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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
_____________
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 22, 1999
LHS Group Inc.
(Exact name of registrant as specified in its charter)
Delaware 000-22409 58-2224883
(State or other jurisdiction (Commission File Number) (IRS Employer Identification No.)
of incorporation)
Six Concourse Parkway, Suite 2700
Atlanta, Georgia 30328
(Address of Principal Executive Offices)
770-280-3000
(Registrant's telephone number, including area code)
Page 1 of 14
Index to Exhibits on Page 13
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Item 5. Other Events.
(a) On February 22, 1999, LHS Group Inc. announced certain consolidated
financial information as of, and for the quarter and year ended, December 31,
1998. This information is contained in a press release that is filed as Exhibit
99.1 to this Report.
(b) Also on February 22, 1999, LHS Group Inc. announced the introduction of
its object-oriented, next generation customer care and billing software,
"Targys-the millennium series." Information regarding this product introduction
is contained in a press release that is filed as Exhibit 99.2 to this Report.
(c)
RISK FACTORS
We must adapt to changes in technology, products, industry standards and
customer needs.
The telecommunications industry is characterized by rapidly changing
technology and evolving industry standards. Also, customer needs frequently
change, and competitors constantly introduce new products and services. To be
successful, we must:
. use leading technologies effectively;
. continue developing our technical expertise;
. enhance our existing products and services;
. develop new products and services; and
. meet changing customer needs on a timely and cost-effective basis.
If we fail to do any of these things, our customers may choose to purchase
products and services from our competitors.
We continually introduce our products and services into new markets. If
our products do not adequately meet the demands of these new markets, we could
experience decreased revenues. We could experience difficulties in the
development of products and services for new and existing markets that could
delay or prevent the successful development, introduction and marketing of these
products and services. Our failure to develop and introduce new products and
services in a timely manner, or the lack of success of a new release of a
product in the market, would likely result in a material adverse effect on our
business, operating results and financial condition.
We cannot assure you that we will effectively manage our growth
Over the last three years, we have greatly expanded our operations,
placing considerable demand on our administrative, operational and financial
personnel and systems. Further expansion may place additional strains on our
resources. To address these expansion issues, we may have to make substantial
expenditures and devote further management time and resources to:
. improve or replace our management information, financial and other
reporting systems;
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. standardize BSCS installation methods;
. further develop our infrastructure;
. develop and coordinate strategies, operations and product development
among our operations in the Americas, Europe and Asia;
. maintain customer satisfaction;
. manage changing business conditions; and
. recruit, train and retain qualified consulting, technical, sales,
financial, marketing and management personnel.
We cannot assure you that our existing resources, systems and space will be able
to adequately support our further expansion. Our failure to respond
appropriately to growth and change would likely result in a material adverse
effect on the quality of our services, our ability to retain key personnel and
our business.
We depend on large contracts from a limited number of customers.
We provide customized billing and customer handling systems to
telecommunications carriers in the wireline and wireless markets. Although no
single customer accounted for more than 10% of our revenues in 1998, we have
traditionally relied upon, and expect to continue to rely upon, large contracts
from a limited number of customers. This can cause our revenues and earnings to
fluctuate between quarters based on the timing of orders and realization of
revenues from these orders.
Some of the telecommunications industry's established carriers are forming
alliances, while others are consolidating. If a consolidation or alliance
involves one of our customers, that customer may switch to another billing
system. In addition, none of our major customers has any obligation to purchase
additional products or services from us. The loss of one of our major customers
because of industry consolidation or otherwise would likely result in a material
adverse effect on our business, operating results and financial condition.
Our success depends on developing relationships with new customers in a
very competitive telecommunications market.
The wireline and wireless markets have grown significantly and become much
more competitive in recent years. This growth may not continue, and we may not
be able to successfully market and sell our products in these competitive
markets. It is critical to our continued success that we develop relationships
with new customers. Our failure to develop relationships with new customers, or
the failure of our customers to compete effectively in the telecommunications
market, would likely result in a material adverse effect on our business,
operating results and financial condition.
Many of our potential customers are new entrants in the telecommunications
market and lack significant financial and other resources. We may be required
to offer them alternative pricing arrangements, including deferred payments, if
we want these new market entrants to be our customers. We may not be able to
develop customer
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relationships with these new entrants, but even if we do, there is no guarantee
that these customers will be successful. If they are not successful, they may
reduce or discontinue their purchases from us. If we have permitted customers to
pay us on a deferred basis, we may be unable to collect payments from these
customers. Any one of these factors could have a material adverse effect on our
business, operating results and financial condition.
We cannot assure you that expansion of our products and services into new
geographic markets and applications will be successful.
We plan to continue expanding our products and services into new geographic
markets and to carriers offering new applications of their telecommunications
services. Our failure to successfully establish ourselves in new markets would
likely result in a material adverse effect on our business.
Our success is dependent on our relationships with consulting firms and
systems integration firms.
Consulting firms and systems integration firms help us with marketing,
sales, lead generation, customer support and installation of our products. In
order to grow successfully, we must maintain our relationships with these firms
and generate new business opportunities through joint marketing and sales with
them.
We also serve as subcontractor to consulting firms and systems integration
firms where those firms provide information technology to end-user customers. In
these cases we depend heavily on these firms to install our products and to
train end-users to use our products. Incorrect product installation, failure to
properly train the end-user, or general failure of the firm to satisfy the
customer could have a negative effect on our relationships with the contracting
firm and the customer. Such problems could damage our reputation and the
reputation of our products and services.
Obstacles we may encounter to forging long-term relationships with
consulting and systems integration firms include:
. we have no exclusive agreements with any consulting and systems
integration firms;
. many consulting and systems integration firms have more established
relationships with our principal competitors; and
. many consulting and systems integration firms have the resources to
compete with us by developing their own products and services.
These firms may discontinue their relationships with us and/or develop
relationships with our competitors. Our inability to establish and maintain
effective, long-term relationships with these firms, and their failure to meet
the needs of our customers, would likely adversely affect our business.
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Prior to 1996, we had contracts pursuant to which we gave certain systems
integration firms our kernel source code and the right to market and sell
versions of our products that these firms independently modified. A few U.S.
carriers had problems with our products as modified and installed by these
firms. This damaged our reputation and credibility and that of our products,
and we may have lost the confidence of the affected carriers. Although we have
terminated all of these types of contracts, we cannot assure you that there will
not be further damage to our reputation and credibility in the U.S. that could
have a material adverse effect on our business.
The telecommunications billing and customer care systems industry is very
competitive.
The telecommunications billing and customer care systems industry is very
competitive. We expect competition to increase in the future.
Some of the independent providers we compete with are:
. Alltel
. AMDOCS
. CBIS
. ITDS
. Kenan
. Kingston-SCL
. SEMA Group
We also compete with systems integrators and internal billing departments of
larger telecommunications carriers.
Many of our competitors have advantages over us, including:
. longer operating histories;
. larger customer bases;
. substantially greater financial, technical, sales, marketing and other
resources; and
. greater name recognition.
Our current and potential competitors have established, and may continue to
establish in the future, cooperative relationships among themselves or with
third parties to increase their ability to compete with us. In addition,
competitors may be able to adapt
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more quickly than us to new or emerging technologies and changes in customer
needs, or to devote more resources to promoting and selling their products. New
competitors or alliances among competitors could also result in these
competitors quickly gaining significant market share.
We believe that our ability to compete successfully in our markets is
affected by these principal factors:
. development of competing software and services;
. price of competing software and services;
. responsiveness to customer needs; and
. hiring, retaining and motivating key personnel.
Our failure to adapt to market demands and to compete successfully with existing
and new competitors would have a material adverse effect on our business.
As we expand, we will market our products and services to carriers in
markets that we do not currently serve. We may encounter new competitors upon
entry into these markets that may have greater financial, technical, personnel
and marketing resources than we do. We cannot assure you that we will be able to
successfully identify and address the demands for these new markets or that we
can continue to compete effectively in our current markets. Our failure to
maintain our competitiveness in current or new markets would have a material
adverse effect on our business, operating results and financial condition.
Our success depends upon our ability to attract and retain key personnel.
Our future success depends in large part on the continued service of our
key management, sales, product development and operational personnel, including
Hartmut Lademacher, Chairman of the Board and Chief Executive Officer. Since it
is our goal to continue our expansion, our success also depends on our ability
to attract and retain highly qualified technical, managerial, sales and
marketing personnel. Competition is intense for the recruitment of highly
qualified personnel in the software and telecommunications services industry. We
may not be able to successfully retain or integrate existing personnel or
identify and hire additional personnel. Our inability to hire and retain
qualified personnel would likely have a material adverse effect upon our current
business, new product development efforts and future business prospects. We do
not currently maintain key person insurance coverage for any of our employees.
The success of our international business operations is subject to many
uncertainties.
We conduct a substantial portion of our business outside of the Americas.
In each of 1997 and 1998, our sales outside the Americas represented
approximately 60% of our total revenues. We expect a majority of our revenues to
continue to be provided from our European and Asian operations. Our
international business may be adversely affected by the following:
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. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. difficulties in customizing our products for use in foreign countries;
. longer accounts receivable payment cycles;
. difficulties in managing international operations;
. availability of trained personnel to install and implement our systems;
. political instability;
. potentially adverse tax obligations;
. restrictions on the repatriation of earnings; and
. the burdens of complying with a wide variety of foreign laws and
regulations.
In addition, the laws of some foreign countries do not protect our
intellectual property rights to as great an extent as the laws of the United
States. There can be no assurance that such factors will not have a material
adverse effect on our international revenues and earnings or our overall
financial performance.
If we cannot provide financing for potential customers, we may not get
their business.
Certain of our potential customers may require financing to fund purchases
of our products. In particular, our ability to increase sales to start-up
telecommunications carriers with limited financial resources in the future will
depend significantly upon our ability to arrange financing for these customers.
We may not be able to successfully implement a vendor financing program for
these customers or to assist them in obtaining alternative financing for our
products. In such event, we will have decreased revenues.
Failure to obtain Year 2000 compliance may negatively affect our business
The term "Year 2000 issue" is used to describe the various problems that
may result from the improper processing of dates and date-sensitive calculations
by computers and other machinery as the year 2000 is approached and reached.
These problems could result in a system failure or miscalculations causing
disruptions of our operations, including an inability to process transactions,
send invoices, or engage in similar normal business activities.
Although we believe that our internal systems and software products are
Year 2000 compliant, we are vulnerable to the risk that our customers,
government agencies, significant suppliers and other third parties will not be
able to remedy their own Year 2000 issues. We rely, both domestically and
internationally, upon government agencies, utility companies, telecommunication
service companies and other service providers outside of our control. Such
suppliers, governmental agencies, or other third parties or
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our customers may suffer a Year 2000 business disruption. Such failures could
have a material adverse effect on our business, operating results and financial
condition.
We have not developed a contingency plan to address the results of our
analysis of the most reasonably likely worst case Year 2000 scenarios.
Consequently, we are not able to determine at this time whether the consequences
of Year 2000 failures will have a material impact on our operations, but they
may.
Exchange rate fluctuations between the U.S. dollar and other currencies in
which we do business may result in currency translation losses.
A significant portion of our revenues are denominated in the German
Deutsche Mark. We also have revenues denominated in the Swiss Franc and the
Malaysian Ringgit. The value of the German Deutsche Mark against the Euro was
fixed upon the introduction of the Euro on January 1, 1999. Consequently,
fluctuations in exchange rates between the U.S. Dollar and the Euro may have a
material adverse effect our business, operating results and financial condition
and could also result in significant exchange losses. Foreign currency
transaction gains and losses are a result of transacting business in certain
foreign locations in currencies other than the functional currency of the
location. We attempt to balance our revenues and expenses in each currency to
minimize net foreign currency risk. To the extent that we are unable to balance
revenues and expenses in a currency, fluctuations in the value of the currency
in which we conduct our business relative to the functional currency have caused
and will continue to cause currency transaction gains and losses. We cannot
accurately predict the impact of future exchange rate fluctuations on our
results of operations.
We have not sought to hedge the risks associated with fluctuations in
exchange rates but may undertake such transactions in the future. Any hedging
techniques which we implement in the future may not be successful, and exchange
rate losses could be exacerbated by hedging techniques that we use.
Our European operations expose us to heightened Euro conversion risks.
Because of our significant operations in Europe, we are particularly
exposed to risks resulting from the conversion by certain European Union member
states of their respective currencies to the Euro as legal currency on January
1, 1999. The conversion rates between such European Union member states'
currencies and the Euro have been fixed by the European Union's council;
however, the mandatory switch to the Euro will not occur until June 30, 2002.
We will be modifying our software during the period of conversion to the
Euro and intend to complete such work and have our products Euro compliant by
such time. Risks to us related to the conversion of the Euro include:
. effects on pricing due to increased cross-border price transparency;
. costs of modifying information systems, including both software and
hardware;
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. costs of modifying our software products to accommodate Euro conversion;
. costs of relying upon third parties whose systems also require
modification;
. changes in the conduct of business; and
. changes in the currency exchange rate.
The actual effects of the Euro conversion could have a material adverse
effect on our business, operating results and financial condition.
We have only limited protection of our proprietary rights and technology.
We rely primarily on a combination of statutory and common law copyright,
trademark and trade secret laws, customer licensing agreements, employee and
third-party nondisclosure agreements and other methods to protect our
proprietary rights and technology. These laws and contractual provisions
provide only limited protection. We have no patents or patent applications
pending, no copyrights and only a limited number of registered trademarks. It
may be possible for a third party to copy or otherwise obtain and use our
technology without authorization or to develop similar technology independently.
Also, the laws of certain countries in which we sell our products do not offer
as much protection of our proprietary rights as the laws of the United States.
Unauthorized copying or misuse of our products or proprietary rights could have
a material adverse effect on our business, operating results and financial
condition.
We may not be successful in avoiding claims that we infringe others'
proprietary rights.
Many patents, copyrights and trademarks have been issued in the general
areas of information and telecommunications. We expect that software developers
will be increasingly subject to infringement claims as the number of products
and competitors providing products and services to the telecommunications
industry grows. Third parties may claim that our current or future products
infringe their proprietary rights. Infringement claims, with or without merit,
could
. result in costly litigation;
. require significant management resources;
. cause product shipment delays;
. require us to enter into unfavorable royalty or licensing agreements; or
. cause us to discontinue the use of the challenged trade name, service
mark or technology.
Consequently, infringement claims could have a material adverse effect on our
business, operating results and financial condition.
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Our software may contain undetected errors.
The software that we have developed and sold to our customers may contain
undetected errors. Although we test our software prior to installing it in a
customer's network, we may discover errors after the installation. The cost to
fix the errors or to develop the software further could be high. These errors
may subject us to product liability claims. We have not experienced any product
liability claims to date, but we may be subject to such claims in the future. We
have insurance that would cover certain of these claims; however, a successful
product liability claim brought against us could have a material adverse effect
on our business, operating results and financial condition.
Our stock ownership is highly concentrated.
Upon the anticipated completion in the first quarter of 1999 of a proposed
offering of common stock by certain existing stockholders, our executive
officers, directors and their affiliates will beneficially own approximately
19.8 million shares (approximately 36.8%) of the outstanding common stock.
Also, our executive officers and directors and their affiliates hold options to
acquire an additional 1.3 million shares of common stock. If exercised, these
options, taken with the shares owned, would give the directors, officers and
their affiliates beneficial ownership of approximately 38.3% of our common stock
after the proposed public offering.
Substantially all such persons and certain other significant stockholders
have granted Hartmut Lademacher the right to vote, through December 31, 1999,
all shares of common stock owned by them. As a result, Mr. Lademacher may be
able to exert significant influence over the election of directors and the
outcome of certain corporate actions requiring stockholder approval. This
concentration of ownership may have the effect of delaying or preventing a
change in control.
Certain measures that we have adopted may have anti-takeover effects.
The Board of Directors has the authority to issue up to 225,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares, without stockholder
action. The rights of the holders of common stock will be subject to, and may
be adversely affected by, the rights of the holders of any preferred stock that
may be issued in the future. The issuance of preferred stock could discourage
or make difficult the acquisition of a majority of our outstanding voting stock
by a third party.
Certain provisions of our Certificate of Incorporation and By-Laws and the
Delaware General Corporation Law could delay or make more difficult a merger,
tender offer or proxy contest involving us. In addition, our Board of Directors
is divided into three classes with only one class being elected each year, and
directors may only be removed by the affirmative vote of 80% or more of all
classes of voting stock. Also, pursuant to our Stock Incentive Plan, all stock
options granted to employees
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automatically vest and become exercisable upon certain triggering events leading
up to a change of control. These factors may have the effect of delaying or
preventing a change of control.
The market price of our common stock may be volatile.
There may be significant volatility in the market price of our common
stock. The stock market has from time to time experienced significant price and
volume fluctuations which may be unrelated to the operating performance of
particular companies. Factors such as the following will vary from period to
period:
. actual or anticipated operating results;
. growth rates;
. changes in estimates by analysts;
. industry conditions;
. competitors' announcements;
. regulatory actions; and
. general economic conditions.
As a result of these and other factors, our operating results from time to time
may be below the expectations of public market analysts and investors. Any such
event would likely have a material adverse effect on the market price of the
common stock.
Government regulation of our customers could negatively affect us.
Currently, our business is not subject to direct government regulation;
however, our existing and potential customers are subject to extensive
regulation in many jurisdictions. Regulatory changes which affect our existing
and potential customers could have a material adverse effect on our business,
operating results and financial condition.
Additional shares will become eligible for sale in the future
The market price of our common stock could drop as a result of sales of
large numbers of shares in the market, or the perception that such sales could
occur. Several of our principal stockholders hold a significant portion of the
outstanding common stock.
We have approximately 52.8 million shares of common stock outstanding.
Immediately after the proposed public offering, 10.9 million of these shares
will be freely transferable without restriction or further registration under
the Securities Act of 1933, except for any shares purchased by our "affiliates,"
as defined in Rule 144 under the Securities Act. The remaining 41.9 million
shares of common stock outstanding will be "restricted securities" as defined in
Rule 144. These shares may be sold in the future without registration under the
Securities Act to the extent permitted by Rule 144 or an exemption
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under the Securities Act. In addition, we have registered under the Securities
Act 16 million shares of common stock issuable under our Long-Term Incentive
Plan.
Certain of our stockholders are entitled to demand and piggyback
registration rights with respect to the shares that they own. Once registered,
such shares generally will be eligible for immediate sale in the public market.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LHS Group Inc.
(Registrant)
Date: March 1, 1999 By /s/ Jerry W. Braxton
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Jerry W. Braxton
Executive Vice President, Chief
Financial Officer and Treasurer
INDEX TO EXHIBITS
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Exhibit Description
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99.1 Press Release dated February 22, 1999
99.2 Press Release dated February 22, 1999