SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 1997.
[ ] 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: 0-26394
ACCENT SOFTWARE INTERNATIONAL LTD.
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(Exact Name of Registrant in its Chapter)
ISRAEL N/A
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
28 PIERRE KOENIG STREET, JERUSALEM 91530 ISRAEL
011-972-2-679-3723
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(Address, Including Zip Code, and Telephone Number, Including
Area Code of Registrant's Principal Executive Offices.)
N/A
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(Former Name, Former Address and Former 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 [ ]
On April 17, 1997, the registrant had outstanding 11,696,442 Ordinary Shares
(including 1,800,000 Ordinary Shares included in the registrant's outstanding
Units).
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars and shares in thousands
(Unaudited)
December 31, March 31,
1996 1997
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 8,723 $ 4,352
Trade receivables, net of allowance of
$2,245 in 1996 and $2,069 in 1997 984 995
Other receivables 172 72
Prepaid expenses 595 547
Inventories 1,021 800
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Total current assets 11,495 6,766
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Equipment
Cost 2,462 2,493
Less - Accumulated depreciation 723 840
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Equipment, net 1,739 1,653
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Capitalized software development costs, net of
accumulated amortization of $1,098 in 1996
and $1,209 in 1997 555 444
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Total assets $ 13,789 $ 8,863
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 1,443 $ 1,719
Accounts payable and accrued expenses 6,424 3,629
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Total current liabilities 7,867 5,348
Long-term bank loans 2,619 2,200
Accrued severance liability 329 306
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Total liabilities 10,815 7,854
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Shareholders' Equity
Share capital 28 28
Ordinary shares of NIS 0.01 par value.
Authorized 30,000 shares; issued and
outstanding 11,670 at December 31, 1996
and 11,696 at March 31, 1997
Share premium 36,193 36,255
Accumulated deficit (33,247) (35,274)
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Total shareholders' equity 2,974 1,009
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Total liabilities and shareholders' equity $ 13,789 $ 8,863
========== ==========
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars and shares in thousands (except per share amounts)
(Unaudited)
For the three months ended March 31,
1996 1997
---- ----
Net sales $ 2,843 $ 727
Operating costs and expenses
Cost of sales 1,367 575
Product development costs, net 648 1,118
Marketing expenses 3,273 567
General and administrative expenses 1,480 512
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Total operating costs and expenses 6,768 2,772
Operating loss (3,925) (2,045)
Other income (expense) (7) 18
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Net loss $(3,932) $(2,027)
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Net loss per share $ (0.41) $ (0.17)
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Weighted average number of shares 9,570 11,686
========== ========
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
U.S. dollars and shares in thousands
(Unaudited)
Number of
Ordinary Share Share Accumulated
Shares Capital Premium Deficit Total
------ ------- ------- ------- -----
Balance as of December 31, 1995 9,481 $ 21 $ 22,325 $ (12,213) $10,133
Warrants exercised 192 1 640 - 641
Net loss - (3,932) (3,932)
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Balance as of March 31, 1996 9,673 $ 22 $ 22,965 $ (16,145) $6,842
=========================================================
Balance as of December 31, 1996 11,670 $ 28 $ 36,193 $ (33,247) $2,974
Warrants exercised 26 - 62 - 62
Net loss - - - (2,027) (2,027)
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Balance as of March 31, 1997 11,696 $ 28 $ 36,255 $(35,274) $ 1,009
=========================================================
THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
(Unaudited)
For the three months ended March 31,
1996 1997
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Operating activities
Net Loss $ (3,932) $ (2,027)
Adjustments to reconcile net loss to net cash
used in operating activities (see below) (697) (2,232)
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Net cash used in operating activities (4,629) (4,259)
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Investing activities (388) (31)
Acquisition of equipment
Capitalized software development costs (46) -
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Net cash used in investing activities (434) (31)
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Financing activities
Repayment of long-term bank loans (1) (143)
Proceeds received on exercise of options
and warrants, net 641 62
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Net cash (provided) used by financing activities 640 (81)
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Decrease in cash and cash equivalents (4,423) (4,371)
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Cash and cash equivalents, beginning of period 9,633 8,723
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Cash and cash equivalents, end of period $ 5,210 $ 4,352
=========== ============
Adjustments to reconcile net loss to net cash used
in operating activities
Items not involving cash flow
Depreciation and amortization $ 222 $ 228
Increase (decrease) in severance liability 13 (23)
Increase (decrease) in allowance for doubtful
accounts and sales returns, net 491 (176)
Changes in operating assets and liabilities
(Increase) decrease in trade receivables (1,633) 165
(Increase) decrease in other receivables (147) 100
(Increase) decrease in prepaid expenses (118) 48
(Increase) decrease in inventories (368) 221
Increase (decrease) in accounts payable
and accruals 843 (2,795)
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Net adjustments $ (697) $ (2,232)
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THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Accent
Software International Ltd., and its subsidiaries ("Accent" or "the
Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information. 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
of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month
period ended March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
Although the Company believes that the disclosure presented herein is
adequate to make the information presented not misleading, it is
suggested that these condensed consolidated financial statements be
read in conjunction with the audited financial statements and
footnotes included in the Company's 1996 Annual Report on Form 10-K
for the year ended December 31, 1996.
NOTE 2 - INVENTORIES
December 31 March 31,
1996 1997
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Materials $ 230 $ 180
Finished Goods 791 620
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$ 1,021 $ 800
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NOTE 3 - SHARE CAPITAL
On June 6, 1996, the Company effected a three-for-two stock split. All
share and per share data have been retroactively restated in the
accompanying financial statements to give effect to this stock split.
NOTE 4 - LIQUIDITY
As of December 31, 1996 and March 31, 1997, the Company had
accumulated deficits of $33,247 and $35,274, respectively, and
anticipates that it will continue to incur losses for some time.
Working capital decreased from $3,628 to $1,418 due primarily to the
Company's continuing operating losses and working capital needs.
6
In October 1996, the Company initiated a restructuring and refocusing
effort which included a substantial reduction in the number of
employees, major reductions in sales and marketing activities and the
elimination or reduction of various other expenses. As a result of
these efforts, the Company believes, at this time, that it has
sufficient funds to allow it to operate consistent with its plans
throughout 1997. There can be no assurance, however, that the Company
will be able to operate in accordance with its plans and, therefore,
additional funding from other sources may be necessary. As 1997
achievements begin to be recognized, efforts will be placed on
obtaining additional funding through new or restructured borrowings or
the sale of equity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITIONS.
OVERVIEW
This Form 10-Q for Accent Software International Ltd., and its
subsidiaries ("Accent" or "the Company") contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 1O-Q pursuant to the "safe harbor" provision of the Private Securities
Litigation Reform Act of 1995. They involve known and unknown risks and
uncertainties including, but not limited to, the timely availability of new
products, market acceptance of the Company's existing products and products
under development, the impact of competing products and pricing, the
availability of sufficient resources including short and long-term financing of
the Company to carry out its marketing plans, and quarterly fluctuations in
operating results. The Company's actual results in future periods may be
materially different from any future performance suggested herein. Further, the
Company operates in an industry sector where securities' values may be volatile
and may be influenced by economic and other factors beyond the Company's
control. In the context of the forward-looking information provided in this Form
10-Q, please refer to the Company's Form 10-K and the Company's other filings
with the Securities and Exchange Commission.
Accent designs, develops, markets and supports multilingual software
development tools as well as multilingual Internet and text-processing software
applications. Through its majority-owned subsidiary, AgentSoft, the Company also
develops and markets intelligent agent-based software tools and products for
process automation over the Internet. Since it first began to develop
multilingual software, Accent has invested substantial sums on research and
development, established a sales and marketing force, introduced new products
and developed customer support services and the administrative infrastructure
necessary to conduct its operations. As a result of the start-up nature of its
business efforts during this period, Accent has incurred net losses each year
since 1992, including a net loss of $21,034,000 for the fiscal year ended
December 31, 1996.
In October 1996, the Company initiated a restructuring and refocusing
effort including a substantial reduction in the number of employees, large
reductions in sales and marketing expenses and the elimination or reduction of
various other costs. Certain new, experienced senior management individuals,
including a new chief executive officer and a new chief financial officer, have
also joined the Company. Through March 31, 1997, these initiatives have achieved
a nearly two-thirds reduction in the Company's quarterly loss from its peak of
$6,091,000 in the second quarter, 1996, to $2,027,000 in the most recently
completed quarter. The Company believes, at this time, that it has sufficient
funds to operate consistent with its plans throughout 1997. Management also
believes it has developed appropriate contingency plans in order to further
manage its cash and working capital in the event that its plans do not fully
materialize. There is no assurance, however, that the Company will be able to
operate in accordance with its plans and, therefore, additional funding from
other sources may be necessary.
As 1997 achievements begin to be recognized, efforts will be placed on
obtaining additional funding through new or restructured borrowings or the sale
of equity. If additional funds are raised through the issuance of equity or
convertible debt securities, the Company's current shareholders may experience
dilution. While management of the Company believes additional funding will be
available if necessary, there can be no assurance that additional financing will
be available on terms acceptable to the Company, if at all, if and when such
financing is required. The inability to obtain additional financing, if and when
needed, would have a material adverse effect on the Company, including possibly
requiring the Company to curtail or cease operations.
The Company's ability to generate increased revenue and to fund planned
expenditures is dependent on a number of factors, many of which are outside its
control. In particular, revenue growth and profitability, if any, will depend on
the ability of the Company to develop and market new products and product
enhancements, the continued growth in the number of Internet users, demand for
the Company's products, the level of product and price competition, the success
of the Company in attracting and retaining motivated and qualified personnel,
the ability of the Company to control its costs and general economic conditions.
There can be no assurance that the
8
Company will meet such challenges successfully. Any of these or other factors
could have a material adverse effect on the Company's business, operating
results or financial condition.
RESULTS OF OPERATIONS
Accent achieved sales of approximately $727,000 during the three months
ended March 31, 1997, while narrowing its operating loss to approximately
$2,045,000 for the period.
The following table sets forth for the periods indicated the percentage of
revenues represented by certain expense items reflected in the Company's
Consolidated Statement of Operations.
Percentage of Sales
For the three months ended March 31.
------------------------------------
1996 1997
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Net sales 100.0% 100.0%
Cost of sales 48.1% 79.1%
Product development costs 22.8% 153.8%
Marketing expenses 115.1% 78.0%
General & administrative costs 52.1% 70.4%
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Total operating costs and expense 238.1% 381.3%
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Operating loss -138.1% -281.3%
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THREE MONTHS ENDED MARCH 31, 1997, COMPARED WITH THE THREE MONTHS ENDED MARCH
31, 1996
Net Sales. Net sales decreased approximately 74% to $727,000 in the
three months ended March 31, 1997 from $2,843,000 in the three months ended
March 31, 1996. The year earlier period included a non-recurring OEM contract of
$1,100,000 The Company's revenues during both three month periods were derived
primarily from retail sales.
Cost of Sales. Costs of sales were $575,000 during the three months
ended March 31, 1997, a reduction of 58% from $1,367,000 during the three months
ended March 31, 1996. The decline is primarily attributable to the reduced sales
volume during the latest quarter. Manufacturing, production, warehousing and
shipping expenses have all been reduced proportionally from the year earlier
period as the Company has begun to shift the focus of its marketing efforts away
from retail sales and towards more cost productive OEM and business-to- business
sales. The Company also continues to be impacted by prepaid, fixed royalty
expenses and the amortization of capitalized software costs, although both of
these costs were reduced from the year earlier period.
Product Development Costs. Product development costs increased to
$1,118,000 during the three months ended March 31, 1997 from $648,000 during the
year earlier period, an increase of approximately 73%. The number of employees
in product development increased to 70 at March 31, 1997 from 49 at March 31,
1996, as the Company has focused additional resources on the development of new
products. Included in product development costs are expenses of the Company's
84% owned subsidiary, AgentSoft, which began operations during the first quarter
1996, and whose expenses amounted to approximately $150,000 during the latest
quarter. Also during the first quarter 1997, the Company established a Chief
Technology Office whose purpose is to develop longer-range product strategies
and ideas.
Marketing Expenses. The Company's marketing expenses have been reduced
by over 80% to $567,000 in the three months ended March 31, 1997 from $3,273,000
in the three months ended March 31, 1996. Staffing in the sales and marketing
areas has been reduced to 7 during the latest quarter from 51 during the year
earlier
9
quarter as the Company has begun to shift the focus of its marketing and sales
efforts from retail to OEM and business-to-business sales. Also consistent with
the change in focus is significant reductions in non-personnel expenses such as
participation in trade shows, advertising and public relations costs. The
Company also closed its U.S. sales office in Newport Beach, California, during
the first quarter 1997, resulting in additional personnel and coot reductions.
General and Administrative Expenses. The Company reduced general and
administrative expenses by approximately 65% to $512,000 during the three months
ended March 31, 1997 from $1,480,000 during the three months ended March 31,
l996. The total number of employees in the various general and administrative
functions decreased to 19 during the quarter ended March 31, 1997 from 38 during
the year earlier period. General and administrative expenses include the costs
incurred by the Company's executive management, legal, finance, human resources,
MIS and office administration departments. During the most recent quarter, the
Company established a new office in Colorado Springs, Colorado. Certain
executive, sales, marketing and administrative functions will be based in the
Colorado Springs location.
Other income (Expense). The Company generated $18,000 in net other
income during the three months ended March 31, 1997 compared with a loss of
$7,000 during the three months ended March 31, 1996.
Net Loss. The net loss during the three months ended March 31, 1997 was
$2,027,000 or $0.17 per share, a reduction of approximately 48% compared with a
net loss of $3,932,000 or $0.41 per share during the three months ended March
31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Future sales of the Company's products and proposed products and
services will depend principally on customer demand for multilingual software
programs and services, multilingual Internet products and services and products
and services utilizing intelligent agent technology. The computer industry has
historically been volatile and, as is typically the case with newly introduced
products, the ultimate level of demand for the Company's products is subject to
a high degree of uncertainty. Developing worldwide market acceptance for the
Company's existing and planned products will require substantial marketing
efforts and capital resources to inform customers of the perceived benefits and
cost advantages of the Company's products. The Company has begun to narrow the
focus of its marketing efforts to primarily corporate and OEM customers because
the Company believes this approach will result in both increased sales and more
efficient utilization of its marketing resources.
Although Accent has refocused its sales and marketing efforts away from
the retail channel towards OEM and business-to-business sales, it will continue
to place product in the retail channel where appropriate. It therefore expects
that certain consequences of participation in the retail channel, such as
unexpected product returns or excess inventory and increased working capital
requirements necessitated by transfers of products to distributors on
consignment, may occur.
The Company's sales are made on credit terms which vary significantly
depending on the nature of the sale and size of the customer. In addition, the
Company does not hold collateral to secure payment from its customers.
Therefore, defaults on payment by several of the Company's customers have
adversely affected, and in the future could adversely affect, the Company's
business, results of operations and financial condition.
The Company believes it has established sufficient reserves to
accurately reflect the amount or likelihood of product returns or credits and
uncollectible receivables. There can be no assurance, however, that actual
returns or uncollected accounts receivable beyond the reserves established would
not have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company's operating activities used cash of $4,259,000 and
$4,629,000 during the three months ended March 31, 1997 and 1996, respectively.
Of the cash used during the first quarter 1997, $2,795,000 was used to bring
certain creditors current in the amounts owed them. The Company's investing
activities used cash of
10
$31,000 and $434,000 for the three month periods ended March 31, 1997 and 1996,
respectively. The Company's financing activities used cash of $81,000 during the
three month period ended March 31, 1997, and provided cash of $640,000 during
the three month period ended March 31, 1996.
To date, Accent's capital requirements in connection with its
development and marketing activities have been and will continue to be
significant. Since its inception, the Company has financed its operations
primarily through net proceeds from sales of equity securities, bank and other
credit facilities, various government guaranteed long-term loans under the
Approved Enterprise Program which is administered by the Israel Investment
Center, revenues from sales of software and loans from certain affiliated
parties.
During 1995, the Company obtained short-term bank loans and borrowed
funds from certain individuals, including certain shareholders, for general
working capital purposes. In May 1995, the Company received net proceeds of
$2,600,000 from a private placement of Units consisting of Ordinary Shares,
warrants to purchase Ordinary Shares and an unsecured promissory note. In July
1995, the Company received $9,785,000 from the Initial Public Offering of
Ordinary Shares and warrants to purchase Ordinary Shares. During the second half
of 1996, Accent borrowed an aggregate of $1,500,000 from IMR Fund, L.P. In
November 1996, the Company completed a secondary offering, receiving net
proceeds of approximately $12,800,000 from Ordinary Shares and warrants to
purchase Ordinary Shares.
The Law for the Encouragement of Capital Investments, 1959, provides
that capital investment in certain production facilities (or other eligible
assets) may, upon application to the Israel Investment Center which administers
the program, be designated as an "Approved Enterprise." Each certificate of
approval for an Approved Enterprise relates to a specific investment program in
the Approved Enterprise, delineated both by the financial scope of the
investment and by the physical characteristics of the facility or asset. The
Company must continue to comply with the various conditions of each respective
approved program including compliance with minimum investment levels and the
achievement of certain levels of sales. The Company believes it is in compliance
with, and will continue to comply with, these conditions; however, there can be
no assurance of such continued compliance.
Long-term bank loans received as part of the Approved Enterprise Program
totaled $4,100,000 as of December 31, 1996. Repayment of the loan began in March
1997, and is expected to continue at the rate of $145,000 per month. The balance
of the loan at March 31, 1997 was $3,900,000.
The Company anticipates, based on its current plans and assumptions
relating to its operations, that its current cash level and its projected cash
flow from operations will allow it to operate consistent with its plans
throughout 1997. In addition, management believes it has developed appropriate
contingency plans in the event its current plans and assumptions do not
materialize. Thereafter, the Company will need to raise additional funds. The
Company may need to raise additional funds sooner in order to fund more rapid
expansion, to develop new or enhanced services or products, or to acquire
complementary products, businesses or technologies. If additional fluids are
raised through the issuance of equity or convertible debt securities, the
Company's shareholders may experience dilution. While the Company has been
successful in raising additional funds when needed in the past, there can be no
assurance that the Company will continue to be successful in obtaining required
funds if and when needed, or that additional fluids will be available on
commercially reasonable terms, if at all.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". This statement establishes standards for computing and presenting
earnings per share (EPS), replacing the presentation of currently required
Primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, the statement requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under the new standard,
Basic EPS is computed based on weighted average shares outstanding and excludes
any potential dilution. Diluted EPS reflects potential dilution for the exercise
or conversion of securities into common stock or from other contracts to issue
common stock and is similar to the currently required fully diluted EPS. SFAS
128 is effective for financial statements issued for periods ending after
December 15, 1997 and earlier application is not permitted. When adopted, the
Company will be required to restate its EPS data for all prior periods
presented. The Company does not expect that the adoption of this statement will
have a material effect on previously reported EPS amounts.
11
PART II - OTHER INFORMATION
EXHIBITS AND REPORTS ON FORM 8-K
ITEM 6.
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
On February 5, 1997, Accent filed a report on Form 8-K, dated February
5, 1997, in connection with the resignation of Mitchell Joelson from his
positions as Executive Vice President and Director of the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCENT SOFTWARE INTERNATIONAL LTD.
(REGISTRANT)
Date: May 12, 1997 by: /s/ ROBERT J. BEHR
---------------------------
Robert J. Behr
Chief Financial Officer
(Principal Financial and
Accounting Officer)
12