U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- -----
Exchange Act of 1934
For the quarterly period ended June 30, 1998 or
______ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 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
Not Applicable
(Former name, address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Registrant had 9,315,460 shares of common stock outstanding as of June 30, 1998.
Transitional Small Business Disclosure Format (Check one): Yes X No
GLOBALINK, INC.
TABLE OF CONTENTS
Part I Financial Information: Page No.
Item 1. Financial Statements
Balance Sheets as of June 30, 1998,
and December 31, 1997 1
Statements of Operations for the Three
Months Ended June 30, 1998, and
June 30, 1997 2
Statements of Operations for the Six
Months Ended June 30, 1998, and
June 30, 1997 3
Statements of Cash Flows for the Six
Months Ended June 30, 1998, and
June 30, 1997 4
Notes to Interim Financial Statements 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Part II Other Information:
Item 2. Changes in Securities 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
Item 1. Financial Statements
GLOBALINK, INC.
BALANCE SHEETS
June 30, December 31,
1998 1997
------------------ ------------------
ASSETS (Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 1,795,040 $ 1,068,241
Marketable securities 0 0
Accounts receivable, net of allowances of
$2,879,887 and $2,693,826 11,619,376 11,200,143
Inventories 736,769 760,659
Prepaid expenses and deposits 1,185,750 791,415
Other receivables 43,506 37,134
------------------ ------------------
Total Current Assets 15,380,441 13,857,592
Long-Term Receivable 125,479 327,750
Equipment and Furniture, net of accumulated
depreciation of $1,372,379 and $1,144,766 507,613 587,783
Capitalized Software, net of accumulated
amortization of $5,546,609 and $5,299,793 707,989 641,821
------------------ ------------------
Total Assets $ 16,721,522 $ 15,414,946
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 2,972,126 $ 2,410,886
Accrued and other liabilities 1,163,140 832,847
Current portion of notes payable 1,114,356 1,484,356
------------------ ------------------
Total Current Liabilities 5,249,622 4,728,089
Long-Term Notes Payable 2,087,877 92,000
Deferred Rent 31,696 42,015
Stockholders' Equity:
Preferred stock, $.01 par value, 250,000 shares
authorized, 23,342 and 26,771 shares
issued and outstanding 645,864 755,354
Common stock, $.01 par value, 20,000,000 shares
authorized, 9,315,460 and 9,160,236 shares
issued and outstanding 93,155 91,602
Additional paid-in capital - common stock 22,822,454 22,143,154
Dividends payable 29,982 72,573
Accumulated deficit (14,239,128) (12,509,841)
------------------ ------------------
Total Stockholders' Equity 9,352,327 10,552,842
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 16,721,522 $ 15,414,946
================== ==================
<FN>
The accompanying notes are an integral part of these statements.
1
</FN>
GLOBALINK, INC.
STATEMENTS OF OPERATIONS
Three Months Ended
June 30,
1998 1997
------------------ ------------------
(Unaudited) (Unaudited)
Product sales (net of returns and allowances) $ 2,328,626 $ 3,012,546
Translation service revenue 323,919 448,607
------------------ ------------------
2,652,545 3,461,153
Costs and Expenses:
Cost of products sold 462,748 386,027
Amortization of capitalized software 84,597 183,769
Direct labor and fringes 159,346 152,504
Development 269,998 214,597
Selling, marketing and other 2,231,319 1,873,824
Administrative 974,071 949,984
------------------ ------------------
4,182,079 3,760,705
------------------ ------------------
Loss From Operations (1,529,534) (299,552)
Interest expense, net (50,029) (506)
------------------ ------------------
Loss Before Income Taxes (1,579,563) (300,058)
Income tax expense 0 0
------------------ ------------------
Net Loss $ (1,579,563) $ (300,058)
================== ==================
Loss Per Common Share (Basic and Diluted) $ (0.17) $ (0.05)
================== ==================
Weighted-Average Number of Common Shares 9,220,986 5,899,485
================== ==================
<FN>
The accompanying notes are an integral part of these statements.
2
</FN>
GLOBALINK, INC.
STATEMENTS OF OPERATIONS
Six Months Ended
June 30,
1998 1997
------------------ ------------------
(Unaudited) (Unaudited)
Product sales (net of returns and allowances) $ 6,144,400 $ 6,568,251
Translation service revenue 936,909 599,067
------------------ ------------------
7,081,309 7,167,318
Costs and Expenses:
Cost of products sold 885,150 861,716
Amortization of capitalized software 246,816 358,007
Direct labor and fringes 520,158 222,564
Development 497,614 437,824
Selling, marketing and other 4,617,609 3,662,607
Administrative 1,974,046 1,811,670
------------------ ------------------
8,741,393 7,354,388
------------------ ------------------
Loss From Operations (1,660,084) (187,070)
Interest expense, net (69,203) (12,774)
------------------ ------------------
Loss Before Income Taxes (1,729,287) (199,844)
Income tax expense 0 0
------------------ ------------------
Net Loss $ (1,729,287) $ (199,844)
================== ==================
Loss Per Common Share (Basic and Diluted) $ (0.19) $ (0.04)
================== ==================
Weighted-Average Number of Common Shares 9,192,863 5,748,496
================== ==================
<FN>
The accompanying notes are an integral part of these statements.
3
</FN>
GLOBALINK, INC.
STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
1998 1997
------------------ ------------------
(Unaudited) (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (1,729,287) $ (199,844)
------------------ ------------------
Adjustments to reconcile net loss to net cash
used in operating activities
Amortization of capitalized software 246,816 358,007
Depreciation 227,613 209,901
Change in Assets and Liabilities
Increase in accounts receivable (419,233) (2,083,023)
Decrease in inventories 23,890 110,643
Increase in prepaid expenses and deposits (394,335) (273,881)
Decrease (increase) in other receivables 195,899 (237,006)
Increase in accounts payable 561,240 398,187
Increase in accrued and other liabilities 330,293 5,902
Decrease in deferred rent (10,319) (11,774)
------------------ ------------------
Total Adjustments 761,864 (1,523,044)
------------------ ------------------
Net cash used in operating activities (967,423) (1,722,888)
------------------ ------------------
Cash flows from investing activities
Decrease in marketable securities 0 (993,120)
Increase in capitalized software (312,984) (233,572)
Capital expenditures for equipment and furniture (147,443) (65,254)
------------------ ------------------
Net cash used in investing activities (460,427) (1,291,946)
------------------ ------------------
Cash flows from financing activities
Issuance of preferred stock 0 2,381,776
Issuance of common stock and warrants 528,772 8,198
Preferred stock dividends 0 0
Issuance (repayment) of debt 1,625,877 (257,500)
------------------ ------------------
Net cash provided by financing activities 2,154,649 2,132,474
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 726,799 (882,360)
Cash and cash equivalents at beginning of period 1,068,241 1,606,088
------------------ ------------------
Cash and cash equivalents at end of period $ 1,795,040 $ 723,728
================== ==================
<FN>
The accompanying notes are an integral part of these statements.
4
</FN>
GLOBALINK, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE A -- Summary of Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for the interim period ended June 30,
1998, are not necessarily indicative of the results to be expected for the full
year. For further information, refer to the financial statements and the related
footnotes included in the Company's audited financial statements for the year
ended December 31, 1997.
NOTE B -- Composition of Certain Financial Statement Captions
1. Cash and Cash Equivalents
The Company considers all highly liquid securities purchased with a maturity of
three months or less to be cash equivalents.
2. Marketable Securities
Marketable securities include government debt securities which mature within one
year. The Company classifies debt securities as held-to-maturity.
Held-to-maturity securities are carried at amortized cost which equals estimated
fair value.
3. Inventories
Inventories consist of finished goods and work-in-process which are stated at
the lower of first-in, first-out (FIFO) cost or market.
4. Prepaid Expenses and Deposits
Prepaid expenses and deposits consist of a prepaid license, prepaid advertising
and brochures and other prepaid amounts. The prepaid license will be amortized
over the term of the license agreement. 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.
5. Equipment and Furniture
Equipment and furniture consist of office and other equipment and furniture and
fixtures. Depreciation is provided for in amounts sufficient to relate the cost
of depreciable assets to operations over their estimated service lives, ranging
from three to seven years. The straight-line method of depreciation is followed
for all assets for financial reporting purposes. Accelerated methods are used
for tax purposes.
5
NOTES TO INTERIM FINANCIAL STATEMENTS -- (Continued)
6. Capitalized Software
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.
7. Accrued and Other Liabilities
Accrued and other liabilities consist of accrued salaries, incentive
compensation, commissions, payroll taxes and fringe benefits, deferred income,
accrued royalties and other accrued liabilities.
8. Earnings Per Common Share
Basic earnings per common share 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 earnings per common share reflect 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
earnings per common share is computed similarly to fully diluted earnings per
common share pursuant to APB Opinion 15.
The following table reconciles basic and diluted earnings per common share for
the quarters ended June 30, 1998 and 1997:
Three months ended June 30,
1998 1997
-----------------------------------
Numerator
Net loss $ (1,579,563) $ (300,058)
Preferred stock dividend (18,879) (24,132)
-----------------------------------
Net loss available to
common stockholders $ (1,598,442) $ (324,190)
-----------------------------------
Denominator
Weighted-average shares 9,220,986 5,899,485
Common equivalent shares - -
-----------------------------------
Diluted shares 9,220,986 5,899,485
-----------------------------------
Six months ended June 30,
1998 1997
-----------------------------------
Numerator
Net loss $ (1,729,287) $ (199,844)
Preferred stock dividend (37,300) (56,543)
-----------------------------------
Net loss available to
common stockholders $ (1,766,587) $ (256,387)
-----------------------------------
Denominator
Weighted-average shares 9,192,863 5,748,496
Common equivalent shares - -
-----------------------------------
Diluted shares 9,192,863 5,748,496
-----------------------------------
6
NOTES TO INTERIM FINANCIAL STATEMENTS -- (Continued)
The loss per common share for the quarters ended June 30, 1998 and 1997, do not
include the common equivalent shares because the effect of such inclusion would
be to decrease the loss per common share.
NOTE C - 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. This officer has since made payments totaling
approximately $188,000 against the note.
NOTE D - 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 provisions which treble 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.
NOTE E - Warrants, Options and Other Stock Issued
1. 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. No
compensation cost has been recognized for employee options.
2. 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 was 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, or into 500 shares of
Series A-1 preferred stock. 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 whom 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.
7
NOTES TO INTERIM FINANCIAL STATEMENTS -- (Continued)
3. 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, subject to adjustment. Any unconverted preferred
stock remaining at January 1, 2002, will automatically be converted into the
lesser of ten shares of common stock per preferred share or the number of shares
of common stock that is equal to $100 divided by the average bid price for
common stock for the ten consecutive trading days ending five business days
prior to January 1, 2002, subject to adjustment. 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, subject to adjustment. At June 30, 1998,
and December 31, 1997, the Company had outstanding 23,342 and 26,771 shares of
Series A-2 preferred stock and 34,798 and 44,415 associated stock warrants,
respectively.
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 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. 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 whom 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.
4. 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., Inc., which served as the placement agent. These purchase
options have a term of five years.
NOTE F - Long-Term Notes Payable
In June 1998, the Company's Board of Directors approved the issuance of 10%
Convertible Debenture units. The Company sold 22 units for a total of
$2,200,000. Each unit consists of a $100,000 principal amount 10% Convertible
Debenture and 23,000 common stock purchase warrants, each of which entitles the
holder to purchase 23,000 shares of common stock of the Company at an exercise
price of $2.50 per share for a period of five years. The holders of the
debentures have the right to convert all or part of the principal amount of each
debenture into shares of common stock at a price, subject to adjustment, equal
to $2.00 per share. On June 10, 2003, any outstanding debentures shall
automatically convert into shares of common stock. Interest on each debenture
shall accrue at a rate of 10% per annum and is payable in cash annually. As part
of the agreement, the Company also issued five year warrants to purchase 220,000
shares of Common Stock at an exercise price of $2.20, subject to adjustment, to
M. H. Meyerson & Co., Inc., which served as the placement agent.
8
NOTES TO INTERIM FINANCIAL STATEMENTS -- (Continued)
NOTE G - Export Sales
The Company sells software abroad through distributors, dealers and mail orders.
During the six months ended June 30, 1998, export sales to Germany and
Switzerland totaled $382,000 and $375,000, respectively, or approximately 5%
each of net sales. During the corresponding period in 1997, export sales to
Brazil totaled $1,760,000, or approximately 25% of net sales. Total export sales
for the six months ended June 30, 1998 and 1997, were approximately $2,552,000
and $4,007,000, respectively.
NOTE H - 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 the six
months ended June 30, 1998, two customers accounted for 10% or more of net sales
(in aggregate, representing 41% of net sales). During the corresponding period
in 1997, two customers accounted for 10% or more of net sales each (in
aggregate, representing 22% of net sales). Accounts receivable at June 30, 1998,
and December 31, 1997, include approximately $3,137,000 and $1,805,000,
respectively, in amounts due from the Company's significant customer(s).
NOTE I - Subsequent Event
On July 20, 1998, the Company signed an agreement to be acquired by Lernout &
Hauspie Speech Products N.V. ("L&H"). The transaction would be structured as a
merger of the Company with a newly-formed subsidiary of L&H, pursuant to which
the Company's stockholders would receive .095726 of a share of L&H common stock
for each share of the Company's common stock, subject to a 10% collar
arrangement. Based on the July 20, 1998, closing price of L&H's common stock of
$58.50, that would result in a price of $5.60 for each of the Company's common
stock shares. There will be no adjustment in the number of shares of L&H stock
payable in the merger if L&H's stock price increases or decreases only 10% or
less prior to the closing. If L&H's stock price increases or decreases more than
10% from $58.50, the number of shares of L&H common stock payable to the
Company's stockholders would decrease or increase, respectively, to maintain a
per-share consideration at the collared prices of $6.16 or $5.04. If the price
of L&H's common stock drops below $43.00, L&H may either elect not to proceed
with the merger or to avoid substantial dilution by using cash to make up part
of the merger consideration. If the per-share price of L&H's common stock drops
to $20.00 or less, the Company may elect not to proceed with the merger. It is
anticipated that the merger will be consummated in the fourth quarter, pending
approval by the Company's stockholders and the satisfaction of other customary
conditions.
9
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
This Form 10-QSB contains historical information and forward-looking statements
within the meaning 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. In the context of the forward-looking information provided in
this Form 10-QSB, please refer to the Company's most recent Form 10- KSB and the
Company's other filings with the Securities and Exchange Commission.
The Registrant's net loss for the three months ended June 30, 1998, was
$1,580,000 compared to a net loss of $300,000 for the corresponding period in
1997. Revenues for the same three month period decreased 23% to $2,653,000 from
$3,461,000. For the six months ended June 30, 1998, the net loss was $1,729,000
compared to a net loss of $200,000 for the corresponding period in 1997.
Revenues for the same six month period decreased 1% to $7,081,000 from
$7,167,000.
Product sales for the three months ended June 30, 1998, decreased 23% to
$2,329,000 from $3,013,000 for the corresponding period in the prior year. For
the six months ended June 30, 1998, product sales decreased 6% to $6,144,000
from $6,568,000 for the corresponding period in the prior year. The decrease was
primarily attributable to delayed OEM and corporate sales which were anticipated
to close in the second quarter, but were postponed by the prospective clients
until the third and fourth quarters.
International sales for the three months ended June 30, 1998, decreased 41% to
$1,254,000 from $2,122,000 for the corresponding period in 1997. For the six
months ended June 30, 1998, international sales decreased 36% to $2,552,000 from
$4,007,000 for the corresponding period in 1997. 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.
Translation services revenue for the three months ended June 30, 1998, decreased
28% to $324,000 from $449,000 for the corresponding period in the prior year.
For the six months ended June 30, 1998, translation service revenue increased
56% to $937,000 from $599,000 for the corresponding period in 1997. The
fluctuation in revenues for this group was due to the nature and timing of
larger jobs obtained under various long-term projects with the group's more
established customers.
10
Sales returns and allowances increased to $1,717,000 for the six months ended
June 30, 1998, compared to $1,417,000 for the corresponding period in 1997 due
primarily to the Company's continued efforts to reduce distributor inventory in
the channels and collect existing receivable balances from its distributors.
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.
Six months ended June 30,
1998 1997
-----------------------------------
Gross Product Sales $ 7,861,000 $ 7,985,000
Returns (1,717,000) (1,417,000)
-----------------------------------
Net Product Sales $ 6,144,000 $ 6,568,000
-----------------------------------
Cost of products sold for the three months ended June 30, 1998, increased 20% to
$463,000 from $386,000 for the corresponding period in the prior year. For the
six months ended June 30, 1998, cost of products sold increased 3% to $885,000
from $862,000 for the corresponding period in the prior year. The increase in
cost of products sold was primarily due to a shift in the Company's sales
mixture during the second quarter. The Company experienced a decrease in
revenues from OEM contracts, which carry a much higher gross profit margin than
the Company's other products. Gross profit margin was 83% for the three months
ended June 30, 1998, compared to 89% for the corresponding period in 1997. For
the six months ended June 30, 1998, gross profit margin was 87% compared to 88%
for the corresponding period in 1997. The decrease in gross profit margin was
directly attributable to the increase in cost of products sold.
Amortization of capitalized software for the three months ended June 30, 1998,
decreased 54% to $85,000 from $184,000 for the corresponding period in the prior
year. For the six months ended June 30, 1998, amortization of capitalized
software decreased 31% to $247,000 from $358,000 for the corresponding period in
the prior year. The decrease is due to certain previously capitalized software
development costs becoming fully amortized in March 1998. This was partially
offset by the release of new products in March and June 1998 for which
previously capitalized software development costs began to be amortized.
Direct labor and fringes, which principally include charges for independent and
in-house translators within the translation services group, increased 4% for the
three months ended June 30, 1998, to $159,000 from $153,000 for the
corresponding period in 1997. For the six months ended June 30, 1998, direct
labor and fringes increased 134% to $520,000 from $223,000 for the corresponding
period in 1997. These expenses increased from 37% to 55% as a percentage of
Translation Services revenues. This increase was primarily attributable to the
increased sales for this group and to fluctuations in the number and relative
size of jobs being performed, as the gross margin varies with the nature and
size of the job due to the fixed costs incurred and administrative tasks
performed.
Product development expenses, which consist of the current cost of
non-capitalizable development expenses, increased 26% for the three months ended
June 30, 1998, to $270,000 from $215,000 for the corresponding period in the
prior year. For the six months ended June 30, 1998, product development expenses
increased 14% to $498,000 from $438,000 for the corresponding period in the
prior year. The increase in product development expenses is due to the current
development of the Company's new intra-European language pairs along with a
major Barcelona Improvement Project (BIP) which may improve the accuracy and
quality of the Company's entire product line.
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Selling, marketing and other expenses, which include the costs of selling,
marketing, customer support, shipping and administration for product sales and
translation services, increased 19%, or $357,000, to $2,231,000 for the three
months ended June 30, 1998, from $1,874,000 for the corresponding period in
1997. For the six months ended June 30, 1998, selling, marketing and other
expenses increased 26%, or $955,000, to $4,618,000 from $3,663,000 for the
corresponding period in 1997. This increase was primarily attributable to
increased promotion and advertising programs.
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 three months ended
June 30, 1998, these expenses increased 3%, or $24,000, to $974,000 from
$950,000 for the corresponding period in the prior year. For the six months
ended June 30, 1998, these expenses increased 9%, or $162,000, to $1,974,000
from $1,812,000 for the corresponding period in the prior year. The increases
occurred primarily in the areas of payroll, legal and accounting fees,
recruiting, rent and depreciation as a result of additional expenses incurred to
support the growth of the Company.
Interest expense was $50,000 for the three months ended June 30, 1998, compared
to $1,000 for the corresponding period in 1997. For the six months ended June
30, 1998, interest expense was $69,000 compared to $13,000 for the corresponding
period in 1997. This was due to interest expense incurred on the Company's
revolving and equipment lines of credit and convertible debentures.
Income Tax Expense
No provision for income taxes was required due to the Company's net operating
loss ("NOL") carryforwards. Approximately $10,478,000 of NOL carryforwards
existed at December 31, 1997. Accordingly, the NOL carryforwards at June 30,
1998, are sufficient to cover any potential income tax expense generated as a
result of any future earnings reported.
Liquidity and Financial Resources
The Company anticipates that the net proceeds from the issuance of the preferred
stock units, common stock units and convertible debentures, 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.
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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 September 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 June 30, 1998, included approximately $3,119,000 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.
The Company has secured a $1,000,000 revolving line of credit and a $750,000
equipment line of credit with First Union National Bank. As of June 30, 1998,
the Company had $1,000,000 outstanding under the revolving line of credit, which
is being used to finance accounts receivable and other working capital needs. In
addition, the Company had $165,000 outstanding under the equipment line of
credit, which was used to finance furniture and equipment purchases.
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.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities
In June 1998, the Company issued 22 units of $100,000 principal amount 10%
Convertible Debentures for a total of $2,200,000, as further disclosed in Note F
to the Notes to Interim Financial Statements.
During the three months ended June 30, 1998, holders of Series A-2 preferred
stock converted 5,532 shares of preferred stock into 71,711 shares of common
stock and exercised 54,264 warrants to purchase 70,000 shares of common stock at
$3.24 per share.
During the three months ended June 30, 1998, the Company granted options to
certain directors and employees to purchase an aggregate of 146,000 shares of
common stock. Options for 80,000 shares were granted to directors, all of which
have an exercise price of $3.44 per share, have a term of 5 years and are fully
vested. Options for 66,000 shares were granted to employees, all of which have
an exercise price of $3.44 per share, have a term of 8 years and vest at the
rate of 33-1/3 percent per year over 3 years.
The issuances of all of these convertible debentures, common stock and options
are claimed to be exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 as transactions by an issuer not involving a public
offering.
Item 4. Submission of Matters to a Vote of Security Holders
On June 19, 1998, the Company held its annual meeting of stockholders, at which
the Company's stockholders considered (i) the election of directors, (ii) the
appointment of Grant Thornton LLP as the Company's independent public
accountants and (iii) the approval of the Company's 1997 Employee Stock Option
Plan. Stockholders voted to elect Harry E. Hagerty, Jr., William E. Kimberly,
John F. McCarthy, III, Thomas W. Patterson, Ronald W. Johnston and David H.
Biggs to serve as directors for the ensuing year and until their successors are
elected and qualified. 8,089,965 shares were voted for and 122,196 shares were
withheld in Harry E. Hagerty's election, 8,091,915 shares were voted for and
120,246 shares were withheld in William E. Kimberly's, John F. McCarthy's,
Ronald W. Johnston's and David H. Biggs' election and 8,091,715 shares were
voted for and 120,446 shares were withheld in Thomas W. Patterson's election.
With respect to the appointment of Grant Thornton LLP as the Company's
independent public accountants, 8,120,425 were voted for, 50,090 shares were
voted against and 41,646 shares abstained from voting. With respect to the
approval of the Company's 1997 Employee Stock Option Plan, 3,043,719 were voted
for, 342,929 shares were voted against and 4,825,513 shares abstained from
voting.
Item 5. Other Information
Notice to Stockholders Regarding 1999 Annual Meeting of Stockholders
Pursuant to Rule 14a-4 promulgated under the Securities Exchange Act of 1934,
stockholders are advised that the Company's management shall be permitted to
exercise discretionary voting authority under proxies it solicits and obtains
for the Company's 1999 Annual Meeting of Stockholders with respect to any
proposal presented by a stockholder at such meeting, without any discussion of
the proposal in the Company's proxy statement for such meeting, unless the
Company receives notice of such proposal at its principal office in Fairfax,
Virginia no later than February 1, 1999.
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27 Financial Data Schedule (6/30/98)
b. Reports on Form 8-K
The Company filed a report in order to disclose the sale of 22
units of $100,000 principal amount 10% Convertible Debentures
on Form 8-K on June 25, 1998.
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SIGNATURES
In accordance with the requirements 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.
GLOBALINK, INC.
(Registrant)
Date: August 14, 1998 By:/s/Mark A. Paiewonsky
---------------------
Mark A. Paiewonsky
Chief Financial & Accounting Officer
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