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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-21319
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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 12, 1999 was $58,106,815, based on a total of 11,476,756
shares held by nonaffiliates and on a closing price of $5.063 as reported on the
Nasdaq National Market.
The number of shares of Common Stock outstanding as of March 12, 1999 was
16,129,649.
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,
1998. 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 2. Properties...................................................................................... 20
Item 3. Legal Proceedings............................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders............................................. 20
Item 4A. Executive Officers.............................................................................. 21
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters....................... 23
Item 6. Selected Financial Data......................................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 25
Item 7A. Quantitative and Qualitative Market Risk Disclosures............................................ 34
Item 8. Financial Statements and Supplementary Data..................................................... 35
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure............ 35
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 35
Item 11. Executive Compensation.......................................................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 35
Item 13. Certain Relationships and Related Transactions.................................................. 36
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K................................ 36
SIGNATURES................................................................................................... 39
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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
ITEM 1. BUSINESS
Lightbridge, Inc. ("Lightbridge") develops, markets and supports a network
of integrated products and services that enable telecommunications carriers to
improve their customer acquisition, retention and fraud prevention processes.
Historically, Lightbridge's software-based solutions have been delivered
primarily on an outsourcing and service bureau basis, but with the acquisition
of Coral Systems, Inc. ("Coral") in November 1997 and the development of
Lightbridge Consulting Services, a significant portion of Lightbridge's revenues
are now derived from software licensing transactions and consulting services.
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. While its solutions historically have
been delivered primarily to wireless carriers, Lightbridge began providing
service to its first wireline client, a competitive local exchange carrier
("CLEC") in 1998. 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, and more recently to carriers offering converged
telecommunications services, positions Lightbridge to broaden its offerings to
other telecommunications carriers.
Lightbridge offers on-line, real-time transaction processing and call center
support solutions to aid telecommunications carriers in qualifying and
activating applicants for service, as well as software-based sales support
services for traditional distribution channels, such as dealers and agents, and
emerging distribution channels, such as mass market retail stores and Internet
commerce. Lightbridge develops and implements interfaces that 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 and services that enable carriers to
reduce subscriber churn and to make more informed business decisions about their
subscribers, markets and distribution channels. Lightbridge also maintains
databases used to pre-screen applicants for fraud and provides software used to
monitor subscriber call activity for fraud. In addition, Lightbridge has a
global telecommunications consulting practice that provides business advisory,
deployment, training, optimization, customization and integration services.
Lightbridge was incorporated in Delaware in June 1989 under the name Credit
Technologies, Inc. and in November 1994 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, a Delaware corporation based in Colorado. In February
1998, Lightbridge organized Lightbridge Technologies Limited in England to serve
clients in Europe, the Middle East and Africa. During 1998, Lightbridge also
maintained an office in the Philippines, to serve clients located in Asia
Pacific. Unless the context requires otherwise, references in this Form 10-K to
"Lightbridge," the "Company," "We," "Us," and similar terms refer to
Lightbridge, Inc. and its subsidiaries.
CHANNEL WIZARD, CHURN PROPHET, FRAUD SENTINEL, FRAUDBUSTER and PROFILE are
registered trademarks of Lightbridge, and ALIAS, ALLEGRO, CREDIT DECISION
SYSTEM, CUSTOMER ACQUISITION SYSTEM, INSIGHT, LIGHTBRIDGE, the Lightbridge logo,
POPS, RETAIL MANAGEMENT SYSTEM, @RISK, RMS 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.
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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. Transaction processing services include proprietary databases
and processing modules to evaluate existing subscribers and detect
potential subscription fraud. 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
software products for on-going monitoring of subscriber call activity from
the carrier's 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
and call centers.
CUSTOMER MANAGEMENT................. Software-based decision support tools 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................. Deployment, training, custom development and integration, solution
optimization and business advisory services, provided in the fields of
customer acquisition, customer retention, distribution management and fraud
management.
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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
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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 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 a carrier's
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. TeleServices
offerings include a call center solution for credit decisions and activations,
and 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 or per minute basis and varies with the term of the contract under
which services are provided, the volume of transactions processed and the other
products and services selected and integrated with the services.
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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.
Lightbridge's fraud solutions include:
- FRAUD SENTINEL is a suite of fraud management tools, available separately
or together. Lightbridge believes that Fraud Sentinel is the only
pre-screening tool for detection and prevention of subscription fraud
available in the wireless industry today. The components of Fraud Sentinel
are:
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.
- @RISK, scheduled for general availability in 1999, serves as a repository
for suspect information. @Risk enables carriers to access suspect
information discovered from prior fraud investigations during their
pre-screening process.
- 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.
- ALIAS, the industry's first subscription fraud profiler that detects
suspect account activity, is scheduled to be available to clients in 1999.
Alias, when used with @Risk in a pre-screening mode, represents the
industry's only integrated front-end to back-end solution for combating
subscription fraud. When Alias detects a change to the account information
or matches against suspect information, an event is generated. Once an
event is generated, an evaluation is done to determine whether a fraud
investigator should take action. The statistically based scoring logic
reduces the number of cases an investigator needs to work.
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 for
Internet or Intranet environments. POPSEXPRESS is a version of POPS with
less functionality that can be installed quickly in a variety of sales
locations.
- 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.
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POPS 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.
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.
Channel Wizard and Churn Prophet 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 also provides a range of consulting services to improve customer
management including churn analysis and data warehouse design.
CONSULTING SERVICES
Lightbridge Consulting Services is the only global telecommunications
practice that delivers full-service consulting for customer acquisition and
retention. It leverages Lightbridge's in-market expertise and focus in
telecommunications to help carriers bring new services to market quickly,
expedite the process of obtaining and retaining low-risk subscribers and enhance
customer loyalty. The worldwide practice supports Lightbridge clients in Asia
Pacific, Europe, Latin America and North America. Lightbridge Consulting
Services capitalizes on Lightbridge's existing expertise and services to provide
clients with business advisory, deployment, training, optimization,
customization and integration services.
Consulting Services personnel provide a range of consulting services to
telecommunications carriers, employing Lightbridge's expertise and experience in
the telecommunications industry. For example, customer services personnel help
carriers implement Lightbridge solutions and integrate them with carrier and
third party systems, 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
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architecture supports the development of Lightbridge's core products and
provides a discrete platform that enables the rapid creation of client-specific
requirements. In addition, the architecture is open in terms of its ability to
interface with third-party systems, as well as with Lightbridge and third-party
Web-based front ends. 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 Windows NT, 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 for FraudBuster 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 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 and a development
methodology 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
Lightbridge historically has provided its products and services to wireless
carriers in the United States. Recently, Lightbridge has begun to market its
products and services to a broader range of telecommunications carriers
operating around the world.
Revenues attributable to Lightbridge's 10 largest clients accounted for
approximately 81%, 66% and 66% of Lightbridge's total revenues in the years
ended December 31, 1996, 1997 and 1998, respectively. During the years ended
December 31, 1996, 1997 and 1998, two, one and three of Lightbridge's clients
accounted for more than 10% of Lightbridge's total revenues, representing an
aggregate of 44%, 29% and 42% of total revenues in those years, respectively.
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 June 30, 1997. AT&T Wireless accounted
for 29%, 29% and 17% of Lightbridge's total revenues for each of the years ended
December 31, 1996, 1997 and
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1998, respectively. Sprint Spectrum and Nextel accounted for 15% and 10%,
respectively, of Lightbridge's total revenues for the year ended December 31,
1998.
Lightbridge's agreements with its clients set forth the terms on which
Lightbridge will provide products and services for the clients, but do not
always 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 could 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 agreements with AT&T Wireless and Sprint Spectrum
for the provision of credit decision services. The AT&T Wireless agreement will
expire on December 31, 1999 unless it is terminated earlier, upon not less than
sixty days' prior written notice, and AT&T Wireless has the right to extend the
term of the agreement an additional two years. The Sprint Spectrum agreement
will expire on December 31, 1999, and Sprint Spectrum has the right to extend
the term of the agreement for an additional three years. The agreements with
AT&T Wireless and Sprint Spectrum do not require the purchase of any particular
type or quantity of Lightbridge's products or services, although they do 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 expertise in particular solutions 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 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 expands its sales and marketing group 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 Lightbridge and Coral sales and marketing teams were fully
integrated during 1998.
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 $4.4 million, $6.1 million and $9.6 million on engineering,
research and development in the years ended December 31, 1996, 1997 and 1998,
respectively.
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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, timeliness, 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. See "Item
1A. Risk Factors--We Face Competition from a Broad and Increasing Range of
Vendors."
GOVERNMENT REGULATION
The FCC, under the terms of the Communications Act of 1934 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. The
telecommunications industry outside the United States is also subject to
government regulation which could have an increasing impact on Lightbridge if it
is successful in increasing its penetration of international markets. See "Item
1A. Risk Factors--The Telecommunications Industry is Subject To Government
Regulation and Legal Uncertainties."
PROPRIETARY RIGHTS
Lightbridge's success is dependent upon proprietary technology. Lightbridge
has traditionally relied 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 Channel Solutions and Customer
Management products, Lightbridge provides the software under license agreements
that grant clients the right to use, but contain
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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, but it recently filed two U.S. patent applications.
Lightbridge also acquired certain pending and issued patents in connection with
its acquisition of Coral. Lightbridge currently has two issued U.S. patents and
four applications pending in the U.S. Patent and Trademark Office (including two
provisional patent applications), one issued foreign patent and eight
applications pending for foreign patents. There can be no assurance that any of
such pending patent applications will result in the issuance of any patents, or
that Lightbridge's current patent or any future patents will provide meaningful
protection to Lightbridge.
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
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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--Our
Proprietary Technology Is Subject to Limited Protection."
EMPLOYEES
As of March 12, 1999, Lightbridge had a total of 399 employees, of which 355
were full-time and 44 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 service consultants.
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ITEM 1A. RISK FACTORS
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF CLIENTS
Because we derive most of our revenues from a limited number of clients, our
business could be harmed if our relationship with any significant client
terminates or changes. Our 10 largest clients accounted for approximately 81%,
66% and 66% of our total revenues in 1996, 1997 and 1998. During 1996, 1997 and
1998, two, one and three of our clients accounted for more than 10% of our total
revenues. These greater than 10% clients represented a total of 44%, 29% and 42%
of our total revenues in those years. In particular, AT&T Wireless accounted for
29%, 29% and 17% of our total revenues in 1996, 1997 and 1998.
Because our revenues are concentrated, our revenues and earnings may
fluctuate significantly from quarter to quarter, based on the volume of
qualification and activation transactions our significant clients generate.
Moreover, our revenues may become more concentrated as a result of consolidation
among wireless telecommunications companies, which has been occurring at a rapid
pace in recent years. We expect that most of our revenues will continue to come
from a relatively small number of clients for the foreseeable future. Our client
contracts generally extend for terms of one or more years and do not typically
require our clients to purchase any particular type or quantity of our products
or services or to pay any minimum amount for products or services. Therefore,
our clients, including our significant clients, may not continue to utilize our
services at levels similar to previous years or at all. If one of our major
clients terminates or significantly reduces its purchases from us for any
reason, our business could be seriously damaged. Our business could also be
harmed if we are unable to collect, or experience delays in collecting, payments
from any major client.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE
Our operating results are difficult to predict and may fluctuate
significantly from quarter to quarter. If our operating results fall below the
expectations of investors or public market analysts, the price of our common
stock could fall dramatically. Our common stock price could also fall
dramatically if investors or public market analysts reduce their estimates of
our future quarterly operating results, whether as a result of information we
disclose, industry trends or other factors.
Our operating results in the quarters ended March 31 and June 30, 1998 were
below the expectations of some public market analysts and investors, principally
because our revenues were lower than anticipated and our company-wide expenses
were higher than expected. Although our operating results in the third quarter
of 1998 were close to market expectations and in the fourth quarter of 1998
exceeded those expectations, we experienced weakness in our software licensing
and maintenance revenues, and stated publicly that at that time we did not
expect these revenues to increase in 1999. From April 13, 1998, the date on
which we preliminarily announced our estimated results for the fiscal quarter
ended March 31, 1998, through the close of business on March 12, 1999, the price
per share of our common stock, as reported by the Nasdaq National Market,
decreased from $18.38 to $5.06.
Our revenues are difficult to forecast for a number of reasons:
- Seasonal and retail trends affect our transaction services revenues, which
historically have represented the majority of our total revenues. For
example, our revenues generally have been highest in the fourth quarter of
each calendar year, particularly in the holiday shopping season between
Thanksgiving and Christmas. In addition, marketing initiatives undertaken
by our clients or their competitors may significantly affect the number of
transactions we process.
- The sales process for our products and services is lengthy, sometimes
exceeding a year. The length of the sales process makes our revenues
difficult to predict. The delay of one or more large orders, particularly
orders for software, which typically result in a substantial amount of
non-recurring revenue, could cause our quarterly revenues to fall
substantially below expectations.
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- We ship our software products within a short period after receipt of an
order, and we usually do not have a material backlog of unfilled orders of
software products. Consequently, our revenues from software licenses in
any quarter depend substantially on the orders booked and shipped in that
quarter. As a result, a delay in the consummation of a license agreement
may cause our revenues to fall below expectations for that quarter.
- Our consulting services revenues can fluctuate based on the timing of
projects we perform for our clients. Many of our consulting engagements
are of a limited duration, so it can be difficult for us to forecast
consulting services revenues accurately more than a few months in advance.
- We are in the process of developing a number of new products and services,
including products based on technology acquired from Coral. If we do not
complete our development efforts on schedule, or if we are not able to
market our new products and services successfully, our revenues could fall
substantially below expectations.
Most of our expenses, particularly employee compensation, are relatively
fixed. As a result, even relatively small variations in the timing of our
revenues may cause significant variations in our quarterly operating results and
may result in quarterly losses.
As a result of these factors, we believe that quarter-to-quarter comparisons
of our results of operations are not necessarily meaningful. You should not rely
on our quarterly results of operations to predict our future performance.
OUR BUSINESS COULD REQUIRE ADDITIONAL FINANCING
It is possible that we will not achieve profitability on either a quarterly
or annual basis in the future or that we will need to raise funds through public
or private financings. Further expansion of our business, including the
acquisition of additional computer and network equipment and the international
expansion of our business will require us to make significant capital
expenditures. We may also need to make significant expenditures in connection
with the ongoing design and testing of our software-based services and products
for Year 2000 compatibility, and any related modifications or other development
work that may be required to achieve Year 2000 compatibility. If our available
cash resources prove to be insufficient, due to unanticipated expenses, revenue
shortfalls or otherwise, we may need to seek additional financing or curtail our
expansion activities. If we obtain equity financing or finance an acquisition
with equity securities, our existing stockholders may experience dilution in
their investments. It is possible that, if we need additional financing, we will
not be able to obtain it on acceptable terms, or at all.
WE NEED TO ENHANCE OUR EXISTING PRODUCTS AND SERVICES AND DEVELOP NEW ONES
The telecommunications industry has been changing rapidly as a result of
increasing competition, technological advances and evolving industry practices
and standards, and we expect these changes will continue. Carriers in the
telecommunications market have also been changing quickly, as the result of
consolidation among existing carriers and the rapid entrance of new carriers
into the market. In order to be successful, we must:
- identify and anticipate emerging technological and market trends;
- enhance our current products and services;
- develop new products and services that address changing client needs,
business practices and technical requirements;
- integrate our current and future products, including the products acquired
from Coral; and
- create and maintain interfaces to changing third party systems.
In addition, we must achieve these goals in a timely and cost-effective
manner and successfully market our new and enhanced products and services to
clients. In the past, we have experienced delays in developing new products and
enhancing existing products, and on occasion we have postponed scheduled
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delivery dates for products. In order to be successful, we must meet our
clients' expectations with respect to product development, enhancement and
integration and our software and services must adequately address the needs of
our clients.
WE MUST RESPOND TO CHANGING BUSINESS REQUIREMENTS
Our operations have expanded rapidly, both internally and through the Coral
acquisition. This expansion has created significant demands on our executive,
operational, development and financial personnel and other resources. Future
growth in our business, if achieved either domestically or internationally, may
further strain our management, financial and other resources. Our future
operating results will depend on the ability of our officers and key employees
to manage changing business conditions and to continue to improve our
operational and financial control and reporting systems.
WE FACE SIGNIFICANT COMPETITION FOR A LIMITED SUPPLY OF QUALIFIED SOFTWARE
ENGINEERS AND CONSULTANTS
Our business depends on the services of skilled software engineers who can
develop, maintain and enhance our products and consultants who can undertake
complex client projects. In general, only highly qualified, highly educated
personnel have the training and skills necessary to perform these tasks
successfully. In order to maintain the competitiveness of our products and to
meet client requirements, we need to attract, motivate and retain a significant
number of software engineers and consultants. Qualified personnel such as these
are in short supply and we face significant competition for these employees,
from not only our competitors but also clients and other enterprises. Other
employers may offer software engineers and consultants significantly greater
compensation and benefits or more attractive career paths or geographic
locations than we are able to offer. Any failure on our part to hire, train and
retain a sufficient number of qualified project engineers would seriously damage
our business.
WE DEPEND ON THE SERVICES OF OUR CHIEF EXECUTIVE OFFICER
Our future success depends to a significant degree on the skills, experience
and efforts of our executive officers, particularly Pamela D.A. Reeve, our
President and Chief Executive Officer. Ms. Reeve has led us since our
incorporation in 1989. We do not have any employment contract requiring Ms.
Reeve or any of our other executive officers to continue their employment for
any period of time, and we do not maintain key-person life insurance on any of
our executive officers other than Ms. Reeve.
OUR REVENUES ARE CONCENTRATED IN THE DOMESTIC WIRELESS TELECOMMUNICATIONS
INDUSTRY
We derive almost all of our revenues from United States-based companies in
the wireless telecommunications industry, principally cellular and PCS carriers.
We expect that these companies will continue to account for a substantial
majority of our revenues for the foreseeable future. Although the wireless
industry has experienced significant growth in recent years, we believe that the
growth rate of the domestic wireless industry may begin to decline as the
industry matures. As a result, our success depends on a number of factors:
- continued demand for our products and services by domestic companies in
the wireless telecommunications industry;
- continued growth of the domestic cellular and PCS markets;
- our ability to develop and market new products and services to new and
existing clients;
- our ability to increase sales of our products and services overseas; and
- our ability to increase sales of our products and services to CLECs and
other new classes of clients.
Recently some of our clients have completed or announced mergers with other
of our clients. We currently are unable to predict the effect, if any, that
these consolidations will have on the nature and quantity of products and
services we provide to these clients.
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WE FACE COMPETITION FROM A BROAD AND INCREASING RANGE OF VENDORS
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 ours. We anticipate continued growth and the formation of new
alliances in the telecommunications carrier services industry, which will result
in the entrance of new competitors in the future. We face competition from
several primary sources:
- software vendors that provide one or more customer acquisition, retention
or fraud detection solutions, including GTE Corporation's TSI division,
Systems/Link, Magnum Software Systems, Onyx Software and SLP Infoware;
- telecommunications equipment vendors that market software-based solutions
to complement their hardware offerings, such as Compaq, Ericsson and
Northern Telecom;
- service providers that offer customer acquisition, retention or fraud
detection services in connection with other services, including Equifax,
LHS Group, and Amdocs;
- information technology departments within larger carriers that have the
ability to provide products and services that are competitive with those
we offer; and
- consulting firms that may offer competitive services or the ability to
develop customized solutions for customer acquisition, retention or fraud
detection, such as American Managment, Andersen Consulting, CAP Gemini and
Deloitte & Touche.
Many of our current and potential competitors have significantly greater
financial, marketing, technical and other competitive resources than we do. As a
result, these competitors may be able to adapt more quickly to new or emerging
technologies and changes in client requirements, or may be able to devote
greater resources to the promotion and sale of their products and services.
In addition, in order to meet client requirements, we must often work
cooperatively with companies that are, in other circumstances, competitors. The
need for us to work cooperatively with such companies may limit our ability to
compete aggressively with them in other circumstances.
WE DEPEND ON OUR SYSTEMS TO PROVIDE TRANSACTION SERVICES AND SUPPORT SERVICES
We provide transaction services and support services using complex computer
and telecommunications systems. Our business could be significantly harmed if
these systems fail or suffer damage from fire, natural disaster, power loss,
telecommunications failure or similar events. Most of our computer and
telecommunications equipment is located at our sites in Burlington and Waltham,
Massachusetts, and, as a result, may be vulnerable to a natural disaster. In
addition, the growth of our client base, a significant increase in transaction
volume or an expansion of our facilities may strain the capacity of our
computers and telecommunications systems and lead to degradations in performance
or system failure. Many of our agreements with carriers contain level of service
commitments which we might be unable to fulfill in the event of a natural
disaster or a major system failure. Our property and business interruption
insurance might not be adequate to compensate us for any losses that may occur
in the event of a natural disaster or system failure. It is also possible that
such insurance might cease to be available to us on commercially reasonable
terms, or at all.
In addition to our own systems, we rely on certain equipment, software,
systems and services from third parties that are also subject to risks,
including risks of system failure or inadequacy. For example, in order to
provide our credit verification service, we need access to third-party credit
information databases. Similarly, delivery of our activation services often
requires the availability and performance of third-party billing systems. If,
for any reason, we were unable to access any such databases or billing systems,
our ability to process credit verification transactions could be impaired. In
addition, our 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 we cannot recover through an increase in the price of
our services, or any significant interruption in telephone services, could
seriously harm our business.
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OUR SOFTWARE MAY CONTAIN DEFECTS
The software we develop and use in providing our products and services may
contain errors. Although we test software extensively before it is used to
provide services to clients, we cannot be certain that errors will not be found
in software after we put it into use. Any such error may harm our business in
several ways, including the following:
- we may suffer a loss of revenue if we are unable to provide services to
our clients;
- we may incur additional unexpected expenses to fund further product
development or to add programming personnel to complete a development
project; and
- our clients may terminate their agreements with us.
OUR PRODUCTS, SERVICES AND SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT
Many existing computer systems and software applications use only two digits
to identify a year in the date field. These systems and applications were
designed and developed without considering the impact of the upcoming change in
the century. If not corrected, year 2000 problems may cause many computer
applications to fail or create erroneous results for calculations involving
years after 1999.
If we are not able to develop or offer, in a timely manner, year 2000
compliant products and product updates, we may suffer the following
consequences:
- We could experience a significant loss of revenues. Clients may decide not
to purchase our products and services, or may decide to delay purchasing
our products or services in anticipation of our future release of year
2000 compliant products.
- Year 2000 errors in our products could materially impair the utility of
our products and services and could result in significant client claims
against us. Certain of our contracts with clients require us to warrant
year 2000 compliance.
- We could incur significant expenses in making our products, services and
internal systems year 2000 compliant. At present, we believe the total
costs to be incurred for all of our year 2000 related projects will not
have a material impact on our operating results. Currently unidentified
year 2000 problems may, however, cause us to incur material unanticipated
expenses. We are assessing these costs on an ongoing basis in order to
adjust our spending plans as necessary.
We have undertaken a program to determine whether and to what extent we may
need to update our software products and service processes to become year 2000
compliant. Our business uses off-the-shelf and custom software developed
internally and by third parties. We have designed our software products and
service offerings to be year 2000 compliant, and we test third-party software
that is incorporated with our products and services. Although we have completed
year 2000 testing of our products and services, we cannot be sure that our
efforts to address year 2000 issues are adequate.
Some of the hardware and software systems that operate in conjunction with
our services and products may not be year 2000 compliant. These systems include
switches, billing systems, credit bureaus and internal client operating systems.
We have been testing the interfaces between our products and systems and these
other systems, but this testing is not yet complete. If we fail to identify a
year 2000 problem in other systems, errors could result that materially impair
the utility of one or more of our products and services. Even if we discover
such a problem, it is possible that resolution of the problem could require
significant expenditures and might not be achievable by January 1, 2000.
We currently are evaluating the readiness of those of our internal systems
that are business-critical. We consider hardware, software, systems,
technologies and applications to be "business-critical" if a failure would
either have a material adverse impact on our business or involve a safety risk
to our employees or customers. We have reviewed certain of our internal systems
and future system plans to assess year 2000 compliance. We expect that our
internal system development plans will address the year 2000 issue and will
correct any existing non-compliant systems without the need to accelerate our
overall information systems
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implementation plans. Our business would be adversely affected if there are
unidentified dependencies on internal systems to operate the business, or if any
required modifications are not completed on a timely basis or are more costly to
implement than we currently anticipate.
WE MAY MAKE ACQUISITIONS, WHICH INVOLVE RISKS
We acquired Coral in November 1997. Although we have no current arrangements
to make additional acquisitions in the future, we may do so if we identify
companies, technologies or assets that appear to complement our business.
Acquisitions involve risks that could cause our actual growth to differ from our
expectations. For example:
- In future acquisitions, we may issue equity securities that could be
dilutive to our shareholders. In those acquisitions, we also may incur
additional debt and amortization expense related to goodwill and other
intangible assets. This additional debt and amortization expense may
materially and adversely affect our business and operating results.
- We may be unable to integrate acquired businesses successfully and to
realize anticipated economic, operational and other benefits in a timely
manner. Integration of an acquired business is especially difficult when
we acquire a business in a market in which we have limited or no expertise
or a business with a corporate culture different from ours. If we are
unable to successfully integrate acquired businesses, we may incur
substantial costs and delays or other operational, technical or financial
problems.
- Acquisitions may divert management's attention from our existing business
and may damage our relationships with our key clients and employees.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES
Our telecommunications carrier clients are regulated at both the federal and
state levels, and our international clients are subject to regulation by their
own countries. Government regulation could harm our business in several ways,
for example by:
- decreasing the rate of growth of the wireless industry or other segments
of the telecommunications market;
- affecting the development of emerging telecommunications markets;
- limiting the number of potential clients for our products and services;
- introducing new requirements that would force us to modify our products or
services; or
- increasing competition in the industry, which could subject us to
increased pricing pressures.
In making credit evaluations of consumers, our clients are subject to
detailed state and federal requirements, including the Fair Credit Reporting Act
and the Equal Credit Opportunity Act. Although most of our products and
services, other than our ProFile product, are not directly subject to these
requirements, we must take these requirements into account in order to meet our
clients' needs. If we fail to reflect these requirements in a timely or accurate
manner, we could incur liability or suffer a loss of business.
OUR PROPRIETARY TECHNOLOGY IS SUBJECT TO LIMITED PROTECTION
Our business could be materially and adversely affected if we are not able
to protect adequately our proprietary software and other proprietary
intellectual property rights. We rely on a combination of copyright, patent,
trademark and trade secret laws, license and confidentiality agreements, and
software security measures to protect our proprietary rights. Although we
currently hold U.S. and foreign registered trademarks and U.S. patents on
certain of our proprietary technology, we may be unable to obtain similar
protection for our other intellectual property. In addition, the laws of certain
countries in which our products are licensed do not protect our products and
intellectual property rights to the same extent as
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U.S. laws. We generally enter into non-disclosure agreements with our employees
and customers and restrict access to, and distribution of, our proprietary
information. Nevertheless, we may be unable to deter misappropriation of our
proprietary information, detect unauthorized use and take appropriate steps to
enforce our intellectual property rights. Our competitors also may independently
develop technologies that are substantially equivalent or superior to our
technology.
Although we believe that our services and products do not infringe on the
intellectual property rights of others, we cannot prevent someone else from
asserting a claim against us in the future for violating their technology
rights. Even if such a claim is not successful on its merits, we could be
required to incur significant costs in defending the claim. If a claim of this
type is successful, we could be required to pay substantial damages, and we
could also be prevented from selling one or more of our products and services.
OUR INTERNATIONAL EXPANSION STRATEGY INVOLVES RISKS
As part of our business strategy, we are seeking opportunities to expand our
offerings into international markets. As the United States wireless market
matures, we believe that expansion into international markets is important to
our ability to continue to grow and to market our products and services. We have
opened an office in England, but to date we have limited experience in marketing
and distributing our products and services internationally. Expanding our sales
efforts outside the United States will require significant management attention
and financial resources. In addition, our international expansion strategy is
subject to risks, including:
- fluctuations in exchange rates may reduce our earnings, particularly if we
denominate arrangements with international clients in the currency of the
country in which our products or services are provided;
- we may experience longer payment cycles and increased difficulties in
collecting accounts receivable;
- tariffs and other barriers may reduce our ability to sell our solutions or
may reduce the profitability of those solutions;
- political and economic instability, such as the economic downturn in Asia
in 1998, may lead to reduced demand for our solutions;
- changes in technology standards, such as interfaces between products, that
are developed by European or other foreign groups may require additional
development efforts by us or may change the buying behavior of some of our
clients;
- we may experience difficulties in managing a global network of
distributors or representatives and in staffing and managing foreign
subsidiary operations;
- we may encounter difficulties or delays in translating products and
product documentation into foreign languages;
- we may suffer potentially adverse tax consequences from operations abroad;
and
- the adoption and use of the euro, the single European currency introduced
in January 1999, may adversely affect our business in ways we cannot
currently predict.
OUR ANTI-TAKEOVER PROVISIONS MAY DISCOURAGE POTENTIAL TAKEOVER ATTEMPTS
Certain provisions of our certificate of incorporation and Delaware law
could be used by our incumbent management to make it more difficult for a third
party to acquire control of us, even if the change in control might be
beneficial to our stockholders. This could discourage potential takeover
attempts and could adversely affect the market price of our common stock.
In particular, we may issue preferred stock in the future without
stockholder approval, upon terms determined by our board of directors. The
rights of holders of our common stock would be subject to, and
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may be adversely affected by, the rights of holders of any preferred stock
issued in the future. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, a majority of our
outstanding stock. We have adopted a stockholder rights plan that may deter or
delay attempts to acquire us or to accumulate shares of common stock. Except for
the stockholder rights plan, we have no present plans to designate or issue any
shares of preferred stock.
ITEM 2. PROPERTIES
In March 1997, the Company entered into a seven-year lease for approximately
46,000 square feet in Burlington, Massachusetts. This lease was amended October
1997 to include an additional 11,000 square feet at the same location. This
lease, as amended, for the Burlington facility expires in 2004. In August 1997,
the Company relocated its headquarters from Waltham, Massachusetts to the
Burlington facility, and it currently subleases a portion of the 39,000-square
foot facility in Waltham. The Company's teleservices group is located in a
27,000-square foot leased facility, also in Waltham, Massachusetts. The leases
for both Waltham facilities expire between 1999 and 2001. In addition,
Lightbridge's Colorado operations are located in a 30,000 square foot leased
facility in Broomfield, Colorado. The lease on the Broomfield premises will
expire in 2003.
ITEM 3. LEGAL PROCEEDINGS
During 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 (Docket No. MER-L-003436-97) on September 10, 1997
by National Information Bureau Ltd. ("NIB"), a Delaware corporation based in New
Jersey. In January 1998, NIB filed for Chapter 11 bankruptcy protection in
Delaware, and requested that the New Jersey court stay the litigation pending a
determination during the bankruptcy proceedings of whether NIB would pursue the
case. 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 action vigorously, and does not believe that this claim will have a
material adverse effect on the Company's business, financial condition, results
of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter
ended December 31, 1998.
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ITEM 4A. EXECUTIVE OFFICERS
The executive officers and directors of the Company and their ages as of
March 9, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------- --------- ----------------------------------------------------
<S> <C> <C>
Pamela D.A. Reeve................................... 49 President, Chief Executive Officer and Director
Joseph S. Tibbetts, Jr.............................. 46 Chief Financial Officer, Senior Vice President,
Finance & Administration and Treasurer
William G. Brown.................................... 38 Executive Vice President, Development
Brian P. Connolly................................... 49 Senior Vice President, Sales and Marketing
Michael A. Perfit................................... 43 Senior Vice President of Technology
Richard H. Antell................................... 51 Vice President, Software Development
Douglas E. Blackwell................................ 42 Vice President, Service Delivery
Carla J. Marcinowski................................ 41 Vice President, Consulting Services
Andrew I. Fillat(1)(2).............................. 50 Director
Torrence C. Harder(1)............................... 55 Director
D. Quinn Mills(2)................................... 57 Director
Debora Wilson....................................... 41 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Pamela D.A. Reeve has served as the President of the Company since November
1989, as Chief Executive Officer of the Company since September 1993 and as a
director of the Company since November 1989. From November 1989 to September
1993, Ms. Reeve also served as Chief Operating Officer of the Company. Prior to
joining the Company, Ms. Reeve was employed by The Boston Consulting Group. Ms.
Reeve served as President of the Massachusetts Software Council from January
1996 to January 1998. She currently serves as a director of PageMart Wireless,
Inc., a provider of wireless messaging services, and Natural MicroSystems Corp.,
a provider of hardware and software technology for developers of high-value
telecommunications solutions.
Joseph S. Tibbetts, Jr. joined Lightbridge in May 1998 as Chief Financial
Officer, Senior Vice President, Finance & Administration and Treasurer. Mr.
Tibbetts served as Vice President, Finance and Administration, Chief Financial
Officer and Treasurer of SeaChange International, Inc. from June 1996 to March
1998. Prior to June 1996, Mr. Tibbetts was employed as a certified public
accountant by Price Waterhouse LLP, most recently as a partner and National
Director of its Software Services Group. Mr. Tibbetts currently serves as a
director of Great Plains Software, Inc., a provider of business management
software solutions.
William G. Brown has been Lightbridge's Executive Vice President,
Development, since May 1998. Previously, Mr. Brown served as Chief Financial
Officer, Vice President of Finance and Administration and Treasurer of the
Company from June 1989 to May 1998. Prior to joining the Company, Mr. Brown was
Manager of Financial Reporting and Analysis for Bolt, Beranek and Newman, Inc.
and was employed at Deloitte, Haskins and Sells.
21
<PAGE>
Brian P. Connolly has been Lightbridge's Senior Vice President, Sales and
Marketing since May 1998. Prior to joining Lightbridge, Mr. Connolly was
employed by Computer Sciences Corporation's Intellicom Division, most recently
as its Vice President and Chief Operating Officer.
Michael A. Perfit, a founder of the Company, has served as Senior Vice
President of Technology of the Company since June 1991. From June 1989 to May
1991, Mr. Perfit served as Vice President of Engineering of the Company. Prior
to joining the Company, Mr. Perfit was Vice President of Appex, Inc. and held
engineering and technical support positions at Interactive Management Systems.
Richard H. Antell has served as Vice President, Software Development of the
Company since February 1996. From June 1991 to January 1996, Mr. Antell was Vice
President of Engineering of the Company. Prior to joining the Company, Mr.
Antell served as Vice President of Application Development of Applied Expert
Systems, Inc. and Project Leader of Index Systems, Inc.
Douglas E. Blackwell has served as Vice President, Service Delivery of the
Company since November 1995. From October 1994 to October 1995, Mr. Blackwell
served as Vice President of Operations of the Company. From February 1991 to
September 1994, Mr. Blackwell was employed as Vice President of Operations of
Thomson Financial Services, Inc., an on-line financial transaction and
information services firm. Prior to February 1991, Mr. Blackwell was employed at
Nolan, Norton and Co., an affiliate of KPMG/Peat Marwick.
Carla J. Marcinowski has been Lightbridge's Vice President, Consulting
Services since February 1998. Prior to joining Lightbridge as an employee, Ms.
Marcinowski provided services to Lightbridge as an independent consultant, from
October 1997 to January 1998. Ms. Marcinowski was a founder and Vice President,
Business Development of The Net Collaborative from July 1996 to August 1997, and
prior to March 1996 was employed by Lotus Development Corporation in various
positions, including International Managing Director, Consulting Services,
Managing Director, Worldwide Services Group and Services Lead, Lotus/IBM
Transition Team.
Andrew I. Fillat has served as a director of the Company since April 1996.
Since July 1995, Mr. Fillat has served as Senior Vice President of Advent
International Corporation, a venture capital investment firm. From April 1989 to
June 1995, Mr. Fillat served as Vice President of Advent International
Corporation. Mr. Fillat also serves as a director of Advanced Radio Telecom
Corp., a provider of broadband data services, Interlink Computer Sciences Inc.,
a supplier of solutions of products and services for enterprise networked
systems management, Safety 1st, Inc., a developer, marketer and distributor of
juvenile products, and Voxware, Inc., a developer of speech and audio
technologies.
Torrence C. Harder, a founder of the Company, has served as a director of
the Company since June 1989. Mr. Harder has been the President and a director of
Harder Management Company, a registered investment advisory firm, since its
establishment in 1971. He has also been the President and a director of
Entrepreneurial Ventures, Inc., a venture capital investment firm, since 1987
and currently serves as a director of MicroFinancial, Inc., a microticket
leasing firm.
D. Quinn Mills has served as a director of the Company since June 1990.
Since 1976, Dr. Mills has served as the Albert J. Weatherhead, Jr. Professor of
Economics at the Harvard Business School.
Debora J. Wilson has served as a director of Lightbridge since May 1998. Ms.
Wilson is currently Executive Vice President and General Manager at The Weather
Channel, a position she has held since May 1998. From August 1994 to May 1998,
Ms. Wilson held other positions at The Weather Channel, including President,
U.S. Products and Distribution and Senior Vice President--New Media. Prior to
August 1994, Ms. Wilson served as Director--Marketing and Product Development of
Bell Atlantic Video Services.
The Board of Directors is divided into three classes. One class of directors
is elected each year at the annual meeting of stockholders for a term of office
expiring after three years. Mr. Harder and Ms. Reeve serve in the class whose
term expires in 1999; Ms. Wilson serves in the class whose term expires in 2000;
22
<PAGE>
and Mr. Fillat and Dr. Mills serve in the class whose term expires in 2001. Each
director will serve until the expiration of his or her term and thereafter until
his or her successor is duly elected and qualified.
The Board of Directors has appointed a Compensation Committee, which
provides recommendations concerning salaries and incentive compensation for
employees of and consultants to the Company, and an Audit Committee, which
reviews the scope and results of the audit and other services provided by the
Company's independent auditors.
Directors of the Company serve without cash compensation for their services.
Under the Company's 1998 Non-Qualified Stock Option Plan, non-employee directors
of the Company are eligible to receive automatic formula grants of nonqualified
options.
Executive officers of the Company are elected annually by the Board of
Directors and serve at its discretion or until their successors are duly elected
and qualified.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Shares of the Company's Common Stock, $.01 par value per share, have been
quoted on the Nasdaq National Market under the symbol "LTBG" since its initial
public offering in the third quarter of 1996. The following table sets forth,
for the calendar quarters indicated, the high and low sales prices per share of
the Common Stock on the Nasdaq National Market, as reported in published
financial sources:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996
Third Quarter (commencing September 27, 1996).............................. $ 12.00 $ 11.25
Fourth Quarter............................................................. $ 13.00 $ 7.25
1997
First Quarter.............................................................. $ 12.25 $ 5.75
Second Quarter............................................................. $ 9.50 $ 6.50
Third Quarter.............................................................. $ 18.50 $ 7.63
Fourth Quarter............................................................. $ 19.50 $ 13.94
1998
First Quarter.............................................................. $ 20.25 $ 10.00
Second Quarter............................................................. $ 19.25 $ 8.41
Third Quarter.............................................................. $ 9.25 $ 3.38
Fourth Quarter............................................................. $ 6.22 $ 3.13
</TABLE>
As of March 12, 1999, there were 250 holders of record of common stock
(which number does not include the number of stockholders whose shares are held
of record by a broker or clearing agency but does include each such brokerage
house or clearing agency as one record holder).
The Company has never declared or paid any cash dividends on its common
stock. The Company currently anticipates that it will retain future earnings, if
any, to fund the development and growth of its business and therefore does not
expect to pay any cash dividends in the foreseeable future. Furthermore, the
terms of the Company's existing borrowing arrangements and bank lines of credit
prohibit the Company from declaring or paying cash dividends on its common
stock.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Company's
audited historical financial statements, certain of which are included elsewhere
in this Form 10-K. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Financial Statements
and Supplementary Data."
<TABLE>
<CAPTION>
THREE
YEARS ENDED MONTHS
SEPT. 30, ENDED YEARS ENDED DEC. 31,
-------------------- DEC. 31, -------------------------------
1994 1995 1995 1996(1) 1997 1998
--------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ 13,398 $ 19,350 $ 6,512 $ 29,545 $ 40,549 $ 63,352
Cost of revenues..................................... 7,415 12,607 3,484 15,986 19,428 33,108
--------- --------- ----------- --------- --------- ---------
Gross profit......................................... 5,983 6,743 3,028 13,559 21,121 30,244
--------- --------- ----------- --------- --------- ---------
Operating expenses:
Development........................................ 2,317 3,864 1,145 4,380 6,072 9,596
Sales and marketing................................ 815 1,902 795 3,673 6,041 6,857
General and administrative......................... 1,644 2,584 701 2,769 5,228 11,472
Intangible asset impairment........................ -- -- -- -- -- 7,385
In-process research and development................ -- -- -- -- 4,000 --
--------- --------- ----------- --------- --------- ---------
Total operating expenses............................. 4,776 8,350 2,641 10,822 21,341 35,310
--------- --------- ----------- --------- --------- ---------
Income (loss) from operations........................ 1,207 (1,607) 387 2,737 (220) (5,066)
Other income (expense)(2)............................ (234) (826) (313) (305) 949 682
--------- --------- ----------- --------- --------- ---------
Income (loss) before income taxes.................... 973 (2,433) 74 2,432 729 (4,384)
Provision for income taxes........................... 23 -- 2 160 892 2,513
--------- --------- ----------- --------- --------- ---------
Net income (loss).................................... 950 (2,433) 72 2,272 $ (163) $ (6,897)
--------- ---------
--------- ---------
Accretion of preferred stock dividends............... (182) (182) (46) (137)
--------- --------- ----------- ---------
Net income available for common stock................ $ 768 $ (2,615) $ 26 $ 2,135
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Basic earnings (loss) per common share............... $ 0.12 $ (0.40) $ 0.00 $ 0.33 $ (0.01) $ (0.44)
--------- --------- ----------- --------- --------- ---------
--------- --------- ----------- --------- --------- ---------
Diluted earnings (loss) per common share............. $ 0.09 $ (0.40) $ 0.00 $ 0.17 $ (0.01) $ (0.44)
--------- --------- ----------- --------- --------- ---------
--------- --------- ----------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- ------------------------------------------
1994 1995 1995 1996 1997 1998
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 1,832 $ 539 $ 58 $ 27,901 $ 15,716 $ 16,437
Working capital (deficiency).............. $ 1,715 $ (3,280) $ (1,967) $ 30,457 $ 21,186 $ 24,516
Total assets.............................. $ 9,181 $ 10,214 $ 11,055 $ 41,766 $ 63,565 $ 57,777
Long-term obligations, less current
portion................................. $ 4,197 $ 3,796 $ 4,515 $ 2,221 $ 2,221 $ 1,181
Redeemable convertible preferred stock.... $ 2,948 $ 3,131 $ 3,177 $ -- $ -- $ --
Stockholders' equity (deficit)............ $ (1,093) $ (3,564) $ (3,522) $ 33,599 $ 50,716 $ 44,447
</TABLE>
- ------------------------
(1) Lightbridge changed its fiscal year end from September 30 to December 31,
effective with the fiscal years ending December 31, 1996.
(2) Consists principally of interest expense, except consists principally of
interest income for the years ended December 31, 1997 and 1998.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Lightbridge develops, markets and supports a network of integrated products
and services that enable telecommunications carriers to improve their customer
acquisition, retention and fraud prevention processes.
In November 1997, the Company acquired all of the outstanding stock of Coral
in exchange for 892,053 shares of the Company's common stock. The Company also
assumed the obligations under Coral's outstanding stock options and warrants.
The acquisition was accounted for as a purchase and, accordingly, the results of
Coral are included with those of the Company from the date of acquisition.
Lightbridge's total revenues increased by 372.8% from $13.4 million in
fiscal 1994 to $63.4 million in fiscal 1998. This revenue increase was 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, software licensing and maintenance,
and consulting revenues. Historically, transaction revenues have accounted for a
majority of the Company's revenues, although software and licensing and
maintenance revenues and hardware revenues have increased during recent periods,
primarily as a result of increased consulting services associated with linking
wireless carrier legacy and third-party systems to the Company's systems and the
initial licensing of certain software products. Software licensing and
maintenance and consulting revenues, which together represented no more than
6.0% of total revenues in each of fiscal 1994 and 1995, increased to an
aggregate of 7.0%, 25.0%, 33.7% and 34.2% of total revenues in the three months
ended December 31, 1995 and fiscal 1996, 1997 and 1998, respectively. There can
be no assurance that the Company's software and hardware products or its
consulting services will achieve market acceptance or that the mix of the
Company's revenues will remain constant.
Lightbridge's transaction services revenues are derived primarily from the
processing of applications for qualification 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 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. The Company's clients are charged for these services on a
per transaction 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's clients.
Revenues are recognized in the period in which the services are performed.
The Company's software licensing and maintenance revenues consist of
revenues attributable to the licensing of the Company's Channel Solutions,
Customer Management and Fraud Management software. Lightbridge's Channel
Solutions products are designed to assist customers in interfacing with the
Company's transaction processing systems as well as to perform other
point-of-sale and channel functionality. The Company's Customer Management
products are designed to help carriers analyze their marketplace to improve
their business operations. The Company's Fraud Management products are designed
to assist carriers in monitoring subscriber accounts to identify activity that
may indicate fraud. While the Company's software products are licensed as
packaged software products, each of these products generally requires
insignificant customization and integration with other products and systems to
varying degrees. Revenues are recognized when persuasive evidence of an
arrangement exists, delivery of the product has been made, and a fixed fee and
collectibility has been determined. Revenues from software maintenance contracts
are recognized ratably over the term of the maintenance agreement.
25
<PAGE>
The Company's consulting services revenues historically have been derived
principally from providing consulting for customer acquisition and retention.
During the second quarter of 1998, the Company launched Lightbridge Consulting
Services, which provides business advisory, customization and integration,
deployment, and optimization services in the areas of customer acquisition and
retention, fraud prevention and distribution management. Revenues from
consulting services are generally recognized as the services are performed,
using the percentage-of-completion method, measured by labor hours.
During 1998, the Company continued its efforts to complete development of
in-process technology acquired from Coral. In June 1998, the Company released
FraudBuster 4.2.5, a new version of FraudBuster that provides certain
performance and functional enhancements. In September 1998, Lightbridge released
FraudBuster 4.4, another new version of FraudBuster that provides additional
performance and functional enhancements. As of December 31, 1998, the Company
was continuing to develop one new version of FraudBuster, which is expected to
contain substantial enhancements in performance, scalability and functionality
and is currently scheduled to be released in the second quarter of 1999. The
Company was also continuing to develop a product that is expected to be
complementary to FraudBuster and to contain new subscription fraud detection
tools. This product is currently scheduled to be available in 1999. If the
Company is unsuccessful in completing these projects, the Company's business,
financial condition, results of operations and cash flows could be materially
adversely affected. In the fourth quarter of 1998, the Company discontinued its
development efforts with respect to two versions of ChurnAlert, based upon a
lack of market receptiveness to the product and Lightbridge's determination that
its ChurnProphet and Channel Wizard products provide more marketable solutions
to telecommunications carriers.
During fiscal 1996, each of the Company's two largest clients, accounted for
more than 10% of the Company's total revenues, representing an aggregate 44% of
total revenues. During fiscal 1997 and 1998, one and three of the Company's
clients, respectively, accounted for more than 10% of the Company's total
revenues. Revenues from the one client in fiscal 1997 aggregated 29% of total
revenues. Revenues from the three clients in fiscal 1998 aggregated 17%, 15% and
10% of total revenues. 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 CAS. GTE Mobile, which historically used the call center support
solutions provided by the Company's TeleServices Group, changed to on-line
access to the Customer Acquisition System. 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 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--Our Business Depends on a 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, one of
which has been abandoned and the other of which remains under development. 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
26
<PAGE>
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 $355,000, 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 in fiscal 1995, capitalized software
development costs were amortized using the straight-line method over a two-year
period. 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 $1,301,000 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 are being amortized using the straight-line method over a
two-year period.
Substantially all of the Company's revenues historically have been derived
from clients located in the United States, and the Company expects that domestic
sales will continue to account for a substantial majority of its revenues in
1999.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
Transaction......................................................... 75.0% 66.3% 65.8%
Software licensing and maintenance.................................. 9.4 15.6 18.8
Consulting services................................................. 15.6 18.1 15.4
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Cost of revenues:
Transaction......................................................... 47.1 38.3 36.8
Software licensing and maintenance.................................. 1.7 5.0 7.2
Consulting services................................................. 5.3 4.6 8.3
----- ----- -----
54.1 47.9 52.3
----- ----- -----
Gross profit.......................................................... 45.9 52.1 47.7
----- ----- -----
Operating expenses:
Development......................................................... 14.8 15.0 15.1
Sales and marketing................................................. 12.4 14.9 10.8
General and administrative.......................................... 9.4 12.9 18.1
Intangible asset impairment......................................... -- -- 11.7
In-process research and development................................. -- 9.8 --
----- ----- -----
Total operating expenses.......................................... 36.6 52.6 55.7
----- ----- -----
Income (loss) from operations......................................... 9.3 (0.5) (8.0)
Other income (expense), net........................................... (1.1) 2.3 1.1
----- ----- -----
Income (loss) before income taxes..................................... 8.2 1.8 (6.9)
Provision for income taxes............................................ (0.5) 2.2 4.0
----- ----- -----
Net income (loss)..................................................... 7.7% (0.4)% (10.9 )%
----- ----- -----
----- ----- -----
</TABLE>
27
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased by 65.0% to $63.4 million in the year ended
December 31, 1998 from $40.5 million in the year ended December 31, 1997.
Transaction revenues increased by 55.1% to $41.7 million in the year ended
December 31, 1998 from $26.9 million in the year ended December 31, 1997, while
decreasing as a percentage of total revenues to 65.8% from 66.3%. The dollar
increase in transaction revenues for the year ended December 31, 1998 was
primarily due to increased volume of qualification and activation transactions
processed for carrier clients. The decrease in transaction revenues as a
percentage of total revenues for the year ended December 31, 1998 principally
resulted from a greater increase in software licensing and maintenance revenues
than transaction revenues for the same period.
The Company believes that its transaction revenues in 1999 will not increase
at the same rate as they did in 1998. The Company's transaction revenues will
continue to reflect in large part the industry's rate of growth of new
subscribers; the Company believes, based in part on reports of wireless
telecommunication industry analysts, that the rate of subscriber growth will
slow in upcoming years. The rate of growth in the Company's transaction revenues
in 1998 reflects revenues from a number of major PCS carriers that began
operating in late 1997 and in 1998; the Company does not expect that revenues
from these PCS carriers will continue to increase at the same rate as they have
in 1998.
Software licensing and maintenance revenues increased by 88.4% to $11.9
million in the year ended December 31, 1998 from $6.3 million in the year ended
December 31, 1997, while increasing as a percentage of total revenues to 18.8%
from 15.6%. Both the dollar increase and the increase as a percentage of total
revenues in software licensing revenues for the year ended December 31, 1998
were principally a result of the increase in revenues attributable to the
Company's Channel Solutions and Fraud Management products and services.
The Company currently anticipates that its software licensing and
maintenance revenues in 1999 will approximate those in 1998, as the Company
continues to integrate its Fraud Management products with its other offerings
and to build its international sales capability. Actual results for 1999 will,
however, be subject to a number of uncertainties, some of which are not within
the Company's control. In particular, the Company believes that software
licensing revenues at least through 1999 will be subject to fluctuation and will
be more difficult to anticipate than the Company's other types of revenues,
principally due to the relatively long sales cycle and relatively large dollar
size of its software licenses. The sales cycles for domestic software licenses
generally extend from three to six months and may extend as long as twelve
months; sales cycles for software licenses sold to international clients often
are longer. The predictability of software licensing revenue is further impeded
because the Company's licensed software is a discretionary purchase for most
customers. As a result of the foregoing, a small number of licensing
transactions may have a significant effect on the Company's software licensing
revenues in a quarter.
Consulting services revenues increased by 32.8% to $9.7 million in the year
ended December 31, 1998 from $7.3 million in the year ended December 31, 1997,
while decreasing as a percentage of total revenues to 15.4% from 18.1%. The
dollar increase in consulting services revenues for the year ended December 31,
1998 was principally due to increased demand for the consulting services offered
by the Company. The decrease in consulting services revenue as a percentage of
total revenues for the year ended December 31, 1998 principally resulted from a
greater increase in software licensing revenues than consulting services
revenues for the same period. The Company is continuing to standardize its
consulting services offerings and to build its consulting capabilities. Its
consulting business has become less concentrated in 1998, with consulting work
being performed for more than 35 clients during the year ended December 31,
1998.
COST OF REVENUES. Cost of revenues consists primarily of personnel costs,
costs of maintaining systems and networks used in processing qualification and
activation transactions (including depreciation and amortization of systems and
networks) and amortization of capitalized software and acquired technology. Cost
of revenues may vary as a percentage of total revenues in the future as a result
of a number of factors,
28
<PAGE>
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 among
transaction revenues, software licensing revenues and consulting services
revenues.
Transaction cost of revenues increased by 50.0% to $23.3 million in the year
ended December 31, 1998 from $15.5 million in the year ended December 31, 1997,
while decreasing as a percentage of total revenues to 36.8% from 38.3%. The
increase in transaction cost of revenues for the year ended December 31, 1998
resulted principally from increases in transaction volume and costs attributable
to expansion of the Company's staff and systems capacity. The decrease in
transaction cost of revenues as a percentage of total revenues for the year
ended December 31, 1998 principally resulted from an increase in the number of
transactions processed compared to the same period of the prior year.
Software licensing and maintenance cost of revenues increased by 125.3% to
$4.6 million in the year ended December 31, 1998 from $2.0 million in the year
ended December 31, 1997, while increasing as a percentage of total revenues to
7.2% from 5.0%. Both the dollar increase and the increase as a percentage of
total revenues in software licensing cost of revenues for the year ended
December 31, 1998 were primarily due to the increased cost of revenues for Fraud
Management products.
Consulting services cost of revenues increased by 181.1% to $5.2 million in
the year ended December 31, 1998 from $1.9 million in the year ended December
31, 1997, while increasing as a percentage of total revenues to 8.3% from 4.6%.
Both the dollar increase and the increase as a percentage of total revenues in
consulting services cost of revenues were attributable primarily to the increase
in consulting staff due to the expansion of the consulting services group,
including both newly hired personnel and personnel reallocated from other areas
of the Company's operations, including sales and marketing, as part of the
establishment of Lightbridge Consulting Services. The Company expects to
continue hiring consulting staff during the year ending December 31, 1999.
The Company expects fluctuations in gross profit may occur primarily due to
fluctuations in revenue generated from the Company's three revenue components,
particularly revenues from software licensing which have historically generated
higher gross profit margins.
DEVELOPMENT. Development expenses include internal software development
costs and 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 58.0% to $9.6 million in the year ended
December 31, 1998 from $6.1 million in the year ended December 31, 1997. The
increase in costs for the year ended December 31, 1998 resulted primarily from
the addition of engineering personnel necessary to support the Company's product
development plans in connection with the development and deployment of enhanced
versions of its Fraud Management software product, FraudBuster. The Company
expects to continue to increase its engineering and development efforts in order
to continue enhancing its existing products and services, including its Channel
Solutions, Churn and Fraud Management products and services, as well as to
develop new products and services.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and travel expenses of direct sales and marketing
personnel, as well as costs associated with advertising, trade shows and
conferences. Sales and marketing expenses increased by 13.5% to $6.9 million in
the year ended December 31, 1998 from $6.0 million in the year ended December
31, 1997. The increase for the year ended December 31, 1998 was due principally
to the addition of direct sales and product marketing personnel, increased
commissions resulting from the higher level of revenues and an increase in
marketing programs. This increase was offset in part by the reallocation of
certain personnel to Lightbridge Consulting Services as well as the allocation
of certain related expenses to consulting services cost of
29
<PAGE>
revenues. The Company expects to continue to invest in sales and marketing
efforts, both domestically and internationally, in order to increase its
penetration of existing accounts and to add new clients and markets.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of salaries of executive, finance, human resources and
administrative personnel, fees for outside professional services, and
amortization of goodwill and certain acquired intangible assets incurred
pursuant to the acquisition of Coral. General and administrative expenses
increased by 119.4% to $11.5 million in the year ended December 31, 1998 from
$5.2 million in the year ended December 31, 1997. The increase reflected the
amortization of $3.0 million of goodwill and certain acquired intangible assets
attributable to the Company's acquisition of Coral and an increase in the number
of personnel. The Company expects that its general and administrative costs will
not materially change during the year ending December 31, 1999.
INTANGIBLE ASSET IMPAIRMENT. During the year ended December 31, 1998,
Lightbridge expensed approximately $7.4 million of intangible assets recorded in
connection with the acquisition of Coral. The write-off included approximately
$2.6 million from the abandonment of the ChurnAlert product and an additional
$4.8 million of goodwill, based on a determination that the net book value of
this asset was impaired at December 31, 1998. This determination was based on a
comparison of the undiscounted cash flows associated with the Coral business,
excluding ChurnAlert with the net book value of the related assets. That
comparison indicated that the remaining net book value would not be recovered
through normal operations, and accordingly, a charge was taken to state the
assets at estimated fair value, determined as the net present value of the
estimated cash flows, discounted at a rate of 13%.
OTHER INCOME, 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, net in the year
ended December 31, 1998 consisted predominantly of interest income and expense.
Interest expense consists of interest, commitment fees and other similar fees
payable with respect to the Company's bank lines of credit, subordinated notes
and capital leases. Interest expense remained the same at $0.2 million in the
years ended December 31, 1998 and 1997. Interest income decreased to $0.6
million in the year ended December 31, 1998 from $1.2 million in the year ended
December 31, 1997 as a result of lower average cash balances during the year.
Interest income for the year ended December 31, 1998 reflected an average rate
of return of approximately 4.7%.
PROVISION FOR INCOME TAXES. The Company's effective tax rate was 57.3% and
122.4% for the years ended December 31, 1998 and 1997, respectively. The
relatively high effective tax rate for 1998 resulted from goodwill attributable
to the Company's acquisition of Coral, which is recognized as an expense for
accounting purposes, but is not deductible for tax purposes. Because the
goodwill attributable to the Coral acquisition will continue to be amortized
through the year ending December 31, 2002, the Company anticipates that its
effective tax rate will continue to be relatively high during that amortization
period and, in particular, estimates that its effective tax rate for the year
ending December 31, 1999 will be approximately 49%. The actual effective tax
rate for 1999 may vary significantly from the Company's estimates as the result
of a number of factors, including any and all factors that cause the Company's
actual pretax book income for those years to vary from the Company's internal
estimates. The Company has net operating loss carryforwards for federal income
tax purposes which were acquired with Coral. These net operating loss
carryforwards are limited in use and therefore a valuation allowance was
established against the deferred tax assets as their realization is not assured.
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
30
<PAGE>
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 hardware revenues and consulting 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 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 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, including customized software integration services
and the initial two modules in the Customer Management solution. The Company
capitalized $1,301,000 and $0 of internally developed software development costs
for the years ended December 31, 1997 and 1996, respectively.
SALES AND MARKETING. Sales and marketing expenses increased by 43.0% 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 (including
costs attributable to Coral marketing personnel subsequent to Coral's
acquisition on November 7, 1997) and increased use of marketing programs,
including trade shows.
GENERAL AND ADMINISTRATIVE. 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 12.9% 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 December 31, 1997 balance of goodwill and certain other
acquired intangible assets attributable to the Coral acquisition began being
amortized over the sixty and thirty-six months beginning November 1997,
respectively.
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 Company's acquisition
of Coral, described above.
OTHER INCOME (EXPENSE), NET. Other income (expense), net increased 410.9%
to $949,000 in the year ended December 31, 1997 from net other expense of
$(305,288) 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
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<PAGE>
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 significantly influenced by the nondeductible charge of
$4.0 million for purchased in-process research and development from the
acquisition of Coral. The effective tax rate was further affected by
nondeductible amortization resulting from the merger offset by the recognition
of certain tax credits and changes in the Company's valuation allowances on tax
assets.
LIQUIDITY AND CAPITAL RESOURCES
Prior to its initial public offering, the Company funded its operations
primarily through 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 were sold at an initial 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 selling stockholders. Proceeds to
the Company, net of underwriters' discount 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 the common stock of
the Company and to fund working capital and other general corporate purposes.
During 1998, the Company funded its operations primarily through cash flows from
operations.
The Company has a $4.0 million working capital line of credit and a $3.0
million equipment line of credit with a bank. The working capital line of credit
is secured by a pledge of the Company's accounts receivable, equipment and
intangible assets, and borrowing availability is based on the amount of
qualifying accounts receivable. Advances under the working capital line of
credit and equipment line of credit bear interest at the bank's prime rate
(7.75% at December 31, 1998). The working line of credit also provides for the
issuance of letters of credit, which reduce the amount that may be borrowed
under the line of credit and are limited to $1,250,000 in the aggregate. At
December 31, 1998, there were no borrowings outstanding under the working
capital line of credit and borrowings of $0.2 million were outstanding under the
equipment line of credit. The Company's agreements with the bank 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 1999 and the equipment line of credit
expires in June 2001.
The Company's capital expenditures totaled $6.9 million and $10.4 million,
respectively, for the years ended December 31, 1998 and 1997. The capital
expenditures during these periods consisted of purchases of fixed assets,
principally for the Company's services delivery infrastructure and computer
equipment for development activities. Capital expenditures during the year ended
December 31, 1998 also included leasehold improvements and other costs
attributable to the relocation of Coral's facilities to Broomfield, Colorado.
The Company currently estimates that its capital expenditures for 1999 will
total approximately $6.0 million to $7.0 million, although the actual amount of
those expenditures may vary significantly, depending upon, among other things,
the extent to which the Company determines to update the capacity of its data
center and to acquire additional computer equipment. The Company leases its
facilities and certain equipment under non-cancelable capital and operating
lease agreements that expire at various dates through December 2003.
32
<PAGE>
As of December 31, 1998, the Company had cash and cash equivalents of $16.4
million and working capital of $24.7 million. The Company believes that the
current cash balances and funds available under existing lines of credit will be
sufficient to finance the Company's operations and capital expenditures for at
least the next twelve months.
YEAR 2000 IMPACT ON INFORMATION TECHNOLOGY COSTS
Many companies' currently installed computer systems and software products
are coded to accept only two digit year entries in date coded fields,
potentially with the incorrect assumption of the twentieth century. To eliminate
date ambiguity, these date coded fields need to accept four digit entries, or
utilize a consistent, predictable technique to distinguish twenty-first century
dates from twentieth century dates. In addition, four digit year dates must be
stored in database or file fields, regardless of the entry of two digit years.
As a result, in less than a year, 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 software industry concerning the potential
effects associated with such compliance.
Lightbridge has been actively involved in addressing Year 2000 issues since
early 1997. Lightbridge believes that its software products are generally Year
2000 compliant, meaning that the use or occurrence of dates after January 1,
2000 will not materially affect the performance of Lightbridge's software
products with respect to date dependent data, or the ability of such products to
correctly create, store, process and output information related to such date
data. In October 1998, the Company completed development of version 1.20 of CAS,
the Company's transaction processing system. Version 1.20 is Year 2000 compliant
for the core CAS and for the front-end access points to CAS, and also includes
Year 2000 support for third-party interfaces to CAS, such as interfaces with
credit bureaus and billing systems. During the third quarter of 1998, the
Company completed Year 2000 compliance for its Fraud Management software
product, FraudBuster. The Company had previously verified Year 2000 compliance
for its Retail Management System, its point-of-sale system. The Company is
continuing its testing and modification efforts relating to its software
products. There can be no assurance that Lightbridge's software products contain
all necessary software routines and codes necessary for the accurate
calculation, display, storage and manipulation of data involving dates. The
Company may be required to make significant expenditures in connection with the
on-going design and testing of its software-based services and products and
interfaces to third-party systems for Year 2000 compatibility, and any related
modifications or other development work that may be required to cause those
services and products to be Year 2000 compatible. In addition, in certain
circumstances, Lightbridge has warranted that the use or occurrence of dates on
or after January 1, 2000 will not adversely affect the performance of
Lightbridge's products with respect to date dependent data or the ability to
create, store, process and output information related to such data. If any of
Lightbridge's clients experience Year 2000 problems, such clients could assert
claims for damages against Lightbridge. Lightbridge's agreements with clients in
most cases limit liability to prevent unlimited exposure from such claims.
Lightbridge has completed an inventory and review of the Year 2000
compliance status of the software and systems considered critical to its
transaction processing operations and its internal business, and has begun to
obtain appropriate assurances of compliance from manufacturers of such software
and systems and agreements to modify or replace all non-compliant products. In
addition, Lightbridge is considering converting certain of its software and
systems to commercial products that are known to be Year 2000 compliant.
Implementation of software products of third parties, however, will require the
dedication of substantial administrative and management information resources,
the assistance of consulting personnel from third party software vendors and the
training of Lightbridge's personnel using such systems. Back office software and
systems considered critical to Lightbridge's business are scheduled to be Year
2000 compliant by the second quarter of 1999. Nevertheless, particularly to the
extent Lightbridge is relying on the products of other vendors to resolve Year
2000 issues, there can be no assurance that Lightbridge will not experience
delays in completing the resolution of such issues. If a key system, or a
significant number
33
<PAGE>
of systems, were to fail as a result of software products that were not Year
2000 compliant, Lightbridge could incur substantial costs and experience
disruption of its business, which could have a material adverse effect on
Lightbridge's business, financial condition, results of operations and cash
flows.
Lightbridge expects that its Year 2000 procedures with respect to its
software products, transaction processing systems, and internal business
software and systems, will be substantially completed by the second quarter of
1999. Lightbridge has not separately tracked the costs incurred for
investigating and remedying issues related to Year 2000 compliance, and all of
the costs have been internal. Lightbridge currently estimates that it will spend
approximately $500,000 on Year 2000 testing and compliance during 1999. There
can be no assurance that Company resources spent on investigating and remedying
Year 2000 issues will not have a material adverse effect on Lightbridge's
business, financial condition, results of operations and cash flows.
In addition, Year 2000 issues may affect the purchasing patterns of clients
and potential clients. Many companies are expending significant resources to
correct their current software systems for Year 2000 compliance. These
expenditures may adversely affect the amount or timing of funds available to
purchase software products such as those offered by Lightbridge, which could
have an adverse effect on Lightbridge's business, financial condition, results
of operations and cash flows.
The foregoing is a Year 2000 readiness disclosure within the meaning of the
Year 2000 Information and Readiness Disclosure Act.
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 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS No. 133 establishes standards
applicable to the manner in which Lightbridge accounts for derivative
instruments in its annual financial statements commencing with fiscal year
ending December 31, 1999. Lightbridge is unable at this time to determine
whether the adoption of SFAS No. 133 will have a material effect on
Lightbridge's results of operations or financial condition.
In December 1998, the AICPA released Statement of Position No. 98-9, ("SOP
98-9") "Modification of SOP 97-2, "Software Revenue Recognition, "with Respect
to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple elements arrangements by means of the "residual
method" when (1) there is vendor-specific objective evidence ("VSOE") of fair
values of all the undelivered elements that are not accounted for by means of
long-term contract accounting, (2) VSOE of fair value does not exist for one or
more of the delivered elements, and (3) all revenue recognition criteria of SOP
97-2 (other than the requirement for VSOE of the fair value of each delivered
element) are satisfied. The provisions of SOP 98-9 that extend the deferral of
certain paragraphs of SOP 97-2 became effective December 15, 1998. These
paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions that are
entered into in fiscal years beginning after March 15, 1999. Retroactive
application is prohibited. The Company does not expect the adoption of SOP 98-9
to have a material effect on its consolidated financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
The market risk exposure inherent in the Company's financial instruments and
consolidated financial position represents the potential losses arising from
adverse changes in interest rates. The Company is
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<PAGE>
exposed to such interest rate risk primarily in its significant investment in
cash and cash equivalents and the use of fixed and variable rate debt to fund
its acquisition of property and equipment in past years.
Market risk for cash and cash equivalents and fixed-rate borrowings is
estimated as the potential change in the fair value of the assets or obligations
resulting from a hypothetical ten percent adverse change in interest rates,
which would not have been signifcant to the Company's financial position or
results of operations during 1998. The effect of a similar hypothetical change
in interest rates on the Company's variable-rate debt also would have been
insignificant due to the immaterial amounts of borrowings outstanding under the
Company's credit arrangements.
For additional information about the Company's financial instruments and
debt obligations, see Notes to Consolidated Financial Statements in the
accompanying consolidated financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are listed in the index included in
Item 14(a)(1) of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by this Item is not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Certain of the information concerning the Directors of the Company required
under this item is contained in "Item 4A. Executive Officers," and the remainder
of such information is incorporated herein by reference to the information under
the heading "Election of Directors" in the Company's Proxy Statement for the
1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or before April 30, 1999.
EXECUTIVE OFFICERS
Certain of the information concerning the executive officers of the Company
required under this item is contained in "Item 4A. Executive Officers," and the
remainder of such information is incorporated herein by reference to the
information under the heading "Election of Directors" in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information under the heading "Election of Directors" and "Executive
Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or
before April 30, 1999 is incorporated by reference herein. Such incorporation by
reference shall not be deemed to specifically incorporate by reference the
information referred to in Item 402(a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information under the heading "Share Ownership of Principal Stockholders and
Management" in the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or
before April 30, 1999 is incorporated by reference herein.
35
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information under the heading "Certain Relationships and Other Transactions"
in the Company's Proxy Statement for the 1999 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission on or before April 30, 1999
is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) Documents filed as part of this report
<TABLE>
<S> <C> <C>
(1) Financial Statements
Independent Auditors' Report............................................... F-1
Consolidated Balance Sheets as of December 31, 1997 and 1998............... F-2
Consolidated Statements of Operations for the years ended December 31, F-3
1996, 1997 and 1998........................................................
Consolidated Statements of Stockholders' Equity (Deficiency) for the years F-4
ended December 31, 1996, 1997 and 1998.....................................
Consolidated Statements of Cash Flows for the years ended December 31, F-5
1996, 1997 and 1998........................................................
Notes to Consolidated Financial Statements................................. F-6
(2) Consolidated financial statement schedules
All schedules have been omitted because the required information either is
not applicable or is shown in the financial statements or notes thereto.
</TABLE>
(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
3.3+++ Amendment to Amended and Restated By-Laws of the Company, adopted October 29, 1998
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
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ----------------------------------------------------------------------------------------------------
<C> <S>
10.5++ Loan Modification Agreements, dated from August 19, 1996 to June 26, 1998, each amending 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
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
10.17+ Office Building Lease, dated March 12, 1998, between 8900 Grantline Road Investors and the Company
10.18++++ 1998 Non-Statutory Stock Option Plan
23 Independent Auditors' Consent--Deloitte & Touche LLP
27.1 Financial Data Schedule for fiscal year ended December 31, 1998
</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 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
+ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998
++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998
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<PAGE>
+++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998
++++ Incorporated by reference to the Company's Registration Statement on Form
S-8, as filed with the Securities and Exchange Commission on November 25,
1998
(b) Reports on Form 8-K filed in the fourth quarter of 1998
No Current Reports on Form 8-K were filed by the Company during the fourth
quarter of 1998.
38
<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 thirty-first
day of March, 1999.
LIGHTBRIDGE, INC.
By: /s/ PAMELA D.A. REEVE
-----------------------------------------
President and Chief Executive Officer
Each person whose signature appears below hereby appoints Pamela D.A. Reeve,
Joseph S. Tibbetts, Jr., and Alexander H. Pyle and each of them severally,
acting alone and without the other, his or her true and lawful attorney-in-fact
with the authority to execute in the name of each such person, and to file with
the Securities and Exchange Commission, together with any exhibits thereto and
other documents therewith, any and all amendments to this Annual Report on Form
10-K necessary or advisable to enable Lightbridge, Inc., to comply with the
rules, regulations, and requirements of the Securities Act of 1934, as amended,
in respect thereof, which amendments may make such other changes in the Annual
Report on Form 10-K as the aforesaid attorney-in-fact executing the same deems
appropriate.
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 thirty-first day of March, 1999.
President, Chief Executive
Officer and Director
/s/ PAMELA D.A. REEVE (Principal Executive
- ------------------------------ Officer)
Senior Vice President,
Finance & Administration
and Chief Financial
/s/ JOSEPH S. TIBBETTS, JR. Officer (Principal
- ------------------------------ Financial and Accounting
Officer)
/s/ ANDREW I. FILLAT Director
- ------------------------------
/s/ TORRENCE C. HARDER Director
- ------------------------------
/s/ D. QUINN MILLS Director
- ------------------------------
/s/ DEBORA J. WILSON Director
- ------------------------------
39
<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 as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Companies at December 31,
1997 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
Februrary 24, 1999
F-1
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 15,715,726 $ 16,436,995
Accounts receivable, net......................................................... 13,195,865 18,803,230
Accounts receivable from related parties......................................... 17,187 28,732
Deferred tax assets.............................................................. 426,348 335,348
Other current assets............................................................. 2,459,235 1,063,848
------------- -------------
Total current assets........................................................... 31,814,361 36,668,153
Property and equipment, net........................................................ 11,763,013 13,454,070
Notes receivable from related parties.............................................. 128,127 67,113
Deferred tax assets................................................................ 216,038 453,038
Other assets, net.................................................................. 421,952 425,542
Goodwill, net...................................................................... 10,383,581 2,145,313
Acquired intangible assets, net.................................................... 7,716,545 4,024,811
Other intangible assets, net....................................................... 1,121,559 539,239
------------- -------------
Total assets............................................................... $ 63,565,176 $ 57,777,279
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................. $ 2,830,847 $ 5,774,975
Accrued compensation............................................................. 1,567,833 1,648,459
Other accrued liabilities........................................................ 3,260,003 2,401,414
Short-term borrowings and current portion of subordinated notes payable.......... 805,205 652,770
Current portion of obligations under capital leases.............................. 339,258 44,440
Deferred revenues................................................................ 1,658,406 1,460,636
Other current liabilities........................................................ 166,876 166,876
------------- -------------
Total current liabilities...................................................... 10,628,428 12,149,570
Notes payable...................................................................... 152,770 --
Subordinated notes payable......................................................... 1,244,844 655,484
Other long-term liabilities........................................................ 823,346 525,124
------------- -------------
Total liabilities.............................................................. 12,849,388 13,330,178
------------- -------------
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock; $0.01 par value, 5,000,000 shares authorized; no shares issued
or outstanding at December 31, 1997 and 1998................................... -- --
Common stock, $.01 par value; 60,000,000 shares authorized; 16,492,954 and
16,841,823 shares issued; 15,665,662 and 16,014,531 shares outstanding at
December 31, 1997 and 1998, respectively....................................... 164,929 168,417
Additional paid-in capital....................................................... 53,660,991 54,285,766
Warrants......................................................................... 598,875 598,875
Accumulated deficit.............................................................. (2,084,044) (8,980,994)
------------- -------------
Total.......................................................................... 52,340,751 46,072,064
Less treasury stock; 827,292 shares at cost at December 31, 1997 and 1998........ (1,624,963) (1,624,963)
------------- -------------
Total stockholders' equity..................................................... 50,715,788 44,447,101
------------- -------------
Total liabilities and stockholders' equity................................. $ 63,565,176 $ 57,777,279
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Transaction....................................................... $ 22,158,773 $ 26,881,516 $ 41,683,290
Software licensing and maintenance................................ 2,780,355 6,331,769 11,927,082
Consulting services............................................... 4,605,724 7,336,037 9,741,124
------------- ------------- -------------
Total revenues.................................................. 29,544,852 40,549,322 63,351,496
------------- ------------- -------------
Cost of Revenues:
Transaction....................................................... 13,918,628 15,535,143 23,300,910
Software licensing and maintenance................................ 496,560 2,034,453 4,583,494
Consulting services............................................... 1,570,240 1,858,039 5,223,259
------------- ------------- -------------
Total cost of revenues.............................................. 15,985,428 19,427,635 33,107,663
------------- ------------- -------------
Gross profit........................................................ 13,559,424 21,121,687 30,243,833
------------- ------------- -------------
Operating expenses:
Development....................................................... 4,380,293 6,072,468 9,596,423
Sales and marketing............................................... 3,673,422 6,040,846 6,856,522
General and administrative........................................ 2,768,424 5,228,801 11,472,090
Intangible asset impairment....................................... -- -- 7,384,506
Purchased in-process research and development..................... -- 4,000,000 --
------------- ------------- -------------
Total operating expenses............................................ 10,822,139 21,342,115 35,309,541
------------- ------------- -------------
Income (loss) from operations....................................... 2,737,285 (220,428) (5,065,708)
------------- ------------- -------------
Other income (expense):
Interest income:
Related parties................................................. 4,807 18,675 6,945
Other........................................................... 416,801 1,163,775 638,834
Interest expense:
Related parties................................................. (89,142) (18,984) --
Other........................................................... (664,481) (351,763) (241,594)
Other non-operating income (expense).............................. 26,727 137,756 277,573
------------- ------------- -------------
Total other income (expense)........................................ (305,288) 949,459 681,758
------------- ------------- -------------
Income (loss) before provision for income taxes..................... 2,431,997 729,031 (4,383,950)
Provision for income taxes.......................................... 159,500 892,000 2,513,000
------------- ------------- -------------
Net income (loss)................................................... $ 2,272,497 $ (162,969) $ (6,896,950)
------------- ------------- -------------
------------- ------------- -------------
Basic earnings (loss) per share (Note 10)......................... $ 0.33 $ (0.01) $ (0.44)
------------- ------------- -------------
------------- ------------- -------------
Diluted earnings (loss) per share (Note 10)....................... $ 0.17 $ (0.01) $ (0.44)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
TREASURY
COMMON STOCK ADDITIONAL STOCK
------------------------ PAID-IN ACCUMULATED ---------
SHARES AMOUNT CAPITAL WARRANTS DEFICIT SHARES
------------ ---------- -------------- ---------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996................... 6,575,098 $ 65,751 $ -- $ 406,375 $ (3,993,572) 1,148
Issuance of common stock for cash.......... 115,120 1,152 156,420 -- -- --
Exercise of common stock warrants.......... 410,287 4,103 27,147 (31,250) -- --
Repurchase of common stock for cash........ -- -- -- -- -- 800,000
Dividends on redeemable convertible
preferred stock.......................... -- -- (136,905) -- -- --
Expenses paid on behalf of stockholder..... -- -- -- -- (200,000) --
Issuance of common stock, net of issuance
costs.................................... 3,021,868 30,219 27,030,857 -- -- --
Conversion of redeemable convertible
preferred stock to common stock.......... 5,247,324 52,473 9,219,450 -- -- --
Compensation cost of issuance of warrant... -- -- -- 230,000 -- --
Net income................................. -- -- -- -- 2,272,497 --
------------ ---------- -------------- ---------- -------------- ---------
Balance, December 31, 1996................. 15,369,697 153,698 36,296,969 605,125 (1,921,075) 801,148
Issuance of common stock for cash.......... 193,704 1,935 266,904 -- -- --
Issuance of common stock for technology
acquisition.............................. 25,000 250 312,250 -- -- --
Repurchase of common stock from related
parties.................................. -- -- -- -- -- 26,144
Exercise of common stock warrants.......... 12,500 125 31,125 (6,250) -- --
Issuance of common stock for acquisition... 892,053 8,921 16,511,057 -- -- --
Tax benefit from disqualifying dispositions
of incentive stock options and
non-qualified stock options.............. -- -- 242,686 -- -- --
Net loss................................... -- -- -- -- (162,969) --
------------ ---------- -------------- ---------- -------------- ---------
Balance, December 31, 1997................. 16,492,954 164,929 53,660,991 598,875 (2,084,044) 827,292
Issuance of common stock for cash.......... 18,573 185 143,872
Exercise of common stock options........... 330,296 3,303 312,903
Tax benefit from disqualifying dispositions
of incentive stock options and
non-qualified stock options.............. 168,000
Net loss................................... -- -- -- -- (6,896,950) --
------------ ---------- -------------- ---------- -------------- ---------
Balance, December 31, 1998................. 16,841,823 $ 168,417 $ 54,285,766 $ 598,875 $ (8,980,994) 827,292
------------ ---------- -------------- ---------- -------------- ---------
------------ ---------- -------------- ---------- -------------- ---------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
AMOUNT (DEFICIENCY)
-------------- --------------
<S> <C> <C>
Balance, January 1, 1996................... $ (574) $ (3,522,020)
Issuance of common stock for cash.......... -- 157,572
Exercise of common stock warrants.......... -- --
Repurchase of common stock for cash........ (1,535,500) (1,535,500)
Dividends on redeemable convertible
preferred stock.......................... -- (136,905)
Expenses paid on behalf of stockholder..... -- (200,000)
Issuance of common stock, net of issuance
costs.................................... -- 27,061,076
Conversion of redeemable convertible
preferred stock to common stock.......... -- 9,271,923
Compensation cost of issuance of warrant... -- 230,000
Net income................................. -- 2,272,497
-------------- --------------
Balance, December 31, 1996................. (1,536,074) 33,598,643
Issuance of common stock for cash.......... -- 268,839
Issuance of common stock for technology
acquisition.............................. -- 312,500
Repurchase of common stock from related
parties.................................. (88,889) (88,889)
Exercise of common stock warrants.......... -- 25,000
Issuance of common stock for acquisition... -- 16,519,978
Tax benefit from disqualifying dispositions
of incentive stock options and
non-qualified stock options.............. -- 242,686
Net loss................................... -- (162,969)
-------------- --------------
Balance, December 31, 1997................. (1,624,963) 50,715,788
Issuance of common stock for cash.......... 144,057
Exercise of common stock options........... 316,206
Tax benefit from disqualifying dispositions
of incentive stock options and
non-qualified stock options.............. 168,000
Net loss................................... -- (6,896,950)
-------------- --------------
Balance, December 31, 1998................. $ (1,624,963) $ 44,447,101
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ 2,272,497 $ (162,969) $(6,896,950)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities (net of effect of acquisition):
Purchased in-process research and development................................. -- 4,000,000 --
Intangible asset impairment................................................... -- -- 7,384,506
Deferred income taxes......................................................... -- (695,000) (266,390)
Depreciation and amortization................................................. 3,557,699 5,551,447 10,561,554
Amortization of discount on notes............................................. 63,975 43,704 35,640
(Gain) loss on disposal of equipment.......................................... -- (43,007) 18,978
Compensation expense related to warrant grant................................. 230,000 -- --
Changes in assets and liabilities:
Accounts receivable........................................................... (2,802,772) (4,727,562) (5,618,910)
Other assets.................................................................. (731,600) (751,258) 1,331,809
Accounts payable and accrued liabilities...................................... 185,287 342,500 2,166,165
Other liabilities............................................................. -- 79,452 (177,833)
Deferred revenues............................................................. 348,075 (1,545,582) (197,770)
----------- ------------ -----------
Net cash provided by operating activities................................... 3,123,161 2,091,725 8,840,799
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (2,339,797) (10,388,992) (6,928,692)
Capitalization of software development costs.................................... -- (963,499) (155,092)
Proceeds from sale of equipment................................................. -- 245,996 --
Redemption of investments....................................................... -- 2,069,323 --
Purchase of investments......................................................... -- (2,069,323) --
Notes receivable--to related parties............................................ -- (87,000) --
Repayments of notes receivable--related parties................................. -- 14,083 61,014
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....................................... (2,689,797) (11,622,916) (7,022,770)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reimbursement of leasehold improvements......................................... -- 254,410 --
Proceeds from equipment line borrowings......................................... 763,013 -- --
Payments on notes payable....................................................... (2,651,000) (1,270,028) (930,205)
Payments under capital lease obligations........................................ (2,144,187) (1,578,107) (294,818)
Proceeds from issuance of common stock.......................................... 27,218,648 268,839 628,263
Stock issuance expenditures..................................................... -- (353,999) --
Proceeds from exercise of warrant............................................... -- 25,000 --
Payments toward the purchase of treasury stock.................................. (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......................... 27,409,374 (2,653,885) (596,760)
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents............................ 27,842,738 (12,185,076) 721,269
Cash and cash equivalents, beginning of year.................................... 58,064 27,900,802 15,715,726
----------- ------------ -----------
Cash and cash equivalents, end of year.......................................... $27,900,802 $ 15,715,726 $16,436,995
----------- ------------ -----------
----------- ------------ -----------
Cash paid for interest.......................................................... $ 836,869 $ 353,990 $ 232,239
----------- ------------ -----------
----------- ------------ -----------
Cash paid for income taxes...................................................... $ 87,413 $ 1,778,026 $ 641,703
----------- ------------ -----------
----------- ------------ -----------
</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. The Company develops, markets and supports a
network of integrated products and services that enable telecommunications
carriers to improve their customer acquisition, retention and fraud prevention
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
Coral Systems, Inc. ("Coral"), a Delaware corporation, through the issuance of
892,053 shares of common stock for all of the outstanding shares of Coral's
common stock. In addition, all of Coral's outstanding options were converted
into options to acquire stock of the Company, adjusted only for the exchange
ratio between the stocks of Coral and the Company.
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 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>
The purchase price, which aggregated $17,296,442 was 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>
F-6
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND RECENT ACQUISITIONS (CONTINUED)
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, 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. The 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, 1997 or of results which may occur in the future.
<TABLE>
<CAPTION>
(In thousands except per share data) 1997
- ------------------------------------------------------------------- ---------
<S> <C>
Revenues........................................................... $ 45,021
Net loss........................................................... (8,013)
Basic and diluted loss per common share............................ $ (0.55)
</TABLE>
TECHNOLOGY ACQUISITION--During the year ended December 31, 1997, the Company
acquired the technology for a point-of-sale software product for $337,500 in
stock and cash. The costs associated with this technology acquisition were
recorded as capitalized software costs, since such products had reached
technological feasibility at the date of acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION 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.
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
reported each 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 these estimates. The
Company does not expect any changes in the near term that would have a
significant impact on its consolidated financial statements.
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 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 certain 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 has entered into license agreements that
F-7
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provide for either a one-time license fee or a monthly license fee with no
additional fees based on incremental subscriber growth.
Prior to 1998, revenue from software license sales was recognized upon
shipment of the product. To the extent that insignificant obligations remained
after delivery, costs associated with those obligations were accrued at the time
that revenue was recognized. Effective January 1, 1998, the Company adopted the
provisions of Statement of Position No. 97-2, "Software Revenue Recognition"
("SOP 97-2"). Since that date, revenue from software license sales continued to
be recognized when persuasive evidence of an arrangement exists, delivery of the
product has been made, and a fixed fee and collectibility has been determined;
to the extent that obligations exist for other services, the Company allocates
revenue between the license and the services based upon their relative fair
value. Revenue from customer maintenance support agreements is deferred and
recognized ratably over the term of the agreements. Revenue from consulting and
training services is recognized as those services are rendered. Adoption of the
provisions of SOP 97-2 did not have a significant impact on the consolidated
results of operations or financial position of the Company. 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.
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 December 31, 1996, 1997 and 1998 was
approximately $18,000, $219,000 and $496,000 respectively. The Company recorded
bad debt expense of $0, $151,000 and $793,000 and had write-offs, net of
recoveries associated with accounts receivable of $4,000, $0 and $516,000 for
the years ended December 31, 1996, 1997 and 1998, respectively.
Customers exceeding 10% of the Company's revenues during the years ended
December 31, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
PERCENT OF REVENUE
-------------------------------------
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31,
-------------------------------------
CUSTOMER 1996 1997 1998
- ------------------------------------------------------------------------- ----- ----- -----
A........................................................................ 15% * *
B........................................................................ 29 29% 17%
C........................................................................ * * 15
D........................................................................ * * 10
-- -- --
44% 29% 42%
-- -- --
-- -- --
</TABLE>
- ------------------------
* For years in which a customer represented less than 10% of revenues, such
customer's percent of revenue for that year is not presented.
F-8
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXPORT SALES--The Company had export sales to the following countries during
fiscal 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Brazil............................................................ -- $ 149,200
Canada............................................................ $ 1,301,000 --
Chile............................................................. 30,000 452,100
Malaysia.......................................................... -- 676,900
Netherlands....................................................... 84,900 243,100
Philippines....................................................... -- 156,600
Taiwan............................................................ 257,000 757,500
United Kingdom.................................................... 410,000 25,300
------------ ------------
Total............................................................. $ 2,082,900 $ 2,460,700
------------ ------------
------------ ------------
</TABLE>
Export sales in fiscal 1996 were less than 10% of total revenues.
ACQUIRED 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. Acquired intangible
assests are recorded net of accumulated amortization of approximately $688,000
and $3,088,000 at December 31, 1997 and 1998, respectively.
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. Goodwill is recorded net of
accumulated amortization of $358,000 and $2,507,000 at December 31, 1997 and
1998, respectively.
INCOME TAXES--The Company provides deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the
financial reporting and tax bases of existing assets and liabilities. Deferred
income tax assets are principally the result of net operating loss
carryforwards, income tax credits and differences in depreciation and
amortization and accrued expenses and reserves for financial purposes and income
tax purposes, and are recognized to the extent realization of such benefits is
more likely than not. (See Note 7.)
DEVELOPMENT COSTS--Development costs, which consist of research into and
development of new products and services, are expensed as incurred, except for
software development costs. Software development costs are capitalized after
establishment of technological feasibility which the Company defines as the
point that a "working model" of the software application has achieved all design
specifications and is available for "beta testing."
During the years ended December 31, 1997 and 1998, the Company capitalized
approximately $1,301,000 and $155,000, 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 specific release's estimated
life, generally two years. The unamortized balance of capitalized software
development costs was approximately $1,122,000 and $540,000 at December 31, 1997
and 1998, respectively. Accumulated amortization was approximately $1,138,000
and $1,875,000 at December 31, 1997 and 1998, respectively.
F-9
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION--The Company entered into the following
noncash transactions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1996 1997 1998
---------- ------------- ---------
Capital lease obligations incurred for the acquisition of equipment.......... $ 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 --
---------- ------------- ---------
$ 202,364 $ 17,186,477 $ --
---------- ------------- ---------
---------- ------------- ---------
</TABLE>
- ------------------------
(1) Stock issued and options and warrants assumed in connection with the
acquisition of Coral Systems, Inc. exclude stock issuance costs of
approximately $354,000 recorded as reduction of stockholders' equity.
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 periodically assesses the
recoverability of its long-lived assets by comparing the undiscounted cash flows
expected to be generated by those assets to their carrying value. If the sum of
the undiscounted cash flows is less than the carrying value of the assets, an
impairment charge is recognized.
In December 1998, the Company recorded $7,384,506 of expense related to
impairment of certain intangible assets acquired in the Coral acquisition in
1997. In December 1998, the Company decided to abandon sales and development
efforts related to the ChurnAlert product. As a result of this abandonment,
unamortized amounts included in other acquired intangible assets associated with
ChurnAlert, together with an allocation of remaining unamortized goodwill in the
amount of $2,552,000, were charged to expense. Because of factors that indicated
possible impairment of the remaining assets acquired from Coral, the Company
then compared the remaining unamortized long-lived assets and goodwill to the
undiscounted cash flows expected to be generated by the remaining Coral products
and services. Since the undiscounted cash flows were less than the carrying
value of the related assets, a goodwill impairment charge of $4,833,000 was
recorded. In calculating the goodwill impairment charge, the fair value of the
assets related to the remaining Coral products and services was determined using
the present value of the cash flows to be generated by such products and
services discounted using a 13% cost of capital.
STOCK-BASED COMPENSATION--Compensation cost associated with the grant of
options and other stock awards to employees is determined using the intrinsic
value method. Compensation cost associated with the grant of options and other
stock awards to non-employees is determined using the fair value method.
COMPREHENSIVE INCOME--The Company has adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which
requires businesses to disclose comprehensive income (loss) and its components
in their financial statements. The Company currently has no items of
comprehensive income other than net income (loss).
F-10
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION--Based
upon the way management and the Board of Directors monitor the operations, the
company operates in three distinct segments including the transaction business,
the software license and maintenance business, and the consulting business.
Within these three segments, performance is measured based on gross profit
realized from each segment. Information about costs and expenses other than
costs of revenues and assets and cash flows is not reported by segment.
Information about revenues and cost of revenues of each segment is shown
separately on the statement of operations. Amortization expense of acquired
intangible assets related to the Coral acquisition recorded in software
licensing and maintenance cost of revenues for the years ended December 31,
1996, 1997 and 1998 was approximately $0, $550,000, and $1,566,000,
respectively. There are no transactions between segments.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes standards for
accounting for derivative instruments and hedging activities. The Company is
unable at this time to determine whether the adoption of SFAS No. 133 will have
a material effect on the consolidated results of operations or financial
condition.
In December 1998, the AICPA released Statement of Position No. 98-9 ("SOP
98-9") "Modification of SOP 97-2," Software Revenue Recognition," with Respect
to Certain Transactions". SOP 98-9 amends SOP 97-2 to require that an entity
recognize revenue for multiple element arrangements by means of the "residual
method" when (1) there is vendor-specific objective evidence (VSOE) of the fair
values of all the undelivered elements that are not accounted for my means of
long-term contract accounting, (d) VSOE of fair value does not exist for one or
more of the delivered elements, and (3) all revenue recognition criteria of SOP
97-2 (other than the requirement for VSOE of the fair value of each delivered
element) are satisfied. The provisions of SOP 98-9 that extend the deferral of
certain paragraphs of SOP 97-2 and SOP 98-9 will be effective for transactions
that are entered into in fiscal years beginning after March 15,1999. Retroactive
application is prohibited. The Company does not expect the adoption of SOP 98-9
to have a material effect on its consolidated financial position or results of
operations.
RECLASSIFICATIONS--Certain reclassifications have been made to the 1996 and
1997 financial statements to conform with the 1998 presentation.
F-11
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Furniture and fixtures............................................................. $ 1,011,916 $ 1,327,251
Leasehold improvements............................................................. 3,332,211 5,466,177
Computer equipment................................................................. 8,361,950 12,187,777
Computer software and equipment and furniture and fixtures under capital leases.... 4,810,335 310,575
Computer software.................................................................. 2,814,663 3,467,298
------------- -------------
20,331,075 22,759,078
Less accumulated depreciation and amortization..................................... (8,568,062) (9,305,008)
------------- -------------
Property and equipment--net........................................................ $ 11,763,013 $ 13,454,070
------------- -------------
------------- -------------
</TABLE>
Accumulated amortization of computer software and equipment and furniture
and fixtures under capital leases was $4,611,650 and $265,454 at December 31,
1997 and 1998, respectively.
4. NOTES PAYABLE
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Equipment line borrowings......................................... $ 457,975 $ 152,770
8% subordinated notes............................................. 1,744,844 1,155,484
------------ ------------
Total............................................................. 2,202,819 1,308,254
Less current portion.............................................. (805,205) (652,770)
------------ ------------
Long-term portion................................................. $ 1,397,614 $ 655,484
------------ ------------
------------ ------------
</TABLE>
LINE OF CREDIT--The Company has a $4,000,00 working capital line of credit
and a $3,000,000 equipment line of credit with a bank. The working capital line
of credit is collateralized by the Company's accounts receivable, equipment, and
intangible assets. Borrowing availability is based upon the amount of qualifying
accounts receivable. Advances under the working capital line of credit and the
equipment line of credit bear interest at the bank's prime rate (7.75% at
December 31, 1998). The working capital line of credit expires in June 1999 and
the equipment line of credit expires in June 2001.
The working capital line of credit also provides for issuance of letters of
credit of up to $1,250,000. Letters of credit reduce availability under the
line. At December 31, 1997 and 1998, there were no borrowings outstanding under
the working capital line of credit and approximately $458,000 and $153,000 of
loans were outstanding under the equipment line of credit. The entire amount
outstanding under the equipment line of credit at December 31, 1998 is due in
1999.
The Company's agreements with the bank contain covenants that, among other
things, prohibit the declaration of payments of dividends and require the
Company to maintain certain financial ratios, principally related to tangible
net worth and leverage.
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.
F-12
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE (CONTINUED)
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 were appraised
and recorded at an aggregate market value of $262,500. The related discount on
the subordinated notes ($262,500 at time of issuance) is being accreted over the
term of the notes. Interest expense for the years ended December 31, 1996, 1997
and 1998 included accretion related to these notes of approximately $37,500,
$43,700 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.
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, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING SUBRENTAL
LEASES LEASES INCOME
---------- ------------- ------------
<S> <C> <C> <C>
1999..................................................................... $ 47,514 $ 3,567,268 $ 944,854
2000..................................................................... -- 3,436,166 826,791
2001..................................................................... -- 2,883,373 298,139
2002..................................................................... -- 2,079,317 --
2003..................................................................... -- 387,041 --
---------- ------------- ------------
Total minimum lease payments............................................. 47,514 $ 12,353,165 $ 2,069,784
------------- ------------
------------- ------------
Less amount representing interest........................................ (3,074)
----------
Present value of future minimum lease payments........................... 44,440
Less current portion..................................................... (44,440)
----------
Long-term portion........................................................ $ --
----------
----------
</TABLE>
Rent expense for operating leases was approximately $1,797,000, $2,291,000
and $2,773,000 for the years ended December 31, 1996, 1997 and 1998,
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
F-13
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 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 9). 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. The
liability related to this matter was recorded by Coral prior to the acquisition
and constituted a liability assumed at the date of purchase.
6. COMMON STOCK OPTION PLANS, WARRANTS, STOCKHOLDER RIGHTS PLAN AND REDEEMABLE
CONVERTIBLE PREFERRED STOCK
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 of the Company (the
"Board"), and expire ten years later. No further grants will be made under the
1990 Incentive and Nonqualified Stock Option Plan.
1996 EMPLOYEE STOCK PLANS--On June 14, 1996, the Board authorized and the
stockholders approved the adoption of the 1996 Incentive and Nonqualified Stock
Option Plan and the 1996 Employee Stock
F-14
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMON STOCK OPTION PLANS, WARRANTS, STOCKHOLDER RIGHTS PLAN AND REDEEMABLE
CONVERTIBLE PREFERRED STOCK (CONTINUED)
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. 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 at the date of grant, in the case of nonqualified options.
--1996 EMPLOYEE STOCK PURCHASE PLAN--The 1996 Employee 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. At December 31, 1998, 57,790 shares were
available for purchase under the 1996 Stock Purchase Plan.
1998 NON-STATUTORY STOCK OPTION PLAN--The 1998 Non-Statutory Stock Option
Plan provides for the issuance of up to 1,000,000 options to purchase shares of
the Company's common stock. Options are granted with an exercise price no less
than the common stock's market value at the date of the grant, as determined by
the Board.
On July 31, 1998, the Board determined that, because certain stock options
held by employees of the Company had exercise prices significantly higher than
the fair market value of the Company's common stock, those stock options were
not providing the desired incentive to employees. Accordingly the Board provided
employees with an opportunity to receive new options in replacement of any
existing options that had exercise prices of more than $7.63 per share (the fair
market value of the Company's common stock at the close of the market on July
31, 1998). All of the Company's executive officers except the chief executive
officer were eligible to participate in the stock option repricing. The new
options are exercisable for the same number of shares as the options they
replace, but they have exercise prices of $7.63 per share and vesting schedules
commencing as of July 31, 1998. As a result of this stock option repricing, new
options were granted to purchase 843,100 shares of common stock and the average
exercise price of such options was reduced from $12.44 per share to $7.63 per
share. During the execution of the stock option repricing, the fair market value
of the Company's common stock fell below $7.63 per share and therefore no
compensation charge was recorded as a result of the repricing.
F-15
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMON STOCK OPTION PLANS, WARRANTS, STOCKHOLDER RIGHTS PLAN AND REDEEMABLE
CONVERTIBLE PREFERRED STOCK (CONTINUED)
The following table presents activity under all stock option plans:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE
OF EXERCISE GRANT DATE
OPTIONS PRICE FAIR VALUE
----------- ----------- -------------
<S> <C> <C> <C>
Outstanding at January 1, 1996........................ 1,072,700 $ 0.40
Granted............................................. 817,100 5.40 $ 866,102
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 1,762,471
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
Granted............................................. 2,084,349 9.89 8,459,966
Exercised........................................... (325,908) 8.07
Forfeited(1)........................................ (1,259,413) 12.18
-----------
Outstanding at December 31, 1998...................... 2,495,349 6.11
-----------
-----------
</TABLE>
(1) Includes options cancelled and regranted in connection with the repricing
described above.
The number of options exercisable at the dates presented below and their
weighted average exercise price were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE
EXERCISABLE PRICE
---------- -----------
<S> <C> <C>
December 31, 1996...................................................... 684,705 $ 0.51
December 31, 1997...................................................... 941,975 2.69
December 31, 1998...................................................... 1,014,703 3.97
</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>
YEARS ENDED
DECEMBER 31,
-------------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------------- --------------- ---------------
Risk-free interest rate........................................ 5.36%-6.69% 5.80%-6.76% 4.18%-5.63%
Expected life of options grants................................ 1-6 years 1-6 years 1-6 years
Expected volatility of underlying stock........................ 31% 82% 114%
Expected dividend payment rate, as a percentage of the stock
price on the date of grant................................... -- -- --
</TABLE>
F-16
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMON STOCK OPTION PLANS, WARRANTS, STOCKHOLDER RIGHTS PLAN AND REDEEMABLE
CONVERTIBLE PREFERRED STOCK (CONTINUED)
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.
The following table sets forth information regarding options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
WEIGHTED REMAINING EXERCISE
NUMBER AVERAGE CONTRACTUAL PRICE FOR
NUMBER OF RANGE OF CURRENTLY EXERCISE LIFE CURRENTLY
PLAN OPTIONS EXERCISE PRICES EXERCISABLE PRICE (YEARS) EXERCISABLE
- ------------------------------------------- ----------- --------------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
1990 Incentive Stock Option Plan........... 590,375 $0.04-$0.75 452,750 $ 0.40 5 $ 0.15
266,185 2.00 167,035 2.00 7.5 2.00
200,000 8.50 100,000 8.50 7.5 8.50
1996 Incentive Stock Option Plan........... 12,000 7.75 7,200 7.75 8 7.75
57,950 8.13 33,690 8.13 8 8.13
80,000 12.38 53,332 12.38 8 12.38
5,500 7.00 2,750 7.00 9 7.00
11,375 7.50 5,125 7.50 9 7.50
49,900 8.25 22,400 8.25 9 8.25
15,050 10.25 7,524 10.25 9 10.25
2,500 16.50 1,125 16.50 9 16.50
1,300 14.38 520 14.38 9 14.38
6,550 14.00 2,620 14.00 9 14.00
3,000 14.06 1,200 14.06 10 14.06
250 11.63 75 11.63 10 11.63
24,000 12.13 2,008 12.13 10 12.13
11,000 7.88 1,200 7.88 10 7.88
482,414 7.63 103,296 7.63 10 7.63
34,250 4.94 4,678 4.94 10 4.94
4,500 4.81 450 4.81 10 4.81
1,500 4.88 0 4.88 10 4.88
5,750 4.94 400 4.94 10 4.94
1,250 4.94 125 4.94 10 4.94
10.750 3.72 1,100 3.72 10 3.72
1998 Incentive Stock Option Plan........... 296,000 12.13 23,101 12.13 10 12.13
302,000 7.63 19,000 7.63 10 7.63
20,000 3.72 2,000 3.72 10 3.72
Options assumed from acquisition of Coral
Systems, Inc............................. 20,532 $0.46-$25.76 8,865 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 such
F-17
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMON STOCK OPTION PLANS, WARRANTS, STOCKHOLDER RIGHTS PLAN AND REDEEMABLE
CONVERTIBLE PREFERRED STOCK (CONTINUED)
compensation, reported net income (loss) and basic and diluted earnings (loss)
per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------ -------------- --------------
Income (loss) before provision for income taxes.................... $ 1,892,716 $ (83,555) $ (10,378,058)
Provision for income taxes......................................... 125,000 7,000 475,000
------------ -------------- --------------
Net income (loss).................................................. $ 1,767,716 $ (90,555) $ (10,853,058)
------------ -------------- --------------
------------ -------------- --------------
Basic earnings (loss) per share.................................... $ 0.25 $ (0.01) $ (0.73)
------------ -------------- --------------
------------ -------------- --------------
Diluted earnings (loss) per share.................................. $ 0.12 $ (0.01) $ (0.73)
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
COMMON STOCK WARRANTS--The Company has issued warrants to purchase 1,270,038
shares of the Company's common stock at exercise prices ranging from $0.793 to
$2.00 per share. Warrants issued prior to August 1994 were assigned nominal
value based upon management's estimate of their fair market value. Warrants
issued in connection with the Company's issuance of subordinated notes (see Note
4) have been ascribed an aggregate value of $406,375. During 1996, warrant
holders with warrants to purchase 457,288 shares of common stock exercised such
warrants in conjunction with the IPO. The warrant holders 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 Option
pricing model. At December 31, 1998, 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 to $34.35 at December 31, 1998.
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 (1/100(th)) 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
F-18
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMON STOCK OPTION PLANS, WARRANTS, STOCKHOLDER RIGHTS PLAN AND REDEEMABLE
CONVERTIBLE PREFERRED STOCK (CONTINUED)
by the Board 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").
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 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 January 1, 1996................ $ 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>
7. INCOME TAXES
The income tax (benefit) provision for the years ended December 31 consisted
of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
<S> <C> <C>
1997 1998
------------ ------------
Current:
Federal......................................................... $ 1,333,000 $ 2,105,000
State........................................................... 254,000 554,000
Deferred:
Federal......................................................... (530,000) 2,000
State........................................................... (165,000) (148,000)
------------ ------------
Income tax provision............................................ $ 892,000 $ 2,513,000
------------ ------------
------------ ------------
</TABLE>
F-19
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (Continued)
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
-------------------------
<S> <C> <C>
1997 1998
------------ -----------
Current Items:
Assets:
Accrued expenses................................................ $ 146,386 $ 313,878
Tax credits..................................................... 539,462 200,970
Valuation allowance............................................. (179,500) (179,500)
Liabilities:
Acquired technology............................................. (80,000) --
------------ -----------
Net current deferred tax assets................................... $ 426,348 $ 335,348
------------ -----------
------------ -----------
Long-Term Items:
Assets:
Depreciation and amortization................................... $ 38,046 $ 202,932
Accrued expenses................................................ 192,525 267,439
Acquired loss carryforwards..................................... 5,555,431 5,555,431
Valuation allowance............................................. (2,548,813) (3,508,466)
Liabilities:
Acquired intangible assets...................................... (3,006,618) (2,046,965)
Other........................................................... (14,533) (17,333)
------------ -----------
Net long-term deferred tax assets................................. $ 216,038 $ 453,038
------------ -----------
------------ -----------
</TABLE>
The net change in the valuation allowance for the years ended December 31,
1996, 1997 and 1998 was an increase (decrease) of $(713,913), $2,001,696 and
$959,653, 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 allowance was established against a portion of these
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 acquisition will be recorded as a
reduction of goodwill.
F-20
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (Continued)
The following is a reconciliation of income taxes at the federal statutory
rate to the Company's effective tax rate:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1996 1997 1998
----- --------- -----
Statutory federal income tax rate.................................. 34% (34)% (37 )%
In-process research and development................................ -- 186 --
Non-deductible goodwill, including goodwill written off as
impaired......................................................... -- -- 74
Alternative minimum tax asset, not assured of realization.......... 2 -- --
State taxes, net of federal benefit................................ 1 36 7
Change in valuation allowance...................................... -- (37) 20
Other, net......................................................... 4 (29) (10 )
Net operating loss carryforwards................................... (34 ) -- --
-- --
---
Effective tax rate................................................. 7% 122% 57%
-- --
-- --
---
---
</TABLE>
8. 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 $91,000, $129,000 and $142,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
9. 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.
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 6) to purchase 100,000
shares of the Company's Common Stock at $10.00 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.
F-21
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EARNINGS PER SHARE
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.
A reconciliation of the items used to compute basic income (loss) per share
to those used for diluted income (loss) per share is as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Shares for basic computation............................................ 6,520,789 14,802,012 15,833,635
Assumed conversion of preferred stock................................... 4,747,300 -- --
Options and warrants (treasury stock method)............................ 1,838,155 -- --
------------ ------------ ------------
Shares for diluted computation.......................................... 13,106,244 14,802,012 15,833,635
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
In 1996, net income was reduced by $136,905 of preferred stock dividends to
arrive at income of $2,135,592 for common stockholders used in the computation
of basic income per share.
Stock options and warrants convertible into common stock have also been
excluded from the diluted computation, in 1997 and 1998 as they are
anti-dilutive. Had such shares been included, shares for diluted computation
would have increased by approximately 1,900,000 and 1,632,000 for the years
ended December 31, 1997 and 1998, respectively.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998
Revenues.............................................................. $ 13,303 $ 15,145 $ 15,604 $ 19,299
Income (loss) from operations......................................... $ (867) $ (108) $ 769 $ (4,859)
Net income (loss)..................................................... $ (722) $ (159) $ 264 $ (6,279)
Basic earnings (loss) per share....................................... $ (0.05) $ (0.01) $ 0.02 $ (0.39)
Diluted earnings (loss) per share..................................... $ (0.05) $ (0.01) $ 0.02 $ (0.39)
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)
</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.
F-22
<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 24, 1999, appearing in this Annual
Report on Form 10-K of Lightbridge, Inc. for the year ended December 31, 1998.
Deloitte & Touche LLP
Boston, Massachusetts
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,436,995
<SECURITIES> 0
<RECEIVABLES> 19,327,555
<ALLOWANCES> 495,593
<INVENTORY> 0
<CURRENT-ASSETS> 1,399,196
<PP&E> 23,994,652
<DEPRECIATION> 10,540,582
<TOTAL-ASSETS> 57,777,279
<CURRENT-LIABILITIES> 12,149,570
<BONDS> 0
0
0
<COMMON> 168,417
<OTHER-SE> 44,278,684
<TOTAL-LIABILITY-AND-EQUITY> 57,777,279
<SALES> 63,351,496
<TOTAL-REVENUES> 63,351,496
<CGS> 33,107,663
<TOTAL-COSTS> 35,309,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 241,594
<INCOME-PRETAX> (4,383,950)
<INCOME-TAX> 2,513,000
<INCOME-CONTINUING> (6,896,950)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,896,950)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
