<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
AMENDMENT NO. 2
<TABLE>
<C> <S>
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
</TABLE>
Commission file number: 000-21319
LIGHTBRIDGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3065140
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
</TABLE>
67 SOUTH BEDFORD STREET
BURLINGTON, MASSACHUSETTS 01803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(781) 359-4000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 / /
As of October 27, 1998, there were 16,000,877 shares of the registrant's
common stock, $.01 par value, outstanding.
On February 24, 1999, the registrant announced that it had restated its
financial statements for the year ended December 31, 1997 and the quarters ended
March 31, June 30, and September 30, 1998 to correct the accounting relating to
the acquisition of Coral Systems in November 1997. This amended Quarterly Report
on Form 10-Q contains restated financial information and disclosures for the
quarter ended September 30, 1998. (See Note 5 to the unaudited condensed
consolidated financial statements).
Unless otherwise stated, information in the originally filed Form 10-Q for
the quarter ended September 30, 1998 is presented as of the original filing
date, and has not been updated in this amended filing.
Financial statement information and related disclosures included in this
amended filing reflect, where appropriate, changes as a result of the
restatement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LIGHTBRIDGE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
-------------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1997 and September 30, 1998 (Restated)..................... 3
Income Statements for the three months ended September 30, 1997
and September 30, 1998 (Restated).......................................................... 4
Statements of Operations for the nine months ended September 30, 1997
and September 30, 1998 (Restated).......................................................... 5
Statements of Cash Flows for the nine months ended September 30, 1997
and September 30, 1998 (Restated).......................................................... 6
Notes to Unaudited Condensed Consolidated Financial Statements............................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 10
PART II. OTHER INFORMATION
SIGNATURE............................................................................................... 20
</TABLE>
INTRODUCTORY NOTE
This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on
Form 10-Q/A for the period ended September 30, 1998, as filed by the Registrant
on November 23, 1998, and is being filed to reflect the restatement of the
Registrant's condensed consolidated financial statements (the "Restatement").
The Restatement reflects the revaluation of acquired in-process research and
development in connection with the acquisition of Coral Systems in November
1997.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
DECEMBER 31, -------------
1997
------------- (RESTATED,
SEE NOTE 5)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 15,715,726 $ 12,582,230
Accounts receivable, net......................................................... 13,213,052 17,028,919
Other current assets............................................................. 2,885,583 2,197,391
------------- -------------
Total current assets........................................................... 31,814,361 31,808,540
Property and equipment, net........................................................ 11,763,013 13,476,126
Goodwill, net...................................................................... 10,383,581 8,774,442
Acquired intangible assets, net.................................................... 7,716,545 5,772,895
Other assets, net.................................................................. 1,887,676 1,500,804
------------- -------------
Total assets............................................................... $ 63,565,176 $ 61,332,807
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities......................................... $ 8,164,817 $ 5,590,788
Short-term borrowings and current portion of notes payable....................... 805,205 729,071
Deferred revenues................................................................ 1,658,406 2,009,749
------------- -------------
Total current liabilities...................................................... 10,628,428 8,329,608
Other long-term liabilities...................................................... 823,346 1,696,198
Notes payable.................................................................... 1,397,614 772,563
------------- -------------
Total liabilities.............................................................. 12,849,388 10,798,369
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares issued or
outstanding at December 31, 1997 and September 30, 1998, respectively.......... -- --
Common stock, $.01 par value; 60,000,000 shares authorized; 16,492,954 and
16,819,507 shares issued and 15,665,662 and 15,992,215 shares outstanding at
December 31, 1997 and September 30, 1998, respectively......................... 164,929 168,194
Additional paid-in capital....................................................... 53,660,991 54,094,446
Warrants......................................................................... 598,875 598,875
Accumulated deficit.............................................................. (2,084,044) (2,702,114)
------------- -------------
Total.......................................................................... 52,340,751 52,159,401
Less: treasury stock, at cost................................................... (1,624,963) (1,624,963)
------------- -------------
Total stockholders' equity..................................................... 50,715,788 50,534,438
------------- -------------
Total liabilities and stockholders' equity................................. $ 63,565,176 $ 61,332,807
------------- -------------
------------- -------------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1998
------------ -------------
(RESTATED,
SEE NOTE 5)
<S> <C> <C>
Revenues:
Transaction services............................................................... $ 6,749,506 $ 10,682,320
Software licensing and maintenance................................................. 862,843 2,498,841
Consulting services................................................................ 1,844,933 2,422,648
------------ -------------
Total revenues................................................................... 9,457,282 15,603,809
------------ -------------
Cost of revenues:
Transaction services............................................................... 3,754,795 5,804,219
Software licensing and maintenance................................................. 232,358 1,160,078
Consulting services................................................................ 397,949 1,292,947
------------ -------------
Total cost of revenues........................................................... 4,385,102 8,257,244
------------ -------------
Gross profit......................................................................... 5,072,180 7,346,565
------------ -------------
Operating expenses:
Development........................................................................ 1,532,353 2,327,608
Sales and marketing................................................................ 1,249,481 1,609,761
General and administrative......................................................... 1,097,373 2,640,156
------------ -------------
Total operating expenses......................................................... 3,879,207 6,577,525
------------ -------------
Income from operations............................................................... 1,192,973 769,040
Other income (expense):
Interest income.................................................................... 292,304 102,374
Interest expense................................................................... (88,194) (70,767)
Other non-operating income......................................................... 98,432 85,919
------------ -------------
Income before provision for income taxes............................................. 1,495,515 886,566
Provision for income taxes........................................................... 568,300 623,000
------------ -------------
Net income........................................................................... $ 927,215 $ 263,566
------------ -------------
------------ -------------
Basic and diluted earnings per common share.......................................... $ 0.06 $ 0.02
------------ -------------
------------ -------------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
----------------------------
1997 1998
------------- -------------
(RESTATED,
SEE NOTE 5)
<S> <C> <C>
Revenues:
Transaction services............................................................. $ 18,751,427 $ 27,667,653
Software licensing and maintenance............................................... 2,608,108 10,019,903
Consulting services.............................................................. 5,928,435 6,364,551
------------- -------------
Total revenues................................................................. 27,287,970 44,052,107
------------- -------------
Cost of revenues:
Transaction services............................................................. 10,675,657 15,924,134
Software licensing and maintenance............................................... 658,293 3,663,892
Consulting services.............................................................. 1,371,243 3,743,369
------------- -------------
Total cost of revenues......................................................... 12,705,193 23,331,395
------------- -------------
Gross profit....................................................................... 14,582,777 20,720,712
------------- -------------
Operating expenses:
Development...................................................................... 4,214,566 7,049,279
Sales and marketing.............................................................. 3,854,030 5,281,003
General and administrative....................................................... 3,219,990 8,596,928
------------- -------------
Total operating expenses....................................................... 11,288,586 20,927,210
------------- -------------
Income (loss) from operations...................................................... 3,294,191 (206,498)
Other income (expense):
Interest income.................................................................. 939,545 501,555
Interest expense................................................................. (279,736) (170,379)
Other non-operating income....................................................... 113,956 209,252
------------- -------------
Income before provision for income taxes........................................... 4,067,956 333,930
Provision for income taxes......................................................... 474,791 952,000
------------- -------------
Net income (loss).................................................................. $ 3,593,165 $ (618,070)
------------- -------------
------------- -------------
Basic earnings (loss) per common share............................................. $ 0.25 $ (0.04)
------------- -------------
------------- -------------
Diluted earnings (loss) per common share........................................... $ 0.22 $ (0.04)
------------- -------------
------------- -------------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
30,
----------------------------
1997 1998
------------- -------------
(RESTATED,
SEE NOTE 5)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)................................................................ $ 3,593,165 $ (618,070)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization.................................................. 3,217,823 7,700,528
Gain on sale of equipment...................................................... (43,003) --
Amortization of discount on notes payable...................................... 26,847 27,552
Deferred taxes................................................................. (931,752) --
Changes in assets and liabilities:
Accounts receivable and other current assets................................. (4,148,183) (3,147,675)
Other assets................................................................. (249,811) (223,137)
Deferred rent................................................................ 399,946 --
Accounts payable and accrued liabilities..................................... 677,325 (2,574,029)
Deferred revenues............................................................ (76,526) 351,343
Other liabilities............................................................ -- 1,103,033
------------- -------------
Net cash provided by operating activities........................................ 2,465,831 2,619,545
------------- -------------
Cash Flows From Investing Activities:
Principal payment--note receivable from officer................................ -- 20,000
Purchases of property and equipment............................................ (7,681,993) (5,250,843)
Purchase of investments........................................................ (2,069,323) --
Redemption of investments...................................................... 2,069,323 --
Capitalization of software development costs................................... (333,203) --
Proceeds from sale of equipment................................................ 166,246 --
Reimbursement for leasehold improvements....................................... 254,405 --
------------- -------------
Net cash used in investing activities............................................ (7,594,545) (5,230,843)
------------- -------------
Cash Flows From Financing Activities:
Principal payments on notes payable............................................ (453,737) (728,737)
Principal payments under capital lease obligations............................. (1,230,320) (230,181)
Proceeds from issuance of common stock......................................... 139,910 436,720
Proceeds from exercise of warrant.............................................. 25,000 --
Expenditures made for acquisition activities................................... (183,915) --
Issuance of note receivable.................................................... (75,000) --
------------- -------------
Net cash used in financing activities............................................ (1,778,062) (522,198)
------------- -------------
Net decrease in cash and cash equivalents.......................................... (6,906,776) (3,133,496)
Cash and cash equivalents, beginning of period..................................... 27,900,802 15,715,726
------------- -------------
Cash and cash equivalents, end of period........................................... $ 20,994,026 $ 12,582,230
------------- -------------
------------- -------------
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE>
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
include the accounts of Lightbridge, Inc. and its subsidiaries (the "Company").
The Company believes that the unaudited condensed consolidated financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's financial
position, results of operations and cash flows at the dates and for the periods
indicated. Although certain information and disclosures normally included in the
Company's annual financial statements have been omitted, the Company believes
that the disclosures provided are adequate to make the information presented not
misleading. Results of interim periods may not be indicative of results for the
full year or any future periods. These financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES:
SOFTWARE REVENUE RECOGNITION
Effective January 1, 1998, the Company adopted the provisions of Statement
of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), which provides
guidance on recognizing revenue on software transactions. The Company's revenue
recognition practices were substantially in compliance with SOP 97-2 at the time
of adoption.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if outstanding dilutive options and warrants were exercised and resulted
in the issuance of common stock.
A reconciliation of the denominators of the basic and diluted earnings per
share computations is shown below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shares for basic earnings per
share.............................. 14,698,003 15,860,518 14,646,282 15,788,661
Effect of options and warrants....... 1,948,995 1,448,751 1,801,798 --
------------ ------------ ------------ ------------
Shares for diluted earnings per
share.............................. 16,646,998 17,309,269 16,448,080 15,788,661
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Stock options and warrants convertible into common stock have been excluded
from the diluted computation for the nine months ended September 30, 1998 as
they are anti-dilutive. Had such shares been included, shares for the dilutive
computation would have increased by approximately 1,800,000 shares for the nine
months ended September 30, 1998.
No adjustments have been made to net income in computing diluted income per
share.
7
<PAGE>
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." No
items, other than net income, are currently considered elements of comprehensive
income, and accordingly net income and comprehensive income are the same for all
periods presented.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements to
conform with the 1998 presentation.
3. STOCK OPTION REPRICING:
On July 31, 1998, the Board of Directors of the Company (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). 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. All of the Company's executive officers except the chief executive
officer were eligible to participate in the stock option repricing. During the
execution of the stock option repricing, the fair market value of the Company's
common stock was below $7.63 per share and therefore no compensation charge was
recorded as a result of the repricing.
4. COMMITMENTS:
The Company leases computer and other equipment under various noncancelable
leases that have been capitalized for financial reporting purposes. The Company
has noncancelable operating lease agreements for office space and certain
equipment. In August 1998, the Company relocated its Colorado operations
facilities to Broomfield, Colorado pursuant to a five-year lease agreement and
subleased a portion of its facility in Longmont, Colorado for the remaining term
of the existing lease for that facility.
Future minimum payments under operating leases and income from subleases
consist of the following at September 30, 1998:
<TABLE>
<CAPTION>
OPERATING SUBRENTAL
LEASES INCOME
------------- ------------
<S> <C> <C>
Three months ended December 31, 1998............................. $ 808,557 $ 245,236
Year ended December 31, 1999..................................... 3,567,268 994,854
Year ended December 31, 2000..................................... 3,436,166 826,791
Year ended December 31, 2001..................................... 2,883,373 298,139
Year ended December 31, 2002..................................... 2,079,317 --
Year ended December 31, 2003..................................... 387,041 --
------------- ------------
Total minimum lease payments..................................... $ 13,161,722 $ 2,365,020
------------- ------------
------------- ------------
</TABLE>
8
<PAGE>
5. RESTATEMENT
The Company has restated its previously filed condensed consolidated
financial statements as of and for the three and nine months ended September 30,
1998 to adjust the allocation of purchase price related to the acquisition of
Coral Systems, Inc. ("Coral") in November, 1997 and the resulting amortization
of goodwill and intangible assets.
The Securities and Exchange Commission ("SEC") issued new guidance in
September 1998 on its views regarding the valuation methodologies used to
determine the allocation of purchase price to acquired in-process research and
development ("IPRD") and intangible assets in a purchase business combination.
Generally accepted accounting principles require that amounts allocated to IPRD
be expensed upon consummation of an acquisition. Following discussions between
the Company and the staff of the SEC regarding the application of this guidance,
the Company has modified the methods used to value IPRD and other intangible
assets acquired in connection with the acquisition of Coral. The revised
valuation is based on management's best estimates at the date of acquisition of
the net cash flows expected to be generated by Coral on a going-forward basis
and gives explicit consideration to the SEC's views on IPRD as set forth in in
its September 1998 letter to the American Institute of Certified Public
Accountants. As a result of this revised valuation, the amount of purchase price
allocated to IPRD at the date of acquisition decreased from $16 million to $4
million, and the amount ascribed to goodwill and acquired intangible assets
increased by $4.0 million and $8.0 million, respectively.
The effects of this restatement on the Company's consolidated financial
statements are as follows:
CONSOLIDATED BALANCE SHEETS:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -------------
<S> <C> <C>
Goodwill--net.................................................. $ 4,624,605 $ 8,774,442
Acquired intangible assets--net................................ -- 5,772,895
Total assets................................................... $ 1,410,075 61,332,807
Total stockholders' equity..................................... 40,611,706 50,534,438
</TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
---------------------------- ----------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cost of revenues................ $ 8,010,094 $ 8,257,244 $ 22,012,745 $ 23,331,395
Total operating expenses........ 6,386,921 6,577,525 20,555,397 20,927,210
Net income (loss)............... 701,320 263,566 1,072,393 (618,070)
Basic and diluted (loss) per
common share.................. $ 0.04 $ (0.02) $ 0.07 $ (0.04)
Diluted earnings (loss) per
common share.................. $ 0.04 $ (0.02) $ 0.06 $ (0.04)
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION IN THIS FORM 10-Q/A 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. ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THE RESULTS CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A
NUMBER OF FACTORS, INCLUDING (A) THE UNPREDICTABILITY OF FUTURE REVENUES AND
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS, (B) CONTINUING RAPID
CHANGE IN THE TELECOMMUNICATIONS INDUSTRY THAT MAY AFFECT BOTH LIGHTBRIDGE, INC.
AND ITS CUSTOMERS, (C) CUSTOMER CONCENTRATION, (D) UNCERTAINTIES ASSOCIATED WITH
THE ABILITY OF LIGHTBRIDGE, INC. TO DEVELOP NEW PRODUCTS AND TECHNOLOGIES, (E)
MARKET ACCEPTANCE OF NEW PRODUCTS OF LIGHTBRIDGE, INC. AND CONTINUING DEMAND FOR
PRODUCTS OF LIGHTBRIDGE, INC. BY TELECOMMUNICATIONS COMPANIES, (F) THE IMPACT OF
COMPETITIVE PRODUCTS AND PRICING ON BOTH LIGHTBRIDGE, INC. AND ITS CUSTOMERS AND
(G) THE OTHER FACTORS SET FORTH UNDER "ITEM 1A. RISK FACTORS" IN THE ANNUAL
REPORT ON FORM 10-K/A OF LIGHTBRIDGE, INC. FOR THE YEAR ENDED DECEMBER 31, 1997.
Information set forth under the heading "ITEM 1A. Risk Factors" in the Annual
Report on Form 10-K/A of Lightbridge, Inc. for the year ended December 31, 1997
is incorporated as an exhibit to this Form 10-Q/A. Unless the context otherwise
requires, "Lightbridge" and the "Company" refer collectively to Lightbridge and
its subsidiaries.
CHURNALERT and FRAUDBUSTER are registered trademarks of the Company, and
CUSTOMER ACQUISITION SYSTEM, LIGHTBRIDGE and POPS are trademarks of the Company.
All other trademarks or trade names referred to in this Form 10-Q/A are the
property of their respective owners.
RESTATEMENT
The Company has restated its previously filed condensed consolidated
financial statements as of and for the three and nine months ended September 30,
1998 to adjust the allocation of purchase price related to the acquisition of
Coral Systems, Inc. ("Coral") in November, 1997 and the resulting amortization
of goodwill and intangible assets.
The Securities and Exchange Commission ("SEC") issued new guidance in
September 1998 on its views regarding the valuation methodologies used to
determine the allocation of purchase price to acquired in-process research and
development ("IPRD") and intangible assets in a purchase business combination.
Generally accepted accounting principles require that amounts allocated to IPRD
be expensed upon consummation of an acquisition. Following discussions between
the Company and the staff of the SEC regarding the application of this guidance,
the Company has modified the methods used to value IPRD and other intangible
assets acquired in connection with the acquisition of Coral. The revised
valuation is based on management's best estimates at the date of acquisition of
the net cash flows expected to be generated by Coral on a going-forward basis
and gives explicit consideration to the SEC's views on IPRD as set forth in
guidance issued in its September 1998 letter to the American Institute of
Certified Public Accountants. As a result of this revised valuation, the amount
of purchase price allocated to IPRD at the date of acquisition decreased from
$16 million to $4 million, and the amount ascribed to goodwill and acquired
intangible assets increased by $4.0 million and $8.0 million, respectively.
OVERVIEW
Lightbridge develops, markets and supports a network of integrated products
and services that enable telecommunications carriers to improve their customer
acquisition and retention processes.
In November 1997, the Company acquired all of the outstanding stock of Coral
Systems, Inc. ("Coral") in exchange for 892,073 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.
10
<PAGE>
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 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 delivery has occurred and collectibility is probable. Revenues
from software maintenance contracts are recognized ratably over the term of the
maintenance agreement.
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 the third quarter of 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. As of September 30,
1998, the Company was continuing to develop two new versions of FraudBuster, one
of which is expected to contain additional performance and functional
enhancements and is currently scheduled to be released in the fourth quarter of
1998, and the other of which is expected to contain substantial enhancements in
performance, scalability and functionality and is currently scheduled to be
released in 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. Finally, the Company continued its development efforts with respect to two
versions of ChurnAlert, both of which currently are scheduled to be released in
1999. The Company has not changed its original estimates of the costs expected
to be incurred to complete these projects, although the estimated completion
dates have been delayed. 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.
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 substantially all of its revenues in the
fourth quarter of 1998 and in 1999.
11
<PAGE>
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(1) (1)
Revenues:
Transaction services....................................................... 71.4% 68.5% 68.7% 62.8%
Software licensing and maintenance......................................... 9.1 16.0 9.6 22.7
Consulting services........................................................ 19.5 15.5 21.7 14.5
--------- --------- --------- ---------
Total revenues........................................................... 100.0 100.0 100.0 100.0
--------- --------- --------- ---------
Cost of revenues:
Transaction services....................................................... 39.7 37.2 39.1 36.2
Software licensing and maintenance......................................... 2.5 7.4 2.4 8.3
Consulting services........................................................ 4.2 8.3 5.1 8.5
--------- --------- --------- ---------
Total cost of revenues................................................... 46.4 52.9 46.6 53.0
--------- --------- --------- ---------
Gross profit................................................................. 53.6 47.1 53.4 47.0
--------- --------- --------- ---------
Operating expenses:
Development................................................................ 16.2 14.9 15.4 16.0
Sales and marketing........................................................ 13.2 10.3 14.1 12.0
General and administrative................................................. 11.6 17.0 11.8 19.5
--------- --------- --------- ---------
Total operating expenses................................................. 41.0 42.2 41.3 47.5
--------- --------- --------- ---------
Income (loss) from operations................................................ 12.6 4.9 12.1 (0.5)
Other income, net............................................................ 3.2 0.8 2.8 1.3
--------- --------- --------- ---------
Income before provision for income taxes..................................... 15.8 5.7 14.9 0.8
Provision for income taxes................................................... 6.0 4.0 1.7 2.2
--------- --------- --------- ---------
Net income................................................................... 9.8% 1.7% 13.2% (1.4)%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) As restated. See Note 5 of the Notes to the Unaudited Condensed Consolidated
Financial Statements.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES. Revenues increased by 65.0% to $15.6 million in the three months
ended September 30, 1998 from $9.5 million in the three months ended September
30, 1997.
Transaction services revenues increased by 58.3% to $10.7 million in the
three months ended September 30, 1998 from $6.7 million in the three months
ended September 30, 1997, while decreasing as a percentage of total revenues to
68.5% from 71.4%. The dollar increase in transaction services revenues for the
three months ended September 30, 1998 was primarily due to increased volume of
qualification and activation transactions processed for carrier clients. The
decrease in transaction services revenues as a percentage of total revenues for
the three month period ended September 30, 1998 principally resulted from a
greater increase in software licensing revenues than transaction services
revenues for the same period.
The Company believes that its transaction services revenues in 1999 will not
increase at the same rate as they have in 1998. The Company's transaction
services 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
services 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.
12
<PAGE>
Software licensing and maintenance revenues increased by 189.6% to $2.5
million in the three months ended September 30, 1998 from $0.9 million in the
three months ended September 30, 1997, while increasing as a percentage of total
revenues to 16.0% from 9.1%. Both the dollar increase and the increase as a
percentage of total revenues in software licensing revenues for the three months
ended September 30, 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 large dollar costs and relatively long sales
cycles of the 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
typically 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 31.3% to $2.4 million in the three
months ended September 30, 1998 from $1.8 million in the three months ended
September 30, 1997, while decreasing as a percentage of total revenues to 15.5%
from 19.5%. The dollar increase in consulting services revenues for the three
months ended September 30, 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 three months ended September
30, 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 on more than thirty projects during
the three months ended September 30, 1998.
In the year ended December 31, 1997, one customer accounted for 29% of the
Company's total revenues. While Lightbridge believes that its relationship with
this customer is good, the Company currently expects that the percentage of the
Company's total revenues for the year ended December 31, 1998 attributable to
that customer will be significantly less than for the preceding year, as a
result of growth in the Company's total revenues, the Company's efforts to
diversify its customer base and a decrease in the consulting services utilized
by the customer.
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 certain acquired
intangible assets. Cost of revenues may vary as a percentage of total revenues
in the future as a result of a number of factors, including changes in the mix
of transaction services revenues between revenues from on-line transaction
processing and revenues from processing transactions services through the
Company's Teleservices Group and changes in the mix of total revenues among
transaction services revenues, software licensing revenues and consulting
services revenues.
Transaction services cost of revenues increased by 54.6% to $5.8 million in
the three months ended September 30, 1998 from $3.8 million in the three months
ended September 30, 1997, while decreasing as a percentage of total revenues to
37.2% from 39.7%. The increase in transaction services cost of revenues for the
three months ended September 30, 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 services cost of revenues as a
percentage of total revenues for the three months ended
13
<PAGE>
September 30, 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 399.3% to
$1.2 million in the three months ended September 30, 1998 from $0.2 million in
the three months ended September 30, 1997, while increasing as a percentage of
total revenues to 7.4% from 2.5%. Both the dollar increase and the increase as a
percentage of total revenues in software licensing cost of revenues for the
three months ended September 30, 1998 were primarily due to the increased cost
of revenues for Fraud Management products and amortization expense of certain
acquired intangible assets.
Consulting services cost of revenues increased by 224.9% to $1.3 million in
the three months ended September 30, 1998 from $0.4 million in the three months
ended September 30, 1997, while increasing as a percentage of total revenues to
8.3% from 4.2%. 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 three months
ending December 31, 1998.
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 increased by 51.9% to $2.3 million in the three months
ended September 30, 1998 from $1.5 million in the three months ended September
30, 1997. The increase in costs for the three months ended September 30, 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 28.8% to $1.6 million in
the three months ended September 30, 1998 from $1.2 million in the three months
ended September 30, 1997. The increase for the three months ended September 30,
1998 was due principally to the addition of direct sales and product marketing
personnel, increased commissions resulting from the higher level of revenues and
increased use of 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
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 incurred pursuant to the acquisition of Coral. General
and administrative expenses increased by 140.6% to $2.6 million in the three
months ended September 30, 1998 from $1.1 million in the three months ended
September 30, 1997. The increase reflected the amortization of
14
<PAGE>
$0.7 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 three months ended December 31, 1998.
OTHER INCOME, NET. Other income, net in the three months ended September
30, 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 $0.1 million in the three
months ended September 30, 1998 and 1997. Interest income decreased to $0.1
million in the three months ended September 30, 1998 from $0.3 million in the
three months ended September 30, 1997 as a result of lower cash balances.
Interest income for the three months ended September 30, 1998 reflected an
average rate of return of approximately 3.5%.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The Company's effective tax rate
was 70.3% and 38.0% for the three months ended September 30, 1998 and 1997,
respectively. The relatively high effective tax rate for 1998 results in part
from goodwill and acquired intangible assets attributable to the Company's
acquisition of Coral; the amortization of this goodwill and acquired intangible
assets is recognized as an expense for accounting purposes, but is not
deductible for tax purposes. Since the goodwill and acquired intangible assets
attributable to the Coral acquisition will continue to be amortized through the
five years 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 also will be approximately 47%. The actual effective tax rate
for 1998 and 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 revenues for those years to vary from the Company's internal
estimates.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES. Revenues increased by 61.4% to $44.1 million in the nine months
ended September 30, 1998 from $27.3 million in the nine months ended September
30, 1997.
Transaction services revenues increased by 47.5% to $27.7 million in the
nine months ended September 30, 1998 from $18.8 million in the nine months ended
September 30, 1997. The increase in transaction services revenues for the nine
months ended September 30, 1998 was primarily due to increased volume of
qualification and activation transactions processed for carrier clients.
Software licensing and maintenance revenues increased by 284.2% to $10.0
million in the nine months ended September 30, 1998 from $2.6 million in the
nine months ended September 30, 1997. The increase in software licensing
revenues for the nine months ended September 30, 1998 was principally a result
of the increase in revenues attributable to the Company's Channel Solutions and
Fraud Management products and services.
Consulting services revenues increased by 7.4% to $6.4 million in the nine
months ended September 30, 1998 from $5.9 million in the nine months ended
September 30, 1997. The increase in consulting services revenues for the nine
months ended September 30, 1998 was principally due to an increased demand for
the consulting services provided to clients of the Company.
COST OF REVENUES. Transaction services cost of revenues increased by 49.2%
to $15.9 million in the nine months ended September 30, 1998 from $10.7 million
in the nine months ended September 30, 1997. The increase in transaction
services cost of revenues for the nine months ended September 30, 1998 resulted
principally from increases in transaction volume and costs attributable to
expansion of the Company's staff and systems capacity.
15
<PAGE>
Software licensing and maintenance cost of revenues increased by 456.6% to
$3.7 million in the nine months ended September 30, 1998 from $0.7 million in
the nine months ended September 30, 1997. The increase in software licensing
cost of revenues for the nine months ended September 30, 1998 was primarily due
to the increased costs of revenues for Fraud Management products and
amortization expense of certain acquired intangible assets.
Consulting services cost of revenues increased by 173.0% to $3.7 million in
the nine months ended September 30, 1998 from $1.4 million in the nine months
ended September 30, 1997. The increase in consulting services cost of revenues
was 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 as part
of the establishment of Lightbridge Consulting Services.
DEVELOPMENT. Development expenses increased by 67.3% to $7.0 million in the
nine months ended September 30, 1998 from $4.2 million in the nine months ended
September 30, 1997. The increase in costs for the nine months ended September
30, 1998 resulted primarily from the addition of engineering personnel necessary
to support the Company's product development plans.
SALES AND MARKETING. Sales and marketing expenses increased by 37.0% to
$5.3 million in the nine months ended September 30, 1998 from $3.9 million in
the nine months ended September 30, 1997. The increase for the nine months ended
September 30, 1998 was due principally to the addition of direct sales and
product marketing personnel, increased commissions resulting from the higher
level of revenues and increased use of marketing programs, including trade
shows. This increase was offset in part by the reallocation during the six
months ended September 30, 1998 of certain personnel to Lightbridge Consulting
Services as well as the allocation of certain related expenses for those three
months to consulting services cost of revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by 167.0% to $8.6 million in the nine months ended September 30, 1998 from $3.2
million in the nine months ended September 30, 1997. The increase reflected the
amortization of $2.2 million of goodwill and certain acquired intangible assets
attributable to the Company's acquisition of Coral, certain costs associated
with the integration of Coral and the hiring of additional personnel. The
increase also reflected (i) a one-time write-off during the nine months ended
September 30, 1998 of approximately $0.1 million relating to fixed assets,
including leasehold improvements and telephone systems, used at Coral's existing
facilities in Longmont, Colorado, that were not deployed at its new facilities
in Broomfield, Colorado, (ii) write-offs of approximately $0.3 million for bad
debts attributable principally to contracts of Coral that predated the Company's
acquisition of Coral and (iii) accruals of approximately $0.3 million for
various matters, including sales taxes, the Company's allowance for doubtful
accounts and costs attributable to the Company's establishment of foreign
subsidiaries in Asia and the United Kingdom.
OTHER INCOME, NET. Other income, net in the nine months ended September 30,
1998 consisted predominantly of interest income and expense. Interest expense
decreased to $0.1 million in the nine months ended September 30, 1998 from $0.3
million in the nine months ended September 30, 1997. Interest income decreased
to $0.5 million in the nine months ended September 30, 1998 from $0.9 million in
the nine months ended September 30, 1997 as a result of lower cash balances due
to the investment made in the service delivery infrastructure and computer
equipment for development activities of the business during 1997.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. During the nine months ended
September 30, 1998 and 1997, the Company's effective tax rate was 285.1% and
11.7%, respectively. The Company's effective tax rate in 1997 was affected by
the reversal of its deferred tax valuation allowance and the utilization of
certain tax credits in the quarter ended March 31, 1997.
16
<PAGE>
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, $.01 par value, 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
shareholders. 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.
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 (8.5%
at September 30, 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
September 30, 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 $3.3 million and $5.3 million,
respectively, for the three and nine months ended September 30, 1998 and $4.2
million and $7.7 million, respectively, for the three and nine months ended
September 30, 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 three months ended September 30, 1998 also included
leasehold improvements and other costs attributable to the relocation of Coral's
facilities to Broomfield, Colorado. The Company expects capital expenditures for
the remainder of 1998 to total approximately $0.3 million. The Company currently
estimates that its capital expenditures for 1999 will total approximately $4.0
million to $5.0 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 2002.
As of September 30, 1998, the Company had cash and cash equivalents of $12.6
million and working capital of $23.5 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 years.
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 1900 as the 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 two years, computer systems and software used by many
companies may
17
<PAGE>
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 the
Customer Acquisition System ("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 service
bureau 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. Based on the information available
to date, Lightbridge believes it will be able to make necessary modifications to
service bureau systems prior to the end of 1998. 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 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, service bureau 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
$100,000 and $500,000 on Year 2000 testing and compliance during the fourth
quarter of 1998 and during 1999, respectively. There can be no assurance that
Company resources
18
<PAGE>
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
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and
AICPA Statement of Position No. 97-2, "Software Revenue Recognition." Adoption
of these pronouncements has not had a material effect on reported results of
operations or financial position. The future effects of AICPA Statement of
Position No. 97-2 on the Company's results of operations will depend on the
nature and terms of the individual software agreements entered into in future
periods.
In September 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards applicable to the manner in which the Company reports
information about operating segments in its annual financial statements
commencing with the Company's fiscal year ending December 31, 1998 and will
require that the Company report selected information about operating segments in
subsequent interim financial reports issued to stockholders.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIGHTBRIDGE, INC.
By: /s/ JOSEPH S. TIBBETTS, JR.
-----------------------------------------
Joseph S. Tibbetts, Jr.
Senior Vice President, Finance and
Administration and Chief Financial
Officer (Authorized Officer and
Principal Financial and Accounting
Date: March 31, 1998 Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,582,230
<SECURITIES> 0
<RECEIVABLES> 17,351,210
<ALLOWANCES> 322,291
<INVENTORY> 0
<CURRENT-ASSETS> 2,197,391
<PP&E> 26,816,563
<DEPRECIATION> 13,340,437
<TOTAL-ASSETS> 61,332,807
<CURRENT-LIABILITIES> 8,329,608
<BONDS> 0
0
0
<COMMON> 168,194
<OTHER-SE> 50,366,244
<TOTAL-LIABILITY-AND-EQUITY> 61,332,807
<SALES> 15,603,809
<TOTAL-REVENUES> 15,603,809
<CGS> 8,257,244
<TOTAL-COSTS> 6,577,525
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 70,767
<INCOME-PRETAX> 886,566
<INCOME-TAX> 623,000
<INCOME-CONTINUING> 263,566
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 263,566
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
