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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-21319
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LIGHTBRIDGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-3065140
(State or Other Jurisdiction (I.R.S Employer
of Incorporation or Organization) Identification Number)
67 SOUTH BEDFORD STREET 01803
BURLINGTON, MASSACHUSETTS (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (781) 359-4000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock,
$.01 par value per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _____X_____ No ___________
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____X_____
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 9, 1998 was $152,977,134, based on a total of 11,025,379
shares held by nonaffiliates and on a closing price of $13.875 as reported on
the Nasdaq National Market.
The number of shares of Common Stock outstanding as of March 9, 1998 was
15,691,155.
On February 24, 1999, the registrant announced that it had restated its
financial statements for the year ended December 31, 1997 and the quarters ended
March 31, June 30 and September 30, 1998 to correct the accounting relating to
the acquisition of Coral Systems, Inc. in November 1997. This amended Annual
Report on Form 10-K contains restated financial information and disclosures for
the year ended December 31, 1997 reflecting the restatement and certain other
matters. (See Note 12 to the consolidated financial statements).
Unless otherwise stated, information in the originally filed Form 10-K for
the year ended December 31, 1997 is presented as of the original filing date,
and has not been updated in this amended filing.
Financial statement information and related disclosures included in this
amended filing reflect, where appropriate, changes as a result of the
restatement.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1997. Certain portions of such proxy statement are incorporated by reference in
Part III of this Form 10-K.
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TABLE OF CONTENTS
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PART I
Item 1. Business...................................................................................... 3
Item 1A. Risk Factors.................................................................................. 13
Item 6. Selected Financial Data....................................................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 28
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K............................. 41
SIGNATURES................................................................................................. 43
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THIS FORM 10-K CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF
HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING
THE FOREGOING, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS, INCLUDING THE FACTORS SET FORTH BELOW IN "ITEM 1A. RISK FACTORS,"
THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS OF LIGHTBRIDGE,
INC. TO DIFFER MATERIALLY FROM THOSE INDICATED BY THE FORWARD-LOOKING
STATEMENTS.
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PART I
INTRODUCTORY NOTE
This Amendment on Form 10-K/A amends the Registrant's Annual Report on Form
10-K for the period ended December 31, 1997, as filed by the Registrant on March
31, 1998, and is being filed to reflect the restatement of the Registrant's
consolidated financial statements (the "Restatement"). The Restatement reflects
the revaluation of acquired in-process research and development in connection
with the acquisition of Coral Systems in November 1997.
ITEM 1. BUSINESS
Lightbridge, Inc. ("Lightbridge" or the "Company") develops, markets and
supports a network of integrated products and services that enable
telecommunications carriers to improve their customer acquisition and retention
processes. Lightbridge's comprehensive software-based solutions are delivered
primarily on an outsourcing and service bureau basis, which allows
telecommunications 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. Historically the Company's
solutions have been delivered primarily to cellular carriers and, beginning in
1996, to carriers in the emerging personal communications services ("PCS")
market. The open architecture underlying Lightbridge's software applications
supports the development of flexible, integrated solutions, regardless of the
type of wireless or wireline service provided by a client and independent of the
client's computing environment. Lightbridge's depth of experience as a provider
of these solutions to wireless telecommunications carriers historically
positions the Company to broaden its offerings to other telecommunications
carriers.
Lightbridge offers on-line, real-time transaction processing and call center
support solutions to aid carriers in qualifying and activating applicants for
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 and home
shopping. Lightbridge 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. Lightbridge provides
software-based decision support tools, switch monitoring software and services
that enable carriers to reduce subscriber fraud and churn and to make more
informed business decisions about their subscribers, markets and distribution
channels. The Company also maintains databases used to pre-screen applicants for
fraud and provides software used to monitor subscriber call activity for fraud.
Lightbridge was incorporated in Delaware in June 1989 under the name Credit
Technologies, Inc. Effective November 1994, Lightbridge changed its name to
Lightbridge, Inc. In September 1996, Lightbridge organized a wholly owned
subsidiary, Lightbridge Security Corporation, as a Massachusetts securities
corporation to buy, hold and sell securities. In November 1997, Lightbridge
acquired all of the outstanding capital stock of Coral Systems, Inc. ("Coral"),
a Delaware corporation based in Longmont, Colorado. Unless the context requires
otherwise, references in this Form 10-K to "Lightbridge" or the "Company"
include Lightbridge, Inc. and its subsidiaries.
CHURNALERT, FRAUDBUSTER and PROFILE are registered trademarks of
Lightbridge, and ALLEGRO, CAS COMM, CHANNEL WIZARD, CHURN PROPHET, CREDIT
DECISION SYSTEM, CUSTOMER ACQUISITION SYSTEM, 800-FOR-CREDIT, FRAUD SENTINEL,
INSIGHT, LIGHTBRIDGE, POPS, POPSEXPRESS, POPS ON THE WEB, PROFILE, RETAIL
MANAGEMENT SYSTEM, SAMS and TELESTO are trademarks of Lightbridge. All other
trademarks or trade names appearing in this Form 10-K are the property of their
respective owners.
PRODUCTS AND SERVICES
Telesto, Lightbridge's network of software-based acquisition and retention
products and services, permits a telecommunications carrier to select
applications and functions to create an integrated, customized solution
addressing the carrier's particular needs. Lightbridge's products and services
are provided in five broad solutions areas:
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GROUP FUNCTIONS
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Customer Acquisition Services................ On-line, real-time transaction processing services to aid carriers
in qualifying and activating applicants for service, as well as
call center support services to assist carriers in acquiring and
activating applicants for service. Services include access to
proprietary and third-party databases and processing modules to
evaluate new and existing subscribers. Call center support
services include qualification and activation, analyst reviews,
telemarketing to existing and new subscribers, back-up and
disaster recovery for acquisition and activation services, and
customer care.
Fraud Management............................. On-line, real-time inquiries into proprietary and exclusive
databases and processing modules to pre-screen applicants for
potential fraud, as well as on-going monitoring of subscriber call
activity from the switch to determine likely fraudulent use.
Channel Solutions............................ Software products and services and consulting services to support
a variety of distribution channels, including software
applications for in-store use, laptop applications for mobile
sales professionals and call centers.
Customer Management.......................... Software-based decision support tools, switch monitoring software
and related consulting services to allow carriers to access data
and analyze the marketplace in order to make more informed
business decisions about their customers, markets and distribution
channels.
Consulting Services.......................... Services, software and tools to link carrier legacy systems and
third-party systems to Lightbridge's systems, as well as other
custom development services to help carriers improve their
business processes.
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CUSTOMER ACQUISITION SYSTEM
Lightbridge's Customer Acquisition System ("CAS") includes on-line,
real-time transaction processing services for the qualification and activation
of applicants for telecommunications service.
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 Lightbridge
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 electronically routes the
application to a Lightbridge 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 typically enables carriers to
qualify applicants and activate service in five to ten minutes while screening
for subscriber fraud, thereby assisting the carriers to
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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.
- 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.
Lightbridge's TeleServices Group provides a range of call center support
solutions for the subscriber acquisition and activation process. Lightbridge
first offered a TeleServices call center solution to the wireless marketplace in
1990 with its 800-FOR-CREDIT service. Since that time, Lightbridge'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. Lightbridge'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.
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. Pricing of TeleServices solutions is on a per
transaction 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.
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FRAUD MANAGEMENT
Lightbridge's fraud solutions include real-time, on-line access to
proprietary and exclusive databases for pre-activation screening and software
for on-going monitoring of subscriber call activity from the switch. The
Company's fraud solutions include:
- Fraud Sentinel is a suite of fraud management tools, available separately
or together, that pre-screens wireless service applicants in order to
detect and prevent subscription fraud. The components of Fraud Sentinel
are:
- 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.
- FraudBuster is a fraud management software product that includes a fraud
profiler and subscription monitoring functionality and is designed to
identify most commonly known types of fraud, such as cloning,
subscription, tumbling and cellular theft. FraudBuster collects subscriber
account information and call usage data from telecommunication switches
and other commonly accepted data sources to create individual subscriber
profiles.
Lightbridge's pre-screening fraud solutions are priced on a per inquiry
basis. Monitoring solutions are priced on a license basis, with annual
maintenance and additional charges per subscriber. Additional fees may also be
charged for consulting, implementation and support requirements of specific
clients.
CHANNEL SOLUTIONS
Lightbridge'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 and
activation transactions quickly via a dial-up or network connection to
CAS. POPS on the Web is a browser-enabled version of this software that
may be implemented in Internet or Intranet environments. POPSExpress is a
version of POPS with lesser functionality that can be installed quickly in
a variety of sales locations.
- SAMS, a laptop application, contains a number of tools needed by carriers'
mobile sales staff, such as coverage maps and product catalogs, as well as
the ability to handle qualification and activation transactions via
wireline or wireless data connection to CAS.
- Retail Management System ("RMS") is a point-of-sale client/server
application designed to help telecommunications retailers manage the sale
of telecommunications products more efficiently. RMS handles credit
screening, transaction and payment processing, service activation, cash
drawer management, inventory and purchasing management and management
reporting.
POPS, SAMS and RMS are licensed to clients and require customization and
integration with other products and systems to varying degrees. Pricing of these
software products varies with the configurations selected, the number of
locations licensed and the degree of customization required.
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CUSTOMER MANAGEMENT
Lightbridge's customer management solutions consist of software-based
decision-support tools and monitoring software to help carriers analyze their
marketplace and subscribers to improve business operations. Lightbridge believes
that, as carriers encounter increasing competition and a growing and changing
market, the ability to gather, analyze and interpret business data and then take
appropriate actions will be essential to their success. Customer management
solutions currently include the following:
- 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 to operate, even for users
without statistical training.
- 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.
- ChurnAlert utilizes call detail records from switches, billing systems and
other data sources to monitor and profile subscribers who are likely to
churn. Events indicative of a churning subscriber create alerts, which
allow a carrier to take proactive steps to keep the subscriber from
terminating service. ChurnAlert was introduced by Coral in September 1995.
Channel Wizard, Churn Prophet and ChurnAlert are licensed to clients and
require customization and integration with other products and systems to varying
degrees. Pricing of these software products varies with the number of users and
the degree of customization required.
Lightbridge's customer management personnel also provide a range of
consulting services, including churn analysis and data warehouse design.
CONSULTING SERVICES
Lightbridge's consulting services solutions consist of services, software
and tools to link carrier and third-party systems to Lightbridge's systems, in
order to enable carriers to process qualification and activation transactions
through Lightbridge'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
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.
Consulting services personnel also provide a range of other consulting
services to telecommunications carriers, employing Lightbridge's expertise and
experience in the telecommunications industry. For example, consulting services
staff help carriers develop solutions for work flow optimization, management of
bad debt, distribution channel analysis and sales automation.
Lightbridge charges for consulting services on a per diem basis and also
undertakes smaller consulting projects on a fixed-fee basis.
TECHNOLOGY
Lightbridge'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 presentation (front-ends),
business logic and database services, each independent of the others. The
architecture supports the development of Lightbridge's core products and
provides a discrete platform that
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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 Lightbridge'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 Lightbridge.
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 portable and able to run on the most suitable hardware platform for
the computing needs.
A critical element of Lightbridge's development has been the creation and
enhancement of Allegro, a proprietary 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 core technology developed at Coral allows new applications to be built
using applets and services that were developed for previous releases of other
applications, and includes encapsulation of many of the external links of its
core technology, thus supporting easier porting, rapid development and
scalability. The Company is currently in the process of developing significant
modifications and improvements to the Coral core technology. See "Item 1A. Risk
Factors -- Coral Products Require Substantial Future Development."
The telecommunications marketplace continues to grow rapidly and requires
quick reaction to evolving market conditions. To meet this requirement,
Lightbridge 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.
CLIENTS
The Company historically has provided its products and services to wireless
carriers in the United States. Recently, the Company has begun to market its
products and services to a broader range of telecommunications carriers
operating around the world.
Revenues attributable to Lightbridge's ten largest clients accounted for
approximately 90%, 81% and 66% of Lightbridge's total revenues in the years
ended September 30, 1995, December 31, 1996 and December 31, 1997, respectively.
During the years ended September 30, 1995, December 31, 1996 and December 31,
1997, four, two and one of the Company's clients accounted for more than 10% of
the Company's total revenues, representing an aggregate of 63%, 44% and 29% of
total revenues in those years, respectively. GTE Mobile Communications Service
Corporation ("GTE Mobile") accounted for 15% of Lightbridge's total revenues for
the year ended December 31, 1996. During 1996, GTE Mobile changed the way it
accessed Lightbridge's CAS, and then terminated its client relationship with
Lightbridge as of June 30, 1997. As a result, Lightbridge's revenues from GTE
Mobile decreased significantly during fiscal 1996 and the first half of fiscal
1997, before being curtailed completely as of
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June 30, 1997. AT&T Wireless Services, Inc. ("AT&T Wireless") accounted for 29%
of Lightbridge's total revenues for each of the years ended December 31, 1996
and 1997. Approximately $1.0 million of additional services performed for AT&T
Wireless in fiscal 1997 were determined to have been performed without having
been duly approved by AT&T Wireless in the manner delineated in Lightbridge's
contract with AT&T Wireless Services. As a result, these services were deemed to
be outside the scope of that contract and could not be billed to AT&T Wireless.
The Company has undertaken internal procedures that it believes will prevent any
reoccurrence of this procedural problem in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview".
Lightbridge's agreements with its clients set forth the terms on which
Lightbridge will provide products and services for the clients, but do not
typically require the clients to purchase any particular type or quantity of
Lightbridge's products or services or to pay any minimum amount for products or
services. Lightbridge's agreement with GTE Mobile and certain subsidiaries of
GTE Mobile, which provided that the contract may be terminated by GTE Mobile as
of June 30 of any year upon sixty days' prior notice, was terminated as of June
30, 1997. Lightbridge has an agreement with AT&T Wireless for the provision of
credit decision services. The agreement will expire on December 31, 1999 unless
it is terminated earlier, upon not less than sixty days' prior written notice.
AT&T Wireless has the right to extend the term of the agreement for an
additional two years. The agreement with AT&T Wireless does not require that
AT&T Wireless purchase any particular type or quantity of Lightbridge's products
or services, although it does contain provisions requiring payment of minimum
amounts.
SALES AND MARKETING
Lightbridge's sales strategy is to establish, maintain and foster long-term
relationships with its clients. Lightbridge's sales and client services
activities are led by "relationship teams," each of which includes a senior
management team sponsor. Lightbridge employs a team approach to selling in order
to develop a consultative relationship with existing and prospective clients. In
addition to the relationship teams, Lightbridge's sales approach includes direct
sales staff with a particular solution focus and sales through channel partners,
particularly internationally. Lightbridge's software solutions typically require
significant investment by the carrier and involve multilevel testing,
integration, implementation and support requirements.
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.
Lightbridge expanded its sales and marketing group during 1996 and 1997 by
hiring additional staff experienced in the telecommunications industry. The
Coral acquisition has provided additional resources for international sales
support through direct sales and channels sales staff and relationships with
major international switch vendors. The Company has begun to integrate the
Lightbridge and Coral sales and marketing teams.
The sales cycle for Lightbridge's software products and services is
typically six to twelve months, although the period may be substantially longer
in some cases.
ENGINEERING, RESEARCH AND DEVELOPMENT
Lightbridge 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. Lightbridge'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, Lightbridge intends to
continue its strategy of gaining access to new technology through strategic
relationships and acquisitions where appropriate. Lightbridge spent
approximately $3.9 million,
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$4.4 million and $6.1 million on engineering, research and development in the
years ended September 30, 1995, December 31, 1996 and December 31, 1997,
respectively.
COMPETITION
The market for services to wireless and other telecommunications 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 Lightbridge. In addition, many telecommunications carriers are
providing or can provide, internally, products and services competitive with
those Lightbridge offers. Trends in the telecommunications industry, including
greater consolidation and technological or other developments that make it
simpler or more cost-effective for telecommunications carriers to provide
certain services themselves, could affect demand for Lightbridge's services and
could make it more difficult for Lightbridge to offer a cost-effective
alternative to a telecommunications carrier's own capabilities. In addition,
Lightbridge anticipates continued growth in the telecommunications carrier
services industry and, consequently, the entrance of new competitors in the
future.
Lightbridge believes that the principal competitive factors in the
telecommunications carrier services industry include the ability to identify and
respond to subscriber needs, quality and breadth of service offerings, price and
technical expertise. Lightbridge 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 Lightbridge'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 Lightbridge's current and potential competitors have significantly
greater financial, marketing, technical and other competitive resources than
Lightbridge. As a result, Lightbridge'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 Lightbridge 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 Lightbridge and
could have a material adverse effect on Lightbridge's business, financial
condition, results of operations and cash flows.
To remain competitive in the telecommunications carrier services industry,
Lightbridge will need to continue to invest in engineering, research and
development, and sales and marketing. There can be no assurance that Lightbridge
will have sufficient resources to make such investments or that Lightbridge 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 Lightbridge 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, Lightbridge's business,
financial condition, results of operations and cash flows could be materially
and adversely affected.
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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
Lightbridge is not required to and does not hold any licenses or other
authorizations issued by the FCC, the telecommunications carriers that
constitute Lightbridge's clients are regulated at both the federal and state
levels. Federal and state regulation may decrease the growth of the
telecommunications industry, affect the development of the PCS or other wireless
markets, limit the number of potential clients for Lightbridge's services,
impede Lightbridge's ability to offer competitive services to the
telecommunications market, or otherwise have a material adverse effect on
Lightbridge's business, financial condition, results of operations and cash
flows. 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 Lightbridge to
increased pricing pressures, decrease the demand for Lightbridge's products and
services, increase Lightbridge's cost of doing business or otherwise have a
material adverse effect on Lightbridge's business, financial condition, results
of operations and cash flows.
As a result of offering its ProFile product, Lightbridge is subject to the
requirements of the Fair Credit Reporting Act as well as various state laws and
regulations. Although Lightbridge's business activities are not otherwise within
the scope of federal or state regulations applicable to credit bureaus and
financial institutions, Lightbridge must take into account such regulations in
order to provide products and services that help its clients comply with such
regulations. Lightbridge monitors regulatory changes and implements changes to
its products and services as appropriate. Although Lightbridge 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 Lightbridge to liabilities that could have a material adverse effect on
Lightbridge's business, financial condition, results of operations and cash
flows.
PROPRIETARY RIGHTS
Lightbridge's success is dependent upon proprietary technology. Lightbridge
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. Lightbridge 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.
Lightbridge operates its CDS software on an outsourcing basis for its clients.
In the case of its Fraud Management, Channel Solutions and Customer Management
products, Lightbridge provides the software under license agreements that grant
clients the right to use, but contain various provisions intended to protect
Lightbridge's ownership of and the confidentiality of the underlying copyrights
and technology. Lightbridge requires its employees and other parties with access
to its confidential information to execute agreements prohibiting unauthorized
use or disclosure of Lightbridge's technology. In addition, all of Lightbridge's
employees are required, as a condition of employment, to enter into
non-competition and confidentiality agreements with Lightbridge.
Lightbridge historically has not sought patent protection for its
proprietary technology. Coral currently has two issued U.S. patents and five
applications pending in the U.S. Patent and Trademark Office (including one
provisional patent application), nine applications pending for foreign patents
and one Patent Cooperation Treaty application preserving Coral's ability to
obtain patent protection in a number of foreign countries. There can be no
assurance that any of such pending patent applications will result in the
issuance of any patents, or that Coral's current patent or any future patents
will provide meaningful protection to Coral.
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There can be no assurance that the steps taken by Lightbridge 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 Lightbridge's
products or reverse engineer or obtain and use information that Lightbridge
regards as proprietary. Lightbridge has no patents and existing copyright and
trade secret laws offer only limited protection. Lightbridge'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
Lightbridge's proprietary rights to the same extent as do the laws of the United
States. Lightbridge 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 Lightbridge breaches its support and
maintenance obligations, files for bankruptcy or ceases to continue doing
business.
Lightbridge's competitive position may be affected by limitations on its
ability to protect its proprietary information. However, Lightbridge believes
that patent, trademark, copyright, trade secret and other legal protections are
less significant to Lightbridge's success than other factors, such as the
knowledge, ability and experience of Lightbridge's personnel, new product and
service development, frequent product enhancements, customer service and ongoing
product support.
Certain technologies used in Lightbridge's products and services are
licensed from third parties. Lightbridge 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 Lightbridge 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 Lightbridge in the future
or that such future claims will not be successful. Lightbridge 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 Lightbridge's business, financial condition, results
of operations and cash flows. Furthermore, parties making such claims could
secure a judgment awarding substantial damages, as well as injunctive or other
equitable relief, which could effectively block Lightbridge'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 Lightbridge's
business, financial condition, results of operations and cash flows. In the
event a claim relating to proprietary technology or information is asserted
against Lightbridge, Lightbridge 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 Lightbridge. The failure to obtain the
necessary licenses or other rights could preclude the sale, manufacture or
distribution of Lightbridge's products and, therefore, could have a material
adverse effect on Lightbridge's business, financial condition, results of
operations or cash flows. The cost of responding to any such claim may be
material, whether or not the assertion of such claim is valid. See "Item 1A.
Risk Factors--Risk of Software Defects, Including Year 2000 Incompatibility."
EMPLOYEES
As of March 13, 1998, Lightbridge had a total of 402 employees, of which 346
were full-time and 56 were part-time or seasonal. The number of personnel
employed by Lightbridge varies seasonally. None of Lightbridge's employees is
represented by a labor union, and Lightbridge believes that its employee
relations are good.
The future success of Lightbridge 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 consultants.
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ITEM 1A. RISK FACTORS
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 ten largest clients accounted for approximately 90%, 81% and 66%
of the Company's total revenues in the years ended September 30, 1995, December
31, 1996 and December 31, 1997, respectively. During the years ended September
30, 1995, December 31, 1996 and December 31, 1997, four, two and one of the
Company's clients accounted for more than 10% of the Company's total revenues,
representing an aggregate of 63%, 44% and 29% of total revenues in those years,
respectively.
GTE Mobile, which accounted for 31% and 15% of the Company's revenues in the
years ended September 30, 1995 and December 31, 1996, respectively, changed the
way it accessed the Company's Customer Acquisition System during the year ended
December 31, 1996, and then terminated its client relationship with Lightbridge
as of June 30, 1997. As a result, the Company's revenues from GTE Mobile
decreased significantly during the years ended December 31, 1996 and 1997. AT&T
Wireless Services, Inc. accounted for 29% of Lightbridge's total revenues for
each of the years ended December 31, 1996 and 1997. Approximately $1.0 million
of additional services performed for AT&T Wireless in fiscal 1997 were
determined to have been performed without having been duly approved by AT&T
Wireless in the manner delineated in Lightbridge's contract with AT&T Wireless
Services. As a result, these services were deemed to be outside the scope of
that contract and could not be billed to AT&T Wireless. The Company has
undertaken internal procedures that it believes will prevent any reoccurrence of
this procedural problem in the future.
The concentration of the Company's revenues may 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 flows. 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 "Item 1. Business--Clients" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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
telecommunications industry, changes in the client markets served by the
Company, changes in regulations
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affecting the wireless and other telecommunications industries, 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 transaction revenues, which historically have represented the
majority 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
consulting revenues, which include software license revenues and related
consulting revenues, recently have represented an increasing proportion of the
Company's total revenues, in part as the result of the Company's acquisition of
Coral, which generates substantially all of its revenues from software licenses
and related consulting services. Under Statement of Position 97-2, "Software
Revenue Recognition," of the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants, the timing of revenue
recognition for software licenses may result in further fluctuations in the
Company's quarterly operating results. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Recent Accounting
Pronouncements." 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. 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.
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 flows. 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 flows. In addition, in 1997 the
Company hired a significant number of employees directly and through the Coral
acquisition, and this 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.
Fluctuations in operating results due to the foregoing factors may result in
volatility in the market price of the Company's Common Stock. It is possible,
for example, 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 market price of the Company's Common Stock
would likely be materially adversely affected. On February 11, 1998, the market
price of the Company's Common Stock decreased from $18.375 to a low of $10.00
after the Company announced its results of operations for the quarter and year
ended December 31, 1997, which results were below the expectations of certain
market analysts.
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INTEGRATION OF CORAL INTO THE COMPANY
Through its acquisition of Coral in November 1997, Lightbridge has expanded
its product offerings to include additional churn prevention and fraud detection
software services, and has substantially increased its scope of operations and
number of personnel. The successful and timely integration of Coral into
Lightbridge is critical to Lightbridge's future financial performance and market
position. The diversion of the attention of management created by the
integration process, and any disruptions or other difficulties encountered in
the transition process, could temporarily distract attention from the day-to-day
business of the Company. The integration of the companies' businesses will
require that the Company, among other things, integrate the companies' software
products and technologies, retain key Coral employees, assimilate diverse
corporate cultures, integrate the companies' management information systems,
consolidate Coral's operations, and manage the companies' geographically
dispersed operations, each of which could pose significant challenges. The
difficulty of combining the companies may be increased by the need to integrate
personnel, and changes effected in the combination may cause key employees to
leave. Certain of Coral's employees, including its former President, have
terminated their employment with Coral since the acquisition. Furthermore, the
Company's amortization of goodwill and acquired technology in connection with
the acquisition of Coral will continue to reduce the Company's earnings through
fiscal 2000.
The Company incurred charges to operations of approximately $5.2 million in
the quarter ended December 31, 1997 reflecting the write-off of in-process
research and development, the amortization of goodwill and acquired technology,
and costs associated with combining the operations of the two companies.
Additional expenses, including expenses to be incurred in connection with the
relocation of Coral's operations to a new location in Colorado, may be incurred
relating to the integration of the businesses of the Company and Coral. Finally,
the Company may be subject to unknown contingent liabilities, financial claims
or lawsuits from clients of Coral, among others, any of which could have a
material adverse effect on the business, financial condition, results of
operations and cash flows of the Company. A portion of the shares of Common
Stock issuable to former Coral stockholders has been deposited in escrow in
support of certain representations and warranties made to Lightbridge, but there
can be no assurance that the value of the escrowed shares will be adequate to
cover any unknown liabilities of Coral.
CORAL PRODUCTS REQUIRE SUBSTANTIAL FUTURE DEVELOPMENT
In connection with the acquisition of Coral, the Company acquired in-process
technology valued at $4.0 million. This in-process technology consisted of
substantial modifications and improvements to FraudBuster and ChurnAlert,
including new architectures for both products, that were under development at
the time of the acquisition, and the technological feasibility of which had not
yet been established. All of the in-process technology required substantial
development and testing before it could achieve potential technological
feasibility. The Company's future financial results will depend in part on its
success in completing development of new versions of FraudBuster and ChurnAlert
that incorporate such modifications and improvements. Since the date of the
acquisition of Coral, the Company has devoted substantial resources to the
development of these new versions, and the Company anticipates that these
development efforts will continue at least through the first half of 1999. There
can be no assurance that these development efforts will be successful, or that
the Company will succeed in marketing the new versions of FraudBuster and
ChurnAlert on a profitable basis if they are developed.
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 years ended September 30, 1994 and December 31,
1996. The net loss in the year ended December 31, 1997 was attributable in part
to charges to operations of approximately $5.2 million relating to the Company's
acquisition of Coral. No assurance can be given that the Company will be
profitable on either a
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quarterly or annual basis in the future or that the Company will not need to
raise funds through public or private financings. Moreover, no assurance can be
given that Coral will be profitable on either a quarterly or annual basis in the
future or that the Company will not need to raise additional funds to support
the operations of Coral. Further expansion of the Company's business, including
the acquisition of additional computer and network equipment and the relocation
of the offices of Coral in Colorado, will require the Company to make
significant capital expenditures. The Company may also be required to make
significant expenditures in connection with the ongoing design and testing of
its software-based services and products for Year 2000 compatibility, and any
related modifications or other developmental work that may be required to cause
those services and products to be Year 2000 compatible. See "--Risk of Software
Defects, Including Year 2000 Incompatibility." The Company believes that its
existing cash balances, and funds available under existing lines of credit will
be sufficient to finance the Company's operations and capital expenditures
through at least the next twelve months. In the event that the Company's plans
change 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
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 "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RAPID INDUSTRY CHANGE REQUIRES ONGOING PRODUCT DEVELOPMENT EFFORTS
The 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 telecommunications 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 by clients in the wireless segment of the
telecommunications industry, acceptance of its existing products and services by
companies in other segments of the telecommunications industry, market
acceptance of its new products and services, and Lightbridge's ability to
develop and market new offerings or adapt existing offerings to keep pace with
changes in the telecommunications industry. 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 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 flows 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 "Item 1. Business--Competition."
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RISKS ASSOCIATED WITH MANAGING A CHANGING BUSINESS
The Company has expanded its operations rapidly, both internally and through
the Coral acquisition. 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
in connection with the acquisition of Coral or otherwise, 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 flows could be materially and
adversely affected. See "Item 1. Business--Employees," "Item 4A. Executive
Officers" and "Item 10. Directors and Executive Officers of the Registrant."
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. 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 "Item 1. 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 material
adverse effect on the Company's business, financial condition, results of
operations and cash flows. 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 flows. The Company does not maintain key person
life insurance policies on any of its employees other than Ms. Reeve. See "Item
1. Business-- Employees," "Item 4A. Executive Officers" and "Item 10. Directors
and Executive Officers of the Registrant."
DEPENDENCE ON CELLULAR MARKET AND EMERGING MARKETS
The Company historically has provided its products and services
predominantly to cellular carriers and, more recently, to other wireless
carriers. The Company also has begun to offer its products to wireline 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 flows.
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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 the wireless or wireline markets do
not use the Company's products and services, the Company's business, financial
condition, results of operations and cash flows could be materially and
adversely affected. See "Item 1. Business--Products and Services."
HIGHLY COMPETITIVE INDUSTRY
The market for products and services provided to telecommunications 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
telecommunications carriers are providing or can provide, internally, products
and services competitive with those the Company offers. Trends in the
telecommunications industry, including greater consolidation and technological
or other developments that make it simpler or more cost-effective for
telecommunications 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 carrier's own capabilities.
In addition, the Company anticipates continued growth in the telecommunications
carrier services industry and, consequently, the entrance of new competitors in
the future.
The Company believes that the principal competitive factors in the
telecommunications 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 share by the Company and
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
To remain competitive in the telecommunications carrier services industry
and to become competitive in other segments of the telecommunications 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 flows could be materially
and adversely affected. See "Item 1. Business--Competition."
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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. Substantially all of the
Company's computer and telecommunications equipment is located at its sites in
Burlington and 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 on-site power generators. 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 flows. 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 "Item 1. 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 flows.
RISK OF SOFTWARE DEFECTS, INCLUDING YEAR 2000 INCOMPATIBILITY
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 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 flows.
Many currently installed computer and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish twenty-first
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century dates from twentieth century dates. As a result, computer systems and
software used by many companies may need to be upgraded to comply with these
"Year 2000" requirements. Significant uncertainty exists in the computer and
software industry concerning the potential effects associated with Year 2000
compliance.
Lightbridge has undertaken a comprehensive testing of the software developed
and utilized by Lightbridge in providing its services and products, in order to
ascertain whether the software properly interprets dates for the Year 2000 and
beyond. Certain of the Company's contracts with its clients generally require
that the Company warrant Year 2000 compatibility. The Company utilizes
off-the-shelf and custom software developed internally and by third parties.
Although the Company has designed its software products to be Year 2000 capable
and tests third-party software that is incorporated with the Company's products,
the Company is in the early stages of the Year 2000 testing of its software and
there can be no assurance that the Company's software-based services and
products reflect all necessary date code changes.
Certain of the third-party software used by clients of the Company in
conjunction with the Company's software-based services and products may not be
Year 2000 compliant. In particular, third-party software used by some switches
is not expected to become Year 2000 compliant until later in 1998 or in 1999.
The Company believes that it will need to undertake additional testing of its
fraud detection products software used in its services and products once the
new, Year 2000 compliant third-party switch software becomes available. While
the Company does not expect that this testing will have a material adverse
effect on its business, financial condition, results of operation and cash
flows, any failure by the Company to identify a Year 2000 problem in other
third-party software could cause errors that materially impair the utility of
one or more of the Company's products and services. Even if such a problem is
defined, resolution of the problem may require significant expenditures and may
not be achievable by January 1, 2000.
The Company may be required to make significant expenditures in connection
with the ongoing design and testing of its software-based services and products
for Year 2000 compatibility, and any related modifications or other
developmental work that may be required to cause those services and products to
be Year 2000 compatible. Because the Company has not completed a significant
portion of its year 2000 testing, the Company currently is unable to estimate
accurately the amount of these expenditures. There can be no assurance that
potential systems interruptions or the costs necessary for such testing and
modifications will not have a material adverse effect on the Company's business,
financial condition, results of operations and cash flows.
DEPENDENCE ON THIRD-PARTY SOFTWARE
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 three-year 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 "Item
1. Business--Proprietary Rights."
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
The Company may pursue in the future additional 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 goodwill and other intangible assets, any of which could have a
material adverse effect on the Company's business, financial
20
<PAGE>
condition, results of operations and cash flows. 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.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The telecommunications carriers that constitute the Company's clients are
regulated at both the federal and state levels, and international clients of the
Company are subject to regulation by their own countries. Federal and state
regulation may decrease the growth of the wireless or other segments of the
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
telecommunications market, or otherwise have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
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 flows. Moreover, the addition of international carriers
to Lightbridge's clientele may subject the Company to greater international
government regulation.
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 flows. See "Item 1.
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 protects its property rights in its technology primarily through
copyrights, the law of trademarks, trade secrets, and employee and third-party
non-disclosure agreements. In addition, although the Company historically has
not sought patent protection for its technology, Coral has obtained patents with
respect to a limited amount of its technology. 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.
Coral currently has two issued U.S. patents and five applications pending in
the U.S. Patent and Trademark Office (including one provisional patent
application), nine applications pending for foreign patents and one Patent
Cooperation Treaty application preserving Coral's ability to obtain patent
protection in a number of foreign countries. There can be no assurance that any
of such pending patent applications will result in the issuance of any patents,
or that Coral's current patent or any future patents will provide meaningful
protection to Coral. In particular, there can be no assurance that third parties
have
21
<PAGE>
not or will not develop equivalent technologies or products that avoid
infringing Coral's current patent or any future patents or that Coral's current
patent or any future patents would be held valid and enforceable by a court
having jurisdiction over a dispute involving such patents. In addition, since
patent applications in the United States are not publicly disclosed until the
patents issue and foreign patent applications generally are not publicly
disclosed for at least a portion of the time that they are pending, applications
may have been filed by entities other than Coral that, if issued as patents, may
relate to Lightbridge's products. There can be no assurance that third parties
will not assert infringement claims in the future based on existing or future
patents or that such claims will not be successful.
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 claims of infringement against the Company in
the future or that any such future claims will not be successful. As the number
of software products being offered to the telecommunications industry
proliferates and the possibility of overlapping functionality increases,
software developers may increasingly become subject to infringement claims. 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 flows. 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 flows.
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 flows. The cost of responding to any such claim may be
material, whether or not the assertion of such claim is valid. See "Item 1.
Business--Proprietary Rights."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
Until the Coral acquisition, the Company historically had derived
substantially all of its revenues from U.S. markets. As part of its business
strategy, the Company is seeking opportunities to expand its offerings into
international markets. The Company believes that expansion of its offerings into
international markets is important to the Company's ability to continue to grow
and to market its products and services. Lightbridge has begun to seek to market
its products and services to telecommunications companies operating outside the
United States and has also gained access to international markets through its
acquisition of Coral, which derived a majority of its revenues during the period
from November 7, 1997 through December 31, 1997 from international sales. 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
limited experience in marketing and distributing its services internationally,
and expanding its sales efforts outside of the United States will require
significant management attention and financial resources. 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
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for each of the three years in the
period ended September 30, 1995, the three months ended December 31, 1995 and
each of the two years in the period ended December 31, 1997 have been derived
from the Company's audited historical consolidated financial statements, certain
of which are included elsewhere in this Form 10-K. Selected financial data for
the twelve months ended December 31, 1995 are unaudited. 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 such period. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data."
26
<PAGE>
<TABLE>
<CAPTION>
THREE
MONTHS TWELVE
YEARS ENDED SEPT. 30, ENDED MONTHS YEARS ENDED DEC. 31,
------------------------------- DEC. 31, ENDED -----------------------
1993 1994 1995 1995 DEC. 31, 1996 1997(3)
--------- --------- --------- ----------- 1995(1) --------- ------------
-----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ 6,986 $ 13,398 $ 19,350 $ 6,512 $ 20,347 $ 29,545 $ 40,549
Cost of revenues.................. 3,554 7,415 12,607 3,484 13,075 15,986 19,428
--------- --------- --------- ----------- ----------- --------- ------------
Gross profit...................... 3,432 5,983 6,743 3,028 7,272 13,559 21,121
--------- --------- --------- ----------- ----------- --------- ------------
Operating expenses:
Development..................... 1,164 2,317 3,864 1,145 4,159 4,380 6,072
Sales and marketing............. 829 815 1,902 795 2,264 3,673 6,041
General and administrative...... 1,309 1,644 2,584 701 2,655 2,769 5,228
In-process research and
development................... -- -- -- -- -- -- 4,000
--------- --------- --------- ----------- ----------- --------- ------------
Total operating expenses.......... 3,302 4,776 8,350 2,641 9,078 10,822 21,341
--------- --------- --------- ----------- ----------- --------- ------------
Income (loss) from operations..... 130 1,207 (1,607) 387 (1,806) 2,737 (220)
Other income (expense)(2)......... (255) (234) (826) (313) (965) (305) 949
--------- --------- --------- ----------- ----------- --------- ------------
Income (loss) before income
taxes........................... (125) 973 (2,433) 74 (2,771) 2,432 729
Provision for (benefit from)
income taxes.................... -- 23 -- 2 2 160 892
--------- --------- --------- ----------- ----------- --------- ------------
Net income (loss)................. (125) 950 (2,433) 72 $ (2,773) 2,272 (162)
-----------
-----------
Accretion of preferred stock
dividends....................... (151) (182) (182) (46) (137) --
--------- --------- --------- ----------- --------- ------------
Net income available for common
stock........................... $ (276) $ 768 $ (2,615) $ 26 $ 2,135 $ (162)
--------- --------- --------- ----------- --------- ------------
--------- --------- --------- ----------- --------- ------------
Basic earnings (loss) per common
share........................... $ (0.05) $ 0.12 $ (0.40) $ 0.00 $ 0.33 $ (0.01)
--------- --------- --------- ----------- --------- ------------
--------- --------- --------- ----------- --------- ------------
Diluted earnings (loss) per common
share........................... $ (0.05) $ 0.09 $ (0.40) $ 0.00 $ 0.17 $ (0.01)
--------- --------- --------- ----------- --------- ------------
--------- --------- --------- ----------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------------- -------------------------------
1993 1994 1995 1995 1996 1997(3)
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 192 $ 1,832 $ 539 $ 58 $ 27,901 $ 15,716
Working capital (deficiency)..................... (292) 1,715 (3,280) (1,967) 30,457 21,186
Total assets..................................... 3,396 9,181 10,214 11,055 41,766 63,565
Long-term obligations, less current portion...... 554 4,197 3,796 4,515 2,221 2,221
Redeemable convertible preferred stock........... 2,933 2,948 3,131 3,177 -- --
Stockholders' equity (deficit)................... (2,132) (1,093) (3,564) (3,522) 33,599 50,716
</TABLE>
- ------------------------
(1) Lightbridge 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, except consists principally of
interest income for the year ended December 31, 1997.
(3) As restated. See note 12 of Notes to the Consolidated Financial Statements.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
As discussed in Note 12 of the Notes to the Consolidated Financial
Statements the Company has restated its previously issued consolidated financial
information as of December 31, 1997 to adjust the allocation of purchase price
related to the acquisition of Coral.
The Securities and Exchange Commission ("SEC") issued new guidance in
September 1998 on its views regarding the methodologies used to determine the
allocation of purchase price in a purchase business combination, particularly
amounts allocated to in-process research and development ("IPRD") and intangible
assets. Generally accepted accounting principles require that amounts allocated
to IPRD be expensed upon consummation of an acquisition accounted for as a
purchase. As a result of this new guidance, the Company has modified the methods
used to value IPRD and other intangibles acquired related to Coral. The revised
valuation is based on management's best estimates at the date of acquisition of
the net cash flows associated with expected operations of Coral and gives
explicit consideration to the SEC's views on acquired IPRD as set forth in its
September 1998 letter to the American Institute of Certified Public Accountants.
The information included in Item 6, "Selected Financial Data," and in the
discussion following reflect the effects of this restatement.
The following discussion and analysis should be read in conjunction with
"Item 6. Selected Financial Data" and "Item 8. Financial Statements and
Supplementary Data." The discussion in this Form 10-K/A 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 Form 10-K/A should be read as being applicable to all
related forward-looking statements wherever they appear in this Form 10-K/A. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed in "Item 4A. Risk Factors" as well as those discussed elsewhere
herein.
OVERVIEW
Lightbridge develops, markets and supports a network of integrated products
and services that enable 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, except that
references to fiscal 1996 and 1997 are to the years ended December 31, 1996 and
1997, respectively.
In November 1997, the Company acquired all of the outstanding stock of
Coral, pursuant to an Agreement and Plan of Reorganization dated as of September
9, 1997 (the "Reorganization Agreement"). The acquisition was effected through a
reverse triangular merger (the "Merger") in which a newly formed subsidiary of
Lightbridge was merged with and into Coral and the surviving corporation became
a wholly owned subsidiary of the Company. Pursuant to the Merger, each of the
outstanding shares of Coral's common stock was converted into a fraction of a
share of Lightbridge common stock determined as set forth in the Reorganization
Agreement. In addition, as a result of the Merger, all options and warrants to
purchase shares of Coral's common stock became exercisable, when vested, to
purchase shares of Lightbridge common stock. As a result of the Merger,
Lightbridge issued 892,073 shares of its common stock for all of the outstanding
shares of Coral's common stock and reserved 114,399 shares of its common stock
for Coral's options and warrants. The Merger has been accounted for using the
purchase method, which combines the results of Coral from the date of
acquisition with those of the Company. In accordance with generally accepted
accounting principles, the Company expensed Coral's in-process research and
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<PAGE>
development associated with FraudBuster and ChurnAlert, valued at $4.0 million,
on the effective date of the Merger. See "Item 8. Financial Statements and
Supplementary Data--Note 1." In determining the value of the in-process research
and development, the Company considered a valuation analysis which utilized a
discounted cash flow method based on a number of estimates and assumptions
regarding the Coral products and market conditions generally. These estimates
and assumptions, among others, included the following:
- An estimate of the percentage of completion of each product under
development, and the dates on which development of each product was
expected to be completed. These estimates were based on information
provided by Coral's management and the Company's analysis of the amount of
development work performed and remaining to be performed on each product
at the time of the acquisition.
- An estimate of the revenues and cost of sales associated with each product
under development, which was based on the sales pipeline under development
by Coral at the time of the acquisition and the Company's estimate of the
worldwide market for the Coral products.
- An estimate that 50% of the cash flows attributable to the first new
version of FraudBuster under development by Coral, and originally
scheduled for release in the fourth quarter of 1997, would be attributable
to the version of FraudBuster that Coral was marketing at the time of the
acquisition. Prior to the date of the acquisition, Lightbridge determined
that the existing version of FraudBuster contained several performance and
functional deficiencies that rendered it almost unmarketable in its
current form. The Company determined that the product changes planned for
the first new version of FraudBuster were not simply feature enhancements,
but substantial modifications that affected all aspects of FraudBuster and
rendered the new version essentially new technology.
- An estimate that 20% of the cash flows attributable to the second new
version of FraudBuster and 25% of the cash flows attributable to the new
versions of ChurnAlert under development by Coral would be attributable to
existing technology. These assumptions were based on the fact that these
products generally were to be based on a new architecture substantially
different than that used in the versions of FraudBuster and ChurnAlert
that were commercially available at the time of the acquisition.
- Estimates of the Company's effective tax rate, based on existing state and
federal tax structures.
- An estimated 13% risk-adjusted cost of capital used in the present value
calculations. This discount rate was based upon the weighted average of
the costs of different types of capital experienced by the Company.
Coral provides client server software products for the wireless
telecommunications industry to enable carriers to reduce fraud and customer
turnover, or "churn," and increase operating efficiencies. Coral's products are
based upon its core technology, which is designed to provide several key
advantages, including rapid product development, portability, technology
independence and enhanced scalability. Coral's fraud management software,
FraudBuster, incorporates a fraud profiler and subscription fraud monitoring
functionality and is designed to combat most currently identified types of
wireless fraud. FraudBuster detects multiple types of existing and emerging
fraud, including cloning, subscription fraud, tumbling fraud and cellular
telephone theft. Coral's churn prevent product, ChurnAlert, allows carriers to
analyze and identify potential churn candidates before they seek customer
service assistance or deactivate service.
Lightbridge's total revenues increased by 479% from $7.0 million in fiscal
1993 to $40.5 million in fiscal 1997. 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 services revenues.
Historically, transaction revenues have accounted for substantially all of the
Company's revenues, although software and services revenues have increased
during recent periods, primarily as a result of increased consulting services
associated with linking wireless carrier legacy and
29
<PAGE>
third-party systems to the Company's systems and the initial licensing of
certain software products. Software and services revenues, which together
represented no more than 6.0% of total revenues in each of fiscal 1993, 1994 and
1995, increased to an aggregate of 7.0% and 25.0% and 33.7% of total revenues in
the three months ended December 31, 1995 and fiscal 1996 and 1997, respectively.
There can be no assurance that the Company's software and related services 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 services revenues have been derived primarily
from developing customized software and providing consulting services. The
Company also began licensing its Channel Solutions software with the
introduction of its POPS product 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 Customer Management products are
being designed to help carriers analyze their marketplace to improve their
business operations. While its Channel Solutions and Fraud Management products
are, and its Customer Management and ChurnAlert products are currently expected
to be, licensed as packaged software 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 services
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 fiscal 1996, each of the
Company's two largest clients, accounted for more than 10% of the Company's
total revenues, representing an aggregate of 64%, 63%, 61% and 44% of total
revenues in those periods, respectively. During fiscal 1997, only one of the
Company's clients accounted for more than 10% of the Company's total revenues.
Revenues from this client aggregated 29% of total revenues for fiscal 1997.
During fiscal 1996, GTE Mobile, which accounted for 31% and 15% of the Company's
revenues in the fiscal year ended September 30, 1995 and the year ended December
31, 1996, respectively, changed the way it accessed the Company's Customer
Acquisition System. GTE Mobile, which historically used the call center support
solutions provided by the Company's TeleServices Group, had changed to on-line
access to the Customer Acquisition System during the first two quarters of
fiscal 1997, and then elected not to renew its agreement with Lightbridge when
it expired on June 30, 1997. GTE Mobile accounted for 4% of the Company's total
revenues in fiscal 1997. As a result, revenues from this client decreased
significantly in fiscal 1997. The Company currently believes that the loss of
revenues from this client will continue to 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
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<PAGE>
with processing transactions will continue to decrease as a result of the change
in services used by the client. As a result, the Company currently believes that
the change in services used by this client will not have a material adverse
effect on its business, financial condition, results of operations or cash
flows. See "Item 1A. Risk Factors--Dependence on Limited Number of Clients." The
Company's revenues have been derived primarily from sales of products and
services in the United States.
Beginning in fiscal 1995, Lightbridge 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.
Also beginning in fiscal 1995, the Company 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 Customer
Management software products and services. In addition, as a result of the
acquisition of Coral, the Company acquired two new software products,
FraudBuster and ChurnAlert. 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. In fiscal 1995, the Company capitalized approximately $980,000 of
software costs representing the aggregate of internally developed products and
for the purchase of the aforementioned technology. Commencing with the
availability of the SAMS product for general release in fiscal 1995, capitalized
software development costs are being amortized proportionately to anticipated
revenues or over the software's estimated life, generally two years. In fiscal
1997, the Company acquired the rights to a point-of-sale software technology for
$337,500 in cash and stock and, including this technology, capitalized
approximately $1,276,000 of software costs related to the internally developed
RMS product. Commencing with the availability of the RMS product for general
release in fiscal 1998, these capitalized software development costs will also
be amortized proportionately to anticipated revenues or over the software's
estimated life, generally two years.
As a result of the acquisition of Coral, the Company acquired certain
in-process research and development related to the FraudBuster and ChurnAlert
products. These costs were expensed as a charge against operations in the fourth
quarter of 1997. The projects under development included substantial
technological and architectural changes that would add new performance
capabilities, functionality and scalability to FraudBuster, as well as the
development of two versions of ChurnAlert. At the date of the acquisition,
technological feasibility of the acquired technology for a substantial portion
of the planned future releases of FraudBuster and the two versions of ChurnAlert
was not established and the technology had no future alternative uses. All of
the projects acquired required substantial development and testing before they
could achieve potential technological feasibility, and there was and can be no
assurance that they will reach technological feasibility or develop into
products that may be sold profitability by the Company.
As of the date of the acquisition of Coral, the following projects were
under development:
- Version 4.3 of FraudBuster, which was intended to add substantial new
performance capabilities and functionality to the product, and was
approximately 78% complete on the acquisition date. Subsequent to the
acquisition date, however, the Company determined that it would not
release version 4.3, but would release the new performance capabilities
and functionality planned for version 4.3 in versions 4.2.5 and 4.4, which
will be available in the second and fourth quarters of 1998, respectively.
- Version 5.0 of FraudBuster, which was and is being developed based on a
new architecture that is expected to substantially increase the
performance, scalability and functionality of FraudBuster and is scheduled
to be released in 1999. Version 5.0 was approximately 10% complete on the
acquisition
31
<PAGE>
date. Subsequent to the acquisition date, the Company decided to release
certain of the subscription fraud capabilities originally planned for
version 5.0 as a separate product, to be known as Alias-TM-, which is
currently scheduled to be available in the first half of 1999.
- Versions 1.3 and 2.0 of ChurnAlert, each of which was being developed to
incorporate substantial new performance capabilities and functionality.
These new versions were approximately 37% complete on the acquisition
date. Subsequent to the acquisition date, however, in December 1998, the
Company decided that it would cease development of the new versions of
ChurnAlert based on a lack of market receptiveness to the product and the
Company's determination that its Churn Prophet and Channel Wizard products
provide more marketable solutions to telecommunications carriers.
Prior to the date of the acquisition, Coral had incurred development costs
relating to these projects totaling approximately $1.2 million. As of the date
this report was originally filed, the Company expected its total development
costs related to the technology acquired from Coral to aggregate approximately
$8.0 million through 2001, of which $2.7 million was expected to be incurred in
1998, $3.0 million in 1999, $1.8 million in 2000, and $0.5 million in 2001. If
the Company is unsuccessful in completing one or more of these projects, the
Company's business, financial condition, results of operations and cash flows
could be materially adversely affected. See "Item 1A. Risk Factors--Rapid
Industry Change Requires Ongoing Product Development Efforts."
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 TWELVE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1995 1996 1997
------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(RESTATED)
Revenues:
Transaction......................... 95.1% 93.0% 94.3% 75.0% 66.3%
Software and services............... 4.9 7.0 5.7 25.0 33.7
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of revenues:
Transaction......................... 62.8 53.3 64.1 49.5 38.3
Software and services............... 2.4 0.2 0.2 4.6 9.6
----- ----- ----- ----- -----
65.2 53.5 64.3 54.1 47.9
----- ----- ----- ----- -----
Gross profit.......................... 34.8 46.5 35.7 45.9 52.1
----- ----- ----- ----- -----
Operating expenses:
Development......................... 20.0 17.6 20.4 14.8 15.0
Sales and marketing................. 9.8 12.2 11.1 12.4 14.9
General administrative.............. 13.3 10.8 13.1 9.4 12.8
In-process research and
development....................... -- -- -- -- 9.9
----- ----- ----- ----- -----
Total operating expenses.......... 43.1 40.6 44.6 36.6 52.6
----- ----- ----- ----- -----
Income (loss) from operations......... (8.3) 5.9 (8.9) 9.3 (0.5)
Other income (expense), net........... (4.3) (4.8) (4.7) (1.1) 2.3
----- ----- ----- ----- -----
Income (loss) before income taxes..... (12.6) 1.1 (13.6) 8.2 1.8
Provision for income taxes............ -- -- -- (0.5) 2.2
----- ----- ----- ----- -----
Net income (loss)..................... (12.6)% 1.1% (13.6)% 7.7% (0.4)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
32
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUES
Total revenues increased by 37.2% to $40.5 million in the year ended
December 31, 1997 from $29.5 million in the year ended December 31, 1996.
Transaction revenues increased by 21.3% to $26.9 million in the year ended
December 31, 1997 from $22.2 million in the year ended December 31, 1996,
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 and revenues of Coral subsequent to its acquisition
on November 7, 1997. Software and services revenues increased to a total of
$13.7 million in the year ended December 31, 1997 from $7.4 million in the year
ended December 31, 1996. This increase was attributable to increased consulting
and customized software integration services provided to both existing and new
clients and revenues from the Company's Channel Solutions and Fraud Management
products and services. The increase in revenues from consulting services and
customized software integration services in 1997 resulted primarily from
projects undertaken for one client.
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 services revenues. Cost of
revenues increased by 21.5% to $19.4 million in the year ended December 31, 1997
from $16.0 million in the year ended December 31, 1996, while decreasing as a
percentage of total revenues to 47.9% from 54.1%. The dollar increase in costs
resulted principally from increases in transaction volume, costs attributable to
expansion of the Company's staff and systems capacity, amortization of
capitalized software and costs attributable to Coral including amortization of
acquired intangible assets subsequent to its acquisition on November 7, 1997.
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 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 38.6% to $6.1 million in the year
ended December 31, 1997 from $4.4 million in the year ended December 31, 1996.
Development expenses also increased as a percentage of total revenues to 15.0%
from 14.8%. The dollar increase in costs resulted principally from the hiring of
additional personnel to support the continued enhancement of products and
services (including costs attributable to Coral development personnel subsequent
to Coral's acquisition on November 7, 1997) and the development of new products
and services and the initial two modules in the Customer Management solution.
The Company capitalized $1,276,000 of internally developed software development
costs for the year ended December 31, 1997. No costs were capitalized for the
year ended December 31, 1996. The Company expects to increase its engineering
and development efforts in order to continue enhancing its existing products and
services, including its CAS, Fraud Management, Customer Management, Consulting
Services and Channel Solutions products, as well as to develop new products and
services.
33
<PAGE>
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 64.4% to $6.0 million in the year ended December 31, 1997
from $3.7 million in the year ended December 31, 1996, and increased as a
percentage of total revenues to 14.9% from 12.4%. The increase in costs was due
to the addition of direct sales personnel (including costs attributable to Coral
sales personnel subsequent to Coral's acquisition on November 7, 1997),
increased commissions resulting from the higher level of revenues, the addition
of marketing personnel and increased use of marketing programs, including trade
shows. The Company continues to invest in sales and marketing efforts in order
to increase 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 increased by
88.8% to $5.2 million in the year ended December 31, 1997 from $2.8 million in
the year ended December 31, 1996. General and administrative expenses also
increased as a percentage of total revenues to 12.8% from 9.4%. The dollar
increase in general and administrative expenses resulted from the addition of
general and administrative personnel, an increased use of other outside services
during 1997 and costs attributable to Coral subsequent to its acquisition on
November 7, 1997. The goodwill and acquired workforce attributable to the Coral
acquisition will be amortized over the sixty and thirty-six months,
respectively, beginning November 1997. The amount of goodwill is subject to
change in the event of any modification of the purchase price of the Coral
acquisition made subsequent to December 31, 1997.
IN-PROCESS RESEARCH AND DEVELOPMENT
During the year ended December 31, 1997, the Company expensed approximately
$4.0 million of purchased in-process research and development technology in
connection with the Coral acquisition.
OTHER INCOME (EXPENSE), NET
Other expense consists of interest expense, commitment fees and other
similar fees payable with respect to the Company's bank line of credit,
subordinated notes and capital leases. Other income (expense) net increased
411.0% to $949,000 in the year ended December 31, 1997 from net other expense of
$305,000 in the year ended December 31, 1996. Interest expense decreased to
$371,000 in the year ended December 31, 1997 from $754,000 in the year ended
December 31, 1996. Interest income increased to $1.2 million in the year ended
December 31, 1997 from $422,000 in the year ended December 31, 1996 as a result
of the continued investment of proceeds received from the issuance of Series D
convertible preferred stock in April 1996 and the Company's initial public
offering of common stock in November 1996.
PROVISION FOR INCOME TAXES
The provision for income taxes for fiscal 1997 was $892,000 compared to
$160,000 in fiscal 1996. The Company's effective tax rate for fiscal 1997 was
influenced by the nondeductible charge of $4.0 million for purchased in- process
research and development in connection with the acquisition of Coral. The
effective tax rate was further effected by nondeductible amortization resulting
from the merger offset by the recognition of certain tax credits and the
reduction of the Company's valuation allowance on the tax assets. See "Item 8.
Financial Statements and Supplementary Data--Note 8." Pursuant to the merger,
the Company has net operating loss carryforwards for federal income tax purposes
available at December 31, 1997. These net operating loss carryforwards are
limited in use and therefore a valuation allowance was
34
<PAGE>
established against the deferred tax assets as their realization is not assured.
Any future benefit realized from any of the acquired net operating loss
carryforwards of Coral will be recorded as a reduction of goodwill.
SUPPLEMENTAL DISCUSSION OF YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE TWELVE
MONTHS ENDED DECEMBER 31, 1995
REVENUES
Total revenues increased by 45.2% to $29.5 million in the year ended
December 31, 1996 from $20.3 million in the twelve months ended December 31,
1995. Transaction revenues increased by 17.1% to $22.2 million in the year ended
December 31, 1996 from $18.9 million in the twelve months ended December 31,
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 services revenues increased to an
aggregate of $7.4 million in the year ended December 31, 1996 from $1.4 million
in the twelve months ended December 31, 1995. This increase was attributable to
increased consulting and customized software integration services provided to
both existing and new clients and revenues from the Company's Channel Solutions
products and services. The increase in revenues from consulting services and
customized software integration services in 1996 resulted primarily from
projects undertaken for one client.
COST OF REVENUES
Cost of revenues increased by 18.0% to $16.0 million in the year ended
December 31, 1996 from $13.1 million in the twelve months ended December 31,
1995, while decreasing as a percentage of total revenues to 54.1% from 64.3%.
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 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 increased by 5.3% to $4.4 million in the year ended
December 31, 1996 from $4.2 million in the twelve months ended December 31,
1995, while decreasing as a percentage of total revenues to 14.8% from 20.4%.
The dollar 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 and the initial two modules in the
Customer Management solution. 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 year ended December 31, 1996 and capitalized $535,000 of internally
developed software development costs during the twelve months ended December 31,
1995.
SALES AND MARKETING
Sales and marketing expenses increased by 60.9% to $3.7 million in the year
ended December 31, 1996 from $2.3 million in the twelve months ended December
31, 1995, and increased as a percentage of total revenues to 12.4% from 11.1%.
The increase in costs was due to the addition of direct sales personnel,
increased commissions resulting from the higher level of revenues, the addition
of marketing personnel and increased use of marketing programs, including trade
shows.
35
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by 4.3% to $2.8 million in the
year ended December 31, 1996 from $2.7 million in the twelve months ended
December 31, 1995, and decreased as a percentage of total revenues to 9.4% from
13.1%. The dollar increase in general and administrative expenses resulted from
the addition of general and administrative personnel and other outside services,
offset in part by a decrease in legal costs associated with certain litigation
settled in 1996.
OTHER INCOME (EXPENSE) NET
Other expense (net) decreased 68.4% to $305,000 in the year ended December
31, 1996 from $965,000 in the twelve months ended December 31, 1995. Interest
expense increased to $754,000 in the year ended December 31, 1996 from $307,000
in the twelve months ended December 31, 1995. Interest income, which
historically had not been significant, increased to $422,000 in the year ended
December 31, 1996 from $2,000 in the twelve months ended December 31, 1995 as a
result of the investment of proceeds received from the issuance of Series D
convertible preferred stock in April 1996 and the Company's initial public
offering of common stock in November 1996.
PROVISION FOR INCOME TAXES
The provision for income taxes was $160,000 for the year ended December 31,
1996. The Company had an effective tax rate of 6.6% for the year ended December
31, 1996, principally due to the application of net operating loss carryforwards
from previous years. The Company incurred a net loss for the twelve months ended
December 31, 1995 and did not record a benefit for income tax for the period.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER 30, 1995
REVENUES
Total revenues increased by 52.7% to $29.5 million in the year ended
December 31, 1996 from $19.4 million in the year ended September 30, 1995.
Transaction revenues increased by 20.4% to $22.2 million in the year ended
December 31, 1996 from $18.4 million in the year ended September 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 services revenues increased to an
aggregate of $7.4 million in the year ended December 31, 1996 from $0.9 million
in the year ended September 30, 1995. This increase was attributable to
increased consulting and customized software integration services provided to
both existing and new clients and revenues from the Company's Channel Solutions
products and services. The increase in revenues from customized software
integration services in 1996 resulted primarily from projects undertaken for one
client.
COST OF REVENUES
Cost of revenues increased by 26.8% to $16.0 million in the year ended
December 31, 1996 from $12.6 million in the year ended September 30, 1995, while
decreasing as a percentage of total revenues to 54.1% from 65.2%. 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 from TeleServices operations,
a higher percentage of revenues from customized software integration services
and software licenses, and increased utilization of the Company's operating and
networking systems.
36
<PAGE>
DEVELOPMENT
Development expenses increased by 13.4% to $4.4 million in the year ended
December 31, 1996 from $3.9 million in the year ended September 30, 1995, while
decreasing as a percentage of total revenues to 14.8% from 20.0%. The increase
in dollar 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 and the initial two modules in the Customer
Management solution. 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 year
ended December 31, 1996 and capitalized $597,000 of internally developed
software development costs during the year ended September 30, 1995.
SALES AND MARKETING
Sales and marketing expenses increased by 93.2% to $3.7 million in the year
ended December 31, 1996 from $1.9 million in the year ended September 30, 1995,
and increased as a percentage of total revenues to 12.4% from 9.8%. The increase
in costs was due to the addition of direct sales personnel, increased
commissions resulting from the higher level of revenues, the addition of
marketing personnel and increased use of marketing programs, including trade
shows.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by 7.1% to $2.8 million in the
year ended December 31, 1996 from $2.6 million in the year ended September 30,
1995, and decreased as a percentage of total revenues to 9.4% from 13.3%. The
dollar increase in general and administrative expenses resulted from the
addition of general and administrative personnel and other outside services,
offset in part by a decrease in legal costs associated with certain litigation
settled in 1996.
OTHER INCOME (EXPENSE) NET
Other expense (net) decreased 63.0% to $305,000 in the year ended December
31, 1996 from $826,000 in the year ended September 30, 1995. Interest expense
decreased by 12.7% to $754,000 in the year ended December 31, 1996 from $864,000
in the year ended September 30, 1995. Interest income, which historically had
not been significant, increased to $422,000 in the year ended December 31, 1996
from $38,000 in the year ended September 30, 1995 as a result of the investment
of proceeds received from the issuance of Series D convertible preferred stock
in April 1996 and the Company's initial public offering of common stock in
November 1996.
PROVISION FOR INCOME TAXES
The provision for income taxes was $160,000 for the year ended December 31,
1996. The Company had an effective tax rate of 6.6% for the year ended December
31, 1996, principally due to the application of net operating loss carryforwards
from previous years. The Company incurred a net loss for the year ended
September 30, 1995 and did not record a benefit for income tax for the period.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through its initial public
offering, private placements of equity and debt securities, cash generated from
operations, bank borrowings and equipment financings.
In October 1996, the Company consummated an initial public offering in which
4,370,000 shares of the Company's common stock, $.01 par value, were sold at a
public offering price of $10.00 per share. The total shares consisted of
3,021,868 shares sold by the Company and 1,348,132 shares sold by certain
37
<PAGE>
stockholders of the Company. Proceeds to the Company, net of underwriters'
discounts and commission and associated costs, were approximately $27.1 million.
These proceeds were used to repay certain debt obligations of the Company, to
repurchase certain shares of common stock of the Company, to fund working
capital and for other general corporate purposes.
Prior to its initial public offering, the Company 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
redeemable convertible preferred stock in April 1996 for an aggregate purchase
price of $6.0 million. A portion of the proceeds of the Series D redeemable
convertible preferred stock was applied to repay the 16% subordinated notes.
The Company's capital expenditures in the year ended September 30, 1995, the
three months ended December 31, 1995 and the years ended December 31, 1996 and
1997 aggregated $2.4 million, $0.2 million, $2.3 million, and $10.4 million,
respectively. The capital expenditures consisted of purchases of fixed assets,
principally for the Company's services delivery infrastructure, and TeleServices
call center and computer equipment for development activities. The Company
leases its facilities and certain equipment under non-cancelable capital and
operating lease agreements that expire at various dates through December 2002.
The Company currently anticipates that it will relocate the offices of Coral to
a new location in Colorado in the near future; the Company expects that the cost
of this relocation will be approximately $1.0 million, although plans are in an
early stage of development and may ultimately result in a significantly higher
cost, depending on, among other things, real estate market conditions and the
extent of leasehold improvements required. See "Item 2. Properties."
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
(approximately $2,750,000 at December 31, 1997) 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 (8.5% at December 31, 1997) and
advances under the equipment line of credit bear interest at the Bank's prime
rate (8.5% at December 31, 1997). The working capital line of credit also
provides for the issuance of letters of credit, which reduce the amount
Lightbridge may borrow under the line of credit and are limited to $1,250,000 in
the aggregate. At December 31, 1997, no borrowings were outstanding under the
working capital line of credit and borrowings of approximately $458,000 were
outstanding under the equipment line of credit. The agreements contain covenants
that, among other things, prohibit the declaration or payment of dividends and
require the Company to maintain certain financial ratios which the Company
believes are not restrictive to its business operations. The working capital
line of credit expires in June 1998, and the equipment line of credit expires in
June 1999.
Further expansion of the Company's business, including the acquisition of
additional computer and network equipment and the relocation of the offices of
Coral in Colorado, will require the Company to make significant capital
expenditures. The Company may also be required to make significant expenditures
in connection with the on-going design and testing of its software-based
services and products for Year 2000 compatibility, and any related modifications
or other developmental work that may be required to cause those services and
products to be Year 2000 compatible. Because the Company has not completed a
significant portion of its Year 2000 testing, the Company currently is unable to
estimate accurately the
38
<PAGE>
amount of these expenditures. See "Item 1A. Risk Factors--History of Losses;
Capital Requirements" and "--Risk of Software Defects, Including Year 2000
Incompatibility."
As of December 31, 1997, the Company had cash and cash equivalents of $15.7
million and working capital of $21.2 million. The Company believes that the
current cash balances and funds available under its existing lines of credit
will be sufficient to finance the Company's operations and capital expenditures
for at least the next twelve months.
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 June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which is effective
for fiscal 1998. SFAS No. 130 establishes standards for reporting and display of
comprehensive income (all changes in equity during a period except those
resulting from investments by and distributions to owners) and its components in
the financial statements. This new standard is not currently anticipated to
significantly change the information presented regarding changes in the
Company's equity.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"), which is effective for fiscal 1998. SFAS No. 131 establishes
standards for reporting information about operating segments in the annual
financial statements, selected information about operating segments in interim
financial reports and disclosures about products and services, geographic areas
and major customers. The Company does not expect the adoption of SFAS No. 131 to
significantly change the information disclosed relating to its operations or
major customers.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"), which is effective for fiscal
1998. SOP 97-2 provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions and supersedes
Statement of Position 91-1, "Software Revenue Recognition." Subsequent to the
release of SOP 97-2, the Accounting Standards Executive Committee proposed
delaying for one year the effective date of certain provisions of SOP 97-2
relating to software arrangements that include multiple elements. The Statement
of Position, "Deferral of the Effective Date of the Certain Provisions of SOP
97-2, Software Revenue Recognition, for Certain Transactions" would be effective
upon issuance. The Company has not yet determined the effects on the Company's
future interim and annual consolidated financial statements arising from the
adoption of SOP 97-2.
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Financial Statements
<TABLE>
<S> <C>
Independent Auditors' Report.......................................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1997
(Restated).......................................................... F-2
Consolidated Statements of Operations for the year ended September 30,
1995, the three months ended December 31, 1995, and the years ended
December 31, 1996 and 1997 (Restated)............................... F-3
Consolidated Statements of Stockholders' Equity (Deficiency) for the
year ended September 30, 1995, the three months ended December 31,
1995, and the years ended December 31, 1996 and 1997 (Restated)..... F-4
Consolidated Statements of Cash Flows for the year ended September 30,
1995, the three months ended December 31, 1995, and the years ended
December 31, 1996 and 1997 (Restated)............................... F-5
Notes to Consolidated Financial Statements............................ F-6
</TABLE>
(2) Financial statement schedules
All schedules have been omitted because the required information either is
not applicable or is shown in the consolidated financial statements or notes
thereto.
(3) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* Amended and Restated By-Laws of the Company
4.1* Specimen certificate for Common Stock of the Company
4.2** Rights Agreement dated as of November 14, 1997, between Lightbridge, Inc. and American Stock
Transfer and Trust Company, as Rights Agent
4.3** Form of Certificate of Designation of Series A Participating Cumulative Preferred Stock of
Lightbridge, Inc.
4.4** Form of Right Certificate
10.1* 1991 Registration Rights Agreement dated February 11, 1991, as amended, between the Company and the
persons named herein
10.2* Subordinated Note and Warrant Purchase Agreement dated as of August 29, 1994 between the Company and
the Purchasers named therein, including form of Subordinated 14% Promissory Notes and form of Common
Stock Purchase Warrants
10.3* Form of Common Stock Purchase Warrants issued August 1995
10.4* Amended and Restated Credit Agreement dated as of June 18, 1996, between the Company and Silicon
Valley Bank
10.5*** Amendment dated June 5, 1997, to the Amended and Restated Credit Agreement included as Item 10.4
10.6* Settlement Agreement dated February 2, 1996 between the Company, BEB, Inc., BEB Limited Partnership
I, BEB Limited Partnership II, BEB Limited Partnership III, BEB Limited Partnership IV, certain
related parties and Brian Boyle
10.7* 1990 Incentive and Nonqualified Stock Option Plan
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<C> <S>
10.8* 1996 Incentive and Non-Qualified Stock Option Plan
10.9* 1996 Employee Stock Purchase Plan
10.10* Employment Agreement dated August 16, 1996 between the Company and Pamela D.A. Reeve
10.11* Letter Agreement, dated August 26, 1996, between the Company and Brian E. Boyle, including form of
Common Stock Purchase Warrant and Registration Rights Agreement
10.12* Office Lease dated September 21, 1993, as amended, between the Company and L&E Investment of
Massachusetts One, Inc.
10.13* Office Lease dated September 30, 1994, as amended, between the Company and Hobbs Brook Office Park
10.14* Office Lease dated August 5, 1994, as amended, between the Company and L&E Investment of
Massachusetts One, Inc.
10.15**** Office Lease dated March 5, 1997, between the Company and Sumitomo Life Realty (N.Y.), Inc.
10.16***** First and Second Amendments dated July 22, 1997 and October 6, 1997, respectively, to the Office
Lease included as Item 10.15
11.1***** Statement re computation of per share earnings
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule for fiscal year ended December 31, 1997 (Restated)
27.2***** Financial Data Schedule for fiscal year ended December 31, 1996
27.3***** Financial Data Schedule for the nine months ended September 30, 1997
27.4***** Financial Data Schedule for the six months ended June 30, 1997
27.5***** Financial Data Schedule for the three months ended March 31, 1997
27.6***** Financial Data Schedule for the nine months ended September 30, 1996
</TABLE>
- ------------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended (File No. 333-6589)
** Incorporated by reference to the Company's Registration Statement on Form
8-A, as filed with the Securities and Exchange Commission on November 21,
1997
*** Incorporated by reference to the Company's Registration Statement on Form
S-4, as amended (File No. 333-36801)
**** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996
***** Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, as originally filed on March 31,
1998
(b) Reports on Form 8-K filed in the fourth quarter of 1997
On October 15, 1997, the Company filed a Current Report on Form 8-K dated
October 9, 1997 with respect to the Company's execution of a definitive
agreement for the acquisition of Coral.
On November 4, 1997, the Company filed a Current Report on Form 8-K dated
October 28, 1997 providing copies of press releases with respect to (i) the
results of operations of the Company for the three and nine months ended
September 30, 1997 and (ii) a proposal by the Company to file a registration
statement for a public offering of common stock.
On November 21, 1997, the Company filed a Current Report on Form 8-K dated
November 7, 1997 with respect to (i) the consummation of the Company's
acquisition of Coral and (ii) the adoption by the Company of a shareholder
rights plan.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the thirtieth day
of March, 1999.
<TABLE>
<S> <C> <C>
LIGHTBRIDGE, INC.
By: /s/ PAMELA D.A. REEVE
-----------------------------------------
Pamela D.A. Reeve
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on the thirtieth day of March, 1999.
<TABLE>
<C> <S>
President, Chief Executive
/s/ PAMELA D.A. REEVE Officer and Director
- ------------------------------ (Principal Executive
Pamela D.A. Reeve Officer)
Senior Vice President
Finance & Administration
/s/ JOSEPH S. TIBBETTS, JR. and Chief Financial
- ------------------------------ Officer (Authorized
Joseph S. Tibbetts, Jr. Officer and Principal
Financial and Accounting
Officer)
*
- ------------------------------ Director
Andrew I. Fillat
*
- ------------------------------ Director
Torrence C. Harder
*
- ------------------------------ Director
D. Quinn Mills
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ PAMELA D.A. REEVE
-------------------------
Pamela D.A. Reeve,
ATTORNEY-IN-FACT
</TABLE>
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Lightbridge, Inc.
Burlington, Massachusetts
We have audited the accompanying consolidated balance sheets of Lightbridge,
Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for the year ended September 30, 1995, the three
months ended December 31, 1995, and the years ended December 31, 1996 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1996 and 1997, and the results of its operations and its cash flows for the
above stated periods in conformity with generally accepted accounting
principles.
As discussed in Note 12, the accompanying 1997 consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 10, 1998 (February 22, 1999 as to Note 12)
F-1
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
(RESTATED,
SEE
NOTE 12)
ASSETS
Current assets:
Cash and cash equivalents................................................................ $27,900,802 $15,715,726
Accounts receivable-net.................................................................. 7,249,106 13,195,865
Accounts receivable from related parties................................................. 281,703 17,187
Deferred tax assets...................................................................... -- 426,348
Other current assets..................................................................... 970,735 2,459,235
----------- -----------
Total current assets................................................................... 36,402,346 31,814,361
Property and equipment-net................................................................. 4,271,880 11,763,013
Notes receivable from related parties...................................................... 55,210 128,127
Deferred tax assets........................................................................ -- 216,038
Other assets-net........................................................................... 680,381 421,952
Goodwill-net............................................................................... -- 10,383,581
Acquired intangible assets-net............................................................. -- 7,716,545
Other intangible assets-net................................................................ 355,838 1,121,559
----------- -----------
Total assets........................................................................... $41,765,655 $63,565,176
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 1,489,812 $ 2,830,847
Accrued compensation..................................................................... 903,274 1,567,833
Other accrued liabilities................................................................ 823,882 3,260,003
Short-term borrowings and current portion of subordinated notes payable.................. 555,205 805,205
Current portion of obligations under capital leases...................................... 1,533,899 339,258
Deferred revenues........................................................................ 422,875 1,658,406
Other current liabilities................................................................ 166,876 166,876
Related parties:
Interest payable....................................................................... 37,453 --
Current portion of subordinated notes payable.......................................... 12,500 --
----------- -----------
Total current liabilities............................................................ 5,945,776 10,628,428
Notes payable.............................................................................. 457,808 152,770
Subordinated notes payable:
Unaffiliated parties..................................................................... 1,583,707 1,244,844
Related parties.......................................................................... 79,420 --
Other long-term liabilities................................................................ 100,301 823,346
----------- -----------
Total liabilities...................................................................... 8,167,012 12,849,388
----------- -----------
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock; $.01 par value, 5,000,000 shares authorized; no shares issued or
outstanding at December 31, 1996 and 1997, respectively................................ -- --
Common stock, $.01 par value; 60,000,000 shares authorized;
15,369,697 and 16,492,954 shares issued; 14,568,549 and 15,665,662 shares
outstanding at December 31, 1996 and 1997, respectively................................ 153,698 164,929
Additional paid-in capital............................................................... 36,296,969 53,660,991
Warrants................................................................................. 605,125 598,875
Accumulated deficit...................................................................... (1,921,075) (2,084,044)
----------- -----------
Total.................................................................................. 35,134,717 52,340,751
Less treasury stock; 801,148 and 827,292 shares reacquired at cost
at December 31, 1996 and 1997, respectively............................................ (1,536,074) (1,624,963)
----------- -----------
Total stockholders' equity............................................................. 33,598,643 50,715,788
----------- -----------
Total liabilities and stockholders' equity........................................... $41,765,655 $63,565,176
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, -----------------------------
1995 1995 1996 1997
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
(RESTATED, SEE
NOTE 12)
Revenues:
Transaction revenues.............................. $ 18,403,460 $ 6,053,690 $ 22,158,773 $ 26,881,517
Software and services revenues.................... 947,007 458,360 7,386,079 13,667,805
------------- ------------- ------------- --------------
Total revenues.................................... 19,350,467 6,512,050 29,544,852 40,549,322
------------- ------------- ------------- --------------
Cost of revenues:
Transaction cost of revenues...................... 12,151,752 3,472,294 14,618,246 15,535,143
Software and services cost of revenues............ 456,127 11,881 1,367,182 3,892,492
------------- ------------- ------------- --------------
Total cost of revenues.............................. 12,607,879 3,484,175 15,985,428 19,427,635
------------- ------------- ------------- --------------
Gross profit........................................ 6,742,588 3,027,875 13,559,424 21,121,687
------------- ------------- ------------- --------------
Operating expenses:
Development....................................... 3,864,000 1,144,973 4,380,293 6,072,468
Sales and marketing............................... 1,901,716 794,687 3,673,422 6,040,846
General and administrative........................ 2,583,912 700,640 2,768,424 5,228,801
Purchased in-process research and development..... -- -- -- 4,000,000
------------- ------------- ------------- --------------
Total operating expenses............................ 8,349,628 2,640,300 10,822,139 21,342,115
------------- ------------- ------------- --------------
Income (loss) from operations....................... (1,607,040) 387,575 2,737,285 (220,428)
------------- ------------- ------------- --------------
Other income (expense):
Interest income:
Related parties................................. 8,688 1,551 4,807 18,675
Other........................................... 29,006 510 416,801 1,163,775
Interest expense:
Related parties................................. (39,276) (11,657) (89,142) (18,984)
Other........................................... (824,292) (295,454) (664,481) (351,763)
Other non-operating income (expense).............. -- (7,920) 26,727 137,756
------------- ------------- ------------- --------------
Total other income (expense)........................ (825,874) (312,970) (305,288) 949,459
------------- ------------- ------------- --------------
Income (loss) before provision for income taxes..... (2,432,914) 74,605 2,431,997 729,031
Provision for income taxes.......................... -- 2,400 159,500 892,000
------------- ------------- ------------- --------------
Net income (loss)................................... $ (2,432,914) $ 72,205 $ 2,272,497 $ (162,969)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Basic earnings (loss) per common share (Note
11)............................................. $ (0.40) $ 0.00 $ 0.33 $ (0.01)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Diluted earnings (loss) per common share-assuming
dilution (Note 11).............................. $ (0.40) $ 0.00 $ 0.17 $ (0.01)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK TREASURY STOCK ADDITIONAL STOCKHOLDERS'
-------------------- -------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL WARRANTS DEFICIT (DEFICIENCY)
---------- -------- ------- ----------- ----------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1994........... 6,498,232 $ 64,982 -- $ -- $ 100,003 $262,500 $(1,506,905) $ (1,079,420)
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 (4,022,218 ) (3,551,410)
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 (3,993,572 ) (3,522,020)
Issuance of common stock for
cash............................. 115,120 1,152 -- -- 156,420 -- -- 157,572
Exercise of common stock
warrants......................... 410,287 4,103 -- -- 27,147 (31,250 ) -- --
Repurchase of common stock for
cash............................. -- -- 800,000 (1,535,500) -- -- -- (1,535,500)
Dividends on redeemable convertible
preferred stock.................. -- -- -- -- (136,905) -- -- (136,905)
Expenses paid on behalf of
stockholder...................... -- -- -- -- -- -- (200,000 ) (200,000)
Issuance of common stock, net of
issuance costs................... 3,021,868 30,219 -- -- 27,030,857 -- -- 27,061,076
Conversion of redeemable
convertible preferred stock to
common stock..................... 5,247,324 52,473 -- -- 9,219,450 -- -- 9,271,923
Compensation cost of issuance of
warrant.......................... -- -- -- -- -- 230,000 -- 230,000
Net income......................... -- -- -- -- -- -- 2,272,497 2,272,497
---------- -------- ------- ----------- ----------- -------- ----------- -------------
Balance, December 31, 1996......... 15,369,697 153,698 801,148 (1,536,074) 36,296,969 605,125 (1,921,075 ) 33,598,643
Issuance of common stock for
cash............................. 193,704 1,935 -- -- 266,904 -- -- 268,839
Issuance of common stock for
technology acquisition........... 25,000 250 -- -- 312,250 -- -- 312,500
Repurchase of common stock from
related parties.................. -- -- 26,144 (88,889) -- -- -- (88,889)
Exercise of common stock
warrants......................... 12,500 125 -- -- 31,125 (6,250 ) -- 25,000
Issuance of common stock for
acquisition...................... 892,053 8,921 -- -- 16,511,057 -- -- 16,519,978
Tax benefit from disqualifying
dispositions of incentive stock
options and non-qualified stock
options.......................... -- -- -- -- 242,686 -- -- 242,686
Net loss (Restated, see Note 12)... -- -- -- -- -- -- (162,969 ) (162,969)
---------- -------- ------- ----------- ----------- -------- ----------- -------------
Balance, December 31, 1997
(Restated, see Note 12).......... 16,492,954 $164,929 827,292 $(1,624,963) $53,660,991 $598,875 $(2,084,044) $ 50,715,788
---------- -------- ------- ----------- ----------- -------- ----------- -------------
---------- -------- ------- ----------- ----------- -------- ----------- -------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED
YEAR ENDED ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, -----------------------
1995 1995 1996 1997
------------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
<CAPTION>
(RESTATED,
SEE NOTE
12)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $(2,432,914) $ 72,205 $2,272,497 $ (162,969)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities (net of effect of
acquisition):
Write-off of purchased in-process research and development... -- -- -- 4,000,000
Deferred income taxes........................................ -- -- -- (695,000)
Depreciation and amortization................................ 2,567,767 864,192 3,557,699 5,551,447
Amortization of discount on notes............................ 76,500 87,853 63,975 43,704
Gain on disposal of equipment................................ -- -- -- (43,007)
Compensation expense related to warrant grant................ -- -- 230,000 --
Changes in assets and liabilities:
Accounts receivable........................................ (77,307) (1,840,094) (2,802,772) (4,727,562)
Other assets............................................... (173,594) (30,014) (731,600) (751,258)
Accounts payable and accrued liabilities................... 935,172 725,504 185,287 342,500
Other liabilities.......................................... -- -- -- 79,452
Deferred revenues.......................................... 167,536 (153,850) 348,075 (1,545,582)
------------- ------------- ---------- -----------
Net cash provided by (used in) operating activities...... 1,063,160 (274,204) 3,123,161 2,091,725
------------- ------------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................ (1,391,679) (184,186) (2,339,797) (10,388,992)
Capitalization of software development costs................... (980,453) -- -- (963,499)
Proceeds from sale of equipment................................ -- -- -- 245,996
Redemption of investments...................................... -- -- -- 2,069,323
Purchase of investments........................................ -- -- -- (2,069,323)
Notes receivable issued to related parties..................... -- -- -- (87,000)
Repayments of notes receivable from related parties............ -- -- -- 14,083
Cost associated with the acquisition of Coral, net of cash
received of $332,750......................................... -- -- -- (443,504)
Other assets................................................... -- -- (350,000) --
------------- ------------- ---------- -----------
Net cash used in investing activities........................ (2,372,132) (184,186) (2,689,797) (11,622,916)
------------- ------------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and warrants....................... 1,901,000 500,000 -- --
Reimbursement of leasehold improvements........................ -- -- -- 254,410
Proceeds from equipment line borrowings........................ -- -- 763,013 --
Payments on notes payable...................................... -- -- (2,651,000) (1,270,028)
Payments under capital lease obligations....................... (1,884,512) (525,391) (2,144,187) (1,578,107)
Proceeds from initial public offering.......................... -- -- 27,061,076 --
Proceeds from issuance of common stock......................... 167 2,820 157,572 268,839
Stock issuance expenditures.................................... -- -- -- (353,999)
Proceeds from exercise of warrant.............................. -- -- -- 25,000
Payments toward the purchase of treasury stock................. (574) -- (1,535,500) --
Expenses paid on behalf of stockholder......................... -- -- (200,000) --
Proceeds from issuance of mandatory redeemable convertible
preferred stock, net......................................... -- -- 5,958,400 --
------------- ------------- ---------- -----------
Net cash provided by (used in) financing activities.......... 16,081 (22,571) 27,409,374 (2,653,885)
------------- ------------- ---------- -----------
Net increase (decrease) in cash and cash equivalents............. (1,292,891) (480,961) 27,842,738 (12,185,076)
Cash and cash equivalents, beginning of period................... 1,831,916 539,025 58,064 27,900,802
------------- ------------- ---------- -----------
Cash and cash equivalents, end of period......................... $ 539,025 $ 58,064 $27,900,802 $15,715,726
------------- ------------- ---------- -----------
------------- ------------- ---------- -----------
Cash paid for interest........................................... $ 904,605 $ 176,271 $ 836,869 $ 353,990
------------- ------------- ---------- -----------
------------- ------------- ---------- -----------
Cash paid for income taxes....................................... $ 25,000 $ 15,700 $ 87,413 $ 1,778,026
------------- ------------- ---------- -----------
------------- ------------- ---------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND RECENT ACQUISITIONS
BUSINESS--Lightbridge, Inc. (formerly Credit Technologies, Inc.) (the
"Company") was incorporated in June 1989 under the laws of the state of
Delaware. 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 Company's fiscal year end to December 31. The Company
develops, markets and supports a network of integrated products and services
that enable telecommunications carriers to improve their customer acquisition
and retention processes.
In September 1996, the Company completed an initial public offering (the
"IPO") whereby 3,021,868 shares of its Common Stock ($.01 par value) were sold
by the Company, 778,132 shares by selling stockholders and 570,000 additional
shares sold by selling stockholders pursuant to the exercise of the
over-allotment option by the underwriters at $10.00 per share. The net proceeds
of the IPO, after deducting underwriters' commissions and fees and offering
costs, were approximately $27.1 million. These proceeds were used to repay
certain debt obligations of the Company, to repurchase certain shares of the
common stock of the Company and are currently being used to fund working capital
and other general corporate purposes.
ACQUISITION OF CORAL SYSTEMS, INC.
In November 1997, the Company acquired through a stock purchase business
combination all of the outstanding stock of Coral Systems, Inc. ("Coral"), a
Delaware corporation. Each of the outstanding shares of Coral's common stock was
converted into a fraction of a share of Lightbridge common stock as specified in
the merger agreement. In addition, all options and warrants to purchase shares
of Coral's common stock became exercisable, when vested, to purchase shares of
Lightbridge common stock. As a result of the merger, Lightbridge issued 892,053
shares of common stock for all of the outstanding shares of Coral's common stock
and reserved 114,399 shares of common stock for issuance upon the issuance of
Coral's options and warrants.
The purchase price has been allocated to the assets acquired and the
liabilities assumed based on their estimated fair values at the date of
acquisition. The acquisition included $4.0 million of purchased in-process
research and development which was expensed on the date of acquisition. The
excess of the estimated purchase price over the estimated fair value of the net
assets acquired was recorded as goodwill and is being amortized using the
straight-line method over five years. The operating results of Coral are
included in the Company's consolidated results of operations from the date of
acquisition.
The preliminary determination and allocation of the purchase price was as
follows:
<TABLE>
<S> <C>
Total purchase price:
Shares issued........................... $15,101,166
Options and warrants assumed............ 1,418,812
Acquisition related expenses............ 776,464
-----------
Total purchase price.................... $17,296,442
-----------
-----------
</TABLE>
F-6
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND RECENT ACQUISITIONS (CONTINUED)
The purchase price was preliminarily allocated to:
<TABLE>
<S> <C>
Current assets................................................. $1,280,679
Current liabilities............................................ (8,475,909)
Property and equipment......................................... 1,295,500
Other assets................................................... 46,700
Acquired intangible assets..................................... 8,405,000
In-process research and development............................ 4,000,000
Goodwill....................................................... 10,744,472
----------
Total purchase price........................................... $17,296,442
----------
----------
</TABLE>
The following unaudited pro forma information presents the consolidated
results of operations of the Company as if the acquisition of Coral had occurred
as of January 1, 1996 and 1997 after giving effect for certain adjustments,
including depreciation and amortization of acquired assets and excludes the
write-off of $4.0 million of purchased in-process research and development.
These unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what would have occurred had the
acquisition been made as of January 1, 1996 and 1997 or of results which may
occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 1996 1997
- ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Revenues................................................................ $ 38,237 $ 45,021
Net loss................................................................ (5,686) (8,013)
Basic loss per common share............................................. $ (0.43) $ (0.55)
Diluted loss per common share........................................... $ (0.43) $ (0.55)
</TABLE>
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 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.
During the year ended December 31, 1997, the Company acquired the technology
for a point-of-sale software product for $337,500 for stock and cash.
The costs associated with these technology acquisitions were recorded as
capitalized software costs, since such products had reached technological
feasibility at the date of acquisition. In accordance with Statements of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be sold, leased, or otherwise marketed" (SFAS No. 86), the Company
defines "technology feasibility" as the point that a "working model" of the
software application has achieved all design specifications and is available for
"beta testing."
F-7
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION--These consolidated
financial statements include the accounts of the Company and its subsidiaries.
All intercompany accounts and transactions have been eliminated in
consolidation.
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.
PROPERTY AND EQUIPMENT--Property and equipment is recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets ranging from three to seven 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--The Company generates
revenue from the processing of qualification and activation transactions;
granting of software licenses; services (including maintenance, installation and
training); development and consulting contracts; and certain hardware sold in
conjunction with software licenses. Revenues from processing of qualification
and activation transactions for wireless telecommunications carriers are
recognized in the period when services are performed. The Company's software
license agreements have typically provided for an initial license fee and annual
maintenance based on a defined number of subscribers, as well as additional
license and maintenance fees for net subscriber additions. The Company also has
entered into license agreements that provide for either a one-time license fee
or a monthly license fee with no additional fees based on incremental subscriber
growth. Revenues from software licenses are recognized upon delivery when no
significant future obligations remain to the Company.
Maintenance revenue is recognized ratably over the term of the maintenance
agreement. Service revenue for installation and training is recognized as the
services are performed. Software installation and training services provided to
the Company's customers typically are not significant. After completion of
software installation and training, the Company generally does not have any
significant future obligations to customers other than for maintenance services,
which are performed under separate arrangements. Revenue from development and
consulting contracts is generally recognized as the services are performed,
using the percentage of completion method, based upon hours incurred to date
relative to the total hours expected to be incurred on the contract. Hardware is
sold in conjunction with software licenses only when required by the customer
and such revenue is deferred until the related license revenue is recognized.
Sales agreements with distributors typically do not include any rights of
return or provisions for the future adjustment of the selling price. The Company
recognizes revenue from these transactions at the time the products are shipped
to the distributor, unless payment terms are contingent on the distributor's
subsequent resale or other significant matters. In those latter cases, revenue
is not recognized until the contingencies are resolved.
Substantially all of the Company's customers are providers of wireless
telecommunications 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. The
allowance for doubtful accounts at September 30, 1995 and at December 31, 1995,
1996 and 1997 was approximately $9,000, $22,200, $18,000 and $219,000
respectively. The Company recorded bad debt expense of $0, $13,200, $0 and
$151,000 and had write-offs, net of recoveries associated with accounts
F-8
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
receivable of $16,000, $0, $4,200 and $0 for the year ended September 30, 1995,
the three months ended December 31, 1995, and the years ended December 31, 1996
and 1997, respectively.
Customers exceeding 10% of the Company's revenues during the year ended
September 30, 1995, the three months ended December 31, 1995, and the years
ended December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
PERCENT OF REVENUE
--------------------------------------------------------------
THREE MONTHS YEARS ENDED
YEAR ENDED ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, ------------------------
CUSTOMER 1995 1995 1996 1997
- ------------------------------------------------ ----------------- ----------------- ----- -----
<S> <C> <C> <C> <C>
A............................................... 31% 22% 15% *
B............................................... 11 18 29 29%
C............................................... 11 10 * *
D............................................... 10 11 * *
-- -- -- --
63% 61% 44% 29%
-- -- -- --
-- -- -- --
</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.
EXPORT SALES--The Company had export sales to the following countries during
fiscal 1997:
<TABLE>
<S> <C>
Canada.................................. $ 1,301,000
Chile................................... 30,000
Netherlands............................. 84,900
Taiwan.................................. 257,000
United Kingdom.......................... 410,000
-----------
Total............................... $ 2,082,900
-----------
-----------
</TABLE>
Export sales in prior periods were insignificant.
ACQUIRED INTANGIBLE ASSETS AND OTHER INTANGIBLE ASSETS--Acquired intangible
assets, primarily related to the Coral acquisition, consist of acquired existing
technology and workforce. These assets are being amortized on a straight-line
basis over their estimated useful lives, ranging from five months to five years.
Accumulated amortization of acquired intangible assets and other intangible
assets was approximately $688,000 and $2,108,000, respectively, at December 31,
1997. Other intangible assets consist mainly of software development costs and
organization costs. These assets are being amortized on a straight-line basis
over their estimated useful lives, ranging from two to five years.
GOODWILL--Goodwill, representing the excess of the purchase price of the
acquisition of Coral over the fair value of the net assets acquired, is being
amortized on a straight-line basis over five years. The Company evaluates
recorded goodwill for potential impairment against the current and estimated
future cash flows of its Coral subsidiary as provided for by Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No.
121"). Goodwill is recorded net of accumulated amortization of $361,000 at
December 31, 1997.
F-9
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES--The Company recognizes 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 in
accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred income tax
assets are principally the result of net operating loss carryforwards, income
tax credits and differences in depreciation and amortization and accrued
expenses and reserves for financial statement purposes and income tax purposes,
and are recognized to the extent realization of such benefits is more likely
than not. (See Note 8.)
SOFTWARE DEVELOPMENT COSTS--Software development costs are capitalized after
establishment of technological feasibility as provided for under SFAS No. 86.
During the years ended September 30, 1995 and December 31, 1997, the Company
capitalized approximately $980,000 and $1,301,000, respectively, of software
development costs associated with the development of three new products,
including the costs of purchasing certain technology (see Note 1). Amortization
is provided proportionately to anticipated revenues or over the software's
estimated life, generally two years. The unamortized balance of capitalized
software development costs was approximately $359,000 and $1,122,000 at December
31, 1996 and 1997, respectively. Accumulated amortization was approximately
$625,000 and $1,138,000 at December 31, 1996 and 1997, respectively.
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 YEARS ENDED
YEAR ENDED ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, -------------------------
1995 1995 1996 1997
------------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Capital lease obligations incurred for the acquisition
of equipment.......................................... $ 2,268,605 $ 118,057 $ 202,364 $ --
Stock issued for the acquisition of the technology for a
point-of-sale software product........................ -- -- -- 312,500
Stock issued and options and warrants assumed in
connection with the acquisition of Coral Systems,
Inc.(1)............................................... -- -- -- 16,873,977
------------- ------------- ---------- -------------
$ 2,268,605 $ 118,057 $ 202,364 $ 17,186,477
------------- ------------- ---------- -------------
------------- ------------- ---------- -------------
</TABLE>
- ------------------------
(1) Stock issued and options and warrants assumed in connection with the
acquisition of Coral Systems, Inc. are presented excluding stock issuance
costs of approximately $354,000.
In both April and September of 1996, the Company reacquired 200,000 shares
of its common stock from a former director. These repurchases were partially
financed through the issuance of two separate 8% notes payable in the amount of
$226,667 and $260,000. Such notes were repaid during 1996.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company's adoption of SFAS No. 121 in
1996 did not have a material impact on the Company's consolidated results of
operations, financial position or cash flows. SFAS No. 121 addresses the
accounting for the impairment of long-lived assets, certain identifiable
F-10
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
intangibles and goodwill when events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
STOCK-BASED COMPENSATION--In November 1995, the Financial Accounting
Standards Board (the "FASB") issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). SFAS No. 123 addresses the financial accounting
and reporting standards for stock-based compensation plans and 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. Compensation expense associated with awards to non
employees is required to be measured using a fair value method. The Company has
elected to provide the appropriate disclosures in the notes to its consolidated
financial statements for employee compensation plans.
SIGNIFICANT ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at each reporting date and the amount of revenue and expense during
each reporting period. These estimates include provisions for bad debts, certain
accrued liabilities, recognition of revenue and expenses, and recoverability of
deferred tax assets. Actual results could differ from those estimates. The
Company does not expect any changes in the near term that would have a
significant impact on its consolidated financial statements.
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, during 1996, the number of shares of authorized common stock
was increased to 60,000,000.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE--In February 1997, the
FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure"
("SFAS 129"). SFAS No. 129 requires the Company to disclose certain information
about its capital structure. The adoption of SFAS 129 during 1997 did not impact
the Company's consolidated results of operations, financial position, or cash
flows.
RECLASSIFICATION--Certain reclassifications have been made to the 1995 and
1996 consolidated financial statements to conform with the 1997 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," ("SFAS No. 130") which is effective for fiscal 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income (all
changes in equity during a period except those resulting from investments by and
distributions to owners) and its components in the financial statements. This
new standard is not currently anticipated to significantly change the
information presented regarding changes in the Company's equity.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"), is effective for fiscal 1998. SFAS No. 131 establishes
standards for reporting information about operating segments in the annual
financial statements, selected information about operating segments in interim
financial reports and disclosures about products and services, geographic areas
and major customers. The Company does not expect the adoption of SFAS No. 131 to
significantly change the information disclosed relating to its operations or
major customers.
F-11
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"), which is effective for fiscal
1998. SOP 97-2 provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions and supersedes
Statement of Position 91-1, "Software Revenue Recognition." Subsequent to the
release of SOP 97-2, the Accounting Standards Executive Committee proposed
delaying for one year the effective date of certain provisions of SOP 97-2
relating to software arrangements that include multiple elements. The Statement
of Position, "Deferral of the Effective Date of the Certain Provisions of SOP
97-2, Software Revenue Recognition, for Certain Transactions" would be effective
upon issuance. The Company has not yet determined the effects on the Company's
business practices and future interim and annual consolidated financial
statements arising from the adoption of SOP 97-2.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Furniture and fixtures......................................... $ 261,379 $ 1,011,916
Leasehold improvements......................................... 776,634 3,332,211
Computer equipment............................................. 2,603,936 8,361,950
Computer software and equipment and furniture and fixtures
under capital leases......................................... 5,846,954 4,810,335
Computer software.............................................. 953,602 2,814,663
------------- -------------
10,442,505 20,331,075
Less accumulated depreciation and amortization................. (6,170,625) (8,568,062)
------------- -------------
Property and equipment--net.................................... $ 4,271,880 $ 11,763,013
------------- -------------
------------- -------------
</TABLE>
Accumulated amortization of computer software and equipment and furniture
and fixtures under capital leases was $4,400,628 and $4,611,650 at December 31,
1996 and 1997, respectively.
4. NOTES PAYABLE
The carrying value of notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 31, 1996 1997
------------------------ ------------
HELD BY HELD BY HELD BY
RELATED UNAFFILIATED UNAFFILIATED
PARTIES PARTIES PARTIES
---------- ------------ ------------
<S> <C> <C> <C>
Equipment line borrowings............................ $ -- $ 763,013 $ 457,975
8% subordinated notes................................ 91,920 1,833,707 1,744,844
---------- ------------ ------------
Total................................................ 91,920 2,596,720 2,202,819
Less current portion................................. (12,500) (555,205) (805,205)
---------- ------------ ------------
Long-term portion.................................... $ 79,420 $ 2,041,515 $1,397,614
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
F-12
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE (CONTINUED)
LINE OF CREDIT--In December 1995, the Company amended its line of credit
agreement with a bank (the "Bank Agreement") to reduce the amount of permitted
borrowings to $1,500,000 and the outstanding borrowings were converted to a
demand note due in March 1996 (the "Demand Note Agreement"). The weighted
average annual interest rate for outstanding borrowings during the year ended
September 30, 1995 and the three months ended December 31, 1995 approximated
9.9% and 9.5%, respectively.
During 1996, the Company converted the existing Demand Note Agreement (the
"Amended Bank Agreement") to a line of credit which increased the maximum
borrowing limit to $4,000,000, subject to a borrowing base formula, and
decreased the interest rate to prime plus .25%.
The Amended Bank Agreement was further amended on March 5, 1997 to provide
for the issuance of letters of credit. Outstanding letters of credit reduce the
amount the Company may borrow under the Amended Bank Agreement and are limited
to $1,250,000 in the aggregate. The weighted average annual interest rate on
outstanding borrowings during the years ended December 31, 1996 and 1997 was
9.4% and 0%, respectively. The Amended Bank Agreement expires in June 1998 and
contains certain restrictions which, among others, limits the Company's ability
to pay cash dividends and requires the Company to achieve defined levels of
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.
Pursuant to the acquisition of Coral the Company assumed outstanding debt of
approximately $740,000 from a line of credit with a bank which was repaid
subsequent to the merger in 1997.
LINE OF CREDIT-EQUIPMENT--The Company has a $2,000,000 line of credit
available for equipment purchases (the "Equipment Line"). Borrowings under the
Equipment Line are payable in 30 monthly installments of principal and interest
commencing January, 1997 and ending June, 1999. In October 1997, the Equipment
Line was amended to reduce the interest rate to prime. The weighted average
annual interest rate for outstanding borrowings under the Equipment Line during
the years ended December 31, 1996 and 1997 approximated 8.78% and 8.70%,
respectively.
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 year ended
September 30, 1995, the three months ended December 31, 1995, the years ended
December 31, 1996 and 1997 included accretion related to these notes of
approximately $37,500, $9,375, $37,500, and $43,700, respectively. During 1997,
the Company repaid one of the two notes in the amount of $100,000. Interest on
the remaining note is payable quarterly at an annual rate of 8%. Principal
became payable in quarterly installments of $125,000 on September 30, 1997
through maturity (2001) on the remaining note. The remaining note is 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
principal and accrued interest were payable on January 31, 1996. Such repayment
obligations were extended by the note holders until the Company completed the
placement of its Series D Preferred
F-13
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE (CONTINUED)
Stock on April 4, 1996 (See Note 6). 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) has been accreted over the originally
scheduled term of the notes. Interest expense for the year ended September 30,
1995, the three months ended December 31, 1995 and the year ended December 31,
1996 included approximately $38,900, $78,500, and $26,475 of accretion,
respectively. The Company repaid principal and interest related to these notes
in full upon the sale of its 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 and subrental
income relating to certain operating leases consisted of the following at
December 31, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING SUBRENTAL
LEASES LEASES INCOME
---------- ------------- ------------
<S> <C> <C> <C>
1998................................................ $ 365,204 $ 3,220,750 $ 828,202
1999................................................ 47,514 3,125,837 860,787
2000................................................ -- 2,816,735 787,370
2001................................................ -- 2,231,697 298,139
2002................................................ -- 1,415,819 --
---------- ------------- ------------
Total minimum lease payments........................ 412,718 $ 12,810,838 $ 2,774,498
------------- ------------
------------- ------------
Less amount representing interest................... (28,580)
----------
Present value of future minimum lease payments...... 384,138
Less current portion................................ (339,258)
----------
Long-term portion................................... $ 44,880
----------
----------
</TABLE>
Rent expense for operating leases was approximately $1,503,000, $405,000,
$1,797,000, and $2,291,000 for the year ended September 30, 1995, for the three
months ended December 31, 1995, for the years ended December 31, 1996 and 1997,
respectively.
LITIGATION--On September 10, 1997, an action was brought against the Company
and another defendant, United States Cellular Corp. in the Superior Court of New
Jersey, Law Division, Mercer County by National Information Bureau Ltd. ("NIB"),
a Delaware corporation based in New Jersey. The complaint asserts counts against
the Company alleging misappropriation of trade secrets, interference with
contractual relations, civil conspiracy, and breach of contract. Three other
counts of the complaint assert claims only against United States Cellular Corp.
In the complaint, NIB seeks damages, attorneys' fees, costs, and unspecified
other relief. The complaint does not identify or specify the amount, if any, of
damages NIB claims to have incurred as a result of any alleged conduct by the
Company. The Company believes that the claims asserted against it by NIB are
without merit. The Company intends to defend the
F-14
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
action vigorously, and does not believe that this claim will have a material
adverse effect on the Company's business, consolidated financial condition,
results of operations or cash flows.
During 1996, 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 10). In addition to settling all claims and disputes, the former
director agreed, in exchange for payments of $25,500 each, 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 permitted the Company to purchase Settlement Shares in 200,000
share allotments during each of 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 that the Company
chose not to immediately pay for the Settlement Shares, a portion of the
purchase price (66.67%) could be financed by issuing the former director an 8%
two-year note. During 1996, the Company exercised its option to purchase 600,000
settlement shares of which a portion were temporarily financed during the year
and subsequently repaid in October 1996.
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 May 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, for certain legal fees and expenses
incurred by them in connection with the litigation against the former director
in the amount of $200,000.
PATENT INTERFERENCE--Prior to the acquisition of Coral by Lightbridge, an
interference proceeding was declared by the United States Patent and Trademark
Office between an issued patent and a patent application of Coral and a patent
application by another company (the "Interference"). The other company's patent
and patent application involve certain technology that is an essential part of
its current FraudBuster product. Subsequent to the acquisition of Coral,
Lightbridge settled the matter by paying the other company $425,000.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1996, the holders of the Company's Series A, B, C, and D redeemable
convertible preferred stock (collectively, the "Preferred Stock") converted
their holdings into shares of the Company's common
F-15
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
stock in accordance with their specified rights under the Company's charter.
Activity related to the classes of redeemable convertible preferred stock prior
to conversion was as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D TOTAL
------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balances, October 1, 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 issuance costs of $41,600... -- -- -- 5,958,400 5,958,400
Dividends accreted............................ 45,731 57,083 34,091 -- 136,905
Conversion to common stock.................... (1,268,096) (1,356,942) (688,485) (5,958,400) (9,271,923)
------------- ------------- ----------- ------------- -------------
Balances, December 31, 1996..................... $ -- $ -- $ -- $ -- $ --
------------- ------------- ----------- ------------- -------------
------------- ------------- ----------- ------------- -------------
</TABLE>
During 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.
Also during 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.
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. 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 had net income in excess of $500,000 and accruable 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 were paid in the years ended
September 30, 1995, the three months ended December 31, 1995 or during fiscal
1996. In connection with the issuance of the Series D Preferred Stock, the
Series A, Series B and Series C Preferred Stock dividends became payable in cash
or by issuance of subordinated promissory notes for fiscal years in which the
Company's net income was $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 were accreted ratably over the
period the Preferred Stock was 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.
F-16
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
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 Series A, B and C Preferred Stock could
have, commencing on April 1, 2000 and on the same date in each following year,
required the Company to redeem 1/3 of their shares. The redemption amount
equaled 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.
7. COMMON STOCK OPTION PLANS, WARRANTS, AND STOCKHOLDER RIGHTS PLAN
1990 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN--Under the Company's 1990
Incentive and Nonqualified Stock Option Plan, the Company could grant either
incentive or nonqualified stock options to officers, directors, employees or
consultants for the purchase of up to 2,400,000 shares of common stock. Options
were 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 would expire ten
years later. No further grants will be made under the 1990 Incentive and
Nonqualified Stock Option Plan.
F-17
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK OPTION PLANS, WARRANTS, AND STOCKHOLDER RIGHTS PLAN (CONTINUED)
1996 EMPLOYEE STOCK PLANS--On June 14, 1996, the Board of Directors
authorized and the stockholders approved the adoption of the 1996 Incentive and
Nonqualified Stock Option Plan and the 1996 Stock Purchase Plan for the issuance
of options or sale of shares to employees. Both plans became effective
immediately after the closing of the Company's IPO:
- 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 the Company's 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 EMPLOYEE STOCK PURCHASE PLAN--The 1996 Stock Purchase Plan provides
for the sale of up to 100,000 shares of the Company's common stock to
employees. Employees will be allowed to purchase shares at a discount from
the lower of fair value at the beginning or end of the purchase periods
through payroll deductions.
The following table presents activity under all stock option plans:
<TABLE>
<CAPTION>
WEIGHTED GRANT
NUMBER AVERAGE DATE
OF EXERCISE FAIR
OPTIONS PRICE VALUE(1)
---------- ------------- ------------
<S> <C> <C> <C>
Outstanding at October 1, 1994....................... 716,100 $ 0.16
Granted............................................ 321,700 0.62 $ 199,454
Exercised.......................................... (2,516) 0.07
Forfeited.......................................... (21,584) 0.12
----------
Outstanding at September 30, 1995.................... 1,013,700 0.31
Granted............................................ 233,500 0.75 175,125
Exercised.......................................... (74,350) 0.04
Forfeited.......................................... (100,150) 0.05
----------
Outstanding at December 31, 1995..................... 1,072,700 0.40
Granted............................................ 817,100 5.40 4,412,340
Exercised.......................................... (52,620) 0.64
Forfeited.......................................... (105,880) 0.84
----------
Outstanding at December 31, 1996..................... 1,731,300 2.74
Granted............................................ 447,000 12.10 5,407,050
Assumed............................................ 58,576 6.72
Exercised.......................................... (176,775) 1.20
Forfeited.......................................... (63,780) 2.46
----------
Outstanding at December 31, 1997..................... 1,996,321 4.96
----------
----------
</TABLE>
- ------------------------
(1) Exercise prices on grant date have equaled fair market value, accordingly,
no compensation expense has been recorded in the accompanying consolidated
financial statements.
F-18
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK OPTION PLANS, WARRANTS, AND STOCKHOLDER RIGHTS PLAN (CONTINUED)
The number of options exercisable at the dates presented below and their
weighted average exercise price were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISABLE
EXERCISABLE PRICE
-------------- -----------------
<S> <C> <C>
September 30, 1995........................................... 457,055 $ 0.10
December 31, 1995............................................ 426,835 0.13
December 31, 1996............................................ 684,705 0.51
December 31, 1997............................................ 941,975 2.69
</TABLE>
The fair value of options on their grant date was measured using the
Black/Scholes option pricing model. Key assumptions used to apply this pricing
model are as follows:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED
ENDED DECEMBER 31,
DECEMBER 31, --------------------------------
1995 1996 1997
----------------- --------------- ---------------
<S> <C> <C> <C>
Risk-free interest rate..................................... 5.51%-5.86% 5.36%-6.69% 5.80%-6.76%
Expected life of option grants.............................. 2-6 years 1-6 years 1-6 years
Expected volatility of underlying stock..................... 31% 31% 82%
Expected dividend payment rate, as a percentage of the stock
price on the date of grant................................ -- -- --
</TABLE>
It should be noted that the option pricing model used was designed to value
readily tradable stock options with relatively short lives. The options granted
to employees are not tradable and have contractual lives of up to ten years.
However, management believes that the assumptions used to value the options and
the model applied yield a reasonable estimate of the fair value of the grants
made under the circumstances.
F-19
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK OPTION PLANS, WARRANTS, AND STOCKHOLDER RIGHTS PLAN (CONTINUED)
The following table sets forth information regarding options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED REMAINING EXERCISE
RANGE OF NUMBER AVERAGE CONTRACTUAL PRICE FOR
NUMBER OF EXERCISE CURRENTLY EXERCISE LIFE CURRENTLY
PLAN OPTIONS PRICES EXERCISABLE PRICE (YEARS) EXERCISABLE
- ------------------------- ------------- -------------- -------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1990 Incentive Stock
Option Plan............ 801,875 $ 0.04-$0.75 580,020 $ 0.40 6 $ 0.15
319,820 2.00 140,570 2.00 8.5 2.00
200,000 8.50 60,000 8.50 8.5 8.50
1996 Incentive Stock
Option Plan............ 12,000 7.75 4,800 7.75 9 7.75
94,200 8.13 35,700 8.13 9 8.13
80,000 12.38 26,664 12.38 9 12.38
9,500 7.00 2,850 7.00 10 7.00
12,375 7.50 3,275 7.50 10 7.50
55,750 8.25 14,450 8.25 10 8.25
80,275 10.25 27,457 10.25 10 10.25
2,500 11.75 625 11.75 10 11.75
16,500 12.88 4,125 12.88 10 12.88
7,000 16.50 1,750 16.50 10 16.50
72,000 14.38 14,400 14.38 10 14.38
173,950 14.00 -- 14.00 10 --
Options assumed from
acquisition of Coral
Systems, Inc........... 58,576 $ 0.46-$25.76 25,289 6.72 6-10 6.93
</TABLE>
The Company uses the intrinsic value method to measure compensation expense
associated with grants of stock options to employees. Had the Company used the
fair value method to measure compensation, reported net income (loss) and basic
and diluted earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED
ENDED DECEMBER 31,
DECEMBER 31, ------------------------
1995 1996 1997
------------- ------------ ----------
<S> <C> <C> <C>
Income (loss) before provision for income taxes...... $ 64,188 $ 1,892,716 $ (83,555)
Provision for income taxes........................... 2,200 125,000 7,000
------------- ------------ ----------
Net income (loss).................................... $ 61,988 $ 1,767,716 $ (90,555)
------------- ------------ ----------
------------- ------------ ----------
Basic earnings (loss) per common share............... $ 0.00 $ 0.25 $ (0.01)
------------- ------------ ----------
------------- ------------ ----------
Diluted earnings (loss) per common share............. $ 0.00 $ 0.12 $ (0.01)
------------- ------------ ----------
------------- ------------ ----------
</TABLE>
The pro forma effect on net income (loss) and earnings (loss) per share for
the three months ended December 31, 1995 and the years ended December 31, 1996
and 1997 is not representative of the pro
F-20
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK OPTION PLANS, WARRANTS, AND STOCKHOLDER RIGHTS PLAN (CONTINUED)
forma effect in future years because it does not take into consideration pro
forma compensation expense related to grants made prior to October 1, 1995.
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. During 1996, warrant
holders with warrants to purchase 457,288 shares of common stock exercised such
warrants in conjunction with the IPO. The warrant holder surrendered a portion
of the warrants, valued at the IPO price of the common stock, in lieu of payment
of the cash exercise price. In addition, a director exercised a warrant for
3,234 shares in conjunction with the IPO which was valued at the IPO price of
common stock. In June 1996, a warrant holder exercised a warrant for 62,500
shares which had an exercise price of $2.00 per share. In conjunction with the
IPO, the Company issued warrants to a former director to purchase 100,000 shares
of common stock at the IPO price. The compensation expense recognized for this
warrant grant was $230,000 and was determined by using the Black/Scholes pricing
model. At December 31, 1997, outstanding warrants to purchase shares of common
stock aggregated 834,516 (734,516 shares at an exercise price of $2.00 and
100,000 shares at an exercise price of $10.00). Such shares are subject to
certain antidilution provisions. Pursuant to the acquisition of Coral, all
warrants to purchase shares of Coral's common stock became exercisable, when
vested, to purchase shares of Lightbridge common stock. Warrants converted to
purchase Lightbridge common stock aggregated 55,823 at exercise prices ranging
from $0.05 and $34.35 at December 31, 1997.
RESERVED SHARES--The Company has reserved 3,577,016 shares of common stock
for issuance for the stock purchase plan and the exercise of stock options and
warrants.
STOCKHOLDER RIGHTS PLAN--In November 1997, the Board of Directors of
Lightbridge declared a dividend of one right (each a "Right" and collectively
the "Rights") for each outstanding share of common stock. The Rights will be
issued to the holders of record of common stock outstanding on November 14,
1997, and with respect to common stock issued thereafter until the Distribution
Date (as defined below) and, in certain circumstances, with respect to shares of
common stock issued after the Distribution Date. Each Right, when it becomes
exercisable will entitle the registered holder to purchase from Lightbridge one
one-hundredth (1/100th) of a share of Series A participating cumulative
preferred stock, par value $0.01 per share, of Lightbridge at a price of $75.00.
The Rights will be issued upon the earlier of the date which Lightbridge learns
that a person or group acquired, or obtained the right to acquire, beneficial
ownership of fifteen percent or more of the outstanding shares of common stock
or such date designated by the Board of Directors following the commencement of,
or first public disclosure of an intent to commence, a tender or exchange offer
for outstanding shares of the Company's common stock that could result in the
offeror becoming the beneficial owner of fifteen percent or more of the
outstanding shares of the Company's common stock (the earlier of such dates
being called the "Distribution Date".)
F-21
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The income tax (benefit) provision for the year ended September 30, 1995,
the three months ended December 31, 1995, and for the years ended December 31,
1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED
YEAR ENDED ENDED DECEMBER 31
SEPTEMBER 30, DECEMBER 31, ------------------------
1995 1995 1996 1997
------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Current:
Federal................................................ $ -- $ 2,400 $ 141,400 $ 1,333,000
State.................................................. -- -- 18,100 254,000
Deferred:
Federal................................................ -- -- -- (530,000)
State.................................................. -- -- -- (165,000)
------ ------ ---------- ------------
Income tax provision..................................... $ -- $ 2,400 $ 159,500 $ 892,000
------ ------ ---------- ------------
------ ------ ---------- ------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -------------
<S> <C> <C>
Current Items:
Assets:
Accrued expenses................................................ $ 86,669 $ 146,386
Tax credits..................................................... 60,189 539,462
Valuation allowance............................................. (146,858) (179,500)
Liabilities:
Acquired technology............................................. -- (80,000)
----------- -------------
Net current deferred tax assets................................... $ -- $ 426,348
----------- -------------
----------- -------------
Long-Term Items:
Assets:
Depreciation and amortization................................... $ 579,759 $ 38,046
Accrued expenses................................................ -- 192,525
Acquired loss carryforwards..................................... -- 5,555,431
Valuation allowance............................................. (579,759) (2,548,813)
Liabilities:
Acquired intangible assets...................................... -- (3,006,618)
Other........................................................... -- (14,533)
----------- -------------
Net long-term deferred tax assets................................. $ -- $ 216,038
----------- -------------
----------- -------------
</TABLE>
The net change in the valuation allowance for the year ended September 30,
1995, the three month period ended December 31, 1995 and the years ended
December 31, 1996 and 1997 was an increase (decrease) of $956,390, $(55,211),
$(713,913) and $2,001,696, respectively. Pursuant to the acquisition of Coral,
the Company had net operating loss carryforwards for federal income tax purposes
available at December 31, 1997. These net operating loss carryforwards are
limited in use and therefore a valuation
F-22
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
allowance was established against the deferred tax assets as their realization
is not assured. Any future benefit realized from any of the acquired net
operating loss carryforwards of Coral for which a valuation allowance was
provided at the acquisition date will be recorded as a reduction of goodwill.
The following is a reconciliation of income taxes at the federal statutory
rate to the Company's effective tax rate:
<TABLE>
<CAPTION>
THREE YEARS
YEAR MONTHS ENDED
ENDED ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, ------------------------------
1995 1995 1996 1997
------------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Statutory federal income tax rate..... (34)% 34% 34% (34)%
Loss producing no tax benefit......... 34 -- -- --
In-process research and development... -- -- -- 186
Alternative minimum tax asset, not
assured of realization.............. -- 3 2 --
State taxes, net of federal benefit... -- -- 1 36
Changes in valuation allowances....... -- -- -- (37)
Other, net............................ -- -- 4 (29)
Net operating loss carryforwards...... -- (34) (34) --
----- ----- ----- -----
Effective tax rate.................... -- % 3% 7% 122%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
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 $43,000, $20,000, $91,000 and $129,000 for the year
ended September 30, 1995, the three months ended December 31, 1995, and the
years ended December 31, 1996 and 1997, respectively.
As a result of the Merger, the Company assumed Coral's 401(k) Defined
Contribution Plan under which substantially all of the Coral employees are
eligible to participate. No employer contributions were made for the period
November 7, 1997 to December 31, 1997. The Company intends to merge this plan
into the existing Lightbridge Plan.
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 was to
receive $250,000, comprised of five installments in varying amounts through
August 1996. The final payment was not made in August 1996. In 1997, the Company
received from RentGrow a three year 11.25% promissory note in the principal
amount of $75,584 representing the final payment and other amounts owed to the
Company. 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.
F-23
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED-PARTY TRANSACTIONS (CONTINUED)
On August 26, 1996, the Company entered into an agreement with a former
director pursuant to which the Company paid $75,000 to the former director and
granted the former director warrants (described in Note 7) to purchase 100,000
shares of the Company's Common Stock at the IPO price in exchange for the
execution of certain agreements related to the IPO.
During 1997, the Company entered into notes receivable agreements with two
officers totaling $87,000. Interest on the notes accrues monthly at the prime
rate. One of the notes which aggregated $12,000 was repaid during 1997.
11. EARNINGS PER SHARE
In February of 1997, the FASB released Statement of Financial Accounting
Standards No. 128, "Earnings per Share," effective for fiscal periods ending
after December 15, 1997. The Statement simplifies the standards for computing
earnings per share ("EPS") and makes them comparable to international EPS
standards. The statement replaces primary EPS with basic EPS. Basic EPS is
computed by dividing income available to common stockholders by the weighted-
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock. Diluted EPS is computed similarly to fully diluted
EPS previously presented. In accordance with the standard, all prior period EPS
data have been restated.
A reconciliation of the numerators and denominators of the basic and diluted
EPS computations for income (loss) from continuing operations is shown below:
<TABLE>
<CAPTION>
EARNINGS
(LOSS)
INCOME SHARES PER
(NUMERATOR) (DENOMINATOR) SHARE
-------------- ------------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Basic and Diluted EPS
Loss available to common stockholders................................ $ (162,969) 14,802,012 $ (0.01)
YEAR ENDED DECEMBER 31, 1996
Basic EPS
Income available to common stockholders.............................. $ 2,272,497 6,520,789
Less: accreted preferred stock dividends............................. (136,905)
-------------- -------------
$ 2,135,592 6,520,789 $ 0.33
Effect of dilutive securities
Assumed conversion of redeemable convertible preferred stock......... 4,747,300
Options and warrants................................................. 1,838,155
-------------
Diluted EPS
Income available to common stockholders and assumed conversions...... $ 2,272,497 13,106,244 $ 0.17
</TABLE>
F-24
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
EARNINGS
(LOSS)
INCOME SHARES PER
(NUMERATOR) (DENOMINATOR) SHARE
-------------- ------------- -----------
<S> <C> <C> <C>
THREE MONTHS ENDED DECEMBER 31, 1995
Basic and Diluted EPS
Income available to common stockholders.............................. $ 72,205 6,509,214
Less: accreted preferred stock dividends............................. (45,635)
-------------- -------------
$ 26,570 6,509,214 $ 0.00
-------------- ------------- -----------
-------------- ------------- -----------
YEAR ENDED SEPTEMBER 30, 1995
Basic and Diluted EPS
Loss available to common stockholders................................ $ (2,432,914) 6,508,424
Less: accreted preferred stock dividends............................. (182,544)
-------------- -------------
$ (2,615,458) 6,508,424 $ (0.40)
-------------- ------------- -----------
-------------- ------------- -----------
</TABLE>
Shares of redeemable preferred stock convertible into common stock have been
excluded from the diluted computation in all periods except 1996 as they are
anti-dilutive. Had such shares been included, shares for diluted computation
would have increased by approximately 3,244,000 for both the year ended
September 30, 1995 and the three months ended December 31, 1995. Stock options
and warrants convertible into common stock have also been excluded from the
diluted computation as they are also anti-dilutive. Had such shares been
included, shares for diluted computation would have increased by approximately
450,000, 500,000 and 1,900,000 for the year ended September 30, 1995, the three
months ended December 31, 1995 and the year ended December 31, 1997,
respectively. In addition, because such shares are anti- dilutive, no adjustment
has been made to reconcile from income (loss) for the basic computation to that
for the diluted computation for those periods.
12. RESTATEMENT
The Company has restated its previously issued consolidated financial
statements as of and for the year ended December 31, 1997 to adjust the
allocation of purchase price related to the acquisition of Coral (discussed in
Note 1) and the resulting amortization of goodwill and intangible assets. The
Securities and Exchange Commission ("SEC") issued new guidance in September 1998
on its views regarding the valuation methodologies used to determine the
allocation of purchase price to acquired in-process research and development
("IPRD") and intangible assets in a purchase business combination. Generally
accepted accounting principles require that amounts allocated to IPRD be
expensed upon consummation of an acquisition. Following discussions between the
Company and the staff of the SEC regarding the application of this guidance, the
Company has modified the methods used to value IPRD and other intangible assets
acquired in connection with the acquisition of Coral. The revised valuation is
based on management's best estimates at the date of acquisition of the net cash
flows expected to be generated by Coral on a going-forward basis and gives
explicit consideration to the SEC's views on IPRD as set forth in its September
1998 letter to the American Institute of Certified Public Accountants. As a
result of this revised valuation, the amount of purchase price allocated to IPRD
decreased from $16.0 million to $4.0 million, and the amount ascribed to
goodwill and acquired intangible assets increased by $4.0 million and $8.0
million, respectively.
F-25
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RESTATEMENT (CONTINUED)
The effects of this restatement on the Company's consolidated financial
statements as of and for the year ended December 31, 1997 are as follows:
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -------------
<S> <C> <C>
Goodwill--net....................................................................... $ 6,286,931 $ 10,383,581
Acquired intangible assets--net..................................................... 7,716,545
Other intangible assets............................................................. 1,321,559 1,121,559
Total assets........................................................................ 51,951,981 63,565,176
Total stockholders' equity.......................................................... 39,102,593 50,715,788
</TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -------------
<S> <C> <C>
Cost of revenues.................................................................... $ 18,898,068 $ 19,427,635
Purchased in-process research and development....................................... 16,039,831 4,000,000
Total operating expenses............................................................ 33,504,877 21,342,115
Income (loss) from operations....................................................... (11,833,623) (220,428)
Net loss............................................................................ (11,776,164) (162,969)
Basic and diluted loss per common share............................................. ($0.80) ($0.01)
</TABLE>
13. EVENTS SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT (UNAUDITED)
In December 1998, the Company determined that certain of the long-lived
assets acquired from Coral were impaired. This assessment was based upon a
comprehensive review of the expected cash flows of the Coral business over the
remaining useful life of the affected assets. The charge taken aggregated
approximately $7,400,000.
Of the assets written down, approximately $2,600,000 related to the
ChurnAlert product acquired from Coral. This decision was based on a
determination that the net book value of this asset was impaired as of December
31, 1998, due to the decision by management in December 1998 to discontinue the
development effort related to this product based on a lack of market
receptiveness to the product and the Company's determination that its Churn
Prophet and Channel Wizard products provide more marketable solutions to
telecommunications carriers.
In addition, based on an estimate of the undiscounted cash flows associated
with the Coral assets, the remaining net book value of intangible assets was
deemed to be impaired and an additional charge of approximately $4,800,000 was
taken to reduce these assets (principally goodwill) to their estimated
recoverable amounts.
F-26
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD
QUARTER QUARTER QUARTER
----------- ----------- -----------
FOURTH
QUARTER
-----------
(RESTATED
IN 1997)(2)
-----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Revenues............................................................... $ 8,823 $ 9,008 $ 9,457 $ 13,262
Income (loss) from operations(1)....................................... 921 1,180 1,193 (3,515)
Net income (loss)...................................................... $ 1,767 $ 898 $ 927 $ (3,756)
Basic earnings (loss) per share........................................ $ 0.12 $ 0.06 $ 0.06 $ (0.25)
Diluted earnings (loss) per share...................................... $ 0.11 $ 0.06 $ 0.06 $ (0.25)
1996
Revenues............................................................... $ 6,314 $ 6,949 $ 7,372 $ 8,910
Income from operations................................................. 282 410 533 1,513
Net income............................................................. $ 23 $ 280 $ 354 $ 1,616
Basic earnings per share............................................... $ 0.00 $ 0.03 $ 0.05 $ 0.11
Diluted earnings per share............................................. $ 0.00 $ 0.03 $ 0.03 $ 0.10
</TABLE>
- ------------------------
(1) Net loss for the fourth quarter of 1997 includes the write-off of purchased
in-process research and development costs of $4.0 million.
(2) See note 12 to the consolidated financial statements.
F-27
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-21585, 333-23937, 333-39817 and 333-67881 of Lightbridge, Inc. on Form
S-8 of our report dated February 10, 1998 (February 22, 1999 as Note 12)
(which contains an explanatory paragraph relating to the restatement of the
1997 consolidated financial statements), appearing in this Annual Report on
Form 10-K/A of Lightbridge, Inc. for the year ended December 31, 1997.
Deloitte & Touche LLP
Boston , Massachusetts
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,715,126
<SECURITIES> 0
<RECEIVABLES> 13,431,925
<ALLOWANCES> 218,873
<INVENTORY> 0
<CURRENT-ASSETS> 2,885,583
<PP&E> 21,566,649
<DEPRECIATION> 9,803,636
<TOTAL-ASSETS> 63,565,176
<CURRENT-LIABILITIES> 10,628,428
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0
0
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<CGS> 19,427,635
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<INCOME-PRETAX> 729,031
<INCOME-TAX> 892,000
<INCOME-CONTINUING> (162,969)
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<NET-INCOME> (162,969)
<EPS-PRIMARY> (0.01)
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</TABLE>
