SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
X Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
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1934 For the fiscal year ended: December 31, 1997
------------------
______ Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _________ to _________
Commission file number 33-60296
Globalink, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 54-1473222
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9302 Lee Highway, 12th Floor, Fairfax, VA 22031
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703) 273-5600
Securities registered pursuant to Section 12(b) of the Exchange Act:Common Stock
Securities registered pursuant to Section 12(g) of the Exchange Act:none
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirementsfor the past 90 days.
Yes X No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is contained in this form, and 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. [ ]
State the issuer's revenues for the most recent fiscal year: $14,729,000
State the aggregate market value of the voting stock held by non-affiliates of
the registrant: $15,973,701 based on the closing price on February 27, 1998.
Indicate the number of shares outstanding of each of the issuer's classes of
common equity: Common Stock, par value $.01 per share --
9,160,236 as of February 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the close of the fiscal year ended December 31, 1997, are
incorporated by reference into Part III hereof.
Portions of the Registrant's Registration Statement number 33-60296 filed with
the Securities and Exchange Commission on Form SB-2 are incorporated by
reference into Part IV hereof.
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GLOBALINK, INC.
TABLE OF CONTENTS
Annual Report on Form 10-KSB
For the Fiscal Year ended December 31, 1997
Part I Page No.
Item 1. Business................................................. 3
Item 2 Properties............................................... 11
Item 3 Legal Proceedings........................................ 11
Item 4 Submission of Matters to a Vote of Security Holders...... 11
Item 4(a) Directors and Executive Officers of the Registrant....... 11
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder's Matters.................................... 14
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 15
Item 7 Financial Statements and Supplementary Data.............. 21
Item 8 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 21
Part III
Item 9 Directors, Executive Officers of the Registrant.......... 22
Item 10 Executive Compensation................................... 22
Item 11 Security Ownership of Certain Beneficial Owners and
Management............................................... 22
Item 12 Certain Relationships and Related Transactions........... 22
Part IV
Item 13 Exhibits and Reports on Form 8-K ........................ 23
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PART I
ITEM 1 BUSINESS
The Company
Globalink, Inc. ("Globalink" or "the Company") is a leading provider of products
and services that help businesses and individuals overcome language barriers.
The Company designs, develops, publishes, markets and supports translation and
language learning software; provides real-time translations to Internet users
through its Comprende service; and provides professional translation services
through the Globalink Translation Services Division and the Globalink
Translation Alliance. With an extensive range of software and service offerings,
Globalink helps corporations, government agencies, large organizations,
students, educators and small businesses solve language problems. The Company
currently markets bi-directional software for creating draft translations
between English and French, German, Italian, Portuguese and Spanish, as well as
language learning software for English, French, German and Spanish. The Company
continues to develop new generations of its core translation technology while
also bringing new applications of that technology and related technologies to
market, providing advanced and affordable translation software and language
learning software for its customers.
The Company also offers professional translation services through its worldwide
network of preferred translators. Some of the materials routinely translated
include: Web Sites, software user guides, technical manuals, proposals, legal
contracts, business correspondence, advertising and marketing materials,
newsletters, employee handbooks, and more. These services focus on translating
documents in a time sensitive production environment designed to meet the needs
of the Company's domestic and international client base.
Background
As the global economy has continued to expand, so too has the need to share
information. As post- industrial economies are transforming into information
economies, data is increasingly a vital asset. Timely access to pertinent
information is essential for the "knowledge workers" of these new economies. The
growth of the Internet has played a significant role in this new wave of
information processing. E- mail messages, Web sites, and HTML and word
processing documents are rapidly becoming international in the audience they
address, as they are disseminated over the Internet. While the Internet enables
the flow of information across national and cultural boundaries, communication
still requires overcoming the language barrier. As a leading provider of machine
translation technology, the Company sees growth opportunities in providing tools
to enable communication. Machine translation, also known as "MT," is the process
of converting text from one language to another with a computer. Today, humans
still perform most translations. However, demand for translations is already
beginning to outpace supply, and as more information is digitally created and
transmitted, alternative translation methods will play a larger role. In the
case of the Internet and e-business, the need for high-volume, real-time
translations makes machine translation solutions particularly important.
The introduction of powerful new personal computers and workstations has helped
this trend, by allowing the development of PC-based MT functions that had
previously been mainframe dependent. The widespread acceptance of these powerful
new personal computers, and their increasing use as communication devices, has
rapidly increased demand for low-cost, PC-based MT software.
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Machine Translation (MT) Technology
Machine Translation (MT), the automated process of translating from one natural
language to another, is the earliest type of natural language processing. Unlike
software that merely looks up words in a dictionary, MT grammatically analyzes
the original language text (source language) and automatically generates
corresponding text in the target language desired. This output may then be
displayed on- screen, printed (with or without the corresponding source
language), e-mailed or posted on a Web site, among other options. Globalink's
translation applications use three sets of data: the input text, the translation
program and permanent knowledge sources (containing a dictionary of words and
phrases of the source language), and information about the concepts evoked by
the dictionary and rules for sentence development. These rules are 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
reordering. Once the user has selected the source text and initiated the machine
translation process the program begins to match words of 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.
Globalink's Products -- Core Technology
Globalink translation software products and services (Comprende(TM), Globalink
Language Assistant(TM), Globalink Power Translator(R), Globalink Power
Translator(R) Pro and Globalink Web Translator(TM)) provide high-speed,
computer-assisted draft translations for a wide range of applications. When used
with customized Subject Dictionaries, Globalink translation software will create
acceptable draft translations of scientific, technical, or commercial texts. The
texts should use clearly written, grammatically correct, declarative sentences.
The Company's software is not intended for use in translating literary works or
poetry.
The most recent versions of these products are based on Globalink's proprietary
Barcelona technology. The innovation of Globalink's Barcelona technology, with
its modular architecture of linguistics and programming components, allows for
unprecedented growth in the development of both the core translation technology
and new language pairs. In addition, Globalink's research efforts currently
underway in the areas of context-free parsing, transformational morphology,
statistical analysis, and large-corpus lexicography promise to set a new
standard for future machine translation systems and the MT industry.
Globalink translation programs convert the original text into the selected
target language, utilizing the machine translation dictionaries as lexical
databases. Users can translate entire documents with a single command, or
translate selections or single sentences from the document. Documents can be
created using the built-in editor of the program, or can be imported from most
popular word processors, using import filters that retain formatting. In
addition, some of the Company's programs allow users to operate the program from
within a word processor (e.g. Microsoft Word for Windows). Similarly, Web
Translator and Comprende let users translate Web pages as they surf the
Internet. Other features allow for translation of e-mail messages and chat
rooms.
All of Globalink's translation programs seek to be user-friendly and to generate
quality draft translations. Users can add new terms to the dictionaries or
modify existing terms. They can also create special Subject Dictionaries or
purchase them from Globalink. In programs such as Power Translator, the texts
are displayed in a split screen, facilitating review of the source text and the
target text. Similarly, the built in editor, with special features for entering
accented and foreign character entry, make it easy to edit
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translations on-screen. During the editing process, users can access alternative
translations or synonyms for terms in the source language that would result in
translations that are more accurate.
Special translation algorithms will perform multiple translations of a word in a
sentence based on parts of speech. Other translation features include: component
analysis of German compound nouns, the disambiguation of terms with multiple
parts of speech, automatic inflection of semantic units, and other automatic
grammatical functions.
The software products also contain a special reference component that will
display parts of speech, translations and other grammatical information for any
term in the dictionary.
Market Strategy
Globalink's objective is to become the world's leading provider of translation
and language solutions. The Company's target market areas are professional,
governmental, educational, industry, and consumer mass markets. Globalink
translation software products are designed to emphasize quality translation,
adaptability to the end user, integration with market-leading applications (such
as Web browsers, e-mail packages, word processors and online offerings) and
affordability, thus creating high utility and value for users.
Current Globalink products and others under development are available on a wide
variety of computer platforms including IBM PCs and compatibles under Windows
and Internet-based offerings that are functional across platforms. These
products and services deliver high productivity through rapid draft
translations. The Company's products and services cover a range in price for
large organizations as well as for general consumers. The Company plans to
continue to broaden its product offerings with more language pairs, enhancements
to its existing products, and new products and services for areas such as e-
business.
The Company sells its products and services primarily through worldwide
non-exclusive distributor/dealer channels and original equipment manufacturer
(OEM) agreements. All distributors have agreed to purchase inventory of products
upon execution of their respective distributor agreements. The Company is
broadening its distribution through expansion of its distribution/dealer
channels, direct sales efforts nationally, OEM agreements, on-line
(Internet-based) sales channels and extensive promotional programs.
Products
Globalink Comprende is a real-time translation service that uses the
global medium of the Internet to bring down the last barrier separating
people: language. This real-time translation service gives account
holders the capability to translate documents, web pages, electronic
mail, newsgroups, and even chat. Comprende account holders can surf the
Internet in any of the offered languages, turning the service on and
off as needed. The process of translation through the Internet is
simple for account holders. Once logged on, the Globalink server
systems will remotely retrieve web pages, e-mail, documents, newsgroup
content, or chat dialogue on demand, run it through the Comprende
translation engine, and return the page contents to the user for
viewing. Currently, the service offers translation for the following
language pairs: French{}English, German{}English, Italian{}English,
Portuguese{}English and Spanish{}English.
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Globalink Intranet Translator(TM) is a product for corporate Intranets
which translates e-mail messages, web pages, word processor files and
other documents. Language pairs supported are French{}English,
German{}English, Italian{}English, Portuguese{}English and
Spanish{}English. Chinese, Japanese and Russian are in development.
Globalink Intranet Translator is compatible with most Windows
applications, including the leading office suites, e- mail packages,
Web browsers and groupware packages. The server portion of Globalink
Intranet Translator currently runs on Windows NT, while desktop clients
using Windows 3.X, Windows 95 or Windows NT interact with the server.
Because Globalink Intranet Translator is Intranet- based, information
services (IS) departments can maintain and control deployment of
computer-based translation capabilities while providing similar,
scaleable support for "clients" on workstations or notebook computers
located anywhere throughout the enterprise. This architecture also
allows customers to develop and control customized dictionaries.
Globalink Power Translator(R) and Globalink Power Translator(R) Pro
(versions 6.x) Globalink Power Translator is the Company's newest
shrink-wrapped retail product, and raises the bar significantly by
offering tremendous value at an aggressive price. The product creates
draft translations of documents, e-mail, Web pages and more. With four
or five language pairs in one box-- French{}English, German{}English,
Italian{}English, Portuguese{}English and Spanish{}English--it is easy
to translate almost any text. Globalink Power Translator customers can
create new documents, import files from other applications, or install
it to work within Microsoft Word or Corel WordPerfect. Globalink Power
Translator also includes a utility for translating within e-mail
applications, a special version of Globalink Web Translator(TM) (see
below), and a Conversation utility. Advanced features allow the user to
create, prioritize and modify dictionaries; edit documents
interactively; and look up or inflect words. Globalink Power Translator
uses the Globalink Barcelona(TM) technology and runs on Windows 95 or
NT systems.
Globalink Power Translator 5.1 is a similar product to Globalink Power
Translator 6.x (above), but is for Windows 3.1 systems. The product
includes three language pairs: French{}English, German{}English and
Spanish{}English.
Globalink Language Assistant is targeted at consumers purchasing
software through traditional (e.g. superstores) and emerging (such as
mass merchants) retail outlets. The low price point and appealing
feature set make the product perfect for students, travelers, pen pals,
and home computer users. Globalink Language Assistant is useful to
translate letters, articles, recipes, travel brochures, bulletins and
more. A complete suite of reference tools gives users instant help when
writing, studying, or translating. Globalink Language Assistant
products have extensive grammar help, including an on-line grammar
"reference book" to help users get better translation quality.
Bilingual dictionaries can easily be customized by adding new words and
phrases, or by modifying existing entries. Finally, for writing in a
foreign language or entering new foreign words to dictionaries, the
program contains an accented character utility.
Globalink Web Translator(TM) is a browser add-on for translating Web
sites. Users can research companies and markets, plan a vacation,
broaden their horizons, or just have fun. The product applies the
Company's core MT technology to business tasks such as finding and
understanding information from news bureaus, resorts, embassies,
libraries, museums, and more. Translations are draft-quality, providing
an understandable translation of the foreign language site. Translated
pages maintain all hotlinks, graphics, and formatting of the original
pages. Globalink Web Translator works with Netscape Navigator and
Microsoft Internet Explorer and translates while on-line so users do
not have to exit their browser. Versions for Italian to and from
English and Portuguese (Brazilian) to and from English are also
available. Runs on Windows 3.1, Windows 95 or Windows NT.
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Globalink Talk to Me(TM) - In response to market demand and customer
requests for language learning titles, Globalink offers Talk to Me.
Just as MT software helps customers to overcome language barriers by
producing draft translations, language learning software helps users
bridge the language gap by developing foreign language skills.
Globalink Talk to Me is published in conjunction with Auralog, a
privately held French company. The program was developed in conjunction
with leading educational institutions in Europe, including the
Sorbonne, the University of Bristol and the Goethe Institute.
Speaking a foreign language like a native is one thing. Understanding
what native speakers are saying is quite another. Globalink Talk to Me
is the one interactive language learning program that does both:
teaches users how to listen and to talk. Using unique speech
recognition technology, Globalink Talk to Me lets users actually see
voiceprints of native speakers, then record a voiceprint of their own
pronunciation. Through imitation, repetition and comparison, users can
perfect their pronunciation. At the same time, the program helps to
train the ear to hear subtle nuances and differences in the
pronunciation of phrases, words and even syllables. Globalink Talk to
Me includes adjustable self-paced challenge levels, interactive
dialogues involving real-life situations, and language learning games
that help reinforce vocabulary, spelling and listening skills.
Languages available: English, French, German and Spanish. Runs on
Windows 3.1 and Windows 95.
New Products--During 1998, Globalink plans to release a variety of new
products and services. These new offerings will include updated
versions of existing products, new language pairs (such as
French{}German and Spanish{}Portuguese) within the Barcelona technology
for use across multiple product lines, and extended services, with
heavy emphasis on the Internet/Intranet/Extranet environment, and the
market segments of e-business and online communication. In addition,
Globalink plans to put significant emphasis on continued development of
its core Barcelona technology, expanding its functionality and
increasing both speed and translation quality. These improvements in
the Barcelona technology will eventually be visible in all Globalink
products and services.
Sales, Marketing and Distribution
The Company markets and sells its software products through a variety of
channels. This includes sales to distributors who in turn provide products to
retailers or value added resellers (VARs) who sell to end users or the public.
In order to accomplish this channel sales process the Company employs not only
an experienced internal retail and distribution sales team but the services of
merchandising representatives who call on retail establishments. The Company
also participates in trade shows and invests in advertising and other
promotional activities. The Company continues to expand the sales channels it
uses, with particular focus on Internet-related direct channels and VAR and ISP
partnerships.
Promotional cost is the single largest expense of software product marketing.
Furthermore, product promotion is a continuing business activity and increases
proportionally with increases in revenue. Consequently, the success of the
Company's promotional programs are directly related to the success of the
Company.
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Promotion and Advertising
The Company's success to date has been a result of careful expenditures on
advertising and promotion controlled by limited budgets. With the recent private
equity placements, the Company has been able to continue investing in aggressive
advertising campaigns and promotions. This has included expanded public
relations programs, extended advertising in general business publications, as
well as known trade journals, and increased use of free or general news coverage
publicity.
Currently, the Company's promotion and advertising programs include the
following:
Advertising - Product advertising appears at different times in
different media, as the Company performs targeted marketing. For
example, campaigns have included ads in trade magazines, regional
promotions and promotions targeting specific demographic sectors.
Catalog advertising continues at a high rate in known industry and trade
catalogs. Online advertising and promotions will continue to increase in
importance in 1998.
Direct Mail - The Company invests in direct mail programs to increase
sales and exposure for its product lines. This includes programs by
industry and by demographic profiles of known buyers.
Exhibits - CeBIT and other European trade shows highlight the company's
participation in several local, national and international trade shows.
In addition to Company expenditures, many of the distributors and agents
employed by the Company participate in local exhibits. Globalink is also
the Official Translation Company of the Internet World shows in Latin
America and Europe.
Public Relations - The Company continues to expand its public relations
programs to educate the general marketplace. These include the
employment of free lance public relations agents or specialized
companies throughout the world.
Distributors
The Company currently has a number of worldwide distributors who are major
players typical of the type engaged by the world's significant software
manufacturers. These include the larger international distributors such as
Ingram Micro, Merisel and TechData, and various second-tier distributors. In
less developed parts of the world the Company uses regional or local
distributors. In parts of Europe and South America the Company uses agents to
represent its interests.
Product Development
Since inception, the Company has made substantial investments in product
development. To date, the Company's products have been developed by its internal
product development staff and independent contractors. The Company believes that
timely development of new products and enhancements to existing products is
essential to maintaining a competitive position in the market.
The Company currently has a staff of nineteen (19) development personnel located
in the Research and Development facility in San Diego, California. The Company
is focusing its development efforts in two areas: first, in the development of
algorithms to improve the translation quality and second, in the development of
new language pairs to expand current markets or enter new markets.
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Competition
Competition in the PC software industry in general is intense and includes not
only competition between similar product companies but all PC software companies
for retail shelf space in general. The same battle for mindshare is now also
being waged in online environments. Thus the Company's competitors include not
only other companies who produce and market machine translation products but
also virtually all software companies who compete for shelf space in computer
software retailers, and translation services marketed on the Internet.
Within the software industry, several manufacturers have made public statements
of their intent to produce or market machine translation products. These
companies include Microsoft, Novell and IBM. Among direct PC software
competitors there are a dozen or more companies, including Logos, Systran and
Transparent Language Inc., who market machine translation software products that
compete either in the PC marketplace or the online marketplace.
Globalink holds a strong position in the retail marketplace for machine
translation software. The Company believes it has successfully pioneered and
dominated an emerging software industry segment to date and can continue to do
so as long as it continues to generate new and advanced products.
In order to be successful in the future, the Company must continue to respond
promptly and effectively to all challenges of technological and marketing
capabilities any competitor may offer. The Company's performance will continue
to depend on its ability to innovate, as well as maintain and solicit quality
people in technical, sales and management positions. The Company will continue
to seek out and recruit the most capable and experienced staff in order to
maintain its competitive superiority.
Intellectual Property, Proprietary Rights, Licenses and Software Protection
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 has 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.
The Company provides its products to end users under non-exclusive, perpetual
term licenses, which generally are nontransferable. The Company generally
licenses its products solely for the customer's internal operations and only on
designated computers. In certain circumstances, the Company makes available
enterprise-wide licenses. The Company does not make source code available as
this may increase the likelihood of misappropriation or other misuse of the
Company's intellectual property.
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The Company has registered its "GLOBALINK" service mark and trademark in the
United States for language translation services and computer software for
foreign language translation, respectively. The Company has also registered the
following marks in the United States: "POWER TRANSLATOR" for computer software
for foreign language translation; "GLOBALINK THE TRANSLATION COMPANY", together
with the oval logo, for computer hardware and software for language translation;
"TRANSLATE DIRECT" for language translation services. The Company has
applications pending for federal registration of the following marks:
"COMPRENDE", "NO COMPRENDE? NO COMPRENDE, KNOW THE WORLD", "TRANSLATEPLUS", "WEB
TRANSLATOR", "GLOBALINK THE TRANSLATION COMPANY" with the flag logo,
"TRANSLATION @ YOUR FINGERTIPS", the "Flag Design", and the "Comprende Design".
The Company is in the process of registering the mark "GLOBALINK", together with
its flag logo, in addition to the mark "WEB TRANSLATOR", in the United States,
Canada, the European Community (Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain,
Sweden and the United Kingdom) and other major international markets in Asia and
South America; the first of these concerns language translation software and
services, whereas the latter has been filed in connection with software. The use
and registration rights of a trademark holder do not ensure that such holder has
superior rights to others that may have registered or used identical related
marks on related goods or services.
The Company believes that copyright protection, which generally applies whether
or not a license agreement exists, is sufficient to protect the Company's rights
regarding its products.
Employees
As of December 31, 1997, the Company had seventy-three (73) full-time and
part-time employees including nineteen (19) in product development, thirteen
(13) in marketing and sales, twenty-six (26) in finance, administration and
shipping, two (2) in customer support, and thirteen (13) in language services.
The Company's future success will depend on, in part, its ability to continue to
attract, retain and motivate highly qualified technical, marketing and
management personnel. The Company's employees are not represented by any
collective bargaining agreements, and the Company has never experienced a work
stoppage. The Company believes that it has a satisfactory relationship with its
employees.
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ITEM 2 PROPERTIES
The Company leases approximately 21,100 square feet of office space in Fairfax,
Virginia, pursuant to a lease that expires on August 31, 1999. This space, which
allows some room for expansion, is used as the Company's headquarters and
includes marketing, sales, customer support, and administrative offices. The
Company also leases approximately 7,200 square feet of office space in San
Diego, California, pursuant to a lease that expires on December 7, 2000. This
space is primarily utilized as the Research and Development center.
ITEM 3 LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the ordinary
course of its business. Management believes that the ultimate resolution of such
claims, either individually or in the aggregate, will not have a material
adverse effect on the Company's financial position or results of operations.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the stockholders of the Company during the quarter
ended December 31, 1997.
ITEM 4(a) DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors, Executive Officers and Key Employees are as follows:
Name Age Position
Harry E. Hagerty, Jr. (2) 57 Chairman, Chief Executive Officer
John F. McCarthy, III (1)(2) 52 Director, Secretary, Vice President
Ronald W. Johnston 51 Director, President, Chief Operating
Officer
William E. Kimberly (1)(2) 64 Director
Thomas W. Patterson (1) 38 Director
David H. Biggs 52 Director
Mark A. Paiewonsky 35 Chief Financial & Accounting Officer
Philippe J. Kuperman 54 Executive Vice President of Sales &
Marketing
(1) Members of the Audit Committee
(2) Members of the Compensation Committee
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Biographical Information
Mr. Harry E. Hagerty, Jr., a director of Globalink since its inception, is
President of Hagerty & Associates, a company that invests in and consults with
start-up and early-stage businesses. Mr. Hagerty participated in the initial
funding of the Discovery Channel and was a founder of Digital Switch Corporation
(now "DSC Communications, Inc."). Until recently he served on the Board of
Directors of CCAIR, Inc. a regional airline based in Charlotte, NC. Mr. Hagerty
currently serves on the Boards of Directors of Learning 2000 Corporation and
Systems Impact.
Mr. John F. McCarthy, III, a director of Globalink since 1993, was Vice
President and General Counsel for Computone Corporation, which was engaged in
the development of computer peripheral products. Prior to joining Computone, Mr.
McCarthy was the managing partner of the Washington, DC, offices of the law firm
of Burnham, Connolly, Osterle and Henry. Mr. McCarthy joined Globalink in August
1995 as Chief Legal Counsel and is responsible for resolving all international
and domestic legal issues for the Company.
Mr. Ronald W. Johnston brings over 25 years of executive experience with an
emphasis on operations, administration and finance to Globalink. He has
first-hand knowledge of foreign and domestic markets and an extensive background
in overseas business, due in part to 11 years in senior management positions at
Whittaker Corporation. Mr. Johnston joined Globalink in April 1995 as Chief
Operating Officer. In October 1997 he was promoted to President and was
appointed as a director.
Mr. William E. Kimberly, a director of the Company since 1990, is Chairman of
NAZTEC International Group, Inc. a McLean, VA based investment banking firm.
Prior to this, Mr. Kimberly worked for Kimberly-Clark Corporation from 1959 to
1983, where he held various management positions including Marketing Director,
CEO of a major subsidiary and Senior Vice President. Mr. Kimberly has held Board
of Director positions at Pabst Brewing Co., Blue Cross and Blue Shield of
Wisconsin and First National Bank of Neenah, Wisconsin. He is currently director
of several emerging companies.
Mr. Thomas W. Patterson was appointed as a director of Globalink in March 1997
and has over fifteen years of combined experience in information security and
electronic commerce. He has advised the White House, U.S. Congress, NII
Committee, Departments of Defense, Treasury, Energy and Commerce, and scores of
large businesses and organizations around the world. Formerly the Information
Security Director for MicroElectronics and Computer Technology Corp. ("MCC") and
the Chief Strategist for Electronic Commerce for IBM Corporation, Mr. Patterson
is a leader in driving industry toward reasonable use of the Internet.
Mr. David H. Biggs was appointed as a director of Globalink in January 1998 and
has extensive experience and expertise in the business arena. He formerly served
as Vice President of Operations and Product Development at Bently Nevada
Corporation where he managed operations for a number of domestic and
international sites and implemented an MRP II system that is today the basis of
Bently Nevada's competitive edge. He was also responsible for the MAP (Market
Aimed Products) development methodology at Bently Nevada and is the author of a
popular book on the same subject called Market Aimed Products. He is currently
Vice President at R. D. Garwood, Inc.
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Mr. Mark A. Paiewonsky joined the Company in May 1994. He has over 10 years of
finance and accounting experience in the computer software industry. Prior to
joining Globalink, he was the Corporate Controller for Best Programs, Inc., a
software development company offering solutions to the accounting, tax and human
resources software markets. While with the Small Business Enterprise group at
Arthur Andersen & Co., he performed a variety of business and accounting
functions on behalf of publicly and privately held companies in the
manufacturing, distribution, retail and service industries.
Mr. Philippe J. Kuperman joined Globalink in August 1996 as Vice President,
International, to lead the expansion of the Company's software business overseas
through channel and OEM distribution. Mr. Kuperman is fluent in 6 languages and
has over 25 years of experience in international markets, including Europe,
Latin America and Asia, with companies such as SOFTWARE AG, Sterling Software
and PEGASUS International. In January 1997 he was appointed Executive Vice
President of Sales & Marketing.
Directors hold their offices until the next annual meeting of the stockholders
and thereafter until their successors have been duly elected and qualified.
Executive officers are elected by the Board of Directors on an annual basis and
serve at the discretion of the Board or pursuant to an employment agreement.
13
<PAGE>
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS
The Company's Common Stock was first listed for trading on June 4, 1993, on the
National Association of Securities Dealers Automated Quotations (NASDAQ)
Small-Cap Market System under the symbol "GLNK." As of May 1, 1994, the
Company's Common Stock was listed for trading on the American Stock Exchange
(ASE) under the symbol "GNK." The table below presents the quarterly high and
low sale prices for the Company's Common Stock as reported by the American Stock
Exchange.
Calendar year 1996 High Low
First Quarter.................. 8.000 5.000
Second Quarter................. 9.375 5.875
Third Quarter.................. 7.375 5.125
Fourth Quarter................. 5.750 2.750
Calendar year 1997 High Low
First Quarter.................. 4.312 2.875
Second Quarter................. 4.000 3.125
Third Quarter.................. 3.562 1.125
Fourth Quarter................. 3.500 1.688
The Company has never paid cash dividends on its Common Stock. The Board of
Directors does not anticipate paying cash dividends in the foreseeable future as
it intends to retain future earnings to finance the growth of the business. The
payment of future cash dividends will depend on such factors as earnings levels,
anticipated capital requirements, the operating and financial conditions of the
Company and other factors deemed relevant by the Board of Directors.
As of February 27, 1998, there were approximately 180 holders of record of the
Company's Common Stock. The Company believes that at such date there were in
excess of 2,700 beneficial owners of the Company's Common Stock.
14
<PAGE>
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Form 10-KSB contains historical information and forward-looking statements
within the meaning of Section 21E of the Private Securities Litigation Reform
Act of 1995, including material regarding the future business operations and
projected financial results of the Company. These forward-looking statements are
subject to risks and uncertainties which could cause the Company's actual
results to differ materially from the forward-looking statements. Such risks and
uncertainties, include, but are not limited to: general business conditions and
growth in the language translation industry and the economy; competitive
factors, such as competing language translation software products and services,
acceptance of new language translation software products and services and
pricing issues; timing of language translation software product and service
introductions; unanticipated costs, complications or delays in product
development; fluctuations in customer demand; risk of inventory obsolescence due
to shifts in market demand; risk of nonpayment of material customer receivables;
continued success in current product enhancements and language translation
technology advances; risks associated with the sales of products in foreign
markets, including currency fluctuations; unanticipated costs or adverse effects
associated with distributors, vendors and suppliers; litigation involving
intellectual property, licensing and consumer issues; availability of sufficient
resources including short- and long-term financing to carry out the Company's
product development and marketing plans; and other unanticipated business risks
and uncertainties.
Year 2000 Issue
Management has undertaken an investigation of whether the Company will be
adversely impacted by the issue of whether its systems are Year 2000 compliant.
Based on this review, management has determined that a material adverse impact
on the Company's financial statements is unlikely. In addition, as none of the
Company's products utilize dates or date fields mathematically, they are not
subject to Year 2000 compliance issues.
Revenues
Year Ended Year Ended Change
12/31/97 12/31/96 %
----------- ----------- --------
Product Sales (net of returns)... 13,387,000 12,429,000 8%
Translation Services ............ 1,342,000 1,547,000 -13%
----------- ----------- --------
Total Sales ..................... 14,729,000 13,976,000 5%
----------- ----------- --------
Globalink's total sales increased 5% to $14,729,000 for the year ended December
31, 1997, from $13,976,000 for the year ended December 31, 1996. During 1997 the
Company introduced a Portuguese version of Power Translator Pro 6.2 which has
been very well accepted in Brazil. The Company continues to experience revenue
pressures resulting from the increased efforts in reducing distributor inventory
in the channels, aligning sell-through campaigns with sales of products into the
channels and collecting existing receivable balances to provide for more
consistent sales cycles.
15
<PAGE>
Product sales for the year ended December 31, 1997, increased 8%, or $958,000,
to $13,387,000 from $12,429,000 for the year ended December 31, 1996. U.S.
distributor channel sales increased 8% to $5,798,000 for the year ended December
31, 1997, from $5,350,000 in the prior year. The Company continues to open new
distributor channels, increase growth in the existing distributor channels and
pursue additional Original Equipment Manufacturer (OEM) opportunities. The
Language Assistant Series Localized version and the Power Translator and
Language Assistant Series versions for Windows in CD-ROM media have been the
primary vehicles for sales to the Company's distributors and have been well
accepted. In addition, the Company introduced Power Translator 6.0 in June 1996,
Talk to Me in December 1996, Power Translator Pro 6.2 in March 1997 and Language
Assistant 2.0 in September 1997, all of which have also been well accepted and
contributed to sales in 1997.
For the year ended December 31, 1997, international sales increased 7% to
$7,589,000 from $7,079,000 in the prior year. International sales represented
51% of total sales in 1997 and 1996. The primary exports have been to Europe,
Canada and Latin America. In 1997, export sales to Brazil were approximately
$3,159,000, or 21% of total sales. In 1996, export sales to France and Germany
were approximately $2,126,000 and $1,495,000, respectively, or 15% and 11% of
total sales, respectively. International sales have been primarily attributable
to further development of the Company's network of international distributors,
along with additional OEM contracts entered into in Latin America and Europe. In
addition, the Company's introduction of a Portuguese version of Power Translator
Pro 6.2 in March 1997 has been very well accepted in Brazil. The Company has
also shifted its focus in Europe away from the exclusive use of key major
distributors toward smaller, more active, second-tier distributors who are
better able to promote and sell its products into the retail channel of their
respective geographical locations.
Translation Services revenue decreased 13% to $1,342,000 for the year ended
December 31, 1997, from $1,547,000 for the year ended December 31, 1996. The
decrease in revenues for this group resulted from delays early in the year in
obtaining larger jobs and establishing more long-term projects with the group's
customers.
Throughout 1997, the Company placed increasing emphasis on developing multiple
channels of distribution, including distributors, resellers, value added
resellers (VARs) and OEMs. Globalink also continued to develop a telesales
group, which has proven to be successful.
Sales returns and allowances decreased to $3,807,000 in fiscal 1997 compared to
$4,665,000 for the prior year. The Company has continued its efforts to reduce
distributor inventory and align sell-through campaigns with sales of products
into the channels. Distribution agreements typically allow for the return of
certain merchandise to provide for stock balancing. The Company continuously
monitors these programs and makes appropriate accruals monthly to handle future
distribution stock balancing. The following table shows the gross product sales,
returns and net product sales for the periods indicated.
Year Ended Year Ended
12/31/97 12/31/96
------------ ------------
Gross Product Sales........ 17,194,000 17,094,000
Returns.................... (3,807,000) (4,665,000)
------------ ------------
Net Product Sales.......... 13,387,000 12,429,000
------------ ------------
16
<PAGE>
Costs and Expenses
Year Ended Year Ended Change
12/31/97 12/31/96 %
----------- ----------- --------
Cost of products sold............... 2,347,000 1,766,000 33%
Direct labor & fringes.............. 705,000 799,000 -12%
Amortization of capitalized software 650,000 570,000 14%
Product development................. 898,000 1,452,000 -38%
Selling, marketing & other.......... 7,978,000 8,245,000 -3%
General & administrative............ 3,744,000 3,357,000 12%
----------- ----------- --------
Total costs and expenses............ 16,322,000 16,189,000 1%
----------- ----------- --------
Cost of products sold increased 33% in fiscal 1997 to $2,347,000 compared to
$1,766,000 in the prior year. The increase in cost of products sold was
primarily due to a charge of $650,000 associated with a non-monetary transaction
the Company entered into with a customer in December 1997 (see Note O to the
Company's Financial Statements for further discussion of the transaction).
Otherwise, cost of products sold decreased by $69,000 due to decreased costs of
certain packaging components. This was partially offset by the increased costs
of certain products due to associated royalties for the licensing of products,
such as Talk to Me, and various features, such as speech recognition and word
processing filters in other products. Gross profit margin was 84% in fiscal 1997
compared to 87% in the prior year. The decrease in gross profit margin was
directly attributable to the increase in cost of products sold.
Direct labor and fringes, which principally include charges for independent and
in-house translators within the Translation Services group, decreased 12% in
fiscal 1997 to $705,000 compared to $799,000 in 1996 as a result of the
decreased revenues in 1997. These expenses increased from 52% to 53% as a
percentage of Translation Services revenues. This increase was primarily
attributable to fluctuations in the number and relative size of jobs being
performed, as the gross margin varies with the size of the job due to the fixed
administrative tasks that still must be performed.
Amortization of capitalized software for the period ended December 31, 1997,
increased 14% to $650,000 from $570,000 for the prior year. The increase was due
to the release of new products in the latter part of 1996 and in March and
September of 1997 for which previously capitalized software development costs
began to be amortized. This was partially offset by the impact of certain
previously capitalized software development costs becoming fully amortized in
June of 1997.
Product development expenses, which consist of the current cost of
non-capitalizable development expenses, decreased 38% to $898,000 from
$1,452,000 for the prior year. The decrease was a result of the Company's
completion of several new products resulting in reduced costs associated with
certain outside consultants who were assisting in the development of those
products.
Selling, marketing and other expenses, which include the costs of selling,
marketing, customer support, shipping and administration for product sales,
decreased 3%, or $267,000, to $7,978,000 for the period ended December 31, 1997,
from $8,245,000 for the prior year. This decrease was primarily attributable to
the Company's increased focus of fiscal resources on more effective promotion
and advertising programs, particularly in print media and retail store
promotions.
17
<PAGE>
General and administrative expenses consist primarily of payroll and related
expenses, occupancy costs, travel and related expenses for senior management,
finance and accounting, legal and administration. For the year ended December
31, 1997, general and administrative expenses increased 12%, or $387,000, from
the prior year. The increases occurred primarily in the areas of payroll, legal
and accounting fees, insurance costs, rent and depreciation as a result of
additional expenses incurred to support the anticipated growth of the Company.
Other Income/Expense
Interest expense was $22,000 for the fiscal year ended December 31, 1997, as
compared to $32,000 in the prior year. This was due to interest expense incurred
as a result of draws on the Company's revolving and equipment lines of credit.
Income Tax Expense
No provision for income taxes was required for the years ended December 31, 1997
and 1996, due to the Company's net operating loss ("NOL") carryforwards.
Approximately $10,478,000 of NOL carryforwards existed at December 31, 1997. The
use of the NOL carryforwards is limited to future taxable earnings of the
Company.
Variability of Operating Results
Although the Company has not identified any specific seasonality, the Company's
revenues and operating results have varied substantially from period to period.
Historically, the Company, with the exception of its Translation Services
operations, has operated with little backlog of orders because its software
products are generally shipped as orders are received. Product sales and OEM
agreements are difficult to forecast due to the relatively early stages of both
the consumer market and the machine translation software market. As a result,
small variations in the timing of product sales can cause significant variations
in operating results from period to period.
Liquidity and Financial Resources
The Company has secured a $3,000,000 demand note and a $750,000 equipment line
of credit with First Union National Bank. As of December 31, 1997, the Company
had $1,250,000 outstanding under the demand note, which is being used to finance
accounts receivable and other working capital needs. In addition, the Company
had $326,000 outstanding at December 31, 1997, under the equipment line which
was used to finance furniture and equipment purchases.
During 1997 and 1996, the Company's principal uses of cash were to fund the
losses incurred and support the development of the Company's software products
and increases in accounts receivable and fixed assets.
In October 1996, the Company sold three (3) prepaid warrants to a private fund
at $500,000 per warrant for a total consideration of $1,500,000. Each prepaid
warrant was convertible into a number of shares of Common Stock determined by
dividing the exercise amount by the lower of $5.25 or 85% of the arithmetic
average of the closing price of the Common Stock on the five (5) consecutive
trading days immediately preceding the exercise date. The prepaid warrants were
convertible on the 90th, 120th and 150th day following the closing date,
respectively.
18
<PAGE>
In December 1996 and January 1997, the Company issued 40,224 and 4,191 units of
Series A-2 8%, convertible, redeemable Preferred Stock and associated warrants,
respectively. Each unit consisted of one (1) share of 8% convertible, redeemable
Preferred Stock and one (1) warrant to purchase ten (10) shares of Common Stock
at $4.18 per share. Each share of Preferred Stock was convertible into (10) ten
shares of Common Stock at the holder's option. Dividends on the Preferred Stock
are cumulative and payable annually in arrears, beginning January 1, 1998,
either in cash or in additional shares of Preferred Stock at the option of the
Company. The offering resulted in net proceeds to the Company of approximately
$1,253,000.
In March 1997 the Company issued 2,502 shares of Series A-3, convertible,
redeemable preferred stock and associated stock warrants to a private fund for a
total of $2,502,000. Each share was convertible into shares of common stock at
the lower of $3.44 per share, or 85% of the arithmetic average of the prior five
days closing prices. In addition, the Company raised $1,000,000 in a private
placement of 727,274 units in October 1997. Each unit consisted of one share of
common stock and one warrant which entitles the holder to purchase one share of
common stock at an exercise price of $1.75.
During 1997, approximately $2,160,000 was used to finance accounts receivable,
$473,000 was used to finance capitalized software and $136,000 was used to
purchase fixed assets. During 1996, approximately $1,860,000 was used to finance
accounts receivable, $437,000 was used to finance capitalized software and
$271,000 was used to purchase fixed assets. The remaining proceeds have been
invested in short-term repurchase agreements collateralized by U.S. government
securities.
For the year ended December 31, 1997, the Company's cash and cash equivalents,
invested cash and marketable securities decreased to $1,068,000 from $1,606,000
as a result of the loss incurred for the year along with the financing of
accounts receivable, capitalized software and fixed assets. As of December 31,
1997, the Company had $9,130,000 in working capital. The Company has no
significant capital asset commitments.
For the year ended December 31, 1997, accounts receivable increased to
$11,200,000 from $9,040,000. This increase of $2,160,000 resulted principally
from the increase in OEM contracts, which typically provide for graduated
installment payments over a period of up to 12 months. In addition, the Company
has experienced certain payment delays from some of its OEM customers due to
various factors, such as, local banking regulations in Brazil and tax
withholding requirements in other countries. The Company has also filed suit
against one customer in France, which represents approximately $1,547,000 of
overdue OEM receivables. The case will be heard in April 1998 and management
believes it is probable that the balance of this receivable will be fully
collected. The Brazilian economy has experienced significant shifts and currency
fluctuations during the last several years. With the introduction of the
Portuguese version of Power Translator Pro 6.2 in March 1997, the Company
experienced significant revenue generation in the Brazilian market. Accounts
receivable at December 31, 1997, included approximately $3,425,000 due from
Brazilian partners. While the Company has experienced some delays in scheduled
payments from such partners, it is management's belief that payments will be
made in full over the next several months. Management of the Company works
closely with its partners on a continuous basis in order to insure timely
collection of amounts owed to the Company. If the Brazilian economy were to
worsen significantly, timeliness of cash receipts from these partners could be
jeopardized and thus adversely impact the Company's overall working capital
position.
19
<PAGE>
In addition, accounts receivable from distributors has increased. In general,
the contractual payment terms from distributors are between 60 and 90 days;
however, the Company has experienced a longer payment cycle with some
distributors, which has resulted in an increase in their accounts. The Company
introduced new product offerings in Latin America late in the second and third
quarters of 1997. In order to assist with the introduction of these new products
to the market, the Company has allowed certain distributors extended payment
terms on their purchases of these new products, which, in most instances, extend
through June 1998.
For the years ended December 31, 1997 and 1996, net cash used in operating
activities was approximately $3,162,000 and $3,009,000, respectively, due
primarily to net losses from operations and financing of accounts receivable,
inventory and prepaid expenses.
For the year ended December 31, 1997, net cash used in investing activities was
approximately $610,000. For the year ended December 31, 1996, net cash provided
by investing activities was approximately $871,000. In 1997 and 1996, investing
activities consisted primarily of increases in capitalized software development
costs, purchases and sales of marketable securities and purchases of office
equipment.
For the years ended December 31, 1997 and 1996, capital expenditures totaled
$136,000 and $271,000, respectively. Capital expenditures were higher than
normal in 1996 due to a number of factors, including purchases of new PC
equipment and software for new employees, new trade show booths and other fixed
assets to accommodate the personnel growth of the organization.
For the years ended December 31, 1997 and 1996, cash provided by financing
activities was approximately $3,234,000 and $2,924,000, respectively. For the
years ended December 31, 1997 and 1996, financing activities consisted primarily
of the issuance of warrants, preferred stock and common stock along with the
issuance and repayment of debt under the Company's revolving and equipment lines
of credit.
The Company anticipates that the net proceeds from the sale of the prepaid
warrants and the issuance of the preferred and common stock units, together with
cash flow from operations, existing cash balances and periodic borrowings under
the Company's bank lines of credit, will be adequate to meet the Company's
expected cash requirements through 1998.
While operating activities may provide cash in certain periods, to the extent
the Company experiences growth in the future, the Company anticipates that its
operating and product development activities, along with extended payment terms
for certain distributors, may use cash, and consequently, such growth may
require the Company to obtain additional sources of financing. There can be no
assurances that unforeseen events may not require more working capital than the
Company currently has at its disposal.
If additional funds are raised through the issuance of equity or convertible
securities, the Company's current shareholders will experience additional
dilution. While management of the Company believes additional funding will be
available if and when needed, there can be no assurance that additional
financing will be available on terms acceptable to the Company, if at all. The
inability to obtain additional financing, if and when needed, would have a
material adverse effect on the Company.
Other than as discussed above, the Company is not aware of any known trends, or
uncertainties, that have had or are reasonably likely to have a material effect
on the Company's liquidity, capital resources or operations.
20
<PAGE>
ITEM 7 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements Form 10-KSB
-----------
Independent Auditors' Report F-1
Balance Sheets as of
December 31, 1997 and 1996 F-2
Statements of Operations for the years
ended December 31, 1997 and 1996 F-3
Statements of Stockholders' Equity for the years
ended December 31, 1997 and 1996 F-4
Statements of Cash Flows for the years
ended December 31, 1997 and 1996 F-5
Notes to the Financial Statements F-6 to F-22
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
21
<PAGE>
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT
Except for the information disclosed in Item 4(a) of this Annual Report on Form
10-KSB, the information required by this item will be contained in the Company's
Proxy Statement for its 1997 Annual Stockholders' Meeting to be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997, and
is incorporated herein by reference.
ITEM 10 EXECUTIVE COMPENSATION
The information required by this item will be contained in the Company's Proxy
Statement for its 1997 Annual Stockholders' Meeting to be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997, and
is incorporated herein by reference.
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item will be contained in the Company's Proxy
Statement for its 1997 Annual Stockholders' Meeting to be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997, and
is incorporated herein by reference.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the Company's Proxy
Statement for its 1997 Annual Stockholders' Meeting to be filed with the
Securities and Exchange Commission within 120 days after December 31, 1997, and
is incorporated herein by reference.
22
<PAGE>
PART IV
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(A) Index of Exhibits as required by Item 601 of Regulations S-B.
Exhibit Number Description of Exhibit
3.1 (a) Articles of Incorporation (1)
3.1 (b) Certificate of Amendment of
Certificate of Incorporation (3)
3.1 (c) Certificate of Designations of Series
A-1 Convertible Preferred Stock (3)
3.1 (d) Certificate of Designations of Series
A-2 8% Convertible Redeemable
Preferred Stock (3)
3.1 (e) Certificate of Designations of Series
A-3 Convertible Preferred Stock (4)
3.2 Bylaws (1)
4.1 (a) Common Stock Specimen (1)
4.1 (b) Form of Stock Option (2)
4.1 (c) Form of Warrant Purchase Agreement
between the Company and the Pangaea
Fund Limited dated October 2, 1996 (3)
4.1 (d) Form of Unit Purchase Agreement
between the Company and J. Michael
Reisert, Inc. dated December 20, 1996 (3)
4.1 (e) Form of Subscription Agreement
between the Company and The Pangaea
Fund Limited dated March 27, 1997 (4)
23
<PAGE>
(1) Incorporated herein by reference from the Registration Statement
number 33-60296 as filed by the Company on Form SB-2.
(2) Incorporated herein by reference from the Registration Statement
number 33-82062 as filed by the Company on Form S-8.
(3) Incorporated herein by reference from the Annual Report on Form
10-KSB as filed by the Company for the fiscal year ended
December 31, 1996.
(4) Incorporated herein by reference from the Current Report on Form
8-K as filed by the Company on April 7, 1997.
(B) Reports on Form 8-K
None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Fairfax, State of Virginia, on the 18th day of March, 1998.
GLOBALINK, INC.
By:/s/Ronald W. Johnston
------------------------
Ronald W. Johnston
President
Pursuant to the requirements of 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 18th day of March, 1998.
Signature Title
/s/Harry E. Hagerty, Jr. Chairman and Chief Executive Officer
- ----------------------------------
Harry E. Hagerty, Jr.
/s/Ronald W. Johnston Director, President and Chief Operating
- ---------------------------------- Officer
Ronald W. Johnston
/s/John F. McCarthy, III Director, Secretary and Vice President
- ----------------------------------
John F. McCarthy, III
/s/William E. Kimberly Director
- ----------------------------------
William E. Kimberly
/s/Thomas W. Patterson Director
- ----------------------------------
Thomas W. Patterson
/s/David H. Biggs Director
- ----------------------------------
David H. Biggs
/s/Mark A. Paiewonsky Chief Financial & Accounting Officer
- ----------------------------------
Mark A. Paiewonsky
/s/Philippe J. Kuperman Executive Vice President of Sales &
- ---------------------------------- Marketing
Philippe J. Kuperman
25
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Globalink, Inc.
We have audited the accompanying balance sheets of Globalink, Inc., as of
December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Globalink, Inc., as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Vienna, Virginia
February 27, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
Globalink, Inc.
Balance Sheets
December 31, 1997 1996
- --------------------------------------------------------------------------------
Assets
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 68,241 $ 406,088
Invested cash 1,000,000 1,200,000
Accounts receivable, net 11,200,143 9,040,297
Inventories, net 760,659 818,294
Prepaid expenses and deposits 791,415 108,745
Other receivables 37,134 126,894
---------------------------
Total Current Assets 13,857,592 11,700,318
Long-Term Receivable 327,750 -
Equipment and Furniture, net 587,783 879,753
Capitalized Software, net 641,821 817,988
---------------------------
$ 15,414,946 $ 13,398,059
===========================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable--trade $ 2,410,886 $ 2,057,002
Accrued and other liabilities 832,847 763,948
Line of credit 1,484,356 1,279,000
---------------------------
Total Current Liabilities 4,728,089 4,099,950
Long-Term Notes Payable 92,000 216,356
Deferred Rent 42,015 65,706
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock, $.01 par value, 250,000 shares
authorized; 26,771 and 40,224 shares issued
and outstanding in 1997 and 1996, respectively 755,354 1,154,658
Common stock, $.01 par value, 20,000,000 shares
authorized; 9,160,236 and 5,341,352 shares issued
and outstanding in 1997 and 1996, respectively 91,602 53,413
Additional paid-in capital--common stock 22,143,154 18,702,013
Dividends payable 72,573 -
Accumulated deficit (12,509,841) (10,894,037)
---------------------------
10,552,842 9,016,047
---------------------------
$ 15,414,946 $ 13,398,059
===========================
<FN>
The accompanying notes are an integral part of these statements.
F-2
</FN>
<PAGE>
<CAPTION>
Globalink, Inc.
Statements of Operations
Year ended December 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Product Sales, net of returns and allowances of
$3,807,485 and $4,664,942 in 1997 and 1996,
respectively $ 13,386,873 $ 12,429,362
Translation Service Revenue 1,342,242 1,546,672
---------------------------
14,729,115 13,976,034
Costs and Expenses
Cost of products sold 2,347,514 1,765,951
Direct labor and fringes 705,241 799,206
Amortization of capitalized software 649,597 570,247
Development 897,715 1,451,687
Selling, marketing and other 7,978,294 8,244,992
Administrative 3,744,099 3,356,443
---------------------------
16,322,460 16,188,526
---------------------------
Loss from Operations (1,593,345) (2,212,492)
Interest Expense, net (22,459) (32,393)
---------------------------
Loss Before Income Taxes (1,615,804) (2,244,885)
Income Tax Expense - -
---------------------------
Net Loss $ (1,615,804) $ (2,244,885)
===========================
Loss per Common Share (Basic and Diluted) $ (.25) $ (.42)
===========================
Weighted-Average Number of Common Shares
Outstanding During the Year 6,876,743 5,333,852
===========================
<FN>
The accompanying notes are an integral part of these statements.
F-3
</FN>
<PAGE>
<CAPTION>
Globalink, Inc.
Statements of Stockholders' Equity
Years ended December 31, 1997 and 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Additional
Paid-in
Capital-
Common Common Common Preferred Preferred Dividend Accumulated
Shares Stock Stock Shares Stock Payable Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 5,304,017 $ 53,040 $ 17,246,384 - $ - $ - $ (8,649,152) $ 8,650,272
Exercise of Stock Options 30,000 300 109,700 - - - - 110,000
Common Stock Issued in
Payment of Debt 7,335 73 52,647 - - - - 52,720
Sale of Stock Warrants - - 1,293,282 - - - - 1,293,282
Preferred Stock Issued - - - 40,224 1,154,658 - - 1,154,658
Net Loss for the Year - - - - - - (2,244,885) (2,244,885)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 5,341,352 53,413 18,702,013 40,224 1,154,658 - (10,894,037) 9,016,047
Issuance of Preferred Stock - - - 6,693 2,381,777 - - 2,381,777
Conversions to Common Stock 3,091,610 30,916 2,770,367 (20,146) (2,781,081) (20,202) - -
Issuance of Common Stock 727,274 7,273 763,549 - - - - 770,822
Preferred Stock Dividends - - (92,775) - - 92,775 - -
Net Loss for the Year - - - - - - (1,615,804) (1,615,804)
------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 9,160,236 $ 91,602 $ 22,143,154 26,771 $ 755,354 $ 72,573 $ (12,509,841) $ 10,552,842
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these statements.
F-4
</FN>
<PAGE>
<CAPTION>
Globalink, Inc.
Statements of Cash Flows
Year ended December 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents and
Invested Cash
Cash Flows from Operating Activities
Net loss $ (1,615,804) $ (2,244,885)
---------------------------
Adjustments to reconcile net loss to net cash
used in operating activities
Non-monetary transaction (375,000) -
Amortization of capitalized software 649,597 570,247
Depreciation 428,180 370,852
Reserve for obsolete inventories - 100,000
Changes in assets and liabilities
Increase in accounts receivable (2,159,846) (1,859,697)
Decrease (increase) in other receivables 89,760 (33,642)
Decrease (increase) in inventories 57,635 (332,944)
(Increase) decrease in prepaid expenses
and deposits (82,670) 154,306
Increase in long-term receivable (327,750) -
Increase in accounts payable--trade 353,884 316,017
Decrease in accrued and other liabilities (156,101) (31,801)
Decrease in deferred rent (23,691) (17,873)
---------------------------
Total Adjustments (1,546,002) (764,535)
---------------------------
Net Cash Used in Operating Activities (3,161,806) (3,009,420)
---------------------------
Cash Flows from Investing Activities
Purchase of marketable securities - (2,778,279)
Proceeds from sales of marketable securities - 4,357,516
Increase in capitalized software (473,430) (436,911)
Capital expenditures for equipment and furniture (136,210) (271,071)
---------------------------
Net Cash (Used in) Provided by Investing Activities (609,640) 871,255
---------------------------
Cash Flows from Financing Activities
Sale of common stock 770,823 110,000
Sale of preferred stock 2,381,776 1,154,658
Sale of stock warrants - 1,293,282
Repayment of debt (801,000) (253,000)
Proceeds from issuance of debt 882,000 619,467
---------------------------
Net Cash Provided by Financing Activities 3,233,599 2,924,407
---------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (537,847) 786,242
Cash and Cash Equivalents and Invested Cash at
Beginning of Year 1,606,088 819,846
---------------------------
Cash and Cash Equivalents and Invested Cash at
End of Year $ 1,068,241 $ 1,606,088
===========================
<FN>
The accompanying notes are an integral part of these statements.
F-5
</FN>
</TABLE>
<PAGE>
Globalink, Inc.
Notes to Financial Statements
December 31, 1997 and 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Company designs, develops, publishes, markets and supports foreign
language translation and language learning software for business,
professional and personal use for the microcomputer marketplace. In
addition, the Company provides professional language services through its
multilingual staff and through contract arrangements with independent
linguists/translators. The Company's products and services are sold
worldwide.
Using Estimates in Preparing Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition and Significant Estimates
Revenue from sales to distributors or dealers is recognized when the
products are shipped (transfer of title occurs) and no significant
obligation remains to the Company. Revenue billed or collected in advance
for future product shipments is deferred and recorded as income in the
period in which the products are shipped. Revenue from royalties pursuant to
license arrangements with certain distributors and Original Equipment
Manufacturers (OEMs) is recognized upon delivery of the software. Generally,
the Company has no, or insignificant, obligations remaining under the
agreement after delivering the software. Payment terms under OEM agreements
are based on graduated payment schedules generally over 12 months.
Allowances for estimated future returns and exchanges are recorded in the
period in which the related revenue is recognized. Distribution agreements
typically allow for the return of certain merchandise to provide for stock
balancing. The Company continually monitors such programs and uses
historical and current information to estimate and record appropriate
accruals to provide for future stock balancing. Although it is reasonably
possible that management's estimate for future returns and exchanges could
change in the near future, management is not currently aware of any events
that would result in a change to its estimate which would be material to the
Company's financial position or its results of operations.
In October 1997, the American Institute of Certifited Public Accountants
issued Statement of Position 97-2 ("SOP 97-2"), Softwae Revenue Recognition,
which is effective for transactions entered into in fiscal years beginning
after December 15, 1997. Retroactive application of the provisions of this
SOP is prohibited. The SOP 97-2 provides guidance on applying generally
accepted accounting principles in recognizing revenue on software
transactions. This SOP supersedes SOP 91-1, Software Revenue Recognition.
The effect of adopting this new standard is not expected to be material.
Inventories
Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market.
F-6
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Research and Development
Research and development costs are expensed as incurred.
Capitalized Software Costs
The Company capitalizes certain initial software development costs and
enhancements thereto incurred after technological feasibility has been
demonstrated. To date, all products and enhancements thereto have utilized
proven technology. Such capitalized amounts are amortized commencing with
product introduction over the greater of the ratio of current gross revenue
for a product to the total expected gross revenue over the life of that
product, or the straight-line method over the remaining estimated economic
life, ranging from 24 to 36 months. The unamortized capitalized costs by
product are reduced to an amount not to exceed the future net realizable
value by product at each balance sheet date. Future net realizable value is
determined through sales forecasts based on existing and anticipated
dealer/distributor agreements and other sales contracts. Although it is
possible that management's estimate for the future net realizable value
could change in the near future, management is not currently aware of any
events that would result in a change to its estimate which would be material
to the Company's financial position or its results of operations.
The amount of development costs capitalized in accordance with Statement of
Financial Accounting Standards No. 86 for 1997 and 1996 was $473,429 and
$436,911, respectively. Amortization of software development costs charged
to costs and expenses during the years ended December 31, 1997 and 1996, was
$649,597 and $570,247, respectively.
Income Taxes
The Company accounts for income taxes under the liability method pursuant to
SFAS No. 109, "Accounting for Income Taxes." Deferred taxes arise from
temporary differences, primarily attributable to differences between
depreciation and amortization for tax and financial statement purposes, and
reserves accrued for book purposes on accounts receivable and inventories.
As a result of net operating losses for tax purposes for the years ended
December 31, 1997 and 1996, a provision for deferred income taxes arising
from temporary differences, primarily due to differences between the
treatment of capitalized software costs and depreciation for tax and
financial statement purposes, has not been recognized.
Depreciation
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives. The
estimated lives used in determining depreciation are--
Office and other equipment 3-5 years
Furniture and fixtures 5-7 years
The straight-line method of depreciation is followed for all assets for
financial reporting purposes. Accelerated methods are used for tax purposes.
F-7
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Loss per Common Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" (EPS).
This Statement replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted
EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
Opinion 15. In complying with the requirements of SFAS No. 128, the Company
has recalculated all prior period EPS data resulting in no change.
The following table reconciles basic and diluted EPS for the years ended
December 31:
1997 1996
---------------------------
Numerator
Net loss $ (1,615,804) $ (2,244,885)
Preferred stock dividend (92,775) -
---------------------------
Net loss available to common stockholders $ (1,708,579) $ (2,244,885)
---------------------------
Denominator
Weighted-average shares 6,876,743 5,333,852
---------------------------
The loss per common share for 1997 and 1996 do not include the common
equivalent shares because the effect of such inclusion would be to decrease
the loss per share. No reconciliation has been presented for the numerator
and denominator, as the antidilution of common equivalent shares causes
basic and diluted EPS to be the same.
Advertising Costs
The Company expenses the costs of first-time advertising when the material
is published. Prepaid advertising and brochures consist of advertising costs
paid in advance of publication. Also included in prepaid advertising and
brochures expense are the costs of developing various marketing and product
materials for new software. These costs are expensed when the software is
released.
F-8
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Employee Stock Options
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," requires that stock-based compensation be
accounted for on the fair value method as described in SFAS No. 123, or on
the intrinsic value-based method of Accounting Principles Board Opinion No.
25 (APB 25), whereby if options are priced at or above the quoted market
price on the date of grant, there is no compensation expense recognized by
the Company as a result of the options. If the intrinsic value-based method
is used, pro forma net income and earnings per share must be disclosed as if
the fair value-based method had been applied. The Company continues to
account for its employee stock options in accordance with APB 25; therefore,
the required pro forma disclosures are contained in Note H to the financial
statements.
Cash and Cash Equivalents
The Company considers all highly liquid securities purchased with a maturity
of three months or less to be cash equivalents.
Invested Cash
The Company has invested excess cash in money market accounts. This cash
investment is consistent with the Company's investment strategy to set aside
cash not to be used for Company operations but to allow for liquidity as the
need arises. At December 31, 1997 and 1996, invested cash totaled $1,000,000
and $1,200,000, respectively, which amounts are collateralized by government
securities held by the Company's bank.
Liquidity
The Company has incurred losses and used cash in its recent operation. The
Company anticipates that the net proceeds from past equity offerings, exist-
ing cash balances, and periodic borrowings under the Company's bank lines of
credit will be adequate to meet the Company's expected cash requirements
through 1998. In addition, the Company anticipates obtaining equity during
1998.
Reporting Comprehensive Income
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
Statement establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full
set of general-purpose financial statements. This Statement requires all
items required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 does
not require a specific format for that financial statement but requires that
an enterprise display an amount representing total comprehensive income for
the period in that financial statement. The Statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other
comprehensive income separately
F-9
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position. Reclassification of financial state-
ments for earlier periods provided for comparative purposes is required.
The Company will comply with the disclosure requirements of SFAS No. 130
in fiscal year 1998.
Disclosures About Segments of an Enterprise and Related Information
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information,"
effective for periods beginning after December 15, 1997. This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
This Statement requires a public business enterprise to report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. This Statement requires a
public business enterprise to report a measure of segment profit loss,
certain specific revenue and expense items and segment assets and certain
other related information; and information about the revenue derived from
the enterprise's products or services (or groups of similar products and
services), about the countries in which the enterprise earns revenue and
holds assets and about major customers regardless of whether that
information is used in making operating decisions. However, this Statement
does not require an enterprise to report information that is not prepared
for internal use if reporting it would be impracticable. The Company will
comply with the disclosure requirements of SFAS No. 131 in fiscal year 1998.
NOTE B--ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
1997 1996
---------------------------
Trade $ 13,893,969 $ 12,044,950
Allowance for returns and uncollectible
accounts (1,676,110) (1,863,653)
Allowance for advertising and other credits (1,017,716) (1,141,000)
---------------------------
$ 11,200,143 $ 9,040,297
---------------------------
F-10
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE B--ACCOUNTS RECEIVABLE--Continued
The Company provides for an allowance for uncollectible accounts receivable
based on experience. Although it is reasonably possible that management's
estimate for uncollectible accounts could change in the near future,
management is not aware of any events that would result in a change to its
estimate which would be material to the Company's financial position or
results of operations.
Included in the accounts receivable balance at December 31, 1997, is
$1,547,000 due from a customer which is currently in litigation in France.
The case will be heard in April 1998, and management believes it is probable
the balance of this receivable will be fully collected.
NOTE C--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Inventories
Inventories consist of the following at December 31:
1997 1996
---------------------------
Finished goods $ 661,479 $ 649,495
Allowance (150,000) (150,000)
---------------------------
511,479 499,495
Work-in-process 249,180 318,799
---------------------------
$ 760,659 $ 818,294
---------------------------
Prepaid Expenses and Deposits
Prepaid expenses and deposits consist of the following at December 31:
1997 1996
---------------------------
Prepaid license $ 600,000 $ -
Prepaid advertising and brochures 23,334 47,671
Other prepaid amounts 168,081 61,074
---------------------------
$ 791,415 $ 108,745
---------------------------
F-11
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE C--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS--Continued
Equipment and Furniture
Equipment and furniture consist of the following at December 31:
1997 1996
---------------------------
Office and other equipment $ 1,620,150 $ 1,532,574
Furniture and fixtures 112,399 115,808
---------------------------
1,732,549 1,648,382
Accumulated depreciation (1,144,766) (768,629)
---------------------------
$ 587,783 $ 879,753
---------------------------
Capitalized Software
Capitalized software consists of the following at December 31:
1997 1996
---------------------------
Capitalized software $ 5,941,614 $ 5,468,185
Accumulated amortization (5,299,793) (4,650,197)
---------------------------
$ 641,821 $ 817,988
---------------------------
Accrued and Other Liabilities
Accrued and other liabilities consist of the following at December 31:
1997 1996
---------------------------
Accrued salaries, taxes and fringe benefits $ 491,828 $ 623,958
Deferred income--maintenance fee 293,000 -
Accrued royalties 48,019 89,990
Other accrued liabilities - 50,000
---------------------------
$ 832,847 $ 763,948
---------------------------
F-12
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE D--FINANCIAL INSTRUMENTS
The financial statements include various estimated fair value information as
of December 31, 1997 and 1996, as required by SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments." Such information, which pertains
to the Company's financial instruments, is based on the requirements set
forth in the Statement and does not purport to represent the aggregate net
fair value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short-term
maturity of these instruments. At December 31, 1997 and 1996, the carrying
amount/estimated fair value of these assets is approximately $68,000 and
$406,000, respectively.
Invested Cash
The carrying amount approximates fair value because of the short-term
maturity of these instruments. At December 31, 1997 and 1996, the carrying
amount/estimated fair value of these assets is approximately $1,000,000 and
$1,200,000, respectively.
Loans Receivable
Outstanding loans receivable included in other receivables represent loans
to the employees of the Company. The carrying amount of the loans
approximates the fair value due to the nature of the transactions and the
rates of interest corresponding to quoted market prices available to the
Company. At December 31, 1997 and 1996, the carrying amount/estimated fair
value of these assets is approximately $328,000 and $95,000, respectively.
Line of Credit and Notes Payable
Quoted market prices for the same or similar issues or the current rates
offered to the Company for debt of the same remaining maturities are used to
estimate the fair value of the Company's line of credit. At December 31,
1997 and 1996, the carrying amount/estimated fair value of this debt is
approximately $1,576,000 and $1,495,000, respectively, recorded as a
short-term line of credit, and long-term notes payable in the financial
statements.
F-13
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE E--LINE OF CREDIT
At December 31, 1997, the Company had available a $3,000,000 short-term
working capital line of credit at the lower of the bank's prime rate plus
.25%, or LIBOR plus 2.75%. At December 31, 1996, the Company had a
$2,000,000 short-term working capital line of credit (the borrowing base
facility) and a $2,000,000 intermediate-term working capital line of credit
(the cash flow facility), at the lower of the bank's prime rate or LIBOR
plus 2.50%. In 1997, the short-term and intermediate-term working capital
lines of credit were replaced by the $3,000,000 line of credit referenced
above. Also, at December 31, 1997 and 1996, the Company had a $750,000 fixed
asset line of credit at the bank's prime rate plus 3/4% and 1/4%,
respectively. All credit facilities are collateralized by the assets of the
Company. Under these credit facilities the Company is required to maintain
certain financial covenants.
The rate of interest on the short-term working capital line of credit at
December 31, 1997, was 8.47%. The short-term working capital and the unused
portion of the fixed asset line of credit were set to expire on April 30,
1999. On March 4, 1998, the Company's loan agreement was modified to change
the $3,000,000 line of credit from a time note having a maturity of April
30, 1999, to a demand note which shall be payable on demand. This
modification also removed all financial covenants from the agreement.
At December 31, 1997, $326,356 and $1,250,000 were outstanding on the fixed
asset and short-term working capital lines of credit, respectively, with
principal payments as follows:
Year ending December 31,
1998 $ 1,484,356
1999 92,000
-------------
$ 1,576,356
-------------
At December 31, 1996, $495,356 and $1,000,000 were outstanding on the fixed
asset and intermediate-term working capital lines of credit, respectively.
The bank's rate of interest at December 31, 1996, was 8.25%. The lines of
credit were renewed by the Company before their expiration on June 30, 1997.
NOTE F--LEASES
The Company leases its office facilities and certain office equipment under
various operating leases. Lease terms range from one to four years.
F-14
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE F--LEASES--Continued
Minimum annual rental and lease commitments for leases with a remaining term
of one year or more at December 31, 1997, are as follows:
Year ending December 31,
1998 $ 537,000
1999 413,000
2000 117,000
-------------
Net minimum lease payments $ 1,067,000
-------------
Rent expense was $587,000 and $628,000 for the years ended December 31, 1997
and 1996, respectively.
NOTE G--RELATED PARTY TRANSACTIONS
During 1996, the Company loaned $95,000 to two officers. One officer was
loaned $25,000 at an interest rate of 9 1/4%, which was payable on demand
and repaid during 1997. A second officer was loaned $70,000 at an interest
rate of 8%, in two separate promissory notes. Both notes were payable on or
before December 1, 1997, with interest.
Additional notes were issued to the second officer during fiscal year 1997.
On December 17, 1997, all outstanding notes for this officer were
consolidated into one note of $327,750, including accrued interest. The note
is a demand note with an interest rate of 8.95% and is due in full, without
demand notice, on December 17, 2000. As part of the agreement, this officer
pledged 140,000 shares of common stock as collateral.
NOTE H--COMMITMENTS
Employment Agreements
The Company has entered into employment agreements with three employees. The
agreements are each for a three-year period commencing between March 1995
and June 1996 and will renew automatically for succeeding periods of one
year unless sooner terminated. In the event the Company terminates without
cause the employment of any of these employees, the employee shall receive
an amount equal to one year's base salary plus accrued benefits and
incentive compensation. The agreements contain a provision which triples
certain amounts due in the event of a hostile takeover. The agreements also
contain provisions for the accelerated vesting of options if certain defined
changes to the composition of the Board of Directors should occur.
F-15
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE H--COMMITMENTS--Continued
The minimum amounts due under the agreements during the succeeding two-year
period, exclusive of contingent incentive compensation and salary
adjustments, are as follows:
Year ending December 31,
1998 $ 310,000
1999 83,000
-------------
$ 393,000
-------------
NOTE I--WARRANTS, OPTIONS AND OTHER STOCK ISSUED
Stock Options Issued
The Company issues options to employees and members of its Board of
Directors based on merit. The Company has accounted for its options under
APB Opinion No. 25 and related interpretations. The options, which have a
term of five years when issued, are granted at various times during the year
and vest based upon individual grant specifications. The exercise price of
each option equals or exceeds the market price of the Company's stock on the
date of grant. During 1997, 584,975 options granted previously were revalued
to a lower exercise price. No compensation cost has been recognized for
employee options. Had compensation cost for the plan been determined based
on the fair value of the options at the grant dates, consistent with the
method in Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss would have
been increased to the pro forma amounts indicated below:
1997 1996
---------------------------
Net loss--as reported $ (1,615,804) $ (2,244,885)
Net loss--pro forma (2,229,997) (2,996,947)
Net loss per share--as reported (0.25) (0.42)
Net loss per share--pro forma (0.34) (0.56)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing method with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: expected
volatility of 42% and 40%; risk-free interest rate of 5.9% and 6.2% and
expected lives of 2.9 and 2.7 years.
F-16
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE I--WARRANTS, OPTIONS AND OTHER STOCK ISSUED--Continued
The following tables depict activity in the plan for the years ended
December 31, 1997 and 1996:
Weighted-
Average
Exercise
1997 Shares Price
----------------------------------------------------------------------------
Options outstanding at beginning of year 943,516 $8.57
Granted 906,000 3.64
Exercised - -
Forfeited (95,867) (8.73)
Expired (20,000) (4.00)
-------------
Outstanding at end of year 1,733,649 $4.18
-------------
Options exercisable at year-end 1,132,816 $4.52
-------------
Weighted-average fair value per share
of options granted during the year $0.53
Weighted-
Average
Exercise
1996 Shares Price
----------------------------------------------------------------------------
Options outstanding at beginning of year 801,800 $9.35
Granted 387,050 7.05
Exercised (30,000) (3.67)
Forfeited (215,334) (9.44)
-------------
Outstanding at end of year 943,516 $8.57
-------------
Options exercisable at year-end 526,714 $8.41
-------------
Weighted-average fair value per share
of options granted during the year $2.22
F-17
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE I--WARRANTS, OPTIONS AND OTHER STOCK ISSUED--Continued
The following applies to options outstanding at December 31, 1997:
Number outstanding 1,254,000
Range of exercise prices $ 3.13 to $ 3.75
Weighted-average exercise price 3.44
Weighted-average remaining contractual life 5.92 years
Number outstanding 437,249
Range of exercise prices $ 3.76 to $ 8.50
Weighted-average exercise price $ 5.67
Weighted-average remaining contractual life 2.96 years
Number outstanding 42,400
Range of exercise prices $ 8.51 to $ 14.88
Weighted-average exercise price $ 10.88
Weighted-average remaining contractual life 1.64 years
Prepaid Warrants Issued
During 1996, the Company sold three prepaid warrants to a private fund in
the amount of $500,000 each for a total of $1,500,000. Each warrant is
convertible into shares of common stock at the lower of $5.25 per share, or
85% of the arithmetic average of the prior five days closing prices. As part
of the agreement, the Company also issued 33,613 options at an exercise
price of $5.25 per share to the private fund. The options have a term of
four years. In addition, the Company issued 20,000 options at an exercise
price of $5.25 per share to both Tanner Unman Securities, Inc., and
Prudential Securities, Inc., both of which facilitated the agreement with
the private fund. These options also have a term of four years. As of
December 31, 1997, the private fund had converted the prepaid warrants into
526,832 shares of common stock.
Preferred Stock Issued
During 1996, the Company's Board of Directors approved a private placement
of Series A-2 8% convertible, redeemable preferred stock and associated
stock warrants. Dividends on the preferred stock are cumulative and payable
annually in arrears, beginning January 1, 1998, in either cash or additional
shares of preferred stock, at the option of the Company. The dividend is
calculated as 8% of the book value of the stock, based on its original
trading price. The preferred stock is convertible into ten shares of common
stock any time after 30 days from the date of issuance. Any unconverted
preferred stock remaining at January 1, 2002, will automatically be
converted into ten shares of common stock per preferred share at that time.
Each share of preferred stock was also issued with one warrant entitling the
holder to purchase ten shares of common stock each at $4.18 per share.
During 1997, 17,644 shares of Series A-2 preferred stock were converted into
176,440 shares of common stock. At December 31, 1997 and 1996, the Company
has outstanding 26,771 and 40,224 shares of Series A-2 preferred stock,
respectively, and 44,415 and 40,224 associated stock warrants, respectively.
F-18
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE I--WARRANTS, OPTIONS AND OTHER STOCK ISSUED--Continued
In March 1997, the Company's Board of Directors approved a private placement
of Series A-3, convertible, redeemable preferred stock and associated stock
warrants. The Company sold 2,502 shares of Series A-3 preferred stock to a
private fund for a total of $2,502,000. Each share is convertible into
shares of common stock at the lower of $3.44 per share, or 85% of the
arithmetic average of the prior five days closing prices. As part of the
agreement, the Company also issued 85,568 options at an exercise price of
$4.30 per share to the private fund. The options have a term of four years.
In addition, the Company issued 25,020 options at an exercise price of $3.44
per share to Tanner Unman Securities, Inc., and 20,000 options at an
exercise price of $4.30 per share to Prudential Securities, Inc., both of
which facilitated the agreement with the private fund. These options also
have a term of four years. As of December 31, 1997, the private fund had
converted the Series A-3 preferred stock into 2,382,268 shares of common
stock.
Common Stock Issued
In October 1997, the Company's Board of Directors approved a private
placement of common stock units. The Company sold 727,274 units for a total
of $1,000,000. Each unit consisted of one share of common stock and one
warrant which entitles the holder to purchase one share of common stock at
an exercise price of $1.75 per share. As part of the agreement, the Company
also issued purchase options for 72,727 additional units at an exercise
price of $1.51 per unit to M. H. Meyerson & Co. which served as the
placement agent. These purchase options have a term of five years.
NOTE J--INCOME TAXES
Deferred tax assets (liabilities) consist of the following at December 31:
1997 1996
---------------------------
Capitalized software $ (243,635) $ (310,508)
Fixed assets (5,241) (38,687)
Inventory capitalization (6,439) (8,270)
Inventory reserves 56,940 56,940
Receivable reserves 1,022,576 1,140,566
Deferred rent and other 15,949 24,942
Accrued compensation 66,772 90,756
Loss carryforwards 3,977,292 3,448,152
---------------------------
Gross deferred tax asset 4,884,214 4,403,891
Deferred tax asset valuation allowance (4,884,214) (4,403,891)
---------------------------
$ - $ -
---------------------------
F-19
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE J--INCOME TAXES--Continued
The differences between the total income tax expense (benefit) and the
income tax expense (benefit) computed using the federal income tax rate were
as follows:
1997 1996
---------------------------
Pretax loss $(1,615,804) $ (2,244,885)
---------------------------
Computed federal income taxes at 34% $ (549,373) $ (763,261)
Computed state income taxes, net of federal
benefit (63,986) (88,897)
Effect of recognizing stock option
compensation for tax purposes 133,038 (220,728)
---------------------------
Deferred tax benefit (480,321) (1,072,886)
Expense arising from change in deferred tax
asset valuation allowance 480,321 1,072,886
---------------------------
Income tax expense $ - $ -
---------------------------
Approximately $10,478,000 and $9,084,000 of loss carryforwards are available
for tax return purposes at December 31, 1997 and 1996, respectively. Their
use is limited to future taxable earnings of the Company, and subject to an
annual limitation. The loss carryforwards expire from December 31, 2004, to
December 31, 2013.
NOTE K--SUPPLEMENTAL CASH FLOWS INFORMATION
Supplemental Disclosures of Cash Flows Information
The Company paid the following amounts for interest and income taxes during
the years ended December 31:
1997 1996
---------------------------
Interest $ 110,382 $ 103,169
---------------------------
Income taxes $ - $ -
---------------------------
F-20
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE K--SUPPLEMENTAL CASH FLOWS INFORMATION--Continued
Supplemental Schedule of Non-Cash Investing and Financing Activities
The following amounts have been recorded in non-cash transactions during the
years ended December 31, 1997 and 1996:
As a result of the exchange discussed in Note O, prepaid expenses and other
deposits have been increased $600,000 and accrued and other liabilities have
been increased $225,000.
Series A-2 preferred shares with a value of $497,832 were converted into
common stock. Series A-3 preferred shares with a value of $2,283,249 were
converted into common stock. Dividends owed on preferred stock converted
with a value of $20,202 were paid in common stock. Dividends payable which
were paid subsequently to December 31, 1997, in preferred shares with a
value of $72,573 were accrued against additional paid-in capital.
In 1996, stock was issued in payment to a vendor with a value of $52,720.
NOTE L--EXPORT SALES
The Company sells software abroad through distributors, dealers, and mail
orders. In 1997, export sales to Brazil totaled $3,159,000 or approximately
21% of total sales. Total export sales for the years ended December 31, 1997
and 1996, were approximately $7,589,000 and $7,079,000, respectively.
NOTE M--RETIREMENT PLAN
The Company has a profit-sharing retirement plan which conforms to the
provisions of Section 401(a) of the Internal Revenue Code. The plan covers
all full-time employees, and allows employees voluntarily to defer a certain
percentage of their income through contributions to the plan. If no
resolution is made by the Board of Directors to the contrary, the Company is
not required to contribute. No Company contribution was made for the years
ended December 31, 1997 or 1996.
F-21
<PAGE>
Globalink, Inc.
Notes to Financial Statements--Continued
December 31, 1997 and 1996
NOTE N--CONCENTRATION OF CREDIT RISK
Due to the nature of the Company's business, sales to a few customers,
primarily software distributors and original equipment manufacturers (OEMs),
have accounted for a significant percentage of the Company's sales. During
1997, one customer accounted for 17% of net sales. During 1996, three
customers accounted for 10% or more of net sales each (in aggregate,
representing 37% of net sales). Accounts receivable at December 31, 1997 and
1996, include approximately $1,805,000 and $3,981,000, respectively, in
amounts due from the Company's significant customer(s).
NOTE O--NON-MONETARY TRANSACTION
In December 1997, the Company entered into a non-monetary transaction with a
publishing company which included license agreements between the parties. No
gain or loss was recorded on this transaction, as there was an equal
exchange between the two companies.
The Company became a licensee under two agreements. The first, a one-year
license for the use of six "Virtual Campuses" established by the publishing
company, had a value of $600,000. At December 31, 1997, this amount was
capitalized as a prepaid license, the balance of which will be amortized
over the term of the license agreement. The second license, relating to
"Campus Courseware" provided by the publishing company, had a value of
$650,000 which was expensed in 1997.
In exchange, the Company granted a license for its Barcelona Technology
Server in five languages with a value of $1,025,000 which has been included
in income in 1997. In conjunction with this license, the Company will
provide maintenance for a period of one year from the date of the agreement.
The value of the maintenance agreement is $225,000 which has been recorded
as deferred income at December 31, 1997, and will be recognized over the
term of the maintenance agreement.
F-22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1997, Financial Statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,068,241
<SECURITIES> 0
<RECEIVABLES> 13,893,969
<ALLOWANCES> 2,693,826
<INVENTORY> 760,659
<CURRENT-ASSETS> 13,857,592
<PP&E> 1,732,549
<DEPRECIATION> 1,144,766
<TOTAL-ASSETS> 15,414,946
<CURRENT-LIABILITIES> 4,728,089
<BONDS> 92,000
0
755,354
<COMMON> 91,602
<OTHER-SE> 22,215,727
<TOTAL-LIABILITY-AND-EQUITY> 15,414,946
<SALES> 13,386,873
<TOTAL-REVENUES> 14,729,115
<CGS> 2,347,514
<TOTAL-COSTS> 7,978,294
<OTHER-EXPENSES> 5,996,652
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,459
<INCOME-PRETAX> (1,615,804)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,615,804)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,615,804)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
