<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 SEPTEMBER 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 October 31, 2000 was 27,322,785.
================================================================================
<PAGE>
LIONBRIDGE TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999.............................................................. 3
Consolidated Statements of Operations (unaudited) for the three months and nine
months ended September 30, 2000 and 1999....................................... 4
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
September 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
Operations..................................................................... 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 6. Exhibits and Reports on Form 8-K............................................... 22
SIGNATURE............................................................................................ 23
EXHIBIT INDEX........................................................................................ 23
</TABLE>
-2-
<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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,177 $ 12,350
Accounts receivable, net of allowances of $1,138 and $1,122 at
September 30, 2000 and December 31, 1999, respectively 15,984 15,063
Work in process 8,381 5,119
Other current assets 1,683 1,410
-------- --------
Total current assets 45,225 33,942
Property and equipment, net 5,129 6,388
Goodwill and other intangible assets, net 16,067 19,948
Other assets 563 417
-------- --------
Total assets $ 66,984 $ 60,695
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term debt and current portion of long-term debt $ 15,534 $ 9,636
Current portion of capital lease obligations 535 959
Accounts payable 8,165 9,621
Accrued compensation and benefits 4,655 4,798
Accrued outsourcing 3,919 2,664
Other accrued expenses 5,728 4,081
Deferred revenue 4,639 3,619
Deferred income taxes 224 224
-------- --------
Total current liabilities 43,399 35,602
-------- --------
Long-term debt, less current portion 6,750 15,472
Capital lease obligations, less current portion 858 307
Other long-term liabilities 483 269
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;
27,340,980 and 21,323,790 shares issued and 27,299,783 and
21,282,593 shares outstanding at September 30, 2000 and
December 31, 1999, respectively 274 213
Additional paid-in capital 90,973 47,239
Accumulated deficit (74,179) (55,476)
Deferred compensation (1,900) (2,837)
Subscriptions receivable (102) (152)
Treasury stock, at cost (167) (167)
Accumulated other comprehensive income 595 438
-------- --------
Total stockholders' equity (deficit) 15,494 (10,742)
-------- --------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit) $ 66,984 $ 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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Revenue $ 30,345 $ 23,575 $ 87,430 $ 64,903
Cost of revenue 18,112 15,505 55,352 44,592
-------- -------- -------- --------
Gross profit 12,233 8,070 32,078 20,311
-------- -------- -------- --------
Operating expenses:
Sales and marketing 2,778 2,625 8,466 7,235
General and administrative 7,996 7,668 24,048 21,331
Research and development 605 746 1,868 1,322
Amortization of acquisition-related
intangible assets 1,637 1,649 4,823 4,241
Merger, restructuring and other
charges 725 -- 4,266 747
Acquired in-process research and
development -- -- -- 300
Stock-based compensation 202 233 630 465
-------- -------- -------- --------
Total operating expenses 13,943 12,921 44,101 35,641
-------- -------- -------- --------
Loss from operations (1,710) (4,851) (12,023) (15,330)
Interest expense:
Interest on outstanding debt 704 567 1,857 1,738
Accretion of discount on debt -- 1,879 212 5,978
Other (income) expense, net 196 (114) 558 205
-------- -------- -------- --------
Loss before income taxes (2,610) (7,183) (14,650) (23,251)
Provision for income taxes 201 1,760 479 526
-------- -------- -------- --------
Net loss (2,811) (8,943) (15,129) (23,777)
Accrued dividends on preferred stock -- (694) (3,574) (1,853)
-------- -------- -------- --------
Net loss attributable to common
stockholders $ (2,811) $ (9,637) $(18,703) $(25,630)
======== ======== ======== ========
Basic and diluted net loss per share
attributable to common stockholders $ (0.10) $ (0.73) $ (0.78) $ (3.09)
Shares used in computing basic and diluted
net loss per share attributable to
common stockholders 27,235 13,200 23,979 8,285
</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,
2000 1999
-----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(15,129) $(23,777)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of acquisition-related intangible assets 4,823 4,241
Stock-based compensation 630 465
Accretion of discount on debt 212 5,978
Impairment of long-lived assets 886 --
Acquired in-process research and development -- 300
Depreciation and amortization of property and equipment 2,778 2,142
Provision for doubtful accounts 53 511
Loss on disposal of fixed assets 99 --
Foreign currency loss on intercompany balances 759 399
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (1,862) (2,318)
Work in process (1,699) (933)
Other current assets (453) 55
Other assets 505 (198)
Accounts payable (1,129) (523)
Accrued compensation and benefits (143) 887
Other accrued expenses 3,500 2,081
Deferred revenue 1,170 2,315
-------- --------
Net cash used in operating activities (5,000) (8,375)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (2,369) (3,349)
Payments for businesses acquired, net of cash acquired (2,876) (4,145)
Maturities of marketable securities -- 2,194
Proceeds from sales of property and equipment under sale
leaseback arrangements 1,109 --
-------- --------
Net cash used in investing activities (4,136) (5,300)
-------- --------
Cash flows from financing activities:
Net decrease in amounts owed to banks -- (347)
Net increase (decrease) in short-term debt 4,218 (915)
Proceeds from issuance of long-term debt -- 14,000
Payments of long-term debt -- (6,000)
Redemption of preferred stock -- (16,105)
Proceeds from issuance of common stock 12,750 31,760
Proceeds from issuance of common stock under option and employee
stock purchase plans 453 119
Proceeds from issuance of preferred stock -- 3,901
Payments of capital lease obligations (882) (133)
Increase in other long-term liabilities -- 158
Collection of subscriptions receivable 51 146
Dividends paid -- (400)
-------- --------
Net cash provided by financing activities 16,590 26,184
-------- --------
Net increase in cash and cash equivalents 7,454 12,509
Effects of exchange rate changes on cash and cash equivalents (627) (220)
Cash and cash equivalents at beginning of period 12,350 1,199
-------- --------
Cash and cash equivalents at end of period $ 19,177 $ 13,488
======== ========
</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. ("Harvard
Translations") 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
Harvard Translations and INT'L.com and, therefore, reflect the combined
financial position, operating results and cash flows of Lionbridge, Harvard
Translations 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 Harvard Translations, a company
based in Massachusetts, by means of a merger. Upon the effective date of the
merger, each outstanding share of Harvard Translations common stock was
converted into the right to receive 3.8864 shares of Lionbridge common stock. In
addition, long-term debt of Harvard Translations 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 Harvard Translations 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 Harvard Translations 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>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Computer software and equipment $ 10,121,000 $ 10,206,000
Furniture and office equipment 2,840,000 2,501,000
Leasehold improvements 1,241,000 965,000
------------ ------------
14,202,000 13,672,000
Less: Accumulated depreciation and amortization (9,073,000) (7,284,000)
------------ ------------
$ 5,129,000 $ 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 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:
Current assets $1,693,000
Current liabilities (57,000)
Property and equipment 140,000
Acquired workforce 377,000
Goodwill 323,000
----------
$2,476,000
==========
The initial calculation of goodwill did not include any contingent
consideration. Future payments, if any, under the contingent payment arrangement
will increase goodwill. The goodwill and the value of the acquired workforce are
being amortized on a straight-line basis over 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.
-7-
<PAGE>
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Lines of credit $ 8,803,000 $ 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 22,284,000 25,108,000
Less current portion (15,534,000) (9,636,000)
------------ ------------
Long-term debt, less current portion $ 6,750,000 $ 15,472,000
============ ============
</TABLE>
LINE OF CREDIT
On September 26, 1997, Lionbridge entered into a line of credit
agreement with a commercial bank, which expired on October 20, 2000. Under
the amended terms of the agreement, Lionbridge was able to borrow up to
$8,000,000, based on the value of certain eligible current assets worldwide.
The interest rate payable on any outstanding borrowings was prime plus 1% per
year (10.5% and 9.5% at September 30, 2000 and December 31, 1999,
respectively). Borrowings outstanding under the line of credit agreement were
collateralized by certain assets of Lionbridge. The amounts outstanding on
the line of credit at September 30, 2000 and December 31, 1999 were
$7,042,000 and $6,593,000, respectively. The agreement required Lionbridge to
maintain certain financial ratios and restricted the payment of dividends. 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. Lionbridge is in the process of negotiating an
extension of the expired line of credit with the same commercial bank on
terms similar to those of its September 26, 1997 facility, as amended. On
November 9, 2000, the commercial bank indicated in a letter to Lionbridge
that it did not intend to call amounts outstanding on the expired line of
credit.
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
September 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 September 30, 2000 and December 31, 1999 were $1,761,000 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 September 30, 2000,
INT'L.com was in compliance with the covenants.
NOTES PAYABLE TO STOCKHOLDERS
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%.
-8-
<PAGE>
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.
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 September 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
Redeemable preferred stock consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
INT'L.com Series A convertible preferred stock; 0 and 867,047 shares authorized
at September 30, 2000 and December 31, 1999, respectively; 0 and 867,047
shares issued and outstanding at September 30, 2000 and December 31,
1999, respectively --- $ 1,811,000
INT'L.com Series B redeemable preferred stock, 0 and 3,500,000 shares authorized
at September 30, 2000 and December 31, 1999, respectively; 0 and 2,621,477
shares issued and outstanding at September 30, 2000 and December 31,
1999, respectively --- 10,586,000
INT'L.com Series C redeemable preferred stock, 0 and 5,000 shares
authorized at September 30, 2000 and December 31, 1999,
respectively; 0 and 5,000 shares issued and outstanding at
September 30, 2000 and December 31, 1999 --- 537,000
INT'L.com Series D redeemable preferred stock; 0 and 1,100,000 shares authorized
at September 30, 2000 and December 31, 1999, respectively; 0 and 936,991
shares issued and outstanding at September 30, 2000 and December 31,
1999, respectively --- 6,853,000
--------- -----------
$ --- $19,787,000
========= ===========
</TABLE>
-9-
<PAGE>
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 $2,733,000 and $9,069,000
for the three-month periods ended September 30, 2000 and 1999, respectively,
and $14,972,000 and $23,807,000 for the nine-month periods ended September
30, 2000 and 1999, respectively, which consists of net loss and the net
change in the foreign currency translation adjustment.
8. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
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:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
--------------------- -----------------------
<S> <C> <C> <C> <C>
Merger costs $142,000 $ -- $2,465,000 $ --
Restructuring charges, net 528,000 -- 915,000 747,000
Impairment of long-lived assets 55,000 -- 886,000 --
-------- ---------- ---------- --------
$725,000 $ -- $4,266,000 $747,000
======== ========== ========== ========
</TABLE>
Merger costs for the three and nine months ended September 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 and nine months ended September 30,
2000 relate to: (i) the costs of closing facilities in the United States, France
and The Netherlands as a result of the merger with INT'L.com consisting
primarily of accruals for lease payments on vacant office space, and (ii) costs
associated with workforce reductions in Canada, the United States and France,
consisting of six technical staff and three administrative staff. All employees
had been informed of their termination and related benefits in the period that
the charge was recorded. The restructuring charges for the three months
-10-
<PAGE>
ended September 30, 2000 are presented net of a $162,000 reversal of a charge
recorded in the three months ended June 30, 2000, due to subsequent events
which have reduced the potential loss on vacant office space.
Restructuring charges for the nine months ended September 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 September 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 nine months
ended September 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 September 30, 2000, accruals totaling $14,000 related to merger
costs and $732,000 related to restructuring charges remained on the consolidated
balance sheet in other accrued expenses. Lionbridge currently anticipates that
all merger and restructuring-related accrual balances will be utilized by
December 31, 2000 except for certain long-term contractual obligations
related to leases for facilities.
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 nine-month periods ended September 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 Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
External revenue:
Localization $ 26,805,000 $ 20,965,000 $ 78,697,000 $ 59,873,000
Testing 3,540,000 2,610,000 8,733,000 5,030,000
Corporate and other -- -- -- --
------------ ------------ ------------ ------------
Total $ 30,345,000 $ 23,575,000 $ 87,430,000 $ 64,903,000
============ ============ ============ ============
Inter-segment revenue:
Localization $ -- $ -- $ -- $ --
Testing -- 85,000 27,000 246,000
Corporate and other -- -- -- --
Eliminations -- (85,000) (27,000) (246,000)
------------ ------------ ------------ ------------
Total $ -- $ -- $ -- $ --
============ ============ ============ ============
Net income (loss):
Localization $ 3,145,000 $ (3,374,000) $ 4,335,000 $ (6,138,000)
Testing 575,000 729,000 1,081,000 553,000
Corporate and other (6,531,000) (6,298,000) (20,545,000) (18,192,000)
------------ ------------ ------------ ------------
Total $ (2,811,000) $ (8,943,000) $(15,129,000) $(23,777,000)
============ ============ ============ ============
</TABLE>
-11-
<PAGE>
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended
September 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., International Language Engineering Corporation and
Motus! for $13,715,000 in the nine months ended September 30,
1999. In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired and goodwill............. $22,201,000
Cash paid for capital stock............................ (3,384,000)
Common stock issued.................................... (3,751,000)
Series D redeemable preferred stock issued............. (5,830,000)
Notes issued........................................... (750,000)
-----------
Liabilities assumed................................. $ 8,486,000
===========
Purchases of property and equipment under capital lease
arrangements........................................... $ 1,159,000
===========
</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 - 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.
-12-
<PAGE>
In September 2000, the FASB issued SFAS No. 140 ("SFAS 140"),
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities -a replacement of FASB Statement No. 125."
SFAS 140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of SFAS 125's provisions without
reconsideration. This Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. This Statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company does
not expect the application of SFAS 140 to have a material impact on its
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 "Risk Factors" in Lionbridge's
Registration Statement on Form S-3, filed September 28, 2000 (SEC File No.
333-46852) 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 future 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, particularly with respect to the Euro; (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 services to Global 2000 and emerging
companies. Founded in 1996, Lionbridge has clients in industries such as
technology, telecommunications, life sciences, and financial services. Our
services include strategic consulting, linguistic and technical implementation,
product testing, and multilingual content management. Lionbridge manages some of
its services under the VeriTest brand for functional and logo certification
testing, the Harvard Translations brand for specialty translation and print/Web
publishing services for the financial services and life science industries, and
the China Connect brand for Web integration services applicable to the
Chinese-speaking market.
-13-
<PAGE>
Lionbridge's revenue is derived from project-by-project fees and, to a lesser
extent, long-term service agreements. Projects are generally billed on a time
and expense basis and long-term service agreements are generally 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 September 30, 2000, had an accumulated deficit
of $74.2 million.
ACQUISITIONS
We have grown our business since inception through a combination of acquisitions
and organic growth. Such acquisitions through September 30, 2000 have resulted
in the recognition of approximately $25.9 million of goodwill 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 $323,000 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. ("Harvard
Translations"), a company based in Massachusetts, by means of a merger. Upon
the effective date of the merger, each outstanding share of Harvard
Translations common stock was converted into the right to receive 3.8864
shares of Lionbridge common stock. In addition, long-term debt of Harvard
Translations 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 Lionbridge common stock. Upon the
completion of the acquisition, all outstanding options to purchase common
stock of Harvard Translations 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 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.
-14-
<PAGE>
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.
MERGER, RESTRUCTURING AND OTHER CHARGES
Merger costs for the three and nine months ended September 30, 2000 of $142,000
and $2.5 million, respectively, 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 nine months ended September 30, 2000
of $528,000 and $915,000, respectively, relate to: (i) the costs of closing
facilities in the United States, France and The Netherlands as a result of
the merger with INT'L.com, consisting primarily of accruals for lease
payments on vacant office space, and (ii) costs associated with workforce
reductions in Canada, the United States and France, consisting of six
technical staff and three administrative staff. All employees had been
informed of their termination and related benefits in the period that the
charge was recorded. The restructuring charges for the three months ended
September 30, 2000 are presented net of a $162,000 reversal of a charge
recorded in the three months ended June 30, 2000, due to subsequent events
which have reduced the potential loss on vacant office space.
Restructuring charges for the three and nine months ended September 30, 1999 of
$0 and $747,000, respectively, 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 September 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 of $55,000 and $886,000 for the three
and nine months ended September 30, 2000, respectively, 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 September 30, 2000, accruals totaling $14,000 related to merger costs and
$732,000 related to restructuring charges remained on the consolidated
balance sheet in other accrued expenses. We currently anticipate that all
merger and restructuring-related accrual balances will be utilized by
December 31, 2000 except for certain long-term contractual obligations
related to leases for facilities.
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, $1.3 million had been amortized and $544,000 had been reversed due to
cancellation of the underlying options as of September 30, 2000. The
amortization of deferred compensation is recorded as an operating expense and
totaled $202,000 and $233,000 for the three months ended September 30, 2000 and
1999, respectively. For the nine-month periods ended September 30, 2000 and
1999, stock-based compensation totaled $630,000 and $465,000, respectively. We
currently expect to amortize the following remaining amounts of deferred
compensation as of September 30, 2000 in the fiscal periods ending:
December 31, 2000.............................................. $190,000
December 31, 2001.............................................. $765,000
December 31, 2002.............................................. $765,000
December 31, 2003.............................................. $180,000
-15-
<PAGE>
ORIGINAL ISSUE DISCOUNT ON DEBT. Interest expense for the three- and
nine-month periods ended September 30, 2000 includes $0 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. Accretion of this
discount of $0 and $11,000 was recorded for the three- and nine-month periods
ended September 30, 1999. 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 exercised in May 2000 in connection
with our merger with INT'L.com.
Interest expense for the three- and nine-month periods ended September 30, 1999
includes $1.9 million and $6.0 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 Nine Months Ended
September 30, September 30,
------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 59.7 65.8 63.3 68.7
----- ----- ----- -----
Gross profit 40.3 34.2 36.7 31.3
Operating expenses:
Sales and marketing 9.2 11.1 9.7 11.1
General and administrative 26.2 32.5 27.6 32.9
Research and development 2.0 3.2 2.1 2.0
Amortization of acquisition-related
intangible assets 5.4 7.0 5.5 6.5
Merger, restructuring and other
charges 2.4 -- 4.9 1.2
Acquired in-process research and
development -- -- -- 0.5
Stock-based compensation 0.7 1.0 0.7 0.7
----- ----- ----- -----
Total operating expenses 45.9 54.8 50.5 54.9
----- ----- ----- -----
Loss from operations (5.6) (20.6) (13.8) (23.6)
Interest expense:
Interest on outstanding debt 2.4 2.4 2.1 2.7
Accretion of discount on debt -- 8.0 0.2 9.2
Other (income) expense, net 0.6 (0.5) 0.7 0.3
----- ----- ----- -----
Loss before income taxes (8.6) (30.5) (16.8) (35.8)
Provision for income taxes 0.7 7.4 0.5 0.8
----- ----- ----- -----
Net loss (9.3) (37.9) (17.3) (36.6)
Accrued dividends on preferred stock -- (3.0) (4.1) (2.9)
----- ----- ----- -----
Net loss attributable to common
stockholders (9.3)% (40.9)% (21.4)% (39.5)%
===== ===== ===== =====
</TABLE>
-16-
<PAGE>
REVENUE. Revenue for the quarter ended September 30, 2000 was $30.3 million
compared to revenue of $23.6 million for the quarter ended September 30,
1999, an increase of $6.8 million or 28.7%. Revenue increased by $22.5
million or 34.7% to $87.4 million for the nine months ended September 30,
2000 as compared to $64.9 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 International Language Engineering Corporation ("ILE") which was only
included for six of the nine months ended September 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 59.7% for
the quarter ended September 30, 2000 as compared to 65.8% for the
corresponding period of the prior year. For the nine months ended September
30, 2000, cost of revenue decreased to 63.3% as a percentage of revenue from
68.7% from the corresponding nine months of the prior year. These decreases
are primarily attributable to decreased outsourcing costs as INT'L.com
adopted the Lionbridge outsourcing 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 nine 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 September 30, 2000 were
relatively consistent with the corresponding quarter of the previous year. We
expect sales and marketing costs to increase in future periods as we increase
our sales force, expand marketing efforts and consider alternate sales
channels. For the nine months ended September 30, 2000, sales and marketing
expenses increased 17.0% to $8.5 million from $7.2 million for the nine
months ended September 30, 1999. These increases were primarily due to
expenses associated with the continued hiring of additional direct sales
personnel. As a percentage of revenue, sales and marketing expenses decreased
to 9.2% in the third quarter of 2000 from 11.1% in the corresponding period
in 1999 and decreased to 9.7% during the first nine months of 2000 from 11.1%
during the nine months ended September 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 $8.0 million for the three months ended
September 30, 2000 are relatively consistent with the expenses incurred
during the three months ended September 30, 1999 due to operating
efficiencies gained through our mergers with INT'L.com and Harvard
Translations. General and administrative expenses for the nine months ended
September 30, 2000 increased 12.7% to $24.0 million from $21.3 million during
the corresponding period of 1999, primarily due to ILE which was purchased in
April 1999. As a percentage of revenue, general and administrative expenses
decreased from 32.9% to 27.6% for the nine-month periods ended September 30,
2000 and 1999 due primarily to the increases noted above offset by the impact
of the increase in total revenue.
RESEARCH AND DEVELOPMENT. Research and development expenses relate to
ForeignDesk(R) and LionTrack(TM), our proprietary translation memory and
internal workflow systems which comprise the Lionbridge Globalization Platform,
and include salaries and associated employee benefits and third-party contractor
expenses. Research and development expenses of $605,000 for the quarter ended
September 30, 2000 decreased 18.9% from the corresponding quarter of the
previous year due to lower usage of third-party contractors. For the nine months
ended September 30, 2000, research and development expenses increased 41.3% to
$1.9 million from $1.3 million for the nine months ended September 30, 1999, as
LionTrack development efforts commenced during the first quarter of 1999.
-17-
<PAGE>
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 September 30, 2000 was consistent
with $1.6 million for the three months ended September 30, 1999. For the nine
months ended September 30, 2000, amortization expense increased to $4.8 million
or 13.7% over the nine months ended September 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 $704,000 for the three months ended
September 30, 2000 as compared to $2.4 million for the three months ended
September 30, 1999. Interest expense was $2.1 million for the nine months
ended September 30, 2000 versus $7.7 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 from $1.9 million to $0
and from $6.0 million to $212,000 for the three- and nine-month periods ended
September 30, 1999 and 2000, respectively.
PROVISION FOR INCOME TAXES. The provision for income taxes for the three and
nine months ended September 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 months ended September
30, 1999, INT'L.com recorded a tax provision of $1.6 million, offsetting tax
benefits previously recorded in 1999 as management reassessed the probable
utilization of these benefits against future taxable income. In addition, in
1999 Lionbridge also recorded tax provisions for foreign taxes of its other
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
We have a commercial credit facility that allows Lionbridge to borrow up to
$5.0 million, expiring in January 2001. The facility requires Lionbridge to
maintain certain financial covenants and restricts the payment of dividends.
The facility bears interest at prime plus 2.5% (12.0% at September 30, 2000)
and is collateralized by accounts receivable and work in process of
INT'L.com. As of September 30, 2000, $1.8 million was outstanding under the
facility.
We are in the process of negotiating an extension to our line of credit with
a commercial bank on similar terms to our facility with that bank that
expired on October 20, 2000. That facility required Lionbridge to maintain
certain financial covenants and restricted the payment of dividends. The
facility bore interest at prime plus 1% and was collateralized by certain
accounts receivable and work in process. On November 9, 2000, the commercial
bank indicated in a letter that it did not intend to call the $7.0 million
balance outstanding on the expired line of credit. Lionbridge believes that
we will be able to complete our negotiations with the commercial bank and
secure a facility of at least $8.0 million on terms essentially the same as
the expired line of credit. However, there can be no guarantee that a
facility for this amount and with these terms will be obtained.
Cash increased to $19.2 million at September 30, 2000 from $12.4 million at
December 31, 1999. Net cash used in operating activities was $5.0 million and
$8.4 million for the nine-month periods ended September 30, 2000 and 1999,
respectively. These usages were attributable to funding of operating losses
resulting from growth in revenue and operations. Net cash used in investing
activities was $4.1 million for the nine months ended September 30, 2000 as
compared to $5.3 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 in 1999. Net cash provided
by financing activities was $16.6 million and $26.2 million in the first nine
months of 2000 and 1999, respectively. The primary financing activity in the
nine-month period ended September 30, 2000 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. The
primary financing activity in the nine months ended September 30, 1999 was
the completion of our initial public offering as well as the issuance of the
subordinated debt and borrowing against our bank lines of credit.
As of September 30, 2000, we had cash of $19.2 million and an additional $3.2
million available for borrowing under the commercial credit facility. Our
future financing requirements will depend upon a number of factors, including
our operating performance and increases in operating expenses
-18-
<PAGE>
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 September 2000, the FASB issued SFAS No. 140 ("SFAS 140"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities -a replacement of FASB Statement No. 125." SFAS 140 revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over
most of SFAS No. 125's provisions without reconsideration. This Statement is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. This Statement is effective
for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years
ending after December 15, 2000. Lionbridge does not expect the application of
SFAS 140 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.
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FOREIGN CURRENCY EXCHANGE RATE RISK. The majority of our contracts with clients
are denominated in U.S. dollars. However, 39% and 32% of our costs and expenses
for the nine months ended September 30, 2000 and 1999, respectively, were
denominated in foreign currencies. Forty-one percent and 35% of our assets were
recorded in foreign currencies as of September 30, 2000 and December 31, 1999,
respectively. Twenty-four percent and 17% of our liabilities were recorded in
foreign currencies as of September 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, particularly with respect to the Euro.
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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.
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 $5.0 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 $12.8 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.
These shares of common stock were covered by the Company's registration
statement on Form S-3, which was declared effective by the Securities and
Exchange Commission (SEC File No. 333-46852) on October 13, 2000.
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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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
Number Description
------- ------------
10.1 Agreement between Lionbridge Technologies, Inc. and
Christoph Heck dated as of September 29, 2000.
10.2 Loan Document Modification Agreement Number 9
dated as of July 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.
(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: November 13, 2000 By: /s/ Stephen J. Lifshatz
-------------------------------------------
Stephen J. Lifshatz
Senior Vice President, Chief Financial
Officer
(Duly Authorized Officer and Principal
Financial Officer)
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Agreement between Lionbridge Technologies, Inc. and
Christoph Heck dated as of September 29, 2000.
10.2 Loan Document Modification Agreement Number 9
dated as of July 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.
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