e10vk
UNITED STATES 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.
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the fiscal year ended
December 31, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the transition period
from to
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Commission file number:
000-21319
Lightbridge, Inc.
(Exact Name of
Registrant as Specified in Its Charter)
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Delaware
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04-3065140
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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30 Corporate Drive
Burlington, Massachusetts
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01803
(Zip Code)
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(Address of Principal Executive
Offices)
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(781) 359-4000
Registrants Telephone
Number, Including Area Code
Securities registered pursuant
to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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common stock, $.01 par
value per share
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NASDAQ Global
Market
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Securities registered pursuant
to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
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 a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and
large accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting common stock held by
nonaffiliates of the registrant as of June 30, 2006 was
$352,142,590 based on a total of 27,192,478 shares held by
nonaffiliates and on a closing price of $12.95 as reported on
the NASDAQ Global Market.
The number of shares of common stock outstanding as of
March 13, 2007 was 28,011,637.
DOCUMENTS
INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement
pursuant to Regulation 14A with regard to its 2007 annual
meeting of stockholders or special meeting in lieu thereof on or
before April 30, 2007. Certain portions of such proxy
statement are incorporated by reference in Part III
(Items 10, 11, 12, 13 and 14) of this
Form 10-K.
Except as expressly incorporated by reference, the proxy
statement is not deemed to be part of this report.
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 1A. RISK
FACTORS, AND ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, 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.
AIRPAY BY AUTHORIZE.NET, ALIAS, ALTALINKS, AUTHORIZE-IT,
AUTHORIZE.NET, the Authorize.Net logo, AUTHORIZE.NET
WHERE THE WORLD DOES BUSINESS ON THE WEB, AUTHORIZE.NET
WHERE THE WORLD TRANSACTS, ECHECK.NET, FRAUDBUSTER, FRAUD
CENTURION, FRAUDSCREEN.NET, FRAUD SENTINEL, LIGHTBRIDGE,
the Lightbridge logo, and POCKET AUTHORIZE.NET are registered
trademarks of Lightbridge, and AUTOMATED RECURRING BILLING,
AUTHORIZE.NET YOUR GATEWAY TO IP TRANSACTIONS, ECHECK, FRAUD
DETECTION SUITE, and LIGHTBRIDGE TELESERVICES 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.
3
PART I
Overview
Lightbridge, Inc. (Lightbridge or the Company) develops, markets
and supports products and services primarily for businesses that
sell products or services online and, prior to February 20,
2007, for communications providers.
We have undergone significant changes to our business since 2004
and, with the sale of certain assets related to our Telecom
Decisioning Services (TDS) business to Vesta Corporation
(Vesta). on February 20, 2007 and our decision to exit the
TDS business on October 4, 2006, our business operates in
one segment, Payment Processing Services (Payment Processing).
In 2004, the Company operated in four distinct operating
segments: Telecom Decisioning Services, Payment Processing,
Intelligent Network Solutions (INS) and Instant Conferencing
Services (Instant Conferencing). During 2005, we sold our INS
business and ceased the operation of our Instant Conferencing
business. We sold the TDS business on February 20, 2007.
The operating results and financial condition of the TDS segment
have been included as part of the financial results from
continuing operations in the accompanying consolidated financial
statements. Commencing in the first quarter of 2007, the
financial condition and results of the TDS segment will be
presented as a discontinued operation. The operating results and
financial condition of the INS and Instant Conferencing segments
have been included as part of the financial results from
discontinued operations in the accompanying consolidated
financial statements.
Lightbridges two areas of business in 2006 were Payment
Processing and TDS. Historically, TDS had comprised a majority
of the Companys business; however, in recent years,
revenues from that business declined. With the sale of the TDS
business, the Company will solely operate in and focus on the
Payment Processing business. 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 consisted 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.
The Companys
IP-based
Payment Processing solutions offer 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 merchants. The Payment Processing
solutions are designed to provide 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.
TDS offered online, real-time transaction processing and contact
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 offered services
designed to authenticate users engaged in online transactions.
Additionally, TDS developed and implemented interfaces that
integrate its systems with client and third-party systems, such
as those for billing,
point-of-sale,
activation and order fulfillment. TDS solutions were provided on
a direct sales basis.
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.
4
New
Developments
On February 21, 2007, we announced that we had entered into
an asset purchase agreement and sold certain assets related to
our TDS business to Vesta at the close of business on
February 20, 2007 for $2.5 million in cash plus
assumption of certain contractual liabilities. The TDS
operations for 2006 and prior periods will be presented as
discontinued when they are disposed of in 2007. We expect to
record a gain on the disposal of our TDS business of
approximately $1.0 million to $1.5 million, which will
be presented as a gain on disposal of discontinued operations.
On November 1, 2006, we announced that our board of
directors authorized the discretionary repurchase of up to
$15.0 million of shares of the Companys common stock.
The shares may be purchased from time to time depending on
market conditions through December 31, 2008. As of
March 8, 2007, we have not made any repurchases under this
program.
On October 4, 2006, we announced our plan to exit the TDS
business. With respect to our exit and subsequent sale of the
TDS business, we recorded asset impairment charges of
$2.4 million during 2006. We expect to incur pre-tax
restructuring charges in the range of $1.9 million to
$2.5 million in the first quarter of 2007. These charges
are expected to consist of approximately $0.9 million to
$1.1 million of severance charges with respect to
terminated employees; approximately $0.3 million to
$0.5 million of facilities exit charges, comprised of the
net present value of the lease payment obligations for the
remaining term of our TDS-related leases in Burlington and Lynn,
Massachusetts, net of estimated sublease income; and
approximately $0.7 million to $0.9 million of other
charges related to the exit of the TDS business. Substantially
all of the remaining costs will require the outlay of cash,
although the timing of lease payments relating to leased
facilities will be unchanged by the restructuring action. We
began to implement the restructuring efforts in October 2006
with notifications of intended action to certain affected
personnel. The majority of these restructuring charges related
to the exit and subsequent sale of the TDS business will be
reported as a discontinued operation in the first quarter of
2007.
We expect to record restructuring charges in the range of
$0.4 million to $0.6 million in the first quarter of
2007 related to termination benefits of corporate employees. We
also expect to record accelerated depreciation charges in the
range of $0.4 million to $0.6 million in the first
quarter of 2007 related to the relocation of the Companys
headquarters.
In May 2006, we were advised by
T-Mobile
USA, Inc.
(T-Mobile)
that
T-Mobile
planned to consolidate its contact center business and begin the
transition of that business from us to other vendors. In
response, we closed our Liverpool, Nova Scotia contact center in
the third quarter of 2006 and we recorded restructuring and
related asset impairment charges of approximately
$0.9 million and $0.8 million during the second and
third quarters of 2006, respectively.
In May 2006, we entered into a settlement agreement with respect
to certain litigation involving NetMoneyIN, Inc. Pursuant to the
agreement, we agreed to pay NetMoneyIN, Inc. a lump sum payment
of $1.75 million in exchange for a release and covenant not
to sue. The cost of the settlement to us was $1.5 million
net of $0.25 million received from another party named in
the litigation. We recorded this cost in general and
administrative expenses in the second quarter of 2006. We had
incurred legal expenses of approximately $0.6 million and
$1.1 million for the years ended December 31, 2006 and
December 31, 2005, respectively, in connection with the
defense of this lawsuit. We do not expect to incur any further
litigation costs related to this lawsuit.
On January 13, 2006, we announced a restructuring focused
primarily within the TDS business, as well as reductions in
general and administrative expenses. The restructuring consisted
of a total workforce reduction of about 28 positions, and we
recorded a restructuring charge of approximately
$1.4 million in the first quarter of 2006, primarily
related to employee severance and termination benefits.
Products
and Services
PAYMENT
PROCESSING
Lightbridges Payment Processing solutions, which are
provided on an Application Services Provider (ASP) basis, allow
IP-enabled
merchants to process credit card and electronic check
transactions through credit card
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processors and banking organizations, thereby enabling those
merchants to accept electronic payments. Lightbridge offers its
Payment Processing products and services through its wholly
owned subsidiary Authorize.Net in two broad solutions groups,
Payment Gateway Solutions and Additional Services:
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Solutions Groups
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Functions
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Payment Gateway
Solutions
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The payment gateway allows
IP-enabled
merchants to accept credit card payments via web sites and
mobile devices or from retail storefronts with integrated point
of sale solutions and MOTO merchants.
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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.
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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.
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The Advanced Integration Method
(AIM) is a merchant-initiated
server-to-server
connection for submitting CNP transactions to the payment
gateway.
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The Server Implementation Method
(SIM) provides a solution for CNP merchants with basic
customization needs where the payment gateway handles all steps
in the secure transaction process.
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Card Present (CP) retail and
mobile merchants may purchase third-party POS solutions or
devices that are integrated to the Authorize.Net payment
gateway. Merchants or solution providers integrate directly to
the payment gateway using the CP Application Programming
Interface (API).
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Additional Services
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eCheck.Net®
is a solution that allows merchants to process electronic check
transactions directly from a web site or through the Virtual
Terminal.
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Integrated Payment Solution
(IPS) is a service that offers merchants both an
Authorize.Net Payment Gateway account and Wells Fargo credit
card processing account through an integrated payment system.
The service uses a single online application for merchants to
apply for services and automatically provides them with a
payment gateway and merchant credit card processing account.
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Fraud Detection
Suitetm
(FDS) is designed to assist web merchants to monitor, manage,
and reduce potentially fraudulent credit card transactions with
a customizable, rules and filter-based solution.
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Automated Recurring
Billingtm
(ARB) provides a system for CNP and eCheck.Net merchants to
automatically handle regularly recurring billings or
subscriptions according to a specific billing interval and
duration.
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Support for Cardholder
Authentication Programs, provided under agreement with Visa and
MasterCard, for the benefit of merchants that sell products or
services online, including the Verified by
Visa®
and
MasterCard®
SecureCodetm
programs for reducing liabilities and expenses of merchants
arising from unauthorized use of credit cards. The Company no
longer actively markets this service.
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SalesBoost.Net, provided under
agreement with eBoz, Inc., is an integrated suite of 50 web
promotion tools designed to boost CNP merchants sales by
attracting shoppers to their web sites. The Company no longer
actively markets this service.
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AmbironTrustwave PCI Scanning and
Compliance Tools, provided under agreement with
AmbironTrustWave, are leading information security and
compliance management solutions that offer convenient and
affordable Payment Card Industry (PCI) tools. PCI is an
industry-wide security standard building on Visas
Cardholder Information Security Program (CISP) and
MasterCards Site Data Protection (SDP) program that
increases security for storing, transmitting, and processing
cardholder data.
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The
Authorize.Net®
Merchant Toolbox features business solutions to merchants to
help improve security, marketing and productivity.
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Solutions Groups
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Functions
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The Authorize.Net Verified
Merchant
Seal®
confirms to consumers that Web sites displaying the seal are
verified Authorize.Net merchants. The seal is designed to foster
a sense of confidence for consumers who may be concerned about
the security of making online purchases.
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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 payments via IP. The
Authorize.Net gateway is a hosted ASP service solution that
integrates with existing web sites,
IP-enabled
POS hardware and software solutions and mobile payment devices.
It is hardware and software independent, and is supported by
over 250 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
payment information is submitted via a web site payment form,
virtual terminal, mobile payment device or a
point-of-sale
card reader (transmitted as a CP transaction) to the
Authorize.Net payment gateway, the payment gateway captures the
transaction data using real-time IP technology, directs and
transmits the information through the credit card authorization
network to the merchants credit card payment processor
using a secure, proprietary connection. 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 securely stores the transaction.
Transactions are automatically submitted for settlement each day
as dictated by the merchant and are typically funded within two
to three business days as determined by the issuing and
merchants acquiring banks.
In the case of eCheck.Net transactions, bank information is
processed through the Automated Clearing House (ACH) processing
network by utilizing the Companys relationship with a
single Originating Depository Financial Institution (ODFI).
eCheck.Net transactions may take seven to ten days to be funded
to the merchant. Our ability to process eCheck.Net transactions
would be severely impaired if we were to lose our ODFI partner
for any reason.
For submitting manual CNP credit card 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.
Account Management
Merchants can manage their payment gateway account through the
Merchant Interface, a password-protected web site that offers
merchants the ability to monitor and review their transactions,
configure their account and their transaction settings, view
account billing statements and reporting, and manually submit
transactions via the Virtual Terminal and Batch Upload features.
Connection
Methods
The Payment Processing segment offers several methods for
connecting web sites and POS systems to the payment gateway. Web
merchants have the flexibility to choose which connection method
best fits their payment acceptance infrastructure. Retail and
mobile merchants may connect to the payment gateway via
third-party hardware and software solutions that are integrated
to the payment gateway. Connection methods are as follows:
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AIM is a 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
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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.
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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.
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The Company has certified approximately 79 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.
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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 payment application
programming interface.
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Additional
Services
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 view and monitor transaction
activities including settled transactions, returns and
chargebacks. In addition, merchants have the ability to run
batch statistics on transactions, and receive notification of
settlement activity to facilitate account reconciliation.
Integrated Payment Solution is a service that offers
merchants both an Authorize.Net Payment Gateway account and a
Wells Fargo credit processing account through an integrated
payment system. The service uses a single online application for
merchants to apply for services and automatically provisions
them with a payment gateway and merchant credit card processing
account.
Fraud Detection
Suitetm
(FDS) is a customizable, rules and filter-based solution that is
designed to assist merchants who sell products or services to
monitor and manage fraudulent credit card transactions through a
combination of multiple fraud filters and tools. These tools
include the following:
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Amount Filter allows merchants to set upper and lower
transaction amount limits
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Velocity Filter allows merchants to limit the total volume of
transactions received per hour, which is designed to help combat
high-volume attacks common with fraudulent transactions
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Shipping-Billing Mismatch Filter helps identify high-risk and
potentially fraudulent transactions containing an address
mismatch
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Transaction IP Velocity Filter helps identify excessive
transactions received from the same IP address, isolating
suspicious activity from a single source
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Suspicious Transaction Filter helps detect suspicious
transactions using proprietary identification criteria and
transaction behavior analysis
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Authorized AIM IP Address feature allows merchants connected via
the AIM feature to list server IP addresses that are
authorized to submit transactions
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IP Address Blocking feature, allows merchants to block
transactions from selected IP addresses
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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
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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 who 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. The Company no longer actively markets
this service.
SalesBoost.Net, provided under agreement with eBoz, Inc.,
is a suite of 50 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. The Company no longer
actively markets this service.
AmbironTrustwave PCI Scanning and Compliance Tools,
provided under agreement with AmbironTrustWave, are leading
information security and compliance management solutions that
offer convenient and affordable Payment Card Industry (PCI)
tools. PCI is an industry-wide security standard building on
Visas Cardholder Information Security Program (CISP) and
MasterCards Site Data Protection (SDP) program that
increases security for storing, transmitting, and processing
cardholder data.
Payment Processing services are priced based upon a
per-transaction fee, monthly subscription fee, and an initial
set-up fee.
Prices vary with the mix of services a merchant selects, and the
volume of transactions a merchant submits through the payment
gateway service. Fees for additional services are generally
charged on a monthly basis, on a per-transaction basis, or may
be based upon the volume of dollars processed.
TDS
Lightbridge no longer markets or sells its TDS solutions.
Lightbridges TDS solutions helped communications providers
and businesses that sold products or services online deploy
integrated, customized solutions in support of their operational
business processes. Lightbridge offered its TDS products and
services in five broad solutions groups:
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Solutions Groups
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Functions
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Customer Qualification
and Acquisition
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Online, real-time transaction
processing services and contact center services to help carriers
qualify 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,
contact centers and Internet applications, and voice recognition
systems.
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TeleServices
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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.
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Authentication
Services
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Services that provide screening
and authentication of identity data for users engaged in online
transactions.
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Risk Management
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A suite of services that make
online, real-time inquiries into proprietary databases, industry
databases and processing modules to screen applicants for
potential fraud.
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Consulting Services
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Solution Development and
Deployment Services include requirements planning, systems
integration, custom software development, project management,
and training services.
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Business Advisory Consulting
encompasses management consulting services designed to leverage
best practices in telecommunications, online commerce and allied
industries.
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Clients
and Client Concentration
In 2006 and 2005, one of our clients accounted for more than 10%
of our total revenues, and, in 2004, two of our clients
individually accounted for more than 10% of our total revenues.
One client accounted for 10% of total
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accounts receivable at December 31, 2006. The following
Lightbridge clients accounted for more than 10% of total
revenues in the years indicated:
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|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Sprint/Nextel(1)
|
|
|
20
|
%
|
|
|
33
|
%
|
|
|
37
|
%
|
AT&T Wireless Services, Inc.
(AT&T Wireless)
|
|
|
|
*
|
|
|
|
*
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total % of Revenues from
greater-than-10% customers
|
|
|
20
|
%
|
|
|
33
|
%
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Sprint Spectrum L.P. and Nextel Operations, Inc. (Sprint/Nextel)
merged on August 12, 2005. |
|
* |
|
Represents less than 10% of total revenues. |
Payment
Processing
The Company sells its Payment Processing Services primarily
through a network of outside sales partners, merchant banking
partners, third party solution providers and its inside sales
team, 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. The Company had over 166,000 and 135,000
active merchants as of December 31, 2006 and 2005,
respectively. Because of the size and diversity of the
Companys installed merchant base for its gateway product,
the Payment Processing segment does not have significant
merchant concentration.
TDS
On February 21, 2007, we announced that we had entered into
an asset purchase agreement and sold certain assets related to
our TDS business to Vesta at the close of business on
February 20, 2007 for $2.5 million in cash plus
assumption of certain contractual liabilities. The TDS
operations for 2006 and prior periods will be presented as
discontinued when they are disposed of in 2007. We expect to
record a gain on the disposal of our TDS business of
approximately $1.0 million to $1.5 million, which will
be presented as a gain on disposal of discontinued operations.
Sales and
Marketing and Seasonality
The Companys sales strategy 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 and merchant banking partners. 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 and merchant banking
partners. The Companys outside sales partnerships and
banking partner relationships are not exclusive. The Company
relies on payment processing product feature differentiation,
attractive residual sales commissions and customer support
services, to motivate these outside sales partners and others to
promote Lightbridges services over those of another
gateway service provider.
Service and technical support for Payment Processing products
are provided to merchants and outside sales partners through a
contact 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 reliable service,
customer support and product innovation is critical to the
objective of differentiating the Companys solutions and
services from those of its competitors.
Our sales, and in particular the number of transactions we
process for our customers, may vary as a result of seasonality.
Customers typically process more transactions during the holiday
season in the fourth quarter of the year. For additional
information on how our quarterly results may fluctuate please
refer to Item 1.A. Risk Factors, Our Quarterly Results may
Fluctuate.
10
Engineering,
Research and Development
Lightbridge believes that its future success of the Company will
depend in part on its ability to continue to enhance, implement,
and maintain its existing product and service offerings
including, without limitation, the Payment Processing gateway,
and to develop, implement and maintain new products and services
that allow customers to respond to changing market requirements.
For the years ended December 31, 2006, 2005 and 2004, the
Companys research and development costs were approximately
$11.3, $14.4 and $18.0 million, respectively.
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 solutions
and services is characterized by a few large competitors and
many smaller competitors. The market is fragmented, and a number
of companies 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
PayPal, Inc., Google, Inc., CyberSource Corporation,
Plug & Pay Technologies, Inc., LinkPoint International,
Inc., a subsidiary of First Data Corporation, Fidelity National
Information Services, Inc., Telecheck International, Inc., Check
Free Corporation and Intuit Inc.
Lightbridge believes that the principal competitive factors in
the online payment industry includes the ability to identify and
respond to customer 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 this industry 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
and Industry-Specific Regulation
The Banking Secrecy Act, the USA Patriot Act of 2001, and the
Homeland Security Act contain anti-money laundering and
financial transparency laws 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, ACH processing, 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 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 internet gambling, taxes, pricing,
content and distribution.
Furthermore, the growth and development of the
e-commerce
market 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, or taxation
requirements, 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.
11
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
including, without limitation, notification of unauthorized
disclosure of personal information of individuals. 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 fines and
penalties, and substantial liability and result in costly and
time-consuming litigation.
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 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.
In the Payment Processing segment, the Company is responsible to
maintain compliance with industry security standards set forth
by the credit card associations under the Payment Card Industry
(PCI) Data Security Standard, and ACH processing rules and
guidelines set forth by the National Automated Clearing House
Association (NACHA).
The Securities and Exchange Commission (SEC) and the National
Association of Securities Dealers, Inc. have also enacted
regulations affecting corporate governance, securities
disclosure or compliance practices. The Company expects these
regulations to increase its compliance costs and require
additional time and attention.
Proprietary
Rights
Lightbridges success is dependent upon proprietary
technology. Lightbridge relies 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
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, 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.
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 has received notices alleging that certain of its
products or services may infringe on
12
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, 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 March 1, 2007, Lightbridge had a total of 201
employees, of which 200 were full-time and 1 was part-time or
seasonal. 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. The information found on our Web site is not
part of this or any other report we file with or furnish to the
SEC.
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 distribution partners and its revenues are
derived predominantly through these relationships. In
particular, Wells Fargo is a significant distributor of our
gateway services.
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 including, without
limitation, Wells Fargo or other sales and marketing partners to
generate significant revenues, our failure to establish
additional distribution or sales and marketing alliances,
changes in the industry that render third party distribution
networks obsolete, termination of relationships with significant
distributors including, without limitation, Wells Fargo, or
marketing partners would have a material adverse effect on our
business, operating results and financial condition. In
addition, we may be required to pay higher commission rates in
order to maintain loyalty among our third-party distribution
partners, which may have a material adverse impact on our
profitability.
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
13
example, outside sales partners of Authorize.Net products and
services are permitted to and generally do market and sell
competing 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 software, data, systems and services. In some
circumstances, we rely on a single supplier or limited group of
suppliers. For example, our Payment Processing 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 a single
Originating Depository Financial Institution (ODFI) partner to
process ACH transactions, and our ability to process these
transactions would be severely impacted if we were to lose such
partner or if such partner stopped processing our ACH
transactions 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.
In addition, our business is materially dependent on services
provided by various telecommunications providers. A significant
interruption in telecommunications services including, without
limitation, a power loss 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. 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.
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 represent a
significant portion of the overall sales of goods and services
in the economy. 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.
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 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. We expect that technically
sophisticated criminals will continue to attempt to circumvent
our anti-fraud systems. If such fraud schemes
14
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 storage and transmission of confidential
personal data, coupled with 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 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.
Authorize.Net believes it is compliant with the Payment Card
Industrys (PCI) Security Standard which incorporates
Visas Cardholder Information Security Program (CISP) and
MasterCards Site Data Protection (SDP) standard.
However, there is no guarantee that we will maintain such
compliance or that compliance will prevent illegal or improper
use of our payment system.
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.
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 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, a growth of our client base, a significant 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. 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.
Changes
to Credit Card Association and ACH Rules or Practices Could
Adversely Impact Our Authorize.Net Business.
Our Authorize.Net credit card payment gateway does not directly
access the credit card associations. As a result, we must rely
on banks and their credit card processing providers to process
our transactions. Nevertheless, as a payment gateway 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
15
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.
In December 2004, the Payment Card Industry (PCI) Data Security
Standard was created by major credit card companies to safeguard
customer information. Visa, MasterCard, American Express, and
other credit card associations mandate that merchants and
service providers meet certain minimum standards of security
when they store, process and transmit cardholder data. Our
Payment Processing business must comply with this standard in
order to continue as an internet payment gateway. Changes to
this standard may require us to invest significant resources in
engineering and hardware in order to comply.
Additionally, our eCheck.Net service is required to be compliant
with Automated Clearing House processing rules promulgated by
the National Automated Clearing House Association (NACHA). NACHA
could adopt new operating rules or interpretations of existing
rules which we might find difficult or impossible to comply
with, resulting in our inability to give customers the option of
using the ACH network for payment processing services, as well
as significantly hindering our ability, or making us unable, to
utilize the ACH network for our own billing and collection
activities for our own services.
We May
Become a Party to Intellectual Property Infringement Claims,
Which Could Harm Our Business.
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 customers or other third
partys rights. These claims, regardless of merit, may
consume valuable management time, result in costly litigation or
service 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 customers, third
parties or purchasers of assets or businesses we have sold for
losses they may incur under indemnification agreements if we are
found to have violated the intellectual property rights of
others. We may also seek to settle intellectual property
infringement claims which could require payment of material
amounts to the third parties claiming infringement. Please refer
to Part I Item 3, Legal Proceedings for a
discussion of certain matters related to our intellectual
property.
In connection with the sale of our INS business to VeriSign on
June 14, 2005, we agreed to indemnify VeriSign for up to
$5.0 million in damages incurred for potential breaches of
our intellectual property representations and warranties in the
asset purchase agreement. Such representations and warranties
extend for two years from the date of closing. We received
notification from VeriSign, Inc. asserting that we are obliged
to indemnify VeriSign with respect to a lawsuit filed against
VeriSign which alleges that VeriSign is infringing certain
patents of the plaintiff. VeriSign asserts that our obligation
to indemnify it arises in connection with the sale by us to
VeriSign of certain assets related to our Intelligent Network
Systems business unit, including our Prepay IN software, which
VeriSign acquired in April 2005. We objected to VeriSigns
claim and have asked for additional information, which we have
not yet recieved. We are not a party to the litigation at this
time.
The
Success of Our Business Strategy Is Dependent on Our Ability to
Further Penetrate into the Payment Processing Market and to
Expand into New or Complementary Markets.
As part of our business strategy, we are seeking to further
penetrate into the payment processing market and to expand our
business into new markets or markets that are complementary to
our existing payment processing business.
16
If we are not able to successfully expand our penetration into
our existing payment processing market or into new or
complementary markets, our financial results and future
prospects may be harmed. Our ability to increase market
penetration and enter new or complementary markets depends on a
number of factors, including:
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growth in our existing and targeted markets;
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our ability to provide products and services to address the
needs of those markets; and
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competition in those markets.
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We
Have Made and May Continue to Make Acquisitions, Which Involve
Risks.
We may continue to make acquisitions in the future if we
identify companies, technologies or assets that appear to expand
or complement our business. Acquisitions involve risks that
could cause the actual results of any acquisitions we make to
differ from our expectations. At the same time, if we are not
able to make acquisitions, we may not be able to expand our
business. Some examples of the difficulties posed by
acquisitions are that:
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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.
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Our acquisition of other businesses could significantly reduce
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 substantial amounts of 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.
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We may also incur additional costs relating to the integration,
review and evaluation and enhancement of our internal controls
for businesses we acquire. In addition, we may assume contingent
liabilities that may be difficult to estimate and costs and
liabilities associated with assumed litigation matters.
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Acquisitions may divert managements attention from our
existing business and may damage our relationships with our key
clients and employees.
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Acquisitions may also result in liabilities including, without
limitation, intellectual property infringement claims not known
at the time of acquisition as well as for assumed obligations.
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We
Face Competition from a Broad and Increasing Range of
Vendors.
The market for products and services offered to participants in
online transactions is highly competitive and subject to rapid
change. This market is fragmented, and a number of companies
offer one or more products or services competitive with ours. We
anticipate continued growth and the formation of new alliances
in the market in which we compete, which will result in the
entrance of new or the creation of bigger competitors in the
future. For example, in October 2005, VeriSign, Inc. announced
that PayPal, Inc., a wholly-owned subsidiary of eBay, Inc.,
agreed to acquire VeriSigns payment gateway business and
to form a strategic alliance with VeriSign, Inc. for on-line
commerce and security. In addition, in June 2006 Google, Inc.
announced Google Checkout, a new payment service that may
compete with us. We face potential competition from several
primary sources:
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providers of online payment processing services, including
CyberSource Corporation, Plug & Pay Technologies, Inc.,
PayPal, Inc., Google, Inc. and LinkPoint International, Inc., a
subsidiary of First Data Corporation.
|
17
|
|
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|
|
providers of ACH services including Fidelity National
Information Services, Inc., Telecheck International, Inc.,
CheckFree Corporation and Intuit Inc.
|
Other companies, including financial services, credit card and
payment processing companies compete with us or may enter the
market and provide competing services.
Because competitors can 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.
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 competition 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:
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identify and anticipate emerging technological and market trends
affecting the markets in which we do business;
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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;
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develop or acquire new products and services that meet emerging
client needs, such as products and services for the online
market;
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modify our products and services in response to changing
business practices and technical requirements of our clients, as
well as to new regulatory requirements;
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integrate our current and future products with third-party
products; and
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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.
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 Payment Processing business, are subject to
numerous state and federal regulations, including those related
to banking, credit cards, electronic transactions and
communication, escrow, fair credit reporting, privacy of
financial records, internet gambling and others. State money
transmitter regulations and federal anti-money laundering and
money services business regulations can also apply under some
circumstances.
18
The application of many of these laws with regard to electronic
commerce is 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.
Privacy legislation including the Gramm-Leach-Bliley Act and
regulations there under, as well as state laws 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.
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
including, without limitation, notification of unauthorized
disclosure of personal information of individuals. Uncertainty
and new laws and regulations, as well as the application of
existing laws, could limit our ability to operate in our
markets, expose us to compliance costs, fines, penalties 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 companies that provide
services to online business. The adoption of additional laws or
regulations, or taxation requirements may affect the ability to
offer, or cost effectiveness of offering, goods or services
online, 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 costsand require additional time and
attention. If we fail to comply with any of these regulations,
we could be subject to legal actions by regulatory authorities
or private parties.
Our
Quarterly Operating Results May Fluctuate.
Our operating results may fluctuate in the future based upon a
number of factors, many of which are not within our control. We
base our operating expenses on anticipated revenue growth and
many of our operating expenses are relatively fixed in the
short-term. Our revenue model is based largely on recurring
revenues, billed monthly, predominately derived from growth in
customers and the numbers of transactions processed within a
monthly billing period. The number of transactions processed is
affected by many factors, several of which are beyond our
control, including general consumer trends and holiday shopping
in the fourth quarter of the year.
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.
Our operating results may also fluctuate in the future due to a
variety of other factors, including:
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how well we execute on our strategy and operating plans;
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|
changes in the number of transactions we process for our
customers, including as a result of seasonality, success of each
customers business, general economic conditions or
regulatory requirements restricting our customers;
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|
changes in our pricing policies or those of our competitors;
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|
relative rates of acquisition of new customers and the loss of
existing customers;
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|
delays in the introduction of new or enhanced services, software
and related products by us or our competitors or market
acceptance of these products and services;
|
19
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the amount of capital expenditures required to maintain and
expand our business, operations, and infrastructure; and
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|
the impact of external factors or events, such as war, cyber
terrorism or other acts of terrorism.
|
Our quarterly results may also vary due to the timing and extent
of restructuring, and impairment and other charges that may
occur in a given quarter.
Our quarterly results may be affected by new changes in
accounting rules, such as the requirement to record share-based
compensation expense for employee stock option grants made at
fair market value. Since the Company has adopted the modified
prospective transition method to report share-based compensation
expense, periods prior to 2006 have not been restated to reflect
the fair value method of expensing share-based compensation.
As a result of these factors, we believe that our quarterly
results are not predictable with any significant degree of
certainty, and
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
Success Depends in Part on Our Ability to 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 maintain or 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 pending application for a patent, but we cannot be
certain that the patent will be issued on that application, that
any of our 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 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.
Our
Business May Be Harmed by Errors in Our Software.
The software that we develop and use in providing our
transaction processing 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. 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 use. 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 business policies, or to fail to
comply with legal,
20
credit card, and banking requirements, such as those under the
Fair Credit Reporting Act, Gramm-Leach-Bliley Act, NACHA rules,
MasterCards Site Data Protection (SDP) Standard,
Visas Cardholder Information Security Program (CISP) and
Payment Card Industrys (PCI) Data Security Standard.
Such errors can harm our business in several ways, including the
following:
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we may suffer a loss of revenue if, due to software errors, we
are temporarily unable to provide products or services to our
merchant customers;
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|
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 customer as a result of such errors;
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|
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;
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|
we may damage our relationships with clients or suffer a loss of
reputation within our industry;
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|
we may become subject to litigation or regulatory
scrutiny; and
|
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|
|
our customers 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.
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 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.
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. 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 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.
21
Our
Business Could Require Additional Financing.
Our future business activities, 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 future expansions
including acquisitions will require us to make significant
capital expenditures. If our available cash resources prove to
be insufficient, because of unanticipated expenses, previous
acquisitions, 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.
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.
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|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Lightbridge leases approximately 80,000 square feet in a
single building in Burlington, Massachusetts for its corporate
headquarters. This lease was executed and delivered in January
2004, had a rent commencement date in June 2004 and expires in
2011. The Company sublet 35,000 square feet in conjunction
with the Company vacating the third floor of the Companys
corporate headquarters in the third quarter of 2005. The initial
sublease term for such 35,000 square feet is from
November 9, 2005 through September 30, 2008. The
Company will be vacating the remaining 45,000 square feet
in 2007 in connection with the sale of certain assets related to
the Companys TDS business on February 20, 2007 and
subsequent sublease agreement for that space. The Company plans
to relocate its corporate headquarters to a 10,000 square
foot facility in Marlborough, Massachusetts during the first
half of 2007.
The Company leases approximately 14,000 and 23,400 square
feet with lease expiration dates in 2010 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.
The Company leases approximately 30,000 square feet with an
lease expiration date in 2008, for a former product development
facility in Broomfield, Colorado. We have subleased our
Broomfield, Colorado facility for the balance of the lease term.
The Company leases 29,000 square feet with a lease
expiration date in 2007, for the contact center in Lynn,
Massachusetts. The Company leases approximately
4,000 square feet in Waltham, Massachusetts for a data
center with a lease expiration date in 2010. The Waltham,
Massachusetts data center facility has been subleased in
connection with the sale of certain assets related to the TDS
business. The terms of the Companys leases generally run
from one to six years. We believe that our present facilities
are adequate for our current needs and that suitable additional
space will be available as needed.
22
|
|
Item 3.
|
Legal
Proceedings
|
In May 2006, we entered into a settlement agreement with respect
to certain litigation involving NetMoneyIN, Inc. Pursuant to the
agreement, we agreed to pay NetMoneyIN, Inc. a lump sum payment
of $1.75 million in exchange for a lease and covenant not
to sue. The cost of the settlement to us is $1.5 million
net of $0.25 million received from another party named in
the litigation. We recorded this cost in general and
administrative expenses in the second quarter of 2006.
We had incurred legal expenses of approximately
$0.6 million and $1.1 million for the years ended
December 31, 2006 and December 31, 2005, respectively,
in connection with the defense of this lawsuit following our
acquisition of Authorize.Net. We do not expect to incur any
additional litigation costs related to this lawsuit.
In connection with the sale of our INS business to VeriSign on
June 14, 2005, we agreed to indemnify VeriSign for up to
$5.0 million in damages incurred for potential breaches of
our intellectual property representations and warranties in the
asset purchase agreement. Such representations and warranties
extend for two years from the date of closing. We received
notification from VeriSign, Inc. asserting that we are obliged
to indemnify VeriSign with respect to a lawsuit filed against
VeriSign which alleges that VeriSign is infringing certain
patents of the plaintiff. VeriSign asserts that our obligation
to indemnify it arises in connection with the sale by us to
VeriSign of certain assets related to our Intelligent Network
Systems business unit, including our Prepay IN software, which
VeriSign acquired in April 2005. We objected to VeriSigns
claim and have asked for additional information, which we have
not yet received. We cannot predict the outcome of this matter
at this time and we are presently not a party to the litigation.
We are involved in various litigation and legal matters other
than the VeriSign matter described above that have arisen in the
ordinary course of business. We believe that the ultimate
resolution of any existing matter will not have a material
adverse effect on our consolidated financial statements.
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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, 2006.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Shares of the Companys common stock, $.01 par value
per share, are quoted on the NASDAQ Global Market under the
symbol LTBG. The following table sets forth, for the
calendar quarters indicated, the high and low closing prices per
share of the common stock on the National Market System, as
reported in published financial sources:
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High
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|
Low
|
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
11.10
|
|
|
$
|
8.38
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|
Second Quarter
|
|
$
|
14.31
|
|
|
$
|
11.12
|
|
Third Quarter
|
|
$
|
13.60
|
|
|
$
|
10.60
|
|
Fourth Quarter
|
|
$
|
14.03
|
|
|
$
|
10.96
|
|
2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
6.35
|
|
|
$
|
5.74
|
|
Second Quarter
|
|
$
|
6.79
|
|
|
$
|
5.73
|
|
Third Quarter
|
|
$
|
8.10
|
|
|
$
|
6.50
|
|
Fourth Quarter
|
|
$
|
9.95
|
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|
$
|
7.53
|
|
23
Performance
Graph
The following graph compares the cumulative total return of our
common stock for the five year period from 2002 to 2006 to the
cumulative total return of the NASDAQ 100 Stock Market Index and
the NASDAQ Computer Index for the same period.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Lightbridge, Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index
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* |
|
$100 invested on 12/31/01 in stock or index-including
reinvestment of dividends.
Fiscal year ending December 31. |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec-01
|
|
|
|
Dec-02
|
|
|
|
Dec-03
|
|
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|
Dec-04
|
|
|
|
Dec-05
|
|
|
|
Dec-06
|
|
Lightbridge, Inc.
|
|
|
|
100.00
|
|
|
|
|
50.62
|
|
|
|
|
74.90
|
|
|
|
|
49.71
|
|
|
|
|
68.23
|
|
|
|
|
111.44
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
68.85
|
|
|
|
|
101.86
|
|
|
|
|
112.16
|
|
|
|
|
115.32
|
|
|
|
|
127.52
|
|
NASDAQ Computer & Data
Processing
|
|
|
|
100.00
|
|
|
|
|
70.29
|
|
|
|
|
89.82
|
|
|
|
|
102.40
|
|
|
|
|
105.49
|
|
|
|
|
119.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holders
As of March 13, 2007, there were 153 holders of record of
common stock (which number does not include the number of
stockholders whose shares are held by a broker or clearing
agency but which does include each such brokerage house or
clearing agency as one record holder).
Dividend
Policy
The Company has never declared or paid any cash dividends on its
common stock. The Company 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.
24
Issuer
Purchases of Equity
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
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|
|
(c)Total Number of
|
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|
(d)Maximum Dollar Value
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
of Shares
|
|
|
|
(a)Total Number
|
|
|
(b)Average Price
|
|
|
Purchased as
|
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that May
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|
of Shares
|
|
|
Paid per
|
|
|
Part of Publicly
|
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|
Yet Be Purchased
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Announced Plan
|
|
|
under the Plan (in thousands)
|
|
|
October 1, 2006
October 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2006
November 30,
2006(1)
|
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369
|
|
|
$
|
13.71
|
|
|
|
|
|
|
|
|
|
December 1, 2006
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
369
|
|
|
$
|
13.71
|
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
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|
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|
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|
(1) Represents shares of stock surrendered by
Lightbridge employees in order to meet tax withholding
obligations in connection with the vesting of an installment of
their restricted stock awards
In September 2006, our Board of Directors authorized a stock
repurchase program of up to $15.0 million allowing us to
repurchase shares of our outstanding common stock in the open
market or through private transactions from time to time
depending on market conditions. As of March 8, 2007, the
Company has not made any repurchases under this program.
Securities
Authorized for Issuance under Equity Compensation
Plans
See Part III, Item 12 for information regarding
securities authorized for issuance under equity compensation
plans.
25
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|
Item 6.
|
Selected
Financial Data
|
The following selected financial data have been derived from the
Companys audited historical consolidated financial
statements, certain of which are included elsewhere in this
Annual Report on
Form 10-K.
The following selected financial data should be read in
conjunction with the Companys consolidated financial
statements and related notes and Managements
Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this Annual Report on
Form 10-K.
The following selected financial data includes the results of
operations, from the date of acquisition, of Authorize.Net
Corporation, which the Company acquired on March 31, 2004.
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Years Ended December 31,
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2006
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2005
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2004
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2003
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2002
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(In thousands, except per share amounts)
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Statement of Operations
Data:
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Revenues
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$
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95,646
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$
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108,278
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$
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115,133
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$
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99,023
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|
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$
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107,120
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Cost of revenues
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38,795
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49,803
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58,533
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52,624
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55,853
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Gross profit
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56,851
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58,475
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56,600
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46,399
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51,267
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Operating expenses:
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Engineering and development costs
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11,259
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14,375
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18,002
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17,150
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15,389
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Sales and marketing
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19,571
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18,072
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17,705
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8,960
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6,848
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General and administrative
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17,550
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15,974
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15,758
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12,991
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15,569
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Purchased in-process research and
development
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679
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Restructuring costs
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7,283
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1,259
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4,069
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1,227
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3,154
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Total operating expenses
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55,663
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49,680
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56,213
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40,328
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40,960
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Income from operations
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1,188
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8,795
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387
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6,071
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10,307
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Interest income
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4,883
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1,937
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935
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1,778
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2,439
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Equity in loss of partnership
investment
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(471
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)
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(464
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)
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Income from continuing operations
before provision for income taxes
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6,071
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10,732
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1,322
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7,378
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12,282
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(Benefit) provision for income taxes
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(18,219
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)
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1,976
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8,677
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1,889
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2,591
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Income (loss) from continuing
operations
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24,290
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8,756
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(7,355
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)
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5,489
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9,691
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Discontinued operations, net of
income taxes:
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Gain on sale of Fraud Centurion
assets
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2,673
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Gain on sale of INS assets
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12,689
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Income (loss) from operations
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468
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(2,433
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)
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(10,723
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(6,938
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)
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(6,061
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)
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Total discontinued operations, net
of income taxes
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468
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10,256
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(8,050
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(6,938
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(6,061
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)
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Net income (loss)
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$
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24,758
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$
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19,012
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$
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(15,405
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$
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(1,449
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)
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$
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3,630
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Net income (loss) per common share
(basic):
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From continuing operations
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$
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0.89
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$
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0.33
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$
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(0.28
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)
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$
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0.20
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$
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0.35
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From discontinued operations
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0.02
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|
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0.38
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(0.30
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)
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(0.25
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)
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(0.22
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)
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Net income (loss) per common share
(basic)
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$
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0.91
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$
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0.71
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$
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(0.58
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)
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$
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0.05
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$
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0.13
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Net income (loss) per common share
(diluted):
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From continuing operations
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$
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0.86
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$
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0.32
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$
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(0.28
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$
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0.20
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$
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0.34
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From discontinued operations
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0.02
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0.38
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(0.30
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)
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|
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(0.25
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)
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|
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(0.21
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)
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Net income (loss) per common share
(diluted)
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|
$
|
0.88
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|
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$
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0.70
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$
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(0.58
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)
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|
$
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(0.05
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)
|
|
$
|
0.13
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Basic weighted average shares
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27,248
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|
|
26,670
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|
|
26,643
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|
|
|
27,015
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|
|
|
28,030
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|
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|
|
|
|
|
|
|
|
|
|
|
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|
Diluted weighted average shares
|
|
|
28,245
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|
|
|
27,282
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|
|
|
26,643
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|
|
|
27,416
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|
|
|
28,433
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
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|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
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(In thousands)
|
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|
Balance Sheet Data:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash, cash equivalents and
short-term investments
|
|
$
|
116,172
|
|
|
$
|
84,808
|
|
|
$
|
51,625
|
|
|
$
|
133,488
|
|
|
$
|
133,470
|
|
Working capital
|
|
$
|
103,966
|
|
|
$
|
74,156
|
|
|
$
|
42,997
|
|
|
$
|
137,684
|
|
|
$
|
136,501
|
|
Total assets
|
|
$
|
222,474
|
|
|
$
|
189,535
|
|
|
$
|
170,486
|
|
|
$
|
177,836
|
|
|
$
|
180,672
|
|
Long-term obligations, less
current portion
|
|
$
|
700
|
|
|
$
|
700
|
|
|
$
|
149
|
|
|
$
|
33
|
|
|
$
|
259
|
|
Stockholders equity
|
|
$
|
190,315
|
|
|
$
|
156,953
|
|
|
$
|
135,667
|
|
|
$
|
154,503
|
|
|
$
|
159,641
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We have undergone significant changes to our business since 2004
and, with the sale of certain assets related to our TDS business
to Vesta we are now focused on our Payment Processing Services
segment (Payment Processing). In 2004, the Company operated in
four distinct operating segments: Telecom Decisioning Services
(TDS), Payment Processing, Intelligent Network Solutions (INS)
and Instant Conferencing Services (Instant Conferencing). During
2005, we sold our INS business and ceased the operation of our
Instant Conferencing business. We sold the TDS business on
February 20, 2007. The operating results and financial
condition of the TDS segment have been included as part of the
financial results from continuing operations in the accompanying
consolidated financial statements. Commencing in the first
quarter of 2007, the financial condition and results of the TDS
segment will be presented as a discontinued operation. The
operating results and financial condition of the INS and Instant
Conferencing segments have been included as part of the
financial results from discontinued operations in the
accompanying consolidated financial statements.
Lightbridges two areas of business in 2006 were Payment
Processing and TDS. Historically, TDS comprised a majority of
the Companys business; however, in recent years, revenues
from that business declined. With the sale of the TDS business,
the Company will solely operate in and focus on the Payment
Processing business. 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
consisted 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.
The Companys
IP-based
Payment Processing solutions offer 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 merchants. The Payment Processing
solutions are designed to provide secure transmission of
transaction data over the Internet and manage 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.
Our 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.
A majority of our revenues historically have been derived from
clients located in the United States. Our revenues are derived
from transaction services and consulting and maintenance
services.
Payment
Processing and Exit from Telecom Decisioning
Services
Transaction services revenues related to payment processing are
derived from our credit card processing and ACH processing
services, and other services (collectively, processing
services). Processing services revenue is
27
based on a one-time set up fee, a monthly gateway fee, and a fee
per transaction. The per transaction fee 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 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.
TDS
Our transaction service revenues related to the TDS business
were derived primarily from the processing of applications for
qualification of subscribers for telecommunications services and
the activation of services for those subscribers. Our
telecommunications transactions offerings included screening for
subscriber fraud, evaluating carriers existing accounts,
interfacing with carrier and third-party systems and providing
contact center services. Pricing varied 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 varied 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 have been
recognized in the period in which the services are performed.
Our consulting revenues were related to our TDS business and
were derived principally from providing solution development and
deployment services and business advisory consulting in the
areas of customer acquisition and retention, authentication, and
risk management. The majority of consulting engagements have
been performed on a time and materials basis and revenues from
these engagements have been recognized based on the number of
hours worked by our consultants at an agreed upon rate per hour
and are recognized in the period in which services are
performed. When we performed work under a fixed fee arrangement,
revenues were generally recognized on the proportional
performance method of accounting based on the ratio of labor
hours incurred to estimated total labor hours. In instances
where the customer, at its discretion, had the right to reject
the services prior to final acceptance, revenue was deferred
until such acceptance occurs. Revenues from software maintenance
and support contracts were recognized ratably over the term of
the agreement.
2007
Developments
On February 21, 2007, we announced that we had entered into
an asset purchase agreement and sold certain assets related to
our TDS business to Vesta at the close of business on
February 20, 2007 for $2.5 million in cash plus
assumption of certain contractual liabilities. The TDS
operations for 2006 and prior periods will be presented as
discontinued when they are disposed of in 2007. We expect to
record a gain on the disposal of our TDS business of
approximately $1.0 million to $1.5 million, which will
be presented as a gain on disposal of discontinued operations.
2006
Developments
On November 1, 2006, we announced that our board of
directors authorized the discretionary repurchase of up to
$15.0 million of shares of the Companys common stock.
The shares may be purchased from time to time depending on
market conditions through December 31, 2008. As of
March 8, 2007, we have not made any repurchases under this
program.
On October 4, 2006, we announced our plan to exit the TDS
business. With respect to our exit and subsequent sale of the
TDS business, we recorded asset impairment charges of
$2.4 million during 2006. We expect to incur pre-tax
restructuring charges in the range of $1.9 million to
$2.5 million in the first quarter of 2007. These charges
are expected to consist of approximately $0.9 million to
$1.1 million of severance charges with respect to
terminated employees; approximately $0.3 million to
$0.5 million of facilities exit charges, comprised of the
net present value of the lease payment obligations for the
remaining term of our TDS-related leases in Burlington and Lynn,
Massachusetts, net of estimated sublease income; and
approximately $0.7 million to $0.9 million of other
charges related to the exit and subsequent sale of the TDS
business. Substantially all of the remaining costs will
28
require the outlay of cash, although the timing of lease
payments relating to leased facilities will be unchanged by the
restructuring action. We began to implement the restructuring
efforts in October 2006 with notifications of intended action to
certain affected personnel. The majority of these restructuring
charges related to the exit and subsequent sale of the TDS
business will be reported as a discontinued operation in the
first quarter of 2007.
We expect to record restructuring charges in the range of
$0.4 million to $0.6 million in the first quarter of
2007 related to termination benefits of corporate employees. We
also expect to expect to record accelerated depreciation charges
in the range of $0.4 million to $0.6 million in the
first quarter of 2007 related to the relocation of the
Companys headquarters.
In May 2006, we were advised by
T-Mobile
that
T-Mobile
planned to consolidate its contact center business and begin the
transition of that business from us to other vendors. In
response, we closed our Liverpool, Nova Scotia contact center in
the third quarter of 2006 and we recorded restructuring and
related asset impairment charges of approximately
$0.9 million and $0.8 million during the second and
third quarters of 2006, respectively.
In May 2006, we entered into a settlement agreement with respect
to certain litigation involving NetMoneyIN, Inc. Pursuant to the
agreement, we agreed to pay NetMoneyIN, Inc. a lump sum payment
of $1.75 million in exchange for a release and covenant not
to sue. The cost of the settlement to us was $1.5 million
net of $0.25 million received from another party named in
the litigation. We recorded this cost in general and
administrative expenses in the second quarter of 2006. We had
incurred legal expenses of approximately $0.6 million and
$1.1 million for the years ended December 31, 2006 and
2005, respectively, in connection with the defense of this
lawsuit. We do not expect to incur any further litigation costs
related to this lawsuit.
On January 13, 2006, we announced a restructuring focused
primarily within the TDS business, as well as reductions in
general and administrative expenses. The restructuring consisted
of a total workforce reduction of about 28 positions, and we
recorded a restructuring charge of approximately
$1.4 million in the first quarter of 2006, primarily
related to employee severance and termination benefits.
Operating
Segments
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, for the periods presented we have
reported our operations in two distinct operating segments:
Payment Processing Services, and Telecom Decisioning Services.
|
|
|
|
|
Payment Processing Services (Payment Processing)
This segment provides 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.
|
|
|
|
Telecom Decisioning Services (TDS) This segment
provided wireless subscriber qualification, risk assessment,
fraud screening, consulting services and contact center services
to telecommunications and other companies. As discussed above,
we sold the TDS business on February 20, 2007.
|
We do not allocate shared-based compensation, 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 Retail
Management System (RMS) product, which we no longer actively
market or sell, are included in our TDS segment.
As a result of the decision to exit, and subsequent sale of
certain assets related to, the TDS business, we do not expect
our historical financial results related to the TDS segment to
be indicative of our future results.
29
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 and amounts 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 revenue mix, 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.
Share-Based Compensation. Effective
January 1, 2006, we account for employee stock-based
compensation costs in accordance with Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment (SFAS 123(R). Except as noted below, we
utilize the Black-Scholes option pricing model to estimate the
fair value of employee stock based compensation at the date of
grant, and used the Monte Carlo simulation model for the
share-based performance options, which both require the input of
highly subjective assumptions, including expected volatility and
expected life. Further, as required under SFAS 123(R), we
now estimate forfeitures for options granted that are not
expected to vest. Changes in these inputs and assumptions can
materially affect the measure of estimated fair value of our
share-based compensation.
Internal-use Software. Costs incurred to
develop internal-use software during the application development
stage are capitalized and reported at cost, subject to an
impairment test as described below. Application development
stage costs generally include costs associated with internal-use
software configuration, coding, installation and testing. Costs
of significant upgrades and enhancements that result in
additional functionality are also capitalized whereas costs
incurred for maintenance and minor upgrades and enhancements are
expensed as incurred. We assess potential impairment of
capitalized internal-use software whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to the future undiscounted net cash flows that are expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. This analysis requires us to estimate
future net cash flows associated with the assets. If these
estimates change, reductions or write-offs of internal-use
software costs could result.
Impairment of Long-Lived Assets. We evaluate
long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). Long-lived assets are
evaluated for recoverability in accordance with SFAS 144
whenever events or changes in circumstances indicate that an
asset may have been impaired. In evaluating an asset for
recoverability, we estimate the future cash flow expected to
30
result from the use of the asset and eventual disposition. If
the expected future undiscounted cash flow is less than the
carrying amount of the asset, an impairment loss, equal to the
excess of the carrying amount over the fair value of the asset,
is recognized. We determine fair value by appraisal or
discounted cash flow analysis.
During the third quarter of 2006, we assessed the fair value of
certain of our long-lived assets associated with our TDS
segment, including computer equipment and other tangible assets.
This assessment resulted in impairment charges of
$2.4 million. As a result of our May 2006 announcement to
close our Liverpool, Nova Scotia contact center, we incurred
impairment charges of $1.1 million.
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.
In evaluating our ability to recover our deferred tax assets, we
considered all available positive and negative evidence
including our past operating results, the existence of
cumulative income in the most recent fiscal years, changes in
the business in which we operate 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
required 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. Our decision
to exit the TDS business on October 4, 2006 removed
considerable uncertainty regarding our estimates of expected
future results. Based upon our cumulative operating results and
an assessment of our expected future results, we concluded that
it was more likely than not that we would be able to realize a
substantial portion of our U.S. net operating loss
carryforward tax asset prior to their expiration and realize the
benefit of other net deferred tax assets. As a result, we
reduced our valuation allowance in 2006, resulting in
recognition of a deferred tax asset of $20.3 million.
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 available information.
Goodwill and Acquired Intangible Assets, Impairment of
Long-lived Assets. We recorded goodwill of
$57.6 million in connection with the acquisition of
Authorize.Net, 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 or if other indicators of
impairment arise. We have adopted March 31st as the date of
the annual impairment tests for Authorize.Net.
Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning
assets and liabilities 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 making other
assumptions. Changes in these estimates and assumptions could
materially affect the determination of fair value for each
reporting unit.
31
Results
of Operations
Year
Ended December 31, 2006 Compared with Year Ended
December 31, 2005
Revenues. Revenues and certain revenues
comparisons for the years ended December 31, 2006 and 2005
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
Difference
|
|
|
Difference
|
|
|
|
(Dollars in thousands)
|
|
|
Transaction services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Processing (Authorize.Net)
|
|
$
|
57,549
|
|
|
$
|
45,328
|
|
|
$
|
12,221
|
|
|
|
27.0
|
%
|
TDS
|
|
|
35,427
|
|
|
|
57,493
|
|
|
|
(22,066
|
)
|
|
|
(38.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Transaction services revenues
|
|
|
92,976
|
|
|
|
102,821
|
|
|
|
(9,845
|
)
|
|
|
(9.6
|
)%
|
Consulting and maintenance services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS
|
|
|
2,670
|
|
|
|
5,457
|
|
|
|
(2,787
|
)
|
|
|
(51.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
95,646
|
|
|
$
|
108,278
|
|
|
$
|
(12,632
|
)
|
|
|
(11.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in transaction services revenues was primarily due
to a $22.1 million decline in transactions services
revenues from our TDS segment offset by a $12.2 million
increase in Authorize.Nets revenue. Authorize.Nets
revenues for 2006 increased 27.0% compared to 2005. The
increased revenues were primarily the result of an increase in
the number of merchant customers and the volume of transactions
processed. The decline in TDS transaction services revenues was
primarily a result of a $15.5 million reduction in
transaction fees charged to Sprint/Nextel following the merger
between Sprint Spectrum L.P. (Sprint) and Nextel Operations,
Inc. (Nextel), a $3.1 million reduction in transaction fees
charged to
T-Mobile, as
a result of their decision to consolidate its contact center
business with other vendors, and an unfavorable change in the
mix of services provided to our TDS clients.
In the near term, we expect transaction services revenue from
our Payment Processing segment to continue to increase. However,
as a result of the sale of our TDS business, we will not
generate any transaction services revenue from our TDS segment
after February 2007.
The decrease in consulting and maintenance services revenues of
$2.8 million was principally due to lower revenues from
AT&T Wireless and Sprint/Nextel. We will not generate
consulting and maintenance services revenues associated with our
TDS segment as a result of the sale of certain TDS assets after
February 2007.
Cost of Revenues and Gross Profit. Cost of
revenues consists primarily of personnel costs, 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 pricing to clients, and changes in the amount of
monthly gateway fees and gateway setup fees to clients.
32
Cost of revenues, gross profit and certain comparisons for the
years ended December 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
Difference
|
|
|
Difference
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$
|
37,396
|
|
|
$
|
47,263
|
|
|
$
|
(9,867
|
)
|
|
|
(20.9
|
)%
|
Consulting and maintenance services
|
|
|
1,399
|
|
|
|
2,540
|
|
|
|
(1,141
|
)
|
|
|
(44.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
38,795
|
|
|
$
|
49,803
|
|
|
$
|
(11,008
|
)
|
|
|
(22.1
|
)%
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services $
|
|
$
|
55,580
|
|
|
$
|
55,558
|
|
|
$
|
22
|
|
|
|
0.0
|
%
|
Transaction services %
|
|
|
59.8
|
%
|
|
|
54.0
|
%
|
|
|
|
|
|
|
|
|
Consulting and maintenance
services $
|
|
$
|
1,271
|
|
|
$
|
2,917
|
|
|
$
|
(1,646
|
)
|
|
|
(56.4
|
)%
|
Consulting and maintenance
services %
|
|
|
47.6
|
%
|
|
|
53.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit $
|
|
$
|
56,851
|
|
|
$
|
58,475
|
|
|
$
|
(1,624
|
)
|
|
|
(2.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit %
|
|
|
59.4
|
%
|
|
|
54.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services cost of revenues decreased by
$9.9 million in 2006 from the prior year. Transaction
services cost of revenues from our TDS segment were
approximately $24.9 million for 2006, which represents a
decrease of approximately $12.4 million compared to 2005.
Transactions services cost of revenues from our Payment
Processing segment were approximately $12.5 million for
2006, which represents an increase of approximately
$2.6 million compared to the prior year. In our TDS
business, we realized reductions in third party data and
services costs as a result of processing fewer transactions. We
also realized personnel-related savings resulting from our
restructuring activities. The increase in our Payment Processing
transaction services cost of revenues was primarily due to the
increase in the number of transactions processed and increased
customer support personnel costs to support the new merchants
added during the year.
Authorize.Nets transaction services gross profit amount
was approximately $45.2 million in 2006 versus
approximately $35.4 million in the preceding year as a
result of higher revenues. This increase was partially offset by
a decrease in the transaction services gross profit related to
our TDS segment where the revenue reduction exceeded the cost of
sales expense reduction. Transaction services gross profit from
our TDS segment were approximately $10.5 million for 2006
which represents a decrease of approximately $9.6 million
compared to 2005.
Authorize.Net generated a higher gross profit percentage than
our TDS segment, resulting in increased transaction services
gross profit percentage in 2006 in comparison with 2005.
Transactions services gross profit percentage from our Payment
Processing segment was approximately 78% for 2006 and 2005.
Transactions services gross profit percentage from our TDS
segment decreased to 28% in 2006 from 32% in 2005.
Consulting and maintenance services cost of revenues decreased
by $1.1 million in 2006. This decrease was attributable to
a reduction in personnel-related expenses as a result of our
restructuring activities. Consulting and maintenance services
gross profit and gross profit percentage decreased in 2006 due
to the lower revenues from AT&T Wireless, Inc. and Sprint
Nextel following the merger between Sprint Spectrum L.P.
(Sprint) and Nextel Operations, Inc. (Nextel), partially offset
by the reduction in personnel-related expenses. All of our
consulting and maintenance services are part of our TDS segment.
We do not expect future consulting and maintenance services
revenues associated with our TDS segment as a result of the sale
of the TDS segment.
In the near term, we expect gross profit will decrease and gross
profit percentage to increase due to the exit from and
subsequent sale of the TDS business and higher gross profit
percentage from the Payment Processing business.
33
Operating Expenses. Operating expenses and
certain operating expense comparisons for the years ended
December 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
Difference
|
|
|
Difference
|
|
|
|
(Dollars in thousands)
|
|
|
Engineering and development
|
|
$
|
11,259
|
|
|
$
|
14,375
|
|
|
$
|
(3,116
|
)
|
|
|
(21.7
|
)%
|
Sales and marketing
|
|
|
19,571
|
|
|
|
18,072
|
|
|
|
1,499
|
|
|
|
8.3
|
|
General and administrative
|
|
|
17,550
|
|
|
|
15,974
|
|
|
|
1,576
|
|
|
|
9.9
|
|
Restructuring
|
|
|
7,283
|
|
|
|
1,259
|
|
|
|
6,024
|
|
|
|
478.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,663
|
|
|
$
|
49,680
|
|
|
$
|
5,983
|
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $3.1 million
decrease in engineering and development expenses for 2006 as
compared with 2005 was primarily due to cost savings associated
with our restructuring activities. The cost savings were
partially offset by a $0.4 million share-based compensation
expense due to the adoption of SFAS No. 123(R).
We expect engineering and development expenses to decrease in
2007 as a result of our exit from and subsequent sale of the TDS
business offset by a planned increase in the level of funded
development associated with our Authorize.Net services and
products.
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 agents. The increase of
$1.5 million in sales and marketing expenses in 2006 as
compared with 2005, in absolute dollars and as a percentage of
revenue, was due to the increase in expenses for Authorize.Net.
Authorize.Net represented $18.4 million of sales and
marketing expenses in 2006 as compared to $16.3 million in
2005. This increase was partially offset by reductions in sales
and marketing costs for the TDS segment.
We expect that sales and marketing expenses in 2007 will
continue to increase with growth in Authorize.Nets
revenues as a result of greater sales agent commissions
associated with these revenues.
General and Administrative. General and
administrative expenses consist principally of salaries of
executive, finance, human resources, legal and administrative
personnel and fees for certain outside professional services.
The increase of $1.6 million in general and administrative
expenses, as compared to in 2005, in absolute dollars and as a
percentage of revenues, was due to $3.2 million in
share-based compensation expense due to the adoption of
SFAS No. 123(R) partially offset by cost savings
associated with our restructuring activities.
We expect general & administrative expenses to decrease
in 2007. However, general and administrative expenses will
increase in the first half of 2007 as a result of our exit and
sale of the TDS business and our plans to relocate our corporate
headquarters to Marlborough, Massachusetts. During the second
half of 2007, we expect our general and administrative expenses
to decline as a result of such events.
Restructuring. A discussion of restructuring
charges recorded during 2006 and 2005 is contained in the
separate Restructurings section below.
Interest Income. Interest income consists of
earnings on our cash and short-term investment balances.
Interest income increased to $4.9 million in 2006 from
$1.9 million in 2005. This increase in interest income was
primarily due to our higher cash and short-term investments
balance and an increase in the prevailing interest rates.
(Benefit) Provision for Income Taxes. Benefit
for income taxes increased to $18.2 million for the year
ended December 31, 2006 as compared to a provision for
income taxes of $2.0 million during the year ended
December 31, 2005. In 2006 our effective tax rate was
(300) percent. During 2006, due to with the release of our
deferred tax asset valuation allowance, we recorded an income
tax benefit of $20.3 million. Also during 2006 we recorded
a discrete item of $0.2 million related to the settlement
of a tax audit and related interest for prior periods, a current
provision
34
of $0.2 million related to federal, state and foreign taxes
and a deferred federal and state provision of $1.7 million
attributable to amortization of intangibles with indefinite
lives. In 2005 our effective tax rate was 19 percent
consisting of a current state and foreign taxes expense of
$0.2 million and a deferred federal and state provision of
$1.8 million attributable to amortization of intangibles
with indefinite lives. During 2005 we maintained a full
valuation allowance recorded against our deferred tax assets.
In evaluating our ability to recover our deferred tax assets, we
considered all available positive and negative evidence
including our past operating results, the existence of
cumulative income in the most recent fiscal years, changes in
the business in which we operate 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
required 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. Our decision
to exit the TDS business on October 4, 2006 removed
considerable uncertainty regarding our estimates of expected
future results. Based upon our cumulative operating results and
an assessment of our expected future results, we concluded that
it was more likely than not that we would be able to realize all
of our U.S. net operating loss carryforward tax asset prior
to their expiration and realize the benefit of other net
deferred tax assets. As a result, the Company reduced its
valuation allowance in 2006, resulting in recognition of a
deferred tax asset of $20.3 million.
As of December 31, 2006 we had a remaining valuation
allowance of $9.1 million, which primarily relates to
certain state NOLs and tax credits that we expect to expire or
go unused within the respective carryforward period. If
circumstances change such that the realization of these deferred
tax assets is concluded to be more likely than not, the Company
will record future income tax benefits at the time that such
determination is made.
Because of the availability of the U.S. NOLs discussed
above, a significant portion of our future provision for income
taxes is expected to be a non-cash expense; consequently, the
amount of cash paid with respect to income taxes is expected to
be a relatively small portion of the total annualized tax
expense during periods in which the NOLs are utilized.
Year
Ended December 31, 2005 Compared with Year Ended
December 31, 2004
Revenues. Revenues and certain revenue
comparisons for the years ended December 31, 2005 and 2004
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2005
|
|
|
2004
|
|
|
Difference
|
|
|
Difference
|
|
|
|
(Dollars in thousands)
|
|
|
Transaction services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Processing (Authorize.NET)
|
|
$
|
45,328
|
|
|
$
|
26,836
|
|
|
$
|
18,492
|
|
|
|
68.9
|
%
|
TDS
|
|
|
57,493
|
|
|
|
76,812
|
|
|
|
(19,319
|
)
|
|
|
(25.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Transaction services revenues
|
|
|
102,821
|
|
|
|
103,648
|
|
|
|
(827
|
)
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting and maintenance services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS
|
|
|
5,457
|
|
|
|
9,851
|
|
|
|
(4,394
|
)
|
|
|
(44.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licensing and hardware
|
|
|
|
|
|
|
1,634
|
|
|
|
(1,634
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
108,278
|
|
|
$
|
115,133
|
|
|
$
|
(6,855
|
)
|
|
|
(6.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in transaction services revenues was due to the
decline of $19.3 million in transaction services revenue
from our TDS segment partially offset by an increase in revenue
of $18.5 million from Authorize.Net. The decline in TDS
transaction services revenues was primarily a result of a
$15.2 million reduction in transaction fees charged to
AT&T Wireless, a decrease in transaction fees charged to
Sprint and Nextel as a result of their merger, and an
unfavorable change in the mix of services provided to them.
The increase in Authorize.Net transaction services revenue was
due to a full year of revenue in 2005 and an increase in the
number of merchant customers added and the volume of
transactions processed. Lightbridge began
35
recording Payment Processing revenues as of April 1, 2004
following the acquisition of Authorize.Net on March 31,
2004. The year ended December 31, 2004 includes revenue
from April 1, 2004 through December 31, 2004.
The decrease in consulting and maintenance services revenues of
$4.4 million was principally due to lower revenues from
AT&T Wireless and a decline in consulting and maintenance
revenues related to our decision to no longer market, sell or
develop our RMS product.
The decline in software licensing and hardware revenues of
$1.6 million in 2005 was similarly due to our decision to
no longer market, sell or develop our RMS product.
Cost of Revenues and Gross Profit. Cost of
revenues and certain cost of revenues comparisons for the years
ended December 31, 2005 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2005
|
|
|
2004
|
|
|
Difference
|
|
|
Difference
|
|
|
|
(Dollars in thousands)
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$
|
47,263
|
|
|
$
|
54,127
|
|
|
$
|
(6,864
|
)
|
|
|
(12.7
|
)%
|
Consulting and maintenance services
|
|
|
2,540
|
|
|
|
4,393
|
|
|
|
(1,853
|
)
|
|
|
(42.2
|
)
|
Software licensing and hardware
|
|
|
|
|
|
|
13
|
|
|
|
(13
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
49,803
|
|
|
$
|
58,533
|
|
|
$
|
(8,730
|
)
|
|
|
(14.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services $
|
|
$
|
55,558
|
|
|
$
|
49,521
|
|
|
$
|
6,037
|
|
|
|
12.2
|
%
|
Transaction services %
|
|
|
54.0
|
%
|
|
|
47.8
|
%
|
|
|
|
|
|
|
|
|
Consulting and maintenance
services $
|
|
$
|
2,917
|
|
|
$
|
5,458
|
|
|
$
|
(2,541
|
)
|
|
|
(46.6
|
)%
|
Consulting and maintenance
services %
|
|
|
53.5
|
%
|
|
|
55.4
|
%
|
|
|
|
|
|
|
|
|
Software licensing and hardware $
|
|
$
|
N/A
|
|
|
$
|
1,621
|
|
|
$
|
(1,621
|
)
|
|
|
(100
|
)%
|
Software licensing and hardware %
|
|
|
N/A
|
|
|
|
99.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit $
|
|
$
|
58,475
|
|
|
$
|
56,600
|
|
|
$
|
1,875
|
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit %
|
|
|
54.0
|
%
|
|
|
49.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services cost of revenues decreased by
$6.9 million in 2005 from 2004. In our TDS business,
spending decreased in our contact centers as a result of the
closing of our Broomfield, Colorado contact center, and the
staffing shift from that site to our Liverpool, Nova Scotia
contact center. We also realized reductions in third party data
and services costs as a result of processing fewer transactions
for AT&T Wireless, reduced costs for maintaining systems and
networks used in processing qualification and activation
transactions, and personnel-related savings resulting from our
2004 restructuring activities.
Transaction services gross profit and gross profit percentage
increased primarily as a result of Authorize.Nets higher
contribution to the transaction services gross profit amount.
Authorize.Nets percent of the transaction services gross
profit amount was 64% in 2005 versus 40% in 2004 as a result of
higher revenues. This increase was partially offset by a
decrease in the transaction services gross profit related to our
TDS segment, where the revenue reduction exceeded the cost of
sales expense reduction. Authorize.Net generated a higher gross
profit percentage than our TDS segment, resulting in increased
transaction services gross profit percentage in 2005 in
comparison with 2004.
Consulting and maintenance services cost of revenues decreased
by $1.9 million in 2005. This decrease was attributable to
a reduction in personnel-related expenses as a result of the
September and December 2004 restructurings. Consulting and
maintenance services gross profit and gross profit percentage
decreased in 2005 due to lower revenues related to our RMS
product and from AT&T Wireless which were partially offset
by the reduction in headcount.
36
There were no software licensing and hardware revenues in 2005
due to our decision to no longer market, sell or develop our RMS
product.
Operating Expenses. Operating expenses and
certain operating expense comparisons for the years ended
December 31, 2005 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
$
|
|
|
%
|
|
|
|
2005
|
|
|
2004
|
|
|
Difference
|
|
|
Difference
|
|
|
|
(Dollars in thousands)
|
|
|
Engineering and development
|
|
$
|
14,375
|
|
|
$
|
18,002
|
|
|
$
|
(3,627
|
)
|
|
|
(20.1
|
)%
|
Sales and marketing
|
|
|
18,072
|
|
|
|
17,705
|
|
|
|
367
|
|
|
|
2.1
|
|
General and administrative
|
|
|
15,974
|
|
|
|
15,758
|
|
|
|
216
|
|
|
|
1.4
|
|
Restructuring
|
|
|
1,259
|
|
|
|
4,069
|
|
|
|
(2,810
|
)
|
|
|
(69.1
|
)
|
Purchased in-process research and
development
|
|
|
|
|
|
|
679
|
|
|
|
(679
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,680
|
|
|
$
|
56,213
|
|
|
$
|
(6,533
|
)
|
|
|
(11.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and Development. The
$3.6 million decrease in engineering and development
expenses for 2005 as compared with 2004 was primarily due to
cost savings associated with the 2004 restructuring activities
and our decision to cease new development and enhancement of our
RMS software product. This decrease was partially offset by a
full year of Authorize.Net engineering and development expenses
in 2005 which we acquired on March 31, 2004. Authorize.Net
represented $4.7 million of engineering and development
expenses in 2005 compared to $3.2 million in 2004.
Sales and Marketing. The increase of
$0.4 million in sales and marketing expenses in 2005 as
compared to in 2004, was due to a full year of Authorize.Net
sales and marketing expenses partially offset by restructuring
activities and reduced sales and marketing program spending.
Authorize.Net represented $16.3 million of sales and
marketing expenses in 2005 compared to $10.2 million in
2004.
General and Administrative. The increase in
general and administrative costs in 2005 was primarily due to a
full year of Authorize.Net general and administrative expenses
partially offset by cost savings associated with the 2004
restructurings. Authorize.Net represented approximately
$3.0 million of general and administrative expenses in 2005
compared to $2.6 million in 2004.
Restructuring. A discussion of restructuring
charges recorded during 2005 and 2004 is contained in the
separate Restructurings section below.
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.
Management used a variety of methods for evaluating the fair
values of the projects, including independent appraisals. The
value of the projects was determined 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,
37
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 project in May 2004 and
the CPS project in September 2005 and spent approximately
$129,000 and $433,000, respectively, on each project after the
acquisition.
Interest Income. Interest income consists of
earnings on our cash and short-term investment balances.
Interest income increased to $1.9 million in 2005 from
$0.9 million in 2004. This increase was primarily due to an
increase in our cash and short-term investments balance as a
result of the cash received for the sale of our INS business, an
increase in the prevailing interest rates, and cost savings from
the 2004 and 2005 restructurings.
Provision for Income Taxes. We recorded a
provision for income taxes of approximately $2.0 million in
2005, which reflected a current provision for state and foreign
taxes of $0.2 million, a deferred federal and state
provision of $1.8 million attributable to amortization of
intangibles with indefinite lives and includes a full valuation
allowance after utilizing net operating loss carry-forwards to
offset projected current taxable income. In 2004, we recorded a
provision for income taxes of approximately $8.7 million,
which related to a full valuation allowance being recorded
against our deferred tax assets.
Discontinued
Operations
INS Segment On April 25, 2005, we
announced that we had entered into an asset purchase agreement
for the sale of our INS business, which includes our PrePay IN
product and related services, to VeriSign. The sale was
completed on June 14, 2005 for $17.45 million in cash
plus assumption of certain contractual liabilities. Of the
$17.45 million in consideration, $1.495 million is
being held in escrow by VeriSign, and $0.25 million is
being held by us as a liability to VeriSign, until certain
representations and as warranties expire and will be recorded as
a gain, net of indemnity claims at that time. As of
December 31, 2006 based on notification we received from
VeriSign, Inc., asserting that we are obliged to indemnify
VeriSign with respect to a lawsuit filed against VeriSign, the
liability is still appropriate. We cannot predict the outcome of
this matter at this time and we are presently not a party to the
litigation. Please refer to Part I Item 3, Legal
Proceedings for a discussion on this matter.
In addition, a liability of $0.45 million has been
established in accordance with FIN 45 based on the
estimated cost if we were to purchase an insurance policy to
cover up to $5.0 million of indemnification obligations for
certain potential breaches of our intellectual property
representations and warranties in the asset purchase agreement
with VeriSign. Such representations and warranties extend for a
period of two years and expire on June 14, 2007. We
periodically verifiy that the $0.45 million liability is
appropriate.
Instant Conferencing Segment On
August 17, 2005, we and America Online, Inc. mutually
agreed to terminate our master services agreement under which we
provided our GroupTalk instant conferencing services to America
Online, Inc. We subsequently terminated all of the outsourcing
agreements and ceased operations of the Instant Conferencing
segment in the third quarter of 2005. In accordance with
SFAS 144, the operating results and financial condition of
the Instant Conferencing segment have been included as part of
the financial results from discontinued operations in the
accompanying consolidated financial statements.
We recorded net income from discontinued operations of
$0.5 million and $10.3 million for the years ended
December 31, 2006 and December 31, 2005, respectively.
We recorded a net loss from discontinued operations of
$8.1 million for the year ended December 31, 2004. The
net income from discontinued operations in 2006 represents a
refund received for past telecommunications costs previously
paid which related to the Instant Conferencing segment. The net
income from discontinued operations in 2005 includes the gain on
the sale of INS of $12.7 million and a $1.4 million
settlement of a lawsuit between Lucent Technologies, Inc. and
us. The net loss from discontinued operations in 2004 includes
the gain on the sale of our Fraud Centurion products of
$2.7 million and a $2.3 million impairment charge
related to the impairment of goodwill and other intangibles as a
result of the Altawave acquisition in 2002.
Liquidity
and Capital Resources
As of December 31, 2006, we had cash and cash equivalents,
short-term investments of $116.2 million, which included
$8.8 million of cash due to merchants related to our
payment processing business. Our cash and cash
38
equivalents increased to $116.2 million at
December 31, 2006 from $83.1 million at
December 31, 2005 as a result of the cash flows generated
from operating activities in 2006. We believe that our current
cash and short-term investment balances will be more than
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, additional acquisitions or investments,
divestitures, restructuring or obligations associated with the
closure of facilities or exit from product or service lines, and
the sustained profitability of the our operations. We may also
require additional cash in the future to finance growth
initiatives including acquisitions.
For the year ended December 31, 2006, we generated cash
from operating activities of continuing operations of
$26.9 million, and cash from financing activities of
$4.6 million, and $1.1 million of cash from investing
activities.
Our capital expenditures totaled $2.2 million for the year
ended December 31, 2006. The capital expenditures during
this period were principally associated with our service
delivery infrastructure and computer equipment for software
development activities. We lease our facilities and certain
equipment under non-cancelable operating lease agreements that
expire at various dates through January 2011.
As a result of our plans to exit, and the subsequent sale of
certain assets related to, the TDS business, we expect to incur
future cash outlays of approximately $1.9 to $2.5 million
in the first quarter of 2007 for severance, facilities exit and
other charges related to the exit and subsequent sale.
Our primary contractual obligations and commercial commitments
are under our operating leases. Our future minimum payments due
under operating leases, including facilities affected by
restructurings, as of December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(Dollars in thousands)
|
|
|
Operating leases
|
|
$
|
12,963
|
|
|
$
|
3,895
|
|
|
$
|
7,382
|
|
|
$
|
1,686
|
|
|
|
|
|
In March of 2007, we entered into a lease agreement for a
10,000 square foot facility in Marlborough, Massachusetts
which will serve as our new corporate headquarters. Our future
minimum payments due under this lease are $0.1 million,
$0.5 million and $0.3 million, for the periods of less
than one year, one to three years and three to five years,
respectively.
We typically agree to indemnify our customers and distributors
for any damages or expenses or settlement amounts resulting from
claimed infringement of intellectual property rights of third
parties, our landlords for any expenses or liabilities resulting
from our use of the leased premises, occurring on the leased
premises or resulting from the breach of our obligations under
the leases related to the leased premises, and purchasers of
assets or businesses we have sold for any expenses or
liabilities resulting from our breaches of any representations,
warranties or covenants contained in the purchase and sale
agreements associated with such sales including, without
limitation, that the assets sold do not infringe on the
intellectual property rights of third parties. While we maintain
insurance that may provide limited coverage for certain warranty
and indemnity claims, such insurance may cease to be available
to us on commercially reasonable terms or at all. Please refer
to Part I. Item 3. Legal Proceedings for a discussion
of certain indemnity claims asserted by Verisign.
At December 31, 2006, we were holding funds in the amount
of $8.8 million due to merchants comprised of
$7.3 million held for Authorize.Nets eCheck.Net
®
product, and $1.5 million held for Authorize.Nets
Integrated Payment Solution (IPS) product. The funds are
included in both cash and cash equivalents and the funds due to
merchants liability on our consolidated balance sheet.
Authorize.Net holds merchant funds for approximately seven
business days; the actual number of days depends on the
contractual terms with each merchant. The $1.5 million held
for IPS includes funds from processing both credit card and
Automated Clearing House (ACH) transactions. IPS credit card
funds are held for approximately two business days; IPS ACH
funds are held for approximately four business days, according
to the requirements of the IPS product and the contract between
Authorize.Net and the financial institution through which the
transactions are processed.
In addition, we have $0.5 million on deposit with a
financial institution to cover any deficit account balance that
could occur if the amount of eCheck.Net transactions returned or
charged back exceeds the balance on deposit
39
with the financial institution. This amount is classified as
restricted cash in the Companys balance sheet. To date,
the deposit has not been applied to offset any deficit balance,
and we believe 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 we utilize the ACH
processing services of the financial institution, and the amount
of the deposit may increase as processing volume increases.
At December 31, 2006, we had a letter of credit in the
amount of $0.8 million which was reduced from
$1.6 million in December 2006 per the terms of our
operating lease for our Burlington, MA headquarters. As a result
of our plans to relocate corporate headquarters, this amount was
increased to $1.1 million in March 2007.
Restructuring
and Related Asset Impairments
The following table summarizes the activity in the restructuring
accrual for the years ended December 31, 2004, 2005, and
2006 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
and Termination
|
|
|
Facility Closing
|
|
|
Asset
|
|
|
|
|
|
|
Benefits
|
|
|
and Related Costs
|
|
|
Impairment
|
|
|
Total
|
|
|
Accrued restructuring balance at
January 1, 2004
|
|
$
|
|
|
|
$
|
985
|
|
|
$
|
|
|
|
$
|
985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual
January 2004
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
488
|
|
Restructuring accrual
September 2004
|
|
|
2,090
|
|
|
|
|
|
|
|
|
|
|
|
2,090
|
|
Restructuring accrual
December 2004
|
|
|
1,410
|
|
|
|
178
|
|
|
|
|
|
|
|
1,588
|
|
Cash payments
|
|
|
(1,784
|
)
|
|
|
(841
|
)
|
|
|
|
|
|
|
(2,625
|
)
|
Restructuring adjustments
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at
December 31, 2004
|
|
$
|
2,204
|
|
|
$
|
286
|
|
|
$
|
|
|
|
$
|
2,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual
January 2005
|
|
|
70
|
|
|
|
302
|
|
|
|
|
|
|
|
372
|
|
Restructuring accrual
September 2005
|
|
|
|
|
|
|
1,037
|
|
|
|
654
|
|
|
|
1,691
|
|
Impairment of assets
|
|
|
|
|
|
|
|
|
|
|
(654
|
)
|
|
|
(654
|
)
|
Cash payments
|
|
|
(2,082
|
)
|
|
|
(650
|
)
|
|
|
|
|
|
|
(2,732
|
)
|
Restructuring adjustments
|
|
|
(175
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
(178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at
December 31, 2005
|
|
$
|
17
|
|
|
$
|
972
|
|
|
$
|
|
|
|
$
|
989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual
January 2006
|
|
|
1,396
|
|
|
|
|
|
|
|
|
|
|
|
1,396
|
|
Restructuring accrual
May 2006
|
|
|
61
|
|
|
|
|
|
|
|
862
|
|
|
|
923
|
|
Restructuring accrual
August 2006
|
|
|
296
|
|
|
|
301
|
|
|
|
211
|
|
|
|
808
|
|
Restructuring accrual
September 2006
|
|
|
|
|
|
|
|
|
|
|
2,402
|
|
|
|
2,402
|
|
Restructuring accrual
October 2006
|
|
|
1,705
|
|
|
|
71
|
|
|
|
|
|
|
|
1,776
|
|
Impairment of assets
|
|
|
|
|
|
|
|
|
|
|
(3,475
|
)
|
|
|
(3,475
|
)
|
Cash payments
|
|
|
(2,454
|
)
|
|
|
(657
|
)
|
|
|
|
|
|
|
(3,111
|
)
|
Restructuring adjustments
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at
December 31, 2006
|
|
$
|
1,021
|
|
|
$
|
746
|
|
|
$
|
|
|
|
$
|
1,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have incurred significant restructuring charges related to or
the result of the decline in our TDS business which we sold on
February 20, 2007. In October 2006, we announced plans to
exit from the TDS business. As a result of our decision, we
determined that there were impairment indicators that existed as
of September 30, 2006 which required us to assess the
recoverability of the TDS long-lived assets as of
September 30, 2006. We reviewed the carrying value of our
long-lived assets and determined that the expected future cash
flows from the TDS
40
business would not be sufficient to recover the recorded
carrying value of such long-lived assets. We analyzed various
scenarios related to our exit from the TDS business and weighed
the probability of each scenario. We considered various
valuation methods in determining the fair value of the assets
including appraisal values. Accordingly, we recognized an
impairment charge to reduce the carrying value of leasehold
improvements to zero and other tangible assets to their
estimated fair value of $1.1 million which resulted in an
impairment charge of $2.4 million in the third quarter of
2006 which represented the excess of the carrying amount over
the fair value of the TDS long-lived assets. During the fourth
quarter of 2006, we incurred restructuring charges of
$1.8 million primarily related to employee severance and
termination benefits for 87 employees who were terminated in the
fourth quarter and 48 employees who received notification that
they would be terminated by the second quarter of 2007. During
the third and fourth quarter of 2006, we incurred restructuring
and asset impairment charges of $4.2 million related to our
exit of the TDS business. We expect total restructuring charges
related to the exit of the TDS business to be approximately
$6.5 million to $7.3 million.
During 2006, we made restructuring adjustments of
$0.1 million. These adjustments were primarily related to
an adjustment of a sublease assumption associated with our
Broomfield, Colorado facility.
In May 2006, we announced the planned closing of the Liverpool,
Nova Scotia contact center. Related to this closing, we recorded
restructuring and related asset impairment charges of
$0.9 million and $0.8 million during the second and
third quarters of 2006, respectively.
In January 2006, we announced a workforce reduction focused
primarily within the TDS business, as well as reductions in
general and administrative expenses. The restructuring consisted
of a total workforce reduction of about 28 positions, and we
recorded a restructuring charge of $1.4 million in the
first quarter of 2006, primarily related to employee severance
and termination benefits.
In September 2005, we decided to consolidate our administrative
facilities and vacated the third floor of our corporate
headquarters at 30 Corporate Drive, Burlington Massachusetts. We
recorded a restructuring and related asset impairment charge of
$1.7 million in 2005 related to this action. This charge
included $1.0 million of lease obligations and facility
exit costs, and $0.7 million for the impairment of
leasehold improvements and equipment. The lease obligation
represents the fair value of future lease commitment costs, net
of projected sublease rental income. The estimated future cash
flows used in the fair value calculation are based on certain
estimates and assumptions by us, including the projected
sublease rental income, the amount of time the space will be
unoccupied prior to sublease and the lengths of any sublease.
The estimated future cash flows used were discounted using a
credit adjusted risk-free interest rate and has a maturity date
that approximates the expected timing of future cash flows.
These amounts will be paid out over the remaining term of the
lease.
In January 2005, we announced the closing our Broomfield,
Colorado contact center in order to take advantage of our other
existing contact center infrastructure and operate more
efficiently. This action resulted in the termination of
approximately 40 employees associated with product service and
delivery at this location. We recorded a restructuring charge of
approximately $0.4 million relating to facility closing
costs and employee severance and termination benefits during the
three months ended March 31, 2005. We anticipate that the
severance costs related to this action will be paid by the end
of the first quarter of 2006, and we anticipate that all other
costs relating to this action, consisting principally of lease
obligations on unused space, net of estimated sublease income,
will be paid by the end of 2008.
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 Wireless Services, Inc. (AT&T
Wireless) by Cingular Wireless LLC (Cingular). This action
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 our offices in Bellevue, Washington and the remaining
rent paid of $0.2 million on the vacated space was included
in restructuring charges during the three months ended
December 31, 2004. The costs related to these actions were
paid by the end of 2005.
41
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. All costs related to this action were
paid by the end of 2005.
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 10
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. All costs related to this action were paid
by the end of the first quarter of 2005.
Off-Balance
Sheet Arrangements
We had no off-balance sheet arrangements other than operating
lease obligations during the year ended December 31, 2006.
During 2006, we were a party to a material transaction involving
a related person or entity (other than employment, separation
and other compensation agreements with certain entities).
Inflation
Although certain of our expenses increase with general inflation
in the economy, inflation has not had a material impact on our
financial results to date.
New
Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109
( FIN 48), which will become effective for
Lightbridge, Inc. on January 1, 2007. The Interpretation
prescribes a recognition threshold and a measurement attribute
for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For
those benefits to be recognized, a tax position must be
more-likely-than-not to be sustained upon examination by taxing
authorities. The amount recognized is measured as the largest
amount of benefit that is greater than 50 percent likely of
being realized upon ultimate settlement. The Company is
evaluating the impact of adopting FIN 48 on its
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 establishes a framework for measuring fair value
and expands disclosures about fair value measurements. The
changes to current practice resulting from the application of
this Statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures
about fair value measurements. We will be required to adopt the
provisions of SFAS 157 beginning with our first quarter
ending March 31, 2007. We are assessing the impact of
adopting SFAS 157 but do not expect that it will have a
material effect on our consolidated financial position, results
of operations or cash flows.
We adopted, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Years Misstatements in Current Year Financial
Statements (SAB 108). SAB 108 requires that
companies utilize a dual-approach to assessing the quantitative
effects of financial statement misstatements. The dual approach
includes both an income statement focused and balance sheet
focused assessment. The adoption of SAB 108 had no effect
on our consolidated financial statements for the year ended
December 31, 2006.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159
permits Companies to choose to elect, at specified election
dates, to measure eligible financial instruments at fair value.
Companies shall report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each
subsequent reporting date, and recognize upfront costs and fees
related to those items in earnings as incurred and not deferred.
We have not decided if we will early adopt SFAS 159 or if
we will choose to measure any eligible financial assets and
liabilities at fair value.
42
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The market risk exposure inherent in our financial instruments
and consolidated financial position represents the potential
losses arising from adverse changes in interest rates. We are
exposed to such interest rate risk primarily in our 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. Our short term
investments also include debt securities maturing in one year or
less that are classified as available for sale, which are
carried at fair value. We do not execute transactions in or hold
derivative financial instruments for trading or hedging purposes.
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 a material impact on the
fair value due to their short maturity.
We are 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 included elsewhere in
the report are listed in the index included in Part IV,
Item 15(a)(1) of this Annual Report on
Form 10-K.
|
|
Item 9.
|
Changes
In and Disagreements With Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Securities Exchange Act of 1934) as of
December 31, 2006. This evaluation included consideration
of the controls, processes and procedures that comprise our
internal control over financial reporting. Based on such
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2006, our
disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed
by us in the reports that we file under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms and that such information is accumulated and communicated
to our management as appropriate to allow timely decisions
regarding required disclosure.
|
|
(b)
|
Managements
Annual Report on Internal Control Over Financial
Reporting
|
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting as of
December 31, 2006, based on the framework in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
In completing our assessment, no material weaknesses in the
Companys internal controls over financial reporting as of
December 31, 2006 were identified. In addition, based on
such assessment, our Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2006, our
disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed
by us in the reports that we file under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms and that such information is accumulated and communicated
to our management as appropriate to allow timely decisions
regarding required disclosure.
43
Managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2006 has been attested to by
Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report which is included
following Item 9A below.
|
|
(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,
2006 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over
financial reporting.
|
|
(d)
|
Inherent
Limitations of Disclosure Controls and Internal Control Over
Financial Reporting
|
The effectiveness of our disclosure controls and procedures and
our 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 our 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.
44
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, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. 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, 2006, 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, 2006, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
45
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, 2006 of the Company and our report dated
March 15, 2007 expressed an unqualified opinion on those
financial statements and included an explanatory paragraph
regarding the Companys adoption of Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment, effective January 1, 2006.
Deloitte & Touche LLP
Boston, Massachusetts
March 15, 2007
46
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 2007 annual meeting of
stockholders or special meeting in lieu thereof to be filed with
the Securities and Exchange Commission on or before
April 30, 2007 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 2007 annual meeting of
stockholders or special meeting in lieu thereof to be filed with
the Securities and Exchange Commission on or before
April 30, 2007 and is incorporated by reference herein.
|
|
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 2007 annual meeting of
stockholders or special meeting in lieu thereof to be filed with
the Securities and Exchange Commission on or before
April 30, 2007 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 2007 annual meeting of
stockholders or special meeting in lieu thereof to be filed with
the Securities and Exchange Commission on or before
April 30, 2007 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 2007 annual meeting of
stockholders or special meeting in lieu thereof to be filed with
the Securities and Exchange Commission on or before
April 30, 2007 and is incorporated by reference herein.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Documents filed as part of this report
(1) 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.
47
(3) Exhibits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
Incorporated by Reference
|
|
|
|
|
this
|
|
|
|
|
|
Exhibit
|
Exhibit No.
|
|
Description
|
|
Form 10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
2
|
.1
|
|
Stock Sale Agreement dated
February 29, 2004 with InfoSpace, Inc., Go2Net, Inc.,
Authorize.Net Corporation
|
|
|
|
8-K
|
|
March 9, 2004
|
|
|
2
|
.1
|
|
2
|
.2
|
|
Asset Purchase Agreement dated
April 25, 2005 with VeriSign, Inc.
|
|
|
|
8-K
|
|
June 20, 2005
|
|
|
10
|
.1
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation
|
|
|
|
S-1
|
|
August 27, 1996
|
|
|
3
|
.2
|
|
3
|
.2
|
|
Amended and Restated By-Laws
|
|
|
|
S-1
|
|
June 21, 1996
|
|
|
3
|
.4
|
|
3
|
.3
|
|
Amendment to Amended and Restated
By-Laws, adopted October 29, 1998
|
|
|
|
10-Q
|
|
November 13, 1998
|
|
|
3
|
.1
|
|
4
|
.1
|
|
Specimen Common Stock Certificate
|
|
|
|
S-1
|
|
August 27, 1996
|
|
|
4
|
.1
|
|
4
|
.2
|
|
Rights Agreement dated
November 14, 1997 with American Stock Transfer and Trust
Company as Rights Agent
|
|
|
|
8-A
|
|
November 21, 1997
|
|
|
1
|
|
|
4
|
.3
|
|
Form of Certificate of Designation
of Series A Participating Cumulative Preferred Stock
|
|
|
|
8-A
|
|
November 21, 1997
|
|
|
A
|
|
|
4
|
.4
|
|
Form of Rights Certificate
|
|
|
|
8-A
|
|
November 21, 1997
|
|
|
B
|
|
|
4
|
.5
|
|
Amendment No. 1 to Rights
Agreement dated November 14, 1997 with American Stock
Transfer and Trust Company as Rights Agent
|
|
|
|
8-K
|
|
January 30, 2007
|
|
|
4
|
.1
|
|
10
|
.1*
|
|
1990 Incentive and Nonqualified
Stock Option Plan
|
|
|
|
S-1
|
|
August 9, 1996
|
|
|
10
|
.6
|
|
10
|
.2*
|
|
1996 Incentive and Non-Qualified
Stock Option Plan
|
|
|
|
S-1
|
|
August 9, 1996
|
|
|
10
|
.7
|
|
10
|
.3*
|
|
Amendment to 1996 Incentive and
Non-Qualified Stock Option Plan
|
|
|
|
S-8
|
|
August 11, 2000
|
|
|
4
|
.8
|
|
10
|
.4*
|
|
Amendment to 1996 Incentive and
Non-Qualified Stock Option Plan
|
|
|
|
10-Q
|
|
May 15, 2001
|
|
|
10
|
.1
|
|
10
|
.5*
|
|
1996 Employee Stock Purchase Plan
|
|
|
|
S-1
|
|
August 9, 1996
|
|
|
10
|
.8
|
|
10
|
.6*
|
|
Amendments to 1996 Stock Purchase
Plan, as amended
|
|
|
|
10-Q
|
|
August 14, 2001
|
|
|
10
|
.1
|
|
10
|
.7*
|
|
Amendment to 1996 Stock Purchase
Plan, as amended
|
|
|
|
10-Q
|
|
November 14, 2002
|
|
|
10
|
.1
|
|
10
|
.8*
|
|
Amendment to 1996 Stock Purchase
Plan, as amended
|
|
|
|
10-Q
|
|
August 9, 2004
|
|
|
10
|
.2
|
|
10
|
.9*
|
|
1998 Non-Statutory Stock Option
Plan
|
|
|
|
10-Q
|
|
August 14, 2000
|
|
|
10
|
.5
|
|
10
|
.10*
|
|
Amendment to 1998 Non-Statutory
Stock Option Plan, as amended, effective November 16, 2000
|
|
|
|
10-K
|
|
April 2, 2001
|
|
|
10
|
.22
|
|
10
|
.11*
|
|
2004 Stock Incentive Plan
|
|
|
|
Def.14A
|
|
April 29, 2004
|
|
|
|
|
|
10
|
.12*
|
|
Terms and Conditions of Stock
Options Granted under the 2004 Stock Incentive Plan
|
|
|
|
10-Q
|
|
November 9, 2004
|
|
|
10
|
.4
|
|
10
|
.13*
|
|
Form of Notice of Grant of Stock
Options Granted under the 2004 Stock Incentive Plan
|
|
|
|
10-Q
|
|
November 9, 2004
|
|
|
10
|
.5
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
Incorporated by Reference
|
|
|
|
|
this
|
|
|
|
|
|
Exhibit
|
Exhibit No.
|
|
Description
|
|
Form 10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
10
|
.14*
|
|
Form of Notice of Stock Option
Grants to Directors
|
|
|
|
8-K
|
|
February 22, 2005
|
|
|
10
|
.2
|
|
10
|
.15*
|
|
Corporate Executive Incentive Plan
for People Managers and Senior Individual Contributors Grade 9
and above dated January 1, 2006
|
|
|
|
8-K
|
|
February 21, 2006
|
|
|
99
|
.1
|
|
10
|
.16*
|
|
Business Unit Incentive Plan for
People Managers and Senior Individual Contributors Grade 9 and
above dated January 1, 2006
|
|
|
|
8-K
|
|
February 21, 2006
|
|
|
99
|
.2
|
|
10
|
.17*
|
|
Form of Executive Retention
Agreement dated May 23, 2005 with each of Timothy C.
OBrien, Eugene J. DiDonato and Roy Banks
|
|
|
|
8-K
|
|
May 25, 2005
|
|
|
10
|
.1
|
|
10
|
.18*
|
|
Employment Agreement dated
August 2, 2004 with Robert E. Donahue
|
|
|
|
10-Q
|
|
November 9, 2004
|
|
|
10
|
.2
|
|
10
|
.19*
|
|
Employment Agreement dated
January 7, 2005 with Robert E. Donahue
|
|
|
|
8-K
|
|
January 13, 2005
|
|
|
10
|
.1
|
|
10
|
.20*
|
|
Amendment to Employment Agreement
dated January 12, 2007 with Robert E. Donahue
|
|
X
|
|
|
|
|
|
|
|
|
|
10
|
.21*
|
|
Employees Restricted Stock
Agreement dated May 9, 2006
|
|
|
|
8-K
|
|
May 11, 2006
|
|
|
10
|
.1
|
|
10
|
.22*
|
|
Oldham Offer Letter
|
|
|
|
8-K
|
|
September 6, 2006
|
|
|
10
|
.1
|
|
10
|
.23*
|
|
Departure of Don Oldham
|
|
|
|
8-K
|
|
November 28, 2006
|
|
|
9
|
.01
|
|
10
|
.24
|
|
Settlement Agreement dated
May 19, 2005 with Lucent Technologies, Inc.
|
|
|
|
8-K
|
|
May 25, 2005
|
|
|
10
|
.2
|
|
10
|
.25
|
|
Office Building Lease dated
March 12, 1998 with 8900 Grantline Road Investors
|
|
|
|
10-Q
|
|
May 1, 1998
|
|
|
10
|
.1
|
|
10
|
.26
|
|
Office Lease dated August 15,
2000 with Arthur Pappathanasi, trustee of 330 Scangus Nominee
Trust
|
|
|
|
10-Q
|
|
November 8, 2000
|
|
|
10
|
.1
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed with
|
|
Incorporated by Reference
|
|
|
|
|
this
|
|
|
|
|
|
Exhibit
|
Exhibit No.
|
|
Description
|
|
Form 10-K
|
|
Form
|
|
Filing Date
|
|
No.
|
|
|
10
|
.27
|
|
Second Amendment of Office Lease
dated September 7, 2005 with Arthur Pappathanasi, trustee
of 330 Scangus Nominee Trust
|
|
|
|
8-K
|
|
September 12, 2005
|
|
|
10
|
.1
|
|
10
|
.28
|
|
Office Building Lease dated
December 23, 2003 with Corporate Drive Corporation, as
trustee of Corporate Drive Nominee Realty Trust
|
|
|
|
10-K
|
|
March 15, 2004
|
|
|
10
|
.32
|
|
10
|
.29
|
|
Lease dated February 10, 2004
with Region of Queens Municipality, LTBG TeleServices ULC
|
|
|
|
10-Q
|
|
May 10, 2004
|
|
|
10
|
.3
|
|
10
|
.30
|
|
Office Lease dated August 10,
2004 with EOP Operating Limited Partnership
|
|
|
|
10-Q
|
|
November 9, 2004
|
|
|
10
|
.3
|
|
10
|
.31
|
|
First Amendment to Office Lease
dated May 3, 2005 with EOP Operating Limited Partnership
|
|
|
|
10-Q
|
|
November 4, 2005
|
|
|
99
|
.1
|
|
10
|
.32
|
|
Utah Commercial Lease dated
October 27, 2005 between Authorize.Net Corp. and
Scarborough Building LLC
|
|
|
|
8-K
|
|
November 1, 2005
|
|
|
10
|
.1
|
|
10
|
.33
|
|
Sublease Agreement with Oracle
USA, Inc. dated November 7, 2005
|
|
|
|
8-K
|
|
November 15, 2005
|
|
|
10
|
.1
|
|
10
|
.34
|
|
Early Lease Termination Agreement
with Region of Queens Municipality for Liverpool, Nova Scotia
Premises
|
|
|
|
8-K
|
|
August 17, 2006
|
|
|
10
|
.1
|
|
10
|
.35
|
|
Confidential Settlement Agreement
dated May 22, 2006 by and among NetMoneyIN, Inc. and
Infospace, Inc.,
E-Commerce
Exchange LLC, Lightbridge, Inc. and Authorize.Net corp
|
|
|
|
8-K
|
|
May 25, 2006
|
|
|
10
|
.1
|
|
10
|
.36
|
|
Asset Purchase Agreement dated
February 20, 2007 between Vesta Corporation and
Lightbridge, Inc.
|
|
X
|
|
|
|
|
|
|
|
|
|
10
|
.37*
|
|
2007 Incentive Plan dated
January 1, 2007
|
|
X
|
|
|
|
|
|
|
|
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
X
|
|
|
|
|
|
|
|
|
|
24
|
.1
|
|
Power of Attorney (on signature
page)
|
|
X
|
|
|
|
|
|
|
|
|
|
31
|
.1
|
|
Certification of the chief
executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
31
|
.2
|
|
Certification of the chief
financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
32
|
.1
|
|
Certification of the chief
executive officer and the chief financial officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
X
|
|
|
|
|
|
|
|
|
|
99
|
.1
|
|
Sublease Agreement dated as of
February 8, 2007 by and between Lightbridge, Inc. and By
Appointment Only, Inc., as amended
|
|
|
|
8-K
|
|
February 14, 2007
|
|
|
99
|
.1
|
50
|
|
|
* |
|
Management contract or compensatory plan. |
51
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 15 day of March 2007.
Lightbridge, Inc.
|
|
|
|
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 15, 2007
|
|
|
|
|
|
/s/ Robert
E. Donahue
Robert
E. Donahue
|
|
President, Chief Executive Officer
and Director (Principal Executive Officer)
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Rachelle
B. Chong
Rachelle
B. Chong
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Gary
Haroian
Gary
Haroian
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Kevin
C. Melia
Kevin
C. Melia
|
|
Director
|
|
March 15, 2007
|
|
|
|
|
|
/s/ Andrew
G. Mills
Andrew
G. Mills
|
|
Director
|
|
March 15, 2007
|
52
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, 2006 and 2005, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2006. 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, 2006
and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 4 to the financial statements, the
Company changed its method of accounting for share-based
payments upon the adoption of Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, effective
January 1, 2006.
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, 2006, 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 15, 2007 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 15, 2007
F-1
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands except share and per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
116,172
|
|
|
$
|
83,120
|
|
Short-term investments
|
|
|
|
|
|
|
1,688
|
|
Accounts receivable, net
|
|
|
5,010
|
|
|
|
11,911
|
|
Deferred tax assets
|
|
|
4,690
|
|
|
|
|
|
Other current assets
|
|
|
1,871
|
|
|
|
3,432
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
127,743
|
|
|
|
100,151
|
|
Property and equipment, net
|
|
|
4,907
|
|
|
|
10,804
|
|
Other assets, net
|
|
|
459
|
|
|
|
438
|
|
Restricted cash
|
|
|
500
|
|
|
|
2,100
|
|
Goodwill
|
|
|
57,628
|
|
|
|
57,628
|
|
Intangible assets, net
|
|
|
15,582
|
|
|
|
18,414
|
|
Deferred tax assets
|
|
|
15,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
222,474
|
|
|
$
|
189,535
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,879
|
|
|
$
|
3,448
|
|
Accrued compensation and benefits
|
|
|
3,690
|
|
|
|
5,724
|
|
Other accrued liabilities
|
|
|
4,689
|
|
|
|
5,203
|
|
Deferred rent
|
|
|
606
|
|
|
|
656
|
|
Deferred revenues
|
|
|
2,395
|
|
|
|
2,863
|
|
Funds due to merchants
|
|
|
8,751
|
|
|
|
7,112
|
|
Accrued restructuring
|
|
|
1,767
|
|
|
|
989
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
23,777
|
|
|
|
25,995
|
|
Deferred rent, less current portion
|
|
|
1,957
|
|
|
|
2,548
|
|
Deferred tax liabilities
|
|
|
4,754
|
|
|
|
3,074
|
|
Deferred revenues, less current
portion
|
|
|
971
|
|
|
|
265
|
|
Other long-term liabilities
|
|
|
700
|
|
|
|
700
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
32,159
|
|
|
|
32,582
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 11)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value; 5,000,000 shares authorized; no shares issued or
outstanding at December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value; 60,000,000 shares authorized; 30,888,910 and
30,259,882 shares issued and 27,448,926 and
26,820,839 shares outstanding at December 31, 2006 and
2005, respectively
|
|
|
309
|
|
|
|
303
|
|
Additional paid-in capital
|
|
|
178,196
|
|
|
|
169,648
|
|
Accumulated other comprehensive
income
|
|
|
171
|
|
|
|
110
|
|
Retained earnings
|
|
|
32,437
|
|
|
|
7,679
|
|
Treasury stock, at cost
|
|
|
(20,798
|
)
|
|
|
(20,787
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
190,315
|
|
|
|
156,953
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
222,474
|
|
|
$
|
189,535
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-2
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands
|
|
|
|
except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$
|
92,976
|
|
|
$
|
102,821
|
|
|
$
|
103,648
|
|
Consulting and maintenance services
|
|
|
2,670
|
|
|
|
5,457
|
|
|
|
9,851
|
|
Software licensing and hardware
|
|
|
|
|
|
|
|
|
|
|
1,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
95,646
|
|
|
|
108,278
|
|
|
|
115,133
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
|
37,396
|
|
|
|
47,263
|
|
|
|
54,127
|
|
Consulting and maintenance services
|
|
|
1,399
|
|
|
|
2,540
|
|
|
|
4,393
|
|
Software licensing and hardware
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
38,795
|
|
|
|
49,803
|
|
|
|
58,533
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
|
55,580
|
|
|
|
55,558
|
|
|
|
49,521
|
|
Consulting and maintenance services
|
|
|
1,271
|
|
|
|
2,917
|
|
|
|
5,458
|
|
Software licensing and hardware
|
|
|
|
|
|
|
|
|
|
|
1,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
|
56,851
|
|
|
|
58,475
|
|
|
|
56,600
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering and development
|
|
|
11,259
|
|
|
|
14,375
|
|
|
|
18,002
|
|
Sales and marketing
|
|
|
19,571
|
|
|
|
18,072
|
|
|
|
17,705
|
|
General and administrative
|
|
|
17,550
|
|
|
|
15,974
|
|
|
|
15,758
|
|
Purchased in-process research and
development
|
|
|
|
|
|
|
|
|
|
|
679
|
|
Restructuring charges and related
asset impairments
|
|
|
7,283
|
|
|
|
1,259
|
|
|
|
4,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
55,663
|
|
|
|
49,680
|
|
|
|
56,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,188
|
|
|
|
8,795
|
|
|
|
387
|
|
Interest income, net
|
|
|
4,883
|
|
|
|
1,937
|
|
|
|
935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before (benefit) provision for income taxes
|
|
|
6,071
|
|
|
|
10,732
|
|
|
|
1,322
|
|
(Benefit) provision for income
taxes
|
|
|
(18,219
|
)
|
|
|
1,976
|
|
|
|
8,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
24,290
|
|
|
|
8,756
|
|
|
|
(7,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of
income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of Fraud Centurion
assets
|
|
|
|
|
|
|
|
|
|
|
2,673
|
|
Gain on sale of INS business
|
|
|
|
|
|
|
12,689
|
|
|
|
|
|
Income (loss) from operations
|
|
|
468
|
|
|
|
(2,433
|
)
|
|
|
(10,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations, net
of income taxes
|
|
|
468
|
|
|
|
10,256
|
|
|
|
(8,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
24,758
|
|
|
$
|
19,012
|
|
|
$
|
(15,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common
shares (basic):
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.89
|
|
|
$
|
0.33
|
|
|
$
|
(0.28
|
)
|
From discontinued operations
|
|
|
0.02
|
|
|
|
0.38
|
|
|
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
(basic)
|
|
$
|
0.91
|
|
|
$
|
0.71
|
|
|
$
|
(0.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
(diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.86
|
|
|
$
|
0.32
|
|
|
$
|
(0.28
|
)
|
From discontinued operations
|
|
|
0.02
|
|
|
|
0.38
|
|
|
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share
(diluted):
|
|
$
|
0.88
|
|
|
$
|
0.70
|
|
|
$
|
(0.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
27,248
|
|
|
|
26,670
|
|
|
|
26,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
|
|
|
28,245
|
|
|
|
27,282
|
|
|
|
26,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Earnings
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Treasury Stock
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Warrants
|
|
|
Income/(Loss)
|
|
|
Deficit)
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
|
|
(Amounts in thousands)
|
|
|
Balance, January 1,
2004
|
|
|
29,648
|
|
|
$
|
298
|
|
|
$
|
166,882
|
|
|
$
|
206
|
|
|
|
|
|
|
$
|
4,072
|
|
|
|
2,804
|
|
|
$
|
(16,955
|
)
|
|
$
|
154,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,405
|
)
|
|
|
|
|
|
|
|
|
|
|
(15,405
|
)
|
Foreign currency loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,589
|
)
|
Issuance of common stock under
employee stock purchase plan
|
|
|
84
|
|
|
|
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395
|
|
Exercise of common stock options
|
|
|
220
|
|
|
|
2
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
635
|
|
|
|
(3,832
|
)
|
|
|
(3,832
|
)
|
Tax benefit from disqualifying
dispositions of stock options
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
29,952
|
|
|
|
300
|
|
|
|
167,465
|
|
|
|
206
|
|
|
|
(184
|
)
|
|
|
(11,333
|
)
|
|
|
3,439
|
|
|
|
(20,787
|
)
|
|
|
135,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,012
|
|
|
|
|
|
|
|
|
|
|
|
19,012
|
|
Foreign currency gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314
|
|
Unrealized loss on short-term
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,306
|
|
Issuance of common stock under
employee stock purchase plan
|
|
|
73
|
|
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290
|
|
Exercise of common stock options
|
|
|
235
|
|
|
|
3
|
|
|
|
1,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,276
|
|
Expiration of warrants
|
|
|
|
|
|
|
|
|
|
|
206
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
30,260
|
|
|
|
303
|
|
|
|
169,648
|
|
|
|
|
|
|
|
110
|
|
|
|
7,679
|
|
|
|
3,439
|
|
|
|
(20,787
|
)
|
|
|
156,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,758
|
|
|
|
|
|
|
|
|
|
|
|
24,758
|
|
Foreign currency gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
Change in unrealized loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,819
|
|
Issuance of common stock under
employee stock purchase plan
|
|
|
20
|
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
|
|
Exercise of common stock options
|
|
|
605
|
|
|
|
6
|
|
|
|
4,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,457
|
|
Issuance of restricted stock awards
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of restricted common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2006
|
|
|
30,889
|
|
|
$
|
309
|
|
|
$
|
178,196
|
|
|
$
|
|
|
|
$
|
171
|
|
|
$
|
32,437
|
|
|
|
3,440
|
|
|
$
|
(20,798
|
)
|
|
$
|
190,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Amounts in thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
24,758
|
|
|
$
|
19,012
|
|
|
$
|
(15,405
|
)
|
Income (loss) from discontinued
operations
|
|
|
468
|
|
|
|
10,256
|
|
|
|
(8,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
24,290
|
|
|
|
8,756
|
|
|
|
(7,355
|
)
|
Adjustments to reconcile net
income (loss) to net cash provided by operating activities of
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased in-process research and
development
|
|
|
|
|
|
|
|
|
|
|
679
|
|
Depreciation and amortization
|
|
|
7,539
|
|
|
|
8,968
|
|
|
|
9,859
|
|
Asset impairment related to
restructuring
|
|
|
3,475
|
|
|
|
654
|
|
|
|
|
|
Deferred income taxes
|
|
|
(18,665
|
)
|
|
|
1,813
|
|
|
|
9,081
|
|
Loss on disposal of property and
equipment
|
|
|
|
|
|
|
17
|
|
|
|
63
|
|
Tax benefit from disqualifying
dispositions of stock options
|
|
|
|
|
|
|
|
|
|
|
40
|
|
Shared-based compensation expense
|
|
|
3,971
|
|
|
|
414
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
6,901
|
|
|
|
2,457
|
|
|
|
5,281
|
|
Other assets
|
|
|
1,496
|
|
|
|
(1,485
|
)
|
|
|
248
|
|
Accounts payable and accrued
liabilities
|
|
|
(3,344
|
)
|
|
|
(342
|
)
|
|
|
1,648
|
|
Funds due to merchants
|
|
|
1,639
|
|
|
|
1,554
|
|
|
|
(839
|
)
|
Deferred rent
|
|
|
(641
|
)
|
|
|
404
|
|
|
|
4,301
|
|
Deferred revenues
|
|
|
238
|
|
|
|
532
|
|
|
|
353
|
|
Other liabilities
|
|
|
|
|
|
|
816
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities of continuing operations
|
|
|
26,899
|
|
|
|
24,558
|
|
|
|
23,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,157
|
)
|
|
|
(3,139
|
)
|
|
|
(13,764
|
)
|
Change in restricted cash
|
|
|
1,600
|
|
|
|
(1,500
|
)
|
|
|
(600
|
)
|
Purchase of short-term investments
|
|
|
(520
|
)
|
|
|
(3,928
|
)
|
|
|
(33,490
|
)
|
Proceeds from sales and maturities
of short-term investments
|
|
|
2,208
|
|
|
|
14,829
|
|
|
|
84,705
|
|
Acquisition of Authorize.Net, less
cash received
|
|
|
|
|
|
|
|
|
|
|
(77,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities of continuing operations
|
|
|
1,131
|
|
|
|
6,262
|
|
|
|
(40,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities of continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
4,583
|
|
|
|
1,566
|
|
|
|
545
|
|
Repurchase of restricted common
stock
|
|
|
(11
|
)
|
|
|
|
|
|
|
(3,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities of continuing operations
|
|
|
4,572
|
|
|
|
1,566
|
|
|
|
(3,287
|
)
|
Effects of foreign exchange rate
changes on cash and cash equivalents
|
|
|
(18
|
)
|
|
|
270
|
|
|
|
(192
|
)
|
Net cash provided by (used in)
operating activities of discontinued operations
|
|
|
468
|
|
|
|
(3,589
|
)
|
|
|
(12,360
|
)
|
Net cash provided by investing
activities of discontinued operations
|
|
|
|
|
|
|
15,017
|
|
|
|
2,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
33,052
|
|
|
|
44,084
|
|
|
|
(30,649
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
83,120
|
|
|
|
39,036
|
|
|
|
69,685
|
|
Cash and cash equivalents, end of
year
|
|
$
|
116,172
|
|
|
$
|
83,120
|
|
|
$
|
39,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Business Lightbridge, Inc. and subsidiaries
(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, and
authentication services. Lightbridges two areas of
business in 2006 were of Payment Processing Services (Payment
Processing) and Telecom Decisioning Services (TDS).
|
|
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 majority
owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
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 and disclosure of
contingent assets and liabilities at each reporting date and the
amount of revenues and expenses reported each period. These
estimates include provisions for bad debts, certain accrued
liabilities, goodwill and impairment of long lived assets,
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,
accounts receivable, accounts payable and accrued expenses. The
estimated fair value of these financial instruments approximates
their carrying value because of their short-term nature.
Cash and Cash Equivalents Cash and cash
equivalents include short-term, highly liquid instruments, which
consist primarily of money market accounts. 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.
Short-Term Investments Short-term investments
consist of corporate debt and government securities maturing in
one year or less and are classified as
available-for-sale.
These investments are carried at fair market value with
unrealized gains and losses recorded as a component of
stockholders equity. The Company did not hold any
short-term investments at December 31, 2006. As of
December 31, 2005, short-term investments consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Fair
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Market
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
710
|
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
702
|
|
Government securities
|
|
|
998
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,708
|
|
|
$
|
|
|
|
$
|
(20
|
)
|
|
$
|
1,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains and losses are determined using the specific
identification method. Gains are recognized when realized and
are recorded in the Consolidated Income Statements as Other
income (expense), net. Losses are recognized as realized or when
the Company has determined that an
other-than-temporary
decline in fair value has occurred.
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
F-6
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recorded at appraised fair value, which is then considered cost,
and depreciated over the remaining estimated useful life.
Repairs and maintenance costs are expensed as incurred.
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 receipts are recorded as a
deferred credit that is amortized into income as a reduction of
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
performing payment processing services; the processing of
qualification and activation transactions; services (including
maintenance, installation and training); development and
consulting contracts. Revenues from processing of qualification
and activation transactions for communications providers are
recognized in the period in which services are performed. 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 processing
services), from gateway fees and from
set-up fees.
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
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.
The Company recognizes revenue in accordance with
EITF 99-19,
Reporting Revenue Gross as a Principal versus Net as an
Agent which includes evaluating a number of criteria
that management considers in making its determination with
respect to gross vs. net reporting of revenue. The Company
recognizes revenue on the gross amount earned from the merchant
under arrangements where the Company is the primary obligor,
performs all services, performs administrative functions
including billing, and bears all performance and collection
risks. The Company recognizes revenue on the net amount earned
from outside sales partners or third party solution providers
when the Company is not the primary obligor, does not perform
all the services, and bears no collection risk.
Revenues from consulting and services contracts are recognized
on a
project-by-project
basis. Revenues for services rendered are recognized on a time
and materials basis or on a fixed-fee basis. Revenues for time
and materials contracts are recognized based on the number of
hours worked by the Companys consultants at an agreed upon
rate per hour and are recognized in the period in which services
are performed. Revenues related to fixed-fee contracts are
recognized on the proportional performance method of accounting
based on the ratio of labor hours incurred to estimated total
labor hours. In instances where the customer, at its discretion,
has the right to reject the services prior to final acceptance,
revenue is deferred until such acceptance occurs. Revenues from
software maintenance and support contracts are recognized
ratably over the term of the agreement and are reported as
consulting and services revenues.
The Companys TDS customers were historically providers of
wireless telecommunications services and are generally granted
credit without collateral. The Company maintains an allowance
for bad debts and sales returns
F-7
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and allowances based on factors such as the composition of
accounts receivable, historical experience, and current economic
trends. These estimates are adjusted periodically to reflect
changes in facts and circumstances. The Companys allowance
for doubtful accounts was $0.9 million $1.1 million
and $1.1 million for the years ended December 31,
2006, 2005 and 2004, respectively. One customer accounted for
10% of the total accounts receivable at December 31, 2006
and two customers accounted for 40% and 14%, respectively, of
the total accounts receivable at December 31, 2005. The
following reflects the activity of the allowance for doubtful
accounts for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance at beginning of year
|
|
$
|
1,147
|
|
|
$
|
1,075
|
|
|
$
|
944
|
|
Provisioning
|
|
|
707
|
|
|
|
762
|
|
|
|
(255
|
)
|
Actual Activity
|
|
|
(966
|
)
|
|
|
(690
|
)
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
888
|
|
|
$
|
1,147
|
|
|
$
|
1,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers exceeding 10% of the Companys revenues and their
percentage of total revenue during the years ended
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
Sprint Spectrum L.P. /Nextel
Operations. Inc.(1)
|
|
|
20
|
%
|
|
|
33
|
%
|
|
|
37
|
%
|
|
|
|
|
AT&T Wireless Services,
Inc.
|
|
|
|
*
|
|
|
|
*
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total % of Revenues from
greater-than-10% customers
|
|
|
20
|
%
|
|
|
33
|
%
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Sprint Spectrum L.P. and Nextel Operations, Inc. merged on
August 12, 2005. |
|
* |
|
Represents less than 10% of revenue. |
Goodwill and Acquired Intangible Assets
During 2004, the Company recorded goodwill of $57.6 million
in connection with the acquisition of Authorize.Net. The Company
is required to test such goodwill as well as indefinite lived
intangible assets for impairment on at least an annual basis.
The Company has adopted March 31st as the date of the
annual impairment tests for Authorize.Net. The Company completed
its annual testing for impairment of goodwill and indefinite
lived intangible assets and, based on those tests, concluded
that no impairment of goodwill and indefinite lived intangible
assets existed as of March 31, 2006 or 2005. 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
Authorize.Net include reseller networks, existing technology,
merchant customer base, trademarks and processor relationships.
The reseller network and the processor relationships are
amortized over twelve years. The merchant customer base and the
existing technology are amortized over five years. Trademarks
are not amortized.
F-8
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of acquired intangible assets are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside sales partner network
|
|
$
|
9,300
|
|
|
$
|
(2,131
|
)
|
|
$
|
7,169
|
|
|
$
|
9,300
|
|
|
$
|
(1,356
|
)
|
|
$
|
7,944
|
|
Merchant customer base
|
|
|
7,000
|
|
|
|
(3,850
|
)
|
|
|
3,150
|
|
|
|
7,000
|
|
|
|
(2,450
|
)
|
|
|
4,550
|
|
Existing technology
|
|
|
3,162
|
|
|
|
(1,730
|
)
|
|
|
1,432
|
|
|
|
3,162
|
|
|
|
(1,098
|
)
|
|
|
2,064
|
|
Processor relationships
|
|
|
300
|
|
|
|
(69
|
)
|
|
|
231
|
|
|
|
300
|
|
|
|
(44
|
)
|
|
|
256
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
3,600
|
|
|
|
|
|
|
|
3,600
|
|
|
|
3,600
|
|
|
|
|
|
|
|
3,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,362
|
|
|
$
|
(7,780
|
)
|
|
$
|
15,582
|
|
|
$
|
23,362
|
|
|
$
|
(4,948
|
)
|
|
$
|
18,414
|
|
Amortization expense for intangible assets totaled
$2.8 million for the years ended December 30, 2006 and
2005.
Future amortization expense consisted of the following at
December 31, 2006:
|
|
|
|
|
|
|
Amortization
|
|
|
2007
|
|
$
|
2,832
|
|
2008
|
|
|
2,833
|
|
2009
|
|
|
1,317
|
|
2010
|
|
|
800
|
|
2011
|
|
|
800
|
|
Thereafter
|
|
|
3,400
|
|
|
|
|
|
|
Total future amortization expense
|
|
$
|
11,982
|
|
|
|
|
|
|
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
reported differently 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 13).
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.
Internal Use Software The Company follows the
guidance set forth in Statement of Position (SOP)
No. 98-1,
Accounting for the Cost of Computer Software Developed or
Obtained for Internal Use, in accounting for the development
of its on demand use systems.
SOP No. 98-1
requires companies to capitalize qualifying computer software
costs which are incurred during the application development
stage, and to amortize them over the softwares estimated
useful life.
The Company capitalized $0.5 million during the year ended
December 31, 2006 which primarily related to upgrades and
enhancements to the Companys proprietary billing system
that added significant functionality. These amounts are included
in internally developed software in the accompanying
consolidated balance sheets. The
F-9
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company amortizes such costs when the systems become
operational. Approximately $0.1 million of this software
was placed in service as of December 31, 2006. These costs
are being amortized over an estimated life of three years. The
Company did not incur material amortization costs associated
with this software during the year ended December 31, 2006.
Foreign Currency Translation The financial
statements of the Companys foreign subsidiary are
translated in accordance with SFAS No. 52,
Foreign Currency Translation. The reporting
currency for the Company is the U.S. dollar. The functional
currency of the Companys foreign subsidy in Canada is the
Canadian dollar. Accordingly, the assets and liabilities of the
Companys foreign subsidiary are translated into
U.S. dollars using the exchange rate in effect at each
balance sheet date. Revenue and expense accounts generally are
translated using an average rate of exchange during the period.
Foreign currency translation adjustments are accumulated as a
component of other comprehensive income as a separate component
of stockholders equity. We recognize realized foreign
currency transaction gains and losses in the consolidated
statements of operations except where such transaction gains and
losses arise in intercompany transactions of a long-term
investment nature. In those situations, we report such movements
in accumulated other comprehensive income (loss). Gains and
losses arising from transactions denominated in foreign
currencies have not been material to date.
Supplemental
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Supplemental Item:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
345
|
|
|
$
|
1,481
|
|
|
$
|
2,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising Expenses The Company expenses
advertising costs as incurred. During the years ended
December 31, 2006, 2005 and 2004, advertising expenses
totaled $0.4 million, $0.3 million and
$0.9 million, respectively, and were included in sales and
marketing expense in the consolidated statements of operations.
Impairment of Long-Lived Assets The Company
evaluates long-lived assets in accordance with
SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets
(SFAS 144). Long-lived assets are evaluated
for recoverability in accordance with SFAS 144 whenever
events or changes in circumstances indicate that an asset may
have been impaired. In evaluating an asset for recoverability,
the Company estimates the future cash flow expected to result
from the use of the asset and eventual disposition. If the
expected future undiscounted cash flow is less than the carrying
amount of the asset, an impairment loss, equal to the excess of
the carrying amount over the fair value of the asset, is
recognized. The Company determines fair value by appraisal or
discounted cash flow analysis.
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income
(loss) include, in addition to net income, unrealized gains and
losses on short-term investments and foreign currency
translation adjustments. Accumulated other comprehensive income
consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Unrealized gain (loss) on
short-term investments
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
Foreign currency gain (loss)
|
|
|
171
|
|
|
|
130
|
|
|
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income (loss)
|
|
$
|
171
|
|
|
$
|
110
|
|
|
$
|
(184
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109
( FIN 48), which will become effective for
Lightbridge, Inc. on
F-10
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
January 1, 2007. The Interpretation prescribes a
recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions
taken or expected to be taken in a tax return. For those
benefits to be recognized, a tax position must be more likely
than not to be sustained upon examination by taxing authorities.
The amount recognized is measured as the largest amount of
benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. The Company is evaluating the
impact of adopting FIN 48 on its consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157). SFAS 157 establishes a
framework for measuring fair value and expands disclosures about
fair value measurements. The changes to current practice
resulting from the application of this Statement relate to the
definition of fair value, the methods used to measure fair
value, and the expanded disclosures about fair value
measurements. The Company will be required to adopt the
provisions of SFAS 157 beginning with its first quarter
ending March 31, 2007. The Company is assessing the impact
of adopting SFAS 157 but does not expect that it will have
a material effect on its consolidated financial position,
results of operations, or cash flows.
The company adopted Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Years Misstatements in
Current Year Financial Statements
(SAB 108) in 2006. SAB 108 requires that
companies utilize a dual-approach to assessing the quantitative
effects of financial statement misstatements. The dual approach
includes both an income statement focused and balance sheet
focused assessment. The adoption of SAB 108 had no effect
on the Companys consolidated financial statements for the
year ended December 31, 2006.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159
permits Companies to elect, at specified election dates, to
measure eligible financial instruments at fair value. Companies
shall report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each
subsequent reporting date, and recognize upfront costs and fees
related to those items in earnings as incurred and not deferred.
The Company has not decided if it will early adopt SFAS 159
or if it will choose to measure any eligible financial assets
and liabilities at fair value.
|
|
3.
|
Exit From
The Telecom Decisioning Services (TDS) Business
|
On October 4, 2006, the Company announced plans to exit
from the Telecom Decisioning Services (TDS) business segment.
The decision was based upon discussions with Sprint Nextel,
which advised the Company that it would not be a significant
customer after October 2006. With respect to the Companys
planned exit from the TDS business, it recorded an impairment
charge to reduce the carrying value of leasehold improvements
and other tangible assets to the estimated fair value of
$1.1 million, which resulted in impairment charge of
$2.4 million in the third quarter of 2006.
During the fourth quarter of 2006, the Company incurred
restructuring charges of $1.8 million primarily related to
employee severance and termination benefits for 87 employees who
were terminated in the fourth quarter and 48 employees who
received notification that they would be terminated by the
second quarter of 2007. The severance charges for those
employees that will be terminated by the second quarter of 2007
are being recognized over the remaining service period of the
employee.
On February 21, 2007, the Company announced that it had
entered into an asset purchase agreement and sold certain assets
related to its TDS business to Vesta Corporation at the close of
business on February 20, 2007 for $2.5 million in cash
plus assumption of certain contractual liabilities. The TDS
operations for 2006 and prior periods will be presented as
discontinued when they are disposed of in 2007. The Company
expects to record a gain on the disposal of its TDS business of
approximately $1.0 million to $1.5 million, which will
be presented as a gain on disposal of discontinued operations.
F-11
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The carrying amount of the major classes of assets and
liabilities included as part of our disposal group as of
December 31, 2006, were as follows (in thousands):
|
|
|
|
|
Total current assets
|
|
$
|
2,519
|
|
Property and equipment, net
|
|
|
469
|
|
Total other assets
|
|
|
41
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,029
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,594
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,594
|
|
|
|
|
|
|
|
|
4.
|
Share-Based
Compensation
|
Stock
Option Plans
Stock Incentive Plans The Company awards
stock options and restricted share awards under the 2004 Stock
Incentive Plan (2004 Plan). No further grants can be made under
the 1996 Incentive and Nonqualified Stock Option Plan (the 1996
Plan) and the 1998 Non-Statutory Stock Option Plan (the 1998
Plan). The Company does not plan to make any further grants
under the 1997 Stock Incentive Plan and Restricted Stock
Purchase Plan.
In April and June 2004, respectively, the Board authorized and
the stockholders approved the adoption of the 2004 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 not less
than the common stocks market value at the date of grant.
Options generally have a four-year graded vesting and have
10-year
contractual terms. Certain option and plan awards provide for
accelerated vesting based on stock price performance or if there
is a change in control (as defined in the 2004 Plan). At
December 31, 2006, 3,355,367 shares were available for
grant.
Employee Stock Purchase Plan On June 14,
1996, the Board authorized and the stockholders approved the
adoption of the 1996 Employee Stock Purchase Plan (ESPP Plan).
The ESPP Plan provided for the sale of up to 600,000 shares
of the Companys common stock to employees. Employees may
have up to 6% of their base salary withheld through payroll
deductions to purchase common stock during semi-annual offering
periods. The purchase price of the stock is the lower of 85% of
(i) the fair market value of the common stock on the
enrollment date (the first day of the offering period), or
(ii) the fair market value on the exercise date (the last
day of each offering period). Offering period means
approximately six-month periods commencing (a) on the first
trading day on or after February 1 and terminating on the last
trading day in the following July, and (b) on the first
trading day on or after August 1 and terminating on the
last trading day in the following January.
During the years ended December 31, 2006, 2005 and 2004,
the Company issued approximately 20,000, 73,000 and
84,000 shares, respectively, under the ESPP Plan. The ESPP
Plan was terminated upon expiration of the offering period on
January 31, 2006.
Stock
Option Valuation and Expense Information under
SFAS No. 123(R)
Effective January 1, 2006, the Company adopted the
provisions of SFAS No. 123(R) Share-Based
Payment, which establishes accounting for equity
instruments exchanged for employee services. Under the
provisions of SFAS No. 123(R), share-based
compensation cost is measured at the grant date, based on the
calculated fair value of the award, and is recognized as an
expense over the employees requisite service period
(generally the vesting period of the equity grant). Prior to
January 1, 2006, the Company accounted for share-based
compensation to
F-12
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employees in accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company
also followed the disclosure requirements of
SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS 148,
Accounting for Stock-Based Compensation
Transition and Disclosure. The Company elected to
adopt the modified prospective transition method as provided by
SFAS No. 123(R) and, accordingly, financial statement
amounts for the prior periods presented in this
Form 10-K
have not been restated to reflect the fair value method of
expensing share-based compensation.
On November 10, 2005, the FASB issued FASB Staff Position
No. FAS 123(R)-3, Transition Election Related
to Accounting for the Tax Effects of Share-Based Payment
Awards (the FSP). The FSP provides that companies may
elect to use a specified short-cut method to
calculate the historical pool of windfall tax benefits upon
adoption of SFAS No. 123(R). The Company elected to
use the short-cut method when
SFAS No. 123(R) was adopted by the Company on
January 1, 2006.
Share-based compensation expense recognized in the consolidated
statement of operations for the year ended December 31,
2006 is based on awards ultimately expected to vest, and has
been reduced for estimated forfeitures.
SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
Forfeitures were estimated based partially on historical
experience. In the Companys pro forma information required
under SFAS No. 123 for the periods prior to
January 1, 2006, did not require the Company to establish
estimates for forfeitures.
The Company recognized the full impact of its share-based
payment plans in the consolidated statements of operations for
fiscal year 2006 under SFAS No. 123(R) and did not
capitalize any such costs on the consolidated balance sheet, as
such costs that qualified for capitalization were not material.
The following table presents share-based compensation expense
included in the Companys consolidated statement of
operations (amounts in thousands):
|
|
|
|
|
|
|
The Year
|
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Cost of revenues
|
|
$
|
249
|
|
Engineering and development
|
|
|
439
|
|
Sales and marketing
|
|
|
119
|
|
General and administrative
|
|
|
3,164
|
|
|
|
|
|
|
Share-based compensation expense
|
|
$
|
3,971
|
|
|
|
|
|
|
Except as noted below, the Company estimates the fair value of
options granted using the Black-Scholes option valuation model.
It estimates the volatility of the Companys common stock
at the date of grant based on its historical volatility rate,
consistent with Staff Accounting Bulletin No. 107
(SAB 107). The Companys decision to use historical
volatility is based upon the absence of actively traded options
on its common stock and its assessment that historical
volatility is more representative of future stock price trends
than implied volatility. Lightbridge estimates the expected term
to be consistent with the simplified method identified in
SAB 107 for share-based awards granted during the year
ended December 31, 2006. The simplified method calculates
the expected term as the average of the vesting and contractual
terms of the award. The dividend yield assumption is based on
historical and expected dividend payouts. The risk-free interest
rate assumption is based on observed interest rates appropriate
for the term of the Companys employee options. The Company
uses historical data to estimate pre-vesting option forfeitures
and records share-based compensation expense only for those
awards that are expected to vest. For options granted, the
Company amortizes the fair value on a straight-line basis over
the vesting period of the options.
F-13
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Lightbridge used the following assumptions to estimate the fair
value of share-based payment awards:
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2006
|
|
|
|
|
|
Employee Stock
|
|
|
|
Stock Options
|
|
Purchase Plan(1)
|
|
|
Expected term (years)
|
|
6.25
|
|
|
0.50
|
|
Expected volatility
|
|
56%-62%
|
|
|
38
|
%
|
Risk-free interest rate (range)
|
|
4.3 - 5.2%
|
|
|
4.6
|
%
|
Expected dividend yield
|
|
0.0%
|
|
|
0.0
|
%
|
Upon adoption of SFAS No. 123(R), the Company
recognized a benefit of $0.2 million as a cumulative effect
of a change in accounting principle resulting from the
requirement to estimate forfeitures on the Companys
share-based awards at the date of grant under
SFAS No. 123(R) rather than recognizing forfeitures as
incurred under APB 25. The cumulative benefit, net of tax,
was immaterial for separate presentation in the consolidated
statement of operations.
|
|
|
(1) |
|
The 1996 Employee Stock Purchase Plan was terminated upon
expiration of the offering period ended January 31, 2006. |
During 2004 and 2005, the Company granted stock options to
certain executive officers that provide for vesting of the
options upon the achievement of stock price performance. During
the three months ended March 31, 2006, 125,000 of these
options vested because the average closing price of the
Companys common stock reached $10.00 for over 20
consecutive trading days. During the three months ended
June 30, 2006, 50,000 of these options vested because the
average closing price of the Companys common stock reached
$12.50 for over 20 consecutive trading days. Additional vesting
of 50,000, and 50,000 shares under such stock options could
occur if the average closing price of the Companys common
stock over 20 consecutive days reaches $15.00, and $17.50,
respectively. The estimated fair value of these options was
calculated using a Monte Carlo simulation model that estimated
(i) the probability that the performance goal will be
achieved, and (ii) the length of time required to attain
the target market price. The Company recognized approximately
$1.3 million of share-based compensation expense related to
these options during the Year Ended December 31, 2006.
Stock-based compensation of $0.4 million was recorded in
the Year ended December 31, 2005 related to the performance
based vesting of certain executives stock options. The
compensation charge was in accordance with the achievement of
certain stock price milestones determined in the option grants
of the executives.
Share
Awards
The value of restricted share awards is determined by their
intrinsic value (as if the underlying shares were vested and
issued) on the grant date. The following table summarizes the
Companys time-based non-vested share activity for the year
ended December 31, 2006:
The following table summarizes the status of the Companys
non-vested restricted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Non-vested at January 1, 2006
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
30,000
|
|
|
|
13.17
|
|
Vested
|
|
|
3,750
|
|
|
|
13.17
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31,
2006
|
|
|
26,250
|
|
|
$
|
13.17
|
|
|
|
|
|
|
|
|
|
|
F-14
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option Pro Forma Information under SFAS 123
The Company did not recognize compensation expense for employee
share-based awards for the year ended December 31, 2005
when the exercise price of the Companys employee stock
awards equaled the market price of the underlying stock on the
date of grant. The Company had previously adopted the provisions
of SFAS No. 123, as amended by SFAS No. 148,
through disclosure only. The following table illustrates the
effects on net income (loss) and earnings (loss) per share for
the years ended December 31, 2005 and 2004, as if the
Company had applied the fair value recognition provisions of
SFAS 123 to share-based employee awards.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, expect per share amounts)
|
|
|
Income (loss) from continuing
operations as reported
|
|
$
|
8,756
|
|
|
$
|
(7,355
|
)
|
Add: Stock-based compensation
included in income (loss) from continuing operations
|
|
|
414
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value method
|
|
|
(2,331
|
)
|
|
|
(2,754
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma income (loss) from
continuing operations
|
|
$
|
6,839
|
|
|
$
|
(10,109
|
)
|
Income (loss) from continuing
operations per common share basic as reported
|
|
$
|
0.33
|
|
|
$
|
(0.28
|
)
|
Income (loss) from continuing
operations per common share diluted as reported
|
|
$
|
0.32
|
|
|
$
|
(0.28
|
)
|
Income (loss) from continuing
operations per common share basic pro forma
|
|
$
|
0.26
|
|
|
$
|
(0.38
|
)
|
Income (loss) from continuing
operations per common share diluted proforma
|
|
$
|
0.25
|
|
|
$
|
(0.38
|
)
|
Net income (loss) as reported
|
|
$
|
19,012
|
|
|
$
|
(15,405
|
)
|
Add: Stock-based compensation
included in net income (loss)
|
|
|
414
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value method
|
|
|
(2,520
|
)
|
|
|
(3,272
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
16,906
|
|
|
$
|
(18,677
|
)
|
Net income (loss) per common
share basic as reported
|
|
$
|
0.71
|
|
|
$
|
(0.58
|
)
|
Net income (loss) per common
share diluted as reported
|
|
$
|
0.70
|
|
|
$
|
(0.58
|
)
|
Net income (loss) per common
share basic pro forma
|
|
$
|
0.63
|
|
|
$
|
(0.70
|
)
|
Net income (loss) per common
share diluted pro forma
|
|
$
|
0.62
|
|
|
$
|
(0.70
|
)
|
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:
|
|
|
|
|
|
|
2005
|
|
2004
|
|
Risk-free interest rate
|
|
3.68% 4.47%
|
|
1.9% 3.4%
|
Expected life of options grants
|
|
1-5 years
|
|
1-5 years
|
Expected volatility
|
|
55% 68%
|
|
82%
|
Expected dividend payment rate, as
a percentage of the stock price on the date of grant
|
|
0%
|
|
0%
|
F-15
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents activity under all stock option
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at January 1, 2004
|
|
|
3,329
|
|
|
$
|
10.12
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,905
|
|
|
|
5.71
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(220
|
)
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,331
|
)
|
|
|
9.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2004
|
|
|
4,683
|
|
|
|
8.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,243
|
|
|
|
6.26
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(235
|
)
|
|
|
7.25
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,870
|
)
|
|
|
8.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2005
|
|
|
3,821
|
|
|
|
7.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
775
|
|
|
|
11.42
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(605
|
)
|
|
|
7.36
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(996
|
)
|
|
|
10.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
2,995
|
|
|
$
|
7.29
|
|
|
|
7.65
|
|
|
$
|
19,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
December 31, 2006
|
|
|
2,673
|
|
|
$
|
7.19
|
|
|
|
7.15
|
|
|
$
|
17,338
|
|
The number of options exercisable at the dates presented below
and their weighted average exercise price were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2004
|
|
|
2,502
|
|
|
$
|
10.05
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2005
|
|
|
2,012
|
|
|
$
|
8.51
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2006
|
|
|
1,655
|
|
|
$
|
6.92
|
|
|
|
7.13
|
|
|
$
|
11,322
|
|
F-16
LIGHTBRIDGE,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth information regarding options
outstanding at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Number
|
|
|
Price for
|
|
Number of
|
|
|
Range of
|
|
|
Exercise
|
|
|
Life
|
|
|
Currently
|
|
|
Currently
|
|
Options
|
|
|
Exercise Prices
|
|
|
Price
|
|
|
(Years)
|
|
|
Exercisable
|
|
|
Exercisable
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
12
|
|
|
$
|
3.75
|
|
|
$
|
3.75
|
|
|
|
7.62
|
|
|
|
6
|
|
|
$
|
3.75
|
|
|
300
|
|
|
|
3.76
|
|
|
|
3.76
|
|
|
|
7.59
|
|
|
|
300
|
|
|
|
3.76
|
|
|
547
|
|
|
|
4.44 - 5.50
|
|
|
|
5.10
|
|
|
|
7.44
|
|
|
|
302
|
|
|
|
5.13
|
|
|
217
|
|
|
|
5.60 - 6.10
|
|
|
|
5.87
|
|
|
|
7.27
|
|
|
|
151
|
|
|
|
5.85
|
|
|
400
|
|
|
|
6.11
|
|
|
|
6.11
|
|
|
|
8.02
|
|
|
|
159
|
|
|
|
6.11
|
|
|
339
|
|
|
|
6.16
|
|
|
|
6.16
|
|
|
|
7.95
|
|
|
|
147
|
|
|
|
6.16
|
|
|
336
|
|
|
|
6.17 - 7.70
|
|
|
|
6.81
|
|
|
|
7.47
|
|
|
|
206
|
|
|
|
6.86
|
|
|
393
|
|
|
|
7.72 - 9.78
|
|
|
|
9.36
|
|
|
|
7.62
|
|
|
|
186
|
|
|
|
9.06
|
|
|
348
|
|
|
|
9.81 - 13.17
|
|
|
|
12.45
|
|
|
|
8.17
|
|
|
|
111
|
|
|
|
12.14
|
|
|
103
|
|
|
|
|