allows more than one wireless user to simultaneously occupy a single
radio frequency channel.
"cell" -- The geographic area defined by the signal coverage of one
transmitter/receiver site in a cellular system.
"cellular" -- A wireless telephone system based on a grid of cells. Each
cell site contains transmitters, receivers and antennas and is connected to
switching gear and control equipment.
"Centura" -- a set of software tools from Centura Software Corporation for
development of client/server applications.
"client" -- The client component of a client/server system. It is typically
a personal computer with a graphical user interface.
"client/server" -- A computer system architecture in which two independent
processes communicate via an established protocol. The client component makes
requests to the server component, which responds with information or actions.
The client component is typically the "front-end" of the system and is
operated by the end-user.
"database" -- A collection of information organized in such a way that a
computer program can quickly retrieve desired data.
"digital" -- A method of storing, processing and transmitting information by
representing information with combinations of the binary digits 0 and 1.
"ERMES" -- European Radio Message System. A European digital standard for
paging services also suited to applications such as process monitoring,
telemetry and alarm systems.
"frequency" -- The number of cycles per second, measured in hertz, of a
periodic oscillation or wave.
"GSM" -- Global System for Mobile Communications. A distributed open
networking architecture standard for digital wireless systems worldwide.
"HTML" -- Hypertext Markup Language. An authoring language used to create
documents on the Internet's World Wide Web.
"HTTP" -- Hypertext transfer protocol. The protocol used by the Internet's
World Wide Web to format and transmit messages and instructions.
"ISO 9001" -- A quality assurance standard administered by the International
Standards Organization.
"Java" -- A high-level object-oriented programming language developed by Sun
Microsystems, Inc. which is independent of a computer operating system.
"LAN" -- Local Area Network. A short distance data transmission network,
usually with decentralized communication management.
"NMT" -- Nordic Mobile Telephone. An analog cellular standard adopted in
Europe and Asia.
G-1
"object-oriented" -- A type of software programming that combines data
structures with programming functions to create reusable software modules
("objects").
"PCS" -- Personal Communications Services. An advanced digital wireless
system operating at frequencies between 1800 MHz and 2000 MHz.
"Pocsag" -- An analog standard for paging services.
"protocol" -- A formal set of standards governing the establishment of a
communications link and controlling the format and timing of transmissions
between two devices.
"roaming" -- A set of agreements among wireless carriers to permit a
carrier's customer to communicate with another carrier's wireless network.
"server" -- The server component of a client/server system typically
performs database management functions.
"smart card" -- A plastic card with an embedded integrated circuit for
storing information.
"SMR" -- Specialized Mobile Radio. A system originally providing non-public
mobile dispatch services which may be adapted to provide two-way wireless
communications services.
"SQL" -- Structured Query Language. A high-level language used to define and
manipulate data in a database.
"switch" -- A central facility capable of routing calls from one point to
another. Usually a point of connection to the public switched telephone
network.
"TACS" -- Total Access Communication System. An analog cellular standard
adopted in Europe.
"TCP/IP" -- Transmission Control Protocol/lnternet Protocol. A compilation
of network- and transport-level protocols that allow diverse computers to
communicate over the Internet and other networks.
"TDMA" -- Time Division Multiple Access. A digital wireless transmission
technology that converts analog voice signals into digital form and encodes
more than one voice channel onto a single radio frequency channel by
separating the users in time.
"UNIX" -- A computer operating system, versions of which are provided by a
variety of vendors. UNIX is often used to run the database server in a
client/server application.
"Visual C++" -- A C language development system for Windows applications
software.
"Windows (Windows 3.1; Windows NT; Windows 95)" -- A family of computer
operating systems developed by Microsoft which provide a graphical user
interface. Windows NT has the same graphical user interface as Windows 95 but
is optimized for use in a network environment.
"X.25" -- A communications protocol for packet-switched data transfer.
G-2
LHS GROUP INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors.............................................. F-2
Consolidated Statements of Income........................................... F-3
Consolidated Balance Sheets................................................. F-4
Consolidated Statements of Stockholders' Equity............................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to the Consolidated Financial Statements.............................. F-7
F-1
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of LHS Group
Inc. and Subsidiaries (the "Company") as of December 31, 1995 and 1996, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years then ended. 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, 1995 and 1996 and the results of their
operations and their cash flows for each of the three years then ended, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 7, 1997
F-2
LHS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
QUARTER ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------- --------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
Revenues
License revenues....... $ 15,026 $ 13,654 $ 23,701 $ 2,625 $ 7,310
Service revenues....... 5,696 13,313 33,163 4,131 13,576
----------- ----------- ----------- ---------- ----------
Total revenues.......... 20,722 26,967 56,864 6,756 20,886
Cost of services........ 4,457 9,653 19,107 1,977 9,544
----------- ----------- ----------- ---------- ----------
Gross profit............ 16,265 17,314 37,757 4,779 11,342
Operating expenses:
Sales and marketing.... 2,965 2,455 7,653 1,238 2,253
Research and develop-
ment.................. 5,169 9,714 16,236 3,540 4,111
General and administra-
tive.................. 3,949 3,928 8,287 1,238 3,012
----------- ----------- ----------- ---------- ----------
12,083 16,097 32,176 6,016 9,376
----------- ----------- ----------- ---------- ----------
Earnings (loss) before
interest and taxes..... 4,182 1,217 5,581 (1,237) 1,966
Interest expense, net... 70 110 77 52 23
----------- ----------- ----------- ---------- ----------
Earnings (loss) before
income taxes........... 4,112 1,107 5,504 (1,289) 1,943
Income taxes (credit)... 1,069 823 2,084 (490) 789
----------- ----------- ----------- ---------- ----------
Net earnings (loss)..... $ 3,043 $ 284 $ 3,420 $ (799) $ 1,154
=========== =========== =========== ========== ==========
Net earnings (loss) per
share.................. $ 0.29 $ 0.02 $ 0.16 $ (0.04) $ 0.05
=========== =========== =========== ========== ==========
Shares used in per share
calculation (Note 2)... 10,421 16,098 21,757 21,757 21,757
=========== =========== =========== ========== ==========
F-3
LHS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
---------------- -----------------------
PRO FORMA
1995 1996 1997 1997
------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE
DATA)
ASSETS
Current assets:
Cash and cash equivalents....... $10,200 $ 4,289 $ 2,415
Trade accounts receivable, net
of allowance for doubtful
accounts of $-0-, $200 and
$450........................... 8,002 22,415 15,570
Unbilled receivables............ 238 6,073 7,154
Amounts due from stockholders... 297 -- --
Prepaid expenses................ 607 2,505 2,016
Deferred taxes.................. 120 -- --
------- ------- -------
Total current assets............. 19,464 35,282 27,155
Leasehold improvements and equip-
ment:
Leasehold improvements.......... 1,741 1,870 1,874
Computer equipment.............. 2,627 4,431 4,754
Purchased computer software..... 672 1,370 1,363
Furniture, fixtures and equip-
ment........................... 2,185 3,755 3,777
------- ------- -------
7,225 11,426 11,768
Allowance for depreciation and
amortization................... (3,054) (4,304) (4,580)
------- ------- -------
4,171 7,122 7,188
Deferred taxes................... 335 1,187 1,187
Other............................ 492 228 388
------- ------- -------
Total assets..................... $24,462 $43,819 $35,918
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQ-
UITY
Current liabilities:
Loans payable to banks.......... $ 3,842 $ 1,914 $ --
Accounts payable................ 2,735 2,572 4,220
Salaries, wages and commissions. 950 2,532 1,906
Accrued expenses and other lia-
bilities....................... 1,716 6,215 7,459
Deferred revenues............... 3,789 8,931 4,227
Amount due to former sharehold-
er............................. -- 4,000 --
Income taxes payable............ 1,098 3,730 3,981
Deferred income taxes........... -- 240 240
------- ------- -------
Total current liabilities........ 14,130 30,134 22,033
Long-term obligations............ -- 897 867
Other............................ 399 463 458
Stockholders' equity:
Series A convertible preferred
stock ($.01 par value), 225,000
shares authorized, issued and
outstanding (none outstanding
pro forma)..................... 2 2 2 $ --
Common stock ($.01 par value)
40,000,000 shares authorized;
15,500,000 and 15,550,000
shares issued and outstanding
(20,050,000 outstanding pro
forma)......................... 155 156 156 201
Additional paid-in-capital...... 6,110 6,374 6,374 6,331
Retained earnings............... 2,881 6,301 7,455 7,455
Accumulated translation adjust-
ments.......................... 785 (508) (1,427) (1,427)
------- ------- ------- --------
Total stockholders' equity....... 9,933 12,325 12,560 $12,560
------- ------- ------- ========
Total liabilities and stockhold-
ers' equity..................... $24,462 $43,819 $35,918
======= ======= =======
F-4
LHS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
SERIES A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
SHARE ---------------------------------------- PAID-IN- RETAINED TRANSLATION TREASURY TOTAL
CAPITAL SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCK EQUITY
------- ----------- -------------------- ------ ---------- -------- ----------- -------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
BALANCE JANUARY 1,
1994............... $ 506 -- $ -- -- $-- $ -- $ 175 $-- $-- $ 681
Issuance of share
capital............ 539 -- -- -- -- -- -- -- -- 539
Distribution of
share capital...... (62) -- -- -- -- -- -- -- -- (62)
Dividends paid...... -- -- -- -- -- -- (621) -- -- (621)
Translation adjust-
ment............... -- -- -- -- -- -- -- 190 -- 190
Net earnings........ -- -- -- -- -- -- 3,043 -- -- 3,043
------ ----------- -------- ---------- ---- -------- ------ ------- ---- --------
BALANCE DECEMBER 31,
1994............... 983 -- -- -- -- -- 2,597 190 -- 3,770
Issuance of share
capital............ 300 -- -- -- -- -- -- -- -- 300
Issuance of pre-
ferred stock....... -- 225,000 2 -- -- 19,564 -- -- -- 19,566
Reclassification of
share capital to
common stock....... (155) -- -- 15,500,000 155 -- -- -- -- --
Distribution of
share capital...... (1,128) -- -- -- -- (13,454) -- -- -- (14,582)
Translation adjust-
ment............... -- -- -- -- -- -- -- 595 -- 595
Net earnings........ -- -- -- -- -- -- 284 -- -- 284
------ ----------- -------- ---------- ---- -------- ------ ------- ---- --------
BALANCE DECEMBER 31,
1995............... -- 225,000 2 15,500,000 155 6,110 2,881 785 -- 9,933
Repurchase of shares
of common stock.... -- -- -- 1,861,560 -- (9,981) -- -- (19) (10,000)
Issuance of common
stock.............. -- -- -- (1,861,560) -- 9,981 -- -- 19 10,000
Exercise of stock
options............ -- -- -- 50,000 1 264 -- -- -- 265
Translation adjust-
ment............... -- -- -- -- -- -- -- (1,293) -- (1,293)
Net earnings........ -- -- -- -- -- -- 3,420 -- -- 3,420
------ ----------- -------- ---------- ---- -------- ------ ------- ---- --------
BALANCE DECEMBER 31,
1996............... -- 225,000 2 15,550,000 156 6,374 6,301 (508) -- 12,325
Net earnings........ -- -- -- -- -- -- 1,154 -- -- 1,154
Translation adjust-
ment............... -- -- -- -- -- -- -- (919) -- (919)
------ ----------- -------- ---------- ---- -------- ------ ------- ---- --------
BALANCE MARCH 31,
1997 (UNAUDITED)... $ -- 225,000 $ 2 15,550,000 $156 $ 6,374 $7,455 $(1,427) $-- $ 12,560
====== =========== ======== ========== ==== ======== ====== ======= ==== ========
F-5
LHS GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED QUARTER ENDED
DECEMBER 31, MARCH 31,
------------------------- -----------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS)
OPERATING ACTIVITIES
Net earnings (loss)........ $ 3,043 $ 284 $ 3,420 $ (799) $ 1,154
Adjustments to reconcile
net earnings to net cash
provided by (used in) op-
erating activities:
Depreciation and amorti-
zation.................. 940 1,226 1,474 300 276
Provision for deferred
income taxes (credit)... 522 (932) (492) -- --
Changes in operating as-
sets and liabilities
Trade accounts receiv-
able................... (4,245) (2,518) (14,413) (844) 6,845
Unbilled receivables.... -- 739 (5,835) (629) (1,081)
Amounts due from stock-
holders................ -- (154) 297 297 --
Prepaid expenses........ (1,184) (125) (1,898) (172) 489
Accounts payable........ 936 1,018 (163) (398) 1,648
Accrued expenses and
other liabilities...... 342 392 6,081 100 618
Deferred revenues....... 976 2,773 5,142 (75) (4,704)
Income taxes payable.... 1,946 493 2,632 (490) 251
------- ------- ------- ------- -------
Net cash provided by (used
in) operating activities.. 3,276 3,196 (3,755) (2,710) 5,496
INVESTING ACTIVITIES
Additions of leasehold
improvements and
equipment................. (3,527) (1,768) (3,978) (720) (342)
Other...................... (63) (360) 264 143 (160)
------- ------- ------- ------- -------
Net cash used in investing
activities................ (3,590) (2,128) (3,714) (577) (502)
FINANCING ACTIVITIES
Proceeds from issuance of
share capital............. 649 300 -- -- --
Proceeds from issuance of
preferred stock........... -- 19,566 -- -- --
Proceeds from issuance of
capital stock............. -- -- 10,265 -- --
Purchase of treasury stock. -- -- (6,000) -- --
Repayment of amount due to
former shareholder........ -- -- -- -- (4,000)
Dividends and distribution
of share capital.......... (683) (14,582) -- -- --
Proceeds from bank
borrowings................ 2,504 1,912 450 299 --
Repayment of bank
borrowings................ -- (836) (1,928) -- (1,914)
Other...................... -- -- 64 -- (35)
------- ------- ------- ------- -------
Net cash provided by (used
in) financing activities.. 2,470 6,360 2,851 299 (5,949)
Effect of exchange rate
differences on cash....... 56 398 (1,293) (356) (919)
------- ------- ------- ------- -------
Increase (decrease) in cash
and cash equivalents...... 2,212 7,826 (5,911) (3,344) (1,874)
Cash and cash equivalents
at beginning of period.... 162 2,374 10,200 10,200 4,289
------- ------- ------- ------- -------
Cash and cash equivalents
at end of period.......... $ 2,374 $10,200 $ 4,289 $ 6,856 $ 2,415
======= ======= ======= ======= =======
ADDITIONAL CASH FLOW INFOR-
MATION
Cash paid for interest..... $ 93 $ 204 $ 167 $ 58 $ 41
======= ======= ======= ======= =======
Cash paid for income taxes. $ 66 $ 465 $ 260 $ 34 $ 7
======= ======= ======= ======= =======
F-6
LHS GROUP INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(All U.S. Dollar amounts in the notes to the consolidated financial statements
are expressed in thousands)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The consolidated financial statements include the accounts of LHS Group Inc.
and its wholly-owned subsidiaries ("LHS Group" or the "Company"). Prior to
December 1995, the companies comprising the LHS Group operated under the
common control of individual stockholders. The accompanying financial
statements have been presented on a consolidated basis as if the
reorganization described in Note 2 occurred January 1, 1994. Significant
intercompany accounts and transactions have been eliminated in preparing the
accompanying financial statements.
Business Activity and Basis of Revenue Recognition:
The Company provides scaleable client/server-based billing and customer care
solutions to carriers in the global telecommunications industry. Solutions
based on the Company's software products enable carriers to offer flexible,
customer-tailored, cost effective billing and customer care services in the
wireless and wireline telecommunications markets. LHS configures its
proprietary software tools to give each carrier a flexible and cost-effective
billing solution tailored to specific network technology and marketing needs.
The Company derives revenues from license fees and fees for its services.
License revenues consist of license fees for the Company's client/server-based
software and service revenues consist of fees for customization, installation
and production support services. License revenues for one-time licenses
without customization are recognized upon delivery of the software to the
customer unless the Company has significant related obligations remaining or
the collectibility of the receivable is doubtful. When significant obligations
remain after the software product has been delivered or the collectibility of
the receivable is considered doubtful, revenue is not recognized until such
obligations have been completed or are no longer significant and the
collectibility of the receivable is no longer doubtful. Both service and
license revenues on long-term projects for the customization and installation
of the software are recognized over the term of the contract on the percentage
of completion method of accounting, based on hours worked on a project
compared to hours expected to be worked. Invoices on contracts where
customization and installation services are included are sent to customers
upon the achievement of certain milestones included in the contract with the
customer. Additional license revenues are realized and recognized only when
the Company is notified that the number of customer subscribers supported by
the BSCS software exceeds the number of subscribers for which the customer is
currently licensed. The Company invoices the customer and recognizes the
revenue at the time of notification by the customer. If the maximum number of
customer subscribers covered by the license is never reached, no additional
revenue is recognized, realized or invoiced to the customer. The typical BSCS
license is perpetual and is non-refundable by the Company. Service revenues
also includes, to a lesser extent, maintenance fees which are recognized
ratably over the term of the maintenance contract and fees for training which
are recognized as the training is performed.
F-7
LHS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(All U.S. Dollar amounts in the notes to the consolidated financial statements
are expressed in thousands)
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Leasehold Improvements and Equipment:
Leasehold improvements 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, 1994, 1995 and 1996 was $940, $1,226
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.
Income Taxes:
The Company accounts for income taxes under the liability method. Under the
liability method, deferred income taxes are recorded to reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting and the amounts used for income tax
purposes.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentrated
credit risks consists primarily of cash and trade receivables. The Company
maintains cash and cash equivalents with various financial institutions. The
Company policy is designed to limit exposure to any one institution. A
significant percentage of the Company's revenues and receivables are
concentrated in a relatively few number of customers. Refer to Note 7.
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.
F-8
LHS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(All U.S. Dollar amounts in the notes to the consolidated financial statements
are expressed in thousands)
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.
Unaudited Pro Forma Information:
If the offering contemplated by this Prospectus is consummated, all of the
Preferred Stock outstanding as of the closing date will be converted into
shares of common stock. The pro forma stockholders' equity as of March 31,
1997 reflects the conversion of all outstanding Preferred Stock into 4,500,000
shares of common stock.
Unaudited Interim Statements:
The interim financial data for the three months ended March 31, 1997 and
1996 is unaudited; however, in the opinion of management, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods, on a
consistent basis.
2. CAPITALIZATION
Corporate Reorganization:
Effective December 22, 1995, the stockholders of the companies comprising
the LHS Group exchanged their shareholdings for cash of $14,580 and 15,500,000
shares of the common stock of LHS Group Inc. (a newly formed company). LHS
Group Inc. also issued 225,000 shares of Series A Convertible Preferred Stock
("Preferred Stock") with a par value of $.01 per share to a previously
unrelated third party for $20,000. The proceeds of the preferred stock
offering, net of approximately $434 in issuance costs, were used to finance
the acquisition of the shareholdings.
On October 16, 1996, the Company effected a 20-for-1 common stock split. The
share and per share amounts in the financial statements have been
retroactively adjusted for the stock split.
Preferred Stock:
The board of directors of the Company is authorized to issue up to 225,000
shares of preferred stock, par value $.01 per share, in one or more series and
to fix the powers, voting rights, designations and preferences of each series.
During 1995, the board of directors authorized for issuance 225,000 shares of
Preferred Stock ranking senior to common stock. The Preferred Stock ranks
senior to common stock and is entitled to dividends, if declared by the board
of directors, in an amount equal to the pro rata share that would have been
received had the Preferred Stock been converted to common stock.
Upon liquidation, holders of Preferred Stock, on an equal basis, are
entitled to receive the preference value of $88.89, plus accumulated and
unpaid dividends, if any, before any distribution or payment is made to the
holders of common stock. No dividends have been declared or paid on Preferred
Stock.
F-9
LHS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(All U.S. Dollar amounts in the notes to the consolidated financial statements
are expressed in thousands)
Any holder of Preferred Stock has the right at its option, to convert each
share of Preferred Stock into 20 shares of common stock, adjusted for stock
splits and unpaid dividends (the "Conversion Ratio"). In the event of an
underwritten initial public offering, as defined in the certificate of
incorporation of the Company, all Preferred Stock will be converted into
common stock at the Conversion Ratio.
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.
Per Share Data:
Net earnings per share was computed by dividing net earnings by the weighted
average number of shares of Common Stock and common stock equivalents
outstanding (all currently outstanding Preferred Stock is considered a common
stock equivalent). Retroactive effect has been given to share and per share
amounts for the stock split as noted above. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common stock, common
stock equivalents and other potentially dilutive securities issued at prices
below the assumed initial public offering price per share ("cheap stock")
during the twelve month period immediately preceding the initial filing date
of the Company's Registration Statement for its public offering have been
included as outstanding for all periods presented (using the treasury stock
method at the assumed initial public offering price) even when the effect is
to reduce the loss per share.
3. LONG-TERM OBLIGATIONS
At December 31, 1995, the Company had short-term overdraft facilities, with
two banks, under which it could borrow up to $4,138. At December 31, 1995
total borrowings on the facilities were $3,392. Interest on the facilities was
8.75% with respect to $568 and 8% with respect to $2,824. Subsequent to
December 31, 1995, the Company replaced one of its short-term overdraft
facilities with a new facility which provides the Company with a total $4,138
of available credit. The interest rate on the new facility is 8%.
In 1995, the Company had a line of credit agreement with a United States
bank which provided for borrowings of up to $500. Borrowings under the
agreement were secured by a letter of credit from the Company's German bank.
In 1996, the Company terminated this line of credit agreement.
At December 31, 1996, the Company had short-term overdraft facilities with
two banks under which it could borrow up to $3,871. At December 31, 1996 total
borrowings on the facilities were $1,914. Interest on the facilities was 8%.
4. LEASES
LHS Group leases certain of its office buildings from a company related
through common ownership under an operating lease agreement which expires in
2002. The lease agreement requires monthly rental payments of $32 adjusted
annually for inflation.
F-10
LHS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(All U.S. Dollar amounts in the notes to the consolidated financial statements
are expressed in thousands)
The Company also leases various automobiles and miscellaneous office
equipment under operating lease arrangements. Rental expense under all
operating leases totaled $683, $1,583 and $1,982 for the years ended December
31, 1994, 1995 and 1996, respectively. Telecommunications equipment in the
amount of $476 was acquired under capital lease arrangements. Future minimum
lease payments are as follows:
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- -------
1997................................................. $143 $ 2,971 $ 3,114
1998................................................. 106 2,629 2,735
1999................................................. 106 2,233 2,339
2000................................................. 106 1,975 2,081
2001................................................. 99 1,637 1,736
Thereafter........................................... -- 889 889
---- ------- -------
Total future minimum lease payments.................. 560 $12,334 $12,894
======= =======
Less amounts representing interest................... (113)
----
Present value of net minimum lease payments.......... $447
====
5. INCOME TAXES
The Company and each of its consolidated subsidiaries file separate tax
returns. For financial reporting, the Company and consolidated subsidiaries
calculate their respective tax liabilities on a separate return basis which
are combined in the accompanying consolidated financial statements.
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER
31,
---------------------
1994 1995 1996
------ ------ ------
Currently payable income taxes
U.S. federal............................................ $ -- $ -- $1,143
Foreign................................................. 547 1,755 1,433
Deferred income taxes (credit)
U.S. federal............................................ -- (139) (230)
Foreign................................................. 522 (793) (262)
------ ------ ------
$1,069 $ 823 $2,084
====== ====== ======
F-11
LHS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(All U.S. Dollar amounts in the notes to the consolidated financial statements
are expressed in thousands)
The net deferred income tax asset (liability) consists of the following:
DECEMBER 31,
---------------
1995 1996
------ -------
Deferred Tax Assets:
Deferred revenue.............................................. $ 688 $ 1,449
Net operating loss carryforward............................... 139 1,058
Accrued vacation and bonuses.................................. 56 43
Tax on foreign differences.................................... 414 190
Other......................................................... -- 10
Valuation allowance........................................... (139) --
------ -------
1,158 2,750
Deferred tax liabilities:
Unbilled receivables.......................................... (80) (1,083)
Warranty expenses............................................. (483) (661)
Depreciation expense.......................................... (102) (61)
Other......................................................... (38) --
------ -------
(703) (1,805)
------ -------
$ 455 $ 945
====== =======
The reconciliation of income tax expense computed using the statutory tax
rates in the United States to the income tax expense recognized in the
financial statements is as follows:
YEAR ENDED
DECEMBER 31,
------------------
1994 1995 1996
------ ---- ------
Tax at statutory rates...................................... $1,046 $399 $1,871
Differences resulting from higher tax rates in foreign coun-
tries...................................................... 23 285 213
Tax benefit of net operating loss not recognized............ -- 139 --
------ ---- ------
$1,069 $823 $2,084
====== ==== ======
The Company has foreign net operating loss carryforwards for tax purposes of
approximately $1,600. Such net operating losses can be carried forward
indefinitely.
6. RELATED PARTY TRANSACTIONS
The Company leases office space and housing space for certain of its
employees from partnerships consisting in part of three of the Company's
directors. During the years ended December 31, 1994, 1995 and 1996, the
Company made lease payments totaling $314, $437 and $437, respectively to the
partnerships.
7. MAJOR CUSTOMERS
The Company's revenues are derived from a relatively few number of
customers. In 1996, two customers accounted for 12% and 10% of revenues; in
1995, three customers accounted for 14%, 10% and 10% of revenues; and in 1994,
two customers accounted for 15% and 12%.
F-12
LHS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(All U.S. Dollar amounts in the notes to the consolidated financial statements
are expressed in thousands)
8. 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. No
Company contributions to date have been made to the plan.
9. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, 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 4,000,000 shares of common stock. All
options are exercisable over a five year period with 25% vesting on the first
anniversary of the grant date and the remaining 75% vesting ratable over 48
months. The terms of the options are ten years from the date of the grant at
which time all unexercised options expire and are again available for future
grant.
The Company may also award restricted stock or other stock-based awards in
such amounts and subject to such terms as may be selected by the Company.
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 these options was estimated at the date of grant using a
minimum value option pricing model with the following assumptions for 1996:
risk-free interest rates of 6.3%; no anticipated dividends; and a weighted-
average expected life of the option of seven years.
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. The weighted average grant date fair value of options granted during
the year using the minimum value option pricing model was $1.79.
For purposes of SFAS 123 pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's pro forma net earnings was $3,078 and the pro forma earnings per
share was $0.14 for the year ended December 31, 1996. There is no effect on
years prior to 1996 as all options were issued during 1996.
F-13
LHS GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(All U.S. Dollar amounts in the notes to the consolidated financial statements
are expressed in thousands)
Prior to 1996, no stock options were issued by the Company. A summary of the
Company's stock option activity, and related information for the year ended
December 31, 1996 follows:
NUMBER OF
SHARES ISSUED
-------------
Outstanding as of January 1, 1996................................. --
Granted.......................................................... 2,954,500
Exercised........................................................ (50,000)
---------
Outstanding as of December 31, 1996............................... 2,904,500
=========
Information regarding stock options outstanding as of December 31, 1996 is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------------
EXERCISE NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
PRICE OPTIONS CONTRACTUAL LIFE (YEARS) OPTIONS EXERCISE PRICE
-------- --------- ------------------------ --------- ----------------
$ 5.30 2,881,500 9.66 313,352 $ 5.30
16.75 23,000 9.94 -- 16.75
In September and October 1996, the Company granted the foregoing options
with the $5.30 per share exercise price. At such time, the Board of Directors
set the exercise price at $5.30 primarily because of a third-party common
stock transaction that occurred in mid-July 1996 which was the last event
relevant to the Board's fair market value determination of the Company's
Common Stock prior to the option grants.
10. GEOGRAPHIC INFORMATION
Information about the Company's operations by geographic area is as follows:
1994 1995 1996
------- ------- -------
Revenues:
Americas............................................. $ -- $ 945 $18,115
Europe............................................... 20,722 23,722 32,495
Far East............................................. -- 2,300 6,254
------- ------- -------
Total in Financial Statements....................... $20,722 $26,967 $56,864
======= ======= =======
Earnings (Loss) Before Interest and Taxes
Americas............................................. $ -- $ (454) $ 914
Europe............................................... 4,182 420 957
Far East............................................. -- 1,251 3,710
------- ------- -------
Total in Financial Statements....................... $ 4,182 $ 1,217 $ 5,581
======= ======= =======
Identifiable Assets:
Americas............................................. $ -- $ 6,429 $14,868
Europe............................................... 14,006 18,033 26,541
Far East............................................. -- -- 2,410
------- ------- -------
Total in Financial Statements....................... $14,006 $24,462 $43,819
======= ======= =======
The European operations of the Company incurred substantial development
costs in connection with the establishment of the Americas and Far East
operations in 1995 and 1996.
F-14
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the U.S.
Underwriters named below, and each of such U.S. Underwriters, for whom
Goldman, Sachs & Co., Cowen & Company and Robertson, Stephens & Company LLC
are acting as representatives, has severally agreed to purchase from the
Company and the Selling Stockholders, the respective number of shares of
Common Stock set forth opposite its name below:
NUMBER OF SHARES
UNDERWRITERS OF COMMON STOCK
------------ ----------------
Goldman, Sachs & Co........................................
Cowen & Company............................................
Robertson, Stephens & Company LLC..........................
---------
Total.................................................... 3,200,000
=========
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The U.S. Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the representatives.
The Company and the Selling Stockholders have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters
of the international offering (the "International Underwriters") providing for
the concurrent offer and sale of 800,000 shares of Common Stock in an
international offering outside the United States. The offering price and
aggregate underwriting discounts and commissions per share for the two
offerings are identical. The completion of the offering made hereby is a
condition to the completion of the international offering, and vice versa. The
representatives of the International Underwriters are Goldman Sachs
International, Cowen & Company and Robertson, Stephens & Company LLC.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of
the U.S. Underwriters named herein has agreed that, as a part of the
distribution of the shares offered hereby and subject to certain exceptions,
it will offer, sell or deliver the shares of Common Stock, directly or
indirectly, only in the United States of America (including the States and the
District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction (the "United States") and to U.S. persons, which
term shall mean, for purposes of this paragraph: (a) any individual who is a
resident of the United States or (b) any corporation, partnership or other
entity organized in or under the laws of the United States or any political
subdivision thereof and whose office most directly involved with the purchase
is located in the United States. Each of the International Underwriters has
agreed pursuant to the Agreement Between that, as a part of the distribution
of the shares offered as a part of the international offering and subject to
certain exceptions, it will (i) not, directly or indirectly, offer, sell or
deliver shares of Common Stock (a) in the United States or to any U.S. persons
or (b) to any person who it believes intends to reoffer,
U-1
resell or deliver the shares in the United States or to any U.S. persons and
(ii) cause any dealer to whom it may sell such shares at any concession to
agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall
be the initial public offering price, less an amount not greater than the
selling concession.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
480,000 additional shares of Common Stock solely to cover over-allotments, if
any. If the U.S. Underwriters exercise their over-allotment option, the U.S.
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
3,200,000 shares of Common Stock offered hereby. The Company has granted the
International Underwriters a similar option to purchase up to an aggregate of
120,000 additional shares of Common Stock.
The Company and the Selling Stockholders have agreed that, during the period
beginning from the date of this Prospectus and continuing to and including the
date 180 days after the date of this Prospectus, they will not offer, sell,
contract to sell or otherwise dispose of any securities of the Company which
are substantially similar to the shares of Common Stock or which are
convertible into or exchangeable for securities which are substantially
similar to the shares of Common Stock without the prior written consent of the
representatives, except for the shares of Common Stock offered in connection
with the concurrent U.S. and international offerings.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company, the
Selling Stockholders and the representatives of the U.S. Underwriters and the
International Underwriters. Among the factors to be considered in determining
the initial public offering price of the Common Stock, in addition to
prevailing market conditions, will be the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuations of companies in related businesses.
The Common Stock will be quoted on the Nasdaq National Market under the
symbol "LHSG".
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Common Stock, including shares initially sold in the
international offering, to persons located in the United States.
In connection with the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Underwriters in connection with the offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the Common Stock; and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company in
the Offerings. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the securities sold in the
offering may be reclaimed by the Underwriters if such shares of Common Stock
are repurchased by the Underwriters in stabilizing or covering transactions.
These activities may stabilize, maintain or otherwise affect the market price
of the Common Stock, which may be higher than the price that might otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
U-2
- -------------------------------------------------------------------------
WORLDWIDE GROWTH
AND EXPERIENCE
- -------------------------------------------------------------------------
LHS has built its global business around its Business Support and Control
System (BSCS) software solution. BSCS is licensed to approximately 70
carriers in more than 25 countries supporting an approximate total
of 3.5 million subscribers. BSCS is a global solution, with support
for multiple languages, currencies and the requirements for different
geographic markets. LHS is a global company with offices in Frankfurt,
Germany and Kuala Lumpur, Malaysia, and its headquarters
in Atlanta, United States.
BACK COVER (DESIGN BETWEEN TOP AND BOTTOM TEXTS)
Illustration of the Globe Highlighting LHS in Atlanta, United States; Frankfurt,
Germany; and Kuala Lumpur, Malaysia.
Americas Asia
Aerial Communications, USA Binariang, Maxis, Malaysia
BellSouth PCS,USA BPL Bombay, India
Clearnet, Canada BPL-US-West, India
CTBC, Brazil BUC-Bangalore, India
Iridium, USA Excel Comindo, Indonesia
Pacific Bell Mobile Services, USA J.T. Mobiles, India
Pocker Communications, USA Mobicell, Indonesia
Powertel, USA Mondi Telstra, India
Sprint, USA New Caledonia, New Caledonia
Western Wireless, USA RPG, India
Tikiphone, Polynesia
VMS Vietnam, Vietnam
Vodac, Australia
Europe
Bouygues Telecom. France Nishny Novgorod, Russia
BU-PTT, Serbia Nokia, Finland
Centertel, Poland Omnitel Pronto Italia, Italy
Chekker, Germany PTC, Poland
CNI, Germany Radio Mobil, Czech Republic
E-Plus, Germany Rostov on Don, Russia
Eurotel, Bratislava RWE, Germany
Eurotel, Czech Republic SAIT, The Netherlands
France, Telecom, France Swiss PTT, Switzerland
Guernsey Telecom, Germany Talkline, Germany, INT
IBM, Germany Talkline, The Netherlands
ISIS, Germany Telia Datacom, Sweden
Lesotho, Africa Tritel Tanzania, Tanzania
Max-Call, Austria Turkcell, Turkey
Miniruf, Germany UMC, Ukraine
Mobtel, Slovenia Unicom/Dekrafon, Germany
MTC-Namibia, Namibia Vevacom Netz, Germany
MTL Lithuania, Lithuania Westel 900, Hungary
MTS, Russia
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECU-
RITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Dilution.................................................................. 15
Capitalization............................................................ 16
Selected Consolidated Financial Data...................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 18
Business ................................................................. 26
Management................................................................ 36
Certain Transactions...................................................... 41
Principal and Selling Stockholders........................................ 43
Description of Capital Stock.............................................. 45
Shares Eligible for Future Sale........................................... 47
Legal Matters............................................................. 48
Experts................................................................... 48
Additional Information.................................................... 49
Glossary of Terms......................................................... G-1
Index to Consolidated Financial Statements................................ F-1
Underwriting.............................................................. U-1
------------
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,000,000 SHARES
LHS GROUP INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
----------------
[LOGO OF LHS APPEARS HERE]
----------------
GOLDMAN, SACHS & CO.
COWEN & COMPANY
ROBERTSON, STEPHENS & COMPANY
REPRESENTATIVES OF THE UNDERWRITERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by the
Registrant in connection with the issuance and distribution of the securities
being registered hereby, other than underwriting discounts and commissions.
The Registrant is paying all of these expenses in connection with the issuance
and distribution of the securities.
SEC registration fee................................................ $32,803
NASD filing fee..................................................... 11,325
Nasdaq National Market listing fee.................................. 50,000
Accountants' fees and expenses...................................... 200,000
Legal fees and expenses............................................. 200,000
Printing and engraving costs........................................ 160,000
Blue Sky fees and expenses.......................................... 5,000
Transfer agent and registrar fees................................... 5,000
Miscellaneous....................................................... 15,872
--------
Total........................................................... $680,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's By-Laws provide for indemnification of directors and officers
of the Company to the full extent permitted by Delaware law.
Section 145 of the General Corporation Law of the State of Delaware provides
generally that a corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at its request in
such capacity in another corporation or business association, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit
or proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. In addition, pursuant to the authority of
Delaware law, the Certificate of Incorporation of the Company also eliminates
the monetary liability of directors to the fullest extent permitted by
Delaware law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On December 21, 1995, in connection with the reorganization of LHS, the
Company issued shares of its Common Stock to certain of its officers and
certain holders of shares in LHS Communications Systems Inc. ("LHS
Communications"), LHS Holding Germany GmbH ("LHS Germany") and
II-1
LHS Europe Ltd. ("LHS Europe"), which companies are affiliates of the Company.
These shares were issued in the amounts and for the consideration as follows:
NAME NUMBER OF SHARES OF LHS(1) CONSIDERATION TENDERED
---- -------------------------- ----------------------
Hartmut Lademacher 193,676 250 LHS Communications
shares; 22.23% interest in
LHS Germany; 23,704,083 LHS
Europe shares; Forgiveness of
$8,270,000 loan to LHS
Germany
Dr. Joachim Hertel 193,676 250 LHS Communications
shares; 22.23% interest in
LHS Germany; 23,704,083 LHS
Europe shares; Forgiveness of
$8,270,000 loan to LHS
Germany
Manfred Hellwig 100,745 13.65% interest in LHS
Germany; 17,808,366 LHS
Europe shares; Forgiveness of
$5,080,000 loan to LHS
Germany
Dieter Pfisterer 93,078 200 LHS Communications
shares; 3.93% interest in LHS
Germany; 12,596,195 LHS
Europe shares; Forgiveness of
$1,460,000 loan to LHS
Germany
Dr. Rainer Zimmermann 93,078 12.67% interest in LHS
Germany; 16,361,034 LHS
Europe shares; Forgiveness of
$4,710,000 loan to LHS
Germany
Otto Wipprecht 50,374 150 LHS Communications
shares; 5.56% interest in LHS
Germany; 3,149,180 LHS Europe
shares; Forgiveness of
$2,070,000 loan to LHS
Germany
Eberhard Czempiel 23,249 4.41% interest in LHS
Germany; 2,499,182 LHS Europe
shares; Forgiveness of
$1,640,000 loan to LHS
Germany
William Bobb 15,500 100 LHS Communications shares
Dr. Wolf Gaede 7,750 50 LHS Communications shares
Jurgen Spengler 3,874 0.33% interest in LHS
Germany; 187,877 LHS Europe
shares; Forgiveness of
$120,000 loan to LHS Germany
- --------
(1)These shares were subsequently adjusted for a 20-to-1 stock split.
These transactions were exempt from registration pursuant to Section 4(2) of
and Regulation D under the Securities Act as a limited offer and sale of
securities to accredited investors or persons who have such knowledge and
experience in financial and business matters that they are capable of
evaluating the merits and risks of the prospective investment.
On December 22, 1995, the Company sold 225,000 shares of Series A
Convertible Preferred Stock to investors at $88.89 per share. Each of the
investors was an accredited investor. Each share of Series A Convertible
Preferred Stock was, at the time of issuance, convertible into one share of
the Company's Common Stock (adjusted to 20 shares following the stock split).
These transactions were exempt from registration pursuant to Section 4(2) of
and Regulation D under the Securities Act as a limited offer and sale of
securities to accredited investors.
On July 15, 1996, the Company sold 93,078 shares of Common Stock to
investors at $107.44 per share. These shares were subsequently adjusted for a
20-to-1 stock split. Each of the investors was an accredited investor. These
transactions were exempt from registration pursuant to Section 4(2) of and
Regulation D under the Securities Act as a limited offer and sale of
securities to accredited investors.
On October 18, 1996, the Company sold 50,000 shares of Common Stock to
William O. Grabe, a director of the Company, upon the exercise of stock
options. Mr. Grabe paid an exercise price of $5.30 per share, equal to
$265,000. This transaction was exempt from registration pursuant to Section
4(2) of and Regulation D under the Securities Act as an offer and sale of
securities to an accredited investor.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
1.1 -- Form of U.S. Underwriting Agreement between the Company, certain
stockholders of the Company and Goldman Sachs & Co., Cowen &
Company and Robertson, Stephens & Company LLC, as representatives
of the several underwriters.
1.2 -- Form of International Underwriting Agreement between the Company,
certain stockholders of the Company and Goldman Sachs
International, Cowen & Company and Robertson, Stephens & Company
LLC, as representatives of the several underwriters.
3.1** -- Certificate of Incorporation, as amended.
3.2** -- By-Laws.
4.1** -- Specimen Common Stock Certificate.
5.1 -- Opinion of Alston & Bird LLP (including consent).
10.1** -- Preferred Stock Purchase Agreement dated December 22, 1995 among
the Company, General Atlantic Partners 23, L.P. and GAP
Coinvestment Partners, L.P.
10.2** -- Common Stock Purchase Agreement dated July 15, 1996 among the
Company, General Atlantic Partners 31, L.P. and GAP Coinvestment
Partners, L.P.
10.3** -- Amended and Restated Stockholders 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.
10.4** -- 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.
10.5** -- Credit line of DM5,000,000 from BHF-Bank to LHS Holding Germany
GmbH dated March 19, 1996.
10.6** -- Employment Agreement dated as of April 14, 1997, between Hartmut
Lademacher and LHS Group Inc.
10.7** -- Employment Agreement dated as of April 14, 1997, between Dr.
Joachim Hertel and LHS Group Inc.
10.8** -- Contract for Employment dated May 21, 1996, between Erik Froberg
and LHS Holding Germany GmbH.
11.1** -- Statement re computation of per share earnings.
21.1** -- Subsidiaries.
23.1 -- Consent of Alston & Bird LLP (contained in Exhibit 5.1)
23.2 -- Consent of Ernst & Young LLP.
24.1** -- Power of Attorney with regard to amendments to this Registration
Statement executed by the directors and officers of the Company is
included on the signature page of this Registration Statement
appearing on page II-5.
27.1** -- Financial Data Schedule.
- --------
**Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule is included in this Registration
Statement:
II Valuation and Qualifying Accounts
All other financial statement schedules are omitted because they are not
required or are not applicable.
II-3
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
representatives of the Underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the representatives of the Underwriters to permit
prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rules 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on April 17, 1997.
LHS GROUP INC.
By: /s/ Hartmut Lademacher__________
Hartmut Lademacher
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to Registration Statement has been signed by the following persons in
the capacities indicated on April 17, 1997.
SIGNATURE TITLE
--------- -----
/s/ Hartmut Lademacher Chairman of the Board and Chief
_________________________________ Executive Officer (Principal
HARTMUT LADEMACHER Executive Officer)
/s/ Jerry W. Braxton Executive Vice President, Chief
_________________________________ Financial Officer, Treasurer and
JERRY W. BRAXTON Director (Principal Financial and
Accounting Officer)
/s/ Dr. Wolf J. Gaede* Executive Vice President, General
_________________________________ Counsel 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
- --------
* Hartmut Lademacher signed on behalf of such person as attorney-in-fact.
II-5
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated balance sheets of LHS Group Inc. as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years then ended,
and have issued our report thereon dated February 7, 1997 (included elsewhere
in this Registration Statement on Form S-1). Our audits also included the
financial statement schedule of LHS Group Inc. listed in item 16(b). This
schedule is the responsibility of the Company'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.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
February 7, 1997