Lightbridge, Inc. Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
|
|
(Mark One)
|
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934. |
|
|
|
For the fiscal year ended December 31, 2004 |
|
OR |
|
o
|
|
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 Incorporation or
Organization) |
|
(I.R.S. Employer Identification No.) |
|
30 Corporate Drive
Burlington, Massachusetts
(Address of Principal Executive Offices) |
|
01803
(Zip Code) |
(781) 359-4000
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
common stock, $.01 par value per share
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
The aggregate market value of the voting common stock held by
nonaffiliates of the registrant as of June 30, 2004 was
$146,254,634 based on a total of 26,116,899 shares held by
nonaffiliates and on a closing price of $5.60 as reported on The
Nasdaq Stock Market (National Market System).
The number of shares of common stock outstanding as of
March 11, 2005 was 26,585,455.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement
pursuant to Regulation 14A with regard to its 2005 annual
meeting of stockholders or special meeting in lieu thereof on or
before April 30, 2005. Certain portions of such proxy
statement are incorporated by reference in Part III of this
Form 10-K.
TABLE OF CONTENTS
THIS ANNUAL REPORT ON FORM 10-K 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
BELOW IN ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK FACTORS, THAT MAY CAUSE THE ACTUAL RESULTS,
PERFORMANCE AND ACHIEVEMENTS OF LIGHTBRIDGE, INC. TO DIFFER
MATERIALLY FROM THOSE INDICATED BY THE FORWARD-LOOKING
STATEMENTS. LIGHTBRIDGE, INC. UNDERTAKES NO OBLIGATION TO UPDATE
ANY FORWARD-LOOKING STATEMENTS IT MAKES.
2
PART I
Lightbridge, Inc. (Lightbridge or the
Company) develops, markets and supports products and
services primarily for businesses that sell products or services
online and for communications providers.
Lightbridges four areas of business consist of Payment
Processing Services (Payment Processing), Telecom
Decisioning Services (TDS), Intelligent Network
Services (INS), and Instant Conferencing Services
(Instant Conferencing). The Payment Processing
business consists of a set of Internet Protocol (IP)
based payment processing gateway services that enable online and
other merchants to authorize, settle, manage risk, and manage
credit card or electronic check transactions via a variety of
interfaces. The TDS business consists of Lightbridges
customer qualification and acquisition, risk management and
authentication services, delivered primarily on an outsourced or
service bureau basis, together with the Companys
TeleServices offerings. Lightbridges TDS solutions provide
multiple, remote, systems access for workflow management, along
with centrally managed client-specified business policies, and
links to client and third-party systems. The Companys INS
business offers a license-based software product, bundled with
third-party hardware, enabling prepaid rating and charging for
voice, messaging, and data, as well as postpaid charging
functionality and calling card services for wireless
telecommunications carriers. The Companys Instant
Conferencing Services allow users to create and join
reservationless audio conferences instantly across multiple
carrier and service provider networks. Lightbridge also provides
consulting and maintenance services sold primarily in
conjunction with the TDS and INS solutions.
The Companys IP-based Payment Processing solution offers
products and services to merchants in both the Card Not Present
(CNP) (e-commerce and mail order/telephone order or
MOTO) and Card Present (CP) (retail
point-of-sale (POS) and mobile devices) segments of
the U.S. credit card transaction processing market. In
addition, the Payment Processing services include an electronic
check payment processing solution for CNP merchants. The Payment
Processing solution provides secure transmission of transaction
data over the Internet and manages submission of this payment
information to the credit card and Automated Clearing House
(ACH) processing networks. The Company provides its
Payment Processing solutions primarily through a network of
outside sales partners, Independent Sales Organizations
(ISOs), and merchant bank partners.
The Lightbridge TDS solution offers online, real-time
transaction processing and call center services to aid
communications clients in qualifying and activating applicants
for service, as well as software-based point-of-sale support
services for a variety of distribution channels, including
dealers and agents, mass market retail stores, and Internet
commerce. The TDS business unit also offers services designed to
authenticate users engaged in online transactions. Additionally,
Lightbridge TDS develops and implements interfaces that
integrate its systems with client and third-party systems, such
as those for billing, point-of-sale, activation and order
fulfillment. Lightbridge TDS also maintains and has access to
databases used to screen applicants and online users for fraud,
and maintains a global telecommunications consulting practice
that provides clients with solution development and deployment
services, and business advisory consulting. The Companys
TDS solutions are provided on a direct sales basis.
The Lightbridge INS solution offers to wireless
telecommunications carriers a prepaid billing system that is
designed to integrate with Intelligent Network standards and
offer the capability for subscribers to replenish their prepaid
accounts. The INS software enables prepaid rating and charging
for voice, messaging, and data, as well as postpaid charging
functionality and calling card services for wireless
telecommunications carriers. The Companys INS solutions
are provided mainly through indirect sales channels.
Lightbridges Instant Conferencing Service provides users
access to instant, reservationless teleconferencing over a
variety of wireless or wireline carriers. Its dynamic
configuration allows users to define specific call groups and
manage these groups and their accounts through a web-based
interface. Calls can be initiated from telephones, web browsers,
instant messaging sessions, or desktop applications. The
Companys Instant Conferencing Service is provided on a
direct sales basis.
3
In January 2004, the Company announced a reorganization of its
internal business operations, resulting in the termination of
ten individuals in the Companys corporate office in
Burlington, Massachusetts. In September 2004, the Company
announced a restructuring of its business in order to lower
overall expenses to better align them with future revenue
expectations. This action resulted in the termination of 64
employees and 2 contractors in the Companys offices in
Burlington, Massachusetts and Broomfield, Colorado. In December
2004, the Company announced a restructuring of its business
following an announcement regarding lower expected revenue from
the Companys client AT&T Wireless Services, Inc. as a
result of its acquisition by Cingular Wireless LLC. This action
resulted in the termination of 38 employees and one contractor
in the Companys corporate office in Burlington,
Massachusetts. In January 2005, the Company announced the
closing of its Broomfield, Colorado call center, resulting in
the termination of 44 employees in the Companys Broomfield
office. The Broomfield, Colorado call center facility had been
supporting the Companys TDS operating segment. The work
performed at the facility was transitioned to other Lightbridge
call center facilities. In conjunction with the closure, the
Company expects to record a restructuring charge of
approximately $0.9 million in the first quarter of 2005,
primarily relating to facility closing costs and employee
severance and termination benefits.
On March 31, 2004, the Company acquired all of the
outstanding stock of Authorize.Net Corporation
(Authorize.Net) for $81.6 million in cash from
InfoSpace, Inc. In addition, the Company incurred approximately
$2.0 million in acquisition related costs. The total
purchase price for the acquisition was $83.6 million.
Authorize.Net provides the solutions that make up the
Companys Payment Processing Services business.
On October 1, 2004, the Company sold the assets of its
Fraud Centurion® product suite to Subex Systems Limited
(Subex) for $2.4 million in cash. The Fraud
Centurion® product is a suite of network monitoring
software tools designed to detect fraudulent activity on
wireless networks. Network monitoring tools no longer support
Lightbridges strategy for its fraud product lines, which
is focused on continued development of the Companys
customer screening, risk, and value management solutions.
Subsequent to December 31, 2004 the Company determined that
the Fremont, California facility, where its Instant Conferencing
business is located, would be closed during the first quarter of
2005. In connection with the closure, the Company expects to
record a restructuring charge in the first quarter of 2005 of
approximately $0.3 million, primarily relating to employee
severance and termination benefits. Lightbridge expects to
continue to provide the services for GroupTalk, its Instant
Conferencing product, under its agreement with America Online,
Inc.
Lightbridge was incorporated in Delaware in June 1989 under the
name Credit Technologies, Inc. and in November 1994 changed its
name to Lightbridge, Inc. Lightbridge sells and markets its
products and services throughout the world both directly and
through its wholly owned subsidiaries. Unless the context
requires otherwise, references in this Annual Report on
Form 10-K to Lightbridge, the
Company, we, us and similar
terms refer to Lightbridge, Inc. and its subsidiaries.
ALIAS, AUTHORIZE.NET, the Authorize.Net logo, ECHECK.NET,
FRAUDBUSTER, FRAUD CENTURION, FRAUDSCREEN.NET, FRAUD SENTINEL,
LIGHTBRIDGE, PHONEPRINT and PROFILE are registered trademarks of
Lightbridge, and @RISK, AUTOMATED RECURRING BILLING, CAS,
CUSTOMER ACQUISITION SYSTEM, FDS, GROUPTALK, INSIGHT,
LIGHTBRIDGE FRAUDBRIDGE, LIGHTBRIDGE IDENTITYBRIDGE, LIGHTBRIDGE
CREDITBRIDGE, PREPAY IN, LIGHTBRIDGE TELESERVICES, POPS, PREPAY,
RETAIL MANAGEMENT SYSTEM, RMS, the Lightbridge logo, and
TALKGROUP are trademarks of Lightbridge. All other trademarks or
trade names appearing in this annual Report on Form 10-K
are the property of their respective owners.
4
Business Segment Data
As a result of the Companys corporate reorganization
efforts during 2004, the Company has changed its previously
reported operating segments effective in the fourth quarter of
2004. Based upon the way the Companys chief operating
decision maker, its Chief Executive Officer, monitors
operations, the Company operates in four distinct segments:
Payment Processing, TDS, INS, and Instant Conferencing. Within
these four segments, performance is measured based on revenues
and gross profit realized from each segment. Information about
revenues, cost of revenues, and gross profit of each segment is
presented in Note 3 to the financial statements and
discussed below in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations. There are no transactions between segments.
In addition, information concerning the four segments in which
Lightbridge operates, and export sales is set forth in
Note 3 of Notes to Consolidated Financial
Statements.
Products and Services
Payment Processing Services
Lightbridges Payment Processing solutions, provided on an
ASP basis, allow IP-enabled merchants to connect with large
credit card processors and banking organizations, thereby
enabling those businesses to accept electronic payments.
Lightbridge offers its Payment Processing products and services
through its wholly owned subsidiary Authorize.Net Corporation in
two broad solutions groups, Core Solutions and Additional
Services:
|
|
|
Solutions Groups |
|
Functions |
|
Core Solutions |
|
The payment gateway allows IP-enabled merchants to accept credit
card payments via web sites and mobile devices or from retail
storefronts and MOTO merchants. |
|
|
|
The Virtual Terminal and Batch Upload allow merchants to
authorize, process, and manage credit card transactions manually
from any computer that has an Internet connection and a web
browser. |
|
|
|
The Merchant Interface is a secure web site that allows
merchants to view and manage transactions and other details of
their accounts, including activity reports and authorizations
for purchases, credits and returns. |
|
|
|
The Advanced Integration Method (AIM) is a
merchant-initiated server-to-server connection for submitting
CNP transactions to the payment gateway. |
|
|
|
The Simple Integration Method (SIM) provides a
solution for CNP merchants with basic customization needs where
the payment gateway handles all steps in the secure transaction
process. |
|
|
|
Although in most cases, CP retail and mobile merchants simply
purchase a ready-to-install POS solution or device that is
integrated in the payment gateway, those that wish to integrate
to the payment gateway directly can use a CP application
programming interface (API). |
|
|
|
Daily transaction settlement and two-to-three day transaction
funding time. |
5
|
|
|
Additional Services |
|
eCheck.Net® allows CNP merchants to authorize and process
electronic check transactions directly from a web site or
through the Virtual Terminal. |
|
|
|
Fraud Detection Suite
(FDStm)
allows web merchants to identify, manage, and reduce fraudulent
transactions with a customizable, rules-based solution. |
|
|
|
Automated Recurring
Billingtm
(ARB) provides a system for CNP merchants to
automatically handle regularly recurring billings or
subscriptions according to a specific billing interval and
duration. |
|
|
|
Cardholder Authentication Programs implement, for the benefit of
merchants that sell products or services online, the Verified by
Visa® and MasterCard®
SecureCodetm
programs for reducing liabilities and expenses of merchants
arising from unauthorized use of credit cards. |
|
|
|
FraudScreen.Net®, provided under agreement with Fair Isaac
Corporation, provides CNP merchants with strategies and customer
service tools to help protect themselves from fraudulent
transactions using neural net technologies. The Company no
longer actively markets this product. |
|
|
|
SalesBoost.Net, provided under agreement with eBoz, Inc., is an
integrated suite of fifty web promotion tools designed to boost
CNP merchants sales by attracting shoppers to their web
sites. |
|
|
|
Payment Gateway Solutions |
The Payment Processing segments core product is the
payment gateway, which enables CNP and CP merchants to accept
credit card and electronic check (CNP only) payments via IP. The
Authorize.Net gateway is a hosted solution that integrates with
existing web sites and IP-enabled POS and mobile devices. It is
hardware and software independent, and is supported by over 200
web development and shopping cart systems.
A typical automatic transaction occurs in the following way:
When purchasing an item, whether online or at retail, the
customer provides credit card or bank account information. To
authorize credit card transactions, merchants must post an
electronic request, including the customers payment
information, to the Companys secure payment gateway
service. Transaction information is encrypted using 128-bit
Secure Socket Layer (SSL) technology. Regardless of
whether the information is submitted via a web site payment form
or swiped, the payment gateway captures the transaction data
and, using real time IP technology, directs the information
through the authorization network to the merchants credit
card payment processor or issuing bank using a secure,
proprietary connection or via the ACH network in the case of an
eCheck.Net transaction. After the credit card is authorized and
the transaction approved, the Company receives confirmation from
the processing network, communicates the approval to the
merchant, and stores the transaction. Transactions are
automatically settled each day and are typically funded within
two to three business days. eCheck.Net transactions may take up
to seven to ten days to be funded.
For submitting manual CNP transactions, the secure,
browser-based Virtual Terminal and Batch Upload features of the
Merchant Interface are accessible from any computer with an
Internet connection and a web browser, and may be used by MOTO
merchants.
Merchants can manage their payment gateway account through the
Merchant Interface, a password-protected web site that offers
the ability to monitor and review transactions, configure
account and transaction
6
settings, view account billing statements and report, and
manually submit transactions via the Virtual Terminal and Batch
Upload features.
The Payment Processing segment offers several methods for
connecting web sites and POS systems to the payment gateway. Web
merchants can choose the method that is right for them,
according to their customization requirements. Retail and mobile
merchants connect to the payment gateway via third-party
hardware and software solutions that are integrated to the
payment gateway.
|
|
|
|
|
AIM is a secure, merchant-initiated server-to-server connection
for submitting transactions to the payment gateway. AIM provides
merchants with control over each phase of the customers
online transaction experience, including the payment form and
receipt page. AIM employs industry standard secure data
encryption technology 128-bit SSL protocol.
Additional features include: transaction key authentication,
merchant control over all phases of the customers online
transaction experience, and configurable transaction response
that integrate with merchant enterprise applications. |
|
|
|
SIM is a solution for web merchants with basic customization
needs. The Authorize.Net payment gateway handles all the steps
in the secure transaction process payment data
collection, data submission and the response to the customer.
Additional features of SIM include: a payment gateway hosted
payment form employing 128-bit SSL data encryption, transaction
digital fingerprints to enhance security, and a customizable
payment gateway hosted payment form and/or receipt page. |
|
|
|
The Company has certified approximately 85 shopping cart
solutions providers that have integrated their e-commerce
shopping carts with the payment gateway. Certified shopping
carts are Internet companies that provide merchants with easy to
implement checkout page solutions or software that are already
integrated to the payment processing gateway. |
|
|
|
In most cases, for CP merchants, technical integration is
handled by the merchants POS system provider (hardware or
software). CP merchants interested in integrating directly to
the payment gateway can use a Card Present API. |
eCheck.Net® is a payment processing solution that
allows both online and MOTO merchants to accept and process
electronic check payments from consumer and corporate bank
accounts directly through their e-commerce web site or through
the Virtual Terminal. The eCheck.Net service transmits
transactions via 128-bit SSL technology, and automatically
submits transactions for settlement daily. Through the Merchant
Interface, merchants using eCheck.Net have access to tools
allowing them to look up returns and chargebacks, run batch
statistics on transactions, and receive notification of
settlement activity in sufficient detail to facilitate account
reconciliation.
Fraud Detection Suite
(FDStm)
is a customizable, rules-based solution that helps merchants
that sell products or services online to reduce, detect and
manage fraudulent transactions through a combination of multiple
fraud filters and tools, including the following:
|
|
|
|
|
Amount Filter allows merchants to set upper and lower
transaction amount limits |
|
|
|
Velocity Filter allows merchants to limit the total volume of
transactions received per hour, preventing high-volume attacks
common with fraudulent transactions |
|
|
|
Shipping-Billing Mismatch Filter identifies high-risk
potentially fraudulent transactions containing an address
mismatch |
|
|
|
Transaction IP Velocity Filter identifies excessive transactions
received from the same IP address, isolating suspicious activity
from a single source |
7
|
|
|
|
|
Suspicious Transaction Filter detects suspicious transactions
using proprietary identification criteria and transaction
behavior analysis |
|
|
|
Authorized AIM IP Address feature allows merchants connected via
the AIM feature to list server IP addresses that are authorized
to submit transactions |
|
|
|
IP Address Blocking feature, allows merchants to block
transactions from selected IP addresses |
Automated Recurring
Billingtm
(ARB) allows online and MOTO merchants to generate
recurring transactions based on a subscription model. To use the
ARB feature, a merchant creates a subscription consisting of a
customers payment information, billing amount, interval,
and duration. ARB then places the customer on an automatic
payment schedule based on the merchants instructions.
The Cardholder Authentication service, provided under
agreements with Visa and MasterCard, makes use of the Verified
by Visa® and MasterCard®
SecureCodetm
programs to allow CNP merchants that sell products or services
online to validate the identity of registered cardholders during
web-based transactions by requiring a personal identification
number (PIN) at checkout.
FraudScreen.Net® is a fraud screening service
provided under Agreement with Fair Isaac Corporation. The
Company no longer markets this product and does not expect
FraudScreen.Net revenues to be significant in the future.
SalesBoost.Net, provided under agreement with eBoz, Inc.,
is a suite of fifty Internet-based web site promotional and
marketing tools that consolidate applications into functional
categories for search engine submission, banner ad impressions,
newsletter mailing, email list management, web site monitoring,
and a compilation of comprehensive how-to guides.
SalesBoost.Net is designed to boost CNP merchants sales by
attracting shoppers to their web sites.
Payment Processing Services are priced on a per transaction
basis and prices vary with the mix of services a merchant
selects, the term of the contract and the volume of
transactions. Fees for additional services are charged on a
monthly basis, on a per-transaction basis, or may be volume
based. The Company also earns Payment Processing Services
revenue from initial set-up fees and monthly subscription fees.
TDS
Lightbridges TDS solutions help communications providers
and businesses that sell products or services online deploy
integrated, customized solutions in support of their operational
business processes. Lightbridge offers its TDS products and
services in five broad solutions groups:
|
|
|
Solutions Groups |
|
Functions |
|
Customer Qualification and Acquisition |
|
Online, real-time transactionprocessing services and callcenter
services to help carriersqualify applicants and activate service. |
|
|
|
Transaction processing services include applicant qualification
and service activation, as well as risk management. |
|
|
|
Transaction processing interfaces include interfaces that
support the processing of data at a variety of distribution
channels, including retail stores, call centers and Internet
applications, and voice recognition systems. |
|
TeleServices |
|
TeleServices include qualification and activation, analyst
reviews, telemarketing to existing and new subscribers, back-up
and disaster recovery for acquisition and activation services,
porting support and customer care. |
|
Authentication Services |
|
Services that provide screening and authentication of identity
data for users engaged in online transactions. |
8
|
|
|
Risk Management |
|
A suite of services that make online, real-time inquiries into
proprietary databases, industry databases and processing modules
to screen applicants for potential fraud. |
|
Consulting Services |
|
Solution Development and Deployment Services include
requirements planning, systems integration, custom software
development, project management, and training services. |
|
|
|
Business Advisory Consulting encompasses management consulting
services designed to leverage best practices in
telecommunications, online commerce and allied industries. |
|
|
|
Customer Qualification and Acquisition |
Lightbridge® Customer Acquisition
Systemtm(CAStm)
offers online, real-time transaction processing services for
applicant credit qualification and service activation.
Introduced in 1989 and enhanced over time, CAS enables a carrier
to close a sale at the time the customer is ready to purchase by
qualifying applicants, screening for indications of subscriber
fraud and activating service quickly. Although CAS typically
requires no human intervention beyond the initial data entry, it
can include analyst intervention in carrier-specified
situations. When intervention is required, CAS routes the
exception data to a queue in order to manage
workflow.
CAS accepts applicant information online from retail stores and
a variety of other carrier distribution points. Once CAS
receives the application, it can qualify the applicant for
service using both Lightbridge proprietary databases and
external sources, such as credit bureaus. CAS validates the
applicants identification and determines creditworthiness
based on client-specified business policies. If CAS identifies
an issue, it electronically routes the application to a
Lightbridge or carrier analyst for review and action. When the
analyst makes a decision, CAS notifies the point-of-sale agent.
If the applicant wants to activate service at that time, CAS
verifies the information necessary to establish the billing
account and activate service and then transmits it to the
carriers billing and activation systems. Throughout the
process, CAS routes the application and information to system
components and individuals in a secure, controlled environment.
CAS includes the following fully integrated modules:
|
|
|
|
|
InSighttm
is a database containing information about a carriers
current accounts, previous accounts, previous applicants and
preapproved applicants. InSight can decrease a carriers
costs for evaluating a prospective subscriber by using
carrier-controlled data points such as subscriber payment
histories rather than third-party data points, such as credit
bureau reports, or manual review processes. |
|
|
|
Small Business Exchange, a database of credit information
on small businesses provided under agreement with Equifax
Information Services LLC, screens businesses for credit risk. |
|
|
|
CAS interfaces deliver data from the point of sale
directly to CAS for decisioning. If manual intervention is
required, data is presented to the appropriate person. Once the
decision is made, CAS communicates it to the point-of-sale agent. |
|
|
|
Lightbridge®
POPStm
a browser-based point-of-sale application typically used in
carrier-owned or dealer store locations. POPS runs over the
Internet or an intranet and features a graphical user interface
(GUI) that allows even inexperienced sales staff to
qualify applicants quickly and activate service via a dial-up or
network connection to CAS. |
|
|
Lightbridge® Retail Management
Systemtm(RMStm)
a point-of-sale application that helps telecommunications
retailers manage the sale of telecommunications products more
efficiently. RMS handles credit screening, transaction and
payment processing, service activation, cash drawer management,
inventory and purchasing management and management reporting.
The Company no longer actively markets or sells this product and
does not expect RMS revenues to be significant in the future. |
9
|
|
|
Lightbridge® Speech Interface a
point-of-sale application used in carriers agents
stores or kiosks. Speech Interface converts voice information to
text to allow even inexperienced sales staff to qualify
applicants quickly via a connection to CAS. |
|
|
Credit Workstation a character-based
workstation that allows a carriers credit analyst to enter
information or to evaluate applications that require manual
review. |
|
|
Browser Interface allows a carriers
credit analyst to enter information or to evaluate applications
that require manual review via a Lightbridge-developed GUI. |
|
|
Activation Workstation allows the user to
review, correct and reprocess activation requests returned from
the billing system because of an error. |
|
|
Fulfillment Workstation allows the user to
fulfill orders for wireless handsets and accessories at a remote
or third-party fulfillment center. |
CAS service modules are priced on a per transaction, per
qualification or per activation basis, or, in the case of
application modules, on a licensed basis. Fees for CAS services
or applications may vary with the term of the contract, the
volume of transactions, the other products and services selected
and integrated with CAS services, the configurations selected,
the number of locations licensed or the degree of customization
required.
Lightbridge TeleServices encompasses a range of call
center solutions. TeleServices offerings include call center
solutions for credit decisions and activations, analyst reviews,
telemarketing to existing subscribers, back-up and disaster
recovery for acquisition and activation services, porting
support and customer care. TeleServices solutions can be
provided using CAS or a clients own customer acquisition
system. Lightbridges clients can integrate TeleServices
solutions into their existing sales and distribution strategies
to support special projects without the overhead of building and
maintaining call centers.
TeleServices solutions are priced on a per transaction or per
minute basis and prices may vary with the term of the contract,
the volume of transactions, the number of minutes and the other
products and services selected and integrated with the solutions.
Authentication services offer the ability to screen and
authenticate the identity data of users engaged in online
transactions. Lightbridge offers the following authentication
services on an Application Service Provider (ASP)
model:
|
|
|
|
|
Lightbridge®
IdentityBridgetm:
A service that allows clients to authenticate the identities of
users involved in online transactions. |
|
|
|
Lightbridge®
FraudBridgetm:
A service that allows clients to screen users involved in
online transactions for potential fraud. |
Authentication services are priced on a per transaction basis
and prices may vary with the term of the contract, the volume of
transactions and the other products and services selected.
Lightbridges risk management solutions are offered as an
ASP or hosted service. The ASP or hosted model supports
real-time, online access to the Companys proprietary
databases, client proprietary databases and third-party
databases in support of pre-activation applicant screening.
These solutions generally include the following:
|
|
|
|
|
AirWaves OneScore: A risk management score provided under
agreement with RiskWise, L.L.C. that is designed to identify the
most profitable customers, even among consumers whose financial
history is non-existent or too thin for traditional
risk assessment tools. |
10
|
|
|
|
|
Fraud Sentinel®: A suite of subscription fraud
management tools, offered separately or in combination. Fraud
Sentinel includes the following components: |
|
|
|
ProFile®, presently a proprietary, inter-carrier database
of fraud and bad debt information, identifies customers whose
previous accounts were written off or shut off by a
participating carrier and provides ongoing screening of existing
customers. The Company plans to expand the content of ProFile to
include information from other industries and to market and
offer database services to clients other than carriers. |
|
|
Fraud Detect, a multifaceted fraud detection tool provided under
agreement with Trans Union L.L.C., analyzes data such as an
applicants Social Security number, date of birth, address,
telephone number and drivers license information and
identifies any discrepancies. |
|
|
Fraud Detect Model, a fraud scoring tool developed jointly by
Lightbridge and Trans Union L.L.C., is a neural-net scoring
model that quantifies the probability that a subscriber will be
written off. |
|
|
Fraud ID-Tect, a multifaceted verification tool provided under
agreement with Trans Union L.L.C., verifies subscriber data,
identifies possible data entry errors, and alerts carriers to
potential subscription fraud. |
|
|
TotalID, an identity verification and application
analysis service, provided under agreement with Trans Union
L.L.C., checks for potential fraudulent information in an
application by comparing application data against multi-source
databases. |
|
|
@Risktm,
a database of suspect fraud information, identifies subscribers
whose information matches suspect fraud information gathered
from previous fraud investigations. |
|
|
InstantID, a multifaceted verification tool provided under
agreement with RiskWise, L.L.C., highlights verified information
and possible data entry errors, and alerts carriers to
conditions that are often associated with identity theft. |
|
|
FraudPoint, a fraud detection tool provided under agreement with
RiskWise, L.L.C., validates data provided by subscribers to help
prevent subscription fraud and identify data entry errors. |
|
|
FraudDefender, a fraud scoring tool provided under agreement
with RiskWise, L.L.C., rank-orders fraud risk based on a score
and helps manage review rates. |
|
|
Business FraudDefender, a fraud scoring tool provided under
agreement with RiskWise, L.L.C, rank-orders fraud risk based on
a score and helps manage review of business applications. |
|
|
Chargeback Defender, a fraud screening tool provided under
agreement with RiskWise, L.L.C., verifies information of
applicants to minimize chargebacks to online retailers. |
Risk management solutions are priced on a per inquiry basis and
prices may vary with the term of the contract and the volume of
transactions. Additional fees may also be charged for
consulting, implementation and support requirements of clients.
Lightbridge Consulting Services (LCS)
delivers full-service consulting for customer acquisition
and retention, statistical models, authentication, and risk
management. LCS leverages Lightbridges market expertise
and focus in telecommunications to help clients bring new
services to market quickly, acquire low-risk subscribers and
build customer loyalty. Clients can use LCS to supplement their
resources with both domain expertise and project-based
resources. The worldwide practice can support Lightbridge
clients worldwide.
11
LCS capitalizes on Lightbridges established expertise with
multiple carriers, across multiple geographic regions to provide
clients with two distinct types of service:
|
|
|
|
|
Solution Development and Deployment Services includes
systems installation, integration, custom software development,
project management and training services. |
|
|
|
Business Advisory Consulting includes management
consulting services in customer acquisition, distribution and
retention, and risk management. |
Consulting Services are priced on a time and materials basis in
a majority of cases or, in some circumstances, on a fixed fee
basis.
INS
Lightbridge®
PrePaytm
Software allows carriers to sell services to customers who
prefer to pay with cash or who do not qualify for credit and
would otherwise be required to provide substantial deposits.
Lightbridges Intelligent Network standards and
architecture allow carriers to use existing switches without
costly adjunct switches and voice trunk resources. The INS
software architecture is designed to scale as the number of INS
subscribers on a system grows. Because prepaid calls are
controlled by the carriers existing switch, there is no
impact on call setup times. Calls by prepaid subscribers are
rated in real time, and an integrated, interactive,
voice-response system automatically informs the subscriber when
account funds are low. If a subscriber depletes prepaid funds
during a call, the INS software automatically terminates the
call and suspends service until the subscriber deposits
additional funds. The subscriber can deposit additional funds
over the air by using a prepaid phone card or by depositing or
transferring cash at a replenishment center or web site
designated by the carrier.
PhonePrint® offers wireless telecommunications
carriers a cloning-fraud prevention system by using proprietary
radio frequency signal analysis to identify attempted fraudulent
calls and prevent cloners from gaining access to a
carriers analog network. The Company no longer actively
sells or markets this product and does not expect PhonePrint
revenues to be significant in the future.
Prepaid billing applications are priced on a licensed basis.
Additional fees may also be charged for subscriber growth,
annual maintenance, customization, consulting services,
implementation, training and other support requirements
requested by the client. Fees may vary with the term of the
contract and the number of licenses. Additional revenues are
derived from hardware sales associated with PrePay and
PhonePrint products.
Lightbridge® Instant Conferencing, provided
under the product name
GroupTalktm,
is an ASP hosted teleconferencing service that allows groups
of users to connect instantly via multiple wireless or wireline
carriers.
The GroupTalk product requires no reservations, PINs, or call-in
numbers, and is capable of being integrated into existing
workflow applications such as contact managers, CRM, and instant
messaging. The GroupTalk application provides a turnkey
solution, including ASP hosting, conference bridge services,
public switch telephone network (PSTN) or wireless
transport, and all back-end processing such as customer
activation, customer care, billing, payment, and operations.
GroupTalk was developed from the technology the company acquired
from Altawave, Inc.
Instant Conferencing services are priced on a per-unit,
volume-based basis. Additional fees may also be charged for
annual maintenance, customization, consulting services,
implementation, training and other support requirements
requested by the client. Fees may vary with the term of the
contract and with volume.
12
Clients
Revenues attributable to Lightbridges 10 largest clients
accounted for approximately 72%, 91%, and 90% of
Lightbridges total revenues in the years ended
December 31, 2004, 2003, and 2002, respectively. The
following Lightbridge clients accounted for more than 10% of
total revenues in the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended Dec. 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Sprint Spectrum L.P.
|
|
|
21 |
% |
|
|
28 |
% |
|
|
30 |
% |
AT&T Wireless Services, Inc.
|
|
|
16 |
|
|
|
21 |
|
|
|
21 |
|
Ericsson AB
|
|
|
* |
|
|
|
14 |
|
|
|
15 |
|
Nextel Finance Company
|
|
|
11 |
|
|
|
12 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
48 |
% |
|
|
75 |
% |
|
|
77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
* |
Less than 10% of total revenues for 2004 |
Payment Processing
The Company sells its Payment Processing Services primarily
through a network of outside sales partners, ISOs, and merchant
banking partners, mainly to merchants that sell products or
services online. Additionally, the Company maintains an inside
sales team for management of inbound merchant inquiries
regarding its Payment Processing Services. As of December 2004,
the Company had over 113,000 active merchants using its
Authorize.Net gateway product. Because of the size and diversity
of the Companys installed merchant base for its gateway
product, the Payment Processing segment does not have
significant customer concentration.
TDS
Lightbridge historically has provided its TDS products and
services to wireless carriers in the United States. The TDS
business unit also offers services designed to screen,
authenticate and approve users engaged in online transactions.
In November 2004, the Company announced revised guidance for the
fourth quarter of 2004, due to lower revenue expectations from
AT&T Wireless Services, Inc. (AT&T),
following the acquisition of AT&T by Cingular Wireless LLC.
As a result of that acquisition, the Company does not expect
significant revenues from AT&T in 2005. On December 15,
2004, Sprint Spectrum L.P. (Sprint) and Nextel
Operations, Inc. (Nextel) announced that their
respective Boards of Directors had approved a definitive
agreement for a merger of the two companies. Lightbridge is
unable to predict the effect of the merger of Nextel and Sprint
on its relationship with either customer including, without
limitation, the timing or extent of any reductions in
applications processed or other services provided under its
contracts with those customers. The loss of another one or more
of these major clients, a decrease in orders by one or more of
them or a change in the combination of products and services
they obtain from the Company would adversely affect
Lightbridges revenues, margins and net income.
Lightbridge has agreements with many of its clients that provide
for the purchase of various combinations of TDS products and
services including CAS, risk management and TeleServices over
periods of one to three years. Although some of these agreements
contain annual minimum payment requirements, such minimum
payments are typically substantially less than the amount of
revenue Lightbridge has historically received from the
particular client and therefore provide only limited assurance
of future sales. Lightbridges client agreements also often
permit changes in the combination of products and services
purchased by the client during the term of the agreement. Such
changes can affect the revenues, margins and net income that
Lightbridge achieves from quarter to quarter in its TDS business.
Lightbridge has agreements for its TDS services with AT&T,
Sprint and Nextel. The agreements with Nextel and Sprint were
renewed in 2003 and extended in each case through December 2006.
The agreement
13
with AT&T extends through March 2009, but the Company does
not expect to receive significant revenues from AT&T in 2005
because of AT&Ts acquisition by Cingular Wireless,
LLC, which is not a client of the Company.
Because Lightbridge derives almost all of its TDS revenues from
telecommunications carriers, the demand for Lightbridges
products and services is dependent, in major part, on the
overall market demand for the products and services provided by
telecommunications carriers. In particular, Lightbridges
TDS business is dependent on the rate of new subscriber growth
and the rate at which subscribers switch from one carrier to
another, known as the churn rate. Accordingly, if the growth
rate of the telecommunications industry continues to slow and
the churn rate does not increase, sales of Lightbridges
TDS products and services could continue to decline. TDS
revenues may also be affected by mergers or consolidations
involving telecommunications carriers, such as the planned
merger of Sprint and Nextel.
INS
The Company sells its INS system primarily through distribution
agreements with Ericsson AB (Ericsson) and Nortel
Networks, Inc. (Nortel) and through direct sales,
mainly to international wireless telecommunications carriers.
The agreement with Ericsson was amended in 2003 and continues in
effect until either party gives the other 180 days
notice of cancellation. The agreement with Nortel extends
through February 2006. A significant portion of the
Companys INS revenues in 2004 were generated from the
Ericsson and Nortel relationships. The loss of one or more of
these major distribution partners, a decrease in orders by one
or more of them or a change in the combination of products and
services they obtain from the Company would adversely affect
Lightbridges INS revenues, margins and net income.
Because Lightbridge derives all of its INS revenues from
telecommunications carriers, the demand for Lightbridges
INS products and services is dependent, in major part, on the
overall market demand for the prepaid products and services
provided by telecommunications carriers, and may be affected by
mergers or consolidations involving telecommunications carriers.
The Companys INS sales are also largely dependent on the
efforts of Ericsson and Nortel and its other indirect channel
partners to market and sell the INS products, over which the
Company has no control. To date, only a small number of wireless
telecommunications carriers, almost all of them outside the
U.S., have deployed the Companys INS products and
services, and the rate of adoption of the INS system will need
to increase significantly in order for Lightbridge to increase
future revenues from INS.
Instant Conferencing
The Company presently provides its
GroupTalktm
product pursuant to an agreement with America Online, Inc.
(AOL) to the users of AOLs instant messaging
service (AIM) under the branded name AIM Voice
Conferencing. The agreement contains certain restrictions on
selling the GroupTalk product to other instant messaging
providers. To date, the Company has not recorded any revenue
from its GroupTalk product and it does not expect to generate
significant revenue from the product in 2005.
Sales and Marketing
Payment Processing
The Companys sales strategy for the Payment Processing
segment is to continue to grow its business through a
differentiated model that primarily focuses on IP-enabled
merchants, utilizing its relationships with its outside sales
partners, ISOs, and merchant banking partners. The sales and
client services activities involved in the Payment Processing
segment are led by relationship teams. Lightbridge employs a
team approach to selling its Payment Processing Services in
order to develop a consultative relationship with existing and
prospective outside sales partners, merchant banking partners,
and ISOs. The Companys outside sales partner, ISO, and
banking partner relationships are not exclusive, and the Company
relies on differentiation, including its support and service, of
its Payment Processing products and services to motivate these
outside sales partners and others to
promote Lightbridges services over those of another
gateway service provider.
14
Service and technical support for Payment Processing products
are provided to merchants and outside sales partners through a
call center, an online help desk, and a dedicated team of
account managers that provide services to the Companys
outside sales partners. A high level of continuing service and
support is critical to the objective of differentiating the
Companys services from those of its competitors. The
Company provides a range of technical implementation and
sustaining support services in order to support this goal.
TDS
Lightbridges TDS sales strategy is to establish, maintain
and foster long-term relationships with its clients. TDS sales
and client services activities are led by relationship teams.
The TDS segment employs a team approach to selling in order to
develop a consultative relationship with existing and
prospective clients. In addition to relationship teams,
Lightbridges TDS sales approach includes direct sales
staff with expertise in particular solutions.
Implementation of Lightbridges TDS products and services
may involve significant investment by the carrier with delays
frequently associated with capital expenditures, and involve
multilevel testing, integration, implementation and support
requirements. Product managers, as well as other technical,
operational and consulting personnel, are frequently involved in
the business development and sales process. The teams conduct
needs assessments and, working with the client, develop a
customized solution.
The sales cycle for TDS services is typically six to eighteen
months, and is subject to a number of risks over which the
Company has little control, including the clients
budgetary and capital spending constraints, internal
decision-making processes, industry consolidation and general
industry, market and economic conditions.
Service and technical support for TDS services are provided
through direct field service and support personnel. A high level
of continuing service and support is critical to the objective
of developing long-term relationships with clients. Technical
assistance is also provided as part of the standard support and
service package that clients typically purchase for the length
of their respective agreements. On-site installations and
various training courses for clients are also offered.
INS
Lightbridges INS sales approach includes direct sales,
using staff with expertise in particular solutions and sales
through channel partners and alliances, particularly
internationally. Historically, the Companys INS solutions
have been sold principally through third parties such as
Ericsson and Nortel. The Companys INS sales strategy is to
establish, maintain and foster long-term relationships with its
clients and outside sales partners. Lightbridge employs a team
approach to selling in order to develop a consultative
relationship with existing and prospective clients.
Implementation of Lightbridges INS products and services
typically require significant investment by the carrier with
delays frequently associated with capital expenditures, and
involve multi-level testing, integration, implementation and
support requirements. Product managers, as well as other
technical, operational and consulting personnel, are frequently
involved in the business development and sales process. The
teams conduct needs assessments and, working with the client,
develop a customized solution.
The sales cycle for INS is typically nine to twenty-four months,
although the period may be substantially longer in some cases,
and is subject to a number of risks over which the Company has
little control, including the carriers budgetary and
capital spending constraints, internal decision-making
processes, and general industry, market and economic conditions.
Service and technical support for INS products are provided
through both direct field service and support personnel and
distributors. A high level of continuing service and support is
critical to the objective of developing long-term relationships
with clients. The Company provides technical assistance as part
of the standard support and maintenance package that clients
typically purchase for the length of their respective
agreements. Lightbridge also offers on-site installations and
various training courses for distributors and clients.
15
Instant Conferencing
The Company presently provides its Instant Conferencing Services
through an agreement with AOL under the branded name AIM Voice
Conferencing. The Company is no longer actively marketing or
selling this product.
Engineering, Research and Development
Lightbridge believes that its future success in all business
segments will depend in part on its ability to continue to
enhance, implement, and maintain its existing product and
service offerings including, without limitation TDS, INS and the
Payment Processing gateway, and to develop, implement and
maintain new products and services that allow clients to respond
to changing market requirements. Lightbridges research and
development activities consist of long-term efforts to develop,
enhance and maintain products and services and short-term
projects to make modifications to respond to immediate client
needs. In addition to internal research and development efforts,
Lightbridge intends to continue its strategy of gaining access
to new technology through strategic relationships and
acquisitions where appropriate. Lightbridge also intends to
utilize contracted development resources when desirable in order
to manage its development costs.
Competition
The market for the Companys Payment Processing Services is
characterized by a few large competitors and many smaller
competitors. The market is fragmented, and a number of companies
currently offer one or more payment gateway products or services
competitive with those offered by Lightbridge. In particular,
the Company faces competition from its Payment Processing
outside sales partners, which often resell multiple competing
gateway products in addition to the Authorize.Net products and
services. Some of the principal competitors are VeriSign, Inc.,
CyberSource Corporation, Plug & Pay Technologies, Inc.
and LinkPoint International, Inc.
The market for products and services to wireless and other
communications providers served by the Companys TDS, INS,
and Instant Conferencing businesses is highly competitive and
subject to rapid change. The market is fragmented, and a number
of companies currently offer one or more products or services
competitive with those offered by Lightbridge. In addition, many
telecommunications carriers are providing, or can provide
internally, products and services competitive with those
Lightbridge offers in these segments. Trends in the
telecommunications industry, including greater consolidation and
technological or other developments that make it simpler or more
cost-effective for carriers to provide certain services
themselves, could affect demand for Lightbridges TDS, INS,
and Instant Conferencing products or services. These
developments could make it more difficult for Lightbridge to
offer a cost-effective alternative to a telecommunications
carriers own capabilities.
Lightbridge believes that the principal competitive factors in
the communications provider and online industries include the
ability to identify and respond to client needs, timeliness,
quality and breadth of product and service offerings, price,
continuous availability of service, and technical expertise.
Lightbridge believes that its ability to compete in these
industries also depends in part on a number of factors outside
its control, including the ability to hire and retain employees,
the development of products and services by others that are
competitive with Lightbridges products and services, the
price at which others offer comparable products and services,
and the extent of its competitors responsiveness to client
needs.
Government Regulation
The Federal Communications Commission (FCC), under
the terms of the Communications Act of 1934, regulates
interstate communications and use of the radio spectrum.
Although Lightbridge is not required to and does not hold any
licenses or other authorizations issued by the FCC for its TDS
business segment, the domestic telecommunications carriers that
constitute Lightbridges TDS clients are regulated at both
the federal and state levels. Federal and state regulation may
decrease the growth of the telecommunications industry, affect
the development of the wireless markets, limit the number of
potential clients for Lightbridges TDS services, impede
Lightbridges ability to offer competitive services to the
telecommunica-
16
tions market, or otherwise have a material adverse effect on
Lightbridges TDS business, financial condition, results of
operations and cash flows. Changing laws and regulations have
caused, and are likely to continue to cause, significant changes
in the industry, including the entrance of new competitors,
consolidation of industry participants, the introduction of
bundled wireless and wireline services and the introduction of
wireless number portability (WNP) in November 2003.
Those changes could in turn subject Lightbridge to increased
pricing pressures, decrease the demand for Lightbridges
TDS products and services, increase Lightbridges cost of
doing business or otherwise have a material adverse effect on
Lightbridges TDS business, financial condition, results of
operations and cash flows. The telecommunications industry
outside the United States is also subject to government
regulation, which could have similar effects on
Lightbridges ability to increase or maintain its
penetration of international markets with its INS products and
services.
The Banking Secrecy Act, the USA Patriot Act of 2001, and the
Homeland Security Act contain anti-money laundering and
financial transparency law and mandate the implementation of
various new regulations applicable to financial services
companies, including obligations to monitor transactions and
report suspicious activities. The obligations under these acts
which may apply directly or could be applied to
Lightbridges financial services partners or to certain of
its merchant services, require the implementation and
maintenance of internal practices, procedures, and controls
which may increase the Companys costs and may subject the
Company to liability.
Businesses that handle consumers funds, such as the
Companys Payment Processing business, are subject to
numerous regulations, including those related to banking, credit
cards, escrow, fair credit reporting, privacy of financial
records and others. State money transmitter regulations and
federal anti-money laundering and money services business
regulations can also apply under some circumstances. The
application of many of these laws with regard to electronic
commerce is currently unclear. In addition, it is possible that
a number of laws and regulations may be applicable or may be
adopted in the future with respect to conducting business over
the Internet concerning matters such as taxes, pricing, content
and distribution.
Furthermore, the growth and development of the market for
e-commerce may prompt more stringent consumer protection laws
that may impose additional regulatory burdens on those
companies, such as Lightbridge, that provide services to online
business. The adoption of additional laws or regulations may
decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for the Companys
products and services and increase the Companys cost of
doing business.
Consumer protection laws in the areas of privacy, credit and
financial transactions have been evolving rapidly at the state,
federal and international levels. As the electronic
transmission, processing and storage of financial information
regarding consumers continues to grow and develop, it is likely
that more stringent consumer protection laws may impose
additional burdens on companies involved in such transactions.
Uncertainty and new laws and regulations, as well as the
application of existing laws to e-commerce, could limit the
Companys ability to operate in its markets, expose the
Company to compliance costs and substantial liability and result
in costly and time-consuming litigation.
The Federal Communications Commission (FCC) and
state public service commissions may require Lightbridge to
submit to traditional telecommunications carrier regulations for
its GroupTalk on-demand, voice conferencing service under the
Communications Act of 1934, as amended, and various state laws
or regulations as a provider of telecommunications services. If
the FCC or any state public service commission seeks to enforce
any of these laws or regulations against the Company,
Lightbridge could be prohibited from providing the voice aspect
of its voice conferencing service until it has obtained various
federal and state licenses and filed tariffs.
In addition, privacy legislation including the
Gramm-Leach-Bliley Act (GLBA) and regulations
thereunder affect the nature and extent of the products or
services the Company is able to provide to clients across all
segments as well as the Companys ability to collect,
monitor and disseminate information subject to privacy
protection. Consumer legislation such as the Fair Credit
Reporting Act (FCRA) and Equal Credit Opportunity
Act (ECOA) and state laws also affect the nature and
extent of the products or services the Company is able to
provide to clients.
17
The Securities and Exchange Commission (SEC) and the
National Association of Securities Dealers, Inc.
(NASD) have also enacted regulations affecting
corporate governance, securities disclosure or compliance
practices. The Company expects these regulations to increase its
compliance costs and to make some of its activities more
time-consuming.
Proprietary Rights
Lightbridges success across all segments is dependent upon
proprietary technology. Lightbridge has traditionally relied on
a combination of copyrights, patents, trade secrets and employee
and third-party non-disclosure agreements to establish and
protect its rights in its software products and proprietary
technology. Lightbridge protects the source code versions of its
products as trade secrets and as unpublished copyrighted works,
and has internal policies and systems designed to limit access
to and require the confidential treatment of its trade secrets.
Lightbridge software is provided either on an outsourced basis
or under license agreements that grant clients the right to use,
but contain various provisions intended to protect
Lightbridges ownership and confidentiality of the
underlying copyrights and technology. Lightbridge requires its
employees and other parties with access to its confidential
information to execute agreements prohibiting unauthorized use
or disclosure of Lightbridges technology. In addition, all
of Lightbridges employees are required as a condition of
employment to enter into confidentiality agreements with
Lightbridge. Lightbridge also relies on the law of trademarks to
establish and protect rights in its products, services and brand
names.
Lightbridge currently has several issued U.S. and foreign
patents and applications pending in the U.S. Patent and
Trademark Office and with certain foreign regulatory bodies.
There can be no assurance that any pending patent applications
will result in the issuance of any patents, or that
Lightbridges current patents or any future patents will
provide meaningful protection to Lightbridge.
There can be no assurance that the steps taken by Lightbridge to
protect its proprietary rights will be adequate to prevent
misappropriation of its technology or independent development by
others of similar technology. It may be possible for
unauthorized parties to copy certain portions of
Lightbridges products or reverse engineer or obtain and
use information that Lightbridge regards as proprietary.
Existing copyright and trade secret laws and patents issued to
Lightbridge offer only limited protection. In addition, the laws
of some foreign countries do not protect Lightbridges
proprietary rights to the same extent as do the laws of the
United States.
Lightbridges competitive position may be affected by
limitations on its ability to protect its proprietary
information. However, Lightbridge believes that patent,
trademark, copyright, trade secret and other legal protections
are less significant to Lightbridges success than other
factors, such as the knowledge, ability and experience of
Lightbridges personnel, new product and service
development, frequent product enhancements, customer service and
ongoing product support.
Certain technologies used in Lightbridges products and
services are licensed from third parties. Lightbridge generally
pays license fees on these technologies and believes that if the
license for any such third-party technology were terminated, it
would be able to develop such technology internally or license
equivalent technology from another vendor, although no assurance
can be given that such development or licensing could be
effected without significant delay or expense.
Although Lightbridge believes that its products and technology
do not infringe on any existing proprietary rights of others,
the Company expects to become a party to a pending lawsuit
entitled Net MoneyIN, Inc. v. VeriSign, Inc., et al.,
involving intellectual property infringement claims against
businesses providing electronic payment gateway services. The
Company has also received notices alleging that certain of its
products or services may infringe on another partys
intellectual property rights. There can be no assurance that
third parties will not assert other infringement claims against
Lightbridge in the future or that any asserted or future claims
will not be successful. Lightbridge could incur substantial
costs and diversion of management resources with respect to the
defense of any claims relating to proprietary rights, which
could have a material adverse effect on Lightbridges
business, financial condition, results of operations and cash
flows. Furthermore, parties making such claims could secure a
judgment awarding substantial damages, as well as injunctive or
other equitable relief, which could effectively block
Lightbridges ability to make, use,
18
sell, distribute or market its products and services in the
United States or abroad. Such a judgment could have a material
adverse effect on Lightbridge. In the event a claim relating to
proprietary technology or information is asserted against
Lightbridge, Lightbridge may seek licenses to such intellectual
property. There can be no assurance, however, that such a
license could be obtained on commercially reasonable terms, if
at all, or that the terms of any offered licenses will be
acceptable to Lightbridge. The failure to obtain the necessary
licenses or other rights could preclude the sale, manufacture or
distribution of Lightbridges products and, therefore,
could have a material adverse effect on Lightbridge.
Employees
As of January 31, 2005, Lightbridge had a total of 789
employees, of which 727 were full-time and 62 were part-time or
seasonal. The number of personnel employed by Lightbridge varies
seasonally. None of Lightbridges employees are represented
by a labor union, and Lightbridge believes that its employee
relations are good.
The future success of Lightbridge will depend in large part upon
its continued ability to attract and retain highly skilled and
qualified personnel. Competition for such personnel can be
strong, particularly for sales and marketing personnel, software
developers and service consultants.
Additional Available Information
Lightbridges principal Internet address is
www.lightbridge.com. The Companys web site provides
a hyperlink to a third-party web site through which
Lightbridges annual, quarterly and current reports, and
amendments to those reports, are available free of charge.
Lightbridge believes these reports are made available as soon as
reasonably practicable after it electronically files them with,
or furnishes them to, the SEC. The Company does not maintain or
provide any information directly to the third-party web site,
and does not check its accuracy. Copies of the Companys
SEC reports can also be obtained from the SECs web site at
www.sec.gov.
Lightbridge leases approximately 80,000 square feet in a
single building in Burlington, Massachusetts for its corporate
headquarters and its principal sales, consulting, marketing,
operations and product development facility for its TDS
business. This lease was executed and delivered in January,
2004, had a rent commencement date in June 2004 and expires in
2011. Under the terms of the lease, the Company was not required
to pay rent during the construction period from January 2004
through May 2004 and the maximum amount of the landlords
tenant improvement allowance was approximately
$3.3 million. There is approximately 3,000 square feet
under lease in the Companys former Burlington,
Massachusetts headquarters which expires in October 2005.
The Company leases approximately 12,000 and 19,000 square
feet with lease expiration dates in 2006 and 2009, respectively,
in American Fork, Utah and Bellevue, Washington, respectively,
for its Payment Processing operations. The Companys
Bellevue, Washington lease was executed in August 2004, and had
a rent commencement date in September 2004. Under the terms of
the lease, the Company was not obligated to pay rent during the
construction period prior to the rent commencement date and the
maximum amount of the landlords tenant improvement
allowance was approximately $177,000. The Company also received
abated rent for the first three months of the lease term.
The Company leases approximately 10,000, 21,000 and
30,000 square feet with lease expiration dates in 2005,
2006 and 2008, respectively, for product development facilities
in Fremont and Irvine, California and Broomfield, Colorado,
respectively. The Company leases 32,000 and 29,000 square
feet with lease expiration dates in 2005 and 2009, respectively,
for call centers in Liverpool, Nova Scotia, Canada and Lynn,
Massachusetts, respectively. The Companys Nova Scotia
lease was entered into in February 2004, and had a rent
commencement date in May 2004. The Company was allowed access to
the premises in Nova Scotia for a period of 90 days prior to May
2004 in order to make tenant improvements. The Company leases
approximately 4,000 square feet in Waltham, Massachusetts
for one of its three data centers. The terms of the
19
Companys leases generally run from one to six years. From
time to time, Lightbridge enters into short-term leases to
provide space for international sales offices. Lightbridge
believes that its present facilities are adequate for its
current needs and that suitable additional space will be
available as needed.
|
|
Item 3. |
Legal Proceedings |
In a case pending in the United States District Court for the
District of Arizona, a variety of defendants, including payment
processing gateway providers and banks, are accused of
infringing certain patents involving payment processing over
computer networks. The case is captioned Net MoneyIN,
Inc. v. VeriSign, Inc., et al., Case No. CIV
01-441 TUC RCC. The plaintiff alleges that numerous products or
services infringe its patents, including the Authorize.Net
Payment Gateway Service and eCheck.Net Service. Neither
Lightbridge nor Authorize.Net is a party to the lawsuit, but
Authorize.Net is indemnifying and defending defendants
InfoSpace, Inc. and E-Commerce Exchange, Inc. as to services
provided by Authorize.Net. Defendant Wells Fargo Bank, N.A. has
also requested indemnification, including defense costs, from
Authorize.Net based on certain contracts with Authorize.Net.
Lightbridge anticipates that plaintiff may attempt to add
Authorize.Net and/or Lightbridge as party defendants. The
litigation is currently in the fact discovery phase, and no
trial date has been set. The Company intends to defend any
claims brought against it, Authorize.Net or third parties that
it is contractually obligated to defend in connection with the
lawsuit. While there can be no assurances as to the outcome of
the lawsuit, an adverse outcome in the lawsuit could have a
material effect on the Companys financial condition,
results of operations or cash flow.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
No matter was submitted to a vote of security holders during the
quarter ended December 31, 2004.
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Shares of the Companys common stock, $.01 par value
per share, are quoted on The NASDAQ Stock Market under the
symbol LTBG. The following table sets forth, for the
calendar quarters indicated, the high and low sales prices per
share of the common stock on the National Market System, as
reported in published financial sources:
|
|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
2004
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
9.06 |
|
|
$ |
5.90 |
|
Second Quarter
|
|
$ |
6.62 |
|
|
$ |
5.16 |
|
Third Quarter
|
|
$ |
5.54 |
|
|
$ |
3.74 |
|
Fourth Quarter
|
|
$ |
6.04 |
|
|
$ |
4.44 |
|
2003
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
6.82 |
|
|
$ |
5.88 |
|
Second Quarter
|
|
$ |
9.10 |
|
|
$ |
6.40 |
|
Third Quarter
|
|
$ |
10.79 |
|
|
$ |
8.61 |
|
Fourth Quarter
|
|
$ |
10.70 |
|
|
$ |
8.21 |
|
As of March 11, 2005, there were 179 holders of record of
common stock (which number does not include the number of
stockholders whose shares are held of record by a broker or
clearing agency but which does include each such brokerage house
or clearing agency as one record holder).
The Company has never declared or paid any cash dividends on its
common stock. The Company currently anticipates that it will
retain future earnings, if any, to fund the development and
growth of its business and therefore does not expect to pay any
cash dividends in the foreseeable future.
The Company did not make any repurchases of its common stock
during the fourth quarter of 2004.
20
|
|
Item 6. |
Selected Financial Data |
The following selected financial data have been derived from the
Companys audited historical consolidated financial
statements, certain of which are included elsewhere in this
Annual Report on Form 10-K. The following selected
financial data should be read in conjunction with the
Companys consolidated financial statements and related
notes and Managements Discussion and Analysis of
Financial Condition and Results of Operations appearing
elsewhere in this Annual Report on Form 10-K.
The following selected financial data includes the results of
operations, from the date of acquisition, of Authorize.Net
Corporation, which the Company acquired on March 31, 2004.
See Note 1 to the Companys consolidated financial
statements for further information concerning this acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended Dec. 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
133,055 |
|
|
$ |
119,978 |
|
|
$ |
133,438 |
|
|
$ |
176,616 |
|
|
$ |
186,644 |
|
Cost of revenues
|
|
|
67,890 |
|
|
|
61,949 |
|
|
|
65,943 |
|
|
|
80,811 |
|
|
|
81,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
65,165 |
|
|
|
58,029 |
|
|
|
67,495 |
|
|
|
95,805 |
|
|
|
104,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and development costs
|
|
|
29,000 |
|
|
|
28,426 |
|
|
|
29,269 |
|
|
|
32,259 |
|
|
|
29,256 |
|
Sales and marketing
|
|
|
22,541 |
|
|
|
14,239 |
|
|
|
13,270 |
|
|
|
20,460 |
|
|
|
22,159 |
|
General and administrative
|
|
|
15,987 |
|
|
|
14,143 |
|
|
|
18,170 |
|
|
|
19,517 |
|
|
|
17,955 |
|
Restructuring costs
|
|
|
4,346 |
|
|
|
5,079 |
|
|
|
3,616 |
|
|
|
4,000 |
|
|
|
|
|
Impairment of goodwill and other intangible assets
|
|
|
2,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased in-process research and development
|
|
|
679 |
|
|
|
|
|
|
|
1,618 |
|
|
|
|
|
|
|
|
|
Gain on sale of Fraud Centurion assets
|
|
|
(2,673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of goodwill and acquired workforce
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502 |
|
Merger related costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
72,143 |
|
|
|
61,887 |
|
|
|
65,943 |
|
|
|
82,235 |
|
|
|
69,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(6,978 |
) |
|
|
(3,858 |
) |
|
|
1,552 |
|
|
|
13,570 |
|
|
|
35,040 |
|
Interest income
|
|
|
1,185 |
|
|
|
1,778 |
|
|
|
2,439 |
|
|
|
4,233 |
|
|
|
5,446 |
|
Equity in loss of partnership investment
|
|
|
|
|
|
|
(471 |
) |
|
|
(464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(5,793 |
) |
|
|
(2,551 |
) |
|
|
3,527 |
|
|
|
17,803 |
|
|
|
40,486 |
|
Provision for (benefit from) income taxes
|
|
|
8,351 |
|
|
|
(1,102 |
) |
|
|
(103 |
) |
|
|
3,848 |
|
|
|
9,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(14,144 |
) |
|
$ |
(1,449 |
) |
|
$ |
3,630 |
|
|
$ |
13,955 |
|
|
$ |
30,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$ |
(0.53 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.13 |
|
|
$ |
0.50 |
|
|
$ |
1.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$ |
(0.53 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.13 |
|
|
$ |
0.48 |
|
|
$ |
1.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
52,225 |
|
|
$ |
133,488 |
|
|
$ |
133,470 |
|
|
$ |
118,570 |
|
|
$ |
98,743 |
|
Working capital
|
|
$ |
43,597 |
|
|
$ |
137,684 |
|
|
$ |
136,501 |
|
|
$ |
127,129 |
|
|
$ |
109,672 |
|
Total assets
|
|
$ |
170,486 |
|
|
$ |
177,836 |
|
|
$ |
180,672 |
|
|
$ |
188,882 |
|
|
$ |
187,680 |
|
Long-term obligations, less current portion
|
|
$ |
2,858 |
|
|
$ |
33 |
|
|
$ |
259 |
|
|
$ |
667 |
|
|
$ |
963 |
|
Stockholders equity
|
|
$ |
136,928 |
|
|
$ |
154,503 |
|
|
$ |
159,641 |
|
|
$ |
161,522 |
|
|
$ |
144,986 |
|
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of this Annual Report on Form 10-K requires
us to make estimates and assumptions that affect the reported
amount of assets and liabilities, disclosure of contingent
assets and liabilities at the date of our financial statements,
and the reported amounts of revenue and expenses during the
reporting period. We base our estimates on historical experience
and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily derived from other
sources. There can be no assurance that actual amounts will not
differ from those estimates.
We have identified the policies below as critical to our
business operations and the understanding of our results of
operations.
Revenue Recognition. Our revenue recognition policy is
significant because revenue is a key component affecting our
operations. In addition, revenue recognition determines the
timing of certain expenses, such as commissions and bonuses.
Certain judgments relating to the elements required for revenue
recognition affect the application of our revenue policy.
Revenue results are difficult to predict, and any shortfall in
revenue, change in judgments concerning recognition of revenue,
change in mix, amount of international sales or delay in
recognizing revenue could cause operating results to vary
significantly from quarter to quarter.
Allowance for Doubtful Accounts. We must also make
estimates of the collectibility of our accounts receivable. An
increase in the allowance for doubtful accounts is recorded when
the prospect of collecting a specific account receivable becomes
doubtful. We analyze accounts receivable and historical bad
debts, customer creditworthiness, current domestic and
international economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for
doubtful accounts. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability
to make payments, or if our estimates of uncollectibility prove
to be inaccurate, additional allowances would be required.
Income Taxes and Deferred Taxes. Our income tax policy
records the estimated future tax effects of temporary
differences between the tax bases of assets and liabilities and
the amounts reported in the accompanying consolidated balance
sheets, as well as operating loss and tax credit carryforwards.
We assess the recoverability of any tax assets recorded on the
balance sheet and provide any necessary valuation allowances as
required. If we were to determine that it was more likely than
not that we would be unable to realize all or part of our net
deferred tax asset in the future, an adjustment to the deferred
tax asset would be charged to operations in the period that such
determination was made.
Restructuring Estimates. Restructuring-related
liabilities include estimates for, among other things,
anticipated disposition of lease obligations. Key variables in
determining such estimates include anticipated commencement of
sublease rentals, estimates of sublease rental payment amounts
and tenant improvement costs and estimates for brokerage and
other related costs. We periodically evaluate and, if necessary,
adjust our estimates based on currently available information.
22
Goodwill and Acquired Intangible Assets. We recorded
goodwill of $1.7 million and $57.6 million in
connection with the acquisitions of Altawave, Inc.
(Altawave) and Authorize.Net, respectively and we
recorded other intangible assets of $23.3 million in
connection with the acquisition of Authorize.Net. We are
required to test such goodwill for impairment on at least an
annual basis. We have adopted January 1st and
March 31st as the dates of the annual impairment tests for
Altawave and Authorize.Net, respectively. Application of the
goodwill impairment test requires judgment, including the
identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill to reporting
units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of
reporting units include estimating future cash flows,
determining appropriate discount rates and other assumptions.
Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit.
We will assess the impairment of goodwill on an annual basis or
more frequently if other indicators of impairment arise.
Overview
We develop, market and support a suite of products and services
for merchants that sell products and services online and
communications providers, including payment processing, customer
acquisition and qualification, risk management, prepaid billing,
instant teleconferencing, and authentication services.
A majority of our revenues historically have been derived from
clients located in the United States. Our revenues are derived
from transaction services, consulting and maintenance services,
software licensing and hardware.
Our transaction service revenues are derived primarily from the
processing of applications for qualification of subscribers for
telecommunications services, the activation of services for
those subscribers and from the processing of payment
transactions for merchants. We have expanded our
telecommunications transactions 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. We also
offer transaction services to screen and authenticate the
identity of users engaged in online transactions. Our
transaction-based solutions provide multiple, remote, systems
access for workflow management, along with centrally managed
client-specified business policies, and links to client and
third-party systems. Transaction services are provided through
contracts with carriers and others, which specify the services
to be utilized and the markets to be served. Our clients are
charged for these services on a per transaction basis. Pricing
varies depending primarily on the volume and type 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
transactions processed varies depending on seasonal and retail
trends, the success of the carriers and others utilizing our
services in attracting subscribers and the markets served by our
clients. Transaction revenues are recognized in the period in
which the services are performed.
Transaction services revenues related to payment processing are
derived from our credit card processing and eCheck processing
services, and other services (collectively, payment
processing services) gateway fees and set-up fees. Payment
processing services revenue is based on a fee per transaction
and is recognized in the period in which the transaction occurs.
Gateway fees are monthly subscription fees charged to our
merchant customers for the use of our payment gateway. Gateway
fees are recognized in the period in which the service is
provided. Set-up fees represent one-time charges for initiating
our payment processing services. Although these fees are
generally paid to us at the commencement of the agreement, they
are recognized ratably over the estimated average life of the
merchant relationship, which is determined through a series of
analyses of active and deactivated merchants. Commissions paid
to outside sales partners are recorded in sales and marketing
expense in our statements of operations.
We also offer instant voice conferencing transaction services
through our GroupTalk offering. No significant revenues have
been recognized from our GroupTalk offering to date and the
Instant Conferencing business segment is not expected to
generate significant revenues in 2005.
Our consulting revenues are derived principally from providing
solution development and deployment services and business
advisory consulting in the areas of customer acquisition and
retention, authentication,
23
prepay billing and risk management. The majority of consulting
engagements are performed on a time and materials basis and
revenues from these engagements are generally recognized as the
services are performed. When we perform 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.
Our software licensing revenues consist of revenues attributable
to the licensing of our CAS Application Modules and PrePay
billing software. The PrePay billing system allows carriers to
market and manage prepaid wireless services to customers. Prepay
is licensed as a packaged software product 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. Our hardware
revenues historically have been derived in connection with sales
of our PrePay and PhonePrint products. Revenue from hardware is
recognized upon shipment, unless testing, integration or other
services are required, in which case it is recognized upon
commissioning and acceptance of the product. Revenue from
hardware sold in conjunction with software is deferred until the
software revenue is recognized.
In 2004, we determined that we would no longer actively market
or sell our Retail Management System (RMS) product or our
PhonePrint product. In October 2004, we completed the sale of
certain assets related to our Fraud Centurion software product
to Subex. As a result of these actions, we do not expect to
recognize significant future revenues from these products.
In 2003 and 2004, the rate of subscriber growth in the wireless
telecommunications industry declined. We believe, based in part
on reports of wireless telecommunications industry analysts,
that the rate of subscriber growth will continue to slow in
upcoming years. We also believe we may continue to experience
changes in the combination of services acquired by clients and
that competitive pricing pressures will continue to negatively
affect transaction revenues in 2005. We do not expect
significant growth in capital spending in the telecommunications
industry in 2005. In order to add to our business, we are
seeking to expand our reach in the e-commerce and payment
processing business markets and to target industry sectors in
the TDS business we do not currently serve.
On February 22, 2002, we acquired all of the assets and
certain of the liabilities of 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 in 2002 and 2003. No contingent payments were
required to be made in connection with the Altawave acquisition.
The technology acquired from Altawave included solutions to
offer wireless carriers a service platform for the development
and management of data content and applications (Mobile
Data Manager). Certain of Altawaves technology was
used to develop our GroupTalk product.
In December 2003, we entered into an agreement to lease
approximately 80,000 square feet in a single building in
Burlington, Massachusetts for our new principal administrative,
sales, consulting, operations marketing and product development
facility for our TDS business. The lease was executed and
delivered in January 2004. In February 2004, we announced
the planned expansion of our call center operations to
Liverpool, Nova Scotia, Canada. Our Nova Scotia facility became
operational in the second quarter of 2004.
On March 31, 2004, we acquired all of the outstanding stock
of Authorize.Net from InfoSpace Inc., for $81.6 million in
cash and incurred approximately $2.0 million in acquisition
related transaction costs. Authorize.Net is a provider of
payment solutions for online customer transactions. The
Authorize.Net payment gateway provides credit card and
electronic check solutions to companies that process orders for
goods and services over the Internet. Authorize.Net connects
small and medium sized businesses to large credit card
processors and banking organizations, allowing those businesses
to accept electronic payments.
On January 28, 2005, we closed our call center facility in
Broomfield, Colorado. The Broomfield, Colorado call center
facility had been supporting our TDS operating segment. The work
being performed at the facility was transitioned to our other
call center facilities. In conjunction with the closure, we
expect to record a restructuring charge of approximately
$0.9 million in the first quarter of 2005, primarily
relating to facility closing costs and employee severance and
termination benefits.
24
We plan to close our Fremont, California facility, where our
Instant Conferencing business is located, effective
March 31, 2005. In connection with the closure, we expect
to record a restructuring charge in the first quarter of 2005 of
approximately $0.3 million primarily relating to employee
severance and termination benefits. We expect to continue to
provide the services for GroupTalk, our Instant Conferencing
product, under our agreement with AOL.
Operating Segments
As a result of our corporate reorganization efforts during 2004,
we changed our previously reported operating segments effective
in the fourth quarter of 2004. All prior period segment
financial information has been restated to conform to the
current presentation. Based upon the way financial information
is provided to our chief operating decision maker, the Chief
Executive Officer, for use in evaluating allocation of resources
and assessing performance of the business, we now report our
operations in four distinct operating segments: Payment
Processing Services (Payment Processing), Telecom Decisioning
Services (TDS), Intelligent Network Solutions (INS) and
Instant Conferencing Services (Instant Conferencing).
The Payment Processing segment offers a transaction processing
system, under the Authorize.Net® brand, that allows
businesses to authorize, settle and manage credit card,
electronic check and other electronic payment transactions
online. The TDS segment provides customer qualification, risk
assessment, fraud screening, consulting services and call center
services to telecommunications and other companies. The INS
segment provides wireless carriers with a real-time rating
engine for voice, data and IN services for prepaid subscribers
as well as postpaid charging functionality and telecom calling
card services. The Instant Conferencing segment provides managed
instant conferencing services through our
GroupTalktm
product. In 2005, we made the decision to no longer actively
market or sell our
GroupTalktm
product. We expect to continue to provide the services for
GroupTalk under our agreement with AOL. Within these four
segments, performance is measured based on revenue, gross profit
and operating income (loss) realized from each segment. There
are no transactions between segments.
We do not allocate certain corporate or centralized marketing
and general and administrative expenses to our business unit
segments, because these activities are managed separately from
the business units. Also, we do not allocate restructuring
expenses and other non-recurring gains or charges to our
business unit segments because our Chief Executive Officer
evaluates the segment results exclusive of these items. Asset
information by operating segment is not reported to or reviewed
by our Chief Executive Officer and therefore we have not
disclosed asset information for each operating segment.
The historical operating results associated with our RMS
product, which we no longer actively market or sell, are
included in our TDS segment. The historical operating results
associated with our PhonePrint product, which we no longer
actively market or sell, and our Fraud Centurion products, which
we sold to Subex in 2004, are included in our INS segment. The
historical operating results associated with our Mobile Data
Manager product, which we no longer actively market or sell, are
included in our Instant Conferencing segment.
25
Customer Concentration
During fiscal 2004, three of our clients each accounted for more
than 10% of our total revenues. In 2003 and 2002, four of our
clients each accounted for more than 10% of our total revenues.
Revenues from these clients, as a percentage of total revenues,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended Dec. 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Sprint
|
|
|
21 |
% |
|
|
28 |
% |
|
|
30 |
% |
AT&T
|
|
|
16 |
|
|
|
21 |
|
|
|
21 |
|
Ericsson
|
|
|
* |
|
|
|
14 |
|
|
|
15 |
|
Nextel
|
|
|
11 |
|
|
|
12 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
48 |
% |
|
|
75 |
% |
|
|
77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
* |
Represents less than 10% of total revenues in 2004. |
We expect that a significant portion of our revenues will
continue to come from a relatively small number of
telecommunications clients in 2005, although the companies that
comprise our largest clients in any given quarter may vary.
Customer concentration is likely to decline if our revenues from
Payment Processing Services grow. Our revenues, margins and net
income may fluctuate significantly from quarter to quarter based
on the actions of a single significant client. A client may take
actions that significantly affect us for reasons that we cannot
necessarily anticipate or control, such as reasons related to
the clients financial condition, changes in the
clients business strategy or operations, the introduction
of alternative competing products or services, acquisitions or
as the result of the perceived quality or cost-effectiveness of
our products or services. In November 2004, we announced that we
expected that our future revenues from AT&T will decline
significantly as a result of the acquisition of AT&T by
Cingular Wireless LLC. As a result of the acquisition,
AT&Ts customer activations will transition from our
system to Cingulars internal system and we do not expect
that AT&T will be a significant customer in 2005. Our
services agreements with Sprint and Nextel expire on
December 31, 2006. On December 15, 2004, Sprint and
Nextel announced that their respective Boards of Directors had
approved a definitive agreement for a merger of the two
companies. We are unable to predict the effect of the merger of
Nextel and Sprint on our relationship with either customer
including, without limitation the timing or extent of any
reductions in applications processed or other services provided
under our contracts with those customers. It is possible that
Sprint or Nextel could elect not to renew their agreements, to
reduce the volume of products and services they purchase from
the Company or to request significant changes to the pricing or
other terms in any renewal agreement. Additionally, a
significant portion of our revenues from our PrePay billing
system is generated through distribution agreements with
Ericsson and Nortel Networks. A loss of one or more of these
major clients, a decrease in orders by one or more of these
clients or a change in the combination of products and services
they obtain from us would adversely affect our revenues, margins
and net income.
26
Results of Operations
|
|
|
Year Ended December 31, 2004 Compared with Year Ended
December 31, 2003 |
Revenues. Revenues and certain revenues comparisons for
the years ended December 31, 2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
$ | |
|
% | |
|
|
2004 | |
|
2003 | |
|
Difference | |
|
Difference | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Transaction services
|
|
$ |
103,648 |
|
|
$ |
80,552 |
|
|
$ |
23,096 |
|
|
|
28.7 |
% |
Consulting and maintenance services
|
|
|
19,898 |
|
|
|
28,666 |
|
|
|
(8,768 |
) |
|
|
(30.6 |
) |
Software licensing and hardware
|
|
|
9,509 |
|
|
|
10,760 |
|
|
|
(1,251 |
) |
|
|
(11.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
133,055 |
|
|
$ |
119,978 |
|
|
$ |
13,077 |
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in transaction services revenues was due primarily
to the acquisition of Authorize.Net on March 31, 2004,
which contributed $26.8 million of revenue for the period
from April 1, 2004 to December 31, 2004.
Authorize.Nets revenues for the period from April 1,
2004 to December 31, 2004 have increased 25% compared to
the same period in 2003, as reported by Authorize.Nets
former owner, InfoSpace, Inc. The increased revenues are the
result of an increase in the number of merchant customers and
increased volume of transactions processed. The increased
revenue related to the acquisition of Authorize.Net was
partially offset by a decline in transactions services revenues
in our TDS segment. The decline in TDS transaction services
revenues was a result of lower transaction fees charged to
certain clients as a result of competitive pricing pressures and
an unfavorable change in the mix of services provided despite a
4% increase in the volume of subscriber applications processed
during 2004. TDS transaction services revenues in 2004 included
approximately $0.5 million related to a settlement received
as a result of the WorldCom, Inc. bankruptcy proceedings, for
services provided to WorldCom, Inc. in 2002. We did not
recognize revenue at the time the services were performed due to
concerns regarding the collectibility of our fees.
In the near term, we expect transaction services revenue from
Authorize.Net to continue to increase. However, we expect
transaction services revenue associated with our TDS segment to
decline from the 2004 level as a result of Cingular Wireless
LLCs acquisition of AT&T and its decision to process
all credit applications through Cingulars internal system,
and continued price pressures. We do not expect Cingular/
AT&T Wireless to contribute significant revenues in 2005. In
2004, $16.9 million in transaction services revenue was
associated with AT&T. We expect TDS transaction services
revenues to continue to reflect the industrys rate of
growth of new subscribers as well as the rate of switching among
carriers by subscribers (subscriber churn). While we experienced
growth in the number of applications processed in 2004 as
compared to 2003, we believe that transaction revenues in future
periods will continue to be impacted by changes in the demand
for our transaction offerings, changes in the combination of
services purchased by clients, carrier consolidation including
the proposed merger of Sprint and Nextel, and competitive
pricing pressures.
The decrease in consulting and maintenance services revenues of
$8.8 million for 2004 was principally due to a decline in
consulting and maintenance revenues related to our decision to
no longer actively market, sell or develop our RMS and
PhonePrint products and the sale of our Fraud Centurion product.
Consulting and maintenance services revenues associated with
these products were $4.3 million lower in 2004 than in the
preceding year. Additionally, maintenance revenues related to
our PrePay software product suite declined $2.9 million in
2004 as compared with the prior year as a result of pricing
pressures, but an increase in consulting revenues during the
same period related to this product partially mitigated this
impact. In our TDS segment, pricing pressures on maintenance
services and a reduced level of consulting activity also
contributed to the revenue decrease.
We expect consulting and maintenance services revenue associated
with our PrePay software product suite in 2005 to continue at a
similar level as 2004. However, we expect our total consulting
and maintenance services revenue in 2005 to decrease in
comparison with the 2004 level, as we do not expect significant
future
27
revenues from our RMS or Fraud Centurion products. These
products contributed $4.8 million in consulting and
maintenance services revenues in 2004. In addition, we recorded
$3.7 million in consulting and maintenance revenues
associated with AT&T in 2004, and we do not expect
significant revenues from this customer in future periods.
The decline in software licensing and hardware revenues of
$1.3 million in 2004 as compared to 2003 was due to our
decision to no longer actively market sell or develop our RMS
and PhonePrint products, which contributed $1.7 million
less in revenue than in the previous year. In addition, while
the total revenues associated with our PrePay product remained
largely unchanged, revenue associated with new software licenses
and subscriber growth license fees increased, and revenue
associated with hardware sales decreased.
We expect software licensing and hardware revenues in 2005 to be
lower than those in 2004, as a result of the discontinued
marketing of our RMS and PhonePrint products and the sale of our
Fraud Centurion product. In 2004, we recorded software licensing
and hardware revenue of $1.8 million associated with these
products. We expect the level of capital spending by carriers to
continue to affect the sales of our PrePay product in future
quarters. Our PrePay software clients growth rates for net
new subscribers continue to impact the level of our growth fee
license revenue, and hardware revenues are largely a function of
the number of PrePay software license sales and the number of
subscribers each new system sold will support.
Cost of Revenues and Gross Profit. Cost of revenues
consists primarily of personnel costs, costs of resold third
party hardware, software and services, costs of maintaining
systems and networks used in processing qualification and
activation transactions (including depreciation and amortization
of systems and networks) and amortization of capitalized
software and acquired technology. Cost of revenues for
Authorize.Net, included in transaction services cost of
revenues, consists of expenses associated with the delivery,
maintenance and support of Authorize.Nets products and
services, including personnel costs, communication costs, such
as high-bandwidth Internet access, server equipment
depreciation, transactional processing fees, as well as customer
care costs. In the future, 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,
changes in the mix of transaction revenues between those from
automated transaction processing and those from processing
transactions through our TeleServices call centers, changes in
pricing to certain clients and changes in the mix of total
revenues among transaction services revenues, consulting and
maintenance services revenues, and software licensing and
hardware revenues.
28
Cost of revenues, gross profit and certain comparisons for the
years ended December 31, 2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
$ | |
|
% | |
|
|
2004 | |
|
2003 | |
|
Difference | |
|
Difference | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$ |
54,831 |
|
|
$ |
45,667 |
|
|
$ |
9,164 |
|
|
|
20.1 |
% |
Consulting and maintenance services
|
|
|
9,930 |
|
|
|
12,741 |
|
|
|
(2,811 |
) |
|
|
(22.1 |
) |
Software licensing and hardware
|
|
|
3,129 |
|
|
|
3,541 |
|
|
|
(412 |
) |
|
|
(11.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$ |
67,890 |
|
|
$ |
61,949 |
|
|
$ |
5,941 |
|
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services $
|
|
$ |
48,817 |
|
|
$ |
34,885 |
|
|
$ |
13,932 |
|
|
|
39.9 |
% |
Transaction services %
|
|
|
47.1 |
% |
|
|
43.3 |
% |
|
|
|
|
|
|
|
|
Consulting and maintenance services $
|
|
$ |
9,968 |
|
|
$ |
15,925 |
|
|
$ |
(5,957 |
) |
|
|
(37.4 |
)% |
Consulting and maintenance services %
|
|
|
50.1 |
% |
|
|
55.6 |
% |
|
|
|
|
|
|
|
|
Software licensing and hardware $
|
|
$ |
6,380 |
|
|
$ |
7,219 |
|
|
$ |
(839 |
) |
|
|
(11.6 |
)% |
Software licensing and hardware %
|
|
|
67.1 |
% |
|
|
67.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit $
|
|
$ |
65,165 |
|
|
$ |
58,029 |
|
|
$ |
7,136 |
|
|
|
12.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit %
|
|
|
49.0 |
% |
|
|
48.4 |
% |
|
|
|
|
|
|
|
|
Transaction services cost of revenues increased by
$9.2 million in 2004 from 2003. Costs of revenues
associated with our Authorize.Net business were included in our
results beginning in the second quarter of 2004 because of the
acquisition of Authorize.Net on March 31, 2004. This change
accounted for $7.2 million of the spending increase in 2004
from 2003. In our TDS business, spending increased in our call
centers as a result of the addition of a significant new client
in the second half of 2003. Generally, cost of revenue from
automated transaction processing tends to be lower than costs of
revenue from processing transactions through our TeleServices
call centers. This increase was partially offset by reduced
costs of maintaining systems and networks used in processing
qualification and activation transactions. In addition, included
in transaction cost of revenues for 2004 was a one-time benefit
of approximately $0.2 million realized by us as part of the
settlement of the WorldCom, Inc. bankruptcy, related to the
release from liability for certain telecommunications services
which we received from WorldCom, Inc. Transaction services gross
profit and gross profit percentage increased primarily as a
result of the acquisition of Authorize.Net on March 31,
2004. Authorize.Net contributed $19.6 million to the 2004
transaction services gross profit amount. This was partially
offset by a decrease in the 2004 transaction services gross
profit related to our TDS segment. Authorize.Net generates a
higher gross profit percentage than our TDS segment, resulting
in increased transaction services gross profit percentage in
2004 in comparison to 2003.
Consulting and maintenance services cost of revenues decreased
by $2.8 million in 2004. This decrease was attributable to
a reduction in headcount associated with the June 2003, January
2004 and September 2004 restructurings, reduced use of contract
labor primarily for consulting related to our RMS product, and
the sale of our Fraud Centurion product to Subex. Consulting and
maintenance services gross profit and gross profit percentage
decreased in 2004 due to lower revenues related to our RMS,
Fraud Centurion and PhonePrint products, as well as competitive
pricing pressures.
Software licensing and hardware cost of revenues decreased
slightly by $0.4 million in 2004 in comparison with 2003.
This decrease was primarily attributable to the mix of software
products licensed during 2004 as compared to the prior year. The
2004 software licensing and hardware cost of revenue is more
reflective of average historical and expected future software
licensing and hardware cost of revenues than the cost in 2003.
Software licensing and hardware gross profit decreased in 2004
in absolute dollars as a result of lower revenues, but gross
profit percentage remained consistent with 2003. The gross
profit percentage earned can
29
vary significantly based on discounts given on individual
transactions and the mix of software and hardware revenues.
We expect that fluctuations in gross profit may occur in future
periods primarily because of a change in the mix of revenue
generated from our three revenue components, and also because of
competitive pricing pressures.
Operating Expenses. Operating expenses and certain
operating expense comparisons for the years ended
December 31, 2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
$ | |
|
% | |
|
|
2004 | |
|
2003 | |
|
Difference | |
|
Difference | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Engineering and development
|
|
$ |
29,000 |
|
|
$ |
28,426 |
|
|
$ |
574 |
|
|
|
2.0 |
% |
Sales and marketing
|
|
|
22,541 |
|
|
|
14,239 |
|
|
|
8,302 |
|
|
|
58.3 |
|
General and administrative
|
|
|
15,987 |
|
|
|
14,143 |
|
|
|
1,844 |
|
|
|
13.0 |
|
Restructuring
|
|
|
4,346 |
|
|
|
5,079 |
|
|
|
(733 |
) |
|
|
(14.4 |
) |
Impairment of goodwill
|
|
|
1,664 |
|
|
|
|
|
|
|
1,664 |
|
|
|
|
|
Impairment of other intangible assets
|
|
|
599 |
|
|
|
|
|
|
|
599 |
|
|
|
|
|
Purchased in-process research and development
|
|
|
679 |
|
|
|
|
|
|
|
679 |
|
|
|
|
|
Gain on sale of Fraud Centurion assets
|
|
|
(2,673 |
) |
|
|
|
|
|
|
(2,673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
72,143 |
|
|
$ |
61,887 |
|
|
$ |
10,256 |
|
|
|
16.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and Development. Engineering and development
expenses include software development costs, consisting
primarily of personnel and outside technical service costs
related to developing new products and services, enhancing
existing products and services, and implementing and maintaining
new and existing products and services. The $0.6 million
increase in engineering and development expenses for 2004 as
compared with 2003 was primarily due to the addition of
Authorize.Net, the expenses from which are included in our
results beginning on April 1, 2004. Authorize.Net
represented $3.2 million of engineering and development
expenses in the 2004 years results. This increase was
largely offset by cost savings associated with the June 2003,
September 2004 and October 2004 restructurings, our decision to
cease new development and enhancement of our RMS software
product, and our sale of the Fraud Centurion product to Subex.
Engineering and development expenses as a percentage of total
revenues decreased for 2004 as a result of increased revenues.
We expect engineering and development expenses for the quarter
ending March 31, 2005 to be slightly higher than in the
previous quarter as a result of an increased level of funded
development activity associated with our PrePay software product.
Sales and Marketing. Sales and marketing expenses consist
primarily of salaries, commissions and travel expenses of direct
sales and marketing personnel, as well as costs associated with
advertising, trade shows and conferences. For Authorize.Net,
sales and marketing expenses also include commissions paid to
outside sales partners. The increase in sales and marketing
expenses in 2004, in absolute dollars and as a percentage of
revenue, was due to the addition of Authorize.Net and the
related sales partner commissions included in sales and
marketing expense. Authorize.Net represented $10.1 million
of sales and marketing expenses in the 2004 results. This
increase was partially offset by reductions in marketing costs
for the other portions of our business as a result of reduced
marketing headcount and program spending as compared with 2003.
We expect that sales and marketing expenses in the first quarter
of 2005 will remain consistent with the fourth quarter of 2004.
In future quarters, we expect sales and marketing expenses to
increase with growth in Authorize.Nets revenues as a
result of sales partner commissions associated with these
revenues.
30
General and Administrative. General and administrative
expenses consist principally of salaries of executive, finance,
human resources and administrative personnel and fees for
certain outside professional services. The increase in general
and administrative costs in 2004 was primarily due to the
inclusion of Authorize.Net expenditures beginning on
April 1, 2004. Authorize.Net represented approximately
$2.6 million of general and administrative expenses in
2004. In addition, during 2004, we incurred approximately
$0.9 million in separation costs associated with the
resignation our former President and Chief Executive Officer in
August 2004. We also incurred increased general and
administrative expense as a result of increased regulatory and
compliance requirements. These increases were offset by a
one-time benefit in 2004 of approximately $1.0 million
related to the release from liability of amounts that had been
reserved for potential claims against us related to the
WorldCom, Inc. bankruptcy proceedings, by savings associated
with the January 2004 and September 2004 restructuring activity,
and by reductions in program spending.
We expect general and administrative expenses in the quarter
ending March 31, 2005 to continue to be greater than the
corresponding quarter of 2004 primarily due to the inclusion of
Authorize.Nets general and administrative expenses and
increased regulatory and compliance costs.
Restructuring. A discussion of restructuring charges
recorded during 2004 and 2003 is contained in the separate
Restructurings section below.
Impairment of Intangible Assets. On January 1, 2005,
we performed the annual impairment test for the goodwill balance
of approximately $1.7 million related to our acquisition of
Altawave in 2002. We used the discounted cash flow methodology
to determine the fair value of the reporting unit related to
these intangible assets. The discounted cash flow methodology is
based upon converting expected cash flows to present value. Our
assumptions and methodology in determining the fair value of the
reporting unit were reviewed by an independent appraiser. A
comparison of the resulting fair value of the reporting unit to
its carrying amount, including goodwill, indicated that the
goodwill and remaining other intangible assets of approximately
$0.6 million were fully impaired. As a result, a goodwill
impairment charge of approximately $1.7 million and an
other intangible asset impairment charge of approximately
$0.6 million were recorded in our Consolidated Statement of
Operations in 2004.
Purchased In-Process Research and Development
(IPR&D). In connection with the
Authorize.Net acquisition, we recorded a $0.7 million
charge during the first quarter of 2004 for two IPR&D
projects. The Authorize.Net technology includes payment gateway
solutions that enable merchants to authorize, settle and manage
electronic transactions via the Internet, at retail locations
and on wireless devices. The research projects in process at the
date of acquisition related to the development of the Card
Present Solution (CPS) and the Fraud Tool
(FT). Development on the FT project and the CPS
project was started at the end of 2003 and the beginning of
2004, respectively. The complexity of the CPS technology lies in
its fast, flexible and redundant characteristics. The complexity
of the FT technology lies in its responsiveness to changing
fraud dynamics and efficiency.
The value of the projects was determined by an independent
appraiser using the income method. 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, we estimated
that the CPS and the FT projects were approximately 15% and 80%
complete, respectively, with fair values of approximately
$638,000 and $41,000, respectively. The discount rate used for
the fair value calculation was 30% for the CPS project and 22%
for the FT project. At the date of acquisition, development of
the technology involved risks to us including the remaining
development effort required to achieve technological feasibility
and uncertainty with respect to the market for the technology.
We completed the development of the FT in May 2004 having spent
approximately $129,000 on the project after the acquisition.
Total cost to complete the CPS project after acquisition is
estimated to be approximately $650,000. The CPS project is
expected to be completed by September 2005. If the development
of the technology is not completed on schedule, the potential
consequences to us may include
31
increased development costs and increased competition from other
companies that have competitive products in the market.
Gain on Sale of Fraud Centurion Assets. On
October 1, 2004, we closed the sale of our Fraud Centurion
products pursuant to an agreement with India-based Subex. We
received net cash proceeds of $2.4 million as a result of
the sale. As part of this transaction, we sold equipment with a
net book value of approximately $0.2 million to Subex and
assigned the customer maintenance contracts to Subex. The
liabilities for deferred revenue related to these contracts as
of the closing date totaled $0.5 million. We recorded
a gain of approximately $2.7 million in the fourth quarter
of 2004 related to this transaction.
Interest Income. Interest income consists of earnings on
our cash and short-term investment balances. Interest income
decreased to $1.2 million in 2004 from $1.8 million in
2003. This decrease was primarily due to a decline in our cash
and short-term investments balance as a result of the payment of
the purchase price for the acquisition of Authorize.Net.
Equity in Loss of Partnership Investment. In June
2001, we committed to invest up to $5.0 million in a
limited partnership that invested in businesses within the
wireless industry. We used the equity method of accounting for
this limited partnership investment. 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.
Provision for (Benefit from) Income Taxes. We recorded
deferred tax expense of approximately $7.8 million in 2004,
resulting from a full valuation allowance being recorded against
our deferred tax assets. Our effective tax rate was (144)% and
42% for 2004 and 2003, respectively. The 2004 tax provision
reflects current tax expense of approximately $0.6 million,
consisting primarily of foreign tax expenses of
$1.6 million, partially offset by current federal and state
tax benefits.
In evaluating our ability to recover our deferred tax assets, we
consider all available positive and negative evidence including
our past operating results, the existence of cumulative losses
in the most recent fiscal years and our forecast of future
taxable income. In determining future taxable income, we are
responsible for assumptions utilized including the amount of
state, federal and international pre-tax operating income, the
reversal of temporary differences and the implementation of
feasible and prudent tax planning strategies. These assumptions
require significant judgment about the forecasts of future
taxable income and are consistent with the plans and estimates
we are using to manage the underlying businesses.
After considering all available evidence, both positive and
negative, regarding the ability to realize our deferred tax
assets, we concluded that an increase to the valuation allowance
for our deferred tax assets was required. In November 2004, we
announced that we expected our future revenue from AT&T to
decline significantly. This announcement had a considerable
impact on our conclusion regarding the realizability of our
deferred tax assets. Accordingly, based on our best estimate, we
recorded a non-cash charge of $7.8 million in 2004 to
increase the valuation allowance for our deferred tax assets. If
circumstances change such that the realization of our deferred
tax assets is concluded to be more likely than not, we will
record future income tax benefits at the time that such
determination is made.
32
Results by Operating Segment. Certain operating results
and comparisons by operating segment for the years ended
December 31, 2004 and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
$ | |
|
% | |
|
|
2004 | |
|
2003 | |
|
Difference | |
|
Difference | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS
|
|
$ |
88,297 |
|
|
$ |
99,023 |
|
|
$ |
(10,726 |
) |
|
|
(10.8 |
)% |
Payment Processing
|
|
|
26,836 |
|
|
|
|
|
|
|
26,836 |
|
|
|
|
|
INS
|
|
|
17,540 |
|
|
|
20,955 |
|
|
|
(3,415 |
) |
|
|
(16.3 |
) |
Instant Conferencing
|
|
|
382 |
|
|
|
|
|
|
|
382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
133,055 |
|
|
$ |
119,978 |
|
|
$ |
13,077 |
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS $
|
|
$ |
37,020 |
|
|
$ |
46,399 |
|
|
$ |
(9,379 |
) |
|
|
(20.2 |
)% |
TDS %
|
|
|
41.9 |
% |
|
|
46.9 |
% |
|
|
|
|
|
|
|
|
Payment Processing $
|
|
$ |
19,580 |
|
|
$ |
|
|
|
$ |
19,580 |
|
|
|
|
% |
Payment Processing %
|
|
|
73.0 |
% |
|
|
|
% |
|
|
|
|
|
|
|
|
INS $
|
|
$ |
8,790 |
|
|
$ |
11,630 |
|
|
$ |
(2,840 |
) |
|
|
(24.4 |
)% |
INS %
|
|
|
50.1 |
% |
|
|
55.5 |
% |
|
|
|
|
|
|
|
|
Instant Conferencing $
|
|
$ |
(225 |
) |
|
$ |
|
|
|
$ |
(225 |
) |
|
|
|
% |
Instant Conferencing %
|
|
|
(58.9 |
)% |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit $
|
|
$ |
65,165 |
|
|
$ |
58,029 |
|
|
$ |
7,136 |
|
|
|
12.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit %
|
|
|
49.0 |
% |
|
|
48.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS
|
|
$ |
16,188 |
|
|
$ |
22,025 |
|
|
$ |
(5,837 |
) |
|
|
(26.5 |
)% |
Payment Processing
|
|
|
3,560 |
|
|
|
|
|
|
|
3,560 |
|
|
|
|
|
INS
|
|
|
(4,014 |
) |
|
|
(2,541 |
) |
|
|
(1,473 |
) |
|
|
(58.0 |
) |
Instant Conferencing
|
|
|
(4,309 |
) |
|
|
(3,536 |
) |
|
|
(773 |
) |
|
|
(21.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$ |
11,425 |
|
|
$ |
15,948 |
|
|
$ |
(4,523 |
) |
|
|
(28.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items(1)
|
|
|
(18,403 |
) |
|
|
(19,806 |
) |
|
|
|
|
|
|
|
|
Total operating loss
|
|
$ |
(6,978 |
) |
|
$ |
(3,858 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Reconciling items consist of certain corporate or
centralized marketing and general and administrative expenses
not allocated to our business unit segments, because these
activities are managed separately from the business units. Also,
we do not allocate restructuring expenses and other
non-recurring gains or charges to our business unit segments
because our Chief Executive Officer evaluates the segment
results exclusive of these items. |
|
|
|
Revenues by Operating Segment |
TDS. The decline in TDS revenues was a result of lower
transaction fees charged to certain clients as a result of
competitive pricing pressures, a decrease in the level of
consulting activity, and an unfavorable change in the mix of
services provided despite a 4% increase in the volume of
subscriber applications processed during 2004. TDS transaction
services revenues for the quarter ended September 30, 2004
included approximately $0.5 million related to a settlement
received, as a result of the WorldCom, Inc. bankruptcy
proceedings, for services provided to WorldCom, Inc. in 2002. We
did not recognize revenue at the time the services were
performed because of concerns regarding the collectibility of
our fees.
33
Payment Processing. Lightbridge began recording Payment
Processing revenues as of April 1, 2004 following the
acquisition of Authorize.Net on March 31, 2004.
Authorize.Nets revenues for the period from April 1,
2004 to December 31, 2004 have increased 25% compared to
the same period in 2003, as reported by Authorize.Nets
former owner, InfoSpace, Inc. The increased revenues are the
result of an increase in the number of merchant customers and
increased volume of transactions processed.
INS. Revenues decreased by $3.4 million in 2004 as
compared with 2003 as a result of the sale of our Fraud
Centurion products pursuant to an agreement with India-based
Subex on October 1, 2004 and as a result of pricing
pressures on maintenance fees related to our PrePay products.
Instant Conferencing. In 2004, we recorded revenues of
$0.4 million related to a contract for our Mobile Data
Manager product. No future revenues from the Mobile Data Manager
product are expected. In 2004, we did not record any revenues
from our GroupTalk product.
|
|
|
Gross Profit (Loss) by Operating Segment |
TDS. The decline in TDS gross profit was a result of
lower transaction fees charged to certain clients as a result of
competitive pricing pressures, a decrease in the level of
consulting activity, and an unfavorable change in the mix of
services provided despite a 4% increase in the volume of
subscriber applications processed during 2004, partially offset
by spending reductions associated with reduced depreciation
expense in our data center operations and with our September
2004 restructuring activities.
Payment Processing. Lightbridge began recording Payment
Processing results as of April 1, 2004 following the
acquisition of Authorize.Net on March 31, 2004. We expect
gross profit generated by our Payment Processing Segment to
represent a larger portion of our total gross profit in 2005 as
compared with 2004.
INS. The reduction in INS gross profit is largely the
result of pricing pressures on maintenance fees associated with
our PrePay product line.
Instant Conferencing. The decline in Instant Conferencing
gross profit reflects spending to support our relationship with
AOL, which began using the product in the second quarter of 2004.
|
|
|
Operating Income (Loss) by Operating Segment. |
TDS. The decline in TDS operating income reflects the
impact of reduced revenues, partially offset by spending
reductions resulting from our January 2004 and September 2004
restructuring activities. In addition, 2004 results include a
one-time benefit of approximately $1.0 million related to
the release from liability of amounts that had been reserved for
potential claims against us related to the WorldCom, Inc.
bankruptcy proceedings.
Payment Processing. We began recording Payment Processing
results as of April 1, 2004 following the acquisition of
Authorize.Net on March 31, 2004. We expect the operating
income generated by our Payment Processing Segment to become a
larger portion of our total segment operating income in 2005 as
compared with 2004.
INS. The increase in INS operating loss in 2004 is
largely the result of reduced revenues, partially offset by
savings associated with our 2003 and 2004 restructuring
initiatives.
Instant Conferencing. The increase in Instant
Conferencing operating loss reflects increased spending to
support our relationship with AOL, which began using the product
in the second quarter of 2004. We expect the operating loss in
our Instant Conferencing segment to decrease in 2005 as compared
with 2004 as a result of restructuring initiatives undertaken in
2004 and the first quarter of 2005.
34
|
|
|
Year Ended December 31, 2003 Compared with Year Ended
December 31, 2002 |
Revenues. Revenues and certain revenue comparisons for
the years ended December 31, 2003 and 2002 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
$ | |
|
% | |
|
|
2003 | |
|
2002 | |
|
Difference | |
|
Difference | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Transaction services
|
|
$ |
80,552 |
|
|
$ |
88,376 |
|
|
$ |
(7,824 |
) |
|
|
(8.9 |
)% |
Consulting and maintenance services
|
|
|
28,666 |
|
|
|
32,491 |
|
|
|
(3,825 |
) |
|
|
(11.8 |
) |
Software licensing and hardware
|
|
|
10,760 |
|
|
|
12,571 |
|
|
|
(1,811 |
) |
|
|
(14.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
119,978 |
|
|
$ |
133,438 |
|
|
$ |
(13,460 |
) |
|
|
(10.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in transaction services revenues of
$7.8 million was due to slower subscriber growth
experienced by our clients, resulting in a reduction in
transaction volume, and to clients selecting fewer transaction
products and services. Our transaction services revenues also
declined as a result of reduced call volume and a change in the
combination of services provided by our TeleServices call
centers. In addition, in the first quarter of 2002, transaction
revenues included approximately $2.7 million in revenues
from services provided to WorldCom, Inc. (WorldCom).
In the second quarter of 2002, we provided approximately
$2.0 million of transaction services to WorldCom, and did
not record any related revenue because of doubts about
collectibility stemming from WorldComs financial
difficulties. No services were provided to WorldCom in 2003.
The decrease in consulting and maintenance services revenues of
$3.8 million for the year ended December 31, 2003 was
principally due to a decline in software sales that affected the
integration, deployment, optimization and maintenance services
associated with software sales as well as a decline in other
consulting projects.
The decrease in software licensing and hardware revenues was due
to fewer software contracts recorded in 2003 as a result of the
capital spending decline in the telecommunications industry.
This decline was partially offset by a slight increase in
hardware revenues of $0.4 million.
Cost of Revenues and Gross Profit. Cost of revenues and
certain cost of revenues comparisons for the years ended
December 31, 2003 and 2002 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
$ | |
|
% | |
|
|
2003 | |
|
2002 | |
|
Difference | |
|
Difference | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$ |
45,667 |
|
|
$ |
49,194 |
|
|
$ |
(3,527 |
) |
|
|
(7.2 |
)% |
Consulting and maintenance services
|
|
|
12,741 |
|
|
|
13,663 |
|
|
|
(922 |
) |
|
|
(6.7 |
) |
Software licensing and hardware
|
|
|
3,541 |
|
|
|
3,086 |
|
|
|
455 |
|
|
|
14.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$ |
61,949 |
|
|
$ |
65,943 |
|
|
$ |
(3,994 |
) |
|
|
(6.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services $
|
|
$ |
34,885 |
|
|
$ |
39,182 |
|
|
$ |
(4,297 |
) |
|
|
(11.0 |
)% |
Transaction services %
|
|
|
43.3 |
% |
|
|
44.3 |
% |
|
|
|
|
|
|
|
|
Consulting and maintenance services $
|
|
$ |
15,925 |
|
|
$ |
18,828 |
|
|
$ |
(2,903 |
) |
|
|
(15.4 |
)% |
Consulting and maintenance services %
|
|
|
55.6 |
% |
|
|
57.9 |
% |
|
|
|
|
|
|
|
|
Software licensing and hardware $
|
|
$ |
7,219 |
|
|
$ |
9,485 |
|
|
$ |
(2,266 |
) |
|
|
(23.9 |
)% |
Software licensing and hardware %
|
|
|
67.1 |
% |
|
|
75.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit $
|
|
$ |
58,029 |
|
|
$ |
67,495 |
|
|
$ |
(9,466 |
) |
|
|
(14.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit %
|
|
|
48.4 |
% |
|
|
50.6 |
% |
|
|
|
|
|
|
|
|
35
Transaction services cost of revenues decreased in 2003 from the
prior year principally because of lower transaction revenues as
a result of a lower volume of transactions processed through our
TeleServices call centers and a decrease in costs attributable
to our staff reductions. Transaction services cost of revenues
was also affected by a shift in the combination of services
acquired by clients during the year ended December 31,
2003. The decrease in transaction services gross profit
percentage was due to a change in the combination of services
acquired by clients in the year ended December 31, 2003, as
well as the level of our fixed costs which resulted in lower
gross profit percentage as revenues declined. Certain of these
fixed costs were eliminated or reduced as a result of our
restructurings in 2002 and 2003.
Consulting and maintenance services cost of revenues decreased
in 2003 from the prior year and gross profit percentage
decreased slightly in 2003. The decrease in consulting and
maintenance 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.
Software licensing and hardware cost of revenues increased in
2003 compared to 2002. The decrease in software licensing and
hardware gross profit percentage was attributable to the type of
software products licensed during 2003 and as a result of lower
software licensing revenue levels.
Operating Expenses. Operating expenses and certain
operating expense comparisons for the years ended
December 31, 2003 and 2002 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
$ | |
|
% | |
|
|
2003 | |
|
2002 | |
|
Difference | |
|
Difference | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Engineering and development
|
|
$ |
28,426 |
|
|
$ |
29,269 |
|
|
$ |
(843 |
) |
|
|
(2.9 |
)% |
Sales and marketing
|
|
|
14,239 |
|
|
|
13,270 |
|
|
|
969 |
|
|
|
7.3 |
|
General and administrative
|
|
|
14,143 |
|
|
|
18,170 |
|
|
|
(4,027 |
) |
|
|
(22.2 |
) |
Restructuring
|
|
|
5,079 |
|
|
|
3,616 |
|
|
|
1,463 |
|
|
|
40.5 |
|
Purchased in-process research and development
|
|
|
|
|
|
|
1,618 |
|
|
|
(1,618 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
61,887 |
|
|
$ |
65,943 |
|
|
$ |
(4,056 |
) |
|
|
(6.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and Development. The decrease in engineering
and development expenses in 2003 was primarily due to cost
savings associated with the June 2002 and 2003 restructurings.
Development expenses as a percentage of total revenues increased
in 2003 as a result of lower revenue levels.
Sales and Marketing. The increase in sales and marketing
expenses in 2003 was primarily due to the expansion of our
business development organization and costs associated with our
strategic partnerships and key initiatives.
General and Administrative. The decrease in general and
administrative costs in 2003 was primarily due to a decrease in
headcount associated with the June 2002 and June 2003
restructurings and our efforts to limit spending.
Restructuring. A discussion of restructuring charges
recorded during 2003 and 2002 is set forth in the separate
Restructurings section below.
In-Process Research and Development
(IPR&D). In connection with the Altawave
acquisition, we 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.
36
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, we 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 us including the
remaining development effort required to achieve technological
feasibility and uncertainty with respect to the market for the
technology. We 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.
Interest Income. Interest income decreased by 27.1% to
$1.8 million in the year ended December 31, 2003 from
$2.4 million in the prior year. This decrease was primarily
due to a decline in interest rates.
Equity in Loss of Partnership Investment. In June
2001, we committed to invest up to $5.0 million in a
limited partnership that invested in businesses within the
wireless industry. We used the equity method of accounting for
this limited partnership investment. For the year ended
December 31, 2002, our proportionate share of the loss of
the limited partnership was $0.5 million. 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.
Provision for (Benefit from) Income Taxes. Our effective
tax rate was 43.2% and (2.9)% for the years ended
December 31, 2003 and 2002, respectively. The 2003 tax
provision reflects a benefit of $1.1 million, which was
based upon the annual effective tax rate of 33.0%, as well as a
$0.3 million tax benefit from prior years research
and development tax credits. As of December 31, 2003, we
had approximately $11.7 million in loss carryforwards,
principally the result of various acquisitions, and
$8.3 million of other deferred tax assets, against which a
valuation reserve of approximately $12.1 million had been
provided. Net deferred tax assets were approximately
$7.8 million at December 31, 2003. We recorded a net
benefit from income taxes in 2003 due primarily to the net loss
before income taxes and the impact of a refund of prior
years research and development tax credits.
37
Results by Operating Segment. Certain operating results
and comparisons by operating segment for the years ended
December 31, 2003 and 2002 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Year Ended | |
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
$ | |
|
% | |
|
|
2003 | |
|
2002 | |
|
Difference | |
|
Difference | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS
|
|
$ |
99,023 |
|
|
$ |
107,121 |
|
|
$ |
(8,098 |
) |
|
|
(7.6 |
)% |
INS
|
|
|
20,955 |
|
|
|
26,045 |
|
|
|
(5,090 |
) |
|
|
(19.5 |
) |
Instant Conferencing
|
|
|
|
|
|
|
272 |
|
|
|
(272 |
) |
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
119,978 |
|
|
$ |
133,438 |
|
|
$ |
(13,460 |
) |
|
|
(10.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS $
|
|
$ |
46,399 |
|
|
$ |
51,251 |
|
|
$ |
(4,852 |
) |
|
|
(9.5 |
)% |
TDS %
|
|
|
46.9 |
% |
|
|
47.8 |
% |
|
|
|
|
|
|
|
|
INS $
|
|
$ |
11,630 |
|
|
$ |
15,972 |
|
|
$ |
(4,342 |
) |
|
|
(27.2 |
)% |
INS %
|
|
|
55.5 |
% |
|
|
61.3 |
% |
|
|
|
|
|
|
|
|
Instant Conferencing $
|
|
$ |
|
|
|
$ |
272 |
|
|
$ |
(272 |
) |
|
|
(100.0 |
)% |
Instant Conferencing %
|
|
|
|
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit $
|
|
$ |
58,029 |
|
|
$ |
67,495 |
|
|
$ |
(9,466 |
) |
|
|
(14.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit %
|
|
|
48.4 |
% |
|
|
50.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS
|
|
$ |
22,025 |
|
|
$ |
25,749 |
|
|
$ |
(3,724 |
) |
|
|
(14.5 |
)% |
INS
|
|
|
(2,541 |
) |
|
|
(1,986 |
) |
|
|
(555 |
) |
|
|
(27.9 |
) |
Instant Conferencing
|
|
|
(3,536 |
) |
|
|
(4,711 |
) |
|
|
1,175 |
|
|
|
24.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
$ |
15,948 |
|
|
$ |
19,052 |
|
|
$ |
(4,056 |
) |
|
|
(6.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items(1)
|
|
|
(19,806 |
) |
|
|
(17,500 |
) |
|
|
|
|
|
|
|
|
Total operating income (loss)
|
|
$ |
(3,858 |
) |
|
$ |
1,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Reconciling items consist of certain corporate or
centralized marketing and general and administrative expenses
not allocated to our business unit segments, because these
activities are managed separately from the business units. Also,
we do not allocate restructuring expenses and other
non-recurring gains or charges to our business unit segments
because our Chief Executive Officer evaluates the segment
results exclusive of these items. |
|
|
|
Revenues by Operating Segment |
TDS. The decrease in TDS revenues of $8.1 million
was due to slower subscriber growth experienced by our clients,
resulting in a reduction in transaction volume, and to clients
selecting fewer transaction products and services. Our TDS
revenues also declined as a result of reduced call volume and a
change in the combination of services provided by our
TeleServices call centers. In addition, in the first quarter of
2002, TDS revenues include approximately $2.7 million in
revenues from services provided to WorldCom. In the second
quarter of 2002, we provided approximately $2.0 million of
transaction services to WorldCom, and did not record any related
revenue due to doubts about collectibility stemming from
WorldComs financial difficulties. No services were
provided to WorldCom in 2003.
INS. INS segment revenues declined by $5.1 million
in 2003 as compared to 2002 because of fewer software and
hardware sales that affected the integration, deployment,
optimization and maintenance services associated with our
software sales, as well as a decline in other consulting
services. The lower software sales were primarily a result of
reduced capital spending in the telecommunications industry in
2003.
38
Instant Conferencing. Our Instant Conferencing segment
did not produce any revenues in 2003 as compared to $272,000 of
revenues in 2002. The 2002 revenues from this segment were
related to sales of our Mobile Data Manager product, which we no
longer actively market or sell.
|
|
|
Gross Profit (Loss) by Operating Segment |
TDS. Gross profit for our TDS segment in 2003 decreased
by $4.9 million in comparison to 2002 as a result of
reduced revenue for this segment. Gross profit as a percentage
of segment revenues decreased slightly in 2003 as a result of a
change in the combination of services acquired by clients in the
year ended December 31, 2003, as well as the level of our
fixed costs which resulted in lower gross profit margins as
revenues declined.
INS. Gross profit for our INS segment decreased by
$4.3 million in 2003 as compared to 2002 as a result of
lower revenues in this segment. Gross profit as a percentage of
INS segment revenues decreased to 55.5% in 2003 from 61.3% in
2002 due to a lower percentage of segment revenues being
generated from higher margin software sales than in 2002.
Instant Conferencing. Our Instant Conferencing segment
gross profit declined in 2003 in comparison with 2002 as a
result of the decline in revenues for this segment.
|
|
|
Operating Income (Loss) by Operating Segment |
TDS. Operating income in our TDS segment decreased by
$3.7 million to $22.0 million in 2003 from
$25.7 million in 2002. The decline in operating income was
a result of decreased revenues, partially offset by reduced
operating expenses resulting from our restructuring initiatives
in 2003 and 2002 and our efforts to limit spending.
INS. Operating loss in our INS segment increased to
$(2.5) million in 2003 from $(2.0) million in 2002 as
a result of reduced revenues for this segment and lower gross
margin percentages earned on those revenues. These effects were
partially offset by lower operating expenses in our INS segment
as a result of our restructuring initiatives in 2003 and 2002
and our efforts to limit spending.
Instant Conferencing. Operating loss in our Instant
Conferencing segment decreased to $(3.5) million in 2003
from $(4.7) million in 2002 due to reduced operating
expenses resulting from our restructuring initiatives in 2003
and 2002.
Liquidity and Capital Resources
As of December 31, 2004, we had cash and cash equivalents
and short-term investments of $52.2 million, which included
$5.6 million of cash due to merchants related to our
payment processing business. Our working capital decreased to
$43.6 million at December 31, 2004 from
$137.7 million at December 31, 2003 as a result of our
acquisition of Authorize.Net in March 2004. We believe that our
current cash balances will be sufficient to finance our
operations and capital expenditures for the next twelve months.
Thereafter, the adequacy of our cash balances will depend on a
number of factors that are not readily foreseeable such as the
impact of general market conditions on our operations, cash
requirements associated with acquisitions, investments and
capital expenditures, and the profitability of our operations.
Accounts receivable as of December 31, 2004 decreased by
$2.9 million from December 31, 2003 primarily due to
reduced revenues in transactions, excluding Authorize.Net,
consulting and service revenues. As a result, accounts
receivable days outstanding for the year ended December 31,
2004 decreased to 52 days as compared to 60 days and
48 days for the years ended December 31, 2003 and
2002, respectively, due to faster collections from the
Authorize.Net business.
For the year ended December 31, 2004, we generated cash
flows from operating activities of $12.1 million and used
$38.7 million and $3.3 million in investing and
financing activities, respectively. Included in cash flow from
operations was $3.3 million of cash received as tenant
improvement allowance in 2004. Included in investing activities
was $77.5 million spent on the acquisition of
Authorize.Net, net of assets acquired.
39
Our capital expenditures for the years ended December 31,
2004 and 2003 were $14.8 million and $4.9 million,
respectively. The capital expenditures during these periods
consisted primarily of the relocation of our headquarters in
June 2004 and the expansion of our call center operations to
Liverpool, Nova Scotia, Canada as well as purchases of fixed
assets for our operations infrastructure, and computer equipment
for development activities. We lease our facilities and certain
equipment under non-cancelable operating lease agreements that
expire at various dates through November 2011.
On October 4, 2001, we announced that our board of
directors authorized the repurchase of up to 2 million
shares of our common stock at an aggregate price of up to
$20 million. The shares may be purchased from time to time
on or after October 8, 2001, depending on market
conditions. On April 23, 2003, the board approved an
expansion of the plan to authorize us to purchase up to
4 million shares of our common stock at an aggregate price
of up to $40 million through September 26, 2005. As of
December 31, 2004, we had purchased approximately
2.5 million shares at a total cost of approximately
$17.9 million since the inception of its repurchase
program. For the year ended December 31, 2004, we used
$3.8 million for the repurchase of our common stock under
our stock repurchase program. We may continue to repurchase
shares during 2005 based on prevailing market prices and other
financial considerations, and subject to the requirements of the
repurchase program and applicable laws.
On January 14, 2003, we had an outstanding letter of credit
in the amount of $1.0 million, which expired in May 2004.
On January 7, 2004, we entered into another
$1.0 million letter of credit, which was scheduled to
expire in January 2005. This letter of credit was renewed in the
amount of $1.6 million and extends through January 2006. In
January 2005, we restricted $1.6 million of cash as
collateral for the renewed letter of credit.
On January 14, 2003, we 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 expired on January 24, 2005. There were no
transactions under this agreement.
Our primary contractual obligations and commercial commitments
are under our operating leases and letters of credit. Our future
minimum payments due under operating leases, including
facilities affected by restructurings and our new headquarters
lease, and the amount of our commitment per period under
annually renewable letters of credit required as security under
the leases for our current and new headquarters are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than | |
|
|
|
|
|
More than | |
|
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Operating leases
|
|
$ |
20,065 |
|
|
$ |
4,840 |
|
|
$ |
6,833 |
|
|
$ |
4,866 |
|
|
$ |
3,526 |
|
Letters of credit
|
|
$ |
1,600 |
|
|
$ |
1,600 |
|
|
$ |
1,600 |
|
|
|
|
|
|
|
|
|
We provide certain warranties and related indemnities in our
client contracts. These warranties may include warranties that
the transactions processed on a clients behalf have been
processed in accordance with the contract, that products
delivered or services rendered meet designated specifications or
service levels, and that certain applicable laws and regulations
are complied with in the performance of services for or
provision of products to a client. We maintain errors and
omissions insurance that may provide coverage for certain
warranty and indemnity claims. However, such insurance might
cease to be available to us on commercially reasonable terms or
at all.
We generally undertake 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 our
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 us,
breaches of contract by us or the failure by us to comply with
applicable laws in the performance of services or provision of
products by us to its clients. Historically, our 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.
40
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements other than operating
lease obligations during the year ended December 31, 2004,
and we were not a party to any material transactions involving
related persons or entities (other than employment, separation
and other compensation agreements with certain executives)
during 2004. Future annual minimum rental lease payments are
detailed in Note 8 of the Notes to Consolidated Financial
Statements in Item 8 of this Annual Report on
Form 10-K.
Restructurings
In December 2004, we announced a restructuring of our business
in order to lower overall expenses to better align them with
future revenue expectations. This action followed our
announcement of an anticipated revenue reduction as a result of
the acquisition of AT&T by Cingular Wireless LLC. This
restructuring resulted in the termination of 38 employees in our
corporate offices in Burlington, Massachusetts as follows: 16 in
product and service delivery, 11 in engineering and development,
10 in sales and marketing and 1 in general and administrative.
We recorded a restructuring charge of approximately
$1.4 million relating to employee severance and termination
benefits during the three months ended December 31, 2004.
Additionally, subsequent to our acquisition of Authorize.net we
relocated its offices in Bellevue, Washington and the remaining
rent paid on the vacated space of $178,000 was included in the
restructuring charge during the fourth quarter of 2004. We
anticipate that all costs related to this restructuring will be
paid by the end of 2005.
The following summarizes the changes to the December 2004
restructuring reserve since it was accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at | |
|
|
December 31, |
|
|
|
|
|
December 31, | |
|
|
2003 |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Employee severance and termination benefits
|
|
$ |
|
|
|
$ |
1,410 |
|
|
$ |
46 |
|
|
$ |
1,364 |
|
Facility closing and related costs
|
|
|
|
|
|
|
178 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
1,588 |
|
|
$ |
224 |
|
|
$ |
1,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In October 2004, we announced a restructuring of our business in
accordance with the sale of Fraud Centurion product suite to
Subex. This action, a continuation of our emphasis on expense
management, resulted in the termination of nine employees in our
Broomfield, Colorado location as follows: two in product and
service delivery and seven in engineering and development. We
recorded a restructuring charge of approximately $172,000
relating to employee severance and termination benefits during
the three months ended December 31, 2004. We anticipate
that all costs related to this restructuring will be paid by the
end of 2005.
The following summarizes the changes to the October 2004
restructuring reserve since it was accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at | |
|
|
December 31, |
|
|
|
|
|
December 31, | |
|
|
2003 |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Employee severance and termination benefits
|
|
$ |
|
|
|
$ |
172 |
|
|
$ |
147 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2004, we announced a restructuring of our business
in order to lower overall expenses to better align them with
future revenue expectations. This action, a continuation of our
emphasis on expense management, resulted in the termination of
64 employees and 2 contractors in our corporate offices in
Burlington, Massachusetts and our Broomfield, Colorado location
as follows: 12 in product and service delivery, 16 in
engineering and development, 25 in sales and marketing and 13 in
general and administrative. We recorded a restructuring charge
of approximately $2.1 million relating to employee
severance and termination benefits during the three months ended
September 30, 2004. We anticipate that all costs related to
this restructuring will be paid by the end of 2005.
41
The following summarizes the changes to the September 2004
restructuring reserve since it was accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at | |
|
|
December 31, |
|
|
|
|
|
December 31, | |
|
|
2003 |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Employee severance and termination benefits
|
|
$ |
|
|
|
$ |
2,090 |
|
|
$ |
1,255 |
|
|
$ |
835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2004, we announced a reorganization of our internal
business operations. This action, a continuation of our emphasis
on expense management, resulted in the termination of ten
individuals in our corporate office in Burlington,
Massachusetts. We recorded a restructuring charge of
approximately $0.5 million relating to employee severance
and termination benefits during the three months ended
March 31, 2004. We anticipate that all costs related to
this restructuring will be paid by the end of 2005.
The following summarizes the changes to the January 2004
restructuring reserves since it was accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at | |
|
|
December 31, |
|
|
|
|
|
December 31, | |
|
|
2003 |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
(In thousands) | |
|
|
Employee severance and termination benefits
|
|
$ |
|
|
|
$ |
488 |
|
|
$ |
483 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2003, we announced that we would be closing our Irvine,
California facility and transferring certain employment
positions to our Broomfield, Colorado facility and reducing our
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, we recorded a restructuring charge of
approximately $0.7 million, consisting mainly of workforce
reduction costs. In the quarter ended September 30, 2003,
we recorded an additional restructuring charge associated with
this action of approximately $3.3 million, consisting of
$1.1 million for workforce reduction, $1.7 million in
future lease obligations for unused facilities and
$0.5 million for capital equipment write-offs. In the
quarter ended December 31, 2003, we recorded an additional
restructuring charge of $0.1 million related to future
lease obligations and employee severance benefits. The capital
equipment write-offs and a majority of severance costs related
to this restructuring were incurred by the end of 2003, and we
anticipate that all other costs related to this restructuring,
consisting principally of lease obligations on unused space,
will be paid by the end of 2006.
The following summarizes the changes to the June 2003
restructuring reserves for the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
December 31, | |
|
|
|
|
|
December 31, | |
|
|
2003 | |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Employee severance and termination benefits
|
|
$ |
253 |
|
|
$ |
(93 |
) |
|
$ |
160 |
|
|
$ |
|
|
Facility closing and related costs
|
|
|
1,396 |
|
|
|
137 |
|
|
|
665 |
|
|
|
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,649 |
|
|
$ |
44 |
|
|
$ |
825 |
|
|
$ |
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2003, we announced that we would be streamlining our
existing Broomfield, Colorado call center operations into our
Lynn, Massachusetts facility and a smaller facility in
Broomfield, Colorado by the end of May 2003. In the quarter
ended March 31, 2003, we recorded a restructuring charge of
approximately $0.1 million for workforce reductions. In the
quarter ended June 30, 2003, we 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 capital equipment write-offs and all
of the severance costs related to this restructuring were
incurred by the end of 2003, and we anticipate that all other
costs relating to this restructuring, consisting principally of
lease obligations on unused space, will be paid by the end of
the first quarter of 2005.
42
The following summarizes the changes to the March 2003
restructuring reserves for the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
December 31, | |
|
|
|
|
|
December 31, | |
|
|
2003 | |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Facility closing and related costs
|
|
$ |
363 |
|
|
$ |
(36 |
) |
|
$ |
324 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2002, we announced that we were reducing our workforce
by seven percent and consolidating our Waltham, Massachusetts
call center operations into our Lynn, Massachusetts and
Broomfield, Colorado facilities by the end of 2002. We 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 a majority of severance costs related to this
restructuring were incurred by the end of 2002, and we
anticipate that all other costs relating to this restructuring,
consisting principally of lease obligations on unused space,
will be paid by the end of 2005.
The following summarizes the changes to the June 2002
restructuring reserves for the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
December 31, | |
|
|
|
|
|
December 31, | |
|
|
2003 | |
|
Accrued |
|
Utilized | |
|
2004 | |
|
|
| |
|
|
|
| |
|
| |
|
|
(In thousands) | |
Facility closing and related costs
|
|
$ |
622 |
|
|
$ |
|
|
|
$ |
339 |
|
|
$ |
283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflation
Although certain of the Companys expenses increase with
general inflation in the economy, inflation has not had a
material impact on the Companys financial results to date.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 123R, Share-Based Payment
(SFAS No. 123R). This Statement is a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance.
SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in
share-based payment transactions. The Statement requires
entities to recognize stock compensation expense for awards of
equity instruments to employees based on the grant-date fair
value of those awards (with limited exceptions).
SFAS No. 123R is effective for the first interim or
annual reporting period that begins after June 15, 2005.
The Company is evaluating the two methods of adoption allowed by
SFAS No. 123R; the modified-prospective transition
method and the modified-retrospective transition method.
Risk Factors
If One or More of Our Major Clients Stops Using Our Products
or Services or Changes the Combination of Products and Services
It Uses, Our Operating Results Would Suffer Significantly.
Our revenues are concentrated among a few major clients. Our 10
largest clients accounted for approximately 72% of our total
revenues in 2004, and we expect that most of our revenues will
continue to come from a relatively small number of clients for
the foreseeable future. Consequently, our revenues, margins and
net income may fluctuate significantly from quarter to quarter
based on the actions of a single significant client. A client
may take actions that significantly affect us for reasons that
we cannot necessarily anticipate or
43
control, such as reasons related to the clients financial
condition, changes in the clients business strategy or
operations, the introduction of alternative competing products
or services, acquisitions, or as the result of the perceived
quality or cost-effectiveness of our products or services. Our
services agreements with Sprint Spectrum L.P.
(Sprint), and Nextel Operations, Inc.
(Nextel) expire on December 31, 2006. Our
services agreement with AT&T Wireless Services, Inc.
AT&T expires on April 1, 2009, but is subject to
earlier termination of the services agreement upon twelve
months notice and designated services upon notice. In
February 2004, Cingular Wireless LLC (Cingular)
announced an agreement to acquire AT&T and in October 2004,
Cingular announced that it had completed its merger with
AT&T. Cingular is not presently a client of Lightbridge. As
a result of the acquisition of AT&T, we do not expect that
client to generate significant revenue in 2005. On
December 15, 2004, Sprint and Nextel announced that their
respective Boards of Directors had approved a definitive
agreement for a merger of the two companies. We are unable to
predict the effect of the merger of Nextel and Sprint on our
relationship with either client including without limitation the
timing or extent of any reductions in applications processed or
other services provided under our contracts with those clients.
It is possible that Sprint and/or Nextel could elect not to
renew their agreements, to reduce the volume of products and
services they purchase from us or to request significant changes
to the pricing or other terms in any renewal agreement. The loss
of Sprint and/or Nextel or any of our other major clients would
cause sales to fall below expectations and materially reduce our
revenues, margins and net income and adversely affect our
business.
Certain of Our Revenues Are Uncertain Because Our Clients May
Reduce the Amounts of or Change the Combination of Our Products
or Services They Purchase.
Most of our communications client contracts extend for terms of
between one and three years. During the terms of these
contracts, our communications clients typically may elect to
purchase any of several different combinations of products and
services. The revenue that we receive for processing a
transaction for such a client may vary significantly depending
on the particular products and services used to process the
transaction. In particular, transactions handled through our
TeleServices Group generally result in significantly higher
revenue than transactions that are submitted and processed
electronically, but also result in higher cost of revenues.
Therefore, our revenues or margins from a particular client may
decline if the client changes the combination of products and
services it purchases from us.
To the extent our client contracts contain minimum purchase or
payment requirements, these minimums are typically at levels
significantly below actual or historical purchase or payment
levels. Therefore, our current clients may not continue to
utilize our products or services at levels similar to previous
years or at all, and may not generate significant revenues in
future periods. If any of our major clients significantly
reduces or changes the combination of products or services it
purchases from us for any reason, our business would be
seriously damaged.
Our Revenues Are Concentrated in the Wireless
Telecommunications Industry, Which Is Experiencing Declining
Growth Rates, Consolidation and Increasing Pressure to Control
Costs.
We currently derive a majority of our revenues from companies in
the wireless telecommunications industry, and we expect that
wireless telecommunications companies will continue to account
for a majority of our revenues in 2005. In recent years, the
growth rate of the domestic wireless industry has slowed. In
addition, consolidation has affected the number of carriers to
whom our products and services can be marketed and sold, and
competition among wireless carriers has continued to increase,
resulting in heightened efforts by carriers to control costs.
Many of our carrier clients have sought, and may in the future
seek, pricing concessions when they renew their services
agreements with us or at other times, which could affect our
revenues, margins and net income. In addition, certain of our
carrier clients have sought bankruptcy protection in recent
years, and we believe it is possible that additional clients may
file for bankruptcy protection if current industry conditions
continue. Bankruptcy filings by our clients or former clients
such as WorldCom, Inc. may prevent us from collecting some or
all of the amounts owing to us at the time of filing, may
require us to return some or all of any payments received by us
within 90 days prior to a bankruptcy filing and may also
result in
44
the termination of our service agreements. As a result of the
foregoing conditions, our success depends on a number of factors:
|
|
|
|
|
our ability to maintain our profit margins on sales of products
and services to companies in the wireless telecommunications
industry; |
|
|
|
the financial condition of our clients and their continuing
ability to pay us for services and products; |
|
|
|
our ability to develop and market new or enhanced products and
services to new and existing clients; |
|
|
|
continued growth of the domestic wireless telecommunications
markets; |
|
|
|
the number of carriers seeking to implement prepaid billing
services; and |
|
|
|
our ability to increase sales of our products and services
internationally. |
Our Future Revenues May Be Uncertain Because of Reliance on
Third Parties for Marketing and Distribution.
Authorize.Net distributes its service offerings primarily
through outside sales partners. In 2004, Authorize.Nets
revenues were derived predominantly through relationships with
distribution partners. In addition, the PrePay billing system is
currently marketed primarily through distribution agreements
with Ericsson and Nortel. Ericsson has been the source of
substantially all of our revenue derived from the PrePay billing
system in recent years. Our agreement with Ericsson may be
terminated by either party on 180 days notice to the
other. We have also entered into a business alliance with
VeriSign, Inc. (VeriSign) to assist us in
penetrating the online transaction market.
We intend to continue to market and distribute our current and
future products and services through existing and other
relationships both in and outside of the United States. There
are no minimum purchase obligations applicable to any existing
distributor or other sales and marketing partners and we do not
expect to have any guarantees of continuing orders. Failure by
our existing and future distributors or other sales and
marketing partners to generate significant revenues or our
failure to establish additional distribution or sales and
marketing alliances or changes in the industry that render third
party distribution networks obsolete could have a material
adverse effect on our business, operating results and financial
condition.
In addition, distributors and other sales and marketing partners
may become our competitors with respect to the products they
distribute either by developing a competitive product themselves
or by distributing a competitive offering. For example,
resellers of Authorize.Net products and services are permitted
to and generally do market and sell competing products and
services; Ericsson or Nortel may evaluate and seek to distribute
or acquire alternative vendors prepaid products that
compete with PrePay; and VeriSign may elect to market or acquire
alternative fraud and identity verification products.
Competition from existing and future distributors or other sales
and marketing partners could significantly harm sales of our
products.
We Have Made and May Continue to Make Acquisitions, Which
Involve Risks.
We acquired Corsair Communications, Inc. in February of 2001,
the assets of Altawave, Inc. in February of 2002 and
Authorize.Net Corporation in March of 2004. We may also make
additional acquisitions in the future if we identify companies,
technologies or assets that appear to complement our business.
Acquisitions involve risks that could cause the actual results
of any acquisitions we make to differ from our expectations. For
example:
|
|
|
|
|
We may experience difficulty in integrating and managing
acquired businesses successfully and in realizing anticipated
economic, operational and other benefits in a timely manner. The
need to retain existing clients, employees, and sales and
distribution channels of an acquired company and to integrate
and manage differing corporate cultures can also present
significant risks. If we are unable to successfully integrate
and manage acquired businesses, we may incur substantial costs
and delays or other operational, technical or financial problems. |
45
|
|
|
|
|
Our acquisition of Authorize.Net significantly reduced our
available cash and liquidity. In other future acquisitions, we
may issue equity securities that could be dilutive to our
shareholders or we may use our remaining cash, which may have an
adverse effect on our liquidity. We also may incur additional
debt and amortization expense related to intangible assets as a
result of acquisitions. This additional debt and amortization
expense, as well as the potential impairment of any purchased
goodwill, may materially and adversely affect our business and
operating results. We may also be required to make continuing
investments in acquired products or technologies to bring them
to market, which may negatively affect our cash flows and net
income. In addition, we may assume contingent liabilities that
may be difficult to estimate. |
|
|
|
Acquisitions may divert managements attention from our
existing business and may damage our relationships with our key
clients and employees. |
The Success of Our Growth Strategy Is Dependent on Our
Ability to Expand into New or Complementary Markets.
In order to achieve growth in our business, we are seeking to
expand our business into new markets or markets that are
complementary to our existing business. If we are not able to
expand successfully into new markets, our financial results and
future prospects may be harmed. Our ability to enter new markets
depends on a number of factors, including:
|
|
|
|
|
growth in our targeted markets; |
|
|
|
our ability to provide products and services to address the
needs of those markets; and |
|
|
|
competition in those markets. |
If We Do Not Continue to Enhance Our Existing Products and
Services, and Develop or Acquire New Ones, We Will Not Be Able
to Compete Effectively.
The industries in which we do business or intend to do business
have been changing rapidly as a result of increasing
competition, technological advances, regulatory changes and
evolving industry practices and standards, and we expect these
changes will continue. Current and potential clients have also
experienced significant changes as the result of consolidation
among existing industry participants and economic conditions. In
addition, the business practices and technical requirements of
our clients are subject to changes that may require
modifications to our products and services. In order to remain
competitive and successfully address the evolving needs of our
clients, we must commit a significant portion of our resources
to:
|
|
|
|
|
identify and anticipate emerging technological and market trends
affecting the markets in which we do business; |
|
|
|
enhance our current products and services in order to increase
their functionality, features and cost-effectiveness to clients
that are seeking to control costs and to meet regulatory
requirements; |
|
|
|
develop or acquire new products and services that meet emerging
client needs, such as products and services for the online
market; |
|
|
|
modify our products and services in response to changing
business practices and technical requirements of our clients, as
well as to new regulatory requirements; |
|
|
|
integrate our current and future products with third-party
products; and |
|
|
|
create and maintain interfaces to changing client and third
party systems. |
We must achieve these goals in a timely and cost-effective
manner and successfully market our new and enhanced products and
services to clients. In the past, we have experienced errors or
delays in developing new products and services and in modifying
or enhancing existing products and services. If we are unable to
expand or appropriately enhance or modify our products and
services quickly and efficiently, our business and operating
results will be adversely affected.
46
We and Our Clients Must Comply with Complex and Changing Laws
and Regulations.
Government regulation influences our activities and the
activities of our current and prospective clients, as well as
our clients expectations and needs in relation to our
products and services. Businesses that handle consumers
funds, such as our Authorize.Net business, are subject to
numerous regulations, including those related to banking, credit
cards, electronic transactions and communication, escrow, fair
credit reporting, privacy of financial records and others. State
money transmitter regulations and federal anti-money laundering
and money services business regulations can also apply under
some circumstances. The application of many of these laws with
regard to electronic commerce is currently unclear. In addition,
it is possible that a number of laws and regulations may be
applicable or may be adopted in the future with respect to
conducting business over the Internet concerning matters such as
taxes, pricing, content and distribution. If applied to us, any
of the foregoing rules and regulations could require us to
change the way we do business in a way that increases costs or
makes our business more complex. In addition, violation of some
statutes may result in severe penalties or restrictions on our
ability to engage in e-commerce, which could have a material
adverse effect on our business.
Our clients also include telecommunications companies that, to
the extent that they extend consumer credit, may be subject to
federal and state regulations. In making credit evaluations of
consumers, performing fraud screening or user authentication,
our clients are subject to requirements of federal law,
including the Equal Credit Opportunity Act (ECOA),
the Fair Credit Reporting Act (FCRA) and the
Gramm-Leach-Bliley Act (GLBA) and regulations
thereunder, as well as state laws which impose a variety of
additional requirements. Privacy legislation may also affect the
nature and extent of the products or services that we can
provide to clients as well as our ability to collect, monitor
and disseminate information subject to privacy protection.
Although most of the products and services we provide to the
telecommunications industry, other than our ProFile service, are
not directly subject to these requirements, we must take these
extensive and evolving requirements into account in order to
meet our clients needs. In some cases, consumer credit
laws require our clients to notify consumers of credit decisions
made in connection with their applications for
telecommunications services, and we have contracted with some of
our clients, including Sprint, AT&T, Nextel, Western
Wireless Corporation and Dobson Communications, Inc., to provide
such notices on their behalf. Our software has in the past
contained, and could in the future contain, undetected errors
affecting compliance by our clients with one or more of these
legal requirements. Failure to properly implement these
requirements in our products and services in a timely,
cost-effective and accurate manner could result in liability,
either directly or as indemnitor of our clients, damage to our
reputation and relationships with clients and a loss of business.
Consumer protection laws in the areas of privacy, credit and
financial transactions have been evolving rapidly at the state,
federal and international levels. As the electronic
transmission, processing and storage of financial information
regarding consumers continues to grow and develop, it is likely
that more stringent consumer protection laws may impose
additional burdens on companies involved in such transactions.
Uncertainty and new laws and regulations, as well as the
application of existing laws to e-commerce, could limit our
ability to operate in our markets, expose us to compliance costs
and substantial liability and result in costly and time
consuming litigation.
Furthermore, the growth and development of the market for
e-commerce may prompt more stringent consumer protection laws
that may impose additional regulatory burdens on those
companies, such as Lightbridge, that provide services to online
business. The adoption of additional laws or regulations may
decrease the growth of the Internet or other online services,
which could, in turn, decrease the demand for our products and
services and increase our cost of doing business.
The Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. have also enacted
regulations affecting our corporate governance, securities
disclosure and compliance practices. We expect these regulations
to increase our compliance costs and to make some of our
activities more time-consuming. If we fail to comply with any of
these regulations, we could be subject to legal actions by
regulatory authorities or private parties.
47
On-Demand Voice Conferencing Services May Become Subject to
Traditional Telecommunications Carrier Regulation by Federal and
State Authorities, Which Would Increase the Cost of Providing
Our Services, Require Us to Suspend Services to Existing
Clients, and May Subject Us to Penalties.
The Federal Communications Commission (FCC) and
state public service commissions may require us to submit to
traditional telecommunications carrier regulations for our
GroupTalk on-demand, voice conferencing service under the
Communications Act of 1934, as amended, and various state laws
or regulations as provider of telecommunications services. If
the FCC or any state public service commission seeks to enforce
any of these laws or regulations against us, we could be
prohibited from providing the voice aspect of our voice
conferencing service until we have obtained various federal and
state licenses and filed tariffs. We believe we would be able to
obtain those licenses, although in some states, doing so could
significantly delay our ability to provide services. We also
could be required to comply with other aspects of federal and
state laws and regulations. Subjecting our voice conferencing
service to these laws and regulations would increase our
operating costs, may require us to suspend service to existing
clients, could require restructuring of those services to charge
separately for the voice and other components, and would involve
on-going reporting and other compliance obligations. We also
might be subject to fines or forfeitures and civil or criminal
penalties for non-compliance.
We Need to Continue to Improve or Implement our Procedures
and Controls.
Requirements adopted by the Securities and Exchange Commission
in response to the passage of the Sarbanes-Oxley Act of 2002
require annual review and evaluation of our internal control
systems, and attestation of these systems by our registered
independent public accounting firm. As permitted by the rules
and regulations of the Securities and Exchange Commission,
management determined that the internal control over financial
reporting of Authorize.Net would be excluded from the final 2004
internal control assessment. We need to periodically review our
internal control procedures, enhance them as may be necessary
and consider the adequacy of the documentation of such
procedures. There can be no assurance that we will be able to
maintain compliance with all of the new requirements. Any
improvements in our internal control systems or in documentation
of such internal control systems and the internal control
assessment of Authorize.Net could be costly to prepare or
implement, divert attention of management or finance staff, and
may cause our operating expenses to increase over the ensuing
year.
Changes to Credit Card Association Rules or Practices Could
Adversely Impact Our Authorize.Net Business.
Our Authorize.Net credit card payment gateway does not directly
access the Visa and MasterCard credit card associations. As a
result, we must rely on banks and their service providers to
process our transactions. We must comply with the operating
rules of the credit card associations. The associations
member banks set these rules, and the associations interpret the
rules. Some of those member banks compete with Authorize.Net.
Visa, MasterCard, American Express or Discover could adopt new
operating rules or interpretations of existing rules which we
might find difficult or even impossible to comply with,
resulting in our inability to give customers the option of using
credit cards to fund their payments. If we were unable to
provide a gateway for credit card transactions, our
Authorize.Net business would be materially and adversely
affected.
We Could Be Subject to Liability as a Result of Security
Breaches, Service Interruptions by Cyber Terrorists or
Fraudulent or Illegal Use of Our Services.
Because some of our activities involve the storage and
transmission of confidential personal or proprietary
information, such as credit card numbers and social security
numbers, and because we are a link in the chain of e-commerce,
security breaches, service interruptions and fraud schemes could
damage our reputation and expose us to a risk of loss or
litigation and possible monetary damages. Cyber terrorists have
periodically interrupted, and may continue to interrupt, our
payment gateway services in attempts to extort payments from us
or disrupt commerce. Our payment gateway services may be
susceptible to credit card and other payment fraud schemes,
including unauthorized use of credit cards or bank accounts,
identity theft or merchant fraud.
48
We expect that technically sophisticated criminals will continue
to attempt to circumvent our anti-fraud systems. If such fraud
schemes become widespread or otherwise cause merchants to lose
confidence in our services in particular, or in Internet systems
generally, our business could suffer.
In addition, the large volume of payments that we handle for our
clients makes us vulnerable to third party or employee fraud or
other internal security breaches. Further, we may be required to
expend significant capital and other resources to protect
against security breaches and fraud to address any problems they
may cause.
Our payment system may also be susceptible to potentially
illegal or improper uses. These uses may include illegal online
gambling, fraudulent sales of goods or services, illicit sales
of prescription medications or controlled substances, software
and other intellectual property piracy, money laundering, bank
fraud, child pornography trafficking, prohibited sales of
alcoholic beverages and tobacco products and online securities
fraud. Despite measures we have taken to detect and lessen the
risk of this kind of conduct, we cannot ensure that these
measures will succeed. In addition, regulations under the USA
Patriot Act of 2001 may require us to revise the procedures we
use to comply with the various anti-money laundering and
financial services laws. Our business could suffer if clients
use our system for illegal or improper purposes or if the costs
of complying with regulatory requirements increase significantly.
We have expended, and may be required to continue to expend,
significant capital resources to protect against security
breaches, service interruptions and fraud schemes. Our security
measures may not prevent security breaches, service
interruptions and fraud schemes and the failure to do so may
disrupt our business, damage our reputation and expose us to
risk of loss or litigation and possible monetary damages.
The Demand for Our Payment Processing Products and Services
Could Be Negatively Affected by a Reduced Growth of e-Commerce
or Delays in the Development of the Internet Infrastructure.
Sales of goods and services over the Internet do not currently
represent a significant portion of overall sales of goods and
services. We depend on the growing use and acceptance of the
Internet as an effective medium of commerce by merchants and
customers in the United States and as a means to grow our
business. We cannot be certain that acceptance and use of the
Internet will continue to develop or that a sufficiently broad
base of merchants and consumers will adopt, and continue to use,
the Internet as a medium of commerce.
It is also possible that the number of Internet users, or the
use of Internet resources by existing users, will continue to
grow, and may overwhelm the existing Internet infrastructure.
Delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet
activity could also have a detrimental effect on the Internet
and correspondingly on our business. These factors would
adversely affect usage of the Internet, and lower demand for our
products and services.
Our Reliance on Suppliers and Vendors Could Adversely Affect
Our Ability to Provide Our Services and Products to Our Clients
on a Timely and Cost-Efficient Basis.
We rely to a substantial extent on third parties to provide some
of our equipment, software, data, systems and services. In some
circumstances, we rely on a single supplier or limited group of
suppliers. For example, our Authorize.Net business requires the
services of third-party payment processors. If any of these
processors cease to allow us to access their processing
platforms, our ability to process credit card payments would be
severely impacted. In addition, we depend on our Originating
Depository Financial Institution (ODFI) partner to
process Automated Clearing House transactions, and our ability
to process these transactions would be severely impacted if we
were to lose our ODFI partner for any reason.
Our reliance on outside vendors and service providers also
subjects us to other risks, including a potential inability to
obtain an adequate supply of required components and reduced
control over quality, pricing and timing of delivery of
components. For example, in order to provide our credit
verification service, we need access to third-party credit
information databases provided to us by outside vendors.
Similarly, delivery of our activation services often requires
the availability and performance of billing systems which are
also supplied by
49
outside vendors. If for any reason we were unable to access
these databases or billing systems, our ability to process
credit verification transactions could be impaired.
In addition, our business is materially dependent on services
provided by various telecommunications providers. A significant
interruption in telecommunications services could seriously harm
our business.
From time to time, we must also rely upon third parties to
develop and introduce components and products to enable us, in
turn, to develop new products and product enhancements on a
timely and cost-effective basis. In particular, we must rely on
the development efforts of third-party wireless infrastructure
providers in order to allow our PrePay product to integrate with
both existing and future generations of the infrastructure
equipment. We may not be able to obtain access, in a timely
manner, to third-party products and development services
necessary to enable us to develop and introduce new and enhanced
products. We may not be able to obtain third-party products and
development services on commercially reasonable terms and we may
not be able to replace third-party products in the event such
products become unavailable, obsolete or incompatible with
future versions of our products.
Our Business May Be Harmed by Errors in Our Software.
The software that we develop and license to clients, and that we
also use in providing our transaction processing and call center
services, is extremely complex and contains hundreds of
thousands of lines of computer code. Large, complex software
systems such as ours are susceptible to errors. The difficulty
of preventing and detecting errors in our software is compounded
by the fact that we maintain multiple versions of our systems to
meet the differing requirements of our major clients, and must
implement frequent modifications to these systems in response to
these clients evolving business policies and technical
requirements. Our software design, development and testing
processes are not always adequate to detect errors in our
software prior to its release or commercial use. As a result, we
have from time to time discovered, and may likely in the future
discover, errors in software that we have put into commercial
use for our clients, including some of our largest clients.
Because of the complexity of our systems and the large volume of
transactions they process on a daily basis, we sometimes have
not detected software errors until after they have affected a
significant number of transactions. Software errors can have the
effect of causing clients that utilize our products and services
to fail to comply with their intended credit or business
policies, or to fail to comply with legal requirements, such as
those under the ECOA, FCRA, or GLBA.
Such errors, particularly if they affect a major client, can
harm our business in several ways, including the following:
|
|
|
|
|
we may suffer a loss of revenue if, due to software errors, we
are temporarily unable to provide products or services to our
clients; |
|
|
|
we may not be paid for the products or services provided to a
client that contain errors, or we may be liable for losses or
damages sustained by a client or its subscribers as a result of
such errors; |
|
|
|
we may incur additional unexpected expenses to correct errors in
our software, or to fund product development projects that we
may undertake to minimize the occurrences of such errors in the
future; |
|
|
|
we may damage our relationships with clients or suffer a loss of
reputation within our industry; |
|
|
|
we may become subject to litigation or regulatory
scrutiny; and |
|
|
|
our clients may terminate or fail to renew their agreements with
us or reduce the products and services they purchase from us. |
Our errors and omissions insurance may not adequately compensate
us for losses that may occur due to software errors. It is also
possible that such insurance might cease to be available to us
on commercially reasonable terms or at all.
50
Our Initiatives to Improve Our Software Design and
Development Processes May Not Be Successful.
The development of our products has, in some cases, extended
over a period of more than ten years. This incremental
development process has resulted in systems which are extremely
complex. Systems of the size and complexity of ours are
inherently difficult to modify and maintain. We have implemented
and are also evaluating changes in our product development,
testing and control processes to improve the accuracy and
timeliness of modifications that we make to our software,
including the frequent modifications that we must make in
response to changes in the business policies and technical
requirements of our clients. We believe that our initiatives to
implement a new product architecture and to improve our product
development, test and control processes will be important to our
future competitive position and success. If we are not
successful in carrying out these initiatives on a timely basis
or in a manner that is acceptable to our clients, our business
and future prospects could be harmed.
Our Success Is Dependent in Part on PrePay, Which May Not
Achieve Market Penetration.
Our future operating results will depend to a significant extent
on the demand for and market penetration of PrePay, our prepaid
metered billing system. To date, only a small number of wireless
carriers, almost all of them outside the U.S., have deployed
PrePay, and the rate of adoption of the PrePay system will need
to increase significantly in order to achieve our revenue
targets. PrePay has been sold predominantly by Ericsson.
Ericsson, from time to time, may evaluate and seek to distribute
or acquire alternative vendors prepaid product offerings.
Any change in the terms of our distribution arrangements with
Ericsson or Ericssons desire to discontinue our
relationship would drastically affect sales of PrePay. Although
our own sales force also sells PrePay, it has not yet generated
significant PrePay sales. We cannot ensure that sales of the
PrePay system will increase or that PrePay will gain market
penetration. If PrePay does not gain market penetration our
future operating results would be adversely affected.
If We Are Unable to Make Successful Acquisitions , Our Future
Growth Will Be Limited.
A key element of our strategy is to acquire businesses,
technologies or products that expand and complement our
business. We believe acquisitions are necessary for us to grow
at a desirable rate, and we will continue to evaluate possible
acquisition opportunities in the future. Even if we are able to
identify suitable companies or businesses to buy, we may not be
able to purchase any of these companies at favorable prices, or
at all, for any number of reasons. If we are unable to make
acquisitions, we may not be able grow our business.
We May Not Be Able to Successfully Manage Operational
Changes.
Over the last several years, our operations have experienced
rapid growth in some areas and significant restructurings and
cutbacks in others. These changes have created significant
demands on our executive, operational, development and financial
personnel and other resources. If we achieve future growth in
our business, or if we are forced to make additional
restructurings, we may further strain our management, financial
and other resources. Our future operating results will depend on
the ability of our officers and key employees to manage changing
business conditions and to continue to improve our operational
and financial controls and reporting systems. We cannot ensure
that we will be able to successfully manage the future changes
in our business.
Our Quarterly Operating Results May Fluctuate.
Our operating results are difficult to predict and may fluctuate
significantly from quarter to quarter. If our operating results
fall below the expectations of investors or public market
analysts, the price of our common stock could fall dramatically.
Our common stock price could also fall dramatically if investors
or public market analysts reduce their estimates of our future
quarterly operating results, whether as a result of information
we disclose, or based on industry, market or economic trends, or
other factors.
51
Our revenues are difficult to forecast for a number of reasons:
|
|
|
|
|
Seasonal and retail trends affect our transaction revenues, in
both our Payment Processing and TDS businesses, as well as our
other products and services. Transaction revenues historically
have represented the majority of our total revenues. As a
result, our revenues can fluctuate. For example, our revenues
generally have been highest in the fourth quarter of each
calendar year, particularly in the holiday shopping season
between Thanksgiving and Christmas. In addition, marketing
initiatives undertaken by our clients or their competitors may
significantly affect the number of transactions we process. |
|
|
|
The sales process for our products and services offered to
telecommunications clients is lengthy, sometimes exceeding
twenty-four months. The length of the sales process makes our
revenues difficult to predict. The delay of one or more large
orders, particularly orders for software, which typically result
in a substantial amount of non-recurring revenue, could cause
our quarterly revenues to fall substantially below expectations. |
|
|
|
We ship our software products within a short period after
receipt of an order, and we usually do not have a material
backlog of unfilled orders of software products. Consequently,
our revenues from software licenses in any quarter depend
substantially on the orders booked and shipped in that quarter.
As a result, a delay in the consummation of a license agreement
may cause our revenues to fall below expectations for that
quarter. |
|
|
|
Our consulting services revenues can fluctuate based on the
timing of product sales and projects we perform for our clients.
Many of our consulting engagements are of a limited duration, so
it can be difficult for us to forecast consulting services
revenues or staffing requirements accurately more than a few
months in advance. |
Most of our expenses, particularly employee compensation, are
relatively fixed. As a result, even relatively small variations
in the timing of our revenues may cause significant variations
in our quarterly operating results and may result in quarterly
losses.
Our quarterly results may also vary due to the timing and extent
of restructuring and other changes that may occur in a given
quarter.
As a result of these factors, we believe that quarter-to-quarter
comparisons of our results of operations are not necessarily
meaningful. You should not rely on our quarterly results of
operations to predict our future performance.
Our Foreign Sales and Operations Subject Us to Risks and
Concerns Which Could Negatively Affect Our Business Overall.
We expect our international revenues will continue to represent
a significant portion of our total revenues. We also intend to
further expand our sales efforts internationally. In addition to
the risks generally associated with sales and operations in the
U.S., sales to clients outside the U.S. and operations in
foreign countries present us with many additional risks,
including the following:
|
|
|
|
|
the imposition of financial and operational controls and
regulatory restrictions by foreign governments; |
|
|
|
the need to comply with a wide variety of complex U.S. and
foreign import and export laws and treaties; |
|
|
|
political and economic instability that may lead to reduced
demand for our products and services; |
|
|
|
changes in tariffs, taxes and other barriers that may reduce our
ability to sell our solutions or may reduce the profitability of
those solutions; |
|
|
|
longer payment cycles and increased difficulties in collecting
accounts receivable; |
|
|
|
fluctuations in interest and currency exchange rates, which may
reduce our earnings if we denominate arrangements with
international clients in the currency of the country in which
our products or services |
52
|
|
|
|
|
are provided, or with respect to arrangements with international
clients that are U.S. dollar-denominated, which may make
our systems less price-competitive; |
|
|
|
changes in technology standards, such as interfaces between
products, that are developed by foreign groups and may require
additional development efforts on our part or change the buying
behavior of some of our clients; |
|
|
|
reduced protection for intellectual property rights in some
countries; |
|
|
|
difficulties in managing a global network of distributors or
representatives and in staffing and managing foreign subsidiary
operations; |
|
|
|
costs and risks of localizing systems in foreign countries; |
|
|
|
additional complications and expenses related to supporting
products internationally; and |
|
|
|
the possibility that our purchase agreements may be governed by
foreign laws that differ significantly from U.S. laws,
which may limit our ability to enforce our rights under these
agreements. |
We Face Significant Competition for a Limited Supply of
Qualified Software Engineers, Consultants and Sales and
Marketing Personnel.
Our business depends on the services of skilled software
engineers who can develop, maintain and enhance our products,
consultants who can undertake complex client projects and sales
and marketing personnel. In general, only highly qualified,
highly educated personnel have the training and skills necessary
to perform these tasks successfully. In order to maintain the
competitiveness of our products and services and to meet client
requirements, we need to attract, motivate and retain a
significant number of software engineers, consultants and sales
and marketing personnel. Qualified personnel such as these are
in short supply and we face significant competition for these
employees, from not only our competitors but also clients and
other enterprises. Other employers may offer software engineers,
consultants and sales and marketing personnel significantly
greater compensation and benefits or more attractive career
paths than we are able to offer. Any failure on our part to
hire, train and retain a sufficient number of qualified
personnel would seriously damage our business.
Changes in Management Could Affect Our Ability to Operate Our
Business.
Our future success will depend to a significant degree on the
skills, experience and efforts of our executive officers. We
have experienced recent changes in management including the
resignation of Pamela D.A. Reeve, our former President and CEO,
on August 2, 2004. The loss of any of our executive
officers could impair our ability to successfully manage our
current business or implement our planned business objectives
and our future operations may be adversely affected.
We Face Competition from a Broad and Increasing Range of
Vendors.
The market for products and services offered to communications
providers and participants in online transactions is highly
competitive and subject to rapid change. Each of these markets
is fragmented, and a number of companies currently offer one or
more products or services competitive with ours. We anticipate
continued growth and the formation of new alliances in each of
the markets in which we compete, which will result in the
entrance of new competitors in the future. We face potential
competition from several primary sources:
|
|
|
|
|
providers of online payment processing services, including
VeriSign, CyberSource Corporation, Plug & Pay
Technologies, Inc. and LinkPoint International, Inc. |
|
|
|
software vendors that provide one or more customer acquisition,
customer relationship management and retention or risk
management solutions, including ECtel Ltd., TSI
Telecommunications Services Inc. (TSI), Fair Isaac
Corporation, Magnum Software Systems, Inc., American Management
Systems, Incorporated and SLP Infoware; |
53
|
|
|
|
|
telecommunications equipment vendors that market software-based
solutions to complement their hardware offerings, such as
Hewlett-Packard Company and Ericsson; |
|
|
|
service providers that offer customer acquisition, customer
relationship management and retention, risk management or
authentication services in connection with other services,
including Choicepoint Inc., Visa U.S.A., Experian Information
Solutions, Inc., Equifax, Inc., Lexis Nexis, Trans Union,
L.L.C., Schlumberger Sema plc and Amdocs Ltd; |
|
|
|
information technology departments within larger carriers that
have the ability to provide products and services that are
competitive with those we offer; |
|
|
|
information technology vendors that offer wireless and internet
software applications such as Oracle Corporation, Microsoft
Corporation and International Business Machine Corporation; |
|
|
|
consulting firms or systems integrators that may offer
competitive services or the ability to develop customized
solutions for customer acquisition and qualification, customer
relationship management and retention or risk management, such
as American Management Systems, Incorporated, Accenture Ltd.,
BearingPoint, Inc., PeopleSoft, Inc., Siebel Systems, Inc. and
Cap Gemini Ernst & Young; |
|
|
|
software vendors of prepaid wireless billing products, including
Boston Communications Group, Inc., Intervoice, Inc., Comverse
Technology, Inc., Glenayre Technologies, Inc., VeriSign
Telecommunications Services, Telemac Cellular Corporation, Fair,
Isaac & Co. Inc., ORGA Kartensysteme GmbH, Schlumberger
Sema plc, Alcatel USA, Priority Call Management, Lucent
Technologies, Inc., Hewlett-Packard Company (Tandem Division),
Telcordia Technologies, Inc. and Sixbell; |
|
|
|
a number of alternative technologies, including profilers,
personal identification numbers and authentication, provided by
companies such as Verizon Communications, Inc., Authentix
Network Inc. and Fair Isaac Corporation; |
|
|
|
vendors that provide products and services in the wireless data
market, such as Bridgewater Systems Corporation, OracleMobile, a
division of Oracle Corporation, 4thPass, Inc., TSI, Seven
Networks, Inc. and Openwave Systems Inc.; and |
|
|
|
vendors that provide or resell products and services in the
voice conferencing market such as Spectel, Inc., Polycom Inc.,
Raindance Communications, Inc., Ptek Holdings, Inc., and the
major worldwide telecommunications providers such as AT&T,
Sprint, and Global Crossing Limited. |
Because competitors can easily penetrate one or more of our
markets, we anticipate additional competition from other
established and new companies. In addition, competition may
intensify as competitors establish cooperative relationships
among themselves or alliances with others.
Many of our current and potential competitors have significantly
greater financial, marketing, technical and other competitive
resources than we do. As a result, these competitors may be able
to adapt more quickly to new or emerging technologies and
changes in client requirements, or may be able to devote greater
resources to the promotion and sale of their products and
services. In addition, in order to meet client requirements, we
must often work cooperatively with companies that are, in other
circumstances, competitors. The need for us to work
cooperatively with such companies may limit our ability to
compete aggressively with those companies in other circumstances.
A Failure of, Error in or Damage to Our Computer and
Telecommunications Systems Would Impair Our Ability to Conduct
Transactions, Payment Processing and Support Services and Harm
Our Business Operations.
We provide TDS and payment processing transaction services, as
well as support services, using complex computer and
telecommunications systems. Our business could be significantly
harmed if these systems fail or suffer damage from fire, natural
disaster, terrorism including cyber terrorism, power loss,
telecommunications failure, unauthorized access by hackers,
electronic break-ins, intrusions or attempts to deny our ability
to deploy our services, computer viruses or similar events. In
addition, the growth of our client base, a significant
54
increase in transaction volume or an expansion of our facilities
may strain the capacity of our computers and telecommunications
systems and lead to degradations in performance or system
failure. Many of our agreements with telecommunications carriers
contain level of service commitments, which we might be unable
to fulfill in the event of a natural disaster, an actual or
threatened terrorist attack or a major system failure. Errors in
our computer and telecommunications systems may adversely impact
our ability to provide the products and services contracted for
by our clients. We may need to expend significant capital or
other resources to protect against or repair damage to our
systems that occur as a result of malicious activities,
cyber-terrorism, natural disasters or human error, but these
protections and repairs may not be completely effective. Our
property and business interruption insurance and errors and
omissions insurance might not be adequate to compensate us for
any losses that may occur as the result of these types of
damage. It is also possible that such insurance might cease to
be available to us on commercially reasonable terms, or at all.
Our Success Depends in Part on Our Ability to Obtain Patents
for, or Otherwise Protect, Our Proprietary Technologies.
We rely on a combination of copyright, patent, trademark and
trade secret laws, license and confidentiality agreements, and
software security measures to protect our proprietary rights.
Much of our know-how and other proprietary technology is not
covered by patent or similar protection, and in many cases
cannot be so protected. If we cannot obtain patent or other
protection for our proprietary software and other proprietary
intellectual property rights, other companies could more easily
enter our markets and compete successfully against us.
We have a limited number of patents in the U.S. and abroad, and
have pending applications for additional patents, but we cannot
be certain that any additional patents will be issued on those
applications, that any of our current or future patents will
protect our business or technology against competitors that
develop similar technology or products or services or provide us
with a competitive advantage, or that others will not claim
rights in our patents or our proprietary technologies.
Patents issued and patent applications filed relating to
products used in the wireless telecommunications and payment
processing industry are numerous and it may be the case that
current and potential competitors and other third parties have
filed or will file applications for, or have received or will
receive, patents or obtain additional proprietary rights
relating to products used or proposed to be used by us. We may
not be aware of all patents or patent applications that may
materially affect our ability to make, use or sell any current
or future products or services.
The laws of some countries in which our products are licensed do
not protect our products and intellectual property rights to the
same extent as U.S. laws. We generally enter into
non-disclosure agreements with our employees and clients and
restrict access to, and distribution of, our proprietary
information. Nevertheless, we may be unable to deter
misappropriation of our proprietary information or detect
unauthorized use of and take appropriate steps to enforce our
intellectual property rights. Our competitors also may
independently develop technologies that are substantially
equivalent or superior to our technology.
We May Become a Party to Intellectual Property Infringement
Claims, Which Could Harm Our Business.
We are aware of, and we expect we may become a party to, a
pending lawsuit captioned Net MoneyIN, Inc. v. VeriSign,
Inc., et al., Case No. CIV 01-441 TUC RCC, which
lawsuit was brought by a company that claims to hold patents
related to such services. The case was brought in the United
States District Court for the District of Arizona, against a
variety of defendants, including payment processing gateway
providers and banks, which are accused of infringing certain
patents involving payment processing over computer networks. The
plaintiff alleges that numerous products or services infringe
its patents, including the Authorize.Net Payment Gateway Service
and eCheck.Net service. Neither Lightbridge nor Authorize.Net is
a party to the suit, but Authorize.Net is indemnifying and
defending defendants InfoSpace, Inc. and E-Commerce Exchange,
Inc. as to services provided by Authorize.Net. Defendant Wells
Fargo Bank, N.A. has also requested indemnification, including
defense costs, from Authorize.Net based on certain contracts with
55
Authorize.Net. Lightbridge anticipates that plaintiff may
attempt to add Authorize.Net and/or Lightbridge as a party
defendant. The litigation is currently in the fact discovery
phase, and no trial date has been set.
From time to time, we have had and may be forced to respond to
or prosecute other intellectual property infringement claims to
protect our rights or defend a clients rights. These
claims, regardless of merit, may consume valuable management
time, result in costly litigation or cause product shipment
delays, all of which could seriously harm our business and
operating results. Furthermore, parties making such claims may
be able to obtain injunctive or other equitable relief that
could effectively block our ability to make, use, sell or
otherwise practice our intellectual property, whether or not
patented or described in pending patent applications, or to
further develop or commercialize our products in the U.S. and
abroad and could result in the award of substantial damages
against us. We may be required to enter into royalty or
licensing agreements with third parties claiming infringement by
us of their intellectual property in order to settle these
claims. These royalty or licensing agreements, if available, may
not have terms that are acceptable to us. In addition, if we are
forced to enter into a license agreement with terms that are
unfavorable to us, our operating results would be materially
harmed. We may also be required to indemnify our clients for
losses they may incur under indemnification agreements if we are
found to have violated the intellectual property rights of
others.
Our Business Could Require Additional Financing.
Our future business activities, including our operation of
Authorize.Net, the development or acquisition of new or enhanced
products and services, the acquisition of additional computer
and network equipment, the costs of compliance with government
regulations and the international expansion of our business will
require us to make significant capital expenditures. If our
available cash resources prove to be insufficient, because of
unanticipated expenses, revenue shortfalls or otherwise, we may
need to seek additional financing or curtail our expansion
activities. If we obtain equity financing for any reason, our
existing stockholders may experience dilution in their
investments. If we obtain debt financing, our business could
become subject to restrictions that affect our operations or
increase the level of risk in our business. It is also possible
that, if we need additional financing, we will not be able to
obtain it on acceptable terms, or at all.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
The market risk exposure inherent in the Companys
financial instruments and consolidated financial position
represents the potential losses arising from adverse changes in
interest rates. The Company 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 Companys short term investments also
include debt securities maturing in one year or less that 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 amortized cost 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 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, which would not have been significant to the
Companys financial position or results of operations
during 2004.
The Company is not subject to any material market risk
associated with foreign currency exchange rates.
|
|
Item 8. |
Financial Statements and Supplementary Data |
The financial statements of the Company are listed in the index
included in Item 15(a)(1) of this Annual Report on
Form 10-K.
56
|
|
Item 9. |
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure |
The information called for by this Item is not applicable.
|
|
Item 9A. |
Controls and Procedures |
|
|
(a) |
Evaluation of disclosure controls and procedures |
The Companys management, including the chief executive
officer and the chief financial officer, carried out an
evaluation of the effectiveness of the Companys disclosure
controls and procedures as of the end of the period covered by
this report. Based on this evaluation, the Companys chief
executive officer and chief financial officer concluded that the
Companys disclosure controls and procedures were effective
to provide assurance that the information required to be
disclosed in the reports filed or submitted by the Company under
the Securities Exchange Act of 1934 was recorded, processed,
summarized and reported within the requisite time periods.
|
|
(b) |
Managements Annual Report on Internal Control Over
Financial Reporting |
The management of Lightbridge, Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f). Lightbridges internal control system
was designed to provide reasonable assurance to the
Companys management and board of directors regarding the
preparation and fair presentation of published financial
statements.
Lightbridges management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2004. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on our
assessment the Company believes that, as of December 31,
2004, the Companys internal control over financial
reporting is effective based on those criteria.
Managements assessment of the effectiveness of its
internal control over financial reporting as of
December 31, 2004 has been attested to by
Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
|
|
(c) |
Changes in internal control over financial reporting |
No changes in the Companys internal control over financial
reporting occurred during the quarter ended December 31,
2004 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over
financial reporting.
|
|
(d) |
Scope of Managements Annual Report on Internal Control
Over Financial Reporting |
For purposes of evaluating the Companys internal controls
over financial reporting, management determined that the
internal control over financial reporting of Authorize.Net would
be excluded from the fiscal 2004 internal control assessment, as
permitted by the rules and regulations of the Securities and
Exchange Commission.
In March 2004, the Company acquired Authorize.Net.
The effectiveness of the Companys disclosure controls and
procedures and its internal control over financial reporting is
subject to various inherent limitations, including cost
limitations, judgments used in decision making, assumptions
about the likelihood of future events, the soundness of the
Companys systems, the possibility of human error, and the
risk of fraud. Moreover, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions
and the risk that the degree of compliance with policies or
procedures may deteriorate over time. Because of these
limitations, there can be no assurance that any system of
disclosure controls and procedures or internal control over
financial reporting will be successful in preventing all errors
or fraud or in making all material information known in a timely
manner to the appropriate levels of management.
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lightbridge, Inc.
Burlington, Massachusetts
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, that Lightbridge, Inc. and
subsidiaries (the Company) maintained effective
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. As described in Managements Annual Report on
Internal Control Over Financial Reporting, management excluded
from their assessment the internal control over financial
reporting at Authorize.Net, which was acquired on March 31,
2004 and whose financial statements reflect total assets and
revenues constituting 8% and 20%, respectively, of the related
consolidated financial statement amounts as of and for the year
ended December 31, 2004. Accordingly, our audit did not
include the internal control over financial reporting at
Authorize.Net. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2004, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Also in
our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2004, based on the criteria established in
58
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2004 of the Company and our report dated
March 16, 2005, expressed an unqualified opinion on those
financial statements and financial statement schedules.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 16, 2005
59
|
|
Item 9B. |
Other Information |
None.
PART III
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
Information required by this item will be contained in the
Companys Proxy Statement for the 2005 annual meeting of
stockholders or special meeting in lieu thereof to be filed with
the Securities and Exchange Commission on or before
April 30, 2005 and is incorporated by reference herein.
|
|
Item 11. |
Executive Compensation |
Information required by this item will be contained in the
Companys Proxy Statement for the 2005 annual meeting of
stockholders or special meeting in lieu thereof to be filed with
the Securities and Exchange Commission on or before
April 30, 2005 and is incorporated by reference herein.
Such incorporation by reference shall not be deemed to
specifically incorporate by reference the information referred
to in Item 402(a)(8) of Regulation S-K.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Information required by this item will be contained in the
Companys Proxy Statement for the 2005 annual meeting of
stockholders or special meeting in lieu thereof to be filed with
the Securities and Exchange Commission on or before
April 30, 2005 and is incorporated by reference herein.
|
|
Item 13. |
Certain Relationships and Related Transactions |
Information required by this item will be contained in the
Companys Proxy Statement for the 2005 annual meeting of
stockholders or special meeting in lieu thereof to be filed with
the Securities and Exchange Commission on or before
April 30, 2005 and is incorporated by reference herein.
|
|
Item 14. |
Principal Accountant Fees and Services |
Information required by this item will be contained in the
Companys Proxy Statement for the 2005 annual meeting of
stockholders or special meeting in lieu thereof to be filed with
the Securities and Exchange Commission on or before
April 30, 2005 and is incorporated by reference herein.
60
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a) Documents filed as part of this report
(1) Consolidated Financial Statements
|
|
|
Report of Independent Registered Public Accounting
Firm Deloitte & Touche LLP |
|
Consolidated Balance Sheets as of December 31, 2004 and 2003 |
|
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 |
|
Consolidated Statements of Stockholders Equity for the
years ended December 31, 2004, 2003 and 2002 |
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 |
|
Notes to Consolidated Financial Statements |
(2) Consolidated Financial Statement Schedules
|
|
|
All schedules have been omitted because the required information
either is not applicable or is shown in the financial statements
or notes thereto. |
(3) Exhibits
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
|
2 |
.1(1) |
|
Amended and Restated Agreement and Plan of Reorganization dated
November 8, 2000 among the Company, Lightning Merger
Corporation and Corsair Communications, Inc. |
|
|
2 |
.2(2) |
|
Stock Sale Agreement by and among InfoSpace, Inc., Go2Net, Inc.,
Authorize.Net Corporation and Lightbridge, Inc. dated as of
February 29, 2004. |
|
|
3 |
.1(3) |
|
Amended and Restated Certificate of Incorporation of the Company |
|
|
3 |
.2(3) |
|
Amended and Restated By-Laws of the Company |
|
|
3 |
.3(4) |
|
Amendment to Amended and Restated By-Laws of the Company,
adopted October 29, 1998 |
|
|
4 |
.1(3) |
|
Specimen Certificate for Common Stock of the Company |
|
|
4 |
.2(5) |
|
Rights Agreement dated as of November 14, 1997, between
Lightbridge, Inc. and American Stock Transfer and Trust Company,
as Rights Agent |
|
|
4 |
.3(5) |
|
Form of Certificate of Designation of Series A
Participating Cumulative Preferred Stock of Lightbridge, Inc. |
|
|
4 |
.4(5) |
|
Form of Right Certificate |
|
|
10 |
.1(3) |
|
1991 Registration Rights Agreement dated February 11, 1991,
as amended, between the Company and the persons named therein |
|
|
10 |
.2(3) |
|
Subordinated Note and Warrant Purchase Agreement dated as of
August 29, 1994 between the Company and the Purchasers
named therein, including form of Subordinated 14% Promissory
Notes and form of Common Stock Purchase Warrants |
|
|
10 |
.3(3) |
|
Form of Common Stock Purchase Warrants issued August 1995 |
|
|
10 |
.4(3) |
|
Settlement Agreement dated February 2, 1996 between the
Company, BEB, Inc., BEB Limited Partnership I, BEB Limited
Partnership II, BEB Limited Partnership III, BEB
Limited Partnership IV, certain related parties and Brian
Boyle |
|
|
10 |
.5(3) |
|
1990 Incentive and Nonqualified Stock Option Plan |
|
|
10 |
.6(3) |
|
1996 Employee Stock Purchase Plan |
|
|
10 |
.7(3) |
|
Employment Agreement dated August 16, 1996 between the
Company and Pamela D.A. Reeve |
61
|
|
|
|
|
Exhibit | |
|
|
No. | |
|
Description |
| |
|
|
|
|
10 |
.8(3) |
|
Letter Agreement, dated August 26, 1996, between the
Company and Brian E. Boyle, including form of Common Stock
Purchase Warrant and Registration Rights Agreement |
|
|
10 |
.9(3) |
|
Office Lease dated September 30, 1994, as amended, between
the Company and Hobbs Brook Office Park |
|
|
10 |
.10(6) |
|
Office Lease dated March 5, 1997, between the Company and
Sumitomo Life Realty (N.Y.), Inc. |
|
|
10 |
.11(7) |
|
First and Second Amendments dated July 22, 1997 and
October 6, 1997, respectively, to the Office Lease included
as Item 10.10 |
|
|
10 |
.12(8) |
|
Office Building Lease, dated March 12, 1998, between 8900
Grantline Road Investors and the Company |
|
|
10 |
.13(9) |
|
Third and Fourth Amendments dated March 15, 1999 and
July 16, 1999, respectively, to the office lease included
as Item 10.10 |
|
|
10 |
.14(9) |
|
Office Lease dated October 4, 1999, between the Company and
New Alliance Properties, Inc. |
|
|
10 |
.15(9) |
|
First Amendment dated September 20, 1999 to the Office
Lease included as Item 10.9 |
|
|
10 |
.16(10) |
|
Fifth and Sixth Amendments dated March 10, 2000 to the
office lease included as Item 10.10 |
|
|
10 |
.17(11) |
|
Employment Agreement dated May 25, 2000 between the Company
and Harlan Plumley |
|
|
10 |
.18(11) |
|
1996 Incentive and Non-Qualified Stock Option Plan (as amended) |
|
|
10 |
.19(11) |
|
1998 Non-Statutory Stock Option Plan (as amended) |
|
|
10 |
.20(12) |
|
Office lease dated August 15, 2000 between the Company and
Arthur Pappathanasi, trustee of 330 Scangas Nominee Trust |
|
|
10 |
.21(13) |
|
Amendment to 1998 Non-Statutory Stock Option Plan adopted on
November 16, 2000 |
|
|
10 |
.22(14) |
|
Amendment to 1996 Incentive and Non-Qualified Stock Option Plan |
|
|
10 |
.23(15) |
|
Amendment to 1996 Employee Stock Purchase Plan |
|
|
10 |
.24(16) |
|
Memorandum Agreement between Harlan Plumley and the Company
dated April 23, 2002 |
|
|
10 |
.25(17) |
|
Separation Agreement and Release between Carla Marcinowski and
the Company dated June 28, 2002 |
|
|
10 |
.26(17) |
|
Letter Agreement between Thomas Reynolds and the Company dated
July 19, 2002 |
|
|
10 |
.27(18) |
|
Amendment to the Companys 1996 Employee Stock Purchase
Plan, as amended |
|
|
10 |
.28(18) |
|
Memorandum Agreement dated August 5, 2002 by and between
the Company and Pamela D.A. Reeve |
|
|
10 |
.29(18) |
|
Memorandum Agreement dated August 5, 2002 by and between
the Company and Judith Dumont |
|
|
10 |
.30(19) |
|
Foreign Exchange Master Agreement dated March 31, 2003 by
and among Citizens Bank of Massachusetts, the Company, Corsair
Communications, Inc., Coral Systems, Inc., and Lightbridge
Security Corporation. |
|
|
10 |
.31(20) |
|
Separation agreement and release dated July 8,2003 between
Christine Cournoyer and the Company |
|
|
10 |
.32(21) |
|
Office Building Lease, dated December 23, 2003 between
Corporate Drive Corporation, as Trustee of Corporate Drive
Nominee Realty Trust, and the Company |
|
|
10 |
.33(2) |
|
Separation Agreement and Release between Michael Mitsock and the
Company dated January 26, 2004 |
62
|
|
|
|
|
Exhibit | |
|
|
No. | |
|
Description |
| |
|
|
|
|
10 |
.34(2) |
|
Separation Agreement and Release between Stefan Gladyszewski and
the Company dated January 26, 2004 |
|
|
10 |
.35(24) |
|
Lease between Region of Queens Municipality, LTBG TeleServices
ULC and Lightbridge, Inc. dated February 10, 2004 |
|
|
10 |
.36(22) |
|
Separation Agreement and Release between Harlan Plumley and the
Company dated May 20, 2004 |
|
|
10 |
.37(22) |
|
Amendment to the 1996 Stock Purchase Plan |
|
|
10 |
.38(22) |
|
2004 Stock Incentive Plan |
|
|
10 |
.39(20) |
|
Separation Agreement and Release between Pamela D.A. Reeve and
the Company dated August 2, 2004 |
|
|
10 |
.40(20) |
|
Employment Agreement between Robert E. Donahue and the Company
dated August 2, 2004 |
|
|
10 |
.41(20) |
|
Office Lease Agreement between EOP Operating Limited Partnership
and the Company dated as of August 10, 2004 |
|
|
10 |
.42(20) |
|
Terms and Conditions of Stock Options Granted Under the
Lightbridge, Inc. 2004 Stock Incentive Plan |
|
|
10 |
.43(20) |
|
Form of Notice of Grant of Stock Options Under the Lightbridge,
Inc. 2004 Stock Incentive Plan |
|
|
10 |
.44(23) |
|
Separation Agreement and Release between Edward DeArias and the
Company dated October 28, 2004 |
|
|
23 |
.1 |
|
Consent of Independent Registered Public Accounting
Firm Deloitte & Touche LLP |
|
|
24 |
.1 |
|
Power of Attorney (See signature page hereto) |
|
|
31 |
.1 |
|
Certification of Robert E. Donahue dated March 16, 2005 |
|
|
31 |
.2 |
|
Certification of Timothy C. OBrien dated March 16,
2005 |
|
|
32 |
.1 |
|
Certification of Robert E. Donahue and Timothy C. OBrien
dated March 16, 2005 (furnished but not filed with the
Securities and Exchange Commission). |
|
|
(1) |
Incorporated by reference to the Companys Registration
Statement on Form S-4 (Registration Number 333-50196),
as filed with the Securities and Exchange Commission on
November 17, 2000. |
|
(2) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 2004. |
|
(3) |
Incorporated by reference to the Companys Registration
Statement on Form S-1, as amended (File No. 333-6589). |
|
(4) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998. |
|
(5) |
Incorporated by reference to the Companys Registration
Statement on Form 8-A, as filed with the Securities and Exchange
Commission on November 21, 1997. |
|
(6) |
Incorporated by reference to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 1996. |
|
(7) |
Incorporated by reference to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 1997. |
|
(8) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998. |
|
(9) |
Incorporated by reference to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 1999. |
63
|
|
(10) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 2000. |
|
(11) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000. |
|
(12) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000. |
|
(13) |
Incorporated by reference to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2000. |
|
(14) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 2001. |
|
(15) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001. |
|
(16) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 2002. |
|
(17) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002. |
|
(18) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002. |
|
(19) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended March 31, 2003. |
|
(20) |
Incorporated by reference to the Companys Quarterly Report
of Form 10-Q for the quarter ended September 30, 2004. |
|
(21) |
Incorporated by reference to the Companys Annual Report on
Form 10-K for the year ended December 31, 2003. |
|
(22) |
Incorporated by reference to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004. |
|
(23) |
Incorporated by reference to the Companys Current Report
on Form 8-K dated November 8, 2004. |
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 16th day of March, 2005.
|
|
|
|
By: |
/s/ Robert E. Donahue
|
|
|
|
|
|
Robert E. Donahue |
|
President and Chief Executive Officer |
Each person whose signature appears below hereby appoints Robert
E. Donahue and Timothy C. OBrien, and each of them
severally, acting alone and without the other, his or her true
and lawful attorney-in-fact with the authority to execute in the
name of each such person, and to file with the Securities and
Exchange Commission, together with any exhibits thereto and
other documents therewith, any and all amendments to this Annual
Report on Form 10-K necessary or advisable to enable
Lightbridge, Inc., to comply with the rules, regulations, and
requirements of the Securities Act of 1934, as amended, in
respect thereof, which amendments may make such other changes in
the Annual Report on Form 10-K as the aforesaid
attorney-in-fact executing the same deems appropriate.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Name |
|
Title |
|
Date |
|
|
|
|
|
|
/s/ Timothy C.
OBrien
Timothy
C. OBrien |
|
Vice President, Finance and Administration, Chief Financial
Officer and Treasurer (Principal Financial and Accounting
Officer) |
|
March 16, 2005 |
|
/s/ Robert E. Donahue
Robert
E. Donahue |
|
President, Chief Executive Officer and Director (Principal
Executive Officer) |
|
March 16, 2005 |
|
/s/ Rachelle B. Chong
Rachelle
B. Chong |
|
Director |
|
March 16, 2005 |
|
/s/ Gary Haroian
Gary
Haroian |
|
Director |
|
March 16, 2005 |
|
/s/ Kevin C. Melia
Kevin
C. Melia |
|
Director |
|
March 16, 2005 |
|
/s/ Andrew G. Mills
Andrew
G. Mills |
|
Director |
|
March 16, 2005 |
|
/s/ David G. Turner
David
G. Turner |
|
Director |
|
March 16, 2005 |
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lightbridge, Inc.
Burlington, Massachusetts
We have audited the accompanying consolidated balance sheets of
Lightbridge, Inc. and subsidiaries (the Company) as
of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Lightbridge, Inc. and subsidiaries as of December 31, 2004
and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2004, based on the
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated March 16, 2005
expressed an unqualified opinion on managements assessment
of the effectiveness of the Companys internal control over
financial reporting and an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
|
|
/s/ Deloitte &
Touche LLP
|
|
|
|
Boston, Massachusetts
March 16, 2005
F-1
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
39,636 |
|
|
$ |
69,685 |
|
|
Short-term investments
|
|
|
12,589 |
|
|
|
63,803 |
|
|
Accounts receivable, net
|
|
|
18,940 |
|
|
|
20,071 |
|
|
Deferred tax assets
|
|
|
|
|
|
|
3,267 |
|
|
Other current assets
|
|
|
3,132 |
|
|
|
4,158 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
74,297 |
|
|
|
160,984 |
|
Property and equipment, net
|
|
|
16,978 |
|
|
|
9,408 |
|
Deferred tax assets
|
|
|
|
|
|
|
4,553 |
|
Other assets, net
|
|
|
336 |
|
|
|
362 |
|
Goodwill
|
|
|
57,628 |
|
|
|
1,664 |
|
Intangible assets, net
|
|
|
21,247 |
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
170,486 |
|
|
$ |
177,836 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
7,300 |
|
|
$ |
6,825 |
|
|
Accrued compensation and benefits
|
|
|
5,073 |
|
|
|
4,493 |
|
|
Other accrued liabilities
|
|
|
4,113 |
|
|
|
3,887 |
|
|
Deferred rent
|
|
|
1,592 |
|
|
|
|
|
|
Deferred revenues
|
|
|
3,681 |
|
|
|
5,461 |
|
|
Funds due to merchants
|
|
|
5,558 |
|
|
|
|
|
|
Reserves for restructuring
|
|
|
3,383 |
|
|
|
2,634 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
30,700 |
|
|
|
23,300 |
|
Deferred rent, less current portion
|
|
|
2,709 |
|
|
|
|
|
Other long-term liabilities
|
|
|
149 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
33,558 |
|
|
|
23,333 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock; $0.01 par value, 5,000,000 shares
authorized; no shares issued or outstanding at December 31,
2004 and 2003
|
|
|
|
|
|
|
|
|
|
Common stock; $0.01 par value, 60,000,000 shares
authorized; 29,951,826 and 29,647,795 shares issued;
26,512,783 and 26,843,352 shares outstanding at
December 31, 2004 and 2003, respectively
|
|
|
300 |
|
|
|
298 |
|
|
Additional paid-in capital
|
|
|
167,465 |
|
|
|
166,882 |
|
|
Warrants
|
|
|
206 |
|
|
|
206 |
|
|
Foreign currency translation
|
|
|
(184 |
) |
|
|
|
|
|
Retained earnings
|
|
|
(10,072 |
) |
|
|
4,072 |
|
|
Less treasury stock; 3,439,043 and 2,804,443 shares at cost
at December 31, 2004 and 2003, respectively
|
|
|
(20,787 |
) |
|
|
(16,955 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
136,928 |
|
|
|
154,503 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
170,486 |
|
|
$ |
177,836 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-2
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$ |
103,648 |
|
|
$ |
80,552 |
|
|
$ |
88,376 |
|
|
Consulting and maintenance services
|
|
|
19,898 |
|
|
|
28,666 |
|
|
|
32,491 |
|
|
Software licensing and hardware
|
|
|
9,509 |
|
|
|
10,760 |
|
|
|
12,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
133,055 |
|
|
|
119,978 |
|
|
|
133,438 |
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
|
54,831 |
|
|
|
45,667 |
|
|
|
49,194 |
|
|
Consulting and maintenance services
|
|
|
9,930 |
|
|
|
12,741 |
|
|
|
13,663 |
|
|
Software licensing and hardware
|
|
|
3,129 |
|
|
|
3,541 |
|
|
|
3,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
67,890 |
|
|
|
61,949 |
|
|
|
65,943 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
|
48,817 |
|
|
|
34,885 |
|
|
|
39,182 |
|
|
Consulting and maintenance services
|
|
|
9,968 |
|
|
|
15,925 |
|
|
|
18,828 |
|
|
Software licensing and hardware
|
|
|
6,380 |
|
|
|
7,219 |
|
|
|
9,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
|
65,165 |
|
|
|
58,029 |
|
|
|
67,495 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and development
|
|
|
29,000 |
|
|
|
28,426 |
|
|
|
29,269 |
|
|
Sales and marketing
|
|
|
22,541 |
|
|
|
14,239 |
|
|
|
13,270 |
|
|
General and administrative
|
|
|
15,987 |
|
|
|
14,143 |
|
|
|
18,170 |
|
|
Restructuring
|
|
|
4,346 |
|
|
|
5,079 |
|
|
|
3,616 |
|
|
Impairment of goodwill
|
|
|
1,664 |
|
|
|
|
|
|
|
|
|
|
Impairment of other intangible assets
|
|
|
599 |
|
|
|
|
|
|
|
|
|
|
Purchased in-process research and development
|
|
|
679 |
|
|
|
|
|
|
|
1,618 |
|
|
Gain on sale of Fraud Centurion assets
|
|
|
(2,673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
72,143 |
|
|
|
61,887 |
|
|
|
65,943 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(6,978 |
) |
|
|
(3,858 |
) |
|
|
1,552 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,185 |
|
|
|
1,778 |
|
|
|
2,439 |
|
|
Equity in loss of partnership investment
|
|
|
|
|
|
|
(471 |
) |
|
|
(464 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net
|
|
|
1,185 |
|
|
|
1,307 |
|
|
|
1,975 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
(5,793 |
) |
|
|
(2,551 |
) |
|
|
3,527 |
|
Provision for (benefit from) income taxes
|
|
|
8,351 |
|
|
|
(1,102 |
) |
|
|
(103 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(14,144 |
) |
|
$ |
(1,449 |
) |
|
$ |
3,630 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share (Note 12)
|
|
$ |
(0.53 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share (Note 12)
|
|
$ |
(0.53 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained | |
|
|
|
|
|
|
Common Stock | |
|
Additional | |
|
Foreign | |
|
Receivable | |
|
|
|
Earnings | |
|
Treasury Stock | |
|
Total | |
|
|
| |
|
Paid-in | |
|
Currency | |
|
From | |
|
|
|
(Accumulated | |
|
| |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Gain/Loss | |
|
Stockholder | |
|
Warrants | |
|
Deficit) | |
|
Shares | |
|
Amount | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance, January 1, 2002
|
|
|
29,093 |
|
|
|
291 |
|
|
|
162,367 |
|
|
|
|
|
|
|
(115 |
) |
|
|
206 |
|
|
|
1,891 |
|
|
|
1,091 |
|
|
|
(3,118 |
) |
|
|
161,522 |
|
Issuance of common stock for cash
|
|
|
72 |
|
|
|
1 |
|
|
|
584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
585 |
|
Exercise of common stock options
|
|
|
394 |
|
|
|
4 |
|
|
|
2,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,122 |
|
Retirement of treasury stock
|
|
|
(158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(158 |
) |
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,186 |
|
|
|
(8,505 |
) |
|
|
(8,505 |
) |
Tax benefit from disqualifying dispositions of stock options
|
|
|
|
|
|
|
|
|
|
|
172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172 |
|
Shareholder note written off as uncollectible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,630 |
|
|
|
|
|
|
|
|
|
|
|
3,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2002
|
|
|
29,401 |
|
|
|
296 |
|
|
|
165,241 |
|
|
|
|
|
|
|
|
|
|
|
206 |
|
|
|
5,521 |
|
|
|
2,119 |
|
|
|
(11,623 |
) |
|
|
159,641 |
|
Issuance of common stock for cash
|
|
|
84 |
|
|
|
|
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
435 |
|
Exercise of common stock options
|
|
|
163 |
|
|
|
2 |
|
|
|
995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
997 |
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
685 |
|
|
|
(5,332 |
) |
|
|
(5,332 |
) |
Tax benefit from disqualifying dispositions of stock options
|
|
|
|
|
|
|
|
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
211 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,449 |
) |
|
|
|
|
|
|
|
|
|
|
(1,449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
29,648 |
|
|
$ |
298 |
|
|
$ |
166,882 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
206 |
|
|
$ |
4,072 |
|
|
|
2,804 |
|
|
$ |
(16,955 |
) |
|
$ |
154,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash
|
|
|
84 |
|
|
|
|
|
|
|
395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395 |
|
Exercise of common stock options
|
|
|
220 |
|
|
|
2 |
|
|
|
148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150 |
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
635 |
|
|
|
(3,832 |
) |
|
|
(3,832 |
) |
Foreign currency gain/loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184 |
) |
Tax benefit from disqualifying dispositions of stock options
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,144 |
) |
|
|
|
|
|
|
|
|
|
|
(14,144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
29,952 |
|
|
$ |
300 |
|
|
$ |
167,465 |
|
|
$ |
(184 |
) |
|
$ |
|
|
|
$ |
206 |
|
|
$ |
(10,072 |
) |
|
|
3,439 |
|
|
$ |
(20,787 |
) |
|
$ |
136,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
LIGHTBRIDGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(14,144 |
) |
|
$ |
(1,449 |
) |
|
$ |
3,630 |
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
7,820 |
|
|
|
(1,095 |
) |
|
|
1,732 |
|
|
Purchased in-process research and development
|
|
|
679 |
|
|
|
|
|
|
|
1,618 |
|
|
Depreciation and amortization
|
|
|
10,909 |
|
|
|
10,398 |
|
|
|
15,326 |
|
|
Loss on disposal of property and equipment
|
|
|
63 |
|
|
|
1,511 |
|
|
|
735 |
|
|
Gain on sale of Fraud Centurion assets
|
|
|
(2,673 |
) |
|
|
|
|
|
|
|
|
|
Impairment of goodwill and intangibles
|
|
|
2,263 |
|
|
|
|
|
|
|
|
|
|
Tax benefit from disqualifying dispositions of stock options
|
|
|
40 |
|
|
|
211 |
|
|
|
172 |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,967 |
|
|
|
(2,392 |
) |
|
|
9,964 |
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
263 |
|
|
Other assets
|
|
|
1,316 |
|
|
|
(699 |
) |
|
|
2,298 |
|
|
Accounts payable and accrued liabilities
|
|
|
528 |
|
|
|
1,359 |
|
|
|
(3,361 |
) |
|
Funds due to merchants
|
|
|
(839 |
) |
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
116 |
|
|
|
(226 |
) |
|
|
(408 |
) |
|
Deferred rent
|
|
|
4,301 |
|
|
|
|
|
|
|
|
|
|
Deferred revenues
|
|
|
(1,252 |
) |
|
|
1,169 |
|
|
|
(1,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
12,094 |
|
|
|
8,787 |
|
|
|
30,017 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(14,743 |
) |
|
|
(4,869 |
) |
|
|
(4,370 |
) |
Purchase of investments
|
|
|
(33,490 |
) |
|
|
(179,385 |
) |
|
|
(119,539 |
) |
Net cash proceeds from the sale of Fraud Centurion assets
|
|
|
2,374 |
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of short-term investments
|
|
|
84,705 |
|
|
|
158,388 |
|
|
|
87,804 |
|
Acquisition of Authorize.Net, net of cash acquired
|
|
|
(77,510 |
) |
|
|
|
|
|
|
|
|
Acquisition of Altawave
|
|
|
|
|
|
|
|
|
|
|
(4,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(38,664 |
) |
|
|
(25,866 |
) |
|
|
(41,054 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(3,832 |
) |
|
|
(5,332 |
) |
|
|
(8,505 |
) |
Proceeds from issuance of common stock
|
|
|
545 |
|
|
|
1,432 |
|
|
|
2,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(3,287 |
) |
|
|
(3,900 |
) |
|
|
(5,798 |
) |
|
|
|
|
|
|
|
|
|
|
Effects of foreign exchange rate changes on cash and cash
equivalents
|
|
|
(192 |
) |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(30,049 |
) |
|
|
(20,979 |
) |
|
|
(16,835 |
) |
Cash and cash equivalents, beginning of year
|
|
|
69,685 |
|
|
|
90,664 |
|
|
|
107,499 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$ |
39,636 |
|
|
$ |
69,685 |
|
|
$ |
90,664 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
Business and Acquisition Activity |
Business Lightbridge, Inc.
(Lightbridge or the Company) was
incorporated in June 1989 under the laws of the state of
Delaware. The Company develops, markets and supports products
and services for businesses that sell products or services
online and communications providers, including Internet Protocol
(IP)-based payment gateway, customer qualification and
acquisition, risk management, prepaid billing, instant
teleconferencing and authentication services. Lightbridges
four areas of business consist of Payment Processing Services
(Payment Processing), Telecom Decisioning Services
(TDS), Intelligent Network Services
(INS), and Instant Conferencing Services
(Instant Conferencing).
Asset Purchase 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 payment 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 results of Altawave have been included in
these consolidated financial statements from the date of
acquisition.
The allocation of the Altawave purchase price was based upon an
independent appraisal of the estimated fair value of the assets
acquired and the liabilities assumed. The initial purchase price
of $4.0 million, plus the capitalized value of acquisition
costs and assumed liabilities totaling $0.9 million, was
allocated as follows:
|
|
|
|
|
|
|
Estimated | |
|
|
Fair Values | |
|
|
| |
|
|
($ in millions) | |
Acquired technology
|
|
$ |
1.3 |
|
Fixed assets
|
|
|
0.3 |
|
Goodwill
|
|
|
1.7 |
|
In-process research and development
|
|
|
1.6 |
|
Acquisition costs accrued
|
|
|
(0.6 |
) |
Operating liabilities assumed
|
|
|
(0.3 |
) |
|
|
|
|
Total cash purchase price
|
|
$ |
4.0 |
|
|
|
|
|
Any additional contingent consideration that would have been
paid in connection with the Altawave acquisition would have been
recorded as goodwill when the underlying conditions were met and
payment became probable. No contingent payments were required to
be made in connection with the Altawave acquisition.
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 initial 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
F-6
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 and $300, respectively, on the projects after the
acquisition.
Asset Purchase On March 31, 2004, the
Company acquired all of the outstanding stock of Authorize.Net
Corp. (Authorize.Net) from InfoSpace, Inc. for
$81.6 million in cash. In addition, the Company incurred
approximately $2.0 million in acquisition related costs.
Authorize.Net provides credit card and electronic check payment
processing solutions to companies that process orders for goods
and services over the Internet, at retail locations and on
wireless devices. Authorize.Net connects IP-enabled businesses
to large credit card processors and banking organizations,
allowing those businesses to accept electronic payments. Through
the acquisition of Authorize.Net, the Company expanded its
customer transaction business to include online payment
processing, while reaching a new customer base of IP-enabled
merchants. The results of operations of Authorize.Net have been
included in the Companys financial statements since the
date of the acquisition.
The aggregate purchase price for the Authorize.Net acquisition
has been allocated to the tangible and identifiable intangible
assets acquired and liabilities assumed based on their fair
values at the date of acquisition as follows (in thousands):
|
|
|
|
|
|
Tangible assets acquired:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
6,097 |
|
|
Accounts receivable
|
|
|
1,815 |
|
|
Property and equipment
|
|
|
1,655 |
|
|
Other assets
|
|
|
265 |
|
Liabilities assumed:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(1,498 |
) |
|
Funds due to merchants
|
|
|
(6,397 |
) |
Identifiable intangible assets:
|
|
|
|
|
|
In-process research and development
|
|
|
679 |
|
|
ISO network
|
|
|
9,300 |
|
|
Merchant customer base
|
|
|
7,000 |
|
|
Trademarks
|
|
|
3,600 |
|
|
Existing technology
|
|
|
3,162 |
|
|
Processor relationships
|
|
|
300 |
|
|
Goodwill
|
|
|
57,629 |
|
|
|
|
|
Total allocated purchase price
|
|
$ |
83,607 |
|
|
|
|
|
The tangible assets acquired and liabilities assumed were
recorded at their fair values, which approximated their carrying
amounts at the acquisition date. The values of the identifiable
intangible assets were determined by an independent appraiser
using established valuation techniques accepted in the
technology and software industries. The appraisal of the
intangible assets involved calculations which were based in part
on managements judgments and assumptions. These judgments
and assumptions included estimates of growth rates, changes to
pricing and margins, estimates of the life of the reseller
network and merchant customer
F-7
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
base, and an assessment of the value of the existing technology.
The reseller network value of $9.3 million and the
processor relationships value of $300,000 will be amortized over
twelve years. The merchant customer base value of
$7.0 million and the existing technology value of
$3.1 million will be amortized over five years. The value
of the trademarks of $3.6 million is not amortized.
Excluding trademarks, the weighted average amortization term of
the intangible assets is 8.4 years.
In connection with the Authorize.Net acquisition, the Company
recorded a $679,000 charge during the first quarter of 2004 for
two in-process research and development (IPR&D)
projects. The Authorize.Net technology includes payment gateway
solutions that enable merchants to authorize, settle and manage
electronic transactions via the Internet, at retail locations
and on wireless devices. The research projects in process at the
date of acquisition related to the development of the Card
Present Solution (CPS) and the Fraud Tool
(FT). Development on the FT project and the CPS
project was started at the end of 2003 and the beginning of
2004, respectively. The complexity of the CPS technology lies in
its fast, flexible and redundant characteristics. The complexity
of the FT technology lies in its responsiveness to changing
fraud dynamics and efficiency.
The value of the projects was determined by an independent
appraiser using the income method. 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 CPS and the FT projects were approximately
15% and 80% complete, respectively, with fair values of
approximately $638,000 and $41,000, respectively. The discount
rate used for the fair value calculation was 30% for the CPS
project and 22% for the FT project. At the date of acquisition,
development of the technology involved risks to the Company
including the remaining development effort required to achieve
technological feasibility and uncertainty with respect to the
market for the technology.
Lightbridge completed the development of the FT in May 2004
having spent approximately $129,000 on the project after the
acquisition. Total cost to complete the CPS project after
acquisition is estimated to be approximately $650,000. The CPS
project is expected to be completed by September 2005. If the
development of the technology is not completed on schedule, the
potential consequences to the Company may include increased
development costs and increased competition from other companies
that have competitive products in the market.
The purchase price in excess of the net assets acquired and the
identifiable intangible assets acquired was allocated to
goodwill. The entire amount of the goodwill is expected to be
deductible for tax purposes.
In accordance with Statement of Financial Accounting Standard
No. 142 (SFAS 142), the Company is required to analyze
the carrying value of goodwill and other intangible assets
against the estimated fair value of those assets for possible
impairment on an annual basis. If impairment has occurred, the
Company will record a charge in the amount by which the carrying
value of the assets exceeds their estimated fair value.
Estimated fair value will generally be determined based on
discounted cash flows.
Pro forma financial information
The following table presents the unaudited pro forma financial
information of the Company including Authorize.Net for the year
ended December 31, 2004 and 2003, as if the acquisition had
occurred at the beginning of each period presented, after giving
effect to certain purchase accounting adjustments. The pro forma
adjustments include elimination of revenue associated with
pre-acquisition deferred revenue of
F-8
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Authorize.Net, amortization of intangible assets, elimination of
interest income associated with the cash purchase price of the
acquisition and related income tax effects.
The pro forma net loss for the year ended December 31, 2004
excludes the expense of IPR&D of $679,000 related to the
Authorize.Net acquisition due to its non-recurring nature. These
results are presented for illustrative purposes only and are not
necessarily indicative of the actual operating results or
financial position that would have occurred if the transaction
had been consummated on January 1st of each of the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(Amounts in thousands, except | |
|
|
per share amounts) | |
Pro forma net revenues
|
|
$ |
141,307 |
|
|
$ |
147,803 |
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(12,309 |
) |
|
$ |
(1,677 |
) |
|
|
|
|
|
|
|
Pro forma net loss per basic and diluted share
|
|
$ |
(0.46 |
) |
|
$ |
(0.06 |
) |
|
|
|
|
|
|
|
Shares used for basic and diluted computation
|
|
|
26,643 |
|
|
|
27,015 |
|
|
|
|
|
|
|
|
Asset Sale On October 1, 2004, the
Company closed the sale of its Fraud Centurion products pursuant
to an agreement with India-based Subex Systems,
Limited NJ (Subex). The Company received
net cash proceeds of $2.4 million as a result of the sale.
The Company recorded a gain of approximately $2.7 million
in the fourth quarter of 2004 due to this transaction.
As part of this transaction, the Company sold equipment with a
net book value of approximately $200,000 and assigned certain
maintenance contracts to Subex. The deferred revenue related to
these contracts as of December 31, 2004 totaled
approximately $500,000.
|
|
2. |
Summary of Significant Accounting Policies |
Basis of Presentation and Principles of
Consolidation These consolidated financial
statements include the accounts of the Company and its
subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation. Investments in entities over
which the Company has significant influence, such as the
Companys investment in the limited partnership described
below, are accounted for using the equity method.
Significant Estimates The preparation of
financial statements in conformity with generally accepted
accounting principles in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at each reporting
date and the amount of revenue and expense reported each period.
These estimates include provisions for bad debts, certain
accrued liabilities, recognition of revenue and expenses, and
recoverability of deferred tax assets. Actual results could
differ from these estimates.
Financial Instruments Financial instruments
consist of cash and cash equivalents, short-term investments and
accounts receivable. The estimated fair value of these financial
instruments approximates their carrying value.
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 majority of
cash and cash equivalents are maintained with major financial
institutions in North America. Deposits with these banks may
exceed the amount of insurance provided on such deposits;
however, these deposits typically may be redeemed upon demand
and, therefore, bear minimal risk.
F-9
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Short-Term Investments Short-term investments
consist of corporate debt securities maturing in one year or
less and are classified as available-for-sale. These investments
are carried at amortized cost, which approximates fair value.
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. The cost of
securities sold is based on the specific identification method.
Interest and dividends on securities are included in interest
income.
Property and Equipment Property and equipment
is recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of three to
seven years. Leasehold improvements are amortized over the term
of the lease or the lives of the assets, whichever is shorter.
Acquired property and equipment is recorded at appraised fair
value, which is then considered cost, and depreciated over the
estimated useful life.
Deferred rent Deferred rent consists of step
rent and tenant improvement allowances from landlords related to
the Companys operating leases for its facilities. Step
rent represents the difference between actual operating lease
payments due and straight-line rent expense, which is recorded
by the Company over the term of the lease, including the
build-out period. The amount of the difference is recorded as a
deferred credit in the early periods of the lease, when cash
payments are generally lower than straight-line rent expense,
and is reduced in the later periods of the lease when payments
begin to exceed the straight-line expense. Tenant allowances
from landlords for tenant improvements are generally comprised
of cash received from the landlord as part of the negotiated
terms of the lease. These cash payments are recorded as a
deferred credit from landlords that is amortized into income
(through lower rent expense) over the term (including the
build-out period) of the applicable lease.
Revenue Recognition and Concentration of Credit
Risk The Company generates revenue from the
processing of qualification and activation transactions;
granting of software licenses; services (including maintenance,
installation and training); development and consulting
contracts; hardware sold in conjunction with certain software
licenses; and performing payment processing services. The
Company also offers on-demand voice conferencing services
through its GroupTalk offering. Revenues from processing of
qualification and activation transactions for communications
providers are recognized in the period in which services are
performed. Revenues from the Companys GroupTalk offering
are recognized as conference services are utilized. To date, the
Company has not recognized any transaction revenues from its
GroupTalk offering. If substantial doubt exists regarding
collection of fees for the Companys products or services
at the time of delivery or performance, the Company defers
recognition of the associated revenue until the fees are
collected.
Revenues from payment processing transaction services are
derived from the Companys credit card processing and
eCheck processing services (collectively payment
processing services), gateway fees and set-up fees.
Payment processing services revenue is based on a fee per
transaction, and is recognized in the period in which the
transaction occurs. Gateway fees are monthly subscription fees
charged to merchant customers for the use of the payment
gateway. Gateway fees are recognized in the period in which the
service is provided. Set-up fees represent one-time charges for
initiating the Companys payment processing services.
Although these fees are generally paid to the Company at the
commencement of the agreement, they are recognized ratably over
the estimated average life of the merchant relationship, which
is determined through a series of analyses of active and
deactivated merchants. Commissions paid to outside sales
partners are recorded in sales and marketing expense in the
Companys statements of operations.
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. Revenue from hardware sales is recognized
F-10
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
upon shipment, unless testing, integration or implementation
services are required, in which case hardware revenue is
recognized upon commissioning and acceptance of the product.
Revenue from hardware sold in conjunction with software licenses
is deferred until the related license revenue is recognized and
the aforementioned other criteria for hardware revenue
recognition are met.
The Companys 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. Revenue from software license agreements
are recognized when persuasive evidence of an arrangement
exists, product has been delivered, fee is fixed and
determinable and collectibility is assured. 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.
The Companys TDS customers are providers of wireless
telecommunications services and are generally granted credit
without collateral. Lightbridge specifically analyzes accounts
receivable balances and historical bad debts, customer
creditworthiness, current domestic and international economic
trends, and changes in its customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts.
The Companys revenues vary throughout the year, with the
period of highest revenue generally occurring during the period
October 1 through December 31. The allowance for
doubtful accounts at December 31, 2004, 2003, and 2002 was
approximately $1,966,000 $2,561,000 and $2,955,000 respectively.
The Company recorded bad debt expense of $0 and $200,000 for the
years ended December 31, 2003 and 2002, respectively. The
Company recorded a benefit for bad debt expense of $1,364,000
for the year ended December 31, 2004. The Company had
write-offs, net of recoveries, associated with accounts
receivable of $394,000 and $210,000 for the years ended
December 31, 2003 and 2002, respectively. The Company had
recoveries, net of write-offs, associated with accounts
receivable of $769,000 for the year ended December 31, 2004.
Customers exceeding 10% of the Companys revenues during
the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended Dec. 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Sprint Spectrum L.P.
|
|
|
21 |
% |
|
|
28 |
% |
|
|
30 |
% |
AT&T Wireless Services, Inc.
|
|
|
16 |
|
|
|
21 |
|
|
|
21 |
|
Ericsson AB
|
|
|
* |
|
|
|
14 |
|
|
|
15 |
|
Nextel Operations, Inc.
|
|
|
11 |
|
|
|
12 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
48 |
% |
|
|
75 |
% |
|
|
77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
* |
Represents less than 10% of total revenues in 2004. |
F-11
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Export Sales The Company had export sales to
the following regions for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Latin America
|
|
$ |
10,079 |
|
|
$ |
9,240 |
|
|
$ |
10,436 |
|
Mexico
|
|
|
4,084 |
|
|
|
6,191 |
|
|
|
9,299 |
|
Africa
|
|
|
465 |
|
|
|
1,476 |
|
|
|
803 |
|
Canada
|
|
|
485 |
|
|
|
604 |
|
|
|
748 |
|
Asia
|
|
|
12 |
|
|
|
79 |
|
|
|
273 |
|
Russia
|
|
|
38 |
|
|
|
947 |
|
|
|
169 |
|
Europe
|
|
|
60 |
|
|
|
120 |
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
15,223 |
|
|
$ |
18,657 |
|
|
$ |
21,885 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill and Acquired Intangible Assets
During 2002 and 2004, the Company recorded goodwill of
$1.7 million and $57.6 million in connection with the
acquisitions of Altawave and Authorize.Net, respectively. The
Company is required to test such goodwill for impairment on at
least an annual basis. The Company has adopted
January 1st and March 31st as the date of the
annual impairment tests for Altawave and Authorize.Net,
respectively. The Company will assess the impairment of goodwill
on an annual basis or more frequently if other indicators of
impairment arise.
Acquired intangible assets related to the acquisition of
Altawave in 2002 primarily represent existing technology. These
assets were being amortized on a straight-line basis over their
five year estimated useful lives. Acquired intangible assets
related to the acquisition of Authorize.Net include reseller
networks, existing technology merchant customer base, trademarks
and processor relationships. The reseller network and the
processor relationships will be amortized over twelve years. The
merchant customer base and the existing technology will be
amortized over five years. Trademarks are not amortized.
On January 1, 2005, the Company performed the annual
impairment test for the goodwill balance related to Altawave.
The Company used the discounted cash flow methodology to
determine the fair value of the reporting unit. The discounted
cash flow methodology is based upon converting expected cash
flows to present value. The Companys assumptions and
methodology in determining the fair value of the reporting unit
was reviewed by an independent appraiser. A comparison of the
resulting fair value of the reporting unit to its carrying
amount, including goodwill, indicated that the goodwill and
remaining other intangible assets were fully impaired. As a
result, a goodwill impairment charge of approximately
$1.7 million and an other intangible asset impairment
charge of approximately $0.6 million were recorded in the
Companys Consolidated Statement of Operations in 2004.
Acquired intangible assets consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Intangible Assets:
|
|
|
|
|
|
|
|
|
|
Existing technology
|
|
$ |
3,162 |
|
|
$ |
1,330 |
|
|
Reseller network
|
|
|
9,300 |
|
|
|
|
|
|
Merchant customer base
|
|
|
7,000 |
|
|
|
|
|
|
Trademarks
|
|
|
3,600 |
|
|
|
|
|
|
Processor relationships
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,362 |
|
|
|
1,330 |
|
|
Accumulated amortization
|
|
|
(2,115 |
) |
|
|
(465 |
) |
|
|
|
|
|
|
|
|
Net
|
|
$ |
21,247 |
|
|
$ |
865 |
|
|
|
|
|
|
|
|
F-12
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future amortization expense consisted of the following at
December 31, 2004:
|
|
|
|
|
|
|
Amortization | |
|
|
| |
2005
|
|
$ |
2,832 |
|
2006
|
|
|
2,832 |
|
2007
|
|
|
2,832 |
|
2008
|
|
|
2,832 |
|
2009
|
|
|
1,319 |
|
Thereafter
|
|
|
5,000 |
|
|
|
|
|
Total future amortization expense
|
|
$ |
16,647 |
|
|
|
|
|
Income Taxes The Company records deferred tax
assets and liabilities for the expected future tax consequences
of temporary differences between the financial reporting and tax
bases of existing assets and liabilities. Deferred income tax
assets are principally the result of net operating loss
carryforwards, income tax credits and differences in
depreciation and amortization and accrued expenses and reserves
for financial purposes and income tax purposes, and are
recognized to the extent realization of such benefits is more
likely than not. Lightbridge periodically assesses the
recoverability of any tax assets recorded on the balance sheet
and provides for any necessary valuation allowances. (See
Note 10).
Warranty Reserve As a result of the limited
demand for the PhonePrint system, the Company decided to no
longer actively sell or market this system and, no significant
revenues are expected from this product in the future. The
Company no longer has a warranty reserve at December 31,
2004 to cover the costs of PhonePrint replacement units or spare
parts. As the number of carriers still operating the PhonePrint
system has declined substantially, the Company reduced its
PhonePrint warranty reserve by $526,000 in 2002. The balance in
the warranty reserve at December 31, 2004 and 2003 was $0
and $250,000 respectively.
Development Costs Development costs, which
consist of research and development of new products and
services, are expensed as incurred, except for software
development costs meeting certain criteria for capitalization.
Software development costs are capitalized after establishment
of technological feasibility which the Company defines as the
point that a working model of the software
application has achieved all design specifications and is
available for beta testing. No costs have qualified
for capitalization to date.
Foreign Currency Translation The financial
statements of the Companys foreign subsidiary are
translated in accordance with SFAS No. 52, Foreign
Currency Translation. The determination of functional
currency is based on the subsidiary relative financial and
operational independence from the Company. Foreign currency
transaction gains or losses are credited or charged to the
consolidated statements of operations as incurred. Gains and
losses from foreign currency translation related to entities
whose functional currency is their local currency are credited
or charged to the foreign currency account, included in
stockholders equity in the consolidated balance sheets.
|
|
|
Supplemental Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Supplemental Item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
2,004 |
|
|
$ |
373 |
|
|
$ |
3,925 |
|
Impairment of Long-Lived Assets The Company
periodically, or when an impairment event occurs, assesses the
recoverability of its long-lived assets by comparing the
undiscounted cash flows expected to be generated by those assets
to their carrying value. If the sum of the undiscounted cash
flows is less than the
F-13
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
carrying value of the assets, an impairment charge is
recognized. At January 1, 2005, the annual impairment
analysis was performed and, it was determined that the amount of
goodwill and intangibles acquired in the Altawave acquisition
were fully impaired and should be written-off. Approximately
$0.6 million and $1.7 million was reflected on the
income statement as an impairment of intangible assets and
goodwill, respectively.
Stock-Based Compensation The Company applies
the intrinsic value based method of accounting for stock options
granted to employees. The Company accounts for stock options and
awards to non-employees using the fair value method.
Under the intrinsic value method, compensation associated with
stock awards to employees is determined as the difference, if
any, between the current fair value of the underlying common
stock on the date compensation is measured and the price an
employee must pay to exercise the award. The measurement date
for employee awards is generally the date of grant. Under the
fair value method, compensation associated with stock awards to
non-employees 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 for
non-employee awards is generally the date performance of
services is complete.
Had the Company used the fair value method to measure
compensation expense associated with grants of stock options to
employees, reported net income (loss) and basic and diluted
earnings (loss) per share would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except | |
|
|
per share amounts) | |
Net income(loss) as reported
|
|
$ |
(14,144 |
) |
|
$ |
(1,449 |
) |
|
$ |
3,630 |
|
Stock based compensation recorded in net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation measured using the fair value method
(net of tax)
|
|
|
3,272 |
|
|
|
2,156 |
|
|
|
2,350 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) pro forma
|
|
$ |
(17,416 |
) |
|
$ |
(3,605 |
) |
|
$ |
1,280 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share pro forma
|
|
$ |
(0.65 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share pro forma
|
|
$ |
(0.65 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
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 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Risk-free interest rate
|
|
|
1.9% - 3.4% |
|
|
|
2.9% - 4.7% |
|
|
|
2.9% - 4.7% |
|
Expected life of options grants
|
|
|
1 - 5 years |
|
|
|
1 - 5 years |
|
|
|
1 - 5 years |
|
Expected volatility of underlying stock
|
|
|
82% |
|
|
|
86% |
|
|
|
90% |
|
Expected dividend payment rate, as a percentage of the stock
price on the date of grant
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive Income The amounts that
comprise comprehensive income for the years ended
December 31, 2004, 2003 and 2002 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Net income (loss) as reported
|
|
$ |
(14,144 |
) |
|
$ |
(1,449 |
) |
|
$ |
3,630 |
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency loss
|
|
|
(184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$ |
(14,328 |
) |
|
$ |
(1,449 |
) |
|
$ |
3,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 123R, Share-Based Payment
(SFAS No. 123R). This Statement is a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance.
SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in
share-based payment transactions. The Statement requires
entities to recognize stock compensation expense for awards of
equity instruments to employees based on the grant-date fair
value of those awards (with limited exceptions).
SFAS No. 123R is effective for the first interim or
annual reporting period that begins after June 15, 2005.
The Company is evaluating the two methods of adoption allowed by
SFAS No. 123R; the modified-prospective transition
method and the modified-retrospective transition method.
|
|
3. |
Disclosures About Segments of an Enterprise and Related
Information |
As a result of the Companys corporate reorganization
efforts during 2004, the Company has changed its previously
reported operating segments effective in the fourth quarter of
2004. All prior period segment financial information has been
restated to conform with the current presentation. Based upon
the way financial information is provided to the Companys
Chief Executive Officer for use in evaluating allocation of
resources and assessing performance of the business, the Company
reports its operations in four distinct operating segments:
Telecom Decisioning Services (TDS), Payment Processing Services
(Payment Processing), Intelligent Network Solutions
(INS) and Instant Conferencing Services (Instant
Conferencing).
The TDS segment provides wireless subscriber qualification, risk
assessment, fraud screening, consulting services and call center
services to telecom and other companies. The Payment Processing
segment offers a transaction processing system, under the
Authorize.Net® brand, that allows businesses to authorize,
settle and manage credit card, electronic check and other
electronic payment transactions online. The INS segment provides
wireless carriers with a real-time rating engine for voice, data
and IN services for prepaid subscribers as well as postpaid
charging functionality and telecom calling card services. The
Instant Conferencing segment provides managed instant
conferencing services through its Lightbridge
GroupTalktm
product. In 2005, the Company made the decision to no longer
actively market or sell its
GroupTalktm product.
The Company expects to continue to provide the services for
GroupTalk under its agreement with AOL. Within these four
segments, performance is measured based on revenue, gross profit
and operating income (loss) realized from each segment. There
are no transactions between segments.
The Company does not allocate certain corporate or centralized
marketing and general and administrative expenses to its
business unit segments, because these activities are managed
separately from the business units. Also, the Company does not
allocate restructuring expenses and other non-recurring gains or
charges to its business unit segments because the Companys
Chief Executive Officer evaluates the segment results exclusive
of these items. Asset information by operating segment is not
reported to or reviewed by the
F-15
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys Chief Executive Officer and therefore the Company
has not disclosed asset information for each operating segment.
Financial information for each reportable segment for the years
ended December 31, 2004, 2003 and 2002 were as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total | |
|
|
|
|
|
|
|
|
Payment | |
|
|
|
Instant | |
|
Reportable | |
|
Reconciling | |
|
Consolidated | |
December 31, 2004 |
|
TDS | |
|
Processing | |
|
INS | |
|
Conferencing | |
|
Segments | |
|
Items | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
88,297 |
|
|
$ |
26,836 |
|
|
$ |
17,540 |
|
|
$ |
382 |
|
|
$ |
133,055 |
|
|
$ |
|
|
|
$ |
133,055 |
|
Gross profit (loss)
|
|
|
37,020 |
|
|
|
19,580 |
|
|
|
8,790 |
|
|
|
(225 |
) |
|
|
65,165 |
|
|
|
|
|
|
|
65,165 |
|
Operating income (loss)
|
|
|
16,188 |
|
|
|
3,560 |
|
|
|
(4,014 |
) |
|
|
(4,309 |
) |
|
|
11,425 |
|
|
|
(18,403 |
)(1) |
|
|
(6,978 |
) |
Depreciation and amortization
|
|
|
5,760 |
|
|
|
3,086 |
|
|
|
631 |
|
|
|
555 |
|
|
|
10,032 |
|
|
|
877 |
(2) |
|
|
10,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total | |
|
|
|
|
|
|
|
|
Payment |
|
|
|
Instant | |
|
Reportable | |
|
Reconciling | |
|
Consolidated | |
December 31, 2003 |
|
TDS | |
|
Processing |
|
INS | |
|
Conferencing | |
|
Segments | |
|
Items | |
|
Total | |
|
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
99,023 |
|
|
$ |
|
|
|
$ |
20,955 |
|
|
$ |
|
|
|
$ |
119,978 |
|
|
$ |
|
|
|
$ |
119,978 |
|
Gross profit (loss)
|
|
|
46,399 |
|
|
|
|
|
|
|
11,630 |
|
|
|
|
|
|
|
58,029 |
|
|
|
|
|
|
|
58,029 |
|
Operating income (loss)
|
|
|
22,025 |
|
|
|
|
|
|
|
(2,541 |
) |
|
|
(3,536 |
) |
|
|
15,948 |
|
|
|
(19,806 |
)(1) |
|
|
(3,858 |
) |
Depreciation and amortization
|
|
|
7,918 |
|
|
|
|
|
|
|
1,255 |
|
|
|
536 |
|
|
|
9,709 |
|
|
|
689 |
(2) |
|
|
10,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total | |
|
|
|
|
|
|
|
|
Payment |
|
|
|
Instant | |
|
Reportable | |
|
Reconciling | |
|
Consolidated | |
December 31, 2002 |
|
TDS | |
|
Processing |
|
INS | |
|
Conferencing | |
|
Segments | |
|
Items | |
|
Total | |
|
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
$ |
107,121 |
|
|
$ |
|
|
|
$ |
26,045 |
|
|
$ |
272 |
|
|
$ |
133,438 |
|
|
$ |
|
|
|
$ |
133,438 |
|
Gross profit (loss)
|
|
|
51,251 |
|
|
|
|
|
|
|
15,972 |
|
|
|
272 |
|
|
|
67,495 |
|
|
|
|
|
|
|
67,495 |
|
Operating income (loss)
|
|
|
25,749 |
|
|
|
|
|
|
|
(1,986 |
) |
|
|
(4,711 |
) |
|
|
19,052 |
|
|
|
(17,500 |
)(1) |
|
|
1,552 |
|
Depreciation and amortization
|
|
|
11,327 |
|
|
|
|
|
|
|
2,761 |
|
|
|
407 |
|
|
|
14,495 |
|
|
|
831 |
(2) |
|
|
15,326 |
|
|
|
(1) |
Reconciling items from segment operating income (loss) to
consolidated operating income (loss) include the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
Restructuring costs
|
|
$ |
4,346 |
|
|
$ |
5,079 |
|
|
$ |
3,616 |
|
Gain on sale of Fraud Centurion assets
|
|
|
(2,673 |
) |
|
|
|
|
|
|
|
|
Impairment of intangible assets
|
|
|
2,263 |
|
|
|
|
|
|
|
|
|
Unallocated corporate and centralized marketing, general and
administrative expenses
|
|
|
14,467 |
|
|
|
14,727 |
|
|
|
13,884 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
18,403 |
|
|
$ |
19,806 |
|
|
$ |
17,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
Represent depreciation and amortization included in the
unallocated corporate or centralized marketing, general and
administrative expenses. |
F-16
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2001, the Company committed to invest up to
$5.0 million in a limited partnership that invested in
businesses within the wireless industry. The Company used the
equity method of accounting for this limited partnership
investment. For the year ended December 31, 2002, the
Companys proportionate share of the loss of the limited
partnership was $0.5 million. 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.
|
|
5. |
Property and Equipment |
Property and equipment consisted of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Furniture and fixtures
|
|
$ |
3,593 |
|
|
$ |
2,430 |
|
Leasehold improvements
|
|
|
10,558 |
|
|
|
8,209 |
|
Computer equipment
|
|
|
19,688 |
|
|
|
23,411 |
|
Computer software
|
|
|
9,464 |
|
|
|
11,262 |
|
|
|
|
|
|
|
|
|
|
|
43,303 |
|
|
|
45,312 |
|
Less accumulated depreciation and amortization
|
|
|
(26,325 |
) |
|
|
(35,904 |
) |
|
|
|
|
|
|
|
Property and equipment, net
|
|
$ |
16,978 |
|
|
$ |
9,408 |
|
|
|
|
|
|
|
|
During the year ended December 31, 2004, the Company
performed a review of its property and leasehold improvements
and a number of fully depreciated assets were identified as no
longer being in service. As a result, the Company removed from
the property and leasehold improvement accounts cost and
accumulated depreciation of approximately $12.0 million.
Since the assets had been fully depreciated, there was no
material impact on the statement of operations.
At December 31, 2002 the Company had an outstanding letter
of credit in the amount of $1.0 million which expired in
May 2003. On January 14, 2003, this letter of credit was
replaced with a $1.0 million letter of credit, which
expired in May 2004. On January 7, 2004, the Company
entered into another $1.0 million letter of credit, which
was scheduled to expire in January 2005. This letter of credit
was renewed in the amount of $1.6 million and extends
through January 2006. In January 2005, the Company restricted
$1.6 million of cash as collateral for the renewed letter
of credit.
On January 14, 2003, 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 expired on January 24, 2005. There
were no transactions under this agreement.
In December 2004, the Company announced a restructuring of its
business in order to lower overall expenses to better align them
with future revenue expectations. This action followed the
Companys announcement of an anticipated revenue reduction
as a result of the acquisition of AT&T by Cingular Wireless
LLC. This restructuring resulted in the termination of 38
employees, in the Companys corporate offices in
Burlington, Massachusetts as follows: 16 in product and service
delivery, 11 in engineering and development, 10 in sales and
marketing and 1 in general and administrative. The Company
recorded a restructuring charge of approximately
$1.4 million relating to employee severance and termination
benefits during the three months ended December 31, 2004.
Additionally, subsequent to our acquisition of Author-
F-17
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ize.net the Company relocated its offices in Bellevue,
Washington and the remaining rent paid on the vacated space of
$178 was included in restructuring charges during the fourth
quarter of 2004. The Company anticipates that all costs related
to this restructuring will be paid by the end of 2005.
The following summarizes the changes to the December 2004
restructuring reserve since it was accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at | |
|
|
December 31, |
|
|
|
|
|
December 31, | |
|
|
2003 |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
(In thousands) | |
|
|
Employee severance and termination benefits
|
|
$ |
|
|
|
$ |
1,410 |
|
|
$ |
46 |
|
|
$ |
1,364 |
|
Facility closing and related costs
|
|
|
|
|
|
|
178 |
|
|
|
178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
1,588 |
|
|
$ |
224 |
|
|
$ |
1,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In October 2004, the Company announced a restructuring of its
business in accordance with the sale of Fraud Centurion product
suite to Subex Systems Limited. This action, a continuation of
the Companys emphasis on expense management, resulted in
the termination of nine employees in the Companys
Broomfield, Colorado location as follows: two in product and
service delivery, and seven in engineering and development. The
Company recorded a restructuring charge of approximately $172
relating to employee severance and termination benefits during
the three months ended December 31, 2004. The Company
anticipates that all costs related to this restructuring will be
paid by the end of 2005.
The following summarizes the changes to the October 2004
restructuring reserve since it was accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at | |
|
|
December 31, |
|
|
|
|
|
December 31, | |
|
|
2003 |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
(In thousands) | |
|
|
Employee severance and termination benefits
|
|
$ |
|
|
|
$ |
172 |
|
|
$ |
147 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2004, the Company announced a restructuring of its
business in order to lower overall expenses to better align them
with future revenue expectations. This action, a continuation of
the Companys emphasis on expense management, resulted in
the termination of 64 employees and 2 contractors in the
Companys corporate offices in Burlington, Massachusetts
and its Broomfield, Colorado location as follows: 12 in product
and service delivery, 16 in engineering and development, 25 in
sales and marketing and 13 in general and administrative. The
Company recorded a restructuring charge of approximately
$2.1 million relating to employee severance and termination
benefits during the three months ended September 30, 2004.
The Company anticipates that all costs related to this
restructuring will be paid by the end of 2005.
The following summarizes the changes to the September 2004
restructuring reserve since it was accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at | |
|
|
December 31, |
|
|
|
|
|
December 31, | |
|
|
2003 |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
(In thousands) | |
|
|
Employee severance and termination benefits
|
|
$ |
|
|
|
$ |
2,090 |
|
|
$ |
1,255 |
|
|
$ |
835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2004, the Company announced a reorganization of its
internal business operations. This action, a continuation of the
Companys emphasis on expense management, resulted in the
termination of ten individuals in the Companys corporate
office in Burlington, Massachusetts. The Company recorded a
restructuring charge of approximately $0.5 million relating
to employee severance and termination benefits during the three
months ended March 31, 2004. The Company anticipates that
all costs related to this restructuring will be paid by the end
of 2005.
F-18
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following summarizes the changes to the January 2004
restructuring reserves since it was accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at | |
|
|
December 31, |
|
|
|
|
|
December 31, | |
|
|
2003 |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
(In thousands) | |
|
|
Employee severance and termination benefits
|
|
$ |
|
|
|
$ |
488 |
|
|
$ |
483 |
|
|
$ |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2003, the Company announced that 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 reduction, $1.7 million in future lease
obligations for unused facilities and $0.5 million for
capital equipment write-offs. In the quarter ended
December 31, 2003, the Company recorded an additional
restructuring charge of $0.1 million related to future
lease obligations and employee severance benefits. The capital
equipment write-offs and a majority of severance costs related
to this restructuring were incurred by the end of 2003, and the
Company anticipates that all other costs related to this
restructuring, consisting principally of lease obligations on
unused space, will be paid by the end of 2006.
The following summarizes the changes to the June 2003
restructuring reserves since it was accrued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
December 31, |
|
|
|
|
|
December 31, | |
|
|
|
|
|
December 31, | |
|
|
2002 |
|
Accrued | |
|
Utilized | |
|
2003 | |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Employee severance and termination benefits
|
|
$ |
|
|
|
$ |
1,795 |
|
|
$ |
1,542 |
|
|
$ |
253 |
|
|
$ |
(93 |
) |
|
$ |
160 |
|
|
$ |
|
|
Facility closing and related costs
|
|
|
|
|
|
|
1,743 |
|
|
|
347 |
|
|
|
1,396 |
|
|
|
137 |
|
|
|
665 |
|
|
|
868 |
|
Capital equipment write-offs
|
|
|
|
|
|
|
497 |
|
|
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
4,035 |
|
|
$ |
2,386 |
|
|
$ |
1,649 |
|
|
$ |
44 |
|
|
$ |
825 |
|
|
$ |
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In March 2003, the Company announced that it would be
streamlining its existing Broomfield, Colorado call center
operations into its Lynn, Massachusetts facility and a smaller
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 capital
equipment write-offs and all of the severance costs related to
this restructuring were incurred by the end of 2003, and the
Company anticipates that all other costs relating to this
restructuring, consisting principally of lease obligations on
unused space, will be paid by the end of the first quarter of
2005.
The following summarizes the changes to the March 2003
restructuring reserves since inception:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
December 31, |
|
|
|
|
|
December 31, | |
|
|
|
|
|
December 31, | |
|
|
2002 |
|
Accrued | |
|
Utilized | |
|
2003 | |
|
Accrued | |
|
Utilized | |
|
2004 | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Employee severance and termination benefits
|
|
$ |
|
|
|
$ |
77 |
|
|
$ |
77 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Facility closing and related costs
|
|
|
|
|
|
|
548 |
|
|
|
185 |
|
|
|
363 |
|
|
|
(36 |
) |
|
|
324 |
|
|
|
3 |
|
Capital equipment write-offs
|
|
|
|
|
|
|
378 |
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
1,003 |
|
|
$ |
640 |
|
|
$ |
363 |
|
|
$ |
(36 |
) |
|
$ |
324 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2002, the Company announced that it was 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 a majority
of severance costs related to this restructuring were incurred
by the end of 2002, and the Company anticipates that all other
costs relating to this restructuring, consisting principally of
lease obligations on unused space, will be paid by the end of
2005.
The following summarizes the changes to the June 2002
restructuring reserves since inception:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
December 31, |
|
|
|
|
|
December 31, | |
|
|
|
|
|
December 31, | |
|
|
|
|
|
December 31, | |
|
|
2001 |
|
Accrued | |
|
Utilized | |
|
2002 | |
|
Accrued | |
|
Utilized | |
|
2003 | |
|
Accrued |
|
Utilized | |
|
2004 | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
|
| |
Employee severance and termination benefits
|
|
$ |
|
|
|
$ |
1,580 |
|
|
$ |
1,237 |
|
|
$ |
343 |
|
|
$ |
(158 |
) |
|
$ |
185 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Facility closing and related costs
|
|
|
|
|
|
|
1,312 |
|
|
|
320 |
|
|
|
992 |
|
|
|
199 |
|
|
|
569 |
|
|
|
622 |
|
|
|
|
|
|
|
339 |
|
|
|
283 |
|
Capital equipment write-offs
|
|
|
|
|
|
|
724 |
|
|
|
724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
|
|
|
$ |
3,616 |
|
|
$ |
2,281 |
|
|
$ |
1,335 |
|
|
$ |
41 |
|
|
$ |
754 |
|
|
$ |
622 |
|
|
$ |
|
|
|
$ |
339 |
|
|
$ |
283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. |
Commitments and Contingencies |
At December 31, 2004, the Company was holding funds in the
amount of $4.4 million on behalf of merchants utilizing
Authorize.Nets eCheck services. The funds are included in
cash and cash equivalents and funds due to merchants on the
Companys consolidated balance sheet. Authorize.Net
typically holds eCheck funds for approximately seven business
days; the actual number of days depends on the contractual terms
with each merchant. In addition, at December 31, 2004, the
Company held funds in the amount of $1.2 million for and on
behalf of merchants processing credit card and ACH transactions
using the Integrated Payment Solution (IPS) product. The
funds are included in cash and cash equivalents and funds due to
merchants on the Companys consolidated balance sheet.
Credit card funds are typically held for approximately two
business days; ACH funds are held for approximately four
business days, according to the specifications of the IPS
product and the contract between Authorize.Net and the financial
institution through which the transactions are processed.
In addition, the Company currently has $600,000 on deposit with
a financial institution to cover any deficit account balance
that could occur if the amount of transactions returned or
charged back exceeds the balance on deposit with the financial
institution. To date, the deposit has not been applied to offset
any deficit balance, and management believes that the likelihood
of incurring a deficit balance with the financial institution
due to the amount of transactions returned or charged back is
remote. The deposit will be held continuously for as long as
Authorize.Net utilizes the ACH processing services of the
financial institution, and the amount of the deposit may
increase as processing volume increases.
The Companys primary contractual obligations and
commercial commitments are under its operating leases and a
letter of credit. The Company maintained a letter of credit in
the amount of $1.0 million which was scheduled to expire in
January 2005, as required for security under the lease for its
headquarters. This letter of credit was renewed in the amount of
$1.6 million and extends through January 2006. In January
2005, the Company provided $1.6 million of cash as
collateral for the renewed letter of credit.
F-20
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Leases The Company has noncancelable
operating lease agreements for office space and certain
equipment. These lease agreements expire at various dates
through 2011 and certain of them contain provisions for
extension on substantially the same terms as are currently in
effect.
Future minimum payments under operating leases, including
facilities affected by restructurings and the Companys new
headquarters lease, consisted of the following at
December 31, 2004 (amounts in thousands):
|
|
|
|
|
|
|
Operating | |
|
|
Leases | |
|
|
| |
2005
|
|
$ |
4,840 |
|
2006
|
|
|
3,820 |
|
2007
|
|
|
3,013 |
|
2008
|
|
|
2,758 |
|
2009
|
|
|
2,108 |
|
Thereafter
|
|
|
3,526 |
|
|
|
|
|
Total minimum lease payments
|
|
$ |
20,065 |
|
|
|
|
|
Rent expense for operating leases was approximately $5,401,000,
$4,017,000 and $6,052,000 for the years ended December 31,
2004, 2003 and 2002, respectively.
The Company leases its corporate headquarters and its principal
sales, consulting, marketing, operations and product development
facility. This lease was executed and delivered in January,
2004, had a rent commencement date in June 2004 and expires in
2011. The Company was not required to pay rent during the
construction period from January 2004 through May 2004 and the
amount of the landlords tenant improvement allowance was
approximately $3.3 million. In addition, the Companys
Bellevue, Washington lease was executed in August 2004, and had
a rent commencement date in September 2004. The Company was not
obligated to pay rent during the construction period prior to
the rent commencement date and the amount of the landlord in
tenant improvement allowance was approximately $177,000. The
Company also received abated rent for the first three months of
the lease term. The Companys Nova Scotia lease was entered
into in February 2004, and had a rent commencement date in May
2004. The Company was allowed access to the premises in Nova
Scotia for a period of 90 days prior to May 2004 in order to
make tenant improvements.
Warranties and Indemnities The Company
provides certain warranties and related indemnities in its
client contracts. These warranties may include warranties that
the transactions processed on a clients behalf have been
processed in accordance with the contract, that products
delivered or services rendered meet designated specifications or
service levels, and that certain applicable laws and regulations
are complied with in the performance of services for or
provision of products to a client. The Company maintains errors
and omissions insurance that may provide coverage for certain
warranty and indemnity claims. However, such insurance might
cease to be available to the Company on commercially reasonable
terms or at all.
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 Companys 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
Companys 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.
F-21
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Litigation In a case pending in the United
States District Court for the District of Arizona, a variety of
defendants, including payment processing gateway providers and
banks, are accused of infringing certain patents involving
payment processing over computer networks. The case is captioned
Net MoneyIN, Inc. v. VeriSign, Inc., et al.,
Case No. CIV 01-441 TUC RCC. The plaintiff alleges that
numerous products or services infringe its patents, including
the Authorize.Net Payment Gateway Service and eCheck.Net
service. Neither Lightbridge nor Authorize.Net is a party to the
lawsuit, but Authorize.Net is indemnifying and defending
defendants InfoSpace, Inc. and E-Commerce Exchange, Inc. as to
services provided by Authorize.Net. Defendant Wells Fargo Bank,
N.A. has also requested indemnification, including defense
costs, from Authorize.Net based on certain contracts with
Authorize.Net. Lightbridge anticipates that plaintiff may
attempt to add Authorize.Net and/or Lightbridge as a party
defendant. The litigation is currently in the fact discovery
phase, and no trial date has been set. The Company intends to
defend any claims brought against it, Authorize.Net or third
parties that it is contractually obligated to defend in
connection with the lawsuit. While there can be no assurances as
to the outcome of the lawsuit, an adverse outcome in the lawsuit
could have a material effect on the Companys financial
condition, results of operations or cash flow.
|
|
9. |
Common Stock Option Plans, Warrants, Stockholder Rights
Plan |
1990 Incentive and Nonqualified Stock Option
Plan Under the Companys 1990 Incentive and
Nonqualified Stock Option Plan, the Company could grant either
incentive or nonqualified stock options to officers, directors,
employees or consultants for the purchase of up to
2,400,000 shares of common stock. Options were granted with
an exercise price equal to the common stocks market value
at the date of grant, as determined by the Board of Directors of
the Company (the Board), and expired ten years
later. No further grants can be made under the 1990 Incentive
and Nonqualified Stock Option Plan.
1996 Employee Stock Plans On June 14,
1996, the Board authorized and the stockholders approved the
adoption of the 1996 Incentive and Nonqualified Stock Option
Plan and the 1996 Employee Stock Purchase Plan for the issuance
of options or sale of shares to employees. The Company cannot
make any further grants under the 1996 Incentive and
Nonqualified Stock Plan. Both plans became effective immediately
after the closing of the Companys initial public offering:
|
|
|
|
|
1996 Incentive and Nonqualified Stock Option Plan
The 1996 Incentive and Nonqualified Stock Option Plan (the 1996
Plan) provided for the issuance of options to purchase up to
4,350,000 shares of the Companys common stock.
Options could be either qualified incentive stock options or
nonqualified stock options at the discretion of the Board.
Exercise prices must be greater than or equal to the fair market
value on the date of grant, in the case of incentive stock
options and nonqualified options. |
|
|
|
1996 Employee Stock Purchase Plan The 1996 Employee
Stock Purchase Plan provides for the sale of up to
600,000 shares of the Companys common stock to
employees. Employees are allowed to purchase shares at a
discount from the lower of fair value at the beginning or end of
the purchase periods through payroll deductions. At
December 31, 2004, 194,624 shares were available for
purchase and reserved for issuance under the 1996 Employee Stock
Purchase Plan. |
1997 Stock Incentive Plan and Restricted Stock Purchase
Plan The 1997 Stock Incentive Plan and
Restricted Stock Purchase Plan provided for the issuance of up
to 8,516,667 options to acquire shares of common stock. The
Company does not plan to make any further grants under the 1997
Stock Incentive Plan and Restricted Stock Purchase Plan.
1998 Non-Statutory Stock Option Plan The 1998
Non-Statutory Stock Option Plan (the 1998 Plan) provided for the
issuance of options to purchase up to 1,000,000 shares of
the Companys common stock. Options are granted with an
exercise price no less than the common stocks market value
at the date of the
F-22
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
grant, as authorized by the Board. No further grants can be made
under the 1998 Non-Statutory Stock Option Plan.
2004 Stock Incentive Plan In April and June
2004, respectively, the Board authorized and the stockholders
approved the adoption of the 2004 Stock Incentive Plan which
provides for the issuance of options and other stock-based
awards to purchase up to 2,500,000 shares of the
Companys common stock, plus the number of shares then
remaining available for future grants under the Companys
1996 Plan and the 1998 Plan, plus the number of shares subject
to any stock option granted pursuant to the 1996 Plan or the
1998 Plan that expires, is cancelled or otherwise terminates
(other than by exercise) after the effective date of the 2004
Plan. Options are granted with an exercise price of no less than
the common stocks market value at the date of grant. At
December 31, 2004, 2,305,233 shares were available for
grant under the 2004 Stock Incentive Plan.
The following table presents activity under all stock option
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- | |
|
|
|
|
|
|
Average | |
|
|
|
|
Weighted- | |
|
Fair | |
|
|
|
|
Average | |
|
Value of | |
|
|
Number of | |
|
Exercise | |
|
Options | |
|
|
Options | |
|
Price | |
|
Granted | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
|
|
Outstanding at January 1, 2002
|
|
|
4,645 |
|
|
$ |
13.17 |
|
|
|
|
|
|
Granted
|
|
|
1,260 |
|
|
|
9.44 |
|
|
$ |
5.56 |
|
|
Exercised
|
|
|
(394 |
) |
|
|
5.39 |
|
|
|
|
|
|
Forfeited
|
|
|
(1,605 |
) |
|
|
16.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
|
|
3,906 |
|
|
|
11.41 |
|
|
|
|
|
|
Granted
|
|
|
393 |
|
|
|
7.27 |
|
|
$ |
3.86 |
|
|
Exercised
|
|
|
(163 |
) |
|
|
6.11 |
|
|
|
|
|
|
Forfeited
|
|
|
(807 |
) |
|
|
16.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
3,329 |
|
|
|
10.12 |
|
|
|
|
|
|
Granted
|
|
|
2,905 |
|
|
|
5.71 |
|
|
$ |
3.12 |
|
|
Exercised
|
|
|
(220 |
) |
|
|
0.68 |
|
|
|
|
|
|
Forfeited
|
|
|
(1,331 |
) |
|
|
9.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
4,683 |
|
|
$ |
8.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of options exercisable at the dates presented below
and their weighted average exercise price were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- | |
|
|
|
|
Average | |
|
|
Options | |
|
Exercise | |
|
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
|
(In thousands) | |
|
|
December 31, 2002
|
|
|
2,278 |
|
|
$ |
11.76 |
|
December 31, 2003
|
|
|
2,335 |
|
|
$ |
10.12 |
|
December 31, 2004
|
|
|
2,502 |
|
|
$ |
10.05 |
|
F-23
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth information regarding options
outstanding at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
Weighted | |
|
|
|
|
|
|
|
|
Average | |
|
Average | |
|
|
|
|
|
|
Weighted | |
|
Remaining | |
|
Exercise | |
|
|
|
|
Number | |
|
Average | |
|
Contractual | |
|
Price for | |
Number of | |
|
Range of Exercise | |
|
Currently | |
|
Exercise | |
|
Life | |
|
Currently | |
Options | |
|
Prices | |
|
Exercisable | |
|
Price | |
|
(Years) | |
|
Exercisable | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
(In thousands) | |
|
|
|
(In thousands) | |
|
|
|
|
|
|
|
369 |
|
|
|
$ 0.46 $ 4.44 |
|
|
|
52 |
|
|
$ |
3.85 |
|
|
|
8.5 |
|
|
$ |
3.52 |
|
|
889 |
|
|
|
4.67 |
|
|
|
137 |
|
|
|
4.67 |
|
|
|
9.7 |
|
|
|
4.67 |
|
|
659 |
|
|
|
4.69 5.90 |
|
|
|
120 |
|
|
|
5.56 |
|
|
|
9.2 |
|
|
|
5.45 |
|
|
482 |
|
|
|
6.02 7.63 |
|
|
|
258 |
|
|
|
6.63 |
|
|
|
|