<PAGE>
==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 - 26933
LIONBRIDGE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3398462
(State of Incorporation) (I.R.S. Employer
Identification No.)
950 Winter Street, Waltham, MA 02451
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: 781-434-6000
Indicate by check mark whether the registrant 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).
Yes __X___ No _____
Indicate by check mark whether the registrant has been subject to such filing
requirements for the past 90 days.
Yes _____ No ___X__
The number of shares outstanding of the registrant's common stock, par value
$0.01 per share, as of November 10, 1999 was 16,287,827.
==============================================================================
<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Statements of Operations (unaudited) for the three months and nine 3
months ended September 30, 1999 and 1998.......................................
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 4
31, 1998.......................................................................
Consolidated Statements of Cash Flows (unaudited) for the nine months ended 5
September 30,1999 and 1998.....................................................
Notes to Consolidated Financial Statements (unaudited)......................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..................... 17
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds...................................... 18
ITEM 6. Exhibits and Reports on Form 8-K............................................... 19
SIGNATURES........................................................................................... 20
EXHIBIT INDEX........................................................................................ 20
</TABLE>
-2-
<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------------- -----------------
<S> <C> <C> <C> <C>
Revenue $ 12,683 $ 10,021 $ 36,466 $ 28,153
Cost of revenue 7,929 6,550 24,261 18,776
-------- -------- -------- --------
Gross profit 4,754 3,471 12,205 9,377
Operating expenses:
Sales and marketing 1,594 749 4,206 1,955
General and administrative 3,911 2,690 10,620 7,928
Research and development 583 -- 1,043 --
Amortization of acquisition-related
intangible assets 792 441 2,370 1,635
Restructuring charges -- -- -- 451
Stock-based compensation 233 -- 465 --
-------- -------- -------- --------
Total operating expenses 7,113 3,880 18,704 11,969
Loss from operations (2,359) (409) (6,499) (2,592)
Interest expense (2,227) (196) (7,218) (461)
Other income (expense), net 85 (22) (234) (44)
-------- -------- -------- --------
Loss before income taxes (4,501) (627) (13,951) (3,097)
Provision for income taxes 177 36 492 89
-------- -------- -------- --------
Net loss (4,678) (663) (14,443) (3,186)
Accrued dividends on preferred stock (156) (265) (686) (796)
-------- -------- -------- --------
Net loss attributable to common
stockholders $ (4,834) $ (928) $(15,129) $ (3,982)
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted net loss per share
attributable to common stockholders $ (0.56) $ (0.48) $ (3.48) $ (2.31)
Shares used in computing basic and diluted
net loss per share attributable to
common stockholders 8,604 1,938 4,350 1,726
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
-3-
<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except number of shares)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 11,990 $ 732
Accounts receivable, net of allowance of $573 at September 30,
1999 and December 31, 1998, respectively 8,090 7,321
Work in process 4,668 3,929
Other current assets 725 805
-------- --------
Total current assets 25,473 12,787
Property and equipment, net 2,310 1,840
Goodwill, net 9,572 7,370
Other assets 556 405
Total assets $ 37,911 $ 22,402
-------- --------
-------- --------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Amounts owed to banks $ 5 $ 416
Short-term debt 6,593 7,693
Accounts payable 4,234 3,964
Accrued compensation and benefits 3,243 2,356
Other accrued expenses 5,457 5,664
Deferred revenue 1,395 412
-------- --------
Total current liabilities 20,927 20,505
-------- --------
Long-term debt 6,816 --
Redeemable convertible preferred stock, $0.01 par value:
Series A convertible preferred stock; 0 and 17,271,314
authorized at September 30, 1999 and December 31, 1998,
respectively; 0 and 13,271,314 shares issued and
outstanding at September 30, 1999 and December 31, 1998, -- 15,418
respectively
Series D nonvoting convertible preferred stock; 0 and 200 shares authorized
at September 30, 1999 and December 31, 1998, respectively; 0 and 140
shares issued and outstanding at September 30, 1999 and December 31,
1998, respectively -- --
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; 5,000,000 shares authorized
at September 30, 1999; no shares issued and outstanding -- --
Common stock, $0.01 par value; 100,000,000 and 25,950,867
shares authorized at September 30, 1999 and December 31, 1998,
respectively; 16,268,171 and 1,963,614 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 163 20
Additional paid-in capital 42,185 300
Accumulated deficit (29,352) (14,222)
Deferred compensation (3,230) --
Accumulated other comprehensive income 402 381
-------- --------
Total stockholders' equity (deficit) 10,168 (13,521)
-------- --------
Total liabilities, redeemable convertible preferred stock
and stockholders' equity (deficit) $ 37,911 $ 22,402
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
-4-
<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(14,443) $ (3,186)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of acquisition-related intangible assets 2,370 1,635
Compensation expense for stock options granted 465 --
Accretion of discount on subordinated notes payable 5,967 --
Depreciation and amortization of property and equipment 1,128 1,013
Provision for doubtful accounts 69 (8)
Foreign currency loss on intercompany balances 399 62
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (1,706) 302
Work in process (933) (642)
Other current assets 92 (468)
Other assets (149) (50)
Accounts payable 445 (892)
Accrued compensation and benefits 887 902
Other accrued expenses 312 333
Deferred revenue 1,616 (396)
-------- --------
-------- --------
Net cash used in operating activities (3,481) (1,395)
-------- --------
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (1,554) (1,365)
Payments for businesses acquired, net of cash acquired (3,735) (3,456)
-------- --------
-------- --------
Net cash used in investing activities (5,289) (4,821)
-------- --------
-------- --------
Cash flows from financing activities:
Net decrease in amounts owed to banks (347) (81)
Net increase (decrease) in short-term debt (1,225) 6,260
Proceeds from issuance of long-term debt 12,000 --
Repayment of long-term debt (6,000) --
Redemption of preferred stock (16,108) --
Net proceeds from issuance of common stock 31,878 348
-------- --------
-------- --------
Net cash provided by financing activities 20,198 6,527
-------- --------
-------- --------
Net increase in cash 11,428 311
Effects of exchange rate changes on cash (170) 69
Cash at beginning of period 732 1,098
-------- --------
Cash at end of period $ 11,990 $ 1,478
-------- --------
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
-5-
<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. FINANCIAL INFORMATION
The accompanying consolidated financial statements include the accounts of
Lionbridge Technologies, Inc. and its wholly owned subsidiaries (collectively,
"Lionbridge" or "the Company"). These financial statements are unaudited.
However, in the opinion of management, the consolidated financial statements
include all adjustments, consisting of only normal, recurring adjustments,
necessary for their fair presentation. Interim results are not necessarily
indicative of results expected for a full year. The accompanying unaudited
consolidated financial statements have been prepared in accordance with the
instructions for Form 10-Q and therefore do not include all information and
footnotes necessary for a complete presentation of the operations, financial
position and cash flows of the Company in conformity with generally accepted
accounting principles. The Company filed audited consolidated financial
statements for the year ended December 31, 1998 in its registration statement on
Form S-1, as amended, which included all information and footnotes necessary for
such presentation.
The Company's preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reported
periods. Estimates are used when accounting for collectibility of receivables,
calculating revenue using the percentage-of-completion method, and valuing
intangible assets, deferred tax assets and net assets of businesses acquired.
Actual results could differ from these estimates.
2. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic net loss per share attributable to common stockholders is computed by
dividing net loss attributable to common stockholders by the weighted average
number of shares of common stock outstanding. There is no difference between
basic and diluted earnings per share since potential common shares from the
exercises of stock options and warrants are anti-dilutive for all periods
presented. Options to purchase 2,333,207 and 2,171,800 shares of common stock
and warrants to purchase 338,878 and 83,334 shares of common stock were
outstanding as of September 30, 1999 and 1998, respectively, but were not
included in the calculation of diluted net loss per share attributable to common
stockholders because the effect of their inclusion would have been
anti-dilutive.
3. BUSINESS COMBINATIONS
VERITEST, INC.
On January 11, 1999, Lionbridge entered into an agreement to acquire all of the
stock of VeriTest, Inc., a company based in California, for total initial
consideration of $4,354,000 consisting of cash of $3,260,000, 66,668 shares of
common stock valued at $344,000, and notes payable for $750,000. The agreement
also requires certain contingent cash payments, limited to $1,000,000, dependent
on future operating performance through December 31, 2000. This acquisition was
accounted for using the purchase method of accounting. The purchase price,
including direct costs of the acquisition, was allocated based on the fair
values of the acquired assets and assumed liabilities as follows:
<TABLE>
<S> <C>
Current assets......................................................................... $522,000
Current liabilities.................................................................... (616,000)
Property and equipment................................................................. 175,000
Goodwill............................................................................... 4,338,000
---------
$4,419,000
---------
---------
</TABLE>
-6-
<PAGE>
The initial calculation of goodwill did not include any contingent
consideration. Future payments, if any, under the contingent payment arrangement
will increase goodwill. The initial calculation of goodwill is subject to
adjustment when additional information on the valuation of customer contracts
and intellectual property is finalized. An allocation of the purchase price to
such assets, if any, would decrease goodwill by a corresponding amount. The
results of VeriTest, Inc. are included in these financial statements from the
date of acquisition.
The following unaudited pro forma consolidated results of operations for the
nine-month periods ended September 30, 1999 and 1998 assume that the
acquisition of VeriTest, Inc. occurred as of January 1, 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Revenue................................................................. $36,466 $31,303
Net loss................................................................ (14,660) (4,578)
Basic and diluted net loss per share attributable to common stockholders (3.52) (2.51)
</TABLE>
For each period presented, the pro forma results include estimates of
the interest expense on debt used to finance the purchase and the depreciation
and amortization of intangible and other fixed assets based on the purchase
price allocation. These pro forma amounts do not purport to be indicative of the
results that would have actually been obtained if the acquisition had occurred
on January 1, 1998 or that may be obtained in the future.
The expense of amortizing goodwill from all acquisitions was $2,370,000
and $1,635,000 for the nine months ended September 30, 1999 and 1998,
respectively. The expense of amortizing goodwill from all acquisitions was
$792,000 and $441,000 for the three months ended September 30, 1999 and 1998,
respectively.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
Computer software and equipment $ 4,126,000 $ 2,035,000
Furniture and office equipment 970,000 708,000
Leasehold improvements 421,000 327,000
----------------- ----------------
5,517,000 3,070,000
Less: accumulated depreciation and amortization (3,207,000) (1,230,000)
----------------- ----------------
$ 2,310,000 $ 1,840,000
=============== ===============
</TABLE>
5. DEBT
LINE OF CREDIT
On September 26, 1997, Lionbridge entered into a line of credit arrangement with
a commercial bank. The agreement was subsequently amended on May 21, 1998, May
20, 1999, July 16, 1999 and September 20, 1999 and expires on December 20, 1999.
At the time of the May 1998 amendment, Lionbridge issued a warrant for the
purchase of 83,334 shares of common stock at an exercise price of $2.40 per
share. This warrant was exercisable immediately and expires on May 21, 2003. The
value ascribed to this warrant was immaterial. Under the amended terms of the
agreement, Lionbridge may borrow up to $8,000,000, based on the value of certain
eligible current assets worldwide.
-7-
<PAGE>
The interest rate payable on any outstanding borrowings is prime plus 1% per
year (9.25% and 8.8% at September 30, 1999 and December 31, 1998, respectively).
Lionbridge paid a facility fee of $50,000 on the signing of the agreement. This
fee and other direct arrangement expenses were amortized over the initial term
of the agreement, which expired on May 22, 1998. Borrowings outstanding under
the line of credit agreement are collateralized by certain assets of Lionbridge.
The amount outstanding on the line of credit at September 30, 1999 and December
31, 1998 was $6,593,000 and $7,693,000, respectively.
The agreement requires Lionbridge to maintain certain financial ratios and
restricts the payment of dividends. As of September 30, 1999 and December 31,
1998, Lionbridge was in compliance with the financial covenants.
ADDITIONAL FINANCING
On January 11, 1999, Lionbridge entered into two substantially identical
promissory note agreements with the former owners of VeriTest, Inc. in
connection with the acquisition of this business. The notes are for an aggregate
amount of $750,000 and are payable in one installment on January 11, 2001.
Interest on the notes is due annually at a rate of 8%.
On January 8, 1999, Lionbridge entered into a bridge loan agreement with a third
party. Under the terms of the agreement, Lionbridge issued a $4,000,000, 12%
senior subordinated note. On February 26, 1999, Lionbridge entered into a new
subordinated debt agreement with the same party and terminated the bridge loan
agreement. Under the terms of the new agreement, Lionbridge issued $10,000,000,
12% senior subordinated convertible notes. The principal amounts of the notes
are repayable in quarterly installments beginning in March 2003, with final
settlement of the principal and interest due in February 2006. Interest is due
quarterly. The notes are subject to certain covenant restrictions, and are
collateralized by certain assets of Lionbridge. In connection with the issuance
of these notes, Lionbridge issued detachable warrants to purchase 1,277,716
shares of common stock at a price of $0.015 per share, valued at $4,972,000.
These warrants were exercised in full on August 31, 1999.
On March 9, 1999, Lionbridge entered into a subordinated debt agreement with a
stockholder. Under the terms of the agreement, Lionbridge issued $2,000,000, 12%
senior subordinated convertible notes. The principal amounts of the notes are
repayable in quarterly installments beginning in March 2003, with final
settlement of the principal and interest due in March 2006. Interest is due
quarterly. The notes are collateralized by certain assets of Lionbridge and are
subject to certain covenant restrictions. In connection with the issuance of
these notes, Lionbridge issued detachable warrants to purchase 255,544 shares of
common stock at a price $0.015 per share, valued at $995,000.
The detachable warrants issued in connection with these financings expire on the
later of (i) the seventh anniversary of the issuance of the warrant and (ii) the
date when each related note is paid in full. If not otherwise exercised, the
warrants will be automatically exercised in accordance with their terms
immediately prior to any expiration. The aggregate value of these warrants was
recorded as a discount on subordinated notes payable and was amortized as
additional interest expense using the straight-line method over the period from
issuance until August 1999, based on the initially expected repayment of the
debt upon the initial public offering of securities by Lionbridge.
On August 19, 1999, Lionbridge entered into amendments to the subordinated debt
agreements pursuant to which the 12% senior subordinated convertible notes were
issued. As a result, Lionbridge was required to repay one-half of the aggregate
principal amount of each of the notes, together with all accrued and unpaid
interest thereon, upon the closing of the initial public offering. The remaining
aggregate principal amount of such notes, together with all accrued and unpaid
interest thereon, is required to be repaid upon the earlier of August 25, 2001
or an underwritten public offering by Lionbridge subsequent to the initial
public offering of securities with aggregate proceeds of at least $10,000,000.
These notes had previously required that all of the principal amount be paid
upon a closing of an initial public offering of securities with aggregate
proceeds of at least $25,000,000.
As of March 31, 1999, Lionbridge was not in compliance with one of the covenants
common to each of the above notes. Lionbridge subsequently obtained waivers from
the debt holders which released it from the requirement to comply with that
covenant for the quarter ended March 31, 1999 and for the quarters ending June
30 and September 30, 1999.
-8-
<PAGE>
6. CAPITAL STOCK
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock in one or
more series, each with such terms and rights as adopted by the Company in
creating such series. No preferred stock was issued or outstanding as of
September 30, 1999.
CONVERSION AND REDEMPTION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
Upon closing of the Company's initial public offering of common stock on August
25, 1999, all 13,271,314 shares and 140 shares of its Series A convertible
preferred stock and Series D nonvoting convertible preferred stock,
respectively, converted into 132.7145 shares of Series B redeemable preferred
stock and 8,847,649 shares of Series C convertible preferred stock. The Series B
redeemable preferred stock was redeemed for $100,000 per share plus an 8% annual
premium for a total of approximately $16,108,000 on the completion of the
initial public offering. At the same time, the Series C convertible preferred
stock converted into 8,847,649 shares of common stock.
REVERSE STOCK SPLIT
Effective August 31, 1999, the Company's Board of Directors declared a 2-for-3
reverse stock split. All references in these consolidated financial statements
to shares of common stock have been retroactively adjusted to reflect this
reverse stock split.
7. DEFERRED COMPENSATION
During the nine months ended September 30, 1999, Lionbridge granted stock
options to purchase 843,700 shares of its common stock at exercise prices
ranging from $1.50 to $9.75 per share. Lionbridge recognized deferred
compensation relating to these options totaling $3,761,000, representing the
aggregate difference between the estimated fair market value of Lionbridge's
common stock on the date of the grant and the exercise price of each option.
This deferred compensation is being amortized over the four-year vesting period
of the related options, resulting in amortization of approximately $233,000 and
$465,000 in the three- and nine-month periods ended September 30, 1999,
respectively. During the three- and nine-month periods ended September 30, 1999,
respectively, approximately $0 and $66,000 of the deferred compensation
originally recorded and additional paid-in capital was reversed due to the
cancellation of the related options.
8. COMPREHENSIVE LOSS
Total comprehensive loss was approximately $4,751,000 and $696,000 for the
three-month periods ended September 30, 1999 and 1998, respectively, and
$14,422,000 and $3,201,000 for the nine-month periods ended September 30,
1999 and 1998, respectively, which consists of net loss and the net change in
foreign currency translation adjustment. This calculation is in accordance
with the requirements of SFAS No. 130, "Reporting Comprehensive Income," and
has no impact on the Company's net losses or stockholders' equity (deficit).
9. SEGMENT INFORMATION
Lionbridge provides localization services to the information technology
industry, including language translation, cultural reformatting and testing of
applications. Lionbridge provides a full service offering to its clients on a
global basis and, although customers may utilize the results of Lionbridge's
services in a number of different formats, for example, through software manuals
or the Internet, management does not allocate resources or assess performance on
the basis of this end-use. As a result, management considers Lionbridge to have
only one operating segment.
-9-
<PAGE>
10. RESTRUCTURING CHARGES
During the first quarter of 1998, Lionbridge recorded a restructuring charge
of $451,000 in operating expenses. This charge relates to a workforce
reduction in France, consisting of five technical and administrative staff.
All employees had been informed of their termination and related benefits in
the period that the charge was recorded. Lionbridge had no remaining accrual
at December 31, 1998 and at September 30, 1999 in relation to this charge.
As of September 30, 1999, none of these employees remained with Lionbridge
and management does not anticipate any future expenditures related to this
action.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Noncash investing and financing activities:
Issuance of warrants for common stock in
connection with debt (Note 5)............................. $5,967,000
Lionbridge purchased all of the outstanding capital stock of Japanese Language
Services, Inc. for $2,323,000, effective January 2, 1998. In conjunction with
the acquisition, liabilities were assumed as follows:
Fair value of assets acquired and goodwill............. $3,181,000
Cash paid for capital stock............................ (2,237,000)
Common stock issued.................................... (86,000)
----------
Liabilities assumed................................. $ 858,000
----------
----------
Lionbridge purchased all of the outstanding capital stock of VeriTest, Inc.
for $4,354,000, effective January 11, 1999. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired and goodwill............. $5,035,000
Cash paid for capital stock............................ (3,260,000)
Common stock issued.................................... (344,000)
Notes issued........................................... (750,000)
----------
Liabilities assumed................................. $ 681,000
----------
----------
</TABLE>
12. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 was amended on July 7, 1999 by the
issuance of Statement of Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133 - an amendment of FASB Statement No. 133." SFAS
137 defers the implementation of SFAS No. 133 by one year. SFAS 133, as amended,
is effective for fiscal quarters beginning after January 1, 2001 for the
Company, and its adoption is not expected to have a material impact on the
Company's financial position or results of operations.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The matters discussed in this Form 10-Q include forward-looking statements that
involve risks or uncertainties. These statements are based on various
assumptions by management regarding future circumstances over many of which
Lionbridge has little or no control. A number of important factors, including
those identified under the caption "Risk Factors" in Lionbridge's registration
statement on Form S-1 (SEC File No. 333-81233) (the "Registration Statement") as
well as factors discussed elsewhere in this Form 10-Q, could cause Lionbridge's
actual results to differ materially from those in forward-looking statements or
financial information. Actual results may differ from forward-looking results
for a number of reasons, including the following: (i) changes in the demand for
our services; (ii) the delay of one of our clients' product releases or the loss
of a major client; (iii) our ability to attract and retain professional staff;
(iv) Lionbridge's ability to manage its growth; (v) our potential liability for
defects or errors in the solutions we develop; (vi) our potential failure to
keep pace with changing technologies; (vii) year 2000 issues, (viii) the entry
of additional competitors into the marketplace; (ix) future acquisitions
(including the potential diversion of management attention and financial
resources and the ability of acquired businesses to achieve satisfactory
operating results); and (x) downturns in economic conditions generally. Should
one or more of these risks or uncertainties materialize or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected.
OVERVIEW
GENERAL
Lionbridge is a provider of globalization and multilingual Internet services to
industry-leading software publishers, computer hardware manufacturers, and
telecommunications companies. Since 1996, we have focused primarily on
globalization services, including localization, internationalization, and
testing, that enable simultaneous worldwide release and ongoing maintenance of
products and product-related technical support, training materials, and sales
and marketing information in multiple languages. More recently, as product
release, technical support, and training have evolved toward a Web-based
business model, we have begun to offer multilingual Internet services.
Lionbridge's revenues are derived from fees for services generated on a
project-by-project basis. Projects are generally billed on a time and materials
basis. Revenue is recognized using the percentage of completion method of
accounting, based on management's estimate of progress against the project plan.
The agreements entered into in connection with projects are generally terminable
by clients upon 30 days' prior written notice. If a client terminates an
agreement, it is required to pay Lionbridge for time and materials incurred
through the termination date. If clients terminate existing projects or if
Lionbridge is unable to enter into new engagements, our financial condition and
results of operations could be materially and adversely affected.
-11-
<PAGE>
ACQUISITIONS
We have grown our business since inception through a combination of acquisitions
and organic growth. Such acquisitions through 1998 resulted in the recognition
of approximately $12 million of goodwill on our balance sheet. The goodwill is
being amortized over five years.
In January 1999, Lionbridge acquired all of the stock of VeriTest, a
California-based provider of contract and logo certification testing services.
Lionbridge paid $3.3 million in cash and issued notes totaling $750,000 and
66,668 shares of our common stock valued at $344,000. Lionbridge may also be
required to pay up to an additional $1.0 million in cash dependent upon future
operating performance of VeriTest through December 2000. In connection with this
acquisition, Lionbridge recorded $4.3 million of goodwill, not including any
additional contingent amounts that may be paid in the future. The goodwill is
being amortized over five years.
RESTRUCTURING CHARGES
During the first quarter of 1998, Lionbridge recorded a restructuring charge
of $451,000 in operating expenses. This charge relates to a workforce
reduction in France, consisting of five technical and administrative staff.
All employees had been informed of their termination and related benefits in
the period that the charge was recorded. Lionbridge had no remaining accrual
at December 31, 1998 and at September 30, 1999 in relation to this charge.
As of September 30, 1999, none of these employees remained with Lionbridge
and management does not anticipate any future expenditures related to this
action.
NON-CASH CHARGES
DEFERRED COMPENSATION. Lionbridge recorded deferred compensation of
approximately $3.8 million in the first six months of 1999, representing the
difference between the exercise price of stock options granted and the fair
market value for accounting purposes of the underlying common stock at the date
of the grant. The deferred compensation is being amortized over the four-year
vesting period of the applicable options. Of the total deferred compensation
amount, $465,000 had been amortized and $66,000 had been reversed due to
cancellation of the underlying options as of September 30, 1999. The
amortization of deferred compensation is recorded as an operating expense. We
currently expect to amortize the following remaining amounts of deferred
compensation as of September 30, 1999 in the fiscal periods ending:
<TABLE>
<S> <C>
December 31, 1999............................................................................ $229,000
December 31, 2000............................................................................ $914,000
December 31, 2001............................................................................ $914,000
December 31, 2002............................................................................ $914,000
December 31, 2003............................................................................ $259,000
</TABLE>
ORIGINAL ISSUE DISCOUNT ON SUBORDINATED NOTES. Interest expense for the nine
months ended September 30, 1999 includes $6.0 million for the accretion of the
original issue discount on $12.0 million of subordinated notes issued in that
period. This discount represents the $6.0 million value attributable to
detachable warrants to purchase 1,533,260 shares of common stock, at an exercise
price of $0.015 per share, granted in connection with this debt financing. As we
were previously required to repay the subordinated notes in full upon the
closing of our initial public offering, we recorded the expense of this discount
on a straight-line basis over a six-month period from date of debt issuance to
the date by which we expected the initial public offering to occur. Pursuant to
an amendment of the debt agreements effective August 19, 1999, Lionbridge was
required to redeem only $6.0 million of the subordinated notes upon the closing
of the initial public offering.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operating data
associated with the Company's results of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
-12-
<PAGE>
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 62.5 65.4 66.5 66.7
---- ----- ----- -----
Gross profit 37.5 34.6 33.5 33.3
Operating expenses:
Sales and marketing 12.6 7.5 11.5 6.9
General and administrative 30.8 26.8 29.1 28.2
Research and development 4.6 --- 2.9 ---
Amortization of acquisition-related
intangible assets 6.3 4.4 6.5 5.8
Restructuring charges --- --- --- 1.6
Stock-based compensation 1.8 --- 1.3 ---
---- ----- ----- -----
Total operating expenses 56.1 38.7 51.3 42.5
Loss from operations (18.6) (4.1) (17.8) (9.2)
Interest expense (17.6) (2.0) (19.8) (1.6)
Other income (expense), net 0.7 (0.2) (0.7) (0.2)
---- ----- ----- -----
Loss before income taxes (35.5) (6.3) (38.3) (11.0)
Provision for income taxes 1.4 0.4 1.3 0.3
---- ----- ----- -----
Net loss (36.9) (6.6) (39.6) (11.3)
Accrued dividends on preferred stock 1.2 2.7 1.9 2.8
---- ----- ----- -----
Net loss attributable to common
stockholders (38.1)% (9.3)% (41.5)% (14.1)%
======= ====== ======= =======
</TABLE>
REVENUE. Revenue for the quarter ended September 30, 1999 was $12.7 million
compared to revenue of $10.0 million for the quarter ended September 30,
1998, an increase of $2.7 million or 26.6%. Revenue increased by $8.3 million
or 29.5% to $36.5 million for the nine months ended September 30, 1999 as
compared to $28.2 million for the same period of the prior year. These
increases result from additional project volume during the first nine months
of 1999 as compared to the first nine months of 1998, reflecting the
continued impact of a strengthened sales organization. In addition, the nine-
and three-month periods ended September 30, 1999 also reflect revenue derived
from the operations of VeriTest, which was not included in 1998 and accounted
for approximately $4.0 million in revenue in 1999.
COST OF REVENUE. Cost of revenue consists primarily of outsourcing expense
incurred for translation services provided by third parties as well as salaries
and associated employee benefits for personnel related to client projects. As a
percentage of revenue, cost of revenue decreased slightly to 62.5% for the
quarter ended September 30, 1999 as compared to 65.4% for the corresponding
period of the prior year. For the nine months ended September 30, 1999, cost of
revenue remained relatively consistent on a percentage of revenue basis from the
corresponding nine months of the prior year.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries,
commissions and associated employee benefits, travel expenses of sales and
marketing personnel, and promotional expenses. Sales and marketing costs
increased 112.8% to $1.6 million in the third quarter of 1999 from $749,000 in
the third quarter of 1998. For the nine months ended September 30, 1999, sales
and marketing expenses increased 115.1% to $4.2 million from $2.0 million for
the nine months ended September 30, 1998. These increases were primarily due to
expenses associated with the continued hiring of additional direct sales
personnel in fiscal 1999 as we continued to establish our sales and marketing
organization. As a percentage of revenue, sales and marketing expenses increased
to 12.6% in the third quarter of 1999 from 7.5% and increased to 11.5% during
the first nine months of 1999 from 6.9% during the nine months ended September
30, 1998. Sales and marketing expenses are expected to continue to increase in
absolute dollars as we continue to expand our marketing programs and sales
force.
-13-
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
salaries of the management, purchasing, process and technology, finance and
administrative groups, and associated employee benefits; facilities costs,
including depreciation and amortization; information systems costs; professional
fees; travel; and all other site and corporate costs. General and administrative
expenses increased 45.4% to $3.9 million for the three months ended September
30, 1999 from $2.7 million for the three months ended September 30, 1998. This
increase was principally due to the hiring of additional employees, the
recognition of certain one-time expenses in conjunction with Lionbridge's
initial public offering, expenses resulting from the acquisition of VeriTest in
1999. General and administrative expenses for the nine months ended September
30, 1999 increased 34.0% to $10.6 million from $7.9 million during the
corresponding period of 1998 as a result of the hiring of additional employees
and other personnel-related costs as well as the additional infrastructure costs
of the VeriTest acquisition. As a percentage of revenue, general and
administrative expenses remained relatively constant for the nine-month periods
ended September 30, 1999 and 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses relate to
LIONTRACK-TM-, our proprietary internal workflow system, and include salaries
and associated employee benefits, equipment and third-party contractor expenses.
Research and development expense totaled $583,000 and $1.0 million for the
three- and nine-month periods ended September 30, 1999, respectively. No
research and development expense was incurred in 1998. We expect that research
and development expenses relating to LIONTRACK will increase in absolute dollars
in the foreseeable future.
AMORTIZATION OF ACQUISITION-RELATED INTANGIBLE ASSETS. Amortization of
acquisition-related intangible assets consists of amortization of goodwill and
other intangible assets resulting from acquired businesses. Amortization expense
increased 80.0% to $792,000 for the three months ended September 30, 1999 from
$441,000 for the three months ended September 30, 1998. For the nine months
ended September 30, 1999, amortization expense increased to $2.4 million, or
45.0% over the nine months ended September 30, 1998. These increases were
primarily due to the amortization of goodwill recognized on the acquisition of
VeriTest at the beginning of 1999.
INTEREST EXPENSE. Interest expense represents interest payable on debt and the
accretion of original issue discount on subordinated notes with detachable
warrants. Interest expense increased to $2.2 million for the three months ended
September 30, 1999 as compared to $196,000 for the three months ended September
30, 1998. Interest expense was $7.2 million for the nine months ended September
30, 1999 versus $461,000 for the corresponding period of 1998. These increases
were principally due to accretion of $1.9 million and $6.0 million for the
three- and nine-month periods ended September 30, 1999, respectively, on the
original issue discount on the subordinated notes issued in 1999 and to
increased interest as a result of greater borrowings through notes issued and
our commercial credit facility.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consists primarily of
foreign currency transaction gains or losses arising from exchange rate
fluctuations on transactions denominated in currencies other than the local
currencies of the countries in which the transactions are recorded. As a
percentage of revenue, other income (expense), net increased to 0.7% for the
three months ended September 30, 1999 from (0.2)% for the corresponding three
months of 1998. For the nine months ended September 30, 1999, other income
(expense), net was (0.7)% of revenue as compared to (0.2)% for the nine months
ended September 30, 1998.
PROVISION FOR INCOME TAXES. The provision for income taxes in the three- and
nine-month periods ended September 30, 1999 and 1998 represents taxes generated
in foreign jurisdictions for which U.S. tax credit utilization is currently
uncertain. No tax benefit was recorded for losses generated during these periods
due to the uncertainty of realizing any benefit.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Lionbridge has relied upon sales of equity securities and
borrowings to fund operations. On August 25, 1999, Lionbridge completed our
initial public offering of 3,500,000 shares of common stock. After deducting
expenses, Lionbridge received approximately $31.9 million in cash proceeds from
this transaction.
-14-
<PAGE>
Upon closing our initial public offering of common stock, all 13,271,314 shares
and 140 shares of our Series A convertible preferred stock and Series D
nonvoting convertible preferred stock, respectively, converted into 132.7145
shares of Series B redeemable preferred stock and 8,847,649 shares of Series C
convertible preferred stock. The Series B redeemable preferred stock was
redeemed for $100,000 per share plus an 8% annual premium for a total of
approximately $16.1 million at the completion of the initial public offering. At
the same time, the Series C convertible preferred stock converted into 8,847,649
shares of common stock.
Lionbridge issued $12.0 million of subordinated notes, bearing interest at 12%
per year, in the first quarter of 1999. At the completion of our initial public
offering, $6.0 million of the notes were repaid. The remaining $6.0 million of
these notes bear interest at 12% per year and are due upon the earlier to occur
of (i) August 25, 2001 or (ii) our completion of a future underwritten public
offering with aggregate gross proceeds of at least $10.0 million.
We have a commercial credit facility that allows Lionbridge to borrow up to $8.0
million and that expires on December 20, 1999. The facility requires Lionbridge
to maintain financial ratios and restricts the payment of dividends. The
facility bears interest at the bank's prime rate plus 1% (9.25% at September 30,
1999) and is collateralized by worldwide accounts receivable and work in
process. As of September 30, 1999, $6.6 million was outstanding under the
facility.
Cash increased to $12.0 million at September 30, 1999 from $732,000 at December
31, 1998. Net cash used in operating activities was $3.5 million and $1.4
million for the nine month periods ended September 30, 1999 and 1998,
respectively. This increase was attributable to funding of operating losses
resulting from growth in revenue and operations. Net cash used in investing
activities was $5.3 million for the nine months ended September 30, 1999 as
compared to $4.8 million for the corresponding period of 1998. Investing
activities for these periods were primarily purchases of equipment and the
acquisitions of Japanese Language Services and the localization services
division of Lucent Technologies in 1998 and VeriTest in 1999. Net cash provided
by financing activities was $20.2 million and $6.5 million in the first nine
months of 1999 and 1998, respectively. The primary financing activity was the
completion of our initial public offering in 1999, with additional resources
being provided by borrowings against our bank line of credit in each period as
well as the issuance of the subordinated debt in 1999.
As of September 30, 1999, we had cash of $12.0 million and an additional $1.4
million available for borrowing under the bank line of credit. Our future
financing requirements will depend upon a number of factors, including our
operating performance and increases in operating expenses associated with
growth in our business. We anticipate that our present cash position and
available financing should provide adequate cash to fund our currently
anticipated cash needs through at least the next 12 months. We cannot be
assured that additional financing, if needed, will be available to Lionbridge
at terms acceptable to us, if at all.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 problem is the potential for system and processing failures of
date-related data arising from the use of two digits by computer-controlled
systems, rather than four digits, to define the applicable year. Because we and
our clients are dependent, to a very substantial degree, upon the proper
functioning of our and their computer systems, a failure of our or their systems
to correctly recognize dates beyond December 31, 1999 could materially disrupt
our operations, which could materially and adversely affect our business,
results of operations, and financial condition. Additionally, our failure to
provide Year 2000-compliant services to our clients could result in financial
loss, harm to our reputation and legal liability. Likewise, the failure of
computer systems and products of the third parties with which we transact
business to be Year 2000-compliant could materially disrupt their and our
operations.
STATE OF READINESS. We have made an assessment of the Year 2000 readiness of our
information technology ("IT") systems, including the hardware and software that
enable us to provide services. Our Year 2000 readiness plan consists of:
- quality assurance testing of our internally developed proprietary
software,
-15-
<PAGE>
- contacting third-party vendors and licensors of material software
and services that are both directly and indirectly related to the
delivery of our services,
- assessing our repair and replacement requirements, and
- creating contingency plans in the event of Year 2000 failures.
We have contacted our major third party vendors and service
providers to assess their Year 2000 compliance. We have been informed by all
of our material software component vendors that the products we use are
currently Year 2000-compliant. We have substantially completed the assessment
of our non-IT systems and have sought assurance of Year 2000 compliance from
providers of material non-IT systems. We expect to complete resulting
contingency plans by November 30, 1999. Based on the results of our
assessment to date, we do not believe that any significant IT or non-IT
systems will need to be revised or replaced.
COSTS. We have made the majority of our equipment and other purchases over the
course of the last two years, and we believe this equipment is Year
2000-compliant. As a result, we have not incurred any material costs in
identifying or evaluating Year 2000 compliance issues. Based on our assessment
to date, we do not anticipate that costs associated with remediating our
non-compliant IT systems or non-IT systems will be material. We expect that our
existing employees or consultants will perform any significant work pertaining
to Year 2000 compliance.
RISKS. We believe that our internal software and hardware systems will function
properly with respect to dates in the Year 2000 and thereafter. Year 2000
problems of our clients, suppliers and service providers could affect our
systems or operations. Our primary vendors consist of individual translators and
other service professionals who are not expected to be materially impacted by
the Year 2000 issue. We do have relationships with various financial
institutions and telecommunications providers throughout the world which could
be materially impacted by this problem. We have contacted our financial
institutions and critical telecommunications providers and based on their
responses, we believe our operations will not be materially impacted by Year
2000 problems. In addition, we cannot assure you that governmental agencies,
utility companies, Internet access companies, third party service providers, and
others outside our control will be Year 2000-compliant. Because we depend
heavily on the availability of the Internet to conduct our business and provide
services to our clients, disruptions in the use of the Internet arising from
Year 2000 problems could materially affect our business, financial condition,
and results of operations.
Widespread Year 2000 difficulties could also decrease demand for our services as
companies expend resources upgrading their computer systems. Although, as a
general matter, we do not specifically contract with or warrant to our clients
that our work will be Year 2000-compliant, several clients have requested and
received this warranty. In these cases, we do not warrant the compliance of the
client's source material; rather, we warrant only that the localized version
created by us will not include new routines which fail to be Year
2000-compliant. In addition, through our VeriTest labs we provide Year 2000
testing services on customer products, but we expressly exclude any warranty,
guaranty, or certification of Year 2000 compliance, compatibility or the
functionality of the customer's products. Although we believe we have
effectively limited our risk of warranty claims for Year 2000 problems, there is
still a risk that clients for whom we have localized or tested software will
attempt to hold us liable for any damages that result in connection with Year
2000 problems.
CONTINGENCY PLAN. As discussed above, we have substantially completed an
ongoing Year 2000 assessment and continue to finalize contingency plans in
case of Year 2000 disruptions. We will take into account the results of our
Year 2000 simulation testing and the responses received from third party
vendors and service providers in determining the nature and extent of any
contingency plans.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS
-16-
<PAGE>
133 was amended on July 7, 1999 by the issuance of Statement of Accounting
Standards No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 -
an amendment of FASB Statement No. 133." SFAS 137 defers the implementation of
SFAS No. 133 by one year. SFAS 133, as amended, is effective for fiscal quarters
beginning after January 1, 2001 for the Company and its adoption is not expected
to have a material impact on the Company's financial position or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about Lionbridge's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
discussed in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
INTEREST RATE RISK. Lionbridge is exposed to market risk from changes in
interest rates primarily through its investing activities. In addition, our
ability to finance future acquisition transactions may be impacted if we are
unable to obtain appropriate financing at acceptable rates. Our investment
portfolio consists solely of investments in high-grade, commercial bank money
market accounts.
FOREIGN CURRENCY EXCHANGE RATE RISK. The majority of our contracts with clients
are denominated in U.S. dollars. However, 55% and 75% of our costs and expenses
for the nine months ended September 30, 1999 and 1998, respectively, were
denominated in foreign currencies. 47% and 59% of our assets were recorded in
foreign currencies as of September 30, 1999 and December 31, 1998, respectively.
32% and 48% of our liabilities were recorded in foreign currencies as of
September 30, 1999 and December 31, 1998, respectively. Therefore, we are
exposed to foreign currency exchange risks. We have not historically tried to
reduce our exposure to exchange rate fluctuations by using hedging transactions.
However, we may choose to do so in the future. We may not be able to do this
successfully. Accordingly, we may experience economic loss and a negative impact
on earnings and equity as a result of foreign currency exchange rate
fluctuations.
-17-
<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 20, 1999, we commenced an initial public offering of 3,500,000
shares of common stock (4,025,000 shares including 525,000 over-allotment
shares offered by selling stockholders and Lionbridge), $.01 par value per
share pursuant to a final prospectus dated August 20, 1999. The prospectus
was contained in the Company's registration statement on Form S-1, which was
declared effective by the Securities and Exchange Commission (SEC File No.
333-81233) on August 20, 1999. Of the 4,025,000 shares of common stock
offered, 3,798,000 shares were offered and sold, 3,500,000 shares by
Lionbridge and 298,000 shares by certain stockholders of Lionbridge. The
offering closed on August 25, 1999 as to the shares offered and sold by
Lionbridge and on September 10, 1999 as to the shares offered and sold by the
selling stockholders. The aggregate offering price of the offering to the
public was $38.0 million, with proceeds to Lionbridge and the selling
stockholders, after deduction of the underwriting discounts and commissions,
of $33.1 million and $2.8 million, respectively. The aggregate amount of
expenses incurred by the Company in connection with the issuance and
distribution of the shares of common stock sold in the offering were
approximately $3.1 million, including approximately $1.9 million in
underwriting discounts and commissions and $1.2 million in other offering
expenses. None of the expenses incurred by Lionbridge in connection with the
offering represented payments, direct or indirect, to directors, officers,
persons owning 10% or more of the equity securities of Lionbridge, or
affiliates of Lionbridge. Prudential Securities Incorporated, U.S. Bancorp
Piper Jaffray Inc. and Adams, Harkness & Hill, Inc. acted as underwriters for
the initial public offering.
Upon closing our initial public offering of common stock, all 13,271,314 shares
and 140 shares of our Series A convertible preferred stock and Series D
nonvoting convertible preferred stock, respectively, converted into 132.7145
shares of Series B redeemable preferred stock and 8,847,649 shares of Series C
convertible preferred stock. The Series B redeemable preferred stock was
redeemed for $100,000 per share plus an 8% annual premium for a total of
approximately $16.1 million at the completion of the initial public offering. At
the same time, the Series C convertible preferred stock converted into 8,847,649
shares of common stock.
The primary purposes of the initial public offering were to obtain additional
capital, create a public market for Lionbridge's common stock, provide liquidity
to existing stockholders and optionholders, create a currency for future
acquisitions and facilitate future access to public markets. The Company used
$16.1 million of the proceeds of the offering to redeem shares of Series B
redeemable preferred stock, $6.0 million to repay subordinated notes and
approximately $185,000 to purchase fixed assets. The remainder of the proceeds
are intended to be used for working capital and general corporate purposes.
Lionbridge paid approximately $15.4 million of the net proceeds of the offering
to officers and affiliates of Lionbridge to redeem shares of our Series B
redeemable preferred stock and paid $6.0 million to affiliates of the Company to
repay our senior subordinated notes held by those affiliates.
In connection with the issuance of senior subordinated notes in the first
quarter of 1999, Lionbridge issued warrants to purchase 1,533,260 shares of our
common stock at an exercise price of $0.015 per share. Subsequent to the
completion of our initial public offering, warrants to acquire 1,277,716 of
these shares were exercised.
During the three months ended September 30, 1999, options to purchase 271,009
shares of common stock, issued pursuant to Lionbridge's 1998 Stock Plan, were
exercised.
Other than our initial public offering, all such issuances of securities of
Lionbridge during the quarter ended September 30, 1999 were made in reliance
on Section 4(2), Rule 701 and/or Regulation D under the Securities Act of
1933, as amended.
The terms of our commercial bank credit facility prohibit the payment of cash
dividends to us by our European subsidiaries and contain other working capital
restrictions. In addition, the terms of our subordinated debt agreements
prohibit us from paying any dividends to our stockholders and also contain other
working capital restrictions.
-18-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
NUMBER DESCRIPTION
<S> <C>
3.1 Second Amended and Restated Certificate of
Incorporation of Lionbridge (filed as Exhibit 3.2
to Lionbridge's Registration Statement on Form S-1
(File No. 333-81233) and incorporated herein by
reference).
3.2 Amended and Restated By-laws of Lionbridge (filed
as Exhibit 3.4 to Lionbridge's Registration
Statement on Form S-1 (File No. 333-81233) and
incorporated herein by reference).
10.1 Loan Document Modification Agreement Number 5 dated
as of September 20, 1999 by and among Lionbridge
Technologies Holdings, B.V., Lionbridge
Technologies, B.V., Lionbridge Technologies, Inc. and
Silicon Valley Bank.
10.2 Amended and Restated Promissory Note.
27.1 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed by Lionbridge for the quarter
ended September 30, 1999.
-19-
<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIONBRIDGE TECHNOLOGIES, INC.
Dated: November 12, 1999 By: /s/ Stephen J. Lifshatz
---------------------------
Stephen J. Lifshatz
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Second Amended and Restated Certificate of
Incorporation of Lionbridge (filed as Exhibit 3.2
to Lionbridge's Registration Statement on Form S-1
(File No. 333-81233) and incorporated herein by
reference.
3.2 Amended and Restated By-laws of Lionbridge (filed
as Exhibit 3.4 to Lionbridge's Registration
Statement on Form S-1 (File No. 333-81233) and
incorporated herein by reference.
10.1 Loan Document Modification Agreement Number 5 dated
as of September 20, 1999 by and among Lionbridge
Technologies Holdings, B.V., Lionbridge
Technologies, B.V., Lionbridge Technologies, Inc. and
Silicon Valley Bank.
10.2 Amended and Restated Promissory Note.
27.1 Financial Data Schedule.
</TABLE>
-20-
<PAGE>
LOAN DOCUMENT MODIFICATION AGREEMENT
NUMBER 5; DATED AS OF SEPTEMBER 20, 1999
LOAN DOCUMENT MODIFICATION AGREEMENT dated as of September 20, 1999
(this "Agreement") by and among SILICON VALLEY BANK (the "Bank"), a
California-chartered bank with its principal place of business located at 3003
Tasman Drive, Santa Clara, California 95054, and with a loan production office
located at 40 William Street, Wellesley, Massachusetts 02181, doing business
under the name "Silicon Valley East," LIONBRIDGE TECHNOLOGIES HOLDINGS B.V., a
company with limited liability, incorporated in the Netherlands and having a
principal place of business located at The Sinus Building, Overschiestraat 55,
1062 HN, Amsterdam, The Netherlands and LIONBRIDGE TECHNOLOGIES B.V., a company
with limited liability, incorporated in Netherlands and having a principal place
of business located at the same address (each a "Borrower" and collectively, the
"Borrowers") and LIONBRIDGE TECHNOLOGIES, INC., a Delaware company with its
principal place of business located at 950 Winter Street, Suite 2410, Waltham,
Massachusetts 02154 (the "Parent Guarantor").
1. REFERENCE TO EXISTING LOAN DOCUMENTS.
Reference is hereby made to that Loan Agreement dated as of September
26, 1997 among the Bank and the Borrowers, as amended by Loan Documentation
Modification Agreement No. 1 dated as of May 21, 1998, as further amended by
Loan Document Modification Agreement No. 2 dated as of February 25, 1999, Loan
Document Modification Agreement No. 3 dated as of May 20, 1999 and Loan Document
Modification Agreement No. 4 dated as of July 16, 1999 (with the attached
schedules and exhibits, and as the same may hereafter be further amended,
modified, supplemented, extended or restated from time to time, the "Loan
Agreement") and the Loan Documents referred to therein, including without
limitation that certain Amended and Restated Promissory Note of the Borrowers
dated as of May 20, 1999 in the principal amount of $8,000,000 (the "Amended
Note") and the Security Documents referred to therein, and also including that
certain Amended and Restated Guarantee of the Parent Guarantor dated as of May
21, 1998 in favor of the Bank (the "Parent Guarantee"). Unless otherwise defined
herein, capitalized terms used in this Agreement shall have the same respective
meanings as set forth in the Loan Agreement.
2. EFFECTIVE DATE.
This Agreement shall become effective as of September 20, 1999 (the
"Effective Date"), provided that the Bank shall have received the following on
or before October 11, 1999 and provided further, however, in no event shall this
Agreement become effective until signed by an officer of the Bank in California:
a. two copies of this Agreement, duly executed by each
Borrower and the Parent Guarantor;
b. an amended and restated promissory note in the form
enclosed herewith (the "Amended Note"), duly executed by the Borrowers;
<PAGE>
c. the attached consents of affiliated entities who have
previously furnished guaranties in favor of the Bank of the obligations of the
Borrowers, duly executed by officers thereof;
d. payment of the Bank's facility fee specified below; and
e. such other documents, and completion of such other matters,
as the Bank may reasonably request in connection with the amendment of the Loan
Agreement, as contemplated hereunder.
By the signature of its authorized officer below, the Borrowers are
hereby representing that, except as modified in SCHEDULE A attached hereto, the
representations of the Borrowers set forth in the Loan Documents (including
those contained in the Loan Agreement, as amended by this Agreement) are true
and correct as of the Effective Date as if made on and as of such date. In
addition, the Borrowers confirm their authorization as to the debiting of their
account with the Bank in the amount of $10,000 in order to pay the Bank's
facility fee for the period up to and including the extended Revolving Maturity
Date. Finally, the Borrowers (and each guarantor signing below) agree that, as
of the Effective Date, they have no defenses against their obligations to pay
any amounts under the Loan Agreement and the other Loan Documents.
3. DESCRIPTION OF CHANGE IN TERMS.
As of the Effective Date, the Loan Agreement and the Parent Guarantee
are modified in the following respects:
a. Section 1.1 of the Loan Agreement is hereby amended by
restating the definition of "Revolving Maturity Date" in its entirety as
follows:
"`Revolving Maturity Date' means December 20, 1999"
b. Section 13(b) of the Parent Guarantee is hereby amended by
increasing the minimum required quarterly ratio of Quick Assets to Current
Liabilities, commencing with the fiscal quarter ended September 30, 1999, from
0.5 to 1.0 to 0.75 to 1.0.
c. Section 13(c) of the Parent Guarantee is hereby amended by
(i) decreasing the minimum EBITDA requirement for the fiscal quarter ended
September 30, 1999 from ($2,500,000) to ($3,000,000) and (ii) increasing the
minimum EBITDA requirement for the fiscal quarter ended December 31 1999 from
($3,000,000) to ($1,000,000).
d. The Compliance Certificate attached to the Parent Guarantee
is amended by restating in its entirety EXHIBIT A thereto in the form of EXHIBIT
A hereto.
e. The Loan Agreement and the other Loan Documents are hereby
amended wherever necessary or appropriate to reflect the foregoing changes.
-2-
<PAGE>
4. CONTINUING VALIDITY.
Upon the effectiveness hereof, each reference in each Security
Instrument or other Loan Document to (i) "the Loan Agreement," "thereunder,"
"thereof," "therein" or words of like import referring to the Loan Agreement,
shall mean and be a reference to the Loan Agreement, as amended hereby and (ii)
"the Parent Guarantee," "thereunder," "thereof," "therein" or words of like
import referring to the Parent Guarantee, shall mean and be a reference to the
Parent Guarantee, as amended hereby. Except as specifically set forth above, the
Loan Agreement shall remain in full force and effect and is hereby ratified and
confirmed.
Each of the other Loan Documents is in full force and effect and is
hereby ratified and confirmed. The amendments and limited waiver set forth above
(i) do not constitute a waiver or modification of any term, condition or
covenant of the Loan Agreement or any other Loan Document, other than as
expressly set forth herein, and (ii) shall not prejudice any rights which the
Bank may now or hereafter have under or in connection with the Loan Agreement,
as modified hereby, or the other Loan Documents, and shall not obligate the Bank
to assent to any further modifications.
The Parent Guarantor represents that Veritest, Inc. ("Veritest"),
formerly a wholly-owned subsidiary of the Parent Guarantor, has been merged into
Lionbridge Technologies California, Inc., ("Lionbridge California"), with
Lionbridge California as the surviving entity.
5. MISCELLANEOUS.
a. This Agreement may be signed in one or more counterparts
each of which taken together shall constitute one and the same document.
b. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
c. THE BORROWERS ACCEPT FOR THEMSELVES AND IN CONNECTION WITH
THEIR PROPERTIES, UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF ANY STATE
OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS
IN ANY ACTION, SUIT, OR PROCEEDING OF ANY KIND AGAINST THEM WHICH ARISES OUT OF
OR BY REASON OF THIS AGREEMENT; PROVIDED, HOWEVER, THAT IF FOR ANY REASON THE
BANK CANNOT AVAIL ITSELF OF THE COURTS OF THE COMMONWEALTH OF MASSACHUSETTS,
THEN VENUE SHALL LIE IN SANTA CLARA COUNTY, CALIFORNIA.
d. The Borrowers agree to promptly pay on demand all costs and
expenses of the Bank in connection with the preparation, reproduction, execution
and delivery of this Agreement and the other instruments and documents to be
delivered hereunder, including the reasonable fees and out-of-pocket expenses of
Sullivan & Worcester LLP, special counsel for the Bank with respect thereto.
[Remainder of page intentionally left blank.]
-3-
<PAGE>
IN WITNESS WHEREOF, the Bank and the Borrowers have caused this
Agreement to be signed under seal by their respective duly authorized officers
as of the date set forth above.
Sincerely,
SILICON VALLEY EAST, a Division
of Silicon Valley Bank
By:
-----------------------------------
Andrew H. Tsao
Senior Vice President
SILICON VALLEY BANK
By:
-----------------------------------
Name:
Title:
(signed in Santa Clara, CA)
BORROWERS:
LIONBRIDGE TECHNOLOGIES HOLDINGS B.V.
By:
-----------------------------------
Rory J. Cowan
Managing Director
LIONBRIDGE TECHNOLOGIES B.V.
By:
-----------------------------------
Rory J. Cowan
Managing Director
PARENT GUARANTOR:
LIONBRIDGE TECHNOLOGIES, INC.
By:
-----------------------------------
Rory J. Cowan
Title:
-4-
<PAGE>
Exhibit 10.2
FORM OF
AMENDED AND RESTATED PROMISSORY NOTE
------------------------------------
$8,000,000 Boston, Massachusetts
As of September 20, 1999
FOR VALUED RECEIVED, the undersigned (the "Borrowers"), jointly and
severally, absolutely and unconditionally promise to pay to the order of
Silicon Valley Bank ("Payee") at the head office of Payee at 3003 Tasman
Drive, Santa Clara, California 95054:
(a) on December 20, 1999, the principal amount of EIGHT MILLION DOLLARS
($8,000,000) or, if less, the aggregate unpaid principal amount of Advances made
by the Payee to the Borrowers pursuant to the Loan Agreement dated as of
September 26, 1997, as amended May 21, 1998, February 25, 1999, May 20, 1999 and
September 20, 1999 and as may be further amended or supplemented from time to
time (the "Loan Agreement"), by and among the Borrowers and the Payee; and
(b) interest on the principal balance hereof from time to time
outstanding from the date hereof through and including the date on which such
principal amount is paid in full, at the times and at the rates provided in
the Loan Agreement.
This Note constitutes an amendment and restatement in its entirety of
the Amended and Restated Promissory Note payable to the Payee in the original
principal amount of $8,000,000 dated May 20, 1999, (the "Preceding Note") and
is in substitution therefor and a replacement thereof. Nothing herein or in
any other document shall be construed to constitute payment of the Preceding
Note or to release or terminate the security interest created by any Security
Documents in favor of the Payee in respect of the obligations of the
Borrowers, thereunder.
This Note evidences borrowings under, is subject to the terms and
conditions of and has been issued by the Borrowers in accordance with the
terms of, the Loan Agreement. The Payee and any holder hereof is entitled to
the benefits and subject to the conditions of the Loan Agreement and may
enforce the agreements of the Borrowers contained therein, and any holder
hereof may exercise the respective remedies provided for thereby or otherwise
available in respect thereof, all in accordance with the respective terms
thereof. This Note is secured by the Security Documents described in the Loan
Agreement.
All capitalized terms used in this Note and not otherwise defined herein
shall have the same meanings herein as in the Loan Agreement.
This Note may be prepaid at any time, without premium or penalty, in
whole or in part. Any prepayment of principal shall be accompanied by a
payment of accrued interest in respect of the principal being prepaid.
- 7 -
<PAGE>
If any Event of Default shall occur and be continuing, the Payee may
declare any or all obligations or liabilities of the Borrowers to the Payee
(including the unpaid principal hereunder and any interest due thereon)
immediately due and payable without presentment, demand, protest or notice.
The Borrowers and every endorser and guarantor of this Note or the
obligation represented hereby waive presentment, demand, notice, protest and
all other demands and notice in connection with the delivery, acceptance,
performance, default or enforcement of this Note, assent to any extension or
postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of collateral and to the addition or
release of any other party or person primarily or secondarily liable.
This Note shall be governed by, and construed in accordance with, the
internal laws of The Commonwealth of Massachusetts, without regard to
principles of conflicts of law. Each of the Borrowers hereby submits to the
exclusive jurisdiction of the state and Federal courts located in The
Commonwealth of Massachusetts and in the County of Santa Clara, State of
California in connection with any suit under or in connection with this Note.
The Borrowers irrevocably waive any objection which they may now or hereafter
have to the laying of venue of any such action brought in the courts referred
to in the preceding sentence and irrevocably waive and agree not to plead or
claim in any such action that such action has been brought in a inconvenient
forum. THE BORROWERS HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH BORROWER RECOGNIZES AND AGREES THAT THE FOREGOING
WAIVE CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT.
EACH BORROWER REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH
ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL
RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
This Note shall be deemed to take effect as a sealed instrument under
the laws of The Commonwealth of Massachusetts and for all purposes shall be
construed in accordance with such laws (without regard to conflicts of laws
rules).
[Remainder of page intentionally left blank.]
- 8 -
<PAGE>
IN WITNESS WHEREOF, the Borrowers have caused this Note to be signed
under seal by their duly authorized officers as of the day and year first
above written.
BORROWERS:
LIONBRIDGE TECHNOLOGIES
HOLDINGS B.V.
By:
----------------------------
Rory J. Cowan
Managing Director
LIONBRIDGE TECHNOLOGIES B.V.
By:
----------------------------
Rory J. Cowan
Managing Director
- 9 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS AND NINE MONTHS ENDED
9/30/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<EXCHANGE-RATE> 1. 1.
<CASH> 11,990 11,990
<SECURITIES> 0 0
<RECEIVABLES> 8,663 8,663
<ALLOWANCES> (573) (573)
<INVENTORY> 0 0
<CURRENT-ASSETS> 25,473 25,473
<PP&E> 5,517 5,517
<DEPRECIATION> (3,207) (3,207)
<TOTAL-ASSETS> 37,911 37,911
<CURRENT-LIABILITIES> 20,927 20,927
<BONDS> 0 0
0 0
0 0
<COMMON> 163 163
<OTHER-SE> 10,005 10,005
<TOTAL-LIABILITY-AND-EQUITY> 37,911 37,911
<SALES> 0 0
<TOTAL-REVENUES> 12,683 36,466
<CGS> 0 0
<TOTAL-COSTS> 15,042 42,965
<OTHER-EXPENSES> (85) 234
<LOSS-PROVISION> 23 69
<INTEREST-EXPENSE> 2,227 7,218
<INCOME-PRETAX> (4,501) (13,951)
<INCOME-TAX> 177 492
<INCOME-CONTINUING> (4,678) (14,443)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,678) (14,443)
<EPS-BASIC> (0.56) (3.48)
<EPS-DILUTED> (0.56) (3.48)
</TABLE>
