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 September 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
LANGUAGEWARE.NET (COMPANY) 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.)
With Copies To:
2864 South Circle Drive, Suite 500, Colorado Springs, CO 80906
719-955-3400
- --------------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Operating Offices.)
ACCENT SOFTWARE INTERNATIONAL LTD.
- --------------------------------------------------------------------------------
(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 November 9, 1999, the registrant had outstanding 31,672,456 Ordinary Shares
(including 2,000 Ordinary Shares included in the registrant's outstanding
Units)
LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U. S. dollars and shares in thousands
September 30, December 31,
1999 1998
------------- ------------
Assets (Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 30 $ 141
Trade receivables, net of allowance of
$102 in 1999 and $219 in 1998 188 265
Other receivables 284 91
Prepaid expenses - 5
Inventories - 7
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Total current assets 502 509
Equipment
Cost 111 238
Less - Accumulated depreciation 108 198
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Equipment, net 3 40
Other Long Term Assets - 50
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Total assets $ 505 $ 599
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Liabilities and Shareholders' Equity
Current Liabilities
Short-term and current maturities of long-term debt $ 51 $ 1,180
Accounts payable and accrued expenses 820 785
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Total current liabilities 871 1,965
Accrued severance liability - 15
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Total liabilities 871 1,980
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Shareholders' Equity (Deficit)
Preferred Shares, par value NIS 0.01. authorized
10,000 shares:
Series C - issued and outstanding 4 at
September 30, 1999 and December 31, 1998 - -
Series D - issued and outstanding 2,885 at
September 30, 1999 and 0 at December 31, 1998 7 -
Ordinary Shares, par value NIS 0.01. authorized 130,000
shares, issued and outstanding 31,672 at
September 30, 1999 and 28,223 at December 31, 1995 63 77
Share premium 53,130 52,082
Warrants 73 -
Accumulated deficit (63,559) (53,540)
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Total shareholders' equity (deficit) (366) (1,381)
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Total liabilities and shareholders' equity $ 505 $ 599
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The accompanying notes are an integral part of these consolidated statements.
2
LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars and shares in thousands
(Unaudited)
Three months ended September 30, Nine months ended September 30,
-------------------------------------- -------------------------------------
1999 1998 1999 1998
-------------- -------------- ------------- --------------
Net sales $ 550 $ 514 $ 1,561 $ 1,709
Operating costs and expenses
Cost of sales 432 326 980 701
Product development costs 83 498 137 2,341
Marketing expenses 201 351 479 1,140
General and administrative expenses 288 541 1,177 1,944
Restructuring charge - 568 - 568
-------------- -------------- ------------- --------------
Total operating costs and expenses 1,004 2,284 2,773 6,694
-------------- -------------- ------------- --------------
Operating loss (454) (1,770) (1,212) (4,985)
Other Income (Expense) - (61) (24) (152)
-------------- -------------- ------------- --------------
Net loss before extraordinary item (454) (1,831) (1,236) (5,137)
Extraordinary gain from debt extinguishment
(less income taxes of $0) - - 1,117 -
-------------- -------------- ------------- --------------
Net income (loss) $ (454) $(1,831) $ (119) $(5,137)
============== ============== ============= ==============
Net income (loss) per share:
Before extraordinary gain $ (0.01) $(0.07) $ (0.04) $(0.20)
Extraordinary gain - - 0.04 -
-------------- -------------- ------------- --------------
Net income (loss) per share $ (0.01) $(0.07) $ (0.01) $(0.20)
============== ============== ============= ==============
Weighted average number of
shares outstanding 31,336 28,155 29,980 25,359
============== ============== ============= ==============
The accompanying notes are an integral part of these consolidated statements.
3
LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
(Unaudited)
Nine months ended September 30,
1999 1998
---------------- ---------------
(Unaudited) (Unaudited)
Operating activities
Net loss before extraordinary gain $(1,236) $(5,137)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 75 789
Change in allowance for doubtful accounts (117) (13)
Change in realizable value of other long term assets - 244
Changes in assets and liabilities:
(Increase) decrease in trade receivables 194 (198)
(Increase) decrease in other receivables (193) (17)
Decrease in prepaid expenses 5 798
Decrease in inventories 7 46
Increase (decrease) in payables & accruals 35 (1,008)
Increase (decrease) in severance liability (15) (215)
---------------- ---------------
Net cash used in operating activities (1,245) (4,711)
---------------- ---------------
Investing activities
Acquisition of equipment (1) -
Proceeds from disposition of assets 25 216
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Net cash provided by investing activities 24 216
---------------- ---------------
Financing activities
Repayment of government-guaranteed loans - (1,297)
Net proceeds received on issuance of preferred shares - 3,750
Net proceeds received on issuance of debentures and warrants - 23
Net proceeds received on issuance of ordinary shares 459 -
Loan proceeds 651 -
---------------- ---------------
Net cash provided by financing activities 1,110 2,476
---------------- ---------------
Increase (Decrease) in cash and cash equivalents (111) (2,019)
Cash and cash equivalents, beginning of period 141 2,499
================ ===============
Cash and cash equivalents, end of period $ 30 $ 480
================ ===============
Supplemental Schedule of Non-Cash Investing and Financing Activities
Debt extinguished in exchange for warrants $ 1,191 $ -
================ ===============
Preferred shares issued in satisfaction of convertible debt $ 600 $ -
================ ===============
Cancellation of ordinary shares issued in payment for services $ - $ (61)
================ ===============
Ordinary shares issued in satisfaction of accounts payable $ - $ 422
================ ===============
The accompanying notes are an integral part of these consolidated statements.
4
LANGUAGEWARE.NET (COMPANY) 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 LanguageWare.net (Company) Ltd., and its subsidiaries ("the
Company"), have been prepared in accordance with United States
generally accepted accounting principles for interim financial
information. On October 6, 1999, the Company changed its name to
LanguageWare.net (Company) Ltd. from Accent Software International
Ltd.
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 nine months ended September 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 is (1)
positioning the Company to be able to focus on global Internet e-
commerce solutions, (2) continuing to focus on increasing revenue
from current operations, (3) reducing expenses and (4) 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.
Additionally, the Company is in the process of positioning itself to
be able to provide global Internet e-commerce solutions through active
efforts to locate strategic partners and merger candidates.
5
LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
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 September 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 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 Series D Preferred Stock. In July 1999, the Company entered
into an agreement which provides for a group of investors to purchase,
at $0.21 per share, up to 9.5 million shares of the Company's ordinary
shares for $2,000. At closing, the investors paid $500 for 2.4
million shares, and one of the investors is required to purchase the
remaining 7.1 million shares for $1,500 in the event the Company
obtains a strategic partner and enters into a strategic alliance with
such partner. In October 1999, the Company obtained $100 by executing
a convertible promissory note to the investor mentioned above who may
be required to purchase the additional 7.1 million ordinary shares.
The principal balance and unpaid interest thereon is convertible, at
the discretion of the lender, into ordinary shares of the Company.
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
6
LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
As of September 30, 1999 and December 31, 1998, the Company had
accumulated deficits of $53,659 and $53,540, respectively. For the
nine months ended September 30, 1999, the Company incurred a loss of
$1,236 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. 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 D Preferred Shares of the Company. Additionally,
pursuant to the terms of the loan agreement, the Company issued to
LHIC a warrant to purchase 3.0 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 a group of three investors to
purchase, at $0.21 per share, up to 9.5 million shares of the
Company's ordinary shares for $2,000. At closing, the investors paid
$500 for 2.4 million shares and one of the investors is required to
purchase for $1,500 the remaining 7.1 million shares in the event the
Company obtains a strategic partner and enters into a strategic
alliance with such partner. As of November 9, 1999, management of the
Company had not obtained a strategic partner acceptable to the
investor and consequently, had not issued the 7.1 million Ordinary
Shares to the investor and had not received from the investor the
remaining $1,500 for such shares. In October 1999, the Company
obtained $100 by executing a convertible promissory note to the
investor mentioned above who may be required to purchase the
additional 7.1 million ordinary shares. The principal balance and
unpaid interest thereon is convertible, at the discretion of the
lender, into ordinary shares of the Company. 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 $1,500 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
The Company 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
7
LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
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 D Preferred
Shares upon conversion of amounts due it under a loan agreement. The
Series C and Series D 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 D Preferred Shares issued to LHIC are convertible at any
time into 2,884,874 Ordinary Shares of the Company which would dilute
existing shareholders by approximately 8%. The Series C Preferred
Shares issued to L&H also are convertible at any time into Ordinary
Shares of the Company. 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 22%.
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 12%. 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, the Company entered into a stock purchase agreement
with a group of three investors who paid $500, $167 each, for 2.4
million shares. One of the investors is required to purchase an
additional 7.1 million shares, one half (3.55 million Ordinary Shares)
of which will be required to be purchased 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. The investor will not be
required to purchase the additional 7.1 million shares if the Company
does not perform the requirements stated above. If the additional 7.1
million Ordinary Shares are purchased by the investor, existing
shareholders would be diluted by approximately 18%.
On October 12, 1999, the Company received $100 upon executing a
Convertible Promissory Note (the "Note") in the amount of $100 with
the investor mentioned above who may be required to purchase the
additional 7.1 million shares of the Company's Ordinary Shares. The
principal balance of the Note bears interest at the prime rate at the
date of the Note plus 200 basis points. The principal balance, plus
all accrued and unpaid interest, becomes due and payable on December
31, 1999. The investor has the right at any time to convert all or any
portion of the outstanding principal and unpaid interest into Ordinary
Shares of the Company based on the average of the five(5) lowest
closing trading prices of the Company's Ordinary Shares between the
date of the Note and the conversion date.
8
LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
During the second and third quarters of 1998, the Company reached
agreements with several of its major creditors pursuant to which the
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 such 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.
(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
Effective October 6, 1999, the Company changed its name to LanguageWare.net
(Company) Ltd. from Accent Software International Ltd.
This Form 10-Q for LanguageWare.net (Company) Ltd., and its subsidiaries
("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 and
services, market acceptance of the Company's existing products and services, and
products under development, the impact of competing products, services 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.
The Company 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. The Company commenced operations in 1988 in
Jerusalem, Israel, and in 1997 moved its operations to Colorado Springs,
Colorado. Since moving its operations, the Company 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 of $53,659 since its inception through
September 30, 1999, and it may continue to incur deficits through the remainder
of 1999 and possibly beyond. The Company 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.
10
The Company is continuing to work on significant new sales opportunities
and has gradually expanded 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.
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 services, products and
product enhancements, demand for the Company's services and products, the level
of 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 $454 during the
third quarter of 1999 on revenue of $550 compared with an operating loss of
$1,770 on revenue of $514 during the third quarter of 1998. For the first nine
months of 1999, the Company's net loss before an extraordinary gain from debt
extinguishment of $1,117 was $1,236 on revenue of $1,561 compared to an
operating loss of $4,985 on revenue of $1,709 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 focus its efforts on global Internet e-commerce
solutions.
Net Sales. Commencing early in the first quarter of calendar 1999,
management shifted it's focus to generating revenue through Internet portals.
Customer interest in the Company'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 nine 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 efforts on
global e-commerce solutions, 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 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 third quarter of 1999 was $432, or 79% of sales,
compared to $326 in cost of sales, 63% of sales, during the same quarter of
1998. For the first nine months of 1999,
11
cost of sales totaled $980, or 63% of sales, compared to $701, or 41% 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.
Additionally, an engagement for translation services with one significant
customer in the 1999 periods had relatively low margins compared to standard
engagements.
Product Development Costs. Product development costs were $83 and $137 during
the third quarter and first nine months of 1999, respectively, compared to $498
and $2,341 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 $201 for the
quarter ended September 30,1999; a reduction of 43% from $351 in the comparable
period in 1998. Marketing expenses for the first nine months of 1999 were
reduced approximately 58% to $479 from $1,140 for the first nine months 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 third quarter of 1999 were $288 compared to $541 during the same
quarter of 1998 for a reduction of $253, or 47%. Such costs were $1,177 for the
nine months ended September 30, 1999, a reduction of 39% from $1,944 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 did not have other income during the three
months ended September 30, 1999. For the comparable period of 1998, $61 in net
other expenses was incurred consisting primarily of interest and expense arising
from foreign exchange rate fluctuations. For the most recent nine month period,
the Company's other expenses totaled $24 compared to $152 during the year
earlier period. As with the three month periods, other expenses consisted
primarily of interest and foreign exchange rate fluctuations, which fluctuations
were significantly reduced upon the move from Jerusalem, Israel to the U.S.
Net loss before extraordinary item. The Company's net loss before an
extraordinary item during the third quarter of 1999 of $454 was less than the
year earlier figure of $1,831. On a per share basis, the Company lost $0.02 per
share before the extraordinary item during the third quarter of 1999 compared to
a net loss of $0.07 per share during the third quarter of 1998. For the
12
first nine months of 1999 the net loss before an extraordinary item was $1,236,
or $0.04 per share, compared to $5,137, or $0.20 per share, during the first
nine months 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 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 nine months of 1998. The extraordinary gain amounted to $0.04 per share on
a per share basis.
Net Income (Loss). The Company recognized a net loss of $119, or $0.01 per
share, for the nine months ended September 30, 1999 compared to a net loss of
$5,137, or $0.20 per share, for the comparable period of 1998.
Liquidity and Capital Resources
For the nine month period ended September 30, 1999, the Company's operating
activities used cash of $1,245 compared to $4,771 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 D 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, and in October
1999 sold a convertible promissory note for $100 under agreements more fully
described above. Those funds were sufficient to meet the Company's cash
requirements through the end of October 1999. Working capital has fallen short
of its requirements and the Company is actively seeking additional financing.
There is no assurance 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.
The Company's investing activities for the first nine months of 1999 provided
cash of $24, primarily from the sale of office furniture and equipment in Israel
coincident to the cessation of operations there. Investing activities for the
comparable period of 1998 provided cash of $216, primarily from the sale of
AgentSoft.
13
Financing activities provided cash of $1,110 and $2,476 during the nine month
periods ended September 30, 1999, and 1998, respectively. For the 1999 nine
month period proceeds from a short-term loan from LHIC were $600 and net
proceeds from the issuance of Ordinary Shares to the group of three investors
mentioned below were $459, 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, offset by $1,297 used for the repayment of government-guaranteed
loans.
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 D Preferred Shares on June 30, 1999. Additionally, pursuant to
the terms of the loan agreement, the Company issued to LHIC a warrant to
purchase 3.0 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 a group of three
investors whereby the investors purchased for $500, 2.4 million Ordinary Shares
of the Company, which, after related fees, provided $459 to the Company.
Additionally, one of the investors is required to purchase an additional 7.1
million shares for $1,500 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 acceptable to the investor, then
the investor will not be required to purchase the remaining 7.1 million ordinary
shares.
On October 12, 1999, the Company received $100 upon executing a Convertible
Promissory Note (the "Note") in the amount of $100 with the investor mentioned
above who may be required to purchase the additional 7.1 million shares of the
Company's Ordinary Shares. The principal balance of the Note bears interest at
the prime rate at the date of the Note plus 200 basis points. The principal
balance, plus all accrued and unpaid interest, becomes due and payable on
December 31, 1999. The investor has the right at any time to convert all or any
portion of the outstanding principal and unpaid interest into Ordinary Shares of
the Company based on the average of the five(5) lowest closing trading prices of
the Company's Ordinary Shares between the date of the Note and the conversion
date.
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.
The Company 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.
14
The Company 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.
15
Part II - Other Information
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).*
3.1(d) - Certificate of Name Change (filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K on October 18, 1999).*
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 (filed as Exhibit 3.2(b) to the Company's Form 10-Q on
August 11, 1999).*
4.1 - Form of Ordinary Share Certificate (filed as Exhibit 4.1 to the
Company's Registration Statement No. 33-92754).*
4.18 - Certificate of Designation for Series C Preferred Stock
4.19 - Certificate of Designation for Series D Preferred Stock
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). *
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*Incorporated by reference
16
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 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).*
- -------------------------
*Incorporated by reference
17
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. (filed as
Exhibit 4.16 to the Company's Form 10-Q on August 11, 1999).*
4.17 - Form of Warrant to L&H Investment Company, N.V. (filed as Exhibit
4.17 to the Company's For m 10-Q on August 11, 1999).*
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).*
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
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*Incorporated by reference
18
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).*
10.6(f) - CEO Share Option Plan (1999) (filed as Exhibit 10.6(f) to the
Company's Form 10-Q on August 11, 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
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*Incorporated by reference
19
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 (filed as Exhibit 10.13 to the Company's
Form 10-Q filed on August 11, 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
On October 18, 1999, the Registrant filed a Current Report on Form 8-K
reporting (1) a change in its corporate name, effective October 6, 1999, to
LanguageWare.net (Company) Ltd. from Accent Software International Ltd.; and (2)
changes in its trading symbols to "LWNTF" from "ACNTF" for its Ordinary Shares
and to "LWNUF" from "ACNTUF" for its Units.
- -------------------------
*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.
LANGUAGEWARE.NET (COMPANY) LTD.
(Registrant)
Date: November 9, 1999 by: /s/ Todd A. Oseth
---------------- -------------------
Todd A. Oseth
(Principal Executive Officer and
acting Principal Financial Officer)
21