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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-21319
LIGHTBRIDGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-3065140
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
67 SOUTH BEDFORD STREET
BURLINGTON, MASSACHUSETTS 01803
(Address of Principal Executive Offices) (Zip Code)
(781) 359-4000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
As of October 31, 2003, there were 27,004,486 shares of the
registrant's common stock, $.01 par value, outstanding.
LIGHTBRIDGE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
Balance Sheets as of September 30, 2003 and December 31, 2002...................... 3
Income Statements for the quarters ended September 30, 2003 and 2002............... 4
Income Statements for the nine months ended September 30, 2003 and 2002............ 5
Statements of Cash Flows for the nine months ended September 30, 2003 and 2002..... 6
Notes to Unaudited Condensed Consolidated Financial Statements..................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................................................................... 11
Item 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES............................... 20
Item 4. CONTROLS AND PROCEDURES............................................................ 21
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K................................................... 22
SIGNATURES..................................................................... 22
2
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 72,401 $ 90,664
Short-term investments ......................... 58,737 42,806
Accounts receivable, net ....................... 18,774 17,679
Deferred tax assets ............................ 3,012 3,012
Other current assets ........................... 3,444 3,112
-------- --------
Total current assets ....................... 156,368 157,273
Property and equipment, net ...................... 10,226 16,183
Deferred tax assets .............................. 3,713 3,713
Other assets, net ................................ 221 709
Goodwill ......................................... 1,664 1,664
Intangible assets, net ........................... 931 1,130
-------- --------
Total assets ............................... $173,123 $180,672
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ....... $ 11,375 $ 15,145
Deferred revenues .............................. 4,003 4,292
Reserve for restructuring ...................... 3,260 1,335
-------- --------
Total current liabilities .................. 18,638 20,772
Long-term liabilities .......................... 41 259
-------- --------
Total liabilities .......................... 18,679 21,031
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000
shares authorized; no shares issued or
outstanding at September 30, 2003 and
December 31, 2002 ............................ -- --
Common stock, $.01 par value; 60,000,000 shares
authorized; 29,646,904 and 29,400,762 shares
issued and 26,987,661 and 27,282,224 shares
outstanding at September 30, 2003 and
December 31, 2002, respectively .............. 298 296
Additional paid-in capital ..................... 166,407 165,241
Warrants ....................................... 206 206
Retained earnings .............................. 3,188 5,521
Less: treasury stock, at cost .................. (15,655) (11,623)
-------- --------
Total stockholders' equity ................. 154,444 159,641
-------- --------
Total liabilities and stockholders'
equity ................................. $173,123 $180,672
======== ========
See notes to unaudited condensed consolidated financial statements.
3
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
SEPTEMBER 30,
--------------------
2003 2002
-------- --------
Revenues:
Transaction ............................. $ 20,029 $ 21,117
Software licensing ...................... 1,413 1,769
Consulting and services ................. 7,922 8,048
Hardware ................................ 202 620
-------- --------
Total revenues ....................... 29,566 31,554
-------- --------
Cost of revenues:
Transaction ............................. 11,398 11,760
Software licensing ...................... 349 315
Consulting and services ................. 3,544 2,898
Hardware ................................ 123 485
-------- --------
Total cost of revenues ............... 15,414 15,458
-------- --------
Gross profit:
Transaction ............................. 8,631 9,357
Software licensing ...................... 1,064 1,454
Consulting and services ................. 4,378 5,150
Hardware ................................ 79 135
-------- --------
Total gross profit ................... 14,152 16,096
-------- --------
Operating expenses:
Development costs ....................... 6,878 7,095
Sales and marketing ..................... 3,339 3,103
General and administrative .............. 3,240 4,083
Restructuring costs ..................... 3,438 --
-------- --------
Total operating expenses ............. 16,895 14,281
-------- --------
Income (loss) from operations .............. (2,743) 1,815
Other income, net .......................... 377 607
-------- --------
Income (loss) before income taxes .......... (2,366) 2,422
Provision for (benefit from) income taxes .. (473) 681
-------- --------
Net income (loss) .......................... $ (1,893) $ 1,741
======== ========
Basic earnings (loss) per common share ..... $ (0.07) $ 0.06
======== ========
Diluted earnings (loss) per common share ... $ (0.07) $ 0.06
======== ========
See notes to unaudited condensed consolidated financial statements.
4
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2003 2002
--------- ---------
Revenues:
Transaction ..................................... $ 58,880 $ 66,981
Software licensing .............................. 7,474 8,555
Consulting and services ......................... 20,900 25,303
Hardware ........................................ 2,034 2,002
--------- ---------
Total revenues ............................... 89,288 102,841
--------- ---------
Cost of revenues:
Transaction ..................................... 33,475 38,105
Software licensing .............................. 1,136 1,042
Consulting and services ......................... 9,288 10,848
Hardware ........................................ 1,693 1,528
--------- ---------
Total cost of revenues ....................... 45,592 51,523
--------- ---------
Gross profit:
Transaction ..................................... 25,405 28,876
Software licensing .............................. 6,338 7,513
Consulting and services ......................... 11,612 14,455
Hardware ........................................ 341 474
--------- ---------
Total gross profit ........................... 43,696 51,318
--------- ---------
Operating expenses:
Development costs ............................... 21,430 22,278
Sales and marketing ............................. 10,921 10,161
General and administrative ...................... 10,510 13,621
Purchased in-process research and development ... -- 1,618
Restructuring costs ............................. 4,987 3,616
--------- ---------
Total operating expenses ..................... 47,848 51,294
--------- ---------
Income (loss) from operations ...................... (4,152) 24
Other income, net .................................. 1,382 1,823
Equity in loss of partnership investment ........... (471) --
--------- ---------
Profit (loss) before benefit from income taxes ..... (3,241) 1,847
Benefit from income taxes .......................... (908) (607)
--------- ---------
Net income (loss) .................................. $ (2,333) $ 2,454
========= =========
Basic earnings (loss) per common share ............. $ (0.09) $ 0.09
========= =========
Diluted earnings (loss) per common share ........... $ (0.09) $ 0.09
========= =========
See notes to unaudited condensed consolidated financial statements.
5
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income (loss) ............................................. $ (2,333) $ 2,454
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Purchased in-process research and development .............. -- 1,618
Depreciation and amortization .............................. 8,163 11,990
Deferred income taxes ...................................... -- (1,898)
Loss on disposal of property and equipment ................. 876 735
Changes in assets and liabilities:
Accounts receivable ........................................ (1,095) 3,191
Inventories ................................................ -- 263
Other assets ............................................... 156 281
Accounts payable and accrued liabilities ................... (1,845) (4,591)
Deferred revenues .......................................... (289) (1,676)
Other liabilities .......................................... (218) (191)
--------- ---------
Net cash provided by operating activities ..................... 3,415 12,176
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment ........................ (2,883) (3,854)
Purchase of short-term investments ......................... (153,321) (71,255)
Proceeds from sales and maturities of short-term investments 137,390 52,980
Acquisition of Altawave .................................... -- (4,949)
--------- ---------
Net cash used in investing activities ......................... (18,814) (27,078)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ..................... 1,168 2,685
Repurchase of common stock ................................. (4,032) (6,984)
--------- ---------
Net cash used in financing activities ......................... (2,864) (4,299)
--------- ---------
Net decrease in cash and cash equivalents ..................... (18,263) (19,201)
Cash and cash equivalents, beginning of period ................ 90,664 107,499
--------- ---------
Cash and cash equivalents, end of period ...................... $ 72,401 $ 88,298
========= =========
See notes to unaudited condensed consolidated financial statements.
6
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of Lightbridge, Inc. and its subsidiaries (collectively,
"Lightbridge" or the "Company"). Lightbridge believes that the unaudited
condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of
Lightbridge's financial position, results of operations and cash flows at the
dates and for the periods indicated. Although certain information and
disclosures normally included in Lightbridge's annual financial statements have
been omitted, Lightbridge believes that the disclosures provided are adequate to
make the information presented not misleading. Results of interim periods may
not be indicative of results for the full year or any future periods. These
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in Lightbridge's Annual Report
on Form 10-K for the year ended December 31, 2002.
2. STOCK-BASED COMPENSATION
The Company applies the intrinsic value based method of accounting for
stock options granted to employees and members of the Board of Directors. The
Company accounts for stock options to other individuals using the fair value
method.
Under the intrinsic value method, compensation expense associated with
stock awards is determined as the difference, if any, between the current fair
value of the underlying common stock on the date compensation expense is
measured and the price an option holder must pay to exercise the award. The
measurement date for employee and director awards is generally the date of
grant. Under the fair value method, compensation expense associated with stock
awards is determined based on the estimated fair value of the award itself,
measured using either current market data or an established option pricing
model. The measurement date is generally the date of grant.
Had the Company used the fair value method to measure compensation
expense associated with grants of stock options to employees and directors,
reported net income (loss) and basic and diluted earnings (loss) per share would
have been as follows:
QUARTER ENDED NINE MONTHS ENDED
SEP. 30, SEP. 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) as reported ................................... $ (1,893) $ 1,741 $ (2,333) $ 2,454
Stock based compensation recorded in income ..................... -- -- -- --
Stock based compensation measured using the fair value method ... 1,358 503 2,745 1,381
-------- -------- -------- --------
Net income (loss) pro forma ..................................... $ (3,251) $ 1,238 $ (5,078) $ 1,073
======== ======== ======== ========
Basic earnings (loss) per share pro forma ....................... $ (0.12) $ 0.04 $ (0.19) $ 0.04
======== ======== ======== ========
Diluted earnings (loss) per share pro forma ..................... $ (0.12) $ 0.04 $ (0.19) $ 0.04
======== ======== ======== ========
The fair value of options on their grant date was measured using the
Black-Scholes Option Pricing Model. Key assumptions used to apply this pricing
model for the quarters and nine months ended September 30, 2003 and 2002 are as
follows:
2003 2002
----------- -----------
Risk-free interest rate .............................. 2.9% - 4.7% 3.9% - 4.9%
Expected life of options grants ...................... 1 - 5 years 1 - 5 years
Expected volatility of underlying stock .............. 90% 96%
Expected dividend payment rate, as a percentage of the
stock price on the date of grant ................ -- --
The option pricing model used was designed to value readily tradable
stock options with relatively short lives. The options granted to employees and
directors are not tradable and have contractual lives of up to ten years.
3. REVENUE RECOGNITION
The Company generates revenue from the processing of qualification,
activation and authentication transactions; granting of software licenses;
services (including maintenance, installation and training); development and
consulting contracts; and hardware
7
sold in conjunction with certain software licenses. Revenues from processing of
qualification, activation and authentication transactions are recognized in the
period in which services are performed.
The Company's software license agreements have typically provided for
an initial license fee and annual maintenance fees based on a defined number of
subscribers, as well as additional license and maintenance fees for net
subscriber additions in certain circumstances. Revenues from software license
sales are recognized when persuasive evidence of an arrangement exists, delivery
of the product has been made, and a fixed fee and collectibility have been
determined. To the extent that obligations exist for other services, the Company
allocates revenue between the license and the services based upon their relative
fair value or by the residual method.
Revenues from consulting and services contracts are generally
recognized as the services are performed. Revenues from software maintenance
contracts are recognized ratably over the term of the maintenance agreement and
are reported as consulting and services revenues. Revenues from hardware sales
are recognized upon shipment, unless testing, integration or implementation
services are required, in which case hardware revenue is recognized upon
commissioning and acceptance of the product. Revenues from hardware sold in
conjunction with software licenses are deferred until the related license
revenues are recognized.
In the quarter ended September 30, 2003, four clients accounted for
30%, 23%, 13% and 10% of the Company's total revenues. In the quarter ended
September 30, 2002, four clients accounted for 33%, 22%, 13% and 11% of the
Company's total revenues. In the nine months ended September 30, 2003, four
clients accounted for 27%, 21%, 14% and 12% of the Company's total revenues. In
the nine months ended September 30, 2002, four clients accounted for 30%, 20%,
15% and 10% of the Company's total revenues. A loss of one or more of these
major clients, a bankruptcy or period of financial difficulty of one or more of
these clients, a decrease in orders by one or more of these clients or a change
in the combination of products and services obtained from the Company by one or
more of these clients would aversely affect Lightbridge's revenues, margins and
net income.
4. EARNINGS PER SHARE (EPS)
Basic EPS is computed by dividing income (loss) available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock.
A reconciliation of the shares used to compute basic EPS to those used
for diluted EPS is as follows:
QUARTER ENDED SEP. 30, NINE MONTHS ENDED SEP. 30,
---------------------- --------------------------
2003 2002 2003 2002
------ ------ ------ ------
(IN THOUSANDS)
Shares for basic computation 26,912 27,982 27,046 28,194
Options and warrants (treasury stock method) --- 296 --- 453
------ ------ ------ ------
Shares for diluted computation 26,912 28,278 27,046 28,647
====== ====== ====== ======
Stock options for which the exercise price exceeds the average market
price over the period have an anti-dilutive effect on EPS and, accordingly, are
excluded from the diluted computations for all periods presented. Had such
shares been included, shares for the diluted computation would have increased by
approximately 1,873,722 and 3,235,996 for the quarters ended September 30, 2003
and 2002, and 2,242,568 and 2,712,412 for the nine months ended September 30,
2003 and 2002, respectively.
In addition, all other stock options and warrants convertible into
common stock have been excluded from the diluted EPS computation in the quarter
ended September 30, 2003 and the nine months ended September 30, 2003, as they
are anti-dilutive due to the net loss recorded by the Company in those periods.
Had such shares been included, the number of shares for the diluted computation
for the quarter ended September 30, 2003 and the nine months ended September 30,
2003 would have increased by approximately 373,730 and 539,145 shares,
respectively.
5. RESTRUCTURING RESERVES
In June 2002, the Company announced it would be reducing its workforce
by seven percent and consolidating its Waltham, Massachusetts call center
operations into its Lynn, Massachusetts and Broomfield, Colorado facilities by
the end of 2002. The Company recorded a restructuring charge of approximately
$3.6 million, consisting of $1.6 million for workforce reductions, $1.3
8
million for facilities reductions including lease obligations, utilities and
security costs on unused space and $0.7 million for capital equipment write-offs
associated with these measures. The restructuring plan resulted in the
termination of 65 personnel as follows: 25 in product and service delivery, 22
in development, 11 in sales and marketing and seven in general and
administrative. The capital equipment write-offs and the majority of severance
costs related to this restructuring were incurred in 2002. In the quarter ended
September 30, 2003, the Company reduced its estimate of sublease income from
unused space and consequently recorded a restructuring charge of approximately
$0.2 million. The Company anticipates that the majority of the remaining costs
relating to this restructuring, consisting principally of lease obligations on
unused space, will be paid by the end of 2004.
The following summarizes the changes to the June 2002 restructuring
reserves for the nine months ended September 30, 2003:
BALANCE AT (REVERSED) BALANCE AT
DEC. 31, 2002 ACCRUED UTILIZED SEP. 30, 2003
------------- ----------- ----------- -------------
(IN THOUSANDS)
Employee severance and termination benefits ... $ 343 $ (158) $ 185 $ --
Facility closing and related costs ............ 992 199 485 706
------------- ----------- ----------- -------------
$ 1,335 $ 41 $ 670 $ 706
============= =========== =========== =============
In March 2003, the Company announced it would be streamlining its
existing Broomfield, Colorado call center operations into its Lynn,
Massachusetts facility and a neighboring Lightbridge facility in Broomfield,
Colorado by the end of May 2003. In the quarter ended March 31, 2003, the
Company recorded a restructuring charge of approximately $0.1 million for
workforce reductions. In the quarter ended June 30, 2003, the Company recorded
an additional restructuring charge associated with this action of approximately
$1.0 million, consisting of approximately $0.6 million in future lease
obligations for unused facilities and approximately $0.4 million for capital
equipment write-offs.
The following summarizes the changes to the March 2003 restructuring
reserves for the nine months ended September 30, 2003:
BALANCE AT BALANCE AT
DEC. 31, 2002 ACCRUED UTILIZED SEP. 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS)
Employee severance and termination benefits .... $ -- $ 77 $ 77 $ --
Facility closing and related costs ............. -- 545 87 458
Capital equipment write-offs ................... -- 378 378 --
------------- ------------- ------------- -------------
$ -- $ 1,000 $ 542 $ 458
============= ============= ============= =============
In June 2003, the Company announced it would be closing its Irvine,
California facility and transferring certain employment positions to its
Broomfield, Colorado facility and reducing its headcount by an estimated 70
employees as follows: 16 in product and service delivery, 30 in development, 13
in sales and marketing and 11 in general and administrative. In the quarter
ended June 30, 2003, the Company recorded a restructuring charge of
approximately $0.7 million, consisting mainly of workforce reduction costs. In
the quarter ended September 30, 2003, the Company recorded an additional
restructuring charge associated with this action of approximately $3.3 million,
consisting of $1.1 million for workforce reductions, $1.7 million in future
lease obligations for unused facilities and $0.5 million for capital equipment
write-offs. The Company expects to record an additional restructuring charge of
approximately $0.1 million related to future lease obligations in the quarter
ended December 31, 2003.
The following summarizes the changes to the June 2003 restructuring
reserves for the nine months ended September 30, 2003:
BALANCE AT BALANCE AT
DEC. 31, 2002 ACCRUED UTILIZED SEP. 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS)
Employee severance and termination benefits ...... $ -- $ 1,740 $ 1,201 $ 539
Facility closing and related costs ............... -- 1,709 152 1,557
Capital equipment write-offs ..................... -- 497 497 --
------------- ------------- ------------- -------------
$ -- $ 3,946 $ 1,850 $ 2,096
============= ============= ============= =============
9
6. BENEFIT FROM INCOME TAXES
The income tax provision for the nine months ended September 30, 2003
reflects a net benefit of $0.9 million which consists of an income tax benefit
at an annual effective tax rate of 20.0%, as well as a $0.3 million tax benefit
related to the recognition of prior year research and development tax credits.
The 20.0% rate differs from the statutory rate of 34.0% due to a decrease in
estimated pre-tax profit.
The income tax provision for the nine months ended September 30, 2002
reflects a net benefit of $0.6 million which consists of an income tax provision
at an annual effective tax rate of 30%, and a $1.0 million tax benefit related
to the reduction of the valuation allowance on acquired net operating loss
carryforwards, as it was determined that it was more likely than not that such
net operating losses would be utilized.
7. EQUITY IN LOSS OF PARTNERSHIP INVESTMENT
In June 2001, the Company committed to invest up to $5.0 million in a
limited partnership that invests in businesses within the wireless industry. In
July 2003, the partners agreed to dissolve the partnership. Accordingly, future
commitments were eliminated, and the remaining $0.5 million investment was
written off in the quarter ended June 30, 2003.
8. COMMITMENTS AND CONTINGENCIES
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of
FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No.
34." FIN 45 requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken by
issuing the guarantee and requires additional disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees it has issued. The adoption of FIN 45 did not have a
material effect on the Company's financial position or results of operations.
In the ordinary course of its business, the Company has certain
indemnification provisions in its agreements with clients. The Company generally
undertakes to defend and indemnify the indemnified party for damages and
expenses or settlement amounts arising from certain patent, copyright or other
intellectual property infringement claims by any third party with respect to the
Company's products. Some agreements provide for indemnification for claims
relating to property damage or personal injury resulting from the performance of
services or provision of products by the Company, breaches of contract by the
Company or the failure by the Company to comply with applicable laws in the
performance of services or provision of products by the Company to its clients.
Historically, the Company's costs to defend lawsuits, or settle or pay claims
relating to such indemnification provisions have not been material. Accordingly,
the estimated fair value of these indemnification provisions is not material.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. SFAS 146 nullifies EITF No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity," which required a liability be recognized at the commitment date to an
exit plan. The Company adopted the provisions of SFAS 146 effective for exit or
disposal activities initiated after December 31, 2002. All restructuring
activities prior to December 31, 2002, including the June 2002 restructuring
described in Note 5, are accounted for under EITF No. 94-3.
The March 2003 restructuring described in Note 5 is accounted for under
SFAS 146, the impact of which was that the Company recorded approximately $1.0
million for the facility reduction and capital equipment charge in the second
quarter of 2003 rather than the first quarter of 2003 due to the cease-use date
being in the second quarter. In addition, the June 2003 restructuring described
in Note 5 is accounted for under SFAS 146, the impact of which was that the
Company recorded approximately $2.2 million for facility reductions and capital
equipment charges in the third quarter of 2003 rather than the second quarter of
2003 due to the cease-use date being in the third quarter.
In December 2002, the FASB issued SFAS No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123 ("SFAS 123"). SFAS 148 amends SFAS 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition,
10
SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The interim disclosure requirements of SFAS 148 have
been implemented in Note 2.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. ANY STATEMENTS CONTAINED
HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE FOREGOING, THE WORDS
"BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS" AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, INCLUDING THE
FACTORS SET FORTH UNDER "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - RISK FACTORS" IN THE ANNUAL
REPORT ON FORM 10-K OF LIGHTBRIDGE FOR THE YEAR ENDED DECEMBER 31, 2002, THAT
MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS OF LIGHTBRIDGE TO
DIFFER MATERIALLY FROM THOSE INDICATED BY THE FORWARD-LOOKING STATEMENTS.
LIGHTBRIDGE ANTICIPATES THAT ITS BUSINESS WILL BE IMPACTED BY CURRENT AND FUTURE
ECONOMIC CONDITIONS AFFECTING THE COMMUNICATIONS INDUSTRY AND OTHER FACTORS
INCLUDING, WITHOUT LIMITATION, DECREASES OR DELAYS IN CAPITAL SPENDING BY
COMMUNICATIONS PROVIDERS, INCREASING DEPENDENCE ON A LIMITED NUMBER OF CLIENTS,
THE COMPANY'S REVENUE CONCENTRATION IN THE WIRELESS TELECOMMUNICATIONS BUSINESS
AND THE DECLINING SUBSCRIBER GROWTH RATE IN THAT BUSINESS, CONSOLIDATION AND
INCREASING PRESSURE TO CONTROL COSTS IN THAT BUSINESS, CONTINUING RAPID CHANGE
IN THE TELECOMMUNICATIONS INDUSTRY AND OTHER MARKETS IN WHICH THE COMPANY DOES
BUSINESS THAT MAY AFFECT BOTH THE COMPANY AND ITS CLIENTS INCLUDING THE ADVENT
OF WIRELESS NUMBER PORTABILITY IN NOVEMBER 2003, THE IMPACT OF COMPETITIVE
PRODUCTS, SERVICES AND PRICING ON THE COMPANY AND ITS CLIENTS, THE ADVERSE
IMPACT THAT THE FINANCIAL AND OPERATING DIFFICULTIES OF THE COMPANY'S CLIENTS
MAY HAVE ON THE COMPANY'S FUTURE REVENUES AND FINANCIAL AND OPERATING RESULTS,
THE POSSIBLE NEGATIVE IMPACT THAT CHANGES IN THE COMBINATION OF SERVICES
ACQUIRED BY THE COMPANY'S CLIENTS MAY HAVE ON ITS BUSINESS, THE FAILURE TO
PROPERLY IMPLEMENT REGULATORY REQUIREMENTS APPLICABLE TO THE COMPANY'S AND ITS
CLIENTS' BUSINESSES, THE POSSIBLE NEGATIVE IMPACT ON THE COMPANY'S BUSINESS DUE
TO ERRORS IN ITS SOFTWARE OR LACK OF SUCCESS IN IMPROVING ITS SOFTWARE DESIGN
AND DEVELOPMENT PROCESS, THE POSSIBLE NEGATIVE IMPACT ON THE COMPANY'S FINANCIAL
RESULTS IF ITS TAX BENEFITS DO NOT BECOME FULLY RECOVERABLE, GLOBAL ECONOMIC
RECESSION, ECONOMIC AND POLITICAL INSTABILITY IN THE DOMESTIC AND INTERNATIONAL
MARKETS INCLUDING, WITHOUT LIMITATION, THE IMPACT OF TERRORIST THREATS AND
HOSTILITIES AND THE DECLARATION OF WAR OR SIMILAR ACTIONS, POSSIBLE DIFFICULTIES
ASSOCIATED WITH PAST OR FUTURE ACQUISITIONS INCLUDING CORSAIR AND ALTAWAVE, THE
NEED TO DEVELOP AND WIN MARKET ACCEPTANCE OF NEW PRODUCTS, SERVICES AND
TECHNOLOGIES AND TO ENHANCE AND MAINTAIN DEMAND FOR THE COMPANY'S EXISTING
PRODUCTS, SERVICES AND TECHNOLOGIES, LIGHTBRIDGE'S ABILITY TO EXECUTE ON, AND
THE IMPACT ON THE COMPANY'S BUSINESS AND OPERATIONS OF, ITS OBJECTIVES, PLANS OR
STRATEGIES, INCLUDING, WITHOUT LIMITATION, ITS PLANS TO ENTER THE ONLINE
TRANSACTION, WIRELESS DATA AND OTHER MARKETS, AND THE IMPACT OF RESTRUCTURING
AND OTHER CHARGES ON LIGHTBRIDGE'S BUSINESS AND OPERATIONS. LIGHTBRIDGE
UNDERTAKES NO OBLIGATIONS TO UPDATE ANY FORWARD-LOOKING STATEMENTS IT MAKES.
Information set forth under the heading "ITEM 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 2002 is incorporated as an exhibit to this Quarterly Report on Form 10-Q.
Unless the context otherwise requires, "Lightbridge" and the "Company" refer
collectively to Lightbridge, Inc. and its subsidiaries.
ALTALINKS, LIGHTBRIDGE, the Lightbridge logo and PHONEPRINT are
registered trademarks of Lightbridge, and ALTAWAVE, CAS, CORSAIR, CUSTOMER
ACQUISITION SYSTEM, LIGHTBRIDGE MOBILE DATA MANAGER, PREPAY
11
and LIGHTBRIDGE TELESERVICES are trademarks of Lightbridge. All other trademarks
or trade names appearing in this Quarterly Report on Form 10-Q are the property
of their respective owners.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Lightbridge has identified and discussed certain critical accounting
policies and estimates in its Annual Report on Form 10-K for the year ended
December 31, 2002. The Company did not modify its critical accounting policies
during the quarter ended September 30, 2003. Those policies and estimates have
been applied in the preparation of the Company's financial statements included
in this Quarterly Report on Form 10-Q. In applying its critical accounting
policies, the Company reduced the annual estimated effective tax rate to 20% in
the quarter ended March 31, 2003 and has applied that rate consistently
throughout the nine months ended September 30, 2003.
OVERVIEW
Lightbridge develops, markets and supports a suite of products and
services for communications providers that supports the customer lifecycle
including customer qualification and acquisition, risk management, prepaid
billing, mobile data management and authentication services. Lightbridge derives
the majority of its revenues from clients located in the United States.
On February 22, 2002, a wholly owned subsidiary of Lightbridge acquired
all of the assets and certain of the liabilities of Altawave Inc. ("Altawave")
in exchange for the payment of $4.0 million in cash, plus up to an additional
$6.0 million contingent on the achievement of certain revenue goals. The
technology acquired from Altawave includes solutions that offer wireless
carriers a service platform for the development and management of data content
and applications. The condensed consolidated financial statements for the nine
months ended September 30, 2002 include the operations related to Altawave from
the date of acquisition.
Lightbridge's transaction revenues are derived primarily from the
processing of applications for qualification of subscribers for
telecommunications services and the activation of service for those subscribers.
Over time, the Company has expanded its offerings from credit evaluation
services to include screening for subscriber fraud, evaluating carriers'
existing accounts, interfacing with carrier and third-party systems and
providing call center services. The Company also offers transaction services to
pre-screen and authenticate the identity of users engaged in mobile and online
transactions. Transaction services are provided pursuant to contracts with
carriers and others, which specify the services to be utilized and the markets
to be served. The Company's clients are charged for these services on a per
transaction basis. Pricing varies depending primarily on the volume of
transactions, the number and type of other products and services selected for
integration with the services and the term of the contract under which services
are provided. The volume of processed transactions varies depending on seasonal
and retail trends, the success of the carriers and others utilizing the
Company's services in attracting subscribers and customers, and the markets
served by the Company's clients. Transaction revenues are recognized in the
period in which the services are performed.
The Company's software licensing revenues consist of revenues
attributable to the licensing of the Company's CAS Application Modules, Risk
Management, Prepaid Billing and Mobile Data Management software. Lightbridge's
CAS Application Modules are designed to assist customers in interfacing with the
Company's transaction processing systems as well as to perform other
point-of-sale and channel functionality. The Company's Risk Management products
are designed to assist carriers in monitoring subscriber accounts to identify
activity that may indicate fraud. The Company's Prepaid Billing system allows
carriers to market and manage prepaid wireless services to customers. The
Company's Mobile Data Management solutions provide wireless carriers a platform
for the development and management of data content and applications. The
Company's software products are licensed as packaged software products and each
product generally requires incidental customization or integration with other
products and systems to varying degrees. Software licensing revenues are
recognized when persuasive evidence of an arrangement exists, delivery of the
product has been made, and a fixed fee and collectibility have been determined.
The Company's consulting and services revenues historically have been
derived principally from providing solution development and deployment services
and business advisory consulting in the areas of customer acquisition and
retention, authentication, prepay billing and risk management. The majority of
consulting and services engagements are performed on a time and materials basis
and revenues from these engagements are generally recognized as the services are
performed. When the Company performs work under a fixed fee arrangement,
revenues are generally recognized as services are performed. Revenues from
software maintenance contracts are recognized ratably over the term of the
maintenance agreement and are reported as consulting and services revenues.
The Company's hardware revenues historically have been derived in
connection with sales of its PrePay and PhonePrint products. Revenue from
hardware sales is recognized upon shipment, unless testing, integration or other
services are required, in which case it is
12
recognized upon commissioning and acceptance of the product. Revenue from
hardware sold in conjunction with software is deferred until the related
software revenue is recognized. The Company does not expect hardware revenues to
be a significant component of revenue in the future.
In the quarter ended September 30 2003, four clients accounted for 30%,
23%, 13% and 10% of the Company's total revenues. In the quarter ended September
30, 2002, four clients accounted for 33%, 22%, 13% and 11% of the Company's
total revenues. In the nine months ended September 30, 2003, four clients
accounted for 27%, 21%, 14% and 12% of the Company's total revenues. In the nine
months ended September 30, 2002, four clients accounted for 30%, 20%, 15% and
10% of the Company's total revenues. A loss of one or more of these major
clients, a bankruptcy or period of financial difficulty of one or more of these
clients, a decrease in orders by one or more of these clients or a change in the
combination of products and services obtained from the Company by one or more of
these clients would adversely affect Lightbridge's revenues, margins and net
income.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenues:
QUARTER ENDED NINE MONTHS ENDED
SEP. 30, SEP. 30,
--------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues:
Transaction ..................................... 67.7% 66.9% 65.9% 65.1%
Software licensing .............................. 4.8 5.6 8.4 8.3
Consulting and services ......................... 26.8 25.5 23.4 24.6
Hardware ........................................ 0.7 2.0 2.3 2.0
-------- -------- -------- --------
Total revenues ............................... 100.0 100.0 100.0 100.0
-------- -------- -------- --------
Cost of revenues:
Transaction ..................................... 38.6 37.3 37.5 37.1
Software licensing .............................. 1.2 1.0 1.3 1.0
Consulting and services ......................... 12.0 9.2 10.4 10.5
Hardware ........................................ 0.4 1.5 1.9 1.5
-------- -------- -------- --------
Total cost of revenues ....................... 52.2 49.0 51.1 50.1
-------- -------- -------- --------
Gross profit:
Transaction ..................................... 29.1 29.6 28.4 28.0
Software licensing .............................. 3.6 4.6 7.1 7.3
Consulting and services ......................... 14.8 16.3 13.0 14.1
Hardware ........................................ 0.3 0.5 0.4 0.5
-------- -------- -------- --------
Total gross profit ........................... 47.8 51.0 48.9 49.9
-------- -------- -------- --------
Operating expenses:
Development costs ............................... 23.3 22.5 24.0 21.7
Sales and marketing ............................. 11.3 9.8 12.2 9.9
General and administrative ...................... 11.0 12.9 11.8 13.2
Purchased in-process research and development ... -- -- -- 1.6
Restructuring costs ............................. 11.6 -- 5.6 3.5
-------- -------- -------- --------
Total operating expenses ..................... 57.2 45.2 53.6 49.9
-------- -------- -------- --------
Income (loss) from operations ..................... (9.4) 5.8 (4.7) --
Other income, net ................................. 1.3 1.9 1.5 1.8
Equity in loss of partnership investment .......... -- -- (0.5) --
-------- -------- -------- --------
Income (loss) before income taxes ................. (8.1) 7.7 (3.7) 1.8
Provision for (benefit from) income taxes ........ (1.6) 2.2 (1.0) (0.6)
-------- -------- -------- --------
Net income (loss) ................................. (6.5)% 5.5% (2.7)% 2.4%
======== ======== ======== ========
13
QUARTER ENDED SEPTEMBER 30, 2003 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 2002.
REVENUES. Revenues and certain revenue comparisons for the quarters
ended September 30, 2003 and 2002 were as follows:
QUARTER % OF QUARTER % OF
ENDED TOTAL ENDED TOTAL $ %
REVENUES SEP. 30, 2003 REVENUE SEP. 30, 2002 REVENUE DIFFERENCE DIFFERENCE
- ---------------------------- ------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Transaction ................ $ 20,029 67.7% $ 21,117 66.9% $ (1,088) (5.2)%
Software licensing ......... 1,413 4.8 1,769 5.6 (356) (20.0)
Consulting and services .... 7,922 26.8 8,048 25.5 (126) (1.6)
Hardware ................... 202 0.7 620 2.0 (418) (67.4)
------------- ------------- ------------- ------------- ------------- -------------
Total .................... $ 29,566 100.0% $ 31,554 100.0% $ (1,988) (6.3)%
============= ============= ============= ============= ============= =============
The decrease in transaction revenues of $1.1 million was due to slower
subscriber growth experienced by the Company's clients, resulting in a reduction
in transaction volume, and to clients selecting fewer transaction products and
services. The Company's transaction revenues also declined as a result of
reduced call volume and a change in the mix of services provided by
Lightbridge's TeleServices call centers.
The Company's transaction revenues continue to reflect in large part
the industry's rate of growth of new subscribers as well as the rate of
switching among carriers by subscribers (subscriber churn). Lightbridge
believes, based in part on reports of wireless telecommunication industry
analysts, that the rate of subscriber growth will continue to slow in the
current year and in upcoming years, and following the advent of wireless number
portability in November 2003, that the rate of subscriber churn will likely
increase. If churn increases and subscriber applications for wireless carriers
served by Lightbridge increase, the Company expects that the volume of
transactions will increase which may, subject to competitive pricing pressures,
result in increases in transaction revenues. The Company anticipates that
wireless number portability will have a limited impact on its transaction
revenues for the remainder of 2003. Lightbridge also believes it may experience
changes in the combination of services acquired by clients and competitive
pricing pressures that could continue to negatively affect transaction revenues
in 2003 and 2004.
The decrease in software licensing revenues of $0.4 million was
primarily due to fewer software contracts recorded in the third quarter of 2003.
The Company expects lower capital spending by carriers to continue to affect the
sales of Lightbridge software products in future periods. The Company expects
the slowdown and decline in the telecommunications industry will continue for
the remainder of 2003 and into 2004.
The decrease in consulting and services revenues of $0.1 million for
the quarter ended September 30, 2003 was principally due to the slight decline
in consulting projects from the quarter ended September 2002.
There was a decrease in hardware revenues of $0.4 million for the
quarter ended September 30, 2003. The Company does not expect hardware revenues
to be a significant component of revenue in 2003 or thereafter.
COST OF REVENUES. Cost of revenues consists primarily of personnel
costs, costs of acquiring and maintaining systems and networks used in
processing qualification, activation and authentication transactions (including
depreciation and amortization of systems and networks) and amortization of
capitalized software and acquired technology. Cost of revenues may vary as a
percentage of total revenues as a result of a number of factors, including
changes in the volume of transactions processed, the mix of transaction revenues
between revenues from automated transaction processing and revenues from
processing transactions through the Lightbridge TeleServices Group and changes
in the mix of total revenues among transaction revenues, software licensing
revenues and consulting and services revenues.
Cost of revenues and certain cost of revenues comparisons for the
quarters ended September 30, 2003 and 2002 were as follows:
QUARTER % OF QUARTER % OF
ENDED TOTAL ENDED TOTAL $ %
COST OF REVENUES SEP. 30, 2003 REVENUE SEP. 30, 2002 REVENUE DIFFERENCE DIFFERENCE
- ---------------------------- ------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Transaction ................ $ 11,398 38.6% $ 11,760 37.3% $ (362) (3.1)%
Software licensing ......... 349 1.2 315 1.0 34 10.8
Consulting and services .... 3,544 12.0 2,898 9.2 646 22.3
Hardware ................... 123 0.4 485 1.5 (362) (74.6)
------------- ------------- ------------- ------------- ------------- -------------
Total .................... $ 15,414 52.2% $ 15,458 49.0% $ (44) (0.3)%
============= ============= ============= ============= ============= =============
14
Transaction cost of revenues decreased $0.4 million in the quarter
ended September 30, 2003 from the quarter ended September 30, 2002, and
increased as a percentage of total transaction revenues to 56.9% from 55.7% due
to lower revenues. The decrease in transaction cost of revenues was principally
due to lower transaction revenues as a result of a lower volume of subscriber
applications processed through Lightbridge's TeleServices call centers and by a
shift in the mix of services and products provided to clients. The decrease in
costs was also attributable to the Company's staff reductions as a result of the
closing of the Waltham, Massachusetts call center in September 2002 and cost
savings associated with the March 2003 restructuring. Lightbridge believes that
changes in the mix of services provided to clients will affect transaction cost
of revenues in the remainder of 2003 and into 2004.
Software licensing cost of revenues increased in the quarter ended
September 30, 2003 from the quarter ended September 30, 2002, and also increased
as a percentage of total software licensing revenues to 24.7% from 17.8%. These
increases were primarily attributable to the type of software products licensed
during the quarter ended September 30, 2003.
Consulting and services cost of revenues increased in the quarter ended
September 30, 2003, and also increased as a percentage of total consulting and
services revenues to 44.7% from 36.0% in the quarter ended September 30, 2002.
The increase in consulting and services cost of revenue was attributable to the
mix of consulting projects in the periods.
Hardware cost of revenues decreased in the quarter ended September 30,
2003 due to an decrease in hardware revenues. Hardware cost of revenues also
decreased as a percentage of total hardware revenue to 60.9% from 78.2% in the
quarter ended September 30, 2002.
The Company expects that fluctuations in gross profit may occur
primarily because of a change in the mix of revenue generated from the Company's
four revenue components, particularly revenues from software licensing.
OPERATING EXPENSES. Operating expenses and certain operating expense
comparisons for the quarters ended September 30, 2003 and 2002 were as follows:
QUARTER % OF QUARTER % OF
ENDED TOTAL ENDED TOTAL $ %
SEP. 30, 2003 REVENUE SEP. 30, 2002 REVENUE DIFFERENCE DIFFERENCE
------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Development .................. $ 6,878 23.3% $ 7,095 22.5% $ (217) (3.1)%
Sales and marketing .......... 3,339 11.3 3,103 9.8 236 7.6
General and administrative ... 3,240 11.0 4,083 12.9 (843) (20.6)
Restructuring costs .......... 3,438 11.6 -- -- 3,438 100.0%
------------- ------------- ------------- ------------- ------------- -------------
Total ...................... $ 16,895 57.2% $ 14,281 45.2% $ 2,614 18.3%
============= ============= ============= ============= ============= =============
DEVELOPMENT. Development expenses include software development costs
and consist primarily of personnel and outside technical services costs related
to developing new products and services, enhancing existing products and
services, and implementing and maintaining new and existing products and
services. Development expenses decreased slightly for the quarter ended
September 30, 2003 due to a reduction in headcount associated with the Company's
June 2003 restructuring. The Company expects to continue to incur significant
development expenses in the remainder of 2003 and may increase expenses for the
further development of its existing products and services and development of new
products and services.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and travel expenses of sales, business development and
marketing personnel, as well as costs associated with advertising, trade shows
and conferences. The increase in sales and marketing expenses for the quarter
ended September 30, 2003 was primarily due to the expansion of the Company's
business development organization and costs associated with the Company's
strategic partnerships and key initiatives. These costs were partially offset by
the cost savings associated with the June 2003 restructuring.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
principally of salaries of executive, finance, human resources and
administrative personnel and fees for outside professional services. The
decrease in general and administrative costs for the quarter ended September 30,
2003 was primarily due to a decrease in headcount associated with the June 2003
restructurings and the Company's efforts to limit spending. The Company may
experience an increase in general and administrative expenses during the
remainder of 2003 due to increased regulatory compliance requirements associated
with operating as a public company and consumer credit and privacy regulations.
15
OTHER INCOME, NET. Other income, net consisted predominantly of
interest income and decreased to $0.4 million in the quarter ended September 30,
2003 from $0.6 million in the quarter ended September 30, 2002. This decrease
was primarily due to a decline in interest rates.
BENEFIT FROM INCOME TAXES. Lightbridge's annual estimated effective tax
rate was 20.0% for the quarter ended September 30, 2003 compared to 28.0% for
the quarter ended September 30, 2002. The Company anticipates that the tax
benefit recorded in 2003 will be fully recoverable through future taxable income
and or carry back ability.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2002.
REVENUES. Revenues and certain revenue comparisons for the nine months
ended September 30, 2003 and 2002 were as follows:
NINE MONTHS % OF NINE MONTHS % OF
ENDED TOTAL ENDED TOTAL $ %
REVENUES SEP. 30, 2003 REVENUE SEP. 30, 2002 REVENUE DIFFERENCE DIFFERENCE
- ---------------------------- ------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Transaction ................ $ 58,880 65.9% $ 66,981 65.1% $ (8,101) (12.1)%
Software licensing ......... 7,474 8.4 8,555 8.3 (1,081) (12.6)
Consulting and services .... 20,900 23.4 25,303 24.6 (4,403) (17.4)
Hardware ................... 2,034 2.3 2,002 2.0 32 1.6
------------- ------------- ------------- ------------- ------------- -------------
Total .................... $ 89,288 100.0% $ 102,841 100.0% $ (13,553) (13.2)%
============= ============= ============= ============= ============= =============
The decrease in transaction revenues of $8.1 million was due to slower
subscriber growth experienced by the Company's clients, resulting in a reduction
in transaction volume, and to clients selecting fewer transaction products and
services. The Company's transaction revenues also declined as a result of
reduced call volume and a change in the mix of services provided by
Lightbridge's TeleServices call centers.
The decrease in software licensing revenues of $1.1 million was due to
the continued capital spending slowdown in the telecommunications industry.
Lower capital spending by carriers affected sales of all Lightbridge software
products.
The decrease in consulting and services revenues of $4.4 million for
the nine months ended September 30, 2003 was principally due to the decline in
software sales and the related integration, deployment, optimization and
maintenance services provided in conjunction with software sales as well as a
reduction in consulting activities.
Hardware revenues were flat for the nine months ended September 30,
2003. The Company does not expect hardware revenues to be a significant
component of revenue in 2003 or thereafter.
COST OF REVENUES. Cost of revenues and certain cost of revenues
comparisons for the nine months ended September 30, 2003 and 2002 were as
follows:
NINE MONTHS % OF NINE MONTHS % OF
ENDED TOTAL ENDED TOTAL $ %
COST OF REVENUES SEP. 30, 2003 REVENUE SEP. 30, 2002 REVENUE DIFFERENCE DIFFERENCE
- ---------------------------- ------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Transaction ................ $ 33,475 37.5% $ 38,105 37.1% $ (4,630) (12.2)%
Software licensing ......... 1,136 1.3 1,042 1.0 94 9.0
Consulting and services .... 9,288 10.4 10,848 10.5 (1,560) (14.4)
Hardware ................... 1,693 1.9 1,528 1.5 165 10.8
------------- ------------- ------------- ------------- ------------- -------------
Total .................... $ 45,592 51.1% $ 51,523 50.1% $ (5,931) (11.5)%
============= ============= ============= ============= ============= =============
Transaction cost of revenues decreased in the nine months ended
September 30, 2003 from the nine months ended September 30, 2002, and was
relatively flat as a percentage of total transaction revenues. The decrease was
principally due to lower transaction revenues as a result of a lower volume of
transactions processed through Lightbridge's TeleServices call centers and by a
shift in the mix of services provided to clients. The decrease in costs was also
attributable to the Company's staff reductions as a result of the closing of the
Waltham, Massachusetts call center in September 2002, and cost savings
associated with the March 2003 restructuring.
16
Software licensing cost of revenues increased slightly in the nine
months ended September 30, 2003 from the nine months ended September 30, 2002,
and increased as a percentage of total software licensing revenues to 15.2% from
12.2%. The increase was attributable to the type of software products licensed
during the nine months ended September 30, 2003.
Consulting and services cost of revenues decreased in the nine months
ended September 30, 2003, and increased as a percentage of total consulting and
services revenues to 44.3% from 42.9% in the nine months ended September 30,
2002. The decrease in consulting and services cost of revenue was attributable
to a decrease in consulting projects and revenue as well as a reduction in
headcount associated with the June 2002 restructuring.
Hardware cost of revenues increased and also increased as a percentage
of total hardware revenue to 83.2% in the nine months ended September 30, 2003
from 76.3% in the nine months ended June 30, 2002. This increase was
attributable to the increase in hardware revenues.
OPERATING EXPENSES. Operating expenses and certain operating expense
comparisons for the nine months ended September 30, 2003 and 2002 were as
follows:
NINE NINE
MONTHS % OF MONTHS % OF
ENDED TOTAL ENDED TOTAL $ %
SEP. 30, 2003 REVENUE SEP. 30, 2002 REVENUE DIFFERENCE DIFFERENCE
------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Development .................. $ 21,430 24.0% $ 22,278 21.7% $ (848) (3.8)%
Sales and marketing .......... 10,921 12.2 10,161 9.9 760 7.5
General and administrative ... 10,510 11.8 13,621 13.2 (3,111) (22.8)
Purchased in-process R&D ..... -- -- 1,618 1.6 (1,618) (100.0)
Restructuring costs .......... 4,987 5.6 3,616 3.5 1,371 37.9
------------- ------------- ------------- ------------- ------------- -------------
Total ...................... $ 47,848 53.6% $ 51,294 49.9% $ (3,446) (6.7)%
============= ============= ============= ============= ============= =============
DEVELOPMENT. The decrease in development expenses for the nine months
ended September 30, 2003 was primarily due to cost savings associated with the
June 2002 and 2003 restructurings. These cost savings were partially offset by
the addition to and supplementing of engineering personnel in order to support
Lightbridge's product and services development plans. Development expenses as a
percentage of total revenues increased for the nine months ended September 30,
2003 as a result of lower revenue levels.
SALES AND MARKETING. The increase in sales and marketing expenses for
the nine months ended September 30, 2003 was primarily due to the expansion of
the Company's business development organization and costs associated with the
Company's strategic partnerships and key initiatives. These costs were partially
offset by the cost savings associated with the June 2002 and June 2003
restructurings.
GENERAL AND ADMINISTRATIVE. The decrease in general and administrative
costs for the nine months ended September 30, 2003 was primarily due to a
decrease in headcount associated with the June 2002 and June 2003 restructurings
and the Company's efforts to limit spending.
IN-PROCESS RESEARCH AND DEVELOPMENT ("IPR&D"). In connection with the
Altawave acquisition, the Company recorded a $1.6 million charge during the
first quarter of 2002 for several IPR&D projects. The technology acquired from
Altawave includes solutions that offer wireless carriers and enterprises a
service platform for the development and management of data content and
applications. The complexity of the technology lies in its comprehensive, secure
and scalable characteristics. The research projects in process at the date of
acquisition related to the development of the Lightbridge Mobile Data Manager
("MDM") suite of products consisting of MDM Server, MDM Administration, MDM
Altalinks and MDM Provisioner, as well as the Consumer Group Applications
("CGA"). Development of the technology was started in 2000.
The value of the projects was determined by an independent appraiser
using the income approach. The discounted cash flow method was utilized to
estimate the present value of the expected income that could be generated
through revenues from the projects over their estimated useful lives through
2009. The percentage of completion for the projects was determined based on the
amount of research and development expenses incurred through the date of
acquisition as a percentage of estimated total research and development expenses
to bring the projects to technological feasibility. At the acquisition date, the
Company estimated that the MDM suite and CGA were approximately 70% and 32%
complete, respectively, with fair values of approximately $1.0 million and $0.6
million, respectively. The discount rate used for the fair value calculation was
37% for the MDM suite and 40% for CGA. At the date of acquisition, development
of the technology involved risks to the Company including the remaining
development effort required to
17
achieve technological feasibility and uncertainty with respect to the market for
the technology. Lightbridge completed the development of the MDM suite in the
quarter ended September 30, 2002 and the CGA project in the quarter ended
September 30, 2003 having spent approximately $150,000 and $300,000,
respectively, on the projects after the acquisition.
OTHER INCOME, NET. Other income, net consisted predominantly of
interest income and decreased to $1.4 million in the nine months ended September
30, 2003 from $1.8 million in the nine months ended September 30, 2002. This
decrease was primarily due to a decline in interest rates.
BENEFIT FROM INCOME TAXES. Lightbridge's annual estimated effective tax
rate was 20.0% (excluding the benefit from the recognition of prior years' tax
credits) for the nine months ended September 30, 2003 compared to 30.0% for the
nine months ended September 30, 2002. The income tax provision for the nine
months ended September 30, 2003 reflects a net benefit of $0.9 million which
consists of an income tax benefit at an annual effective tax rate of 20.0%, as
well as a $0.3 million tax benefit related to the recognition of prior year
research and development tax credits.
The income tax provision for the nine months ended September 30, 2002
reflects a net benefit of $0.6 million which consists of an income tax provision
at an annual effective tax rate of 30%, and a $1.0 million tax benefit related
to the reduction of the valuation allowance on acquired net operating loss
carryforwards, as it was determined that it was more likely than not that such
net operating losses would be utilized.
RESTRUCTURINGS
In June 2002, the Company announced it would be reducing its workforce
by seven percent and consolidating its Waltham, Massachusetts call center
operations into its Lynn, Massachusetts and Broomfield, Colorado facilities by
the end of 2002. The Company recorded a restructuring charge of approximately
$3.6 million, consisting of $1.6 million for workforce reductions, $1.3 million
for facilities reductions including lease obligations, utilities and security
costs on unused space and $0.7 million for capital equipment write-offs
associated with these measures. The restructuring plan resulted in the
termination of 65 personnel as follows: 25 in product and service delivery, 22
in development, 11 in sales and marketing and seven in general and
administrative. The capital equipment write-offs and the majority of severance
costs related to this restructuring were incurred in 2002. In the quarter ended
September 30, 2003, the Company reduced its estimate of sublease income from
unused space and consequently recorded a restructuring charge of approximately
$0.2 million. The Company anticipates that the majority of the remaining costs
relating to this restructuring, consisting principally of lease obligations on
unused space, will be paid by the end of 2004.
The following summarizes the changes to the June 2002 restructuring
reserves for the nine months ended September 30, 2003:
BALANCE AT (REVERSED) BALANCE AT
DEC. 31, 2002 ACCRUED UTILIZED SEP. 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS)
Employee severance and termination benefits ... $ 343 $ (158) $ 185 $ --
Facility closing and related costs ............ 992 199 485 706
------------- ------------- ------------- -------------
$ 1,335 $ 41 $ 670 $ 706
============= ============= ============= =============
In March 2003, the Company announced it would be streamlining its
existing Broomfield, Colorado call center operations into its Lynn,
Massachusetts facility and a neighboring Lightbridge facility in Broomfield,
Colorado by the end of May 2003. In the quarter ended March 31, 2003, the
Company recorded a restructuring charge of approximately $0.1 million for
workforce reductions. In the quarter ended June 30, 2003, the Company recorded
an additional restructuring charge associated with this action of approximately
$1.0 million, consisting of approximately $0.6 million in future lease
obligations for unused facilities and approximately $0.4 million for capital
equipment write-offs.
The following summarizes the changes to the March 2003 restructuring
reserves for the nine months ended September 30, 2003:
BALANCE AT BALANCE AT
DEC. 31, 2002 ACCRUED UTILIZED SEP. 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS)
Employee severance and termination benefits ...... $ -- $ 77 $ 77 $ --
Facility closing and related costs ............... -- 545 87 458
Capital equipment write-offs ..................... -- 378 378 --
------------- ------------- ------------- -------------
$ -- $ 1,000 $ 542 $ 458
============= ============= ============= =============
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In June 2003, the Company announced it would be closing its Irvine,
California facility and transferring certain employment positions to its
Broomfield, Colorado facility and reducing its headcount by an estimated 70
employees as follows: 16 in product and service delivery, 30 in development, 13
in sales and marketing and 11 in general and administrative. In the quarter
ended June 30, 2003, the Company recorded a restructuring charge of
approximately $0.7 million, consisting mainly of workforce reduction costs. In
the quarter ended September 30, 2003, the Company recorded an additional
restructuring charge associated with this action of approximately $3.3 million,
consisting of $1.1 million for workforce reductions, $1.7 million in future
lease obligations for unused facilities and $0.5 million for capital equipment
write-offs. The Company expects to record an additional restructuring charge of
approximately $0.1 million related to future lease obligations in the quarter
ended December 31, 2003.
The following summarizes the changes to the June 2003 restructuring
reserves for the nine months ended September 30, 2003:
BALANCE AT BALANCE AT
DEC. 31, 2002 ACCRUED UTILIZED SEP. 30, 2003
------------- ------------- ------------- -------------
(IN THOUSANDS)
Employee severance and termination benefits ...... $ -- $ 1,740 $ 1,201 $ 539
Facility closing and related costs ............... -- 1,709 152 1,557
Capital equipment write-offs ..................... -- 497 497 --
------------- ------------- ------------- -------------
$ -- $ 3,946 $ 1,850 $ 2,096
============= ============= ============= =============
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, Lightbridge had cash and cash equivalents and
short-term investments of $131.1 million. Lightbridge's working capital
increased slightly to $137.7 million at September 30, 2003 from $136.5 million
at December 31, 2002. The Company believes that its current cash balances will
be sufficient to finance the Company's operations and capital expenditures for
the next twelve months. Thereafter, the adequacy of the Company's cash balances
will depend on a number of factors that are not readily foreseeable such as the
impact of general market conditions on the Company's operations, cash
requirements associated with acquisitions and investments, and the sustained
profitability of the Company's operations.
During the first nine months of 2003, the Company generated cash flows
from operating activities of $3.4 million and used $18.8 million and $2.9
million in investing and financing activities, respectively.
The Company's capital expenditures totaled $2.9 million for the nine
months ended September 30, 2003. The capital expenditures during this period
were principally associated with the Company's service delivery infrastructure
and computer equipment for software development activities. The Company leases
its facilities and certain equipment under non-cancelable operating lease
agreements that expire at various dates through January 2008.
During the nine months ended September 30, 2003, the Company used $4.0
million for the repurchase of common stock under its stock repurchase program.
At September 30, 2003, the Company had an outstanding letter of credit
in the amount of $1.0 million expiring in May 2004.
The Company entered into a foreign exchange agreement effective April
2003 with a bank for the purchase of one currency in exchange for the sale of
another currency. This agreement is secured by $3.0 million held by the bank. To
date, there have been no transactions under this agreement.
INFLATION
Although certain of Lightbridge's expenses increase with general
inflation in the economy, inflation has not had a material impact on
Lightbridge's financial results to date.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. SFAS 146 nullifies EITF No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity," which required a liability be recognized at the commitment date to an
exit plan. The Company adopted the provisions of SFAS 146 effective for exit or
disposal activities initiated after December 31, 2002. All restructuring
activities prior to December 31, 2002, including the June 2002 restructuring
described in Note 5 to the financial statements included in this report, are
accounted for under EITF No. 94-3.
The March 2003 restructuring described in Note 5 is accounted for under
SFAS 146, the impact of which was that the Company recorded approximately $1.0
million for the facility reduction and capital equipment charge in the second
quarter of 2003 rather than the first quarter of 2003 due to the cease-use date
being in the second quarter. In addition, the June 2003 restructuring described
in Note 5 is accounted for under SFAS 146, the impact of which was that the
Company recorded approximately $2.2 million for facility reductions and capital
equipment charges in the third quarter of 2003 rather than the second quarter of
2003 due to the cease-use date being in the third quarter.
In December 2002, the FASB issued SFAS No. 148 ("SFAS 148"),
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123 ("SFAS 123"). SFAS 148 amends SFAS 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The interim disclosure requirements of SFAS 148
have been implemented in Note 2 to the financial statements included in this
report.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of
FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No.
34." FIN 45 requires that a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken by
issuing the guarantee and requires additional disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under certain guarantees it has issued. The adoption of FIN 45 did not have a
material effect on the Company's financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES.
The market risk exposure inherent in Lightbridge's financial
instruments and consolidated financial position represents the potential losses
arising from adverse changes in interest rates. Lightbridge is exposed to such
interest rate risk primarily in its significant investment in cash and cash
equivalents. Cash and cash equivalents include short-term, highly liquid
instruments, which consist primarily of money market accounts, purchased with
remaining maturities of three months or less. The Company's short-term
investments consist of debt securities maturing in one year or less and are
classified as available for sale. These investments are carried at fair value.
The Company does not execute transactions in or hold derivative financial
instruments for trading or hedging purposes.
The carrying value of available-for-sale debt securities is adjusted
for amortization of premiums and accretion of discounts to maturity. Realized
gains and losses, and declines in value judged to be other than temporary on
available-for-sale debt securities, if any, are included in interest income,
net. The cost of securities sold is based on the specific identification method.
Interest and dividends on securities are included in interest income, net.
Market risk for cash and cash equivalents and fixed-rate borrowings is
estimated as the potential change in the fair value of the assets or obligations
resulting from a hypothetical ten percent adverse change in interest rates. This
change, had it occurred, would not have been significant to Lightbridge's
financial position or results of operations during the quarter ended September
30, 2003.
The Company is not subject to any material market risk associated with
foreign currency exchange rates.
For additional information about Lightbridge's financial instruments
and debt obligations, see Notes to Consolidated Financial Statements in
Lightbridge's Annual Report on Form 10-K for the year ended December 31, 2002.
20
ITEM 4. CONTROLS AND PROCEDURES.
The Company evaluated the effectiveness of the design and operation of
its disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2003.
The Company's Chief Executive Officer and its Chief Financial Officer supervised
and participated in this evaluation. Based on this evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that, as of
September 30, 2003, the Company's disclosure controls and procedures were
effective to provide a reasonable level of assurance of reaching the Company's
disclosure control objectives.
There has not been any change in the Company's internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934) that occurred in the quarter ended September
30, 2003 that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
NO. DESCRIPTION
- ---- -----------------------------------------------------------------------
10.1 Separation agreement and release between Christine Cournoyer and the
Company dated July 8, 2003
31.1 Certification of Pamela D.A. Reeve dated November 14, 2003
31.2 Certification of Harlan Plumley dated November 14, 2003
32.1 Certification of Pamela D.A. Reeve and Harlan Plumley dated November
14, 2003 (furnished but not filed with the Securities and Exchange
Commission)
99.1 Information set forth under the heading "ITEM 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors" in the Annual Report on Form 10-K of the
Company for the year ended December 31, 2002 is incorporated herein by
reference
(b) REPORTS ON FORM 8-K
On July 23, 2003, the Company furnished a Current Report on Form 8-K to
report, under Item 9, Regulation FD Disclosure Provided Under Item 12, the
release of its results of operations for the quarter ended June 30, 2003. The
Report also included, under Item 7, Financial Statements, Pro Forma Financial
Information and Exhibits, a copy of the Press Release regarding the Company's
second quarter 2003 financial results.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIGHTBRIDGE, INC.
Date: November 14, 2003 By: /s/ Harlan Plumley
--------------------------------------------
Harlan Plumley
Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
(Principal Financial and Chief Accounting
Officer)
22