<PAGE>
Filed pursuant to Rule 424(b)(1)
Registration No. 333-6589
3,800,000 Shares
[LOGO]
Common Stock
---------------------
Of the 3,800,000 shares of Common Stock offered hereby, 3,021,868 shares are
being sold by Lightbridge, Inc. ("Lightbridge" or the "Company") and 778,132
shares are being sold by certain selling stockholders (the "Selling
Stockholders"). The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders. See "Principal and Selling
Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for information relating to the
determination of the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol "LTBG."
---------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS," BEGINNING ON
PAGE 6 OF THIS PROSPECTUS.
---------------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $10.00 $0.70 $9.30 $9.30
Total(3).................... $38,000,000 $2,660,000 $28,103,372 $7,236,628
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(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 expenses payable by the Company estimated to be $850,000.
(3) Certain of the Selling Stockholders have granted the Underwriters an
option, exercisable within 30 days of the date hereof, to purchase an
aggregate of up to 570,000 additional shares of Common Stock at the Price
to Public less Underwriting Discounts and Commissions to cover over-
allotments, if any. If all such shares are purchased, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Selling
Stockholders will be $43,700,000, $3,059,000 and $12,537,628,
respectively. See "Underwriting" and "Principal and Selling Stockholders."
---------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, and subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for such shares will be made at the
offices of Cowen & Company, New York, New York, on or about October 2, 1996.
---------------------
COWEN & COMPANY
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
September 27, 1996
<PAGE>
[IMAGE OF LIGHTBRIDGE LOGO SUPERIMPOSED ON IMAGES OF
WIRELESS TELECOMMUNICATIONS EQUIPMENT AND NOMENCLATURE,
FOLLOWED BY CAPTION "LIGHTBRIDGE'S OBJECTIVE IS TO BE THE
LEADING PROVIDER OF INNOVATIVE, SOFTWARE-BASED SOLUTIONS
FOR COST-EFFFECTIVE CUSTOMER ACQUISITION AND RETENTION FOR
THE WIRELESS TELECOMMUNICATIONS INDUSTRY."]
----------------
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent accountants and
quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
LIGHTBRIDGE SOLUTIONS FOR CUSTOMER ACQUISITION AND RETENTION
<TABLE>
<CAPTION>
SAMS(TM) IRIS(TM) POPS(TM)
-------- -------- --------
<S> <C> <C>
Laptop-based "virtual office" Self-service multimedia Windows-based qualification
for the mobile wireless sales education, sales, activation and activation processing at
professional. and vending system. the retail point-of-sale.
[image of laptop computer] [image of vending kiosk] [image of retail transaction]
</TABLE>
[Circular Image]--Text:
Distributed Workflow Management
Lightbridge's Transaction Management Backbone
Security . Validation . Notification . Exception Handling . Data Management
[Text to the Left of Circular Image]:
ACQUISITION
Applicant Screening
.ProFile(R)
Proprietary Intercarrier Fraud Database
.Postalpro(TM)
Address Verification & Correction
.Fraud Detect(TM)
Identification Information Verification
.Insight(TM)
Proprietary Existing Customer Database
Credit Qualification
.Credit Decision System(TM) (CDS)
On-line Real-time Credit Decisions
[Text to the Right of Circular Image]:
WIRELESS INTELLIGENCE(TM)
Decision Support & Data Warehouse Services
.Channel Wizard(TM)
Sales Channel Performance Analysis
.Churn Prophet(TM)
Data Mining for Churn Prediction
TELESERVICES(TM)
.Qualification & Activation Outsourcing
.Telemarketing
.Back-up & Disaster Recovery
.Customer Care
[Text and Graphics Below Circular Image]:
BUSINESS INTEGRATION
<TABLE>
<CAPTION>
<S> <C> <C>
Links to: Links to: Links to:
Payment Systems Activation Systems Fulfillment Systems
Processing of payments with Establishment of accounts & Delivery of product from
credit card. [image of credit activation through carrier & carrier & third party
cards] third party billing systems. distribution centers. [image
[image of call in progress] of delivery center]
</TABLE>
Fraud Detect is a trademark of TRANS UNION.
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information in this Prospectus
(i) gives effect to a 2-for-1 stock split effected on July 15, 1996, (ii)
except in the Financial Statements and Notes thereto, reflects the conversion
of all outstanding shares of the Company's Redeemable Convertible Preferred
Stock (collectively, the "Convertible Preferred Stock") into 5,247,324 shares
of Common Stock and the issuance of 410,287 shares of Common Stock upon
exercise of certain warrants, all upon the closing of this offering, (iii)
gives effect to the filing of an Amended and Restated Certificate of
Incorporation immediately after the closing of this offering to, among other
things, create a new class of undesignated preferred stock and (iv) assumes no
exercise of the Underwriters' over-allotment option. See "Description of
Capital Stock" and "Underwriting."
THE COMPANY
Lightbridge, Inc. ("Lightbridge" or the "Company") develops, markets and
supports a suite of integrated products and services that enable wireless
telecommunications carriers to improve their customer acquisition and retention
processes. The Company's software-based services are delivered primarily on an
outsourcing and service bureau basis, which allows wireless carriers to focus
internal resources on their core business activities. The Company offers on-
line, real-time transaction processing and call center support solutions to aid
carriers in qualifying and activating applicants for wireless service, as well
as software-based sales support services for traditional distribution channels,
such as dealers, agents and direct mobile sales forces, and emerging
distribution channels, such as mass market retail stores, home shopping and
stand-alone kiosks. The Company develops and implements interfaces that fully
integrate its acquisition system with carrier and third-party systems, such as
those for billing, point-of-sale, activation and order fulfillment. The Company
recently introduced software-based decision support tools and services that
enable carriers to reduce subscriber churn and to make more informed business
decisions about their customers, markets and distribution channels.
Over the past 10 years, the number of U.S. cellular subscribers has increased
58% on a compounded annual basis, as the market for cellular phones has evolved
from serving early adopters to serving mass market consumers. While cellular
service historically has represented the largest sector of the U.S. wireless
telecommunications industry, other wireless services, such as personal
communication services ("PCS") and enhanced specialized mobile radio ("ESMR"),
are emerging as competitive alternatives to cellular services. In the midst of
strong subscriber growth and increasing competition, wireless carriers are
encountering high costs of acquisition, declining revenues per subscriber,
escalating losses from subscription fraud and lost revenues from churn in
subscriber bases.
Lightbridge's objective is to be the leading provider of innovative,
software-based solutions for cost-effective customer acquisition and retention
for the wireless telecommunications industry. By focusing on the wireless
telecommunications industry, the Company has developed significant expertise
and experience that it intends to employ to address the changing needs of
wireless carriers in both existing and emerging markets. The Company's strategy
is to provide a suite of complementary software-based products and services
that permit a wireless carrier to select applications and functions to create
an integrated, customized solution addressing its particular needs. The open
architecture underlying the Company's software applications supports the
development of flexible, integrated solutions, regardless of the type of
wireless service provided by a client and independent of the client's computing
environment.
The Company develops long-term consultative relationships with leading
wireless carriers that assist it in identifying evolving industry needs and
marketing additional products and services to its existing client base.
Lightbridge also establishes relationships with strategic partners in order to
increase the functionality of its products, reduce the time to market for its
new products and services, and access its partners' marketing and
3
<PAGE>
development resources. The Company intends to leverage these consultative and
partnering relationships to expand the Company's presence in the United States,
including in the emerging PCS market, and to facilitate and expedite the
Company's entry into the rapidly expanding international wireless market.
The Company sells its products and services through a direct sales force. The
Company's current client base consists of 39 wireless telecommunication
clients, including 8 of the 12 largest domestic cellular carriers (based on
total population coverage) and the only 3 domestic carriers currently
delivering PCS service. In the year ended September 30, 1995, approximately 94%
of the Company's revenues was attributable to carriers that were also clients
in the preceding fiscal year.
Lightbridge was incorporated in Delaware in June 1989 under the name Credit
Technologies, Inc. and changed its name to Lightbridge, Inc. in November 1994.
The Company's principal executive offices are located at 281 Winter Street,
Waltham, Massachusetts 02154, and its telephone number is (617) 890-2000.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company................. 3,021,868 shares
By the Selling Stockholders.... 778,132 shares
Common Stock to be outstanding
after the offering.............. 14,535,599 shares(1)
Use of Proceeds.................. For repayment of indebtedness, for payment of
the exercise price of repurchase options to
acquire 200,000 shares of Common Stock, and
for working capital and other general
corporate purposes, including potential
acquisitions
Nasdaq National Market symbol.... LTBG
</TABLE>
- --------
(1) Excludes, as of September 26, 1996, (i) 1,615,800 shares of Common Stock
issuable upon the exercise of outstanding options at a weighted average
exercise price of $1.80 per share, (ii) 1,000,000 shares of Common Stock
reserved for future option grants under the Company's 1996 Incentive and
Nonqualified Stock Option Plan, (iii) 100,000 shares of Common Stock
reserved for issuance under the Company's 1996 Employee Stock Purchase Plan
and (iv) 750,250 shares of Common Stock issuable upon the exercise of
warrants at an exercise price of $2.00 per share and 100,000 shares of
Common Stock issuable upon the exercise of a warrant at an exercise price
equal to the initial public offering price set forth on the front cover
page hereof. See "Management--Benefit Plans" and Notes 7 and 12 to Notes to
Financial Statements. Reflects the surrender of 47,001 shares of Common
Stock in payment of the exercise price of certain warrants that will expire
upon the closing of the offering. See "Description of Capital Stock--
Warrants." Also gives effect to the repurchase of 200,000 shares of Common
Stock by the Company upon the closing of this offering using a portion of
the net proceeds. See "Use of Proceeds" and "Certain Transactions--
Settlement Agreement and Related Matters."
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE THREE MONTHS SIX MONTHS
MONTHS ENDED ENDED
YEARS ENDED SEPTEMBER 30, ENDED DECEMBER 31, JUNE 30,
---------------------------------------- DEC. 31, ------------- ---------------
1991 1992 1993 1994 1995 1995(1) 1994 1995 1995 1996
------- ------ ------ ------- ------- -------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $ 1,174 $2,988 $6,986 $13,398 $19,350 $20,347 $5,515 $6,512 $9,003 $13,263
Income (loss) from
operations............ (1,125) (623) 130 1,207 (1,607) (1,806) 586 387 (1,331) 692
Net income (loss)...... (1,202) (753) (125) 950 (2,433) (2,773) 412 72 (1,736) 303
Pro forma net income
(loss) per common
share(2).............. $ (0.19) $ 0.01 $ 0.02
Pro forma weighted
average number of
common and common
equivalent shares
outstanding(2)........ 12,662 13,162 13,794
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------
AS
ACTUAL ADJUSTED(2)(3)
------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 3,532 $28,153
Working capital.................................... 2,420 28,654
Total assets....................................... 14,555 39,176
Long-term obligations, less current portion........ 2,694 2,581
Redeemable preferred stock......................... 9,226 --
Stockholders' equity (deficiency).................. (4,153) 31,421
</TABLE>
- --------
(1) The Company changed its fiscal year from September 30 to December 31,
effective with the fiscal year ending December 31, 1996. All references to
fiscal years are to years ended September 30.
(2) Adjusted to give effect to the conversion of all outstanding shares of
Convertible Preferred Stock into 5,247,324 shares of Common Stock. The
Company has never declared or paid any cash dividends on its Common Stock.
(3) Adjusted to reflect the sale of 3,021,868 shares of Common Stock offered by
the Company hereby at the initial public offering price of $10.00 per
share, after deducting underwriting discounts and commissions and estimated
offering expenses, the application of the net proceeds thereof and the
payment by the Company of cash to purchase Common Stock from and settle
certain obligations with an existing stockholder subsequent to June 30,
1996. See "Use of Proceeds" and "Capitalization."
----------------
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
PROFILE is a registered trademark of the Company, and ALLEGRO, CAS COMM,
CHANNEL WIZARD, CHURN PROPHET, CREDIT DECISION SYSTEM, CUSTOMER ACQUISITION
SYSTEM, 800-FOR-CREDIT, FRAUD SENTINEL, INSIGHT, IRIS, LIGHTBRIDGE, POPS,
POSTALPRO, SAMS and WIRELESS INTELLIGENCE are trademarks of the Company. All
other trademarks or trade names referred to in this Prospectus are the property
of their respective owners.
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. This Prospectus contains certain forward-looking statements.
Actual results could differ materially from those projected in the forward-
looking statements as a result of certain of the risk factors set forth below
and elsewhere in this Prospectus. In addition to the other information in this
Prospectus, prospective investors should carefully consider the following risk
factors in evaluating an investment in the Company and its business before
purchasing any shares of Common Stock offered hereby.
Dependence on Limited Number of Clients. A limited number of clients
historically have accounted for a substantial portion of the Company's
revenues in each fiscal year. Revenues attributable to the Company's 10
largest clients accounted for approximately 85%, 90% and 90% of the Company's
total revenues in the years ended September 30, 1993, 1994 and 1995,
respectively. Four clients each accounted for greater than 10% of the
Company's total revenues in the years ended September 30, 1994 and 1995. One
of these clients, which uses the call center support solutions provided by the
Company's Teleservices Group and accounted for 10% of the Company's revenues
in the year ended September 30, 1995, has notified the Company of its intent
to terminate its agreements with the Company, effective in the fourth calendar
quarter of 1996. During 1996, another of these clients, which accounted for
31% of the Company's revenues in the fiscal year ended September 30, 1995, is
changing the way it accesses the Company's Customer Acquisition System, from
using the call center support solutions provided by the Teleservices Group to
using on-line access. As a result, the Company expects the revenues from this
client to decrease significantly during 1996 and 1997. The Company believes
that the termination of these agreements by one client, and the change in the
services used by another client, will not have a material adverse effect on
its business, financial condition, results of operations or cash flow. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview." The concentration of the Company's revenues can cause
the Company's revenues and earnings to fluctuate significantly from quarter to
quarter, based on the volume of qualification and activation transactions
generated through its significant clients. Moreover, recent consolidation
among established participants in the wireless telecommunications industry may
result in further concentration of the Company's revenues from a limited
number of clients. The Company expects that revenues attributable to a
relatively small number of clients will continue to represent a significant
percentage of its total revenues for the foreseeable future. The Company's
contracts with its clients generally extend for terms of one or more years and
do not typically require the clients to purchase any particular type or
quantity of the Company's products or services or to pay any minimum amount
for products or services. Therefore, there can be no assurance that any of the
Company's clients, including its significant clients, will continue to utilize
the Company's services at levels similar to previous years or at all. The loss
of, or a significant curtailment of purchases by, one or more of the Company's
significant clients, including a loss or curtailment due to factors outside of
the Company's control, could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flow. In
addition, delays in collection or uncollectability of accounts receivable from
any of the Company's significant clients could have a material adverse effect
on the Company's liquidity and working capital position. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Clients."
Fluctuations in Quarterly Performance May Adversely Affect Market Price of
Common Stock. The Company has experienced fluctuations in its quarterly
operating results and anticipates that such fluctuations will continue and
could intensify. The Company's quarterly operating results may vary
significantly depending on a number of factors, including the timing of the
introduction or acceptance of new products and services offered by the Company
or its competitors, changes in the mix of products and services provided by
the Company, the nature and timing of changes in the Company's clients or
their use of the Company's products and services, consolidation among
participants and other changes in the wireless telecommunications industry,
changes in the client markets served by the Company, changes in regulations
affecting the wireless industry, changes in the Company's operating expenses,
changes in personnel and changes in general economic conditions. Historically,
the Company's quarterly revenues have been highest in the fourth quarter of
each calendar year and have been particularly concentrated in the holiday
shopping season between Thanksgiving and Christmas. The Company's
6
<PAGE>
transaction revenues, which historically have represented substantially all of
the Company's total revenues, are affected by the volume of use of the
Company's services, which is influenced by seasonal and retail trends, the
success of the carriers utilizing the Company's services in attracting
subscribers and the markets served by the Company for its clients. Software
and other revenues, which include software license revenues and related
consulting revenues, have recently represented an increasing proportion of the
Company's total revenues. Software license revenues are principally recognized
at the time of delivery of the licensed products and therefore may result in
further fluctuations in the Company's quarterly operating results. Consulting
revenues may be influenced by the requirements of one or more of the Company's
significant clients, including engagement of the Company for implementing or
assisting in implementing special projects of limited duration. During the
three months ended June 30, 1996, the Company's revenues from customized
software integration services resulted primarily from projects undertaken for
one client, which projects the Company currently expects will continue at
least through the end of 1996. There can be no assurance that the Company will
be able to achieve or maintain profitability in the future or that its levels
of profitability will not vary significantly among quarterly periods.
Fluctuations in operating results may result in volatility in the price of the
Company's Common Stock.
Although the Company's existing clients typically provide forecasts of
future activity levels, these forecasts have not always proved accurate. In
addition, the sales cycles for the Company's services are typically lengthy
and subject to a number of significant risks over which the Company has little
or no control, including clients' budget constraints and internal
authorization reviews. As a result, the Company may not be able to make
accurate estimates of future sales levels. A significant portion of the
Company's expenses are fixed and difficult to reduce in the event revenues do
not meet the Company's expectations, thus magnifying the adverse effect of any
revenue shortfall. Furthermore, announcements by the Company or its
competitors of new products, services or technologies could cause clients to
defer or cancel purchases of the Company's products and services; any such
deferral or cancellation could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flow.
Accordingly, revenue shortfalls can cause significant variations in operating
results from quarter to quarter and could have a material adverse effect on
the Company's results of operations. If demand for the Company's services
significantly exceeds the Company's estimates at a time when its systems are
used at or near capacity, however, the Company may be unable to meet
contractually required service levels. The Company's failure to meet such
service levels could permit clients to terminate their agreements with the
Company or give rise to liability for damages or penalties, either of which
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flow. In addition, the Company has
hired a significant number of employees since January 1995 and expects to
continue hiring additional sales, customer service, management, software
development and technical support employees during the remainder of 1996 as it
continues to develop and expand its operations. This significant increase in
its workforce may negatively impact the Company's operating margins in the
future, particularly if the Company's commercial introduction of new products
and services is not as successful as planned.
Due to all of the foregoing factors, it is possible that in some future
quarter the Company's results of operations will be below prior results or the
expectations of market analysts and investors. In such an event, the price of
the Company's Common Stock would likely be materially adversely affected.
History of Losses; Capital Requirements. The Company was founded in 1989 and
has incurred net losses in each of its fiscal years other than the year ended
September 30, 1994. As of June 30, 1996, the Company had an accumulated
deficit of approximately $4.0 million. No assurance can be given that the
Company will be profitable on either a quarterly or annual basis in the future
or that the Company will not need to raise additional funds through public or
private financings. Expansion of the Company's business, including the
acquisition of additional computer and network equipment and the expansion of
its teleservices call center capacity, will require the Company to make
significant capital expenditures. The Company believes that its net proceeds
of this offering, together with existing cash balances and funds available
under existing lines of credit, will be sufficient to finance the Company's
operations and capital expenditures for at least the next twelve months. In
the event that the Company's plans change or if the proceeds of this offering
or available cash resources otherwise prove to be insufficient (due to
unanticipated expenses or otherwise), the Company may be required to seek
additional financing or curtail its expansion activities. The Company may
determine, depending upon the opportunities available to it, to seek
additional debt or equity financing to fund the cost of continuing expansion.
To the extent
7
<PAGE>
that the Company obtains equity financing or finances an acquisition with
equity securities, any such issuance of equity securities could result in
dilution to the interests of the Company's stockholders. There can be no
assurance that additional financing will be available to the Company on
acceptable terms, or at all. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Rapid Industry Change Requires Ongoing Product Development Efforts. The
wireless telecommunications industry has been changing rapidly as a result of
increasing competition, technological advances and evolving industry practices
and standards, and the Company expects these changes to continue. Carriers in
the wireless market have also been changing quickly, as the result of
consolidation among established carriers and the rapid entrance of new carriers
into the market. The Company's future success will depend on the continued use
of its existing products and services, market acceptance of its new products and
services and the Company's ability to develop and market new offerings or adapt
existing offerings to keep pace with changes in the wireless telecommunications
industry. A rapid shift away from the use of cellular in favor of other
telecommunications services, such as PCS, could affect demand for the Company's
product and service offerings, since different business practices might evolve
with respect to the offering and sale of new telecommunications services and
could require the Company to develop modified or alternate offerings addressing
the particular needs of providers of the new telecommunications services. In
addition, as the cost of wireless communication services declines and the number
of subscribers increases, carriers may elect to forego credit verification of
new customers, and it is unclear what means of customer screening, if any,
carriers will employ if they do not use credit verification.
Due to rapid changes in the wireless telecommunications industry, the
Company intends to continue to devote substantial financial, managerial and
personnel resources to product development efforts for the foreseeable future.
The development of the Company's product and service offerings is based on a
complex process requiring high levels of innovation and the accurate
anticipation of technological and market trends. There can be no assurance
that the Company will be successful in developing or marketing its existing or
future product and service offerings in a timely manner, or at all. If the
Company is unable, due to resource, technical or other constraints to
anticipate or respond adequately to changing market, client or technological
requirements, the Company's business, financial condition, results of
operations and cash flow will be materially adversely affected. There can be
no assurance that products or services developed by others will not render the
Company's products or services non-competitive or obsolete. See "Business--
Industry Overview" and "--Competition."
Risks Associated with Managing a Changing Business. The Company has expanded
its operations rapidly, and this expansion has created significant demands on
the Company's executive, operational, development and financial personnel and
other resources. Additional expansion by the Company, including geographic
expansion, may further strain the Company's management, financial and other
resources. There can be no assurance that the Company's systems, procedures,
controls and existing space will be adequate to support expansion of the
Company's operations. The Company's future operating results will depend on
the ability of its officers and key employees to manage changing business
conditions and to continue to improve its operational and financial control
and reporting systems. If the Company's management is unable to manage growth
effectively, its business, financial condition, results of operations and cash
flow could be materially and adversely affected. See "Business--Employees" and
"Management."
The success of the Company's business depends in part upon the Company's
ability to attract, train and retain a sufficient number of qualified
personnel to meet its needs. The Company's teleservices call center is labor
intensive; consequently, an increase in the turnover rate among the Company's
teleservices employees would increase the Company's recruiting and training
costs, and if the Company were unable to recruit and retain a sufficient
number of these employees, it could be forced to limit its growth or possibly
curtail its operations. There can be no assurance that the Company will be
successful in attracting, training and retaining the required number of
employees to support the Company's business in the future. See "Business--
Products and Services."
Dependence on Key Personnel. The Company's success to date has depended to a
significant extent on Pamela D.A. Reeve, its President and Chief Executive
Officer, and a number of other key personnel. With the exception of Ms. Reeve,
none of the Company's personnel is a party to an employment agreement with the
Company. The loss of the services of Ms. Reeve or any of the Company's other
key personnel could have a
8
<PAGE>
material adverse effect on the Company's business, financial condition,
results of operations and cash flow. The Company believes that its future
success will depend in large part on its ability to attract and retain highly
qualified management, engineering, research and development, sales and
operational personnel. In particular, the Company will need to hire additional
software developers in order to support and increase its software licensing
activities. Competition for all of these personnel is intense and there can be
no assurance that the Company will be successful in attracting and retaining
key personnel. The failure of the Company to hire and retain qualified
personnel could have a material adverse effect upon the Company's business,
financial condition, results of operations and cash flow. After the closing of
this offering, the Company will not maintain key person life insurance
policies on any of its employees other than Ms. Reeve. See "Business--
Employees" and "Management."
Dependence on Cellular Market and Emerging Wireless Markets. The Company
historically has provided its products and services predominantly to cellular
carriers. Although the cellular market has experienced significant growth in
recent years, there can be no assurance that such growth will continue at
similar rates, or at all, or that cellular carriers will continue to use the
Company's products and services. Further growth in the Company's revenues from
use of the Company's Customer Acquisition System by cellular carriers is more
likely to result from expansion into additional geographic markets for its
existing clients and from general growth of the cellular market, if any, than
from the addition of new cellular carrier clients. Declines in demand for the
Company's products and services, whether as a result of competition,
technological change, industry change, general economic conditions or other
factors, could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flow.
The Company's future operating results will depend in part on the emergence
of the PCS market and other wireless telecommunications markets and the use of
the Company's products and services by PCS and other wireless carriers. The
PCS market is in its initial stages of development. If the growth of the PCS
market or other new wireless markets does not meet expectations or is
significantly delayed for any reason, or if carriers in these markets do not
use the Company's products and services, the Company's business, financial
condition, results of operations and cash flow could be materially and
adversely affected. See "Business--Industry Overview" and "--Products and
Services."
Highly Competitive Industry. The market for products and services provided
to wireless carriers is highly competitive and subject to rapid change. The
market is fragmented, and a number of companies currently offer one or more
products or services competitive with those offered by the Company. In
addition, many wireless carriers are providing or can provide, internally,
products and services competitive with those the Company offers. Trends in the
wireless telecommunications industry, including greater consolidation and
technological or other developments that make it simpler or more cost-
effective for wireless carriers to provide certain services themselves, could
affect demand for the Company's services and could make it more difficult for
the Company to offer a cost-effective alternative to a wireless carrier's own
capabilities. In addition, the Company anticipates continued growth in the
wireless carrier services industry and, consequently, the entrance of new
competitors in the future.
The Company believes that the principal competitive factors in the wireless
carrier services industry include the ability to identify and respond to
subscriber needs, quality and breadth of service offerings, price and
technical expertise. The Company believes that its ability to compete also
depends in part on a number of competitive factors outside its control,
including the ability to hire and retain employees, the development by others
of products and services that are competitive with the Company's products and
services, the price at which others offer comparable products and services and
the extent of its competitors' responsiveness to customer needs.
Many of the Company's current and potential competitors have significantly
greater financial, marketing, technical and other competitive resources than
the Company. As a result, the Company's competitors may be able to adapt more
quickly to new or emerging technologies and changes in customer requirements
or may be able to devote greater resources to the promotion and sale of their
products and services. There can be no assurance that the Company will be able
to compete successfully with its existing competitors or with new competitors.
In addition, competition could increase if new companies enter the market or
if existing competitors expand their service offerings. An increase in
competition could result in price reductions or the loss of market
9
<PAGE>
share by the Company and could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flow.
To remain competitive in the wireless carrier services industry, the Company
will need to continue to invest in engineering, research and development and
sales and marketing. There can be no assurance that the Company will have
sufficient resources to make such investments or that the Company will be able
to make the technological advances necessary to remain competitive. In
addition, current and potential competitors have established or may in the
future establish collaborative relationships among themselves or with third
parties, including third parties with whom the Company has a relationship, to
increase the visibility and utility of their products and services.
Accordingly, it is possible that new competitors or alliances may emerge and
rapidly acquire a significant market share. If this were to occur, the
Company's business, financial condition, results of operations and cash flow
could be materially and adversely affected. See "Business--Competition."
Risk of System Failure. The Company's operations are dependent upon its
ability to maintain its computer and telecommunications equipment and systems
in effective working order and to protect its systems against damage from
fire, natural disaster, power loss, telecommunications failure or similar
events. All of the Company's computer and telecommunications equipment is
located at its two sites in Waltham, Massachusetts, and, as a result, may be
vulnerable to a natural disaster. The Company has taken precautions to protect
itself and its clients from events that could interrupt delivery of the
Company's services. These precautions include physical security systems, back-
up and off-site data storage, back-up telephone lines, service arrangements
with multiple long-distance telephone carriers and an on-site power generator.
Notwithstanding such precautions, there can be no assurance that a fire,
natural disaster, power loss, telecommunications failure or similar event
would not result in an interruption of the Company's services. From time to
time, the Company has experienced delays in the delivery of services to some
clients as a result of failures of certain of the Company's systems. In
addition, the growth of the Company's client base, a significant increase in
transaction volume or an expansion of the Company's facilities may strain the
capacity of its computers and telecommunications systems and lead to
degradations in performance or system failure. Many of the Company's
agreements with carriers contain level of service commitments which the
Company might be unable to fulfill in the event of a natural disaster or major
system failure. Any damage, failure or delay that causes interruptions in the
Company's operations could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flow. Further,
any future addition or expansion of the Company's facilities to increase
capacity could increase the Company's exposure to damage from fire, natural
disaster, power loss, telecommunications failure or similar events. There can
be no assurance that the Company's property and business interruption
insurance will be adequate to compensate the Company for any losses that may
occur in the event of a system failure or that such insurance will continue to
be available to the Company at all or, if available, that it will be available
on commercially reasonable terms. See "Business--Products and Services."
In addition to its own systems, the Company relies on certain equipment,
systems and services from third parties that are also subject to risks,
including risks of system failure or inadequacy. For example, in providing its
credit verification service, the Company is dependent on access to various
credit information data bases. Similarly, delivery of the Company's activation
services is often dependent on the availability and performance of third-party
billing systems. If, for any reason, the Company were unable to access any
such data bases or third-party billing systems, the Company's ability to
process credit verification transactions could be impaired. In addition, the
Company's business is materially dependent on service provided by various
local and long distance telephone companies. A significant increase in the
cost of telephone services that is not recoverable through an increase in the
price of the Company's services, or any significant interruption in telephone
services, could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flow.
Risk of Software Defects; Dependence on Third-Party Software. The software
developed and utilized by the Company in providing its products and services
may contain errors. Although the Company engages in extensive testing of its
software before it is used to provide services to clients, there can be no
assurance that errors will not be found in software after commencement of the
use of such software. Any such error may result
10
<PAGE>
in the Company's partial or total inability to provide services to its
clients, additional and unexpected expenses to fund further product
development or to add programming personnel to complete a development project,
or loss of revenue because of the inability of clients to use the Company's
products or services or the termination by clients of their arrangements with
the Company. Any of these results could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flow.
Certain software used in the Company's software products and to support the
Company's qualification and activation services is licensed by the Company
from third parties. The Company licenses software from Pilot Software, Inc.
under a license agreement that will expire in December 2000 and licenses
software from Trans Union Corporation under a one-year renewable agreement.
There can be no assurance that these suppliers will continue to license this
software to the Company or, if any supplier terminates its agreement with the
Company, that the Company will be able to develop or otherwise procure
software from another supplier on a timely basis or on commercially reasonable
terms. Even if the Company succeeds in developing or procuring such software
in such circumstances, there can be no assurance that the Company will be able
to do so in a timely fashion. See "Business--Proprietary Rights."
Risks Associated with Potential Acquisitions. The Company may in the future
pursue acquisitions of companies, technologies or assets that complement the
Company's business. Future acquisitions may result in the potentially dilutive
issuance of equity securities, the incurrence of additional debt, the write-
off of in-process research and development or software acquisition and
development costs and the amortization of expenses related to goodwill and
other intangible assets, any of which could have a material adverse effect on
the Company's business, financial condition, results of operations and cash
flow. Future acquisitions would involve numerous additional risks, including
difficulties in the assimilation of the operations, services, products and
personnel of the acquired company, the diversion of management's attention
from other business concerns, entering markets in which the Company has little
or no direct prior experience and the potential loss of key employees of the
acquired company. The Company currently has no agreements or understandings
with regard to any acquisition.
Government Regulation and Legal Uncertainties. The wireless carriers that
constitute the Company's clients are regulated at both the federal and state
levels. Federal and state regulation may decrease the growth of the wireless
telecommunications industry, affect the development of the PCS or other
wireless markets, limit the number of potential clients for the Company's
services, impede the Company's ability to offer competitive services to the
wireless telecommunications market, or otherwise have a material adverse
effect on the Company's business, financial condition, results of operations
and cash flow. The Telecommunications Act of 1996, which in large measure
deregulated the telecommunications industry, has caused, and is likely to
continue to cause, significant changes in the industry, including the entrance
of new competitors, consolidation of industry participants and the
introduction of bundled wireless and wireline services. Those changes could in
turn subject the Company to increased pricing pressures, decrease the demand
for the Company's products and services, increase the Company's cost of doing
business or otherwise have a material adverse effect on the Company's
business, financial condition, results of operations and cash flow.
As the result of offering its ProFile product, the Company is subject to the
requirements of the Fair Credit Reporting Act and certain state laws. Although
the Company's business activities are not otherwise within the scope of
federal or state regulations applicable to credit bureaus and financial
institutions, the Company must take into account such regulations in order to
provide products and services that help its clients comply with such
regulations. The Company monitors regulatory changes and implements changes to
its products and services as appropriate. Although the Company attempts to
protect itself by written agreements with its clients, failure to reflect the
provisions of such regulations in a timely or accurate manner could possibly
subject the Company to liabilities that could have a material adverse effect
on the Company's business, financial condition, results of operations and cash
flow. See "Business--Government Regulation."
Limited Protection of Proprietary Technology; Risk of Third Party
Claims. The Company's success is dependent upon proprietary technology. The
Company currently has no patents and protects its property rights in its
technology primarily through copyrights, the law of trademarks, trade secrets
and employee and third-party
11
<PAGE>
non-disclosure agreements. There can be no assurance that the steps taken by
the Company to protect its proprietary rights will be adequate to prevent
misappropriation of its technology or independent development by others of
similar technology. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. There can be no assurance that these protections will be
adequate.
Although the Company believes that its products and technology do not
infringe on any existing proprietary rights of others, there can be no
assurance that third parties will not assert such claims against the Company
in the future or that such future claims will not be successful. The Company
could incur substantial costs and diversion of management resources with
respect to the defense of any claims relating to proprietary rights, which
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flow. Furthermore, parties making
such claims could secure a judgment awarding substantial damages, as well as
injunctive or other equitable relief, which could effectively block the
Company's ability to make, use, sell, distribute or market its products and
services in the United States or abroad. Such a judgment could have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flow. In the event a claim relating to proprietary
technology or information is asserted against the Company, the Company may
seek licenses to such intellectual property. There can be no assurance,
however, that such a license could be obtained on commercially reasonable
terms, if at all, or that the terms of any offered licenses will be acceptable
to the Company. The failure to obtain the necessary licenses or other rights
could preclude the sale, manufacture or distribution of the Company's products
and, therefore, could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flow. The cost
of responding to any such claim may be material, whether or not the assertion
of such claim is valid. See "Business--Proprietary Rights."
Risks Associated with International Expansion. As part of its business
strategy, the Company may seek opportunities to expand its offerings into
international markets. The Company does not currently derive any revenues from
international markets. The Company believes that such expansion is important
to the Company's ability to continue to grow and to market its products and
services. In particular, some domestic wireless carriers expanding into
international markets may seek single, global solutions from the Company and
its competitors, and as a result, the inability of the Company to offer its
products and services internationally may have an adverse effect on the
Company's ability to market its products and services to those carriers for
use in the United States. In marketing its products and services
internationally, however, the Company will face new competitors, some of whom
may have established strong relationships with carriers. There can be no
assurance that the Company will be successful in marketing or distributing its
services abroad or that, if the Company is successful, its international
revenues will be adequate to offset the expense of establishing and
maintaining international operations. To date, the Company has no experience
in marketing and distributing its services internationally. In addition to the
uncertainty as to the Company's ability to establish an international
presence, there are certain difficulties and risks inherent in doing business
on an international level, such as compliance with regulatory requirements and
changes in these requirements, export restrictions, export controls relating
to technology, tariffs and other trade barriers, difficulties in staffing and
managing international operations, longer payment cycles, problems in
collecting accounts receivable, political instability, fluctuations in
currency exchange rates, seasonal reductions in business activity during the
summer months in Europe and certain other parts of the world and potentially
adverse tax consequences. There can be no assurance that one or more of such
factors will not have a material adverse effect on any international
operations established by the Company and, consequently, on the Company's
business, financial condition, results of operations and cash flow. See
"Business--Strategy."
Absence of Public Market; Possible Volatility of Stock Price. Prior to this
offering, 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
after the offering. The initial public offering price of the Common Stock has
been determined through negotiations between the Company and the
Representatives of the Underwriters and may not be indicative of the market
price for the Common Stock after the offering. For a description of the
factors considered in determining the public offering price, see
"Underwriting." Factors such as announcements of technological innovations or
new products by the Company, its competitors and other third parties, as well
as quarterly
12
<PAGE>
variations in the Company's results of operations and market conditions in the
industry, may cause the market price of the Common Stock to fluctuate
significantly. In addition, the stock market in general has experienced
substantial price and volume fluctuations, which have particularly affected
the market prices of many technology companies and which have often been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of the Common Stock.
Control by Existing Stockholders May Discourage Change of Control. After the
sale of the shares of Common Stock offered hereby and the application of the
net proceeds thereof, the Company's executive officers, directors and 5%
stockholders will own beneficially an aggregate of 9,957,488 shares or
approximately 68.5% of the outstanding shares of Common Stock. As a result,
these stockholders, if acting together, would be able to control matters
requiring the approval of stockholders of the Company, including the election
of directors. This concentration of ownership by existing stockholders may
also have the effect of delaying or preventing a change in control of the
Company. See "Principal and Selling Stockholders."
Shares Eligible for Future Sale; Possible Adverse Effect on Market
Price. Sales of a substantial number of shares of Common Stock into the public
market following this offering could adversely affect the prevailing market
price of the Common Stock and the Company's ability to raise capital in the
future. Upon completion of this offering, the Company will have a total of
14,535,599 shares of Common Stock outstanding, of which the 3,800,000 shares
offered hereby will be freely tradable without restriction under the
Securities Act of 1933, as amended (the "Securities Act") by persons other
than "affiliates" of the Company, as defined under the Securities Act. The
remaining 10,735,599 shares of Common Stock outstanding are "restricted
securities" as that term is defined by Rule 144 and Rule 701 as promulgated
under the Securities Act (the "Restricted Shares"). Of the 10,735,599
Restricted Shares, 8,577,709 shares may be sold under Rule 144, subject in
some cases to certain volume restrictions and other conditions imposed
thereby. An additional 95,390 shares will become eligible for sale 90 days
after completion of the offering pursuant to Rules 144 and 701. The remaining
2,062,500 shares will be eligible for sale upon the expiration of their
respective two-year holding periods subject to the conditions of Rule 144,
such holding periods to expire on April 3, 1998 for 2,000,000 shares and on
June 30, 1998 for 62,500 shares. The Commission has proposed certain
amendments to Rule 144 that would reduce by one year the holding periods
required for shares subject to Rule 144 to become eligible for resale in the
public market. This proposal, if adopted, would permit earlier resale of
shares of Common Stock currently subject to holding periods under Rule 144. No
assurance can be given concerning whether or when the proposal will be adopted
by the Commission. Furthermore, all of the 10,735,599 Restricted Shares are
subject to lock-up agreements expiring 180 days following the date of this
Prospectus. Such agreements provide that Cowen & Company may, in its sole
discretion and at any time without notice, release all or a portion of the
shares subject to these lock-up agreements. Upon the expiration of the lock-up
agreements, 8,673,099 of the 10,735,599 Restricted Shares may be sold pursuant
to Rules 144 or 701, subject in some cases to certain volume restrictions
imposed thereby. Certain existing stockholders have rights to include shares
of Common Stock owned by them in future registrations by the Company for the
sale of Common Stock or to request that the Company register their shares
under the Securities Act. See "Shares Eligible for Future Sale--Registration
Rights." Following the date of this Prospectus, the Company intends to
register on one or more registration statements on Form S-8 approximately
3,393,786 shares of Common Stock issued or issuable under its stock option
plans and 100,000 shares of Common Stock issuable under its employee stock
purchase plan. Of the 2,615,800 shares issuable under its option plans,
1,615,800 shares were subject to outstanding options as of September 26, 1996,
of which 770,555 options were exercisable within 180 days following the date
of this Prospectus. Shares covered by such registration statements will be
eligible for sale in the public market after the effective date of such
registration. See "Management--Benefit Plans" and "Shares Eligible for Future
Sale."
Management's Discretion as to Use of Unallocated Net Proceeds. The principal
purposes of this offering are to increase the Company's equity capital, to
create a public market for the Common Stock, to facilitate future access by
the Company to public equity markets and to provide liquidity for the
Company's existing stockholders. As of the date of this Prospectus, the
Company has no specific plans for the use of a substantial portion of the net
proceeds of this offering. The Company expects to use such unallocated
proceeds for working
13
<PAGE>
capital and other general corporate purposes, including potential
acquisitions. Consequently, the Board of Directors and management of the
Company will have significant flexibility in applying the net proceeds of this
offering. See "Use of Proceeds."
Benefits of the Offering to Current Stockholders. The completion of the
offering made by this Prospectus will provide significant benefits to the
current stockholders of the Company, including certain of its directors and
officers. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. In addition, the Company intends to use
approximately $927,000 of the net proceeds of this offering to repurchase
shares of Common Stock from, and repay indebtedness outstanding under
promissory notes held by, a greater-than-5% stockholder of the Company. See
"Use of Proceeds" and "Certain Transactions." The completion of this offering
will also create a public market for the Common Stock and thereby is expected
to increase the market value of the investment by current stockholders in the
Company. Upon the closing of this offering, the difference between the
aggregate purchase price paid or payable by the Company's current
securityholders for shares of Common Stock held by them or subject to options
or warrants held by them and the aggregate market value of such shares will be
approximately $127 million. See "Dilution."
Anti-Takeover Effect of Charter Provisions, By-Laws and Delaware Law. The
Company's Amended and Restated Certificate of Incorporation (the "Restated
Charter") and Amended and Restated By-Laws (the "Restated By-Laws") will
contain provisions that could discourage a proxy contest or make more
difficult the acquisition of a substantial block of the Company's Common
Stock. The Restated Charter requires that any action required or permitted to
be taken by stockholders of the Company must be effected at a duly called
annual or special meeting of stockholders and may not be effected by any
consent in writing. The Restated By-Laws require specified advance notice by a
stockholder of a proposal or director nomination which such stockholder
desires to present at any annual or special meeting of stockholders. Special
meetings of stockholders may be called only by the President or a majority of
the Board of Directors. The Restated By-Laws provide for a classified Board of
Directors, and members of the Board of Directors may be removed only for cause
upon the affirmative vote of holders of at least two-thirds of the shares of
capital stock of the Company issued and outstanding and entitled to vote. The
affirmative vote of the holders of at least 75% of the shares of capital stock
of the Company issued and outstanding and entitled to vote is required to
amend or repeal these provisions. In addition, the Board of Directors is
authorized to issue shares of Common Stock and Preferred Stock which, if
issued, could dilute and adversely affect various rights of the holders of
Common Stock and, in addition, could be used to discourage an unsolicited
attempt to acquire control of the Company.
Following this offering, the Company will become subject to the anti-
takeover provisions of Section 203 of the Delaware General Corporation Law,
which will prohibit the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 may limit the ability of stockholders to approve a transaction
that they deem to be in their best interests. The foregoing and other
provisions of the Restated Charter and the Restated By-Laws and the
application of Section 203 of the Delaware General Corporation Law could have
the effect of deterring certain takeovers or delaying or preventing certain
changes in control or management of the Company, including transactions in
which stockholders might otherwise receive a premium for their shares over
then current market prices. See "Description of Capital Stock--Preferred
Stock" and "--Anti-Takeover Effects of Provisions of the Restated Charter and
By-Laws and of Delaware Law."
Immediate and Future Dilution. Purchasers in the offering will experience
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price. Additional dilution
will occur upon the exercise of outstanding stock options and warrants. See
"Dilution" and "Management--Benefit Plans."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company of the sale of the 3,021,868 shares of
Common Stock offered by the Company hereby are estimated to be $27,253,364,
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company. The principal purposes of this
offering are to increase the Company's equity capital, to create a public
market for the Common Stock, to facilitate future access by the Company to
public equity markets and to provide liquidity for the Company's existing
stockholders.
The Company intends to use a portion of the net proceeds of this offering to
repay all of the indebtedness outstanding under its working capital bank line
of credit at the time this offering is completed (approximately $1,500,000 was
outstanding at September 26, 1996). The Company's working capital line of
credit, which provides for borrowings up to $4,000,000, bears interest at the
lending bank's prime rate plus .25% (8.5% at September 26, 1996). The working
capital line of credit is secured by a pledge of the accounts receivable,
equipment and intangible assets of the Company and terminates in June 1997.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
The Company also intends to use $440,000 of the net proceeds of this
offering to repurchase an aggregate of 200,000 shares of Common Stock pursuant
to options granted to the Company in connection with the settlement of certain
litigation. In addition, the Company intends to use approximately $487,000 of
the net proceeds of this offering to repay indebtedness outstanding under two
8% promissory notes issued in partial payment of the exercise prices of
options to acquire 400,000 shares of Common Stock. One promissory note was
issued in April 1996 and matures in two equal installments in April 1997 and
1998. The other promissory note was issued in September 1996 and matures in
two equal installments on the first and second anniversaries of the date of
issuance. See "Certain Transactions."
The Company intends to use the remainder of the net proceeds of this
offering for working capital and other general corporate purposes. In
addition, the Company may use a portion of the net proceeds of this offering
to acquire or invest in companies, technologies or assets that complement the
Company's business. While from time to time the Company may evaluate potential
acquisitions or investments, the Company is not currently involved in
negotiations with respect to, and has no agreement or understanding regarding,
any such acquisition or investment. Pending such uses, the Company intends to
invest the net proceeds in short-term, investment-grade, interest-bearing
securities. See "Risk Factors--Management's Discretion as to Use of
Unallocated Net Proceeds" and "--Risks Associated with Potential
Acquisitions."
The Company will not receive any proceeds from the sale of shares of Common
Stock offered by the Selling Stockholders hereby. See "Principal and Selling
Stockholders."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently anticipates that it will retain future earnings,
if any, to fund the development and growth of its business and therefore does
not expect to pay any cash dividends in the foreseeable future. The terms of
the Company's existing borrowing arrangements and bank lines of credit
prohibit the Company from declaring or paying cash dividends on the Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 (i) on an actual basis and (ii) as adjusted to reflect the issuance
and sale by the Company of 3,021,868 shares of Common Stock offered hereby
(after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company), the application of the estimated
net proceeds thereof, the payment of cash to purchase Common Stock from and
settle certain obligations with an existing stockholder subsequent to June 30,
1996, the conversion of all outstanding shares of Convertible Preferred Stock
into Common Stock and the filing of the Restated Charter. The following table
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
AS
ACTUAL ADJUSTED
-------------- --------
(IN THOUSANDS)
<S> <C> <C>
Total long-term obligations, less current portion...... $ 2,694 $ 2,581
------- -------
Redeemable convertible preferred stock and
stockholders' equity:
Redeemable convertible preferred stock, $.01 par
value; 2,475,516 shares authorized, 2,451,305 shares
issued and outstanding, actual; no shares authorized,
issued and outstanding, as adjusted.................. 9,226 --
Preferred stock, $.01 par value; no shares authorized,
issued or outstanding, actual; 5,000,000 shares
authorized, no shares issued and outstanding, as
adjusted............................................. -- --
Common stock, $.01 par value; 20,000,000 shares
authorized and 6,256,120 shares outstanding, actual;
60,000,000 shares authorized and 14,535,599 shares
outstanding, as adjusted(1).......................... 67 153
Additional paid-in capital............................. 75 36,468
Warrants............................................... 375 375
Notes receivable, stockholders......................... (13) (13)
Accumulated deficit.................................... (3,951) (4,026)
Less treasury stock, at cost; 401,148 shares, actual;
801,148 shares, as adjusted........................... (706) (1,536)
------- -------
Total redeemable convertible preferred stock and
stockholders' equity................................. 5,073 31,421
------- -------
Total capitalization................................ $ 7,767 $34,002
======= =======
</TABLE>
- --------
(1) Excludes (i) 1,615,800 shares of Common Stock issuable upon exercise of
stock options outstanding as of June 30, 1996, (ii) 1,000,000 shares of
Common Stock reserved for future option grants under the Company's 1996
Incentive and Nonqualified Stock Option Plan, (iii) 100,000 shares of
Common Stock for issuance under the Company's 1996 Employee Stock Purchase
Plan, (iv) 750,250 shares of Common Stock issuable upon exercise of
warrants outstanding as of June 30, 1996 and (v) 100,000 shares of Common
Stock issuable upon the exercise a warrant granted to an existing
stockholder on August 26, 1996. See "Management--Benefit Plans," "Certain
Transactions--Settlement Agreement and Related Matters" and Notes 7 and 12
of Notes to Financial Statements.
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<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996 was
approximately $4,344,000, or $0.38 per share of Common Stock. Pro forma net
tangible book value per share represents the amount of the Company's tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding after giving effect to the conversion of all outstanding shares of
Convertible Preferred Stock into Common Stock (which will occur upon the
closing of this offering). After giving effect to the sale of 3,021,868 shares
of Common Stock offered hereby by the Company at the initial public offering
price of $10.00 per share, the Company's repurchase of 400,000 shares of
Common Stock for an aggregate purchase price of $830,000, the payment of
$75,000 to a stockholder and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company, the
Company's pro forma as adjusted net tangible book value at June 30, 1996 would
have been approximately $30,693,000, or $2.11 per share. This represents an
immediate increase in pro forma net tangible book value of $1.73 per share to
existing stockholders and an immediate dilution of $7.89 per share to
investors purchasing shares of Common Stock in this offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $10.00
Pro forma net tangible book value per share at June 30, 1996... $0.38
Increase per share attributable to new investors............... 1.73
-----
Pro forma as adjusted net tangible book value per share after
offering...................................................... 2.11
------
Dilution per share to new investors............................ $ 7.89
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of June
30, 1996, the number of shares of Common Stock purchased from the Company
(after giving effect to the conversion of all outstanding shares of
Convertible Preferred Stock into Common Stock), the total consideration paid,
and the average price per share paid by existing stockholders and to be paid
by the new investors, at the initial public offering price of $10.00 per
share, before deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Company:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockhold-
ers(1)................. 11,904,592(2) 79.8% $ 9,346,000 23.6% $ 0.79
New investors(1)........ 3,021,868 20.2 30,218,680 76.4 10.00
---------- ----- ----------- -----
Total................. 14,926,460(2) 100.0% $39,564,680 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Sales by the Selling Stockholders in this offering will reduce the number
of shares held by existing stockholders to 11,126,460 or approximately
74.5% (10,556,460 shares or approximately 70.7% if the Underwriters' over-
allotment option is exercised in full) and will increase the number of
shares held by new investors to 3,800,000 or approximately 25.5%
(4,370,000 shares or approximately 29.3% if the Underwriters' over-
allotment option is exercised in full) of the total number of shares of
Common Stock outstanding after this offering. See "Principal and Selling
Stockholders."
(2) Includes (i) 401,148 shares repurchased by the Company prior to June 30,
1996 and (ii) 400,000 shares repurchased or to be repurchased by the
Company after June 30, 1996. Excludes 410,287 shares to be issued upon
exercise of certain warrants upon the closing of the offering.
The foregoing table does not reflect exercises of options or warrants since
June 30, 1996 or the repurchases of Common Stock by the Company and assumes no
exercise of any currently outstanding options or warrants. As of June 30,
1996, there were outstanding options to purchase 1,615,800 shares of Common
Stock at a weighted average exercise price of $1.80 per share and outstanding
warrants to purchase 750,250 shares of Common Stock at an exercise price of
$2.00 (excluding certain warrants to be exercised as of the closing of this
offering). In addition, on August 26, 1996, the Company issued a warrant to
purchase 100,000 shares of Common Stock at the initial public offering price
set forth on the front cover page hereof to an existing stockholder. To the
extent that such options and warrants are exercised in the future, there will
be further dilution to new investors. See "Management--Benefit Plans,"
"Description of Capital Stock" and Notes 7 and 12 to Notes of Financial
Statements.
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the five years ended September 30,
1995 and the three months ended December 31, 1995 have been derived from the
Company's audited historical financial statements, certain of which are
included in this Prospectus. Selected financial data for the twelve months
ended December 31, 1995 are unaudited. Selected financial data for the three
months ended December 31, 1994, and six months ended June 30, 1995 and June
30, 1996 have been derived from the unaudited financial statements of the
Company. In the opinion of management, the unaudited financial information
presented reflects all adjustments, consisting only of normal, recurring
adjustments, necessary for a fair presentation of the financial information
for each such period. Operating results for the six months ended June 30, 1996
are not necessarily indicative of the results that may be expected for any
other interim period or for the year ending December 31, 1996. This data
should be read in conjunction with the Financial Statements and Notes thereto
and the other financial information included elsewhere in this Prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
TWELVE THREE MONTHS SIX MONTHS
MONTHS ENDED ENDED
YEARS ENDED SEPTEMBER 30, ENDED DEC. 31, JUNE 30,
----------------------------------------- DEC. 31, -------------- ----------------
1991 1992 1993 1994 1995 1995(1) 1994 1995 1995 1996
------- ------ ------ ------- ------- -------- ------ ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 1,174 $2,988 $6,986 $13,398 $19,350 $20,347 $5,515 $6,512 $9,003 $13,263
Cost of revenues........ 824 1,703 3,554 7,415 12,607 13,075 3,016 3,484 6,232 7,511
------- ------ ------ ------- ------- ------- ------ ------ ------- -------
Gross profit............ 350 1,285 3,432 5,983 6,743 7,272 2,499 3,028 2,771 5,752
------- ------ ------ ------- ------- ------- ------ ------ ------- -------
Operating expenses:
Development............ 614 790 1,164 2,317 3,864 4,159 850 1,145 1,863 1,971
Sales and marketing.... 214 241 829 815 1,902 2,264 433 795 938 1,917
General and administra-
tive.................. 647 877 1,309 1,644 2,584 2,655 630 701 1,301 1,172
------- ------ ------ ------- ------- ------- ------ ------ ------- -------
Total operating ex-
penses................. 1,475 1,908 3,302 4,776 8,350 9,078 1,913 2,641 4,102 5,060
------- ------ ------ ------- ------- ------- ------ ------ ------- -------
Income (loss) from oper-
ations................. (1,125) (623) 130 1,207 (1,607) (1,806) 586 387 (1,331) 692
Other income (ex-
pense)(2).............. (77) (130) (255) (234) (826) (965) (174) (313) (405) (370)
------- ------ ------ ------- ------- ------- ------ ------ ------- -------
Income (loss) before in-
come taxes............. (1,202) (753) (125) 973 (2,433) (2,771) 412 74 (1,736) 322
Provision for income
taxes.................. -- -- -- (23) -- (2) -- (2) -- (19)
------- ------ ------ ------- ------- ------- ------ ------ ------- -------
Net income (loss)....... $(1,202) $ (753) $ (125) $ 950 $(2,433) $(2,773) $ 412 $ 72 $(1,736) $ 303
======= ====== ====== ======= ======= ======= ====== ====== ======= =======
Pro forma net income
(loss) per common
share(3)............... $ (0.19) $ 0.01 $ 0.02
Pro forma weighted aver-
age number of common
and common equivalent
shares outstanding(3).. 12,662 13,162 13,794
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------- DEC. 31, JUNE 30,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $ 44 $ 182 $ 192 $ 1,832 $ 539 $ 58 $ 3,532
Working capital (defi-
ciency)................ (818) (1,030) (292) 1,715 (3,280) (1,967) 2,420
Total assets............ 1,095 2,390 3,396 9,181 10,214 11,041 14,555
Long-term obligations,
less current portion... 172 624 554 4,197 3,796 4,515 2,694
Redeemable convertible
preferred stock........ 1,009 2,198 2,933 2,948 3,131 3,177 9,226
Stockholders' deficien-
cy..................... (1,420) (2,292) (2,132) (1,093) (3,564) (3,535) (4,153)
</TABLE>
- --------
(1) The Company changed its fiscal year end from September 30 to December 31,
effective with the fiscal year ending December 31, 1996.
(2) Consists principally of interest expense.
(3) Gives effect to the conversion of all outstanding shares of Convertible
Preferred Stock into 5,247,324 shares of Common Stock upon the closing of
this offering. The Company has never declared or paid any cash dividends
on its Common Stock.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. The discussion in this
Prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. This Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors" as
well as those discussed elsewhere herein.
OVERVIEW
Lightbridge develops, markets and supports a suite of integrated products
and services that enable wireless telecommunications carriers to improve their
customer acquisition and retention processes. The Company changed its fiscal
year end from September 30 to December 31, effective with the fiscal year
ending December 31, 1996. The financial statements for the period ended
December 31, 1995 reflect the Company's results of operations for the three
months then ended. References to fiscal years are to years ended September 30.
Lightbridge's total revenues increased from $7.0 million in fiscal 1993 to
$19.4 million in fiscal 1995. This revenue increase has been driven primarily
by increases in volume of wireless customer qualification and activation
transactions processed for wireless carrier clients and in the utilization of
the Company's products and services by carriers. The Company's revenues
consist of transaction revenues and software and other revenues. Historically,
transaction revenues have accounted for substantially all of the Company's
revenues, although software and other revenues have increased during recent
periods primarily as a result of the initial licensing of certain software
products. Software and other revenues, which represented no more than 6.0% of
total revenues in each of fiscal 1993, 1994 and 1995, increased to 7.0% and
19.7% of total revenues in the three months ended December 31, 1995 and the
six months ended June 30, 1996, respectively. There can be no assurance that
the Company's software products will achieve market acceptance or that the mix
of the Company's revenues will remain constant.
Lightbridge's transaction revenues are derived primarily from the processing
of applications of subscribers for wireless telecommunications services and
the activation of service for those subscribers. Over time the Company has
expanded its offerings from credit evaluation services to include screening
for subscriber fraud, evaluating carriers' existing accounts, interfacing with
carrier and third-party systems, and providing teleservices call center
services. These services are provided pursuant to contracts with carriers
which specify the services to be utilized and the markets to be served.
Generally, the Company's clients are charged on a per transaction or, to a
lesser extent, on a per minute basis. Pricing varies depending primarily on
the volume of transactions, the type and number of other products and services
selected for integration with the services, and the term of the contract under
which services are provided. The volume of processed transactions varies
depending on seasonal and retail trends, the success of the carriers utilizing
the Company's services in attracting subscribers and the markets served by the
Company for its clients. Revenues are recognized in the period when the
services are performed.
The Company's software and other revenues have been derived primarily from
developing customized software and providing Business Integration consulting
services. The Company also began licensing its Channel Solutions software with
the introduction of its POPS and Iris products in fiscal 1995 and its SAMS
software in 1996. Lightbridge's Channel Solutions products and services are
designed to assist clients in interfacing with the Company's systems and are
being marketed primarily to wireless telecommunications carriers that utilize
the Company's transaction processing services. The Company's Wireless
Intelligence products are being designed to help carriers analyze their
marketplace to improve their business operations. While its Channel Solutions
products are, and its Wireless Intelligence products are currently expected to
be, licensed as packaged software
19
<PAGE>
products, each of these products requires customization and integration with
other products and systems to varying degrees. Revenues derived from
consulting and other projects are recognized throughout the performance period
of the contracts. Revenues from licensing software are recognized at the later
of delivery of the licensed product or satisfaction of acceptance criteria.
Lightbridge's software and other revenues depend primarily on the continuing
need for integration of diverse systems and acceptance of the Company's
software products by the Company's existing and new clients.
During fiscal 1994 and 1995 and the three months ended December 31, 1995,
each of the Company's four largest clients, and for the six months ended June
30, 1996, each of the Company's three largest clients, accounted for more than
10% of the Company's total revenues, representing an aggregate of 64%, 63%,
61% and 50% of total revenues in those periods, respectively. During fiscal
1993, the Company's two largest clients each accounted for more than 10% of
the Company's total revenues, representing an aggregate of 34% of total
revenues. One of the Company's clients, which accounted for 10% and 11% of the
Company's revenues in the year ended September 30, 1995 and the six months
ended June 30, 1996, respectively, has notified the Company of its intent to
terminate its agreements with the Company, effective in the fourth calendar
quarter of 1996. During 1996, another of these clients, which accounted for
31% and 19% of the Company's revenues in the fiscal year ended September 30,
1995 and the six months ended June 30, 1996, respectively, is changing the way
it accesses the Company's Customer Acquisition System. Both of these clients
historically used the call center support solutions provided by the Company's
Teleservices Group. The continuing customer is switching to on-line access to
the Customer Acquisition System. As a result, the Company expects the revenues
from this client to decrease significantly during 1996 and 1997. The Company
currently believes that the loss of revenues from these clients will be
mitigated by increased revenues from existing clients and revenues from new
clients. Further, the cost of processing transactions through the Teleservices
Group typically involves personnel costs associated with staffing the
Company's call center, which are not required for on-line transaction
processing. Thus, the Company currently expects that its variable cost of
revenues associated with processing transactions will decrease as a result of
the termination of the agreements with one client and the change in services
used by the other client. As a result, the Company currently believes that the
termination of these agreements by one client, and the change in services used
by the other client, will not have a material adverse effect on its business,
financial condition, results of operations or cash flow. See "Risk Factors--
Dependence on Limited Number of Clients." The Company's revenues have been
derived exclusively from sales of products and services in the United States.
Beginning in fiscal 1995, Lightbridge has increased its sales and marketing
efforts to renew contracts with existing cellular carrier clients and to add
new wireless telecommunications carrier clients, including PCS service
providers. In addition, beginning in fiscal 1995, the Company has increased
its development efforts to continue to enhance its existing software and to
develop and acquire new software products and services, including its Channel
Solutions and Wireless Intelligence software products and services. The
Company currently intends to continue to increase its development, sales and
marketing efforts in pursuit of these goals.
Prior to fiscal 1995, the Company's development activities were focused on
creating software for its outsourcing and service bureau operations. All
development costs related to these activities were expensed when incurred. In
fiscal 1995, Lightbridge began developing certain software products to be
licensed as separate products. In connection with these development efforts,
the Company acquired rights to certain pen-based technology for $400,000,
which has been incorporated in the Company's SAMS product, and certain
multimedia software technology, which has been incorporated in the Company's
Iris product. The multimedia technology was purchased for $45,000 in cash plus
an obligation to pay certain royalties. Royalties totalling $6,000 were paid
as of June 30, 1996. In fiscal 1995, the Company capitalized approximately
$980,000 of software development costs for internally developed products and
for the purchase of such technology. Commencing with the availability of the
SAMS and Iris products for general release in fiscal 1995, capitalized
software development costs are being amortized using the straight-line method
over a two-year period.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -------------------
YEAR ENDED SEPTEMBER 30, DECEMBER 31, JUNE 30,
----------------------------- -------------------- -------------------
1993 1994 1995 1994 1995 1995 1996
-------- -------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Transaction........... 94.0% 96.3% 95.1% 96.6% 93.0% 96.0% 80.3%
Software and other.... 6.0 3.7 4.9 3.4 7.0 4.0 19.7
-------- -------- -------- --------- --------- -------- --------
100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues........ 50.9 55.3 65.2 54.7 53.5 69.2 56.6
-------- -------- -------- --------- --------- -------- --------
Gross profit............ 49.1 44.7 34.8 45.3 46.5 30.8 43.4
-------- -------- -------- --------- --------- -------- --------
Operating expenses:
Development........... 16.7 17.3 20.0 15.4 17.6 20.7 14.9
Sales and marketing... 11.9 6.1 9.8 7.9 12.2 10.4 14.5
General and adminis-
trative.............. 18.7 12.3 13.3 11.4 10.8 14.5 8.8
-------- -------- -------- --------- --------- -------- --------
Total operating ex-
penses............. 47.3 35.7 43.1 34.7 40.6 45.6 38.2
-------- -------- -------- --------- --------- -------- --------
Income (loss) from oper-
ations................. 1.8 9.0 (8.3) 10.6 5.9 (14.8) 5.2
Other income (expense),
net.................... (3.6) (1.7) (4.3) (3.1) (4.8) (4.5) (2.8)
-------- -------- -------- --------- --------- -------- --------
Income (loss) before in-
come taxes............. (1.8) 7.3 (12.6) 7.5 1.1 (19.3) 2.4
Provision for income
taxes.................. -- (0.2) -- -- -- -- (0.1)
-------- -------- -------- --------- --------- -------- --------
Net income (loss)....... (1.8)% 7.1% (12.6)% 7.5% 1.1% (19.3)% 2.3%
======== ======== ======== ========= ========= ======== ========
</TABLE>
Six Months Ended June 30, 1996 Compared with Six Months Ended June 30, 1995
Revenues. Total revenues increased by 47% to $13.3 million in the six months
ended June 30, 1996 from $9.0 million in the six months ended June 30, 1995.
Transaction revenues increased by 23% to $10.7 million in the six months ended
June 30, 1996 from $8.6 million in the six months ended June 30, 1995,
primarily due to increased volume of wireless customer qualification and
activation transactions processed for existing carrier clients and, to a lesser
extent, new carrier clients. Software and other revenues increased by 621% to
$2.6 million in the six months ended June 30, 1996 from $0.4 million in the six
months ended June 30, 1995 principally as a result of the increase in revenues
attributable to customized software integration services provided to both
existing and new clients and inclusion in the 1996 period of revenues from the
Company's Channel Solutions products and services. The increase in revenues
from customized software integration services in the 1996 period resulted
primarily from projects undertaken for one client, which projects the Company
currently expects will continue at least through the end of 1996.
Cost of Revenues. Cost of revenues consists primarily of personnel costs,
costs of maintaining systems and networks used in processing subscriber
qualification and activation transactions (including depreciation and
amortization of those systems and networks) and amortization of capitalized
software. Cost of revenues may vary as a percentage of total revenues in the
future as a result of a number of factors, including changes in the mix of
transaction revenues between revenues from on-line transaction processing and
revenues from processing transactions through the Company's TeleServices Group
and changes in the mix of total revenues between transaction revenues and
software and other revenues. Cost of revenues increased by 21% to $7.5 million
in the six months ended June 30, 1996 from $6.2 million in the six months ended
June 30, 1995, while decreasing as a percentage of total revenues to 57% from
69%. The dollar increase in costs resulted principally from increases in
transaction volume, costs attributable to expansion of the Company's staff and
systems capacity and amortization of capitalized software. The decrease in cost
of revenues as a percentage of total revenues primarily
reflected a higher percentage of transaction revenues from on-line processing
than teleservices operations, a
21
<PAGE>
higher percentage of revenues from customized software integration services
and software licenses and increased utilization of the Company's operating and
networking systems.
Development. Development expenses consist primarily of personnel and outside
technical services costs related to developing new products and services,
enhancing existing products and services, and implementing and maintaining new
and existing products and services. Development expenses also include software
development costs incurred prior to the establishment of technological
feasibility. Development expenses increased by 5.8% to $2.0 million in the six
months ended June 30, 1996 from $1.9 million in the six months ended June 30,
1995, while decreasing as a percentage of total revenues to 15% from 21%. The
increase in costs resulted principally from the hiring of additional personnel
to support the continued enhancement of products and services and the
development of new products and services including customized software
integration services, as well as the initial two modules in the Wireless
Intelligence suite. The decrease in development expenses as a percentage of
total revenues reflected the significant growth in the Company's total
revenues. The Company did not capitalize any software development costs during
the six months ended June 30, 1996 and capitalized $524,000 of internally
developed software development costs during the six months ended June 30,
1995.
The Company expects to increase its engineering and development efforts in
order to continue enhancing its existing products and services, including its
CAS, Wireless Intelligence, Business Integration and Channel Solutions
products, as well as to develop new products and services.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and travel expenses of direct sales and marketing
personnel, as well as costs associated with advertising, trade shows and
conferences. Sales and marketing expenses increased by 104% to $1.9 million in
the six months ended June 30, 1996 from $0.9 million in the six months ended
June 30, 1995, and increased as a percentage of total revenues to 14% from
10%. The increase in costs was due to the addition of direct sales personnel,
increased commissions resulting from the higher level of revenues and
increased use of marketing programs, including trade shows. The Company
continues to invest in sales and marketing efforts in order to increase its
penetration of existing accounts and to add new clients and markets.
General and Administrative. General and administrative expenses consist
principally of salaries of administrative, executive, finance and human
resources personnel, as well as outside professional fees. General and
administrative expenses decreased by 10% to $1.2 million in the six months
ended June 30, 1996 from $1.3 million in the six months ended June 30, 1995,
and decreased as a percentage of total revenues to 9% from 14%. The decrease
in general and administrative expenses was due principally to a decrease in
legal costs associated with litigation (see "Certain Transactions--Settlement
Agreement and Related Matters") as well as reduced general and administrative
headcount.
Other Income (Expense) Net. Other income (expense) decreased by 9% to
$370,000 in the six months ended June 30, 1996 from $405,000 in the six months
ended June 30, 1995. Other income (expense) has consisted predominantly of
interest expense. Interest expense consists of interest, commitment fees and
other similar fees payable with respect to the Company's bank lines of credit,
subordinated notes and capital leases. Interest expense decreased by 1% to
$416,000 in the six months ended June 30, 1996 from $421,000 in the six months
ended June 30, 1995. Interest income, which historically had not been
significant, increased to $44,000 in the six months ended June 30, 1996 from
$15,000 in the six months ended June 30, 1995 as a result of the investment of
the proceeds from the issuance of Series D Convertible Preferred Stock in
April 1996.
Provision for Income Taxes. Due to the application of net operating loss
carryforwards from previous years, no significant provision for or benefit
from income taxes was recorded in the six months ended June 30, 1996. The
Company incurred a net loss for the three months ended June 30, 1995 and did
not record a benefit for income tax for the period.
22
<PAGE>
Three Months Ended December 31, 1995 Compared with Three Months Ended
December 31, 1994
Revenues. Total revenues increased by 18% to $6.5 million in the three
months ended December 31, 1995 from $5.5 million in the three months ended
December 31, 1994. Transaction revenues increased by 14% to $6.1 million in
the three months ended December 31, 1995 from $5.3 million in the three months
ended December 31, 1994, principally from increased volume of wireless
customer qualification and activation transactions processed for existing
carrier clients and, to a lesser extent, new carrier clients. Software and
other revenues increased by 142% to $458,000 in the three months ended
December 31, 1995 from $189,000 in the three months ended December 31, 1994,
primarily as a result of the inclusion in the three months ended December 31,
1995 of revenues attributable to the Company's Channel Solutions products and
services.
Cost of Revenues. Cost of revenues increased by 16% to $3.5 million in the
three months ended December 31, 1995 from $3.0 million in the three months
ended December 31, 1994, while decreasing as a percentage of total revenues to
54% from 55%. The dollar increase in costs resulted primarily from increases
in transaction volume, increases in personnel costs attributable to the
Company's TeleServices Group and the inclusion of amortization of capitalized
software. The decrease in cost of revenues as a percentage of total revenues
was primarily the result of a higher percentage of software license revenues,
offset in part by increased costs associated with the Company's infrastructure
investments.
Development. Development expenses increased by 35% to $1.1 million in the
three months ended December 31, 1995 from $0.9 million in the three months
ended December 31, 1994, while increasing as a percentage of total revenues to
18% from 15%. The increase in costs resulted primarily from the hiring of
additional personnel to support the continued enhancement of the Company's
existing products and services and the development of new products and
services, including Channel Solutions, Wireless Intelligence and Business
Integration products and services. The Company did not capitalize any software
development costs during the three months ended December 31, 1995 and
capitalized $62,000 of internally developed software development costs during
the three months ended December 31, 1994.
Sales and Marketing. Sales and marketing expenses increased by 84% to
$795,000 in the three months ended December 31, 1995 from $433,000 in the
three months ended December 31, 1994, and increased as a percentage of total
revenues to 12% from 8%. The increase in costs was due primarily to the
addition of direct sales personnel and increased commissions resulting from
the higher level of revenues.
General and Administrative. General and administrative expenses increased by
11% to $701,000 in the three months ended December 31, 1995 from $630,000 in
the three months ended December 31, 1994. The increase in costs reflects
increases in administrative and finance personnel and, to a lesser extent,
legal costs associated with litigation against a former officer of the
Company.
Other Income (Expense), Net. Interest expense increased by 66% to $307,000
in the three months ended December 31, 1995 from $185,000 in the three months
ended December 31, 1994. This increase principally reflected a higher level of
borrowings for working capital purposes under the Company's bank line of
credit, as well as the inclusion of interest attributable to the issuance of
subordinated notes in August 1995. In addition, interest on capital leases
increased as the result of significant investments in the Company's
infrastructure, which were financed primarily through the leasing of equipment
accounted for as capital leases.
Provision for Income Taxes. Due to the application of net operating loss
carryforwards from previous years, no significant provision for or benefit
from income taxes was recorded in the three months ended December 31, 1995 and
1994. At December 31, 1995, the Company had net operating loss carryforwards
for federal income tax purposes of $2.1 million, expiring at various dates
through 2010.
Fiscal Year Ended September 30, 1995 Compared with Fiscal Year Ended
September 30, 1994
Revenues. Total revenues increased by 44% to $19.4 million in fiscal 1995
from $13.4 million in fiscal j1994. Transaction revenues increased by 43% to
$18.4 million in fiscal 1995 from $12.9 million in fiscal 1994, principally
from increased volume of wireless customer qualification and activation
transactions processed for
23
<PAGE>
existing carrier clients. Software and other revenues increased by 92% to
$948,000 in fiscal 1995 from $495,000 in fiscal 1994, primarily due to an
increase in customized software development for existing clients.
Cost of Revenues. Cost of revenues increased by 70% to $12.6 million in
fiscal 1995 from $7.4 million in fiscal 1994, and increased as a percentage of
total revenues to 65% from 55%. The increase in costs resulted primarily from
increases in transaction volume and increases in personnel costs attributable
to the Company's TeleServices Group and other business operations. In fiscal
1995, the Company relocated its TeleServices Group to a larger facility,
resulting in increased facilities costs. The Company made significant
investments in fiscal 1995 in its computing platform, as well as in increased
networking and systems capacity. The increase in cost of revenues as a
percentage of total revenues reflected continued investment in the Company's
service delivery infrastructure.
Development. Development expenses increased by 67% to $3.9 million in fiscal
1995 from $2.3 million in fiscal 1994, and increased as a percentage of total
revenues to 20% from 17%. The increase in costs was principally attributable
to the hiring of additional personnel to support the continued enhancement of
the Company's existing products and services and the development of new
products and services, including Channel Solutions and Wireless Intelligence
products and services. This increase was offset in part by the capitalization
of $980,000 of software development costs for internally developed products
and for certain purchased technology. The Company did not capitalize any
software development costs in fiscal 1994.
Sales and Marketing. Sales and marketing expenses increased by 133% to $1.9
million in fiscal 1995 from $0.8 million in fiscal 1994, and increased as a
percentage of total revenues to 10% from 6%. The increase in costs was due
principally to increased commissions resulting from the higher level of
transaction revenues, an increase in sales and marketing personnel and an
increase in recruiting, training and other expenses related to the expansion
of the Company's sales and marketing organization. The increase was also
attributable to the Company's increased participation in trade shows and
conferences and additional advertising in trade publications.
General and Administrative. General and administrative expenses increased by
57% to $2.6 million in fiscal 1995 from $1.6 million in fiscal 1994, and
increased as a percentage of total revenues to 13% from 12%. The increase in
costs was principally due to hiring of additional personnel to support the
Company's growth and, to a lesser extent, legal costs associated with
litigation against a former officer of the Company.
Other Income (Expense), Net. Interest expense increased by 252% to $864,000
in fiscal 1995 from $246,000 in fiscal 1994. This increase principally
consisted of interest attributable to the issuance of subordinated notes in
August 1995, as well as a higher level of borrowings for working capital
purposes under the Company's bank line of credit. In addition, interest on
capital leases increased as the result of significant investments in the
Company's infrastructure, which were financed primarily through the leasing of
equipment accounted for as capital leases.
Provision for Income Taxes. The Company recorded a net loss in fiscal 1995
and did not record a provision for or benefit from income taxes. As a result
of the Company's net operating loss carryforwards from previous years, the
provision for income taxes in fiscal 1994 consisted of alternative minimum
taxes.
Fiscal Year Ended September 30, 1994 Compared with Fiscal Year Ended
September 30, 1993
Revenues. Total revenues increased by 92% to $13.4 million in fiscal 1994
from $7.0 million in fiscal 1993. Transaction revenues increased by 97% to
$12.9 million in fiscal 1994 from $6.6 million in fiscal 1993, principally
from increased volume of wireless customer qualification and activation
transactions processed for existing carrier clients (including expansion into
new geographic markets) and new carrier clients. Software and other revenues
increased by 18% to $495,000 in fiscal 1994 from $420,000 in fiscal 1993, due
principally to a change in the Company's pricing practices for custom
development services.
Cost of Revenues. Cost of revenues increased by 109% to $7.4 million in
fiscal 1994 from $3.6 million in fiscal 1993, and increased as a percentage of
total revenues to 55% from 51%. The increase in costs resulted from the
Company's increased transaction volume and continued investments in its
service delivery infrastructure.
24
<PAGE>
Development. Development expenses increased by 99% to $2.3 million in fiscal
1994 from $1.2 million in fiscal 1993, while remaining relatively unchanged as
a percentage of total revenues at approximately 17%. The increase in costs
resulted from an increase in the number of engineering personnel in order to
expand the modules offered as a part of CAS and to further the development of
ProFile and system interfaces. The Company did not capitalize any software
development costs during fiscal 1994 or 1993.
Sales and Marketing. Sales and marketing expenses decreased by 2% to
$815,000 in fiscal 1994 from $829,000 in fiscal 1993, and decreased as a
percentage of total revenues to 6% from 12%. The lower level of sales and
marketing expenses as a percentage of revenues in fiscal 1994 reflected the
significant revenue increase in fiscal 1994, as the Company benefited from the
addition of sales and marketing personnel during fiscal 1993.
General and Administrative. General and administrative expenses increased by
26% to $1.6 million in fiscal 1994 from $1.3 million in fiscal 1993, while
decreasing as a percentage of total revenues to 12% from 19%. The increase in
costs was principally due to hiring of additional personnel to support the
Company's growth.
Other Income (Expense), Net. Interest expense decreased by 2% to $246,000 in
fiscal 1994 from $250,000 in fiscal 1993. This decrease principally reflected
lower interest rates in fiscal 1994.
Provision for Income Taxes. As a result of the Company's net operating loss
carryforwards from previous years, the provision for income taxes in fiscal
1994 consisted of alternative minimum taxes. No provision for or benefit from
income taxes was recorded in fiscal 1993.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain quarterly financial data for the
eight quarters ended June 30, 1996. The quarterly information is unaudited but
has been prepared on the same basis as the audited financial statements
included elsewhere in this Prospectus. In the opinion of management, all
necessary adjustments (consisting only of normal recurring adjustments) have
been included to present fairly the unaudited quarterly results when read in
conjunction with the Financial Statements and Notes thereto included elsewhere
in this Prospectus. The results of operations for any quarter are not
necessarily indicative of the results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
SEPT. 30 DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues:
Transaction........... $3,815 $5,326 $4,215 $4,426 $ 4,435 $6,054 $5,284 $5,369
Software and other.... 164 189 237 125 397 458 1,030 1,580
------ ------ ------ ------ ------- ------ ------ ------
3,979 5,515 4,452 4,551 4,832 6,512 6,314 6,949
Cost of revenues........ 2,589 3,016 3,125 3,107 3,360 3,484 3,634 3,877
------ ------ ------ ------ ------- ------ ------ ------
Gross profit............ 1,390 2,499 1,327 1,444 1,472 3,028 2,680 3,072
------ ------ ------ ------ ------- ------ ------ ------
Operating expenses:
Development........... 756 850 929 934 1,151 1,145 953 1,018
Sales and marketing... 212 433 477 462 530 795 896 1,021
General and adminis-
trative.............. 340 630 566 735 653 701 549 623
------ ------ ------ ------ ------- ------ ------ ------
Total operating ex-
penses............. 1,308 1,913 1,972 2,131 2,334 2,641 2,398 2,662
------ ------ ------ ------ ------- ------ ------ ------
Income (loss) from oper-
ations................. 82 586 (645) (687) (862) 387 282 410
Other income (expense),
net.................... (99) (174) (202) (203) (247) (313) (250) (120)
------ ------ ------ ------ ------- ------ ------ ------
Income (loss) before in-
come taxes............. (17) 412 (847) (890) (1,109) 74 32 290
Provision for income
taxes.................. -- -- -- -- -- (2) (9) (10)
------ ------ ------ ------ ------- ------ ------ ------
Net income (loss)....... $ (17) $ 412 $ (847) $ (890) $(1,109) $ 72 $ 23 $ 280
====== ====== ====== ====== ======= ====== ====== ======
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUES
Revenues:
Transaction........... 95.9% 96.6% 94.7% 97.3% 91.8% 93.0% 83.7% 77.3%
Software and other.... 4.1 3.4 5.3 2.7 8.2 7.0 16.3 22.7
----- ----- ----- ----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues........ 65.1 54.7 70.2 68.2 69.5 53.5 57.5 55.8
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............ 34.9 45.3 29.8 31.8 30.5 46.5 42.5 44.2
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Development........... 19.0 15.4 20.9 20.5 23.8 17.6 15.1 14.6
Sales and marketing... 5.3 7.9 10.7 10.2 11.0 12.2 14.2 14.7
General and adminis-
trative.............. 8.5 11.4 12.7 16.2 13.5 10.8 8.7 9.0
----- ----- ----- ----- ----- ----- ----- -----
Total operating ex-
penses............. 32.8 34.7 44.3 46.9 48.3 40.6 38.0 38.3
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from oper-
ations................. 2.1 10.6 (14.5) (15.1) (17.8) 5.9 4.5 5.9
Other income (expense),
net.................... (2.5) (3.1) (4.5) (4.4) (5.1) (4.8) (4.0) (1.8)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before in-
come taxes............. (0.4) 7.5 (19.0) (19.5) (22.9) 1.1 0.5 4.1
Provision for income
taxes.................. -- -- -- -- -- -- (0.1) (0.1)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (0.4)% 7.5% (19.0)% (19.5)% (22.9)% 1.1% 0.4% 4.0%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company has experienced fluctuations in its quarterly operating results
and anticipates that such fluctuations will continue and could intensify. The
Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or acceptance of
new products and services offered by the Company or its competitors, changes
in the mix of products and services provided by the Company, the nature and
timing of changes in the Company's clients or their use of the Company's
products and services, consolidation among participants and other changes in
the wireless telecommunications industry, changes in the client markets served
by the Company, changes in regulations affecting the wireless industry,
changes in the Company's operating expenses, changes in personnel and changes
in general economic conditions. One of the Company's clients, which uses the
call center support solutions provided by the Company's Teleservices Group and
accounted for 10% of the Company's revenues in the year ended September 30,
1995, has notified the Company of its intent to terminate its agreements with
the Company, effective in the fourth calendar quarter of 1996. During 1996,
another of these clients, which accounted for 31% of the Company's revenues in
the fiscal year ended September 30, 1995, is changing the way it accesses the
Customer Acquisition System from using the call center support solutions
provided by the Teleservices Group to on-line access. As a result, the Company
expects the revenues from this client to decrease significantly during 1996
and 1997. See "--Overview." Historically, the Company's quarterly revenues
have been highest in the fourth quarter of each calendar year, and have been
particularly concentrated in the holiday shopping season between Thanksgiving
and Christmas. The Company's transaction revenues, which historically have
represented substantially all of the Company's total revenues, are affected by
the volume of use of the Company's services, which is influenced by seasonal
and retail trends, the success of the carriers utilizing the Company's
services in attracting subscribers and the markets served by the Company for
its clients. Software and other revenues, which include software license
revenues and consulting revenues, have recently represented an increasing
proportion of the Company's total revenues. Software license revenues are
principally recognized at the time of delivery of licensed products and
therefore may result in further fluctuations in the Company's quarterly
operating results. Consulting revenues may be influenced by the requirements
of one or more of the Company's significant clients, including engagement of
the Company for implementing or assisting in implementing special projects of
limited duration. During the three months ended June 30, 1996, the Company's
revenues from customized software integration services resulted primarily from
projects undertaken for one client, which projects the Company currently
expects will continue at least through the end of 1996. There can be no
assurance that the Company will be able to achieve or maintain profitability
in the future or that its levels of profitability will not vary significantly
among quarterly periods. Fluctuations in operating results may result in
volatility in the price of the Company's Common Stock. See "Risk Factors--
Potential Fluctuations in Quarterly Performance."
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through private
placements of equity and debt securities, cash generated from operations, bank
borrowings and equipment financings.
The Company has financed its operations in part with the proceeds of four
offerings of Convertible Preferred Stock and two offerings of subordinated
debt. The Company sold shares of its Series A Redeemable Convertible Preferred
Stock in February 1991 for an aggregate purchase price of $1.0 million, shares
of its Series B Redeemable Convertible Preferred Stock in December 1991 for an
aggregate purchase price of $1.1 million and shares of its Series C Redeemable
Convertible Preferred Stock in June, July and August of 1993 for an aggregate
purchase price of $0.6 million. In August 1994, the Company sold $2.1 million
in principal amount of its 8% subordinated notes, together with warrants
exercisable to purchase up to 525,000 shares of Common Stock. In August 1995,
the Company sold $1.2 million in principal amount of its 16% subordinated
notes, together with warrants exercisable to purchase up to 287,750 shares of
Common Stock. The Company sold shares of its Series D Preferred Stock in April
1996 for an aggregate purchase price of $6.0 million. A portion of the
proceeds of the Series D Preferred Stock was applied to repay the 16%
subordinated notes.
Net cash provided by (used in) operating activities in the years ended
September 30, 1993, 1994 and 1995, the three months ended December 31, 1995
and the six months ended June 30, 1996 was $0.4 million, $0.5 million, $1.1
million, $(0.3) million and $0.8 million, respectively.
The Company's capital expenditures in the years ended September 30, 1993,
1994 and 1995, the three months ended December 31, 1995 and the six months
ended June 30, 1996 aggregated $1.0 million, $3.6 million, $3.7 million, $0.3
million and $1.0 million, respectively. The capital expenditures consisted of
purchases of fixed assets, principally for the Company's services delivery
infrastructure and teleservices call center. The Company leases its facilities
and certain equipment under non-cancelable capital and operating lease
agreements that expire at various dates through December 2000. The Company
anticipates that its capital expenditures in the fiscal year ending December
31, 1996 will be made primarily to acquire, through purchases or capital lease
arrangements, additional computer equipment for development activities. The
Company currently expects that its capital expenditures, including equipment
acquired with capital leases, for the last six months of 1996 will be
approximately $2.0 million.
The Company has a $4.0 million working capital line of credit and a $2.0
million equipment line of credit with Silicon Valley Bank (the "Bank"). The
working capital line of credit is secured by a pledge of the Company's
accounts receivable, equipment and intangible assets, and borrowing
availability is based on the amount of qualifying accounts receivable.
Advances under the working capital line of credit bear interest at the Bank's
prime rate plus .25% (8.50% at June 30, 1996) and advances under the equipment
line of credit bear interest at the Bank's prime rate plus .75% (9.0% at June
30, 1996). At June 30, 1996, borrowings of $1.5 million were outstanding under
the working capital line of credit and no borrowings were outstanding under
the equipment line of credit. The Company has agreed to comply with covenants
that, among other things, prohibit the declaration or payment of dividends and
require the Company to maintain certain financial ratios. After giving effect
to an amendment to the bank agreement dated August 8, 1996, the Company was in
compliance with the required financial covenants and ratios as of June 30,
1996. Further, the Company believes that the August 8, 1996 amendment will
permit the Company to remain in compliance with the required financial
covenants and ratios throughout the term of the bank agreement. The working
capital line of credit expires in June 1997, and the equipment line of credit
expires in June 1999. See "Use of Proceeds."
As of June 30, 1996, an aggregate of $2.1 million in principal amount was
outstanding under unsecured subordinated notes issued by the Company to a
greater-than-5% stockholder and a director, acting as custodian for a minor
child. See "Certain Transactions--Other." The principal of these notes is due
in quarterly installments from September 30, 1997 through June 30, 2001.
Prepayment of the notes is subject to a premium, currently 6% of the principal
amount prepaid. The notes accrue interest at an annual rate of 8% which is
payable quarterly. The Company's agreement with the holders of the notes
includes certain covenants that, among other things, prohibit the declaration
or payment of dividends and require the Company to maintain certain financial
ratios.
27
<PAGE>
As of June 30, 1996, the Company had cash and cash equivalents of $3.5
million and working capital of $2.4 million. The Company believes that the net
proceeds of this offering, together with existing cash balances and funds
available under existing lines of credit, will be sufficient to finance the
Company's operations and capital expenditures for at least the next twelve
months.
In the normal course of business, the Company evaluates acquisitions or
investments in companies, technologies or assets that complement the Company's
business. The Company is not currently involved in negotiations with respect
to, and has no agreement or understanding regarding, any such acquisition or
investment.
INFLATION
Although certain of the Company's expenses increase with general inflation
in the economy, inflation has not had a material impact on the Company's
financial results to date.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." SFAS No. 121 addresses the accounting for the impairment
of long-lived assets, certain identifiable intangibles and goodwill when
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The adoption of SFAS No. 121 in 1996 did not
have a material impact on the Company's results of operations, financial
position or cash flows.
In November 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 addresses the
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 permits an entity to either record the
effects of stock-based employee compensation plans in its financial statements
or present pro forma disclosures in the notes to the financial statements. In
connection with the adoption of SFAS No. 123 during 1996, the Company will
elect to provide the appropriate disclosures in the notes to its financial
statements. Since the Company does not expect to make significant equity
awards to outsiders, adoption of SFAS No. 123 is not expected to have a
material impact on the Company's results of operations, financial position or
cash flows.
28
<PAGE>
BUSINESS
Lightbridge, Inc. ("Lightbridge" or the "Company") develops, markets and
supports a suite of integrated products and services that enable wireless
telecommunications carriers to improve their customer acquisition and
retention processes. The Company's comprehensive software-based solutions are
delivered primarily on an outsourcing and service bureau basis, which allows
wireless carriers to focus internal resources on their core business
activities.
The Company offers on-line, real-time transaction processing and call center
support solutions to aid carriers in qualifying and activating applicants for
wireless service, as well as software-based sales support services for
traditional distribution channels, such as dealers, agents and direct mobile
sales forces, and emerging distribution channels, such as mass market retail
stores, home shopping and stand-alone kiosks. The Company develops and
implements interfaces that fully integrate its acquisition system with carrier
and third-party systems, such as those for billing, point-of-sale, acquisition
and order fulfillment. The Company recently introduced software-based decision
support tools and services that enable carriers to reduce subscriber churn and
to make more informed business decisions about their subscribers, markets and
distribution channels.
The Company's current client base consists of 39 wireless telecommunication
clients, including 8 of the 12 largest domestic cellular carriers (based on
total population coverage) and the only 3 domestic carriers currently
delivering personal communications systems ("PCS") service. In the year ended
September 30, 1995, approximately 94% of the Company's revenues was
attributable to carriers that were also clients in the preceding fiscal year.
INDUSTRY OVERVIEW
Wireless telecommunications services have been one of the fastest growing
areas of the U.S. telecommunications industry over the last 10 years. Cellular
service has represented the largest component of the wireless
telecommunications industry to date and has continued to grow rapidly in the
1990s as the market for cellular phones has evolved from serving early
adopters to serving mass market consumers. The Cellular Telecommunications
Industry Association (the "CTIA") estimates that the number of cellular
subscribers in the United States increased from 340,000 in December 1985 to
33.7 million in December 1995, representing a compounded annual growth rate of
58%. The CTIA also estimates that the market penetration of cellular service,
as measured by the percentage of the population that subscribes to a cellular
service, was approximately 13% as of December 1995.
Other wireless telecommunications technologies, services and markets are
emerging. In the last year, the Federal Communications Commission (the "FCC")
has sold licenses for PCS, a digital technology with the potential to provide
enhanced communication quality and security, to more than 60 purchasers.
Certain of these purchasers are currently building the infrastructure required
to support PCS service, which is expected to compete with cellular service on
a nationwide basis. In addition, enhanced specialized mobile radio ("ESMR"), a
digital service typically found in fleet dispatch environments, is evolving as
another potential competitor of cellular service. Additional wireless
technologies and services are expected to continue to develop over the next 10
years, and industry sources estimate that by 2005 approximately 125 million
customers will subscribe to wireless telecommunications services in the United
States, representing a market penetration of 35% to 45%. The market for
wireless telecommunications services outside the United States has also grown
significantly in recent years and is expected to continue to do so through at
least the end of the decade. One industry analyst estimates that wireless
subscribers in Europe, for example, will increase from 18 million in 1995 to
78 million by the end of the year 2000, resulting in a market penetration of
approximately 20%.
In addition to this rapid growth, a number of recent and anticipated events
are causing fundamental changes in the wireless telecommunications industry.
The industry continues to experience significant consolidation as cellular
carriers are seeking to achieve greater market coverage and economies of scale
in operations, marketing, customer service and support. While the number of
cellular service subscribers in the United States has grown
29
<PAGE>
substantially in recent years, the average revenue per subscriber has declined
and is expected to decrease further. The CTIA has reported that revenue per
subscriber declined 47% from 1987 to 1995. Carriers are anticipating increased
price competition in the wireless telecommunications industry as providers of
PCS and other services enter the geographic markets previously served only by
cellular carriers. Moreover, as a result of the Telecommunications Act of
1996, carriers are beginning to offer wireless services bundled with wireline
services. These changes are causing carriers to seek new ways to reduce their
costs and interact more effectively with their subscribers.
The process by which a wireless carrier acquires a subscriber is costly and
complex. The Company estimates, based on its market research, that acquisition
costs typically range from $350 to $500 per subscriber, with the largest
portion of those costs consisting of commissions and promotional items, such
as subsidies on telephones. Carriers typically offer a variety of rate plans,
features and special promotions that change on a regular basis, often making
the customer acquisition process complicated for both sales representatives
and applicants for service. The complexity of the customer acquisition process
has been exacerbated by the recent consolidation of participants in the
wireless industry, which has resulted in many carriers employing a number of
different legacy systems for credit verification, activation and billing that
are not integrated or even compatible. These problems are expected to be
magnified for carriers seeking to offer bundled wireless and wireline
services. Carriers are therefore seeking ways to reduce the costs and simplify
the process of customer acquisition.
Acquiring a wireless subscriber is a time-consuming process. The Company's
market research has indicated that, while the entire acquisition process
typically takes between 15 and 30 minutes, it is not unusual for the process
to take up to an hour. Carriers' employees or agents are often required to
make duplicate data entries into separate computer systems in order to
complete the acquisition process. If a carrier is unable to complete the
process of acquiring a potential customer in a single transaction, the
customer may decide to become a subscriber of another carrier or not to
subscribe to the service at all. Therefore, carriers that are able to provide
a more simplified, expedited sales process have a competitive advantage.
Distribution channels for wireless telecommunications services are also
changing. In the 1980s, substantially all wireless subscriber acquisitions
were made through channels such as dealers, agents and direct mobile sales
forces. Today carriers also reach potential subscribers through home shopping,
telemarketing and a variety of other retail distribution methods and may begin
marketing on the Internet. These new distribution channels require that
carriers implement new processes for marketing, qualifying and activating new
subscribers.
Because of declining revenue per subscriber, carriers must retain
subscribers for a longer period in order to recover their acquisition costs.
Carriers therefore need to reduce their "churn" rates, which measure the
extent to which subscribers switch to another carrier's services or otherwise
cease to use a carrier's services. Churn has historically been a problem for
wireless carriers, which have had an average annual subscriber turnover rate
between 25% and 30%. The Company believes that churn may, in part, be
attributed to frustration on the part of subscribers resulting from confusion
about the broad and changing variety of available service options and the
complexity of billing practices, as well as dissatisfaction with the scope and
quality of service. In the face of increased competition and growth in the
subscriber base, churn is expected to become an increasingly costly problem
for carriers.
In order to reduce costs and remain competitive, carriers are also seeking
to address subscriber fraud. Fraud in the wireless telecommunications industry
is generally divided into two categories: technical fraud, which often
involves copying or manipulating a cellular telephone's mobile identification
number or electronic serial number; and subscription fraud, in which
individuals obtain service using false information. Technical fraud can be
addressed by changing the ways in which calls are processed. Subscription
fraud, however, is most effectively addressed in the customer acquisition
process. One industry source estimates that in 1995 subscription fraud
generated losses to the industry of over one percent of total industry
revenues, or approximately $180 million, and could grow to $500 million by the
year 2000 if it is not controlled.
30
<PAGE>
The development of new wireless services, carriers and technologies, the
emergence of the mass market for wireless services and increased competition
have created an environment in which successful carriers must be able to
better utilize data and statistical tools to manage their businesses. Carriers
are beginning to recognize the need to utilize "data warehouses," repositories
of business data organized for analysis, and to acquire the tools necessary
for business managers to access and analyze the data.
The Company believes that established wireless carriers increasingly are
considering outsourcing qualification and activation services as a means by
which they can improve flexibility and efficiency while focusing internal
resources on their core business activities. Further, the Company believes
that many new entrants to the wireless market, such as PCS providers, are
considering outsourcing portions of their customer acquisition requirements as
an attractive means of expediting their introduction of new services.
THE LIGHTBRIDGE SOLUTION
Lightbridge's suite of complementary software-based products and services
permits a wireless carrier to select applications and functions to create an
integrated, customized solution addressing its particular needs. The Company's
solutions include:
. The Customer Acquisition System ("CAS") provides on-line, real-time
transaction processing services that utilize and interface with
proprietary and third-party databases to expedite the qualification and
activation of applicants for wireless service on a cost-effective basis.
. TeleServices consists of call center services that assist wireless
carriers in acquiring and activating applicants, using either
Lightbridge's CAS or the carrier's own customer acquisition systems.
Lightbridge's TeleServices Group also offers telemarketing and customer
care activities that assist carriers in acquiring subscribers through
new distribution channels and retaining existing subscribers.
. Channel Solutions consist of software-based products and services
designed to simplify and expedite the customer acquisition process
through both existing and emerging distribution channels and to provide
wireless carriers with flexibility to capitalize on emerging
distribution channels.
. Wireless Intelligence solutions are software-based decision support
tools and services designed to enable carriers to make more informed
business decisions about their subscribers, markets and distribution
channels.
. Business Integration solutions include consulting services, software and
tools to link the Company's acquisition systems with carrier and third-
party systems, such as those for billing, point-of-sale, activation and
order fulfillment.
The Company's services are delivered primarily on an outsourcing and service
bureau basis, which allows carriers to focus internal resources on their core
business activities. Lightbridge's solutions combine the advantages of
distributed access and workflow management, centrally managed client-specified
business policies, and links to carrier and third-party systems. The open
architecture underlying the Company's software applications supports the
development of flexible, integrated solutions, regardless of the type of
wireless service provided by a client and independent of the client's
computing environment.
STRATEGY
The Company's objective is to be the leading provider of innovative,
software-based solutions for cost-effective customer acquisition and retention
for the wireless telecommunications industry. The Company's strategy is based
on the following key elements:
Continue to Focus on Wireless Telecommunications Industry
The Company believes that the wireless industry will continue to grow
rapidly and will be characterized by both increased competition and heightened
subscriber expectations. As a result, the Company believes there will
31
<PAGE>
be significant opportunities to provide carriers with products and services
that enable carriers to focus their internal resources on building and
managing their telecommunications networks, while outsourcing certain
administrative and other functions. By focusing on the wireless
telecommunications industry, the Company has developed significant expertise
and experience that it intends to employ in providing innovative, flexible
solutions to address the changing needs of wireless carriers in both existing
and emerging markets.
Provide Complete Solutions to Clients
Based on its expertise in the wireless industry, Lightbridge seeks to offer
complete solutions to wireless carriers, particularly in addressing issues of
customer acquisition, fraud and retention. Lightbridge's suite of software-
based products and services permits a wireless carrier to select applications
and functions to create an integrated, customized solution addressing its
particular needs. The Company's services are delivered primarily on an
outsourcing and service bureau basis, which allow carriers to focus internal
resources on their core business activities. The Company supports its product
and service offerings with consulting in related areas such as workflow
analysis, requirements definition, credit policy, fraud prevention, channel
management and churn control.
Continue Commitment to Technological Leadership
Lightbridge's products and services are based on its proprietary software
technology, which is enhanced regularly to address the evolving needs of
wireless carriers. The Company has designed, developed and implemented an open
application programming interface and related software specifically to enable
the Company to provide flexible, fully integrated solutions to clients with
differing needs. The Company has developed and implemented interfaces to more
than 30 disparate systems, including carrier legacy systems and third-party
systems, such as billing, point-of-sale, activation and order fulfillment.
Drawing on its industry and technological expertise, the Company has developed
products that enable carriers to access the Company's services through a
variety of emerging distribution channels, as well as software-based decision
support tools that assist carriers in analyzing their distribution channel
performance and churn experience. The Company intends to leverage and expand
this capability to offer solutions to wireless carriers, regardless of the
type of wireless service (cellular, PCS, ESMR or other) being offered by a
client and independent of the client's computing environment.
Foster Long-Term Client Relationships
The Company's strategy is to use its reputation and experience in servicing
leading wireless carriers to market additional products and services to those
clients and to attract new clients. In the year ended September 30, 1995,
approximately 94% of the Company's total revenues was derived from carriers
who were also clients in the preceding fiscal year. Lightbridge has developed
long-term consultative relationships with many of the leading wireless
carriers in the United States. The experience and expertise gained in these
relationships will assist the Company in identifying emerging client needs and
developing solutions to address those needs.
Leverage and Expand Strategic Relationships
An important part of Lightbridge's strategy is to establish strong working
relationships with other suppliers to the wireless industry. The Company
enters into these relationships to increase the functionality of its products
and services and to reduce the time to market for its new products and
services. The Company believes these relationships also provide the Company
with access to the marketing resources and credibility of larger, more
established participants in the wireless industry. Lightbridge's relationships
with Pilot Software, Inc. (a subsidiary of Dun & Bradstreet), Trans Union
Corporation and XcelleNet, Inc., for example, have provided the Company with
access to technology and joint development and marketing efforts that have
enabled the Company to offer more fully featured products and services in a
shorter period of time. The Company intends to explore ways to expand such
relationships and seek out opportunities to develop new strategic
relationships.
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Expand into International Wireless Telecommunications Markets
While the Company has offered its products and services only in the United
States to date, it believes the significant growth in international wireless
telecommunications markets will require carriers in those markets to address
many of the same issues currently confronting domestic wireless carriers. The
Company intends to leverage its long-term client relationships and strategic
partnerships to facilitate and expedite the Company's entry into rapidly
expanding international wireless markets.
PRODUCTS AND SERVICES
Lightbridge's suite of software-based products and services permits a
wireless carrier to select applications and functions to create an integrated,
customized solution addressing its particular needs. Lightbridge's products
and services are provided by five solutions groups:
GROUP FUNCTIONS
Customer Acquisition Services On-line, real-time transaction processing
services to aid wireless carriers in
qualifying and activating applicants for
wireless service, including proprietary
databases and processing modules to
evaluate existing subscribers and detect
potential subscription fraud.
TeleServices Call center support services to assist
wireless carriers in acquiring and
activating applicants for wireless
service, including qualification and
activation, analyst reviews,
telemarketing to existing and new
subscribers, back-up and disaster
recovery for acquisition and activation
services, and customer care.
Channel Solutions Software products and services to support
a variety of distribution channels,
including software applications for in-
store use, laptop applications for mobile
sales professionals and an interactive
multimedia kiosk.
Wireless Intelligence Software-based decision support tools and
related consulting services to allow
wireless carriers to access data and
analyze the marketplace in order to make
more informed business decisions about
their customers, markets and distribution
channels.
Business Integration Consulting services, software and tools
to link wireless carrier legacy systems
and third-party systems to the Company's
systems, as well as other consulting
services to help wireless carriers
improve business processes.
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Customer Acquisition System
CAS includes on-line, real-time transaction processing services for the
qualification and activation of applicants for wireless service. The following
chart illustrates the utilization of CAS:
[Image of boxes representing sequence of events as follows:
Box 1: Customer indicates intent to purchase phone. Agent enters information
into POPS terminal
Box 2: CAS validates application for completeness & format
Box 3: Application transmitted to Lightbridge via dial-up, leased line or
network connection
Box 4: Lightbridge checks InSight and Fraud Sentinel and retrieves credit
bureau report to evaluate application
IF HIGH RISK [arrow points to alternate box]
Box 4A: Confirmation sent to agent indicating security deposit required
Box 5: CAS transmits information to billing system; phone activated in
switch
Box 6: Confirmation sent to agent with customer name, mobile number &
account number
Box 7: Customer leaves store with activated phone]
CAS accepts applicant information on-line from a variety of carrier
distribution points, such as retail stores. Upon receipt of information, the
system begins a series of steps required to determine the applicant's
qualification for the carrier's service through inquiry into Company
proprietary databases, such as ProFile, and external sources, such as credit
bureaus. The complete applicant file is evaluated by the system and a
determination regarding the applicant's creditworthiness is made based on
centrally managed client-specified business policies. If an issue is raised
regarding qualification of an applicant, the system routes the application to
a Company or carrier credit analyst for review and action. The point-of-sale
is then notified when a determination is made. If service is to be activated
at that time, the system receives, verifies and translates the information
necessary to establish the billing account and activate service, transmitting
data to the carrier's billing and activation systems. Throughout the process,
Lightbridge's client/server system manages the routing of the application and
the flow of information, both within the system and, as necessary, to
appropriate individuals for their involvement, all in a secure, controlled
environment.
Introduced in 1989 and enhanced over time, CAS had processed over 12 million
applications for wireless service through June 1996. CAS typically enables
carriers to qualify applicants and activate service in five to ten minutes
while screening for subscriber fraud, thereby assisting the carriers to close
sales at the time when the customer is ready to purchase. Although CAS
typically requires no human intervention beyond the initial data entry, it
permits a carrier to implement policies requiring analyst intervention in
carrier-specified situations. When intervention is required, CAS facilitates
the on-line handling of exceptions by, among other things, queuing exceptions
to manage workflow. CAS includes the following modules, all of which are fully
integrated:
. Credit Decision System ("CDS") is an integrated qualification system for
carriers to acquire qualified applicants rapidly. Using redundant, high-
speed data lines to five major credit bureaus, CDS typically provides
consumer and business credit decisions in under 20 seconds, based on
automated analysis of credit information using a credit policy specified
by the carrier. CDS can be integrated with a carrier's existing customer
acquisition and billing systems and can be modified quickly to reflect
changes in a carrier's credit policies.
. Fraud Sentinel is a suite of fraud management tools, available
separately or together. The Company believes that Fraud Sentinel is the
only pre-screening tool for detection and prevention of subscription
fraud available in the wireless industry today. The components of Fraud
Sentinel are:
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ProFile, a proprietary intercarrier database of accounts receivable
write-offs and service shut-offs, provides on-line pre-screening of
applicants, on-going screening of existing subscribers, and
notification if an application is processed for a subscriber whose
account has been previously written off by a carrier.
Fraud Detect, a multifaceted fraud detection tool provided under
agreement with Trans Union Corporation, analyzes data such as an
applicant's Social Security Number, date of birth, address, telephone
number and driver's license information and identifies any
discrepancies. Fraud Detect became commercially available through
Lightbridge in the second quarter of 1996.
Postalpro, a tool to validate addresses, will enable a carrier to
detect false addresses, incorrect ZIP codes and contradictions between
addresses and ZIP codes before a potential subscriber's service is
activated. Postalpro is currently expected to become commercially
available by the first quarter of 1997.
. InSight is a proprietary database containing information about existing
accounts and previous applicants. InSight also evaluates existing
subscribers who apply for additional services on the basis of their
payment histories. InSight can decrease costs for carriers by reducing
the number of credit bureau inquiries and the number of applications
requiring manual review.
. Workstation Offerings present data electronically to the appropriate
person for decision or action and then automatically route data to the
next step in the process. Workstation Offerings are:
Credit Workstation allows a carrier's credit analyst to enter
information or to evaluate applications that were entered at a remote
location.
Activation Workstation allows the user to review, correct or reprocess
activation requests returned from the billing system due to an error.
Fulfillment Workstation provides the information necessary to fulfill
orders for wireless handsets and accessories at a remote or third-party
fulfillment operation.
Pricing of CAS is on a per qualification or activation basis and varies
substantially with the term of the contract under which services are provided,
the volume of transactions, and the other products and services selected and
integrated with the services.
TeleServices
The Company's TeleServices Group provides a range of call center support
solutions for the subscriber acquisition and activation process. The Company
first offered a TeleServices call center solution to the wireless marketplace
in 1990 with its 800-FOR-CREDIT service. Since that time, the Company's
TeleServices offerings have expanded to include not only credit decisions and
activations, but also analyst reviews, telemarketing to existing and new
subscribers, back-up and disaster recovery for acquisition and activation
services, and customer care. TeleServices solutions can be provided using CAS
or a carrier's own customer acquisition system. The Company's clients
typically utilize TeleServices solutions as part of an overall sales and
distribution strategy to expand or engage in special projects without
incurring the overhead associated with building and maintaining a call center.
As of September 13, 1996, the TeleServices Group included a total of 159 full-
time and part-time employees, which number fluctuates with the number of
transactions processed. Pricing of TeleServices solutions is on a per
transaction or per minute basis and varies with the term of the contract under
which services are provided, the volume of transactions processed and the
other products and services selected and integrated with the services.
Channel Solutions
The Company's Channel Solutions consist of products and services that
support a growing range of distribution channels. The components of Channel
Solutions include:
. POPS, a Windows-based application typically used in carrier-owned or
dealer/agent store locations, features a graphical user interface that
allows even inexperienced sales staff to conduct qualification
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and activation transactions quickly via a dial-up or network connection
to CAS. Two of the Company's clients have licensed POPS for more than
500 installed locations. POPS is being marketed both as a new solution
and as a replacement to the Company's DOS-based application, which is
currently licensed for more than 800 locations.
. SAMS, a laptop application, provides a "virtual office" for carriers'
mobile sales professionals. The SAMS suite contains a number of tools
needed by sales staff, such as coverage maps and product catalogs, as
well as the ability to handle qualification and activation transactions
via landline, cellular or wireless data connection to CAS. Third-party
modules can be integrated into SAMS to provide additional functionality.
One of the Company's clients has licensed SAMS for approximately 600
users.
. Iris, an interactive multimedia kiosk, uses touch screen technology to
provide potential subscribers with educational information ranging from
the basic operation of a cellular telephone to the form of monthly
bills, display the carrier's coverage area and provide information about
available services and telephone models. Iris incorporates a credit card
reader for payments and allows a customer to purchase a telephone and
complete an application for service, which can then be processed
automatically. Iris can dispense a telephone itself or can provide for
delivery or in-store pick-up. Iris became commercially available in
December 1995.
POPS, SAMS and Iris are licensed to clients and require customization and
integration with other products and systems to varying degrees. Pricing of
POPS, SAMS and Iris varies with the configurations selected, the number of
locations licensed and the degree of customization required.
Wireless Intelligence
The Company's Wireless Intelligence Group provides software-based decision
support tools to help carriers analyze their marketplace to improve business
operations. As carriers encounter increasing competition and a growing and
changing market, the Company believes that the ability to gather, analyze and
interpret business data and then take appropriate actions will be essential to
their success. Wireless Intelligence is currently comprised of the following
two modules:
. Channel Wizard allows a carrier to analyze its distribution channel
performance by market, subscriber type or other factors, to assist the
carrier in making decisions designed to reduce customer acquisition
costs and improve channel performance. Channel Wizard is designed to
provide up-to-date information in a format that is easy for users
without statistical training to operate. Channel Wizard became
commercially available in the second quarter of 1996.
. Churn Prophet is an analytical tool designed to help carriers reduce
churn and increase customer retention. Churn Prophet uses predictive
modeling technology to identify characteristics of subscribers who have
canceled service in the past and to develop predictions as to which
subscribers are likely to cancel service in the future. Customer
retention efforts can then be targeted more cost effectively to the
subscribers most likely to cancel service. Churn Prophet is currently
expected to become commercially available in late 1996.
Channel Wizard and Churn Prophet are licensed to clients and require
customization and integration with other products and systems to varying
degrees. Pricing of Channel Wizard and Churn Prophet varies with the number of
users and the degree of customization required.
Business Integration
The Company's Business Integration Group provides consulting, software and
tools to link carrier and third-party systems to the Company's systems. To
facilitate the development of these interfaces, Lightbridge developed
CAS COMM, a library of software functions for the remote host that enables
third-party systems to connect to CAS. CAS COMM is an application layer
protocol that gives CAS the appearance of a local process
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<PAGE>
to the third-party system. CAS COMM runs on DEC VMS, Microsoft Windows NT and
certain Unix platforms and supports both TCP/IP and DECnet. To date, the
Business Integration Group has implemented more than 35 such interfaces, of
which 13 use CAS COMM.
The Business Integration Group also provides a range of other consulting
services to wireless carriers, employing the Company's expertise and
experience in the wireless telecommunications industry. For example, the
Business Integration Group helps carriers develop solutions for work flow
optimization, management of bad debt, distribution channel analysis, sales
automation, churn analysis and data warehouse design. The Company generally
charges for consulting services on a per diem basis, but occasionally
undertakes smaller consulting projects on a fixed-fee basis.
TECHNOLOGY
The Company's development efforts have created a proprietary multi-layered
software architecture that facilitates the development of application
products. This design conforms to the three standard tiers of (1) presentation
(front-ends), (2) business logic and (3) database services, each independent
of the others. The architecture supports the development of Lightbridge's core
products and provides a discrete platform that enables the rapid creation of
client-specific requirements. In addition, the architecture is open in terms
of its ability to interface with third-party systems, as well as with the
Company's Windows-based products. Lightbridge can therefore offer its clients
the ability to use and enhance legacy systems and third-party systems (such as
billing systems) while implementing the market-oriented products offered by
the Company.
At the most fundamental layer of its architecture, Lightbridge has written a
common, independent library of code that provides a foundation for reusability
and, equally importantly, independence from hardware platforms and operating
systems. The common library currently supports Unix and OpenVMS. The
Lightbridge products are, therefore, portable and able to run on the most
suitable hardware platform for the computing needs.
A critical element of the Company's development has been the creation and
enhancement of Allegro, a peer-to-peer, client/server, transaction management
system. Allegro encapsulates a sequence of independent, application servers
into a complete transaction, customized for the client's customer acquisition
requirements. The solutions may include front-end data capture, customer
qualification, fulfillment of physical distribution and connectivity to back
office systems such as billing. To an individual user, however, Lightbridge
products offer the front-end appearance of a "single virtual machine." Allegro
features include data validation, exception handling, process queues, manual
review queues and transaction monitors.
Lightbridge servers each perform only a single function, without knowledge
of the other steps in the transaction processes or their computing
environment. Third-party software products are encapsulated so that they are
integrated seamlessly into the Allegro system. As a result, the Allegro
network is scalable and includes software redundancy.
The wireless marketplace continues to grow rapidly and requires quick
reaction to evolving market conditions. To meet this requirement, the Company
has incorporated a set of software and tools with which its trained staff can
provide the rapid customization of front-ends, business rules, system
interfaces and reporting. The customization is independent of the core
products, so that Lightbridge can provide client-specific enhancements while
continuing to develop regular releases of major product enhancements.
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<PAGE>
CLIENTS
The Company provides its products and services to wireless carriers across
the United States. The Company's current client base consists of 39 wireless
telecommunication clients, including 8 of the 12 largest domestic cellular
carriers (based on total population coverage) and the only 3 domestic carriers
currently delivering PCS service. In the year ended September 30, 1995,
approximately 94% of the Company's revenues was attributable to carriers that
were also clients in the preceding fiscal year. Lightbridge's clients include:
<TABLE>
<CAPTION>
CELLULAR CARRIERS PCS CARRIERS
----------------- ------------
<S> <C>
AT&T Wireless Services, Inc. American Personal Communications
CommNet Cellular Inc. (an affiliate of Sprint Spectrum L.P.)
Comcast Cellular Communications, Inc. BellSouth Mobility DCS, Inc.
Century Cellunet, Inc. Powertel, Inc.
GTE Mobile Communications Service Cor- Sprint Spectrum L.P.
poration
Palmer Wireless, Inc. Western Wireless Corporation
Southwestern Bell Mobile Systems, Inc.
</TABLE>
Revenues attributable to the Company's 10 largest clients accounted for
approximately 85%, 90% and 90% of the Company's revenues in the years ended
September 30, 1993, 1994 and 1995, respectively. Four clients each accounted
for greater than 10% of the Company's revenues in the years ended September
30, 1994 and 1995. GTE Mobile Communications Service Corporation ("GTE
Mobile") accounted for 31% of the Company's revenues for the year ended
September 30, 1995, and each of AT&T Wireless Services, Inc. ("AT&T
Wireless"), Comcast Cellular Communications, Inc. ("Comcast") and Ameritech
Mobile Communications, Inc. d/b/a Ameritech Cellular Services ("Ameritech")
accounted for greater than 10% of the Company's revenues for that fiscal year.
During 1996, GTE Mobile is changing the way it accesses the Company's Customer
Acquisition System from using the call center support solutions provided by
the Teleservices Group to using on-line access. As a result, the Company
expects the revenues from GTE Mobile to decrease significantly during 1996 and
1997. Ameritech has notified the Company of its intent to terminate its
agreements with the Company, effective in the fourth calendar quarter of 1996.
See "Risk Factors--Dependence on Certain Clients," "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Overview" and
Note 2 of Notes to Financial Statements.
The Company's agreements with its clients set forth the terms on which the
Company will provide products and services for the client, but do not
typically require the clients to purchase any particular type or quantity of
the Company's products or services or to pay any minimum amount for products
or services. The Company's agreement with GTE Mobile and certain of its
subsidiaries provides that the contract may be terminated by GTE Mobile as of
June 30 of any year upon 60 days' prior notice. In addition, if the Company
fails to meet certain performance criteria, GTE Mobile may, among other
things, terminate the agreement upon 30 days' prior written notice. The
Company has an agreement with AT&T Wireless for the provision of credit
decision services. The agreement will expire on December 31, 1996 unless it is
terminated earlier, upon not less than 60 days' prior written notice. The
Company's agreement with Comcast provides that it may be terminated upon 90
days' written notice following December 31, 1996, upon failure of either party
to comply with the terms of the agreement within 30 days after written notice
of such failure or upon bankruptcy or insolvency. The Company has agreements
with Ameritech and certain of its affiliates that may be terminated upon 90
days' prior written notice by either party thereto or upon 30 days' written
notice in the event of failure by the other party to comply with the terms of
the agreement. None of the foregoing agreements requires that the client
either purchase any particular type or quantity of the Company's products or
services or pay any minimum amount for products or services.
Because the PCS industry is in its initial stages of development, clients in
the PCS market have not generated significant revenues for the Company to
date. The Company supplies service to American Personal Communications (an
affiliate of Sprint Spectrum L.P.) in Washington, D.C., Western Wireless
Corporation in Hawaii and certain Western states and BellSouth Mobility DCS,
Inc. in certain Southeastern states. These three
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<PAGE>
corporations are the only three carriers currently providing PCS service.
There can be no assurance that the PCS market will develop as expected. See
"Risk Factors--Dependence on Cellular Market and Emerging Wireless Markets."
SALES AND MARKETING
The Company's sales strategy is to establish, maintain and foster long-term
relationships with its clients. The Company's sales and client services
activities are led by "relationship teams," each of which includes a senior
management team sponsor. The Company's sales force currently consists of 8
relationship managers who report to a senior sales and marketing executive.
The Company employs a team approach to selling in order to develop a
consultative relationship with existing and prospective clients. Directors of
solutions groups and product managers, as well as other executive, technical,
operational and consulting personnel, are frequently involved in the business
development and sales process. The teams conduct needs assessments and,
working with the client, develop a customized solution to meet the client's
particular needs. The sales cycle for the Company's products and services is
typically 6 to 12 months. See "Risk Factors--Potential Fluctuations in
Quarterly Performance."
The Company plans to expand its sales and marketing group during 1996 by
hiring additional staff experienced in the wireless telecommunications
industry. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview" and "--Results of Operations--Six Months
Ended June 30, 1996 Compared with Six Months Ended June 30, 1995."
The Company's marketing activities include advertising, participation in
industry trade shows and panels, substantive articles in trade journals and
targeted direct mail.
ENGINEERING, RESEARCH AND DEVELOPMENT
Lightbridge considers its on-going efforts in engineering, research and
development to be a key component of its strategy. The Company believes that
its future success will depend in part on its ability to continue to enhance
its existing product and service offerings and to develop new products and
services to allow carriers to respond to changing market requirements. The
Company's research and development activities consist of both long-term
efforts to develop and enhance products and services and short-term projects
to make modifications to respond to immediate client needs.
In addition to internal research and development efforts, the Company
intends to continue its strategy of gaining access to new technology through
strategic relationships and acquisitions where appropriate.
The Company spent approximately $1.1 million, $2.3 million and $3.9 million
on engineering, research and development in the years ended September 30,
1993, 1994 and 1995, respectively. As of September 13, 1996, Lightbridge had
53 employees engaged in engineering, research and development.
COMPETITION
The market for services to wireless carriers is highly competitive and
subject to rapid change. The market is fragmented, and a number of companies
currently offer one or more services competitive with those offered by the
Company. In addition, many wireless carriers are providing or can provide,
internally, products and services competitive with those the Company offers.
Trends in the wireless telecommunications industry, including greater
consolidation and technological or other developments that make it simpler or
more cost-effective for wireless carriers to provide certain services
themselves, could affect demand for the Company's services and could make it
more difficult for the Company to offer a cost-effective alternative to a
wireless carrier's own capabilities. In addition, the Company anticipates
continued growth in the wireless carrier services industry and, consequently,
the entrance of new competitors in the future.
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<PAGE>
The Company believes that the principal competitive factors in the wireless
carrier services industry include the ability to identify and respond to
subscriber needs, quality and breadth of service offerings, price and
technical expertise. The Company believes that its ability to compete also
depends in part on a number of competitive factors outside its control,
including the ability to hire and retain employees, the development by others
of products and services that are competitive with the Company's products and
services, the price at which others offer comparable products and services and
the extent of its competitors' responsiveness to subscriber needs.
Many of the Company's current and potential competitors have significantly
greater financial, marketing, technical and other competitive resources than
the Company. As a result, the Company's competitors may be able to adapt more
quickly to new or emerging technologies and changes in subscriber requirements
or may be able to devote greater resources to the promotion and sale of their
products and services. There can be no assurance that the Company will be able
to compete successfully with its existing competitors or with new competitors.
In addition, competition could increase if new companies enter the market or
if existing competitors expand their service offerings. An increase in
competition could result in price reductions or the loss of market share by
the Company and could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flow.
To remain competitive in the wireless carrier services industry, the Company
will need to continue to invest in engineering, research and development, and
sales and marketing. There can be no assurance that the Company will have
sufficient resources to make such investments or that the Company will be able
to make the technological advances necessary to remain competitive. In addition,
current and potential competitors have established or may in the future
establish collaborative relationships among themselves or with third parties,
including third parties with whom the Company has a relationship, to increase
the visibility and utility of their products and services. Accordingly, it is
possible that new competitors or alliances may emerge and rapidly acquire a
significant market share. If this were to occur, the Company's business,
financial condition, results of operations and cash flow could be materially and
adversely affected.
GOVERNMENT REGULATION
The FCC, under the terms of the Communications Act of 1934, as amended,
regulates interstate communications and use of the radio spectrum. Although
the Company is not required to and does not hold any licenses or other
authorizations issued by the FCC, the wireless carriers that constitute the
Company's clients are regulated at both the federal and state levels. Federal
and state regulation may decrease the growth of the wireless
telecommunications industry, affect the development of the PCS or other
wireless markets, limit the number of potential clients for the Company's
services, impede the Company's ability to offer competitive services to the
wireless telecommunications market, or otherwise have a material adverse
effect on the Company's business, financial condition, results of operations
and cash flow. The Telecommunications Act of 1996, which in large measure
deregulated the telecommunications industry, has caused, and is likely to
continue to cause, significant changes in the industry, including the entrance
of new competitors, consolidation of industry participants and the
introduction of bundled wireless and wireline services. Those changes could in
turn subject the Company to increased pricing pressures, decrease the demand
for the Company's products and services, increase the Company's cost of doing
business or otherwise have a material adverse effect on the Company's
business, financial condition, results of operations and cash flow.
As a result of offering its ProFile product, the Company is subject to the
requirements of the Fair Credit Reporting Act. Although the Company's business
activities are not otherwise within the scope of federal or state regulations
applicable to credit bureaus and financial institutions, the Company must take
into account such regulations in order to provide products and services that
help its clients comply with such regulations. The Company monitors regulatory
changes and implements changes to its products and services as appropriate.
Although the Company attempts to protect itself by written agreements with its
clients, failure to reflect the provisions of such regulations in a timely or
accurate manner could possibly subject the Company to liabilities that could
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flow.
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PROPRIETARY RIGHTS
The Company's success is dependent upon proprietary technology. The Company
relies on a combination of copyrights, the law of trademarks, trade secrets
and employee and third-party non-disclosure agreements to establish and
protect its rights in its software products and proprietary technology. The
Company protects the source code versions of its products as trade secrets and
as unpublished copyrighted works, and has internal policies and systems
designed to limit access to and require the confidential treatment of its
trade secrets. The Company generally operates its Credit Decision System
software on an outsourcing basis for its clients. In the case of its Channel
Solutions and Wireless Intelligence products, the Company provides the
software under license agreements which grant clients the right to use, but
contain various provisions intended to protect the Company's ownership of and
the confidentiality of the underlying copyrights and technology. The Company
requires its employees and other parties with access to its confidential
information to execute agreements prohibiting unauthorized use or disclosure
of the Company's technology. In addition, all of the Company's employees have
entered into non-competition agreements with the Company.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of its
technology or independent development by others of similar technology. It may be
possible for unauthorized parties to copy certain portions of the Company's
products or reverse engineer or obtain and use information that the Company
regards as proprietary. The Company has no patents and existing copyright and
trade secret laws offer only limited protection. The Company's non-competition
agreements with its employees may be enforceable only to a limited extent, if at
all. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. The Company has been and may be required from time to time to enter into
source code escrow agreements with certain clients and distributors, providing
for release of source code in the event the Company breaches its support and
maintenance obligations, files for bankruptcy or ceases to continue doing
business.
The Company's competitive position may be affected by limitations on its
ability to protect its proprietary information. However, the Company believes
that patent, trademark, copyright, trade secret and other legal protections
are less significant to the Company's success than other factors, such as the
knowledge, ability and experience of the Company's personnel, new product and
service development, frequent product enhancements, customer service and
ongoing product support.
The Company's agreement with Trans Union Corporation provides Lightbridge
with an exclusive right to market the Fraud Detect product to named accounts.
The Company's agreement with Pilot Software, Inc. provides a non-exclusive
license to use certain software and documentation. Certain other technologies
used in the Company's products and services are licensed from third parties.
The Company generally pays license fees on these technologies and believes
that if the license for any such third-party technology were terminated, it
would be able to develop such technology internally or license equivalent
technology from another vendor, although no assurance can be given that such
development or licensing can be effected without significant delay or expense.
Although the Company believes that its products and technology do not
infringe on any existing proprietary rights of others, there can be no
assurance that third parties will not assert such claims against the Company
in the future or that such future claims will not be successful. The Company
could incur substantial costs and diversion of management resources with
respect to the defense of any claims relating to proprietary rights, which
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flow. Furthermore, parties making
such claims could secure a judgment awarding substantial damages, as well as
injunctive or other equitable relief, which could effectively block the
Company's ability to make, use, sell, distribute or market its products and
services in the United States or abroad. Such a judgment could have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flow. In the event a claim relating to proprietary
technology or information is asserted against the Company, the Company may
seek licenses to such intellectual property. There can be no assurance,
however, that such a license could be
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<PAGE>
obtained on commercially reasonable terms, if at all, or that the terms of any
offered licenses will be acceptable to the Company. The failure to obtain the
necessary licenses or other rights could preclude the sale, manufacture or
distribution of the Company's products and, therefore, could have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flow. The cost of responding to any such claim may be
material, whether or not the assertion of such claim is valid.
EMPLOYEES
As of September 13, 1996, the Company had a total of 299 full-time and part-
time employees. Of these employees, 53 were employed in software and product
development, 48 in sales and marketing, client services and account
management, 16 in operations, 23 in finance and administration and 159 in
teleservices. The number of personnel employed by the Company varies
seasonally. See "Risk Factors--Potential Fluctuations in Quarterly
Performance." None of the Company's employees is represented by a labor union,
and the Company believes that its employee relations are good.
The future success of the Company will depend in large part upon its
continued ability to attract and retain highly skilled and qualified
personnel. Competition for such personnel is intense, particularly for sales
and marketing personnel, software developers and service consultants. See
"Risk Factors--Ability to Manage Change" and "--Dependence on Key Personnel."
PROPERTIES
The Company's headquarters are located in a 39,000 square foot leased
facility, and the teleservices group is located in a 27,000 square foot leased
facility, both in Waltham, Massachusetts. The leases of these facilities
expire between 1999 and 2001. The Company believes its existing facilities are
adequate for its current needs and that suitable additional or substitute
space will be available as needed on commercially reasonable terms.
LEGAL PROCEEDINGS
The Company is not currently party to any legal proceedings of a material
nature.
42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
September 26, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------- --- ---------------------------------------
<S> <C> <C>
Pamela D.A. Reeve President, Chief Executive Officer and
47 Director
William G. Brown 36 Chief Financial Officer, Vice President
of Finance and Administration and
Treasurer
Michael A. Perfit 40 Senior Vice President of Technology
Richard H. Antell 48 Vice President of Software Development
Douglas E. Blackwell 40 Vice President of Service Delivery
Andrew I. Fillat(1) 48 Director
Torrence C. Harder(1) 53 Director
Douglas A. Kingsley(2) 34 Director
D. Quinn Mills(2) 54 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
PAMELA D.A. REEVE has served as the President of the Company since November
1989, as Chief Executive Officer of the Company since September 1993 and as a
director of the Company since November 1989. From November 1989 to September
1993, Ms. Reeve served as Chief Operating Officer of the Company. Prior to
joining the Company, Ms. Reeve was employed by The Boston Consulting Group.
Ms. Reeve is President of the Massachusetts Software Council and also serves
as a director of PageMart Wireless, Inc., a provider of wireless messaging
services.
WILLIAM G. BROWN has served as Chief Financial Officer, Vice President of
Finance and Administration and Treasurer of the Company since June 1989. Prior
to joining the Company, Mr. Brown was Manager of Financial Reporting and
Analysis for Bolt, Beranek and Newman, Inc. and was employed at Deloitte,
Haskins and Sells.
MICHAEL A. PERFIT, a founder of the Company, has served as Senior Vice
President of Technology of the Company since June 1991. From June 1989 to May
1991, Mr. Perfit served as Vice President of Engineering of the Company. Prior
to joining the Company, Mr. Perfit was Vice President of Appex, Inc. and held
engineering and technical support positions at Interactive Management Systems.
RICHARD H. ANTELL has served as Vice President of Software Development of
the Company since February 1996. From June 1991 to January 1996, Mr. Antell
was Vice President of Engineering of the Company. Prior to joining the
Company, Mr. Antell served as Vice President of Application Development of
Applied Expert Systems, Inc. and Project Leader of Index Systems, Inc.
DOUGLAS E. BLACKWELL has served as Vice President of Service Delivery of the
Company since November 1995. From October 1994 to October 1995, Mr. Blackwell
served as Vice President of Operations of the Company. From February 1991 to
September 1994, Mr. Blackwell was employed as Vice President of Operations of
Thomson Financial Services, Inc., an on-line financial transaction and
information services firm. Prior to February 1991, Mr. Blackwell was employed
at Nolan, Norton and Co., an affiliate of KPMG/Peat Marwick.
ANDREW I. FILLAT has served as a director of the Company since April 1996.
Since July 1995, Mr. Fillat has served as Senior Vice President of Advent
International Corporation, a venture capital investment firm. From April 1989
to June 1995, Mr. Fillat served as Vice President of Advent International
Corporation.
43
<PAGE>
TORRENCE C. HARDER, a founder of the Company, has served as a director of
the Company since June 1989. Mr. Harder has been the President and a director
of Harder Management Company, a registered investment advisory firm, since its
establishment in 1971. He has also been the President and a director of
Entrepreneurial Ventures, Inc., Entrepreneurial Inc., and Entrepreneurial
Investment Corp., venture capital investment firms, since their foundings in
1987, 1990 and 1995, respectively.
DOUGLAS A. KINGSLEY has served as a director of the Company since April
1996. Since January 1996, Mr. Kingsley has been Vice President of Advent
International Corporation, a venture capital investment firm. From September
1990 to December 1995, Mr. Kingsley was an investment manager at Advent
International Corporation. Mr. Kingsley is a director of LeCroy Corporation, a
manufacturer of electronic instrumentation.
D. QUINN MILLS has served as a director of the Company since June 1990.
Since 1976, Dr. Mills has served as the Albert J. Weatherhead, Jr. Professor
of Economics at the Harvard Business School.
Upon the closing of this offering, the Board of Directors will be divided
into three classes. One class of directors will be elected each year at the
annual meeting of stockholders for a term of office expiring after three
years. Mr. Kingsley will serve in the class whose term expires in 1997; Mr.
Fillat and Dr. Mills will serve in the class whose term expires in 1998; and
Mr. Harder and Ms. Reeve will serve in the class whose term expires in 1999.
Each director will serve until the expiration of his or her term and
thereafter until his or her successor is duly elected and qualified.
The Board of Directors has appointed a Compensation Committee, which
provides recommendations concerning salaries and incentive compensation for
employees of and consultants to the Company, and an Audit Committee, which
reviews the results and scope of the audit and other services provided by the
Company's independent auditors.
Directors of the Company serve without compensation. Under the Company's
1996 Incentive and Non-Qualified Stock Option Plan, non-employee directors of
the Company will be eligible to receive automatic formula grants of
nonqualified options. See "--Stock Option Plans."
Executive officers of the Company are elected annually by the Board of
Directors and serve at its discretion or until their successors are duly
elected and qualified.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors has established a Compensation Committee,
which currently consists of Messrs. Fillat and Harder. Decisions as to
executive compensation are made by the Board of Directors, primarily upon the
recommendation of the Compensation Committee. During the year ended September
30, 1995, none of the executive officers of the Company served on the board of
directors or the compensation committee of any other entity. There are no
family relationships among executive officers or directors of the Company.
Messrs. Harder, Mills and Perfit have been parties to certain transactions
with the Company. See "Certain Transactions."
44
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation earned by the Company's current chief executive officer and the
other four most highly paid executive officers of the Company (collectively,
the "Named Executive Officers") for services rendered in all capacities to the
Company for the year ended September 30, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
--------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS(S) SALARY($) BONUS($) OPTIONS(#) COMPENSATION(1)
- ------------------------------- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C>
Pamela D.A. Reeve,......... $165,000 $55,700 -- $1,696
President and Chief
Executive Officer
Richard H. Antell,......... 99,000 37,000 -- --
Vice President of Software
Development
William G. Brown,.......... 90,000 36,400 -- 891
Chief Financial Officer,
Vice President of Finance
and Administration and
Treasurer
Douglas E. Blackwell,...... 102,000 15,000 40,000 --
Vice President of Service
Delivery
Michael A. Perfit,......... 92,700 18,300 -- 695
Senior Vice President of
Technology
</TABLE>
- --------
(1) Represents matching contributions made by the Company to the Lightbridge,
Inc. 401(k) savings plan.
BENEFIT PLANS
Option Grants Table
The following table sets forth certain information with respect to the grant
of a stock option by the Company to the only Named Executive Officer to whom
stock options were granted during fiscal 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(4)
----------------------------------------------------------- -----------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SHARE)(3) DATE 5%($) 10%($)
---- ------------------ ---------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Douglas E. Blackwell.... 40,000 12.4% $.50 11-08-04 $12,578 $31,875
</TABLE>
- --------
(1) The option granted is an incentive stock option that becomes exercisable
as to 20% of the shares subject thereto on the first anniversary of the
date of grant and an additional 5% at the end of each three-month period
thereafter.
(2) Based on an aggregate of 321,700 shares subject to options granted to
employees during fiscal 1995.
(3) The exercise price per share equaled the fair market value of the Common
Stock on the date of grant, as determined by the Board of Directors.
45
<PAGE>
(4) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date and are not presented to forecast possible future
appreciation, if any, in the price of the Common Stock. The gains shown
are net of the option exercise price, but do not include deductions for
taxes or other expenses associated with the exercise of the options or the
sale of the underlying shares. The actual gains, if any, on the stock
option exercises will depend on the future performance of the Common
Stock, the optionee's continued employment through applicable vesting
periods and the date on which the options are exercised and the underlying
shares are sold.
On various dates from November 10, 1995 to June 14, 1996, the Company
granted options to certain Named Executive Officers as follows: Mr. Antell
received options to purchase 100,000 shares of Common Stock at $.75 per share,
20,000 shares of Common Stock at $2.00 per share and 70,000 shares of Common
Stock at $8.50 per share; Mr. Blackwell received options to purchase 30,000
shares of Common Stock at $.75 per share, 70,000 shares of Common Stock at
$2.00 per share and 20,000 shares of Common Stock at $8.50 per share; and Mr.
Brown received options to acquire 100,000 shares of Common Stock at $.75 per
share and 70,000 shares of Common Stock at $8.50 per share. Neither Ms. Reeve
nor Mr. Perfit have received any grants of options to buy shares of Common
Stock since September 30, 1995.
Option Exercises and Year-End Value Table
The following table sets forth certain information with respect to the
number and value of unexercised options held by the Named Executive Officers
on September 30, 1995. None of the Named Executive Officers exercised stock
options in fiscal 1995.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END(#) AT FISCAL YEAR-END(1)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
Pamela D.A. Reeve........... 274,500/195,500 $2,710,020/$1,897,180
Richard H. Antell........... 42,500/7,500 $ 421,600/$ 74,400
William G. Brown............ 69,500/10,500 $ 691,245/$ 104,055
Douglas E. Blackwell........ --/40,000 $ --/$ 380,000
Michael A. Perfit........... --/-- $ --/$ --
</TABLE>
- --------
(1) There was no public trading market for the Common Stock on September 30,
1995. Accordingly, solely for purposes of this table, the values in these
columns have been calculated on the basis of the initial public offering
price of $10.00 per share (rather than a determination of the fair market
value of the Common Stock on September 30, 1995), less the aggregate
exercise price of the options.
Stock Option Plans
The Company's 1990 Incentive and Nonqualified Stock Option Plan (the "1990
Plan") was adopted by the Board of Directors and approved by the stockholders
of the Company in July 1990. The Company's stockholders have since amended the
1990 Plan from time to time to increase the number of shares of Common Stock
issuable thereunder, most recently to 2,400,000. In June 1996, the Board of
Directors adopted the Company's 1996 Incentive and Non-Qualified Stock Option
Plan (the "1996 Plan"), which was approved by the Company's stockholders in
July 1996. A total of 1,000,000 shares of Common Stock are issuable under the
1996 Plan. The 1996 Plan will become effective upon the closing of this
offering, and the Company's authority to grant additional options under the
1990 Plan will then terminate. As of September 26, 1996, options to purchase
an aggregate of 1,615,800 shares of Common Stock having a weighted average
exercise price of $1.80 per share were outstanding under the 1990 Plan and
options for 777,986 shares had been exercised under the 1990 Plan.
46
<PAGE>
The 1996 Plan is administered by a committee of the Board of Directors (the
"Committee") consisting of the non-employee directors who are members of the
Compensation Committee. All members of the Committee are intended to be
"disinterested persons" as that term is defined under rules promulgated by the
Securities and Exchange Commission (the "Commission"). The Committee selects
the individuals to whom options will be granted and determines the option
exercise price and other terms of each option, subject to the provisions of
the 1996 Plan.
The 1996 Plan authorizes the grant of options to purchase Common Stock
intended to qualify as incentive stock options ("Incentive Options"), as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, and
the grant of options that do not so qualify ("Non-Qualified Options"). Under
the 1996 Plan, Incentive Options may be granted to employees and officers of
the Company or a subsidiary, including members of the Board of Directors who
are also employees of the Company or a subsidiary. Non-Qualified Options may
be granted to officers or other employees of the Company or a subsidiary, to
members of the Board of Directors or the board of directors of a subsidiary,
whether or not employees of the Company or a subsidiary, and to consultants
and other individuals providing services to the Company or a subsidiary.
The 1996 Stock Option Plan also provides for automatic formula grants of
Non-Qualified Options to non-employee directors of the Company ("Outside
Directors"). Each Outside Director (i) who is in office immediately after the
closing of this offering who holds no outstanding stock option granted to him
in his capacity as a director (a "Prior Option") or (ii) who is elected to the
Board after the closing of this offering will automatically be granted,
immediately after the closing of this offering or upon his or her initial
election, as the case may be, a Non-Qualified Option (an "Initial Option") to
purchase 20,000 shares of Common Stock of the Company, vesting in equal
installments on the first three anniversaries of the date of grant (provided
that the optionee then remains a director of the Company). In addition,
immediately following each annual meeting of stockholders of the Company or
special meeting in lieu thereof, there will automatically be granted to each
Outside Director reelected at or remaining in office after such meeting a
fully-vested Non-Qualified Option to purchase 4,000 shares of Common Stock
("Additional Option"), provided that no such Additional Option will be granted
to any Outside Director who at the time of the meeting holds any outstanding
Initial Option or Prior Option that is not fully vested, unless at least two
annual meetings of stockholders of the Company or special meetings in lieu
thereof have intervened between the closing of the Company's initial public
offering (or, if later, the date of the initial election of such Outside
Director) and the meeting following which such automatic grant would occur.
Each Non-Qualified Option granted to an Outside Director pursuant to this
provision of the 1996 Stock Option Plan will expire on the tenth anniversary
of the date of grant. The exercise price of each such Non-Qualified Option
will be equal to the fair market value of the Common Stock on the date the
Non-Qualified Option is granted.
Stock Purchase Plan
In June 1996, the Board of Directors adopted the Company's 1996 Employee
Stock Purchase Plan (the "Stock Purchase Plan"), under which up to 100,000
shares of Common Stock may be purchased by employees of the Company. The Stock
Purchase Plan, which was approved by the Company's stockholders in July 1996,
will become effective upon the closing of this offering.
During each six-month offering period under the Stock Purchase Plan,
participating employees will be entitled to purchase shares through payroll
deductions. The maximum number of shares that may be purchased will be
determined on the first day of the offering period pursuant to the following
formula: (i) up to 6% (as determined by the employee) of the employee's base
pay on such date divided by 85% of the market value of one share of Common
Stock on the first day of the offering period multiplied by (ii) two. During
each offering period, the price at which the employee will be able to purchase
shares of Common Stock will be 85% (subject to change by the Committee) of the
last reported sale price of the Common Stock on the Nasdaq National Market on
the date that the offering period commences or the date the offering period
concludes, whichever is lower.
The Stock Purchase Plan will be administered by the Committee. The Company
expects that all employees who meet certain minimum criteria based on hours
worked per week and length of tenure with the Company will be eligible to
participate in the Stock Purchase Plan and that no employee will be able to
purchase shares
47
<PAGE>
pursuant to the Stock Purchase Plan if after such purchase such employee would
own more than a specific percentage of the total combined voting power or
value of the stock of the Company.
EMPLOYMENT AGREEMENT
In August 1996 the Company executed an employment agreement with Pamela D.A.
Reeve. The Company agreed to employ Ms. Reeve as President and Chief Executive
Officer of the Company at an annual salary of $165,000. The employment
agreement is terminable at will by either party, but if Ms. Reeve's employment
is terminated by the Company for any reason, other than death or disability,
within one year after a change of control of the Company or if the Company
terminates Ms. Reeve's employment at any time without cause, the Company is
required to continue to pay Ms. Reeve's salary for a period of twelve months
after such termination, offset by any amounts received by Ms. Reeve from
subsequent employment during such period.
CERTAIN TRANSACTIONS
SETTLEMENT AGREEMENT AND RELATED MATTERS
On February 2, 1996, Entrepreneurial Limited Partnership I, Entrepreneurial
Limited Partnership II, Entrepreneurial Limited Partnership III,
Entrepreneurial Limited Partnership IV (collectively, the "Entrepreneurial
Partnerships"), Torrence C. Harder, the Company and certain other partnerships
and corporations entered into a settlement agreement (the "Settlement
Agreement") with Brian E. Boyle relating to litigation between the Company,
the Entrepreneurial Partnerships and one corporation, on the one hand, and Mr.
Boyle, the Company's former Chief Executive Officer and Chairman of the Board,
on the other hand. In the litigation, each of the Company and Mr. Boyle
alleged, among other things, that the other had violated certain provisions of
contracts between them. On February 2, 1996, after giving effect to the
Settlement Agreement, Mr. Boyle was the beneficial owner of 2,258,132 shares
of Common Stock, the Entrepreneurial Partnerships were the record owners of an
aggregate of 3,639,524 shares of Common Stock and Mr. Harder, a director of
the Company, was the beneficial owner of 4,582,384 shares of Common Stock. Mr.
Harder serves as a general partner of certain of the Entrepreneurial
Partnerships. Mr. Harder is also president and a director and stockholder of
the other corporations that were parties to the Settlement Agreement and that
also serve as general partners of certain of the Entrepreneurial Partnerships.
In addition, D. Quinn Mills, a director of the Company, holds a limited
partnership interest in two of the Entrepreneurial Partnerships.
Pursuant to the Settlement Agreement, Mr. Boyle granted to the Company
options to purchase an aggregate of 600,000 shares of Common Stock owned by
him, and granted to the Entrepreneurial Partnerships options to purchase an
aggregate of 600,000 shares of Common Stock owned by him. The exercise prices
of the options range from $1.70 to $2.20 per share. The options expire between
April 1, 1996 and February 3, 1997, and each option may be extended for an
additional 45-day period upon payment of a specified per-share amount. The
Settlement Agreement also provided for the Company and the Entrepreneurial
Partnerships to receive the right to acquire certain interests in the
Entrepreneurial Partnerships owned by Mr. Boyle. The Entrepreneurial
Partnerships, which had shared the costs of the litigation with the Company,
have agreed to cooperate with the Company in order to permit the Company to
receive as proceeds of the settlement of the litigation, to the extent
practical, shares of Common Stock, rather than interests in the
Entrepreneurial Partnerships.
On April 1, 1996, the Company and the Entrepreneurial Partnerships exercised
the options granted by Mr. Boyle that were to expire on that day. Pursuant to
such options, the Company repurchased 200,000 shares of Common Stock and the
Entrepreneurial Partnerships purchased an aggregate of 200,000 shares of
Common Stock, at a price of $1.70 per share. The Company paid $113,000 of the
exercise price of its option in cash, and paid the remaining $227,000 by
delivering an 8% promissory note payable to Mr. Boyle. In connection with the
exercise of the options by the Entrepreneurial Partnerships, the Company
loaned an aggregate of $113,000 to the Entrepreneurial Partnerships at an
interest rate of 16% per annum, which loan was repaid in May 1996. In May
1996, the Company repurchased an aggregate of 200,000 shares of Common Stock
from the Entrepreneurial Partnerships at a price of $1.70 per share. At the
same time, in consideration of the agreement of the Entrepreneurial
Partnerships described above regarding the form of the proceeds to be received
by the Company
48
<PAGE>
from the settlement of the litigation against Mr. Boyle, the Company
reimbursed the Entrepreneurial Partnerships for a portion of the legal fees
and expenses incurred by them in connection with the litigation in an
aggregate amount of $260,000. The Company repurchased an additional 200,000
shares of Common Stock from Mr. Boyle at a price of $1.95 per share on
September 3, 1996, pursuant to options granted by Mr. Boyle that were to
expire on that day. The Company paid $130,000 of the exercise price in cash
and the remaining $260,000 by delivering an 8% promissory note payable to Mr.
Boyle.
On August 26, 1996 the Company and Mr. Boyle entered into a letter agreement
pursuant to which Mr. Boyle, his wife and a corporation controlled by Mr.
Boyle agreed to offer hereby an aggregate of 778,132 shares of Common Stock
representing all of the shares of Common Stock owned by them not subject to
the options held by the Company and the Entrepreneurial Partnerships described
above. The Company has agreed to indemnify Mr. Boyle, his wife and the
corporation against certain liabilities, including liabilities under the
Securities Act, arising in connection with this offering. The letter agreement
also provides that the Company will, upon the closing of this offering,
exercise all of its remaining options to purchase Common Stock from Mr. Boyle
and repay the promissory notes issued to Mr. Boyle in connection with the
exercise of such options. See "Use of Proceeds." Pursuant to the terms of the
letter agreement, the Company also paid Mr. Boyle the sum of $75,000, issued
to a trust for the benefit of Mr. Boyle's children a three-year warrant to
purchase 100,000 shares of Common Stock at the initial public offering price
set forth on the front cover page hereof, and granted incidental ("piggyback")
registration rights with respect to such shares. See "Description of Capital
Stock--Warrants" and "Shares Eligible for Future Sale--Registration Rights."
The letter agreement also provided for the Company, Mr. Boyle, the
Entrepreneurial Partnerships and certain other parties to re-affirm and ratify
the mutual release executed by them under the terms of the Settlement
Agreement.
OTHER
On February 23, 1993, the Company entered into license and maintenance
agreements with RentGrow, Inc. ("RentGrow") pursuant to which the Company
granted to RentGrow license to use and develop the Company's Credit Decision
System software in the real estate rental, real estate broker and real estate
mortgage brokers markets in exchange for certain payments by RentGrow. The
license is exclusive for the first four years and seven months of the
agreement and nonexclusive thereafter. Mr. Harder is a director of RentGrow
and through the Entrepreneurial Partnerships and another related limited
partnership, owned, as of December 31, 1995, approximately 54% (on a fully
diluted basis) of the outstanding capital stock of RentGrow. The last payments
under the license and maintenance agreements are due in August 1996. The
Company believes that the terms of the license and maintenance agreements were
no less favorable than those available to it from unaffiliated third parties.
The Company has also provided RentGrow with certain administrative and
facilities support under a facilities service agreement dated August 1, 1992.
The facilities service agreement was of no further effect after July 1995.
Total payments under the license, maintenance and facilities service
agreements totalled $84,736, $104,278 and $59,107 in the years ended September
30, 1993, 1994 and 1995, respectively.
In August 1994, Massachusetts Capital Resource Company, which at that time
owned an aggregate of 977,156 shares of Common Stock, and Dr. Mills, acting as
custodian for a minor child, made subordinated loans to the Company in the
amounts of $2,000,000 and $100,000, respectively, and received warrants to
purchase 500,000 shares and 25,000 shares, respectively, of Common Stock at
$2.00 per share. The subordinated loans bear interest at the rate of 8% per
annum and are payable in installments between September 1997 and June 2001.
The warrants, all of which remain outstanding on the date of this Prospectus,
expire in June 2001. See "Principal and Selling Stockholders" and "Description
of Capital Stock--Warrants."
In August 1995, certain accredited investors made subordinated bridge loans
to the Company in the aggregate amount of $1,151,000 and received warrants to
purchase an aggregate of 287,750 shares of Common Stock at $2.00 per share.
The bridge loans carried interest at the rate of 16% per annum and were repaid
in full in April 1996. As part of such bridge loans, one of the
Entrepreneurial Partnerships loaned $50,000 to the Company and received a
warrant to purchase 12,500 shares of Common Stock. In addition, Michael A.
Perfit holds interests in two trusts and a 401(k) plan that loaned an
aggregate of $26,000 to the Company and received warrants to purchase an
aggregate of 6,500 shares of Common Stock. Mr. Perfit is the Company's Senior
Vice President of Technology.
49
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 26, 1996,
and as adjusted to reflect the sale by the Company and the Selling
Stockholders of the shares of Common Stock offered by this Prospectus, by (i)
each person (or group of affiliated persons) known by the Company to own
beneficially more than five percent of the outstanding shares of Common Stock,
(ii) each of the Selling Stockholders, (iii) each of the directors of the
Company, (iv) each of the Named Executive Officers and (v) all directors and
executive officers of the Company as a group:
<TABLE>
<CAPTION>
SHARES SHARES TO BE
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) NUMBER OF AFTER OFFERING(1)
----------------------- SHARES BEING ---------------------
NAME AND ADDRESS(2) NUMBER PERCENT OFFERED NUMBER PERCENT
------------------- ------------ ---------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Torrence C. Harder(3)... 4,582,384 40.5% -- 4,582,384 31.5%
Entrepreneurial Limited
Partnership I
Entrepreneurial Limited
Partnership II
Entrepreneurial Limited
Partnership III
Entrepreneurial Limited 3,439,524 30.4 -- 3,439,524 23.7
Partnership IV(4)......
c/o The Harder Group
281 Winter Street
Waltham, Massachusetts
02154
Advent International
Investors II Limited
Partnership
Advent Partners Limited
Partnership
Global Private Equity II 2,000,000 17.7 -- 2,000,000 13.8
Limited Partnership(5).
101 Federal Street
Boston, Massachusetts
02110
Brian E. Boyle(6)....... 1,558,132 13.8 778,132 580,000 4.0
31 Hallett Hill Road
Weston, Massachusetts
02193
Massachusetts Capital 1,477,156 13.1 -- 1,477,156 10.2
Resource Company(7)....
420 Boylston Street
Boston, Massachusetts
02116
Pamela D.A. Reeve(8).... 764,614 6.6 -- 764,614 5.1
D. Quinn Mills(9)....... 581,640 5.1 -- 581,640 4.0
Michael A. Perfit(10)... 337,694 3.0 -- 337,694 2.3
William G. Brown(11).... 95,000 * -- 95,000 *
Richard H. Antell(12)... 76,000 * -- 76,000 *
Douglas E.
Blackwell(13).......... 43,000 * -- 43,000 *
Andrew I. Fillat(14).... 5,500 * -- 5,500 *
Douglas A. Kingsley(15). 5,500 * -- 5,500 *
All directors and
executive officers as a
group
(9 persons)(16)........ 6,491,332 54.8 -- 6,491,332 43.1
</TABLE>
- --------
* Less than 1%
(1) Unless otherwise noted, each person or group identified possesses sole
voting and investment power with respect to such shares, subject to
community property laws where applicable. Shares not outstanding but
deemed beneficially owned by virtue of the right of a person or group to
acquire them within 60 days of
50
<PAGE>
September 26, 1996 are treated as outstanding only for purposes of
determining the amount and percent owned by such person or group. The
number of shares of Common Stock deemed outstanding prior to this offering
consists of (i) 6,056,120 shares of Common Stock outstanding as of
September 26, 1996 and (ii) 5,247,324 shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock. The number of shares of
Common Stock deemed outstanding after this offering includes an additional
3,021,868 shares of Common Stock being offered for sale by the Company in
this offering, includes 410,287 shares of Common Stock to be issued in
connection with the exercise of certain warrants to purchase shares of the
Common Stock and excludes 200,000 shares to be repurchased by the Company
upon the closing of the offering. See "Description of Capital Stock--
Warrants." Assumes no exercise of the Underwriters' over-allotment option.
(2) The address of all persons who are executive officers or directors of the
Company is in care of the Company, 281 Winter Street, Waltham,
Massachusetts 02154.
(3) Consists of 280,000 shares beneficially owned by Mr. Harder's children,
862,860 shares owned by a trust of which Mr. Harder is the trustee and
beneficiary and the shares described in Note 4. Mr. Harder is the general
partner of, or the majority stockholder of the corporate general partner
of, Entrepreneurial Limited Partnership I, Entrepreneurial Limited
Partnership II, Entrepreneurial Limited Partnership III and
Entrepreneurial Limited Partnership IV (together, the "Partnerships").
Mr. Harder is a director of the Company. If the underwriters' over-
allotment option is exercised in full, the number and percent of shares
to be owned beneficially after the offering by Mr. Harder will be
4,239,757 and 28.8%, respectively. See Note 4.
(4) Consists of 1,470,240 shares held by Entrepreneurial Limited Partnership
I, 848,356 shares held by Entrepreneurial Limited Partnership II, 100,000
shares held by Entrepreneurial Limited Partnership III and 12,500 shares
purchasable upon exercise of a warrant held by Entrepreneurial Limited
Partnership III, 808,428 shares held by Entrepreneurial Limited
Partnership IV and 200,000 shares purchasable upon exercise of call
options held by the Partnerships. The general partner of Entrepreneurial
Limited Partnership I is Entrepreneurial Ventures, Inc., of which Mr.
Harder is the majority stockholder, president and a director. The general
partners of Entrepreneurial Limited Partnerhip II and Entrepreneurial
Limited Partnership III are Mr. Harder and Entrepreneurial Ventures, Inc.
The general partners of Entrepreneurial Limited Partnership IV are Mr.
Harder and Entrepreneurial, Inc., of which Mr. Harder is the majority
stockholder, president and a director. As a result of the foregoing
relationships, Mr. Harder may be deemed to be the beneficial owner of the
shares held by the Partnerships. If the underwriters' over-allotment
option is exercised in full, the Partnerships will sell 342,627 shares of
Common Stock and the number and percent of shares to be owned
beneficially after the offering by the Partnerships will be 3,096,897 and
21.0%, respectively.
(5) Consists of 1,668 shares held by Advent International Investors II
Limited Partnership, 93,332 shares held by Advent Partners Limited
Partnership and 1,905,000 shares held by Global Private Equity II Limited
Partnership. Advent International Corporation is the general partner of
Advent International Investors II Limited Partnership, Advent Partners
Limited Partnership and Advent International Limited Partnership, which
the general partner of Global Private Equity II Limited Partnership.
Because Advent International Corporation is controlled by a group of 4
persons, none of whom may act independently and a majority of whom must
act in concert to exercise voting or intestment power over the holdings
of such entity, individually, no individual in this group is deemed to
share such voting or investment power.
(6) Includes 50,000 shares held directly and indirectly by the spouse of Mr.
Boyle, 280,000 shares owned by a trust for the benefit of Mr. Boyle's
children, 100,000 shares purchasable upon exercise of a warrant held by
such trust and 50,000 shares held by Boyle Corp, of which Mr. Boyle is
the President. Also includes an aggregate of 400,000 shares of Common
Stock owned by Mr. Boyle subject to call options held by the Company and
certain of its stockholders. See Note 4, "Use of Proceeds" and "Certain
Transactions." Shares to be Beneficially Owned After Offering gives
effect to the repurchase by the Company of 200,000 shares pursuant to the
exercise of such call options upon the closing of the offering. Number of
Shares Being Offered consists of 678,132 shares being offered by Mr.
Boyle, 50,000 shares being offered by the spouse of Mr. Boyle and 50,000
shares being offered by Boyle Corp.
(7) Includes 500,000 shares currently purchasable upon exercise of a warrant.
William J. Torpey, Jr. is the president, and Joan C. McArdle is the vice
president, of Massachusetts Capital Resource Company, and as a result of
these relationships Mr. Torpey and Ms. McArdle may be deemed to be the
beneficial owners of
51
<PAGE>
the shares held by Massachusetts Capital Resource Company. If the
underwriters' over-allotment option is exercised in full, Massachusetts
Capital Resource Company will sell 167,198 shares of Common Stock and the
number and percent of shares to be owned beneficially after the offering by
MCRC will be 1,309,958 and 8.7%, respectively.
(8) Includes 362,000 shares subject to stock options exercisable within 60
days of September 26, 1996. Ms. Reeve is the President and Chief
Executive Officer and a director of the Company.
(9) Includes 120,000 shares held by the children of Dr. Mills and 25,000
shares purchasable upon exercise of a warrant held by a child of Dr.
Mills. Dr. Mills is a director of the Company. If the underwriters' over-
allotment option is exercised in full, Dr. Mills will sell 60,175 shares
of Common Stock and the number and percent of shares to be owned
beneficially after the offering by Dr. Mills will be 521,465 and 3.6%,
respectively.
(10) Consists of 331,194 shares held by various trusts and a pension plan for
the benefit of Mr. Perfit and 6,500 shares purchasable upon exercise of a
warrant held by various trusts and a pension plan for the benefit of Mr.
Perfit. Mr. Perfit is the Senior Vice President of Technology of the
Company.
(11) Includes 45,500 shares subject to stock options exercisable within 60
days of September 26, 1996. Mr. Brown is the Chief Financial Officer,
Vice President of Finance and Administration and Treasurer of the
Company.
(12) Consists of 76,000 shares subject to stock options exercisable within 60
days of September 26, 1996. Mr. Antell is the Vice President of Software
Development of the Company.
(13) Consists of 43,000 shares subject to stock options exercisable within 60
days of September 26, 1996. Mr. Blackwell is the Vice President of
Service Delivery of the Company.
(14) Consists of shares held by Advent Partners Limited Partnership. Mr.
Fillat holds a limited partnership interest in Advent Partners Limited
Partnership representing beneficial ownership of the shares listed in the
table. Mr. Fillat is a director of the Company.
(15) Consists of shares held by Advent Partners Limited Partnership. Mr.
Kingsley holds a limited partnership interest in Advent Partners Limited
Partnership representing beneficial ownership of the shares listed in the
table. Mr. Kingsley is a director of the Company.
(16) Represents shares described in Notes 3, 8, 9, 10, 11, 12, 13, 14, and 15.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.01 par value, 630,516 shares of Series A Redeemable
Convertible Preferred Stock, $.01 par value (the "Series A Preferred Stock"),
620,000 shares of Series B Redeemable Convertible Preferred Stock, $.01 par
value (the "Series B Preferred Stock"), 225,000 shares of Series C Redeemable
Convertible Preferred Stock, $.01 par value (the "Series C Preferred Stock")
and 1,000,000 shares of Series D Preferred Stock. As of September 26, 1996
there were outstanding 6,256,120 shares of Common Stock held by 28 holders of
record, 630,516 shares of Series A Preferred Stock held by two holders of
record, 620,000 shares of Series B Preferred Stock held by 11 holders of
record, 200,789 shares of Series C Preferred Stock held by 14 holders of
record and 1,000,000 shares of Series D Preferred Stock held by 3 holders of
record. Effective upon the closing of this offering, the outstanding shares of
Series A Preferred Stock will convert into 1,261,032 shares of Common Stock,
the outstanding shares of Series B Preferred Stock will convert into 1,504,412
shares of Common Stock, the outstanding shares of Series C Preferred Stock
will convert into 481,880 shares of Common Stock and the outstanding shares of
Series D Preferred Stock will convert into 2,000,000 shares of Common Stock.
Based on securities outstanding as of September 26, 1996, it is currently
expected that, immediately after the closing of this offering, 14,535,599
shares of Common Stock will be outstanding, together with options to acquire
1,615,800 additional shares and warrants to purchase 850,250 additional
shares. The Restated Charter, which will eliminate references to the
Convertible Preferred Stock, will be filed immediately after the closing of
this offering, and the Restated By-Laws will become effective upon the closing
of this offering. Upon the effectiveness of the Restated Charter, the
authorized capital stock of the Company will consist of 60,000,000 shares of
Common Stock, $.01 par value per share, and 5,000,000 shares of Preferred
Stock, $.01 par value per share. The description set forth below gives effect
to the filing of the Restated Charter and the adoption of the Restated By-
Laws.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders. Holders of
the Common Stock do not have cumulative voting rights, and therefore the
holders of a majority of the shares of Common Stock voting for the election of
directors may elect all of the Company's directors standing for election.
Subject to preferences that may be applicable to the holders of outstanding
shares of Preferred Stock, if any, the holders of Common Stock are entitled to
receive such lawful dividends as may be declared by the Board of Directors. In
the event of a liquidation, dissolution or winding up of the affairs of the
Company, whether voluntary or involuntary, and subject to the rights of the
holders of outstanding shares of Preferred Stock, if any, the holders of
shares of Common Stock shall be entitled to receive pro rata all of the
remaining assets of the Company available for distribution to its
stockholders. The Common Stock has no preemptive, redemption, conversion or
subscription rights. All outstanding shares of Common Stock are, and the
shares of Common Stock to be issued pursuant to this offering will be, fully
paid and non-assessable. The issuance of Common Stock or of rights to purchase
Common Stock could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
a majority of the outstanding voting stock of the Company.
PREFERRED STOCK
The Board is authorized, subject to any limitations prescribed by Delaware
law, to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to fix the powers, designations, preferences and relative,
participating, optional or other rights, and the qualifications, limitations
or restrictions thereof, of the shares of each such series and to increase
(but not above the total number of authorized shares of Preferred Stock) or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series without further vote or action by the
stockholders. The Board is authorized to issue Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock.
53
<PAGE>
Although the Company has no current plans to issue such shares, the issuance
of Preferred Stock or of rights to purchase Preferred Stock could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, a majority of the
outstanding voting stock of the Company.
WARRANTS
The Company has issued warrants to purchase an aggregate of 457,288 shares
of Common Stock, subject to certain antidilution adjustments, at varying
exercise prices. Such warrants will expire by their terms on the closing of
this offering. It is currently anticipated that the holders of such warrants
will, in accordance with the terms thereof, surrender a portion of the
warrants in lieu of payment of the cash exercise price, with the warrants to
be valued at the initial public offering price of the Common Stock offered
hereby.
In addition, the Company has issued warrants (the "Warrants") to purchase an
aggregate of 850,250 shares of Common Stock, subject to certain antidilution
adjustments. The Warrants to purchase 750,250 shares have an exercise price of
$2.00 per share and the Warrants to purchase 100,000 shares have an exercise
price equal to the initial public offering price. All of the Warrants are
exercisable in full. The Warrants expire on dates between September 1999 and
July 2001. The holders of the Warrants are entitled to certain registration
rights in respect of the shares of Common Stock issuable upon exercise of the
Warrants. See "Shares Eligible for Future Sale--Registration Rights."
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE RESTATED CHARTER AND BY-LAWS AND OF
DELAWARE LAW
Restated Charter and By-Laws
The Restated Charter and the Restated By-Laws contain certain provisions
that could discourage potential takeover attempts and make more difficult
attempts by stockholders to change the Company's management. The Restated
Charter authorizes the directors to issue, without stockholder approval,
shares of Preferred Stock in one or more series and to fix the voting powers,
preferences and rights and the qualifications, limitations and restrictions
thereof. The Restated By-Laws provide for the division of the Board of
Directors into three classes as nearly equal in size as possible with
staggered three-year terms. See "Management." The classification of the Board
of Directors could make it more difficult for a third party to acquire, or
discourage a third party from acquiring, control of the Company. The Restated
Charter provides that stockholders may act only at meetings of stockholders
and not by written consent in lieu of a stockholders' meeting. The Restated
By-Laws provide that nominations for directors may not be made by stockholders
at any annual or special meeting thereof unless the stockholder intending to
make a nomination notifies the Company of its intentions a specified number of
days in advance of the meeting and furnishes to the Company certain
information regarding itself and the intended nominee. These provisions could
delay any stockholder actions that are favored by the holders of a majority of
the outstanding stock of the Company until the next stockholders' meeting.
These provisions may also discourage another person or entity from making a
tender offer for the Company's Common Stock, because such person or entity,
even if it acquired a majority of the outstanding stock of the Company could
only take action at a duly called stockholders meeting and not by written
consent. The Restated By-Laws also provide that special meetings of the
Company's stockholders may be called only by the President or a majority of
the directors and require advance notice of business to be brought by a
stockholder before any annual or special meeting of stockholders and the
provision of certain information to the Company regarding such stockholder and
others known to be supporting such proposal and any material interest they may
have in the proposed business.
Delaware Anti-Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law which, subject to certain exceptions, prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for
a period of three years following the date that such stockholder became an
interested stockholder, unless (i) prior to such date, the board of directors
of the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii)
upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction
54
<PAGE>
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least two-thirds of the
outstanding voting stock which is not owned by the interested stockholder.
Section 203 defines "business combination" to include (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation; (iii) subject to
certain exceptions, any transaction which results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation which has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an "interested
stockholder" as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
associated with, affiliated with or controlling or controlled by such entity
or person.
LIMITATION OF LIABILITY
The Restated Charter provides that no director of the Company shall be
personally liable to the Company or to any stockholder for monetary damages
arising out of such director's breach of fiduciary duty, except to the extent
that the elimination or limitation of liability is not permitted by the
Delaware General Corporation Law. The Delaware General Corporation Law, as
currently in effect, permits charter provisions eliminating the liability of
directors for breach of fiduciary duty, except that directors remain liable
for (i) any breach of the director's duty of loyalty to a company or its
stockholders, (ii) any acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) any payment of a
dividend or approval of a stock purchase that is illegal under Section 174 of
the Delaware General Corporation Law or (iv) any transaction from which the
director derived an improper personal benefit. A principal effect of this
provision of the Restated Charter is to limit or eliminate the potential
liability of the Company's directors for monetary damages arising from
breaches of their duty of care, unless the breach involves one of the four
exceptions described in (i) through (iv) above. The provision does not prevent
stockholders from obtaining injunctive or other equitable relief against
directors, nor does it shield directors from liability under federal or state
securities laws.
The Restated Charter and the Restated By-Laws further provide for the
indemnification of the Company's directors and officer to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, including
circumstances in which indemnification is otherwise discretionary.
STOCK TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 14,535,599 shares of
Common Stock outstanding (including 5,247,324 shares of Common Stock issuable
upon conversion of all outstanding shares of Preferred Stock and assuming no
exercise of options or warrants outstanding as of the date of this Prospectus,
other than a warrant to be automatically exercised for 410,287 shares). Of
these shares, the 3,800,000 shares to be sold in this offering will be freely
tradable in the public market without restriction under the Securities Act,
unless they are purchased by an "affiliate" of the Company, as that term is
defined in Rule 144 promulgated under the Securities Act.
SALES OF RESTRICTED SHARES
The remaining 10,735,599 shares are "restricted securities" as defined by
Rules 144 or 701 (the "Restricted Shares"). Restricted securities may be sold
in the public market only if they are registered under the Securities Act or
if they qualify for an exemption from registration under Rules 144, 144(k) or
701 under the Securities Act. All 10,735,599 Restricted Shares are subject to
the lock-up agreements described below. Upon the expiration of the lock-up
agreements, 8,673,099 of the 10,735,599 shares may be sold pursuant to Rules
144 or 701, subject in some cases to certain volume restrictions imposed
thereby. Subject to Rules 144, 144(k) and 701 and to the lock-up agreements,
additional shares will be available for sale in the public market as follows:
(i) 8,577,709 shares will be eligible for resale in the public market
immediately following the completion of this offering, subject in some cases
to certain volume restrictions and other conditions pursuant to Rules 144 and
144(k); (ii) 95,390 shares will become eligible for sale during the 90 days
following the date of this Prospectus pursuant to Rules 144 and 701; and (iii)
2,062,500 shares will be eligible for sale upon expiration of their respective
two-year holding periods, subject to the restrictions and conditions of Rule
144, such holding periods to expire on April 3, 1998 for 2,000,000 shares and
on June 30, 1998 for 62,500 shares.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), who has beneficially owned restricted securities
for at least two years is entitled to sell, within any three-month period, a
number of such securities that does not exceed the greater of 1% of the then
outstanding shares of the Common Stock (approximately 145,400 shares, based on
the number of shares to be outstanding after this offering) or the average
weekly trading volume in the public market during the four calendar weeks
preceding the filing of the seller's Form 144, provided certain requirements
concerning availability of public information concerning the Company, manner
of sale and notice of sale are satisfied. A person who is not an affiliate,
has not been an affiliate within three months prior to the sale and has
beneficially owned the restricted securities for at least three years is
entitled to sell such shares under Rule 144(k) without regard to any of the
limitations described above. Rule 144 also provides that affiliates who are
selling shares that are not restricted securities must nonetheless comply with
the same restrictions applicable to restricted securities with the exception
of the holding period requirement. The two- and three-year holding periods
described above do not begin to run until the full purchase price or other
consideration is paid by the person acquiring the restricted securities from
the issuer or an affiliate of the issuer and may include the holding period of
a prior owner who is not an affiliate of the issuer. The Commission has
proposed certain amendments to Rule 144 that would reduce by one year the
holding periods required for shares subject to Rule 144 to become eligible for
resale in the public market. This proposal, if adopted, would increase the
number of shares of Common Stock eligible for immediate resale following
expiration of the lock-up agreements described below. No assurance can be
given concerning whether or when the proposal will be adopted by the
Commission.
Securities issued in reliance on Rule 701 (such as shares of Common Stock
issued before the closing of this offering upon the exercise of options
granted under the 1990 Plan) are also Restricted Shares and, beginning
approximately 90 days after the date of this Prospectus, may be resold by
persons other than affiliates of the Company subject only to the manner of
sale provisions of Rule 144 and may be resold by affiliates under Rule 144
without compliance with its two-year holding period requirement. Outstanding
options to purchase 615,020 shares of Common Stock were fully vested as of
September 26, 1996, all of which are subject to 180-day lock-up agreements.
56
<PAGE>
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock issued or
issuable under the 1990 Plan, the 1996 Plan and the Stock Purchase Plan. See
"Management--Benefit Plans." The registration statements are expected to be
filed as soon as practicable after the date of this Prospectus and will become
effective immediately upon filing. Shares covered by the registration
statements will be eligible for resale in the public market after the
effective date of the registration statements, subject to the lock-up
agreements described below, if applicable.
As of the consummation of this offering and after giving effect to the sale
of the shares of Common Stock offered by the Selling Stockholders hereby,
holders of 6,613,131 shares of Common Stock will have rights to require the
Company in certain circumstances to register such shares for sale under the
Securities Act. See "--Registration Rights."
Prior to this offering there has been no public market for the Common Stock
of the Company and no prediction can be made as to the effect, if any, that
market sales or the availability for sale of such shares will have on the
market price of the Common Stock prevailing from time to time. Nevertheless,
sales of substantial numbers of shares in the public market could adversely
affect the market price of the Common Stock and could impair the Company's
ability to raise capital through a sale of its equity securities. See "Risk
Factors--Absence of Public Market; Possible Volatility of Stock Price."
LOCK-UP AGREEMENTS
The executive officers and directors of the Company, the Selling
Stockholders and certain others, who, upon the closing of this offering, will
beneficially own an aggregate of 10,735,599 shares of Common Stock, options to
purchase 1,615,800 shares of Common Stock and warrants to purchase 850,250
shares of Common Stock, have agreed that they will not, without the prior
written consent of Cowen & Company, sell, offer, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable for any shares of Common Stock for a period of 180 days after the
date of this Prospectus.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement dated February 11, 1991, as
amended, the Company has granted registration rights to certain of its
stockholders with respect to certain shares ("Registrable Shares") consisting
of (i) 5,247,324 shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock, (ii) 525,000 shares of Common Stock issuable upon
exercise of two outstanding warrants and (iii) 910,615 shares of Common Stock
initially held by two specified stockholders.
Holders may request registration of Registrable Shares under the Securities
Act as follows. First, holders of 25% of the Registrable Shares then
outstanding may, at any time, require the Company to use its best efforts to
register all or any portion of their Registrable Shares if the shares to be
registered (a) represent all of the Registrable Shares then held by such
holders, (b) represent at least 20% of the Registrable Shares originally
issued if such holders request the registration of less than all of the
Registrable Shares held by them or (c) are reasonably anticipated to be
offered at an aggregate price to the public that exceeds $2,000,000. Second,
at any time when the Company qualifies to register securities on Form S-3
under the Securities Act, holders of Registrable Shares may request the
Company file a registration statement on Form S-3 for a public offering of all
or any portion of the Registrable Shares, provided that the reasonably
anticipated aggregate price to the public is at least $500,000. Third, each
holder of Registrable Shares has incidental ("piggyback") registration rights
with respect to registrations of the Company's securities, pursuant to which
the holder may request that all or any portion of its Registrable Shares be
included in a registration statement (other than a registration statement of
Form S-4 or S-8 or certain other forms) being filed by the Company for its own
account or otherwise. The Company will pay certain expenses incurred by the
holders of Registrable Shares in exercising the foregoing registration rights.
Pursuant to a Registration Rights Agreement dated August 26, 1996, the
Company has granted incidental registration rights with respect to 100,000
shares of Common Stock issuable upon exercise of an outstanding warrant. The
holder of such shares may request that all or a portion of such shares be
included in a registration statement (other than a registration statement on
Form S-4 or S-8 or certain other forms) being filed by the Company for its own
account or otherwise. The Company will pay certain expenses incurred by such
holder in exercising the foregoing registration rights.
57
<PAGE>
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
Underwriters named below, and each of the Underwriters, for whom Cowen &
Company, Montgomery Securities and Prudential Securities Incorporated are
acting as Representatives (the "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:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
- ----------- ------------
<S> <C>
Cowen & Company.................................................... 800,000
Montgomery Securities.............................................. 800,000
Prudential Securities Incorporated................................. 800,000
Alex. Brown & Sons Incorporated.................................... 85,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 85,000
Hambrecht & Quist LLC.............................................. 85,000
Lehman Brothers Inc. .............................................. 85,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated................. 85,000
J.P. Morgan Securities Inc. ....................................... 85,000
Morgan Stanley & Co., Incorporated................................. 85,000
Oppenheimer & Co., Inc. ........................................... 85,000
Smith Barney Inc. ................................................. 85,000
UBS Securities LLC................................................. 85,000
Adams, Harkness & Hill, Inc. ...................................... 50,000
Brean Murray, Foster Securities Inc. .............................. 50,000
Crowell, Weedon & Co. ............................................. 50,000
Gerard Klauer Mattison & Co., LLC.................................. 50,000
Interstate/Johnson Lane Corporation................................ 50,000
Kaufman Bros., L.P. ............................................... 50,000
Legg Mason Wood Walker, Incorporated............................... 50,000
McDonald & Company Securities, Inc. ............................... 50,000
Raymond James & Associates, Inc. .................................. 50,000
Sutro & Co. Incorporated........................................... 50,000
William Blair & Company LLC........................................ 50,000
---------
Total.......................................................... 3,800,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
closing certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all of the shares of Common Stock being offered
hereby (other than those covered by the over-allotment option described below)
if any of such shares are purchased.
The 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 dealers at such price less a
concession not in excess of $0.40 per share. The Underwriters may allow, and
such dealers may re-allow, a concession not in excess of $0.10 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.
Certain of the Selling Stockholders have granted the Underwriters an option
exercisable for up to 30 days after the date of this Prospectus to purchase up
to an aggregate of 570,000 additional shares of Common Stock
58
<PAGE>
to cover over-allotments, if any. If the Underwriters exercise their over-
allotment option, the 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 3,800,000 shares of Common Stock offered hereby. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act and to contribute to payments the Underwriters may be
required to make in respect thereof. In addition, in a separate agreement, the
Company has agreed to indemnify certain of the Selling Stockholders against
certain liabilities, including liabilities under the Securities Act, and to
contribute to payments such Selling Stockholders may be required to make in
respect thereof. See "Certain Transactions--Settlement Agreement and Related
Matters."
The Company, the Company's executive officers and directors, all Selling
Stockholders and certain other stockholders and option holders of the Company
have agreed that they will not, without the prior written consent of Cowen &
Company, sell, offer, contract to sell, or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable for any shares
of Common Stock for a period of 180 days after the date of this Prospectus.
See "Shares Eligible for Future Sale--Lock-up Agreements."
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales of the shares offered
hereby to any account over which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price was determined by
negotiation among the Company, the Selling Stockholders and the
Representatives. Among the factors considered in such negotiations were the
prevailing market conditions, the market prices of securities of publicly
traded companies engaged in activities similar to those of the Company, the
Company's financial and operating history and condition, estimates of the
business potential of the Company, the present state of the Company's
development, and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares offered hereby and certain other legal matters
will be passed upon for the Company and the Selling Stockholders by Foley,
Hoag & Eliot llp, Boston, Massachusetts. Certain legal matters will be passed
upon for the Underwriters by Testa, Hurwitz & Thibeault, llp, Boston,
Massachusetts.
EXPERTS
The Financial Statements of the Company at September 30, 1994 and 1995 and
December 31, 1995, and for each of the three years in the period ended
September 30, 1995 and for the three-month period ended December 31, 1995,
appearing in this Prospectus have been audited by Deloitte & Touche llp,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
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 the Common Stock, reference is
made to such Registration Statement and the exhibits and
59
<PAGE>
schedules filed as a part thereof. Statements contained in this Prospectus as
to the contents of any contract or any other document referred to are not
necessarily complete, and, in each instance, if such contract or document is
filed as an exhibit, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference to such exhibit.
The Registration Statement, including exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Regional Offices of the Commission at Suite 1400, 500
West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center,
Thirteenth Floor, New York, New York 10048. Copies also may be obtained from
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates.
60
<PAGE>
LIGHTBRIDGE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of September 30, 1994 and 1995, December 31, 1995 and
June 30, 1996 (Unaudited)................................................ F-3
Statements of Operations for the Years Ended September 30, 1993, 1994 and
1995, the Three Months Ended December 31, 1994 (Unaudited), December 31,
1995, and the Six Months Ended June 30, 1995 (Unaudited) and June 30,
1996 (Unaudited)......................................................... F-4
Statements of Stockholders' Deficiency for the Years Ended September 30,
1993, 1994 and 1995, the Three Months Ended December 31, 1995, and the
Six Months Ended June 30, 1996 (Unaudited)............................... F-5
Statements of Cash Flows for the Years Ended September 30, 1993, 1994 and
1995, the Three Months Ended December 31, 1994 (Unaudited), December 31,
1995, and the Six Months Ended June 30, 1995 (Unaudited) and June 30,
1996 (Unaudited)......................................................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors Lightbridge, Inc. Waltham, Massachusetts
We have audited the accompanying balance sheets of Lightbridge, Inc. as of
September 30, 1994 and 1995 and December 31, 1995, and the related statements
of operations, stockholders' deficiency, and cash flows for the years ended
September 30, 1993, 1994 and 1995 and the three months ended December 31,
1995. 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 audit 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, such financial statements present fairly, in all material
respects, the financial position of the Company at September 30, 1994 and 1995
and December 31, 1995, and the results of its operations and its cash flows
for the years ended September 30, 1993, 1994 and 1995 and the three months
ended December 31, 1995 in conformity with generally accepted accounting
principles.
Deloitte & Touche llp
Boston, Massachusetts April 22, 1996 (Except for Notes 4 and 11 as to which
the dates are August 8, 1996 and July 15, 1996, respectively)
F-2
<PAGE>
LIGHTBRIDGE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30, PRO FORMA
------------------------ DECEMBER 31, 1996 JUNE 30, 1996
1994 1995 1995 (UNAUDITED) (UNAUDITED)
----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 1,831,916 $ 539,025 $ 58,064 $ 3,532,294
Accounts receivable.... 2,676,451 2,753,758 4,578,143 5,270,830
Accounts receivable
from related parties.. 107,231 121,100 136,809 93,877
Other current assets... 223,885 158,571 144,294 310,956
----------- ----------- ----------- -----------
Total current
assets............. 4,839,483 3,572,454 4,917,310 9,207,957
Noncurrent receivable
from related party..... 45,638 -- -- --
Fixed assets--net....... 4,101,292 5,319,832 4,881,655 4,089,622
Capitalized software
development costs--net. -- 896,141 762,084 574,810
Deposits................ 167,963 206,620 225,807 229,024
Other assets............ 26,241 219,236 254,625 453,245
----------- ----------- ----------- -----------
Total assets........ $ 9,180,617 $10,214,283 $11,041,481 $14,554,658
=========== =========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable and
accrued expenses...... $ 1,305,254 $ 2,304,595 $ 3,025,038 $ 2,178,554
Short-term borrowings
and current portion of
subordinated notes
payable............... 250,000 1,976,992 1,500,000 1,500,000
Current portion of
obligations under
capital leases........ 1,181,581 2,066,748 2,073,895 2,017,970
Deferred revenues...... 58,333 228,650 74,800 808,781
Dividends payable on
preferred stock....... 166,876 166,876 166,876 166,876
Related parties:
Accounts payable...... 784 -- -- --
Subordinated notes
payable.............. -- 69,071 -- 113,333
Interest payable...... 99,670 39,035 44,096 2,000
Current portion of
obligations under
capital leases....... 61,952 -- -- --
----------- ----------- ----------- -----------
Total current
liabilities........ 3,124,450 6,851,967 6,884,705 6,787,514
Deferred revenues--
related parties........ 2,781 -- -- --
Obligations under
capital leases......... 2,355,733 1,916,609 1,502,128 683,069
Notes payable:
Unaffiliated parties... 1,754,018 1,789,643 2,848,837 1,807,156
Related parties........ 87,701 89,576 164,298 203,848
----------- ----------- ----------- -----------
Total liabilities... 7,324,683 10,647,795 11,399,968 9,481,587
----------- ----------- ----------- -----------
Commitments and
contingencies (Note 5)
Redeemable convertible
preferred stock at
redemption value
(liquidation preference
of $3,115,315,
$3,297,859, $3,343,494
and $9,393,164 at
September 30, 1994 and
1995 and December 31,
1995 and June 30, 1996,
respectively).......... 2,948,439 3,130,983 3,176,618 9,226,288 $ --
----------- ----------- ----------- ----------- -----------
Stockholders' equity
(deficiency):
Common stock, $.01 par
value; 20,000,000
shares authorized;
6,498,232, 6,500,748,
6,575,098 and
6,657,268 shares
issued; 6,657,268,
6,499,600, 6,573,950
and 6,256,120 shares
outstanding at
September 30, 1994 and
1995, December 31,
1995 and June 30,
1996, respectively.... 64,982 65,007 65,751 66,573 123,149
Additional paid-in
capital............... 100,003 -- -- 75,316 9,245,020
Warrants............... 262,500 406,375 406,375 375,125 375,125
Note receivable,
stockholder........... (13,085) (13,085) (13,085) (13,085) (13,085)
Accumulated deficit.... (1,506,905) (4,022,218) (3,993,572) (3,951,072) (4,026,072)
----------- ----------- ----------- ----------- -----------
Total............... (1,092,505) (3,563,921) (3,534,531) (3,447,143) 5,704,137
Less treasury stock, at
cost.................. -- (574) (574) (706,074) (1,536,074)
----------- ----------- ----------- ----------- -----------
Total stockholders'
equity
(deficiency)....... (1,092,505) (3,564,495) (3,535,105) (4,153,217) $ 4,168,063
----------- ----------- ----------- ----------- -----------
Total liabilities
and stockholders'
equity
(deficiency)....... $ 9,180,617 $10,214,283 $11,041,481 $14,554,658
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
LIGHTBRIDGE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31, JUNE 30,
------------------------------------ ----------------------- ------------------------
1993 1994 1995 1994 1995 1995 1996
---------- ----------- ----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues (Includes sales
to a related party of
$84,736, $104,278,
$59,017, $21,075,
$10,644, $29,240 and
$3,125, respectively).. $6,985,912 $13,397,863 $19,350,467 $5,514,643 $6,512,050 $ 9,003,012 $13,263,057
Cost of revenues 3,553,577 7,415,356 12,607,879 3,015,687 3,484,175 6,231,663 7,511,529
---------- ----------- ----------- ---------- ---------- ----------- -----------
Gross profit............ 3,432,335 5,982,507 6,742,588 2,498,956 3,027,875 2,771,349 5,751,528
---------- ----------- ----------- ---------- ---------- ----------- -----------
Operating expenses:
Development............ 1,164,469 2,317,454 3,864,000 849,705 1,144,973 1,862,712 1,970,735
Sales and marketing.... 829,004 814,891 1,901,716 433,509 794,687 937,869 1,916,694
General and
administrative........ 1,309,049 1,643,496 2,583,912 629,841 700,640 1,301,226 1,172,095
---------- ----------- ----------- ---------- ---------- ----------- -----------
Total operating
expenses............ 3,302,522 4,775,841 8,349,628 1,913,055 2,640,300 4,101,807 5,059,524
---------- ----------- ----------- ---------- ---------- ----------- -----------
Income (loss) from
operations............. 129,813 1,206,666 (1,607,040) 585,901 387,575 (1,330,458) 692,004
Other income (expense):
Interest income:
Related parties........ 11,788 12,604 8,688 2,633 1,551 4,937 3,182
Other.................. 4,328 9,384 29,006 9,120 510 10,362 41,071
Interest expense:
Related parties........ (125,600) (20,753) (3,908) (53,201) (60,586) (102,750) (166,172)
Other.................. (124,704) (224,927) (859,660) (131,800) (246,525) (317,933) (249,371)
Other nonoperating
expense............... (21,048) (9,802) -- (930) (7,920) -- 1,286
---------- ----------- ----------- ---------- ---------- ----------- -----------
Income (loss) before
provision for income
taxes.................. (125,423) 973,172 (2,432,914) 411,723 74,605 (1,735,842) 322,000
Provision for income
taxes.................. -- 22,900 -- -- 2,400 -- 19,500
---------- ----------- ----------- ---------- ---------- ----------- -----------
Net income (loss)....... $ (125,423) $ 950,272 $(2,432,914) $ 411,723 $ 72,205 $(1,735,842) $ 302,500
========== =========== =========== ========== ========== =========== ===========
Pro forma net income
(loss) per common
share.................. $ (0.19) $ 0.01 $ 0.02
=========== ========== ===========
Pro forma weighted
average number of
common and common
equivalent shares
outstanding............ 12,661,576 13,161,680 13,793,911
=========== ========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
LIGHTBRIDGE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL NOTE TOTAL
----------------- ----------------- PAID-IN RECEIVABLE, ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS STOCKHOLDER DEFICIT DEFICIENCY
--------- ------- ------- --------- ---------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1,
1992.................. 5,274,938 $52,749 -- $ -- $ -- $ -- $(13,085) $(2,331,754) $(2,292,090)
Issuance of common
stock for:
Cash.................. 619,416 6,194 -- -- 19,286 -- -- -- 25,480
Convertible notes and
interest payable..... 517,778 5,178 -- -- 405,419 -- -- -- 410,597
Dividends on redeemable
convertible preferred
stock................. -- -- -- -- (150,421) -- -- -- (150,421)
Net loss............... -- -- -- -- -- -- -- (125,423) (125,423)
--------- ------- ------- --------- --------- -------- -------- ----------- -----------
Balance, September 30,
1993.................. 6,412,132 64,121 -- -- 274,284 -- (13,085) (2,457,177) (2,131,857)
Issuance of common
stock for cash........ 86,100 861 -- -- 8,263 -- -- -- 9,124
Issuance of stock
purchase warrants..... -- -- -- -- -- 262,500 -- -- 262,500
Dividends on redeemable
convertible preferred
stock................. -- -- -- -- (182,544) -- -- -- (182,544)
Net income............. -- -- -- -- -- -- -- 950,272 950,272
--------- ------- ------- --------- --------- -------- -------- ----------- -----------
Balance, September 30,
1994.................. 6,498,232 64,982 -- -- 100,003 262,500 (13,085) (1,506,905) (1,092,505)
Issuance of common
stock for cash........ 2,516 25 -- -- 142 -- -- -- 167
Issuance of stock
purchase warrants..... -- -- -- -- -- 143,875 -- -- 143,875
Dividends on redeemable
convertible preferred
stock................. -- -- -- -- (100,145) -- -- (82,399) (182,544)
Repurchase of common
stock for cash........ -- -- 1,148 (574) -- -- -- -- (574)
Net loss............... -- -- -- -- -- -- -- (2,432,914) (2,432,914)
--------- ------- ------- --------- --------- -------- -------- ----------- -----------
Balance, September 30,
1995.................. 6,500,748 65,007 1,148 (574) -- 406,375 (13,085) (4,022,218) (3,564,495)
Issuance of common
stock for cash........ 74,350 744 -- -- 2,076 -- -- -- 2,820
Dividends on redeemable
convertible preferred
stock................. -- -- -- -- (2,076) -- -- (43,559) (45,635)
Net income............. -- -- -- -- -- -- -- 72,205 72,205
--------- ------- ------- --------- --------- -------- -------- ----------- -----------
Balance, December 31,
1995.................. 6,575,098 65,751 1,148 (574) -- 406,375 (13,085) (3,993,572) (3,535,105)
Unaudited:
Issuance of common
stock for cash....... 82,170 822 -- -- 135,336 -- -- -- 136,158
Exercise of common
stock warrant........ -- -- -- -- 31,250 (31,250) -- -- --
Repurchase of common
stock for cash....... -- -- 400,000 (705,500) -- -- -- -- (705,500)
Dividends on
redeemable
convertible preferred
stock................ -- -- -- -- (91,270) -- -- -- (91,270)
Expenses paid on
behalf of
stockholder.......... -- -- -- -- -- -- -- (260,000) (260,000)
Net income............ -- -- -- -- -- -- -- 302,500 302,500
--------- ------- ------- --------- --------- -------- -------- ----------- -----------
Balance, June 30, 1996
(unaudited)........... 6,657,268 $66,573 401,148 $(706,074) $ 75,316 $375,125 $(13,085) $(3,951,072) $(4,153,217)
========= ======= ======= ========= ========= ======== ======== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
LIGHTBRIDGE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
YEARS ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, JUNE 30,
----------------------------------- ------------------------ -----------------------
1993 1994 1995 1994 1995 1995 1996
--------- ----------- ----------- ----------- ----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $(125,423) $ 950,272 $(2,432,914) $ 411,723 $ 72,205 $(1,735,842) $ 302,500
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization.......... 868,965 1,000,057 2,567,767 555,966 864,192 1,447,268 1,665,679
Amortization of
discount on notes..... -- 4,219 76,500 9,375 87,853 18,750 35,534
Changes in assets and
liabilities:
Accounts receivable... (847,786) (1,278,988) (77,307) (1,474,071) (1,840,094) 1,556,256 (649,755)
Other assets.......... (54,475) (269,299) (173,594) (227,752) (30,014) (59,240) (388,860)
Accounts payable and
accrued liabilities.. 274,697 341,878 935,172 610,339 725,504 (40,187) (888,580)
Deferred revenues..... 297,752 (254,721) 167,536 655,094 (153,850) (246,567) 733,981
--------- ----------- ----------- ----------- ----------- ----------- ----------
Net cash provided by
(used in) operating
activities......... 413,730 493,418 1,063,160 540,674 (274,204) 940,438 810,499
--------- ----------- ----------- ----------- ----------- ----------- ----------
Cash flows used in
investing activities:
Purchases of fixed
assets................ (309,868) (339,223) (1,391,679) (359,874) (184,186) (960,360) (463,646)
Capitalization of
software costs........ -- -- (980,453) (310,652) -- (523,983) --
--------- ----------- ----------- ----------- ----------- ----------- ----------
Net cash used in
investing
activities......... (309,868) (339,223) (2,372,132) (670,526) (184,186) (1,484,343) (463,646)
--------- ----------- ----------- ----------- ----------- ----------- ----------
Cash flows from
financing activities:
Proceeds from notes
payable and warrants.. 210,000 2,350,000 1,901,000 -- 500,000 750,000 --
Payments on notes
payable............... (501,000) (50,000) -- -- -- -- (1,151,000)
Payments under capital
lease obligations..... (412,988) (823,085) (1,884,512) (410,045) (525,391) (965,366) (1,077,348)
Proceeds from issuance
of common stock....... 25,480 9,124 167 -- 2,820 167 136,158
Payments toward the
purchase of treasury
stock................. -- -- (574) -- -- (574) (478,833)
Expenses paid on behalf
of stockholder........ -- -- -- -- -- -- (260,000)
Proceeds from issuance
of mandatory
redeemable convertible
preferred stock, net.. 584,228 -- -- -- -- -- 5,958,400
--------- ----------- ----------- ----------- ----------- ----------- ----------
Net cash provided by
(used in) financing
activities......... (94,280) 1,486,039 16,081 (410,045) (22,571) (215,773) 3,127,377
--------- ----------- ----------- ----------- ----------- ----------- ----------
Net increase (decrease)
in cash and cash
equivalents............ 9,582 1,640,234 (1,292,891) (539,897) (480,961) (759,678) 3,474,230
Cash and cash
equivalents, beginning
of period.............. 182,100 191,682 1,831,916 1,831,916 539,025 1,292,019 58,064
--------- ----------- ----------- ----------- ----------- ----------- ----------
Cash and cash
equivalents, end of
period................. $ 191,682 $ 1,831,916 $ 539,025 $ 1,292,019 $ 58,064 $ 532,341 $3,532,294
========= =========== =========== =========== =========== =========== ==========
Cash paid for interest.. $ 152,292 $ 283,272 $ 904,605 $ 251,372 $ 176,271 $ 418,730 $ 495,875
========= =========== =========== =========== =========== =========== ==========
Cash paid for income
taxes.................. $ -- $ 5,300 $ 25,000 $ 25,000 $ 15,700 $ 9,650 $ 31,100
========= =========== =========== =========== =========== =========== ==========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
LIGHTBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE THREE MONTHS ENDED DECEMBER 31, 1994, AND THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED.)
1. BUSINESS AND TECHNOLOGY ACQUISITIONS
Business--Lightbridge, Inc. (formerly Credit Technologies, Inc.) (the
"Company") was incorporated in June 1989 under the laws of the state of
Delaware. The Company develops and markets customer acquisition solutions for
the wireless communications industry. Effective November 1, 1994, the Company
changed its name and reincorporated as Lightbridge, Inc. During 1995, the
Board of Directors passed a resolution to change the fiscal year end to
December 31.
Technology Acquisitions--During the year ended September 30, 1995, the
Company completed the following technology acquisitions:
. In November 1994, the Company purchased the technology for a pen-based
software product for $400,000.
. In February 1995, the Company purchased the software technology for a
multimedia kiosk for $45,000. The Company is also obligated to make
royalty payments to the former owners based on future sales of the
product.
The costs associated with these acquisitions was recorded as capitalized
software costs, since such products had reached technological feasibility at
the date of acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--As discussed in Note 6, the redeemable convertible
preferred stock will be automatically converted upon the closing of the public
offering contemplated by this prospectus. The accompanying pro forma balance
sheet gives effect to this conversion as if it had occurred on June 30, 1996.
In addition, the pro forma balance sheet gives effect as of June 30, 1996 to
(i) the exercise of warrants to purchase 457,288 shares of common stock (to be
accomplished through the surrender of 47,001 shares of common stock), (ii) the
exercise of the Company's option to repurchase 400,000 shares of common stock,
as described in Note 5, and (iii) the payment of $75,000 to an existing
stockholder (see Note 11).
Cash and Cash Equivalents--Cash and cash equivalents include short-term,
highly liquid instruments, which consist primarily of money market accounts,
purchased with remaining maturities of three months or less.
Fixed Assets--Fixed assets are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
respective assets ranging from three to five years. Leasehold improvements are
amortized over the term of the lease or the lives of the assets, whichever is
shorter.
Revenue Recognition and Concentration of Credit Risk--Revenue from
processing of qualification and activation transactions for wireless
telecommunications carriers is recognized in the period when services are
performed. Revenues derived from software implementation projects are
recognized throughout the performance period of the contracts. Revenues
arising from the prepayment of fees or from licensing agreements where the
Company has continuing vendor obligations are deferred. Software-related
revenues are less than 10% of total revenue for all periods presented with the
exception of the six months ended June 30, 1996 during which these items
comprised approximately 20% of total revenue.
Substantially all of the Company's customers are providers of cellular
telephone service and are generally granted credit without collateral. The
Company's revenues vary throughout the year with the period of highest revenue
generally occurring during the period October 1 through December 31.
F-7
<PAGE>
LIGHTBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Customers exceeding 10% of the Company's revenue during the years ended
September 30, 1993, 1994 and 1995, the three months ended December 31, 1994
and 1995, and the six months ended June 30, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
PERCENT OF REVENUE
---------------------------------------------------
THREE SIX
MONTHS ENDED MONTHS ENDED
YEARS ENDED --------------- ---------------
SEPTEMBER 30, DECEMBER 31, JUNE 30,
---------------- --------------- ---------------
CUSTOMER 1993 1994 1995 1994 1995 1995 1996
-------- ---- ---- ---- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
A....................... 20% 32% 31% 32% 22% 33% 19%
B....................... 14 12 11 -- 18 12 20
C....................... -- 10 -- -- -- -- --
D....................... -- 10 11 12 10 10 --
E....................... -- -- 10 11 11 11 11
--- --- --- ------ ------ ------ ------
34% 64% 63% 55% 61% 66% 50%
=== === === ====== ====== ====== ======
</TABLE>
For periods in which a customer represented less than 10% of revenues, such
customer's percent of revenue for that period is not presented.
Income Taxes--The Company has adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of existing assets and
liabilities. Deferred income tax assets are principally the result of net
operating loss carryforwards and differences in depreciation and amortization
for financial statement purposes and income tax purposes, and are recognized
to the extent realization of such benefits is more likely than not.
Software Development Costs--Software development costs are capitalized after
establishment of technological feasibility as provided for under SFAS No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed."
During the year ended September 30, 1995, the Company capitalized
approximately $980,400 of software development costs associated with the
development of two new products, including the costs of purchasing certain
technology (see Note 1). Capitalized software development costs are being
amortized to cost of revenues using the straight-line method over 24 months
which results in the highest levels of amortization. Accumulated amortization
was approximately $84,000, $218,000 and $406,000 at September 30, 1995,
December 31, 1995 and June 30, 1996, respectively. There were no amounts
capitalized prior to the year ended September 30, 1995.
Development Costs--Development costs, which consist of research into and
development of new products and services, are expensed as incurred, except
costs which may be subject to capitalization under the provisions of SFAS No.
86.
Supplemental Cash Flow Information--The Company entered into the following
noncash transactions:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
YEARS ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, JUNE 30,
------------------------------ ------------------- -----------------
1993 1994 1995 1994 1995 1995 1996
-------- ---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Capital lease
obligations incurred
for the acquisition of
fixed assets.......... $653,057 $3,256,900 $2,268,605 $1,720,863 $118,057 $379,013 $202,364
======== ========== ========== ========== ======== ======== ========
Exchange of notes and
interest payable for
common stock.......... $410,597
========
</TABLE>
In April 1996, the Company reacquired 200,000 shares of its common stock
from a former director. This repurchase was partially financed through the
issuance of an 8% note payable in the amount of $226,667.
F-8
<PAGE>
LIGHTBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Pro Forma Income (Loss) Per Common Share--Pro forma income (loss) per common
share is based on the weighted average number of common and dilutive common
equivalent shares (common stock options and warrants) outstanding. The pro
forma weighted average number of common shares assumes that all series of
redeemable convertible preferred stock had been converted to common stock as
of the original issuance date. Common equivalent shares are not included in
the per share calculations where the effect of their inclusion would be anti-
dilutive, except in accordance with the requirements of Securities and
Exchange Commission Staff Accounting Bulletin No. 83. That Bulletin requires
all common shares issued and options or warrants to purchase common stock
granted by the Company during the twelve-month period prior to the filing of a
proposed initial public offering be included in the calculation as if they
were outstanding for all periods. For purposes of applying the Bulletin, the
Company has used the initial public offering price of $10 per share. Shares of
Series D redeemable convertible preferred stock have been treated as
outstanding in all periods for pro forma income (loss) per common share
pursuant to the Bulletin.
Historical income (loss) per share, which excludes the assumed conversion of
the redeemable convertible preferred stock, was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
YEARS ENDED ENDED ENDED
SEPTEMBER 30, DECEMBER 31, JUNE 30,
--------------------------------- -------------------- ----------------------
1993 1994 1995 1994 1995 1995 1996
--------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)....... $(125,423) $ 950,272 $(2,432,914) $ 411,723 $ 72,205 $(1,735,842) $ 302,500
Accretion of preferred
dividends.............. (150,421) (182,544) (182,544) (45,635) (45,635) (91,270) (91,270)
--------- --------- ----------- --------- --------- ----------- ---------
Net income (loss)
available for common
stock.................. $(275,844) $ 767,728 $(2,615,458) $ 366,088 $ 26,570 $(1,827,112) $ 211,230
========= ========= =========== ========= ========= =========== =========
Net income (loss) per
common share........... $ (0.04) $ 0.10 $ (0.35) $ 0.05 $ -- $ (0.25) $ 0.02
Weighted average number
of common and common
equivalent shares
outstanding............ 6,572,228 7,796,000 7,414,252 7,894,427 7,914,356 7,414,147 8,546,587
</TABLE>
Fair Value of Financial Instruments--In the opinion of management, the
estimated fair value of the Company's financial instruments, which include
cash equivalents, accounts receivable and long-term debt, approximates their
carrying value.
New Accounting Pronouncements--
Impairment of Long-Lived Assets--In March 1995, the FASB issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 addresses the accounting for the
impairment of long-lived assets, certain identifiable intangibles and
goodwill when events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The adoption of SFAS No. 121 in
1996 did not have a material impact on the Company's results of operations,
financial position or cash flows.
Stock-Based Compensation--In November 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 addresses the
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 permits an entity to either record the
effects of stock-based employee compensation plans in its financial
statements or present pro forma disclosures in the notes to the financial
statements. In connection with the adoption of SFAS No. 123 during 1996,
the Company will elect to provide the appropriate disclosures in the notes
to the financial statements. Since the Company does not expect to make
significant equity awards to outsiders, adoption of SFAS No. 123 will not
significantly impact the Company's results of operations, financial
position or cash flows.
F-9
<PAGE>
LIGHTBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management
to make estimates. These estimates include provisions for bad debts, certain
accrued liabilities, recognition of revenue and expenses, and recoverability
of deferred tax assets. These estimates could change; however, the Company
does not expect any changes in the near term that would have a significant
impact on the financial statements.
Interim Information--The results of operations and cash flows for the three-
month periods ended December 31, 1994 and 1995, and the six-month periods
ended June 30, 1995 and 1996 are not necessarily indicative of results which
would be expected for a full year. In the opinion of management, the financial
statements for the unaudited periods presented include all adjustments
necessary for a fair presentation in accordance with generally accepted
accounting principles, consisting solely of normal recurring accruals and
adjustments.
3. FIXED ASSETS
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------ DECEMBER 31, JUNE 30,
1994 1995 1995 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Furniture and fixtures.. $ 18,704 $ 118,408 $ 117,876 $ 129,567
Leasehold improvements.. 319,828 877,778 867,726 876,321
Computer equipment...... 528,784 1,115,014 1,161,052 1,453,901
Computer equipment under
capital leases......... 4,858,573 6,942,977 6,972,938 7,133,488
Computer software....... 353,550 685,546 829,436 978,339
----------- ----------- ----------- -----------
6,079,439 9,739,723 9,949,028 10,571,616
Less accumulated depre-
ciation
and amortization....... (1,978,147) (4,419,891) (5,067,373) (6,481,994)
----------- ----------- ----------- -----------
Fixed assets--net....... $ 4,101,292 $ 5,319,832 $ 4,881,655 $ 4,089,622
=========== =========== =========== ===========
</TABLE>
Accumulated amortization of equipment under capital leases was $1,242,725,
$3,155,114, $3,606,915 and $4,659,098 at September 30, 1994 and 1995, December
31, 1995 and June 30 , 1996, respectively.
4. NOTES PAYABLE
The carrying value of notes payable consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 SEPTEMBER 30, 1995 DECEMBER 31, 1995 JUNE 30, 1996
-------------------- --------------------- --------------------- ---------------------
HELD BY HELD BY HELD BY HELD BY HELD BY HELD BY HELD BY HELD BY
RELATED UNAFFILIATED RELATED UNAFFILIATED RELATED UNAFFILIATED RELATED UNAFFILIATED
PARTIES PARTIES PARTIES PARTIES PARTIES PARTIES PARTIES PARTIES
------- ------------ -------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Line-of-credit/demand
note borrowings........ $ -- $ 250,000 $ -- $1,000,000 $ -- $1,500,000 $ -- $1,500,000
8% subordinated notes... 87,701 1,754,018 89,576 1,789,643 90,045 1,798,549 90,514 1,807,156
16% subordinated notes.. -- -- 69,071 976,992 74,253 1,050,288 -- --
8% note payable-
settlement shares...... -- -- -- -- -- -- 226,667 --
------- ---------- -------- ---------- -------- ---------- -------- ----------
Total................... 87,701 2,004,018 158,647 3,766,635 164,298 4,348,837 317,181 3,307,156
Less current portion.... -- 250,000 69,071 1,976,992 -- 1,500,000 113,333 1,500,000
------- ---------- -------- ---------- -------- ---------- -------- ----------
Long-term portion....... $87,701 $1,754,018 $ 89,576 $1,789,643 $164,298 $2,848,837 $203,848 $1,807,156
======= ========== ======== ========== ======== ========== ======== ==========
</TABLE>
F-10
<PAGE>
LIGHTBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
During 1994 and 1995, the Company had a line of credit agreement with a bank
(the "Bank Agreement") which permitted the Company to borrow up to $2,000,000
($1,000,000 during 1994) subject to certain borrowing formulas established by
the bank. Interest based on prime plus .5% was charged on any outstanding
borrowings. In December 1995, the Bank Agreement was amended to reduce the
amount of permitted borrowings to $1,500,000 and the outstanding borrowings
under the Bank Agreement, $1,500,000, were converted to a demand note due in
March 1996. At December 31, 1995 and March 31, 1995, the Company was not in
compliance with certain covenants contained in the Bank Agreement including
covenants related to liquidity, tangible net worth, profitability and debt to
tangible net worth, as defined. The Company obtained agreements from the bank
for these violations, in which the bank agreed to forebear from exercising its
remedies for default, including the right to require payment on demand prior
to March 1996 and June 1996, respectively. The demand note was collateralized
by the Company's accounts receivable, equipment and intangible assets. The
weighted average interest rate for borrowings under the Bank Agreement during
the years ended September 30, 1994 and 1995 and the three months ended
December 31, 1995 approximated 9.75%, 9.9% and 9.5%, respectively.
Subsequent to December 31, 1995, the Bank Agreement was amended (the
"Amended Bank Agreement") to replace the demand note with a line-of-credit
feature and certain other provisions were modified to increase the maximum
borrowing limit to $4,000,000, decrease the interest rate to prime plus .25%
and extend the agreement to June 1997. The Amended Bank Agreement contains
certain restrictions which, among others, limits the Company's ability to pay
cash dividends and requires the Company to achieve defined levels of quarterly
earnings and tangible net worth, as well as meeting defined ratios of senior
liabilities to net worth and quick assets. Borrowings under the Amended Bank
Agreement are collateralized by the Company's accounts receivable, equipment
and intangible assets. After giving effect to an amendment to the Amended Bank
Agreement dated August 8, 1996, the Company was in compliance with the
required financial covenants and ratios as of June 30, 1996. Further, the
Company believes that the August 8, 1996 amendment will permit the Company to
remain in compliance with the required financial covenants and ratios
throughout the term of the Amended Bank Agreement.
The Company has a $500,000 line of credit to be used for equipment purchases
(the "Equipment Line"). Borrowings under the Equipment Line are payable in 36-
monthly installments of principal and interest commencing April 5, 1995 and
ending March 5, 1998. Interest on the Equipment Line is payable at prime plus
1%. Subsequent to December 31, 1995, certain provisions of the Equipment Line
were modified whereby the interest rate was reduced to prime plus .75%, the
maximum borrowing amount was increased to $2,000,000 and expiration date was
changed to June 1999. At December 31, 1995, there were no borrowings
outstanding on the Equipment Line.
8% Subordinated Notes--In August 1994, the Company issued $2,100,000 of
subordinated notes to certain holders of the Company's common and mandatory
redeemable preferred stock, with immediately exercisable warrants for the
purchase of 525,000 shares of the Company's common stock. The warrants are
exercisable through June 30, 2001 at a price of $2 per share and have been
appraised and recorded at an aggregate market value of $262,500. The related
discount on the subordinated notes ($262,500 at time of issuance) is being
accreted over the term of the notes. Interest expense for the years ended
September 30, 1994 and 1995 and for the three months ended December 31, 1995,
includes accretion related to these notes of approximately $4,200, $37,500 and
$9,375, respectively. Interest on the notes is payable quarterly at an annual
rate of 8%. Principal is payable in quarterly installments of $131,250
beginning on September 30, 1997 through maturity (2001). The notes are
redeemable at the Company's option at par plus declining premiums at various
dates.
16% Subordinated Notes--In August 1995, the Company issued $1,151,000 of 16%
subordinated notes to certain holders of the Company's redeemable preferred
stock, with immediately exercisable warrants for the purchase of 287,750
shares of the Company's common stock. Interest on the notes was accrued
monthly, and
F-11
<PAGE>
LIGHTBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
principal and accrued interest were payable at January 31, 1996. Such
repayment obligations were extended by the note holders until such time as the
Company completed the placement of its Series D Preferred Stock, which
occurred on April 4, 1996. The warrants are exercisable through June 30, 2001
at a price of $2 per share and have been appraised and recorded at an
aggregate market value of $143,875. The related discount on the subordinated
note ($143,875 at time of issuance) is being accreted over the originally
scheduled term of the notes. Interest expense for the year ended September 30,
1995 and for the three months ended December 31, 1995 includes approximately
$38,900 and $78,500 of accretion, respectively. The Company repaid principal
and interest related to these notes in full upon the sale of its Series D
Preferred Stock. The amount outstanding related to these notes has been
classified as long term at December 31, 1995, reflecting the Company's
refinancing of this obligation through the issuance of Series D Preferred
Stock.
5. COMMITMENTS AND CONTINGENCIES
Leases--The Company leases computer and other equipment under various,
noncancelable leases which have been capitalized for financial reporting
purposes. The Company has noncancelable operating lease agreements for office
space and certain equipment. Future minimum payments under capital and
operating leases consist of the following at December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31 CAPITAL LEASES LEASES
----------- -------------- ----------
<S> <C> <C>
1996............................................. $ 2,373,156 $1,243,125
1997............................................. 1,530,940 1,231,090
1998............................................. 53,499 1,059,725
1999............................................. -- 1,028,706
2000............................................. -- 887,684
Thereafter....................................... -- 431,657
----------- ----------
Total minimum lease payments..................... 3,957,595 $5,881,987
==========
Less amount representing interest................ (381,572)
-----------
Present value of future minimum lease payments... 3,576,023
Less current portion............................. (2,073,895)
-----------
Long-term portion................................ $ 1,502,128
===========
</TABLE>
During the year ended September 30, 1994, certain payments due under capital
lease agreements with related parties were not made at the request of the
lessor. Such deferred payments aggregated $784, $0 and $0 at September 30,
1994 and 1995 and December 31, 1995, respectively, and are included in
accounts payable--related parties. No interest was accrued on these amounts
subsequent to their original due date.
Rent expense for operating leases was $271,982, $453,687, $1,502,745,
$405,302, $814,910 and $741,747 for the years ended September 30, 1993, 1994
and 1995, for the three months ended December 31, 1995, and for the six months
ended June 30, 1995 and 1996, respectively.
Litigation--Subsequent to December 31, 1995, the Company and certain
affiliates (the "Entrepreneurial Partnerships") (collectively, the
"Plaintiffs") reached an agreement to settle various lawsuits between the
Plaintiffs and a former director of the Company (see Note 11). In addition to
settling all claims and disputes, the former director agreed, in exchange for
payments of $25,500, to grant the Company and the Entrepreneurial
Partnerships' various options to purchase the Company's common stock from the
former director (the "Settlement Shares"). The Company's purchase option
permits the Company to purchase Settlement Shares in 200,000 share allotments
during three specified periods of time through February 1997 at purchase
prices of $1.70, $1.95 and $2.20 per share during the first, second and final
share allotments, respectively. In the event
F-12
<PAGE>
LIGHTBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
that the Company chooses not to immediately pay for the Settlement Shares, a
portion of the purchase price (66 2/3%) may be financed by issuing the former
director an 8% two-year note.
On April 1, 1996, the Company exercised its option to purchase 200,000
Settlement Shares at a price of $1.70 per share for cash consideration of
$113,333 deposited with the selling shareholder on March 28, 1996 and an 8%
two-year note for $226,667. In connection with the exercise of the options by
the Entrepreneurial Partnerships, on March 28, 1996 the Company loaned an
aggregate of $113,333 to the Entrepreneurial Partnerships at an interest rate
of 16%. Such amount was repaid in June 1996. In May 1996, the Company
repurchased for cash consideration an additional 200,000 shares of its common
stock from certain Entrepreneurial Partnerships at a price of $1.70 per share
and reimbursed the Entrepreneurial Partnerships, by means of a distribution,
certain legal fees and expenses incurred by them in connection with the
litigation against the former director in an aggregate amount of $260,000.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Redeemable convertible preferred stock, par value of $.01, consists of the
following at September 30, 1994 and 1995 and December 31, 1995:
. Series A; 630,516 shares authorized, issued and outstanding
. Series B; 620,000 shares authorized, issued and outstanding
. Series C; 225,000 shares authorized, 200,789 shares issued and
outstanding
In April 1996, 1,000,000 shares of Series D Preferred Stock were issued, of
which all remained outstanding at June 30, 1996. There were no changes in the
number of outstanding shares of Series A, B and C Preferred Stock during the
six-month period ended June 30, 1996.
Changes in redeemable convertible preferred stock were as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D TOTAL
---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances, October 1, 1993. $1,130,475 $1,204,729 $597,567 $ -- $2,932,771
Dividends accreted........ 15,668 -- -- 15,668
---------- ---------- -------- ---------- ----------
Balances, September 30,
1994..................... 1,146,143 1,204,729 597,567 -- 2,948,439
Dividends accreted........ 60,978 76,104 45,462 -- 182,544
---------- ---------- -------- ---------- ----------
Balances, September 30,
1995..................... 1,207,121 1,280,833 643,029 -- 3,130,983
Dividends accreted........ 15,244 19,026 11,365 -- 45,635
---------- ---------- -------- ---------- ----------
Balances, December 31,
1995..................... 1,222,365 1,299,859 654,394 -- 3,176,618
Stock issued, net of issu-
ance costs of $41,600 ... -- -- -- 5,958,400 5,958,400
Dividends accreted........ 30,488 38,052 22,730 -- 91,270
---------- ---------- -------- ---------- ----------
Balances, June 30, 1996... $1,252,853 $1,337,911 $677,124 $5,958,400 $9,226,288
========== ========== ======== ========== ==========
</TABLE>
In February 1991, the Company issued 630,516 shares of redeemable
convertible preferred stock ("Series A Preferred Stock") for an aggregate
purchase price of $1,000,000, of which 315,258 shares were issued to a third-
party investor and 315,258 shares were issued to certain Entrepreneurial
Partnerships which are related parties.
In December 1991, the Company issued 620,000 shares of redeemable
convertible preferred stock ("Series B Preferred Stock") for an aggregate
purchase price of $1,085,000.
In June 1993, the Company issued 200,789 shares of redeemable convertible
preferred stock ("Series C Preferred Stock") for an aggregate purchase price
of $602,367.
In April 1996, the Company issued 1,000,000 shares of redeemable convertible
preferred stock ("Series D Preferred Stock") for an aggregate purchase price
of $6,000,000.
F-13
<PAGE>
LIGHTBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Conversion--Each share of Series A and Series D Preferred Stock is
convertible into two shares of common stock. Each share of Series B and Series
C Preferred Stock is convertible into approximately 2.42 and 2.40 shares of
common stock, respectively. The Series A, Series B, Series C and Series D
Preferred Stock ("Serial Preferred Stock") is convertible upon a sale of the
Company's stock or net assets for an amount in excess of $7,500,000, with a
minimum price per share of $5.25.
Dividends--On October 1, 1992, the Series A and Series B Preferred Stock
began accruing dividends at the rate of 8% per annum. The Series C Preferred
Stock began accruing dividends at the rate of 8% per annum beginning on
October 1, 1993. The Series D Preferred Stock began accruing dividends at the
rate of 8% per annum beginning on April 2, 1996. Prior to the issuance of the
Series D Preferred Stock, the Series A, Series B and Series C Preferred Stock
dividends were payable in cash for fiscal years in which the Company has net
income in excess of $500,000 and would accrue in all other years. Accrued
dividends outstanding for any year were payable in cash in subsequent years to
the extent net income exceeded the required minimum of $500,000 by an
additional $500,000. No dividends have been paid in the years ended September
30, 1994 and 1995 and the three months ended December 31, 1995. Since the
issuance of the Series D Preferred Stock, the Series A, Series B and Series C
Preferred Stock dividends are payable in cash or by subordinated promissory
note for fiscal years in which the Company has net income of $1,000,000 or
more, to the extent of the lesser of 20% of net income in excess of $1,000,000
or all dividends then payable. For financial reporting purposes, the dividends
are being accreted ratably over the period the Serial Preferred Stock is
expected to be outstanding to the extent not required to be paid. Dividends
payable for all periods presented consisted of $80,076 and $86,800 required to
be paid on the Series A and Series B Preferred Stock, respectively, as a
result of the Company's 1994 net income.
Liquidation Preference--In the event of a liquidation, merger,
consolidation, or sale of the Company's assets, the holders of the various
classes of Serial Preferred Stock will be entitled to receive a liquidation
preference equal to their aggregate purchase price plus accreted and unpaid
dividends outstanding prior to any distributions to holders of common stock of
the Company.
Redemption--Prior to the issuance of the Series D Preferred Stock, the
Series A and Series B Preferred Stock had a mandatory redemption date of
December 31, 1997 and the Series C Preferred Stock had a mandatory redemption
date of December 31, 1999. Since the issuance of the Series D Preferred Stock,
holders of two-thirds of all shares of Serial Preferred Stock may, commencing
on April 1, 2000 and on the same date in each following year, require the
Company to redeem 1/3 of their shares. The redemption amount equals the higher
of the fair market value of the preferred stock as of the fiscal year end
closest to the redemption date or an amount equal to the aggregate purchase
price plus accrued dividends outstanding.
Voting Rights--Each share of Serial Preferred Stock entitles the holder to
the number of votes per share equivalent to the number of common shares into
which each share of preferred stock is then convertible.
Equity Financing--The Company secured a round of equity financing, which
consisted of the issuance of the Series D Preferred Stock on April 4, 1996.
The total proceeds from the financing were $6,000,000 and were used, in part,
to retire the 16% subordinated notes.
7. COMMON STOCK, OPTIONS AND WARRANTS (SEE NOTE 11)
Increase in Authorized Shares--On March 29, 1996, the Company's Board of
Directors increased the number of authorized shares of $.01 par value common
stock from 14,000,000 to 20,000,000 shares, of which 2,000,000 of such shares
was reserved for the conversion of the Company's Series D Preferred Stock.
Stock Option Plan--Under the Company's stock option plan, the Company may
grant either incentive or nonqualified stock options to officers, directors,
employees or consultants for the purchase of up to 1,800,000 shares of common
stock. Options will be granted with an exercise price equal to the common
stock's market value at the date of grant, as determined by the Board of
Directors, and will expire ten years later. On March 29, 1996, the Board of
Directors increased the number of options available for grant to 2,400,000.
F-14
<PAGE>
LIGHTBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity was as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
------------ -----------
YEARS ENDED
SEPTEMBER 30,
--------------------- DECEMBER 31, JUNE 30,
1994 1995 1995 1996
--------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of
period....................... 991,184 716,100 1,013,700 1,072,700
Granted:
Options................... 200,000 321,700 233,500 625,800
Range of exercise prices
in dollars per share..... $ 0.375 $ .50-.75 $ 0.75 $ 0.75-8.50
Exercised................... (86,100) (2,516) (74,350) (19,670)
Cancelled................... (388,984) (21,584) (100,150) (63,030)
--------- ---------- ---------- -----------
Outstanding, end of period.... 716,100 1,013,700 1,072,700 1,615,800
========= ========== ========== ===========
Options exercisable........... 426,832 561,915
========== ===========
Aggregate option price........ $ 55,724 $ 238,024
========== ===========
</TABLE>
Common Stock Warrants--The Company has issued warrants to purchase 1,270,038
shares of the Company's common stock at exercise prices ranging from $0.793 to
$2.00 per share. Warrants issued prior to August 1994 were assigned nominal
value based upon management's estimate of their fair market value. Warrants
issued in connection with the Company's issuance of subordinated notes (see
Note 4) have been ascribed an aggregate value of $406,375.
Reserved Shares--The Company has reserved 4,920,020 shares of common stock
for issuance upon the conversion of the Serial Preferred Stock and for the
exercise of stock options and warrants.
Note Receivable, Stockholder--The Company holds a note receivable from a
stockholder for the purchase of common stock of the Company. The note, which
totals $13,085, is collateralized by the common stock held by the noteholder,
is due on demand and bears interest at 12%.
8. INCOME TAXES
In October 1993, the Company implemented the provisions of SFAS No. 109. The
cumulative effect of this change did not have a material effect on the
Company's results of operations, financial position or cash flows as a result
of the valuation allowance established at the time of adoption.
The income tax (benefit) provision for the years ended September 30, and for
the three months ended December 31, consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED SEPTEMBER 30, ENDED
-----------------------------DECEMBER 31,
1993 1994 1995 1995
------------------- --------------------
<S> <C> <C> <C> <C>
Current:
Federal.......................... $ -- $ 299,341 $ -- $2,400
State............................ -- 89,156 -- --
Deferred:
Federal.......................... -- (278,341) -- --
State............................ -- (87,256) -- --
------- ----------- ------- ------
Income tax provision............... $ -- $ 22,900 $ -- $2,400
======= =========== ======= ======
</TABLE>
F-15
<PAGE>
LIGHTBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------ DECEMBER 31,
1994 1995 1995
----------- ----------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Depreciation and amortization...... $ 962,278 $ 1,894,190 $ 2,167,010
Interest on capital leases......... 237,740 451,069 495,678
Accrued expenses and reserves...... 102,453 227,787 239,212
Net operating loss carryforwards... 282,962 946,098 842,847
Deferred tax liabilities:
Equipment leases capitalized....... (1,038,500) (2,012,418) (2,292,090)
Other.............................. (7,582) (10,985) (12,127)
Valuation allowance.................. (539,351) (1,495,741) (1,440,530)
----------- ----------- -----------
Net deferred tax asset............... $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The following is a reconciliation of income taxes at the federal statutory
rate to the Company's effective tax rate:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- DECEMBER 31,
1993 1994 1995 1995
----- ---- ----- ------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate....... (34)% 34 % (34)% 34%
Loss producing no tax benefit........... 34 -- 34 --
Alternative minimum tax asset, not
assured of realization................. -- 2 -- 3
Net operating loss carryforwards........ -- (34) -- (34)
----- ---- ----- ----
Effective tax rate...................... -- % 2 % -- % 3 %
===== ==== ===== ====
</TABLE>
The net change in the valuation allowance for the years ended September 30,
1994 and 1995, and the three month period ended December 31, 1995 was an
increase (decrease) of ($409,258), $956,390 and $(55,211), respectively. At
December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of $2.1 million, expiring at various dates through
2010.
9. EMPLOYEE PROFIT SHARING PLAN
The Company has a 401(k) Employee Profit Sharing Plan (the "Plan"). Under
the Plan, the Company, at its discretion, may make contributions to match
employee contributions. All employees of the Company are eligible to
participate, subject to employment eligibility requirements. Vesting of
employer contributions occurs ratably over a five-year period. Employer
contributions amounted to approximately $14,000, $27,500, $43,000 $20,000 and
$31,000 for the years ended September 30, 1993, 1994 and 1995, the three
months ended December 31, 1995, and the six months ended June 30, 1996,
respectively.
10. RELATED-PARTY TRANSACTIONS
Under an agreement dated February 28, 1990, the Company granted an exclusive
license to RentGrow, Inc. ("RentGrow"), a company having certain common
investors with the Company, to use the Company's Credit Decision System in the
rental real estate market. Under the terms of the agreement, the Company is to
receive $250,000, comprised of five installments in varying amounts through
August 1996. For financial reporting
F-16
<PAGE>
LIGHTBRIDGE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
purposes, the remaining receivable has been recorded at its net present value,
estimated to be approximately $87,000, $46,000 and $46,000 at September 30,
1994 and 1995 and December 31, 1995, respectively. In addition, this agreement
provides for the Company to maintain the licensed software, at RentGrow's
option, at an annual amount equal to 15% of the license amount, which the
Company believes exceeds the cost of providing such maintenance.
The Company has received advances from various Entrepreneurial Partnerships
and their general partners and has issued preferred stock to various
Entrepreneurial Partnerships. The Company leased computer equipment from
various Entrepreneurial Partnerships. The general partners of these
partnerships are also stockholders of the Company. In 1992, the Company sold
and leased back equipment from an Entrepreneurial Partnership resulting in a
gain of $12,518, which was deferred and amortized over the capital lease term.
The amount deferred was $2,781, $0 and $0 as of September 30, 1994 and 1995 and
December 31, 1995, respectively.
11. SUBSEQUENT EVENTS
Stock Split--On June 14, 1996, the Board of Directors authorized a two for
one stock split effective on July 15, 1996. All shares and per share
information included in the financial statements has been restated to reflect
this stock split. In addition, the number of shares of authorized common stock
was increased to 20,000,000. The Board also voted to increase the number of
authorized shares of common stock to 60,000,000, effective immediately after
closing of the Company's initial public offering.
Employee Stock Plans--On June 14, 1996, the Board of Directors authorized and
the stockholders approved the adoption of the following plans for the issuance
of options or sale of shares to employees, all to be effective immediately
after the closing of the Company's initial public offering:
1996 Incentive and Nonqualified Stock Option Plan--The 1996 Incentive and
Nonqualified Stock Option Plan provides for the issuance of up to 1,000,000
options to purchase shares of common stock. Options may be either qualified
incentive stock options or nonqualified stock options at the discretion of
the Board of Directors. Exercise prices will be either fair market value on
the date of grant, in the case of incentive stock options, or set by the
Board of Directors at the date of grant, in the case of nonqualified
options.
1996 Stock Purchase Plan--The 1996 Stock Purchase Plan provides for the
sale of up to 100,000 shares of common stock to employees every six months
through payroll deductions. Employees will be allowed to purchase shares at
a 15% discount from the lower of fair value at the beginning or end of the
purchase periods.
Equipment Line Borrowings--Subsequent to June 30, 1996, the Company borrowed
an aggregate of $763,000 under its Equipment Line agreement.
Stockholder Matters--On August 26, 1996, the Company entered into an
agreement with the former director (see Note 5) pursuant to which the Company
paid $75,000 to the former director and granted the former director a warrant
to purchase 100,000 shares of the Company's Common Stock at the initial public
offering price in exchange for the execution of certain agreements related to
the public offering contemplated by this Prospectus.
* * * * * *
F-17
<PAGE>
[IMAGE OF LIGHTBRIDGE, INC. LOGO]
<PAGE>
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No dealer, salesperson or other person has been authorized to give any infor-
mation or to make any representations other than those contained in this Pro-
spectus in connection with the offering covered by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company, the Selling Stockholders or the Under-
writers. This Prospectus does not constitute an offer to sell, or a solicita-
tion of an offer to buy, the Common Stock in any jurisdiction where, or to any
person to whom, it is unlawful to make such offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any cir-
cumstances, create an implication that there has not been any change in the
facts set forth in this Prospectus or in the affairs of the Company since the
date hereof.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 29
Management................................................................ 43
Certain Transactions...................................................... 48
Principal and Selling Stockholders........................................ 50
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 56
Underwriting.............................................................. 58
Legal Matters............................................................. 59
Experts................................................................... 59
Additional Information.................................................... 59
Index to Financial Statements............................................. F-1
</TABLE>
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Until October 22, 1996 (25 days after the date of this Prospectus), all deal-
ers effecting transactions in the Common Stock offered hereby, 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.
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3,800,000 Shares
[LOGO]
Common Stock
-------------------
PROSPECTUS
-------------------
COWEN & COMPANY
MONTGOMERY SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
September 27, 1996
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