| LIONBRIDGE TECHNOLOGIES INC /DE/ Item 1A Risk Factors This Annual Report on Form 10-K contains forward-looking statements which involve risks and uncertainties |
| Lionbridge’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth in the following risk factors and elsewhere in this Annual Report on Form 10-K In addition to the other information included or incorporated by reference in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating Lionbridge and its business |
| Lionbridge’s reliance on a small number of large clients and the delay or reduction of its clients’ product releases and production schedules or the loss of, or reduction in revenue from, a major client could negatively affect Lionbridge’s revenue and results of operations |
| A significant portion of Lionbridge’s revenue is linked to the product release cycles and production schedules of its clients, and, in particular, to certain key clients |
| As a result, Lionbridge performs varying amounts of work for specific clients from year to year based on their product release cycles and production schedules |
| A major client in one year may not have use for a similar level of Lionbridge’s services in another year |
| For example, one of our large technology customers, HP, purchased significantly less services from us during 2005, as compared to 2004, thereby contributing to our overall decline in revenues in 2005 |
| Revenues attributable to this client were down 32prca for the standalone Lionbridge business for the year ended December 31, 2005, as compared to the corresponding period of 2004 |
| In addition, Lionbridge derives a significant portion of its revenues from large projects and programs for a limited number of large clients |
| For the years ended December 31, 2005 and 2004, Lionbridge’s largest client accounted for 20prca and 19prca of its revenue, respectively, and its five largest clients accounted for approximately 40prca and 49prca of its revenue, respectively |
| As a result, the loss of any major client or a significant reduction in a large project’s scope could materially reduce Lionbridge’s revenue and cash flow, and adversely affect its ability to maintain profitability |
| Volatility and expense reduction initiatives in the technology market could affect Lionbridge’s ability to achieve operating goals |
| A substantial portion of Lionbridge’s revenue is derived from companies in the technology industry, an intensely competitive and volatile market sector |
| Many technology companies have experienced severe slowdowns in their businesses and operations |
| In addition, as the industry has matured, many technology companies have implemented cost containment and expense reduction initiatives with vendors and suppliers |
| Declines in the overall performance of the technology sector and these vendor expense management initiatives have in the past and could in the future adversely affect demand for Lionbridge’s services and reduce its revenues and margins from technology customers |
| Pursuing and completing potential acquisitions could divert management attention and financial resources and may not produce the desired business results |
| As part of its growth strategy, Lionbridge intends to continue pursuing and making selected acquisitions of complementary businesses |
| Lionbridge does not have specific personnel dedicated solely to pursuing and making acquisitions |
| As a result, if Lionbridge pursues any acquisition, its management, in addition to their operational responsibilities, could spend a significant amount of time and management and financial resources to pursue and integrate the acquired business with its existing business |
| To fund the purchase price of an acquisition, Lionbridge might use capital stock, cash or a combination of both |
| Alternatively, Lionbridge may borrow money from a bank or other lender |
| If it uses capital stock, Lionbridge’s stockholders will experience dilution |
| If it uses cash or debt financing, Lionbridge’s financial liquidity may be reduced |
| In addition, from an accounting perspective, an acquisition may involve amortization of significant amounts of other intangible assets that could adversely affect Lionbridge’s ability to maintain profitability |
| 10 ______________________________________________________________________ [30]Table of Contents Despite the investment of these management and financial resources, an acquisition, including our recent acquisition of BGS, may not produce the revenue, earnings or business synergies that Lionbridge anticipated for a variety of reasons, including: · difficulties in the assimilation of the operations, technologies, services, products and personnel of the acquired company; · failure of acquired technologies and services to perform as expected; · risks of entering markets in which Lionbridge has no, or limited, prior experience; · effects of any undisclosed or potential legal or tax liabilities of the acquired company; · compliance with additional laws, rules or regulations that Lionbridge may become subject to as a result of an acquisition that might restrict Lionbridge’s ability to operate; and · the loss of key employees of the acquired company |
| Lionbridge may not be able to successfully address these problems |
| Lionbridge’s future operating results may depend to a significant degree on Lionbridge’s ability to successfully integrate acquisitions and manage operations while controlling expenses and cash outflows |
| Lionbridge may have difficulty in identifying and competing for acquisition opportunities |
| Lionbridge’s business strategy includes the pursuit of strategic acquisitions |
| While Lionbridge currently does not have commitments or agreements with respect to any acquisitions, it regularly explores potential acquisitions of strategically complementary businesses or operations |
| Lionbridge may not be able to identify suitable acquisition candidates and it can expect to face competition from other companies for potential acquisition candidates, making it more difficult to acquire suitable companies on favorable terms |
| Lionbridge’s results of operations could be negatively affected by potential fluctuations in foreign currency exchange rates |
| Lionbridge conducts a large portion of its business in international markets |
| Although a majority of Lionbridge’s contracts with clients are denominated in US dollars, 57prca and 45prca of its costs and expenses for the years ended December 31, 2005 and 2004, respectively, were denominated in foreign currencies |
| In addition, 18prca and 6prca of the Company’s assets were subject to foreign currency exchange fluctuations as of December 31, 2005 and 2004, respectively, while 23prca and 22prca of its liabilities were subject to foreign currency exchange fluctuations as of December 31, 2005 and 2004, respectively |
| The principal foreign currencies applicable to our business are the Euro, the Yen and the Indian Rupee |
| In addition, Lionbridge has assets and liabilities denominated in US dollars in foreign countries |
| As a result, Lionbridge is exposed to foreign currency exchange fluctuations |
| Although Lionbridge has not historically tried to reduce its exposure to exchange rate fluctuations by using hedging transactions, it has recently begun to make use of financial hedging techniques to mitigate the effect of such foreign currency volatility |
| Lionbridge cannot assure you that any financial hedging will substantially mitigate its exposure to exchange rate fluctuations |
| From time to time, the US dollar has been volatile relative to foreign currencies, particularly the Euro and the Yen |
| As a result, Lionbridge has experienced exchange rate gains or losses as a result of fluctuations in assets and liabilities and changes in revenue and expense mix in various subsidiaries operating in non-US dollar denominated functional currencies |
| If Lionbridge is unsuccessful in reducing foreign currency exchange rate risk, Lionbridge may experience additional foreign currency fluctuations which may have negatively impact its revenue, cash flow and results of operations |
| 11 ______________________________________________________________________ [31]Table of Contents Lionbridge may not be able to successfully integrate BGS or to achieve the anticipated benefits of the BGS acquisition |
| The integration of BGS into Lionbridge involves a number of risks and presents financial, managerial and operational challenges, including high tax rates attributable to BGS’s historical structure |
| In particular, we may have difficulty, and may incur unanticipated expenses related to, integrating management and personnel from BGS without diverting the attention of management and other personnel from revenue generating activities |
| We may also face difficulties in retaining and growing certain BGS customer relationships |
| Failure to successfully integrate BGS may have a material adverse effect on our business, financial condition and results of operations |
| Lionbridge may be required to remediate material weaknesses in internal controls over financial reporting relating to the BGS business |
| In April 2005, the management of Bowne & Co, Inc, the company of which the BGS business was a part before we acquired it in September 2005, disclosed in an amendment to its Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (10-K/ A), that it had identified material weaknesses in its internal controls related to the BGS business, impacting Bowne & Co, Inc |
| ’s financial statements for the years ended December 31, 2002 and 2003 and for each of the quarters ended March 31, June 30 and September 30, 2004 |
| These identified material weaknesses related to (1) the lack of sufficient reconciliation and review controls over its purchase accounting adjustments and (2) the lack of sufficient reconciliation and review controls over the determination of legal entity profitability, income tax expense and related income tax accounts |
| Under SEC rules and regulations, a material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected |
| Specifically with respect to the BGS business, the 10-K/ A reported that the lack of sufficient reconciliation and review controls over purchase accounting adjustments for the BGS business resulted in a failure to properly eliminate depreciation expense for an acquired entity, and the lack of sufficient reconciliation and review controls over the determination of legal entity profitability for the BGS business resulted in the incorrect allocation of consolidated income to certain legal entities and the determination of income tax expense and the related income tax accounts within the BGS business |
| The 10-K/ A also noted that subsequent to December 31, 2004, management had taken certain actions to remediate these material weaknesses |
| As part of the integration of BGS, we must perform our own testing of the BGS internal controls over financial reporting to allow our management and our independent registered public accounting firm to report on the effectiveness of the internal control over financial reporting related to the BGS operations, as required by Section 404 of the Sarbanes-Oxley Act |
| We anticipate completing our testing by the end of 2006 |
| Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in internal controls over financial reporting, either those described in the preceding paragraph or others, that are deemed to be material weaknesses with respect to our financial statements, a finding which could cause a decline in our stock price and subject us to sanctions from the SEC and the Nasdaq National Market |
| Potential fluctuations in Lionbridge’s quarterly results make financial forecasting difficult and could affect its common stock trading price |
| As a result of fluctuations in Lionbridge’s revenues tied to foreign currency fluctuations, its clients’ activities and release cycles, the three-to nine-month length of its typical sales cycle, historical growth, acquisition activity, the emerging nature of the markets in which it competes, global economic conditions and other factors outside its control, Lionbridge believes that quarter-to-quarter comparisons of its results of operations are not necessarily meaningful |
| You should not rely on the results of any one quarter as an indication of Lionbridge’s future performance |
| Lionbridge may not experience revenue increases in future years comparable to the revenue increases in some prior years |
| There have been quarters in the past in which Lionbridge’s results of operations have fallen below the expectations of securities analysts and investors and this may occur in the 12 ______________________________________________________________________ [32]Table of Contents future |
| If in a future quarter Lionbridge’s results of operations were to fall below the expectations of securities analysts and investors, the trading price of its common stock would likely decline |
| Goodwill and other intangible assets represent a significant portion of Lionbridge’s assets; any impairment of Lionbridge’s goodwill will adversely impact its net income |
| At December 31, 2005, Lionbridge had goodwill and other intangible assets of approximately dlra176dtta6 million, net of accumulated amortization, which represented approximately 55dtta2prca of its total assets |
| Lionbridge’s goodwill is subject to an impairment test on an annual basis and is also tested whenever events and circumstances indicate that goodwill may be impaired |
| Any excess goodwill carrying value resulting from the impairment test must be written off in the period of determination |
| Intangible assets (other than goodwill) are generally amortized over a one to five-year period, with the exception of various customer relationships acquired in the BGS transaction that are amortized over a twelve-year period |
| In addition, Lionbridge will continue to incur non-cash charges in connection with the amortization of its intangible assets other than goodwill over the remaining useful lives of such assets |
| Future determinations of significant write-offs of goodwill as a result of an impairment test or any accelerated amortization of other intangible assets could have a significant impact on Lionbridge’s net income and affect its ability to maintain profitability |
| If Lionbridge does not respond to future advances in technology and changes in customer demands, its business and results of operations may be adversely affected |
| The demand for Lionbridge’s services will be substantially affected, in large part, by future advances in technology and changes in customer demands |
| Lionbridge’s success will also depend on its ability to address the increasingly sophisticated and varied needs of its existing and prospective clients |
| Lionbridge cannot assure you that there will be a demand for its services in the future |
| Lionbridge’s success in servicing its clients will be largely dependent on its development of strategic business solutions and methodologies in response to technological advances and client preferences |
| For example, Lionbridge’s services are based on a hosted internet-based language technology platform, a core component of which is Lionbridge’s Logoport technology |
| Logoport was recently acquired by Lionbridge, and if existing and potential customers do not migrate to the Logoport platform, Lionbridge may not be able to successfully service and retain its clients |
| Lionbridge may be unable to continue to grow at its historical growth rates or to manage its growth effectively |
| Since its inception, Lionbridge’s business has grown significantly and it anticipates additional future growth |
| Recently, Lionbridge focused some of its expansion efforts on leveraging the Lionbridge India solution center while concurrently restructuring certain European operations |
| This realignment has placed and may continue to place significant demands on management and operational resources |
| In order to manage growth effectively, Lionbridge must continue to evolve its operational systems |
| Additional growth, as well as the BGS acquisition, may further strain Lionbridge’s management and operational resources |
| As a result of these concerns, Lionbridge cannot be sure that it will continue to grow, or, if it does grow, that it will be able to maintain its overall historical growth rate |
| Lionbridge’s business may be harmed by defects or errors in the services it provides to its clients |
| Many of the services Lionbridge provides are critical to its clients’ businesses |
| While Lionbridge maintains general liability insurance, including coverage for errors and omissions, defects or errors in the services it provides could interrupt its clients’ abilities to provide services to their end users resulting in delayed or lost client revenue |
| This could damage Lionbridge’s reputation through negative publicity, make it difficult to attract new, and retain existing, customers and cause customers to terminate their contracts and seek damages |
| Lionbridge may incur additional costs to correct errors or defects |
| Lionbridge cannot assure you that its general liability and errors and omissions insurance coverage will be available in amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claims |
| 13 ______________________________________________________________________ [33]Table of Contents If Lionbridge fails to hire and retain professional staff, its ability to obtain and complete its projects could suffer |
| Lionbridge’s potential failure to hire and retain qualified employees could impair its ability to complete existing projects and bid for or obtain new projects and, as a result, could have a material adverse effect on its business and revenue |
| Lionbridge’s ability to grow and increase its market share largely depends on its ability to hire, train, retain and manage highly skilled employees, including project managers and technical, sales and marketing personnel |
| In addition, Lionbridge must ensure that its employees maintain their technical expertise and business skills |
| Lionbridge cannot assure you that it will be able to attract a sufficient number of qualified employees or that it will successfully train and manage the employees it hires to allow Lionbridge to carry out its operating plan |
| Difficulties presented by international economic, political, legal, health, accounting and business factors could negatively affect Lionbridge’s business in international markets |
| A strategic advantage of Lionbridge’s operations is its ability to conduct business in international markets |
| As a result, Lionbridge’s business is subject to political and economic fluctuations in various countries and to more cost-intensive social insurance and employment laws and regulations, particularly in Europe |
| In addition, as Lionbridge continues to employ and retain personnel throughout the world and to comply with various employment laws, it may face difficulties in integrating such personnel on a cost-efficient basis |
| As Lionbridge aligns its worldwide workforce, it may face difficulties and expense in reducing its workforce in certain high cost countries and regions, including Europe |
| To date, Lionbridge has been able to successfully staff its international operations, but if Lionbridge continues to expand its operations, it may become more difficult to manage its international business |
| Lionbridge conducts business and has operations and clients throughout the world |
| In addition, Lionbridge’s ability to engage individual interpreters and translators as contractors rather than employees may be impacted by changes in employment laws, regulations and interpretations in certain jurisdictions, which may expose Lionbridge to additional costs and expenses |
| Lionbridge’s and its clients’ abilities to conduct business may also be affected by wars, political unrest, terrorism, natural disasters or the impact of diseases such as avian influenza |
| Furthermore, as a result of operating in international markets, Lionbridge is subject to longer payment cycles from many of its customers and may experience greater difficulties in timely accounts receivable collections |
| If Lionbridge fails to manage these operations successfully, its ability to service its clients and grow its business will be seriously impeded |
| Lionbridge competes in highly competitive markets |
| The markets for Lionbridge’s services are very competitive |
| Lionbridge cannot assure you that it will compete successfully against its competitors in the future |
| If Lionbridge fails to be competitive with these companies in the future, it may lose market share and its revenue could decline |
| Although Lionbridge owns proprietary technology, Lionbridge does not own any patented or other technology that, by itself, precludes or inhibits others from entering its market |
| As a result, new market entrants also pose a threat to Lionbridge’s business |
| In addition to Lionbridge’s existing competitors, Lionbridge may face further competition in the future from companies that do not currently offer globalization or testing services |
| Lionbridge may also face competition from internal globalization and testing departments of Global 2000 and large emerging companies |
| Technology companies, information technology services companies, business process outsourcing companies, web consulting firms, technical support call centers, hosting companies and content management providers may choose to broaden their range of services to include globalization or testing as they expand their operations internationally |
| Lionbridge cannot assure you that it will be able to compete effectively with potential future competitors |
| Lionbridge will continue to depend on intellectual property rights to protect its proprietary technologies, although it may not be able to successfully protect these rights |
| Lionbridge relies on its proprietary technology to enhance some of its service offerings |
| Lionbridge’s policy is to enter into confidentiality agreements with its employees, outside consultants and independent contractors |
| 14 ______________________________________________________________________ [34]Table of Contents Lionbridge also uses patent, trademark, trade secret and copyright law in addition to contractual restrictions to protect its technology |
| Notwithstanding these precautions, it may be possible for a third party to obtain and use Lionbridge’s proprietary technology without authorization |
| Although Lionbridge holds registered or pending United States patents and foreign patents covering certain aspects of its technology, it cannot be sure of the level of protection that these patents will provide |
| Lionbridge may have to resort to litigation to enforce its intellectual property rights, to protect trade secrets or know-how, or to determine their scope, validity or enforceability |
| Enforcing or defending its proprietary technology is expensive, could cause diversion of Lionbridge’s resources and may not prove successful |
| The laws of other countries may afford Lionbridge little or no effective protection of its intellectual property rights |
| The intellectual property of Lionbridge’s customers may be damaged, misappropriated, stolen or lost while in Lionbridge’s possession, subjecting it to litigation and other adverse consequences |
| In the course of providing globalization and testing services to Lionbridge’s customers, Lionbridge takes possession of or is granted access to certain intellectual property of such customers, including unreleased versions of software and source code |
| In the event such intellectual property is damaged, misappropriated, stolen or lost, Lionbridge could suffer: · claims under indemnification provisions in customer agreements or other liability for damages; · delayed or lost revenue due to adverse customer reaction; · negative publicity; and · litigation that could be costly and time consuming |
| Lionbridge has an accumulated deficit and may not be able to continue to operate profitably |
| For the years ended December 31, 2005, 2004 and 2003, Lionbridge achieved operating profits of dlra1dtta3 million, dlra7dtta2 million, and dlra7dtta5 million, respectively |
| However, prior to 2003, since inception, Lionbridge incurred substantial losses and may incur losses in the future |
| Lionbridge has an accumulated deficit of dlra102dtta8 million as of December 31, 2005 |
| Lionbridge intends to continue to invest in internal expansion, infrastructure, select acquisitions and its sales and marketing efforts |
| Lionbridge cannot assure you that it will continue to operate profitably in the future |