e10vq
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-21319
LIGHTBRIDGE, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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04-3065140
(I.R.S. Employer Identification No.) |
30 Corporate Drive
Burlington, Massachusetts 01803
(Address of Principal Executive Offices) (Zip Code)
(781) 359-4000
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.þ Yes o No
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. (Check one):
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 Exchange Act).o Yes þ No
As
of November 7, 2006, there were 27,382,795 shares of the registrants common stock, $.01
par value, outstanding.
m
LIGHTBRIDGE, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share amounts)
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September 30, |
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December 31, |
|
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2006 |
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2005 |
|
ASSETS |
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|
|
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Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
104,630 |
|
|
$ |
83,120 |
|
Short-term investments |
|
|
1,123 |
|
|
|
1,688 |
|
Accounts receivable, net |
|
|
8,418 |
|
|
|
11,911 |
|
Other current assets |
|
|
2,489 |
|
|
|
3,432 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
116,660 |
|
|
|
100,151 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
5,585 |
|
|
|
10,804 |
|
Other assets, net |
|
|
561 |
|
|
|
438 |
|
Restricted cash |
|
|
2,100 |
|
|
|
2,100 |
|
Goodwill |
|
|
57,628 |
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|
|
57,628 |
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Intangible assets, net |
|
|
16,290 |
|
|
|
18,414 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
198,824 |
|
|
$ |
189,535 |
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|
|
|
|
|
|
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|
LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
|
$ |
3,791 |
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|
$ |
3,448 |
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Accrued compensation and benefits |
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|
2,692 |
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|
5,724 |
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Other accrued liabilities |
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|
4,826 |
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|
|
5,203 |
|
Deferred rent |
|
|
622 |
|
|
|
656 |
|
Deferred revenues |
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|
2,466 |
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|
|
2,863 |
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Funds due to merchants |
|
|
8,525 |
|
|
|
7,112 |
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Accrued restructuring |
|
|
877 |
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|
|
989 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total current liabilities |
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|
23,799 |
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|
|
25,995 |
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|
|
|
|
|
|
|
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Deferred rent, less current portion |
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|
2,101 |
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|
|
2,548 |
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Deferred tax liability |
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4,468 |
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|
3,074 |
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Other long-term liabilities |
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|
1,461 |
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|
965 |
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|
|
|
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Total liabilities |
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31,829 |
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|
32,582 |
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Commitments and contingencies (Note 8) |
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Stockholders equity: |
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Preferred stock, $.01 par value; 5,000,000
shares authorized; no shares issued or
outstanding at September 30, 2006 and December
31, 2005 |
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Common stock, $.01 par value; 60,000,000
shares authorized; 30,738,455 and 30,259,882
shares issued and 27,348,732 and 26,820,839
shares outstanding at September 30, 2006 and
December 31, 2005, respectively |
|
|
308 |
|
|
|
303 |
|
Additional paid-in capital |
|
|
176,855 |
|
|
|
169,648 |
|
Accumulated other comprehensive income |
|
|
181 |
|
|
|
110 |
|
Retained earnings |
|
|
10,438 |
|
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|
7,679 |
|
Less: treasury stock, at cost; 3,439,043 shares |
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|
(20,787 |
) |
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|
(20,787 |
) |
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|
|
|
|
|
|
|
|
|
|
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|
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|
Total stockholders equity |
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|
166,995 |
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|
|
156,953 |
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|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Total liabilities and stockholders equity |
|
$ |
198,824 |
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|
$ |
189,535 |
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|
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|
See notes to unaudited condensed consolidated financial statements.
3
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
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Three Months Ended |
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September 30, |
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2006 |
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|
2005 |
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Revenues: |
|
|
|
|
|
|
|
|
Transaction services |
|
$ |
22,620 |
|
|
$ |
25,676 |
|
Consulting and maintenance services |
|
|
655 |
|
|
|
1,556 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Total revenues |
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23,275 |
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|
27,232 |
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|
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|
|
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|
Cost of revenues: |
|
|
|
|
|
|
|
|
Transaction services |
|
|
8,758 |
|
|
|
11,691 |
|
Consulting and maintenance services |
|
|
263 |
|
|
|
597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total cost of revenues |
|
|
9,021 |
|
|
|
12,288 |
|
|
|
|
|
|
|
|
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|
Gross profit: |
|
|
|
|
|
|
|
|
Transaction services |
|
|
13,862 |
|
|
|
13,985 |
|
Consulting and maintenance services |
|
|
392 |
|
|
|
959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total gross profit |
|
|
14,254 |
|
|
|
14,944 |
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|
|
|
|
|
|
|
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Operating expenses: |
|
|
|
|
|
|
|
|
Engineering and development |
|
|
2,726 |
|
|
|
3,502 |
|
Sales and marketing |
|
|
4,863 |
|
|
|
4,461 |
|
General and administrative |
|
|
3,254 |
|
|
|
4,113 |
|
Restructuring charges and related asset impairments |
|
|
3,187 |
|
|
|
1,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total operating expenses |
|
|
14,030 |
|
|
|
13,620 |
|
|
|
|
|
|
|
|
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|
Income from operations |
|
|
224 |
|
|
|
1,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Other income |
|
|
1,269 |
|
|
|
489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income taxes |
|
|
1,493 |
|
|
|
1,813 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
1,219 |
|
|
|
558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
274 |
|
|
|
1,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of income taxes |
|
|
|
|
|
|
(268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
274 |
|
|
$ |
987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)per common shares (basic): |
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.01 |
|
|
$ |
0.05 |
|
From discontinued operations |
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share (basic) |
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share (diluted): |
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.01 |
|
|
$ |
0.05 |
|
From discontinued operations |
|
|
|
|
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share (diluted): |
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares |
|
|
27,322 |
|
|
|
26,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares |
|
|
28,364 |
|
|
|
27,345 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
4
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
Transaction services |
|
$ |
72,852 |
|
|
$ |
76,477 |
|
Consulting and maintenance services |
|
|
2,188 |
|
|
|
4,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
75,040 |
|
|
|
80,969 |
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
Transaction services |
|
|
30,352 |
|
|
|
35,881 |
|
Consulting and maintenance services |
|
|
1,188 |
|
|
|
1,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
|
31,540 |
|
|
|
37,800 |
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
Transaction services |
|
|
42,500 |
|
|
|
40,596 |
|
Consulting and maintenance services |
|
|
1,000 |
|
|
|
2,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
|
43,500 |
|
|
|
43,169 |
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
Engineering and development |
|
|
8,909 |
|
|
|
10,978 |
|
Sales and marketing |
|
|
14,574 |
|
|
|
13,375 |
|
General and administrative |
|
|
13,794 |
|
|
|
11,734 |
|
Restructuring charges and related asset impairments |
|
|
5,517 |
|
|
|
1,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
42,794 |
|
|
|
38,007 |
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
706 |
|
|
|
5,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
3,378 |
|
|
|
1,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income taxes |
|
|
4,084 |
|
|
|
6,241 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
1,793 |
|
|
|
1,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2,291 |
|
|
|
4,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of income taxes: |
|
|
|
|
|
|
|
|
Gain on sale of INS assets |
|
|
|
|
|
|
12,689 |
|
Discontinued operations |
|
|
468 |
|
|
|
(2,352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations, net of income taxes |
|
|
468 |
|
|
|
10,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,759 |
|
|
$ |
15,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common shares (basic): |
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.08 |
|
|
$ |
0.18 |
|
From discontinued operations |
|
|
0.02 |
|
|
|
0.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share (basic) |
|
$ |
0.10 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share (diluted): |
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.08 |
|
|
$ |
0.18 |
|
From discontinued operations |
|
|
0.02 |
|
|
|
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share (diluted): |
|
$ |
0.10 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares |
|
|
27,197 |
|
|
|
26,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares |
|
|
28,158 |
|
|
|
27,120 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
5
LIGHTBRIDGE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
(As Restated, |
|
|
|
|
|
|
|
See Note 3) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,759 |
|
|
$ |
15,099 |
|
Income from discontinued operations |
|
|
468 |
|
|
|
10,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
2,291 |
|
|
|
4,762 |
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating
activities for continuing operations: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,785 |
|
|
|
6,831 |
|
Asset impairment related to restructuring |
|
|
3,475 |
|
|
|
1,920 |
|
Loss on disposal of property and equipment |
|
|
|
|
|
|
8 |
|
Deferred income taxes |
|
|
1,394 |
|
|
|
1,316 |
|
Stock compensation expense |
|
|
3,432 |
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
3,493 |
|
|
|
2,209 |
|
Other assets |
|
|
786 |
|
|
|
(1,301 |
) |
Accounts payable and accrued liabilities |
|
|
(3,183 |
) |
|
|
(3,248 |
) |
Funds due to merchants |
|
|
1,413 |
|
|
|
1,361 |
|
Deferred rent |
|
|
(481 |
) |
|
|
(1,075 |
) |
Deferred revenues |
|
|
(397 |
) |
|
|
1,454 |
|
Other liabilities |
|
|
496 |
|
|
|
818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities of continuing operations |
|
|
18,504 |
|
|
|
15,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities of continuing operations: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(1,789 |
) |
|
|
(2,232 |
) |
Restricted cash |
|
|
|
|
|
|
(1,500 |
) |
Purchase of short-term investments |
|
|
(520 |
) |
|
|
(3,928 |
) |
Proceeds from sales and maturities of short-term investments |
|
|
1,085 |
|
|
|
13,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities for continuing operations |
|
|
(1,224 |
) |
|
|
5,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities of continuing operations: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
3,780 |
|
|
|
1,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities of continuing operations |
|
|
3,780 |
|
|
|
1,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of foreign exchange rate changes on cash and cash equivalents |
|
|
(18 |
) |
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities of discontinued operations |
|
|
468 |
|
|
|
(1,267 |
) |
Net cash provided by investing activities of discontinued operations |
|
|
|
|
|
|
15,017 |
|
Net cash financing activities of discontinued operations |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
21,510 |
|
|
|
36,337 |
|
Cash and cash equivalents, beginning of period |
|
|
83,120 |
|
|
|
39,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
104,630 |
|
|
$ |
75,373 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
6
LIGHTBRIDGE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include the accounts of
Lightbridge, Inc. and its subsidiaries (collectively, Lightbridge or the Company). Lightbridge
believes that the unaudited condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair presentation of
Lightbridges financial position, results of operations and cash flows at the dates and for the
periods indicated. Although certain information and disclosures normally included in Lightbridges
annual financial statements have been omitted, Lightbridge believes that the disclosures provided
are adequate to make the information presented not misleading. Results of interim periods may not
be indicative of results for the full year or any future periods. These financial statements should
be read in conjunction with the consolidated financial statements and related notes included in
Lightbridges Annual Report on Form 10-K for the year ended December 31, 2005.
2. 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 negotiations with Sprint Nextel, which advised
the Company that it would not be a significant customer after October 2006. The Company expects to
reduce the workforce by approximately 200 employees, or approximately
50 percent of its regular
full-time staff and to complete the exit from the business by the end
of the second quarter of 2007. The Companys exit from the TDS
business may include the sale of all or a part of that business.
With respect to the Companys exit from the TDS business,
it
recorded all impairment charge to reduce the carrying value of
leasehold improvements and other tangible assets to the estimated fair
value of $1.1 million. The Company recorded 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.
The Company expects to incur pre-tax
restructuring charges in the range of $3.5 million to $8.0 million from the fourth quarter 2006
through the second quarter of 2007. These charges are expected to consist of approximately $2.0 to
$4.0 million of severance charges with respect to terminated employees; approximately $1.0 to $2.5
million of facilities exit charges, comprised of the net present value of the lease payment
obligations for the remaining term of the Companys TDS-related leases in Burlington, Lynn, and
Waltham, Massachusetts, net of any estimated sublease income; and approximately $0.5 to $1.5
million of other charges related to the closing 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. The Company began to implement
these restructuring efforts in October 2006 with notifications
of intended action to certain affected
personnel.
3. RESTATEMENT OF FINANCIAL STATEMENTS FOR DISCONTINUED OPERATIONS
Subsequent to the issuance of the Companys interim condensed consolidated financial
statements for the period ended September 30, 2005, the Company concluded that it was necessary to
restate the statement of cash flows for the nine months ended September 30, 2005 previously filed
by the Company on Form 10-Q/A, to correct the error as set forth below in reporting the gain on the
sale of the Companys INS (as defined in Note 5) business. The gain on the sale of the INS business
of $12.7 million and the net proceeds from the sale of the INS business of $15.0 million were
previously improperly presented in net cash provided by (used in) operating activities of
continuing operations and net cash provided by investing activities of continuing operations,
respectively and are now properly classified as cash provided by and used in discontinuing
operations.
The following table summarizes the amounts as previously reported and as restated in
the Statements of Cash Flows for the nine months ended September 30, 2005. The amounts have been
adjusted to reflect discontinued operations (see Note 5) (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
September 30, 2005 |
|
|
As |
|
|
|
|
previously |
|
As |
|
|
reported |
|
restated |
Net cash provided by operating activities of continuing operations |
|
$ |
2,780 |
|
|
$ |
15,469 |
|
Net cash provided by investing activities of continuing operations |
|
$ |
20,818 |
|
|
$ |
5,801 |
|
Net cash provided by (used in) operating activities of discontinued
operations |
|
$ |
11,422 |
|
|
$ |
(1,267 |
) |
Net cash provided by investing activities of discontinued operations |
|
$ |
|
|
|
$ |
15,017 |
|
7
4. SHARE-BASED COMPENSATION
Stock Option Plans
Stock Incentive Plans (active) 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). Also, 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 no 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 September 30, 2006, 3,160,016 shares were available for grant under the 2004 Plan.
Employees 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 nine months ended September 30, 2006, and 2005, the Company issued approximately
20,000 and 74,000 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 123(R)
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 123(R) (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 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 CompensationTransition 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-Q 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 condensed consolidated statement of
operations for the three and nine months ended September 30, 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, the Company did not established estimates for forfeitures.
8
The following table summarizes the share-based compensation expense included in operating
expense captions that the Company recorded within the accompanying condensed consolidated
statements of income (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2006 |
|
Cost of revenues |
|
$ |
52 |
|
|
$ |
197 |
|
Engineering and development |
|
|
73 |
|
|
|
360 |
|
Sales and marketing |
|
|
27 |
|
|
|
96 |
|
General and administrative |
|
|
514 |
|
|
|
2,779 |
|
|
|
|
|
|
|
|
Share-based compensation expense |
|
$ |
666 |
|
|
$ |
3,432 |
|
|
|
|
|
|
|
|
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 was 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 nine months ended September 30, 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.
Lightbridge used the following assumptions to estimate the fair value of share-based payment
awards:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
September 30, 2006 |
|
|
|
|
|
|
Employee Stock |
|
|
Stock Options |
|
Purchase Plan (1) |
Expected term (years) |
|
|
6.25 |
|
|
|
0.50 |
|
Expected volatility |
|
|
57% - 62 |
% |
|
|
38 |
% |
Risk-free interest rate (range) |
|
|
4.3 5.2 |
% |
|
|
4.6 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
Upon
adoption of SFAS 123R, 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 123R rather than recognizing forfeitures as incurred under
APB 25. The cumulative benefit, net of tax, was immaterial for
separate presentation in the unaudited condensed 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 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 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 $0.1 million
and $1.2 million of shared-based compensation expense related to these options during
the three and nine months ended September 30, 2006, respectively. Stock-based
compensation of $0.4 million was recorded in the quarter ended September 30, 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.
9
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 nine months ended September 30, 2006:
The following table summarizes the status of the Companys non-vested restricted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average |
|
|
|
Shares |
|
|
Fair Value |
|
Non-vested at December 31, 2005 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
30,000 |
|
|
|
13.17 |
|
Vested |
|
|
1,875 |
|
|
|
13.17 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2006 |
|
|
28,125 |
|
|
$ |
13.17 |
|
|
|
|
|
|
|
|
Stock Option Pro Forma Information under SFAS 123
The Company did not recognize compensation expense for employee share-based awards for the
three and nine months ended September 30, 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 Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, (SFAS 123), as amended by SFAS No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure, through disclosure only. The following table
illustrates the effects on net income and earnings per share for the three and nine months ended
September 30, 2005, as if the Company had applied the fair value recognition provisions of SFAS 123
to share-based employee awards.
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2005 |
|
Income from continuing operations as reported |
|
$ |
1,255 |
|
|
$ |
4,762 |
|
Add: Stock-based compensation included in income |
|
|
414 |
|
|
|
414 |
|
Deduct: Total stock-based employee compensation expense determined under fair
value method |
|
|
(634 |
) |
|
|
(1,590 |
) |
|
|
|
|
|
|
|
Pro forma income from continuing operations |
|
$ |
1,035 |
|
|
$ |
3,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per common share basic and diluted as reported |
|
$ |
0.05 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations per common share basic and diluted pro forma |
|
$ |
0.04 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income as reported |
|
$ |
987 |
|
|
$ |
15,099 |
|
Add: Stock-based compensation included in (loss) income |
|
|
414 |
|
|
|
414 |
|
Deduct: Total stock-based employee compensation expense determined under fair
value method |
|
|
(645 |
) |
|
|
(1,780 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
756 |
|
|
$ |
13,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic as reported |
|
$ |
0.04 |
|
|
$ |
0.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted as reported |
|
$ |
0.04 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic pro forma |
|
$ |
0.03 |
|
|
$ |
0.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted pro forma |
|
$ |
0.03 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
10
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:
|
|
|
|
|
|
|
Nine |
|
|
Months |
|
|
Ended |
|
|
September |
|
|
30, 2005 |
Risk-free interest rate |
|
|
2.8 |
% |
Expected life of options grants |
|
|
1- 5 |
years |
Expected volatility of underlying stock |
|
|
60 |
% |
Expected dividend payment rate, as a percentage of the stock price on the date of grant |
|
|
0.0 |
% |
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 December 31, 2005 |
|
|
3,821 |
|
|
$ |
7.23 |
|
|
|
7.55 |
|
|
|
|
|
Granted |
|
|
762 |
|
|
|
11.41 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(507 |
) |
|
|
7.21 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(773 |
) |
|
|
10.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
3,303 |
|
|
$ |
7.46 |
|
|
|
8.02 |
|
|
$ |
15,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2006 |
|
|
1,648 |
|
|
$ |
7.09 |
|
|
|
7.42 |
|
|
$ |
8,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth information regarding options outstanding at September 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
|
Range of |
|
|
Average |
|
|
Contractual |
|
|
Number |
|
|
Price for |
|
|
|
Number of |
|
|
Exercise |
|
|
Exercise |
|
|
Life |
|
|
Currently |
|
|
Currently |
|
|
|
Options |
|
|
Prices |
|
|
Price |
|
|
(Years) |
|
|
Exercisable |
|
|
Exercisable |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
615 |
|
|
$ |
3.75 - $4.67 |
|
|
$ |
4.20 |
|
|
|
7.90 |
|
|
|
436 |
|
|
$ |
4.03 |
|
|
|
|
353 |
|
|
|
4.82 5.87 |
|
|
|
5.44 |
|
|
|
7.63 |
|
|
|
195 |
|
|
|
5.46 |
|
|
|
|
197 |
|
|
|
5.88 6.10 |
|
|
|
5.91 |
|
|
|
7.83 |
|
|
|
122 |
|
|
|
5.91 |
|
|
|
|
400 |
|
|
|
6.11 |
|
|
|
6.11 |
|
|
|
8.27 |
|
|
|
144 |
|
|
|
6.11 |
|
|
|
|
358 |
|
|
|
6.16 |
|
|
|
6.16 |
|
|
|
8.30 |
|
|
|
128 |
|
|
|
6.16 |
|
|
|
|
344 |
|
|
|
6.17 7.70 |
|
|
|
6.82 |
|
|
|
7.66 |
|
|
|
196 |
|
|
|
6.88 |
|
|
|
|
450 |
|
|
|
7.72 9.78 |
|
|
|
9.40 |
|
|
|
8.13 |
|
|
|
184 |
|
|
|
9.05 |
|
|
|
|
470 |
|
|
|
9.81 13.17 |
|
|
|
12.24 |
|
|
|
8.65 |
|
|
|
140 |
|
|
|
11.77 |
|
|
|
|
115 |
|
|
|
13.37 28.25 |
|
|
|
16.97 |
|
|
|
6.59 |
|
|
|
102 |
|
|
|
17.36 |
|
|
|
|
1 |
|
|
|
37.32 |
|
|
|
37.32 |
|
|
|
3.68 |
|
|
|
1 |
|
|
|
37.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,303 |
|
|
|
|
|
|
$ |
7.46 |
|
|
|
8.02 |
|
|
|
1,648 |
|
|
$ |
7.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the nine months
ended September 30, 2006 was $6.98. The aggregate intrinsic value of outstanding options as of
September 30, 2006 was $15.0 million. The intrinsic value of options exercised during the period
was $1.7 million.
As of September 30, 2006, there was $6.4 million of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the Companys stock plans
including non-vested restricted share awards. That cost is expected to be recognized over a
weighted-average period of 2.98 years.
The Company received $3.8 million in cash from option exercises and issuances of stock under
the ESPP Plan for the nine months ended September 30, 2006. The excess tax benefits of $0.7 million
attributable to these option exercises are reflected on a with-and-without method and will be
recognized when the benefit is realized.
11
5.
DISCONTINUED OPERATIONS
Recent Accounting Pronouncements
In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets, (SFAS 144), the Company reports discontinued operations in the period that a business
segment has been disposed of or is classified as held for sale. On October 4, 2006, the Company
announced plans to exit from the Telecom Decisioning Services (TDS) business (see Note 2). The TDS
business was not disposed of or classified as held for sale as of September 30, 2006. Accordingly,
the TDS business will continue to be reported as a continuing operation until the period in which
it has been disposed of or is classified as held for sale.
Intelligent Network Solutions (INS) Business
On April 25, 2005, the Company announced that it had entered into an asset purchase agreement
for the sale of its INS business, which included its PrePay IN product and related services, to
VeriSign, Inc. The sale was completed on June 14, 2005 for $17.45 million in cash plus assumption
of certain contractual liabilities. Of the sale price, $1.745 million is being held in escrow,
$1.495 million is being held by VeriSign, and $0.25 million is being held by the Company. The
Company will record the amounts in escrow as a gain upon the expiration of certain representations
and as warranties expire after an 18-month period after closing and will be recorded as a gain, net of
possible indemnity claims at that time.
In addition, a liability of $0.45 million has been established in accordance with FASB
Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, based on the estimated cost if the
Company were to purchase an insurance policy to cover up to $5 million of indemnification
obligations for certain potential breaches of its 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. The operating results and financial
condition of this former INS segment have been reported as discontinued operations in the
accompanying consolidated financial statements in accordance with SFAS No. 144, as the sale was
completed during the second quarter of 2005. All comparative prior period amounts have been
restated in a similar manner.
Included in the amounts reported for net income from discontinued operations for the nine
months ended September 30, 2005 is the gain on the sale of the INS business of $12.7 million (net
of income tax provision of $0.1 million) and a $1.4 million settlement received by the Company from
a lawsuit between Lucent Technologies, Inc. and the Company that was finalized in the second
quarter of 2005.
Instant Conferencing Business
In the first quarter of 2005, the Company made the decision to no longer actively market or
sell its GroupTalk product and took actions to outsource the continuing operations of its Instant
Conferencing business. On August 17, 2005, the Company and America Online, Inc. mutually agreed to
terminate the master services agreement under which the Company provided our GroupTalk instant
conferencing services to America Online, Inc. The Company subsequently terminated all of the
outsourcing agreements for its GroupTalk services and ceased operations of the Instant Conferencing
business in the third quarter of 2005.
12
In accordance with SFAS 144, the operating results of the former INS and Instant Conferencing
segments have been included as part of the financial results from discontinued operations in the
accompanying consolidated financial statements. The components of losses from operations of
discontinued operations previously classified as operating activities are as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September |
|
|
|
30, |
|
|
|
2006 |
|
|
2005 |
|
Results of operations: |
|
|
|
|
|
|
|
|
Total Gross Profit (Loss) |
|
$ |
|
|
|
$ |
(134 |
) |
Total Operating Expenses |
|
|
|
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations, net of income taxes |
|
$ |
|
|
|
$ |
(268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September |
|
|
|
30, |
|
|
|
2006 |
|
|
2005 |
|
Results of operations: |
|
|
|
|
|
|
|
|
Total Gross Profit |
|
$ |
468 |
|
|
$ |
4,324 |
|
Total Operating Expenses |
|
|
|
|
|
|
6,676 |
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
468 |
|
|
|
(2,352 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of INS |
|
|
|
|
|
|
12,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations, net of income taxes |
|
$ |
468 |
|
|
$ |
10,337 |
|
|
|
|
|
|
|
|
The Company recorded net loss from discontinued operations of $0 and $0.3 million for the
three months ended September 30, 2006 and 2005, respectively, and the Company recorded net income
from discontinued operations of $0.5 million and $10.3 million for the nine months ended September
30, 2006 and 2005, respectively. The net income from discontinued operations in 2006 represents a
refund received for telecommunications costs previously paid which related to the Instant
Conferencing segment. The net income from discontinued operations for the nine months ended
September 30, 2005 includes a gain on sale of the INS business of $12.7 million and the operating
results of the INS and Instant Conferencing segments.
6. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Based upon the way financial information is provided to the Companys Chief Executive Officer
for use in evaluating allocation of resources and assessing performance of the business, the
Company reports its operations in two distinct operating segments, described as follows:
|
|
|
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 provides
wireless subscriber qualification, risk assessment, fraud
screening, consulting services and contact center services
to telecommunications and other companies. See Note 2, Exit
From The Telecom Decisioning Services (TDS) Business, for
additional information about this business. |
In the Companys Quarterly Report on Form 10-Q, as amended, for the three and nine months
ended September 30, 2005, the Company reported segment information for the Instant Conferencing
Services (Instant Conferencing) business as a separate segment. The operating results and financial
condition of the Instant Conferencing segments have been included as part of the financial results
from discontinued operations in the accompanying condensed consolidated financial statements and,
accordingly, the Companys segment information has been restated. All prior period segment
financial information has been restated to conform with the current presentation. See Note 5,
Discontinued Operations, for additional information about these businesses.
Within segments, performance is measured based on revenue, gross profit and operating income
(loss) realized from each segment. There are no transactions between segments. The Company
generally does not allocate share-based compensation, corporate or centralized marketing and
general and administrative expenses to its business unit segments, because these activities are
managed separately from the business units. Also, the Company does not allocate restructuring
expenses and other non-recurring gains or charges to its business unit segments because the
Companys Chief Executive Officer evaluates the segment results exclusive of these items. Asset
information by operating segment is not reported to or reviewed by the Companys Chief Executive
Officer, and therefore the Company has not disclosed asset information for each operating segment.
13
Financial information for each reportable segment from continuing operations as restated for
the three and nine months ended September 30, 2006, and 2005 were as follows (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
|
|
Three Months Ended |
|
|
|
|
|
Payment |
|
Reportable |
|
Reconciling |
|
Consolidated |
September 30, 2006 |
|
TDS |
|
Processing |
|
Segments |
|
Items |
|
Total |
Revenues |
|
$ |
8,801 |
|
|
$ |
14,474 |
|
|
$ |
23,275 |
|
|
$ |
|
|
|
$ |
23,275 |
|
Gross profit |
|
|
2,881 |
|
|
|
11,425 |
|
|
|
14,306 |
|
|
|
(52 |
)(1) |
|
|
14,254 |
|
Operating income |
|
|
1,255 |
|
|
|
4,587 |
|
|
|
5,842 |
|
|
|
(5,618 |
)(2) |
|
|
224 |
|
Depreciation and amortization |
|
|
606 |
|
|
|
1,110 |
|
|
|
1,716 |
|
|
|
161 |
(3) |
|
|
1,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
|
|
Three Months Ended |
|
|
|
|
|
Payment |
|
Reportable |
|
Reconciling |
|
Consolidated |
September 30, 2005 |
|
TDS |
|
Processing |
|
Segments |
|
Items |
|
Total |
Revenues |
|
$ |
15,518 |
|
|
$ |
11,714 |
|
|
$ |
27,232 |
|
|
$ |
|
|
|
$ |
27,232 |
|
Gross profit |
|
|
5,776 |
|
|
|
9,168 |
|
|
|
14,944 |
|
|
|
|
|
|
|
14,944 |
|
Operating income |
|
|
2,859 |
|
|
|
3,255 |
|
|
|
6,114 |
|
|
|
(4,790 |
)(2) |
|
|
1,324 |
|
Depreciation and amortization |
|
|
992 |
|
|
|
1,035 |
|
|
|
2,027 |
|
|
|
166 |
(3) |
|
|
2,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
|
|
Nine Months Ended |
|
|
|
|
|
Payment |
|
Reportable |
|
Reconciling |
|
Consolidated |
September 30, 2006 |
|
TDS |
|
Processing |
|
Segments |
|
Items |
|
Total |
Revenues |
|
$ |
33,195 |
|
|
$ |
41,845 |
|
|
$ |
75,040 |
|
|
$ |
|
|
|
$ |
75,040 |
|
Gross profit |
|
|
10,643 |
|
|
|
33,054 |
|
|
|
43,697 |
|
|
|
(197 |
)(1) |
|
|
43,500 |
|
Operating income |
|
|
4,908 |
|
|
|
12,948 |
|
|
|
17,856 |
|
|
|
(17,150 |
)(2) |
|
|
706 |
|
Depreciation and amortization |
|
|
1,991 |
|
|
|
3,319 |
|
|
|
5,310 |
|
|
|
475 |
(3) |
|
|
5,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
|
|
Nine Months Ended |
|
|
|
|
|
Payment |
|
Reportable |
|
Reconciling |
|
Consolidated |
September 30, 2005 |
|
TDS |
|
Processing |
|
Segments |
|
Items |
|
Total |
Revenues |
|
$ |
48,408 |
|
|
$ |
32,561 |
|
|
$ |
80,969 |
|
|
$ |
|
|
|
$ |
80,969 |
|
Gross profit |
|
|
17,727 |
|
|
|
25,442 |
|
|
|
43,169 |
|
|
|
|
|
|
|
43,169 |
|
Operating income |
|
|
8,538 |
|
|
|
7,805 |
|
|
|
16,343 |
|
|
|
(11,181 |
)(2) |
|
|
5,162 |
|
Depreciation and amortization |
|
|
3,123 |
|
|
|
3,121 |
|
|
|
6,244 |
|
|
|
587 |
(3) |
|
|
6,831 |
|
|
|
|
(1) |
|
Represents share-based compensation included in the unallocated gross profit. |
|
(2) |
|
Reconciling items from segment operating income to consolidated operating
income include the following (amounts in thousands). |
|
(3) |
|
Represents depreciation and amortization included in the unallocated
corporate or centralized marketing, general and administrative expenses. |
14
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September |
|
|
|
30, |
|
|
|
2006 |
|
|
2005 |
|
Restructuring charges & related asset impairments |
|
$ |
3,187 |
|
|
$ |
1,544 |
|
Unallocated corporate and centralized marketing, general and administrative expenses |
|
|
1,765 |
|
|
|
2,832 |
|
Unallocated share-based compensation |
|
|
666 |
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,618 |
|
|
$ |
4,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September |
|
|
|
30, |
|
|
|
2006 |
|
|
2005 |
|
Restructuring charges & related asset impairments |
|
$ |
5,517 |
|
|
$ |
1,920 |
|
Litigation settlement, net |
|
|
1,500 |
|
|
|
|
|
Unallocated corporate and centralized marketing, general and administrative expenses |
|
|
6,701 |
|
|
|
8,847 |
|
Unallocated share-based compensation |
|
|
3,432 |
|
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
17,150 |
|
|
$ |
11,181 |
|
|
|
|
|
|
|
|
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Companys goodwill balance of $57.6 million is related to the acquisition of
Authorize.Net. There were no adjustments to goodwill during the nine months ended September 30,
2006.
In accordance with Statement of Financial Accounting Standard No. 142 (SFAS 142), Goodwill
and Other Intangible Assets, the Company is required to analyze the carrying value of goodwill and
other intangible assets against the estimated fair value of those assets for possible impairment on
an annual basis. If impairment has occurred, the Company will record a charge in the amount by
which the carrying value of the assets exceeds their estimated fair value. Estimated fair value
will generally be determined based on discounted cash flows. On March 31, 2006, the Company
performed the annual impairment test for the goodwill balance of $57.6 million related to the
acquisition of Authorize.Net. The Company used the discounted cash flow and market methodologies to
determine the fair value of the reporting unit related to these intangible assets. The discounted
cash flow methodology is based upon converting expected cash flows to present value. A comparison
of the resulting fair value of the reporting unit to its carrying amount, including goodwill,
indicated that the goodwill balance was not impaired as of March 31, 2006. There have been no
events since March 31, 2006 that would require us to perform an additional assessment of goodwill.
Intangible Assets
Acquired intangible assets related to the acquisition of Authorize.Net include outside sales
partner network, merchant customer base, existing technology, processor relationships and
trademarks. The outside sales partner network and the processor relationships will be amortized
over twelve years. The merchant customer base and the existing technology will be amortized over
five years. Trademarks are not amortized.
The components of acquired intangible assets are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006 |
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
Amortizable
intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outside sales
partner network |
|
$ |
9,300 |
|
|
|
($1,937 |
) |
|
$ |
7,363 |
|
|
$ |
9,300 |
|
|
|
($1,356 |
) |
|
$ |
7,944 |
|
Merchant customer
base |
|
|
7,000 |
|
|
|
(3,500 |
) |
|
|
3,500 |
|
|
|
7,000 |
|
|
|
(2,450 |
) |
|
|
4,550 |
|
Existing technology |
|
|
3,162 |
|
|
|
(1,572 |
) |
|
|
1,590 |
|
|
|
3,162 |
|
|
|
(1,098 |
) |
|
|
2,064 |
|
Processor
relationships |
|
|
300 |
|
|
|
(63 |
) |
|
|
237 |
|
|
|
300 |
|
|
|
(44 |
) |
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
3,600 |
|
|
|
|
|
|
|
3,600 |
|
|
|
3,600 |
|
|
|
|
|
|
|
3,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,362 |
|
|
|
($7,072 |
) |
|
$ |
16,290 |
|
|
$ |
23,362 |
|
|
|
($4,948 |
) |
|
$ |
18,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets totaled $708,000 for the three months ended
September 30, 2006 and 2005. Amortization expense for intangible assets totaled $2.1 million for
the nine months ended September 30, 2006 and 2005.
As of September 30, 2006, expected future intangible asset amortization was as follows (in
thousands):
|
|
|
|
|
Fiscal Years: |
|
|
|
|
2006 (remaining three months) |
|
$ |
708 |
|
2007 |
|
|
2,832 |
|
2008 |
|
|
2,832 |
|
2009 |
|
|
1,318 |
|
2010 |
|
|
800 |
|
Thereafter |
|
|
4,200 |
|
|
|
|
|
|
|
$ |
12,690 |
|
|
|
|
|
8. COMMITMENTS AND CONTINGENCIES
Merchant Funds
At September 30, 2006, the Company was holding funds in the amount of $8.5 million due to
merchants comprised of $7.3 million held for Authorize.Nets eCheck.Net ®
product, and $1.2 million held for Authorize.Nets Integrated Payment Solution (IPS) product. The
funds are included in cash and cash equivalents and funds due to merchants on the Companys
consolidated balance sheet. Authorize.Net typically holds eCheck.Net funds for approximately seven
business days; the actual number of days depends on the contractual terms with each merchant. The
$1.2 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, the Company has $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 with the financial institution. To date, the deposit
has not been applied to offset any deficit balance, and management believes that the likelihood of
incurring a deficit balance with the financial institution due to the amount of transactions
returned or charged back is remote. The deposit will be held continuously for as long as
Authorize.Net utilizes the ACH processing services of the financial institution, and the amount of
the deposit may increase as processing volume increases.
15
Legal Proceedings
Litigation Settlement
In May 2006, the Company entered into a settlement agreement with respect to certain
litigation involving NetMoneyIN, Inc. Pursuant to the agreement, the Company 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 the Company was $1.5 million net of $0.25 million received from
another party named in the litigation. The Company recorded this cost in its general and
administrative expenses in the second quarter of 2006.
The Company had incurred legal expenses of approximately $0.6 million and $1.1 million for the
nine months ended September 30, 2006 and for the year ended December 31, 2005, respectively, in
connection with the defense of this lawsuit following the Companys acquisition of Authorize.Net.
The Company has not and does not expect to incur any further litigation costs related to this lawsuit
after the second quarter of 2006.
The Company is subject to legal proceedings, claims, and litigation arising in the ordinary
course of business. On a quarterly basis, the Company reviews its commitments and contingencies to
reflect the effect of ongoing negotiations, settlements, rulings, advice of counsel, and other
information and events pertaining to a particular matter.
Leases
As of September 30, 2006, the Companys primary contractual obligations and commercial
commitments are under its operating leases and a letter of credit. The Company maintains a letter
of credit in the amount of $1.6 million, as required for security under the operating lease for its
corporate headquarters.
The Company has non-cancelable operating lease agreements for office space and certain
equipment. These lease agreements expire at various dates through 2011 and certain of them contain
provisions for extension on substantially the same terms as are currently in effect.
Rent expense for operating leases (excluding sublease income) was
approximately $1.5 million and $2.1 million for the nine months ended September
30, 2006 and 2005, respectively.
Future minimum payments under operating leases, including facilities affected by
restructurings and the Companys headquarters lease, consisted of the following at September 30,
2006 (amounts in thousands):
|
|
|
|
|
|
|
Operating |
|
|
|
Leases |
|
Remainder of 2006 |
|
$ |
845 |
|
2007 |
|
|
3,444 |
|
2008 |
|
|
2,844 |
|
2009 |
|
|
2,405 |
|
2010 |
|
|
2,075 |
|
Thereafter |
|
|
1,686 |
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
13,299 |
|
|
|
|
|
9. RESTRICTED CASH
As of September 30, 2006, the Company has provided $1.6 million of cash as collateral for a
letter of credit, which is required for security under an operating lease for its corporate
headquarters. The Company is required to maintain this letter of credit throughout the term of the
lease, which expires in 2011. In addition, as described in Note 8, Commitments and Contingencies,
the Company has $0.5 million on deposit with a financial institution to cover any deficit account
balance that could occur if the amount of transactions returned or charged back exceeds the balance
on deposit with the financial institution.
10. EARNINGS PER SHARE (EPS)
Basic EPS is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common stock.
16
A reconciliation of the shares used to compute basic income per share from continuing
operations to those used for diluted income per share from continuing operations is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Shares for basic computation |
|
|
27,322 |
|
|
|
26,678 |
|
Options and warrants (treasury stock method) |
|
|
1,042 |
|
|
|
667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for diluted computation |
|
|
28,364 |
|
|
|
27,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Shares for basic computation |
|
|
27,197 |
|
|
|
26,631 |
|
Options and warrants (treasury stock method) |
|
|
961 |
|
|
|
489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for diluted computation |
|
|
28,158 |
|
|
|
27,120 |
|
|
|
|
|
|
|
|
Stock options for which the exercise price exceeds the average market price over the
period have an anti-dilutive effect on EPS and, accordingly, are excluded from the diluted
computations for both periods presented. Had such shares been included, shares for the diluted
computation would have increased by approximately 356,000 and 1,535,000 for the three months ended
September 30, 2006 and 2005, respectively, and approximately 493,000 and 1,627,000 for the nine
months ended September 30, 2006 and 2005, respectively. The EPS calculation has been restated to
reflect the change in income from continuing operations due to the Companys INS and Instant
Conferencing segments now being accounted for as discontinued operations.
11. RESTRUCTURING AND RELATED ASSET IMPAIRMENTS
The following table summarizes the activity in the restructuring accrual for the nine months
ended September 30, 2006 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
|
|
|
|
|
|
|
|
|
|
Severance |
|
|
Facility Closing |
|
|
|
|
|
|
|
|
|
and Termination |
|
|
and Related |
|
|
Asset |
|
|
|
|
|
|
Benefits |
|
|
Costs |
|
|
Impairment |
|
|
Total |
|
Accrued restructuring balance at December 31,
2005 |
|
$ |
17 |
|
|
$ |
972 |
|
|
$ |
|
|
|
$ |
989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual January 2006 |
|
|
1,396 |
|
|
|
|
|
|
|
|
|
|
|
1,396 |
|
Cash payments |
|
|
(1,198 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
(1,237 |
) |
Restructuring adjustments |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at March 31, 2006 |
|
$ |
212 |
|
|
$ |
933 |
|
|
$ |
|
|
|
$ |
1,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual May 2006 |
|
|
61 |
|
|
|
|
|
|
|
862 |
|
|
|
923 |
|
Impairment of assets |
|
|
|
|
|
|
|
|
|
|
(862 |
) |
|
|
(862 |
) |
Cash payments |
|
|
(184 |
) |
|
|
(159 |
) |
|
|
|
|
|
|
(343 |
) |
Restructuring adjustments |
|
|
3 |
|
|
|
11 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at June 30, 2006 |
|
$ |
92 |
|
|
$ |
785 |
|
|
$ |
|
|
|
$ |
877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual August 2006 |
|
|
296 |
|
|
|
301 |
|
|
|
211 |
|
|
|
808 |
|
Impairment of assets |
|
|
|
|
|
|
|
|
|
|
(211 |
) |
|
|
(211 |
) |
Cash payments |
|
|
(342 |
) |
|
|
(302 |
) |
|
|
|
|
|
|
(644 |
) |
Restructuring accrual September 2006 |
|
|
|
|
|
|
|
|
|
|
2,402 |
|
|
|
2,402 |
|
Impairment of assets |
|
|
|
|
|
|
|
|
|
|
(2,402 |
) |
|
|
(2,402 |
) |
Restructuring adjustments |
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance at September 30,
2006 |
|
$ |
46 |
|
|
$ |
831 |
|
|
$ |
|
|
|
$ |
877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
In October 2006, the Company announced plans
to exit from the TDS business (see Note 2). As a result of its decision, the Company determined that
there were impairment indicators that existed as of September 30, 2006 which required the Company
to assess the recoverability of the TDS long-lived assets as of September 30, 2006. The Company
reviewed the carrying value of its long-lived assets and noted that the expected future cash flows
for the TDS business would not be sufficient to recover the recorded carrying value of long-lived
assets. The Company analyzed various scenarios related to its exit from
the TDS business and weighed the probability of each scenario. The Company considered various
valuation methods in determining the fair value of the assets including appraisal values.
Accordingly, the Company recognized an impairment charge to reduce the carrying value of leasehold
improvements to zero and other tangible assets to a fair value of $1.1 million. The Company
recorded 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 third quarter of 2006, the Company had to increase the estimated costs associated
with closing its Broomfield, Colorado facility by $43,000. This adjustment was made due to a
modification in the Companys sublease assumption.
In May 2006, the Company announced the planned closing of the Liverpool, Nova Scotia contact
center. Related to this closing, the Company 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, the Company 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 the Company recorded a restructuring
charge of $1.4 million in the first quarter of 2006, primarily related to employee severance and
termination benefits.
12. PROVISION FOR INCOME TAXES
The Company provides for income taxes on an interim basis based on the full-year projected
effective tax rate. The Companys effective tax rate was 44% for the nine months ended September
30, 2006, as compared to 20%for the nine months ended September 30, 2005. The income tax provision
for the nine months ended September 30, 2006 of $1.8 million reflects a current provision of $0.2
million for federal, state and foreign taxes, a deferred federal and state provision of $1.4
million attributable to amortization of intangibles for tax purposes with indefinite lives, and a
discrete item of $0.2 million, including interest, related to the settlement of a tax audit for
prior periods. The income tax provision for the nine months ended September 30, 2005 of $1.5
million reflects a current provision for state and foreign taxes of $0.2 million and a deferred
federal and state provision of $1.3 million attributable to amortization of intangibles for tax
purposes with indefinite lives. At September 30, 2006, the Company continues to believe a full
valuation allowance is required until an appropriate level of profitability is sustained that would
enable the Company to conclude that it is more likely than not that a portion of the Companys
deferred taxes would be realizable.
13. COMPREHENSIVE INCOME
The amounts that comprise comprehensive loss for the three and nine months ended September 30,
2006 and 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September |
|
|
|
30, |
|
|
|
2006 |
|
|
2005 |
|
Net income as reported |
|
$ |
274 |
|
|
$ |
987 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized gain on short-term investments |
|
|
7 |
|
|
|
|
|
Foreign currency gain (loss) |
|
|
(6 |
) |
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
275 |
|
|
$ |
1,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September |
|
|
|
30, |
|
|
|
2006 |
|
|
2005 |
|
Net income as reported |
|
$ |
2,759 |
|
|
$ |
15,099 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Unrealized gain on short-term investments |
|
|
18 |
|
|
|
|
|
Foreign currency gain |
|
|
53 |
|
|
|
313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
2,830 |
|
|
$ |
15,412 |
|
|
|
|
|
|
|
|
18
14. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the
Company recognize in its financial statements the impact of a tax position if that position is more
likely than not, of being sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of January 1, 2007, with the cumulative effect, if any, of
the change in accounting principle recorded as an adjustment to opening retained earnings. The
Company is currently 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 currently assessing
the impact of adopting SFAS 157 but does not expect that it will have a material effect on its
consolidated financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and
132(R), (SFAS 158). SFAS 158 requires an employer to recognize the over-funded or under-funded
status of a defined benefit pension and other postretirement plan (other than a multiemployer plan)
as an asset or liability in its statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through comprehensive income of a business
entity. The Company will be required to adopt the provisions of SFAS 158 in its annual financial
statements for fiscal year 2007. The Company does not believe that the adoption of the provisions
of SFAS 158 will materially impact its consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current
Year Financial Statements (SAB 108), which provides interpretive guidance on how the effects of
the carryover or reversal of prior year misstatements should be considered in quantifying a current
year misstatement. The Company will be required to adopt the provisions of SAB 108 in its annual
financial statements for fiscal year 2006. The Company does not believe that the adoption of SAB
108 will materially impact its consolidated financial statements.
15. SUBSEQUENT EVENT
On November 1, 2006, The Company announced that its board of directors authorized the
discretionary repurchase of up to $15 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.
19
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This Quarterly Report on Form 10-Q contains Forward-Looking Statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Any statements contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words believes, anticipates,
plans, expects and similar expressions are intended to identify forward-looking statements. The
forward-looking statements involve known and unknown risks, uncertainties and other factors,
including the factors set forth under the heading Risk Factors in Part II., Item 1.A. below that
may cause the actual results, performance and achievements of Lightbridge to differ materially from
those indicated by the forward-looking statements. Lightbridge undertakes no obligation to update
any forward-looking statements it makes.
AIRPAY BY AUTHORIZE.NET, 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,
CAS, CUSTOMER ACQUISITION SYSTEM, ECHECK.NET, FRAUDBUSTER, FRAUD CENTURION, FRAUDSCREEN.NET, FRAUD
SENTINEL, LIGHTBRIDGE, the Lightbridge logo, POCKET AUTHORIZE.NET, and PROFILE are registered
trademarks of Lightbridge, and @RISK, AUTOMATED RECURRING BILLING, AUTHENTICATENOW, AUTHORIZE.NET
YOUR GATEWAY TO IP TRANSACTIONS, CDS, CREDIT DECISION SYSTEM, ECHECK, EDM, ENHANCED DECISION
MANAGEMENT, FRAUDBRIDGE, FRAUD DETECTION SUITE, INSIGHT, LIGHTBRIDGE TELESERVICES, POPS, POINT OF
PURCHASE SYSTEM, RMS, and RETAIL MANAGEMENT SYSTEM are trademarks of Lightbridge. All other
trademarks or trade names appearing in this Quarterly Report on Form 10-Q are the property of their
respective owners.
The following discussion and analysis of our financial conditions and results of operations
has been restated to give effect to the restatement of the cash flows as described in Note 3 to the
unaudited condensed consolidated financial statements and the operations that were discontinued during 2005. See
Discontinued Operations below and Note 5 to the consolidated financial
statements for further information concerning discontinued operations.
Overview
We have undergone significant changes to our business and we expect additional changes to
occur in the near future. On October 4, 2006, we announced plans to exit from the Telecom
Decisioning Services (TDS) business. The decision was based upon
negotiations with Sprint Spectrum LP and Nextel Operations, Inc.
(Sprint Nextel)
which advised us that it would not be a significant customer after October 2006. Sprint Nextel
represented approximately 60% and 53% of the TDS revenue for the three and ninth months ended
September 30, 2006, respectively. The Sprint Nextel business is expected to rapidly wind down prior
to the expiration of the Sprint contract on December 31, 2006 and the Nextel contract on December
8, 2006. We expect to provide certain post-termination services as required under
the Nextel contract through March 31, 2007.
We
plan to continue to operate the TDS business until we are able to
complete our exit of the business, which may be accomplished through
the sale of all or a part of that business. We expect to exit the TDS business by the end of the second
quarter of 2007. As a result of the decision to exit the TDS business, we do not expect our
historical financial results to be indicative of our future results.
During 2005, we sold our INS business and ceased the operation of our Instant Conferencing
business. The INS business and our Instant Conferencing business are presented as discontinued
operations.
We develop, market and support a suite of products and services for both merchants and
communication service providers. 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. Our TDS segment provides
wireless subscriber qualification, risk assessment, fraud screening, consulting services and
contact center services to telecommunications and other companies.
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.
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 based on a one-time set up fee, a
20
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.
Our transaction service revenues are derived primarily from the processing of applications for
qualification of subscribers for telecommunications services, the activation of services for those
subscribers and from the processing of payment transactions for merchants. Our telecommunications
transactions offerings include screening for subscriber fraud, evaluating carriers existing
accounts, interfacing with carrier and third-party systems and providing contact center services.
Our transaction-based solutions provide multiple, remote, systems access for workflow management,
along with centrally managed client-specified business policies, and links to client and
third-party systems. Transaction services are provided through contracts with carriers and others,
which specify the services to be utilized and the markets to be served. Our clients are charged for
these services on a per transaction basis. Pricing varies depending primarily on the volume and
type of transactions, the number and type of other products and services selected for integration
with the services and the term of the contract under which services are provided. The volume of
transactions processed varies depending on seasonal and retail trends, the success of the carriers
and others utilizing our services in attracting subscribers and the markets served by our clients.
Transaction revenues are recognized in the period in which the services are performed.
Our consulting revenues are derived principally from providing solution development and
deployment services and business advisory consulting in the areas of customer acquisition and
retention, authentication, and risk management. The majority of consulting engagements are
performed on a time and materials basis and revenues from these engagements are 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 perform work under a fixed fee arrangement,
revenues are 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, 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.
Recent Developments
On
November 1, 2006, we announced that our board of directors authorized the discretionary repurchase of up
to $15 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.
On October 4, 2006, we announced our plan to exit the TDS business. We intend to reduce our
workforce by approximately 200 employees, or approximately
50 percent of our current regular full-time
staff through the second quarter of 2007. With respect to our exit from the TDS business, we recorded asset impairment charges of $2.4
million during the third quarter of 2006. Our exit from the TDS
business may include the sale of all or a part of that business. We expect to incur pre-tax restructuring
charges in the range of $3.5 million to $8.0 million from the third quarter 2006 through the second
quarter of 2007. These charges are expected to consist of approximately $2.0 to $4.0 million of
severance charges with respect to terminated employees; approximately $1.0 to $2.5 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, Lynn, and Waltham, Massachusetts, net
of any estimated sublease income; and approximately $500,000 to $1.5 million of other charges
related to the closing 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 these restructuring efforts in October
2006 with notifications of intended action to certain affected personnel.
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 nine months ended September 30, 2006 and the year ended
December 31, 2005, respectively, in
connection with the defense of this lawsuit and we had expected to incur additional costs of
approximately $1.5 million in 2006 had we not entered in to the
settlement agreement. We had not
and do not expect to incur any further litigation costs related to this lawsuit after the second
quarter of 2006.
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.
21
Critical Accounting Policies and Estimates
Managements discussion and analysis of our financial condition and results of operations are
based on our condensed consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of
these condensed consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the condensed consolidated financial statements and the
reported amounts of revenue and expense during the reporting period. On an ongoing basis, we
evaluate our estimates, including those listed below. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable under the circumstances.
However, our actual results could differ from those estimates.
We believe the following critical accounting policies affect our significant estimates and
assumptions used in the preparation of our condensed consolidated financial statements. A full
discussion of the following accounting policies is included in our 2005 Annual Report on Form 10-K
filed with the Securities and Exchange Commission and we refer the reader to that discussion.
|
|
|
Revenue Recognition |
|
|
|
|
Allowance for Doubtful Accounts |
|
|
|
|
Income Taxes and Deferred Taxes |
|
|
|
|
Restructuring Estimates |
|
|
|
|
Goodwill and Acquired Intangible Assets |
We updated our critical accounting policies during the nine months ended September 30, 2006 as
follows:
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 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. See Note 11 to the condensed
consolidated financial statements for a more detailed discussion of the impairment charges.
22
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, we report our operations in two distinct operating segments: Payment
Processing Services, and Telecom Decisioning Services (TDS).
|
|
|
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 provides
wireless subscriber qualification, risk assessment, fraud
screening, consulting services and contact center services
to telecommunications and other companies. As discussed
above, we expect to exit the TDS business by the
end of the second quarter of 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 the TDS business, we do not expect our historical
financial results related to the TDS segment to be indicative of our future results.
Results of Operations
Quarter Ended September 30, 2006 Compared with Quarter Ended September 30, 2005.
Revenues. Revenues and certain revenue comparisons for the quarters ended September 30, 2006
and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
Quarter Ended |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
September 30, |
|
|
$ |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Difference |
|
|
Difference |
|
|
|
(Dollars in thousands) |
|
Transaction services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Processing (Authorize.Net) |
|
$ |
14,474 |
|
|
$ |
11,714 |
|
|
$ |
2,760 |
|
|
|
23.6 |
% |
TDS |
|
|
8,146 |
|
|
|
13,962 |
|
|
|
(5,816 |
) |
|
|
(41.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Transaction services revenues |
|
|
22,620 |
|
|
|
25,676 |
|
|
|
(3,056 |
) |
|
|
(11.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting and maintenance services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS |
|
|
655 |
|
|
|
1,556 |
|
|
|
(901 |
) |
|
|
(57.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23,275 |
|
|
$ |
27,232 |
|
|
$ |
(3,957 |
) |
|
|
(14.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in transaction services revenues was primarily due to a $5.8 million
decline in transactions services revenues from our TDS segment offset by a $2.8 million increase in
Authorize.Nets revenue. Authorize.Nets revenues for the quarter increased 23.6% compared to the
same period in 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 $3.3 million reduction in transaction fees charged to
Sprint Nextel following the merger between Sprint Spectrum L.P. (Sprint) and Nextel Operations,
Inc. (Nextel), a $1.7 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, in the near term, we expect transaction services revenue
associated with our TDS segment to decline significantly from the third quarter 2006 level as a
result of the decrease in revenue from Sprint Nextel and our plan to exit the TDS business.
The decrease in consulting and maintenance services revenues of $0.9 million was principally
due to a decrease in consulting fees
23
charged to AT&T Wireless, Inc. and a decline in consulting and
maintenance revenues related to our decision to no longer actively market, sell or develop our RMS
product. In the near term, we expect that consulting and maintenance services revenue related to
our TDS segment will continue to be impacted by pricing pressures and our plan to exit the TDS
business.
Cost of Revenues and Gross Profit. Cost of revenues consists primarily of personnel costs,
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 our plan to
exit the TDS business, changes in the volume of transactions processed, changes in the mix of
transaction revenues between those from automated transaction processing and those from processing
transactions through our TeleServices contact centers (which have a higher cost component), changes
in pricing to certain clients and changes in the mix of total revenues among transaction services
revenues, consulting and maintenance services revenues.
Cost of revenues, gross profit and certain comparisons for the quarters ended September 30,
2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
|
|
|
|
|
|
|
|
|
|
September |
|
|
Quarter Ended |
|
|
|
|
|
|
|
|
|
30, |
|
|
September 30, |
|
|
$ |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Difference |
|
|
Difference |
|
|
|
(Dollars in thousands) |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services |
|
$ |
8,758 |
|
|
$ |
11,691 |
|
|
$ |
(2,933 |
) |
|
|
(25.1 |
)% |
Consulting and maintenance services |
|
|
263 |
|
|
|
597 |
|
|
|
(334 |
) |
|
|
(55.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
9,021 |
|
|
$ |
12,288 |
|
|
$ |
(3,267 |
) |
|
|
(26.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services $ |
|
$ |
13,862 |
|
|
$ |
13,985 |
|
|
$ |
(123 |
) |
|
|
(0.9 |
)% |
Transaction services % |
|
|
61.3 |
% |
|
|
54.5 |
% |
|
|
|
|
|
|
|
|
Consulting and maintenance services $ |
|
$ |
392 |
|
|
$ |
959 |
|
|
$ |
(567 |
) |
|
|
(59.1 |
)% |
Consulting and maintenance services % |
|
|
59.8 |
% |
|
|
61.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit $ |
|
$ |
14,254 |
|
|
$ |
14,944 |
|
|
$ |
(690 |
) |
|
|
(4.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit % |
|
|
61.2 |
% |
|
|
54.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services cost of revenues decreased by $2.9 million in the quarter ended
September 30, 2006 from the prior year.
Transaction services cost of revenues from our TDS segment were
approximately $5.7 million for the quarter ended September 30,
2006 which represents a decrease of approximately $3.4 million
compared to the same period in 2005. Transactions services cost of
revenues from our Payment Processing segment were approximately
$3.0 million for the quarter ended September 30, 2006 which
represents an increase of approximately $0.5 million compared to
the same period in 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.
Transaction services gross profit percentage increased primarily as a result of
Authorize.Nets higher contribution to the transaction services gross profit amount.
Authorize.Nets transaction services gross profit amount was
approximately $11.4 million in the quarter
ended September 30, 2006 versus approximately $9.2 million in the same quarter of 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.
Authorize.Net generated a higher gross profit percentage than our TDS segment, resulting in
increased transaction services gross profit percentage in the quarter ended September 30, 2006 than
in the same quarter of 2005.
Consulting and maintenance services cost of revenues decreased by $0.3 million in the third
quarter of 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 the third quarter of 2006 due to the lower revenues from AT&T
Wireless, Inc. and our RMS product partially offset by the reduction
in personnel-related expenses. All of our consulting and maintenance
services are part of our TDS segment.
In the near term, we expect that fluctuations in gross profit will occur because of our plan
to exit the TDS business. In the long term (after we exit the TDS business), we expect the gross
profit percentage to increase due to the higher gross profit percentage from the Payment Processing
business.
24
Operating Expenses. Operating expenses and certain operating expense comparisons for the three
months ended September 30, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter |
|
|
Quarter |
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
September |
|
|
September |
|
|
|
|
|
|
|
|
|
30, |
|
|
30, |
|
|
$ |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Difference |
|
|
Difference |
|
|
|
(Dollars in thousands) |
|
Engineering and development |
|
$ |
2,726 |
|
|
$ |
3,502 |
|
|
$ |
(776 |
) |
|
|
(22.2 |
)% |
Sales and marketing |
|
|
4,863 |
|
|
|
4,461 |
|
|
|
402 |
|
|
|
9.0 |
|
General and administrative |
|
|
3,254 |
|
|
|
4,113 |
|
|
|
(859 |
) |
|
|
(20.9 |
) |
Restructuring charges and related asset impairments |
|
|
3,187 |
|
|
|
1,544 |
|
|
|
1,643 |
|
|
|
106.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,030 |
|
|
$ |
13,620 |
|
|
$ |
410 |
|
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $0.8 million decrease in engineering and
development expenses for the quarter ended September 30, 2006 as compared with the same quarter in
2005 was primarily due to cost savings associated with our restructuring activities. The cost
savings were partially offset by a $0.1 million share-based compensation expense due to the
adoption of SFAS No. 123(R).
We expect engineering and development expenses for the quarter ending December 31, 2006 to
continue to decline in comparison to the prior year level, primarily due to benefits of
restructuring activities partially 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 $0.4 million in sales and
marketing expenses in the quarter ended September 30, 2006 as compared with the same quarter in
2005, in absolute dollars and as a percentage of revenue, was due to the increase in expenses for
Authorize.Net. Authorize.Net represented $4.6 million of sales and marketing expenses in the third
quarter of 2006 as compared to $4.0 million in the third quarter of 2005. This increase was
partially offset by reductions in marketing costs for the other portions of our business,
restructuring activities, and reduced sales and marketing program spending as compared with the
third quarter of 2005.
We expect that sales and marketing expenses for the quarter ending December 31, 2006 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 and administrative personnel and fees for certain
outside professional services. The decrease of $.9 million in general and administrative expenses,
as compared to the same quarter in 2005, in absolute dollars and as a percentage of revenues, was
due to reductions in legal fees associated with patent infringement litigation and outside
services.
We expect that general and administrative expenses for the quarter ending December 31, 2006
will remain consistent with the previous quarters..
Restructuring charges and related asset impairments. We recorded an asset 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 longlived assets. In May 2006, the Company announced the planned
closing of the Liverpool, Nova Scotia contact center. Related to this closing, the Company
recorded restructuring and related asset impairment charges of $0.8 million during the third
quarter of 2006.
The quarter ended September 30, 2005 has been adjusted for discontinued operations.
With respect to our decision to exit the TDS business, we expect to incur additional pre-tax
restructuring charges in the range of $3.5 million to $8.0 million from the fourth quarter 2006
through the second quarter of 2007. These charges are expected to consist of approximately $2.0 to
$4.0 million of severance charges with respect to terminated employees; approximately $1.0 to $2.5
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, Lynn, and Waltham, Massachusetts,
net of any estimated sublease income; and approximately $0.5 to $1.5 million of other charges
related to the closing of the TDS business.
25
Other Income, Net. Other income, net primarily consists of interest income earned on our cash
and short-term investment balances. Other income, net increased by $0.8 million in the quarter
ended September 30, 2006 in comparison with the same period in 2005.
This increase was primarily due to an increase in our cash and short-term investments balance as a
result of the cash provided by the operating activities of continuing operations, cash received for
the sale of our INS business, an increase in the prevailing interest rates, and cost savings from
our restructuring activities.
Provision for (Benefit from) Income Taxes. We provide for income taxes on an interim basis
based on the full-year projected effective tax rate. The income tax provision for the three months
ended September 30, 2006 of $1.2 million reflects a current provision of $0.1 million for federal,
state and foreign taxes, a deferred federal and state provision of $0.9 million attributable to
amortization of intangibles for tax purposes with indefinite lives, and a discrete item of $0.2
million, including interest, related to the settlement of a tax audit for prior periods. The
income tax provision for the three months ended September 30, 2005 of $0.6 million reflects a
current provision of $0.1 million for federal, state and foreign taxes and a deferred federal and
state provision of $0.5 million attributable to amortization of intangibles for tax purposes with
indefinite lives. At September 30, 2006, the Company continues to believe a full valuation
allowance is required until an appropriate level of profitability is sustained that would enable
the Company to conclude that it is more likely than not that a portion of the Companys deferred
taxes would be realizable.
Nine Months Ended September 30, 2006 Compared with Nine Months Ended September 30, 2005.
Revenues. Revenues and certain revenue comparisons for the nine months ended September 30,
2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Nine Months |
|
|
|
|
|
|
|
|
|
September |
|
|
Ended |
|
|
|
|
|
|
|
|
|
30, |
|
|
September 30, |
|
|
$ |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Difference |
|
|
Difference |
|
|
|
(Dollars in thousands) |
|
Transaction services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Processing (Authorize.Net) |
|
$ |
41,845 |
|
|
$ |
32,561 |
|
|
$ |
9,284 |
|
|
|
28.5 |
% |
TDS |
|
|
31,007 |
|
|
|
43,916 |
|
|
|
(12,909 |
) |
|
|
(29.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Transaction services revenues |
|
|
72,852 |
|
|
|
76,477 |
|
|
|
(3,625 |
) |
|
|
(4.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting and maintenance services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDS |
|
|
2,188 |
|
|
|
4,492 |
|
|
|
(2,304 |
) |
|
|
(51.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
75,040 |
|
|
$ |
80,969 |
|
|
$ |
(5,929 |
) |
|
|
(7.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in transaction services revenues was primarily due to a $12.9 million
decline in transactions services revenues from our TDS segment partially offset by a $9.3 million
increase in Authorize.Nets revenue. Authorize.Nets revenues for the nine months ended September
30, 2006 increased 28.5% compared to the same period in 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 $10.4
million reduction in transaction fees charged to Sprint Nextel
following the merger between Sprint and Nextel.
The decrease in consulting and maintenance services revenues of $2.3 million was principally
due to a decrease in consulting fees charged to AT&T Wireless, Inc. and a decline in consulting and
maintenance revenues related to our decision to no longer actively market, sell or develop our RMS
product.
Cost of Revenues and Gross Profit. Cost of revenues consists primarily of personnel costs,
costs of maintaining systems and networks used in processing qualification and activation
transactions (including depreciation and amortization of systems and networks) and amortization of
capitalized software and acquired technology. Cost of revenues for Authorize.Net, included in
transaction services cost of revenues, consists of expenses associated with the delivery,
maintenance and support of Authorize.Nets products and services, including personnel costs,
communication costs, such as high-bandwidth Internet access, server equipment depreciation,
transactional processing fees, as well as customer care costs. In the future, cost of revenues may
vary as a percentage of total revenues as a result of a number of factors, including changes in the
volume of transactions processed, changes in the mix of transaction revenues between those from
automated transaction processing and those from processing transactions through our TeleServices
contact centers (which have a higher cost component), changes in pricing to certain clients and
changes in the mix of total revenues among transaction services revenues, consulting and
maintenance services revenues.
26
Cost of revenues, gross profit and certain comparisons for the nine months ended September 30,
2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
|
|
|
|
|
|
|
|
|
|
Ended |
|
|
Nine Months |
|
|
|
|
|
|
|
|
|
September |
|
|
Ended |
|
|
|
|
|
|
|
|
|
30, |
|
|
September 30, |
|
|
$ |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Difference |
|
|
Difference |
|
|
|
(Dollars in thousands) |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services |
|
$ |
30,352 |
|
|
$ |
35,881 |
|
|
$ |
(5,529 |
) |
|
|
(15.4 |
)% |
Consulting and maintenance services |
|
|
1,188 |
|
|
|
1,919 |
|
|
|
(731 |
) |
|
|
(38.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues |
|
$ |
31,540 |
|
|
$ |
37,800 |
|
|
$ |
(6,260 |
) |
|
|
(16.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services $ |
|
$ |
42,500 |
|
|
$ |
40,596 |
|
|
$ |
1,904 |
|
|
|
4.7 |
% |
Transaction services % |
|
|
58.3 |
% |
|
|
53.1 |
% |
|
|
|
|
|
|
|
|
Consulting and maintenance services $ |
|
$ |
1,000 |
|
|
$ |
2,573 |
|
|
$ |
(1,573 |
) |
|
|
(61.1 |
)% |
Consulting and maintenance services % |
|
|
45.7 |
% |
|
|
57.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit $ |
|
$ |
43,500 |
|
|
$ |
43,169 |
|
|
$ |
331 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit % |
|
|
58.0 |
% |
|
|
53.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services cost of revenues decreased by $5.5 million for the nine months ended
September 30, 2006 compared to the same period in 2005.
Transaction services cost of revenues from our TDS segment were
approximately $21.5 million for the nine months ended September 30,
2006 which represents a decrease of approximately $7.2 million
compared to the same period in 2005. Transactions services cost of
revenues from our Payment Processing segment were approximately
$8.8 million for the nine months ended September 30, 2006 which
represents an increase of approximately $1.7 million compared to
the same period in 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.
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 transaction services gross profit amount was
approximately $33.1 million for the nine months
ended September 30, 2006 versus approximately $25.4 million for the same period in the prior 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.
Consulting and maintenance services cost of revenues decreased by $0.7 million for the nine
months ended September 30, 2006 compared to the same period in 2005. 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
for the nine months ended September 30, 2006 compared to the same period in 2005 due to the lower
revenues from AT&T Wireless, Inc. and our RMS product partially offset by the reduction in
personnel-related expenses.
Operating Expenses. Operating expenses and certain operating expense comparisons for the nine
months ended September 30, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine |
|
|
|
|
|
|
|
|
|
|
|
|
Months |
|
|
Nine Months |
|
|
|
|
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
|
|
|
|
|
September |
|
|
September |
|
|
|
|
|
|
|
|
|
30, |
|
|
30, |
|
|
$ |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Difference |
|
|
Difference |
|
|
|
(Dollars in thousands) |
|
Engineering and development |
|
$ |
8,909 |
|
|
$ |
10,978 |
|
|
$ |
(2,069 |
) |
|
|
(18.8 |
)% |
Sales and marketing |
|
|
14,574 |
|
|
|
13,375 |
|
|
|
1,199 |
|
|
|
9.0 |
|
General and administrative |
|
|
13,794 |
|
|
|
11,734 |
|
|
|
2,060 |
|
|
|
17.6 |
|
Restructuring charges and related asset impairments |
|
|
5,517 |
|
|
|
1,920 |
|
|
|
3,597 |
|
|
|
187.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
42,794 |
|
|
$ |
38,007 |
|
|
$ |
4,787 |
|
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
27
Engineering and Development. The $2.1 million decrease in engineering and development expenses
for the nine months ended September 30, 2006 compared to the same period in 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).
Sales and Marketing. The increase of $1.2 million in sales and marketing expenses for the nine
months ended September 30, 2006 compared to the same period in 2005, in absolute dollars and as a
percentage of revenue, was due to the increase in expenses for Authorize.Net. Authorize.Net
represented $13.6 million of sales and marketing expenses for the nine months ended September 30,
2006 as compared to $11.9 million for the same period in 2005. This increase was partially offset
by reductions in marketing costs for the other portions of our business, restructuring activities,
and reduced sales and marketing program spending as compared to the same period in 2005.
General and Administrative. The increase of $2.1 million in general and administrative
expenses, as compared to the same period in 2005, in absolute dollars and as a percentage of
revenues, was due to the $2.8 million share-based compensation expense due to the adoption of SFAS
No. 123(R), and the litigation settlement of $1.5 million, net with NetMoneyIN, Inc. This increase
was partially offset by reductions in consulting costs and restructuring activities as compared to
the same period in 2005.
Restructuring charges and related asset impairments. We recorded an asset 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 longlived assets. In May 2006, the Company announced the planned
closing of the Liverpool, Nova Scotia contact center. Related to this closing, the Company
recorded restructuring and related asset impairment charges of $1.7 million during the nine months
ended September 30, 2006.
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 4%, and we recorded a restructuring charge of $1.4 million in
the first quarter of 2006, primarily related to employee severance and termination benefits.
The nine months ended September 30, 2005 has been adjusted for discontinued operations.
Other Income, Net. Other income, net primarily consists of interest income earned on our cash
and short-term investment balances. Other income, net increased by $2.3 million in the nine months
ended September 30, 2006 in comparison with the same period in 2005. This increase was primarily
due to an increase in our cash and short-term investments balance as a result of the cash provided
by the operating activities of continuing operations, cash received for the sale of our INS
business, an increase in the prevailing interest rates, and cost savings from our restructuring
activities.
Provision for (Benefit from) Income Taxes. We provide for income taxes on an interim basis
based on the full-year projected effective tax rate. The income tax provision for the nine months
ended September 30, 2006 of $1.8 million reflects a current provision of $0.2 million for federal,
state and foreign taxes, a deferred federal and state provision of $1.4 million attributable to
amortization of intangibles for tax purposes with indefinite lives, and a discrete item of $0.2
million, including interest, related to the settlement of a tax audit for prior periods. The income
tax provision for the nine months ended September 30, 2005 of $1.5 million reflects a current
provision for state and foreign taxes of $0.2 million and a deferred federal and state provision of
$1.3 million attributable to amortization of intangibles for tax purposes with indefinite lives. At
September 30, 2006, the Company continues to believe a full valuation allowance is required until
an appropriate level of profitability is sustained that would enable the Company to conclude that
it is more likely than not that a portion of the Companys deferred taxes would be realizable.
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 18 months after closing and will
be recorded as a gain, net of possible indemnity claims at that time.
In addition, a liability of $450,000 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. The operating results
and financial condition of the INS business have been included as part of the financial results
from discontinued operations in the accompanying consolidated financial statements in accordance
with SFAS No. 144, as the sale was completed during the second quarter of 2005. All comparative
prior period amounts have been restated in a similar manner.
28
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 loss from discontinued operations of $0 and $0.3 million for the three months
ended September 30, 2006 and 2005, respectively, and we recorded net income from discontinued
operations of $0.5 million and $10.3 million for the nine months ended September 30, 2006 and 2005,
respectively. 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 for the three and nine months ended September 30, 2005
includes a gain on sale of the INS business of $12.7 million and the normal operating results of
the INS and Instant Conferencing segments.
Liquidity and Capital Resources
As of September 30, 2006, we had cash and cash equivalents and short-term investments of
$105.8 million. 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.
During the first nine months of 2006, we generated cash from operating activities of
approximately $18.5 million, and cash from financing activities of approximately $3.8 million, and
used approximately $1.2 million of cash from investing activities. During the first nine months of
2006, our accounts payable and accrued liabilities decreased by a combined $3.2 million primarily
related to a decreased level of spending.
Our capital expenditures totaled $1.8 million for the nine months ended September 30, 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 the TDS business, we expect to
incur future cash outlays of $3.5 to $8.0 million through the second quarter of 2007 for
severance, facilities exit and other charges related to the exit.
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 September 30, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
More Than |
|
|
Total |
|
1 Year |
|
1-3 Years |
|
3-5 Years |
|
5 Years |
|
|
(Dollars in thousands) |
Operating leases |
|
$ |
13,299 |
|
|
$ |
845 |
|
|
$ |
6,288 |
|
|
$ |
4,480 |
|
|
$ |
1,686 |
|
We generally undertake to defend and indemnify the party for damages and expenses or
settlement amounts arising from certain patent, copyright or other intellectual property
infringement claims by any third party with respect to our products and services. Some agreements
provide for indemnification for claims relating to property damage or personal injury resulting
from the performance of services or provision of products by us, breaches of contract by us or the
failure by us to comply with applicable laws in the performance of services or provision of
products by us to its clients.
In May 2006, we entered into a settlement agreement which resolved ongoing litigation with
NetMoneyIN, Inc. Pursuant to the agreement, we agreed to pay NetMoneyIN, Inc. a lump sum payment of
$1.75 million in exchange for a license grant, release and covenant not to sue. Our net cost of the
settlement after contribution from another party is $1.5 million. We had incurred legal expenses
of approximately $0.6 million and $1.1 million for the nine
months ended September 30, 2006 and the year ended
December 31, 2005, respectively, in connection with the
defense of this lawsuit and we expected to incur additional costs of approximately $1.5 million in
2006 had we not entered in to the settlement agreement. We do not expect to incur any further
litigation costs related to this lawsuit after the second quarter of 2006. Except for the
litigation settlement and legal expenses we incurred in connection with the NetMoneyIN, Inc.
litigation, historically, our costs to defend lawsuits, or settle or pay claims relating to such
indemnification provisions, have not been material. Accordingly, the estimated fair value of these
indemnification provisions is not material.
At September 30, 2006, we were holding funds in the amount of $8.5 million due to merchants
comprised of $7.3 million held for
29
Authorize.Nets eCheck.Net ® product, and
$1.2 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 $1.2
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 with the financial institution. 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.
We have a letter of credit in the amount of $1.6 million which was renewed in January 2006 and
is renewable each year. We restricted $1.6 million of cash as collateral for the renewed letter of
credit.
Off-Balance Sheet Arrangements
As of September 30, 2006, we had no off-balance sheet arrangements other than operating lease
obligations, and we were not a party to any material transactions involving related persons or
entities (other than employment, separation and other compensation agreements with certain
executives). Future annual minimum rental lease payments are detailed in Note 8 of the Notes to
Consolidated Financial Statements.
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.
Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN
48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that we
recognize in our financial statements the impact of a tax position if that position is more likely
than not, of being sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of January 1, 2007, with the cumulative effect, if any, of
the change in accounting principle recorded as an adjustment to opening retained earnings. We are
currently evaluating the impact of adopting FIN 48 on our 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 currently assessing the impact of
adopting SFAS 157 but do not expect that it will have a material effect on our consolidated
financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and
132(R), (SFAS 158). SFAS 158 requires an employer to recognize the over-funded or under-funded
status of a defined benefit pension and other postretirement plan (other than a multiemployer plan)
as an asset or liability in its statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through comprehensive income of a business
entity. We will be required to adopt the provisions of SFAS 158 in our annual financial statements
for fiscal year 2007. We do not believe that the adoption of the provisions of SFAS 158 will
materially impact our consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current
Year Financial Statements (SAB 108), which provides interpretive guidance on how the effects of
the carryover or reversal of prior year misstatements should be considered in quantifying a current
year misstatement. We will be required to adopt the provisions of SAB 108 in our annual financial
statements for fiscal year 2006. We do not believe that the adoption of SAB 108 will materially
impact our consolidated financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
The market risk exposure inherent in our financial instruments and consolidated financial
position represents the potential losses arising from adverse changes in interest rates and foreign
currency exchange rates.
We consider all highly liquid marketable securities purchased with a maturity of three months
or less to be cash equivalents and those with maturities greater than three months and less than
one year are considered to be short-term investments. Cash equivalents
are stated at cost plus accrued interest, which approximates fair value. Short-term investments are
stated at fair value based on quoted market prices.
The amortized cost of available-for-sale debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Realized gains and losses, and declines in value
judged to be other than temporary on available-for-sale debt securities, if any, are included in
interest income, net. The cost of securities sold is based on the specific identification method.
Interest and dividends on securities are included in interest income, net.
Our marketable securities and cash equivalent investments are generally high credit quality
instruments, primarily U.S. Treasury and government agency obligations, taxable municipal
obligations and money market investments with the average maturity of the total investment
portfolio being one year or less. Accordingly, we believe that our potential interest rate exposure
in investments is not material.
Our exposure to currency exchange rate fluctuations has been limited. All revenue transactions
are executed in U.S. dollars. We pay for certain foreign operating expenses such as foreign
payroll, rent and office expense in foreign currency and, therefore, currency exchange rate
fluctuations could have a material and adverse impact on our operating results and financial
condition. Currently, we do not engage in foreign currency hedging activities. The impact of any
currency exchange rate fluctuations is recorded in the period incurred.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company evaluated the effectiveness of the design and operation of its disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of September 30, 2006. The Companys Chief Executive Officer and its Chief Financial
Officer supervised and participated in this evaluation. Based on this evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2006, the
Companys disclosure controls and procedures were effective to provide a reasonable level of
assurance of reaching the Companys disclosure control objectives.
Changes in Internal Controls over Financial Reporting
There
were no significant changes to our internal controls during the quarter ended September 30, 2006
that have materially affected our internal controls over financial reporting.
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
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PART II. OTHER INFORMATION
Item 1. 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 nine months ended September 30, 2006 and the
year ended December 31, 2005, respectively, in connection with the defense of this lawsuit following our acquisition of
Authorize.Net, and we expected to incur defense costs of approximately $1.5 million in 2006. We
have not and do not expect to incur any litigation costs related to this lawsuit after the second
quarter of 2006.
We are subject to legal proceedings, claims, and litigation arising in the ordinary course of
business. On a quarterly basis, we review our commitments and contingencies to reflect the effect
of ongoing negotiations, settlements, rulings, advice of counsel, and other information and events
pertaining to a particular matter.
Item 1A. Risk Factors
The following risk factors contain changes from the risk factors set forth in our Annual Report on
Form 10-K for the year ended December 31, 2005 and should be reviewed together with risk factors
set forth in our such Annual Report. The changes may be deemed material.
Risk Factors
We Are in the Midst of Focusing the Company on the Payment Processing Segment and Exiting Our TDS
Business. If We Are Unable to Successfully Complete This Change Quickly and Smoothly, Our Business,
Operating Results and Financial Condition Would Be Harmed. Our Plans For the Restructuring of Our
Company Are Complex, and Our Failure to Complete the Restructuring
Effectively Would Adversely
Affect Our Business.
On October 4, 2006, we announced our plan to exit the TDS business. The exit of our TDS
business is a significant and complex transaction for us that may
include the sale of all or a part of that business. The process of exiting a business could
cause the diversion of managements time and resources, the distraction of employees or the loss of
key personnel, including those necessary to complete the exit smoothly. The activities involved are
complicated and detailed, and they will put a strain on the organization. The diversion of
managements time and resources and any delays or difficulties encountered in connection with
completing the exit by June 30, 2007 would harm our overall business, operating results, and
financial condition. There is no guarantee that the exit of the TDS business will have the
anticipated results, or that the exit will present the advantages that we anticipate towards our
goal of becoming a company focused on the Payment Processing segment.
We
expect a workforce reduction of approximately 200 employees from the
fourth quarter 2006
through the second quarter of 2007. These employees will be terminated over time as we transition
our TDS customers and other TDS obligations. If we are unable to retain the necessary employees
through the transition, our operating results would be harmed and we
would be unable to meet our
customer and other obligations, which would expose us to litigation, damages and liabilities. We may
also be subject to litigation in connection with employee
terminations, which would expose us to
additional costs and liabilities.
The future revenue in our TDS business is difficult to predict because of our decision to exit
the business and the impact that that decision may have on our customers willingness to continue
to use our services during the exit period. Our expenses are in large part comprised of
compensation, facilities rent, and telecommunications costs which can be difficult to change on
short notice. Our management must effectively balance our need to control costs with our need to
respond timely to customer requirements as we exit the TDS business. Any failure to effectively
manage cost and resource levels would adversely affect our business.
We currently plan to exit the TDS business by the end of the second quarter of 2007. However,
we are contractually obligated to service some of our TDS customers past the second quarter of
2007. Our operating results would be harmed if we are unable to transition our customers in a
timely, quick and efficient manner. We could be subject to litigation and incur damages and
liabilities if we are unable to service our TDS customers as required by their contracts. We are
also obligated past the second quarter of 2007 under certain operating leases and other third-party
supply contracts related to our TDS business. Our inability to vacate, transfer or terminate
operating leases for facilities or to sublease them as anticipated or our inability to terminate or
transfer our third-party supply contracts would harm our operating results.
While we believe that changing the organization to focus on the Payment Processing segment is
critical to growing our business
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over the long term, we may be unable to complete this process
smoothly and quickly. In that event, our stock price, business, operating results, financial
condition and prospects would be harmed. In addition, because of the expenses and charges associated
with our announced plan to exit the TDS business, including restructuring, asset impairment charges
and employee retention costs, we
expect our operating results to be adversely impacted through the second quarter of 2007.
We
Expect Our Revenue to Decline Significantly in the Foreseeable Future as Compared to Historical
Levels Due to Our Decision to Exit the TDS Business
Historically, we have had substantial revenue concentration in the wireless telecommunication
industry. Sprint and Nextel accounted for a majority of our TDS
revenue in the quarter and nine months ended
September 30, 2006. Our 10 largest TDS customers accounted for approximately 36% and 43% of our
total revenue in the three and ninth months ended September 30, 2006, respectively. In November
2004, we announced that we did not expect AT&T Wireless, Inc. (now Cingular Wireless LLC), to be a
significant customer commencing in 2005. In May 2006, we announced that we did not expect T-Mobile
to be a significant customer commencing in the third quarter of 2006. In October 2006, we
announced that we did not expect Sprint Nextel to be a significant customer after October 2006.
With the loss of business from AT&T Wireless, Inc. and T-Mobile and the expected loss of business
from Sprint Nextel, our revenues from the TDS business will decline substantially and our total
revenues will decline significantly in the foreseeable future. We expect these declines to be
offset in part from anticipated growth in our Payment Processing revenues. We expect to complete
our exit of the TDS business by June 30, 2007. If we are unable to exit the TDS business smoothly
and quickly, our business, operating results, financial condition and
prospects would be harmed.
Factors that may affect our ability to exit the TDS business smoothly and quickly include
difficulties in transitioning TDS customers to another vendor, loss of employees necessary to meet
required customer commitments, continuing operational expenses due to the inability to terminate or
mitigate expenses under operating leases and other third-party supply
contracts, unanticipated losses
of revenue from remaining TDS customers as we exit the business and timing differences between
declines in TDS revenues and corresponding reductions in employee expenses and fixed costs.
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 clients rights. These claims,
regardless of merit, may consume valuable management time, result in costly litigation or cause
product shipment delays, all of which could seriously harm our business and operating results.
Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief
that could effectively block our ability to make, use, sell or otherwise practice our intellectual
property, whether or not patented or described in pending patent applications, or to further
develop or commercialize our products in the U.S. and abroad and could result in the award of
substantial damages against us.
We may be required to enter into royalty or licensing agreements with third parties claiming
infringement by us of their intellectual property in order to settle these claims. These royalty or
licensing agreements, if available, may not have terms that are acceptable to us. In addition, if
we are forced to enter into a license agreement with terms that are unfavorable to us, our
operating results would be materially harmed.
We may also be required to indemnify our clients for losses they may incur under
indemnification agreements if we are found to have violated the intellectual property rights of
others. 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 II
Item 1, 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 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.
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.
We intend to continue to market and distribute our current and future products and services
through existing and other relationships both in and outside of the United States. There are no
minimum purchase obligations applicable to any existing distributor or other sales and marketing
partners and we do not expect to have any guarantees of continuing orders. Failure by our existing
and future distributors or other sales and marketing partners to generate significant revenues or
our failure to establish additional distribution or sales and marketing alliances or changes in the
industry that render third party distribution networks obsolete could have a material adverse
effect on our business, operating results and financial condition. In addition, 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.
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In addition, distributors and other sales and marketing partners may become our
competitors with respect to the products they distribute either by developing a competitive product
themselves or by distributing a competitive offering. For example, outside sales partners of
Authorize.Net products and services are permitted to and generally do market and sell competing
products and services.
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 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 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 ACH 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 Could Be Subject to Liability as a Result of Security Breaches, Service Interruptions by Cyber
Terrorists or Fraudulent or Illegal Use of Our Services.
Because some of our activities involve the storage and transmission of confidential personal
or proprietary information, such as credit card numbers and social security numbers, and because we
are a link in the chain of e-commerce, security breaches, service interruptions and fraud schemes
could damage our reputation and expose us to a risk of loss or litigation and possible monetary
damages. Cyber terrorists have periodically interrupted, and may continue to interrupt, our payment
gateway services in attempts to extort payments from us or disrupt commerce. Our payment gateway
services may be susceptible to credit card and other payment fraud schemes, including unauthorized
use of credit cards or bank accounts, identity theft or merchant fraud. We expect that technically
sophisticated criminals will continue to attempt to circumvent our anti-fraud systems. If such
fraud schemes become widespread or otherwise cause merchants to lose confidence in our services in
particular, or in Internet systems generally, our business could suffer.
In addition, the 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 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.
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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
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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 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. |
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 for claims not
known at the time of acquisition as well as for assumed
obligations. |
We Need to Continue to Improve or Implement our Procedures and Controls.
Requirements adopted by the SEC in response to the passage of the Sarbanes-Oxley Act of 2002
require annual review and evaluation of our internal controls over financial reporting, and
attestation of these systems by our independent registered public accounting firm. In January 2006, we
re-evaluated our disclosure controls and procedures for the first three quarters of fiscal 2005 and
concluded, based upon managements January 2006 evaluation of those disclosure controls and
procedures, that as of March 31, June 30, September 30, and December 31, 2005, our disclosure
controls and procedures were not fully effective as of those dates to provide a reasonable level of
assurance of reaching the Companys disclosure control objectives. Specifically at December 31,
2005, we had material weaknesses in our procedures for income tax accounting and our ability to
properly account and report complex transactions and we restated our financial results for the year
ended December 31, 2004 and the quarterly periods ended March 31, June 30 and September 30, 2005 to
correct our reporting for income taxes. In addition, in connection with the audit of our financial
statements for 2005, management identified an error in accounting and reporting the sale of the INS
business in the statement of cash flows, which has been identified as a material weakness.
Previously, we had evaluated our disclosure controls and procedures as of March 31 and September
30, 2005 and found them effective to provide a reasonable level of assurance of reaching our
disclosure control objectives. However, our previous evaluation as of September 30, 2005 had
identified a separate material weakness as a result of which adjustments were needed to properly
account for the gain on the sale of our INS business. During the first quarter of 2006, we took
certain steps to address these matters. We continue to evaluate such disclosure controls and
procedures, and may modify, enhance or supplement them as appropriate in the future. There can be
no assurance that we will be able to maintain compliance with all of the new requirements.
Any modifications, enhancements or supplements to our internal control systems or in
documentation of such internal control systems could be costly to prepare or implement, divert
attention of management or finance staff, and may cause our operating expenses to increase over the
ensuing year. Our stock price may be adversely affected if our internal controls over financial
reporting are not effective.
Our Business May Be Harmed by Errors in Our Software.
The software that we develop and license to clients, and that we also use in providing our
transaction processing and contact center services, is extremely complex and contains hundreds of
thousands of lines of computer code. Large, complex software systems such as ours are susceptible
to errors. The difficulty of preventing and detecting errors in our software is compounded by the
fact that we
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maintain multiple versions of our systems to meet the differing requirements of our
major clients, and must implement frequent modifications to these systems in response to these
clients evolving business policies and technical requirements. Our software
design, development and testing processes are not always adequate to detect errors in our software
prior to its release or commercial use. As a result, we have from time to time discovered, and may
likely in the future discover, errors in software that we have put into commercial use for our
clients, including some of our largest clients. Because of the complexity of our systems and the
large volume of transactions they process on a daily basis, we sometimes have not detected software
errors until after they have affected a significant number of transactions. Software errors can
have the effect of causing clients that utilize our products and services to fail to comply with
their intended credit or business policies, or to fail to comply with legal, credit card, and
banking requirements, such as those under the Fair Credit Reporting Act, Gramm-Leach-Bliley Act,
NACHA, MasterCards Site Data Protection (SDP) Standard, Visas Cardholder Information Security
Program (CISP) and Payment Card Industrys (PCI) Security Standard.
Such errors, particularly if they affect a major client, 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
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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 client or its subscribers 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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our clients may terminate or fail to renew their agreements with us or reduce the products and
services they purchase from us. |
Our errors and omissions insurance may not adequately compensate us for losses that may occur
due to software errors. It is also possible that such insurance might cease to be available to us
on commercially reasonable terms or at all.
Our Quarterly Operating Results May Fluctuate.
Our operating results are difficult to predict and may fluctuate significantly from quarter to
quarter. If our operating results fall below the expectations of investors or public market
analysts, the price of our common stock could fall dramatically. Our common stock price could also
fall dramatically if investors or public market analysts reduce their estimates of our future
quarterly operating results, whether as a result of information we disclose, or based on industry,
market or economic trends, or other factors.
Our revenues are difficult to forecast for a number of reasons:
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Seasonal and retail trends affect our transaction
revenues, in both our Payment Processing and TDS
businesses, as well as our other products and services.
Transaction revenues historically have represented the
majority of our total revenues. As a result, our revenues
can fluctuate. For example, our revenues generally have
been highest in the fourth quarter of each calendar year,
particularly in the holiday shopping season between
Thanksgiving and Christmas. In addition, marketing
initiatives undertaken by our clients or their
competitors may significantly affect the number of
transactions we process. |
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Our decision to exit the TDS business will affect our
margins, revenue and net income because of the
uncertainty relating to the loss of revenue from TDS
customers such as Sprint Nextel, timing of the transition
of TDS customers to other vendors, reduced revenues from
remaining TDS customers, the costs associated with
servicing customers as specified in their contracts, and
timing differences between declines in TDS revenues and
corresponding reductions in employee expenses and fixed
costs. |
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The risk factors described above under the headings We Are in
the Midst of Focusing the Company on the Payment
Processing Segment and Exiting Our TDS Business. If We
Are Unable to Successfully Complete This Change Quickly
and Smoothly, Our Business, Operating Results and
Financial Condition Would Be Harmed. Our Plans For the
Restructuring of Our Company Are Complex, and Our Failure
to Complete The Restructuring Effectively Would Adversely
Affect Our Business. and We Expect Our Revenue to Decline
Significantly in the Foreseeable Future as Compared to
Historical Levels Due to Our Decision to Exit the TDS
Business. |
Most of our expenses, particularly employee compensation and facilities, are relatively fixed.
As a result, even relatively small variations in the timing of our revenues may cause significant
variations in our quarterly operating results and may result in quarterly losses.
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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. See Note 4 to the unaudited condensed
consolidated financial statements for further discussion on share-based compensation.
As a result of these factors, we believe that quarter-to-quarter comparisons of our results of
operations are not necessarily meaningful. You should not rely on our quarterly results of
operations to predict our future performance.
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
currently 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. |
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providers of ACH services including Fedetety Infromation
Services, Inc., Telecheck
International, Inc., CheckFree Corporation and Electronic
Clearing House, 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.
Competitors in our TDS business may also aggressively seek to solicit our remaining TDS customers
now that we have announced our decision to exit the TDS business, which may impact the orderly
transition from that business.
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.
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 limited number of U.S. and foreign patents, and have pending applications for
additional patents, but we cannot be certain that any additional patents will be issued on those
applications, that any of our current or future patents will protect our business or technology
against competitors that develop similar technology or products or services or provide us with a
competitive advantage, or that others will not claim rights in our patents or our proprietary
technologies.
Patents issued and patent applications filed relating to products used in the wireless
telecommunications and payment processing industry are numerous and it may be the case that current
and potential competitors and other third parties have filed or will file applications for, or have
received or will receive, patents or obtain additional proprietary rights relating to products used
or proposed
37
to be used by us. We may not be aware of all patents or patent applications that may
materially affect our ability to make, use or sell any current or future products or services.
The laws of some countries in which our products are licensed do not protect our products and
intellectual property rights to the same extent as U.S. laws. We generally enter into
non-disclosure agreements with our employees and clients and restrict access to, and distribution
of, our proprietary information. Nevertheless, we may be unable to deter misappropriation of our
proprietary information
or detect unauthorized use of and take appropriate steps to enforce our intellectual property
rights. Our competitors also may independently develop technologies that are substantially
equivalent or superior to our technology.
We 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. The application of many of these laws with regard to electronic commerce is
currently unclear. In addition, it is possible that a number of laws and regulations may be
applicable or may be adopted in the future with respect to conducting business over the Internet
concerning matters such as taxes, pricing, content and distribution. If applied to us, any of the
foregoing rules and regulations could require us to change the way we do business in a way that
increases costs or makes our business more complex. In addition, violation of some statutes may
result in severe penalties or restrictions on our ability to engage in e-commerce, which could have
a material adverse effect on our business.
Our clients also include telecommunications companies that, to the extent that they
extend consumer credit, may be subject to federal and state regulations. In making credit
evaluations of consumers, performing fraud screening or user authentication, our clients are
subject to requirements of federal law, including the Equal Credit Opportunity Act, the Fair Credit
Reporting Act and the Gramm-Leach-Bliley Act and regulations thereunder, as well as state laws
which impose a variety of additional requirements. Privacy legislation may also affect the nature
and extent of the products or services that we can provide to clients as well as our ability to
collect, monitor and disseminate information subject to privacy protection. Although most of the
products and services we provide to the telecommunications industry, other than our ProFile
service, are not directly subject to these requirements, we must take these extensive and evolving
requirements into account in order to meet our clients needs. In some cases, consumer credit laws
require our clients to notify consumers of credit decisions made in connection with their
applications for telecommunications services, and we have contracted with some of our clients,
including Sprint Nextel, AT&T Wireless, and Dobson Communications, Inc., to provide such notices on
their behalf. Our software has in the past contained, and could in the future contain, undetected
errors affecting compliance by our clients with one or more of these legal requirements. Failure to
properly implement these requirements in our products and services in a timely, cost-effective and
accurate manner could result in liability, either directly or as indemnitor of our clients, damage
to our reputation and relationships with clients and a loss of business.
Consumer protection laws in the areas of privacy, credit and financial transactions have
been evolving rapidly at the state, federal and international levels. As the electronic
transmission, processing and storage of financial information regarding consumers continues to grow
and develop, it is likely that more stringent consumer protection laws may impose additional
burdens on companies involved in such transactions 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 costs
and to make some of our activities more time-consuming. If we fail to comply with any of these
regulations, we could be subject to legal actions by regulatory authorities or private parties.
38
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.
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. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The shares shown as repurchased in the table below were surrendered by Lightbridge employees
in order to meet tax withholding obligations in connection with the vesting of an installment of
their restricted stock awards. Below is a summary of these transactions for the three months ended
September 30, 2006:
ISSUER PURCHASES OF EQUITY SECURITIES
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(a) Total Number of |
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(b) Average |
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Shares (or Units) |
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Price Paid per |
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Period |
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Purchased |
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Share (or Unit) |
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July 1, 2006 July 31, 2006 |
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August 1, 2006 August 31, 2006 (1) |
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572 |
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$ |
11.23 |
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September 1, 2006 September 30, 2006 |
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Total shares repurchased |
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572 |
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$ |
11.23 |
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(1) |
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Represents 572 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 November 7, 2006, the Company has not made any repurchases
under this program.
39
Item 6. Exhibits
(a) Exhibits
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Filed with |
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Incorporated by Reference |
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this |
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Exhibit |
Exhibit No. |
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Description |
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Form 10-Q |
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Form |
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Filing Date |
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No. |
3.1
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Amended and Restated Certificate of Incorporation
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S-1
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August 27, 1996
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3.2 |
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3.2
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Amended and Restated By-Laws
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S-1
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June 21, 1996
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3.4 |
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3.3
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Amendment to Amended and Restated By-Laws, adopted October 29, 1998
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10-Q
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November 13, 1998
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3.1 |
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4.2
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Rights Agreement dated November 14, 1997 with American Stock Transfer and Trust Company as Rights Agent
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8-A
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November 21, 1997
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1 |
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4.3
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Form of Certificate of Designation of Series A Participating Cumulative Preferred Stock
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8-A
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November 21, 1997
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A |
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4.4
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Form of Rights Certificate
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8-A
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November 21, 1997
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B |
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10.1
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Early Lease Termination Agreement with Region of Queens Municipality for Liverpool, Nova Scotia Premises
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8-K
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August 17, 2006
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10.1 |
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10.2
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Oldham Offer Letter
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8-K
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September 6, 2006
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10.1 |
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31.1
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Certification of the chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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X |
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31.2
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Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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X |
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32.1
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Certification of the chief executive officer and the chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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X |
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40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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LIGHTBRIDGE, INC. |
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Date: November 9, 2006
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By:
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/s/ Timothy C. OBrien
Timothy C. OBrien
Vice President, Finance and Administration,
Chief Financial Officer and Treasurer
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(Principal Financial and Chief Accounting Officer) |
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41