UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission file number 000-21725
March 31, 1997
THE TRANSLATION GROUP, LTD.
--------------------------
(Name of small business issuer in its charter)
Delaware 23-3382869
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employ.Ident. No.)
incorporation or organization)
332C Haddon Avenue 08108
Westmont, NJ ----------
- --------------------------------------- (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (609) 858-4665
Securities registered under Section 12(b) of the Exchange Act:
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
Common Stock Purchase Warrants
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 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 .
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. { }
Issuer's revenues for its most recent fiscal year: $3,193,068 million
Aggregate market value of the voting stock held by non-affiliates of
registrant (based on average of the bid and asked price on June 15, 1997):
$15,930,720. See "Market of the Registrant's Common Stock and Related
Stockholder Matters."
The number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 1,991,340 shares of Common Stock, par
value $.001 per share, as of June 15, 1997
Transitional Small Business Disclosure Format: Yes ; No X
----- -----
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
THE COMPANY
The Translation Group, Ltd. ("TTGL") was incorporated under the laws of
Delaware on July 7, 1995. On January 17, 1996, TTGL consummated its first
acquisition when the shareholders of Bureau of Translation Services, Inc., a
Pennsylvania corporation ("BTS") exchanged their shares of BTS, treated as a
business combination, for shares of TTGL so that BTS became a wholly owned
subsidiary of TTGL. TTGL and BTS are referred to herein collectively as the
"Company." Prior to the acquisition of BTS, TTGL's only activity was related to
the negotiations and other matters pertaining to the raising of funds under a
private placement. The corporate office of the Company is located at 332C Haddon
Avenue, Westmont, NJ 08108 and its telephone number at that location is (609)
858-4665. The administrative office and operating facilities are located at 44
Tanner Street, Haddonfield, New Jersey 08033 and its telephone number at that
location is (609) 795-8669.
The Company translates conventional documents and software written in
one language into other languages, and specializes as a provider of high tech
translation and localization services in the Information Technology ("IT")
sector of the translation market. Localization is the art of converting from one
language to another giving careful consideration to the customs of the local
area.
As of March 31, 1997, the Company entered into an agreement to acquire
various corporations that comprise the Word House Group (Word House) for 375,000
shares of it's Common Stock. Word House has been in operation since 1984, and
currently has offices in The Netherlands, France, England and China. The Company
has also entered into a marketing/production joint venture with World Tech.
Corp.(WTC), a Korean corporation, subject to Korean government approval. BTS
will initially operate as a branch in Seoul to exploit the translation markets
from English to Korean and other Asian languages. TTGL will also have an option
to acquire WTC by the issuance of shares of Common Stock based on WTC's
performance.
These agreements are more fully described below under the heading of
Recent Agreement and Acquisition.
BUSINESS OF THE COMPANY
The Company translates conventional documents and software written in
one language into other languages. The Company functions in the so-called "high
tech" niche of the translation industry, providing translation, localization,
software and tools to a range of world wide companies who have needs in computer
related hardware and/or software fields, referred to in the industry as
Information Technology ("IT"). Localization is the art of converting documents,
contracts, marketing tools, advertising, engineering specs, computer hardware
and software support materials, packaging, TV shows, etc. into local languages,
giving careful consideration to custom and tradition indigenous to the local
area.
The process of localization for the information technology market is
highly labor intensive, with much of the hands on work being done principally by
independent translators and editors as well as Company employees. Various
machine tools (also referred to as translation tools "TT") are also used that
are software applications for extracting and formatting data, for online
dictionaries, for presentation of text (e.g., prepress) and for customer
networking. On the other hand, the Company's machine translation ("MT")
abilities depend upon the storage of and access to previously translated
material in machine usable form. Thus, the ability to take advantage of this
type of MT depends on the stability of customers, types of products, material to
be translated and customers requirements. If variables upset this
storage-
2
access-use of previously translated material, such as occurs with first-time
customers or when translating materials in new topics, the Company will be
unable to exploit this advantage. For this reason the Company is embarking on
the production of its own phased in system of document translation which would
not be limited to previously translated material. See "Research and
Development."
COMPETITIVE POSITION
The Company believes it has a good position in the localization
industry, in part because, through BTS, it entered this market early. Initially,
the Company provided translation of technical material in various industries
heavily weighted toward engineering and analytical instrumentation. However, by
the mid-1980's, the Company recognized the opportunity in the computer industry.
Thus, the Company made the transition from a "generic" translation bureau, to
one whose business emphasizes translation services for IT customers.
The Company has leveraged ten years of localization experience into a
set of processes which it considers its principal competitive advantage. Every
operational process, from bidding through delivery of the completed project, is
tracked and accounted for, making job costing accurate and predictable, while at
the same time offering savings to its customers. The Company seeks to build
long-term relationships with clients, who will continue to work with the Company
over several years and many projects.
At present, key markets for the Company's services are customers
located in Japan, Europe (including Scandinavia) and in "the Americas", the
dialects of Canadian French, Latin American Spanish and Brazilian Portuguese.
The Company does not provide Middle and Near Eastern languages at this time.
Growth markets are primarily in Asia. Japanese now represents the Company's
largest single language, by volume, and the Company believes that Chinese will
also become significant in the near future. The Company's business in Japan is
primarily in translation for manufacturers of applications software, including a
substantial volume of Unix-based systems and customized implementations. The
principal applications are financial and manufacturing, with systems
encompassing everything from order entry to distribution. The Company believes
these are strong growth application areas in Asia.
The IT translation industry is highly fragmented and is dominated by
numerous small to medium size companies, each with a handful of clients
competing for IT products in global markets. The Company believes that this
industry phenomenon provides substantial opportunities for consolidation. The
Company is pursuing a strategy which will enable it to expand its business
through identifying companies that fit the Company's consolidation guidelines,
acquiring these companies, and integrating the acquired operations into the
Company's existing operations. Management believes that such acquisitions will
enable the Company to achieve economies of scale, maintain its gross margins and
eventually become one of the world's largest translation companies. The Company
may retain senior management and other employees of the acquired companies after
the acquisition. Additionally, the Company intends to expand its existing
translation services and to continue to research and develop more advanced
technologies, particularly relative to machine translation. There can be no
assurances that suitable acquisitions can be identified, consummated or
successfully operated or that the Company's goals will otherwise be achieved.
The Company is currently reviewing potential candidates for acquisition. See
Recent Agreement and Acquisition, below.
SERVICES AND CLIENTS
The Company provides translation and localization services (i.e.,
translating so that the result is reader friendly, using local dialect so that
it is easily readable and not stilted) to a range of industries and sectors,
3
with an emphasis on IT companies. During fiscal 1996 and 1997, approximately 80%
of the Company's revenues came from localization work for software publishers,
computer hardware manufacturers and computer and peripherals vendors. Customer
concentration decreased for the fiscal year ended March 31, 1997 when two
customers accounted for 31% of revenues in comparison to 37% and 70% for the two
prior fiscal years. The Company also has an active business in the legal area,
translating depositions, patents, and material relating to international
contracts and law suits for large law firms in the Philadelphia area.
The Company has a large number of IT-based clients. The Company has not
entered into any long-term contracts with any of its clients in accordance with
industry practice. The Company has a long-standing relationship with SAP-AG (a
leading software producer) whereby the Company is responsible for Japanese
translation of its "Financial Accounting" support materials. The strong
relationships the Company has developed with its IT clients have also generated
a volume of more conventional translation work. For example, the Company is
translating software messages and conventional documentation for Okidata, a
peripherals manufacturer. Bentley Systems, a leading CAD/CAM software developer,
relies on the Company for Korean and Japanese software localization and
translation of related documentation. Syncro, Inc.(now Intel), a developer of
telephony software, uses the Company to localize the software into at least ten
languages, and Matrox Electronics Systems, is a leading manufacturer of video
boards for whom the Company also translates into at least 18 languages. Because
many American companies have a large number of Hispanic and Vietnamese employees
in the United States, the Company has been engaged to translate corporate
personnel materials into Spanish and Vietnamese.
At the request of clients, the Company may also expand its software
localization services to include video and multi-media translation. While these
translation contracts require an investment in equipment and facilities, the
Company believes the costs may be justified by the higher value contracts
generated by this application. In addition, the Company has been testing and
exploring multimedia localization. Currently, the Company performs multimedia
localization using external studio facilities. If it proves feasible and
attractive, the Company may consider establishing its own studio, and broaden
its localization services to full multimedia capability. The Company sees
multimedia localization as similar in process to other software localization
that it already performs, and while it adds additional technical complexity, it
does not require a substantially different skill set.
THE TRANSLATION PROCESS
The Company considers its highly detailed project management, tracking
and costing procedures to be at the heart of its specialized services. The
Company places a strong emphasis on efficient processes, and believes that
centralized project management is essential to efficiency. Thus, even when a
project may have team members in many different locations, most work is
coordinated centrally in the United States via electronic communication. Certain
core functions such as editing, proofreading, desktop publishing and client
coordination are part of central project management. In preparing work for
translation into multiple languages the project editor may identify problems or
issues which are relevant across the entire project. Similarly, in a
multiple-language project, problems may be picked up by the translators in one
or two languages that are relevant to others. The Company believes that central
control of the process is the only way certain situations can be adequately
handled, such as identification of software bugs.
All the Company's translators are native speaking professionals in the
target language, and are required to know the subject matter of the area in
which they translate. In addition, a project must have technically knowledgeable
staff in the source language, preferably a specialist in that area.
4
The Company supports an extensive range of communications facilities
linking its internal systems to both clients and translators. These include an
in-house local area network ("LAN"), dial-up bulletin board (BBS), modem
transfer and multiple Internet and CompuServe connections. Some of the Company's
staff have remote connections to clients' LANs as well. Most translation
projects use one or the other of the following processes to exchange files:
- the client dials into the Company's own systems and "drops
off" files, usually via FTP (file transfer protocol) at any
time; the files are then picked up, and entered into the
translation process.
- the client shares a common messaging platform with the Company
(either LAN-to-LAN or using a wide-area service provider) and
files are sent back and forth on the internal network systems
between the Company and the client.
- the client is connected via a high speed dedicated line
directly to the Company's network and several of the Company's
machines may be connected, via a router, directly through this
line so that translators are able to work directly inside the
client environment.
Files are prepared for translation by the Company's technical staff and
are distributed electronically to translators either locally or in applicable
country. Translated versions are returned to the Company's central project
management for checking and proofing (and also compilation, if software is
involved) and the target language versions are distributed to appropriate client
locations which may be multiple locations or a central site.
In terms of process, the Company considers itself an extension of the
client's documentation department. All project activities are closely tracked
using spreadsheets which are fully available to the client. Thus, the client
always knows the status of the project.
TRANSLATION TOOLS
The Company has an internal IT standard which is based around a Novell
LAN and Windows NT for handling Japanese and Microsoft applications. All client
projects, however, are handled on a customized basis.
As the Company uses increasingly advanced technological translation
tools (i.e., pieces of software that make the translation process quicker), the
most notable impact has been a change in the structure of the project team.
Under the old, "pre-tools" model, a typical project might consist of a project
manager with 50 translators and editors working in various languages.
Translation tools have created an entirely new type of team, particularly where
translation memory databases are used to leverage previously translated material
for re-use in new or updated programs and documentation. The same project team
includes a project manager, 2 technical analysts, and 15 translators/editors.
The Company believes it was one of the first extensive outside
commercial users of a workbench environment for software translation called XL8.
It has selected as its corporate standard the integrated Transit/Termstar
Translation Management System. The product was designed for use in translation
and editing of software, help and documentation. The manager controls the flow
of materials and translators use limited version workstations. Transit is
thought to be the most versatile product of its kind commercially available on
the market; it runs in Windows environment, and may be used for Asian as well as
European languages. In 1995 BTS was selected as the sole distributor in North
America for Transit and Termstar translation software products. These software
applications, or "memory translation tools", assist in the translation process
5
by increasing efficiency through reuse of prior translations. BTS is an industry
leader in its use of software tools and is expanding its efforts to increase
their distribution. The sole distributor agreement is currently in force, with
no expiration date.
The Company has followed the progress of machine translation (MT) over
the years. After much careful review and consideration, the Company concluded
that to the best of its knowledge no one system exists that meets its standards
of accuracy, efficiency and efficacy. Therefore, the Company recently contracted
to complete its own MT system which it hopes will be capable of automatic
document translation. Until such a machine is available, the Company will
continue to upgrade both its hardware and software as technology in this or
other adaptable fields progress. The Company intends to take necessary action to
maintain its position as a leader in the use of MT. No assurance can be given
that other companies will not develop a competitive machine which could have an
adverse affect on the Company. See "Business - Research and Development."
RESEARCH AND DEVELOPMENT
In mid-1995, the Company entered into a five year Agreement with debis
Systemhaus KSP- Kommerzielle Systeme und Projekte GmbH ("debis"), a wholly owned
subsidiary of Daimler Benz, whereby the Company acquired license rights to a
software product known as KEYTERM. KEYTERM is a concept-oriented fully
relational proprietary database running under UNIX and Windows for developing
and maintaining glossaries. It has a customizable structure for entering
terminology and lexicographical information. The product has been in use in
Germany for several years and is being further developed, marketed and supported
by the Company. The Company has no obligations to assume previous Debis
obligations, will receive fees for all current and future services and will have
the exclusive right to market KEYTERM throughout North America, and elsewhere
non-exclusively. Finally, under the debis Agreement, the Company is allowed to
use the indication "Bureau of Translation Services in partnership with debis
Systemhaus". The Company has continued to develop this system since its
acquisition.
During the past fiscal year, the Company has also continued to expand
its tailored processes and disciplines used in the translation field. The
Company is committed to invest significant amounts on machine translation ("MT")
with specific emphasis on developing a proprietary real-time completely
automated machine translation system. The proposed system would operate via
standard telecommunications systems and ultimately would have the ability to
instantaneously translate voice from one language into another. The Company has
entered into a licensing agreement with the inventor, Dr. Cherny, for the
exclusive rights to such technology as they regard translation applications and
have a right of first refusal for all other applications covered by the patent
application. Part of the proceeds of the initial public offering (IPO) has been
allocated for this project and the Company currently intends to finance a
portion of the balance through proceeds received from the potential exercise of
the Warrants and the remainder through other external financing. The Company
intends to closely monitor the progress of the project and will discontinue
financing the project unless certain development milestones are reached. The
initial phase is directed towards generating specific context dictionaries,
i.e., relationships between words in different languages but in the same
context. In any given language words have multiple meanings. In addition, words
of one language do not often translate on a one to one basis, into another
language. Context is the key to translating a message from one language into
another. The first milestone of the first phase will take the many thousands of
documents already translated and amassed by the Company and organize them by
context and analyze them through the use of appropriate neural network systems
for the purpose of generating specific context dictionaries. The second
milestone of the first phase will generalize the context dictionary generator
making it capable of generating context dictionaries from written
6
materials in different languages on the same topic, not previously translated or
amassed. The Company has contracted to pay the Gedanken Corporation (Gedanken),
the owner of the patent by assignment from Dr. Cherny, the following for the
development of the machine translation system: $250,000 over a 12 month period,
which began February 15, 1997 for the Specific Topic builder and $500,000,
beginning September 15, 1997, over an 18 month- period for the development of
the General Topic Dictionary. The Company also acquired the rights to the
development of a Real Time Voice Translation System based on providing the
necessary funding estimated at $4,000,000. The Company is obligated to pay
royalties on all revenues generated that use in whole or in part the patent
rights and know-how. The Company has the right to stop funding at specified
times or accomplishment periods. If the first two milestones are successful,
even if the instantaneous voice translation machine is ultimately never
completed, the Company will still benefit from using the specific and general
context dictionary generators.
COMPETITION
Berlitz, Bowne(IDOC), and Lernout & Hauspie(Mendez), and many other
smaller companies offer similar services and currently compete with the Company.
Some of these competitors have substantially greater financial resources, more
extensive experience, and better established research and development, marketing
and servicing capabilities than the Company. The Company must compete not only
on the basis of price, but also delivery time and quality.
SUPPLIES AND MATERIALS
The materials and supplies used to produce the Company's products are
obtainable from a wide variety of suppliers. There is not currently, nor has
there been in the recent past, a shortage of any of these materials. The Company
believes that its current sources of supply are adequate to meet its future
needs.
EMPLOYEES
The Company presently employs thirty-two (32) full-time people,
comprised of seven (7)in Management positions, three (3) in Administration, four
(4) in Sales and Marketing, and eighteen (18) in Production. In addition, the
Company also uses the services of freelance and/or independent translators and
editors on an as needed basis from a roster of approximately 900. The Company
has never had a problem with access to qualified personnel. The Company has
entered into written employment agreements with each of Ms. Theodora Landgren
and Mr. Charles Cascio, and an oral agreement with Mr. Richard Herson. See
"Management - Employment Agreements".
7
RECENT AGREEMENT AND ACQUISITION
In February 1997, the Company entered into a marketing/production venture
with WTC, a Korean corporation. Subject to Korean government approval, BTS will
operate initially as a branch in Seoul to exploit the translation markets from
English to Korean and other Asian languages. TTGL will also have an option to
acquire WTC, for shares of its Common Stock based on performance criteria of
WTC. To date, this venture has had negligible impact on the financial
statements.
On March 31, 1997, the Company entered into an agreement to acquire the
various corporations that comprise The Word House Group (Word House), for
375,000 shares of its Common Stock. Word House has offices in The Netherlands,
France, Great Britain and China. Word House translates and localizes documents
and software, concentrating on European languages. Three principal customers
accounted for approximately 77% of sales in calendar 1996. The Company currently
believes that this transaction will close during the early part of July. During
calender 1996, Word House had unaudited revenues of approximately $3.2 million
and net income of $297,000.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal operating facility is located in Haddonfield,
New Jersey, where it occupies approximately 3,600 square feet at a monthly rate
of $2,875 pursuant to a lease that extends until March, 1998. The Company has
another domestic operating facility in Westmont, New Jersey, where it occupies
approximately 1,100 square feet at a monthly rate of $1,200 pursuant to a lease
that extends until June, 1998. Under both leases the Company is responsible for
utilities and certain other expenses. In January 1997, the Company moved it's
Pennsauken corporate office to it's Westmont location and in April 1997, closed
its German operating facility, because of the agreement to acquire Word House.
In June 1997, the Company opened a London office at an annual rental of
approximately $9,000. The Company believes that all of its facilities are
currently adequate and further believes that, if necessary, adequate facilities
could be located in the event the Company needs to replace or expand its current
facilities.
In connection with the proposed Word House acquisition, subsidiaries to
be acquired own a condominium floor in France and are also subject to a lease in
The Netherlands. In May 1997, Word House moved its principal location to
Amsterdam. It's lease for 5,500 square feet is for a period of 5 years at a rate
of approximately $95,000 per year.
ITEM 3. LEGAL PROCEEDINGS.
The Company has been given notice that it will be sued by a stockholder
who is seeking monetary damages, specific performance, equitable relief and
costs in the amount of $3,000,000. The Company and its counsel believe that this
suit is completely without merit and will vigorously defend it. At this time a
complaint has not been served. The Company is not a party to, or involved in,
any other legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company completed its initial public offering on December 2, 1996. Its
Common Stock is reported on the NASDAQ "pink sheets" over-the-counter market
under the symbol THEO for the Common Stock, and THEOW for the Warrants. The
following table sets forth the range of prices for the Common Stock as reported
for the periods indicated and represents prices between broker-dealers, which do
not include retail mark-ups and mark-downs, or any commission to the
broker-dealer. The bid prices do not reflect prices of actual transactions.
Common Stock
<TABLE>
<CAPTION>
WEEKLY SUMMARY
DATE HIGH LOW CLOSE AVG TRADE VOLUME
---- ---- --- ----- --------- ------
<S> <C> <C> <C> <C> <C>
12/02/96 15.00 7.00 13.50 12.17 1491800
12/09/96 12.50 5.00 6.50 10.01 241000
12/16/96 8.50 6.00 6.50 6.78 367900
12/23/96 9.00 7.00 7.00 7.53 27900
12/30/96 9.00 7.00 9.00 7.60 25600
01/06/97 9.00 7.00 9.00 7.92 137900
01/13/97 10.00 7.50 10.00 9.22 82000
01/20/97 10.75 7.75 9.50 9.64 107800
01/27/97 10.00 7.87 9.50 9.05 110400
02/03/97 9.50 8.00 9.50 8.94 33400
02/10/97 9.75 6.37 8.00 7.93 77300
02/17/97 9.25 7.75 8.25 8.58 76800
02/24/97 10.00 8.25 9.75 9.39 147800
03/03/97 10.00 9.00 10.00 9.60 60700
03/10/97 10.00 8.75 10.00 9.51 150100
03/17/97 10.00 9.00 10.00 9.60 58900
03/24/97 10.00 8.75 9.25 9.32 58600
03/31/97 9.87 8.62 9.12 9.48 39800
</TABLE>
The approximate number of record holders of Common Stock as of March 31,
1997 was 600.
DIVIDEND POLICY
The Company has not declared or paid any dividends nor does it expect to
pay dividends on its Common Stock in the foreseeable future intending to retain
earnings to finance the growth of its operations.
TRANSFER AGENT
The Company uses American Stock Transfer & Trust Company, 40 Wall Street,
New York, New York 10005, to act as Transfer Agent for the Company's Common
Stock and Warrants.
9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.( stated in thousands).
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto contained in this
Prospectus.
(a) GENERAL
The Company has been in business since 1984. Generally, sales
have been increasing year to year. Net sales for its fiscal year ended March 31,
1997, were approximately 20% higher than its net sales for its fiscal year ended
March 31, 1996, which in turn were 20% higher than for the year ended March 31,
1995.
(b) RESULTS OF OPERATIONS
Fiscal Year Ended March 31, 1997 as Compared to Fiscal Year ended March 31,
1996.
For the year ended March 31, 1997 net sales increased 23% over the
corresponding period in 1996, from $ 2,586.3 to $ 3,193.1. However, net income
declined by 56% in comparison to the period, from $ 347.9 to $ 154.0. Gross
profit decreased from $ 1,068.6 (41% of sales) to $ 991.6 (31% of sales), or 7%.
Selling, general and administrative expenses, (the current year includes
approximately $100,000 of expenses of the IPO as described below) increased in
the amount of $326.5, from $485.1 to $811.6, or 67%, from 19% to 25% of sales
respectively. Interest income amounted to $ 76.3 (there was no net interest in
the prior period).
Discussion
The net income for the year ended March 31, 1997 was negatively
impacted by the following factors:
(i) The Company's initial public offering (IPO) became effective in December
1996. The outside costs of underwriting, legal, accounting, blue sky,
printing and other expenses of the underwriting incurred during the period
were charged to the proceeds received. Internal expenses such as officers'
salaries and staff time were charged to operations. The chief executive
officer (CEO) devoted full time during this period to negotiations with
underwriters, preparation of the registration statement, meetings with
various professionals (legal and accounting), printers, etc. The CEO's
salary and related expenses of approximately $ 100,000 are included in
selling, general and administrative expenses.
(ii) The Company was unable to utilize machine translation as effectively as in
the prior periods, since it expanded its base of customers, topics and
languages. Without repeat business,(by customer, topic and language)
additional lead time is required to effect efficiency in the use of machine
translation.
(iii)The Company expanded its project management and customer communication
facilities in comparison to a year ago, approximately doubling its
computers and related operating systems and software; this expansion
involved additional hiring and training costs.
(iv) The Company added to its sales and sales support personnel to promote
regular business as well as sales under license agreements.
The statements presented for the comparative periods are reclassified to agree
with the classifications of the current statements.
10
Fiscal Year Ended March 31, 1996 as Compared to Fiscal Year Ended March 31, 1995
Net sales for the fiscal year ending March 31, 1996 increased to $2,586
from $2,149.1 or approximately 20% over net sales for the prior fiscal year,
ending March 31, 1995. The Company believes this increase is primarily due to
the growth of its reputation with regard to its ability to deliver quality work
on a timely basis. During the fiscal year 1996, 54% of the Company's sales were
to four major customers in the high-tech area, of which two accounted for 37% in
fiscal year 1996 and 70% in the prior fiscal year ended March 31, 1995.
The Company's operating income for the fiscal year ended March
31, 1996, was $583.5 in comparison to $130.4 for the prior fiscal year, or an
increase of 350%. Of this increase of $453.0, approximately $331.0 (or 73%) is
attributable to the increase in gross margin -- from 20% to 33%; approximately
$87.0 (or 19%) is attributable to the increase in sales volume of $436.0; and
$35.0 (or 8%) to the decrease in general and administrative expenses and
depreciation.
There was a significant increase in gross profit from 20% to
33%. The company benefited from the increasing use of translation tools due to
the unusual amount of repeat business from existing customers. Therefore, the
relative stability of customers' requirements and contents permitted a more
effective use of translation memory storage, i.e. machine tool translation. In
addition, there were the gains derived from an organizational structure
established for a two million dollar level, increasing its sales by 20%.
The increase of gross profit was not maintained at this rate.
In anticipation of increasing volume, the Company had increased its production
staff to concentrate on job flow, quality control, editing and customer
communications. Likewise, the type of translation products and customer
requirements did not permit the use of machine tool translation of previously
stored memory data to the previous extent.
Total general and administrative expenses and depreciation
decreased in the amount $35.0 for fiscal 1996 in comparison to fiscal 1995, from
$299.6 to $264.2. This decrease was caused by the providing for bad debts in
prior years ($36.0 in fiscal year ended March 31, 1995) and recovering $45.0 in
the current fiscal year. Excluding such accounts for bad debts, general and
administrative expenses increased by $25.0 (12%) over the prior fiscal year and
depreciation by $19.0 (35%).
(c) LIQUIDITY AND FINANCIAL RESOURCES
UNDERWRITING
On December 2, 1996, the Company completed its IPO with the sale of
705,000 shares of its Common Stock at a price of $6.00 per share, and 1,840,000
Warrants at a price of $.20 per share. The Company had net proceeds from this
underwriting of $3,582,065 after underwriting discounts of 10%, a
non-accountable expense allowance of 3% and other expenses in the amount of
$443,195. In connection with the IPO, the Company has given warrants to its
underwriters to purchase 68,572 shares of Common Stock at an excercise price of
$7.80. The Company has agreed to register (or file a post-effective amendment)
to acquire a similar number of shares of Common Stock at $7.80 per share.
11
Under the IPO the Company registered 705,000 shares sold by the Company
for its benefit, 100,000 shares sold by its Chairman and Chief Operating
Officer, 1,840,000 redeemable Common Stock Purchase Warrants, 241,000 shares of
Common Stock owned by other selling shareholders, and 300,000 warrants received
by certain existing shareholders.
As noted above, the Company received net proceeds of $3,582,065 from
its IPO. The Company also issued 12,000 shares in payment of indebtedness of
approximately $48,000. The Company generated cash from operations for the year
of $229,223 and invested $261,040 in equipment and related software. Accounts
receivable and other assets net of accounts payable and other liabilities
increased by $455,821. Accordingly, cash and equivalents increased by
$3,128,967, from $530,340 as of March 31, 1996 to $3,659,307 as of March 31,
1997.
Net working capital at March 31, 1996 was $777.0, an increase of
approximately $650.0 from the end of the prior fiscal year. The increase in net
working capital was primarily due to the Company completing in January 1996 a
private offering of 120.5 units of its securities at a price of $5,000 per unit,
each unit consisting of 4,000 shares of Common Stock. The gross proceeds from
the offering were $602.5; the net proceeds were $463.0. On March 31, 1996, the
Company had $530.0 in cash or cash equivalents. See Statement of Cash Flow for
other sources and uses of working capital contained in the attached Consolidated
Financial Statements.
Inflation has not been a significant factor in the Company's
operations.
(d) FOREIGN CURRENCY FLUCTUATIONS
The Company has changed its policy and now only bills its customers in
US Dollars at agreed upon amounts of exchange. Accordingly, the Company is not
impacted by exchange rate fluctuations.
ITEM 7. FINANCIAL STATEMENTS.
The information called for by Item 7 is included in the Financial
Statements contained in this Annual Report of Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
12
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
As at March 31, 1997, the directors and/or executive officers of the
Company are as follows:
Name Age Position
Theodora Landgren 49 Chairman of Board and Chief Operating
Officer
Charles D. Cascio 57 President, Chief Executive Officer and
Director
Richard J.L. Herson 78 Chief Accounting Officer and Director
Luis M. Garcia-Barrio, Ph.D 52 Vice President/Special Projects
John Wetter 47 Vice President/Operations
Julius Cherny, Ph.D 60 Director
Gary M. Schlosser 46 Director
James W. Grau 57 Director
THEODORA LANDGREN has been the Chairman of the Board of Directors and Chief
Operating Officer of the Company since January 17, 1996. In addition, she has
been Chairman and President of BTS since the founding of that firm in 1984.
Prior to starting BTS she studied linguistics and computer programming at
several universities including Universities of Denver and Innsbruck (Austria)
and USC College of Continuing Education, as well as teaching English to
non-English speaking students at the University of Stockholm, Sweden. Ms.
Landgren is active in the American Translator's Association (ATA), Society of
Technical Communication (STC) where she annually speaks on translation
processes, and serves as an elected executive committee member on the board of
the Localization Industry Standards Association (LISA). LISA is the leading
association and is head-quartered in Geneva, Switzerland, dedicated to promoting
standards for the computer industries. She also serves as the newly elected
president of the Logos User's Group in the United States. Logos, Inc. is the
developer of a machine translation system. She is a respected authority on
product globalization and has published articles in major magazines on the
subject. Ms. Landgren lived many years in Europe prior to opening BTS thereby
gaining hands on expertise in multi-lingual product adaptation.
CHARLES D. CASCIO became a Director, President and Chief Executive Officer of
the Company in May of 1996. He had previously been engaged by the Company, from
inception, as a full time financial consultant. From late 1992 until July 1996
he was Chairman and President of Electro-Kinetic Systems, Inc., a publicly held
provider of laboratory testing products. From 1990 to late 1992, Mr. Cascio was
employed as a full time marketing and financial consultant to John B. Canuso,
Inc., a large privately held development, building and entertainment company
located in Southern New Jersey. From 1987 to 1990, he was a full time financial
and marketing consultant to Drug Screening Systems, Inc., a publicly held
manufacturer of drug screening systems to detect the presence of "drugs of
abuse". From 1984 to 1987, Mr. Cascio managed a wholly and family owned
sporting, entertainment and recreational facility, known as the Coliseum,
located in Voorhees, N.J., which was sold. Mr. Cascio holds a Bachelors Degree
in Economics from Iona College.
RICHARD J.L. HERSON was Secretary, Treasurer and a Director of TTGL since
inception until February 1, 1996, when he resigned as Secretary and Treasurer
and was appointed Chief Accounting Officer. Mr. Herson was previously a General
Partner in the firm of Hertz, Herson and Company, CPA's with offices in New
York, and Charlotte. He is currently Secretary of the Bruner Foundation, where
he is responsible for its investments and accounting operations. He holds a
Bachelor's Degree from the City College of New York and an M.S. in Accounting
from Columbia University. He has also authored numerous articles and a book on
accounting.
13
LUIS M. GARCIA-BARRIO, PH.D has been the Vice President/Special Projects of the
Company since April 1996. Prior thereto, since January 1991, he held the
position of International Production Manager. Dr. Barrio also is the head of
Research and Development. Dr. Barrio holds degrees in Linguistics, Education,
and the Humanities, including a Masters Degree and Ph.D. from the University of
Pennsylvania. He is a certified State and Federal Court interpreter and has
served on the faculty as Chairman, Associate Professor and Curriculum
Development Administrator of several major universities in both the US and
abroad. In addition, he has published over two (2) dozen papers on literature
and linguistics.
JOHN WETTER is now Vice President/Operations for the Company. Since his arrival
in July 1995, he has been responsible for the significant increase in the turn
around time and quality of the Company's project work by concentrating on
increased productivity through computerization and training. From 1989 until
June 1995, Mr. Wetter owned and operated Colortech Graphics, Inc., a specialty
music printing company. Mr. Wetter holds an MBA in Business from the University
of Scranton and has served as an adjunct professor at the University of Vermont.
JULIUS CHERNY, PH.D has been a Director since May 10, 1996. Dr. Cherny is a
founder and partner of Mottola, Cherny and Associates, a consulting firm
specializing in providing financial, organizational and systems consulting
services. Dr. Cherny holds a Ph.D. in accounting and is currently on staff at
the NYU Graduate School of Business and previously at the Hagen School of
Business at Iona College. Dr. Cherny has held positions as Director, Senior Vice
President, and Chief Financial Officer with firms in the securities industry.
Dr. Cherny has published numerous papers and books dealing with Finance,
Accounting and Advanced Mathematical Theory.
GARY M. SCHLOSSER was appointed a Director in August 1996. Since August 1, 1994,
Mr. Schlosser has been the President and a director of Jefferson Bank of New
Jersey. From October 1989 through July 1994 he was Executive Vice President of
Glendale National Bank of New Jersey and prior thereto, from July 1988, he was
President of Glendale Mortgage Services Corporation, a subsidiary of Atlantic
Bancorporation. Mr. Schlosser is a member of the Camden County Bankers
Association and the South Jersey Security Bankers Association.
JAMES W. GRAU is President and Founder of Charisma Communications, Ltd, which
specializes in producing programs, industrials, live events and concerts for the
networks, cable and industry. During its 19 year history Charisma has created
programs earning the highest industry awards and accolades and has eleven
productions in THE MUSEUM OF TELEVISION AND RADIO.
Prior thereto, Mr. Grau was under contract to some of the major networks and
corporations including ABC, CBS, MetroMedia, the U.S. Congress Sub-Committee on
Communications and the National Cable Television Association. In the late 80's
Mr. Grau served as the only outside consultant to CBS Ventures Committee and has
served under two U.S. Presidents on the National Advisory Council of the Small
Business Administration. Presently, he is the Entertainment Director of the
Mar-a-Lago Club, Palm Beach, Fla., and the executive Producer of contemporary
concerts for the Trump Organization.
Mr. Grau is a Graduate of the Medill School of Journalism at Northwestern and is
married to Elizabeth Trump Grau.
Following are some of Mr. Grau's involvements
o Trump Palace - Treas. and Board of Managers
o Friars Club - Governor/Lifetime Secretary
o Congressional Select Committee on Crime.
o FBI - Marine Corps Law Enforcement Foundation
o Daytop Village - Board of Directors
BOARD OF DIRECTORS
Each director is elected at the Company's annual meeting of
stockholders and holds office until the next annual meeting of stockholders, or
until his successor is elected and qualified. At present, the Company's bylaws
require no fewer than one director. Currently, there are six directors of the
Company. The bylaws permit the Board of Directors to increase the size of the
board and to fill any vacancy and the new director may serve until the next
annual meeting of stockholders or until his successor is elected and qualified.
Officers are elected by the Board of Directors and their terms of office are,
except to the extent governed by employment contracts, at the discretion of the
Board. There are no family relations among any officers or directors of the
Company. The officers of the Company, other than Richard J.L. Herson, devote
full time to the business of the Company. The Company has established separate
Audit and Compensation Committees. The Audit Committee, consisting of Mr. Herson
and Dr. Cherny, makes recommendations to the Board of Directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and of the services provided by the Company's independent auditors, and reviews
and evaluates the Company's internal control functions. The Compensation
Committee, consisting of Ms. Landgren and Mr. Herson, makes recommendations to
the Board of Directors concerning compensation for executive officers and
consultants of the Company. While the Underwriter has the right to designate a
member to the Board of Directors during the next two years, it has advised the
Company that it has no current intent to exercise this right.
Section 16(a) Beneficial Ownership Reporting Compliance
During the fiscal year ended March 31, 1997, all of the Directors filed
their Form 3 late and each executive officer did not timely file one Form 4 to
report a grant of stock options. The Company is instituting procedures to
prevent future untimely filings.
14
ITEM 10. EXECUTIVE COMPENSATION.
EMPLOYMENT AGREEMENTS
As of December 7, 1995, the Company entered into formal five year
written employment contracts with the Company's Chairman/Chief Operating Officer
and its President/Chief Executive Officer for an annual base salary of $104,000
each during each of the five years thereof, plus annual cost of living
adjustments. These agreements also (i) contain restrictions on competing with
the Company for two years following termination of employment, (ii) provide for
severance payments in the event of termination without cause by the Company in
an amount equal to the aggregate amount of payments due under the term of the
Agreement (without regard to extensions), but in no event less than one year's
compensation, (iii) provide that the Company will purchase a life insurance
policy naming as beneficiary a person chosen by each officer in an amount equal
to 2.5 times such officer's salary and (iv) provide a car or a car allowance.
The Company has also entered into an oral agreement with Mr. Herson to pay him
an annual compensation of $25,000 to begin following the close of the IPO.
The estimated value of benefits to each officer not available to other
employees was less than $10,000.
EXECUTIVE COMPENSATION
The following table summarizes the total compensation of the Chief
Executive Officers of the Company for the fiscal year ending March 31, 1997 and
since inception (the "Named Executive Officer"). There were no other executive
officers of the company who received compensation in excess of $100,000 for the
fiscal year ending March 31, 1997.
SUMMARY COMPENSATION TABLE
Name/ Annual Compensation Long Term Compensation
Principal Position Year Salary Other Options (#)
- ------------------ ---- ------ ----- -----------
Michael C. Cascio/ 1997 $4,615 N/A N/A
President and Chief 1996 $8,462 N/A N/A
Executive Officer (i)
Charles D. Cascio/ 1997 $87,000 N/A 100,000
President and Chief
Executive Officer (ii)
Theodora Landgren/ 1996 $20,000 N/A
Chief Operating Officer (iii) 1997 $104,000 N/A 100,000
- -----------------------
(i) From inception (July 7, 1995) through May 9, 1996.
(ii) From May 10, 1996.
(iii) Covers the period January 17, 1996 through March 31, 1997 and does not
include the period when an officer of Bureau of Translation Servies, Inc.
STOCK OPTION PLAN
The Board of Directors and stockholders of the Company have adopted a
Stock Option Plan (the "Option Plan") as an incentive for, and to encourage
share ownership by, the Company's officers, directors and other key employees
and/or consultants and potential management of possible future acquired
companies. The Option Plan provides that options to purchase a maximum of
2,500,000 shares of Common Stock (subject to adjustment in certain
circumstances) may be granted under the Option Plan, 2,200,000 of which shares
may not be issued for 18 months from December 2, 1996, without the consent of
the Underwriter. The Option Plan also allows for the granting of stock
appreciation rights ("SARs") in tandem with, or independently of, stock options.
Any SARs granted will not be counted against the 2,500,000 share limit.
The purpose of the Option Plan is to make options (both "incentive
stock options" within the meaning of Section 422A of the Internal Revenue Code
of 1986, as amended (the "Code"), and non-qualified options) and "stock
appreciation rights" (with non-qualified options only) available to certain
officers, directors and other key employees and/or consultants of the Company in
order to give such individuals a greater personal interest in the success of the
Company and, in the case of employees, an added incentive to continue and
advance in their employment.
The Plans are currently administered by the majority vote of a
Committee (the "Committee") appointed by the Board of Directors and comprised of
at least two members of the Board who, in the case of the Option Plan, are not
eligible to receive options, other than pursuant to a formula, it being intended
that such plan shall qualify under Rule 16b-3 as promulgated pursuant to the
Securities Exchange Act of 1934, as amended. The Committee will designate those
persons to receive grants under the Plans and determine the number of shares
and/or options, as the case may be, to be granted and the price payable for the
shares of Common Stock thereunder. The price payable for the shares of Common
Stock under each option will be fixed by the Committee at the time of the grant,
but, for incentive stock options, must be not less than 100% (110% if the person
granted such option owns more than 10% of the outstanding shares of Common
Stock) of the fair market value of Common Stock at the time the option is
granted, and 85% of such price for non-qualified stock options. The above
notwithstanding, the Company intends shortly to amend the Option Plan so it will
conform to the recent revisions of Rule 16b-3.
15
The Company issued 100,000 options to each of its Chairman and
President. Pursuant to the agreement with the Underwriter, the Company will not
issue more than an additional 100,000 stock options, for a total of 300,000
stock options, during the 18 months following the date of the IPO, without the
consent of the Underwriter. The following table sets forth information with
respect to each Executive Officer and Director and other employees relative to
the granting of options during the year ended March 31, 1997, and unexercised
options held as of the end of the fiscal year (no option was exercised during
the year):
<TABLE>
<CAPTION>
Number of % of Exercisable Within 18 % of Estimated Value of Sale of Such
Securities Grants Mos. Market on Options ***
Underlying (April 30, 1998) Date of 5 Years 10 Years
Options Grant
<S> <C> <C> <C> <C> <C> <C>
Theodora Landgren 100,000 15.1 100,000 110 $166,800 $ 381,600
Charles D.Cascio 100,000 15.1 100,000 110 166,800 381,600
Richard J.L.Herson 65,000 9.9 13,000 * 100 108,400 248,000
Luis Garcia-Barrio 25,000 3.8 5,000 * 100 41,700 95,400
John J. Wetter 25,000 3.8 5,000 * 100 41,700 95,400
Gary M. Schlosser 10,000 1.5 10,000 100 16,700 38,200
Other Employees 335,000 50.8 67,000 * 100 558,800 1,278,400
TOTAL 660,000 100.0 300,000 **
</TABLE>
* Exercisable 20% per year.
** Per Agreement with Underwriter.
*** Based on assumed increase in value of 5% per annum of the underlying
Common Stock securities.
Subsequent to March 31, 1997 all of the options which were exercisable
within the 18 month period were registered on Form S-8.
COMPENSATION OF DIRECTORS
Directors of the Company are not compensated for their services, in
that capacity. See "Executive Compensation - Employment Agreements" for
descriptions of other agreements between the Company and certain of its
directors.
16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock, as of June 15, 1997, (a) each person
known by the Company to own beneficially more than five percent of the Company's
outstanding shares of Common Stock, (b) each director and executive officer of
the Company who owns shares and (c) all directors and executive officers of the
Company as a group. Unless otherwise indicated, all shares of Common Stock are
owned by the individual named as sole record and beneficial owner with exclusive
power to vote and dispose of such shares.
COMMON STOCK
OWNED PERCENTAGE
NAME AND ADDRESS BENEFICIALLY OF CLASS
- ---------------- ------------ --------
Theodora Landgren 285,000 14.6
(1)(2)(3)
Charles D. Cascio 200,000 10.3
(1)(2)(4)
Richard J.L. Herson 57,500 3.0
(1)
James W. Grau 20,000 1.0
(1)(5)
All Executive Officers and
Directors as a Group 562,500 28.9
(1) Uses the Company's address at 332C Haddon Avenue, Westmont, New Jersey
08108.
(2) Does not include 100,000 Warrants subject to restrictions on
transferability for 18 months from December 2, 1996.
(3) Does not include an additional 112,500 shares of Common Stock held in a
Voting Trust under which she has sole voting control until December 2,
1998. With such shares she controls 20.46% of the shares.
(4) Does not include an aggregate of 144,000 shares owned by adult,
independent children of Mr. Cascio. Mr. Cascio disclaims beneficial
interest in such shares.
(5) Represents 20,000 currently exerciseable warrants.
ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company has entered into written employment agreements with
Theodora Landgren and Charles D. Cascio, and an oral agreement with Richard J.L.
Herson, all of whom are executive officers and directors. The Company has
recently concluded an exclusive license agreement with Dr. Julius Cherny, a
director, for the worldwide rights to an automated machine translation system
for which Dr. Cherny has filed a patent application. See "Business-Research and
Development."
As part of the Company's January 1996 transaction with BTS, as a
shareholder of BTS, Ms. Landgren received a pro rata amount of stock in the
Company, amounting to 677,500 shares of Common Stock, which has since been
reduced to 385,000 shares by accounting for her give-back to the Company of
292,500 shares and which was further reduced to 285,000 shares by the sale by
the Underwriters of 100,000 shares on her behalf as part of the IPO. As a
prerequisite for the Underwriter entering into this transaction with the
Company, it required that not more than 1,226,000 (post-Reverse Split) shares of
Common Stock be outstanding. In order to meet this limit an aggregate of 665,000
shares of Common Stock were returned to the Company by various stockholders
including Ms. Landgren (292,500 shares), Mr. Cascio and his family members
(300,000 shares) and Mr. Herson (7,500 shares). In an attempt to compensate such
people for their loss, on May 24, 1996, the Company granted 100,000 warrants, to
each of Ms. Theodora Landgren and Mr. Charles Cascio. These warrants are
identical in all respects to the 1,840,000 Warrants that were sold by the
Company.
17
Other assets include approximately $52,000 due from Theodora Landgren,
the Company's chairman and chief operating officer; interest charged for the
year on such advances is at the rate of 8% per annum.
18
In February 1997, the Company entered into a Consulting Agreement with
Mr. Grau for which he received 20,000 warrants. The Company also entered into a
Consulting Agreement with Charisma Communications Ltd., a corporation controlled
by Mr. Grau, for which it receives a fee of $60,000.
PART IV
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
The following exhibits were filed as part of SB-2 Registration Statement dated
July 25, 1996 (Registration No. 333-8857):
3.1 Restated Certificate of Incorporation
3.2 By-Laws
4.6 Form of Subscription Agreement between the Company and investors
pursuant to December 7, 1995 Private Placement Memorandum.
10.1 Lease Agreement between BTS and J.C.G. Partnership dated January
18, 1995.
10.5 The Translation Group, Ltd. 1995 Stock Option Plan.
The following exhibits were filed as part of Amendment No. 1 to the SB-2
Registration Statement dated September 19, 1996:
10.2 Employment Agreement between the Company and Theodora Landgren
dated as of December 7, 1995, as amended.
- --------------------
(1) Includes $7,000 as a car allowance and the balance as an IRA
contributions and insurance premiums.
10.3 Employment Agreement between the Company and Charles Cascio dated
as of December 7, 1995, as amended.
10.4 Agreement between the Bureau of Translation Services, Inc. and
debis Systemhaus KSP-Kommerzielle Systeme und Projekte GmbH dated
May 24, 1995
10.5 Voting Trust Agreement between Ms. Theodora Landgren and various
stockholders dated as of September 11, 1995.
The following exhibits were filed as part of Amendment No, 2 to the SB-2
Registration Statement dated October 17, 1996:
4.1 Specimen Common Stock Certificate
4.2 Specimen Warrant Certificate
The following exhibits were filed as part of Amendment No. 3 to the SB-2
Registration Statement dated November 14, 1996
1.1.2 Revised Underwriting Agreement
4.3.1 Revised Form of Warrant Agreement
4.4.1 Form of Revised Repressentative's Warrant Agreement
4.5.1 Form of Revised Repressentative's Warrant
10.6 Consulting Agreement between the Repressentative and the Company
The following exhibit is filed herewith:
10.7 License Agreement Between the Company and Gedanken Corporation
dated as of November 1, 1997.
(b) Reports on Form 8-K:
During the last quarter of its fiscal year ending March 31, 1997, the Company
filed one Current Report on Form 8-K dated as of March 31, 1997, to report
entering into a letter of intent to acquire the Word House companies.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE TRANSLATION GROUP, LTD.
By: /s/CHARLES D. CASCIO
------------------------
Charles D. Cascio
President
Dated: June 26, 1997
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:
Signiture Title Date
- --------- ----- ----
/s/ THEODORA LANDGREN Chairman and Chief Operating
- --------------------- Officer -----------------
THEODORA LANDGREN
/s/ CHARLES D. CASCIO President, Chief Executive
- --------------------- Officer and Director -----------------
CHARLES D. CASCIO
/s/ RICHARD J.L. HERSON Chief Accounting Officer and
- ----------------------- Director(Principal Financial Officer)---------------
RICHARD J.L. HERSON
/s/ JULIUS CHERNY Director
- ----------------------- -----------------
JULIUS CHERNY
/s/ GARY M. SCHLOSSER Director
- ----------------------- -----------------
GARY M. SCHLOSSER
/s/ JAMES W. GRAU Director
- ----------------------- -----------------
JAMES W. GRAU
19
<PAGE>
THE TRANSLATION GROUP, LTD.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND MARCH 31, 1996
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1996
---- ----
ASSETS:
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,659,307 $ 530,340
Accounts receivable, net of allowance for doubtful
accounts of $25,000 and $20,000 respectively 946,107 642,481
Prepaid expenses and other current assets 175,627
Deferred offering costs 34,540
--------------- --------------
Total current assets 4,781,041 1,207,361
Property and equipment 529,785 362,178
Less: accumulated depreciation and amortization (171,235) (189,466)
--------------- --------------
Net property and equipment 358,550 172,712
Other assets 126,204 58,759
--------------- --------------
TOTAL ASSETS $ 5,265,795 $ 1,438,832
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 111,799 $ 55,834
Accrued liabilities 130,514 26,000
Accrued income taxes 115,000
Deferred income taxes 278,792 233,394
--------------- --------------
Total current liabilities 521,105 430,228
Stockholders' equity:
Common stock, $.001 par value, 15,000,000
shares authorized, 1,943,000 outstanding
and 1,891,000 outstanding, respectively 1,943 1,891
Preferred stock, $.001 par value, 1,000,000
authorized, none outstanding
Additional paid-in capital 4,046,772 464,759
Retained earnings 695,975 541,954
--------------- --------------
Total stockholders' equity 4,744,690 1,008,604
--------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,265,795 $ 1,438,832
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE TRANSLATION GROUP, LTD.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1996
---- ----
<S> <C> <C>
Revenue $ 3,193,068 $ 2,586,306
Cost of services provided 2,126,262 1,442,940
Depreciation and amortization
75,202 74,751
-------------- --------------
Gross profit 991,604 1,068,615
Selling, general and
administration expense 811,626 485,137
-------------- --------------
Operating income 179,978 583,478
Non-operating income (expense)
Interest income (expense) 76,343 (3,007)
-------------- --------------
Income before income taxes 256,321 580,471
Provision for income taxes 102,300 232,600
-------------- --------------
Net income $ 154,021 $ 347,871
================= ================
Net income per common share
outstanding $ 0.11 $ 0.34
================= ================
Weighted average shares
outstanding 1,465,000 1,033,200
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE TRANSLATION GROUP, LTD.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 154,021 $ 347,871
Depreciation and amortization 75,202 74,751
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (303,626) (316,816)
Prepaid expenses and other current assets (175,627) 31,625
Other assets (67,445) (42,258)
Accounts payable 55,965 33,826
Accrued liabilities 104,514 2,130
Accrued income taxes (115,000) 107,118
Deferred income taxes 45,398 117,600
--------------- ---------------
Net cash flows provided by operating activities (226,598) 355,847
CASH FLOWS (USED FOR) INVESTING ACTIVITIIES:
Purchase of property and equipment (261,040) (196,749)
CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES:
Issuance of common stock 3,582,065 446,600
Deferred offering costs 34,540 (34,540)
Net payments under line of credit (40,000)
Payments on long-term debt (3,056)
--------------- ---------------
Net cash flows provided by (used in) financing activities 3,616,605 369,004
--------------- ---------------
Net increase in cash and cash equivalents 3,128,967 528,102
Cash and cash equivalents, beginning of year 530,340 2,238
--------------- ---------------
Cash and cash equivalents, end of year $ 3,659,307 $ 530,340
=============== ================
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest $ 258 $ 3,227
=============== ================
Income Taxes $ 233,100 $ 8,933
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
THE TRANSLATION GROUP, LTD.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
Total
Common Common Paid-in Retained Stockholders'
Shares Stock Capital Earnings Equity
------ ----- ------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1995 50 $ 50 $ - $ 194,083 $ 194,133
YEAR ENDED MARCH 31, 1996:
Formation of TTGL 885,000
885 885 - 1,770
Conversion of note 10,000 19,990
10 - 20,000
Recapitalization 755,000
755 (705) - 50
BTS shares acquired (50) (50) - - (50)
Private Placement 241,000 241 444,589 - 444,830
Net income - March 31, 1996
- - - 347,871 347,871
--------- ------ ------- ------- ----------
BALANCE AT MARCH 31, 1996 1,891,000 1,891 464,759 541,954 1,008,604
YEAR ENDED MARCH 31, 1997:
Give back of shares in connection with the IPO (665,000) (665) (665)
Shares issued in connection with IPO 705,000 705 3,534,025 3,534,730
Shares issued in satisfaction of debt 12,000 12 47,988 48,000
Net income - March 31, 1997 - - - 154,021 154,021
--------- ------ ------- ------- ----------
BALANCE AT MARCH 31, 1997 1,943,000 $ 1,943 $ 4,046,772 $ 695,975 $ 4,744,690
========= ========== =========== ========= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
The Translation Group, LTD.
Notes to Consolidated Financial Statements
NOTE 1-THE COMPANY
The Translation Group, LTD. (TTGL or the Company) was incorporated in the State
of Delaware on July 7, 1995, and acquired 100% of the issued and outstanding
shares of the Bureau of Translations Services, Inc. (BTS) on January 17, 1996;
BTS was incorporated in 1984 in the State of Pennsylvania. The Company
translates and localizes documents and software into various languages. It
provides services to a range of industries with a concentration on information
technology companies.
On January 17, 1996, pursuant to the terms of an Agreement and Plan of
Reorganization, TTGL completed a business combination merger with BTS. The
transaction was effected by the exchange of 755,000 of TTGL common shares for
all the issued and outstanding common shares of BTS. Concurrent with the merger,
TTGL issued 241,000 shares pursuant to a private placement offer at a price of
$2.50 a share and costs of issuance of $157,670. Subsequently, of the original
shares issued, 292,500 shares were returned by BTS shareholders and 362,500
shares by TTGL shareholders in connection with the initial public offering
(IPO).
In November 1996, the Company underwent a two-for-one reverse stock split. This
was recorded retroactively in the Company's March 31, 1996 Consolidated
Financial Statements. The statements presented for the comparative period are
reclassified to agree with the classifications of the current statements.
As of December 2, 1996, the Company completed its IPO. The Company sold for its
own account 705,000 shares of its Common Stock at $6.00 per share and 1,840,000
warrants at a price of $.20 per share. The net proceeds after expenses amounted
to approximately $3,535,000. The Company also issued 12,000 common shares in
payment of indebtedness of $48,000.
On March 31, 1997, TTGL agreed to acquire all the capital stock of the companies
that comprise the Word House Group(Word House) in exchange for 375,000 of its
common shares; the closing is scheduled for June 30,1997. The acquisition will
be accounted for on a pooling of interests basis. See Note 11 below and Pro
Forma (Unaudited) Consolidated Financial Information.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements for the year ended March 31,1997, include
the accounts of TTGL and BTS. The acquisition of BTS by TTGL was accounted for
as a recapitalization of BTS as of January 17, 1996. Accordingly, the
consolidated financial statements for the year ended March 31, 1996 reflect the
results of activities of both companies. Operations have been conducted by the
Subsidiary, BTS. The Parent's activities have been related to the private
placement financing and to the IPO, potential and actual acquisitions and joint
ventures, and overall coordination and direction of research and development and
market strategies with operations.
1
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and judgments that affect the reported amounts 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
reporting periods. Actual results could differ from these estimates.
REVENUE RECOGNITION
Revenues are recognized on the accrual method of accounting upon billing to
customers. Customers are billed upon completion of project milestones which are
defined at the beginning of the projects.
MARKETING AND ADVERTISING
The Company adopted the American Institute of Certified Public Accountants
Statement of Position (SOP) 93-7, Reporting on Advertising Cost. In accordance
with SOP 93-7, marketing and advertising costs are expensed as incurred. Such
expenses approximated $61,000 and $53,000 for the years ended March 31, 1997 and
1996, respectively.
FOREIGN CURRENCY TRANSACTIONS
Gains and losses from exchange rate fluctuations are not material.
CASH AND CASH EQUIVALENTS
Cash includes demand deposits, certificates of deposit, and investments in
United States government securities with a due date of less than two years,
carried at cost, net of amortization of premium. Market and credit risk are not
significant because of the nature of these securities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost net of depreciation and amortization.
Depreciation and amortization are computed using accelerated and straight-line
methods over the estimated useful lives of the assets. See also Notes 4 and 5
below relative to licensing agreements and their accounting.
INCOME TAXES
Deferred income tax assets and liabilities are determined in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
(SFAS No. 109), and result from revenues and expenses being recognized for
financial reporting purposes in time periods different from those for income tax
purposes. Under SFAS No. 109, deferred income tax liabilities are classified as
current or noncurrent, based upon the financial reporting classification of
assets and liabilities to which they relate.
RESEARCH AND DEVELOPMENT
See Notes 4 and 5 below relative to certain license agreements and their
accounting. Other research and development costs are charged to operations as
incurred.
2
EARNINGS PER COMMON SHARE
In calculating average earnings per common share, the weighted average shares
outstanding reflect the reverse split and modifications (in connection with the
IPO) to shares originally issued:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1997 March 31, 1996
Shares Weighted Shares Weighted
------ -------- ------ --------
<S> <C> <C> <C> <C>
TTGL shares original issue and note 522,500 522,500 522,500 522,500*
conversion (t)
TTGL shares issued to BTS shareholders 462,500 462,500 462,500 462,500**
(t)
TTGL shares issued in connection with 241,000 241,000 241,000 48,200**
private placement
TTGL shares issued in connection with 717,000 239,000 -0- -0-
IPO and debt settlement --------- --------- --------- ---------
Total: 1,943,000 1,465,000 1,226,000 1,033,200
========= ========= ========= =========
</TABLE>
t Net of give-back of 372,500 and 292,500 shares by TTGL and BTS
shareholders.
* The original shares issued by TTGL are assumed to be outstanding for the
entire year.
** From January 17, 1996, the date of merger and private placement.
For the computation of earnings per share for the year ended March 31, 1997, the
inclusion of Common Stock equivalents of outstanding warrants and options is
antidilutive.
NOTE 3-SIGNIFICANT CUSTOMERS
For the year ended March 31, 1997, two customers represent 31% of revenues in
comparison to 37% for the prior year. For each of the years ended, March 31,
1997 and 1996, approximately 29% of the Company's revenues were to foreign
markets.
The Company has some concentration of credit risk with regard to its accounts
receivable. Three clients represented approximately 40% of the total accounts
receivable as of March 31, 1997 and two clients represented approximately 41.5%
as of March 31, 1996.
NOTE 4-LICENSING AGREEMENTS
In mid 1995, the Company entered into a five-year agreement with debis
Systemhaus KSP- Kommerzielle Systeme und Projekte GmbH ("debis"), a wholly owned
subsidiary of Daimler Benz. The Company acquired license rights to a software
product known as KEYTERM, a concept-oriented, fully relational proprietary
database running under UNIX and Windows for developing and maintaining
glossaries. The Company has the exclusive right to use and to market KEYTERM
throughout North America, and elsewhere nonexclusively. The Company is obligated
to pay royalties on all revenues generated that use in whole or in part the
patent rights and know-how.
3
In February 1997, the Company obtained an exclusive worldwide license and rights
for the life of the patent to use and sell know-how, apparatus, and methods
pertaining to a patent owned by the Gedanken Corporation (Gedanken). By
assignment from Dr. Julius Cherny, Gedanken is the owner of a United States
Patent Application that describes apparatus and methods for translating words,
phrases, and sentences from a source language to other target languages using
advanced telecommunications and computer technologies. The Company has
contracted to pay Gedanken for the development of a machine translation system:
(1) $250,000 over a twelve-month period, beginning February 15, 1997, for a
Specific Topic Builder; and (2) $500,000, beginning September 15, 1997, over an
eighteen-month period, for the development of a General Topic Dictionary. The
Company also acquired the rights to the development of a Real Time Voice
Translation System based on providing the necessary funding estimated at
$4,000,000. The Company is obligated to pay royalties on all revenues generated
that use in whole or in part the patent rights and know-how. The Company has the
right to stop funding at specified times or accomplishment periods. As of March
31, 1997, the Company has paid $43,191.
See Note 5 below for the accounting of such payments.
NOTE 5-PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 31, 1997 March 31, 1996
-------------- --------------
Equipment $245,020 $221,212
Software 117,723 40,090
Equipment & Software 143,128 74,702
(under Licenses)
Furniture & Fixtures 16,459 24,133
Leasehold Improvements 7,455 2,041
-------- --------
Total 529,785 362,178
Less: accumulated depreciation &
amortization 171,235 189,466
------- -------
Net property & equipment $358,550 $172,712
======== ========
For the years ended March 31, 1997 and 1996, depreciation and amortization
expense was $75,201 and $74,751 respectively. Original KEYTERM software costs
approximated $75,000. Additional KEYTERM software costs for the current year
approximate $26,000. Amortization included in depreciation expense approximates
$21,700 and $12,000 for the years ended March 31, 1997 and 1996, respectively.
The $43,191 costs of Gedanken's development of the machines for translations as
described in Note 4 above is also included in Equipment and Software (under
Licenses); there is no amortization.
4
NOTE 6 -RELATED PARTY TRANSACTIONS
Other assets include approximately $52,000 due from Theodora Landgren, the
Company's chairman and chief operating officer; interest charged for the year on
such advances is at the rate of 8% per annum.
The Company has retained Michael Cascio, Esq., former officer and son of the
Company's president as outside legal counsel. All transactions with Michael
Cascio, Esq., are at arms length.
NOTE 7-INCOME TAXES
The provisions for current and deferred income tax expense for the years ending
March 31, 1997 and 1996 consist of the following:
March 31, 1997 March 31, 1996
-------------- --------------
Provision for Taxes
Current:
Federal 23,715 $88,000
State 10,390 26,556
------ ------
34,105 114,556
Deferred:
Federal 54,685 92,217
State 13,510 25,827
------ ------
68,195 118,944
Total 102,300 232,600
======= =======
Components of Deferred
Tax Assets and Liabilities:
Accounts Receivable 394,293 $257,136
Accounts Payable and
Accrued Liabilities (115,501) (23,742)
-------- -------
$278,792 $233,394
======== ========
Reconciliation of Effective
Income Tax Rate:
Federal Income Tax Rate 34.0% 34.0%
State Taxes, Net of Federal
Income Tax Benefit 6.0% 6.0%
----- -----
Total 40.0% 40.0%
===== =====
Included in prepaid expenses is approximately $88,800 of refundable income
taxes.
5
NOTE 8-WARRANTS AND STOCK OPTIONS
Pursuant to the IPO, the Company sold 1,840,000 warrants. There were also
300,000 warrants outstanding to shareholders given in consideration of their
give-back of shares to the Company in connection with the IPO . Each warrant
entitles the registered shareholder to purchase one share of Common Stock at
$6.00 per share for a period of three years beginning December 1996. For a
holder to exercise such warrants, there must be a current registration statement
on file; the current registration statement becomes outdated on July 31, 1997.
Under certain terms and conditions, all warrants may be redeemed by the Company
at a price of $.25 per warrant. There are also outstanding warrants granted to
underwriters for a period of three years to purchase 60,000 shares of Common
Stock at an exercise price of $7.80 per share and to purchase 160,000 warrants
at an exercise price of $.26 per warrant to acquire a similar number of shares
of Common Stock at $7.80 per share. In connection with the Company's private
placement, additional stock warrants were issued to purchase 40,000 shares of
the Company's Common Stock at a price of $1.50 per share for a period of five
years.
The Company has adopted a Stock Option Plan (the "Plan") that provides a maximum
of 2,500,000 shares of Common Stock to be issued under such plan. The price
payable for the shares of Common Stock under incentive stock options must be not
less than 100% of the fair market value at the time the option is granted (and
110% if the person granted such option owns more than 10% of the outstanding
shares of the Common Stock). Additionally, under the Plan, participants may be
granted stock appreciation rights (SAR). SAR consist of rights to receive either
cash or shares of Common Stock equal to the amount by which the value of such
shares of Common Stock on the date the SAR is exercised exceeds the per share
option price. Options granted under the plan expire ten years from date of
grant.
During the year the Company granted total stock options of 660,000 shares at
$6.00 per share of which 300,000 shares are exercisable during the eighteen
months ended June 30, 1998, (no options were exercised during the current
year):
<TABLE>
<CAPTION>
NUMBER OF % OF EXERCISABLE % OF MARKET ESTIMATED VALUE OF SALE OF
SECURITIES GRANTS WITHIN 18 MOS. ON DATE OF SUCH OPTIONS ***
UNDERLYING (APRIL 30, 1998) GRANT 5 YEARS 10 YEARS
OPTIONS
<S> <C> <C> <C> <C> <C> <C>
Theodora Landgren 100,000 15.1 100,000 110 $166,800 $ 381,600
Charles D.Cascio 100,000 15.1 100,000 110 166,800 381,600
Richard J.L.Herson 65,000 9.9 13,000 * 100 108,400 248,000
Luis Garcia-Barrio 25,000 3.8 5,000 * 100 41,700 95,400
John J. Wetter 25,000 3.8 5,000 * 100 41,700 95,400
Gary M. Schlosser 10,000 1.5 10,000 100 16,700 38,200
Other Employees 335,000 50.8 67,000 * 100 558,800 1,278,400
TOTAL 660,000 100.0 300,000 **
</TABLE>
* Exercisable 20% per year.
** Per Agreement with Underwriter.
*** Based on assumed increase in value of 5% per annum of the underlying Common
Stock securities.
6
Subsequent to March 31, 1997 all of the options which were exercisable within
the 18 month period were registered on Form S-8.
NOTE 9-COMMITMENTS AND CONTINGENGIES
The Company has five year employment agreements with three officers that
aggregate $233,000 per year. The Company has outstanding lease agreements for
premises that approximate $60,000 per year (plus certain operating
expenses)until June 1998. Rent expenses under such leases for the years ending
March 31, 1997 and 1996 were $77,000 and $68,000, respectively. In April 1997,
the Company closed its German office and in June 1997, opened a London office
at a rental of $9,000 per year.
The Company has been given notice that it will be sued by a stockholder who is
seeking monetary damages, specific performance, equitable relief and cost in the
amount of $3,000,000. The Company and its counsel believe that this suit is
completely without merit and will vigorously defend it. At this time a complaint
has not been served. The Company is not a party to, or involved in, any other
legal proceedings.
NOTE-10-SUBSEQUENT EVENTS
Between April 1, 1997 and June 25, 1997 a total of 13,340 warrants were
exercised at $6.00 a share, 10,000 shares were issued in connection with the
original public offering, and 25,000 were issued pursuant to a consulting
agreement.
NOTE 11-RECENT AGREEMENT AND ACQUISITION
In February 1997, the Company entered into a marketing/production venture with
World Tech. Corp (WTC), a Korean corporation. Subject to Korean government
approval, BTS will initially operate as a branch in Seoul to exploit the
translation markets from English to Korean and other Asian languages. TTGL will
also have an option to acquire WTC, for shares of its Common Stock based on
performance criteria of WTC. To date, this venture has had negligible impact on
the financial statements.
On March 31, 1997, the Company entered into an agreement to acquire the various
corporations that comprise The Word House Group (Word House), for 375,000 shares
of its Common Stock. Word House has been in business since 1984 and has offices
in The Netherlands, France, Great Britain and China. Word House translates and
localizes documents and software, concentrating on European languages. Three
principal customer accounted for approximately 77% of sales in calendar 1996. In
May 1997, Word House moved its principal location to Amsterdam. Its lease of
approximately 5,500 square feet is for a period of five years at approximately
$95,000 per year.
7
Word House's net income (unaudited) for the calendar years 1996 and 1995 were
$297,000 and a loss of $117,000 on sales of $3,240,000 and $1,720,000
respectively. For the year 1996, net income reflects the recovery of income tax
carry forward in the amount of $120,000. The acquisition will be accounted for
on a pooling-of-interests basis; accordingly, the consolidated financial
statements will retroactively include the operations of Word House for their
fiscal years based on the historical costs of the carrying value of their
assets, together with the consolidated financial statements of the Company for
their fiscal years ended March 31. Costs in connection with this transaction are
estimated at $55,000 and will be expensed in the consolidated statement of
income for the year ended March 31, 1998. The (unaudited) pro forma effect of
such acquisition on sales and net income is as follows:
SALES YEAR ENDED 3/31/97 YEAR ENDED 3/31/96
Company $3,200,000 $2,586,300
Word House 3,240,000 1,720,000
---------- ----------
TOTAL $6,440,000 $4,306,300
========== ==========
Net Income
Company 154,000 348,000
Word House 297,000 (117,000)
---------- -----------
TOTAL $ 451,000 $ 231,000
========== ==========
NET INCOME PER SHARE
Company $ .08 $ .17
--- ---
Word House .75 (.30)
--- ---
WEIGHTED AVERAGE $ .19 $ .12
===== =====
The Company's pro forma net income per share (above) for each of the years is
based upon 1,943,000 shares currently issued and outstanding and 375,000 shares
to be issued for Word House. Net income of Word House for the year 1996 includes
the recovery of income taxes from the carry forward of prior losses of
approximately $120,000, or $.05 per share.
8
The following is a pro forma (unaudited) consolidated condensed balance sheet of
the Company giving effect to the acquisition of Word House at March 31, 1997:
Consolidated
(000)
Assets
Current assets
Cash & equivalents $3,892
Accounts receivable, net 1,306
Prepaid exp & other current 280
------
Total current 5,478
Property & equipment, net of 796
depreciation
Other assets 129
------
Total Assets $6,403
------
Liabilities & Stockholders' Equity
Current liabilities
Accounts payable $ 359
Accrued expenses 231
Deferred income tax 279
Bank overdraft (secured)* 529
------
Total current 1,398
------
Mortgage payable 92
------
Total liabilities 1,490
Stockholders' equity 4,913
-----
Total Liabilities & $6,403
======
Stockholders' Equity
*Secured by cash and accounts receivable of Word House in the amount of
$493,000.
9
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
The Translation Group, LTD
We have audited the accompanying balance sheets of The Translation Group, LTD.
and its consolidated subsidiary at March 31, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for both of the
years in the two year period ended March 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of The Translation
Group, LTD. And its subsidiary at March 31, 1997 and 1996, and the results of
their operations, stockholders' equity and their cash flows for each of the
years in the two year period ended March 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
consolidated financial data reflect the result of a business combination merger,
accounted for as a recapitalization and a 1 for 2 reverse split of the
outstanding common shares.
/s/VOTTA & COMPANY
Votta & Company
(A Professional Corporation)
Haddonfield, New Jersey
June 26, 1997
10
AGREEMENT BETWEEN GEDANKEN
CORPORATION AND THE TRANSLATION GROUP, LTD.
This Agreement, entered into by and between Gedanken
Corporation, a Delaware corporation, whose address is c/o Dr. Julius Cherny,
Four Carter Lane, Monsey, New York 10952, and The Translation Group, Ltd., a
Delaware Corporation having its principal place of business at 7703 Maple
Avenue, Pennsauken, New Jersey 08109, shall be effective as of the 1st day of
November 1996.
WITNESSETH:
WHEREAS, Gedanken Corporation is the owner by assignment duly
recorded in the United States Patent and Trademark Office of all right, title
and interest in and to United States Patent Application No. 08/733,808, titled
"METHODS AND APPARATUS FOR TRANSLATING BETWEEN LANGUAGES," filed October 18,
1996, naming Julius Cherny as inventor;
WHEREAS, Gedanken Corporation's United States Patent
Application No. 08/733,808 describes and claims apparatus and methods for
translating words, phrases and sentences in oral or written form from a source
language to other target languages using advanced telecommunications and
computer technologies;
WHEREAS, Gedanken Corporation owns, possesses and is
continuing to develop trade secrets, knowhow and other confidential research,
development and commercial information and materials relating to apparatus and
methods for translating words, phrases and sentences in oral or written form
from a source language to other target languages using advanced
telecommunications and computer technologies;
WHEREAS, The Translation Group, Ltd., by and through its
wholly-owned subsidiary, Bureau of Translation Services, Inc., is in the
business of translating words, phrases and sentences from a source language to
other target languages;
WHEREAS, The Translation Group, Ltd., in consideration of the
terms and conditions set forth in this Agreement, wishes to obtain an exclusive
world-wide right and license in the field of language translation to make, have
made, use, offer for sale, sell and distribute apparatus and methods covered by
the LICENSED PATENT RIGHTS (as hereinafter defined), and GEDANKEN (as
hereinafter defined) is willing to grant such an exclusive, world-wide field of
use license to TTGL (as hereinafter defined), subject to the terms and
conditions set forth in this Agreement;
WHEREAS, The Translation Group, Ltd., in consideration of the
terms and conditions set forth in this Agreement, wishes to obtain an exclusive,
world-wide right and license to use Gedanken Corporation's trade secrets,
knowhow and other confidential research, development and commercial information
and materials in the field of language translation relating to apparatus and
methods for translating words, phrases and sentences in oral or written form
from a source language to other target languages using advanced
telecommunications and computer technologies, and GEDANKEN (as hereinafter
defined), is willing to grant such an exclusive, world-wide field of use license
and to disclose such trade secrets, knowhow and other confidential research,
development and commercial information and materials in the field of language
translation to TTGL (as hereinafter defined), subject to the terms and
conditions set forth in this Agreement; and
WHEREAS, Gedanken Corporation and The Translation Group, Ltd.
each represent and warrant that they have the unencumbered right and power to
enter into
2
this Agreement on behalf of themselves and any and all parents, subsidiaries,
divisions, affiliates, predecessor companies or proprietorships, and that the
consent or joinder of any other person or entity is not necessary to bind either
party with respect to any provision of this Agreement;
NOW THEREFORE, in consideration of the premises, license
grants, disclosures, payments, funding, mutual covenants and agreements,
together with the other conditions, undertakings and commitments set forth in
this Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, GEDANKEN (as hereinafter defined)
and TTGL (as hereinafter defined), intending to be legally bound, agree as
follows:
ARTICLE I -- DEFINITIONS
As used in this Agreement, the following defined terms shall
have the meanings set forth below:
1.1 "EFFECTIVE DATE" shall mean November 1, 1996.
1.2 "GEDANKEN" shall mean and include Gedanken Corporation,
together with any parent corporations, subsidiary corporations, corporate
divisions or predecessor corporations.
1.3 "TTGL" shall mean and include The Translation Group, Ltd.,
together with any parents, subsidiaries, divisions, affiliates, predecessor
companies or proprietorships, and any real persons or business entities directly
or indirectly owned by, controlling or controlled by The Translation Group, Ltd.
As used herein, the term "control" means possession of the power to direct, or
to cause the direction of the
3
management and policies of a real person, corporation or other business entity,
whether through the ownership of voting securities, by contract or otherwise.
1.4 "LICENSED PATENT RIGHTS" shall mean and include Gedanken
Corporation's United States Patent Application No. 08/733,808 (titled "METHODS
AND APPARATUS FOR TRANSLATING BETWEEN LANGUAGES"), filed October 18, 1996,
naming Julius Cherny as inventor, any divisions, continuations or
continuations-in-part thereof, any patent or patents that issue on any of the
foregoing, together with any reissues, reexaminations, renewals or extensions of
any such patent or patents, together with any foreign patents or applications
for foreign patents that correspond in whole or in part to any of the foregoing.
1.5 "LICENSED TRADE SECRETS AND KNOWHOW" shall mean and
include trade secrets, knowhow and other confidential research, development and
commercial information owned, possessed or developed by GEDANKEN in the field of
language translation relating to apparatus and methods for translating words,
phrases and sentences in oral or written form from a source language to other
target languages using advanced telecommunications and computer technologies,
including, without limitation, the apparatus and methods described and claimed
in GEDANKEN's United States Patent Application No. 08/733,808, which will remain
confidential trade secrets and knowhow until a patent issues and those trade
secrets and that knowhow are disclosed to the public.
1.6 "FIELD OF USE" shall mean and include the field of
translating words, phrases and sentences in oral or written form from a source
language to other target languages.
4
1.7 "LICENSED PRODUCTS AND METHODS" shall mean and include any
apparatus, product, service, method or process made by, made for, used, offered,
sold or distributed by TTGL that falls within the scope of any VALID CLAIM (as
hereinafter defined) of the LICENSED PATENT RIGHTS and/or uses or is otherwise
based in whole or in part on any of the LICENSED TRADE SECRETS AND KNOWHOW.
1.8 "VALID CLAIM" shall mean and include any issued, unexpired
claim of the LICENSED PATENT RIGHTS that GEDANKEN has not expressly admitted in
writing to be invalid or unenforceable, or that has not been held invalid or
unenforceable by a court, tribunal or governmental agency of competent
jurisdiction, or that has not been held invalid or unenforceable as a result of
an opposition proceeding, reissue, reexamination, dedication, disclaimer or
otherwise, and, in the case of a holding or decision, cannot be appealed or has
not been appealed within the time allowed for appeal.
1.9 "NET SALES" shall mean and include TTGL's gross sales of
LICENSED PRODUCTS AND METHODS as invoiced to customers, exclusive of sales or
other taxes, duties and the like, and less any insurance, transportation,
shipping, handling and related charges. NET SALES shall include, without
limitation, all revenue generated on billings to customers for time spent by any
person providing services that use or are otherwise based in whole or in part on
any of the LICENSED PATENT RIGHTS or any of the LICENSED TRADE SECRETS AND
KNOWHOW. For purposes of this Agreement, a sale shall occur when TTGL receives
or collects payment for the manufacture, use, offer, sale, distribution,
delivery, provision or shipment of LICENSED PRODUCTS AND METHODS.
5
ARTICLE II -- GRANTS OF LICENSES
2.1 In consideration of the terms and conditions set forth in
this Agreement, GEDANKEN hereby grants to TTGL an exclusive, world-wide right
and license in the FIELD OF USE to use the LICENSED TRADE SECRETS AND KNOWHOW
only in connection with TTGL's research, development, testing, marketing,
promotion, manufacture, use, offer, sale and distribution of LICENSED PRODUCTS
AND METHODS.
2.2 The license granted in Paragraph 2.1 shall be effective as
of the EFFECTIVE DATE of this Agreement, and shall apply to LICENSED PRODUCTS
AND METHODS that TTGL researches, develops, tests, markets, promotes,
manufactures, uses, offers, sells or distributes on or after that date. The
license granted in Paragraph 2.1 shall extend for the full term of this
Agreement.
2.3 In consideration of the terms and conditions set forth in
this Agreement, GEDANKEN hereby grants to TTGL an exclusive, world-wide right
and license under the LICENSED PATENT RIGHTS in the FIELD OF USE to make, have
made, use, offer, sell and distribute LICENSED PRODUCTS AND METHODS. TTGL shall
have the right to sublicense others under the LICENSED PATENT RIGHTS in the
FIELD OF USE, subject to approval of any and all proposed sublicenses by
GEDANKEN, which approval shall not unreasonably be withheld. Fees, royalties and
other payments paid by sublicensees shall be accounted for separately. Seventy
percent (70%) of all such fees, royalties and other payments paid by
sublicensees shall be retained by TTGL, and thirty percent (30%) of all such
fees, royalties and other payments paid by sublicensees shall be paid to
GEDANKEN until such time as TTGL recoups by NET
6
SALES of LICENSED PRODUCTS AND METHODS and\or fees, royalties or other payments
paid by sublicensees, the total amount of all payments TTGL actually makes to
GEDANKEN in accordance with Article IV of this Agreement in connection with
GEDANKEN's Phase 1, 2 and/or 3 research, development and testing of apparatus
and methods in the field of language translation for translating words, phrases
and sentences in oral or written form from a source language to other target
languages using advanced telecommunications and computer technologies. After
TTGL recoups the total amount of all payments TTGL actually makes to GEDANKEN in
accordance with Article IV of this Agreement in connection with GEDANKEN's Phase
1, 2 and/or 3 research, development and testing of apparatus and methods in the
field of language translation for translating words, phrases and sentences in
oral or written form from a source language to other target languages using
advanced telecommunications and computer technologies, all such fees, royalties
and other payments paid by sublicensee's shall be divided equally between
GEDANKEN and TTGL.
2.4 The license granted in Paragraph 2.3 shall be effective as
of the EFFECTIVE DATE of this Agreement, and shall apply to LICENSED PRODUCTS
AND METHODS that TTGL makes, has made, uses, offers, sells or distributes on or
after that date. The license granted in Paragraph 2.3 shall extend until the
earlier of: (a) the full term of this Agreement; or (b) the expiration of the
last-to-expire patent of the LICENSED PATENT RIGHTS.
7
ARTICLE III -- ROYALTY PAYMENTS, REPORTS, RECORDS AND AUDITS
3.1 ROYALTY PAYMENTS.
(A) PHASES 1, 2 AND 3.
In consideration of the rights and licenses granted herein to
TTGL, and in consideration of the other terms and conditions of this Agreement,
TTGL shall pay to GEDANKEN during Phases 1, 2 and 3 of this Agreement (see
Paragraph 4.3 below) a royalty in the amount of four percent (4%) of the first
one million dollars ($1,000,000) of NET SALES of LICENSED PRODUCTS AND METHODS
sold, offered or distributed each calendar year, three percent (3%) of NET SALES
of LICENSED PRODUCTS AND METHODS above one million dollars ($1,000,000) to two
million dollars ($2,000,000) each calendar year, and two percent (2%) of NET
SALES of LICENSED PRODUCTS AND METHODS above two million dollars ($2,000,000)
each calendar year. These royalties shall be payable during Phases 1, 2 and 3 of
this Agreement (see Paragraph 4.3 below) from the EFFECTIVE DATE for the full
term of this Agreement.
During Phases 1, 2 and 3 of this Agreement (see Paragraph 4.3
below), TTGL shall pay to GEDANKEN an additional royalty of three percent (3%)
of NET SALES of LICENSED PRODUCTS AND METHODS sold, offered or distributed in
any country in which there is a VALID CLAIM of the LICENSED PATENT RIGHTS. This
additional royalty shall be payable during Phases 1, 2 and 3 of this Agreement
(see Paragraph 4.3 below) from the EFFECTIVE DATE for the full term of this
Agreement.
(B) AFTER SUBSTANTIAL COMPLETION
OF PHASES 1, 2 AND 3.
In consideration of the rights and licenses granted herein to
TTGL, and in consideration of the other terms and conditions of this Agreement,
TTGL shall pay to
8
GEDANKEN after the substantial completion of Phases 1, 2 and 3 of this Agreement
(see Paragraph 4.3 below) a royalty in the amount of five percent (5%) of NET
SALES of LICENSED PRODUCTS AND METHODS. This royalty shall be payable after the
substantial completion of Phases 1, 2 and 3 of this Agreement (see Paragraph 4.3
below) for the full term of this Agreement.
After the substantial completion of Phases 1, 2 and 3 of this
Agreement (see Paragraph 4.3 below), TTGL shall pay to GEDANKEN an additional
royalty of three percent (3%) of NET SALES of LICENSED PRODUCTS AND METHODS
sold, offered or distributed in any country in which there is a VALID CLAIM of
the LICENSED PATENT RIGHTS. This additional royalty shall be payable after the
substantial completion of Phases 1, 2 and 3 of this Agreement (see Paragraph 4.3
below) for the full term of this Agreement.
If the royalties calculated and payable in accordance with the
preceding provisions of this Paragraph 3.1(B) amount to less than one hundred
thousand dollars ($100,000) for any partial or full calendar year after the
substantial completion of Phases 1, 2 and 3 of this Agreement (see Paragraph 4.3
below), TTGL shall nevertheless pay to GEDANKEN for each such partial or full
calendar year after the substantial completion of Phases 1, 2 and 3 of this
Agreement a minimum royalty of one hundred thousand dollars ($100,000).
(C) TIMING OF ROYALTY PAYMENTS.
The first royalty payment to be made hereunder, covering sales
and distribution of LICENSED PRODUCTS AND METHODS, shall be due within twenty
(20) days after the end of the first month in which TTGL sells, offers or
distributes any of
9
the LICENSED PRODUCTS AND METHODS. Thereafter, royalty payments under this
Agreement shall be payable on a monthly basis within twenty (20) days after the
close of each month during the term of this Agreement. All royalty payments
shall be accompanied by the royalty report required under Paragraph 3.2 of this
Agreement. Royalty payments shall be made in the form of a check made payable to
Gedanken Corporation.
3.2 ROYALTY REPORTS.
Within twenty (20) days after the close of each month during
the term of this Agreement, beginning with the first month in which TTGL sells,
offers or distributes any of the LICENSED PRODUCTS AND METHODS, TTGL shall send
to GEDANKEN a written report reflecting TTGL's sales and distribution of
LICENSED PRODUCTS AND METHODS. Each written report shall include: (a) the total
number of LICENSED PRODUCTS AND METHODS sold, offered and distributed during the
period covered by the report, including a correlation identifying the country or
countries in which the LICENSED PRODUCTS AND METHODS were sold, offered or
distributed during that period; (b) the total dollar amount of TTGL's NET SALES
of LICENSED PRODUCTS AND METHODS sold, offered or distributed during the period
covered by the report, including a correlation identifying the country or
countries in which the LICENSED PRODUCTS AND METHODS were sold, offered or
distributed during that period; and (c) the royalty due in accordance with the
terms of this Agreement for the period covered by the report.
3.3 ROYALTY RECORDS.
TTGL shall keep or cause to be kept books and records in
detail sufficient to enable the royalties payable hereunder to be determined.
10
3.4 AUDITS.
GEDANKEN shall have the right to conduct an audit no more than
twice each calendar year to confirm the accuracy of the information included in
royalty reports provided by TTGL in accordance with Paragraph 3.2 of this
Agreement. Such audits shall be conducted only upon reasonable notice, and in no
case less than five (5) days' notice, to TTGL in writing, and shall be performed
by any person or entity appointed by GEDANKEN and acceptable to TTGL, and shall
be conducted pursuant to a confidentiality agreement executed by the appointed
person or entity in a form acceptable to TTGL. TTGL shall make available to the
appointed person or entity for review books and records that may be reasonably
necessary for conducting such audits. The appointed person or entity may
disclose to GEDANKEN only whether TTGL has complied with the terms and
conditions of this Agreement, and shall keep all other information received from
TTGL in strict confidence (e.g., the names and identities of TTGL's customers),
and shall not disclose any of that other information to GEDANKEN or to any other
person or entity. The entire cost of these audits shall be borne solely by
GEDANKEN.
3.5 GEDANKEN'S OPTION TO CONVERT
ROYALTIES TO COMMON STOCK OF TTGL.
GEDANKEN shall have the right at any time during the term of
this Agreement to convert royalties due and payable into common stock of TTGL.
GEDANKEN may exercise this option within five (5) business days after GEDANKEN's
receipt from TTGL of a royalty payment, by providing TTGL with written notice of
GEDANKEN's election to convert all, or a stated portion, of such royalty payment
into common stock of TTGL. If GEDANKEN elects to convert all of any such royalty
payment into common stock of TTGL, GEDANKEN shall return TTGL's royalty
11
payment check to TTGL with GEDANKEN's written notice of its election to convert
all of the royalty payment into common stock of TTGL. If GEDANKEN elects to
convert only a portion of any such royalty payment into common stock of TTGL,
GEDANKEN's written notice to TTGL of its election to do so shall be accompanied
by payment from GEDANKEN in the amount of the royalty payment to be converted
into common stock of TTGL. The rate for converting royalty payments or any
portion thereof into common stock of TTGL shall be determined by calculating the
average of the closing bid price of TTGL's common stock as reported by the
primary exchange or reporting bureau where the stock trades (except that if such
medium reports a last or closing sale price, that figure shall be used in place
of the closing bid price), for the ten (10) business days prior to the date
GEDANKEN receives the royalty report and payment. The average price determined
as above in this Paragraph 3.5 shall then be reduced by twenty percent (20%) to
account for the shares being unregistered. The number of shares of common stock
that TTGL shall deliver to GEDANKEN shall be the number of shares calculated by
dividing the dollar amount of the royalty payment to be converted by GEDANKEN by
the price per share determined in accordance with the calculus described above
in this Paragraph 3.5. TTGL shall, promptly upon GEDANKEN's election to convert
all or any portion of any royalty payment to common stock to TTGL, promptly
instruct its transfer agent to issue to GEDANKEN the number of shares calculated
in accordance with the provisions of this Paragraph 3.5. Notwithstanding the
foregoing provisions of this Paragraph 3.5, GEDANKEN shall at no time be
permitted to convert any royalty payment into common stock of TTGL in an amount
that would result in GEDANKEN having the beneficial
12
ownership of an aggregate of more than twenty percent (20%) of the then
outstanding shares of the common stock of TTGL.
ARTICLE IV -- RESEARCH AND DEVELOPMENT, FUNDING OF
SAME AND DISCLOSURE OF TRADE SECRETS AND KNOWHOW
4.1 In consideration of the premises, payments, funding,
covenants and agreements, together with the other conditions, undertakings and
commitments set forth in this Agreement, and in accordance with the provisions
of this Article IV, GEDANKEN shall continue its research, development and
testing of apparatus and methods in the field of language translation for
translating words, phrases and sentences in oral or written form from a source
language to other target languages using advanced telecommunications and
computer technologies, and shall disclose to TTGL GEDANKEN's past, current and
future developments in the field of language translation relating to apparatus
and methods for translating words, phrases and sentences in oral or written form
from a source language to other target languages using advanced
telecommunications and computer technologies, including all of GEDANKEN'S past,
current and future trade secrets, knowhow and other confidential research,
development and commercial information and materials in the field of language
translation relating to such apparatus and methods.
4.2 In consideration of the premises, license grants,
disclosures, covenants and agreements, together with the other conditions,
undertakings and commitments set forth in this Agreement, and in accordance with
the provisions of this Article IV, TTGL agrees to fund GEDANKEN'S research,
development and testing of apparatus and methods in the field of language
translation for translating words, phrases and sentences in oral or written form
from a source language to other target languages using advanced
telecommunications and computer technologies.
13
4.3 GEDANKEN'S continuing research, development and testing in
the field of language translation directed to apparatus and methods for
translating words, phrases and sentences in oral or written form from a source
language to other target languages using advanced telecommunications and
computer technologies shall be conducted in three phases:
(A) PHASE 1 -- SPECIFIC TOPIC BUILDER.
Phase 1 of GEDANKEN'S continuing research and development will
be directed to generating topic dictionaries, i.e., relationships between words
in different languages used in connection with the same topic. Among other
things, this work will involve the organization of many thousands of documents
already translated and amassed by TTGL, and the analysis of those documents
using appropriate neural network systems to generate or build specific
dictionaries for various topics. Phase 1 will begin at the EFFECTIVE DATE of
this Agreement and shall be substantially completed within twelve (12) months
after TTGL provides GEDANKEN with the initial twenty thousand dollar
($20,000.00) payment described in Paragraph 4.5 of this Agreement.
(B) PHASE 2 -- GENERAL TOPIC BUILDER.
Phase 2 of GEDANKEN'S continuing research and development will
be directed to generalizing the topic dictionary generator to make it capable of
generating dictionaries for various topics from written materials in different
languages relating to the same topic that have not previously been translated or
amassed. Phase 2 shall begin on the seventh month after TTGL provides GEDANKEN
with the initial twenty thousand dollar ($20,000.00) payment described in
Paragraph 4.5 of this Agreement and shall be substantially completed within six
(6) months after the substantial completion of Phase 1.
14
(C) PHASE 3 -- REAL-TIME VOICE
TRANSLATION SYSTEM.
Phase 3 of GEDANKEN'S continuing research and development will
be directed to the development of a proprietary, real-time machine voice
translation system. The proposed system will operate via standard
telecommunications systems and ultimately will have the ability to
instantaneously translate language in oral form from one language to another. If
TTGL exercises its option to fund GEDANKEN'S Phase 3 research and development in
accordance with the provisions of Paragraph 4.4 of this Agreement, Phase 3 shall
be substantially completed within twelve (12) months after the substantial
completion of Phase 2.
4.4 TTGL agrees to fund GEDANKEN'S research, development and
testing from the EFFECTIVE DATE of this Agreement through Phases 1 and 2 (see
Paragraph 4.3) as follows:
(a) Phase I -- Specific Topic Builder: $250,000.00; and
(b) Phase II -- General Topic Builder: $500,000.00.
GEDANKEN and TTGL agree that TTGL shall have an option to fund
GEDANKEN'S Phase 3 research, development and testing directed to a real-time
voice translation system (see Paragraph 4.3) by providing GEDANKEN with written
notice of TTGL's election to do so not less than three months prior to the
substantial completion of Phase 2. If TTGL exercises this option, TTGL shall
fund GEDANKEN'S Phase 3 research, development and testing (see Paragraph 4.3) in
the amount of four million dollars ($4,000,000.00).
Although there may be some overlap, and work on the various
phases may be interrelated, GEDANKEN shall report on a discrete basis the
research, development
15
and testing conducted in accordance with this Agreement, separately identifying
the work performed in connection with each of the three phases. GEDANKEN shall
prepare monthly progress reports describing the research and development work
done during the monthly period covered by the report, the status of the research
and development work and a description of the current status of the research and
development work completed in relation to the pre-established goals for such
work set forth in Exhibit A to this Agreement. GEDANKEN shall prepare and submit
to TTGL within thirty (30) days after the execution of this Agreement by both
parties, an initial progress report describing research and development work
conducted by GEDANKEN from the EFFECTIVE DATE of this Agreement through the date
of the initial progress report. Thereafter, progress reports shall be submitted
on a monthly basis.
4.5 TTGL'S funding of GEDANKEN'S Phase 1, 2 and 3 research,
development and testing shall be made on a "fixed price" basis and shall not be
subject to any audit by TTGL or any accounting from GEDANKEN. Within thirty (30)
days after the execution of this Agreement by both parties, TTGL shall deliver
to GEDANKEN an initial payment of twenty thousand dollars ($20,000.00).
Thereafter, TTGL'S funding of GEDANKEN'S research, development and testing shall
be paid to GEDANKEN as follows:
(a) PHASE 1 -- SPECIFIC TOPIC BUILDER.
TTGL shall fund GEDANKEN'S Phase 1 research, development
and testing in the fixed amount of two hundred and fifty thousand dollars
($250,000.00), payable in twelve equal monthly payments, each monthly payment to
be delivered to
16
GEDANKEN within five (5) days after TTGL'S receipt of each of the Phase 1
monthly progress reports required by Paragraph 4.4 of this Agreement.
(b) PHASE 2 -- GENERAL TOPIC BUILDER.
TTGL shall fund GEDANKEN'S Phase 2 research, development
and testing in the fixed amount of five hundred thousand dollars ($500,000.00),
payable in twelve equal monthly payments, each monthly payment to be delivered
to GEDANKEN within five (5) days after TTGL'S receipt of each of the Phase 2
monthly progress reports required by Paragraph 4.4 of this Agreement.
(c) PHASE 3 -- REAL-TIME VOICE TRANSLATION SYSTEM.
If TTGL exercises its option to fund GEDANKEN'S Phase 3
research, development and testing in accordance with the provisions of Paragraph
4.4 of this Agreement, TTGL shall fund GEDANKEN'S Phase 3 research, development
and testing in the fixed amount of four million dollars ($4,000,000.00). The
schedule for payment of this four million dollars ($4,000,000.00) shall be fixed
by mutual agreement of the parties if TTGL exercises its option to fund
GEDANKEN'S Phase 3 research, development and testing.
4.6 Notwithstanding the foregoing provisions of this Article
IV, TTGL shall have the right to discontinue funding GEDANKEN'S continuing
research, development and testing in the field of language translation directed
to apparatus and methods for translating words, phrases and sentences in oral or
written form from a source language to other target languages using advanced
telecommunications and computer technologies in accordance with the following
schedule:
17
(a) Phase 1. TTGL may discontinue funding GEDANKEN's
research and development work during Phase 1: (i) at six months prior to the
substantial completion date of Phase 1 (see Paragraph 4.3(A)); or (ii) on the
substantial completion date of Phase 1 (see Paragraph 4.3(A)), by providing
GEDANKEN with notice of TTGL's intention to do so in writing not less than
thirty (30) days before either of those dates.
(b) Phase 2. TTGL may discontinue funding GEDANKEN's
research and development work during Phase 2: (i) at four months prior to the
substantial completion date of Phase 2 (see Paragraph 4.3(b)); (ii) at two
months prior to the substantial completion date of Phase 2; or (iii) on the
substantial completion date of Phase 2 (see Paragraph 4.3(B)), by providing
GEDANKEN with notice of TTGL's intention to do so in writing not less than
thirty (30) days before any of those dates.
(c) Phase 3. If TTGL exercises its option to fund
GEDANKEN'S Phase 3 research and development in accordance with the provisions of
Paragraph 4.4 of this Agreement, TTGL may discontinue funding GEDANKEN'S
research and development work at any time during Phase 3, by providing GEDANKEN
with notice of TTGL'S intention to do so in writing not less than sixty (60)
days prior to the date that funding will be discontinued.
4.7 If TTGL discontinues funding GEDANKEN's research and
development prior to substantial completion of Phase 1 in accordance with
Paragraph 4.6(a) of this Agreement, GEDANKEN shall have the right to immediately
terminate this Agreement and all rights and licenses granted hereunder by
providing TTGL with written notice of GEDANKEN's election to do so. Upon such
termination by GEDANKEN: (a)
18
TTGL shall have no rights under the LICENSED PATENT RIGHTS and no right to use
the LICENSED TRADE SECRETS AND KNOWHOW; and (b) the total amount of all fees,
royalties and other payments payable by any sublicensees pursuant to any
sublicenses granted prior to such termination shall thereafter be paid solely to
GEDANKEN; and (c) TTGL shall return to GEDANKEN all copies (in whatever form
they may be recorded) of all trade secrets, knowhow and other confidential
research, development and commercial information and materials disclosed by
GEDANKEN in connection with this Agreement, and shall take all reasonable steps
necessary to preserve and maintain in strict confidence all of the trade
secrets, knowhow and other confidential research, development and commercial
information and materials that GEDANKEN disclosed to TTGL in connection with
this Agreement.
If TTGL funds GEDANKEN'S Phase 1 research and development, but
does not fund or discontinues its funding of GEDANKEN's Phase 2 research and
development prior to substantial completion of Phase 2 in accordance with
Paragraph 4.6(b) of this Agreement: (a) the parties shall promptly amend this
Agreement in writing to convert the exclusive, world-wide right and license in
the FIELD OF USE to use the LICENSED TRADE SECRETS AND KNOWHOW granted to TTGL
in Paragraph 2.1 of this Agreement, to a nonexclusive, world-wide right and
license in the FIELD OF USE to use only the LICENSED TRADE SECRETS AND KNOWHOW
GEDANKEN discloses to TTGL in connection with Phase 1 directed to the
development of a specific topic builder, but otherwise on the same terms and
conditions set forth in this Agreement; (b) the parties shall promptly amend
this Agreement in writing to convert the exclusive, world-wide right and license
under the LICENSED PATENT RIGHTS in the FIELD OF
19
USE to make, have made, use, offer, sell and distribute LICENSED PRODUCTS AND
METHODS granted to TTGL in Paragraph 2.3 of this Agreement, to a nonexclusive,
world-wide right and license (with no right to sublicense others) to make, have
made, use, offer, sell and distribute LICENSED PRODUCTS AND METHODS for
translating words, phrases and sentences in written form only from a source
language to other target languages using only specific topic builders (said
amended license shall not grant TTGL any rights under the LICENSED PATENT RIGHTS
to make, have made, use, offer, sell or distribute any product or method for
translating words, phrases and sentences in oral form from a source language to
other target languages, and shall not grant TTGL any rights under the LICENSED
PATENT RIGHTS to make, have made, use, offer, sell or distribute any product or
method for translating words, phrases and sentences in written form from a
source language to other target languages using general topic builders), but
otherwise on the same terms and conditions set forth in this Agreement; (c) the
total amount of all fees, royalties and other payments payable by any
sublicensees pursuant to any sublicenses granted prior to the conversion of the
license grant contemplated by the provisions of (b) immediately above shall
thereafter be paid solely to GEDANKEN; (d) GEDANKEN shall have no obligation to
conduct any Phase 2 or Phase 3 research, development and testing work for the
benefit of TTGL and shall have no obligation to disclose to TTGL any of
GEDANKEN's past, current or future Phase 2 or Phase 3 developments in the field
of language translation relating to apparatus and methods for translating words,
phrases and sentences in oral or written form from a source language to other
target languages using advanced telecommunications and computer technologies,
including any of GEDANKEN'S past, current or future Phase 2 or Phase 3 trade
secrets,
20
knowhow or other confidential research, development and commercial information
and materials in the field of language translation relating to such apparatus
and methods; (e) TTGL shall have no right to use any of THE LICENSED TRADE
SECRETS AND KNOWHOW disclosed by GEDANKEN in connection with Phase 2, TTGL shall
return to GEDANKEN all copies (in whatever form they may be recorded) of all
trade secrets, knowhow and other confidential research, development and
commercial information and materials disclosed by GEDANKEN in connection with
Phase 2, and shall take all reasonable steps necessary to preserve and maintain
in strict confidence all of the trade secrets, knowhow and other confidential
research, development and commercial information and materials that GEDANKEN
disclosed to TTGL in connection with Phase 2; and (f) GEDANKEN shall be free to
grant licenses to others in the FIELD OF USE under the LICENSED PATENT RIGHTS to
make, have made, use, offer, sell and distribute LICENSED PRODUCTS AND METHODS,
and shall be free to license others to use any and all of GEDANKEN's past,
current and future developments in the field of language translation relating to
apparatus and methods for translating words, phrases and sentences in oral or
written form from a source language to other target languages using advanced
telecommunications and computer technologies, including any and all of
GEDANKEN'S past, current or future trade secrets, knowhow or other confidential
research, development and commercial information and materials in the field of
language translation relating to such apparatus and methods.
If TTGL funds GEDANKEN'S Phase 1 and Phase 2 research and
development, but does not exercise its option to fund GEDANKEN'S Phase 3
research and development in accordance with the provisions of Paragraph 4.4 of
this Agreement:
21
(a) the parties shall promptly amend this Agreement in writing to convert the
exclusive, world-wide right and license in the FIELD OF USE to use the LICENSED
TRADE SECRETS AND KNOWHOW granted to TTGL in Paragraph 2.1 of this Agreement, to
a nonexclusive, world-wide right and license, but otherwise on the same terms
and conditions set forth in this Agreement; (b) the parties shall promptly amend
this Agreement in writing to convert the exclusive, world-wide right and license
under the LICENSED PATENT RIGHTS in the FIELD OF USE to make, have made, use,
offer, sell and distribute LICENSED PRODUCTS AND METHODS granted to TTGL in
Paragraph 2.3 of this Agreement, to an exclusive, world-wide right and license
(with no right to sublicense others) to make, have made, use, offer, sell and
distribute LICENSED PRODUCTS AND METHODS for translating words, phrases and
sentences in written form only from a source language to other target languages
(said amended license shall not grant TTGL any rights under the LICENSED PATENT
RIGHTS to make, have made, use, offer, sell or distribute any product or method
for translating words, phrases and sentences in oral form from a source language
to other target languages), but otherwise on the same terms and conditions set
forth in this Agreement; (c) the total amount of all fees, royalties and other
payments payable by any sublicensees pursuant to any sublicenses granted prior
to the conversion of the license grant contemplated by the provisions of (b)
immediately above shall thereafter be paid solely to GEDANKEN; (d) GEDANKEN
shall have no obligation to conduct any Phase 3 research, development and
testing work for the benefit of TTGL and shall have no obligation to disclose to
TTGL any of GEDANKEN's past, current or future Phase 3 developments in the field
of language translation relating to apparatus and methods for translating words,
phrases and
22
sentences in oral or written form from a source language to other target
languages using advanced telecommunications and computer technologies, including
any of GEDANKEN'S past, current or future Phase 3 trade secrets, knowhow or
other confidential research, development and commercial information and
materials in the field of language translation relating to such apparatus and
methods; and (e) GEDANKEN shall be free to grant licenses to others in the FIELD
OF USE under the LICENSED PATENT RIGHTS to make, have made, use, offer, sell and
distribute products and methods for translating words, phrases and sentences in
oral form from a source language to other target languages, including, without
limitation, real-time voice translation systems, and shall be free to license
others to use any and all of GEDANKEN's past, current and future developments in
the field of language translation relating to apparatus and methods for
translating words, phrases and sentences in oral or written form from a source
language to other target languages using advanced telecommunications and
computer technologies, including any and all of GEDANKEN'S past, current or
future trade secrets, knowhow or other confidential research, development and
commercial information and materials in the field of language translation
relating to such apparatus and methods.
If TTGL funds GEDANKEN'S Phase 1 and Phase 2 research and
development and exercises its option to fund GEDANKEN'S Phase 3 research and
development in accordance with the provisions of Paragraph 4.4 of this
Agreement, but thereafter discontinues funding GEDANKEN's research and
development work prior to substantial completion of Phase 3 in accordance with
Paragraph 4.6(c): (a) the parties shall promptly amend this Agreement in writing
to convert the exclusive, world-wide right and license in the FIELD OF USE to
use the LICENSED TRADE SECRETS AND
23
KNOWHOW granted to TTGL in Paragraph 2.1 of this Agreement, to a nonexclusive,
world-wide right and license, but otherwise on the same terms and conditions set
forth in this Agreement; (b) the parties shall promptly amend this Agreement in
writing to convert the exclusive, world-wide right and license under the
LICENSED PATENT RIGHTS in the FIELD OF USE to make, have made, use, offer, sell
and distribute LICENSED PRODUCTS AND METHODS granted to TTGL in Paragraph 2.3 of
this Agreement, to an exclusive, world-wide right and license (with no right to
sublicense others) to make, have made, use, offer, sell and distribute LICENSED
PRODUCTS AND METHODS for translating words, phrases and sentences in written
form only from a source language to other target languages (said amended license
shall not grant to TTGL any rights under the LICENSED PATENT RIGHTS to make,
have made, use, offer, sell or distribute any product or method for translating
words, phrases and sentences in oral form from a source language to other target
languages), but otherwise on the same terms and conditions set forth in this
Agreement; (c) the total amount of all fees, royalties and other payments
payable by any sublicensees pursuant to any sublicenses granted prior to the
conversion of the license grant contemplated by the provisions of (b)
immediately above shall thereafter be paid solely to GEDANKEN; (d) GEDANKEN
shall have no obligation to continue Phase 3 research, development and testing
work for the benefit of TTGL, and shall have no obligation to disclose to TTGL
any of GEDANKEN's past, current or future Phase 3 developments in the field of
language translation relating to apparatus and methods for translating words,
phrases and sentences in oral or written form from a source language to other
target languages using advanced telecommunications and computer technologies,
including any of GEDANKEN'S past, current or future Phase 3 trade secrets,
knowhow
24
or other confidential research, development and commercial information and
materials in the field of language translation relating to such apparatus and
methods; (e) TTGL shall have no right to use any of THE LICENSED TRADE SECRETS
AND KNOWHOW disclosed by GEDANKEN in connection with Phase 3, TTGL shall return
to GEDANKEN all copies (in whatever form they may be recorded) of all trade
secrets, knowhow and other confidential research, development and commercial
information and materials disclosed by GEDANKEN in connection with Phase 3, and
shall take all reasonable steps necessary to preserve and maintain in strict
confidence all of the trade secrets, knowhow and other confidential research,
development and commercial information and materials that GEDANKEN disclosed to
TTGL in connection with Phase 3; and (f) GEDANKEN shall be free to grant
licenses to others in the FIELD OF USE under the LICENSED PATENT RIGHTS to make,
have made, use, offer, sell and distribute products and methods for translating
words, phrases and sentences in oral form from a source language to other target
languages, including, without limitation, real-time voice translation systems,
and shall be free to license others to use any and all of GEDANKEN's past,
current and future developments in the field of language translation relating to
apparatus and methods for translating words, phrases and sentences in oral or
written form from a source language to other target languages using advanced
telecommunications and computer technologies, including any and all of
GEDANKEN'S past, current or future trade secrets, knowhow or other confidential
research, development and commercial information and materials in the field of
language translation relating to such apparatus and methods.
25
ARTICLE V -- CONFIDENTIALITY
5.1 TTGL recognizes the proprietary and sensitive nature of
the trade secrets, knowhow and other confidential research, development and
commercial information and materials that GEDANKEN will disclose to TTGL in
connection with this Agreement. TTGL shall take all reasonable steps necessary
to preserve and maintain in strict confidence all of the trade secrets, knowhow
and other confidential research, development and commercial information and
materials that GEDANKEN discloses to TTGL in connection with this Agreement.
TTGL shall not deliver or in any way allow any such trade secrets, knowhow or
other confidential research, development and commercial information and
materials to be disclosed, delivered or used by any third party without the
express, specific written consent of GEDANKEN.
Upon termination of this Agreement, TTGL shall return to
GEDANKEN all copies of all documents and information ( in whatever form that
information may be recorded) containing or reflecting any of the trade secrets,
knowhow or other confidential research, development and commercial information
and materials disclosed by GEDANKEN in connection with this Agreement,
including, without limitation, any writings, designs, records, memoranda,
photographs, sound recordings, tapes and disks containing software, computer
source code listings, routines, file layouts, record layouts, system design
information, models, manuals, documentation and notes.
After termination of this Agreement, TTGL shall not directly
or indirectly (without GEDANKEN's express, specific written consent) use or
disclose to any third party any of the trade secrets, knowhow or other
confidential research, development and
26
commercial information and materials disclosed by GEDANKEN in connection with
this Agreement.
5.2 GEDANKEN recognizes the proprietary and sensitive nature
of the business information of TTGL that must be included in the royalty reports
required by the provisions of Paragraph 3.2 of this Agreement. GEDANKEN shall
take all reasonable steps necessary to preserve and maintain in strict
confidence the business information of TTGL that is included in any royalty
reports received from TTGL. GEDANKEN shall not deliver or in any way allow any
such business information to be disclosed, delivered or used by any third party
without the express, specific written consent of TTGL.
5.3 The obligations of confidentiality set forth in this
Article V shall survive the termination of this Agreement.
ARTICLE VI -- TTGL'S RIGHT OF FIRST REFUSAL IN
FIELDS OF USE OTHER THAN LANGUAGE TRANSLATION
6.1 TTGL shall have the right of first refusal with respect to
any license under the LICENSED PATENT RIGHTS offered by GEDANKEN in fields of
use other than the field of translating words, phrases and sentences in oral or
written form from a source language to other target languages. TTGL may exercise
this right of first refusal by matching the material terms (including royalties
and funding) of any bona fide offer received by GEDANKEN from a third party,
within sixty (60) days of written notice from GEDANKEN of the material terms of
bona fide offers from third parties. If TTGL exercises its right of first
refusal under this Article VI, TTGL shall be entitled to a twenty percent (20%)
royalty discount until such time as TTGL recoups, by NET SALES of LICENSED
PRODUCTS AND METHODS and\or fees, royalties or other payments paid by
sublicensees, the total amount of all payments TTGL actually makes to GEDANKEN
27
in accordance with Article IV of this Agreement in connection with GEDANKEN's
Phase 1, 2 and/or 3 research, development and testing of apparatus and methods
in the field of language translation for translating words, phrases and
sentences in oral or written form from a source language to other target
languages using advanced telecommunications and computer technologies.
ARTICLE VII -- REPRESENTATIONS AND WARRANTIES
7.1 REPRESENTATIONS AND WARRANTIES OF GEDANKEN.
GEDANKEN hereby represents and warrants the following:
(A) Gedanken Corporation is a corporation validly
existing and in good standing under the laws of the State of Delaware, and has
full corporate power and authority to enter into this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
(B) The execution and delivery by Gedanken Corporation
of this Agreement and the performance by GEDANKEN of its obligations hereunder
have been duly and validly authorized by Gedanken Corporation, no corporate
action other than that already taken on the part of Gedanken Corporation's Board
of Directors or its stockholders being necessary. This Agreement has been duly
and validly executed and delivered by Gedanken Corporation and constitutes a
legal, valid and binding obligation of Gedanken Corporation enforceable against
GEDANKEN in accordance with its terms.
(C) Gedanken Corporation is the sole owner of the
entire right, title and interest in and to the LICENSED PATENT RIGHTS, and in
and to the LICENSED TRADE SECRETS AND KNOWHOW.
28
(D) Gedanken Corporation has the right to enter into
this Agreement and to grant the licenses under the LICENSED PATENT RIGHTS and
the LICENSED TRADE SECRETS AND KNOWHOW pursuant to this Agreement. GEDANKEN is
not a party to any agreement with or under any obligation to any third party
that would prevent Gedanken Corporation from entering into this Agreement.
(E) No other person or entity currently has any option
or license with respect to the LICENSED PATENT RIGHTS or with respect to the
LICENSED TRADE SECRETS AND KNOWHOW.
7.2 REPRESENTATIONS AND WARRANTIES OF TTGL.
TTGL hereby represents and warrants the following:
(A) The Translation Group, Ltd. is a corporation
validly existing and in good standing under the laws of the State of Delaware,
and has full corporate power and authority to enter into this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby.
(B) The execution and delivery by The Translation
Group, Ltd. of this Agreement and the performance by TTGL of its obligations
hereunder have been duly and validly authorized by The Translation Group, Ltd.,
no corporate action other than that already taken on the part of The Translation
Group, Ltd.'s Board of Directors or its stockholders being necessary. This
Agreement has been duly and validly executed and delivered by The Translation
Group, Ltd. and constitutes a legal, valid and binding obligation of The
Translation Group, Ltd. enforceable against TTGL in accordance with its terms.
29
7.3 EFFECT OF REPRESENTATIONS AND WARRANTIES.
It is understood that if the representations and warranties of
one party are not true and correct as of the date of execution of this
Agreement, and the other party, its parents, subsidiaries, affiliates, other
business entities directly or indirectly owned by, controlling or controlled by
that party, or its customers incur any damages, costs or other expenses as a
result of such falsity, the breaching party shall indemnify and hold harmless
the other party, its parents, subsidiaries, affiliates, other business entities
directly or indirectly owned by, controlling or controlled by that party, and
its customers for any such damages, costs or expenses incurred. This obligation
shall survive the termination of this Agreement.
ARTICLE VIII -- ARBITRATION
Any dispute, controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be resolved by binding
arbitration in the City of New York, administered by the American Arbitration
Association in accordance with its then prevailing Commercial Arbitration Rules.
Within fifteen days after the commencement of arbitration, each party shall
select one person to act as arbitrator; the two arbitrators selected by the
parties shall select a third arbitrator within ten days of their appointment. If
the arbitrators selected by the parties are unable or fail to agree upon a third
arbitrator, the third arbitrator shall be selected by the American Arbitration
Association. Any interim or provisional remedy that would be available from a
court of law shall be available from the arbitral tribunal to the parties to
this Agreement pending arbitration. The panel of three arbitrators shall have
discretion to order a prehearing exchange of information by the parties,
including, without limitation, production of
30
requested documents, exchange of summaries of testimony of proposed witnesses
and examination by deposition of parties. Neither a party nor an arbitrator may
disclose the existence, content or results of any arbitration hereunder without
the prior written consent of both parties. The arbitration award shall be in
writing and shall specify the factual and legal bases for the award. In
rendering the award, the panel of three arbitrators shall determine the rights
and obligations of the parties according to the substantive and procedural laws
of the State of New York. Judgment on the award rendered by the panel of three
arbitrators may be entered in any federal or state court located in the City of
New York -- the parties hereby submit to the jurisdiction of the federal and
state courts located in the City of New York for this purpose. All fees and
expenses of the arbitration shall be borne by the parties equally. However, each
party shall bear the expense of its own counsel, experts, witnesses and
preparation and presentation of proofs.
ARTICLE IX -- INSURANCE
TTGL shall obtain and maintain standard liability and errors
and omissions insurance coverage at TTGL's sole cost and expense throughout the
term of this Agreement. Insurance coverage shall be obtained in a form
acceptable to GEDANKEN, from a qualified insurance company naming GEDANKEN as an
additional named insured. The insurance policy shall provide coverage against
any and all claims, demands or causes of action arising out of any injury,
error, omission, defect or failure to perform (alleged or otherwise) in
connection with the manufacture, use, offer, provision, sale or distribution of
any of the LICENSED PRODUCTS AND METHODS. Coverage shall be obtained and
maintained in a minimum amount of not less than one million ($1,000,000.00)
combined, single limit for each single occurrence. The insurance policy shall
provide for not less than
31
ten (10) days notice by the insurer to GEDANKEN by registered or certified mail,
return receipt requested, in the event that there is any modification,
cancellation or termination of said policy. TTGL shall provide GEDANKEN with a
certificate evidencing insurance coverage that conforms with the provisions of
this Article IX.
ARTICLE X -- PATENT PROSECUTION AND INFRINGEMENT
10.1 PROSECUTION. During the term of this Agreement, GEDANKEN
shall have discretion to prepare, file and prosecute all applications for
patents within the LICENSED PATENT RIGHTS and may do so at TTGL's sole cost and
expense. During the term of this Agreement, GEDANKEN shall have discretion to
maintain all such applications and patents at TTGL's sole cost and expense and
shall keep TTGL currently advised of all steps taken in the prosecution and
maintenance of any such applications and patents (including any reissues and
reexaminations). During the term of this Agreement, GEDANKEN shall furnish TTGL
with copies of all such patent applications and patents, together with copies of
all papers sent to or received from each patent office timely after filing or
receipt. TTGL shall have the right during the term of this Agreement to request
in writing that GEDANKEN prepare, file, prosecute and maintain applications for
patents and patents within the LICENSED PATENT RIGHTS in specified countries. In
the event that GEDANKEN during the term of this Agreement elects not to prepare
and file an application requested by TTGL, or elects not to continue to
prosecute or maintain any of the foregoing applications or patents (including
any application involved in an appeal or an opposition proceeding) or not to
maintain any patent or patent application within the LICENSED PATENT RIGHTS by
failure to pay any required annuity, renewal or working fee, GEDANKEN shall so
advise TTGL in writing in time to enable TTGL to
32
take appropriate action. TTGL shall be entitled during the term of this
Agreement to take such action at its expense and to own such resultant patents
without any obligation to pay any royalties under such patents under this
Agreement. In such event, GEDANKEN shall, at TTGL's request, but at no
additional cost to TTGL, execute whatever documents are necessary to transfer to
TTGL full ownership of such application or patent.
10.2 INFRINGEMENT.
(A) GEDANKEN and TTGL shall promptly notify each other in
writing of any infringement of the LICENSED PATENT RIGHTS that may come to their
attention during the term of this Agreement.
(B) During the term of this Agreement, GEDANKEN and TTGL
each may bring suit against any infringer of the LICENSED PATENT RIGHTS in their
own names as the sole plaintiff; joinder of the other as a party shall not be
necessary. GEDANKEN and TTGL, however, each shall have the right during the term
of this Agreement to join any such suit and to participate fully as a party.
If either GEDANKEN or TTGL brings suit against an infringer,
and the other elects not to join the suit as a party, it is understood and
agreed that the party bringing the suit shall bear solely all costs and expenses
associated therewith and shall be entitled to retain and keep any and all sums
received, obtained, collected or recovered whether by judgment, settlement or
otherwise, as a result of any such suit. The party electing not to join any such
suit shall, however, at no cost to the party bringing suit, render all
reasonable assistance (with the exception of providing legal counsel or
services) requested by the party involved in such litigation, including, without
limitation, executing all required documents, providing records, documents,
company witnesses, etc.
33
If either GEDANKEN or TTGL brings suit against an infringer,
and the other joins the suit as a party, it is understood and agreed that
GEDANKEN and TTGL shall share equally all costs and expenses associated with the
litigation, and shall share equally any and all sums received, obtained,
collected or recovered whether by judgment, settlement or otherwise, as a result
of any such suit.
ARTICLE XI -- INDEMNIFICATION
GEDANKEN and TTGL agree to indemnify and hold each other
harmless as follows:
(a) TTGL agrees during and after the term of this
Agreement to indemnify and to hold GEDANKEN and its officers, directors, agents,
employees and shareholders harmless from and against any and all loss, damage or
liability, including attorneys' fees, together with all other costs and expenses
incurred in connection with any demands, claims, suits or causes of action
arising out of any injury, error, omission, defect or failure to perform
(alleged or otherwise) relating to the manufacture, use, offer, provision, sale
or distribution of any of the LICENSED PRODUCTS AND METHODS.
(b) TTGL agrees during and after the term of this
Agreement to indemnify and hold GEDANKEN and its officers, directors, agents,
employees and shareholders harmless from and against any and all loss, damage or
liability, including attorneys' fees and other costs and expenses incurred by
GEDANKEN or its officers, directors, agents, employees and shareholders, as a
result of any violation of this Agreement by TTGL.
(c) GEDANKEN agrees during the term of this Agreement
to indemnify and hold TTGL harmless from and against any and all damages for
patent
34
infringement awarded against TTGL in a final judgment of a court or other
tribunal of competent jurisdiction in an action for patent infringement based on
TTGL'S manufacture, use, offer, provision, sale or distribution of any of the
LICENSED PRODUCTS AND METHODS, provided that: (1) TTGL promptly notifies
GEDANKEN in writing of any threat, claim, charge, suit or action for patent
infringement against TTGL based on TTGL's manufacture, use, offer, provision,
sale or distribution of any of the LICENSED PRODUCTS AND METHODS; (2) GEDANKEN
may select counsel to defend against any such threat, claim, charge, suit or
action and may control the conduct of the defense and any litigation and
appeals; and (3) TTGL cooperates fully in connection with the defense and any
litigation and appeals. In the event that TTGL prevails in any such action for
patent infringement, TTGL shall bear solely all costs and expenses incurred in
connection with the litigation, including, without limitation, all reasonable
attorney's fees. In the event that a judgment is entered against TTGL in any
such action for patent infringement, GEDANKEN shall indemnify and hold TTGL
harmless from and against any damages awarded for patent infringement, together
with all costs and expenses incurred in connection with the litigation,
including, without limitation, all attorney's fees, subject to the following
limitation: GEDANKEN'S indemnification shall be limited to the total amount of
all payments TTGL actually makes to GEDANKEN in accordance with Article IV of
this Agreement in connection with GEDANKEN's Phase 1, 2 and/or 3 research,
development and testing of apparatus and methods in the field of language
translation for translating words, phrases and sentences in oral or written form
from a source language to other target languages using advanced
telecommunications and computer technologies, less the total amount TTGL has
recouped as of the date of entry of the adverse judgment
35
for patent infringement by NET SALES of LICENSED PRODUCTS AND METHODS and\or
fees, royalties or other payments paid by sublicensees.
(d) GEDANKEN agrees during and after the term of this
Agreement to indemnify and hold TTGL harmless from and against any and all loss,
damage or liability, including attorneys' fees and other costs and expenses
incurred by TTGL, as a result of any violation of this Agreement by GEDANKEN.
ARTICLE XII -- MISCELLANEOUS PROVISIONS
12.1 GOVERNING LAW. This Agreement shall be governed by and
construed, interpreted and applied in accordance with the laws of the State of
New York, without regard to conflicts of law rules or principles.
12.2 ENTIRE AGREEMENT. This Agreement constitutes the only and
entire agreement between GEDANKEN and TTGL, and supersedes all previous
communications, representations, agreements or understandings, either oral or
written, between the parties with respect to the subject matter of this
Agreement. Any representation, promise, or condition in connection with such
subject matter that is not stated in this Agreement shall not be binding on
either party. This Agreement may be amended, supplemented or modified only by a
written instrument executed by a duly authorized officer of each of GEDANKEN and
TTGL by or on behalf of GEDANKEN and TTGL that specifically refers to this
Agreement. This Agreement shall be considered to have been jointly drafted by
both GEDANKEN and TTGL and shall not be construed in whole or in part against
either party as drafter.
12.3 FORCE MAJEURE. If for reasons of FORCE MAJEURE (as
hereinafter defined) either GEDANKEN or TTGL fails to comply with its
obligations
36
hereunder, such failure shall not constitute breach of this Agreement. For the
purpose of this Agreement, FORCE MAJEURE shall mean: acts of God; acts,
regulations or laws of any government; war; fire, earthquake or storm; civil
commotion; destruction of production facilities or materials; labor disturbance;
failure of public utilities or of common carriers or any other causes beyond the
reasonable control of any party.
12.4 NOTICES. All notices, requests, demands, payments or any
other communications required or permitted hereunder shall be in writing and
shall be deemed to have been duly given and received: (a) when delivered by
hand; or (b) four (4) days after having been mailed by certified or registered
mail, return receipt requested, with postage prepaid, addressed as follows:
(a) If to Gedanken Corporation:
Dr. Julius Cherny
4 Carter Lane
Monsey, New York 10952
cc: Kevin J. Culligan, Esq.
Fish & Neave
1251 Avenue of the Americas
New York, New York 10020
(b) If to The Translation Group, Ltd.:
The Translation Group, Ltd.
7703 Maple Avenue
Pennsauken, New Jersey 08109
cc: Irving Rothstein, Esq.
Heller, Horowitz & Feit, P.C.
292 Madison Avenue
New York, New York 10017
37
12.5 WAIVER. Any term or condition of this Agreement may be
waived at any time by the party that is entitled to the benefit thereof, but no
such waiver shall be effective unless set forth in a written instrument duly
executed by or on behalf of the party waiving such term or condition. No waiver
by either party of any term or condition of this Agreement, in any one or more
instances, shall be deemed to be or construed as a waiver of the same or of any
other term or condition of this Agreement on any future occasion.
12.6 SEVERABILITY. If any provision of this Agreement is held
to be illegal, invalid or unenforceable under any applicable present or future
law, and if the rights or obligations of any party hereto under this Agreement
will not be materially and adversely affected thereby: (a) such provision shall
be fully severable; (b) this Agreement shall be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised a part
hereof; (c) the remaining provisions of this Agreement shall remain in full
force and effect and shall not be affected by the illegal, invalid or
unenforceable provision or by its severance herefrom; and (d) in lieu of such
illegal, invalid or unenforceable provision, GEDANKEN and TTGL shall negotiate
and add as part of this Agreement, a valid and enforceable provision as similar
in term to such illegal, invalid or unenforceable provision as may be possible.
12.7 HEADINGS. All headings in this Agreement are inserted for
convenience of reference only and shall not affect its meaning, construction or
interpretation.
12.8 ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of GEDANKEN and TTGL and their successors, heirs, assigns
or the
38
purchasers of substantially all of GEDANKEN's or TTGL's assets to which this
Agreement relates.
12.9 BANKRUPTCY. GEDANKEN shall have the right to terminate
this Agreement upon written notice to TTGL in the event of any bankruptcy of
TTGL that results in the liquidation of TTGL'S assets. Any assignment for the
benefit of creditors of TTGL shall be: (a) conditioned on an agreement by the
assignee to pay, with interest at the then prevailing rate, any unpaid royalties
or research and development funding owed to GEDANKEN; and (b) subject to
GEDANKEN'S approval, which shall not unreasonably be withheld.
12.10 PUBLIC ANNOUNCEMENTS. No news release or other public
announcement or disclosure relating in any way to the transactions contemplated
by this Agreement shall be made by either party without the prior written
consent of the other party (which consent shall not be unreasonably withheld),
unless in the opinion of counsel such release, announcement or disclosure is
required by law.
12.11 EXECUTION OF COUNTERPARTS. This Agreement may be
executed in one or more counterparts, all of which taken together shall be
deemed one original.
39
IN WITNESS WHEREOF, GEDANKEN and TTGL, intending to be legally
bound, have caused this Agreement to be executed and delivered by the duly
authorized officer of each party hereto.
Gedanken Corporation
/s/ Julius Cherny
------------------------------------
Julius Cherny, Ph.D.
Chairman
Dated: February 11, 1997
[Seal]
Attest:
/s/ Stella Buffalguo
- ----------------------------
The Translation Group, Ltd.
/s/ Charles D. Cascio
------------------------------------
Charles D. Cascio
President and Chief Executive Officer
Dated: February 11, 1997
[Seal]
Attest:
/s/ Cynthia Piccola
- ----------------------------
40
ACKNOWLEDGMENTS
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On this 11th day of February 1997, before me personally came
Julius Cherny, Ph.D., to me known, who being duly sworn, did depose and say that
he is Chairman of Gedanken Corporation, the corporation described in, and on
behalf of which he executed the above Agreement; that he knows the seal of said
corporation; and that the seal affixed to said Agreement is such corporate seal.
/s/ Charles R. Brustman
------------------------------
Notary Public
[Notary Stamp and Seal]
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On this 11th day of February 1997, before me personally came
Charles D. Cascio, to me known, who being duly sworn, did depose and say that he
is President and Chief Executive Officer of The Translation Group, Ltd., the
corporation described in, and on behalf of which he executed the above
Agreement; that he knows the seal of said corporation; and that the seal affixed
to said Agreement is such corporate seal.
/s/ Charles R. Brustman
------------------------------
Notary Public
[Notary Stamp and Seal]
41
EXHIBIT A
The following timetable of intra phase accomplishments is to be taken as a list
of estimated times needed to achieve the major components of each phase. The
overall time to complete each phase is specified in other sections of this
Agreement. As it is the case in any project of the sort undertaken herein,
experience may cause changes in the time needed to complete a given component or
the sequence in which intra phase components are worked on.
APPROXIMATE
PHASE I NUMBER OF DAYS
Purchase and installation of hardware and software 30
Completion of augmented dictionary 120
Coding of fuzzy set neural network similarity functions 180
Two language parsers 180
Two language parallel corpora deterministic comparator 180
Trial runs and debugging of deterministic parallel comparator 270
Completion of phase I 360
PHASE II
Two language similar corpora probabilistic word string comparator 540
Trial runs and debugging of probabilistic word string comparator 630
Completion of phase II 720
42
