Annual Reports

 
Quarterly Reports

  • 10-Q (Aug 8, 2014)
  • 10-Q (May 9, 2014)
  • 10-Q (Nov 12, 2013)
  • 10-Q (Aug 9, 2013)
  • 10-Q (May 10, 2013)
  • 10-Q (Nov 8, 2012)

 
8-K

 
Other

Lionbridge Technologies 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-10.2
  4. Ex-31.1
  5. Ex-31.2
  6. Ex-32.1
  7. Ex-32.1
FORM 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  For the quarterly period ended June 30, 2007

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

  For the transition period from                      to                     

Commission File Number 000-26933

 


LIONBRIDGE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   04-3398462
(State of Incorporation)   (I.R.S. Employer Identification No.)

1050 Winter Street, Waltham, MA 02451

(Address of Principal Executive Offices)

Registrant’s Telephone Number, Including Area Code: 781-434-6000

 


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes¨    No  x

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of July 31, 2007 was 60,629,433.

 



Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

TABLE OF CONTENTS

 

          Page
PART I: FINANCIAL INFORMATION   

ITEM 1

   Condensed Consolidated Financial Statements:   
   Condensed Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006    3
   Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2007 and 2006    4
   Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2007 and 2006    5
   Notes to Condensed Consolidated Financial Statements (unaudited)    6

ITEM 2

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    12

ITEM 3

   Quantitative and Qualitative Disclosures About Market Risk    23

ITEM 4

   Controls and Procedures    23
PART II: OTHER INFORMATION   

ITEM 1

   Legal Proceedings    24

ITEM 1A.

   Risk Factors    25

ITEM 2

   Unregistered Sales of Equity Securities and Use of Proceeds    25

ITEM 6

   Exhibits    25

SIGNATURE

   26

EXHIBIT INDEX

   27

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except share data)

 

    

June 30,

2007

   

December 31,

2006

 
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 25,918     $ 27,354  

Accounts receivable, net of allowance of $730 and $728 at June 30, 2007 and December 31, 2006, respectively

     88,172       72,940  

Work in process

     28,293       29,311  

Other current assets

  

 

11,775

 

    7,153  
                

Total current assets

  

 

154,158

 

    136,758  

Property and equipment, net

     13,392       13,032  

Goodwill

     131,044       131,044  

Other intangible assets, net

     32,667       36,894  

Other assets

     7,948       3,772  
                

Total assets

   $ 339,209     $ 321,500  
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Short-term debt and current portion of long-term debt

   $ 306     $ 355  

Accounts payable

     19,933       18,730  

Accrued compensation and benefits

     19,809       18,282  

Accrued outsourcing

     13,385       10,645  

Accrued merger and restructuring

     1,817       1,507  

Income taxes payable

  

 

5,678

 

    4,199  

Accrued expenses and other current liabilities

  

 

11,581

 

    13,564  

Deferred revenue

     11,400       8,583  
                

Total current liabilities

  

 

83,909

 

    75,865  
                

Long-term debt, less current portion

     75,878       77,855  

Deferred income taxes, long-term

     7,954       7,685  

Income tax reserves

     5,905       —    

Other long-term liabilities

     3,573       3,407  

Contingencies (Note 10)

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and outstanding

     —         —    

Common stock, $0.01 par value; 100,000,000 shares authorized; 60,632,808 and 60,089,130 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively

     606       601  

Additional paid-in capital

     260,726       257,077  

Accumulated deficit

     (107,469 )     (107,704 )

Accumulated other comprehensive income

     8,127       6,714  
                

Total stockholders’ equity

     161,990       156,688  
                

Total liabilities and stockholders’ equity

   $ 339,209     $ 321,500  
                

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

3


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Amounts in thousands, except per share data)

 

    

Three Months Ended

June 30,

  

Six Months Ended

June 30,

     2007    2006    2007    2006

Revenue

   $ 114,591    $ 110,525    $ 223,207    $ 209,648

Operating expenses:

           

Cost of revenue (exclusive of depreciation and amortization included below)

     74,806      71,946      147,024      136,774

Sales and marketing

     8,571      7,163      16,522      15,189

General and administrative

     21,319      18,296      41,901      36,782

Research and development

     785      741      1,502      1,484

Depreciation and amortization

     1,324      1,413      2,618      2,905

Amortization of acquisition-related intangible assets

     2,113      2,176      4,227      4,352

Merger, restructuring and other charges

     972      644      1,250      1,411
                           

Total operating expenses

     109,890      102,379      215,044      198,897
                           

Income from operations

     4,701      8,146      8,163      10,751

Interest expense:

           

Interest on outstanding debt

     1,388      2,041      2,806      3,906

Amortization of deferred financing costs and discount on debt

     49      238      95      460

Interest income

     119      51      325      186

Other expense, net

     598      785      1,089      1,145
                           

Income before income taxes

     2,785      5,133      4,498      5,426

Provision for income taxes

     2,598      2,131      4,079      3,431
                           

Net income

   $ 187    $ 3,002    $ 419    $ 1,995
                           

Net income per share of common stock:

           

Basic

   $ 0.00    $ 0.05    $ 0.01    $ 0.03

Diluted

   $ 0.00    $ 0.05    $ 0.01    $ 0.03

Weighted average number of common shares outstanding:

           

Basic

     59,540      58,967      59,432      58,861

Diluted

     60,929      60,772      60,822      60,777

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

4


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Amounts in thousands)

 

    

Six Months Ended

June 30,

 
     2007     2006  

Cash flows from operating activities:

    

Net income

   $ 419     $ 1,995  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Stock-based compensation

     3,757       2,751  

Amortization of deferred financing charges and discount on debt

     95       460  

Depreciation and amortization

     2,618       2,905  

Amortization of acquisition-related intangible assets

     4,227       4,352  

Deferred income taxes

  

 

232

 

    429  

Other

     (42 )     71  

Changes in operating assets and liabilities, net of effects of acquisitions:

    

Accounts receivable

     (13,742 )     (3,453 )

Work in process

     1,401       (5,445 )

Other current assets

     (4,439 )     (476 )

Other assets

     (4,117 )     119  

Accounts payable

     (117 )     8,382  

Income tax payable

     2,130       667  

Accrued compensation and benefits

     (438 )     2,668  

Accrued outsourcing

     2,507       779  

Accrued merger and restructuring

     69       (145 )

Accrued expenses and other liabilities

  

 

4,025

 

    (8,645 )

Deferred revenue

     2,635       284  
                

Net cash provided by operating activities

     1,220       7,698  
                

Cash flows from investing activities:

    

Purchases of property and equipment

     (2,843 )     (1,975 )

Proceeds from sale of property and equipment

     —         12  

Purchase price adjustment for businesses acquired

     —         1,378  

Net proceeds from foreign currency forward contracts

     105       —    
                

Net cash used in investing activities

     (2,738 )     (585 )
                

Cash flows from financing activities:

    

Proceeds from issuance of short-term debt

     15,100       8,000  

Payments of short-term debt

     (15,154 )     (8,000 )

Payments of long-term debt

     (2,000 )     (4,726 )

Proceeds from issuance of common stock under stock option plans

     348       859  

Proceeds from issuance of capital lease obligations

     257       —    

Payments of capital lease obligations

     (187 )     (50 )
                

Net cash used in financing activities

     (1,636 )     (3,917 )
                

Net increase (decrease) in cash and cash equivalents

     (3,154 )     3,196  

Effects of exchange rate changes on cash and cash equivalents

     1,718       441  

Cash and cash equivalents at beginning of period

     27,354       25,147  
                

Cash and cash equivalents at end of period

   $ 25,918     $ 28,784  
                

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

5


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the accounts of Lionbridge Technologies, Inc. and its wholly owned subsidiaries (collectively, “Lionbridge” or the “Company”). These financial statements are unaudited. However, in the opinion of management, the consolidated financial statements include all adjustments, all of a normal nature, necessary for their fair presentation. Interim results are not necessarily indicative of results expected for a full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the operations, financial position and cash flows of the Company in conformity with U.S. generally accepted accounting principles. These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

The Company’s preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Estimates are used when accounting for collectibility of receivables, calculating service revenue using a percentage-of-completion assessment and valuing intangible assets, deferred tax assets and net assets of businesses acquired. Actual results could differ from these estimates.

 

2. STOCKHOLDERS’ EQUITY AND STOCK-BASED COMPENSATION

Stock Option Plans

The Company has stock-based compensation plans for salaried employees and non-employee members of the Board of Directors. The plans provide for discretionary grants of stock options, restricted stock and stock units, and other stock-based awards. The plans are administered by the Nominating and Compensation Committee of the Board of Directors, which consists of non-employee directors.

In November 2005, the stockholders of Lionbridge Technologies, Inc. approved the Lionbridge 2005 Incentive Plan (the “2005 Plan”), which had been previously adopted by the Lionbridge Board of Directors on October 7, 2005, for officers, employees, non-employee directors and other key persons of Lionbridge and its subsidiaries. The 2005 Plan was amended on May 21, 2007 to adjust the vesting schedule of future automatic equity grants to non-employee directors of the Company from four years to two years. The maximum number of shares of common stock available for issuance under the 2005 Plan is 4,000,000 shares. At June 30, 2007, there were 588,402 options available for future grant under the 2005 Plan. Options to purchase common stock are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire five years from the date of grant under the 2005 Plan. Under the terms of the 2005 Plan, the exercise price of incentive and non-qualified stock option grants must not be less than 100% of the fair market value of the common stock on the date of grant. Options are amortized using a straight line basis over the option vesting period. In the six months ended June 30, 2007, Lionbridge issued 1,021,500 stock option grants under the 2005 Plan.

Lionbridge’s 1998 Stock Option Plan (the “Plan”) provides for the issuance of incentive and nonqualified stock options. The maximum number of shares of common stock available for issuance under the Plan is 11,722,032 shares. At June 30, 2007 there were 1,299,921 options available for future grant under the Plan. Options to purchase common stock are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire ten years (five years in certain cases) from the date of grant under the Plan. 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, the par value per share of Lionbridge’s common stock.

 

6


Table of Contents

Restricted Stock Awards

On May 21, 2007, Lionbridge issued 20,625 restricted stock units with a fair market value of $125,000 for which restrictions on disposition lapse over thirteen months from the date of grant on each anniversary date. On May 1, 2007, Lionbridge issued 104,500 shares of restricted common stock and 182,500 restricted stock units with a fair market value of $1.4 million for which restrictions on disposition lapse over four years from the date of grant on each anniversary date. On April 24, 2007, Lionbridge issued 3,000 shares of restricted common stock with a fair market value of $16,000 for which restrictions on disposition lapse over four years from the date of grant on each anniversary date. On February 15, 2007, Lionbridge issued 231,500 shares of restricted common stock with a fair market value of $1.3 million for which restrictions on disposition lapse over four years from the date of grant on each anniversary date. Also on February 15, 2007, Lionbridge issued 84,475 shares of restricted common stock with a fair market value of $485,000 for which restrictions on disposition lapse over two years from the date of grant on each anniversary date.

The Company recognizes expense for stock options, market-based restricted stock awards and time-based restricted stock awards pursuant to the guidance of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, “Share-Based Payment” (“SFAS 123R”). Total compensation expense related to stock options, market-based restricted stock awards and time-based restricted stock awards was $2.0 million and $1.5 million for the three-month periods ended June 30, 2007 and 2006, respectively and $3.8 million and $2.8 million for the six-month periods ended June 30, 2007 and 2006, respectively, classified in the statement of operations line items as follows:

 

    

Three Months Ended

June 30,

  

Six Months Ended

June 30,

     2007    2006    2007    2006

Cost of revenue

   $ 35,000    $ 46,000    $ 60,000    $ 87,000

Sales and marketing

     320,000      293,000      587,000      554,000

General and administrative

     1,624,000      1,087,000      3,038,000      2,067,000

Research and development

     41,000      25,000      72,000      43,000
                           

Total stock-based compensation expense

   $ 2,020,000    $ 1,451,000    $ 3,757,000    $ 2,751,000
                           

 

3. DEBT

On December 21, 2006, the Company entered into a Credit Agreement (the “Credit Agreement”), dated as of December 21, 2006, together with VeriTest, Inc. (“VeriTest”), Lionbridge US, Inc. (“Lionbridge US”), Lionbridge Global Solutions Federal, Inc. (“Federal”) and Lionbridge Global Solutions II, Inc. (“LGS II”) (VeriTest, Lionbridge US, Federal and LGS II, are collectively the “US Guarantors”), the several banks and financial institutions as may become parties to the HSBC Credit Agreement (collectively, the “Lenders”) and HSBC Bank USA, National Association, as administrative agent for the Lenders (“HSBC”). The Credit Agreement was subsequently amended on January 22, 2007 to add certain additional non-U.S. subsidiaries of the Company as Borrowers or Guarantors. The Credit Agreement replaced the Company’s Term Loan B and Revolving Credit Facility with Wachovia Bank, National Association that had been in place since September 1, 2005. The Credit Agreement provides for a five-year $100.0 million revolving credit facility. At June 30, 2007, $75.7 million was outstanding with an interest rate of 6.8%.

 

4. COMPREHENSIVE INCOME

Total comprehensive income consists of net income and the net change in foreign currency translation adjustment, which is the only component of accumulated other comprehensive income. Total comprehensive income was $1.0 million and $4.6 million for the three-month periods ended June 30, 2007 and 2006, respectively, and $1.8 million and $4.3 million for the six-month periods ended June 30, 2007 and 2006, respectively.

 

5. NET INCOME PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. For the purposes of calculating diluted earnings per share, the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options, unvested restricted stock and warrants, as determined using the treasury stock method.

 

7


Table of Contents

Shares used in calculating basic and diluted earnings per share for the three and six-month periods ended June 30, 2007 and 2006, respectively, are as follows:

 

    

Three Months Ended

June 30,

  

Six Months Ended

June 30,

     2007    2006    2007    2006

Weighted average number of shares of common stock outstanding—basic

   59,540,000    58,967,000    59,432,000    58,861,000

Dilutive common stock equivalents relating to options, restricted stock and warrants

   1,389,000    1,805,000    1,390,000    1,916,000
                   

Weighted average number of shares of common stock outstanding—diluted

   60,929,000    60,772,000    60,822,000    60,777,000
                   

Options, unvested restricted stock and warrants to purchase 5,029,000 and 3,421,000 shares of common stock for the three-month periods ended June 30, 2007 and 2006, respectively, and 5,325,000 and 3,969,000 for the six-month periods ended June 30, 2007 and 2006, respectively, were not included in the calculation of diluted net income per share, as their effect would be anti-dilutive.

 

6. MERGER, RESTRUCTURING AND OTHER CHARGES

During the six-month period ended June 30, 2007 Lionbridge recorded $1.3 million of restructuring and other charges. The $1.3 million of restructuring and other charges recorded in the six-month period ended June 30, 2007 included $727,000 for workforce reductions in Europe and South America consisting of twelve technical and five administrative staff, $162,000 recorded for vacated facilities, $132,000 of additional costs recorded for a previously vacated facility in order to reflect a new sublease arrangement, recorded pursuant to the guidance in FASB Statement of Financial Accounting Standards No. 146, “Accounting for Costs associated with Exit or Disposal Activities” (“SFAS No. 146”) and $229,000 of other charges, principally expenses related to integrating financial systems used by the acquired Bowne Global Solutions (“BGS”) sites to a common general ledger financial system. Of these charges, $929,000 related to the Company’s Global Language and Content (“GLC”) segment, $92,000 related to the Global Development and Testing (“GDT”) segment and $229,000 related to Corporate and Other. The Company made $1.1 million of cash payments in the six-month period ended June 30, 2007, $875,000 and $243,000 related to the GLC and GDT segments, respectively.

During the six-month period ended June 30, 2006 Lionbridge recorded $1.4 million of restructuring and other charges. The $1.4 million of restructuring and other charges recorded in the six-month period ended June 30, 2006 included $476,000 for workforce reductions in Europe and the U.S. consisting of six technical and two administrative staff, a $57,000 reduction of anticipated costs recorded in a prior period on a vacated facility in order to reflect a new sublease arrangement, recorded pursuant to the guidance in SFAS No. 146 and $992,000 of other charges, principally professional services fees, related to the integration of BGS recorded pursuant to the guidance in Emerging Issues Task Force Abstract 95-3, “Recognition of Liabilities in connection With a Purchase Business Combination” (“EITF 95-3’), and related literature. Of these charges, $646,000 related to the Company’s GLC segment and $765,000 related to Corporate and Other. Of the $3.3 million of cash payments in the six-month period ended June 30, 2006, $3.2 million and $95,000 related to the GLC and GDT segments, respectively, and $23,000 related to Corporate and Other.

The following table summarizes the accrual activity for the six months ended June 30, 2007 and 2006, respectively, by initiative:

 

     2007     2006  

Beginning balance, January 1

   $ 2,388,000     $ 4,210,000  

Employee severance:

    

Merger and restructuring charges recorded (1)

     727,000       476,000  

Liabilities assumed and recorded on business combinations (2)

     —         1,687,000  

Cash payments related to liabilities assumed and recorded on business combinations

     (3,000 )     (1,879,000 )

Cash payments related to liabilities recorded on exit or disposal activities

     (359,000 )     (499,000 )
                
     365,000       (215,000 )
                

Vacated facility/Lease termination:

    

Merger and restructuring charges recorded (1)

     162,000       —    

Liabilities assumed and recorded on business combinations (2)

     —         262,000  

Revision of estimated liabilities

     132,000       (57,000 )

 

8


Table of Contents
     2007     2006  

Cash payments related to liabilities assumed and recorded on business combinations

     (205,000 )     (608,000 )

Cash payments related to liabilities recorded on exit or disposal activities

     (551,000 )     (301,000 )
                
     (462,000 )     (704,000 )
                

Ending balance, June 30

   $ 2,291,000     $ 3,291,000  
                

(1) Charges recorded pursuant to the guidance in SFAS No. 146
(2) Liabilities assumed and recorded pursuant to the guidance in EITF 95-3 and related literature.

At June 30, 2007, the Company’s consolidated balance sheet includes accruals totaling $2.3 million primarily related to employee termination costs and vacated facilities. Lionbridge currently anticipates that $1.8 million of these will be fully utilized within twelve months. The remaining $474,000 relates to lease obligations on unused facilities expiring through 2011 and is included in long-term liabilities.

 

7. INCOME TAXES

On January 1, 2007, Lionbridge adopted Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”). FIN 48 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

At the adoption date the Company had gross unrecognized tax affected benefits of approximately $1.5 million, exclusive of certain pre-acquisition indemnification items. As a result of adopting FIN 48, the Company recognized a charge of approximately $185,000 to the January 1, 2007 retained earnings balance for accrued taxes, interest and penalties related to the unrecognized tax benefits, which if incurred, would be recognized as a component of income tax expense.

In connection with the acquisition of BGS, Bowne & Co. Inc. agreed to indemnify the Company for any tax liabilities accruing on or prior to the acquisition date of September 1, 2005. The Company determined that its gross unrecognized tax affected benefits related to the acquisition of BGS and subject to indemnification were approximately $4.0 million. Accordingly, the Company adjusted its balance sheet by recording a long-term Indemnification Receivable and related FIN 48 liability as of January 1, 2007 for this amount. Tax provisions during the six months ended June 30, 2007, primarily related to accrued interest, have increased these balances by $192,000 to $4.2 million.

The components of the provision for income taxes are as follows for the three and six-month periods ended June 30, 2007 and 2006:

 

    

Three Months Ended

June 30,

  

Six Months Ended

June 30,

     2007    2006    2007    2006

Current:

           

Federal

   $ —      $ —      $ —      $ —  

State

     62,000      —        88,000      —  

Foreign

     2,420,000      1,771,000      3,759,000      3,002,000
                           

Total current provision

     2,482,000      1,771,000      3,847,000      3,002,000

Deferred:

           

Federal

   $ 116,000    $ 360,000    $ 232,000    $ 429,000
                           

Total provision for income taxes

   $ 2,598,000    $ 2,131,000    $ 4,079,000    $ 3,431,000
                           

The tax provision for the three and six-month periods ended June 30, 2007 consists primarily of taxes on income in foreign jurisdictions, a deferred tax provision of $116,000 and $232,000, respectively, related to tax-deductible goodwill from the BGS acquisition and a provision of $99,000 and $197,000, respectively, related to the Company’s FIN 48 liability. The Company reasonably anticipates that the unrecognized tax benefit relative to FIN 48 will not change significantly within the next twelve months. The tax provision for the three and six-month periods ended June 30, 2006 consists primarily of taxes on income in foreign jurisdictions and deferred taxes related to tax deductible goodwill acquired from the BGS acquisition.

The tax provisions for both periods include non-cash tax expense that will be offset by pre-acquisition foreign net operating loss carryforwards. The tax benefits from utilization of pre-acquisition losses do not reduce the foreign element of the tax provision, but instead reduce goodwill. The effective rate does not reflect a benefit of U.S. operating loss carryforward amounts due to a full valuation reserve against the U.S. deferred asset.

 

9


Table of Contents

At June 30, 2007, no provision for U.S. income and foreign withholding taxes has been made for unrepatriated foreign earnings because it is expected that such earnings will be reinvested indefinitely or the distribution of any remaining amount would be principally offset by foreign tax credits.

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 that could be used annually to offset future taxable income and income tax liability.

The Company conducts business globally and in the normal course of business is subject to examination by local, state and federal jurisdictions in the United States as well as in multiple foreign jurisdictions. Currently, no Internal Revenue Service audits are underway and audits in foreign jurisdictions are in varying stages of completion. Open audit years are dependent upon the tax jurisdiction and range from 1997 to 2006.

 

8. SEGMENT INFORMATION

Lionbridge has determined that its operating segments are those that are based on its method of internal reporting, which separately presents its business based on the service performed. The Company is reporting its results among the following three business segments:

Global Language and Content (“GLC”)—this segment includes Lionbridge’s globalization, translation and localization services, as well as content development and technical documentation. The GLC segment includes product and content globalization services. Globalization is the process of adapting content and products to meet the language and cultural requirements of users throughout the world. Lionbridge GLC solutions enable the translation, adaptation and worldwide multilingual release of clients’ products, content and related technical support, training materials, and sales and marketing information. Lionbridge GLC solutions also include the development of eLearning content and technical documentation.

Global Development and Testing (“GDT”)—this segment includes Lionbridge’s development, engineering and testing services for software, hardware, websites and content. Specifically, GDT includes the development and maintenance of applications as well as testing to ensure the quality, interoperability, usability and performance of clients’ software, hardware, consumer technology products, web sites and content. Lionbridge’s testing services also include product certification and competitive analysis. Lionbridge offers its testing services under the VeriTest brand.

Interpretation—this segment includes interpretation services provided by Lionbridge to government organizations and businesses that require human interpreters.

The table below presents information about the reported net income of the Company for the three and six-month periods ended June 30, 2007 and 2006. Asset information by reportable segment is not reported, since the Company does not produce such information internally.

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
     2007     2006     2007     2006  

External revenue:

        

Global Language and Content

   $ 88,706,000     $ 88,530,000     $ 175,699,000     $ 167,642,000  

Global Development and Testing

     19,643,000       15,651,000       35,566,000       29,930,000  

Interpretation

     6,242,000       6,344,000       11,942,000       12,076,000  
                                
   $ 114,591,000     $ 110,525,000     $ 223,207,000     $ 209,648,000  
                                

Net income:

        

Global Language and Content

   $ 11,954,000     $ 13,538,000     $ 21,941,000     $ 23,024,000  

Global Development and Testing

     4,335,000       3,504,000       6,913,000       5,610,000  

Interpretation

     903,000       715,000       1,617,000       1,199,000  
                                

Less: corporate and other expenses

     (17,005,000 )     (14,755,000 )     (30,052,000 )     (27,838,000 )
                                
   $ 187,000     $ 3,002,000     $ 419,000     $ 1,995,000  
                                

 

9. GOODWILL AND OTHER INTANGIBLE ASSETS

In connection with the September 1, 2005 acquisition of BGS, Lionbridge recorded $96.1 million of goodwill. Additionally, in connection with the acquisition of BGS, Lionbridge recorded $48.3 million of amortizable intangible assets,

 

10


Table of Contents

including customer contracts, technology and customer relationships. The estimated useful life of acquired customer contracts ranges from 3.3 to 5.3 years and is being amortized on a straight-line basis. The estimated useful life of acquired technology ranges from 1 to 4 years and is being amortized on a straight-line basis. The estimated useful life of acquired customer relationships is 12 years and is being amortized using the economic consumption method to reflect diminishing cash flows from these relationships in the future. In determining the fair value of the acquired customer relationships, Lionbridge used a discounted cash flow model based upon the estimated future income streams associated with the customer relationships considering their estimated remaining period of benefit. As part of this model, Lionbridge relied on historical attrition rates combined with a premium factor related to the inherent risk of attrition in the newly acquired BGS customer base.

The Company evaluates whether there has been an impairment in the carrying value of its long-lived assets, including other intangibles assets and property and equipment, in accordance with SFAS No. 144, “Accounting for Impairment of Long-Lived Assets,” if circumstances indicate that a possible impairment may exist. 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. If it is determined that the asset is impaired then it is written down to its estimated fair value. Long-lived assets, other than goodwill and other intangible assets, which are held for disposal, are recorded at the lower of carrying value or fair market value less the estimated cost to sell. Factors that could lead to an impairment of acquired customer relationships include a worsening in customer attrition rates compared to historical attrition rates, or lower than initially anticipated cash flows associated with customer relationships.

The following table summarizes other intangible assets at June 30, 2007 and December 31, 2006, respectively.

 

     June 30, 2007    December 31, 2006
    

Gross

Carrying

Value

  

Accumulated

Amortization

   Balance   

Gross

Carrying

Value

  

Accumulated

Amortization

   Balance

BGS acquired customer relationships

   $ 32,000,000    $ 8,663,000    $ 23,337,000    $ 32,000,000    $ 6,255,000    $ 25,745,000

BGS acquired customer contracts

     14,000,000      5,431,000      8,569,000      14,000,000      3,950,000      10,050,000

BGS acquired technology

     2,317,000      1,556,000      761,000      2,317,000      1,218,000      1,099,000
                                         
   $ 48,317,000    $ 15,650,000    $ 32,667,000    $ 48,317,000    $ 11,423,000    $ 36,894,000
                                         

Lionbridge currently expects to amortize the following remaining amounts of intangible assets held at June 30, 2007 in the fiscal periods as follows:

 

Year ending December 31,

    

2007

   $ 4,226,000

2008

     8,441,000

2009

     5,520,000

2010

     4,893,000

2011

     2,332,000

Thereafter

     7,255,000
      
   $ 32,667,000
      

 

10. CONTINGENCIES

On or about July 24, 2001, a purported securities class action lawsuit captioned “Samet v. Lionbridge Technologies, Inc. et al.” (01-CV-6770) was filed in the United States District Court for the Southern District of New York (the “Court”) against the Company, certain of its officers and directors, and certain underwriters involved in the Company’s initial public offering. The complaint in this action asserted, among other things, that omissions regarding the underwriters’ alleged conduct in allocating shares in Lionbridge’s initial public offering to the underwriters’ customers. In March 2002, the United States District Court for the Southern District of New York entered an order dismissing without prejudice the claims against Lionbridge and its officers and directors (the case remained pending against the underwriter defendants).

 

11


Table of Contents

On April 19, 2002, the plaintiffs filed an amended complaint naming as defendants not only the underwriter defendants but also Lionbridge and certain of its officers and directors. The amended complaint asserts claims under both the registration and antifraud provisions of the federal securities laws relating to, among other allegations, the underwriters’ alleged conduct in allocating shares in the Company’s initial public offering and the disclosures contained in the Company’s registration statement. The Company understands that various plaintiffs have filed approximately 1,000 lawsuits making substantially similar allegations against approximately 300 other publicly-traded companies in connection with the underwriting of their public offerings. On July 15, 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the complaint on various legal grounds common to all or most of the issuer defendants. In October 2002, the claims against officers and directors were dismissed without prejudice. In February 2003, the Court issued its ruling on the motion to dismiss, ruling that the claims under the antifraud provisions of the securities laws could proceed against the Company and a majority of the other issuer defendants.

In June 2003, Lionbridge elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been approved by the Court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against Lionbridge and against any other of the issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed settlement was conditioned on, among other things, a ruling by the District Court that the claims against Lionbridge and against the other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement.

On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision in In re Initial Public Offering Securities Litigation that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company may not be certified as class actions due, in part, to the Appeals Court’s determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of the Second Circuit Court of Appeals’ decision. On April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision.

In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including Lionbridge. Because any possible future settlement with the plaintiffs, if such a settlement were ever to be agreed to, would involve the certification of a class action for settlement purposes, the impact of the Court of Appeals’ class certification-related rulings on the possible future settlement of the claims against Lionbridge cannot now be predicted.

With the termination of the proposed settlement, we intend to continue to defend the litigation vigorously. The litigation process is inherently uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of this pending lawsuit. The Company believes that the underwriters may have an obligation to indemnify Lionbridge for the legal fees and other costs of defending this suit. While Lionbridge cannot guarantee the outcome of these proceedings, the Company believes that the final result of this lawsuit will have no material effect on its consolidated financial condition, results of operations, or cash flows.

 

11. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Company is currently assessing SFAS No. 159 and has not yet determined the impact, if any, that its adoption will have on its result of operations or financial position.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances many of which Lionbridge has little or no control over. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in Lionbridge’s Annual Report on Form 10-K, filed March 16, 2007 (SEC File No. 000-26933) and subsequent filings as well as risks and uncertainties discussed elsewhere in this Form

 

12


Table of Contents

10-Q could cause Lionbridge’s actual results to differ materially from those in the forward-looking statements. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The forward-looking statements in this Form 10-Q are made as of the date of this filing only, and Lionbridge does not undertake to update or supplement these statements due to changes in circumstances or otherwise.

 

Introduction

Lionbridge is a leading provider of globalization, development and testing services that enable clients to develop, release, manage and maintain their enterprise content and technology applications globally. The Company reports financial performance in the following three segments: Global Language and Content (“GLC”), Global Development and Testing (“GDT”) and Interpretation.

Lionbridge Global Language and Content (“GLC”) solutions enable the globalization and worldwide multilingual release of clients’ products, content and related technical support, training materials, and sales and marketing information. Globalization is the process of adapting content and products to meet the language and cultural requirements of users throughout the world. Lionbridge GLC solutions are based on the Company’s internet technology platform and global service delivery model which make the translation process more efficient for Lionbridge clients and translators. As part of its GLC solutions, Lionbridge also develops eLearning content and technical documentation.

Lionbridge’s interpretation business (“Interpretation”) pertains to the Company’s interpretation services for government organizations and businesses that require human interpreters for non-English speaking individuals.

Through its Global Development and Testing (“GDT”) solutions, Lionbridge develops, re-engineers and optimizes IT applications and performs testing to ensure the quality, interoperability, usability and performance of clients’ software, consumer technology products, web sites and content. Lionbridge’s testing services, which are offered under the VeriTest brand, also include product certification and competitive analysis. Lionbridge has deep domain experience developing, testing and maintaining applications in a cost-efficient, blended on-site and offshore model.

Lionbridge provides a full suite of globalization, testing and development outsourcing services to businesses, particularly in the technology, consumer products, life sciences, publishing, financial services, manufacturing, government automotive and retail industries. Lionbridge’s solutions include product and content globalization; content and eLearning courseware development; application development and maintenance; software and hardware testing; product certification and competitive analysis. Lionbridge’s services enable global organizations to increase market penetration and speed adoption of global content and products, enhance return on enterprise application investments, increase workforce productivity and reduce costs.

For the six-month period ended June 30, 2007, Lionbridge’s income from operations was $8.2 million, with net income of $419,000. For the year ended December 31, 2006, the Company’s income from operations was $15.0 million with a net loss of $4.9 million. As of June 30, 2007, the Company had an accumulated deficit of $107.5 million.

 

Revenue Recognition

Lionbridge recognizes revenue as services are performed and amounts are earned in accordance with the Securities and Exchange Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition.” Lionbridge considers amounts to be earned when (1) persuasive evidence of an arrangement has been obtained; (2) services are delivered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees.

Lionbridge’s revenue is recorded from the provision of services to customers for GLC, GDT and Interpretation services which include content development, product and content globalization, interpretation, software and hardware testing, product certification and application development and maintenance.

Content development, software and hardware testing, interpretations and application development and maintenance projects are normally time and expense priced contracts, and revenue is recognized using a time and expense basis over the period of performance, primarily based on labor costs incurred to date.

Product and content globalization and product certification projects are fixed price contracts and revenue is recognized as services are delivered. Depending on specific contractual provisions and nature of the deliverable, revenue is recognized on (1) a proportional performance model based on level of effort, (2) as milestones are achieved or (3) when final deliverables have been met. Amounts billed in excess of revenue recognized are recorded as deferred revenue.

 

13


Table of Contents

The delivery of Lionbridge’s GLC services involve and are dependent on the translation of content by subcontractors and in-house employees. As the time and cost to translate each word of content within a project is relatively uniform, labor input is reflective of the delivery of the contracted service and an appropriate metric for the measurement of proportional performance in delivering such services. The use of a proportional performance assessment of service delivery requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, anticipated increases in employee wages and prices for subcontractor services, and the availability of subcontractor services. When adjustments in estimated project costs are identified, anticipated losses, if any, are recognized in the period in which they are determined.

Lionbridge’s GLC agreements with its customers may provide the customer with a fixed and limited time period following delivery during which Lionbridge will attempt to address any non-conformity to previously agreed upon objective specifications relating to the work, either in the form of a limited acceptance period or a post-delivery warranty period. Management believes recognition of revenue at the time the services are delivered is appropriate, because its obligations under such provisions are limited in time, limited in scope, and historically have not involved significant costs. In the future, if the post delivery acceptance or warranty provisions become more complex or include subjective acceptance criteria, Lionbridge may have to revise its revenue recognition policy appropriately, which could affect the timing of revenue recognition.

Lionbridge provides integrated full-service offerings throughout a client’s product and content lifecycle, including GLC and GDT services. Such multiple-element service offerings are governed by the Emerging Issues Task Force Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” For these arrangements where the GLC and GDT services have independent value to the customer, and there is evidence of fair value for each service, the combined service arrangement is bifurcated into separate units for accounting treatment. In instances where it is not possible to bifurcate a project, direct and incremental costs attributable to each component are deferred and recognized together with the service revenue upon delivery. The determination of fair value requires the use of significant judgment. Lionbridge determines the fair value of service revenues based upon its recent pricing for those services when sold separately and/or prevailing market rates for similar services.

Revenue includes reimbursement of travel and out-of-pocket expenses with equivalent amounts of expense recorded in cost of revenue.

 

Valuation of Goodwill and Long-Lived Assets

Lionbridge assesses the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that Lionbridge considers important that could trigger an impairment review include: significant underperformance relative to expected historical or projected future operating results; significant changes in the overall business strategy; and significant negative industry or economic trends. When Lionbridge determines that the carrying value of intangibles and goodwill may not be recoverable based upon one or more of these indicators of impairment, the Company measures any impairment using fair value measurements based on projected discounted cash flow valuation models. In addition in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill is reviewed for impairment on an annual basis. At December 31, 2006, the Company performed its annual test of goodwill to determine if an impairment existed. This test determined that each reporting unit’s fair value exceeded the carrying value of the net assets of each respective reporting unit, using projected discounted cash flow modeling. As a result, no impairment was required to be recorded related to the Company’s annual impairment testing for the year ended December 31, 2006. Estimating future cash flows requires management to make projections that can differ materially from actual results.

The Company evaluates whether there has been an impairment in the carrying value of its long-lived assets, including other intangibles assets and property and equipment, in accordance with SFAS No. 144, “Accounting for Impairment of Long-Lived Assets,” if circumstances indicate that a possible impairment may exist. 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. If it is determined that the asset is impaired then it is written down to its estimated fair value. Long-lived assets, other than goodwill and other intangible assets, which are held for disposal, are recorded at the lower of carrying value or fair market value less the estimated cost to sell. Factors that could lead to an impairment of acquired customer relationships (recorded with the BGS acquisition) include a worsening in customer attrition rates compared to historical attrition rates, or lower than initially anticipated cash flows associated with customer relationships.

 

Merger, Restructuring and Other Charges

During the six-month period ended June 30, 2007 Lionbridge recorded $1.3 million of restructuring and other charges. The $1.3 million of restructuring and other charges recorded in the six-month period ended June 30, 2007 included $727,000

 

14


Table of Contents

for workforce reductions in Europe and South America consisting of twelve technical and five administrative staff, $162,000 recorded for vacated facilities, $132,000 of additional costs recorded for a previously vacated facility in order to reflect a new sublease arrangement, recorded pursuant to the guidance in FASB Statement of Financial Accounting Standards No. 146, “Accounting for Costs associated with Exit or Disposal Activities” (“SFAS No. 146”) and $229,000 of other charges, principally expenses related to integrating financial systems used by the acquired Bowne Global Solutions (“BGS”) sites to a common general ledger financial system. Of these charges, $929,000 related to the Company’s Global Language and Content (“GLC”) segment, $92,000 related to the Global Development and Testing (“GDT”) segment and $229,000 related to Corporate and Other. The Company made $1.1 million of cash payments in the six-month period ended June 30, 2007, $875,000 and $243,000 related to the GLC and GDT segments, respectively.

During the six-month period ended June 30, 2006 Lionbridge recorded $1.4 million of restructuring and other charges. The $1.4 million of restructuring and other charges recorded in the six-month period ended June 30, 2006 included $476,000 for workforce reductions in Europe and the U.S. consisting of six technical and two administrative staff, a $57,000 reduction of anticipated costs recorded in a prior period on a vacated facility in order to reflect a new sublease arrangement, recorded pursuant to the guidance in SFAS No. 146 and $992,000 of other charges, principally professional services fees, related to the integration of BGS recorded pursuant to the guidance in EITF 95-3, and related literature. Of these charges, $646,000 related to the Company’s GLC segment and $765,000 related to Corporate and Other. Of the $3.3 million of cash payments in the six-month period ended June 30, 2006, $3.2 million and $95,000 related to the GLC and GDT segments, respectively, and $23,000 related to Corporate and Other.

 

Stock-based Compensation

Stock Option Plans

The Company has stock-based compensation plans for salaried employees and non-employee members of the Board of Directors. The plans provide for discretionary grants of stock options, restricted stock and stock units, and other stock-based awards. The plans are administered by the Nominating and Compensation Committee of the Board of Directors, which consists of non-employee directors.

In November 2005, the stockholders of Lionbridge Technologies, Inc. approved the Lionbridge 2005 Incentive Plan (the “2005 Plan”), which had been previously adopted by the Lionbridge Board of Directors on October 7, 2005, for officers, employees, non-employee directors and other key persons of Lionbridge and its subsidiaries. The 2005 Plan was amended on May 21, 2007 to adjust the vesting schedule of future automatic equity grants to non-employee directors of the Company from four years to two years. The maximum number of shares of common stock available for issuance under the 2005 Plan is 4,000,000 shares. At June 30, 2007, there were 588,402 options available for future grant under the 2005 Plan. Options to purchase common stock are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire five years from the date of grant under the 2005 Plan. Under the terms of the 2005 Plan, the exercise price of incentive and non-qualified stock option grants must not be less than 100% of the fair market value of the common stock on the date of grant. Options are amortized using a straight line basis over the option vesting period. In the six months ended June 30, 2007, Lionbridge issued 1,021,500 stock option grants under the 2005 Plan.

Lionbridge’s 1998 Stock Option Plan (the “Plan”) provides for the issuance of incentive and nonqualified stock options. The maximum number of shares of common stock available for issuance under the Plan is 11,722,032 shares. At June 30, 2007 there were 1,299,921 options available for future grant under the Plan. Options to purchase common stock are granted at the discretion of the Board of Directors and the Nominating and Compensation Committee. Generally, stock options vest over a four-year period: 25% of the option shares vest one year from the date of grant and the remaining option shares vest at the rate of 12.5% each six month period thereafter. Stock options generally expire ten years (five years in certain cases) from the date of grant under the Plan. 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, the par value per share of Lionbridge’s common stock.

 

Restricted Stock Awards

On May 21, 2007, Lionbridge issued 20,625 restricted stock units with a fair market value of $125,000 for which restrictions on disposition lapse over thirteen months from the date of grant on each anniversary date. On May 1, 2007, Lionbridge issued 104,500 shares of restricted common stock and 182,500 restricted stock units with a fair market value of $1.4 million for which restrictions on disposition lapse over four years from the date of grant on each anniversary date. On April 24, 2007, Lionbridge issued 3,000 shares of restricted common stock with a fair market value of $16,000 for which

 

15


Table of Contents

restrictions on disposition lapse over four years from the date of grant on each anniversary date. On February 15, 2007, Lionbridge issued 231,500 shares of restricted common stock with a fair market value of $1.3 million for which restrictions on disposition lapse over four years from the date of grant on each anniversary date. Also on February 15, 2007, Lionbridge issued 84,475 shares of restricted common stock with a fair market value of $485,000 for which restrictions on disposition lapse over two years from the date of grant on each anniversary date.

The Company recognizes expense for stock options, market-based restricted stock awards and time-based restricted stock awards pursuant to the guidance of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123, “Share-Based Payment” (“SFAS 123R”). Total compensation expense related to stock options, market-based restricted stock awards and time-based restricted stock awards was $2.0 million and $1.5 million for the three-month periods ended June 30, 2007 and 2006, respectively and $3.8 million and $2.8 million for the six-month periods ended June 30, 2007 and 2006, respectively, classified in the statement of operations line items as follows:

 

    

Three Months Ended

June 30,

  

Six Months Ended

June 30,

     2007    2006    2007    2006

Cost of revenue

   $ 35,000    $ 46,000    $ 60,000    $ 87,000

Sales and marketing

     320,000      293,000      587,000      554,000

General and administrative

     1,624,000      1,087,000      3,038,000      2,067,000

Research and development

     41,000      25,000      72,000      43,000
                           

Total stock-based compensation expense

   $ 2,020,000    $ 1,451,000    $ 3,757,000    $ 2,751,000
                           

 

Results of Operations

The following table sets forth for the periods indicated certain unaudited consolidated financial data as a percentage of total revenue.

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
     2007     2006     2007     2006  

Revenue

   100.0 %   100.0 %   100.0 %   100.0 %

Operating expenses:

        

Cost of revenue (exclusive of depreciation and amortization included below)

   65.3     65.1     65.9     65.2  

Sales and marketing

   7.5     6.5     7.4     7.3  

General and administrative

   18.6     16.5     18.8     17.5  

Research and development

   0.7     0.7     0.7     0.7  

Depreciation and amortization

   1.2     1.3     1.2     1.4  

Amortization of acquisition-related intangible assets

   1.8     2.0     1.9     2.1  

Merger, restructuring and other charges

   0.8     0.6     0.4     0.7  
                        

Total operating expenses

   95.9     92.7     96.3     94.9  
                        

Income from operations

   4.1     7.3     3.7     5.1  

Interest expense:

        

Interest in outstanding debt

   1.2     1.8     1.3     1.9  

Amortization of deferred financing costs

   —       0.2     —       0.2  

Interest income

   0.1     —       0.1     0.1  

Other expense, net

   0.5     0.7     0.5     0.5  
                        

Income before income taxes

   2.5     4.6     2.0     2.6  

Provision for income taxes

   2.3     1.9     1.8     1.6  
                        

Net income

   0.2 %   2.7 %   0.2 %   1.0 %
                        

 

16


Table of Contents

Revenue. The following table shows Global Language and Content (“GLC”), Global Development and Testing (“GDT”), and Interpretation revenues in dollars and as a percentage of total revenue for the three and six months ended June 30, 2007 and 2006, respectively:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2007    2006    2007    2006

GLC

   $ 88,706,000    78%    $ 88,530,000    80%    $ 175,699,000    79%    $ 167,642,000    80%

GDT

     19,643,000    17%      15,651,000    14%      35,566,000    16%      29,930,000    14%

Interpretation

     6,242,000    5%      6,344,000    6%      11,942,000    5%      12,076,000    6%
                                               

Total revenue

   $ 114,591,000    100%    $ 110,525,000    100%    $ 223,207,000    100%    $ 209,648,000    100%
                                               

Revenue for the quarter ended June 30, 2007 was $114.6 million, an increase of $4.1 million, or 3.7%, from $110.5 million for the quarter ended June 30, 2006 and consists of $176,000 and $4.0 million of revenue growth in GLC and GDT, respectively. Interpretation revenue for the quarter ended June 30, 2007, declined $102,000 to $6.2 million from $6.3 million in the comparable quarter of 2006. As compared to the quarter ended June 30, 2006, revenues increased approximately $1.0 million as the result of organic growth, and approximately $3.1 million, due to the impact of foreign exchange, primarily affecting the GLC business, as the U.S. dollar declined against certain foreign currencies, in particular the Euro, during the quarter ended June 30, 2007. This increase was partially offset by a $4.8 million increase in deferred revenue which negatively impacted comparative recognized revenue in the GLC business.

Revenue for the six months ended June 30, 2007 was $223.2 million, an increase of $13.6 million, or 6.5%, from $209.6 million for the six months ended June 30, 2006. The increase of $13.6 million consists of $8.1 million and $5.6 million of revenue growth in GLC and GDT, respectively. Interpretation revenue for the six months ended June 30, 2007, declined $134,000 to $11.9 million from $12.1 million in the comparable six months of 2006. As compared to the six months ended June 30, 2006, revenues increased approximately $6.5 million as the result of organic growth, and approximately $7.1 million, due to the impact of foreign exchange, primarily affecting the GLC business, as the U.S. dollar declined against certain foreign currencies, in particular the Euro, during the six months ended June 30, 2007. As noted above, this increase was partially offset by the increase in deferred revenue in the GLC business.

Revenue from the Company’s GLC business for the quarter ended June 30, 2007 increased $176,000 to $88.7 million from $88.5 million for the quarter ended June 30, 2006, essentially flat year over year. Revenue from the Company’s GLC business for the six months ended June 30, 2007 was $175.7 million, an increase of $8.1 million, or 4.8%, from $167.6 million for the six months ended June 30, 2006. Approximately half of the increase for the six months ended June 30, 2007, as compared to the six months ended June 30, 2006, is due to organic growth and the balance is the result of the impact of foreign exchange, as noted above. Organic growth consisted of increased revenue from new and existing customers and in part reflects a growing demand for localized web services. This increase in revenue was partially offset by the increase in deferred revenue in the GLC business.

Revenue from the Company’s GDT business was $19.6 million for the quarter ended June 30, 2007, an increase of $4.0 million, or 25.5%, from $15.7 million for the quarter ended June 30, 2006. Revenue from the Company’s GDT business for the six months ended June 30, 2007 was $35.6 million, an increase of $5.6 million, or 18.8%, from $29.9 million for the six months ended June 30, 2006. The year-on-year increase in GDT for the quarter and six months ended June 30, 2007, was primarily due to increased revenue from two large customers under long-term engagements.

Revenue from the Company’s Interpretation business for the quarter and six months ended June 30, 2007 was down slightly as compared to the quarter ended and six months ended June 30, 2006.

Cost of Revenue. Cost of revenue, excluding depreciation and amortization, consists primarily of expenses incurred for translation services provided by third parties as well as salaries and associated employee benefits for personnel related to client projects. The following table shows GLC, GDT and Interpretation cost of revenues, the percentage change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2007 and 2006, respectively:

 

17


Table of Contents
     

Three Months

Ended

June 30,

2007

   

% Change

Q2 06 to Q2 07

   

Three Months

Ended

June 30,

2006

   

Six Months

Ended

June 30,

2007

   

% Change

Six Months
06 to Six
Months 07

   

Six Months

Ended

June 30,

2006

 

GLC:

            

Cost of revenue

   $ 58,173,000     0.8 %   $ 57,684,000     $ 115,959,000     6.6 %   $ 108,783,000  

Percentage of revenue

     65.6 %       65.2 %     66.0 %       64.9 %

GDT:

            

Cost of revenue

     11,885,000     28.4 %     9,256,000       21,963,000     19.9 %     18,314,000  

Percentage of revenue

     60.5 %       59.1 %     61.8 %       61.2 %

Interpretation:

            

Cost of revenue

     4,748,000     (5.2 )%     5,006,000       9,102,000     (5.9 )%     9,677,000  

Percentage of revenue

     76.1 %       78.9 %     76.2 %       80.1 %
                                    

Total cost of revenue

   $ 74,806,000       $ 71,946,000     $ 147,024,000       $ 136,774,000  
                                    

Percentage of revenue

     65.3 %       65.1 %     65.9 %       65.2 %

For the quarter and six months ended June 30, 2007, as a percentage of revenue, cost of revenue increased slightly to 65.3% and 65.9%, respectively as compared to 65.1% and 65.2% for the three and six months ended June 30, 2006. These increases were primarily due to the changes in the revenue and service mix and the impact of foreign exchange primarily in the GLC business. The U.S. dollar declined against certain foreign currencies, in particular the Euro, in the quarter ended June 30, 2007 as compared to the quarter ended June 30, 2006.

For the quarter ended June 30, 2007, cost of revenue increased $2.9 million, or 4.0%, to $74.8 million compared to $71.9 million for the same quarter of the prior year. This increase was primarily in support of $4.1 million incremental revenue as compared to the quarter ended June 30, 2006. Approximately $3.1 million of the increase is attributable to depreciation of the dollar against certain currencies as noted above. Cost of revenue was $147.0 million for the six months ended June 30, 2007, an increase of $10.3 million, or 7.5%, as compared to $136.8 million for the same period of 2006. This increase was primarily in support of $13.6 million incremental revenue as compared to the six months ended June 30, 2006. Approximately $6.8 million of the increase is attributable to depreciation of the dollar against certain currencies as noted above.

Cost of revenue as a percentage of revenue in the Company’s GLC business increased to 65.6% and 66.0%, for the three and six months ended June 30, 2007, respectively as compared to 65.2% and 64.9% for the three and six months ended June 30, 2006. These increases reflect higher costs for labor and outside translation services, mainly due to variation in work mix and the impact of foreign exchange. These increases were partially offset by benefits realized from the deployment and use of Logoport, Lionbridge’s language management technology platform, and lower internal operating costs resulting from the benefit of certain restructuring and cost reduction actions initiated in the prior year.

For the six months ended June 30, 2007, GLC cost of revenue increased $7.2 million to $116.0 million as compared to $108.8 million for the corresponding period of the prior year. This increase was primarily associated with the $8.1 million revenue increase year over year, and is significantly impacted by the impact of foreign exchange, as compared to the three and six months ended June 30, 2006.

Cost of revenue as a percentage of revenue in the Company’s GDT business increased to 60.5% for the quarter ended June 30, 2007, as compared to 59.1% during the corresponding quarter of the prior year. This increase reflects a change in the work mix of services provided as compared to the prior year. For the quarter ended June 30, 2007, GDT cost of revenue increased $2.6 million or 28.4%, to $11.9 million as compared to $9.3 million for the corresponding quarter of the prior year. This increase was primarily associated with the $4.0 million increase in revenue year-over-year, and to a lesser degree work mix variation in services as compared to the prior year.

For the six months ended June 30, 2007, as a percentage of revenue, cost of revenue in the Company’s GDT business increased slightly to 61.8% as compared to 61.2% for the corresponding period of the prior year. Cost of revenue was $22.0 million for the six months ended June 30, 2007, an increase of $3.6 million, or 19.9%, as compared to $18.3 million for the same period of 2006. This increase was primarily in support of $5.6 million incremental revenue as compared to the six months ended June 30, 2006.

Cost of revenue as a percentage of revenue in the Company’s Interpretation business decreased to 76.1% and 76.2%, for the three and six months ended June 30, 2007, respectively, as compared to 78.9% and 80.1% for the three and six months ended June 30, 2006. This decrease reflects the favorable impact of pricing and work mix variations in services as compared to the prior year.

 

18


Table of Contents

Sales and Marketing. Sales and marketing expenses consist primarily of salaries, commissions and associated employee benefits, travel expenses of sales and marketing personnel, promotional expenses, sales force automation/CRM system expense, training, and the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs. The following table shows sales and marketing expenses in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2007 and 2006, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2007     2006     2007     2006  

Total sales and marketing expenses

   $ 8,571,000     $ 7,163,000     $ 16,522,000     $ 15,189,000  

Increase from prior year

     1,408,000         1,333,000    

Percentage of revenue

     7.5 %     6.5 %     7.4 %     7.3 %

For the three and six months ended June 30, 2007, sales and marketing expenses increased $1.4 and $1.3 million, respectively, as compared with the corresponding periods of 2006. As a percentage of revenue, sales and marketing expenses increased to 7.5% and 7.4% as compared to 6.5% and 7.3% for three and six months ended June 30, 2006. This increase is primarily attributable to increased compensation and travel expense, to support increased revenue levels from period to period, as well as projected revenue growth in the future. Additionally the increase reflects increased spending on marketing initiatives, in particular during the quarter ended June 30, 2007.

General and Administrative. General and administrative expenses consist of salaries of the management, purchasing, process and technology, finance and administrative groups, and associated employee benefits and travel; facilities costs; information systems costs; professional fees; business reconfiguration costs and all other site and corporate costs. The following table shows general and administrative expenses in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2007 and 2006, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2007     2006     2007     2006  

Total general and administrative expenses

   $ 21,319,000     $ 18,296,000     $ 41,901,000     $ 36,782,000  

Increase from prior year

     3,023,000         5,119,000    

Percentage of revenue

     18.6 %     16.5 %     18.8 %     17.5 %

General and administrative expenses increased $3.0 million, or 16.5%, to $21.3 million for the quarter ended June 30, 2007 as compared to $18.3 million for the quarter ended June 30, 2006. Approximately $900,000 of the increase is attributable to the impact of foreign exchange, as the U.S. dollar declined against certain foreign currencies, in particular the Euro. The remainder is primarily due to $537,000 increased stock-based compensation and certain other rent, legal, consulting and compensation expenses in the quarter ended June 30, 2007 as compared to the quarter ended June 30, 2006. As a percentage of revenue, general and administrative expenses increased to 18.6% for the quarter ended June 30, 2007, as compared to 16.5%, for the same period of the prior year, due primarily to the items noted above, as well as the impact of supporting the increase in revenue from period to period.

General and administrative expenses increased $5.1 million, or 13.9%, to $41.9 million for the six months ended June 30, 2007 as compared to $36.8 million for the six months ended June 30, 2006. Approximately $1.9 million of the increase is attributable to the impact of foreign exchange, as the U.S. dollar declined against certain foreign currencies, in particular the Euro. The remainder is primarily due to $971,000 increased stock-based compensation and certain other rent, legal, consulting and compensation expenses in the six months ended June 30, 2007 as compared to the six months ended June 30, 2006. As a percentage of revenue, general and administrative expenses increased to 18.8% for the six months ended June 30, 2007 as compared to 17.5%, for the same period of the prior year, due primarily to the items noted above, as well as the impact of supporting the increase in revenue from period to period.

 

19


Table of Contents

Research and Development. Research and development expenses relate primarily to the Company’s web-based hosted language management technology platform used in the globalization process and the research and development of a globalization management system. The cost consists primarily of salaries and associated employee benefits and third-party contractor expenses. The following table shows research and development expense in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2007 and 2006, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2007     2006     2007     2006  

Total research and development expense

   $ 785,000     $ 741,000     $ 1,502,000     $ 1,484,000  

Increase from prior year

     44,000         18,000    

Percentage of revenue

     0.7 %     0.7 %     0.7 %     0.7 %

Research and development expense increased slightly to $785,000 and $1.5 million for the three and six months ended June 30, 2007 as compared to $741,000 and $1.5 million for the corresponding periods of the prior year.

Depreciation and Amortization. Depreciation and amortization consist of the expense related to property and equipment that is being depreciated over the estimated useful lives of the assets using the straight-line method. The following table shows depreciation and amortization expense in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2007 and 2006, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2007     2006     2007     2006  

Total depreciation and amortization expense

   $ 1,324,000     $ 1,413,000     $ 2,618,000     $ 2,905,000  

Decrease from prior year

     89,000         287,000    

Percentage of revenue

     1.2 %     1.3 %     1.2 %     1.4 %

Depreciation and amortization expense decreased to $1.3 million and $2.6 million for the three and six months ended June 30, 2007, respectively, as compared to $1.4 million and $2.9 million for the three and six months ended June 30, 2006. The decrease for the three and six-month periods ended June 30, 2007 as compared to the corresponding periods of the prior year is primarily due to the culmination of depreciable lives of certain assets acquired in prior years.

Amortization of Acquisition-related Intangible Assets. Amortization of acquisition-related intangible assets consists of the amortization of identifiable intangible assets resulting from acquired businesses. Amortization expense for the three months ended June 30, 2007 and 2006 of $2.1 million and $2.2 million, respectively, and for the six months ended June 30, 2007 and 2006 of $4.2 million and $4.4 million, respectively, relates solely to the amortization of identifiable intangible assets.

Interest Expense. Interest expense primarily represents interest paid or payable on debt and the amortization of deferred financing costs. Interest expense for the quarter ended June 30, 2007 of $1.4 million decreased $842,000 from $2.3 million for the quarter ended June 30, 2006. The decrease reflects the impact of an approximately $14.5 million lower average outstanding principal balance on debt during the quarter, year over year, coupled with lower interest rates resulting from the Company’s new financing arrangement. Interest expense for the six months ended June 30, 2007 of $2.9 million decreased $1.5 million from $4.4 million for the six months ended June 30, 2006, and primarily represents interest paid or payable on debt and for the six-month periods ended June 30, 2007 and 2006, respectively. The decrease reflects the impact of an approximately $14.3 million lower average outstanding principal balance on debt during the six month period year over year coupled with lower interest rates resulting from the Company’s new financing arrangement.

Other Expense, Net. Other expense, net primarily reflects the foreign currency transaction gains or losses arising from exchange rate fluctuations on transactions denominated in currencies other than the functional currencies of the countries in which the transactions are recorded. The Company recognized $598,000 and $1.1 million in other expense, net, in the three and six months ended June 30, 2007, respectively, as compared to $785,000 and $1.1 million in other expense, net, in the corresponding periods of the prior year. The variations are primarily attributable to the variances among the Euro and other currencies against the U.S. dollar in the periods, as compared to the net position and variance during the corresponding periods of prior year.

 

20


Table of Contents

Provision for Income Taxes. The following table shows the provision for income taxes expense in dollars, the dollar change from the three and six-month periods of the prior year and as a percentage of revenue for the three and six months ended June 30, 2007 and 2006, respectively:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2007     2006     2007     2006  

Total provision for income taxes

   $ 2,598,000     $ 2,131,000     $ 4,079,000     $ 3,431,000  

Increase from prior year

     467,000         648,000    

Percentage of revenue

     2.3 %     1.9 %     1.8 %     1.6 %

The provision for income taxes consists primarily of taxes resulting from profits in foreign jurisdictions and the increase in deferred tax liabilities related to the tax deductible goodwill from the BGS acquisition. The tax provision increased $467,000 to $2.6 million for the quarter ended June 30, 2007 from $2.1 million in the corresponding quarter of the prior year, and by $648,000 for the comparable six-month period primarily due to the shift in the specific location of profits throughout the foreign jurisdictions.

 

Liquidity and Capital Resources

On December 21, 2006, the Company entered into a Credit Agreement (the “Credit Agreement”), replacing the Company’s Term Loan B and Revolving Credit Facility that had been in place since September 1, 2005. The Credit Agreement was subsequently amended on January 22, 2007 to add certain additional non-U.S. subsidiaries of the Company as Borrowers or Guarantors. The Credit Agreement provides for a five-year $100.0 million revolving credit facility. At June 30, 2007, $75.7 million was outstanding with an interest rate of 6.8%.

The following table shows cash and cash equivalents and working capital at June 30, 2007 and at December 31, 2006:

 

     June 30, 2007    December 31, 2006

Cash and cash equivalents

   $ 25,918,000    $ 27,354,000

Working capital

     70,249,000      60,893,000

Lionbridge’s working capital increased $9.4 million to $70.2 million at June 30, 2007 as compared to $60.9 million at December 31, 2006. The increase was driven by the growth of the business during the six months ended June 30, 2007. As of June 30, 2007, cash and cash equivalents totaled $25.9 million, a decrease of $1.4 million from $27.4 million at December 31, 2006, primarily due to $1.2 million net cash provided by operating activities of the business, $1.7 million increase in cash due to exchange rate changes in the period, reduced by $1.6 million of net cash used in financing, including $2.0 million in payments of long-term debt and $2.7 million in cash used in investing, including $2.8 million for purchases of property and equipment. Accounts receivable and work in process totaled $116.5 million, an increase of $14.2 million as compared to $102.3 million at December 31, 2006. Other current assets increased $4.6 million to $11.8 million as compared to $7.2 million at December 31, 2006. Current liabilities totaled $83.9 million at June 30, 2007, an increase of $8.0 million as compared to $75.9 million at December 31, 2006.

The following table shows the net cash provided by operating activities, net cash used in investing activities, and net cash used in financing activities for the six months ended June 30, 2007 and 2006, respectively:

 

    

Six Months Ended

June 30,

 
     2007     2006  

Net cash provided by operating activities

   $ 1,220,000     $ 7,698,000  

Net cash used in investing activities

     (2,738,000 )     (585,000 )

Net cash used in financing activities

     (1,636,000 )     (3,917,000 )

Net cash provided by operating activities was $1.2 million for the six months ended June 30, 2007, as compared to $7.7 million for the corresponding period of the prior year. The $1.2 million cash provided by operating activities was due to net income of $419,000 (inclusive of $10.9 million in depreciation, amortization, stock based compensation and other non-cash expenses), a $13.7 million increase in accounts receivable, a $1.4 million decrease in work in process, a $8.6 million increase in other operating assets, a $8.2 million increase in accounts payable, accrued expenses and other operating liabilities, and a $2.6 million increase in deferred revenue.

In the six months ended June 30, 2006, net cash provided by operating activities was $7.7 million. The $7.7 million cash provided by operating activities was due to the net income of $2.0 million (inclusive of $11.0 million in depreciation, amortization, stock based compensation and other non-cash expenses), a $3.7 million increase in accounts payable and

 

21


Table of Contents

accrued expenses, and a $284,000 increase in deferred revenue, partially offset by a $9.3 million increase in accounts receivable, work-in-process and other operating assets.

Lionbridge has not experienced any significant trends in accounts receivable and work in process other than changes relative to the change in revenue, as previously noted. Fluctuations in accounts receivable from period to period relative to changes in revenue are a result of timing of customer invoicing and receipt of payments from customers.

Net cash used in investing activities increased $2.2 million to $2.7 million for the six months ended June 30, 2007, from $585,000 for the corresponding period of the prior year. The primary investing activity in the six month periods ended June 30, 2007 was $2.8 million for the purchase of property and equipment. The primary investing activity in the six months ended June 30, 2006 was $2.0 million, for the purchase of property and equipment, partially offset by a purchase price reimbursement from Bowne of $1.4 million.

Net cash used in financing activities for the six months ended June 30, 2007 was $1.6 million, a decrease of $2.3 million as compared to $3.9 million net used in financing activities for the corresponding period of 2006. Cash used in financing activities consisted of $15.1 million of payments of short-term debt, $2.0 million of payments of long-term debt, $348,000 of proceeds from the issuance of common stock under stock option plans, $257,000 in proceeds from the issuance of capital leases and $187,000 for payments of capital lease obligations, partially offset by $15.1 million in proceeds from the issuance of short-term debt.

In the six months ended June 30, 2006, net cash used in financing activities was $3.9 million. Cash provided by financing activities consisted of $8.0 million in proceeds from the issuance of short term debt and $859,000 of proceeds from the issuance of common stock under stock option plans. Cash used for financing activities included $8.0 million of payments of short term debt, $4.7 million of payments of long-term debt and $50,000 for payments of capital lease obligations, in the six month period ended June 30, 2006.

On February 10, 2005, Lionbridge filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended (SEC File No. 333-122698), covering the registration of common stock (the “Securities”), in an aggregate amount of $130.0 million, which was declared effective by the Commission on February 23, 2005. These Securities may be offered from time to time in amounts, at prices and on terms to be determined at the time of sale. The Company believes the shelf registration provides additional financing flexibility to meet potential future funding requirements and the ability to take advantage of potentially attractive capital market conditions. Lionbridge anticipates that its present cash and short-term investments position, available financing and access to capital markets should provide adequate cash to fund its currently anticipated cash needs for the next twelve months and foreseeable future.

 

Contractual Obligations

As of June 30, 2007, there are no material changes in Lionbridge’s contractual obligations as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 other than impact of the adoption of FIN No. 48. The adoption of FIN No. 48 resulted in an increase to the Company’s income tax liabilities of approximately $185,000 to $1.5 million from the amount recorded at December 31, 2006. Tax provisions during the six months ended June 30, 2007, primarily related to accrued interest, have increased these balances by $197,000 to $1.7 million.

Additionally, in connection with the acquisition of BGS, the Company has recorded a FIN No. 48 tax liability of approximately $4.0 million related to tax liabilities accruing on or prior to the acquisition date of September 1, 2005 that Bowne & Co., Inc. agreed to indemnify. Accordingly, the Company adjusted its balance sheet by recording a long-term Indemnification Receivable and related FIN 48 liability for this amount. The timing of settlement of these tax liabilities is uncertain at this time. Tax provisions during the six months ended June 30, 2007, primarily related to accrued interest, have increased these balances by $192,000 to $4.2 million.

 

Off-Balance Sheet Arrangements

The Company does not have any special purpose entities or off-balance sheet financing arrangements.

 

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS

 

22


Table of Contents

No. 159 are effective for fiscal years beginning after November 15, 2007. The Company is currently assessing SFAS No. 159 and has not yet determined the impact, if any, that its adoption will have on its result of operations or financial position.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Lionbridge conducts its business globally and its earnings and cash flows are exposed to market risk from changes in interest rates and currency exchange rates. Lionbridge does not currently manage its risk to changes in interest rates. The Company does address its risk to foreign currency exchange fluctuation through a risk management program that includes the use of derivative financial instruments. Lionbridge operates that program pursuant to documented corporate risk management policies. Lionbridge does not enter into any derivative transactions for speculative purposes. Gains and losses on derivative financial instruments substantially offset gains and losses on underlying hedged exposures and were immaterial for all periods presented.

Interest Rate Risk. Lionbridge is exposed to market risk from changes in interest rates with respect to its revolving loan facility which bear interest at Prime or LIBOR (at the Company’s discretion) plus an applicable margin based on certain financial covenants. As of June 30, 2007, $75.7 million was outstanding. A hypothetical 10% increase or decrease in interest rates would have a $516,000 impact on the Company’s interest expense based on the $75.7 million outstanding at June 30, 2007 with an interest rate of 6.8%. Additionally, Lionbridge is exposed to market risk through its investing activities. The Company’s portfolio consists primarily of investments in high quality commercial bank time deposits. A hypothetical 10% increase or decrease in interest rates would not have a material impact on the carrying value of Lionbridge’s investments due to their immediately available liquidity.

Foreign Currency Exchange Rate Risk. Lionbridge conducts a large portion of its business in international markets. Although a majority of Lionbridge’s contracts with clients are denominated in U.S. dollars, 70% and 62% of its costs and expenses for the six-month periods ended June 30, 2007 and 2006, respectively, were denominated in foreign currencies. In addition, 23% of the Company’s assets were subject to foreign currency exchange fluctuations as of June 30, 2007 and December 31, 2006, while 7% and 6% of its liabilities were subject to foreign currency exchange fluctuations as of June 30, 2007 and December 31, 2006, respectively. The principal foreign currency applicable to our business is the Euro. In addition, Lionbridge has assets and liabilities denominated in currencies other than the functional currency of the relative entity. As a result, Lionbridge is exposed to foreign currency exchange fluctuations. The Company manages its risk to changes in foreign currency exchange rates through a risk management program that partially mitigates its exposure to foreign currency assets or liabilities, primarily with respect to the Euro, and that includes the use of derivative financial instruments not designated as hedges in accordance with FASB SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The Company had forward contracts outstanding in the notional amount of $64.5 million at June 30, 2007 and recorded $160,000 in other assets to recognize the fair value of these forward contracts. A 10% appreciation in the U.S. dollar’s value relative to the hedge currencies would decrease the forward contracts’ fair value by $1.7 million at June 30, 2007. A 10% depreciation in the U.S. dollar’s value relative to the hedge currencies would increase the forward contracts’ fair value by $2.2 million at June 30, 2007. Any increase or decrease in the fair value of the Company’s currency exchange rate sensitive forward contracts would be substantially offset by a corresponding decrease or increase in the fair value of the hedged underlying asset or liability.

 

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Lionbridge maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2007.

Changes in internal control over financial reporting. During the second quarter of 2007, the Company converted all the former BGS locations worldwide to its accounting general ledger software. Other than the item noted above, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2007 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

23


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

PART II—OTHER INFORMATION

 

 

Item 1. Legal Proceedings

On or about July 24, 2001, a purported securities class action lawsuit captioned “Samet v. Lionbridge Technologies, Inc. et al.” (01-CV-6770) was filed in the United States District Court for the Southern District of New York (the “Court”) against the Company, certain of its officers and directors, and certain underwriters involved in the Company’s initial public offering. The complaint in this action asserted, among other things, that omissions regarding the underwriters’ alleged conduct in allocating shares in Lionbridge’s initial public offering to the underwriters’ customers. In March 2002, the United States District Court for the Southern District of New York entered an order dismissing without prejudice the claims against Lionbridge and its officers and directors (the case remained pending against the underwriter defendants).

On April 19, 2002, the plaintiffs filed an amended complaint naming as defendants not only the underwriter defendants but also Lionbridge and certain of its officers and directors. The amended complaint asserts claims under both the registration and antifraud provisions of the federal securities laws relating to, among other allegations, the underwriters’ alleged conduct in allocating shares in the Company’s initial public offering and the disclosures contained in the Company’s registration statement. The Company understands that various plaintiffs have filed approximately 1,000 lawsuits making substantially similar allegations against approximately 300 other publicly-traded companies in connection with the underwriting of their public offerings. On July 15, 2002, the Company, together with the other issuers named as defendants in these coordinated proceedings, filed a collective motion to dismiss the complaint on various legal grounds common to all or most of the issuer defendants. In October 2002, the claims against officers and directors were dismissed without prejudice. In February 2003, the Court issued its ruling on the motion to dismiss, ruling that the claims under the antifraud provisions of the securities laws could proceed against the Company and a majority of the other issuer defendants.

In June 2003, Lionbridge elected to participate in a proposed settlement agreement with the plaintiffs in this litigation. If the proposed settlement had been approved by the Court, it would have resulted in the dismissal, with prejudice, of all claims in the litigation against Lionbridge and against any other of the issuer defendants who elected to participate in the proposed settlement, together with the current or former officers and directors of participating issuers who were named as individual defendants. This proposed settlement was conditioned on, among other things, a ruling by the District Court that the claims against Lionbridge and against the other issuers who had agreed to the settlement would be certified for class action treatment for purposes of the proposed settlement, such that all investors included in the proposed classes in these cases would be bound by the terms of the settlement unless an investor opted to be excluded from the settlement.

On December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued a decision in In re Initial Public Offering Securities Litigation that six purported class action lawsuits containing allegations substantially similar to those asserted against the Company may not be certified as class actions due, in part, to the Appeals Court’s determination that individual issues of reliance and knowledge would predominate over issues common to the proposed classes. On January 8, 2007, the plaintiffs filed a petition seeking rehearing en banc of the Second Circuit Court of Appeals’ decision. On April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained free to ask the District Court to certify classes different from the ones originally proposed which might meet the standards for class certification that the Court of Appeals articulated in its December 5, 2006 decision.

In light of the Court of Appeals’ December 5, 2006 decision regarding certification of the plaintiffs’ claims, the District Court entered an order on June 25, 2007 terminating the proposed settlement between the plaintiffs and the issuers, including Lionbridge. Because any possible future settlement with the plaintiffs, if such a settlement were ever to be agreed to, would involve the certification of a class action for settlement purposes, the impact of the Court of Appeals’ class certification-related rulings on the possible future settlement of the claims against Lionbridge cannot now be predicted.

With the termination of the proposed settlement, we intend to continue to defend the litigation vigorously. The litigation process is inherently uncertain and unpredictable, however, and there can be no guarantee as to the ultimate outcome of this pending lawsuit. The Company believes that the underwriters may have an obligation to indemnify Lionbridge for the legal fees and other costs of defending this suit. While Lionbridge cannot guarantee the outcome of these proceedings, the Company believes that the final result of this lawsuit will have no material effect on its consolidated financial condition, results of operations, or cash flows.

 

24


Table of Contents
Item 1A. Risk Factors

The matters discussed in this Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances many of which Lionbridge has little or no control over. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in Lionbridge’s Annual Report on Form 10-K, filed March 16, 2007 (SEC File No. 000-26933), as well as risks and uncertainties discussed elsewhere in this Form 10-Q, could cause Lionbridge’s actual results to differ materially from those in the forward-looking statements.

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended June 30, 2007, the Company withheld 21,786 restricted shares from certain employees to cover certain withholding taxes due from the employees at the time the shares vested. The following table provides information about Lionbridge’s purchases of equity securities for the quarter ended June 30, 2007:

 

Period

  

Total Number of

Shares Purchased

  

Average Price

Paid Per Share

April 1, 2007 – April 30, 2007

   6,560    $ 5.60

May 1, 2007 – May 31, 2007

   4,840    $ 6.04

June 1, 2007 – June 30, 2007

   10,386    $ 5.89

In addition, upon the termination of employees during the quarter ended June 30, 2007, 1,500 unvested restricted shares were forfeited. The following table provides information about Lionbridge’s forfeited restricted shares for the quarter ended June 30, 2007:

 

Period

  

Total Number of

Shares Forfeited

May 1, 2007 – May 31, 2007

   1,500

 

Item 6. Exhibits

(a) Exhibits.

 

10.1*    Lease amendment dated as of May 1, 2007 between Société Civile Immobilière Core Sophia and Lionbridge Technologies
10.2*    Lease amendment dated as of June 4, 2007 between IEF Vastgoad Pluto B.V. and Lionbridge Technologies B.V.
10.3    Lionbridge 2005 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.1 to Report on Form 8-K on May 25, 2007 (File No. 000-269-333) and incorporated herein by reference.
10.4    Lionbridge Amended and Restated Independent Directors Compensation Plan (filed as Exhibit 10.2 to Report on Form 8-K on May 25, 2007 (File No.:000-269-333) and incorporated herein by reference.
10.5    Lionbridge Independent Director Compensation Plan (filed as Exhibit 10.3 to Report on Form 8-K on May 25, 2007 (File No.: 000-269-333) and incorporated herein by reference.
10.6    Form of Restricted Stock Unit Agreement for Independent Directors (filed as Exhibit 10.4 to Report on Form 8-K on May 25, 2007 (File No.:000-269-333) and incorporated herein by reference.
10.7    Form of Stock Option for Independent Directors (filed as Exhibit 10.5 to Report on Form 8-K on May 25, 2007 (File No. (000-269-333) and incorporated herein by reference.
31.1 *    Certification of Rory J. Cowan, the Company’s principal executive officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *    Certification of Stephen J. Lifshatz, the Company’s principal financial officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *    Certifications of Rory J. Cowan, the Company’s principal executive officer, and Stephen J. Lifshatz, the Company’s principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

 

25


Table of Contents

LIONBRIDGE TECHNOLOGIES, INC.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

LIONBRIDGE TECHNOLOGIES, INC.
By:   /S/    STEPHEN J. LIFSHATZ        
 

Stephen J. Lifshatz

Senior Vice President, Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer)

 

Dated: August 9, 2007

 

26


Table of Contents

Exhibit Index

 

Exhibit

Number

  

Description

10.1 *    Lease amendment dated as of May 1, 2007 between Société Civile Immobilière Core Sophia and Lionbridge Technologies
10.2 *    Lease amendment dated as of June 4, 2007 between IEF Vastgoad Pluto B.V. and Lionbridge Technologies B.V.
10.3    Lionbridge 2005 Stock Incentive Plan, as amended and restated (filed as Exhibit 10.1 to Report on Form 8-K on May 25, 2007 (File No. 000-269-333) and incorporated herein by reference.
10.4    Lionbridge Amended and Restated Independent Directors Compensation Plan (filed as Exhibit 10.2 to Report on Form 8-K on May 25, 2007 (File No.:000-269-333) and incorporated herein by reference.
10.5    Lionbridge Independent Director Compensation Plan (filed as Exhibit 10.3 to Report on Form 8-K on May 25, 2007 (File No.: 000-269-333) and incorporated herein by reference.
10.6    Form of Restricted Stock Unit Agreement for Independent Directors (filed as Exhibit 10.4 to Report on Form 8-K on May 25, 2007 (File No.:000-269-333) and incorporated herein by reference.
10.7    Form of Stock Option for Independent Directors (filed as Exhibit 10.5 to Report on Form 8-K on May 25, 2007 (File No. (000-269-333) and incorporated herein by reference.
31.1 *    Certification of Rory J. Cowan, the Company’s principal executive officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *    Certification of Stephen J. Lifshatz, the Company’s principal financial officer as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *    Certifications of Rory J. Cowan, the Company’s principal executive officer, and Stephen J. Lifshatz, the Company’s principal financial officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

 

27

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki