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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 MARCH 31, 2000
COMMISSION FILE NUMBER 0-21725
THE TRANSLATION GROUP, LTD.
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(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
DELAWARE 23-3382869
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(State or other jurisdiction of (I.R.S. Employ. Ident. No.)
incorporation or organization)
30 WASHINGTON AVENUE
HADDONFIELD, NJ 08033
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(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER: (856) 795-8669
ISSUER'S FAX NUMBER: (856) 795-8737
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
NONE
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
Common Stock, $.001 per value
COMMON STOCK PURCHASE WARRANTS
(Titles of classes)
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
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Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is 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: $ 13,874,289
Aggregate market value of the voting stock held by non-affiliates of
registrant on July 12, 2000, based on average of the high and low price on that
date, was $22,205,639 million. Exclusion of shares in this calculation shall not
be deemed an admission that such person is an affiliate and inclusion shall not
be deemed an admission that such person is not an affiliate. This information is
provided solely for record keeping purposes of the Securities and Exchange
Commission.
The number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 4,737,203 shares of common
stock, par value $ .001 per share, as of July 12, 2000, which includes up to
103,000 shares to be issued pursuant to an agreement with a former executive of
a wholly owned subsidiary and TBD shares issued in connection with a recent
acquisition.
Transitional Small Business Disclosure Format: Yes ; No X
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PART I
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
When used in this Annual Report on Form 10-KSB and in other public
statements by the Company and Company officers, the words "expect", "estimate",
"project", "intend", and similar expressions are intended to identify
forward-looking statements regarding events and financial trends which may
affect the Company's future operating results and financial condition. Such
statements are subject to risks and uncertainties that could cause the Company's
actual results and financial condition to differ materially. Such factors
include, among others, the risk factors described under Item 1 in this Annual
Report. Additional factors are described in the Company's other public reports
filed with the Securities and Exchange Commission. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date made. The Company undertakes no obligation to publicly release the
result of any revision of these forward-looking statements to reflect events or
circumstances after the date they are made or to reflect the occurrence of
unanticipated events.
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY AND BACKGROUND
The Company was incorporated under the laws of Delaware on July 6,
1995. On January 17, 1996, the Company consummated its first acquisition when
the shareholders of Bureau of Translation Services, Inc., a Pennsylvania
corporation ("BTS"), exchanged their shares of BTS, for shares of the Company so
that BTS became a wholly owned subsidiary of the Company. BTS had been engaged
in providing translation services since 1984.
The Company completed its initial public offering on December 6, 1996.
Its common stock is reported on the NASDAQ OTC Bulletin Board market under the
symbol THEO for its common stock, and THEOW for Warrants which were initially
issued in connection with its initial public offering.
On June 30, 1997, the Company acquired all the issued and outstanding
common stock of the companies that comprise the Word House Group ("Word House")
in exchange for 185,000 of its common shares and 200,000 additional common
shares contingent on future earnings levels. Word House has been in operation
since 1984, and currently has offices in The Netherlands, France, and China.
In May of 1999, the Company acquired all of the issued and outstanding
stock of Planet Access Networks, Inc., an Internet engineering firm, in a stock
and cash transaction. Management believes that Planet Access will enable the
Company's translation solutions to be delivered through secure Intranet or
Internet services. The Translation Group, Ltd. ("TTGL"), Bureau of Translation
Services, Inc. ("BTS"), Planet Access Networks, Inc. ("PAN") and Word House are
referred to herein collectively as the "Company."
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The following diagram provides a summary of the Company's current organizational
structure and the number of employees working for each as of the date of this
report:
The Translation Group, Ltd.
Haddonfield, NJ
9 Employees
BTS-Wordhouse Wordhouse Planet Access Networks
Haddonfield, NJ Amsterdam Flanders, NJ
33 Employees 45 Employees 75 Employees
1 Location 3 Locations 2 Locations
OVERVIEW AND STRATEGY
The Company is positioning itself to become a leading supplier of
multilingual products and solutions via the Internet. Since inception, the
Company has acquired two translation companies, an Internet solutions provider,
and has licensed two unique, advanced translation systems. The goal is to
completely integrate the existing services of each business unit while expanding
the globalization capabilities in targeted market segments.
The Company has been supplying translation, localization, and
localization engineering services to the software, telecommunications and other
technical publication customers. The customer list for these services includes
Microsoft(R), Oracle, Minitab, ADP, SAP, INSO, PSDI, HP, and others. Through the
acquisition of Planet Access, the Company is also supplying Internet, Intranet,
and Extranet website development, hosting and other solutions for informational,
interactive, and e-commerce clients. The customer lists for these services
includes Avis, Novartis, Microsoft, Alta Vista, Lockheed Martin, and others.
The Company has linked its language technologies and services with Web
development and e-commerce enabling capabilities through its acquisition of
Planet Access. Planet Access is a nationally known website developer, who
through this linkage is expanding its services to deliver multilingual web
technologies and services to owners of complex, dynamically updated Web sites.
Based on internal research as well as external sources, there appear to be very
few competitors with similar capabilities in combining multilingual technologies
and web development.
The Company is developing unique computer-based language translation
systems and language tools with Gedanken, Inc. and ESTeam AB, with whom the
Company has exclusive and worldwide distribution rights,. These automated
language systems are specifically designed to provide significant advantages in
terms of speed and cost. Management believes that its systems are capable of
performing language translations with very high "first-pass" accuracy within
specified domains of texts, unlike the majority of its competitors.
The Internet has significantly improved the distribution of software
and other products, and information and products are now instantly available
globally. This capability for many different industries has created the need to
have products and product information translated into local languages. To
satisfy this growing need for multilingual web solution, the Company has
accelerated its integration efforts and development of enhanced technology to
enable timely and effective solutions.
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LANGUAGE TECHNOLOGY
The Company has invested in two licenses that management believes
should offer new abilities within language technologies. These licensed systems
could provide the Company with the ability to process significant volumes of
written text in electronic form. Further capabilities include preprocessing to
enhance meaning, building language reference databases, pre-translation, and,
depending on the domain or topic, actual translation of the text in an automated
fashion.
MANUAL TRANSLATIONS
Historically, the translation process has been nearly a 100% human
exercise. For precise translations to occur, the translator and editor need to
not only be fluent in both the source and target languages, but, especially in
the case of highly technical materials, also `fluent' in the topic which is the
subject of the translation. In addition, manual translation is generally very
time-intensive and costly with fully burdened pricing running between $.25 and
$1.00 per word. As such, manual translations have, and continue to be,
characterized by:
o High costs
o Long completion times
o A high quality "first-pass" that is very slow and expensive to attain.
TRADITIONAL LINGUISTIC RULE-BASED MACHINE TRANSLATION SYSTEMS
In a manual translation, the cost of the human translator accounts for
35% to 80% of the total job cost. In an effort to reduce the high "human
component" cost of translation, several machine translation systems have been
developed over the past several decades. Unfortunately, according to industry
sources, these systems have proven largely ineffective, providing at best only a
45-65% correct "first pass" translation. This kind of "first pass" translation
provides a reader with, at best, the "gist" of a topic, and requires that the
remaining 35% - 55% of the source document be translated manually, which, as
noted above, is both time consuming and expensive, especially when large volumes
of material are involved.
In short, the use of these systems has yielded little productivity
improvements for the industry. Implementation of these systems has had little or
no impact on either the input or actual translation time, although they have
somewhat shortened printing times.
Traditional machine translation applications utilize three sets of
data: the input text, the translation program and permanent knowledge sources.
Permanent knowledge sources contain a dictionary of words and phrases in the
source language along with information about the concepts evoked by the
dictionary and rules for sentence development. The methodology employed is in
the form of linguistic rules for syntax and grammar, and some are algorithms
governing verb conjugation, syntax adjustment, gender and number agreement and
word re-ordering.
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Once the user has selected the source text and initiated the machine
translation process, the program begins to match words from the input text with
those stored in its dictionary. Upon finding a match, the application brings up
a complete record that includes information on possible meanings of the word and
its contextual relationship to other words that occur in the same sentence. The
time required for the translation depends on the length of the text and the
system running the software.
MATHEMATICAL AND STATISTICALLY-BASED TRANSLATION SYSTEMS AND TOOLS
The Company believes that the common structural flaw of its
competitors' traditional translation systems has been their reliance upon
software programs driven by linguistic rules. These rules have been generally
developed by academic linguists to address specific items such as grammar,
syntax, lexical usage, context, and sentence structure. The primary impediment
to the success of the traditional linguistic rule-based systems has been that it
is virtually impossible for the system designers to include the myriad of
exceptions to all the various linguistic rules in the systems. This ultimately
leads to consistently faulty translations.
Recognizing the limitations inherent in linguistic rule-based
translation systems, the Company has acquired the license rights to two
automated translation systems that utilize a fundamentally different approach to
the problem. The Gedanken system and the BTR system, developed by ESTeam, rely
upon mathematical and statistical evaluations of dual language texts in
particular topics. By statistically analyzing substantial amounts of legacy text
in two languages, patterns of word matches, as well as phrase and sentence
matches become apparent and remembered in such a way as to allow the translation
of newly inputted text with close to manual "first pass" translation accuracy.
Furthermore, the systems "learn" from post edit corrections, which
means that the next translation of each new version should be better than the
last. By utilizing statistical matching and pattern recognition, so-called
language rules become apparent in the translated text.
THE BTR SYSTEM
In April 1999, the Company entered into a development and license
agreement with ESTeam AB ("EST"), a Swedish corporation specializing in the
development of a computer-automated language system known as the "BTR System",
and customized this system for specific market applications. The BTR System is a
reference based translation system comprising large amounts of legacy text
(pre-translated text) arranged and coded at the sentence and sub-sentence level
and then broken down into a topical sub-section. This system is designed to be
particularly effective for the automated translation of content in a
well-defined topic.
The BTR system, its modifications, improvements, and adaptations, are
used to perform machine translations of specific text documents in a particular
domain, and is designed to accept and analyze very large amounts of data;
namely, words, word phrases, sentence segments and whole sentences in both
source and target languages. One particular application already perfected by
ESTeam was developed for the automated translation of trademark information for
the customer, Compu-Mark, S.A. (a Thompson Group Company) which holds a license
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to use the system for patent and trademark registrations. This custom system is
now available in 11 different languages and it performs understandable
translations automatically with no human intervention.
As with other machine translation systems, the BTR System is comprised
of sub-routines, or modules, which perform specific tasks. These modules
interrelate via a master control program. Sub-routines include such functions as
topic delineator, bilingual dictionary matches, large capacity databases, target
language verification, and statistical word matches. One of the key
differentiating features of the BTR System is its ability to analyze and find
language matches at the sub-sentence level, namely, sentence segments and word
phrase levels.
The BTR System was designed to excel in automated translation within a
defined market or topic. Examples of these include financial, chemical, and
environmental, for which the Company is developing "products" or "applications"
using the BTR System. With the financial support of the Company, ESTeam is the
development group that will complete these products. The first application
commenced development in May 1999 and has been delivered by ESTeam to the
Company for commercialization.
Specific BTR System applications have been exclusively licensed by the
Company for a period of fifteen years. In consideration for the license, the
Company has agreed to pay royalties on sales for the use of the application, to
pay EST's development costs for perfecting each of the named applications, and
to provide additional development funding under certain conditions.
The license entails certain risks. While the Company firmly believes
the BTR System could add significant value in the future, there is no assurance
that any applications will be successfully developed. In addition, the license
represents a substantial financial commitment by the Company without any
guarantee of successful development of commercially exploitable applications.
THE GEDANKEN SYSTEMS
On November 1, 1996, the Company entered into a licensing agreement
with Gedanken, Inc. ("Gedanken") to develop an automated translation system. The
agreement is broken up into three phases. Phases I and II call for the Company
to pay Gedanken $750,000 for the development of an improved
translation/localization system. Phase III is optional and calls for the Company
to pay Gedanken $4.0 million to develop a real-time voice translation system.
The agreement also states the Company is obligated to pay royalties on all
revenues generated that use in whole or in part the patent rights and know-how
of Gedanken. To date, the Company has invested $750,000 in system research and
development relating to phases I and II. Further research and development is
required to produce commercially salable applications, and no assurance can be
given that such applications will be successfully developed.
In evaluating the potential opportunity to commercially exploit and
monetize the Gedanken system, and given the remaining funding requirements and
future royalties payable to Gedanken, the Company determined that purchasing
Gedanken, Inc. would be in the Company's best financial interest. Therefore, the
Company is currently negotiating the purchase of all of the outstanding stock of
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Gedanken. The proposed terms call for purchase of all of the outstanding stock
of Gedanken for consideration consisting of: (i) 800,000 shares of TTGL common
stock, and (ii) 3-year options to purchase up to 200,000 shares of TTGL common
stock at an exercise price of $5.00 per share. If the purchase of Gedanken is
completed, TTGL will become the owner of the technology licensed under the
Gedanken License.
In addition, the Company plans to retain key employees of Gedanken
through standard employment and non-compete agreements. Management plans to
close this transaction by the end of July 2000.
While the Company firmly believes the Gedanken system could add
significant value in the future, there is no assurance that any commercially
exploitable applications will be developed. In addition, both scenarios
represent a substantial financial commitment by the Company without any
guaranteed results or products.
The Gedanken system addresses the added complexities of translating
information from free-flowing texts of any kind. The Gedanken system is rooted
in statistical analysis of large amounts of language data, and is constructed of
modules that perform different functions. These modules are designed to make the
system a single comprehensive automated translation system. There are several
important differentiating features of the Gedanken system, one of which is the
"Precision English" module. The system also includes a sophisticated parser that
dissects sentences and bilingual dictionaries. By eliminating the bulk of the
ambiguous words and phrases and substituting more accurate words, the "Precision
English" module should raise the level of correct translation.
PRODUCTS AND SERVICES BASED ON THE GEDANKEN AND BTR SYSTEMS
Faced with a very wide range of potential translation products the
Company has set specific criteria to narrow the possibilities. Computer
translation systems perform better on texts, which include high repetition of
known terms, than on texts with intentional ambiguity, slang, idioms, and
emotive terms such as are found in poetry, novels, and general readership
magazines.
Possible target markets include nearly all professional, technical and
industrial applications such as financial, medical, legal, trade publications,
software, patents, technical abstracts, equipment and instrument manuals,
environmental regulations and various other governmental regulations, aerospace,
telecommunications, automotive and many others. Both systems allow the Company
the possibility to move effectively into varying market segments and meet
specific language requirements within a given industry.
The BTR systems will be focused on use within industries that require
accurate translations but not as accurate as human translation. These are
industries where text is primarily used for reference or as qualifying
information. It has been proven that existing machine translation systems do not
meet the requirements necessary. Currently, the Company is targeting financial
content and will be continually expanding into additional topic areas.
The Gedanken systems should offer a broader range of usefulness for
critical or technical text where the translated text needs to be clear and
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concise. The Gedanken systems also have marketable usage during the authoring
stage of the text where extreme costs are incurred for editing and reviewing the
final version of the source material.
INTERNET TECHNOLOGY
INTERNET APPLICATION DEVELOPMENT
In May 1999, the Company acquired Planet Access Networks, Inc. in a
stock and cash transaction. The "fit" with the Company's existing business
relates to the fact that virtually every new translation application the Company
is developing requires that the source text be in digital form for input into
the translation software, processing, and subsequent transportation. Depending
on the particular market application, the customer may access the system
remotely via private subscriber Intranet, public Internet, or dedicated service
lines. Virtually all of the Company's future products including IT, financial
translations, medical device labels, etc., will offer remote-user electronic
interfaces to further speed translation time, giving the Company an additional
advantage over its competitors.
In addition to providing the Company with an electronic interface
option for both its existing and developmental products, its acquisition of
Planet Access provides the Company with new opportunities in the exciting and
high-margin technology field of Internet service provision, including website
development and management services.
NETWORKING TECHNOLOGIES
Planet Access also provides outstanding custom network solutions,
hosting and engineering services such as Internet design and security, dedicated
high-speed corporate Internet access and many other custom applications. Clients
for the above activities include AVIS, Novartis, Lucent Technologies,
Lockheed-Martin, ABN AMRO, Knoll Pharma.
INTERNET/E-BUSINESS TECHNOLOGIES
Planet Access is fully capable of comprehensive Internet engineering,
including site design, security, security pass access, secured credit card
transactions, secure private access and hosting among many other services. Based
upon the advanced nature of its capabilities, Company management considers
Planet Access among the top 50 Internet engineering firms in the United States.
MULTILINGUAL WEB AND INTERNET TECHNOLOGIES
The linkage of language with the Web creates a synergy of two
technologies that the Company believes is an absolute necessity today with the
growing popularity of the Internet and Internet based applications. The Company
is currently developing automated translation management systems that interface
directly with the server and the translation process. These systems provide
client cost reduction as well as solve "time to market" problems due to the
labor intensive site maintenance required in order to keep a multilingual site
"live".
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PRODUCTS AND SERVICES
TRANSLATION AND LOCALIZATION
The Company offers its clients a comprehensive solutions-based menu of
value-added products and services, from development to localization to
in-country service and support. The Company specializes in managing and
producing high volume, technical translations and localization for its clients.
All of the Company's products and services can be customized to the client's
specific requirements. The primary products and services the Company currently
provides to translate software manuals and other technical content are as
follows:
1. Multilingual Localization and Translation services that include:
o All levels of product management
o Terminology development
o Re-use of previously translated materials using the latest technology
tools
o Translation and technical editing of text
o Software engineering, including resizing and compiling
o On-line help compiling and formatting
o Linguistic, functionality, and QA testing
o Desktop publishing, graphic layout, editing, and proofreading
o Coordination of in-country review
o Production of publishable materials and electronic media, including
CD ROM
o Multimedia localization and production
o Web site and on-line publishing localization and production
2. Internationalization and Development Consulting
3. Technical Writing of Documentation, including editing and evaluation
4. In-Country Training, Support, and Service Centers
5. Facilities Management and Resource On-Site Placement Services
Historically, the process of Multilingual Localization for the
information technology (IT) market has been highly labor intensive, with much of
the hands-on work being done principally by independent translators and editors
retained by the Company, as well as Company employees. The Company utilizes
various machine translation tools to reduce the high cost associated with human
translators, decrease the completion time and to enhance consistency.
The Company utilizes several translation software tools for: (i)
extracting and storing data; (ii) preserving formatting during the translation
process; (iii) online dictionaries; (iv) presentation of text (e.g., pre-press)
and (v) use of previous translations.
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
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centralized project management is essential to efficiency. To better implement
this policy, a project manager is assigned to each project. Thus, even when a
project may have team members in many different locations, most work is
coordinated centrally in the Company's United States and European headquarters
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 a
project editor may identify problems or issues that 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 problems can be adequately handled.
All of the independent translators utilized by the Company 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. The Company provides an extensive range of
communications facilities by utilizing its own internal systems integration
group that maintains the Company's Internet/Extranet/Intranet and E-mail
Systems. Files are prepared for translation by the Company's technical staff and
are distributed electronically to translators either locally or in the
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 and software development departments. All project
activities are closely tracked using custom and commercial project
management/tracking applications where the data is fully available to the
client. Thus, the client always knows the status of the project.
The Company realizes that many of its customers do not possess all of
the expertise needed to manage the localization process. The Company, therefore,
expanded its service offerings to include management consulting and on-site
management. Systems development and consulting services also include product
planning and redesign for local markets. The Company understands the changes in
technology, and that taking a product to a global market can be a difficult
proposition. In order to offset the technical difficulties for its customers,
the Company has taken an active role in the development and modifications of its
customers' products to support local specifications and character encoding for
different regions of the world. These services allow the Company to manage the
localization and the customer to manage the product. Therefore, costs are
reduced while quality is maintained.
INTERNET WEBSITE DESIGN AND APPLICATION DEVELOPMENT
The Company offers its customers a comprehensive solutions-based menu
of value-added products and services, from basic billboard web development to
highly complicated transactional e-commerce sites. All of the Company's products
and services can be customized to the customer's specific requirements. The
primary products and services the Company currently provides are as follows:
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1. Web Design and Development
o All levels of product management
o Design and layout
o Graphics design and creation
o Interactive scripting and application design and development
o Database design and development
o Backend application design and development
o On-line publishing and production
o All of these services in multiple languages
2. Solution Consulting
3. Technical Writing of Documentation, including editing and evaluation
4. Network design and implementation
5. Off-site/On-site systems administration and hosting .....
Planet Access is completely integrated in offering an "end to end"
service to web customers. The Company employs senior, experienced professionals
in each key discipline of web design and implementation, including graphics
design, HTML coding, master program architecture, web analysis, testing,
equipment platform specification, installation and hosting.
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MARKETING
TRANSLATION/LOCALIZATION
CURRENT
The Company markets its products and services primarily through a
dedicated six-person sales force. In addition, the Company participates in
several trade shows annually and conducts limited print advertising in several
trade publications. The Company is an active member in the STC (Society for
Technical Communications), the ATA (American Translators Association) and
several regional chapters of the Chamber of Commerce. An extensive marketing and
PR program will commence in July 2000 focusing on multi-lingual web development
customers.
CLIENTS
The Company provides translation and localization services to a range
of industries and sectors, with an emphasis on IT companies. During fiscal 1999
and 2000, approximately 36% of the Company's revenues came from localization
projects for software publishers, computer hardware manufacturers and computer
and peripherals vendors.
The Company has a large number of IT-based clients, including
Microsoft, Oracle, Okidata, Bentley Systems, HP, Cannon, Creative Labs, Bay
Networks, PSDI, INSO, ADP, General Instruments, Fisher Rosemont, Minitab along
with many others. The strong relationships the Company has developed with its IT
clients have also generated a volume of more conventional translation work. As
an example of these services, the Company is translating and localizing software
messages, software dialogue boxes, software help, related documentation
including user manuals, product literature and websites.
At present, key markets for the Company's solutions are clients located
in Japan, Europe, and the Americas, which include the dialects of Canadian
French, Latin American Spanish, and Brazilian Portuguese. The Company provides
translation in 36 languages.
The Company's business consists of translation for suppliers of
applications software, including a substantial volume of Unix-based systems and
customized implementations. Principal applications are financial and
manufacturing, with systems encompassing everything from order entry to
distribution.
MARKET SIZE
According to OVUM, Inc., a market research company, and LISA
(Localization Industrial Standards Association), the translation and
localization market currently approximates $20 billion annually and is expected
to grow 10% to 15% annually. In addition, OVUM forecasts a higher growth rate
over the next five years as the demand for translation and localization in the
IT related market increases.
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The Company believes that OVUM's estimate of $20 billion includes a
substantial amount of casual translation, which is unlikely to be subject to an
automated solution. In addition, this estimate includes an unknown percentage of
language translation performed by the in-house translation staffs of certain
medium and large sized multinational companies with product offerings in various
languages, including Caterpillar, Boeing, IBM, Bloomberg, and XEROX.
By adding total estimated revenues of translation firms to estimates of
"in-house" translation activities of medium to large multi-national companies,
the Company is estimating a current market for its translation/localization
solutions of approximately $5 billion.
THE TRANSLATION AND LOCALIZATION SERVICES MARKET
The translation/localization industry is highly volatile.
Traditionally, translation has been a production "afterthought". In general,
products and documentation are first completed for the home market, and then
companies face the painful hurdle of localization before shipping the products
to their customers. As a result, translation requirements arise somewhat
unpredictably and with much urgency.
The translation/localization market breaks down into two broad
categories, namely "retail" and "professional/technical." The Company plans to
compete almost exclusively in the high volume professional/technical market.
RETAIL: The retail translation segment includes a variety of applications such
as general business correspondence, consumer product marketing, newspapers,
magazines, literary works, chat room conversations, TV shows, news programs,
personal letters and the like.
PROFESSIONAL/TECHNICAL: The professional/technical translation market consists
primarily of high volume translation items, and includes all types of business
products and services as well as government publications requiring translation.
Virtually all businesses which export products or services require that their
products be tailored to the local target market or country. The types of
businesses included in the professional/technical segment include automotive,
aerospace telecommunications, pharmaceutical, medical device, software,
transportation equipment, chemicals, industrial tools, accounting standards,
investment data and research reports, patents, government regulations, financial
data, computers, educational materials, foods, scientific instruments and many
others.
The level of precision required of translators in the
professional/technical market is significantly greater than that of the retail
translation market. Not only is fluency in both the source and target languages
required, but also fluency in the topic which is the subject of the translation.
Examples of professional/technical translations requiring a high degree of
precision include automotive, aircraft engine repair manuals, and pharmaceutical
labeling.
The intensity of global competition places pressure on organizations to
utilize simultaneous market release opportunities in order to be competitive on
a global basis. This means that information must be enabled for global markets
so that the localization process is easier to manage. Consequently, the need to
localize products for foreign markets is increasing. A lack of internal
resources has forced many companies to outsource their translation/localization
needs, and the movement toward outsourcing is, in turn, revolutionizing the
translation/localization industry.
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Translation Services are evolving into Global Information Services.
Some of the key market drivers of the global information services industry are
described as follows:
COMPETITION
The translation and localization industry is characterized by
volatility and is highly competitive. Traditionally, translation companies have
competed primarily on a mixture of price and completion time, often at the
expense of quality. Competition in the translation market is characterized by
widely differing elements, reflecting the diverse needs of clients. At one end
of the spectrum, there are small agencies with a generalist approach that offer
services typically limited to translation. At the other end of the spectrum,
there are a few large companies that offer machine translation software and/or
turnkey services (more than translation only), focusing on providing
industry-specific "solutions".
As translation and localization contracts become larger, the Company
believes that large corporate IT customers will continue to migrate to the
solution-based models offered by large capacity service providers. Currently,
the Company's competitors can be divided into two main subcategories,
traditional translation companies and companies offering large capacity machine
translation products and/or solution-based models. However, the Company believes
that within a relatively short period of time, it will be competing primarily
with companies in the second subcategory.
Companies that perform translation as a business tend to be small, `mom
and pop' type firms with annual revenues of $300,000 to $700,000. In fact, the
Company estimates that 95% of the 3000+ U.S. based translation agencies have
annual revenues of less than $1.5 million. The same fragmented market structure
of thousands of small firms prevails overseas, where there are many more
companies performing translations than in the US. The Company believes that the
key competitive factors in the market for translation services are: (i) price;
(ii) delivery time, and (iii) quality. Worldwide, fewer than 10 translation and
localization companies have annual translation revenues of over $50 million.
Alpnet (NL) $55 million
Lernout & Hauspie (BE) $60 million
Bowne Trans. Div. (US) $65 million
Berlitz (US) $85 million
Lionbridge (US) $90 million
A wide range of Web development firms exist in the marketplace. Small
mom and pop firms typically tend to develop and host small static sites where
content remains constant and the main purpose for the site is visibility. Medium
to large size firms with a staff that has expertise to handle the complexity of
the primary components of a dynamic web site (User Interface, Graphics, and
back-office application development) produce most of today's e-commerce enabled
sites, (i.e. CDNow, Amazon.com, Priceline.com). The major web development
players today are the independent web development companies, and the consulting
arms of the Big 5 accounting firms and global IT integration firms (IBM
e-commerce division). Despite all the development talent available to the firms
mentioned above, no one has created a single solution for the integration of web
and automated translation technologies.
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EMPLOYEES
The Company presently employs 147 full-time people, comprised of 11 in
management positions, 10 in administration, 7 in sales and marketing, 119 in
production and engineering. In addition, the Company also uses the services of
about 450 freelance and/or independent translators and editors on an as-needed
basis from a roster of several thousand worldwide.
All of 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.
Even with machine translation, there is a need for qualified
individuals as in-house quality-control personnel and as translators of subject
areas that have not been mechanized. The Company expects that the available pool
of qualified translators will not grow as rapidly as the growth in the
translation and localization market as a whole.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS, LICENSES AND SOFTWARE PROTECTION
On November 1, 1996 the Company entered into a development and license
agreement to use and sell know-how, apparatus, and methods pertaining to tools
and systems developments made by the Gedanken Corporation, an unaffiliated
development company ("Gedanken"). Gedanken has filed and received an allowance
for a United States Patent 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. Currently, the
Company is negotiating the purchase of Gedanken, Inc.
In April 1999, the Company entered into a development and license
agreement with ESTeam AB ("EST"), a Swedish corporation specializing in the
development of a computer-automated language system known as the "BTR System",
and the customization of this system for specific market applications. The BTR
system, its modifications, improvements, and adaptations, are used to perform
machine translations of specific text documents in a particular domain, and is
designed to accept and analyze very large amounts of data; namely, words, word
phrases, sentence segments and whole sentences in both source and target
languages.
The Company entered into an exclusive worldwide license for certain
applications, chosen by the Company, for a period of fifteen years. In
consideration for the worldwide license, the Company has agreed to pay royalties
on sales of any application, to pay EST's development costs for perfecting each
of the named applications, and to provide additional development funding under
certain conditions.
The Company regards certain features of its internal operations,
software and documentation as proprietary, and relies on a combination of
contract, copyright, trademark and trade secret laws and other measures to
protect this proprietary information. The Company holds no patents, and existing
copyright laws afford only limited protection. The Company believes that,
because of the rapid pace of technological change in the computer software
industry, trade secret and copyright protection are less significant than
factors such as the knowledge, ability and experience of the Company's
employees, frequent product enhancements and the timeliness and quality of
support services.
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RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES NUMEROUS SIGNIFICANT RISKS,
INCLUDING THOSE SET FORTH BELOW. THE FOLLOWING RISKS, AMONG OTHERS NOTED IN THIS
REPORT, SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY. THIS REPORT
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS THAT
INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY
FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS
REPORT. THE CAUTIONARY STATEMENTS MADE IN THIS REPORT SHOULD BE READ AS BEING
APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS
REPORT..
FUTURE PROFITABILITY AND THE VALUE OF YOUR INVESTMENT WILL DEPEND UPON THE
COMPANY'S SUCCESS GROWTH STRATEGY
The Company has reflected only modest net income from operations during
fiscal 1997, a net loss during fiscal 1998, 1999, and 2000. As a result, the
Company's successful implementation of its business strategy will likely
determine:
o future profitability
o ability to effectively compete in the translation and localization industry;
and
o The ultimate value of an investment in the Company
The Company's business plan relies primarily on the development and
implementation of computer-aided translation and localization products and the
integration of existing translation and Web development services.
THE COMPANY HAS COMMITTED A SIGNIFICANT PORTION OF ITS WORKING CAPITAL TO
RESEARCH AND DEVELOPMENT, AND THE FAILURE TO COMMERCIALIZE THE COMPUTER AIDED
TRANSLATION AND LOCALIZATION PRODUCTS AND SERVICES WILL HAVE A MATERIAL ADVERSE
IMPACT ON THE COMPANY'S FINANCIAL CONDITION
Over the past three years the Company has invested approximately $1.7
million on the development of the Gedanken and BTR systems. The Company
anticipates providing additional funding during fiscal 2001 and beyond to
complete production models and commence commercialization of the systems. The
inability to commercialize either one or both of these projects may well affect
their competitive position in the industry and impact profitability.
LIMITED MARKET FOR THE COMPANY'S COMMON STOCK INCREASES THE POSSIBLE VOLATILITY
OF STOCK PRICES AND THE VALUE OF ANY INVESTMENT IN EQUITY MAY BE REDUCED
The public trading market for the Company's shares of common stock is
limited on the OTC Bulletin Board. There can be no assurances that a regular
trading market for the common stock will be sustained. By its very nature,
trading on the OTC Bulletin Board provides only limited market liquidity. In
addition, the stock markets generally have experienced, and continue to
experience, extreme price and volume fluctuations which have affected the market
price of many small cap companies and which have often been unrelated to the
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operating performance of these companies. These broad market fluctuations, as
well as general economic and political conditions, may adversely affect the
market price of the Company's common stock.
IF THE COMPANY USES ITS COMMON STOCK TO CARRY OUT ADDITIONAL ACQUISITIONS OR
ISSUE MORE COMMON STOCK IN A PUBLIC OFFERING, ADDITIONAL DILUTION TO YOUR
INVESTMENT WILL OCCUR
The Company may grow the business through acquisitions. The Company
could accomplish this through the issuance of additional shares of common stock.
This would have the effect of increasing the number of shares of common stock
outstanding. In addition, in order to accomplish the Company's business strategy
on a longer-term basis, they are likely to require additional financing, which
may entail the issuance of additional shares of common stock, preferred stock or
common stock equivalents, which would have the further effect of increasing the
number of shares outstanding. This may be done in order to, among other things:
o Facilitate a business combination
o Acquire assets or stock of another business
o Compensate employees or consultants; and
o For other valid business reasons in the discretion of the Board of Directors
THE COMPANY OPERATES IN HIGHLY COMPETITIVE MARKETS, WHICH COULD RESULT IN LOSS
OF MARKET SHARE OR REDUCED MARGINS
The Company faces intense competition from multinational, regional and
local companies in every market in which they operate. The principal competitive
factors within the translation and localization industry include:
o Price
o Technological capability
o Accuracy
o Extent of geographic coverage; and
o Ability to deliver services in a timely manner
Many of the Company's competitors have well-established reputations and
significantly greater financial, marketing, personnel and other resources. The
Company's principal competitors are:
o Berlitz o Lernout & Hauspie, N.V.
o Bowne Translation Division o Logos
o Alpnet o Systran
o Lionbridge o LMI
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Some of these competitors are multinational, highly visible and well-regarded
enterprises. There can be no assurance that the Company will be able to compete
effectively against these or any other competitors.
SENIOR MANAGEMENT BENEFICIALLY OWNS A SIGNIFICANT PERCENTAGE OF THE COMPANY'S
COMMON STOCK AND THEREFORE HAS SIGNIFICANT INFLUENCE OVER THE ELECTION OF
DIRECTORS
The officers, directors and principal stockholders own approximately
[30.4%] of the Company's common stock on a fully diluted basis. Consequently,
upon exercise of their vested options and warrants and by virtue of Delaware
law, these stockholders could be in a position to influence the election of all
the directors and possibly control the outcome of other corporate matters
without the approval of other stockholders. In addition, applicable statutory
provisions and the ability of the Board of Directors to issue one or more series
of preferred stock without stockholder approval could deter or delay unsolicited
changes in control by discouraging open market purchases of the Company's common
stock or a non-negotiated tender or exchange offer for stock, which may be
disadvantageous to stockholders who may otherwise desire to participate in such
a transaction and receive a premium for their shares.
THE SUCCESSFUL IMPLEMENTATION OF THE COMPANY'S BUSINESS STRATEGY IS DEPENDENT
UPON MANAGEMENT PERSONNEL AND EXECUTIVE OFFICERS
Operations are dependent upon the continued services of senior
management and upon the Company's ability to hire and retain qualified
management and technical personnel. The loss of services of any of those
executive officers or other management or personnel, whether as a result of
death, disability or otherwise, may have a material adverse effect upon the
Company's business.
A SIGNIFICANT PORTION OF REVENUES ARE DERIVED FROM INTERNATIONAL OPERATIONS, AND
A DOWNTURN IN INTERNATIONAL COMMERCE COULD SEVERELY IMPACT RESULTS OF OPERATIONS
A significant portion of the Company's business is conducted outside
the United States. International trade is influenced by many factors, including
economic and political conditions, employment issues, currency fluctuations and
laws relating to tariffs, trade restrictions, foreign investments and taxation.
As a result, the Company's operations are subject to various risks such as:
o Loss of revenue due to the instability of foreign economies
o Currency fluctuations and devaluations
o Adverse tax policies; and
o Governmental activities that may limit or disrupt markets, restrict
payments or the movement of funds or result in the deprivation of contract
rights
The Company is subject to taxation in a number of jurisdictions, and
the final determination of tax liabilities involves the interpretation of the
statutes and requirements of various domestic and foreign taxing authorities.
Moreover, many of the countries where the Company operates and plans to operate
have legal systems that differ from the United States legal system and may
provide substantially less protection for foreign investors. A reduction in the
level of international trade, material restrictions on trade or a downturn in
the economies of countries in which the Company currently operates could have a
material adverse effect on the results of operations.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal operating facilities are located in
Haddonfield, New Jersey, USA: Amsterdam, The Netherlands, and Lyon, France. The
New Jersey production facility occupies approximately 6,000 square feet at a
monthly rate of $8,300 pursuant to a lease that extends until February 28, 2003.
In May 1997 Word House moved its principal location to Amsterdam. Its lease is
for approximately 5,500 square feet, and is for a period of five years at a rent
of $7,500 per month. A French subsidiary owns a condominium floor in Lyon, with
approximately 3,000 square feet of space. Estimated annual costs approximate
$43,000. The Company also has an office in Beijing, China, with an annual rent
of $21,000 for approximately 800 square feet.
Planet Access leases approximately 2,500 square feet of office and
production space in Stanhope, New Jersey with an annual rent of $32,400. This
lease expired on June 30, 1998. Since the expiration date, Planet Access has
been on a month-to-month extension. Planet Access has recently entered into a
lease for 8,500 square feet of office and production space in Flanders, New
Jersey with an annual rent of $127,500. This lease expires on July 15, 2004.
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.
ITEM 3. LEGAL PROCEEDINGS
The Company has been 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 special litigation counsel believe that this
suit is completely without merit and will vigorously defend it. On September 15,
1997 the Company was served with a summons which was subsequently filed in the
New York State Supreme Court, Kings County, alleging various acts of fraud
associated with the Company's reverse stock split which occurred on November 21,
1996. The plaintiff, Lee Dan Ltd., a shareholder of the Company, is seeking
monetary damages, specific performance, equitable relief and costs in the amount
of $3,000,000. Based on a review of the file and discussions with Company
management, counsel for the Company believes that there is a substantial
likelihood that the Company will prevail in this matter.
The Company is not a party to, or involved in, any other material legal
proceedings. In the ordinary course of business the Company may become subject
to certain legal proceedings and there can be no assurances that the results of
such proceedings will not have a material adverse affect on the Company's
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company completed its initial public offering on December 6, 1996.
Since that date its common stock has been reported on the NASDAQ OTC Bulletin
Board under the symbol THEO. The following table sets forth the range of the
high and low bid prices for the common stock as reported by the National
Quotation Bureau 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.
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1998 High Low
----
Quarter ended March 31, 1998 $ 4.75 $ 3.75
Quarter ended June 30, 1998 6.50 4.00
Quarter ended September 30, 1998 7.5625 5.25
Quarter ended December 31, 1998 6.25 4.50
1999
Quarter ended March 31, 1999 $5.00 $3.00
Quarter ended June 30, 1999 6.125 3.00
Quarter ended September 30, 1999 3.75 2.00
Quarter ended December 31, 1999 5.3125 1.5625
2000
Quarter ended March 31, 2000 10.50 3.25
On July 12, 2000 the closing bid price for the Company's common stock
was $4.6875. The approximate number of record holders of common stock as of July
12, 2000 was 66. The approximate number of beneficial owners was 675 as of
July12, 2000.
The Company also issued common stock purchase warrants in connection
with its initial public offering which are now exercisable until December 31,
2000 for a share of common stock upon payment of the exercise price of $4.35.
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.
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ITEM 6. MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CREDIT (000'S)
YEAR ENDED MARCH 31, 2000, 1999 & 1998
<TABLE>
<CAPTION>
OPERATIONS 2000* % 1999** % CHANGE 1998 % CHANGE
---------- ----- - ------ - ------ ---- - ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales......................... $13,347 100.0 $ 5,987 100.0 $ 7,360 $ 6,421 100.0 ($ 432)
Operating Costs &
EXPENSES
Cost of Sales................. 8,715 65.3 4,833 80.6 3,882 4,189 65.3 643
Selling & Admin............... 2,724 20.4 1,865 31.1 859 1,309 20.3 556
Research & Develop............ 147 2.4 (147) 244 3.8 ( 97)
Special & Other............... 979 16.3 (979) -- 979
Corporate Admin............... 1,244 9.3 736 12.2 508 774 12.0 ( 38)
Amort. of excess.............. 340 2.6 97 1.6 243 73 1.1 24
-------- --------- --------- ---------- --------- --------- --------- ---------
Total......................... 13,023 97.6 8,657 1,442.2 4,366 6,589 102.5 2,068
Operating profit (loss)
before other income........... 324 2.4 (2,670) (44.2) 2,994 (168) (2.5) (2,502)
Other income (expense), net...
(344) (2.6) 125 2.1 (469) 178 2.7 ( 53)
-------- --------- --------- ---------- --------- --------- --------- ---------
(Loss) income before taxes....
(20) (.2) (2,545) (42.1) 2,525 10 .2 (2,555)
Income taxes (benefit)........ 168 1.2 (396) 6.5 564 24 .4 420
-------- --------- --------- ---------- --------- --------- --------- ---------
Net Income (Loss)............. $ (188) (1.4) $(2,149) (35.6) $1,961 $ (14) (.2) $(2,135)
======== ========= ========= ========== ========= ========== ========= =========
Average shares outstanding....
2,966 2,278 2,124
Primary earnings (loss)
per share.....................
(.06) $ (.94) $ (.01)
</TABLE>
* Includes sales and costs of acquired subsidiary for the eleven months ended
March 31, 1999
** Includes sales and costs of acquired subsidiary for the nine months ended
March 1, 1998
Reflects reclassifications for consistency of comparisons.
3/31/00 3/31/99
FINANCIAL CONDITION (IN 000'S) CHANGE
Cash and short term investments.......... 1,700 $ 1,896 (196)
Other current assets..................... 3,072 1,697 1,375
------------ ------------- -----------
Total Current Assets..................... 4,772 3,593 1,179
Total Current Liabilities................ 1,672 1,452 220
------------ ------------- -----------
Working Capital.......................... 3,100 2,141 959
------------ ------------- -----------
Current Ratio............................ 2.9:1 2.5:1
Total Assets............................. 11,933 6,161 5,772
Total Liabilities........................ 2,166 1,639 527
------------ ------------- -----------
Stockholders' equity..................... 9,767 4,522 5,245
------------ ------------- -----------
Book value per share.....................
$ 3.29 $ 2.00 $ 1.29
============ ============= ===========
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RESULTS OF OPERATIONS FOR THE
FISCAL YEAR ENDED MARCH 31, 2000 (THE "CURRENT YEAR")
COMPARED TO THE FISCAL YEAR ENDED MARCH 31, 1999 ("COMPARABLE YEAR")
GENERAL
During the Current Year, the Company purchased all of the outstanding
shares of Planet Access Networks, Inc. ("Planet Access"), a New-Jersey based
web-site design and hosting company. The Company also continued development of
computer-based translation tools licensed from Gedanken, Inc. (Gedanken") and
ESTeam AB ("ESTeam"), although launch of services based on these tools is not
anticipated until later in Fiscal Year 2001. During the Current Year, the
Company continued the historic operations of the Bureau of Translation Services
("BTS") and the WordHouse Group of Companies ("WordHouse").
SALES
During the Current Year, consolidated sales increased by $7,360,000
from the Comparable Year to $13,347,000, an increase of 123%. Of this increase,
the acquisition of Planet Access accounted for $9,006,000, or 67% of total
sales. Sales at BTS and WordHouse were lower than during the Comparable Year.
BTS and WordHouse continue to be affected by intense competition in the market
for translation and localization services. As a result, the Company is
repositioning itself as a technology company that will use the tools licensed
from Gedanken and ESTeam to offer quicker services at lower cost and greater
margins.
During the Current Year, Brandwise LLC ("Brandwise") accounted for 74%
of Planet Access' revenues. During the fourth quarter of the Current Year,
Brandwise encountered financial difficulties and reduced operations. As a
result, Planet Access and Brandwise terminated their relationship. Furthermore,
during the fiscal year ending March 31, 2001, Planet Access will not have
Brandwise as a client. Accordingly, it can be expected that unless and until
Planet Access can replace the revenues generated by Brandwise, Planet Access'
revenues will decline.
COST OF SALES AND GROSS MARGIN
During the Current Year, cost of sales increased by 80% over the
Comparable Year to $8,715,000.00, principally as a result of higher sales. As a
percentage of sales, cost of sales decreased from 80.6% to 65.3%. This decrease
is attributable to the inclusion of Planet Access, with its higher gross margins
when compared to BTS and WordHouse. Due to the competitive pressures in the
translation and localization market, BTS and WordHouse continue to suffer from
low margins. Management believes that the commercialization of products based on
the Gedanken and ESTeam technologies will allow the Company to offer
satisfactory margins notwithstanding competitive pressures in the industry.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased from the Comparable Year
by $859,000 or 46% to $2,724,000 in the Current Year, principally as the result
of the acquisition of Planet Access and increased administrative salaries
associated with the expected launch of translation services based on the
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technologies licensed from Gedanken and ESTeam. As a percentage of sales,
general administrative expenses decreased from 31.1% to 20.4%.
NET INCOME
Net loss decreased from the Comparable Year by $1,961,000 to $188,000,
or 91% in the Current Year, principally as a result of the acquisition of Planet
Access which added approximately $9,006,000 to revenues, $1,602,000 to operating
profit and $1,541,000 to net income. The reduction in net loss is also
attributable to the fact that Planet Access had higher gross margins when
compared to BTS and WordHouse. Additionally, losses at WordHouse were 25% lower
than the Comparable Year due to increased sales in the 3rd and 4th quarters of
the Current year, resulting in break-even in the 3rd quarter and a profit in the
4th quarter.
The Company increased the number of outstanding shares from 2,270,000
shares in the Comparable Year to 3,788,000 shares in the Current Year. The
increased number of outstanding shares along with a decrease in net loss caused
net loss per share to decrease from $.94 per share in the Comparable Year to
$.06 per share in the Current Year.
FISCAL YEAR ENDED MARCH 31, 1999 AS COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
As presented in the above summaries, the Company lost $2,149,000 for
the year ended March 31, 1999 in comparison to a loss of $14,000 for the prior
fiscal year. The primary reasons for the increased loss were: a 6.7% decrease in
sales from $6,421,000 in 1998 to $5,987,000 in 1999 and a 15.3% increase of cost
of sales from $4,189,000 to $4,832,000 during the same period; the Company's
expenses for special projects and other costs not directly related to the
current production-sales cycle of $979,000; and an increase in selling and
administration of $556,000, which was only partially offset by other decreases
of $55,000 and an income tax recovery change of $402,000, also contributed to
the loss.
A reduction in the Company's gross margin of $1,075,000 was the result
of a decrease in sales of $432,000 and increase of cost of sales of $643,000.
The increased costs were primarily the result of the Company's expansion of its
capacity. The Company moved to larger quarters and increased its engineering,
production and support personnel. During this fiscal year, the Company's results
from operations were negatively affected by the economic downturn in Asia. At
the same time, the Company was in the beginning of a transition from a
translation service bureau utilizing tools and memory translation to a more
technologically based products enterprise developing its own computer
translation system.
Management believed that most of the causes of the significant loss
were eliminated or their effects reduced. The Company took the following steps
to mitigate further losses and to return to profitability: International
operations in Europe and Canada lost approximately $500,000 in the last fiscal
year. The Canadian entity was closed in March, 1999. Personnel costs were
reduced. Such changes will reduce costs by approximately $350,000. The general
advertising campaign has been terminated and marketing costs reduced by
approximately $200,000. The Company achieved "technological feasibility"
relative to its research and development efforts to design a computer
translation system. It has also acquired under a license, exclusive rights for
computer based translations for certain of the products (see "Business"). The
Company acquired a Web site and internet management services operation (see
"Business") which became immediately accretive to earnings.
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LIQUIDITY AND WORKING CAPITAL
As of March 31, 2000, the Company had a cash balance of $1,700,000 down
from $1,896,000 at March 31, 1999. Also, as of March 31, 2000, the Company had
working capital of $3,100,000, up from $2,141,000 at March 31, 1999.
The increase in working capital was as a result of cash raised through
several private placements of securities during the Current Year. During the
Current Year, the Company completed a common stock and warrant offering through
Pennsylvania Merchant Group, which raised $1.0 million. In addition the Company
completed a $1.0 million offering of Series A Convertible Preferred Stock.
Finally, during the Current Year the Company received $1,478,112 in proceeds
from the exercise of outstanding common stock purchase warrants. These proceeds
were used to pay the deferred purchase price associated with the acquisition of
Planet Access.
Subsequent to year-end, the Company raised additional proceeds
$2,500,000 in a private placement of common stock with a venture capital fund.
Management believes that the existing cash balance, together with cash
generated from operations, will be adequate to meet the Company's working
capital needs for the fiscal year ending March 31, 2001 at existing levels of
operations. However, the Company anticipates incurring additional expenses in
connection with its launch of products incorporating the licensed technologies
from Gedanken and ESTeam. The Company believes that it will be able to finance
its growth from the issuance of securities and has had preliminary discussions
with a number of potential financing sources. However, the Company has not
received any commitments with respect to such financing and there can be no
assurance that the Company will be able to finance its planned growth. If it is
unable to do so, the Company may be required to slow its projected launch of its
new translation products or may be required to seek joint venture partners or
license its technologies to others with better resources to commercialize the
technologies.
FOREIGN CURRENCY FLUCTUATIONS
The Company bills its customers in US Dollars and in foreign currencies
at agreed upon amounts of exchange. The Company's operations impacted by
exchange rate fluctuations have been immaterial.
THE EURO
On January 1, 1999 a new currency was launched, the Euro, which is a
significant step towards full European Monetary Union (EMU) whereby the national
currencies of certain European sovereign states will be replaced by a single,
supra-national currency in July 2002.
Currently, the Euro co-exists at fixed exchange rates with existing
national currencies of the eleven participating European countries. It is
planned that the Euro will stimulate the economies of the EMU countries by
introducing transparent pricing between countries, lower transaction costs and
greater certainty of investment and trade within Europe.
Approximately 22% of the Company's revenue for the fiscal year ended
March 31, 2000 is located within countries adopting the Euro (Ireland, Germany,
France, Spain, the Netherlands and Belgium). The impact of the Euro's
introduction and future implementation is not expected to be significant to the
revenue and net income of the Company.
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ITEM 7. FINANCIAL STATEMENTS
The information called for by Item 7 is included in the Financial
Statements contained in this Annual Report on Form 10-KSB found on pages F-1 to
F-19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
During the fiscal year ended March 31, 1999, the directors and/or
executive officers of The Translation Group were as follows:
NAME AGE POSITION
Randy G. Morris 42 President, Chief Executive Officer/Director
Charles D. Cascio 63 Director
John Toedtman 55 Director
Fred LaParo 45 Director/Chief Executive Officer of Planet
Access Network, Inc.
Gary M. Schlosser 49 Director
Theodora Landgren 55 Director
Richard J. L. Herson 81 Director
Kenneth A. Mack 56 Chief Financial Officer
RANDY G. MORRIS, President, Chief Executive Officer and a Director. Mr.
Morris joined the Company as Chief Executive officer in December 1999. Prior to
the Company, Mr. Morris served as a Senior Product Manager for Lernout &
Hauspie, S.V. from April 1998 until November 1999. From 1994 to 1998, Mr. Morris
was a Director of Engineering in the Advanced Technology Division of Novell,
Inc. during 1993 and 1994 Mr. Morris served as an Adjunct Professor of Computer
Science for Weber State University and operated as an independent consultant
where he wrote and taught courses on OOA, OOD and Software Engineering
Management. Mr. Morris was a Software Engineer from 1985 to 1993 working first
for Unisys Corporation and finishing with Libra Corporation. From 1982 to 1985
Mr. Morris served as a Programmer for two Salt Lake City based corporations. Mr.
Morris received his Bachelor of Science in Business Management from Brigham
Young University in 1982.
CHARLES D. CASCIO became a Director, of the Company in May of 1996. He
had previously been engaged by the Company, from its inception, as a financial
consultant. From late 1992 until July 1996 he was Chairman and President of
Electro-Kinetic Systems, Inc., a publicly held company. 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 New Jersey. From 1987 to 1990, he was a full
25
<PAGE>
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, NJ. Mr. Cascio holds a Bachelors Degree in Economics from
Iona College.
FRED LAPARO is a Director and Chief Executive Officer of Planet Access
Network, Inc. Mr. LaParo was one of the original founders of Planet Access
Networks, Inc. For approximately 10 years prior to founding Planet Access
Networks, Inc., Mr. LaParo was a senior officer of ATI which provided technical
training to Fortune 500 companies in data handling. Mr. LaParo received his
Bachelor of Fine Arts from New York University in 1980 with post-graduate
studies in interactive telecommunications.
JOHN TOEDTMAN has been employed by the Company since October 1998 and
was appointed as a Director in February 1999. From 1996 to 1998 Mr. Toedtman was
employed as Managing Director of Blue Stone Capital Partners, L.P., an
investment banking firm. From 1990 to 1996 Mr. Toedtman was President and
Director of Gen/Rx, Inc., a pharmaceutical firm; from 1980 to 1986 he was
President and Director of Personal Diagnostics, Inc., a medical device company;
and from 1976 to 1980 he was President and Director of Princeton Chemical
Research, Inc., a process technology company; and from 1970 to 1976 he was Group
Vice President of Englehard Industries, a large precious metals company. Mr.
Toedtman has a B.A. in economics from Georgetown University.
KENNETH A. MACK became Chief Financial Officer in December 29, 1999.
Prior to joining the Company, Mr. Mack was the managing partner in the firm of
Metsky, Mack & Associates, CPA's. Mr. Mack currently serves on the Board of
Directors of Project Acorn as well as the Special Council Commission on Revenue
and Expenditure for the township of West Orange, New Jersey. He holds a Bachelor
of Science Degree in Business Administration with an Accounting Major from
Bryant College. He has also authored numerous articles on accounting.
GARY M. SCHLOSSER was elected a Director in August 1996. From August 1,
1994 until May 2000, Mr. Schlosser was the President and a director of Jefferson
Bank of New Jersey. In May 2000 Mr. Schlosser became Senior Vice President at
Commerce Bank, N.A. 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 received a Bachelor of Arts degree in
history and business from the University of Colorado at Denver. Mr. Schlosser is
a member of the Camden County Bankers Association and the South Jersey Security
Bankers Association.
THEODORA LANDGREN currently is a Director and resides in London,
England. She was the Chairperson of the Board of Directors and Chief Operating
Officer of the Company from January 1996, to April 1998 and she was the Chairman
and President of BTS since founding the firm in 1984 until September 2, 1997.
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) and the
Society of Technical Communication (STC).
26
<PAGE>
RICHARD J. L. HERSON is a Director and former employee of The
Translation Group. Mr. Herson served as the Chief Financial Officer from July 6,
1995, until August 31, 1997. From 1945 to 1974 Mr. Herson was 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 directs
its investment portfolio. He is also secretary/treasury of Electro-Kinetic
Systems, Inc., a publicly held company. He holds a Bachelor's Degree from the
City College of New York and a M.S. in Accounting from Columbia University. He
has also authored numerous articles and a book on accounting. Mr. Herson retired
as an employee in July 1999.
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes the total compensation of the chief
executive officer and the other most highly compensated officers whose salary is
in excess of $100,000 for the fiscal year ending March 31, 2000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
==================== =========== ================= ============ ============== =====================================================
Long Term Compensation
-----------------------------------------------------
Annual Compensation Awards Payouts
-------------------- ----------- --------------------------------------------- ----------------------------- -----------------------
Other Restricted
Name and Principal Annual Stock Stock LTIP All Other
Position Salary Bonus Compen- Award(s) Options/ Payouts Compen-sation($)
Year(s) ($) ($) Sation($) ($) SARS(#) ($)
----------- ----------- ----------- ------------- ----------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Randy G. Morris - 2000(ii) $ 44,387 -0- -0- 200,000
President and CEO 1999 N/A N/A N/A
1998 N/A N/A N/A
-------------------- ------------- ------------- -------------
Charles D. Cascio 2000 $110,877 -0- $27,955(i) 100,000
President and 1999 $108,058 -0- $24,955
CEO 1998 $106,775 -0- $19,188
-------------------- ----------- ------------- ------------ ------------- -------------- -------------- -------------- -------------
John R. Toedtman
Chief Operating 2000 $103,861 -0- $13,146(iv) 100,000
Officer 1999(iii) $ 46,154 -0- $ 4,216
1998 N/A N/A N/A
-------------------- ----------- ------------- ------------ ------------- -------------- -------------- -------------- -------------
Fred LaParo 2000 $144,231 -0- 15,130(ix) 244,000
CEO of Planet
Access Networks
-------------------- ----------- ------------- ------------ ------------- -------------- -------------- -------------- -------------
Jeffrey Cartwright 2000 $144,231 -0- 17,267(x) 244,000
Vice President of
Planet Access
Networks
-------------------- ----------- ------------- ------------ ------------- -------------- -------------- -------------- -------------
Kenneth A. Mack 2000(v) $ 32,700 -0- $2,500(vi) 157,500
Chief 1999 N/A N/A N/A
Financial 1998 N/A N/A N/A
Officer
Theodora 2000 $133,843(vii) -0- $3,655(viii) 100,000
Landgren 1999 $126,748(vii) -0- $5,309
Chief 1998 $106,775 -0- $9,000
Operating Officer
==================== =========== ============= ============ ============= ============== ============== ============== =============
</TABLE>
27
<PAGE>
(i) Consists of car allowance and related expenses totaling $10,608,
medical reimbursement of $4,303, health insurance premiums of
$5,522 and life insurance premiums of $6,655.
(ii) For the period from December 20, 1999 to March 31, 2000.
(iii) For the period October 1, 1998 to March 31, 1999.
(iv) Consists of car allowance and related expenses totaling $5,824,
health Insurance premiums of $5,522 and life insurance premiums or
$1,800.
(v) For the period from August 29, 1999 to March 31, 2000.
(vi) Consists of car allowance of $2,500.
(vii) Consists of settlement agreement payments in lieu of salary.
(viii) Consists of health insurance premiums of $2,655 and life insurance
premiums of $1,000.
(ix) Consists of car allowance and related expenses of $5,326, health
insurance premiums of $6,125 and life insurance premium of $3,679.
(x) Consists of car allowance of $7,463, health insurance premiums of
$6,125 and life insurance premiums of $3,679.
EMPLOYMENT AGREEMENTS
The Company entered into one-year employment agreement as of December
20, 1999 with its President and Chief Executive Officer, Randy G. Morris.
Pursuant to the employment agreement, Mr. Morris receives a base salary of
$150,000 per year. In addition, Mr. Morris received five-year options to
purchase 200,000 shares of common stock exercisable at $2.00 per share which was
fair market value on the date of grant, and a life insurance policy in the
amount of $500,000 payable to the beneficiary of his choice. Finally, the
Company agreed to reimburse Mr. Morris for the expense of relocating and agreed
to make a $100,000 loan for a down payment on a house. The loan is due and
payable upon the sale of his New Jersey home or employment termination,
whichever occurs earlier.
In April 2000 the Company and Charles Cascio terminated his prior
employment agreement and entered into a new three-year employment agreement as a
consultant to the Company's chief executive officer. The agreement, which
provides for base compensation of $125,000 per year, will be extended upon the
Company achieving cumulative gross financing of $4,000,000. In addition, Mr.
Cascio will receive incentive compensation equal to 50% of his base compensation
upon the Company meeting its operating goals, and a five-year options and
warrants to purchase 200,000 shares, of which 100,000 will vest upon the Company
achieving cumulative gross financing of $4,000,000.
The Company has a three-year written employment contract dated as of
October 1, 1998 with John Toedtman, for an annual base salary of $100,000 during
each of the three years thereof, plus annual cost of living adjustments. Mr.
Toedtman was also granted options to purchase 100,000 shares of the Company's
common stock.
28
<PAGE>
The Company has four-year written employment contracts dated as of May
1, 1999 with Fred LaParo and Jeffrey Cartwright, the President and Vice
President of Planet Access Networks, Inc. respectively. Pursuant to the
employment agreement, Messrs. LaParo and Cratwright receive a base salary of
$150,000 plus annual cost of living adjustments.
STOCK OPTION PLAN
In October of 1996, the Board of Directors and stockholders of the
Company 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. Both incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and non-qualified options are provided for under the Plan.
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 and SARS 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 Plan is 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 designates those
persons to receive grants under the Plan and determines the number of options 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 is 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.
See Note 8-Stock Options and Warrants, Notes to Consolidated Financial
Statements, relative to the granting of options during the years ended March 31,
1999, and March 31, 1998, unexercised options held as of the end of the fiscal
year, options exercised and options forfeited during the years.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon information supplied to the Company by its directors,
officers and beneficial owners of at last 10% of the common stock, the Company
believes that during the fiscal year ended March 31, 1999, all filing
requirements under Section 16(a) applicable to its directors and executive
officers were met except provide that Mr. Herson failed to file Form 4 relative
to the disposition of certain of his shares to members of his family and to a
foundation of which he is president.
29
<PAGE>
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, 2000, by (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. The reported numbers and percentages
include stock options and warrants which are currently exercisable or
exercisable within 60 days of June 15, 2000 as required by Item 403 of
Regulation S-B under the Security Exchange Act.
COMMON STOCK PERCENTAGE
NAME AND ADDRESS OWNED BENEFICIALLY OF CLASS
---------------- ------------------ ----------
Charles D. Cascio (1) (2) 365,000 9.1%
30 Washington Avenue
Haddonfield, NJ 08033
Theodora Landgren (3) 477,000 11.9%
1901 Walnut Street, Apt. 20E
Philadelphia, PA 19103
Richard J.L. Herson (4) 133,500 3.4%
270 Rocky Run Road
Glen Gardner, NJ 08826
Gary M. Schlosser (5) 100,000 2.6%
6 Ridgeview Court
Voorhees, NJ 08043
John R. Toedtman (6) 150,00 3.9%
3 Gold Mine Road
Flanders, NJ 07836
Frederick LaParo (7) 581,666 14.2%
3 Gold Mine Road
Flanders, NJ 07836
Jeff Cartwright (7) 581,666 14.2%
3 Gold Mine Road
Flanders, NJ 07836
Randy G. Morris (8) 50,000 1.3%
3 Gold Mine Road
Flanders, NJ 07836
30
<PAGE>
Kenneth A. Mack (9) 157,500 4.0%
3 Gold Mine Road
Flanders, NJ 07836
Julius Cherny (10) 300,000 7.3%
4 Carter Lane
Monsey, NY 10952
Edouard Prisse (11) 253,000 6.6%
Rijksstraatweg 121B
1396 J J Baambruggle Netherlands
All Executive Officers and Directors
As a Group (12) 2,596,332 48.5%
(1) Includes 100,000 currently exercisable warrants and 100,000
currently vested Stock options.
(2) Does not include an aggregate of 144,000 shares owned by his adult
independent Children. Mr. Cascio disclaims beneficial ownership of
such shares.
(3) Includes 100,000 currently exercisable warrants and 100,000
currently vested Stock options.
(4) Includes 100,000 currently vested stock options.
(5) Includes 100,000 currently vested stock options.
(6) Includes 100,000 currently vested stock options.
(7) Includes 46,000 currently exercisable warrants and 244,000
currently vested Stock options.
(8) Includes 50,000 currently vested stock options.
(9) Includes 157,500 currently vested stock options.
(10) Includes 300,000 currently vested stock options.
(11) Includes 50,000 currently vested stock options.
(12)Includes 1,108,832 shares, 292,000 currently exercisable warrants,
and 1,195,500 currently vested stock options owned by all executive
officers and directors.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has an exclusive license agreement with Gedanken, a company
controlled by Dr. Julius Cherny, for the worldwide rights to an automated
machine translation system. Dr. Cherny owns a United States Patent that
describes apparatus and methods for translating languages using advanced
telecommunications and computer technologies. The Company is obligated under the
agreement to pay royalties on all revenues generated that use, in whole or in
part, the patent rights and know-how.
Michael Cascio, Esquire, the son of Charles Cascio, Director and
Consultant of The Translation Group, provided legal services to the Company for
the fiscal years ended March 31, 2000 and 1999 valued at $44,100 and 49,000,
respectively.
The Company has entered into written employment agreements with certain
of its officers. See "Executive Compensation."
31
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as a part of this Report or are
incorporated herein by recipient.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
<S> <C> <C>
2.1 Stock Purchase Agreement between the Stockholders of Planet Access (1)
Networks, Inc., Planet Access Networks, Inc. and the Company, as
amended dated April 27, 1999 (the PAN "Stock Purchase Agreement")
2.2 Amendment dated September 2, 1999 to the PAN Stock Purchase Filed herewith
Agreement
2.3 Amendment dated March 8, 2000 to the PAN Stock Purchase Agreement Filed herewith
3.1 Restated Certificate of Incorporation of the Company (2)
3.2 By-laws of the Company (2)
3.3 Certificate of Designation for Series A Preferred Stock Filed herewith
4.2 Specimen Warrant Certificate (4)
4.4 Revised Form of Warrant Agreement (5)
4.5 Form of Revised Representative's Warrant Agreement (5)
4.6 Form of Revised Representative's Warrant (5)
10.1 Lease Agreement between Bureau of Translation Services, Inc. and (2)
J.C.G. Partnership dated January 18, 1995
10.2 Employment Agreement between the Company and Charles D. Cascio Filed herewith
dated as of April 10, 2000
10.3 Employment Agreement between the Company and Randy G. Morris dated Filed herewith
as of December 20, 1999
10.4 The Translation Group, Ltd. 1995 Stock Option Plan (1)
10.9 Employment Agreement between the Company and Jeffrey Cartwright (1)
dated May 18, 1999
10.10 Employment Agreement between the Company and Frederick LaParo (1)
dated May 18, 1999
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C>
10.11 Employment Agreement between the Company and John Toedtman dated (1)
October 1, 1998
10.12 Stock Pledge Agreement between the Company and various former (1)
stockholders of Planet Access Network, Inc. dated May 18, 1999
10.13 License Agreement between the Company and ESTeam AB dated April (1)
15, 1999*
</TABLE>
-------------------------
o Subject to confidential treatment request pursuant to Rule 24b-2 of the
Exchange Act of 1934.
(1) Incorporated by reference to the Form 10-KSB for the fiscal year ended March
31, 1999.
(2) Incorporated by reference to the Company's Registration Statement on
Form SB-2 dated July 25, 1996 (Registration No. 333-8857) (the "Form SB-2").
(3) Incorporated by reference to Amendment No. 1 to the Company's Form SB-2
(4) Incorporated by reference to Amendment No. 2 to the Company's Form SB-2
(5) Incorporated by reference to Amendment No. 3 to the Company's Form SB-2
(b) REPORTS ON FORM 8-K.
During the quarter ended March 31, 2000 the Company filed the following
Reports on Form 8-K
33
<PAGE>
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/ RANDY G. MORRIS
--------------------------------
Randy G. Morris, President
Dated: July 13, 2000
By: /S/ KENNETH A. MACK
--------------------------------
Kenneth A. Mack, Chief Financial
Officer
Dated: July 13, 2000
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:
Signature Title Date
/s/ Randy G. Morris President, Chief Executive July 13, 2000
--------------------------- Officer and Director
RANDY G. MORRIS
/s/ Charles D. Cascio Director July 13, 2000
---------------------------
CHARLES D. CASCIO
/s/ Theodora Landgren Director July 13, 2000
---------------------------
THEODORA LANDGREN
/s/ Richard J.L. Herson Director July 13, 2000
---------------------------
RICHARD J.L. HERSON
/s/ Gary M. Schlosser Director July 13, 2000
---------------------------
GARY M. SCHLOSSER
/s/ Fred LaParo Director July 13, 2000
---------------------------
FRED LAPARO
/s/ John Toedtman Director July 13, 2000
---------------------------
JOHN TOEDTMAN
34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
The Translation Group, Ltd.
We have audited the accompanying consolidated balance sheet of The Translation
Group, Ltd. and subsidiaries as of March 31, 2000, and the related consolidated
statements of operations, comprehensive operations, stockholders' equity and
cash flows for each of the years in the period ended March 31, 2000. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all materials respects, the consolidated financial position of The Translation
Group, Ltd. and subsidiaries as of March 31, 2000, and the consolidated results
of their operations and their consolidated cash flows for the two years ended
March 31, 2000, in conformity with generally accepted accounting principles.
WISS & COMPANY, LLP
Livingston, New Jersey
June 26, 2000
F-1
<PAGE>
THE TRANSLATION GROUP, LTD.
and Subsidiaries
Consolidated Balance Sheet
March 31, 2000
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,700,080
Accounts receivable, net of allowance for doubtful accounts of $27,000 2,429,155
Work in process 319,823
Loans and receivables from officers 87,740
Other current assets 235,622
-------------
Total current assets 4,772,420
Property and equipment, net of accumulated depreciation and
amortization of $1,359,497 2,666,185
Excess of purchase price over fair value of net assets acquired, net of
accumulated amortization of $509,964 3,937,586
Loans and receivables from officers 414,980
Other assets 141,452
-------------
TOTAL ASSETS $ 11,932,623
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 626,750
Notes payable 4,268
Current maturities of long-term obligations 80,748
Obligations under capital leases 4,200
Accrued liabilities 274,803
Deferred income 492,196
Deferred income taxes 189,000
-------------
TOTAL LIABILITIES 1,671,965
Commitments and contingencies
Preferred stock redeemable at the option of purchasers, $.001 par value,
1,000,000 authorized, 250,000 shares issued and outstanding, less
subscriptions receivable of $500,000 493,622
Stockholders' equity:
Common stock, $.001 par value, 15,000,000 shares authorized, 3,787,902
shares outstanding, and 3,795,902 shares issued and to be issued 3,796
Additional paid-in capital 11,473,011
Retained earnings (deficit) (1,655,434)
Common stock in treasury, 8,000 shares (68,032)
Accumulated other comprehensive income 13,695
--------------
Total stockholders' equity 9,767,036
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,932,623
=============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<PAGE>
THE TRANSLATION GROUP, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
---- ----
<S> <C> <C>
Revenue $ 13,346,774 $ 5,987,002
Cost of revenue 8,714,821 4,832,359
-------------- --------------
Gross profit 4,631,953 1,154,643
Cost and expenses:
Selling, general and administration 2,724,005 1,864,721
Research and development 147,320
Special projects and other costs 979,357
Corporate administration 1,243,594 736,184
Amortization of excess of purchase price over
fair value of net assets acquired 340,417 96,884
------- ------
Total 4,308,016 3,824,466
--------- ---------
Income (loss) before other income (expense) 323,937 (2,669,823)
Other income (expense):
Interest income 47,111 185,212
Interest expense (75,907) (45,461)
Amortization of compensatory warrants and finance charges (1)(2) (315,987)
Foreign currency gains (losses) 815 (14,774)
--- --------
(343,968) 124,977
(Loss) income before provision for income taxes (20,031) (2,544,846)
Provision (benefit) for income taxes 168,378 (396,160)
------- ---------
Net (loss) income $ (188,409) $ (2,148,686)
=========== =============
Net (loss) income per common share outstanding (basic and diluted) $ (0.06) $ (0.94)
======== ========
Weighted average shares outstanding 2,965,805 2,278,340
========= =========
</TABLE>
[FN]
(1) Includes $266,136 of amortization of deferred stock based interest expense
(2) Includes $49,851 of amortization of deferred stock based public relations
expense
</FN>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
THE TRANSLATION GROUP, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
UNEARNED ACCUMILATED
ADDITIONAL PORTION OF OTHER TOTAL
COMMON COMMON PAID-IN COMPENSATORY RETAINED TREASURY COMPREHENSIVESTOCKHOLDERS'
SHARES STOCK CAPITAL WARRANTS EARNINGS STOCK INCOME EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1998 2,278,340 $2,278 $6,051,985 $(225,000) $ 681,661 $ - $ 9,769 $6,520,693
Amortization of unearned compensation 180,000 180,000
Purchase of treasury stock, 8,000 shares (68,032) (68,032)
Foreign currency translation adjustment 12,157 12,157
Net loss - - - - (2,148,686) - - (2,148,686)
-- -- -- -- ----------- -- -- -----------
BALANCE AT MARCH 31, 1999 2,278,340 2,278 6,051,985 (45,000) (1,467,025)(68,032) 21,926 4,496,132
Warrants issued in connection with financing
arrangements and consulting agreement 264,000 (264,000)
Amortization of unearned compensation 309,000 309,000
Shares issued in satisfaction of debt 25,000 25 74,975 75,000
Adjustment of shares for acquisition of
Word House (35,000) (35) (209,965) (210,000)
Shares issued in connection with private
placements 550,000 550 1,000,753 1,001,303
Shares issued and issuable and warrants
issued in connection with the acquisition
of Planet Access Networks, Inc. 634,668 635 2,813,494 2,814,129
Shares issued with the exercise of warrants 342,894 343 1,477,769 1,478,112
Foreign currency translation adjustment (8,231) (8,231)
Net loss - - - - (188,409) - - (188,409)
-- -- -- -- --------- -- -- ---------
BALANCE AT MARCH 31, 2000 3,795,902 $ 3,796 $11,473,011 $ - ($1,655,434) $(68,032) $ 13,695 $ 9,767,036
========= ======= =========== ==== ============ ========= ========= ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
THE TRANSLATION GROUP, LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
MARCH 31, MARCH 31,
2000 1999
---- ----
Net loss $ (188,409) $ (2,148,686)
Other comprehensive income (loss):
Currency translation adjustment (8,231) 12,157
----------- ------------
Comprehensive loss $ (196,640) $ (2,136,529)
=========== =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
THE TRANSLATION GROUP, LTD.
and Subsidiaries
Consolidated Statements of Cash Flow
For the years ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (188,409) $ (2,148,686)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 451,169 325,382
Amortization of excess purchase price over fair value of net assets acquired 340,417 130,882
Amortization of compensatory warrants 309,657 180,000
Foreign currency translation adjustment (8,231) 12,157
Deferred income taxes 78,700 (218,172)
Settlement agreement, net of payments 270,251
Changes in operating assets and liabilities:
Accounts receivable (824,315) 326,779
Work in process 70,957 346,917
Other current assets 116,715 (205,962)
Other assets (44,143) (22,261)
Accounts payable 72,119 108,828
Accrued liabilities and deferred income (93,365) (3,034)
Accrued income taxes - (31,954)
------------------ --------------------
Net cash provided by (used in) operating activities 281,271 (928,873)
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of subsidiary, net of cash acquired (895,567)
Purchase of property and equipment (1,725,049) (404,851)
Investment in certificate of deposit 106,540 (6,540)
Loans and advances to officers (522,148) (12,000)
Investment in US Government obligations - 2,000,000
------------------ --------------------
Net cash provided by (used for) investing activities (3,036,224) 1,576,609
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,001,303
Net proceeds from exercise of common stock warrants 1,478,112
Net proceeds from notes payable 475,000 46,672
Financing costs (6,378)
Payments on long-term obligations (388,974) (95,477)
--------- --------
Net cash provided by (used in) financing activities 2,559,063 (48,805)
Net change in cash and cash equivalents (195,890) 598,931
Cash and cash equivalents, beginning of year 1,895,970 1,297,039
------------------ --------------------
Cash and cash equivalents, end of year $ 1,700,080 $ 1,895,970
================== ====================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES: Acquisition of
subsidiary on May 1, 1999:
Fair value of assets acquired (other than cash) $ 4,469,510
Liabilities assumed 759,814
-------
3,709,696
Less: common stock issued in connection with the acquisition (2,814,129)
-----------
Net cash paid for acquisition $ 895,567
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for:
Interest $ 75,907 $ 45,461
================== ====================
Income taxes $ 500 $ 359
================== ====================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
THE TRANSLATION GROUP, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
The Translation Group, Ltd. and Subsidiaries (TTGL or the Company) translates
and localizes documents and software into various languages. Services are
provided to many industries with a concentration in information technology
companies. The Company has launched a research program directed toward the
development of computer-based translation systems. The basic business model is
to accelerate technical developments together with product marketing and sales.
TTGL was incorporated in the State of Delaware on July 6, 1995, and under the
terms of an agreement and plan of reorganization, acquired 100% of the issued
and outstanding shares of the Bureau of Translation Services, Inc. (BTS) on
January 17, 1996. BTS was incorporated in 1984 in the State of Pennsylvania. On
December 2, 1996, the Company completed its initial public offering (IPO) and
sold 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 warrant. The net proceeds amounted to
approximately $3.5 million.
In February 1997, the Company obtained an exclusive worldwide license and rights
to use and sell know-how, apparatus, and methods pertaining to tools and systems
developments based on a patent application by the Gedanken Corporation
("Gedanken"). Gedanken has been granted a United States Patent 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 original agreement has been modified as described in
Note 4.
Effective June 30, 1997, and as later amended, TTGL acquired all the issued and
outstanding common stock of the companies that comprise the Word House Group
(Word House) in exchange for 185,000 of its common shares, later adjusted to
150,000 common shares, and 200,000 additional common shares contingent on future
earnings levels, of which 100,000 shares were issuable as of March 31, 2000.
On April 15, 1999, the Company entered into a development and license agreement
with ESTEAM AB (EST), a corporation organized under the laws of Sweden. EST is a
software-development company specializing in the development of a
computer-automated language translation system, known as the "BTR System," that
tailors such system to specific applications. The BTR System, when applied to
appropriate hardware, automatically performs language translations without any
human intervention. TTGL has received an exclusive worldwide license for four
identified applications and for four additional applications for a period of
fifteen years. For royalties, development costs, and other information, see Note
11.
As of May 1, 1999, the Company acquired all the issued and outstanding shares of
Planet Access Networks, Inc. (Planet) for 416,668 shares of its common stock and
cash in the amount of $900,000. In order to complete the transaction, the
Company issued warrants to purchase 100,000 shares of its common stock on
December 15, 1999, and 218,000 shares of its common stock on March 8, 2000.
Planet is a digital communications solutions provider. Planet provides an
integrated service offering consisting of strategic consulting, design of
information architectures and user-interfaces and creation and customization of
software necessary to implement digital communications solutions. Planet
primarily uses Internet-based technologies to create digital communications
solutions for the World Wide Web.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEARS
The Company's reporting year ends March 31. For purposes of reporting, fiscal
year ended March 31, 2000 will also be referred to as the 2000 fiscal year;
fiscal year ended March 31, 1999 will also be referred to as the 1999 fiscal
year; and any reference to fiscal year ended March 31, 1998 will also be
referred to as the 1998 fiscal year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of TTGL, BTS, Word
House, and Planet. Planet's accounts are included from the date of its
acquisition on May 1, 1999. All significant inter-company accounts and
transactions have been eliminated. Accordingly, the consolidated financial
statements for the year ended March 31, 2000 and 1999 reflect the results of
activities of all of these companies.
F-7
<PAGE>
The Company has accounted for its acquisition of the Word House Companies under
the purchase method of accounting, wherein the purchase price is allocated to
the assets and liabilities as of the acquisition date based on estimated
respective fair values. The excess of purchase price over fair values of net
assets acquired is being amortized over fifteen years. Stockholders' equity as
of March 31, 2000 includes issuable shares (see Note 11).
The Company has accounted for its acquisition of Planet Access Networks under
the purchase method of accounting, where in the purchase price is allocated to
the assets and liabilities as of the acquisition date based on estimated
respective fair values. The excess of purchase price over fair value of net
assets acquire is being amortized over ten years.
REVENUE RECOGNITION
Revenue is accounted for under the percentage of completion method of
accounting, whereby sales and costs are recognized as work on contracts
progresses. Changes in estimates for revenue, costs and profits are recognized
in the period in which they are determinable. Work in progress represents the
excess of revenue recognized for financial reporting purposes over amounts
contractually permitted to be billed to customers. Deferred revenue represents
excess of amounts billed over revenue recognized for financial reporting
purposes. Invoices are rendered based upon terms of the contract.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Systems acquisitions
and specialized tools, together with related software, are expensed while in
development until technological feasibility has been established.
CAPITALIZED COMPUTER SOFTWARE COSTS
AcSEC SOP98-1 requires companies to capitalize and amortize certain costs
associated with developing software for internal use. There are three stages:
the preliminary project stage; the application development stage; and the
post-implementation/operation stage. After the preliminary project stage is
completed and management has committed to funding a probable successful software
project, such costs should be capitalized. Once the software is placed into
service, the capitalized cost should be amortized over the period of expected
benefit in a systematic and rational manner.
SFAS No. 2, together with FASB No. 86, accounting for research and development
(R&D) costs, require that companies expense R & D until the research and
development project has reached technological feasibility. The Company believes
that these releases apply to its development of machine-translation computer
systems and that such technological feasibility was achieved as at August 1,
1998. Accordingly, all expenditures to that point have been expensed as research
and development and capitalized after that date (see Note 4). In this regard,
the Company expensed $149,000 in fiscal 1999 and capitalized $1,199,027 and
$180,000 for the years ended March 31, 2000 and 1999, respectively.
FOREIGN CURRENCY TRANSLATION
Statement of operations amounts have been translated using the average exchange
rates in effect for each period. Gains and losses from foreign exchange
transactions have been included in the Statements of Operations. Balance sheet
amounts have been translated using exchange rates in effect at the balance sheet
dates and the translation adjustment has been included in the foreign currency
translation adjustment, as accumulated other comprehensive income.
EARNINGS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share" (EPS) which requires dual presentation of basic and
diluted EPS for all entities with complex capital structures on a retroactive
basis. Basic (loss) per share is computed based upon the weighted average number
of common shares outstanding during each year, shares contingently issuable
under the Word House acquisition as described in Note 1, have been included.
Diluted EPS gives effect to outstanding warrants and options using the treasury
stock method. For fiscal 2000 and fiscal 1999, options and warrants were
considered anti-dilutive and were excluded from the calculation of diluted EPS.
F-8
<PAGE>
CASH AND CASH EQUIVALENTS
The Company considers highly liquid debt instruments when purchased with a
maturity of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS
Financial instruments include cash and equivalents, accounts receivable, other
assets, loan receivable, notes and accounts payable, accrued expenses, deferred
income, and long-term debt. The amounts reported for financial instruments are
considered to be reasonable approximations of their fair values, based on market
information available to management. The use of different market assumptions
and/or estimation methodologies could have a material effect on the estimated
fair value amounts.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of cash and unsecured trade receivables. The
Company maintains its cash balances in financial institutions some of which are
insured by the Federal Deposit Insurance Corporation up to $100,000. Uninsured
balances at March 31, 2000 totaled approximately $1,396,000.
The Company grants unsecured credit to virtually all of its customers, with one
individual customer comprising a concentrated risk (see Note 3 and 12).
Management believes that credit risk associated with accounts receivable is
limited due to the Company's long standing relationships with the majority of
its customers.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost net of depreciation and amortization.
Depreciation and amortization are computed using straight-line and accelerated
methods over the estimated useful lives of the assets in place. Amortization of
leasehold improvements is provided over the shorter of the lease term or the
estimated useful life of the asset. Capitalized software included in property
and equipment will be amortized when placed in service.
STOCK OPTIONS
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," which requires pro-forma disclosure of net income
as if the SFAS No. 123 fair-value method had been applied. The Company measures
and recognizes compensation costs under the provisions of Accounting Princples
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (by SFAS No.
123) which permits that when the exercised price of the Company's employee stock
option equals or is more than the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
MARKETING AND ADVERTISING
Marketing and advertising costs are expensed as incurred. Such expenses
approximated $54,600 and $223,000 for the years ended March 31, 2000 and 1999,
respectively.
INCOME TAXES
The Company accounts for its income taxes using the liability method which
measures deferred income taxes by applying enacted statutory rates in effect at
the balance sheet date to differences between the tax bases of assets and
liabilities and their reported amounts in the financial statements. The asset
arising from the net operating loss carry forwards was fully reserved since the
realization of the benefits is uncertain.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities 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. Certain of the Company's subsidiaries were previously a part
of a consolidated group in the Netherlands. Such subsidiaries may be jointly and
severally liable for any tax assessments resulting from the group. Management
estimates that no provision for such contingency is necessary. Actual results
could differ from these estimates.
F-9
<PAGE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has implemented: SFAS No. 130 "Reporting Comprehensive Income" which
establishes standards for reporting and displaying comprehensive income and its
components in financial statements; and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" which establishes standards
for the way public business enterprises report information about operating
segments in annual and interim financial statements. The Company considers that
it operates in two industry segments and is reporting segment data in accordance
with markets.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Annual Report to Stockholders contains forward-looking statements. To date,
the Company has not completed the commercialization of products or services
based on its technological approaches, and there can be no assurance that the
approaches will enable the Company to commercially exploit such technology. In
addition, the Company faces competition from other companies, many of which are
larger and better financed.
Other factors may affect the Company's future operations, including the ability
to attract and retain qualified management, to exploit current marketing
efforts, and to compete successfully in the market.
NOTE 3-SIGNIFICANT CUSTOMERS
For the year ended March 31, 2000, one customer accounted for 50% of revenues,
in comparison to two customers that represented 20% and 11% of revenues for the
year ended March 31, 1999.
The Company has experienced concentration of credit risk with regard to its
accounts receivable as of March 31, 2000. One customer represented approximately
69% of the total accounts receivable (see Note 12).
NOTE 4-RESEARCH AND DEVELOPMENT
The Company expensed approximately $147,000 for the development of a
machine-translation system during the year ended March 31, 1999. The goal for
the design of machine tools, or systems, is to enhance the
translation/localization (production) process. The Company considers that
technological feasibility was achieved as at August 1, 1998, and subsequent
payments to the Gedanken Corporation, in the amount of $324,591 and $180,000
were capitalized for the years ended March 31, 2000 and 1999, respectively.
In February 1997, the Company obtained an exclusive worldwide license and rights
to use and sell know-how, apparatus, and methods pertaining to tools and systems
developments based on a patent application by Gedanken. By assignment from Dr.
Julius Cherny, Gedanken applied for a United States Patent 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 is obligated to pay royalties on all revenues
generated that use in whole or part the patent rights and know-how. The Company
has the right to stop funding at specified times or accomplishment periods. The
Company has agreed to pay Gedanken $750,000 for a translation/ localization
system (that includes a specific topic builder, general topic dictionary,
quality control, and alignment tools) at the rate of $20,000 a month through
December 15, 1998, and at the rate of $40,000 a month thereafter; the original
arrangement of $20,000 per month has been verbally extended through September
30, 2000.
Under the 1997 license agreement, the Company also has the option from Gedanken
for the rights to the development of a Real Time Voice Translation System based
on providing the necessary funding estimated at $4,000,000.
Dr. Cherny resigned his positions as the president of BTS and a director of the
Company in November, 1998. Since that time, he has devoted full time to research
and development on behalf of the Company. Dr. Cherny remains president and
principal shareholder of Gedanken.
F-10
<PAGE>
On April 15, 1999, the Company entered into a development and license agreement
with ESTEAM AB (EST), a corporation organized under the laws of Sweden. EST is a
software-development company specializing in the development of a
computer-automated language translation system, known as the "BTR System," that
tailors such system to specific applications. The BTR System, its modifications,
improvements, and adaptations, are used to perform translations of specific text
documents in a particular domain. The BTR System, when applied to appropriate
hardware, automatically performs language translations without any human
intervention. The computer software utilized in the BTR System may be
"off-the-shelf" or proprietary, that is, created for a specific purpose and not
commercially available. TTGL has received an exclusive worldwide license for
four identified applications and for four additional applications for a period
of fifteen years, with an option, under certain conditions and considerations,
to extend the agreement for an additional three years.
In consideration of the worldwide license, TTGL has agreed: to pay royalties on
sales of any application; to pay EST a minimum of $50,000 per month towards
EST's operating expenses for two years; and will provide certain development
funding in addition to the $50,000 minimum. During the year ended March 31,
2000, payments in the amount of $874,436 were capitalized by the Company.
In addition, TTGL will grant stock options to four employees of EST, aggregating
102,000 shares of its common stock at a price of $3.50 per share, when certain
levels of sales are reached. Such options are subject to the provisions of
TTGL's 1995 Stock Option Plan and will vest with the grantees based upon the
achievement of revenues by TTGL from the development work of EST.
NOTE 5-PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
MARCH 31, 2000 AVERAGE USEFUL
LIFE(Years)
Equipment (includes $520,000 pledged as
collateral for bank notes payable) $1,582,306 5
Software 481,130 5
Equipment and software under license 1,540,701 5
Office condominium 245,182 20
Furniture & fixtures 111,986 5
Vehicles 23,269 3
Leasehold improvements 41,108 5
----------
Total 4,025,682
Less: accumulated depreciation and amortization 1,359,497
---------
Net property and equipment $2,666,185
==========
For the years ended March 31, 2000 and 1999, depreciation and amortization
expenses were $420,461 and $258,880, respectively.
NOTE 6-RELATED PARTY TRANSACTIONS
Due from the Company's chief executive officer (CEO) is a loan of $31,000. This
represents the first installment of a $100,000 interest free loan in connection
with his relocation. The loan is due and payable upon the sale of his New Jersey
home or employment termination, whichever occurs earlier.
Due from the Company's former chief executive officer (CEO) is a loan of
$170,220 (which includes accrued interest at the rate of 6% per annum) that is
collateralized by 20,000 of such individual's shares of the Company's common
stock.
Due from the chief executive officer (CEO) of Planet is a loan of $150,000 dated
March 31, 2000 at an interest rate of 6% per annum.
Due from a vice president of Planet is a loan of $150,000 dated March 31, 2000
at an interest rate of 6% per annum.
F-11
<PAGE>
In April, 1998, the Company settled the outstanding employment contract and loan
account with its former chairperson and chief operating officer for
approximately $360,000 (which includes legal fees) and the return of 8,000
shares of its common stock. It was deemed that $275,000 of the settlement was a
period expense and the balance a deferred consulting fee.
The Company has retained a former officer and son of the Company's CEO as
outside legal counsel; fees were $44,100 in fiscal 2000 and $49,000 in fiscal
1999. A former officer and a current director received $26,851 in fiscal 1999.
Gedanken, a company controlled by Dr. Julius Cherny, was paid $240,000 by the
Company during both fiscal 2000 and fiscal 1999 for the computer translation
system that Gedanken is developing (see Note 4 relative to the accounting for
such payments).
NOTE 7-DEBT
Word House has a bank net overdraft facility of up to $150,000, which is
collateralized by cash, accounts receivable, and equipment. The bank has also
issued a letter of credit for the account of Word House in the amount of $50,000
as a security deposit.
NOTE 8-INCOME TAXES
As of March 31, 2000 and 1999 other current assets include approximately $22,000
and $112,000 respectively of claims for income taxes paid in prior periods as a
result of carry back of operating losses.
The provision (benefits) for taxes on earnings for the years ended March 31,
consist of:
2000 1999
---- ----
Current
Federal $ - $(112,000)
State - -
Foreign - -
------- --------
- (112,000)
======= =========
Deferred
Federal 36,000 (224,000)
State 133,000 -
Foreign - (60,000)
-------- --------
$169,000 $(396,000)
The provision for income taxes is different from that which would be obtained by
applying the statutory Federal income tax rate to income (loss) before income
taxes. The items causing this difference are as follows:
2000 1999
---- ----
Tax expense (benefit) at U.S. statutory rate $(100,000) $(865,000)
Non-deductible expenses:
Amortization of goodwill 116,000 33,000
Amortization of stock based expenses 107,000
Other 10,000 29,000
State income taxes net of federal benefit 88,000
Change in valuation allowance for:
Use of prior year net operating loss (233,000)
Unavailibility of foreign loss for carryback 181,000 75,000
Unavailibility of U.S. net operating loss
for carryback - 332,000
--------- ---------
$ 169,000 $(396,000)
F-12
<PAGE>
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at March 31, are as
follows:
2000 1999
---- ----
Deferred tax assets:
Net operating tax loss carry forward $(388,000) $(366,000)
Less: valuation allowance - 100,000
Deferred tax liability:
Difference in basis of assets due to use of the
cash method for income tax purposes 463,000 266,000
State deferred tax net of federal benefit 114,000 -
--------- --------
$ 189,000 $ -
========== ========
Net operating loss carry-forwards:
The Company has US Federal and State operating loss carry forwards and deferred
tax assets of approximately $900,000 that expire over the ensuing period of
twenty years.
The Company has foreign net operating loss carry-forwards of approximately
$473,000 that expire as follows:
Year Ending
MARCH 31, AMOUNT
--------- ------
2001 $ 10,000
2003 67,000
2004 226,000
-------
303,000
Net operating losses that do not expire 170,000
-------
Total $473,000
========
The deferred tax asset of approximately $600,000 has been offset by a 100%
valuation allowance because of the uncertainty of its realization.
NOTE 9-PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock and has
issued 250,000 shares of convertible preferred stock at March 31, 2000. Holders
of the preferred shares are entitled to receive cumulative cash dividends at the
annual rate of 8% payable quarterly. The shares are convertible at any time
during the five year period ending March 31, 2005, in whole or in part at a
price of $4.00 per share. The preferred stock can be redeemed by the holder at
face value, at the end of five years.
NOTE 10-STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
In October 1996, the Company adopted a Stock Option Plan (the "Plan") that
provides for a maximum of 2,500,000 shares of common stock to be issued in
connection with such plan. The Plan was amended at the annual meeting of
stockholders on September 28, 1999. The price payable for the shares of common
stock under incentive stock options must be not less that 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). SARs 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. No SARs have
been granted. Options granted under this Plan expire ten years from date of
grant, for non-affiliated persons and five years for a 10% owner.
F-13
<PAGE>
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations in accounting
for its employee stock options. Under APB 25, when the exercise price of the
Company's employee stock options equals or is more than the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The alternative fair value accounting is disclosed only for pro forma purposes
as provided for under SFAS No. 123, "Accounting for Stock-Based Compensation",
which requires the use of option valuation models. Options granted to
non-employees are valued at their fair value at the date of grant.
The following is a schedule of the status of options granted under the Company's
stock option plan:
Weighted Average
Exercise Price
OPTIONS PER SHARE
Outstanding at March 31,1996 -0-
Granted 700,000 $6.17
--------- -----
Outstanding at March 31, 1997 700,000 6.17
Granted 599,000 4.75
Exercised (2,000) 6.00
Cancelled (100,000) 6.00
---------- ----
Outstanding at March 31, 1998 1,197,000 $5.47
---------- -----
Granted 495,000 4.99
Cancelled (263,000) 5.75
--------- ----
Outstanding at March 31, 1999 1,429,000 $5.25
--------- -----
Granted 1,627,500 3.15
Cancelled (599,500) 4.69
-------- ----
Outstanding at March 31, 2000 2,457,000 $4.00
========= =====
Exercisable at March 31, 2000 403,750 $5.41
======= =====
Exercisable at March 31, 1999 852,300 $5.37
======= =====
Exercisable at March 31, 1998 409,200 $5.12
======= =====
As of March 31, 2000, the Company has 41,000 options available to grant under
the Plan.
As of March 31, 2000 for each of the following classes of options as determined
by the range of exercise price, the following information regarding
weighted-average exercise prices and weighted-average remaining contractual
lives of each class is as follows:
<TABLE>
<CAPTION>
Weighted Average Number of Weighted Average
Number Weighted Average Remaining Contract Life Options Exercise Price of
Of Exercise Price Of of Outstanding Options Currently Options Currently
OPTIONS Options (YEARS) Exercisable Exercisable
-------- ----------------- ----------------------- ------------ -----------------
<S> <C> <C> <C> <C>
125,000 $2.22 9.67
15,000 2.25 9.44
397,500 2.31 8.45
5,000 2.54 9.71
10,000 2.75 9.53
607,500 3.00 9.52
10,000 4.00 8.75 2,500 $4.00
100,000 4.06 4.25
420,000 4.50 7.95 155,000 4.50
335,000 5.00 9.32 62,500 5.00
222,000 6.00 3.21 81,250 6.00
210,000 6.60 6.78 102,500 6.60
------- ------ ---- ------- ----
2,457,000 $4.00 8.03 403,750 $5.41
========= ===== ==== ======= =====
</TABLE>
F-14
<PAGE>
The pro forma information regarding net (loss) and (loss) per share as required
by SFAS No. 123, has been determined as if the Company had been accounting for
its employee stock options under the fair value method of that statement. The
fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
MARCH 31,
1999 --------- 2000
---- ----
Range of risk free interest rates 6.10% - 6.30% 6.10% - 6.30%
Dividend yield 0% 0%
Volatility factor 158% 64%
Expected life of options (in years) 8 8
The weighted average fair value of options granted was $2.57 for the year ended
March 31, 2000 and $4.91 for the year ended March 31, 1999. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In
addition, for traded shares, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. For
purposes of pro forma disclosures, the estimated fair value of the options
granted in fiscals 2000 and 1999 is amortized to expense over the options'
average vesting period. The Company's pro forma information follows:
YEAR ENDED MARCH 31
2000 1999
---- ----
Pro forma loss $(2,649,411) $(3,063,591)
============ ============
Pro forma loss per share $ (.89) $ (1.35)
======== =========
The pro forma disclosures presented above for fiscals 2000 and 1999,
respectively, reflect compensation expense only for options granted in fiscals
2000 and 1999. These amounts may not necessarily be indicative of the pro forma
effect of SFAS No. 123 for future periods in which options may be granted.
WARRANTS
Pursuant to its Initial Public Offering ("IPO") in December 1996, the Company
sold 1,840,000 warrants. There were also 300,000 warrants outstanding to
shareholders given in consideration of their give-back of common shares to the
Company in connection with the IPO. Each warrant entitled the registered
shareholder to purchase one share of common stock at an exercise price of $6.20
per share for a period of three years beginning December 1996. There is a
current registration statement in effect covering the exercise of these
warrants.
The Company also granted the underwriters, of its IPO, rights to purchase 60,000
shares of the Company's common stock at an exercise price of $7.80 per share and
160,000 warrants at an exercise price of $.26 per warrant and in turn, an
exercise price for the stock of $7.80 per share, the former of which expires on
December 2, 2001, and the later of which expired on December 2, 1999. In
connection with the Company's earlier 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 that expires on January 17, 2001.
During the year ended March 31, 2000, the Company issued 598,250 warrants, with
exercise prices ranging from $2.00 to $6.00 that expire over the next 5 years
valued at $315,987 for financing arrangements and a consulting agreement. The
Company also issued 100,000 warrants at an exercise price of $2.39 on December
15, 1999 in connection with the purchase of Planet Access Networks, Inc.
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<PAGE>
During the year ended March 31,1998, the Company issued 20,000 warrants valued
at $40,000 for consulting fees and also gave an option to a consultant for three
years and an additional three years by mutual consent for 100,000 warrants at
the then market price of $.80 per warrant and a price of $4.50 per common share.
The term of the warrant overlays the option period. The Company valued the
warrants at $225,000 and services are to be provided from April 1, 1998 to June
30, 1999; the costs are being amortized over the period of fifteen months during
which the services were to be performed.
Effective December 2, 1999, the Company extended the warrants until July 2,
2000, with a concomitant reduction in the exercise price to $5.12 and again
extended the warrants, effective July 2, 2000 to December 31, 2000. The current
exercise price is $4.35 per warrant.
Outstanding warrants consist of the following:
Issued in connection with the Initial
Public Offering 2,140,000
---------
Balance at March 31, 1997 2,140,000
Granted 20,000
Exercised (13,340)
---------
Balance at March 31, 1998 2,146,660
---------
Balance at March 31, 1999 2,146,660
---------
Granted
Exercised (292,600)
----------
Balance at March 31, 2000 1,854,060
=========
The above outstanding warrants do not include the warrants described above
relating to the Company's underwriters' options to acquire 260,000 warrants and
for the option to acquire 100,000 warrants issued to the consultant.
NOTE 11-COMMITMENTS AND CONTINGENCIES
(A) Employment Contracts
The Company has employment contracts with its chief executive officer, former
chief executive officer, its chief operating officer, and the president and vice
president of one of its subsidiaries that expire December 2000, April 2003,
September 2001and April 2003. Aggregate remaining compensation and benefits
under such contracts approximate $1,508,000.
(B) Rent
The Company has operating leases for its production facilities and office space.
Aggregate minimum future annual rental payments are as follows:
Year Ending
MARCH 31, TOTAL
-------- -----
2001 $ 452,000
2002 388,674
2003 291,915
2004 195,564
2005 65,188
----------
Total $1,393,341
==========
Rent expenses from fiscal years 2000 and 1999 were $324,908 and $196,707
respectively.
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<PAGE>
(C) Other matters and Litigation
The Company has been 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 there is a substantial likeliness that
the defendants will prevail in this matter.
NOTE 12-ACQUISITIONS AND RECENT AGREEMENTS
ACQUISITION OF PLANET ACCESS NETWORKS, INC.
As of May 1, 1999, the Company acquired all the issued and outstanding shares of
Planet for 634,668 shares of its common stock and cash in the amount of
$900,000. The transaction has been accounted for as a purchase. The excess of
the estimated fair value of common shares, over the underlying fair values of
the net assets acquired, together with the costs of the transaction have been
recorded as excess of purchase price over fair value of net assets acquired
(Excess), and is being amortized over a 10 year period.
The purchase price was recorded as follows:
Current assets $ 817,501
Property and equipment (net) 353,878
Excess of cost over fair value of assets acquired 3,366,053
---------
Total assets 4,537,432
Liabilities (759,814)
-----------
Total cost of acquisition $3,777,618
==========
Stock issued - 634,668 shares $3,689,829
Acquisition costs 89,789
-------
Purchase price $3,777,618
==========
The condensed unaudited pro forma information of the Company for the years ended
March 31, 2000 and 1999 are presented as if the acquisition had occurred on
April 1, 1998 and 1999. The pro forma information is not necessarily indicative
of the results that would be recorded had the acquisition occurred on these
dates, nor is it indicative of the Company's future results:
PRO FORMA
YEAR ENDED MARCH 31,
1999 2000
Revenue $13,874,289 $8,986,203
Net loss (190,363) (1,903,957)
Loss per share (.06) (.65)
Weighted average shares 2,965,805 2,913,008
BRANDWISE, LLC AGREEMENT
On June 29, 2000, Planet Access Networks, Inc. and Brandwise, LLC (Brandwise)
executed an agreement to satisfy the outstanding accounts receivable balance due
Planet from Brandwise in the amount of $1,042,349 as of March 31, 2000. The
agreement called for a cash payment of $32,000 which was received on June 29,
2000. Additionally, the agreement called for the title transfer of equipment and
software from Brandwise to Planet. The equipment and software was valued in
excess of the receivable and was owned by Brandwise, but was already in the
possession of Planet.
SEASIDE PARTNERS, L.P. AGREEMENT
On May 29, 2000, the Company sold 909,091 shares of its common stock for $2.75
per share for a total of $2,500,000 through a private placement with Seaside
Partners, L.P. The $2,500,000 consideration given to the Company by Seaside
Partners, L.P was $300,000 in cash, a $500,000 promissory note due in 90 days
with interest at the rate of 8% per annum and 433,783 shares of common stock of
Sedona Corp. with a fair market value of at least $1,700,000 on the date
thereof. The agreement provides for an adjustment to the fair market value of
F-17
<PAGE>
the Sedona Corp. common stock should it not equal the $1,700,000. The Company
would liquidate the said shares in open market transactions in a commercially
reasonable fashion. To the extent that the proceeds from the sale exceed
$1,700,000, the Company will promptly remit the excess proceeds to Seaside
Partners, L.P. To the extent that the proceeds are less than $1,700,000, the
investor will promptly remit the difference to the Company.
NOTE 13-SEGMENT OPERATIONS
The following summarizes information about the Company's business segments.
Translation/localization is in Japanese, Chinese, and other languages of the
Asian rim, as well as European languages and Canadian French. The sales of BTS
originate in the United States to domestic and foreign customers. The sales of
Word House originate in Europe and are almost entirely in Dutch, French and
other European languages.
Financial information that can be classified by the segments of the Company is
as follows (stated in thousands):
2000 1999
---- ----
Translation/localization (United States):
Revenue $1,348 $3,115
Intercompany revenue - -
Interest income 1 6
Interest expense (3) (11)
Intercompany interest
Depreciation and amortization 144 132
Provision for income taxes 1 (339)
Total assets 589 1,195
Translation/localization (Europe):
Revenue $3,096 $3,029
Intercompany revenue (92) (158)
Interest income 20
Interest expense (51) (52)
Intercompany interest (31) (18)
Depreciation and amortization 93 117
Provision for income taxes (57)
Total assets 1,051 1,234
Internet and web-site development:
Revenue $9,006
Intercompany revenue (11)
Interest income 1
Interest expense (1)
Depreciation and amortization 193
Provision for income taxes 168
Total assets 3,440
Parent:
Revenue $1,283 $ 540
Intercompany revenue (1,283) (540)
Interest income 76 177
Intercompany interest 31 18
Interest expense (53)
Depreciation and amortization 316 93
Provision for income taxes
Total assets 6,853 3,707
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NOTE 13- NEW PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 133 "Accounting for Derivative
Instruments and hedging activities" (FAS 133). FAS 133 is effective for fiscal
quarters of fiscal years begining after June 15, 2000. FAS 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires, among other things, that all derivatives be recognized
as either assets or liabilities in the statement of financial position and that
those instruments be measured at fair value. The Company does not expect the
implementation of this pronouncement to have a material effect on its
consolidated financial statements.
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