SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_________________
FORM 10-Q
_________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934. For the quarterly period ended June 30, 1999.
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: 0-26394
ACCENT SOFTWARE INTERNATIONAL LTD.
________________________________________________________________
(Exact Name of Registrant in its Charter)
Israel N/A
____________________________________ ______________________________________
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
C/O Yigal Arnon & Co., 22 Rivlin Street, Jerusalem 91000, Israel
011-972-2-623-9200
___________________________________________________________________________
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Executive Offices.)
N/A
________________________________________________________________________________
(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 August 10, 1999, the registrant had outstanding 29,291,504 Ordinary Shares
(including 2,000 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
June 30, December 31,
1999 1998
------------- ------------
Assets (Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 7 $ 141
Trade receivables, net of allowance of
$102 in 1999 and $219 in 1998 190 265
Other receivables 107 91
Prepaid expenses - 5
Inventories - 7
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Total current assets 304 509
Equipment
Cost 111 238
Less - Accumulated depreciation 106 198
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Equipment, net 5 40
Other Long Term Assets - 50
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Total assets $ 309 $ 599
============= ============
Liabilities and Shareholders' Equity
Current Liabilities
Short-term and current maturities of long-term debt $ - $ 1,180
Accounts payable and accrued expenses 683 785
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Total current liabilities 683 1,965
Accrued severance liability - 15
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Total liabilities 683 1,980
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Shareholders' Equity (Deficit)
Preferred Shares, par value NIS 0.01, authorized
10,000 shares, issued and outstanding 2,889 at
June 30, 1999 and 4 at December 31, 1998 7 -
Ordinary Shares, par value NIS 0.01, authorized 130,000
shares, issued and outstanding 29,292 at
June 30, 1999 and 29,223 at December 31, 1998 77 77
Share premium 52,674 52,082
Warrants 73 -
Accumulated deficit (53,205) (53,540)
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Total shareholders' equity (deficit) (374) (1,381)
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Total liabilities and shareholders' equity $ 309 $ 599
============= ============
The accompanying notes are an integral part of these consolidated statements.
2
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars and shares in thousands (except per share figures)
(Unaudited)
Three months ended June 30, Six months ended June 30,
----------------------------------- ---------------------------------
1999 1998 1999 1998
----------- ------------ ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $ 540 $ 490 $ 1,011 $ 1,195
Operating costs and expenses
Cost of sales 305 170 548 375
Product development costs 33 718 54 1,843
Marketing expenses 148 331 278 789
General and administrative expenses 384 689 889 1,403
----------- ------------ ----------- -----------
Total operating costs and expenses 870 1,908 1,769 4,410
----------- ------------ ----------- -----------
Operating loss (330) (1,418) (758) (3,215)
Other Income (Expense) 3 (46) (24) (91)
----------- ------------ ----------- -----------
Net loss before extraordinary item (327) (1,464) (782) (3,306)
Extraordinary gain from debt extinguishment
(less income taxes of $0) - - 1,117 -
----------- ------------ ----------- -----------
Net income (loss) $ (327) $ (1,484) $ 335 $ (3,306)
=========== ============ =========== ===========
Net income (loss) per share:
Before extraordinary gain $ (0.01) $ (0.05) $ (0.03) $ (0.14)
Extraordinary gain - - 0.04 -
----------- ------------ ----------- -----------
Net income (loss) per share $ (0.01) $ (0.05) $ 0.01 $ (0.14)
=========== ============ =========== ===========
Weighted average number of
shares outstanding 29,292 27,620 29,292 24,127
=========== ============ =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
3
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
(Unaudited)
For the six months ended June 30,
1999 1998
----------------- -----------------
(Unaudited) (Unaudited)
Operating activities
Net loss before extraordinary gain $ (782) $ (3,306)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 85 371
Change in allowance for doubtful accounts (117) -
Changes in assets and liabilities
(Increase) decrease in trade receivables 192 (205)
(Increase) decrease in other receivables (16) (77)
Decrease in prepaid expenses 5 645
Decrease in inventories 7 15
Increase (decrease) in payables & accruals (102) (296)
Increase (decrease) in severance liability (15) (215)
----------------- -----------------
Net cash used in operating activities (743) (3,068)
----------------- -----------------
Investing activities
Acquisition of equipment (1) (25)
Proceeds from disposition of assets 10 -
Increase in other long term assets - 2
----------------- -----------------
Net cash used in investing activities 9 (23)
----------------- -----------------
Financing activities
Net proceeds received on issuance of preferred shares - 3,750
Ordinary shares issued in satisfaction of accounts payable - 264
Loan proceeds 600 -
Cancellation of shares issued in payment for services - (61)
----------------- -----------------
Net cash used for financing activities 600 3,953
----------------- -----------------
Increase (Decrease) in cash and cash equivalents (134) 862
Cash and cash equivalents, beginning of period 141 2,499
----------------- -----------------
Cash and cash equivalents, end of period $ 7 $ 3,361
================= =================
Supplemental Schedule of Non-Cash Investing and Financing Activities
Debt extinguished in exchange for warrants $ 1,191 $ -
================= =================
Prepaid assets received in exchange for shares $ - $ (61)
================= =================
Preferred shares issued in satisfaction of convertible debt $ 600 $ -
================= =================
The accompanying notes are an integral part of these consolidated statements.
4
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Accent Software International Ltd., and its subsidiaries ("Accent"
or "the Company") have been prepared in accordance with United States
generally accepted accounting principles for interim financial
information. The significant accounting policies, certain financial
information and footnote disclosures which are normally included in
financial statements prepared in accordance with generally accepted
accounting principles, but which are not required for interim
reporting purposes, have been condensed or omitted. In the opinion of
management, all adjustments (consisting of adjustments of a normal,
recurring nature) necessary for a fair presentation of these financial
statements have been reflected in the interim periods presented.
Operating results for the three and six months ended June 30, 1999 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. Although the Company believes that the
disclosures presented herein are 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
1998 Annual Report on Form 10-K for the year ended December 31, 1998.
Note 2 - GOING CONCERN
The consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The report of the Company's
Independent Auditors (included in the Company's 1998 Annual Report on
Form 10-K), however, raises doubt about the Company's ability to
continue as a going concern. Management acknowledges that the
Company's history of operating losses and operating cash flow deficits
raises legitimate concern about the Company's longer term prospects.
To enhance the Company's longer term prospects, management will
continue to focus on increasing revenue, reducing expenses and
obtaining additional external financing.
To increase revenue, the Company has developed new products to serve
the language information industry, has redirected its operations
toward Internet products and services, entered into alliances with
other companies in the industry aimed at broadening the Company's
market reach and has expanded its translation services business.
To reduce expenses, the Company has reduced its staffing level (which
is its largest element of expense) from approximately 170 employees at
its peak in 1996 to 15 at June 30, 1999.
Related expenses such as rent, telephone, travel and training costs
have been reduced proportionately. The shift away from the retail
market has led to reductions in production and inventory carrying
costs. Product development costs
5
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
have been reduced by closing the Company's product development
facility in Jerusalem, narrowing the number of new products under
development and focusing on those opportunities that provide the
greatest near-term revenue potential. The Company has reduced
discretionary spending on advertising and marketing as well as the
amount it spends on exhibitions and trade shows and has closed its
sales offices in London, England, and Newport Beach, California. The
sale in 1998 of the assets of the Company's subsidiary, AgentSoft,
also reduced costs with no decrease in total revenue.
To obtain additional external financing, the Company sold convertible
debentures and convertible preferred stock in the third and fourth
quarters of 1997 and again in the second quarter of 1998. In the
first quarter of 1999 the Company obtained $600 in the form of a
short-term loan convertible, at the discretion of the lender, into
convertible preferred stock. Effective June 30, 1999, the lender
elected to convert the loan, plus accrued interest, into 2.9 million
shares of preferred stock. In July 1999, the Company entered into an
agreement which provides for an investor to purchase, at $0.21 per
share, up to 9.5 million shares of the Company's ordinary shares for
$2.0 million. At closing, the investor paid $500 thousand for 2.4
million shares and is required to purchase the remaining 7.1 million
shares in the event the Company obtains a strategic partner and enters
into a strategic alliance with such partner. The Company continues to
explore sources of additional financing to satisfy its continuing
operational requirements.
In the first quarter of 1999, an extraordinary gain of $1,117 was
recognized by the Company related to the extinguishment of $1,180 of
long-term debt, plus $11 of accrued interest, in exchange for the
issuance of a warrant to the lender to receive 2,448,000 shares of the
Company's Ordinary Shares anytime after January 25, 2001, but before
January 25, 2006.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability or classification of asset
carrying amounts or the amounts and classification of liabilities that
may result should the company be unable to continue as a going
concern.
Note 3 - LIQUIDITY
As of June 30, 1999 and December 31, 1998, the Company had accumulated
deficits of $53,205 and $53,540, respectively. For the six months
ended June 30, 1999, the Company incurred a loss of $782 before the
extraordinary gain from debt extinguishment mentioned above and
recognizes that it may continue to incur operating losses through the
remainder of 1999 and possibly beyond. Furthermore, the Company has
not generated sufficient cash to finance its operations and has been
dependent upon external sources to meet its liquidity requirements.
In addition to the cost reduction initiatives completed during the
first quarter of 1999 and the fourth quarter of 1998, the Company will
continue to explore new methods to increase revenues and reduce costs
and working capital requirements.
6
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
As mentioned above the Company obtained $600 of short-term financing
under a loan agreement it executed with L&H Investment Company, N.V.
("LHIC") on February 19, 1999. On June 30, 1999, pursuant to the terms
of the loan agreement, the principal of the loan, plus $24 of accrued
interest, was converted into 2,884,874 Series C Preferred Shares of
the Company. Additionally, pursuant to the terms of the loan
agreement, the Company issued to LHIC a warrant to purchase three
million Ordinary Shares of the Company at a price of $0.269 per share.
Additionally, as mentioned above, in July 1999, the Company entered
into an agreement which provides for an investor to purchase, at $0.21
per share, up to 9.5 million shares of the Company's ordinary shares
for $2.0 million. At closing, the investor paid $500 thousand for 2.4
million shares and is required to purchase the remaining 7.1 million
shares in the event the Company obtains a strategic partner and enters
into a strategic alliance with such partner. There can be no
assurance the Company will be able to locate and enter into a
definitive agreement with a strategic partner as required by the
agreement, in which case the Company would not receive from the
investor up to $1.5 million in exchange for the issuance to it of 7.1
million of the Company's Ordinary Shares.
The Company continues to explore sources of additional financing to
satisfy its operational requirements.
Note 4 - SHARE CAPITAL
Accent executed a Preferred Share Purchase Agreement with Lernout &
Hauspie Speech Products, N.V. ("L&H"), an affiliate of LHIC, on June
4, 1998 pursuant to which the Company issued 4,000 Series C Preferred
shares in exchange for $4,000. Fees and expenses related to the
transaction totaled approximately $250 resulting in net proceeds to
the Company of $3,750. As mentioned above, LHIC was issued 2,884,874
Series C Preferred Shares upon conversion of amounts due it under a
loan agreement. The Series C Preferred Shares held by L&H and LHIC do
not pay interest but do provide the investors with a preference over
Ordinary Shareholders in the event of liquidation. The investors also
have the right to vote the shares as if they had all been converted
into Ordinary Shares.
The Series C Preferred Shares issued to LHIC are convertible at any
time into 2,884,874 Ordinary Shares of Accent which would dilute
existing shareholders by approximately 9%. The Series C Preferred
Shares issued to L&H also are convertible at any time into Ordinary
Shares of Accent. The conversion price of $0.45 per share represents a
10% premium over the average closing price of the Company's Ordinary
Shares during the ten trading days preceding execution of the
agreement with L&H. Conversion of all 4,000 Series C Preferred Shares
held by L&H would result in the issuance of 8,888,889 Ordinary Shares
and would dilute existing shareholders by approximately 28%.
7
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
L&H also received warrants to purchase 4,444,444 Ordinary Shares of
the Company at an exercise price of $0.55 per share. The warrants are
exercisable for five years, the conversion of which would dilute
existing shareholders by an additional 13%. LHIC received warrants,
also exercisable for five years, to purchase 3,000,000 Ordinary Shares
of the Company at an exercise price of $0.269 per share. Exercise of
the warrants would dilute existing shareholders by an additional 9%.
On July 14, 1999, subsequent to the date of the financial statements
presented herein, the Company entered into a stock purchase agreement
with an investor, Gotham Bay Partners LLC ("Gotham") which provides
for Gotham to purchase, at $0.21 per share, up to 9.5 million shares
of the Company's Ordinary Shares for $2.0 million. At closing, the
investor paid $500 thousand for 2.4 million shares and is required to
purchase the remaining 7.1 million shares, one half (3.55 million
Ordinary Shares) of which it will be required to purchase if the
Company enters into a letter of intent with a strategic partner and
the remaining one half if the Company subsequently executes a
definitive agreement of strategic alliance with such partner. Gotham
will not be required to purchase the remaining 7.1 million shares if
the Company does not perform the requirements stated above. If the
entire 9.5 million Ordinary Shares are purchased by Gotham, existing
shareholders would be diluted by approximately 25%.
During the second and third quarters of 1998, Accent reached
agreements with several of its major creditors pursuant to which these
creditors agreed to accept Ordinary Shares in the Company in payment
for all or a portion of amounts due them. Approximately 1,000,000
shares were issued to these creditors at market value which averaged
approximately $0.45 per share. Dilution, at the date of the
agreements, to existing shareholders from the issuance of these shares
amounted to approximately 3%.
As mentioned in the preceding Note 2, the Company recognized an
extraordinary gain of $1,117 from the extinguishment of bank debt. On
January 25, 1999, the Company executed an agreement with its prime
lending bank in Israel pursuant to which the balances of $1,180 in
principal and approximately $11 in interest due the bank were
extinguished in exchange for the Company issuing to the bank a warrant
to receive 2,448,000 of the Company's Ordinary Shares. The warrant
will fully vest on January 25, 2001 and expires on January 25, 2006.
Note 5 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
(a) SOP 97-2, regarding software revenue recognition became effective for
all transactions entered into, in fiscal years commencing December 15,
1997. The Company recognizes revenue in accordance with this Standard.
8
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
(b) In June 1998, the Financial Accounting Standards Board issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities.
The Statement establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allow a
derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must
formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
Statement 133 is effective for fiscal years commencing after June 15,
1999. Statement 133 cannot be applied retroactively. Statement 133
must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued,
acquired, or subsequently modified after December 31,1997.
The Company believes that the adoption of Statement 133 will not have
a material effect on its financial statements.
9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition. (U.S. dollars in thousands, except per share
data.)
Introduction
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 10-Q
pursuant to the "safe harbor" provision of the Private Securities Litigation
Reform Act of 1995. Such statements 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 to
carry out the Company's product development and 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 most recent Form 10-K
and the Company's other filings with the Securities and Exchange Commission.
Accent designs, develops and markets Language Information Technologies
(LIT) over the Internet. These technologies include software products and
services that help businesses easily localize their products and information
into other natural languages. Accent commenced operations in 1988 in Jerusalem,
Israel, and has since moved its operations to Colorado Springs, Colorado in
1997. Over the last year Accent has changed its direction toward Internet
products and services for corporate customers that are reaching international
markets. Revenues are currently being generated through Internet portals,
translation services and software products that increase the efficiencies of
localizing media and products.
The Company has accumulated deficits in excess of $53 million since its
inception through June 30, 1999, and it may continue to incur deficits through
the remainder of 1999 and possibly beyond. Accent historically has generated
operating cash flow deficits and its liquidity is essentially exhausted. To
enhance the Company's longer term prospects, management has focused on
increasing revenue by changing its direction toward Internet products and
services, reducing expenses and obtaining additional external financing. There
can be no assurance that the Company will be successful in reversing the trend
of operating losses and in generating sufficient working capital to meet its
operating requirements and any failure on the part of the Company to do so will
have a material adverse impact on the Company and could force it to cease
operations. Although the Company believes it has made substantial progress in
penetrating Internet markets and reducing its operating expenses and annual
losses, its historical failure to generate adequate operating income and cash
flow to meet its working capital requirements create doubt about the Company's
ability to continue as a going concern and there can be no assurance that the
Company will be able to continue as a going concern.
The Company completed a restructuring during 1998 designed to reduce its
working capital requirements and to align its operating expenses with its
revised revenue projections. The restructuring eliminated the Company's Israeli-
based product development, sales and marketing functions and various general and
administrative activities. Staffing was reduced to 15 people during the first
quarter of 1999.
The Company is continuing to work on significant new sales opportunities
and intends to gradually expand its sales and marketing operations through the
expanded use of sales representatives and cooperative agreements with other
businesses. There can be no assurance, however, that future revenue will meet
management's expectations.
10
The Company's ability to generate increased revenue and to fund planned
expenditures is dependent on a number of factors, some 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, 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 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
The Company's operations produced an operating loss of $327 during the
second quarter of 1999 on revenue of $540 compared with an operating loss of
$1,464 on revenue of $490 during the second quarter of 1998. For the first six
months of 1999, the Company's net loss before an extraordinary gain from debt
extinguishment of $1,117, was $782 on revenue of $1,011 compared to an
operating loss of $3,306 on revenue of $1,195 during the comparable period of
1998.
The improvement in the Company's operating results was achieved through
significant cost reduction efforts in all facets of the business, coupled with
the redirection of the Company's operating strategy as mentioned above. The
Company believes it has now reduced spending to the minimum sustainable level
and has recently begun to rebuild the sales and marketing organization in the
United States to pursue its new operating strategy.
Net Sales. Commencing early in the first quarter of calendar 1999,
management has shifted Accent's focus to generating revenue through Internet
portals. Customer interest in Accent's newest products offered on the Internet,
Loc@le and LanquageWare, has been positive. Additionally, the Company is
- ------
encouraged by the number of requests for proposals for translation services from
customers visiting the Company's web site.
Revenue recorded in the three and six month periods of 1998 included sales
of products that were dropped and/or not supported by the Company in the
comparable periods of 1999. Revenues in the comparable periods of 1999 primarily
include sales of translation services generated through traditional sales
methods. Because the Company is in the early stages of focusing its marketing
and sales efforts over the Internet, the benefits, if any, from such efforts
have yet to be realized.
Cost of Sales. Manufacturing, production, warehousing and shipping expenses
have all been eliminated or significantly reduced from the year earlier period
consistent with the Company's shift away from the retail market and toward the
business-to-business market through Internet portals where manufacturing and
support costs are significantly lower. At the same time, the Company has
increased its emphasis on translation services which have a relatively high cost
of sales due to a reliance on external translators to meet fluctuating demand.
Cost of sales during the second quarter of 1999 was $305, or 56% of sales,
compared to $170 in cost of sales, 35% of sales, during the same quarter of
1998. For the first six months of 1999, cost of sales totaled $548, or 54% of
sales, compared to $375, or 31% of sales, reported during the same period of
1998.
The increased emphasis on translation services with its relatively higher
cost of sales than products previously offered by the Company in the comparable
periods of 1998 is reflected in the above comparisons of cost of sales.
11
Product Development Costs. Product development costs were $33 and $54
during the second quarter and first six months of 1999, respectively, compared
to $718 and $1,843 during the comparable periods of 1998. The reduction in such
costs from the 1998 periods reflects primarily the cost savings realized from
the closure of the Company's product development center in Jerusalem coincident
to the change in the Company's operating strategy.
Product development costs historically included costs incurred by the
Company's subsidiary, AgentSoft. Founded in 1996, AgentSoft was a Jerusalem-
based start-up business focused on developing "intelligent agent" technology for
use on the Internet. Because the Company did not anticipate near-term revenue or
profit from AgentSoft and to allow the Company to focus all of its energies on
its core competencies in the Language Information Industry, the Board of
Directors concluded early in 1998 that the divestiture of AgentSoft would be in
the best interests of all concerned. The assets of AgentSoft were sold for $225
in September, 1998.
Marketing Expenses. The Company's marketing expenses were $148 for the
quarter ended June 30,1999; a reduction of 55% from $331 in the comparable
period in 1998. Marketing expenses for the first six months of 1999 were reduced
approximately 65% to $278 from $789 for the first half of 1998.
Sales and marketing personnel were eliminated from the Jerusalem operation
during the third quarter of 1998 as the Company concluded it would be more
economical to rely on sales representatives for its Middle East activity rather
than full time employees. At the same time, the Company commenced establishing
the sales and marketing capability at its U.S. base in Colorado Springs,
Colorado. The Company's shift away from the retail market allows it to function
with fewer sales and marketing personnel and has also led to reductions in non-
personnel expenses such as trade shows, advertising and public relations costs.
General and Administrative Expenses. General and administrative expenses
during the second quarter of 1999 were $384 compared to $689 during the same
quarter of 1998 for a reduction of $305, or 44%. Such costs were $889 for the
six months ended June 30, 1999, a reduction of 37% from $1,403 for the same
period of 1998. The reductions in general and administrative expenses are
primarily attributable to staff reductions from the closure of the Company's
offices in Jerusalem.
Other expenses, net. The Company had other income of $3 during the three
months ended June 30, 1999, primarily as a result of accrued interest recorded
in the first quarter of 1999 being converted to Series C Preferred Shares by
LHIC on June 30, 1999. For the comparable period of 1998, $46 in net other
expenses was incurred consisting primarily of interest and expense arising from
foreign exchange rate fluctuations. For the most recent six month period, the
Company's other expenses totaled $24 compared to $91 during the year earlier
period. As with the three month periods, other expenses consisted primarily of
interest and foreign exchange rate fluctuations.
Net loss before extraordinary item. Accent's net loss before an
extraordinary item during the second quarter of 1999 of $327 was less than the
year earlier figure of $1,464. On a per share basis, the Company lost $0.01 per
share before the extraordinary item during the second quarter of 1999 compared
to a net loss of $0.05 per share during the second quarter of 1998. For the
first half of 1999 the net loss before an extraordinary item was $782, or $0.03
per share, compared to $3,306, or $0.14 per share, during the first half of
1998. The significant reductions in net losses before the extraordinary item
recorded in 1999 reflect the impact of the Company's cost reduction initiatives
and change in operating strategy.
Extraordinary gain from debt extinguishment. As previously mentioned, the
Company recognized an extraordinary gain of $1,117 in the first quarter of 1999
as a result of the extinguishment of $1,180 of long-term debt, plus $11 of
accrued interest, in exchange for the
12
issuance of a warrant to the lender to receive 2,448,000 shares of the Company's
Ordinary Shares anytime after January 25, 2001, but before January 25, 2006. No
such gain or loss was reported in the first half of 1998. The extraordinary gain
amounted to $0.04 per share on a per share basis.
Net Income (Loss). The Company recognized net income of $335, or $0.01 per
share, for the six months ended June 30, 1999 compared to a net loss of $3,306,
or $0.14 per share, for the comparable period of 1998.
Liquidity and Capital Resources
For the six month period ended June 30, 1999, the Company's operating
activities used cash of $736 compared to $3,068 used during the comparable
period of 1998.
The Company has been successful on several occasions during the past two
and one half years in raising additional working capital through the sale of
convertible securities. The Company secured $600 in additional working capital
during the first quarter of 1999 in the form of short-term debt which was
converted to Series C Preferred Shares on June 30, 1999. Those funds, coupled
with cost reduction efforts which substantially reduced its working capital
requirements, were sufficient to meet its requirements through June, 1999. In
July 1999, the Company sold 2.4 million Ordinary Shares for $500 under an
agreement more fully described above. In the event current working capital falls
short of its requirements due to (1) the inability of the Company to locate and
enter into a strategic alliance with a strategic partner under the terms of the
stock purchase agreement with Gotham, (2) revenue shortfalls, or (3) other
unanticipated contingencies, the Company will need to seek additional financing.
Although management currently is seeking additional financing, there is no
assurance that the Company will be successful in securing additional working
capital and any failure on the part of the Company to do so will have a material
adverse impact on the Company and may cause the Company to cease operations.
On January 25, 1999 the Company entered into an agreement with the
government of Israel and various Israeli banking officials whereby the Company
issued a warrant to the bank to issue to the bank 2,448,000 Ordinary Shares in
full satisfaction of the balance of the loan. The warrant vests on the second
anniversary of the grant (that is, January 25, 2001) and expires on January 25,
2006.
Management has taken additional steps in securing additional external
financing and increasing revenues. At its annual meeting held on June 25,
1999, shareholders approved a reverse stock split and an increase in the
Company's capitalization. Management believes these actions will provide a
sufficient number of unreserved and unissued shares to pursue, among other
things, equity financing transactions and strategic alliances and enhance the
marketability of the Company's outstanding Ordinary Shares to the investment
community.
Additionally, shareholders approved a change in the Company's name with a
".net" extension which would, in the opinion of management, better reflect the
Company's movement toward Internet products and services and away from its
historical product line. The name change currently is going through the
approval process of the Israeli Registrar of Companies.
The Company's investing activities for both the first six months of 1999
and 1998 were immaterial wherein cash of $9 was provided by such activities in
the 1999 period and cash of $23 was used during the 1998 period.
Financing activities provided cash of $600 and $3,953 during the six month
periods ended June 30, 1999, and 1998, respectively. Proceeds from a short-term
loan provided cash of $600 during the first half of 1999, whereas the majority
of the cash provided during the comparable period of 1998 was from proceeds from
the sale of Series C Preferred Shares to L&H.
13
The Company obtained $600 of short-term financing under a Loan Agreement it
executed with L&H Investment Company, N.V. ("LHIC") on February 19, 1999. The
principal amount of the loan, plus $24 of accrued interest, was converted into
2,884,874 Series C Preferred Shares on June 30, 1999. Additionally, pursuant to
the terms of the loan agreement, the Company issued to LHIC a warrant to
purchase three million Ordinary Shares of the Company at a price of $0.269 per
share.
On July 14, 1999, the Company entered into an agreement with an investor,
Gotham Bay Partners, LLC, to purchase, at $0.21 per share, up to 9.5 million
shares of the Company's ordinary shares for $2.0 million. At closing, the
investor paid $500 thousand for 2.4 million shares and is required to purchase
the remaining 7.1 million shares for $1.5 million when and if the Company
obtains a strategic partner and enters into a strategic alliance with such
partner. Under the terms of the agreement , in the event the Company is unable
to find and enter into a definitive agreement with a strategic partner, the
investor will not be required to purchase the remaining 7.1 million ordinary
shares. The Company believes that its operations may not generate adequate cash
flow to meet its needs without additional external financing. The inability of
the Company to find and enter into a strategic alliance with a strategic
partner, or obtain other external financing in the event it is unable to do so
will have a material adverse impact and may cause the Company to cease
operations.
Year 2000
The Company has reviewed its operations in relation to the Year 2000 issue
and has concluded that the likelihood of this issue having a material adverse
impact on the Company is remote. Any costs incurred in relation to the Year 2000
issue are expected to be immaterial.
Accent develops all of its software products in compliance with Year 2000
industry guidelines. The Company's software products are not date sensitive and,
therefore, are not likely to be adversely impacted by Year 2000. The Company,
therefore, believes that it has minimal, if any, exposure to contingencies
related to the Year 2000 issue for the products it manufactures and sells. The
Company has reviewed the third-party custom-written software it uses in its
operations and has determined that this software is also not date sensitive and
poses minimal, if any, Year 2000 risk.
Accent has a policy of purchasing only information technology ("IT")
hardware that is warranted to be Year 2000 compliant and, therefore, believes
its only Year 2000 exposure in this regard is if the hardware fails to perform
as warranted, which is unlikely. The Company also utilizes "off-the-shelf"
software products in its operations. Such software is issued with frequent
updates which have or which are expected to address the Year 2000 issue.
The potential impact of the Year 2000 issue on the Company's non-IT systems
that may include embedded technology, such as microprocessors, is more difficult
to assess. The Company believes, however, that its operations are small enough
that any Year 2000 issue that may arise in its non-IT systems will amount to
inconveniences, which it can work around, rather than significant business
problems.
Because the Company believes the possibility that a Year 2000 issue
significantly disrupting its operations is remote, it has not developed a
contingency plan in this regard. The Company will continue to monitor and assess
the Year 2000 issue, particularly the extent to which its operations are
vulnerable from interactions with its vendors, customers and financial
institutions.
14
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On June 25, 1999, the Company held its Annual Meeting of Shareholders
at its offices in Colorado Springs, Colorado. Matters voted on at the meeting
and the results of such voting are as follows:
1. The election of five directors to hold office until the next Annual
Meeting of Shareholders or until their respective successors shall be
elected and qualified. The following persons were elected as
directors of the Company and received the number of votes set forth
below:
Director For
-------- ---
Todd A. Oseth 21,924,968
Esther Dyson 21,924,968
Chantal Mestdagh 21,924,968
Bob Kutnick 21,924,968
Francis Vanderhoydonck 21,924,968
2. To increase authorized share capital by New Israel Shekels (NIS)
650,000, divided into 65,000,000 Ordinary Shares with nominal value
NIS 0.01 each, following which the total number of Ordinary Shares,
nominal value NIS 0.01 per share (the "Ordinary Shares") shall be
130,000,000, and to approve a corresponding amendment to the
Company's Memorandum of Association and Articles of Association
For: 30,113,689
Against: 703,877
Abstain: 101,850
3. To approve a reverse stock split of the Company's outstanding shares
on such ratio (a one-for-seven basis, a one-for-ten basis or a one-
for-fifteen basis) as the Board of Directors shall determine; (ii) to
approve a corresponding increase in the nominal value of the
Company's Ordinary Shares from NIS 0.01 (to NIS 0.07, NIS 0.10 or NIS
0.15, depending on the ratio of the reverse stock split determined by
the Board of Directors); and (iii) to approve amendments to the
Memorandum of Association and Articles of Association to reflect
these matters; such reverse stock split to take place at the sole
discretion of the Board Directors at any time prior to January 1,
2000;
For: 29,784,322
Against: 1,060,494
Abstain: 0
____________________________
* Incorporated by reference.
15
4. To increase the number of options to purchase Ordinary Shares which
may be granted under the Employee Share Option Plan (1995) by
625,000, from 1,875,000 to 2,500,000;
For: 13,247,709
Aginst: 770,577
Abstain: 79,990
5. To approve the adoption of the CEO Share Option Plan (1999), and the
grant of certain options pursuant thereto;
For: 13,062,490
Against: 969,727
Abstain: 101,300
6. To approve a change in the name of the Company to "LanguageWare.net
Ltd." or such other similar name as shall be determined by the Board
of Directors and approved by the Israeli Registrar of Companies;
For: 30,734,964
Against: 92,235
Abstain: 92,217
7. To appoint Luboshitz, Kasierer & Co., a member firm of Arthur
Andersen, as independent auditors to audit the Financial Statements
of the Company and its subsidiaries for the year ended December 31,
1999, and to authorize the Board of Directors to determine their
level of compensation
For: 30,671,774
Against: 148,475
Abstain: 99,167
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1(a) - Memorandum of Association of Registrant (filed as Exhibit 3.1(a) to
the Company's Registration Statement No. 33-92754).*
3.1(b) - Certificate of Name Change dated October 23, 1994 (filed as Exhibit
3.1(b) to the Company's Registration Statement No. 33-92754).*
3.1(c) - Certificate of Name Change dated April 23, 1995 (filed as Exhibit
3.1(c) to the Company's Registration Statement No. 33-92754).*
3.2(a) - Articles of Association of Registrant (filed as Exhibit 3.2 to the
Company's Registration Statement No. 33- 92754).*
3.2(b) - Authorization of Registration of Increase in Share Capital dated July
18, 1999.
4.1 - Form of Ordinary Share Certificate (filed as Exhibit 4.1 to the
Company's
__________________________
*Incorporated by reference
16
Registration Statement No. 33-92754).*
4.2 - Form of Underwriter's Warrant Agreement (filed as Exhibit 4.4 to the
Company's Registration Statement No. 33-92754).*
4.3 - Form of Bridge Financing Warrant dated as of May 22, 1995 between the
Company and each of the Holders (filed as Exhibit 4.5 to the
Company's Registration Statement No. 33-92754).*
4.4 - Form of Representative's Warrant Agreement, between the Company and
Sands Brothers & Co, Ltd., as representative of the several
underwriters (filed as Exhibit 4.4 to the Company's Registration
Statement No. 333-7637). *
4.5 - Form of IMR Warrant dated as of November 22, 1996 between the Company
and IMR Fund, L.P. (filed as Exhibit 4.5 to the Company's
Registration Statement No. 333-7637).*
4.6 - Form of Redeemable Warrant Agreement dated as of Exhibit 4.6 to the
Company's Registration November 22, 1996 between the Company, Sands
Statement No. 333-7637).* Brothers & Co., Ltd., as representative of
the several underwriters, and American Stock Transfer & Trust Company
(filed as Exhibit 4.6 to the Company's Registration Statement No.
333-7637).*
4.7 - Form of Redeemable Warrant Certificate (filed as Exhibit 4.6 to the
Company's Registration Statement No. 333-7637).*
4.8 - Form of Unit Certificate (filed as Exhibit 4.6 to the Company's
Registration Statement No. 333-7637).*
4.9 - Securities Purchase Agreement dated August 5, 1997, between CC
Investments LDC and Accent Software International Ltd., which
includes the Convertible Debenture, two Warrant Agreements and the
Registration Rights Agreement as exhibits thereto. (filed as Exhibit
4.1 to the Company's Registration Statement filed on August 27, 1997,
Reg. No. 333-34455).*
4.10 - Warrant Agreement with The Shemano Group, Inc. (filed as Exhibit 4.6
to the Company's Registration Statement filed on October 16, 1997,
Reg. No. 333-380043).*
4.11 - Warrant Agreement with Equity Management Partners LLP (filed
__________________________
*Incorporated by reference
17
as Exhibit 4.7 to the Company's Registration Statement filed on
October 16, 1997, Reg. No. 333-38043).*
4.12 - Warrant Agreement with Brad Gillingham (filed as Exhibit 4.8 to the
Company's Registration Statement filed on October 16, 1997, Reg. No.
333-38043).*
4.13 - Form of Warrant Agreement covering warrant agreements with Robert J.
Laikin, Michael Mosher and Manufacturers Indemnity and Insurance
Company of America (filed as Exhibit 4.9 to the Company's
Registration Statement filed on October 16, 1997, Reg. No. 333-
38043).*
4.14 - Form of Securities Purchase Agreement dated November 6, 1997, between
Accent Software International Ltd., and CC Investments LDC, Nelson
Partners, Olympus Securities, Ltd., Marshall Companies, Profinsa
Investments, which includes the Convertible Debenture, the Warrant
Agreement, Registration Rights Agreement and Certificate of
Designation as exhibits thereto. (filed as Exhibit 4.1 to the
Company's Registration Statement filed on November 6, 1997, Reg. No.
333-39697).*
4.15 - Warrant Agreement with The Shemano Group, Inc. (filed as Exhibit 4.1
to the Company's Form S-3 filed on November 6, 1997, Reg. No. 333-
39697).*
4.16 - Form of Warrant to Lernout & Hauspie Speech Products, N.V.
4.17 - Form of Warrant to L&H Investment Company, N.V..
10.1 - Stock Purchase Agreement between IMR Investments V.O.F. and Kivun
Computers Company (1988), Ltd., Robert Rosenschein, Jeffrey
Rosenschein, Accent Software Partners, Pal-Ron Marketing, Ltd., and
KZ Overseas Holding Corp., dated as of May 11, 1994, as amended July
20, 1995 (filed as Exhibit 10.1 to the Company's Form 10-K on April
1, 1996).*
10.2 - Shareholders' Agreement by and among Kivun Computers Company (1988)
Ltd., Robert Rosenschein, Dr. Jeffrey Rosenschein, Pal-Ron Marketing,
Ltd., Accent Software Partners, KZ Overseas Holding Corp. and IMR
Investments V.O.F., dated May 11, 1994, as amended July 20, 1995
(filed as Exhibit 10.2 to the Company's Form 10-K on April 1, 1996).*
__________________________
*Incorporated by reference
18
10.3(a) - Option Agreement dated March 23, 1993 between the Company and Robert
S. Rosenschein (filed as Exhibit 10.3(a) to the Company's
Registration Statement No. 33-92754).*
10.3(b) - Schedule of other option agreements substantially identical in all
material respects to the option agreement filed as Exhibit 10.3(a)
(filed as Exhibit 10.3(b) to the Company's Registration Statement No.
33-92754).*
10.4(a) - Warrant Acquisition Agreement dated January 1, 1995 between the
Registrant and Robert S. Rosenschein (filed as Exhibit 10.4(a) to the
Company's Registration Statement No. 33-92754).*
10.4(b) - Schedule of other warrant acquisition agreements substantially
identical in all material respects to the warrant agreement (filed as
Exhibit 10.4(b) to the Company's Registration Statement No. 33-
92754).*
10.5 - Form of Registration Rights Agreements dated as of May 22, 1995
between the Company and each of the Holders (filed as Exhibit 10.5 to
the Company's Registration Statement No. 33-92754).*
10.6(a) - Employee Share Option Plan (1995) (filed as Exhibit 10.7(a) to the
Company's Registration Statement No. 33-92754).*
10.6(b) - Amended and Restated Employee Share Option Plan (1995) (filed as
Exhibit 4.2 to the Company's Registration Statement No. 333-04285).*
10.6(c) - Non-Employee Director Share Option Plan (1995) (filed as Exhibit
10.7(b) to the Company's Registration Statement No. 33-92754).*
10.6(d) - Amended and Restated Non-Employee Share Option Plan (1995) (filed as
Exhibit 4.2 to the Company's Registration Statement No. 333-07965).*
10.6(e) - Amended and Restated Non-Employee Share Option Plan (1995) (filed as
Exhibit 10-6(e) to the Company's Form 10-K on March 31, 1998).*
__________________________
*Incorporated by reference
19
10.6(f) - CEO Share Option Plan (1999)
10.6(g) - Non-Employee Share Option Plan (1998) (filed as Exhibit B to the
Company's Form DEF14A on April 29, 1998)*
10.7(b) - Employment Agreement between the Company and Todd A. Oseth, dated
February 3, 1997 (filed as exhibit 10.7(b) to the Company's Form 10-K
on March 31, 1998).*
10.8 - Consulting Agreement, dated August 4, 1997, between the Company and
Investor Resource Services, Inc. (filed as Exhibit 4.1 to the
Company's Registration Statement filed on October 16, 1997, Reg. No.
333-38043).*
10.9 - Amendment to the Consulting Agreement, dated January 30, 1998,
between Company and Investor Resource Services, Inc. (filed as
Exhibit 10-9 to the Company's Form 10-K on March 31, 1998).*
10.10 - Shareholders Agreement by and between Accent Software International
Limited and Gilad Zlotkin, dated February 21, 1996 (filed as Exhibit
10.10 to the Company's Form 10-K on April 1, 1996).*
10.11 - Debenture between the Company and Bank Leumi (filed as Exhibit 10.11
to the Company's Registration Statement No. 333-7637).*
10.12 - Agreement between the Company and The Bank for Industrial Development
(filed as Exhibit 4-1 to the Company's Form S-3 on August 4, 1998)*
10.13 - Stock Purchase Agreement between the Company and Gotham Bay Partners
LLC dated July 14, 1999.
21 - Subsidiaries of Registrant (filed as Exhibit 21 to the Company's Form
10-K filed on April 2, 1996).*
27 - Financial Data Schedule.
(b) Reports on Form 8-K
None.
__________________________
*Incorporated by reference
20
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: August 10, 1999 by: /S/ Todd A. Oseth
--------------- -------------------
Todd A. Oseth
(Principal Executive Officer and
acting Principal Financial
Officer)
21