EXHIBIT 99.9
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Lionbridge Technologies, Inc.:
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, redeemable preferred stock and stockholders' deficit and cash
flows present fairly, in all material respects, the financial position of
Lionbridge Technologies, Inc. at December 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. The
consolidated financial statements give retroactive effect to the mergers of
Harvard Translations, Inc. and INT'L.com, Inc. on May 18, 2000 and May 22, 2000,
respectively, in transactions accounted for as poolings of interests, as
described in Note 4 to the consolidated financial statements. We did not audit
the financial statements of INT'L.com, Inc., which statements reflect total
assets of $23,805,000 and $11,113,000 as of December 31, 1999 and 1998,
respectively, and total revenues of $34,902,000, $17,317,000 and $9,407,000 for
each of the three years in the period ended December 31, 1999. Those statements
were audited by other auditors whose report thereon has been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts included
for INT'L.com, Inc., is based solely on the report of the other auditors. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 24, 2000, except as to the poolings of interests
described in Note 4 which are as of May 22, 2000
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
INT'L.com, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets, as restated,
of INT'L.com, Inc. and Subsidiaries (a Delaware corporation formerly known as IC
Global Services, Inc.) as of December 31, 1999 and 1998, and the related
consolidated statements of operations, redeemable preferred stock, stockholders'
equity (deficit) and comprehensive loss, as restated, and cash flows for each of
the three years in the period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of INT'L.com,
Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 3, 2000
F-2
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $12,350 $ 1,199
Marketable securities..................................... -- 2,194
Accounts receivable, net of allowances of $1,122 and $722
at December 31, 1999 and 1998, respectively............. 15,063 11,280
Work in process........................................... 5,119 4,515
Other current assets...................................... 1,410 1,383
------- -------
Total current assets.................................... 33,942 20,571
Property and equipment, net................................. 6,388 3,556
Goodwill and other intangible assets, net................... 19,948 9,942
Other assets................................................ 417 522
------- -------
Total assets............................................ $60,695 $34,591
======= =======
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
Current liabilities:
Amounts owed to banks..................................... $ -- $ 416
Short-term debt and current portion of long-term debt..... 9,636 9,009
Current portion of capital lease obligations.............. 959 215
Accounts payable.......................................... 9,621 5,752
Accrued compensation and benefits......................... 4,798 3,338
Accrued outsourcing....................................... 2,664 1,223
Other accrued expenses.................................... 4,081 4,602
Deferred revenue.......................................... 3,619 419
Deferred income taxes..................................... 224 --
------- -------
Total current liabilities............................... 35,602 24,974
------- -------
Long-term debt, less current portion........................ 15,472 3,703
Capital lease obligations, less current portion............. 307 240
Other long-term liabilities................................. 269 188
Redeemable preferred stock, $0.01 par value:
Series A convertible preferred stock, 867,047 and
18,138,361 shares authorized at December 31, 1999 and
1998, respectively; 867,047 and 14,138,361 shares issued
and outstanding at December 31, 1999 and 1998,
respectively............................................ 1,811 17,229
Series B redeemable convertible preferred stock, 3,500,000
and 2,100,000 shares authorized at December 31, 1999 and
1998, respectively; 2,621,477 and 1,572,725 shares
issued and outstanding at December 31, 1999 and 1998,
respectively............................................ 10,586 6,026
Series C redeemable preferred stock, 5,000 shares
authorized, issued and outstanding at December 31, 1999
and 1998................................................ 537 510
Series D nonvoting convertible preferred stock, 0 and 200
shares authorized at December 31, 1999 and 1998,
respectively; 0 and 140 shares issued and outstanding at
December 31, 1999 and 1998, respectively................ -- --
Series D redeemable preferred stock, 1,100,000 and 0
shares authorized at December 31, 1999 and 1998,
respectively; 936,991 and 0 shares issued and
outstanding at December 31, 1999 and 1998,
respectively............................................ 6,853 --
Commitments (Note 7)
Stockholders' deficit:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized at December 31, 1999; no shares issued and
outstanding............................................. -- --
Common stock, $0.01 par value; 100,000,000 and 25,950,867
shares authorized at December 31, 1999 and 1998,
respectively; 21,323,790 and 4,603,397 shares issued and
outstanding at December 31, 1999 and 1998,
respectively............................................ 213 46
Additional paid-in capital................................ 47,239 1,614
Accumulated deficit....................................... (55,476) (19,872)
Deferred compensation..................................... (2,837) --
Subscriptions receivable.................................. (152) (446)
Treasury stock, at cost................................... (167) --
Accumulated other comprehensive income.................... 438 379
------- -------
Total stockholders' deficit............................. (10,742) (18,279)
------- -------
Total liabilities, redeemable preferred stock and
stockholders' deficit................................ $60,695 $34,591
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Revenue..................................................... $ 88,764 $59,754 $39,443
Cost of revenue............................................. 62,644 39,885 27,211
-------- ------- -------
Gross profit............................................ 26,120 19,869 12,232
-------- ------- -------
Operating expenses:
Sales and marketing....................................... 10,141 5,053 2,334
General and administrative................................ 29,222 16,393 12,211
Research and development.................................. 2,216 265 202
Amortization of acquisition-related intangible assets..... 6,113 2,445 4,400
Merger, restructuring and other charges................... 1,197 501 541
Acquired in-process research and development.............. 300 -- --
Stock-based compensation.................................. 730 -- --
-------- ------- -------
Total operating expenses................................ 49,919 24,657 19,688
-------- ------- -------
Loss from operations........................................ (23,799) (4,788) (7,456)
Interest expense:
Interest on outstanding debt.............................. (2,349) (816) (156)
Accretion of discount on subordinated notes payable....... (6,009) -- --
Other income (expense), net................................. (351) 69 (475)
-------- ------- -------
Loss before income taxes.................................... (32,508) (5,535) (8,087)
Provision for (benefit from) income taxes................... 699 (306) (39)
-------- ------- -------
Net loss.................................................... (33,207) (5,229) (8,048)
Accrued dividends on preferred stock........................ (2,397) (1,248) (1,062)
-------- ------- -------
Net loss attributable to common stockholders................ $(35,604) $(6,477) $(9,110)
======== ======= =======
Basic and diluted net loss per share attributable to common
stockholders.............................................. $ (3.08) $ (1.64) $ (3.29)
Shares used in computing basic and diluted net loss per
share attributable to common stockholders................. 11,560 3,938 2,770
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF SHARES)
REDEEMABLE COMMON STOCK RETAINED
PREFERRED STOCK --------------------- ADDITIONAL EARNINGS
---------------------- PAR PAID-IN (ACCUMULATED DEFERRED SUBSCRIPTIONS
SHARES AMOUNT SHARES VALUE CAPITAL DEFICIT) COMPENSATION RECEIVABLE
----------- -------- ---------- -------- -------- ----------- ----------- -----------
Balance at December 31,
1996....................... 13,673,098 $13,696 2,770,052 $ 27 $ 8 $ 1,715
Stock options exercised...... 375,385 4 52
Issuance of Series A
convertible preferred
stock...................... 570,010 570
Repurchase of Series A
convertible preferred stock
to be retired.............. (971,654) (972)
Accrual of dividends on
preferred stock............ 1,062 (1,062)
Comprehensive loss:
Net loss..................... (8,048)
Other comprehensive income:
Translation adjustment...
Comprehensive loss...........
----------- ------- ---------- ---- ------- --------
Balance at December 31,
1997....................... 13,271,454 14,356 3,145,437 31 60 (7,395)
Issuance of common and
preferred stock in
connection with business
combinations............... 1,095,514 2,661 1,025,699 11 899
Stock options exercised...... 316,662 3 39
Issuance on common stock in
exchange for subscriptions
receivable................. 115,599 1 495 $(496)
Issuance of Series B
redeemable preferred
stock...................... 1,344,258 5,000
Dividend distribution........ 5,000 500 (6,000)
Accrual of dividends on
preferred stock............ 1,248 (1,248)
Accretion of common stock to
redemption value........... 121
Collection of subscriptions
receivable................. 50
Comprehensive loss:
Net loss..................... (5,229)
Other comprehensive loss:
Translation adjustment...
Comprehensive loss...........
----------- ------- ---------- ---- ------- -------- -----
ACCUMULATED TOTAL
TREASURY STOCK OTHER STOCKHOLDERS'
------------------- COMPREHENSIVE EQUITY COMPREHENSIVE
SHARES AMOUNT INCOME (DEFICIT) LOSS
-------- -------- ------------ ----------- ------------
Balance at December 31,
1996....................... $ 1,750
Stock options exercised...... 56
Issuance of Series A
convertible preferred
stock......................
Repurchase of Series A
convertible preferred stock
to be retired..............
Accrual of dividends on
preferred stock............ (1,062)
Comprehensive loss:
Net loss..................... (8,048) $ (8,048)
Other comprehensive income:
Translation adjustment... $ 741 741 741
--------
Comprehensive loss........... $ (7,307)
----- ------- ========
Balance at December 31,
1997....................... 741 (6,563)
Issuance of common and
preferred stock in
connection with business
combinations............... 910
Stock options exercised...... 42
Issuance on common stock in
exchange for subscriptions
receivable................. --
Issuance of Series B
redeemable preferred
stock......................
Dividend distribution........ (6,000)
Accrual of dividends on
preferred stock............ (1,248)
Accretion of common stock to
redemption value........... 121
Collection of subscriptions
receivable................. 50
Comprehensive loss:
Net loss..................... (5,229) $ (5,229)
Other comprehensive loss:
Translation adjustment... (362) (362) (362)
--------
Comprehensive loss........... $ (5,591)
----- ------- ========
F-5
REDEEMABLE COMMON STOCK RETAINED
PREFERRED STOCK --------------------- ADDITIONAL EARNINGS
---------------------- PAR PAID-IN (ACCUMULATED DEFERRED SUBSCRIPTIONS
SHARES AMOUNT SHARES VALUE CAPITAL DEFICIT) COMPENSATION RECEIVABLE
----------- -------- ---------- -------- -------- ----------- ----------- -----------
Balance at December 31,
1998....................... 15,716,226 23,765 4,603,397 46 1,614 (19,872) (446)
Issuance of common and
preferred stock in
connection with business
combinations............... 936,991 5,830 2,073,953 21 3,785
Issuance of warrants in
connection with debt
financing.................. 6,221
Deferred compensation........ 3,803 $(3,803)
Amortization of deferred
compensation............... 730
Reversal of deferred
compensation due to option
forfeitures................ (236) 236
Stock options exercised...... 765,741 8 290
Accrual of dividends on
preferred stock............ 2,397 (2,397)
Accretion of common stock to
redemption value........... 120
Warrants exercised........... 1,533,050 15 5
Issuance of common stock in
connection with initial
public offering............ 3,500,000 35 31,725
Issuance of Series B
redeemable preferred
stock...................... 1,048,752 3,900
Redemption and conversion of
preferred stock............ (13,271,454) (16,105) 8,847,649 88 (88)
Collection of subscriptions
receivable................. 147
Purchase of treasury stock... 147
Comprehensive loss:
Net loss..................... (33,207)
Other comprehensive income:
Translation adjustment...
Comprehensive loss...........
----------- ------- ---------- ---- ------- -------- ------- -----
Balance at December 31,
1999....................... 4,430,515 $19,787 21,323,790 $213 $47,239 $(55,476) $(2,837) $(152)
=========== ======= ========== ==== ======= ======== ======= =====
ACCUMULATED TOTAL
TREASURY STOCK OTHER STOCKHOLDERS'
------------------- COMPREHENSIVE EQUITY COMPREHENSIVE
SHARES AMOUNT INCOME (DEFICIT) LOSS
-------- -------- ------------ ----------- ------------
Balance at December 31,
1998....................... 379 (18,279)
Issuance of common and
preferred stock in
connection with business
combinations............... 3,806
Issuance of warrants in
connection with debt
financing.................. 6,221
Deferred compensation........ --
Amortization of deferred
compensation............... 730
Reversal of deferred
compensation due to option
forfeitures................ --
Stock options exercised...... 298
Accrual of dividends on
preferred stock............ (2,397)
Accretion of common stock to
redemption value........... 120
Warrants exercised........... 20
Issuance of common stock in
connection with initial
public offering............ 31,760
Issuance of Series B
redeemable preferred
stock...................... --
Redemption and conversion of
preferred stock............ --
Collection of subscriptions
receivable................. 147
Purchase of treasury stock... 41,197 $(167) (20)
Comprehensive loss:
Net loss..................... (33,207) $(33,207)
Other comprehensive income:
Translation adjustment... 59 59 59
--------
Comprehensive loss........... $(33,148)
------ ----- ----- -------- ========
Balance at December 31,
1999....................... 41,197 $(167) $ 438 $(10,742)
====== ===== ===== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
LIONBRIDGE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(33,207) $(5,229) $(8,048)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of acquisition-related intangible assets... 6,113 2,445 4,400
Stock-based compensation................................ 730 -- --
Deferred executive compensation expense................. -- -- (232)
Accretion of discount on subordinated notes payable..... 6,009 -- --
Loss on disposal of fixed assets........................ -- 23 --
Equity in (income) loss of joint ventures and other
unconsolidated entities................................ 21 (57) --
Acquired in-process research and development............ 300 -- --
Deferred rent........................................... (36) (22) 23
Depreciation and amortization of property and
equipment.............................................. 3,277 1,754 1,638
Provision for doubtful accounts......................... 552 328 420
Deferred income taxes................................... 519 (313) (29)
Foreign currency (gain) loss on intercompany
transactions........................................... 759 (67) 353
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable................................... (2,304) (82) 300
Work in process....................................... (901) (1,361) (645)
Other current assets.................................. 404 (480) 379
Other assets.......................................... 52 (193) (78)
Accounts payable...................................... 2,250 723 (324)
Accrued compensation and benefits..................... 1,459 148 1,040
Other accrued expenses................................ 926 637 41
Deferred revenue...................................... 2,929 (950) (426)
-------- ------- -------
Net cash used in operating activities............... (10,148) (2,696) (1,188)
-------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (3,450) (2,081) (1,583)
Payments for businesses acquired, net of cash acquired.... (4,150) (3,340) (18)
Maturities (purchases) of marketable securities, net...... 2,194 (2,194) 49
Payments for Asian asset purchase, net of cash acquired... -- -- (85)
Transfer of funds from escrow............................. -- -- 600
Other..................................................... -- -- (57)
-------- ------- -------
Net cash used in investing activities............... (5,406) (7,615) (1,094)
-------- ------- -------
Cash flows from financing activities:
Net increase (decrease) in amounts owed to banks.......... (348) 328 (522)
Net increase (decrease) in short-term debt................ (18) 6,109 1,805
Proceeds from issuance of long-term debt and warrants..... 14,000 -- 131
Repayment of long-term debt............................... (6,000) (6) (217)
Proceeds from issuance of preferred stock................. 3,901 5,000 570
Redemption of preferred stock............................. (16,105) -- --
Net proceeds from initial public offering of common
stock................................................... 31,760 -- --
Proceeds from exercise of stock options................... 297 42 56
Payments on capital lease obligations..................... (265) 138 168
Purchase of treasury stock................................ (20) -- --
Collection of subscriptions receivable.................... 147 50 --
Dividends paid............................................ (400) (1,600) --
Other..................................................... 118 26 --
-------- ------- -------
Net cash provided by financing activities........... 27,067 10,087 1,991
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 11,513 (224) (291)
Effects of exchange rate changes on cash and cash
equivalents............................................... (362) (53) (130)
Cash and cash equivalents at beginning of year.............. 1,199 1,476 1,897
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 12,350 $ 1,199 $ 1,476
======== ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
LIONBRIDGE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
NATURE OF THE BUSINESS
Lionbridge Technologies, Inc. and its subsidiaries (collectively,
"Lionbridge" or the "Company") is a provider of globalization and other
services, primarily to software publishers, computer hardware manufacturers, and
companies in the telecommunications, financial services and life sciences
industries. Globalization services, including localization, internationalization
and testing, enable simultaneous worldwide release and ongoing maintenance of
products and product-related technical support, training materials, and sales
and marketing information in multiple languages. Lionbridge has its head office
in the United States, with operations in France, Germany, Ireland, The
Netherlands, China, Japan, Canada, Brazil, South Korea and the United States.
FORMATION OF LIONBRIDGE AND BASIS OF PRESENTATION
Lionbridge was incorporated on September 11, 1996 in order to effect the
acquisition of certain elements of the localization businesses of Stream
International Holdings, Inc. ("Stream"). Funding for the acquisition was
provided through the issuance of common and preferred stock in Lionbridge and in
a majority-owned subsidiary of Lionbridge.
On December 23, 1996, Lionbridge entered into an agreement with Stream to
acquire its localization businesses in Ireland, The Netherlands and France (see
Note 4). The purchase accounting for the acquisition of the businesses was
recorded as though the purchase had occurred on December 31, 1996, as the
results of operations and changes in financial position between December 23,
1996 and this date were immaterial.
The December 23, 1996 agreement with Stream also contemplated the
acquisition of certain businesses in Asia. However, Lionbridge did not acquire
such businesses as planned, and renegotiated the agreement in July 1997. As a
result, a note payable for $840,000 issued to Stream in contemplation of the
December 23, 1996 agreement was canceled, and restricted cash of $600,000, which
was held in escrow at December 31, 1996 and which was to be paid to Stream on
completion of the Asian acquisition, was returned to Lionbridge, net of certain
payments otherwise due.
On July 3, 1997, Lionbridge entered into a new agreement with Stream to
purchase work in process and certain other assets of Stream's Japanese, Chinese
and Taiwanese localization businesses as of April 1, 1997, and of the South
Korean localization business as of July 3, 1997, in exchange for approximately
$100,000 of cash plus the assumption of liabilities of $317,000 for the
completion of work under existing customer contracts. As these assets did not
comprise businesses, the Company allocated the purchase price based on their
fair values.
On August 25, 1999, Lionbridge consummated an initial public offering of its
common stock. In connection with this offering, Lionbridge sold 3,500,000 shares
of its common stock and received net proceeds of approximately $31,760,000.
SUBSEQUENT EVENTS
On May 18, 2000, as more fully described in Note 4, Lionbridge completed its
acquisition of all of the capital stock of Harvard Translations, Inc. ("HT") by
means of a merger. As a result of the merger, HT became a wholly owned
subsidiary of Lionbridge. In addition, as more fully described in Note 4, on
May 22, 2000, Lionbridge completed its acquisition of all of the capital stock
of INT'L.com, Inc. ("INT'L.com") by means of a merger. As a result of the
merger, INT'L.com became a wholly owned
F-8
1. BASIS OF PRESENTATION: (CONTINUED)
subsidiary of Lionbridge. These transactions are referred to herein as the
"mergers." These consolidated financial statements have been prepared following
the pooling-of-interests method of accounting for the mergers and therefore
reflect the combined financial position, operating results and cash flows of
Lionbridge, HT and INT'L.com and their subsidiaries as if they had been combined
for all periods presented.
Information with respect to HT and INT'L.com common stock, options and
warrants has been retroactively restated in connection with their mergers with
Lionbridge to reflect their applicable merger per share exchange ratios of
3.8864 and 0.7567, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements of Lionbridge reflect the
application of certain significant accounting policies as described below:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Lionbridge and its wholly owned subsidiaries from the effective date of their
acquisition or formation. All significant intercompany accounts and transactions
have been eliminated in the consolidated financial statements.
REVENUE RECOGNITION
Lionbridge recognizes revenue from the provision of services to its
customers primarily on the percentage-of-completion method of accounting, based
on all costs incurred to date as a percentage of management's estimates of total
costs of individual contracts. Anticipated losses by project, if any, are
recognized in the period in which determined.
ADVERTISING COSTS
Advertising costs are included in sales and marketing expenses and are
expensed as incurred. Advertising costs were approximately $281,000, $160,000
and $56,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency for each of Lionbridge's foreign operations is the
local currency of the country in which those operations are based. Revenues and
expenses of foreign operations are translated into U.S. dollars at the average
rates of exchange during the year. Assets and liabilities of foreign operations
are translated into U.S. dollars at year-end rates of exchange. Resulting
cumulative translation adjustments are reflected as a separate component of
accumulated other comprehensive income in stockholders' equity (deficit).
Foreign currency transaction gains or losses, arising from exchange rate
fluctuations on transactions denominated in currencies other than the functional
currencies, are included in other income (expense), net in the consolidated
statements of operations and were $356,000, $57,000 and $(472,000) for the years
ended December 31, 1999, 1998 and 1997, respectively.
For the purpose of the disclosure of comprehensive loss, Lionbridge does not
record tax provisions or benefits for the net changes in foreign currency
translation adjustments, as Lionbridge intends to permanently reinvest
undistributed earnings in its foreign subsidiaries.
F-9
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Included in cash
equivalents at December 31, 1999 and 1998 are funds held in money market
accounts.
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for certain Investments in Debt and Equity Securities," the
Company has classified certain investments at December 31, 1998 as
held-to-maturity. Held-to-maturity securities are reported at amortized cost,
which approximates fair market value. The Company's held-to-maturity securities
at December 31, 1998 consisted of certificates of deposit with an average
maturity date of 30 days.
WORK IN PROCESS
Work in process represents the value of work performed but not billed. Work
in process is calculated using the percentage-of-completion method based on
total anticipated costs and is stated at cost plus estimated profit, but not in
excess of net realizable value. Billing of amounts in work in process occurs
according to customer-agreed payment schedules or upon completion of specified
project milestones. All of Lionbridge's projects in work in process are expected
to be billed and collected within one year.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets using the straight-line method, based upon the
following asset lives:
Computer software and equipment 1 to 5 years
Furniture and office equipment 3 to 7 years
Leasehold improvements Shorter of lease term or useful life
of asset
Upon retirement or other disposition, the cost and related accumulated
depreciation of the assets are removed from the accounts and the resulting gain
or loss is reflected in the determination of net income or loss. Expenditures
for maintenance and repairs are expensed as incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of the net assets
of businesses acquired. Goodwill is amortized using the straight-line method
over five years. Other intangible assets arose from the acquisitions of
VeriTest, Inc. ("VeriTest") and International Language Engineering Corporation
F-10
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
("ILE") (see Note 4) and include the following which are being amortized on a
straight-line basis over the following estimated useful lives:
ESTIMATED
USEFUL LIFE
-----------
VeriTest:
Acquired workforce........................................ 5 years
Trade name................................................ 5 years
ILE:
Installed customer base................................... 5 years
Acquired workforce........................................ 2 years
Completed technology...................................... 3 years
LONG-LIVED ASSETS
Lionbridge periodically evaluates the net realizable value of long-lived
assets, including goodwill and property and equipment, relying on a number of
factors including operating results, business plans, economic projections and
anticipated future cash flows. An impairment in the carrying value of an asset
is assessed when the undiscounted, expected future operating cash flows derived
from the asset are less than its carrying value.
MINORITY INTEREST
Other assets at December 31, 1999 and 1998 include minority investments
accounted for under the equity method of $59,000 and $116,000, respectively. At
December 31, 1999 and 1998, the Company had a 25% minority equity investment in
the capital stock of Language Partners, Inc., headquartered in Chicago,
Illinois. At December 31, 1998, the Company also had a 32.8% minority equity
investment in the capital stock of Motus!, headquartered in Paris, France. The
Company purchased the remaining equity interest in Motus! on September 30, 1999,
subsequent to which the operations of Motus! have been fully consolidated in the
accompanying consolidated statements of operations. The Company accounted for
its acquisition of the remaining equity interest in Motus! as a purchase
transaction (see Note 4). The Company's proportionate share of the income (loss)
of its equity investments is included in other income (expense), net in the
accompanying consolidated statements of operations.
INCOME TAXES
Deferred income taxes are recognized based on the temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the temporary differences are
expected to reverse. Valuation allowances are provided if, based on the weight
of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic and diluted earnings per share are computed in accordance with SFAS
No. 128, "Earnings per Share." Basic net loss per share attributable to common
stockholders is computed by dividing net loss attributable to common
stockholders by the weighted average number of shares of common stock
outstanding. There is no difference between basic and diluted earnings per share
since potential common shares from the conversion of preferred stock and
exercises of stock options and warrants are anti-dilutive for all periods
presented.
F-11
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
Lionbridge accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to the fair
market value of Lionbridge's common stock at the date of grant. When the
exercise price of stock options granted to employees is less than the fair
market value of common stock at the date of grant, Lionbridge records that
difference multiplied by the number of shares under option as deferred
compensation, which is then amortized over the vesting period of the options.
Lionbridge has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," through disclosure only (see Note 9). All stock-based
awards to non-employees are accounted for at their fair value in accordance with
SFAS No. 123 and related guidance.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates. Estimates are used when accounting for the collectibility of
receivables, calculating revenue using the percentage-of-completion method, and
valuing intangible assets, deferred tax assets and net assets of businesses
acquired.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments which potentially subject Lionbridge to concentrations
of credit risk consist principally of cash and cash equivalents and trade
accounts receivables. The Company places its cash and cash equivalents with
financial institutions with high credit standing. Concentrations of credit risk
with respect to trade accounts receivable are limited due to the dispersion of
customers across different geographic regions. Lionbridge does not require
collateral or other security against trade receivable balances; however, it
maintains reserves for potential credit losses and such losses have been within
management's expectations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents, marketable
securities, accounts receivable, accounts payable, redeemable preferred stock
and debt, are carried in the consolidated financial statements at amounts that
approximate fair values at December 31, 1999, 1998 and 1997. Fair values are
based on quoted market prices and assumptions concerning the amount and timing
of estimated future cash flows and assumed discount rates, reflecting varying
degrees of perceived risk.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 was amended on July 7, 1999 by the issuance of SFAS
No. 137 ("SFAS 137"), "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--an
amendment of FASB Statement No. 133." SFAS 137 defers the implementation of
SFAS 133 by one year. SFAS 133, as amended, is effective for fiscal quarters
beginning after January 1, 2001 for the Company and its
F-12
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
adoption is not expected to have a material impact on the Company's financial
position or results of operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." This bulletin summarizes certain views of the staff on applying
generally accepted accounting principles to revenue recognition in financial
statements. The staff believes that revenue is realized or realizable and earned
when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the
seller's price to the buyer is fixed or determinable; and collectibility is
reasonably assured. The Company believes that its current revenue recognition
policy complies with the Commission's guidelines. SAB 101 is effective the
fourth quarter of 2000.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion
No. 25 and among other issues clarifies the following: the definition of an
employee for purposes of applying APB Opinion No. 25; the criteria for
determining whether a plan qualifies as a noncompensatory plan; the accounting
consequence of various modifications to the terms of previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January 12, 2000. The Company does not expect the
application of FIN 44 to have a material impact on the Company's financial
position or results of operations.
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31:
1999 1998
----------- ----------
Computer software and equipment..................... $10,206,000 $5,145,000
Furniture and office equipment...................... 2,501,000 1,193,000
Leasehold improvements.............................. 965,000 466,000
----------- ----------
13,672,000 6,804,000
Less: Accumulated depreciation and amortization..... (7,284,000) (3,248,000)
----------- ----------
Total............................................... $ 6,388,000 $3,556,000
=========== ==========
F-13
4. BUSINESS COMBINATIONS:
LOCALIZATION BUSINESS OF STREAM
On December 23, 1996, Lionbridge acquired the localization businesses of
Stream in Ireland, The Netherlands and France (see Note 1). In accordance with
the acquisition agreement, Lionbridge paid Stream aggregate cash consideration
of $11,300,000 in exchange for all of the outstanding common stock of R.R.
Donnelley Language Solutions International B.V. and Stream International
Language Solutions as well as the assumption of tax liabilities of $100,000
incurred in connection with the transaction. Goodwill of $9,224,000 was
initially recognized in connection with this acquisition.
In 1997, Lionbridge submitted a claim to Stream for the reimbursement of a
portion of the purchase consideration under the indemnity terms of the
December 23, 1996 agreement. This claim was ultimately resolved through a
settlement agreement with Stream, effective December 31, 1997 (see Note 6).
Under the terms of this agreement, the purchase price for the European
businesses was reduced by $531,000. This amount was deducted from goodwill at
December 31, 1997.
During 1999, 1998 and 1997, acquired net operating loss carryforwards of
approximately $1,540,000, $1,291,000 and $1,120,000, respectively, were utilized
to offset taxable income in Ireland, France and The Netherlands. As the deferred
tax assets associated with these losses had been fully reserved at the time of
the Stream acquisition, the benefits were recorded as reductions to goodwill of
$519,000, $207,000, and $112,000 in 1999, 1998 and 1997, respectively.
JAPANESE LANGUAGE SERVICES
On February 27, 1998, Lionbridge entered into an agreement to acquire all of
the outstanding stock of Japanese Language Services, Inc. ("JLS"), a company
based in Massachusetts with additional operations in Japan, for total initial
consideration of $2,323,000 consisting of cash of $2,237,000 and 286,959 shares
of common stock valued at $86,000. The shares of common stock may be redeemed,
at the option of the holder, at a price of $1.35 per share at any time from
July 2001 to September 2001. The carrying amount of the redeemable common stock
will be increased to the redemption amount of $387,000 over the 30-month period
ending July 2001. The agreement also required certain contingent stock
issuances, limited to 24,268 shares of common stock, and cash payments, limited
to $625,000, dependent on operating results of JLS through December 31, 1999.
This agreement was effective January 2, 1998, when operating control of JLS was
assumed by Lionbridge. The acquisition was accounted for using the purchase
method of accounting, and the results of JLS have been included in Lionbridge's
financial statements as of the effective date. The purchase price, including
direct costs of the acquisition, was allocated based on the fair values of the
acquired assets and liabilities assumed as follows:
Current assets.............................................. $ 935,000
Property and equipment...................................... 247,000
Current liabilities......................................... (789,000)
Goodwill.................................................... 1,999,000
----------
$2,392,000
==========
The initial calculation of goodwill did not include any anticipated
contingent consideration. Additional goodwill of $484,000 was subsequently
recorded through December 31, 1999 in connection with incremental payments and
the issuance of 24,268 additional shares of common stock valued at $35,000 made
under the terms of the original agreement. Goodwill was also increased by
$120,000 during each
F-14
4. BUSINESS COMBINATIONS: (CONTINUED)
of the years ended December 31, 1999 and 1998, respectively, related to the
accretion to the redemption amount of the redeemable common stock. Pro forma
statements of operations for the year ended December 31, 1997 would not differ
materially from reported results.
ILT SOLUTIONS GROUP
On April 1, 1998, Lionbridge acquired certain assets and operations of the
ILT Solutions Group of Lucent Technologies, Inc. for cash of $1,000,000. The
acquisition was accounted for using the purchase method of accounting. The
purchase price, including direct costs of the acquisition, was allocated to
current assets of $244,000, property and equipment of $299,000 and goodwill of
$470,000 based on their fair values at the acquisition date. The results of the
ILT Solutions Group are included in the accompanying consolidated financial
statements as of the date of the acquisition. Pro forma statements of operations
would not differ materially from reported results.
SPRACHE UND DOKUMENTATION GMBH
On May 19, 1998, Lionbridge's wholly owned subsidiary, INT'L.com, acquired
all of the assets and assumed certain liabilities of Sprache und Dokumentation
GmbH ("S&D"), a company based in Germany, for total consideration of $512,000,
consisting of cash of $200,000 and 72,575 shares of common stock valued at
$312,000. The acquisition was accounted for using the purchase method of
accounting, and the results of S&D have been included in the accompanying
consolidated financial statements as of the date of the acquisition. The
purchase price, including direct costs of the acquisition, was allocated based
on the fair values of the acquired assets and liabilities assumed as follows:
Property and equipment...................................... $ 99,000
Current liabilities......................................... (89,000)
Goodwill.................................................... 589,000
--------
$599,000
========
Pro forma statements of operations for the year ended December 31, 1997
would not differ materially from reported results.
DIRECT LANGUAGE COMMUNICATIONS
On August 14, 1998, Lionbridge's wholly owned subsidiary, INT'L.com,
acquired Direct Language Communications, Inc. ("DLC"), a company based in San
Francisco, for total consideration of approximately $3,173,000, consisting of
666,165 shares of common stock valued at $511,000, 867,047 shares of Series A
convertible preferred stock valued at $1,811,000, and 228,467 shares of
Series B redeemable convertible preferred stock valued at $850,000. All
outstanding options to purchase common stock of DLC were exchanged for options
to purchase common stock of the Company under similar terms.
In addition, warrants to purchase shares of DLC common stock were exchanged
for warrants to purchase 206,998 shares of the Company's common stock under
similar terms. Warrants to purchase 10,170 shares of common stock were issued
with an exercise price of $4.92 per share. Additionally, warrants to purchase
196,828 shares of common stock were issued with an exercise price of $1.43 per
share. Unless certain conditions are met, the exercise price of $1.43 per share
increases at a rate of 20% per annum, compounded annually. These warrants were
exercised in full in May 2000.
The transaction was accounted for using the purchase method of accounting,
and the results of DLC have been included in the accompanying consolidated
financial statements as of the date of the
F-15
4. BUSINESS COMBINATIONS: (CONTINUED)
acquisition. The initial purchase price, including directs costs of the
acquisition, was allocated based on the fair value of the acquired assets and
liabilities assumed as follows:
Current assets.............................................. $1,843,000
Property and equipment...................................... 484,000
Current liabilities......................................... (691,000)
Noncurrent liabilities...................................... (149,000)
Goodwill.................................................... 2,230,000
----------
$3,717,000
==========
Pro forma statements of operations for the year ended December 31, 1997
would not differ materially from reported results.
VERITEST, INC.
On January 11, 1999, Lionbridge entered into an agreement to acquire all of
the stock of VeriTest, a company based in California, for total initial
consideration of $4,354,000 consisting of cash of $3,260,000, 66,668 shares of
common stock valued at $344,000, and notes payable for $750,000. The agreement
also requires certain contingent cash payments, limited to $1,000,000, dependent
on future operating performance through December 31, 2000. The acquisition was
accounted for using the purchase method of accounting. The purchase price,
including direct costs of the acquisition, was allocated based on the fair
values of the acquired assets and liabilities assumed as follows:
Current assets.............................................. $ 522,000
Current liabilities......................................... (616,000)
Property and equipment...................................... 175,000
Acquired workforce.......................................... 676,000
Trade name.................................................. 505,000
Goodwill.................................................... 3,157,000
----------
$4,419,000
==========
The initial calculation of goodwill did not include any contingent
consideration. Future payments, if any, under the contingent payment arrangement
will increase goodwill. The results of VeriTest are included in these financial
statements from the date of acquisition.
INTERNATIONAL LANGUAGE ENGINEERING CORPORATION
On April 9, 1999, Lionbridge's wholly owned subsidiary, INT'L.com, acquired
ILE, a company based in Colorado, for total consideration of $9,237,000,
consisting of 1,983,017 shares of common stock valued at $3,407,000 and 936,991
shares of Series D redeemable preferred stock valued at $5,830,000. In addition,
long-term debt of ILE in the amount of $3,250,000 was assumed. Upon the
acquisition, all outstanding options to purchase common stock of ILE were
exchanged for options to purchase common stock of the Company under similar
terms. The transaction was accounted for using the purchase method of
accounting, and the results of ILE have been included in the accompanying
consolidated financial statements as of the acquisition date. The purchase
price, including direct costs
F-16
4. BUSINESS COMBINATIONS: (CONTINUED)
of the acquisition, was allocated based on the fair value of the acquired assets
and liabilities assumed as follows:
Current assets.............................................. $ 3,020,000
Property and equipment...................................... 1,922,000
Current liabilities......................................... (4,111,000)
Installed customer base..................................... 1,800,000
Acquired workforce.......................................... 1,200,000
Completed technology........................................ 800,000
Acquired in-process research and development................ 300,000
Goodwill.................................................... 7,892,000
-----------
$12,823,000
===========
The value of acquired in-process research and development was recorded as an
operating expense as of the acquisition date.
MOTUS!
At December 31, 1998, Lionbridge's wholly owned subsidiary, INT'L.com, had a
32.8% equity investment in Motus!, a French-based provider of localization and
translation services. This investment was accounted for using the equity method.
On September 30, 1999, INT'L.com acquired the remaining equity interest in
Motus! for $124,000 in cash and options to purchase 6,000 shares of common stock
of the Company valued at $20,000. The transaction was accounted for using the
purchase method of accounting, and the results of Motus! have been included in
the accompanying consolidated financial statements as of the date of the
acquisition. The purchase price, including direct costs of the acquisition, was
allocated based on the fair value of the acquired assets and liabilities assumed
as follows:
Property, equipment and long-term receivables............... $ 15,000
Current liabilities......................................... (87,000)
Goodwill.................................................... 217,000
--------
$145,000
========
PRO FORMA DISCLOSURES (UNAUDITED)
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1999 and 1998 assume that the acquisitions of S&D, DLC,
VeriTest, ILE and Motus! occurred as of January 1, 1998:
1999 1998
----------- -----------
Revenue............................................ $93,010,000 $90,583,000
Net loss........................................... (35,961,000) (8,581,000)
Basic and diluted net loss per share attributable
to common stockholders........................... (3.32) (2.50)
For each period presented, the pro forma results include estimates of the
interest expense on debt used to finance the purchases and the depreciation and
amortization of intangible assets based on the purchase price allocations. These
pro forma amounts do not purport to be indicative of the results that
F-17
4. BUSINESS COMBINATIONS: (CONTINUED)
would have actually been obtained if the acquisitions had occurred on
January 1, 1998 or that may be obtained in the future.
AMORTIZATION OF GOODWILL
The expense of amortizing goodwill related to all acquisitions was
$4,957,000, $2,445,000, and $1,841,000 in 1999, 1998 and 1997, respectively.
Additionally, amortization of $1,156,000 was recorded in 1999 in connection with
other intangible assets acquired and $2,559,000 was recorded in 1997 in
connection with a noncompete agreement between Lionbridge and Stream.
SUBSEQUENT EVENT--HARVARD TRANSLATIONS, INC.
On May 18, 2000, Lionbridge acquired HT, a company based in Massachusetts,
by means of a merger. Upon the effective date of the merger, each outstanding
share of HT common stock was converted into the right to receive 3.8864 shares
of Lionbridge common stock. In addition, long-term debt of HT payable to its
former sole stockholder in the amount of $202,844 and all accrued interest
thereon was paid in full by the issuance of 13,820 shares of Lionbridge common
stock. As a result of the merger, Lionbridge issued 285,865 shares of common
stock in exchange for all of the outstanding shares of HT common stock and in
payment in full of the $202,844 obligation of HT. Upon the acquisition, all
outstanding options to purchase common stock of HT were assumed by Lionbridge
and converted into options to purchase common stock of Lionbridge under similar
terms. The transaction was accounted for using the pooling-of-interests method
of accounting, and the results of HT have been included in the accompanying
consolidated financial statements for all periods presented.
SUBSEQUENT EVENT--INT'L.COM, INC.
On May 22, 2000, Lionbridge acquired INT'L.com, a company based in
Massachusetts, by means of a merger. Upon the effective date of the merger,
(i) each outstanding share of INT'L.com Series A common stock, Series B common
stock, Series A preferred stock and Series B preferred stock was converted into
the right to receive 0.7567 shares of Lionbridge common stock, (ii) each
outstanding share of INT'L.com Series C preferred stock was converted into the
right to receive 5.4590 shares of Lionbridge common stock, (iii) each
outstanding share of INT'L.com Series D preferred stock was converted into the
right to receive 0.5472 shares of Lionbridge common stock, (iv) the $2,000,000
of INT'L.com convertible debt and all accrued interest thereon was paid in full
and cancelled in exchange for 109,158 shares of Lionbridge common stock, and
(v) the $5,000,000 of INT'L.com subordinated debt and all accrued interest
thereon was paid in full and cancelled in exchange for 258,360 shares of
Lionbridge common stock. As a result of the merger, Lionbridge issued 8,302,960
shares of common stock in exchange for all of the outstanding shares of
INT'L.com capital stock and in payment in full of the $2,000,000 of convertible
debt and $5,000,000 of subordinated debt of INT'L.com. Upon the acquisition, all
outstanding options to purchase common stock of INT'L.com were assumed by
Lionbridge and converted into options to purchase common stock of Lionbridge
under similar terms. The transaction was accounted for using the
pooling-of-interests method of accounting, and the results of INT'L.com have
been included in the accompanying consolidated financial statements for all
periods presented.
F-18
4. BUSINESS COMBINATIONS: (CONTINUED)
Combined and separate results of Lionbridge, HT and INT'L.com for the
periods preceding the mergers were as follows:
LIONBRIDGE HT INT'L.COM COMBINED
----------- ----------- ----------- -----------
Year ended December 31,
1999
Revenue.................. $49,508,000 $ 4,354,000 $34,902,000 $88,764,000
Net loss................. (17,586,000) (113,000) (15,508,000) (33,207,000)
Year ended December 31,
1998
Revenue.................. 38,412,000 4,025,000 17,317,000 59,754,000
Net income (loss)........ (4,262,000) 168,000 (1,135,000) (5,229,000)
Year ended December 31,
1997
Revenue.................. 26,462,000 3,574,000 9,407,000 39,443,000
Net income (loss)........ (7,654,000) 87,000 (481,000) (8,048,000)
5. AMOUNTS OWED TO BANKS:
Amounts owed to banks represent temporary, unsecured overdraft facilities
utilized by Lionbridge's operations in Ireland, France, Holland and the United
States as of December 31, 1998.
6. DEBT:
Debt consisted of the following at December 31:
1999 1998
----------- ----------
Lines of credit..................................... $ 9,636,000 $9,009,000
Notes payable to stockholders....................... 7,703,000 3,703,000
Subordinated debt................................... 5,981,000 --
Convertible promissory notes to stockholders, net of
discount.......................................... 1,788,000 --
----------- ----------
Total debt.......................................... 25,108,000 12,712,000
Less current portion................................ 9,636,000 9,009,000
----------- ----------
Long-term debt, less current portion................ $15,472,000 $3,703,000
=========== ==========
SETTLEMENT AGREEMENT
On June 10, 1998, Lionbridge entered into an agreement with certain
companies that had previously been part of the Stream organization to settle
various outstanding amounts due between Lionbridge and Stream, including the
indemnity claim submitted by Lionbridge (see Note 4); a note payable to Stream
of $569,000, together with accrued interest of $39,000; and the amount due to
Stream on the exercise of its put option to sell 971,654 shares of Series A
convertible preferred stock to Lionbridge (see Note 9). In settlement of all
amounts due to and from Stream (or successor companies), Lionbridge agreed to
pay an interest-free amount of $700,000 in seven equal monthly installments
beginning February 1998. This note was recorded in current liabilities at
December 31, 1997 and was paid during 1998. The net effect of the settlement
agreement was to reduce by $531,000 the Company's purchase
F-19
6. DEBT: (CONTINUED)
price for the European business acquired from Stream. The effective date of this
agreement was December 31, 1997, and its impact was reflected in the
consolidated financial statements as of that date.
LINES OF CREDIT
On September 26, 1997, Lionbridge entered into a line of credit agreement
with a commercial bank. The agreement was subsequently amended on May 21, 1998
and December 20, 1999, and expires on March 20, 2000. At the time of the
May 1998 amendment, Lionbridge issued a warrant for the purchase of 83,334
shares of common stock at an exercise price of $2.40 per share. This warrant was
exercisable immediately and expires on May 21, 2003. The value ascribed to this
warrant was immaterial. This warrant was exercised in full in May 2000. Under
the amended terms of the agreement, Lionbridge may borrow up to $8,000,000,
based on the value of certain eligible current assets worldwide. The interest
rate payable on any outstanding borrowings is prime plus 1% per year (9.5%,
8.8%, and 9.5% at December 31, 1999, 1998 and 1997, respectively), and
Lionbridge was required to pay a facility fee of $50,000 on the signing of the
agreement. This fee and other direct arrangement expenses were amortized over
the initial term of the agreement, which expired on May 22, 1998. Borrowings
outstanding under the line of credit agreement are collateralized by certain
assets of Lionbridge. The amounts outstanding on the line of credit at
December 31, 1999 and 1998 were $6,593,000 and $7,693,000, respectively. The
agreement requires Lionbridge to maintain certain financial ratios and restricts
the payment of dividends. As of December 31, 1999, 1998 and 1997, Lionbridge was
in compliance with the financial covenants as amended by the bank.
On September 18, 1997, Lionbridge's wholly owned subsidiary, INT'L.com,
entered into a demand line of credit and equipment loan with a bank. At
December 31, 1998, $1,261,000 was outstanding under the line of credit and no
amounts were outstanding under the equipment loan. On April 23, 1999, INT'L.com
terminated its demand line of credit arrangement and entered into a new
revolving line of credit agreement with a bank, as amended on August 20, 1999
(the "Revolving Line"). The Revolving Line allows for borrowings up to
$5,000,000, based on the value of certain eligible current assets worldwide at
an interest rate of prime plus 2% through February 28, 2000 and at the prime
rate plus 1.25% thereafter (10.5% at December 31, 1999). Borrowings outstanding
under the Revolving Line are collateralized by substantially all assets of
INT'L.com. During the term of the agreement, INT'L.com must maintain certain
financial covenants, including minimum levels of current assets, tangible net
worth and quarterly revenue. At December 31, 1999, INT'L.com was either in
compliance with the covenants or was in receipt of a waiver from the bank with
respect to any non-compliance with the covenants. The amount outstanding on the
Revolving Line at December 31, 1999 was $2,993,000.
On December 4, 1997, Lionbridge's wholly owned subsidiary, HT, entered into
a line of credit agreement with a bank which expires on May 31, 2000. Under the
terms of the agreement, HT may borrow up to $350,000. The interest rate payable
on any outstanding borrowings is prime (8.5% and 7.8% at December 31, 1999 and
1998, respectively). Borrowings outstanding under the line of credit agreement
are collateralized by substantially all assets of HT and are personally
guaranteed by a former stockholder of HT. The amounts outstanding on the line of
credit at December 31, 1999 and 1998 were $50,000 and $55,000, respectively. The
agreement requires HT to maintain certain financial ratios and restricts the
payment of dividends. As of December 31, 1999, 1998 and 1997, HT was in
compliance with the financial covenants.
F-20
6. DEBT: (CONTINUED)
NOTES PAYABLE TO STOCKHOLDERS
On August 13, 1998, as part of a cash and stock dividend to the INT'L.com
stockholders on record as of that date, promissory notes to stockholders in the
aggregate amount of $3,500,000 were issued (see Note 9). The notes bear interest
at 6% per year for the first year of the term of the notes, and the interest
rate increases by 1% for each successive year of the term of the notes. One half
of the interest accruing in each semi-annual period is payable semi-annually on
January 1 and June 30 during the term of the notes and the remaining interest is
payable upon the maturity of the notes. The principal amount of the notes,
together with any accrued but unpaid interest is payable in April 2005. At
December 31, 1999 and 1998, $3,500,000 was outstanding under these notes.
On January 11, 1999, Lionbridge entered into two substantially identical
promissory note agreements with the former owners of VeriTest in connection with
the acquisition of this business (see Note 4). The notes are for an aggregate
amount of $750,000 and are payable in one installment on January 11, 2001.
Interest on the notes is due annually at a rate of 8%.
On April 9, 1999, INT'L.com assumed ILE's obligation under a promissory note
to an ILE stockholder in the amount of $3,250,000 as part of the acquisition of
ILE. The promissory note accrues interest at 8.5% per year and matures June 27,
2002. The promissory note is subordinate to all indebtedness owed by INT'L.com
to any bank, pension fund, insurance fund or other financial institutions.
In 1997, HT issued a note payable to a stockholder representing unsecured
cash advances from the stockholder. The principal balance is due in July 2001.
The note bears interest at 8.5% and is paid monthly. At December 31, 1999 and
1998, $203,000 was outstanding under this note.
SUBORDINATED DEBT
On January 8, 1999, Lionbridge entered into a bridge loan agreement with a
third party. Under the terms of the agreement, Lionbridge issued a $4,000,000,
12% senior subordinated note. On February 26, 1999, Lionbridge entered into a
new subordinated debt agreement with the same party and terminated the bridge
loan agreement and the $4,000,000 senior subordinated note. Under the terms of
the new agreement, Lionbridge issued $10,000,000, 12% senior subordinated notes.
The notes are subject to certain covenant restrictions, including the
maintenance of a defined minimum current asset to current liability ratio and a
minimum profitability measure, and are collateralized by certain assets of
Lionbridge. The terms of the subordinated debt agreement prohibit Lionbridge
from paying dividends to its stockholders. In connection with the issuance of
these notes, Lionbridge issued detachable warrants to purchase 1,277,716 shares
of common stock at a price of $0.015 per share, valued at $4,972,000. These
warrants were exercised in full in August 1999.
On March 9, 1999, Lionbridge entered into a subordinated debt agreement with
a stockholder. Under the terms of the agreement, Lionbridge issued $2,000,000,
12% senior subordinated notes. The notes are collateralized by certain assets of
Lionbridge and are subject to certain covenant restrictions, including the
maintenance of a defined minimum current asset to current liability ratio and a
minimum profitability measure. The terms of the subordinated debt agreement
prohibit Lionbridge from paying dividends to its stockholders. In connection
with the issuance of these notes, Lionbridge issued detachable warrants to
purchase 255,544 shares of common stock at a price $0.015 per share, valued at
$995,000. These warrants were exercised in full in November 1999.
The aggregate value of the warrants issued in connection with these
financings was recorded as a discount on subordinated notes payable and was
amortized as additional interest expense using the straight-line method over the
period from issuance until August 1999, based on the initially expected
repayment of the debt upon the initial public offering of securities by
Lionbridge.
F-21
6. DEBT: (CONTINUED)
On August 19, 1999, Lionbridge entered into amendments to the subordinated
debt agreements pursuant to which the 12% senior subordinated notes were issued.
As a result, Lionbridge was required to repay one-half of the aggregate
principal amount of each of the notes, together with all accrued and unpaid
interest thereon, upon the closing of its initial public offering. The remaining
aggregate principal amount of such notes, together with all accrued and unpaid
interest thereon, is required to be repaid upon the earlier of August 25, 2001
or an underwritten public offering by Lionbridge subsequent to the initial
public offering of securities with aggregate proceeds of at least $10,000,000.
These notes had previously required that all of the principal amount be paid
upon a closing of an initial public offering of securities with aggregate
proceeds of at least $25,000,000. As of December 31, 1999, $5,981,000 was
outstanding under these subordinated notes.
CONVERTIBLE PROMISSORY NOTES TO STOCKHOLDERS
In August 1999, INT'L.com received $2,000,000 through the issuance of
convertible promissory notes to existing investors. The convertible notes accrue
interest at 10% per annum and mature in August 2001. The convertible promissory
notes are subordinate to the Revolving Line described above. The outstanding
principal and accrued interest on the notes may convert, at the option of the
lenders, into shares of the Company's equity securities. These convertible notes
were paid in full in May 2000. As additional consideration to the investors,
INT'L.com issued warrants to purchase 56,753 shares of its common stock at an
exercise price of $1.45 per share. The warrants are immediately exercisable and
expire 10 years from the date of the grant. The value of the warrants was
calculated using the Black Scholes pricing model as $254,000. These warrants
were exercised in full in May 2000. Due to the issuance of these warrants, the
convertible promissory notes are presented on the consolidated balance sheet at
a discount, which is being amortized over the terms of the notes as additional
interest expense.
7. COMMITMENTS:
LEASE COMMITMENTS
The Company leases certain equipment and office space under noncancelable
agreements and leases which expire at various dates through 2026. Future minimum
lease payments under noncancelable operating leases at December 31, 1999 were as
follows:
YEAR ENDING DECEMBER 31,
- ------------------------
2000........................................................ $ 3,369,000
2001........................................................ 2,815,000
2002........................................................ 1,511,000
2002........................................................ 819,000
2004........................................................ 598,000
Thereafter.................................................. 4,145,000
-----------
$13,257,000
===========
Total rental expenses charged to operations were $3,115,000, $2,073,000 and
$1,347,000 in 1999, 1998 and 1997, respectively.
F-22
8. PREFERRED STOCK:
Lionbridge is authorized to issue 5,000,000 shares of preferred stock in one
or more series, each with such terms and rights as adopted by Lionbridge in
creating such series. No such preferred stock was issued or outstanding as of
December 31, 1999.
Upon the closing of Lionbridge's initial public offering of common stock on
August 25, 1999, all 13,271,314 shares and 140 shares of its Series A
convertible preferred stock and Series D nonvoting convertible preferred stock,
respectively, were converted into 132.7145 shares of Series B redeemable
preferred stock and 8,847,649 shares of Series C convertible preferred stock.
The Series B redeemable preferred stock was redeemed for $100,000 per share plus
an 8% annual premium for a total payment of approximately $16,105,000. At the
same time, the Series C convertible preferred stock was converted into 8,847,649
shares of common stock.
As of December 31, 1999, INT'L.com had Series A, Series B, Series C and
Series D preferred stock issued and outstanding. Holders of Series A and B
preferred stock are entitled to the number of votes equal to the number of
shares of common stock into which the preferred stock is then convertible. Each
share of Series D preferred stock is entitled to one vote on all corporate
matters. The Series C preferred stock is non-voting. The Series D preferred
stock is entitled to cumulative dividends of $0.70 per share per annum. The
Series A and B preferred stock is convertible at any time at the option of the
holder into one share of INT'L.com common stock. The Series C and D preferred
stock is not convertible. On August 10, 2006, all outstanding shares of
Series B preferred stock shall be mandatorily redeemed in an amount equal to the
original purchase price ($3.72 per share) plus interest thereon at 8% per annum,
compounded annually from the date of issuance. During the year ended
December 31, 1999, accretion of $659,000 was recorded on the Series B preferred
stock.
On April 9, 2005, all outstanding shares of INT'L.com Series C preferred
stock shall be mandatorily redeemed in an amount equal to (i) $100.00 per share
plus (ii) interest thereon at 6% per annum, compounded annually, for the first
12 month period and increasing by 1% for each 12 month period thereafter, less
(iii) any interest periodically paid prior to April 9, 2005. One half of the
interest accruing in each semi-annual period shall be payable in arrears
semi-annually on June 30 and January 1 and the balance of the interest shall be
payable upon redemption. During the year ended December 31, 1999, accretion of
$26,642 was recorded on the Series C preferred stock.
The INT'L.com Series D preferred stock is redeemable upon the earliest of
(i) April 9, 2004, (ii) within 30 days of a qualified initial public offering,
as defined, or (ii) upon a greater than 50% change in control of INT'L.com as
defined. The Series D redemption amount is $10.00 pre share plus cumulative
unpaid dividends. During the year ended December 31, 1999, accretion of
$1,023,000 was recorded on the Series D preferred stock.
The above redemption amounts for the INT'L.com preferred stock are also the
amounts to which the holders of the preferred stock will be entitled in the
event of the liquidation, dissolution or winding up of INT'L.com, as defined.
9. STOCKHOLDERS' EQUITY (DEFICIT):
COMMON STOCK
As of December 31, 1999, INT'L.com had authorized and issued two classes of
common stock--Series A and Series B common stock. Each share of Series A common
stock is entitled to one vote on all corporate matters. Each share of Series B
common stock is entitled to 0.6774 votes on all corporate matters. All
outstanding shares of Series B common stock shall automatically be converted
into an equal number of shares of Series A common stock in the event the Company
fully redeems all outstanding shares of Series D redeemable preferred stock.
F-23
9. STOCKHOLDERS' EQUITY (DEFICIT): (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
On June 15, 1999, the Board of Directors of Lionbridge adopted the 1999
Employee Stock Purchase Plan (the "Purchase Plan"), effective upon the
consummation of Lionbridge's initial public offering. The Purchase Plan allows
for the issuance of 1,000,000 shares of Lionbridge's common stock to eligible
employees. Under the Purchase Plan, Lionbridge is authorized to make a series of
offerings during which employees may purchase shares of common stock through
payroll deductions made over the term of the offering. The per-share purchase
price at the end of each offering is equal to 85% of the fair market value of
the common stock at the beginning or end of the offering period (as defined by
the Purchase Plan), whichever is lower. The first six month offering period of
the Purchase Plan commenced on November 1, 1999.
RESTRICTED STOCK SALE
In May 1998, INT'L.com issued a total of 68,306 shares of restricted
Series A common stock and 47,293 shares of unrestricted Series A common stock to
two employees for $4.29 per share. The aggregate purchase price of approximately
$496,000 was evidenced by full recourse notes payable to INT'L.com which are
classified as subscriptions receivable in the accompanying consolidated balance
sheets. The notes bear interest at 6% per annum and are payable in four annual
installments commencing September 30, 1998. The restricted Series A common stock
vests over a period of 27 months. All unvested shares of restricted Series A
common stock may be repurchased at a price of $4.29 per share in the event of
the employee's termination. The unrestricted Series A common stock vested
immediately.
At April 9, 1999, the holder of the 68,306 shares of restricted Series A
common stock terminated his employment. At that date, 34,156 shares of
restricted Series A common stock were vested and retained by the employee. The
remaining 34,150 shares were repurchased by INT'L.com for $4.29 per share. The
related notes were paid in full.
DEFERRED COMPENSATION
During the year ended December 31, 1999, Lionbridge recorded deferred
compensation in connection with options granted at exercise prices below the
then fair market value of Lionbridge's common stock totaling $3,803,000,
representing the aggregate difference between the estimated fair market value of
Lionbridge's common stock on the date of grant and the exercise price of each
option. This deferred compensation is being amortized over the four-year vesting
period of the related options, resulting in amortization of $730,000 in the year
ended December 31, 1999.
SETTLEMENT OF PUT OPTION
In connection with the December 23, 1996 financing of Lionbridge, Stream was
granted a put option to sell its 971,654 shares of Series A preferred stock to
Lionbridge. On September 25, 1997, Stream exercised its put option and
Lionbridge acquired 971,654 shares of its Series A preferred stock at a cost of
$971,654. Settlement of this amount due to Stream was resolved through a
subsequent agreement (see Note 6). In 1998, Lionbridge retired all of the shares
acquired.
REVERSE STOCK SPLIT
Effective August 13, 1999, Lionbridge's Board of Directors declared a
2-for-3 reverse common stock split. All references in these consolidated
financial statements to shares of common stock have been retroactively adjusted
to reflect this reverse stock split.
F-24
9. STOCKHOLDERS' EQUITY (DEFICIT): (CONTINUED)
DIVIDEND
On August 13, 1998, prior to the acquisition of DLC, INT'L.com declared a
dividend to all Series A common stockholders of record as of that date in the
form of cash, promissory notes and Series C preferred stock. The dividend
totaled $6,000,000 and consisted of (i) $2,000,000 in cash, of which $1,600,000
was paid in 1998 and $400,000 was paid in 1999, (ii) promissory notes in the
amount of $3,500,000 (see Note 6) and (iii) 5,000 shares of Series C preferred
stock valued at $100.00 per share.
STOCK OPTION PLANS
Lionbridge maintains a stock option plan (the "Plan") for the issuance of
incentive and nonqualified stock options. The initial number of shares of common
stock available for issuance under the Plan was 2,855,365 shares, an amount that
was increased to 5,522,032 shares in June 1999. Options to purchase common stock
are granted at the discretion of the Board of Directors. Generally, stock
options vest over a four-year period as follows: 25% on the first anniversary of
the date of grant and semi-annually thereafter in equal installments over the
remaining three-year period. Stock options generally expire ten years (five
years in certain cases) from the date of grant.
Under the terms of the Plan, the exercise price of incentive stock options
granted must not be less than 100% (110% in certain cases) of the fair market
value of the common stock on the date of grant, as determined by the Board of
Directors. The exercise price of nonqualified stock options may be less than the
fair market value of the common stock on the date of grant, as determined by the
Board of Directors, but in no case may the exercise price be less than the
statutory minimum. Prior to the Company's initial public offering of securities,
the Board of Directors, in assessing the fair market value of Lionbridge's
common stock, considered factors relevant at the time, including recent
third-party transactions, significant new customers, composition of the
management team, recent hiring results, Lionbridge's financial condition and
operating results and the lack of a public market for Lionbridge's common stock.
HT and INT'L.com also maintain stock option plans which provide for grants
of options to officers, consultants and selected employees which expire ten
years (five years in certain cases) from date of grant. The stock option grants
generally vest over four to five years except for certain options that have
acceleration clauses effective upon certain circumstances including a change of
ownership or control. Upon the mergers with HT and INT'L.com, Lionbridge assumed
options for the purchase of 742,584 shares of common stock. No further options
will be granted under these assumed plans.
F-25
9. STOCKHOLDERS' EQUITY (DEFICIT): (CONTINUED)
Transactions involving all plans from January 1, 1997 to December 31, 1999
are summarized as follows:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ---------
Outstanding at January 1, 1997.......................... 1,501,529 $0.165
Granted................................................. 1,478,385 0.170
Exercised............................................... (375,385) 0.150
Canceled................................................ (382,363) 0.150
---------
Outstanding at December 31, 1997........................ 2,222,166 0.175
Granted................................................. 865,087 1.684
Exercised............................................... (316,662) 0.135
Canceled................................................ (119,288) 0.249
---------
Outstanding at December 31, 1998........................ 2,651,303 0.668
Granted................................................. 1,614,542 5.855
Exercised............................................... (758,693) 1.100
Canceled................................................ (255,783) 3.806
---------
Outstanding at December 31, 1999........................ 3,251,369 2.896
=========
Options for 852,350, 552,592 and 0 shares were exercisable at December 31,
1999, 1998 and 1997, respectively. There were 1,872,274, 636,843 and 263,644
shares available for future grant under the Plan at December 31, 1999, 1998 and
1997, respectively.
F-26
9. STOCKHOLDERS' EQUITY (DEFICIT): (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- -----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------------- ----------- ----------- --------- ----------- ---------
$0.150--0.165........ 1,217,494 7.1 years $0.160 476,669 $0.160
0.300............... 168,004 8.1 years 0.300 39,960 0.300
0.450............... 7,095 8.3 years 0.450 1,059 0.450
0.900............... 47,423 8.6 years 0.900 10,068 0.900
1.080............... 61,726 7.5 years 1.080 39,591 1.080
1.310............... 41,713 8.7 years 1.310 13,599 1.310
1.500--1.800........ 482,775 9.2 years 1.520 2,204 1.500
1.720............... 361,810 8.1 years 1.720 142,757 1.720
4.920............... 302,680 9.3 years 4.920 113,505 4.920
5.660............... 5,830 7.4 years 5.660 2,332 5.660
6.000............... 36,667 9.4 years 6.000 --
7.590............... 78,700 8.9 years 7.590 10,606 7.590
9.010............... 20,404 9.1 years 9.010 --
9.750............... 286,298 9.4 years 9.750 --
17.580.............. 48,050 9.8 years 17.580 --
18.000--18.310...... 84,700 9.8 years 18.010 --
--------- -------
3,251,369 852,350
========= =======
Had compensation cost for stock options granted to employees been determined
based on the fair value at the date of grant consistent with the provisions of
SFAS No. 123, Lionbridge's net loss for 1999, 1998 and 1997 would have been
increased to $33,955,000, $5,476,000 and $8,062,000, respectively, and the net
loss per common share attributable to common stockholders for 1999, 1998 and
1997 would have been increased to $3.14, $1.71 and $3.29, respectively. The
estimated weighted-average fair value of Lionbridge, HT and INT'L.com options
granted during 1999 was $3.04, $3.55 and $0.83, respectively. The estimated
weighted-average fair value of Lionbridge, HT and INT'L.com options granted
during 1998 was $0.06, $2.98 and $0.54 per share, respectively. The estimated
weighted-average fair value of Lionbridge and HT options granted during 1997 was
$0.02 and $2.23, respectively. INT'L.com granted no options in 1997. Stock
options granted by Lionbridge with an exercise price in the range from $1.50
through $9.75 per share have an exercise price which exceeded the fair value of
the underlying common stock on the date of grant. The weighted-average fair
value of these options, which were all granted in 1999, was $2.18 per share.
The fair value of each option grant was estimated on the date of grant using
the Black Scholes option pricing model. The following assumptions were used for
options granted: (i) weighted-average risk free interest rate ranges of 5.30% to
6.00% and 5.10% to 6.00% for 1999 and 1998, respectively, and a rate of 6.1% for
1997, (ii) weighted-average expected option lives of 4.0 to 10.0 years, and
(iii) no expected dividend yield. The fair value of options granted by
Lionbridge after its initial public offering of securities has been calculated
using the Black Scholes option pricing model with the same assumptions as above
for 1999, but with an additional expected volatility factor of 85%.
F-27
10. INCOME TAXES:
The provision for (benefit from) income taxes for the years ended
December 31, 1999, 1998 and 1997 is due to taxable income generated in foreign
jurisdictions for which U.S. tax credit utilization is currently uncertain and
the benefit from U.S. net operating losses.
The components of the provision for (benefit from) income taxes are as
follows:
1999 1998 1997
-------- --------- --------
Current:
State...................................... $ 20,000 $ -- $ --
Federal.................................... -- (70,000) (10,000)
Foreign.................................... 160,000 52,000 --
-------- --------- --------
Total current provision.................... $180,000 $ (18,000) $(10,000)
======== ========= ========
Deferred:
State...................................... $ -- $(123,000) $(39,000)
Federal.................................... -- (372,000) (102,000)
Foreign.................................... 519,000 207,000 112,000
-------- --------- --------
Total deferred provision..................... $519,000 $(288,000) $(29,000)
======== ========= ========
The benefit from the utilization of net operating loss carryforwards in
Europe during the years ended December 31, 1999, 1998 and 1997 was recorded as a
reduction of goodwill of $519,000, $207,000 and $112,000, respectively, rather
than a tax provision benefit, since the deferred tax assets associated with
these carryforwards had been fully reserved at the time of the acquisition of
the businesses from Stream (see Note 4).
The components of the loss before income taxes were as follows for the years
ended December 31:
1999 1998 1997
------------ ----------- -----------
United States................................. $(28,337,000) $(6,124,000) $(6,660,000)
Foreign....................................... (4,171,000) 589,000 (1,427,000)
------------ ----------- -----------
Loss before income taxes...................... $(32,508,000) $(5,535,000) $(8,087,000)
============ =========== ===========
The consolidated deferred tax liabilities of the Company were as follows at
December 31:
1999 1998
----------- ----------
U.S. net operating loss carryforwards............... $ 9,373,000 $1,639,000
Foreign net operating loss carryforwards............ 3,745,000 1,696,000
Difference in accounting for amortization and
depreciation...................................... 523,000 1,113,000
Nondeductible reserves and accruals................. 453,000 61,000
Research and development tax credits................ 50,000 --
Other............................................... 176,000 (285,000)
Valuation allowance................................. (14,544,000) (4,224,000)
----------- ----------
Net deferred tax liability.......................... $ (224,000) --
=========== ==========
Management of Lionbridge has evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets. Under the applicable
accounting standards, management has considered Lionbridge's history of losses
and concluded that it is not certain that Lionbridge will
F-28
10. INCOME TAXES: (CONTINUED)
generate future taxable income prior to the expiration of these net operating
losses. Accordingly, the deferred tax assets have been fully reserved.
Management reevaluates the positive and negative evidence periodically.
At December 31, 1999, Lionbridge had net operating loss carryforwards for
U.S. federal and state income tax purposes of approximately $23,400,000 which
may be used to offset future taxable income, which begin to expire in 2011. The
Company has federal research and development tax credits which may be used to
offset future income tax of approximately $43,000 which expire in 2019.
Additionally, Lionbridge has net operating loss carryforwards in France of
approximately $3,100,000 which begin to expire in 2002; net operating loss
carryforwards in Japan of approximately $1,100,000 which begin to expire in
2003; and net operating loss carryforwards in The Netherlands of approximately
$6,200,000 which may be carried forward indefinitely.
Tax benefits recognized for the utilization of foreign net operating loss
carryforwards acquired in the December 23, 1996 acquisition of businesses from
Stream (see Note 4) are recorded as a reduction to goodwill, rather than as a
tax provision benefit.
Under the provisions of the Internal Revenue Code, certain substantial
changes in Lionbridge's ownership may limit in the future the amount of net
operating loss carryforwards which could be used annually to offset future
taxable income and income tax liability.
11. RESTRUCTURING CHARGES:
During the fourth quarter of 1998, the first quarter of 1998 and the fourth
quarter of 1997, Lionbridge recorded restructuring charges of $50,000, $451,000
and $541,000, respectively, in operating expenses. These charges related to
workforce reductions in France, consisting of nine technical staff in 1997 and
five technical and administrative staff in 1998. All employees had been informed
of their termination and related benefits in the period that the corresponding
charge was recorded. Lionbridge had balances of $0, $0 and $541,000 remaining at
December 31, 1999, 1998 and 1997, respectively, in other accrued expenses in
relation to these charges. As of December 31, 1999, none of these employees
remained with Lionbridge and management does not anticipate any future
expenditures related to these actions.
During the second and fourth quarters of 1999, INT'L.com recorded
restructuring charges of $747,000 and $450,000, respectively, in operating
expenses. These charges relate to workforce reductions in the United States
operating sites, consisting of 36 technical staff, 14 administrative staff and
four sales staff. All employees had been informed of their termination and
related benefits in the period that the corresponding charge was recorded. At
December 31, 1999, approximately $357,000 remained in other accrued expenses
relating to these charges. Management does not anticipate any future
expenditures related to these actions in excess of amounts accrued at
December 31, 1999.
F-29
12. EMPLOYEE BENEFIT PLANS:
Lionbridge maintains an employee benefit plan qualified under
Section 401(k) of the Internal Revenue Code. All U.S. employees may participate
in the 401(k) plan subject to certain eligibility requirements. Under the 401(k)
plan, a participant may contribute a maximum of 15% of his or her pre-tax
salary, commissions and bonuses through payroll deductions (up to the
statutorily prescribed annual limit--$10,000 in 1999) to the 401(k) plan. The
percentage elected by more highly compensated participants may be required to be
lower. In addition, at the discretion of the Board of Directors, Lionbridge may
make discretionary profit-sharing contributions into the 401(k) plan for all
eligible employees. To date, Lionbridge has made no profit-sharing contributions
to the 401(k) plan. In addition, as of December 31, 1999, the Company maintained
defined benefit pension plans for employees in The Netherlands and France, and a
defined contribution scheme for employees in Ireland. Total pension
contributions charged to operations were $294,000, $350,000 and $154,000 in
1999, 1998 and 1997, respectively.
As of December 31, 1999, HT and INT'L.com maintained 401(k) retirement plans
for employees meeting certain age and service requirements. The plans provided
for voluntary employee contributions from their annual compensation as well as
matching contributions by HT and INT'L.com. For the years ended December 31,
1999, 1998 and 1997, respectively, matching contributions totaled approximately
$87,000, $78,000 and $34,000, respectively.
13. OPERATING SEGMENT AND GEOGRAPHICAL INFORMATION:
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires that public business enterprises report certain
information about operating segments in financial statements filed with the SEC
and issued to stockholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing their performance.
Lionbridge has determined that its operating segments are those that are
based on its method of internal reporting, which separately presents its
business by the geographic site in which services are performed. Lionbridge has
combined those segments which meet the aggregation criteria of SFAS No. 131 in
determining its reportable segments.
The Company's reportable segments are Localization and Testing. The
Localization segment provides globalization services, including translation,
software localization, internationalization engineering and multilingual
technical publishing, that enable simultaneous worldwide release and ongoing
maintenance of products and related technical support, training materials, and
sales and marketing information in multiple languages. The Testing segment
provides localization and internationalization testing of software, hardware and
telecommunications equipment, as well as logo certification programs. All other
unallocated enterprise costs are reflected in the "Corporate and Other"
category.
F-30
13. OPERATING SEGMENT AND GEOGRAPHICAL INFORMATION: (CONTINUED)
The table below presents information about the reported net loss of the
Company for the years ended December 31, 1999, 1998 and 1997. For the year ended
December 31, 1997, Lionbridge's only reportable segment was Localization. Asset
information by reportable segment is not reported, since the Company does not
produce such information internally.
CORPORATE AND
LOCALIZATION TESTING OTHER ELIMINATIONS TOTAL
------------ ----------- ------------- ------------ ------------
1999
External revenue.......................... $ 81,582,000 $ 7,182,000 $ -- $ 88,764,000
============ =========== ============ ============
Inter-segment revenue..................... $ -- $ 315,000 $ -- $ (315,000) $ --
============ =========== ============ ============ ============
Depreciation and amortization............. $ 2,678,000 $ 402,000 $ 6,310,000 $ 9,390,000
============ =========== ============ ============
Site contribution......................... $ 3,378,000 $ 1,384,000 $ -- $ 4,762,000
Interest income (expense), income tax
expense and other items of income
(expense)............................... (10,018,000) (1,120,000) (26,831,000) (37,969,000)
------------ ----------- ------------ ------------
Net income (loss)....................... $ (6,640,000) $ 264,000 $(26,831,000) $(33,207,000)
============ =========== ============ ============
1998
External revenue.......................... $ 57,568,000 $ 2,186,000 $ -- $ 59,754,000
============ =========== ============ ============
Inter-segment revenue..................... $ -- $ 144,000 $ -- $ (144,000) $ --
============ =========== ============ ============ ============
Depreciation and amortization............. $ 1,605,000 $ 90,000 $ 2,504,000 $ 4,199,000
============ =========== ============ ============
Site contribution......................... $ 7,934,000 $ 675,000 $ -- $ 8,609,000
Interest income (expense), income tax
benefit (expense) and other items of
income (expense)........................ (8,763,000) (346,000) (4,729,000) (13,838,000)
------------ ----------- ------------ ------------
Net income (loss)....................... $ (829,000) $ 329,000 $ (4,729,000) $ (5,229,000)
============ =========== ============ ============
1997
External revenue.......................... $ 39,443,000 $ -- $ 39,443,000
============ ============ ============
Inter-segment revenue..................... $ -- $ -- $ --
============ ============ ============
Depreciation and amortization............. $ 1,622,000 $ 4,416,000 $ 6,038,000
============ ============ ============
Site contribution......................... $ 3,636,000 $ -- $ 3,636,000
Interest income (expense), income tax
benefit (expense) and other items of
income (expense)........................ (3,638,000) (8,046,000) (11,684,000)
------------ ------------ ------------
Net income (loss)....................... $ (2,000) $ (8,046,000) $ (8,048,000)
============ ============ ============
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13. OPERATING SEGMENT AND GEOGRAPHICAL INFORMATION: (CONTINUED)
A summary of Lionbridge's operations and other financial information by
geographical region follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
Net revenues:
United States..................................... $ 47,981,000 $ 23,865,000 $ 12,981,000
Asia.............................................. 8,075,000 4,801,000 1,510,000
France............................................ 11,725,000 9,094,000 11,070,000
Ireland........................................... 14,398,000 14,296,000 11,157,000
The Netherlands................................... 7,618,000 6,799,000 3,724,000
Germany........................................... 2,947,000 2,520,000 --
Eliminations...................................... (3,980,000) (1,621,000) (999,000)
------------ ------------ ------------
$ 88,764,000 $ 59,754,000 $ 39,443,000
============ ============ ============
DECEMBER 31,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
Long-lived assets:
United States........................................ $24,000,000 $11,648,000 $7,893,000
Asia................................................. 455,000 320,000 146,000
France............................................... 847,000 207,000 121,000
Ireland.............................................. 552,000 989,000 595,000
The Netherlands...................................... 298,000 109,000 108,000
Germany.............................................. 601,000 747,000 --
----------- ----------- ----------
$26,753,000 $14,020,000 $8,863,000
=========== =========== ==========
Foreign revenue is presented based on the country in which projects are
managed. Long-lived assets in the United States as of December 31, 1999, 1998
and 1997 include goodwill and other intangible assets from acquisitions of
$17,068,000, $9,942,000 and $6,710,000, respectively.
Lionbridge has an agreement with the Irish Industrial Development Agency
regarding financial grants to its Irish subsidiary from this agency. Under the
agreement, the Irish subsidiary may not pay dividends or otherwise distribute
its cash, including any distributions to Lionbridge.
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14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
------------ ----------- ---------
Interest paid........................................... $ 2,083,000 $ 824,000 $ 152,000
Income taxes paid....................................... $ 214,000
Noncash investing and financing activities:
Cancellation of note payable (Note 1)................. $ 840,000
Issuance of warrants for common stock in connection
with debt (Note 6).................................. $ 5,967,000 $ 254,000
Noncash dividends paid (Note 9)....................... $ 4,000,000
Lionbridge entered into an agreement to settle various
outstanding amounts due between Lionbridge and Stream
(Note 6) which reduced goodwill as follows:
Cancellation of note payable, including interest...... $ 608,000
Repurchase of Series A preferred stock from Stream.... 972,000
Settlement of operating accounts...................... (349,000)
Amount payable by Lionbridge under agreement.......... (700,000)
---------
Reduction to goodwill................................. $ 531,000
=========
Lionbridge, or a wholly owned subsidiary of Lionbridge,
purchased all of the outstanding capital stock of
Japanese Language Services, Inc., Sprache und
Dokumentation GmbH and Direct Language
Communications, Inc. in 1998 for $6,008,000. In
conjunction with these acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired and goodwill............ $ 8,426,000
Cash paid for capital stock........................... (2,437,000)
Common stock issued................................... (909,000)
Series A convertible preferred stock issued........... (1,812,000)
Series B redeemable convertible preferred stock
issued.............................................. (850,000)
-----------
Liabilities assumed................................... $ 2,418,000
===========
Lionbridge, or a wholly owned subsidiary of Lionbridge,
purchased all of the outstanding capital stock of
VeriTest, Inc., International Language Engineering
Corporation and Motus! in 1999 for $13,715,000. In
conjunction with these acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired and goodwill............ $ 22,201,000
Cash paid for capital stock........................... (3,384,000)
Common stock issued................................... (3,751,000)
Series D redeemable preferred stock issued............ (5,830,000)
Notes issued.......................................... (750,000)
------------
Liabilities assumed................................... $ 8,486,000
============
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15. VALUATION AND QUALIFYING ACCOUNTS:
The following table sets forth activity in Lionbridge's accounts receivable
reserve:
BALANCE AT BALANCE AT
BEGINNING CHARGES TO END OF
OF YEAR OPERATIONS DEDUCTIONS YEAR
---------- ---------- ---------- ----------
YEAR ENDED:
December 31, 1997....................... $ -- $490,000 $ (84,000) $ 406,000
December 31, 1998....................... 406,000 366,000 (50,000) 722,000
December 31, 1999....................... 722,000 614,000 (214,000) 1,122,000
16. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Diluted net loss per share attributable to common stockholders does not
differ from basic net loss per share attributable to common stockholders since
potential common shares from the conversion of preferred stock and the exercise
of stock options and warrants are anti-dilutive for all years presented and are
therefore excluded from the calculation. Preferred stock convertible into
2,639,766, 10,693,824 and 8,847,649 shares of common stock, options to purchase
3,251,369, 2,651,303 and 2,222,166 shares of common stock, and warrants to
purchase 347,084, 290,332 and 0 shares of common stock, were outstanding as of
December 31, 1999, 1998 and 1997, respectively, but were not included in the
calculation of diluted net loss per share attributable to common stockholders
because the effect of their inclusion would have been anti-dilutive.
17. SUBSEQUENT EVENTS:
In January 2000, Lionbridge acquired certain assets and operations of the
Language Services Operation of Nortel Networks Corporation in Montreal and
Ottawa, Canada; Beijing, China; Sao Paulo, Brazil; and Bogota, Colombia for
total initial consideration of approximately $2,476,000. In connection with the
acquisition, Nortel Networks awarded a preferred vendor designation to
Lionbridge as part of a three-year services agreement. The purchase agreement
provides for certain contingent payments to be made by Lionbridge during the
first three years of the agreement, dependent on the level of revenues generated
under the services agreement during those periods. The transaction will be
accounted for using the purchase method of accounting.
In January 2000, INT'L.com amended its Revolving Line. Borrowings under the
amended line are on a formula basis and are limited to the lesser of
(i) $5,000,000 or (ii) 85% of eligible accounts receivable, as defined, and bear
interest at the bank's prime rate plus 2.5%. The Revolving Line, as amended,
expires in January 2001 and for its term requires INT'L.com to maintain a
minimum level of tangible net worth.
In January, March, and April 2000, INT'L.com received $2,000,000, $1,000,000
and $2,000,000, respectively, from the issuance of subordinated promissory notes
to existing investors. The notes accrue interest at 8.5% per annum and mature
one year from the date of issuance. The notes are subordinate to the Revolving
Line described in Note 6. The notes were paid in May 2000 upon the closing of
the merger as described in Note 4.
On May 18, 2000 and May 22, 2000, as more fully described in Note 4,
Lionbridge completed its acquisitions of all of the capital stock of Harvard
Translations, Inc. and INT'L.com, Inc., respectively.
In June 2000, Lionbridge issued 1,500,000 shares of its common stock at
$8.50 per share in a private placement for total consideration received of
approximately $12.8 million.
In July 2000, Lionbridge renewed its line of credit agreement with a
commercial bank at terms substantially similar to those under the previous
arrangement. The renewed credit facility expires on August 20, 2000.
F-34