<PAGE>
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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 JUNE 30, 2000
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 X No
----- -----
The number of shares outstanding of the registrant's common stock, par value
$0.01 per share, as of July 31, 2000 was 27,314,534.
===============================================================================
<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999 ............................................................ 3
Consolidated Statements of Operations (unaudited) for the three months and six
months ended June 30, 2000 and 1999............................................ 4
Consolidated Statements of Cash Flows (unaudited) for the six months ended June
30, 2000 and 1999.............................................................. 5
Notes to Consolidated Financial Statements (unaudited)......................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operation...................................................................... 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk..................... 19
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds...................................... 21
ITEM 4. Submission of Matters to a Vote of Security Holders............................ 22
ITEM 6. Exhibits and Reports on Form 8-K............................................... 22
SIGNATURE ........................................................................................... 23
EXHIBIT INDEX ....................................................................................... 23
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except number of shares)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,533 $ 12,350
Accounts receivable, net of allowances of $1,175 and $1,122 at
June 30, 2000 and December 31, 1999, respectively 17,726 15,063
Work in process 6,970 5,119
Other current assets 1,550 1,410
------------- ------------
Total current assets 47,779 33,942
Property and equipment, net 4,965 6,388
Goodwill and other intangible assets, net 17,439 19,948
Other assets 1,104 417
------------- ------------
Total assets $ 71,287 $ 60,695
============= ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term debt and current portion of long-term debt $ 12,267 $ 9,636
Current portion of capital lease obligations 639 959
Accounts payable 7,783 9,621
Accrued compensation and benefits 3,678 4,798
Accrued outsourcing 4,455 2,664
Other accrued expenses 5,202 4,081
Deferred revenue 5,017 3,619
Deferred income taxes 224 224
------------- ------------
Total current liabilities 39,265 35,602
------------- ------------
Long-term debt, less current portion 12,731 15,472
Capital lease obligations, less current portion 897 307
Other long-term liabilities 470 269
Redeemable preferred stock -- 19,787
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $0.01 par value; 100,000,000 shares authorized;
27,097,213 and 21,323,790 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively 272 213
Additional paid-in capital 91,080 47,239
Accumulated deficit (71,370) (55,476)
Deferred compensation (2,307) (2,837)
Subscriptions receivable (101) (152)
Treasury stock, at cost (167) (167)
Accumulated other comprehensive income 517 438
------------- ------------
Total stockholders' equity (deficit) 17,924 (10,742)
------------- ------------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit) $ 71,287 $ 60,695
============= ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
-3-
<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
--------------------- --------------------
<S> <C> <C> <C> <C>
Revenue $ 28,888 $ 23,072 $ 57,084 $ 41,328
Cost of revenue 17,649 16,314 37,241 29,087
--------- --------- --------- ---------
Gross profit 11,239 6,758 19,843 12,241
Operating expenses:
Sales and marketing 2,779 2,610 5,688 4,610
General and administrative 8,074 7,958 16,052 13,663
Research and development 511 470 1,263 576
Amortization of acquisition-related
intangible assets 1,580 1,670 3,185 2,592
Merger, restructuring and other
charges 3,541 747 3,541 747
Acquired in-process research and
development -- 300 -- 300
Stock-based compensation 212 187 428 232
--------- --------- --------- ---------
Total operating expenses 16,697 13,942 30,157 22,720
Loss from operations (5,458) (7,184) (10,314) (10,479)
Interest expense:
Interest on outstanding debt (607) (693) (1,152) (1,171)
Accretion of discount on debt (79) (3,016) (212) (4,099)
Other income (expense), net (123) (85) (361) (319)
--------- --------- --------- ---------
Loss before income taxes (6,267) (10,978) (12,039) (16,068)
Provision for (benefit from) income taxes 75 (1,021) 278 (1,234)
--------- --------- --------- ---------
Net loss (6,342) (9,957) (12,317) (14,834)
Accrued dividends on preferred stock (1,300) (770) (3,574) (1,159)
--------- --------- --------- ---------
Net loss attributable to common
stockholders $ (7,642) $(10,727) $(15,891) $(15,993)
========= ========= ========= =========
Basic and diluted net loss per share
attributable to common stockholders $ (0.33) $ (1.57) $ (0.71) $ (2.76)
Shares used in computing basic and diluted
net loss per share attributable to
common stockholders 23,236 6,831 22,286 5,801
</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>
SIX MONTHS ENDED
JUNE 30,
2000 1999
---------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(12,317) $(14,834)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of acquisition-related intangible assets 3,185 2,592
Stock-based compensation 428 232
Accretion of discount on debt 212 4,099
Impairment of long-lived assets 831 --
Acquired in-process research and development -- 300
Depreciation and amortization of property and equipment 1,811 1,231
Provision for doubtful accounts 141 482
Foreign currency loss on intercompany balances 174 555
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (3,095) (2,832)
Work in process (93) (47)
Other current assets (227) (331)
Other assets 395 67
Accounts payable (1,715) 197
Accrued compensation and benefits (1,120) 499
Other accrued expenses 2,679 1,905
Deferred revenue 1,647 414
--------- ---------
Net cash used in operating activities (7,064) (5,471)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (1,177) (1,739)
Payments for businesses acquired, net of cash acquired (2,876) (3,726)
Maturities of marketable securities -- 1,884
Proceeds from sales of property and equipment under sale
leaseback arrangements 973 --
--------- ---------
Net cash used in investing activities (3,080) (3,581)
--------- ---------
Cash flows from financing activities:
Net decrease in amounts owed to banks -- (178)
Net increase (decrease) in short-term debt 6,913 (2,000)
Proceeds from issuance of long-term debt and warrants -- 12,000
Proceeds from issuance of common stock 12,750 --
Proceeds from issuance of common stock under option
and employee stock purchase plans 354 75
Payments of capital lease obligations (608) (78)
Collection of subscriptions receivable 51 146
--------- ---------
Net cash provided by financing activities 19,460 9,965
--------- ---------
Net increase in cash and cash equivalents 9,316 913
Effects of exchange rate changes on cash and cash equivalents (133) (276)
Cash and cash equivalents at beginning of period 12,350 1,199
--------- ---------
Cash and cash equivalents at end of period $ 21,533 $ 1,836
========= =========
</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.
These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Current
Report on Form 8-K/A filed on July 31, 2000. As described more fully in Note
2, on May 18, 2000, Lionbridge acquired Harvard Translations, Inc. ("HT") by
means of a merger. In addition, as more fully described in Note 2, on May 22,
2000, Lionbridge acquired INT'L.com, Inc. ("INT'L.com") by means of a merger.
These transactions are referred to herein as the "mergers." The consolidated
financial statements presented herein have been prepared following the
pooling-of-interests method of accounting for the mergers with HT and
INT'L.com and, therefore, reflect the combined financial position, operating
results and cash flows of Lionbridge, HT and INT'L.com as if they had been
combined for all periods presented.
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. MERGERS
On May 18, 2000, Lionbridge acquired HT, a company based in
Massachusetts, by means of a merger. Upon the effective date of the merger,
each outstanding share of HT common stock was converted into the right to
receive 3.8864 shares of Lionbridge common stock. In addition, long-term debt
of HT payable to its former sole stockholder in the amount of $203,000 and
all accrued interest thereon was paid in full by the issuance of 13,820
shares of Lionbridge common stock. As a result of the merger, Lionbridge
issued an aggregate of 285,865 shares of common stock. Upon the completion of
the acquisition, all outstanding options to purchase common stock of HT were
assumed by Lionbridge and converted into options to purchase common stock of
Lionbridge under similar terms. The transaction was accounted for using the
pooling-of-interests method of accounting, and the results of HT have been
included in the accompanying consolidated financial statements for all
periods presented.
On May 22, 2000, Lionbridge acquired INT'L.com, a company based in
Massachusetts, by means of a merger. Upon the effective date of the merger, (i)
each outstanding share of INT'L.com Series A common stock, Series B common
stock, Series A preferred stock and Series B preferred stock was converted into
the right to receive 0.7567 shares of Lionbridge common stock, (ii) each
outstanding share of INT'L.com Series C preferred stock was converted into the
right to receive 5.4590 shares of Lionbridge common stock, (iii) each
outstanding share of INT'L.com Series D preferred stock was converted into the
right to receive 0.5472 shares of Lionbridge common stock, (iv) the $2,000,000
of INT'L.com convertible
-6-
<PAGE>
debt and all accrued interest thereon was paid in full and cancelled in exchange
for 109,158 shares of Lionbridge common stock, and (v) the $5,000,000 of
INT'L.com subordinated debt and all accrued interest thereon was paid in full
and cancelled in exchange for 258,360 shares of Lionbridge common stock. As a
result of the merger, Lionbridge issued an aggregate of 8,302,960 shares of
common stock. Upon the completion of the acquisition, all outstanding options to
purchase common stock of INT'L.com were assumed by Lionbridge and converted into
options to purchase common stock of Lionbridge under similar terms. The
transaction was accounted for using the pooling-of-interests method of
accounting, and the results of INT'L.com have been included in the accompanying
consolidated financial statements for all periods presented.
Combined and separate results of Lionbridge, HT and INT'L.com for the
three months ended March 31, 2000 were as follows:
<TABLE>
<CAPTION>
LIONBRIDGE HT INT'L.COM COMBINED
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 17,006,000 $ 1,366,000 $ 9,824,000 $ 28,196,000
Net income (loss) (3,269,000) 62,000 (2,768,000) (5,975,000)
</TABLE>
3. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Computer software and equipment $ 9,832,000 $ 10,206,000
Furniture and office equipment 2,681,000 2,501,000
Leasehold improvements 1,046,000 965,000
------------ ------------
13,559,000 13,672,000
Less: Accumulated depreciation and amortization (8,594,000) (7,284,000)
------------ ------------
$ 4,965,000 $ 6,388,000
============ ============
</TABLE>
4. PURCHASE OF ASSETS
On January 17, 2000, Lionbridge acquired certain assets of the
language services operation of Nortel Networks Corporation in Montreal and
Ottawa, Canada; Beijing, China; Sao Paulo, Brazil; Sunrise, Florida; and
Bogota, Colombia for cash of $2,476,000. In connection with the purchase,
Nortel Networks awarded a preferred vendor designation to Lionbridge as a
part of a three-year services agreement, under which Lionbridge will provide
a full range of translation and localization services for Nortel. The
purchase agreement provides for certain contingent payments to be made by
Lionbridge, dependent on the level of revenues generated under the services
agreement over the three-year period. The transaction was accounted for using
the purchase method of accounting. The purchase price was allocated based on
the fair values of the acquired assets and liabilities assumed, as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets $1,693,000
Current liabilities (57,000)
Property and equipment 140,000
Intangible assets 500,000
Goodwill 200,000
----------
$2,476,000
==========
</TABLE>
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 until certain additional information on the valuation of intangible
assets acquired is finalized. The goodwill and acquired intangible assets are
being amortized on a straight-line basis over
-7-
<PAGE>
five years. The results of the operations acquired are included in Lionbridge's
financial statements from the date of the asset purchase. Pro forma consolidated
results of operations would not differ materially from reported results.
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Lines of credit $11,517,000 $ 9,636,000
Notes payable to stockholders 7,500,000 7,703,000
Subordinated debt 5,981,000 5,981,000
Convertible promissory notes to stockholders, net of discount -- 1,788,000
----------- ------------
Total debt 24,998,000 25,108,000
Less current portion (12,267,000) (9,636,000)
----------- ------------
Long-term debt, less current portion $12,731,000 $15,472,000
=========== ============
</TABLE>
LINE OF CREDIT
On September 26, 1997, Lionbridge entered into a line of credit
agreement with a commercial bank, which expires on August 20, 2000. 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. The interest rate
payable on any outstanding borrowings is prime plus 1% per year (10.5% and
9.5% at June 30, 2000 and December 31, 1999, respectively). Borrowings
outstanding under the line of credit agreement are collateralized by certain
assets of Lionbridge. The amounts outstanding on the line of credit at June
30, 2000 and December 31, 1999 were $7,341,000 and $6,593,000, respectively.
The agreement requires Lionbridge to maintain certain financial ratios and
restricts the payment of dividends. As of June 30, 2000, Lionbridge was in
compliance with the required financial covenants. In conjunction with the
line of credit, Lionbridge issued a warrant for the purchase of 83,334 shares
of common stock at an exercise price of $2.40 per share. The value ascribed
to this warrant was immaterial. This warrant was exercised in full in May
2000.
On April 23, 1999, Lionbridge's wholly owned subsidiary, INT'L.com,
entered into a line of credit agreement with a commercial bank which expires in
January 2001. Under the amended terms of the agreement, INT'L.com may borrow up
to $5,000,000, based on the value of certain eligible current assets worldwide
at an interest rate of prime plus 2.5% (12.0% and 10.5% at June 30, 2000 and
December 31, 1999, respectively). Borrowings outstanding under the line of
credit agreement are collateralized by substantially all assets of INT'L.com.
The amounts outstanding on the line of credit at June 30, 2000 and December 31,
1999 were $4,126,000 and $2,993,000, respectively. During the term of the
agreement, INT'L.com must maintain certain financial covenants, including
minimum levels of current assets, tangible net worth and quarterly revenue. At
June 30, 2000, INT'L.com was in compliance with the covenants.
On December 4, 1997, Lionbridge's wholly owned subsidiary, HT,
entered into a line of credit agreement with a bank under which HT could
borrow up to $350,000. The interest rate payable on any outstanding
borrowings was prime (9.5% and 8.5% at June 30, 2000 and December 31, 1999,
respectively). Borrowings outstanding under the line of credit agreement were
collateralized by substantially all assets of HT and were personally
guaranteed by a former stockholder of HT. The amount outstanding on the line
of credit at June 30, 2000 and December 31, 1999 was $50,000. The line of
credit and all accrued interest thereon on was paid in full in July 2000, and
the line of credit arrangement was terminated.
NOTES PAYABLE TO STOCKHOLDERS
-8-
<PAGE>
On August 13, 1998, as part of a cash and stock dividend to the
INT'L.com stockholders on record as of that date, promissory notes to
stockholders in the aggregate amount of $3,500,000 were issued. The notes bear
interest at 6% per year for the first year of the term of the notes, and the
interest rate increases by 1% for each successive year of the term of the notes.
One half of the interest accruing in each semi-annual period is payable
semi-annually on January 1 and June 30 during the term of the notes and the
remaining interest is payable upon the maturity of the notes. The principal
amount of the notes, together with any accrued but unpaid interest is payable in
April 2005.
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 April 9, 1999, Lionbridge's wholly owned subsidiary, INT'L.com,
assumed International Language Engineering Corporation's ("ILE") obligation
under a promissory note to a former ILE stockholder in the amount of
$3,250,000 as part of the acquisition of ILE. The promissory note accrues
interest at 8.5% per year and matures June 27, 2002. The promissory note is
subordinate to all indebtedness owed by INT'L.com to any bank, pension fund,
insurance fund or other financial institutions.
In 1997, HT issued a note payable to a stockholder representing
unsecured cash advances from the stockholder. The principal balance was due in
July 2001. The note bore interest at 8.5% which was paid monthly. The
outstanding balance on May 18, 2000 of $203,000 and all accrued interest thereon
was paid in full upon the closing of the merger as described in Note 2.
SUBORDINATED DEBT
Lionbridge has entered into two subordinated debt agreements pursuant
to which 12% senior subordinated notes were issued. The outstanding 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 with aggregate proceeds of at least
$10,000,000. The notes are subject to certain covenant restrictions and are
collateralized by certain assets of Lionbridge. The terms of the subordinated
debt agreement prohibit Lionbridge from paying dividends to its stockholders. As
of June 30, 2000 and December 31, 1999, $5,981,000 was outstanding under these
subordinated notes.
In January, March and April 2000, Lionbridge's wholly owned subsidiary,
INT'L.com, received $2,000,000, $1,000,000 and $2,000,000, respectively, from
the issuance of subordinated promissory notes to existing investors. The notes
accrued interest at 8.5% per annum and matured one year from the date of
issuance. The notes were subordinate to the INT'L.com line of credit described
above. The notes and all accrued interest thereon were paid in full upon the
closing of the merger as described in Note 2.
CONVERTIBLE PROMISSORY NOTES TO STOCKHOLDERS
In August 1999, Lionbridge's wholly owned subsidiary, INT'L.com,
received $2,000,000 through the issuance of convertible promissory notes to
existing investors. The convertible notes accrued interest at 10% per annum
and matured in August 2001. The convertible promissory notes were subordinate
to the INT'L.com line of credit described above. The outstanding principal
and accrued interest were convertible at the option of the lenders into
shares of INT'L.com equity securities. The notes and all accrued interest
thereon were paid in full upon the closing of the merger as described in Note
2. As additional consideration to the investors, INT'L.com issued warrants to
purchase 56,753 shares of its common stock at an exercise price of $1.45 per
share. The warrants were exercised in full in May 2000. Due to the issuance
of these warrants, the convertible promissory notes were presented on the
consolidated balance sheet at December 31, 1999 at a discount, which was
being amortized over the terms of the notes as additional interest expense.
6. CAPITAL STOCK
REDEEMABLE PREFERRED STOCK
-9-
<PAGE>
Redeemable preferred stock consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Series A convertible preferred stock; 0 and 18,138,361 shares authorized at
June 30, 2000 and December 31, 1999, respectively; 0 and 867,047 shares
issued and outstanding at June 30, 2000 and December 31, 1999,
respectively --- 1,811,000
Series B redeemable preferred stock, 0 and 3,500,000 shares authorized at
June 30, 2000 and December 31, 1999, respectively; 0 and 2,621,477
shares issued and outstanding at June 30, 2000 and December 31, 1999,
respectively --- 10,586,000
Series C redeemable preferred stock, 0 and 5,000 shares
authorized at June 30, 2000 and December 31, 1999,
respectively; 0 and 5,000 shares issued and outstanding at --- 537,000
June 30, 2000 and December 31, 1999
Series D redeemable preferred stock; 0 and 1,100,000 shares authorized at
June 30, 2000 and December 31, 1999, respectively; 0 and 936,991 shares
issued and outstanding at June 30, 2000 and December 31, 1999,
respectively --- 6,853,000
-------- -----------
$--- $19,787,000
======== ===========
</TABLE>
WARRANT EXERCISES
In connection with the August 1998 acquisition of Direct Language
Communications, Inc. ("DLC") by Lionbridge's wholly owned subsidiary, INT'L.com,
warrants to purchase shares of DLC common stock were exchanged for warrants to
purchase 206,998 shares of the Company's common stock under similar terms.
Warrants to purchase 10,170 shares of common stock were issued with an exercise
price of $4.92 per share. Additionally, warrants to purchase 196,828 shares of
common stock were issued with an exercise price of $1.43 per share. All of these
warrants were exercised in full in May 2000.
7. COMPREHENSIVE LOSS
Total comprehensive loss was approximately $6,421,000 and $9,957,000
for the three-month periods ended June 30, 2000 and 1999, respectively, and
$12,238,000 and $14,859,000 for the six-month periods ended June 30, 2000 and
1999, respectively, which consists of net loss and the net change in foreign
currency translation adjustment. This calculation is in accordance with the
requirements of Statement of Financial Accounting Standards No.130, "Reporting
Comprehensive Income," and has no impact on the Company's net losses or
stockholders' equity (deficit).
8. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic and diluted earnings per share are computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic
net loss 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 conversion of
preferred stock and exercises of stock options and warrants are anti-dilutive
for all periods presented.
9. MERGER, RESTRUCTURING AND OTHER CHARGES
The following table summarizes activity with respect to merger,
restructuring and other charges:
-10-
<PAGE>
<TABLE>
<CAPTION>
Three and Six Three and Six
Months Ended June Months Ended June
30, 2000 30, 1999
---------------- ---------------
<S> <C> <C>
Merger costs $2,323,000 $ --
Restructuring charges 387,000 747,000
Impairment of long-lived assets 831,000 --
---------------- ---------------
$3,541,000 $747,000
================ ===============
</TABLE>
Merger costs for the three and six months ended June 30, 2000 consist
of fees for investment banking, legal and accounting services and other direct
costs incurred as of the end of the period in connection with Lionbridge's
mergers with HT and INT'L.com.
Restructuring charges for the three months ended June 30, 2000
consist of costs of closing facilities in the United States, France and The
Netherlands as a result of the merger with INT'L.com. Such charges consist
principally of accruals for lease payments on vacant office space.
Restructuring charges for the three months ended June 30, 1999
relate to workforce reductions in United States operating sites, consisting
of 36 technical staff, 14 administrative staff and four sales staff. All
employees had been informed of their termination and related benefits in the
period that the charge was recorded. At June 30, 2000, no amounts remained in
other accrued expenses in relation to these charges, none of these employees
remained with Lionbridge, and management does not anticipate any future
expenditures related to these actions.
Impairment charges for long-lived assets for the three and six
months ended June 30, 2000 relate to the write-off of property and equipment,
primarily consisting of previously capitalized licenses for software, that
was abandoned as a result of Lionbridge's merger with INT'L.com.
At June 30, 2000, accruals totaling $328,000 related to merger costs
and $293,000 related to restructuring charges remained on the consolidated
balance sheet in other accrued expenses. Lionbridge currently anticipates that
this balance will be utilized by December 31, 2000 except for certain long-term
contractual obligations.
10. SEGMENT INFORMATION
Lionbridge has determined that its operating segments are those that
are based on its method of internal reporting, which separately presents its
business by the geographic site in which services are performed. Lionbridge
has combined those segments which meet the aggregation criteria of Statement
of Financial Accounting Standards No. 131 in determining its reportable
segments.
The Company's reportable segments are Localization and Testing. The
Localization segment provides globalization services, including translation,
software localization, internationalization engineering and multilingual
technical publishing, that enable simultaneous worldwide release and ongoing
maintenance of products and related technical support, training materials, and
sales and marketing information in multiple languages. The Testing segment
provides localization and internationalization testing of software, hardware and
telecommunications equipment, as well as logo certification programs. All other
unallocated enterprise costs are reflected in the "Corporate and other"
category.
The table below presents information about the reported net loss of
Lionbridge for the three- and six-month periods ended June 30, 2000 and 1999.
Asset information by segment is not reported, since such information is not
produced internally by Lionbridge.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
External revenue:
Localization $ 26,004,000 $ 21,995,000 $ 51,864,000 $ 38,748,000
Testing 2,884,000 1,077,000 5,220,000 2,580,000
Corporate and other -- -- -- --
------------ ------------- ------------ ------------
Total $ 28,888,000 $ 23,072,000 $ 57,084,000 $ 41,328,000
============ ============= ============ ============
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Inter-segment revenue:
Localization $ -- $ -- $ -- $ --
Testing -- 25,000 27,000 160,000
Corporate and other -- -- -- --
Eliminations -- (25,000) (27,000) (160,000)
------------ ------------- ------------ ------------
Total $ -- $ -- $ -- $ --
============ ============= ============ ============
Net income (loss):
Localization $ 391,000 $ (1,790,000) $ 262,000 $ (2,601,000)
Testing 169,000 (266,000) 521,000 (178,000)
Corporate and other (6,902,000) (7,901,000) (13,100,000) (12,055,000)
------------ ------------- ------------ ------------
Total $ (6,342,000) $ (9,957,000) $(12,317,000) $(14,834,000)
============ ============= ============ ============
</TABLE>
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
------------ ----------
<S> <C> <C>
Noncash investing and financing activities:
Issuance of warrants for common stock in connection with
debt.......................................................... $5,967,000
==========
Lionbridge acquired certain assets of the language services operation of
Nortel Networks Corporation for $2,476,000, effective January 17, 2000. In
conjunction with the purchase, liabilities were assumed as follows:
Fair value of assets acquired and goodwill................... $ 2,533,000
Cash paid for assets acquired................................ (2,476,000)
------------
Liabilities assumed....................................... $ 57,000
============
Lionbridge, or a wholly owned subsidiary of Lionbridge,
purchased all of the outstanding capital stock of
VeriTest, Inc. and International Language Engineering
Corporation for $13,591,000 in the six months ended June
30, 1999. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired and goodwill.................... $21,990,000
Cash paid for capital stock................................... (3,260,000)
Common stock issued........................................... (3,751,000)
Series D redeemable preferred stock issued.................... (5,830,000)
Notes issued.................................................. (750,000)
------------
Liabilities assumed........................................ $ 8,399,000
============
Purchases of property and equipment under capital lease
arrangements..................................................... $1,023,000
==========
</TABLE>
12. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial 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 SFAS No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 -
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<PAGE>
an amendment of FASB Statement No. 133." SFAS 137 defers the implementation of
SFAS 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.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." This bulletin summarizes certain views of the staff on applying
generally accepted accounting principles to revenue recognition in financial
statements. The staff believes that revenue is realized or realizable and earned
when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the
seller's price to the buyer is fixed or determinable; and collectibility is
reasonably assured. The Company believes that its current revenue recognition
policy complies with the Commission's guidelines. SAB 101 becomes effective in
the fourth quarter of 2000.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No.
25 and among other issues clarifies the following: the definition of an employee
for purposes of applying APB Opinion No. 25; the criteria for determining
whether a plan qualifies as a noncompensatory plan; the accounting consequence
of various modifications to the terms of previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 1, 2000, but certain conclusions
in FIN 44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The Company does not expect the application of FIN 44 to have
a material impact on the Company's financial position or results of operations.
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 "Factors That May Affect Future Results"
in Lionbridge's Current Report on Form 8-K/A, filed on July 31, 2000 (SEC
File No. 000-26933) 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) the entry of additional competitors into the
marketplace; (viii) market acceptance of new service offerings; (ix) foreign
currency fluctuations; (x) political, economic and business fluctuations in
international markets; (xi) difficulties Lionbridge may encounter in the
integration of Harvard Translations and INT'L.com; (xii) future acquisitions
(including the potential diversion of management attention and financial
resources and the ability of acquired businesses to achieve satisfactory
operating results); and (xiii) 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.
INTRODUCTION
Lionbridge provides globalization and multilingual Internet solutions to
established multinational and emerging companies. Founded in 1996, Lionbridge
has customers in industries such as software, computer hardware,
telecommunications, financial services and life sciences.
Lionbridge's solutions comprise both services and the integration of third-party
and proprietary technology. The services span an integrated value chain that
includes: globalization consulting, product
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localization and internationalization services, multilingual web content
management, functional and internationalization testing, logo certification
testing, and specialized translation and publishing services for the
financial service and life science industries. The technologies are used to
automate repeatable processes and to connect directly to client content
platforms. We manage some of our services under the brands of VeriTest
(functional and logo certification testing), Harvard Translations (specialty
translation and print/web publishing services for the financial services and
life science industries) and ChinaConnect (web integration services for the
Chinese-speaking market).
Lionbridge's revenues are derived from both project-by-project fees and
long-term volume contracts. Projects are generally billed on a time and
expense basis; long-term engagements are billed on the basis of minimum
volume commitments. 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
expenses 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.
Lionbridge has experienced operating losses, as well as net losses, for each
year of our operations and, as of June 30, 2000, had an accumulated deficit
of $71.4 million.
ACQUISITIONS
We have grown our business since inception through a combination of acquisitions
and organic growth. Such acquisitions through June 30, 2000 have resulted in the
recognition of approximately $26.7 million of goodwill and other intangible
assets on our balance sheet which is being amortized over five years.
In January 2000, Lionbridge acquired certain assets of the language services
operation of Nortel Networks Corporation in Montreal and Ottawa, Canada;
Beijing, China; Sao Paulo, Brazil; Sunrise, Florida; and Bogota, Colombia for
cash of $2.5 million. In connection with the purchase, Nortel Networks
awarded a preferred vendor designation to Lionbridge as part of a three-year
services agreement, under which Lionbridge will provide a full range of
translation and localization services for Nortel. The purchase agreement
provides for certain contingent payments to be made by Lionbridge, dependent
upon the level of revenues generated under the services agreement over the
three-year period. Lionbridge recorded $200,000 of goodwill related to this
acquisition, not including any additional amounts that may be paid in the
future, which is being amortized over five years. The purchase was accounted
for using the purchase method of accounting.
In May 2000, Lionbridge acquired Harvard Translations, Inc. ("HT"), a company
based in Massachusetts, by means of a merger. Upon the effective date of the
merger, each outstanding share of HT common stock was converted into the right
to receive 3.8864 shares of Lionbridge common stock. In addition, long-term debt
of HT payable to its former sole stockholder in the amount of $202,844 and all
accrued interest thereon was paid in full by the issuance of 13,820 shares of
Lionbridge common stock. As a result of the merger, Lionbridge issued an
aggregate of 285,865 shares of Lionbridge common stock. Upon the completion of
the acquisition, all outstanding options to purchase common stock of HT were
assumed by Lionbridge and converted into options to purchase common stock of
Lionbridge under similar terms. The transaction was accounted for using the
pooling-of-interests method of accounting.
In May 2000, Lionbridge acquired INT'L.com, Inc. ("INT'L.com"), a company based
in Massachusetts, by means of a merger. Upon the effective date of the merger,
(i) each outstanding share of INT'L.com Series A common stock, Series B common
stock, Series A preferred stock and Series B preferred stock was converted into
the right to receive 0.7567 shares of Lionbridge common stock, (ii) each
outstanding share of INT'L.com Series C preferred stock was converted into the
right to receive 5.4590 shares of Lionbridge common stock, (iii) each
outstanding share of INT'L.com Series D preferred stock was converted into the
right to receive 0.5472 shares of Lionbridge common stock, (iv) the $2.0 million
of INT'L.com convertible debt and all accrued interest thereon was paid in full
and cancelled in exchange for 109,158 shares of Lionbridge common stock, and (v)
the $5.0 million of INT'L.com subordinated debt and all accrued interest thereon
was paid in full and cancelled in exchange for 258,360 shares of Lionbridge
common stock. As a result of the merger, Lionbridge issued an aggregate of
8,302,960 shares of Lionbridge common stock. Upon the
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completion of the acquisition, all outstanding options to purchase common stock
of INT'L.com were assumed by Lionbridge and converted into options to purchase
common stock of Lionbridge under similar terms. The transaction was accounted
for using the pooling-of-interests method of accounting.
The financial information presented below reflects the combined financial
position, operating results and cash flows of Lionbridge, HT and INT'L.com
and their subsidiaries as if they had been combined for all periods presented.
In April 1999, Lionbridge's wholly owned subsidiary, INT'L.com, acquired
International Language Engineering Corporation ("ILE"), a company based in
Colorado with additional operations in The Netherlands, for total
consideration of $9.2 million, consisting of 1,983,017 shares of common stock
valued at $3,407,000 and 936,991 shares of Series D redeemable preferred
stock valued at $5.8 million. In addition, long-term debt of ILE in the
amount of $3.3 million was assumed. Upon the completion of the acquisition,
all outstanding options to purchase common stock of ILE were exchanged for
options to purchase common stock of INT'L.com under similar terms. The
transaction was accounted for using the purchase method of accounting. In
connection with this acquisition, $7.9 million of goodwill was recorded,
which is being amortized over five years.
MERGER, RESTRUCTURING AND OTHER CHARGES
Merger costs for the three and six months ended June 30, 2000 of $2.3 million
consist of fees for investment banking, legal and accounting services and
other direct costs incurred as of the end of the period in connection with
Lionbridge's mergers with HT and INT'L.com.
Restructuring charges for the three and six months ended June 30, 2000 of
$387,000 consist of costs of closing facilities in the United States, France
and The Netherlands as a result of the merger with INT'L.com. Such charges
consist principally of accruals for lease payments on vacant office space.
Restructuring charges for the three and six months ended June 30, 1999 of
$747,000 relate to workforce reductions in United States operating sites,
consisting of 36 technical staff, 14 administrative staff and four sales
staff. All employees had been informed of their termination and related
benefits in the period that the charge was recorded. At June 30, 2000, no
amounts remained in other accrued expenses in relation to these charges, none
of these employees remained with Lionbridge, and we do not anticipate any
future expenditures related to these actions.
Impairment charges for long-lived assets for the three and six months ended
June 30, 2000 of $831,000 relate to the write-off of property and equipment,
primarily consisting of previously capitalized licenses for software, that
was abandoned as a result of our merger with INT'L.com.
At June 30, 2000, accruals totaling $328,000 related to merger costs and
$293,000 related to restructuring charges remained on the consolidated balance
sheet in other accrued expenses. We currently anticipate that this balance will
be utilized by December 31, 2000 except for certain long-term contractual
obligations.
NON-CASH CHARGES
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<PAGE>
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, $1.2 million had been amortized and $339,000 had been
reversed due to cancellation of the underlying options as of June 30, 2000.
The amortization of deferred compensation is recorded as an operating expense
and totaled $212,000 and $187,000 for the three months ended June 30, 2000
and 1999, respectively. For the six-month periods ended June 30, 2000 and
1999, stock-based compensation totaled $428,000 and $232,000, respectively.
We currently expect to amortize the following remaining amounts of deferred
compensation as of June 30, 2000 in the fiscal periods ending:
<TABLE>
<CAPTION>
<S> <C>
December 31, 2000.......................................................... $414,000
December 31, 2001.......................................................... $828,000
December 31, 2002.......................................................... $828,000
December 31, 2003.......................................................... $237,000
</TABLE>
ORIGINAL ISSUE DISCOUNT ON DEBT. Interest expense for the three- and
six-month periods ended June 30, 2000 includes $79,000 and $212,000 for the
accretion of the original issue discount on $2.0 million of convertible
promissory notes issued in August 1999 by INT'L.com. This discount represents
the $254,000 value attributable to detachable warrants to purchase 56,753
shares of common stock, at an exercise price of $1.45 per share, granted in
connection with this debt financing. These warrants were fully exercised in
May 2000 in connection with our merger with INT'L.com.
Interest expense for the three- and six-month periods ended June 30, 1999
includes $3.0 million and $4.1 million, respectively, for the accretion of the
original issue discount on $12.0 million of subordinated notes issued in the
first quarter of 1999. This discount represents the $6.0 million value
attributable to detachable warrants to purchase 1,533,260 shares of Lionbridge
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 Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 61.1 70.7 65.2 70.4
------- ------- -------- --------
Gross profit 38.9 29.3 34.8 29.6
Operating expenses:
Sales and marketing 9.6 11.3 10.0 11.2
General and administrative 27.9 34.5 28.1 33.1
Research and development 1.8 2.0 2.2 1.4
Amortization of acquisition-related
intangible assets 5.5 7.2 5.6 6.3
Merger, restructuring and other
charges 12.3 3.2 6.2 1.8
Acquired in-process research and
development -- 1.3 -- 0.7
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Stock-based compensation 0.7 0.8 0.7 0.6
------- ------- -------- --------
Total operating expenses 57.8 60.4 52.8 55.0
------- ------- -------- --------
Loss from operations (18.9) (31.1) (18.1) (25.4)
Interest expense:
Interest on outstanding debt (2.1) (3.0) (2.0) (2.8)
Accretion of discount on debt (0.3) (13.1) (0.4) (9.9)
Other income (expense), net (0.4) (0.4) (0.6) (0.8)
------- ------- -------- --------
Loss before income taxes (21.7) (47.6) (21.1) (38.9)
Provision for (benefit from) income taxes 0.3 (4.4) 0.5 (3.0)
------- ------- -------- --------
Net loss (22.0) (43.2) (21.6) (35.9)
Accrued dividends on preferred stock (4.5) (3.3) (6.2) (2.8)
------- ------- -------- --------
Net loss attributable to common
stockholders (26.5)% (46.5)% (27.8)% (38.7)%
======= ======= ======== ========
</TABLE>
REVENUE. Revenue for the quarter ended June 30, 2000 was $28.9 million compared
to revenue of $23.1 million for the quarter ended June 30, 1999, an increase of
$5.8 million or 25.2%. Revenue increased by $15.8 million or 38.1% to $57.1
million for the six months ended June 30, 2000 as compared to $41.3 million for
the same period of the prior year. These increases result from both an increase
in the number of customers as well as an increase in project size during 2000 as
compared to 1999. In addition, results for 2000 also reflected revenue derived
from the operations of ILE which was only included for three of the six months
ended June 30, 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 to 61.1% for the quarter ended
June 30, 2000 as compared to 70.7% for the corresponding period of the prior
year. For the six months ended June 30, 2000, cost of revenue decreased to 65.2%
as a percentage of revenue from 70.4% from the corresponding six months of the
prior year. These decreases are primarily attributable to decreased outsourcing
costs as INT'L.com adopted the Lionbridge pricing structure in fiscal 2000 as
well as a reduction in the internal cost of sales due to the consolidation of
certain offices in the first six months of 2000.
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 of $2.8
million for the quarter ended June 30, 2000 were relatively consistent with the
corresponding quarter of the previous year. For the six months ended June 30,
2000, sales and marketing expenses increased 23.4% to $5.7 million from $4.6
million for the six months ended June 30, 1999. These increases were primarily
due to expenses associated with the continued hiring of additional direct sales
personnel in fiscal 1999. As a percentage of revenue, sales and marketing
expenses decreased to 9.6% in the second quarter of 2000 from 11.3% in the
corresponding period in 1999 and decreased to 10.0% during the first six months
of 2000 from 11.2% during the six months ended June 30, 1999 as a result of the
rate of revenue growth during these periods exceeding the corresponding rate of
increase in sales and marketing expense.
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 of $8.1 million for the three months ended June 30, 2000 are consistent
with the expenses incurred during the three months ended June 30, 1999. General
and administrative expenses for the six months ended June 30, 2000 increased
17.5% to $16.1 million from $13.7 million during the corresponding period of
1999, primarily due to expenses associated with ILE, which was purchased in
April 1999. As a percentage of revenue, general and administrative expenses
decreased from 33.1% to 28.1% for the six-month periods ended June 30, 2000 and
1999 due primarily to the increases noted above offset by the impact of the
increase in total revenue.
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RESEARCH AND DEVELOPMENT. Research and development expenses relate to
ForeignDesk(R) and LionTrack(TM), our proprietary translation memory and
internal workflow systems, and include salaries and associated employee benefits
and third-party contractor expenses. Research and development expenses of
$511,000 for the quarter ended June 30, 2000 were relatively consistent with the
corresponding quarter of the previous year. For the six months ended June 30,
2000, research and development expenses increased 119.2% to $1.3 million from
$576,000 for the six months ended June 30, 1999, as LionTrack development
efforts commenced during the first quarter of 1999.
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
of $1.6 million for the three months ended June 30, 2000 was relatively
consistent with $1.7 million for the three months ended June 30, 1999. For the
six months ended June 30, 2000, amortization expense increased to $3.2 million
or 22.9% over the six months ended June 30, 1999. This increase was primarily
due to the amortization of goodwill recognized on the acquisition of ILE which
was only acquired in the second quarter of 1999.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Acquired in-process research and
development expense of $300,000 in the second quarter of 1999 represents a
portion of the ILE acquisition purchase price which was allocated to projects
that had no alternative future use and had not yet reached technological
feasibility and, therefore, was charged to operations at the acquisition date.
INTEREST EXPENSE. Interest expense represents interest payable on debt and
the accretion of original issue discount on notes issued with detachable
warrants. Interest expense decreased to $686,000 for the three months ended
June 30, 2000 as compared to $3.7 million for the three months ended June 30,
1999. Interest expense was $1.4 million for the six months ended June 30,
2000 versus $5.3 million for the corresponding period of 1999. These
decreases were principally due to a decrease in the accretion of the original
issue discount on notes issued in 1999 to $3.0 million from $4.1 million for
the three- and six-month periods ended June 30, 1999, respectively.
PROVISION FOR (BENEFIT FROM) INCOME TAXES. The provision for income taxes for
the three and six months ended June 30, 2000 represents taxes generated in
foreign jurisdictions for which U.S. tax credit utilization is currently
uncertain. We recorded no tax benefit for losses generated during these periods
due to the uncertainty of realizing any benefit. In the three and six months
ended June 30, 1999, INT'L.com recorded tax benefits of $1.3 million and $1.5
million, respectively, on losses generated during those periods. Such losses
were benefited at that time as management believed that it was more likely than
not that they would be utilized against future taxable income. Such benefits
were partially offset by tax provisions recorded for foreign income taxes of
other subsidiaries of Lionbridge.
LIQUIDITY AND CAPITAL RESOURCES
We have two commercial credit facilities that allow Lionbridge to borrow up
to $13.0 million, expiring in August 2000 and January 2001. The facilities
require Lionbridge to maintain certain financial covenants and restrict the
payment of dividends. The facilities bear interest at rates ranging from
prime plus 1% to prime plus 2.5% (10.5% to 12.0% at June 30, 2000) and are
collateralized by worldwide accounts receivable and work in process. As of
June 30, 2000, $11.5 million was outstanding under the facilities. Although
$8.0 million of our current $13.0 million of credit facilities will expire on
August 20, 2000, the commercial lender has indicated to us its intention to
renew the line of credit on substantially similar terms through October 20,
2000.
Cash increased to $21.5 million at June 30, 2000 from $12.4 million at
December 31, 1999. Net cash used in operating activities was $7.1 million and
$5.5 million for the six-month periods ended June 30, 2000 and 1999,
respectively. This increase was attributable to funding of operating losses
resulting from growth in revenue and operations. Net cash used in investing
activities was $3.1 million for the six months ended June 30, 2000 as
compared to $3.6 million for the corresponding period of 1999. Investing
activities for these periods were primarily purchases of equipment and the
acquisitions of certain assets of the language services operation of Nortel
Networks Corporation in 2000 and VeriTest and ILE
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<PAGE>
in 1999. Net cash provided by financing activities was $19.5 million and
$10.0 million in the first six months of 2000 and 1999, respectively. The
primary financing activity was the issuance of 1,500,000 shares of common
stock at $8.50 per share in a private placement in June 2000 for total
consideration of approximately $12.8 million, with additional resources being
provided by borrowings against our bank lines of credit in each period as
well as the issuance of the subordinated debt in 1999.
As of June 30, 2000, we had cash of $21.5 million and an additional $659,000
available for borrowing under the commercial credit facilities. 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial 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 SFAS 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 133 by one year. SFAS 133, as
amended, is effective for fiscal quarters beginning after January 1, 2001 for
Lionbridge, and we do not expect its adoption to have a material impact on
our financial position or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." This bulletin summarizes certain views of the staff on applying
generally accepted accounting principles to revenue recognition in financial
statements. The staff believes that revenue is realized or realizable and
earned when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the
seller's price to the buyer is fixed or determinable; and collectibility is
reasonably assured. We believe that our current revenue recognition policy
complies with the Commission's guidelines. SAB 101 becomes effective in the
fourth quarter of 2000.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and among
other issues clarifies the following: the definition of an employee for purposes
of applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44
cover specific events that occurred after either December 15, 1998 or January
12, 2000. Lionbridge does not expect the application of FIN 44 to have a
material impact on our 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 and borrowing 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, 36% and 39% of our costs and expenses
for the six months ended June 30, 2000 and
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<PAGE>
1999, respectively, were denominated in foreign currencies. 36% and 35% of our
assets were recorded in foreign currencies as of June 30, 2000 and December 31,
1999, respectively. 22% and 17% of our liabilities were recorded in foreign
currencies as of June 30, 2000 and December 31, 1999, 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.
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<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 1999, we completed an initial public offering of shares of common
stock, $.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
3,798,000 shares of common stock offered and sold, 3,500,000 shares were sold
by Lionbridge and 298,000 shares were sold 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 Lionbridge 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. Lionbridge has 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, $2.5
million to purchase certain assets of the language services operation of Nortel
Networks Corporation, approximately $1.6 million to purchase fixed assets, and
approximately $3.5 million for working capital. 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 other affiliates of Lionbridge to redeem shares of our Series B
redeemable preferred stock and paid $6.0 million to affiliates of Lionbridge to
repay our senior subordinated notes held by those affiliates.
On June 29, 2000, we sold an aggregate of 1,500,000 shares of our common stock
to investors at $8.50 per share for an aggregate consideration of $12.75 million
in a private placement pursuant to a stock purchase agreement by and among the
investors and us. Based on the representations of the investing parties that all
such parties were "accredited" (as such term is defined in Rule 501 of the
Securities Act of 1933) and that the parties were acquiring our shares of common
stock for investment and not with a view to the distribution thereof, we
consummated a private placement of the 1,500,000 shares of our common stock
pursuant to Regulation D, Rule 506 of the Securities Act of 1933. There were no
underwriters or placement agents involved in such private placement transaction.
The terms of our commercial bank credit facilities 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.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders in Lieu of Annual Meeting of Stockholders was
held on May 16, 2000. Holders of an aggregate of 16,617,630 shares at the close
of business on April 13, 2000 were entitled to vote at the meeting. At such
meeting, the Company's stockholders voted as follows:
PROPOSAL 1. To approve the issuance of up to an estimated maximum of 8,201,082
shares of common stock of Lionbridge to stockholders and holders of convertible
and subordinated debt of INT'L.com, as contemplated by the Amended and Restated
Agreement and Plan of Reorganization, dated as of March 30, 2000, by and among
Lionbridge, LTI Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Lionbridge, and INT'L.com pursuant to which LTI Acquisition Corp.
will be merged with and into INT'L.com, with INT'L.com being the surviving
corporation (the "Merger").
<TABLE>
<CAPTION>
Total Vote For Total Vote Against Abstentions from Unvoted
Proposal 1 Proposal 1 Proposal 1
<S> <C> <C> <C>
11,443,994 17,860 7,635 3,521,361
</TABLE>
PROPOSAL 2. To elect Claude P. Sheer to serve for a three-year term as a Class I
Director of Lionbridge.
<TABLE>
<CAPTION>
Total Vote For Total Vote Against Abstentions from Unvoted
Proposal 2 Proposal 2 Proposal 2
<S> <C> <C> <C>
14,985,735 5,115 N/A N/A
</TABLE>
PROPOSAL 3. To ratify selection of the firm of PricewaterhouseCoopers LLP,
independent public accountants, as auditors for the fiscal year ending December
31, 2000.
<TABLE>
<CAPTION>
Total Vote For Total Vote Against Abstentions from Unvoted
Proposal 3 Proposal 3 Proposal 3
<S> <C> <C> <C>
14,980,338 2,753 7,759 N/A
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 Loan Document Modification Agreement Number 8 dated as of May 20, 2000
by and among Lionbridge Technologies Holdings B.V., Lionbridge
Technologies B.V., Lionbridge Technologies, Inc. and Silicon Valley
Bank.
27.1 Financial Data Schedule.
</TABLE>
(B) REPORTS ON FORM 8-K.
A Current Report on Form 8-K was filed by the registrant on June 1, 2000 and
amended July 31, 2000 with respect to the acquisitions of HT on May 18, 2000 and
of INT'L.com on May 22, 2000.
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<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
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.
LIONBRIDGE TECHNOLOGIES, INC.
Dated: August 11, 2000 By: /s/ STEPHEN J. LIFSHATZ
------------------------------------
Stephen J. Lifshatz
Senior Vice President, Chief Financial
Officer (Duly Authorized Officer and
Principal Financial Officer)
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.1 Loan Document Modification Agreement Number 8 dated as of May 20, 2000 by
and among Lionbridge Technologies Holdings B.V., Lionbridge Technologies
B.V., Lionbridge Technologies, Inc. and Silicon Valley Bank.
27.1 Financial Data Schedule.
</TABLE>
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