SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ___________ to ___________
Commission file number: 0-26394
ACCENT SOFTWARE INTERNATIONAL LTD.
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(Exact Name of Registrant as Specified in its Charter)
Israel N/A
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
28 Pierre Koenig Street
P.O. Box 53063
Jerusalem 91530 Israel
011-972-2-6793-723
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
None ---
Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares par value NIS .01 per share Units,
consisting of one Ordinary Share and one Warrant to purchase one Ordinary Share
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [x].
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 15, 1999 (computed by reference to
the last reported closing sale price of the Common Stock on the
over-the-counter market on such date): $4.96 million.
On March 15, 1999, the registrant had outstanding 29,291,504 Ordinary Shares
(including 2,000 Ordinary Shares included in the registrant's outstanding
Units).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement to be delivered to
shareholders pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, in connection with the 1999 Annual Meeting of Shareholders
of the Registrant are incorporated by reference into Part III of this Report.
FORM 10-K
TABLE OF CONTENTS
Page
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PART I
Item 1. Business........................................................................1
Item 2. Properties......................................................................8
Item 3. Legal Proceedings...............................................................8
Item 4. Submission of Matters to a Vote of Security Holders.............................8
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters...........9
Item 6. Selected Consolidated Financial Data...........................................11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................13
Item 8. Consolidated Financial Statements and Supplementary Data.......................23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.........................................................44
PART III
Item 10. Directors and Executive Officers of the Registrant.............................45
Item 11. Executive Compensation.........................................................45
Item 12. Security Ownership of Certain Beneficial Owners and Management.................45
Item 13. Certain Relationships and Related Transactions.................................45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............46
i
PART I
ITEM 1. BUSINESS.
OVERVIEW
Founded in Jerusalem in 1988, Accent Software International fills a niche
within the Language Information Technology (LIT) industry by designing and
developing software tools and services that simplify the processes of
internationalization and make translation more accessible to everyone from
ordinary consumers to multinational corporations. As the Internet creates an
even greater demand for global communication, Accent's product lines have
evolved to meet the needs of software developers as well as the publishers of
international business media.
As recently as 1996, Accent's multilingual software tools were marketed in
more than 30 countries through retail distribution channels. Although
Accent's legacy products, such as Accent Professional and Accent Duo, gained
a loyal following from those who had the need to type, edit and exchange
information in different languages, the market proved to be too small to
support the Company's ongoing development and operations. Following a
significant loss in 1996, the Company restructured its operations and
developed tools and services with broader market appeal.
Throughout 1997 and 1998, Accent's management team further refined the
Company's strategies and shifted its focus away from the consumer retail
market in order to concentrate on building tools and services for
corporations needing to localize software and translate software-related
documentation and marketing materials. By December 1998, fifteen employees
remained with the Company--all involved in core business activities including
software development, translation project management, operations, marketing
and sales.
Substantial advancement into new markets was made in 1998 through the release
of several new products, including:
Loc@le 1.7, 2.0 Efficiently manages the process of
localizing the user
interface of any Windows-TM- application.
(Loc@le 2.0 was introduced in October.)
WordPoint A real-time interactive dictionary for the
bi-directional translation of English,
French, Italian, German, Spanish, Hebrew,
and Dutch.
L@Port A tool for Macromedia Director-TM- that
localizes multimedia content in Director
movies. Macromedia Director is used
extensively by Internet users to create
multimedia advertisements and announcements.
Loc@le for Translators Contains the features of Loc@le that are
useful to translators. This product is
distributed free.
LanguageWare Based on Cortez technology, LanguageWare
brings translations to desktops worldwide
via the Internet.
This Form 10-K contains historical information and forward-looking
statements. Statements looking forward in time are included in this Form 10-K
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
1
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. Accent operates in an
industry where securities' values may be volatile and may be influenced by
economic and other factors beyond the Company's control.
RISKS
The Company wishes to caution investors that the following significant
factors, among others, have affected and in the future could affect the
Company's financial and operating results as well as the return that may be
achieved on investments in the Company.
GOING CONCERN. From its inception through December 31, 1998, Accent has
accumulated deficits in excess of $53 million, including net losses of $6.8
million, $13.5 million and $21.0 million for the fiscal years ended December
31, 1998, 1997 and 1996, respectively. Although the Company believes it has
made substantial progress in reducing its operating expenses and annual
losses, its failure to achieve its revenue plan has significantly affected
the Company's ability to generate adequate cash flow to meet its operating
requirements. These factors 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.
LIQUIDITY/WORKING CAPITAL/DEBT. Although the Company has been successful on
several occasions during the past two years in raising additional working
capital through the sale of convertible securities, those funds were
essentially exhausted by December 31, 1998. The Company secured $600,000 in
additional working capital during the first quarter of 1999 and also
successfully converted all of its long-term debt into equity. The Company
believes that these accomplishments, coupled with an improved revenue outlook
and cost reduction efforts that have substantially reduced its working
capital requirements, will be sufficient to meet its requirements for
approximately six months. Beyond that time, the Company believes it will be
generating sufficient operating cash flow to meet its needs without
additional external financing. If the Company fails to achieve its projected
results and the Company must seek additional financing, there is no assurance
that its efforts to obtain such financing will be successful. Any failure on
the part of the Company to secure required financing will have a material
adverse impact on the Company and may cause the Company to cease operations.
RESTRUCTURING. The Company restructured its activities during 1998 in
response to disappointing operating results and the need to reduce its
working capital requirements. The restructuring eliminated the Company's
Israeli-based product development, sales and marketing functions. The Company
has reestablished a product development capability in the United States and
plans to gradually expand its sales and marketing operations, probably
through the use of sales representatives and cooperative agreements with
other businesses.
INDUSTRY BACKGROUND
The Language Information Technology market represents a potentially rapid
growth segment of the software industry. It is not tied to any specific area
of software development (for example, the Internet, multimedia or word
processing), but rather, spans the entire spectrum of software development.
The LIT market not only crosses all boundaries, but it does so at all levels,
from the two-man development team to large, multinational corporations.
Anyone who needs or wishes to produce software applications in more than one
natural language is part of the LIT market. The market has grown rapidly as
Internet communications spur increased demand for multilingual products.
Accent has concentrated on developing LIT tools in addition to providing
high-quality, language translation services.
2
THE ACCENT STRATEGY. Accent's strategy involves building tools that funnel
text or media files to a transaction server over the Internet. The files are
then translated into different languages and returned in the same format as
the source file. By simplifying the process of translation, Accent believes
that more International business will localize media and products. These
tools create an environment where localization is simplified to the point
where after executing, Loc@le, L@Port or LanguageWare, all that remains is
the need for high quality translation. With Accent's proven pool of
high-quality freelance translators, providing translation services brings the
Company full circle and positions it as the total LIT solution for
corporations entering the worldwide marketplace.
THE ACCENT LANGUAGE INFORMATION TECHNOLOGY (LIT) SOLUTION
LANGUAGEWARE products offer complete language solutions for anyone needing
multilingual versions of software, documentation, videos, web sites,
marketing literature, and virtually any other type of media. With the
introduction of LanguageWare in March, 1999, Accent brought access to its
worldwide network of high-quality human translators to desktops around the
globe. The product family consists of LanguageWare, a desktop application;
LanguageWare VPN, a customized desktop application with a virtual private
network for a specific corporation; or languageware.net, a similar
functioning web site. Each of the LanguageWare products sends files from
customers around the world to Accent's Transaction Server. Made up of Cortez
technology, the Transaction Server is a complex system that tracks and relays
status messages about files as they are going through the many stops on their
way through the translation process and back to the customer's desktop.
DEVELOPMENT TOOLS FOR GLOBALIZATION AND LOCALIZATION. Companies selling
products around the world need to adapt their products for the local language
of each specific market or country. Loc@le and SingleSource, together provide
a programming interface and a set of programming, translation and
administrative tools that allows developers to write software once in English
while, at the same time, "globalizing" the software so that it can quickly
and easily be translated into any other language required. The products
include a programming interface that allows dynamic translation of the
software's display text and the resizing of display boxes made necessary by
the different lengths of the translated texts. The result is the ability to
distribute software products and penetrate markets around the world, quickly
and economically. Accent's development tools answer the need of software
publishers to localize their software into virtually any natural language
(Loc@le) and to translate and localize their multimedia content (L@Port).
Accent has also continued to maintain high quality translation services to
meet the demand for translation that these products create.
TRANSLATION SERVICES. Accent's translation services department has
historically supported in-house development efforts and, in the process, has
employed world-class translators, handpicked and rigorously tested to ensure
high quality results. Having gathered expertise while contributing to the
development of Accent's product line, the Company is now making its
translation services available to outside clients. In close coordination with
the Company's engineering team and linked to translators around the globe
through the Internet, Accent provides translation, localization and
consultation services in virtually any natural language, virtually anywhere
in the world.
MULTILINGUAL TEXT PRODUCTS. Accent is currently producing two word processor
products from its older product lines. Accent is currently giving away Accent
Express, which provides basic multilingual word processing and has an upgrade
to Accent Special Edition, which adds support for multilingual dictionaries
and thesauruses. These products are used to help users produce multilingual
documents. Accent's Dagesh line of Hebrew word processors are being supported
by Galtech, Ltd in Israel. Dagesh, the Company's first multilingual word
processing product has been sold to Torah Education Software, of Monsey, New
York, which has the rights of upgrading and supporting this product.
WORDPOINT, an interactive, word-for-word translation program that utilizes
Accent's patent pending Screen-
3
Text technology, was introduced in September 1997. WordPoint allows a user to
obtain instantaneous translations of words appearing in virtually any Windows
application by simply pointing the mouse at the word in question. The latest
version of WordPoint includes Lernout & Hauspie's text-to-speech technology,
allowing a user to hear the correct pronunciation of the English word being
translated. WordPoint is also currently available in French, German, Spanish,
Italian, Dutch and Hebrew versions, and was officially released February,
1998. The underlying technology was sold in January of 1999 to Guru, Inc. of
New York. Accent has retained the rights to sell WordPoint and updates of the
products to its customers.
AGENTSOFT. During 1998, the Company sold the assets of AgentSoft, which
produced intelligent agents for the Internet. The Company decided to focus
its resources on LIT technologies. The financial burden of the division was
too high because no revenues were being generated by the product line. The
Company did not have the financial resources available to create a more
marketable product line so it sold the Company.
SALES AND MARKETING
The Company's principal target market segments are international companies
that need media or software applications localized. The Company reaches these
market segments through OEMs, direct sales, channel sales and Web-based
e-commerce. The Company's principal markets have historically been the United
States, Canada and Western Europe but more recently the Company has placed
added emphasis on Eastern Europe and the Pacific Rim which are emerging as
large markets for software sales.
ORIGINAL EQUIPMENT MANUFACTURERS (OEMS). Accent has made OEM sales to such
major manufacturers as IBM, Digital Equipment Corporation, Compaq, Lotus,
Packard Bell, AT&T and Creative Labs. OEM sales are typically low unit cost
but high volume transactions that require little or no marketing,
manufacturing, shipping or handling costs. The OEM market lends itself to
free software that connects to Accent's translation services.
DIRECT SALES. Accent uses a combination of direct and manufacturer's
representatives worldwide which focuses on the OEM market and key corporate
accounts.
CHANNEL SALES. Accent offers some of its products through catalog sales aimed
specifically at software developers and publishers. The Company believes that
this sharply focused marketing approach provides a highly cost-effective
means of reaching its primary market.
E-COMMERCE "TRY BEFORE YOU BUY". Recent advances in Internet technologies
have made it possible for customers to purchase and receive software directly
via the Web. Additionally, "time-bombed" software or "try before you buy" has
become the normal expectation of purchasers in the software development
environment. Accent is now providing fully functional evaluation copies of
its new products via the Web on a trial basis. The products can be purchased
and "unlocked" (that is, made usable) either online or by phone through the
use of a credit card.. Accent believes electronic distribution of its
products will become increasingly important as bandwidth on the Internet
increases and e-commerce becomes widely accepted. The Company believes that
sales of its low end products through this channel can help increase high-end
upgrades by quickly increasing market penetration and positively qualifying
those customers who are potential buyers.
MARKETING. The Company has historically utilized a variety of marketing
programs to stimulate and build long-term demand for its products, including
public relations, advertising, trade shows, direct mail, catalogs and
on-going customer communications. During fiscal 1998, the Company introduced
market programs that were specifically sales-oriented, rather than image or
brand-awareness-oriented. Specific programs have been targeted toward the
Company's primary revenue sources, OEM and direct sales, as well as to
specific market segments such as corporate, academic and government. With the
refined focus of the LIT marketplace, the Company will also advertise in
software development and translation industry publications
4
and attend appropriate trade shows. These highly focused efforts are designed
to rapidly get products into the hands of potential customers.
PRODUCT DEVELOPMENT. Product development plays a significant role at Accent.
Such tasks as project engineering, quality assurance, documentation and
project management are key to the development of new products. The
development of the Company's first LIT products generated a vast amount of
market knowledge that has been leveraged within the Company to define the
direction of future products and services.
Since its first collaboration with Microsoft in 1991 to develop the
bi-directional Hebrew and Arabic versions of Microsoft's Windows operating
system, the Company has also continued to undertake contracted development
projects for other major software developers.
In November 1998, after the release of Loc@le 2.0, the product development
team in Israel was dissolved, leaving all remaining development team members
working out of the Colorado Springs office. The Cortez technology and the
LanguageWare product line have been developed in the Colorado Springs
facility.
COMPETITION
SOFTWARE GLOBALIZATION AND LOCALIZATION. While the range of software
development products on the market today is vast, the need for multilingual
development tools has just recently emerged. This is a new and fertile market
as virtually every software developer has some desire to move their product
into foreign language markets. Accent was one of the first companies to
provide robust development tools for single-source, single-binary
globalization of software products with SingleSource. Competitors include:
Alis' Bantam and Reword's Studio
With the release of Loc@le, the Company entered the much broader market of
software localization. While there has always been a need for products in
this market, the competitors here are also few. Most products on the market
are simple utilities that provide limited functionality for software
localization. The only direct competitor for Loc@le of which the Company is
aware is Corel Corporation's Catalyst; but while Catalyst does perform
localization tasks similar to those dealt with by Loc@le, it provides none of
the management and administrative tools found in Accent's product which cover
the entire process of localizing involving many different disciplines. Accent
believes that its approach to software localization/globalization gives it a
distinct advantage over its competitors. By addressing the needs of software
developers, translators, and managers, all within stand_-alone products,
Accent believes it has established a competitive advantage over other
seemingly similar products.
MULTILINGUAL TEXT PRODUCTS. In the multilingual word processing market,
principal competitors include Gamma Productions Inc.'s Universe program and
WYSIWYG Corp.'s Universal Word program.
The Company's products compete with a number of single-language Windows word
processing programs that are available in different languages. The Company
competes primarily with Word for Windows and WordPerfect for Windows in those
markets where these competitors have add-on kits to add additional languages
to their products.
Accent believes that this market will be dominated by Microsoft and is not
investing additional resources into these product lines.
PRODUCT SUPPORT AND MAINTENANCE
Accent's Technical Support group provides the services needed to deliver and
support the Company's products in the marketplace. These services include
translation, technical support and fulfillment
5
(warehousing and shipping).
Accent delivers high-quality technical support to its customer base of
software engineers and developers located around the world via Internet email.
MANUFACTURING AND FULFILLMENT
During 1998, the Accent product line was manufactured (printing, CD-ROM
duplication and packaging) primarily by internal duplicating capabilities and
CMS, Inc. out of Denver, Colorado. With the emphasis on the Internet, most
product fulfillment was done on-line. All of Accent's future products will
emphasize Internet fulfillment. Translation services are all done over the
Internet. The Company also uses space available on other manufacturer's CD's
to deliver product inexpensively to the market.
PROPRIETARY RIGHTS
The Company regards its products and the processes used to produce them
as proprietary trade secrets and confidential information. Like many software
companies, the Company relies on a combination of trademarks, trade secret
and copyright law to establish and protect proprietary rights in its
products. In addition, the Company attempts to protect trade secrets and
other proprietary information through confidentiality agreements with its
employees, outside consultants and potential business partners. The Company
requires all of its employees to sign confidentiality agreements as a
condition of employment.
The Company currently holds no patents. Accent has established an
internal process, however, which has resulted in the filing of two patent
applications (both of which have been transferred to third parties for
appropriate consideration) and which will ensure that protection will be
sought for any future patentable inventions. There can be no assurance that
Accent will develop any further patentable inventions or that any patent
applications filed by the Company for technology or products derived
therefrom will be granted.
The Company provides its products to customers under non-exclusive,
non-transferable licenses. The Company has not required end-users of its
retail, mass-market products to sign license agreements. Instead, the Company
includes an on-line "click wrap" license and/or a printed "shrink wrap"
license with each copy of its products. It is uncertain whether license
agreements of this type are legally enforceable in all countries and
jurisdictions in which the products are marketed.
The Company believes that its products are proprietary and are protected
by copyright, trade secret and trademark law, as well as by the contractual
agreements described above. However, certain protections, such as limitations
on use of a product and limitations on warranties and liability, are not
afforded by copyright law and may not be available without an enforceable
license agreement. Moreover, there can be no assurance that the proprietary
technology of the Company will continue to be secret or that others will not
develop similar technology and use such technology to compete with the
Company. The Company does not currently include in its products any mechanism
to prevent or inhibit unauthorized copying or usage.
6
The following chart describes the status of the Company's trademarks.
Mark Status
- ------------------------ ---------------------------------------------------------
Registered Application Pending
------------------------------ -------------------
Accent United States, United Kingdom, Italy
Germany, France, Benelux
LanguageWare United States, United Kingdom,
France, Israel
AccentDuo United States, United Kingdom, Spain, Switzerland
France, Germany, Mexico
Dagesh Israel
Global Development Kit United States
Global Foundation Class United States
WordPoint United States
Loc@le United States
WebTamer United States, United Kingdom, Canada, Italy
France Germany
The Company does not believe that its products or their trademarks
infringe upon the proprietary rights of third parties. However, there can be
no assurance that a third party will not make a contrary assertion. The cost
of responding to such assertions may be material whether or not the
assertions are validated.
The Company licenses, pursuant to non-exclusive licenses, proprietary
technology from other companies including Lernout & Hauspie C.V.
(text-to-speech software), Globalink, Inc. (translation software), INSO, Inc.
(language utilities and filters), Bitstream, Inc. (fonts) and URW, GmbH
(fonts), for inclusion in its products. These licenses are generally for a
one year term with automatic renewal. There can be no assurance that these
third parties will continue to license their software programs to the Company
on commercially reasonable terms, particularly if such companies develop
products which they perceive as competitive with those developed and marketed
by the Company. Although the Company believes that multiple sources are
available for such licensed products, if any of the Company's license
agreements were terminated and the Company was unable to replace those
licenses with comparable licenses from alternate suppliers, such terminations
could have a material adverse effect on the Company's ability to market
certain of its products.
EMPLOYEES
Following the restructuring which was completed during the fourth quarter
of 1998, the Company had 15 full time employees, including 7 at Accent
Software in Jerusalem and 8 at Accent Worldwide in the United States. Future
staffing requirements cannot be predicted at this time.
Also, pursuant to Israeli law, the Company is legally required to pay
severance benefits upon the retirement or death of an employee or the
termination of employment of an employee without due cause. The Company has
met its obligations with respect to all employees.
7
ITEM 2. PROPERTIES.
The Company occupies approximately 2,600 square feet of leased office space
in Colorado Springs, Colorado, pursuant to a 24 month lease agreement with an
option to terminate the lease after 12 months, and approximately 600 square
feet of leased office space in Jerusalem, Israel, pursuant to a
month-to-month lease agreement. Any expansion of its Colorado-based
operations will require the Company to lease additional office space.
Additional space suitable to the Company's potential needs is readily
available and space limitations are not likely to inhibit any future growth.
ITEM 3. LEGAL PROCEEDINGS.
Other than as described below, no material legal proceedings are pending
as of the date of this filing. The Company is not aware of any other pending
or threatened litigation that could have a material adverse effect on the
Company.
The Company filed an action in the District Court in Jerusalem against
Mainframe Education Consulting GmbH, a German software distributor that
ordered a large amount of the Company's software in 1995, but refused to pay
for it. In the action, the Company is seeking approximately $360,000 as
compensation for Mainframe's breach of contract. In 1998, the Company
received a default judgment against Mainframe for the full amount sought in
the complaint after Mainframe failed to respond in court. The Company has
been informed by its German counsel that Mainframe appears to be bankrupt.
The Company is attempting to enforce the judgment in Germany against
Mainframe and its principals. The probability that this enforcement attempt
will be successful is low.
On September 9, 1997, AgentSoft, Ltd., at that time a subsidiary of the
Company, was served with a complaint filed by its former president and vice
president, both of whom are also AgentSoft shareholders. The complaint named
as defendants AgentSoft, Accent and certain officers and directors of
AgentSoft in the Israeli Labor Court. The complaint alleges wrongful
termination of the plaintiffs' employment agreements in May 1997, failure to
pay the contractually required severance, and failure to pay, in a complete
and timely manner, the statutory severance payments required by Israeli law
upon the termination of an employee. Plaintiffs seek compensation in excess
of NIS 650,000 (or approximately $186,000). The Company believes that the
termination of these individuals was done in accordance with Israeli law and
the employees' employment agreements and that, therefore, any claim is
without merit and will not have a material adverse impact on the Company.
In the course of its business, the Company may become subject to various
claims, some or which may mature into litigation. Although the Company is
aware of claims asserted against it, the Company is not aware of any claims
that have a reasonable possibility of adverse outcome in a material amount.
There can be no assurance, however, that unforeseen circumstances will not
cause such claims, or other, currently unknown claims, to result in adverse
outcomes in material amounts.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 28, 1998, the Company held its annual and extraordinary general
meeting of its shareholders, pursuant to a proxy mailed to all shareholders,
to authorize additional shares to be issued by the Company as needed. The
shareholders voted 21,747,527 shares in favor, 499,763 against and 146,842
abstaining to authorize the amendment of the Articles of Association to
increase the capitalization of the Company by 20,000,000 new Ordinary Shares
on terms set forth in the proxy statement. The shareholders further voted
21,658,207 shares in favor, 570,543 against and 165,382 abstaining to
increase the number of shares reserved for issuance pursuant to the ESOP and
NESOP from 1,125,000 to 1,875,000, and from 200,000 to 300,000, respectively.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION
The Company's Ordinary Shares and Units are quoted on the OTC Bulletin
Board under the symbols "ACNTF" and "ACNUF," respectively. Prior to March 12,
1999, the shares and units were traded on the Nasdaq SmallCap Market. The
following table sets forth, for the periods indicated, the high and low
closing prices of the Company's Ordinary Shares and Units as reported by the
OTC Bulletin Board and Nasdaq SmallCap Market.
Ordinary Shares Units
---------------- ----------------
Low High Low High
------ ------ ------ ------
1999
First Quarter* $ 0.13 $ 0.44 $ 0.09 $ 0.34
1998
First Quarter $ 0.41 $ 1.16 $ 0.38 $ 1.25
Second Quarter $ 0.38 $ 0.78 $ 0.34 $ 0.77
Third Quarter $ 0.22 $ 0.52 $ 0.25 $ 0.69
Fourth Quarter $ 0.13 $ 0.34 $ 0.06 $ 0.34
1997
First Quarter $ 2.19 $ 8.13 $ 2.13 $ 8.38
Second Quarter $ 1.47 $ 2.38 $ 1.63 $ 2.56
Third Quarter $ 1.47 $ 3.63 $ 1.44 $ 3.75
Fourth Quarter $ 0.44 $ 3.13 $ 0.44 $ 3.25
* Through March 15, 1999
Market quotations for the Company's Ordinary Shares and Units reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions. On March 15, 1999, the last
reported sales price of the Ordinary Shares and Units on the OTC Bulletin Board
was $0.17 per Ordinary Share and $0.125 per Unit, respectively.
(b) HOLDERS
As of March 15, 1999 there were approximately 4,000 record holders of
the Ordinary Shares (including 376 record holders of the Units). Such number
of record holders was determined from the Company's shareholder records, and
does not include beneficial owners of the Ordinary Shares whose shares are
held in the names of various shareholders, dealers and clearing agencies.
(c) DIVIDENDS
The Company has paid no cash dividends to date and does not currently
intend to declare any dividends on its Ordinary Shares. The Company intends
to retain earnings, if any, to fund the development and growth of its
business. Payment of cash dividends on the Ordinary Shares will depend upon
the Company's earnings, its capital requirements and financial condition, and
other relevant factors.
9
The Company's decisions with respect to dividend payments will be
determined by its Board of Directors. Under Israeli law, certain dividends,
referred to as final dividends (which are comparable to annual dividends and
are not related to distributions on dissolution or liquidation or similar
final distributions), are recommended by the Board of Directors and may be
declared by shareholders at the annual meeting of shareholders, but only in
an amount per share equal to or less than the amount recommended by the Board
of Directors. In addition, the Board of Directors may declare and pay interim
dividends on account of the final dividend. Cash dividends may be paid by an
Israeli Company only out of the profits of such Company, as determined for
statutory purposes.
Under Israeli law, cash dividends paid by the Company to its
shareholders (other than Israeli corporate shareholders) are subject to a
withholding tax. The applicable withholding tax rate will depend on the
particular operations that have generated the earnings constituting the
source of dividends.
(d) EXCHANGE CONTROLS AND TAXATION MATTERS AFFECTING NON-ISRAELI
SHAREHOLDERS
EXCHANGE CONTROLS
All non-residents of Israel who purchase equity securities of the
Company with certain non-Israeli currencies (including dollars) may freely
repatriate in such non-Israeli currencies all amounts received in respect of
such securities in Israeli currency, whether as a dividend, as a liquidating
distribution or as proceeds from the sale of such securities (provided in
each case that any applicable Israeli income tax is paid or withheld on such
amounts) at the rate of exchange prevailing at the time of conversion,
pursuant to the general permit issued under the Israeli Currency Law, 1978.
CAPITAL GAINS TAXATION OF THE COMPANY AND ITS SHAREHOLDERS
Israeli law imposes a capital gains tax on the sale of capital
assets, including securities held by the Company and securities of the
Company sold by holders thereof. The law distinguishes between "Real Gain"
and "Inflationary Surplus." Real Gain is the excess of the total capital gain
over Inflationary Surplus, computed on the basis of the increase in the
Israeli CPI between the date of purchase and the date of sale. Inflationary
Surplus accumulated until December 31, 1993 is taxed at a rate of 10% for
residents of Israel in respect of securities (in respect of securities
reduced to no tax for non-residents if calculated according to the exchange
rate of the dollar instead of the Israeli CPI), while Real Gain is added to
ordinary income, which is taxed at the applicable ordinary rates for
individuals (30% to 50%) and for corporations (36% in 1996 and thereafter),
while Inflationary Surplus accumulated from and after December 31, 1993 is
exempt from any capital gains tax. Under current law, the Ordinary Shares of
the Company are exempt from Israeli capital gains tax so long as they are
listed on a stock exchange recognized by the Israeli Ministry of Finance and
the Company qualifies as an "Industrial Company" as defined in the "Law for
the Encouragement of Industry (Taxes), 1969." There can be no assurance that
the Company will maintain such listing or qualifications.
Pursuant to the Convention Between the Government of the United
States of America and the Government of Israel with Respect to Taxes on
Income (the "U.S.-Israel Tax Treaty"), the sale, exchange or disposition of
Ordinary Shares by a person who qualifies as a resident of the United States
within the meaning, and who is entitled to claim the benefits afforded to
such resident under, the U.S.-Israel Tax Treaty ("Treaty U.S. Resident") will
not be subject to the Israeli capital gains tax unless such Treaty U.S.
Resident holds, directly or indirectly, shares representing 10% or more of
the voting power of the Company during any part of the 12-month period
preceding such sale, exchange or disposition (assuming that Israeli law would
otherwise tax such gain). If such gain is taxed by Israel, the gain will be a
foreign source under the U.S.-Israel Tax Treaty and such U.S. Holder can
elect to credit such Israeli tax against the U.S. federal income tax imposed
on the gain, subject to the limitations imposed by U.S. law.
10
OTHER TAXATION MATTERS UNDER ISRAELI LAW AFFECTING NON-ISRAELI
SHAREHOLDERS; ESTATE TAXES
Individuals who are non-residents of Israel are subject to a
graduated income tax on income derived from sources in Israel. Israeli source
income is defined under Israeli law as income derived or accrued in Israel
and income derived or accrued outside of Israel, if such income is received
in Israel. A corporate entity is deemed an "Israeli resident" under Israeli
law if it is controlled and managed from Israel or if it is registered in
Israel and its business activities are primarily in Israel. On the
distribution of dividends other than bonus shares to foreign residents,
income tax at the rate of 25% (15% in the case of dividends distributed from
the taxable income attributable to an Approved Enterprise) is withheld at the
source unless a different rate is provided for in a treaty between Israel and
the shareholder's country of residence. The U.S.-Israel Tax Treaty provides
for a maximum tax of 25% on dividends paid to a Treaty U.S. Resident.
A non-resident of Israel who has interest, dividend or royalty
income derived from, accrued or received in Israel from which tax was
withheld at the source is generally exempt from the duty to file tax returns
in Israel in respect of such income, provided that such income was not
derived from a business conducted in Israel.
Residents of the United States generally will have withholding tax
in Israel deducted at the source. Such persons may be entitled to a credit or
deduction for United States federal income tax purposes for the amount of
such taxes withheld.
Israel currently has no estate tax.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected financial data have been summarized from the
Company's consolidated financial statements and are qualified in their
entirety by reference to, and should be read in conjunction with, such
consolidated financial statements and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
11
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE FIGURES)
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net Sales $ 2,091 $ 3,125 $ 4,953 $ 5,135 $ 1,851
Cost of Sales 997 3,062 6,767 2,972 1,155
------- -------- -------- ------- -------
Gross Margin 1,094 63 (1,814) 2,163 696
Product Development 2,540 4,813 3,386 1,097 507
Marketing Expenses 1,404 2,177 9,242 5,955 2,115
General & Administrative 2,365 3,169 6,437 2,796 1,071
Restructuring Charge 1,257 -- -- -- --
------- -------- -------- ------- -------
Operating Expenses 7,566 10,159 19,065 9,848 3,693
------- -------- -------- ------- -------
Operating Loss (6,472) (10,096) (20,879) (7,685) (2,997)
Other Expense 105 3,378 155 163 137
------- -------- -------- ------- -------
Net Loss $(6,577) $(13,474) $(21,034) $(7,848) $(3,134)
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Net Loss per Share $ (0.25) $ (1.08) $ (2.12) $ (1.22) $ (0.68)
------- -------- -------- ------- -------
------- -------- -------- ------- -------
Weighted Average Number
of Shares Outstanding 26,332 12,495 9,926 6,421 4,619
------- -------- -------- ------- -------
------- -------- -------- ------- -------
AS OF DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash and Cash Equivalents $ 141 2,499 8,723 9,633 78
Working Capital (Deficit) $ (1,214) 109 3,628 10,329 (1,009)
Total Assets $ 841 6,438 13,789 17,650 2,503
Total Liabilities $ 1,980 5,415 4,062 2,358 1,680
Accumulated Deficit $(53,298) (46,721) (33,247) (12,213) (4,365)
Shareholders' Equity (Deficit) $ (1,139) 1,023 2,974 10,133 (1,064)
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Accent Software International, is a language solutions Company which
designs develops, markets and supports software products and provides
translation services for the rapidly emerging Language Information Technology
(LIT) industry. Accent commenced operations in 1988 in Jerusalem, Israel, and
from 1988 to 1992, generated nearly all of its revenues from consulting
services. The Company introduced its first word processing software product
in Israel in 1992 and began shipping its first product intended for the
international market in 1994. Accent's revenues during this period were
almost entirely attributable to sales of word processing software.
From its inception through December 31, 1998, Accent has accumulated
deficits in excess of $53 million, including net losses of $6.8 million,
$13.5 million and $21.0 million for the fiscal years ended December 31, 1998,
1997 and 1996, respectively. Although the Company believes it has made
substantial progress in reducing its operating expenses and annual losses,
its failure to achieve its revenue plan has significantly affected the
Company's ability to generate adequate cash flow to meet its working capital
requirements. These factors 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 as
of December 31, 1998. The Company's product development capability is located
in the U.S.
The Company's revenue during both 1998 and 1997 fell short of management
expectations, the Company believes, due primarily to significant concerns of
potential customers as to the Company's ability to continue to support and
expand its product offerings. Also during this period, working capital
constraints forced the Company to reduce its level of spending on sales and
marketing activities. 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
the concerns of potential customers can be alleviated and 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 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.
The decline in revenue experienced during 1998 and 1997 created pressure
on the Company's working capital and its ability to fund its current
operations. Although the Company has been successful on several occasions
during the past two years in raising additional working capital through the
sale of convertible securities, those funds were essentially exhausted by
December 31, 1998. The Company secured $600,000 in additional working capital
during the first quarter of 1999 and also successfully converted all of its
long-term debt into equity. The Company believes that these accomplishments,
coupled with an improved revenue outlook and cost reduction efforts that have
substantially reduced its working capital requirements, will be sufficient to
meet its requirements for approximately six months. Beyond that time, the
Company believes it will be generating sufficient operating cash flow to meet
its needs without additional external
13
financing. If the Company is unable to achieve its projections and the
Company must seek additional financing, there is no assurance that its
efforts to obtain such financing will be successful. Any failure on the part
of the Company to secure required financing will have a material adverse
impact on the Company and may cause the Company to cease operations.
REVENUE RECOGNITION
As required by U.S. generally accepted accounting principles, revenue
from the sale of software products to end-users and resellers (including
distributors and OEMs) is generally recognized when a customer purchase order
has been received, the software has been shipped, the Company has a right to
invoice the customer, collection of the receivable is determined to be
probable and there are no significant obligations remaining on the part of
the Company. Revenue recognition is deferred if any of these conditions are
not met. The Company also maintains appropriate allowances for anticipated
returns.
OEM and licensing arrangements may include non-refundable payments in the
form of guaranteed sublicense and license fees. These guaranteed fees are
recognized as revenue upon shipment of the master copy of all software to
which the fees relate provided there are no significant post-delivery
obligations and the customer is creditworthy. Additionally, such revenue is
recognized only to the extent that the obligation to pay such fees is not
subject to price adjustment, is non-recoverable and non-refundable, and is
due within twelve months.
CURRENCY
The functional currency for the Company is the dollar, which is the
currency of the primary economic environment in which the operations of the
Company are conducted. The majority of the Company's sales and expenses are
made or incurred in the United States. Transactions and balances originally
denominated in dollars are presented at their original amounts. Transactions
and balances in other currencies (including the New Israeli Shekel (NIS)) are
remeasured into dollars in accordance with principles set forth in FASB
Statement No. 52. Exchange gains and losses arising from remeasurement are
reflected in other income or expenses, as applicable.
RESULTS OF OPERATIONS (DOLLARS ARE STATED IN THOUSANDS EXCEPT PER SHARE FIGURES)
The table on the next page sets forth for the periods indicated the
percentage of sales represented by certain items reflected in the Company's
Consolidated Statements of Operations.
14
COST OF SALES AND OPERATING EXPENSES AS A PERCENTAGE OF SALES
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------ ------ ------
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 51.2% 98.0% 136.6%
------ ------ ------
Gross Margin 48.8% 2.0% (36.6)%
------ ------ ------
Product Development 130.3% 154.0% 68.4%
Marketing Expenses 72.0% 69.7% 186.6%
General & Administrative 126.5% 101.4% 130.0%
Restructuring Charge 64.5% 0.0% 0.0%
------ ------ ------
Operating Expenses 393.3% 325.1% 385.0%
------ ------ ------
Operating Loss (344.5)% (323.1)% (348.4)%
------ ------ ------
------ ------ ------
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales decreased approximately 37% to $1,949 in 1998 from
$3,125 in 1997. Recent sales have fallen short of management expectations,
the Company believes, due to potential customers' concerns about Accent's
ability to continue to support and expand its product offerings.
The percentage of the Company's total sales derived from its translation
services business increased substantially during 1998 and accounted for
approximately 40% of total revenue.
COST OF SALES. The Company's cost of sales improved to just over 50% of sales
in 1998, or $997 on sales of $1,949, from almost 100% of sales, $3,062 on
sales of $3,125 in the year earlier. The Company's continuing movement away
from retail sales with "boxed software" and relatively high cost of goods
sold towards the OEM and business-to-business market where manufacturing and
production costs are minimal, is primarily responsible for the improved cost
of sales. The translation services businesses, which received expanded
emphasis in 1998, relies on an international network of human translators and
a correspondingly higher cost of sales.
Cost of sales during 1997 included a charge of $555 to amortize
capitalized software development costs compared to no charge for this expense
in 1998. 1997 cost of sales also included the cost of technical support which
the Company provided primarily in support of its retail sales and a $666
charge related to the sale of excess inventory.
GROSS MARGIN. Although net sales declined by over one-third from 1997 to
1998, the significant reduction in the cost of sales as a percentage of
revenue led to an improvement in the Company's gross margin to 49% in 1998
from just 2% in 1997.
PRODUCT DEVELOPMENT COSTS. Product development costs consist almost entirely
of compensation and other personnel-related costs for the Company's staff of
software engineers. As the Company's sales and
15
marketing focus shifted away from "boxed software" for the retail market and
towards software developers, software content providers and software
localizers/translators, new lines of products were developed and introduced
with corresponding large increases in product development costs in 1997
compared to 1996 and continuing into 1998. By the latter quarters of 1998,
however, much of the personnel-intensive development effort had been
concluded and it became possible to achieve significant cost reductions in
this area. Product development costs for the full year, 1998, were $2,540, a
47% reduction from the $4,813 spent on product development during 1997.
During the fourth quarter of 1998, because significant development
efforts had been concluded and also due to the need to reduce the Company's
overall expenses and working capital requirements, the Israeli-based product
development department was disbanded. The product development staff in Israel
consisted of 44 individuals at the beginning of 1998. The Company has
reestablished its product development capability in the United States.
Product development costs included costs of the Company's former
subsidiary, AgentSoft, of $674 in 1998 and $1,265 in 1997. During 1998, the
Company concluded that AgentSoft no longer fit in the Company's long-range
strategic plans and, furthermore, that AgentSoft required a significant
investment if it were to realize its market potential. The Company's
liquidity constraints precluded it from making the necessary investment in
AgentSoft.
MARKETING EXPENSES. Sales and marketing expenses were reduced approximately
36% to $1,404 in 1998 from $2,177 in 1997. Pressure to reduce operating
expenses and to conserve working capital led to staffing reductions in the
sales and marketing functions, including the elimination of the
Jerusalem-based sales office, and greater reliance on sales representatives
to augment the Company's sales efforts. Related costs such as advertising,
printing, travel and participation in trade shows were also reduced during
the most recent year.
GENERAL AND ADMINISTRATIVE EXPENSES. Efforts to streamline the management of
the Company began in 1997, continued throughout 1998 and led to a 22%
reduction in total general and administrative expenses in 1998 compared to
the year earlier.
By the end of 1998, the Company had eliminated or out-sourced its human
resources and payroll activity, its in-house legal counsel, and significant
portions of its accounting and office management functions. The trend of
reduced general and administrative spending is expected to continue into 1999
as that will be the first year to experience a full year's impact of the
Company's cost reduction efforts. 1998 was also impacted by several large
charges for consulting services related to the Company's efforts to raise new
capital and to sell its subsidiary, AgentSoft. These charges are not expected
to recur in 1999 or beyond.
RESTRUCTURING CHARGE. Beginning with the arrival of a new management team in
early 1997 and continuing into the fourth quarter of 1998, the Company
completed a significant restructuring effort. The restructuring effort
included a complete reorientation of the Company's products away from the
retail market and towards software developers, software content providers and
software localizers/translators, increased emphasis on translation services
as an important source of revenue, corresponding shifts in the composition
and direction of the Company's sales and marketing activities, and movement
of the Company's executive offices from Israel to the United States.
The restructuring activities led to closing sales offices in Israel,
England and Canada; the disposition of the net assets of the Company's
Jerusalem-based subsidiary; AgentSoft, the closing of the Israeli-based
product development function and elimination of almost 90% of the Company's
total staffing. The staffing reductions resulted in large cash outlays for
severance and other employee benefits and left the Company with a substantial
amount of excess equipment. Further, the greatly reduced size of the Company
following the personnel reductions made it unlikely that the Company would
realize significant benefit from certain long-term assets.
16
The restructuring activities also led to a one-time restructuring charge
during 1998 of $1,257 related primarily to the disposal of excess capital
equipment and the write-off of other long-term assets.
OPERATING LOSS. Despite the roughly 37% reduction in revenue and the $1257
restructuring charge, the Company's cost reduction efforts allowed it to
reduce its operating loss by approximately one-third to $6,714 in 1998 from
$10,096 in the year earlier. Without the one-time restructuring charge, the
Company's operating loss would have been $5,457, almost one-half of the year
earlier figure.
OTHER EXPENSES. Other expenses, which totaled $105 during 1998 compared to
$3,378 in 1997, consisted primarily of interest expenses on the Company's
debt and costs related to currency conversions and exchange rate fluctuations
between the U.S. dollar and the Israeli shekel. Other expenses during 1997
included substantial charges related to two offerings by the Company of
convertible securities. These financing costs included a "guaranteed return"
of $2,104 granted to the purchasers and the cost of warrants issued to the
investors in the amount of $1.080.
NET LOSS. The Company experienced a net loss of $6,819 during 1998 compared
to a net loss of $13,474 during the prior year.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales decreased approximately 37% to $3,125 during 1997 from
$4,953 during 1996. New management, which joined the Company during the first
quarter of 1997, shifted the product mix and sales and marketing emphasis
away from the retail market and towards the original equipment manufacturers
(OEM) and business-to-business markets.
Consistent with its focus on the OEM and business-to-business markets,
the Company reduced its advertising, marketing and sales efforts in the
retail market and experienced a corresponding reduction in revenue from this
market. 1997 sales to the OEM and business-to-business market developed at a
slower pace than expected for several reasons including the need to rebuild
and refocus the Company's sales and marketing capability after the
significant restructuring which began in 1996. Also, various products
intended for the OEM and business-to-business market were not available until
the latter part of 1997.
As the Company shifted its sales and marketing focus away from the
retail market, it was left with excess "boxed software" which it had
previously manufactured and assembled for sale. The Company completed a
transaction during 1997, in which it exchanged its excess retail inventory
with a book value of $666 for $1,600 worth of "trade credits." The trade
credits have a useful life of three years and can be used in conjunction with
cash to purchase such items as raw materials, office supplies, travel
services, media and advertising. The Company recognized revenue of $666 as a
result of the trade credit transaction, established a reserve of $934 and
recorded $666 in trade credits as a long term asset. No gain or loss was
recognized as a result of the transaction. The Company subsequently
determined that it was unlikely to realize more than a small amount of value
from the trade credits and, during 1998, took a charge of $512 to reduce the
carrying cost of this asset.
COST OF SALES. Although revenue declined 37% from 1996 to 1997, the Company
was able to achieve a 55% reduction in the cost of sales to $3,062 in 1997
from $6,767 in 1996.
Part of the reduction in the Company's cost of sales is directly related
to the lower level of sales and the Company's focus on the OEM and
business-to-business markets. Cost of sales consists of manufacturing and
production costs, storage and shipping costs, royalties and the amortization
of previously capitalized software development costs. In the retail market,
where sales tend to consist of large quantities of individually "boxed"
software, all of these costs can be significant. In the OEM and
business-to-business markets, however, sales typically consist of a single
master, replicable compact disc (CD), which often includes collateral
material such as help files and instructional material.
17
Cost of Sales included $555 of amortized capitalized software
development costs in 1997 compared to $719 in 1996. The Company no longer
capitalizes such costs and by the end of 1997 had amortized all of its
previously capitalized costs. Costs of sales during 1997 also included $693
in royalty costs compared to $2,286 during the prior year.
Cost of sales also includes technical support which the Company provides
to its customers and the cost of administering its translation services
business. The shift away from the retail market, coupled with the expansion
of the translation services business led to a net reduction in the staffing
levels in the cost of sales departments from 10 in 1996 to 5 at December 31,
1997.
PRODUCT DEVELOPMENT COSTS. The Company has continued to place significant
emphasis on the development and enhancement of new products and introduced,
and continues to introduce, a number of new products aimed primarily at the
business-to-business market. Product development costs, which are
predominantly salaries and other personnel-related costs, increased
approximately 42% from $3,386 in 1996 to $4,813 in 1997. The increase in
product development costs is primarily attributable to AgentSoft. The
subsidiary was formed in early 1996 and its total cost that year was $522
compared to $1,385 in 1997. Staffing in product development at Accent
remained relatively constant at approximately 54 people during most of 1997,
but personnel reductions implemented during the fourth quarter led to a 1997
year-end staffing level of 44. Staffing at AgentSoft increased to 21 at
December 31, 1997, from 12 at the end of 1996.
MARKETING EXPENSES. The shift away from the retail market led to a reduction
in sales and marketing expenses of over 75% from $9,242 in 1996 to $2,177 in
1997. Accent closed its U.S. sales office in Newport Beach, California,
during January, 1997, and in December, 1997, closed its European sales office
in London. Staffing in the sales and marketing area, which had been reduced
from a peak of 37 employees in mid-1996, to 20 at the end of 1996, was
further reduced to 9 at the end of 1997.
In addition to the reduction in sales and marketing personnel, the
Company also experienced a significant reduction is sales and marketing
related expenses such as advertising and marketing material, media costs,
travel and participation in trade shows. The costs related to participation
in exhibitions and trade shows was $329 during 1997 compared to $1,797 during
1996, and the cost of advertising and public relations was $395 in 1997, less
than 10% of its 1996 level of $4,386.
As new products are developed for the OEM and business-to-business
market, the Company believes it will be necessary to rebuild its sales and
marketing work force and increase spending in this area; however, spending is
expected to remain significantly below the 1996 level.
GENERAL AND ADMINISTRATIVE EXPENSES. As the Company restructured its
operations, it reduced its general and administrative staffing level from 26
at the beginning of the year to 12 at December 31, 1997. Total general and
administrative cost declined 51% to $3,169 in 1997 from $6,437 in 1996.
General and administrative expenses include costs related to the executive
management of the Company, and the legal, financial, human resources, MIS and
office management functions that support day-to-day operations of the
business.
Accent retained the services of a marketing and public/investor relations
firm during 1997, and the cost of these services is included in general and
administrative expense. Under the terms of the twelve month agreement, the
firm is compensated entirely in shares of Accent stock and was initially
granted 612,000 Ordinary Shares. The shares have been valued at $995 and are
being expensed over the term of the agreement. During the first quarter of
1998, the firm was granted 550,000 additional shares of stock that will be
valued and expensed over the remaining term.
General and administrative expenses also include a write-off of bad and
doubtful accounts receivable of $209 in 1997.
18
OPERATING LOSS. The operating loss declined by 52% in 1997 to $10,096 from
$20,879 in 1996. The significant cost reductions which the Company achieved
in production, sales and marketing, and general and administrative expenses
were partially offset by the continued decline in revenue and the increased
level of spending on product development and AgentSoft.
OTHER INCOME (EXPENSE), NET. The Company completed two sales of convertible
securities during 1997, realizing proceeds of $7,750, before expenses. The
Company's other expense of $3,378 during 1997 (as compared to $155 during the
previous year) consists almost entirely of costs related to these financing
transactions, offset by interest income and gains from currency fluctuations.
Costs of the financing transactions included the cost of a "guaranteed
return" to the purchasers of the securities in the amount of $2,104, the cost
of warrants issued to the investors in the amount of $1,080 and interest
costs on the debentures and preferred shares which totaled $69.
NET LOSS. The Company's net loss declined 36% to $13,474 in 1997 from $21,034
in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Although the Company has been successful on several occasions during the
past two years in raising additional working capital through the sale of
convertible secutities, those funds were essentially exhausted by December
31, 1998. The Company secured $600 in additional working capital during the
first quarter of 1999 in the form of short term debt and the Company believes
that these funds, coupled with cost reduction efforts which have
substantially reduced its working capital requirements, will be sufficient to
meet its requirements for approximately six months. When these funds are
exhausted or if the Company's current working capital falls short of its
requirements due to revenue shortfalls or other unanticipated contingencies,
the Company may need to seek 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.
Accent executed a Preferred Share Purchase Agreement ("Agreement") with
Lernout & Hauspie during May, 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 $230 resulting in net
proceeds to the Company of $3,770. Also pursuant to the Agreement, Accent
issued warrants which allow the investor 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 Series C Preferred Shares issued to Lernout & Hauspie are convertible
at any time into Ordinary Shares of Accent. The conversion price is $0.45 per
share, representing a 10% premium over the average closing price of the
Company's Ordinary Shares during the ten trading days preceding execution of
the agreement. Conversion of all 4,000 Series C Preferred Shares would result
in the issuance of 8,888,889 Ordinary Shares and would dilute existing
shareholders by approximately 32%.
At the time of the Preferred Share Purchase Agreement with Lernout &
Hauspie, the Company had Israeli government-guaranteed loans outstanding of
approximately $1,710. The agreement stipulated that these loans were to be
retired by September 4, 1998. During the third quarter, the Company used
proceeds from the Preferred Share Purchase Agreement to pay down a portion of
the outstanding balance. The Company also entered into an agreement with the
government of Israel and appropriate Israeli banking officials to permit the
Company to retire the remainder of the loans through the issuance of
additional equity. Subsequent to the agreement with the government, however,
there was a significant decline in both the Company's share price and in the
average daily trading volume in the Company's stock. The combination of the
lower share price and low trading volume made it essentially impossible to
sell sufficient equity to retire the loan by the stipulated date and as of
December 31, 1998, the Company had $1,180 in government-guaranteed loans
still outstanding.
19
Subsequent to December 31, 1998, the Company entered into a further
agreement with the government of Israel and various Israeli banking officials
whereby the Company issued warrants to the bank to purchase 2,448,000
ordinary shares in full satisfaction of the balance of the loan. The warrants
vest on the second anniversary of the grant (that is, January 25, 2001) and
expire on January 25, 2006.
During the second and third quarters of 1998, Accent reached agreement
with certain 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. A total of approximately 1,000,000 shares were issued at
market value to these creditors in satisfaction of approximately $450 in
accounts payable.
The Company believes it has established sufficient reserves to accurately
reflect the likelihood of uncollectable receivables. There can be no
assurance, however, that uncollected accounts receivable beyond the reserves
established would not have a material adverse effect on the Company's
business, results of operations and financial condition.
Accent's working capital was $(1,456) at December 31, 1998 compared to
$109 at December 31, 1997. The change in working capital primarily reflects
the Company's continuing operating losses.
The Company's operating activities used cash of $4,823, $15,579 and
$15,422 for the years ended December 31, 1998, 1997 and 1996, respectively.
The major factors contributing to the lower 1998 figure are the Company's
improved operating results and the fact that a number of large creditors had
been brought into balance during 1997 reducing the amount of further payments
required in 1998. The Company's accounts payable and accruals balance was
reduced by $4,066 during 1997 as the Company attempted to bring its creditors
current in the amounts owed them. During 1997, the Company retained the
services of a marketing specialist and a marketing and public/investor
relations firm, both of which were compensated through the issuance of
warrants or shares rather than in cash.
The Company's investing activities used cash of $12, $834 and $1,067
during the years ended December 31, 1998, 1997 and 1996, respectively. Cash
generated during the most recent year came primarily from the sale of capital
equipment excess to the Company's current needs. The reduction in the 1997
figure as compared to 1996 reflects a reduction in spending on capital
equipment such as computers.
Financing activities provided cash of $2,477, $10,189 and $15,579 during
the years ended December 31, 1998, 1997 and 1996, respectively. The cash
provided in 1998 includes the net proceeds from the sale of preferred shares
to Lernout and Hauspie which was discussed earlier in this section. During
1998, the Company retired long term debt in the amount of $1,550, of which
$1,320 was retired through cash payments and $230 was retired through the
issuance of Ordinary Shares. During 1997, $1,332 of the Company's long term
debt was retired. During 1996, the Company received proceeds from bank loans
of $1,758.
During 1997, Accent completed two private placements, realizing total
proceeds of $7,750 before expenses ($6,955 net of expenses) through the sale
of convertible securities.
During August 1997, the Company completed a financing transaction
pursuant to Rule 505 of Regulation D under the Securities Act of 1933. Rule
505 was applicable because the issuance involved fewer than 35 unaccredited
investors. The Company received $1,850 in cash net of expenses and, in
return, issued the investor an unsecured convertible debenture carrying six
percent (6%) annual interest. The total investment of $2,000, plus accrued
interest of $30, was converted into 1,959 Ordinary Shares of the Company
prior to December 31, 1997. Based on the number of Ordinary Shares
outstanding at the time of the financing, conversion of the debentures
resulted in a 16% dilution to existing shareholders.
The investor was also granted warrants to purchase 250 Ordinary Shares of
the Company at an exercise price of $2.80 and additional warrants to purchase
50 Ordinary Shares at an exercise price of $3.20. The placement agents for
the transaction were granted warrants to purchase 300 Ordinary Shares
20
at an exercise price of $1.73 per share. The warrants are exercisable for
five years. Exercise of all 600 warrants granted to the investor and to the
placement agents would result in a percentage dilution to existing
shareholders of approximately 2%. The investor warrants were valued at $290
and recorded as a reduction in the face value of the debt, with a resulting
increase in shareholders' equity. The reduction in debt was fully accreted
between the time the warrants were issued and the time the debentures were
fully converted into Preferred or Ordinary Shares of the Company. The
placement agents warrants were valued at $326 and have been capitalized as
debt issuance cost, with a resulting increase in shareholders' equity. The
debt issuance costs were fully amortized when the debentures were converted
into Preferred or Ordinary Shares.
During November and December, 1997, the Company completed a financing
transaction with a group of investors in which the Company received a total
of $5,750 in cash before expenses (approximately $5,255 net of expenses). In
return, the Company issued the investors convertible securities in the amount
of $5,750, carrying six percent (6%) annual interest. As of December 31 1997,
$2,140 of the securities, plus $14 of accrued interest had been converted
into 3,504 Ordinary Shares of the Company. The balance of the securities,
plus an additional $56 in accrued interest, was converted into an additional
8,992 Ordinary Shares during the first quarter, 1998. Conversion of all of
the securities resulted in an 88% dilution to existing shareholders.
The investors in the November transaction were also granted warrants to
purchase 1,150 Ordinary Shares of the Company at an exercise price of $2.45.
For facilitating completion of this investment, the placement agent was
granted warrants to purchase 788 Ordinary Shares at the same exercise price
as the investors. The warrants expire on November 6, 2002, if not exercised
earlier. Exercise of all of the investor and placement agent warrants will
result in a percentage dilution to existing shareholders of approximately 7%.
In November 1996, the Company received net proceeds of $12,800 from a
secondary offering of Ordinary Shares and warrants to purchase Ordinary
Shares.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The dollar cost of the Company's operations in Israel is influenced by
the extent to which any increase in the rate of inflation in Israel over the
rate of inflation in the United States is offset by the devaluation of the
NIS in relation to the dollar. Inflation in Israel will have a negative
effect on the profitability of contracts under which the Company is to
receive payment in dollars or other foreign currencies while incurring
expenses in NIS linked to the Israeli CPI, unless such inflation is offset by
a devaluation of the NIS. Inflation in Israel and currency fluctuations will
also have a negative effect on the profitability to the Company of fixed
price contracts under which the Company is to receive payment in NIS.
A devaluation of the NIS in relation to the dollar will have the effect
of decreasing the dollar value of any asset of the Company that consists of
NIS or receivables payable in NIS (unless such receivables are linked to the
dollar). Such a devaluation would also have the effect of reducing the dollar
amount of liabilities of the Company that are payable in NIS (unless such
payables are linked to the dollar). Conversely, any increase in the value of
the NIS in relation to the dollar will have the effect of increasing the
dollar value of any unlinked NIS assets of the Company and the dollar amounts
of any unlinked NIS liabilities of the Company.
Because exchange rates between the NIS and the other currencies in which
the Company conducts its business, including the dollar, fluctuate
continuously (albeit with a historically declining trend in the value of the
NIS), exchange rate fluctuation, and especially larger periodic devaluations,
have an impact on the Company's profitability and period-to-period
comparisons of the Company's results. Such impact is recorded in the
Company's financial statements as Other Expense. Favorable exchange rates
will tend to increase reported financial income and unfavorable exchange
rates will tend to reduce reported income. To date, the Company has not
engaged in currency-hedging transactions intended to reduce the effect of
21
fluctuations in foreign currency exchange rates on the Company's results of
operations.
EFFECTIVE CORPORATE TAX RATE
The Company maintained operations during 1998 in both Israel and the
United States and in 1997 also maintained operations in England and must
comply with the tax regulations of each country. To date, none of the
Company's operations in any of the countries in which it operations has been
profitable and, therefore, the Company has not paid income taxes nor does it
have any income tax liability.
Virtually all of the Company's facilities and investment programs have
been granted "Approved Enterprise" status under Israel's Law for
Encouragement of Capital Investments, 1959. Under the Approved Enterprise
program, the Company is entitled to reductions in the tax rate normally
applicable to Israeli companies with respect to income generated from
Approved Enterprise investments. The Company has derived, and expects to
continue to derive, a substantial portion of its income from Approved
Enterprise investments. The Company is entitled to a ten-year tax exemption
commencing in the first year in which taxable income is earned, subject to
certain time restrictions, the benefit period for which has not yet
commenced. In addition, the Company has net operating loss carryforwards that
it intends to utilize to reduce its future income tax liability.
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.
"EURO" CURRENCY
As the Company does not trade in European currencies, management believes
that the introduction of the Euro will have no significant influence on the
results of the Company.
22
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.......................................... 24
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997........ 25
Consolidated Statements of operations for the years ended
December 31, 1998, 1997 and 1996.................................. 26
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) for the years ended December 31, 1998, 1997 and 1996.... 27
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.................................. 28
Notes to the Consolidated Financial Statements...................... 29
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II: Valuation and Qualifying Accounts........................ 44
All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial
statements or related notes.
23
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF ACCENT SOFTWARE INTERNATIONAL LTD.:
We have audited the consolidated balance sheets of Accent Software
International Ltd. as of December 31, 1998 and 1997, and the related
statements of operations, shareholders' equity (deficit) and cash flows for
each of the three years ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Israel and in the United States, including those prescribed
under the Auditors' Regulations (Auditor's Mode of Performance), 1973. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997 and, and the results of its operations and its
cash flows for each of the three years ended December 31, 1998, in conformity
with accounting principles generally accepted in Israel and in the United
States (as applicable to the financial statements of the Company such
principles are practically identical).
As discussed further in Note 1, the Company incurred losses of
approximately $6.8 million during the year ended December 31, 1998. As of
that date, the Company has an accumulated deficit of approximately $53.5
million. These factors, among others, as described in Note 1, create a
substantial doubt about the Company's ability to continue as a going concern
and uncertainty as to the recoverability and classification of recorded asset
amounts, and the amounts and classification of liabilities. The acCompanying
financial statements do not include any adjustments relating to the
recoverability and classification of assets carrying amounts or the amount
and classification of liabilities that might result should the Company be
unable to continue as a going concern.
LUBOSHITZ KASIERER
Member Firm of Arthur Andersen
Tel Aviv, Israel
March 26, 1999
24
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
U. S. dollars and shares in thousands
DECEMBER 31,
------------------------------
1998 1997
--------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 141 $ 2,499
Trade receivables, net of allowance of
$219 in 1998 and $63 in 1997 265 755
Other receivables 91 117
Prepaid expenses 5 906
Inventories 7 85
--------- ---------
Total current assets 509 4,362
EQUIPMENT
Cost 238 2,630
Less - Accumulated depreciation 198 1,220
--------- ---------
Equipment, net 40 1,410
OTHER LONG TERM ASSETS 50 666
--------- ---------
Total assets $ 599 $ 6,438
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,180 $ 1,886
Accounts payable and accrued expenses 785 2,367
--------- ---------
Total current liabilities 1,965 4,253
LONG-TERM BANK LOANS - 844
ACCRUED SEVERANCE LIABILITY 15 318
--------- ---------
Total liabilities 1,980 5,415
--------- ---------
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred Shares, par value NIS 0.01, authorized
10,000 shares, issued and outstanding 4 and 3 at
December 31, 1998 and 1997, respectively - -
Ordinary Shares, par value NIS 0.01, authorized 65,000
shares, issued and outstanding 29,223 and 17,140
at December 31, 1998 and 1997, respectively 77 43
Share premium 52,082 47,701
Accumulated deficit (53,540) (46,721)
--------- ---------
Total shareholders' equity (deficit) (1,381) 1,023
--------- ---------
Total liabilities and shareholders' equity $ 599 $ 6,438
--------- ---------
--------- ---------
The accompanying notes form an integral part of these consolidated
financial statements.
25
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
U. S. dollars and shares in thousands (except per share information)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
-------------- --------------- ---------------
NET SALES $ 1,949 $ 3,125 $ 4,953
COST OF SALES 997 3,062 6,767
-------------- --------------- ---------------
GROSS PROFIT (LOSS) 952 63 (1,814)
-------------- --------------- ---------------
OPERATING COSTS AND EXPENSES
Product development costs 2,540 4,813 3,386
Marketing expenses 1,404 2,177 9,242
General and administrative expenses 2,465 3,169 6,437
Restructuring charge 1,257 - -
-------------- --------------- ---------------
Total operating costs and expenses 7,666 10,159 19,065
-------------- --------------- ---------------
OPERATING LOSS (6,714) (10,096) (20,879)
Other expenses, net 105 3,378 155
-------------- --------------- ---------------
NET LOSS $ (6,819) $ (13,474) $ (21,034)
-------------- --------------- ---------------
-------------- --------------- ---------------
NET LOSS PER SHARE $ (0.25) $ (1.08) $ (2.12)
-------------- --------------- ---------------
-------------- --------------- ---------------
Weighted average
number of shares outstanding 27,242 12,495 9,926
-------------- --------------- ---------------
-------------- --------------- ---------------
The accompanying notes form an integral part of these consolidated
financial statements.
26
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
U. S. dollars and shares in thousands
NUMBER OF:
--------------------------
PREFERRED ORDINARY SHARE SHARE ACCUMULATED
SHARES SHARES CAPITAL PREMIUM DEFICIT TOTAL
----------- ------------ ------------ -------------- -------------- --------------
BALANCE AS OF DECEMBER 31, 1995 - 9,481 $ 21 $22,325 $(12,213) $ 10,133
Issuance of shares and warrants - 1,800 6 12,785 - 12,791
Warrants and options exercised - 389 1 1,083 - 1,084
Net Loss - - - - (21,034) (21,034)
----------- ------------ ------------ -------------- -------------- --------------
BALANCE AS OF DECEMBER 31, 1996 - 11,670 $ 28 $36,193 $(33,247) $ 2,974
----------- ------------ ------------ -------------- -------------- --------------
Issuance of Preferred Shares 3 - - 1,750 - 1,750
Issuance of Ordinary Shares - 612 2 993 - 995
Issuance of Preferred Shares upon
conversion of debentures 3 - - 6,527 - 6,527
Issuance of Ordinary Shares upon
conversion of debentures - 846 2 2,176 - 2,178
Issuance of Ordinary Shares upon
conversion of Preferred Shares (3) 3,985 11 - - 11
Warrants exercised - 27 - 62 - 62
Net loss - - - - (13,474) (13,474)
----------- ------------ ------------ -------------- -------------- --------------
BALANCE AS OF DECEMBER 31, 1997 3 17,140 43 47,701 (46,721) 1,023
----------- ------------ ------------ -------------- -------------- --------------
Issuance of Ordinary Shares upon
conversion of Preferred Shares (3) 9,623 27 - - 27
Issuance of Preferred Shares 4 3,768 3,768
Issuance of Ordinary Shares in
satisfaction of long-term debt - 732 2 227 - 229
Issuance of Ordinary Shares in -
satisfaction of accounts payable - 1,620 4 356 - 360
Options exercised - 108 1 30 - 31
Net loss - - - - (6,819) (6,819)
----------- ------------ ------------ -------------- -------------- --------------
BALANCE AS OF DECEMBER 31, 1998 4 29,223 77 52,082 (53,540) (1,381)
----------- ------------ ------------ -------------- -------------- --------------
----------- ------------ ------------ -------------- -------------- --------------
The accompanying notes form an integral part of these consolidated
financial statements.
27
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
U. S. dollars and shares in thousands
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
OPERATING ACTIVITIES
Net loss $ (6,819) $ (13,474) $ (21,034)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,382 1,052 1,118
Change in allowance for doubtful accounts 156 (2,182) 1,248
Change in realizable value of other long term assets 616 - -
Changes in assets and liabilities
(Increase) decrease in trade receivables 334 2,466 953
(Increase) decrease in other receivables 26 - -
(Increase) decrease in prepaid expenses 901 (311) 61
(Increase) decrease in inventories 78 936 638
Increase (decrease) in accounts payable & accruals (1,194) (4,066) 1,594
Increase (decrease) in severance liability (303) - -
-------------- -------------- --------------
Net cash (used in) operating activities (4,823) (15,579) (15,422)
-------------- -------------- --------------
INVESTING ACTIVITIES
Disposition (acquisition) of fixed assets (12) (168) (1,021)
Increase in other long-term assets - (666) -
Capitalization of software development costs - - (46)
-------------- -------------- --------------
Net cash provided by (used in) investing activities (12) (834) (1,067)
-------------- -------------- --------------
FINANCING ACTIVITIES
Increase in government-guaranteed loans - - 1,758
Repayment of government-guaranteed loans (1,321) (1,332) (54)
Net proceeds received on issuance of debentures and warrants - 5,525 -
Net proceeds received on issuance of preferred shares 3,768 1,580 -
Net proceeds received on issuance of ordinary shares - - 12,791
Net proceeds received on exercise of warrants and options 30 4,416 1,084
-------------- -------------- --------------
Net cash provided by financing activities 2,477 10,189 15,579
-------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,358) (6,224) (910)
Cash and cash equivalents, beginning of period 2,499 8,723 9,633
-------------- -------------- --------------
Cash and cash equivalents, end of period $ 141 $ 2,499 $ 8,723
-------------- -------------- --------------
-------------- -------------- --------------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Ordinary shares issued in satisfaction of accounts payable $ 388 $ - $ -
-------------- -------------- --------------
-------------- -------------- --------------
Cancellation of ordinary shares issued in payment for services $ 229 $ - $ -
-------------- -------------- --------------
-------------- -------------- --------------
Trade credits received as payment for revenue $ - $ 666 $ -
-------------- -------------- --------------
-------------- -------------- --------------
Debt issuance costs paid by issuance of warrants $ - $ 4,416 $ -
-------------- -------------- --------------
-------------- -------------- --------------
Prepaid assets received in exchange for shares $ - $ 1,089 $ -
-------------- -------------- --------------
-------------- -------------- --------------
The accompanying notes form an integral part of these consolidated
financial statements.
28
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
Note 1 - GENERAL
Accent Software International and its subsidiaries (the "Company") is a
provider of language solutions for software developers, corporations and
consumers. The Company was founded in 1988 in Jerusalem, Israel. Accent
Worldwide, Inc., incorporated in 1991, is located in Colorado Springs,
Colorado, and includes sales, marketing, software development, and executive
management.
The financial statements of the Company have been prepared in U.S.
dollars as the currency of the primary economic environment in which the
operations of the Company are conducted is the U.S. dollar. A majority of the
Company's sales are made outside Israel in foreign currencies (mainly the
U.S. dollar), as are a majority of the purchases of materials. Thus, the
functional currency of the Company is the U.S. dollar.
Transactions and balances originally denominated in U.S. dollars are
presented at their original amounts. Transactions and balances in other
currencies are remeasured into U.S. dollars in accordance with the principles
set forth in Statement No. 52 of the Financial Accounting Standards Board of
the United States (FASB). Exchange gains and losses from the aforementioned
remeasurements are reflected in the statements of operations. The
representative rate of exchange prevailing on December 31, 1998 was U.S. $1 =
New Israeli Shekel ("NIS") 4.160; on December 31, 1997 it was U.S. $1 = NIS
3.536, and on December 31, 1996 it was U.S. $1 = NIS 3.251.
The Company incurred net losses of $6,819 and $13,474 in the years ended
December 31, 1998 and 1997, respectively. Net cash used in operating
activities for 1998 and 1997 was $4,823 and $15,579, respectively. As of
December 31, 1998, the Company had an accumulated deficit of $53,540. The
Company also incurred substantial losses prior to 1997 primarily attributed
to aggressive product development and marketing efforts based upon strong
retail market expectations for the Company's products. Anticipated revenue
did not materialize, however, resulting in substantial operating and cash
losses. Revenue declined in 1998 and 1997 from its 1996 level for several
reasons. First, the Company, under new management, shifted its product
development, sales and marketing focus away from the retail market, toward
the OEM and business-to-business market. Second, due to liquidity and working
capital constraints, the Company reduced the size of its direct sales force
and its expenditures for sales and marketing activities such as advertising
and trade show participation. Concerns from potential customers about the
Company's ability to remain a going concern also contributed to the revenue
shortfall.
GOING CONCERN
The consolidated financial statements have been prepared assuming the
Company will continue as a going concern. Note, however, that the report of
the Company's Independent Auditors raises doubt about the Company's ability
to continue as a going concern. Management believes Accent will remain a
going concern but 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 has focused 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 entered into alliances with other companies
in the industry aimed at broadening the Company's market reach, has expanded its
translation services business and has explored new market niches as potential
sources of customers for its products and translation services.
29
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
To reduce expenses, the Company has reduced its staffing level from
approximately 170 employees at its peak in 1996 to 15 employees at December
31, 1998. Related expenses such as rent, telephone, travel and training costs
have been reduced proportionately. The shift away from the retail market has
led to a reduction in production and inventory carrying costs. Upon
completion of several product development activities during the fourth
quarter, 1998, the Israel-based product development function was disbanded.
The Company intends to reestablish a product development capability in the
United States. The Company has reduced discretionary spending on advertising
and marketing as well as the amount it spends on exhibitions and trade shows
and, over the past two years, has closed its sales offices in England,
California, Canada and Israel. General and administrative expenses have been
reduced through out-sourcing and the elimination of non-essential activities.
During both the third and fourth quarters of 1997, the second quarter of
1998 and the first quarter of 1999, the Company successfully obtained
external financing through the sale of convertible securities. The Company
continues to explore sources of additional financing to satisfy its
operational requirements.
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.
RESTRUCTURING
In response to the fact that actual revenue was short of management's
expectations and that the Company was unable to generate sufficient cash flow
from its operations to sustain the business, management instituted
restructuring initiatives designed to reduce operating expenses and working
capital requirements. The restructuring activities, which are also discussed
in the Going Concern paragraphs, above, were completed during the fourth
quarter of 1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 2 - SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States. The
significant accounting policies followed in the preparation of the financial
statements, applied on a consistent basis, are:
30
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
A. PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the
Company and its subsidiaries. All significant interCompany accounts and
transactions have been eliminated in consolidation.
B. CASH AND CASH EQUIVALENTS
All highly liquid investments (including commercial paper) with an
original maturity of three months or less are considered cash equivalents.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
The allowance for doubtful accounts is calculated principally for
specific accounts the collectibility of which is doubtful and, in part,
includes a general provision based on the aging of the accounts. A provision
for estimated returns is recorded at the time of sale, based on past
experience in determining returns for similar types of products.
D. INVENTORIES
Over the past two years, the Company has almost totally exited the
retail market and, as a result, the amount of inventory the Company maintains
has decreased substantially. The Company no longer maintains any inventory or
its manufacturers now does the Company engage its manufacturers to bill and
ship product as it did in the past. To the extent the Company maintains any
inventory, inventory is stated at the lower of cost or market and consists
primarily of computer software on compact discs and assembled box products.
Cost is determined mainly by the "first-in, first-out" method.
E. EQUIPMENT
Equipment is stated at cost. Depreciation is calculated to show the net
realizable value of the assets at the end of the financial year.
F. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company has accelerated its product development cycle and is
currently expensing its software development costs as part of its product
development costs. All previously capitalized software development costs were
fully amortized by December 31, 1997.
G. REVENUES
SOP 97-2, regarding software revenue recognition, became effective for
all transactions entered into in fiscal years commencing on or after December
15, 1997. The Company recognizes revenue in accordance with this Standard.
OEM sales are typically made to another hardware or software
manufacturer who wishes to "bundle" Accent's product with its product for
sale to an end-user. Accent recognizes OEM sales when all of the following
conditions have been met: (1) the order has been received (or agreement
signed); (2) the software has been shipped; (3) collection of the receivable
is determined to be probable; and, (4) no significant obligations on Accent's
part remain outstanding.
31
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
Accent understands that acceptance of the software by the licensee is a
prerequisite of revenue recognition. The Company generally addresses this
concern by including in its OEM license agreements a statement by the
licensee that it has had a chance to evaluate the software being licensed and
has deemed it suitable for its needs. In those cases where the licensee
negotiates a period of time to evaluate the software prior to formal
acceptance, revenue recognition is deferred until acceptance has been
obtained. End-user acceptance of the software is irrelevant to Accent's
revenue recognition because the OEMs do not have an option to return or
receive credit for product once it has been accepted by the OEM even though
it may subsequently be returned to the OEM by the end-user.
Accent recognizes revenue under the "try before you buy" arrangement
only upon acceptance of the product by the customer. Under the "try before
you buy" arrangement, a potential customer can either download the software
from the Company's Web site or request a CD from the Company. In either case,
the software is "time bombed," meaning that it will operate for only a
limited trial period. If the user wishes to continue using the software after
the trial period, the user must "unlock" the software with instructions
provided by the Company. To receive the instructions, the customer must
accept and agree to pay for the product. Revenue recognition occurs only at
that point.
OEM arrangements may include non-refundable payments in the form of
guaranteed sublicense fees. Guaranteed sublicense fees from OEMs are
recognized as revenue upon shipment of the master copy of all software to
which the sublicense fees relate if there are not significant post-delivery
obligations and the obligation is not subject to price adjustment, is
non-recoverable and non-refundable and due within twelve months.
License fees are earned under software license agreements to end-users
and resellers (including original equipment manufacturers (OEMs) and
distributors). Such fees are generally recognized when a customer purchase
order has been received, the software has been shipped, the Company has a
right to invoice the customer, collection of the receivable is determined to
be probable, and there are no significant obligations remaining.
H. LOSS PER SHARE
Effective December 31, 1997, the Company adopted, as required, SFAS No
128, "Earnings per Share." In accordance with SFAS 128, net earnings (loss)
per Ordinary Share amounts ("Basic EPS") are computed by dividing net
earnings (loss), adjusted for preferred stock as required, by the weighted
average number of common shares outstanding and excluded any dilution. Net
earnings (loss) per Ordinary Share amounts assuming dilution ("Diluted EPS")
are computed by reflecting potential dilution of the Company's securities.
Basic and diluted EPS are the same for the years ended December 31, 1998,
1997 and 1996, respectively since all securities are considered antidilutive.
Options of 1,506,258 and Warrants totaling 12,762,357 that were outstanding
during the year were not included in the computation of diluted EPS since
they were considered anti-dilutive. In addition, the convertible preferred
shares outstanding were not included in the computation of diluted EPS since
their conversion would have had an antidilutive effect.
I. FINANCIAL INSTRUMENTS
The carrying amounts of cash, receivables, accounts payable and bank loans
approximate fair value, unless otherwise noted.
32
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
J. STOCK BASED COMPENSATION
As allowed by Statement of Financial Accounting Standard No. 123 ("SFAS
123"), the Company measures compensation cost of stock issued to employees
under Accounting Principles Board Opinion No. 25 ("APB 25").
Note 3 - TRADE RECEIVABLES
Total trade receivables declined approximately 59% from December 31,
1997 to December 31, 1998 and the Company increased its allowance for
doubtful accounts by $156.
DECEMBER 31,
--------------------------------
1998 1997
------------- --------------
Domestic (Israel) $ 239 $ 356
Foreign 245 462
------------- --------------
484 818
Less: Allowance for Doubtful
accounts and sales returns 219 63
------------- --------------
Total $ 265 $ 755
------------- --------------
Note 4 - INVENTORIES
Inventory at December 31, 1998 and 1997 consisted entirely of finished
goods.
During 1997 as the Company shifted away from the retail market, it
recognized that it had a large amount of inventory that was surplus to its
foreseeable requirements and during the second quarter of 1997, the Company
completed an exchange of its "excess" inventory in which it sold inventory
with a book value of $666 and received $1,600 in "trade credits." The Company
recorded the trade credits as a long-term asset with a value equal to the
inventory surrendered, that is, $666. No gain or loss was recorded on the
transaction. The trade credits were available to use over a period of three
years and could be exchanged, with cash, for a variety of products and
services. From its receipt of the credits in 1997 through the end of 1998,
the Company realized approximately $100 from use of the trade credits.
Following the restructuring which the Company completed during 1998, it
recognized that it was unlikely to realize more than a relatively small
additional amount of value from the trade credits and took a charge of $512
to bring the carrying cost of the credits in line with their estimated value.
33
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
Note 5 - EQUIPMENT
Following the personnel reductions that were part of the 1998 restructuring
effort, the Company was left with a significant amount of equipment which was
excess to its current requirements. The excess equipment was
liquidated during the fourth quarter, 1998.
COMPUTERS OFFICE
SOFTWARE FURNITURE
AND RELATED AND
VEHICLES EQUIPMENT EQUIPMENT TOTAL
--------------- --------------- --------------- ---------------
COST
January 1, 1998 $ 101 $ 1,859 $ 670 $ 2,630
Additions - 38 2 40
Disposals (101) (1,718) (613) (2,432)
--------------- --------------- --------------- ---------------
December 31, 1998 $ - $ 179 $ 59 $ 238
--------------- --------------- --------------- ---------------
ACCUMULATED DEPRECIATION
January 1, 1998 $ 39 $ 941 $ 240 $ 1,220
Provision 58 854 400 1,312
Disposals (97) (1,643) (594) (2,334)
--------------- --------------- --------------- ---------------
December 31, 1998 $ - $ 152 $ 46 $ 198
--------------- --------------- --------------- ---------------
NET BOOK VALUE
December 31, 1998 $ - $ 27 $ 13 $ 40
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
December 31, 1997 $ 62 $ 918 $ 430 $ 1,410
--------------- --------------- --------------- ---------------
Note 6 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The Company has accelerated its product development cycle and is
currently expensing its software -- development costs as part of its product
development costs. All previously capitalized software development costs were
fully amortized by December 31, 1997.
34
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
Note 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Several large vendor account balances were converted into equity during
1998 and the Company continued to make progress in bringing all of its
vendors current. The Company was also able to meet its obligations to its
employees, including those that were discharged as part of the restructuring
activity.
DECEMBER 31,
--------------------------------
1998 1997
------------- --------------
Suppliers $ 467 $ 1,497
Employee-related payables 89 507
Accruals and other payables 229 363
------------- --------------
$ 785 $ 2,367
------------- --------------
------------- --------------
Note 8 - LONG-TERM BANK LOANS
During 1998, the Company entered into an agreement with the government
of Israel and various Israeli banking officials which allowed the Company to
convert its government-guaranteed long-term debt into ordinary shares of the
Company. $1,550 of the Company's long-term debt was retired during the year
including approximately $230 which was converted into 732,000 Ordinary Shares
by December 31, 1998. The balance of the long-term debt was reclassified as
current maturities of long-term debt and this balance was converted into
equity during the first quarter of 1999 through the issuance of warrants to
purchase 2,448,000 Ordinary Shares of the Company.
Note 9 - SHARE CAPITAL
ISSUANCE OF SHARES IN SATISFACTION OF LONG AND SHORT TERM DEBT
During the months of June, July and August 1998, the Company reached
agreement with several of its largest creditors pursuant to which the
creditors agreed to accept shares of the Company in payment of all or a
portion of the amounts due them. First, the Company agreed to issue to the
Bank for Industrial Development (the "Bank"), at the Bank's request, a number
of Ordinary Shares sufficient to repay approximately $1,600 of a
Government-guaranteed loan which the Company received pursuant to the
Government's Approved Enterprise Program. The shares so issued were to be
sold by the Bank so that the proceeds from such sales could suffice to repay
the Bank Debt and any other associated commissions and costs. To date,
732,000 ordinary shares were issued to the Bank. Subsequent to this agreement
with the Bank, the Company and the Bank reached a second agreement, in
January 1999, to issue to the Bank warrants to purchase 2,448,000 ordinary
shares of the Company in exchange the total forgiveness of the outstanding
balance of the Government-guaranteed loan at that date equal to $1,224. These
warrants vest on the second anniversary of their grant and expire on January
25, 2006. Second, the Company issued 1,070,218 Ordinary Shares to four of its
trade creditors in 1998, and another 68,000 Ordinary Shares in February 1999
in payment of trade debts in the amount of approximately $420.
PRIVATE PLACEMENTS PURSUANT TO REGULATION D
35
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
Accent executed a Preferred Share Purchase Agreement with Lernout &
Hauspie Speech Products, N.V. ("L&H") 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 $230 resulting
in net proceeds to the Company of $3,770. The Series C Preferred Shares do
not pay interest but do provide the investor with a preference over Ordinary
Shareholders in the event of liquidation.
The investor also has the right to vote the shares as if they had all
been converted into Ordinary Shares and has been granted one seat on Accent's
Board of Directors.
The Series C Preferred Shares issued to Lernout & Hauspie 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. Conversion of all 4,000 Series C Preferred Shares would
result in the issuance of 8,888,889 Ordinary Shares and would dilute existing
shareholders by approximately 32%. The investor 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. Conversion of
the warrants would dilute existing shareholders by an additional 12%.
In November and December, 1997, the Company completed a private
placement with four private investors pursuant to Regulation D of the
Securities Act of 1933. The Company received $5,750 in cash before expenses,
approximately $5,255 net of expenses. In return for the aggregate purchase
price of $5,750, the Company issued the investors debentures in the amount of
$4,000 and Series B Preferred Shares in the amount of $1,750. Both the
debentures and Preferred Shares carry six percent (6%) annual interest
(payable in cash or Ordinary Shares, at the Company's option). The investors
also received warrants to purchase a total of 1,150,000 Ordinary Shares of
the Company at an exercise price of $2.45. As of March 27, 1998, the
investors had converted all the holdings into 12,496,160 Ordinary Shares.
In August 1997, the Company completed a private placement with one
private investor pursuant to Regulation D of the Act. The Company received
$2,000 in cash before expenses, approximately $1,850 net of expenses. In
return for the aggregate purchase price of $2,000, the Company issued the
investor debentures in the amount of $2,000, carrying six percent (6%) annual
interest (payable in cash or Ordinary Shares, at the Company's option). The
investor also received warrants to purchase a total of 250,000 Ordinary
Shares of the Company at an exercise price of $2.80 and 50,000 Ordinary
Shares of the Company at an exercise price of $3.20. As of March 27, 1998,
the investor had converted all its holdings into 1,959,309 Ordinary Shares.
WARRANTS
During the August 1997 private placement, the Company issued the August
Investor warrants to purchase 250,000 Ordinary Shares at a price of $2.80 per
share and 50,000 Ordinary Shares at a price of $3.20 per share. In addition,
it issued to the placement agents warrants to purchase 300,000 Ordinary
Shares at an exercise price of $1.73 per share. The August Investor's
warrants and those of the placement agents all expire on August 5, 2002.
During the November/December 1997 private placement, the Company issued
the November Investors warrants to purchase 1,150,000 Ordinary Shares at a
price of $2.45 per share. In addition, it issued to the placement agent
warrants to purchase 787,500 Ordinary Shares at an exercise price of $2.44
per share. The November Investors' warrants and those of the placement agent
all expire on November 30, 2002.
36
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
OPTIONS
The Company, pursuant to formal share option plans adopted in 1995 and 1997
under which 1,875,000 shares were initially reserved, has granted options to
shareholders and to employees, non-employee directors and consultants of the
Company. The options are exercisable under certain conditions and for certain
periods and expire between January 1996 and August 2004. The exercise price of
options granted was not less than the fair market value of the shares on the
date of the grants.
WEIGHTED
NUMBER PRICE AVERAGE PRICE
OF SHARES PER SHARE PER SHARE
---------- ------------- --------------
OUTSTANDING DECEMBER 31, 1996 991,000
---------
Granted 829,250 1.63 - 4.50
Exercised 16,667 3.03 - 4.37 3.77
Forfeited 369,916
---------
OUTSTANDING DECEMBER 31, 1997 1,433,667
---------
Granted 2,525,250 0.34 - 0.72
Exercised 107,168 0.24 - 0.34 0.27
Forfeited 2,345,491
---------
OUTSTANDING DECEMBER 31, 1998 1,506,258
---------
The weighted average fair value of options granted in 1998 was $0.15 per
share. The following table summarizes information about options outstanding at
December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE OUTSTANDING AVERAGE
EXERCISE AT CONTRACTUAL EXERCISE AT EXERCISE
PRICES DEC. 31,1998 LIFE PRICE DEC. 31,1998 PRICE
- ------------- ------------ ----------- -------- ------------ --------
$0.24 - $1.00 973,717 6 $0.39 775,636 $0.39
$1.01 - $3.00 355,000 5 $1.87 105,000 $1.86
$3.01 - $4.33 177,541 4 $3.84 177,551 $3.84
--------- ---------
1,506,258 1,058,187
--------- ---------
--------- ---------
As the fair market value of options granted did not exceed the exercise
price on the date of the grant, no compensation was recorded for these options
in accordance with APB No. 25.
Had compensation cost been determined under the alternative fair value
accounting method provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation," the Company's net loss and net loss per share would
have increased to the pro forma amounts shown in the next table.
37
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
1998 1997 1996
--------- --------- ---------
NET LOSS
As Reported $ (6,819) $ (13,474) $ (21,034)
Pro Forma $ (7,146) $ (14,822) $ (21,994)
NET LOSS PER SHARE
As Reported $ (0.25) $ (1.08) $ (2.12)
Pro Forma $ (0.26) $ (1.13) $ (2.22)
Under Statement 123, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1998 and 1997: (1)
expected life of the option for 2 years; (2) dividend yield of 0%; (3) expected
volatility of 156% and 141% respectively; and (4) risk-free interest rate of 6%.
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
As of December 31, 1998, 1,058,187 options were fully vested but have not
been exercised, and the remaining 448,081 will vest as follows:
YEAR VESTING
- ---- -------
1999 222,082
2000 152,999
2001 23,000
Of the total number of options outstanding at the end of 1998, 50,000
had no set vesting date.
In addition, the Company amended the CEO Share Option Plan on July 20,
1998 to grant the chief executive officer a total of 1,086,000 options at
exercise prices between $0.375 and $1.032 per share. These options shall vest
at various times and upon various conditions set forth in the new CEO Share
Option Plan. The granting of these options was conditioned upon the
forfeiture of the 350,000 options granted to the chief executive officer
pursuant to the prior CEO Share Option Plan. Because the new CEO Share Option
Plan and the grants made thereunder are subject to the approval of the
Company's shareholders, which approval has not been granted as of this date,
neither the grant of 1,086,000 options nor the forfeiture of the 350,000
options have been included in the numbers set forth in this note.
The Company also granted 50,000 options to a newly appointed
non-employee director on July 22, 1998, at an exercise price of $0.4375 per
share, subject to approval of the Company's shareholders at the next regular
annual meeting. It is the Company's intention that these options vest one
year after their grant, but because they are subject to the approval of the
Company's shareholders and which approval has not been granted as of this
date, these 50,000 options have not been included in the numbers set forth
above.
38
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
RESERVED FOR FUTURE ISSUANCES
The Company has reserved authorized but unissued ordinary shares for
future issuance as follows:
NUMBER OF SHARES AT DECEMBER 31,
1998 1997
------------- -------------
Warrants 12,616,194 5,819,913
Founder's Share Option Plan -- 225,125
Employee and Non-Employee 1,357,708 1,357,708
Share Option Plans (1995)
CEO Share Option Plan (1997) 450,000 450,000
CEO Share Option Plan (1998) 636,000 * -
Non-Plan Option Grants to
Non-Employee Directors -- 80,000
---------- ---------
15,059,902 7,932,746
---------- ---------
---------- ---------
* Plus the 450,000 Options from the 1997 Plan. These 636,000 additional shares
have been reserved by the Company conditional on the approval of the CEO
Share Option Plan (1998) by the shareholders at the next annual meeting.
Provided the Plan is approved, these shares and the shares previously
reserved in connection with the CEO Share Option Plan (1997) will be
reserved.
INCREASE IN AUTHORIZED SHARES
At the annual and extraordinary shareholders' meeting held on May 28,
1998, the shareholders approved amendments to the Articles of Association to
increase the number of authorized Ordinary Shares from 45,000,000 to
65,000,000 and to increase the number of shares reserved for issuance
pursuant to the ESOP and NESOP from 1,125,000 to 1,875,000 and from 200,000
to 300,000, respectively.
39
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 10 - NET SALES
Sales have declined due to concerns on the part of certain potential
customers as to the Company's ability to remain a going concern. The Company
has also reduced its spending on sales and marketing activities and this, in
turn, has also contributed to lower sales. The Company is not reliant on any
single customer for a significant portion of its revenue.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
SALES BY GEOGRAPHIC AREA
Domestic (Israel) $ 526 $ 650 $ 1,098
North America 1,326 1,197 2,167
Other 97 1,278 1,688
------- ------- -------
$ 1,949 $ 3,125 $ 4,953
------- ------- -------
------- ------- -------
SALES TO A SINGLE CUSTOMER
Customer "A" -- 666 * --
Customer "B" -- -- 1,000
Customer "C" -- -- 713
* Excess inventory liquidation
NOTE 11 - COST OF SALES
Cost of sales has declined both in step with the reductions in revenue
and also as the Company has completed its move away from retail sales where
production and inventory handling costs are higher. The Company also paid
large fixed royalty expenses in 1997 and 1996 which did not recur in 1998.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
Direct Product Costs $ 863 $ 1,631 $ 3,548
Amortization of
Capitalized Software -- 555 719
Royalties 68 693 2,286
Other 66 183 214
------ ------- -------
$ 997 $ 3,062 $ 6,767
------ ------- -------
40
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 12 - PRODUCT DEVELOPMENT COSTS
Following an intensive product development effort during 1997 and the
first portion of 1998 to develop new products for the emerging markets, the
Company gradually reduced its product development-related costs during the
latter half of 1998. During the fourth quarter of 1998 the Company closed its
Israeli-based product development department.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
Personnel-Related Costs $ 1,920 $ 3,705 $ 2,740
Other Costs 620 1,108 692
Software Development
Costs Capitalized -- -- (46)
------- ------- -------
$ 2,540 $ 4,813 $ 3,386
------- ------- -------
NOTE 13 - MARKETING EXPENSES
Marketing expenses have declined by 85% since 1996 as the Company has
moved away from the retail market. Working capital constraints have also led
to reduce spending on sales and marketing activities. During the past two
years, the Company has closed sales offices in England, California, Canada
and Israel.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
Personnel-Related Costs $ 687 $ 999 $ 1,681
Exhibition-Related Costs 182 329 1,797
Advertising and Public
Relations 275 395 4,386
Other 260 454 1,378
------- ------- -------
$ 1,404 $ 2,177 $ 9,242
------- ------- -------
41
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 14 - GENERAL AND ADMINISTRATIVE EXPENSES
As part of the Company's restructuring activity, various general and
administrative sources have been out-sourced, consolidated with other
activities or eliminated. Expenses for professional fees and expenses are
expected to decline significantly in the future.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
------- ------- -------
Personnel-Related Costs $ 696 $ 962 $ 2,153
Bad and Doubtful Accts. 218 209 1,736
Professional Fees and
Expenses 790 922 687
Public/Investor Relations -- 332 --
Other 761 744 1,861
------- ------- -------
$ 2,465 $ 3,169 $ 6,437
------- ------- -------
NOTE 15 - TAXES ON INCOME
TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL
INVESTMENTS, 1959
The Company has been granted "approved enterprise" status under the Law
for the Encouragement of Capital Investments, 1959. The Company opted for
benefits under the "alternative path" which entitles it to a ten year tax
exemption commencing in the first year in which taxable income will be
earned, subject to certain time restrictions. Entitlement to the benefits is
dependent upon compliance with the conditions of the letter of approval. Due
to reported losses, the benefit period has not yet commenced.
CARRYFORWARD LOSSES
The Company has carryforward losses for tax purposes and deductible
temporary differences of approximately $50,000. There are no deferred tax
balances as of December 31, 1998. As the Company is exempt from tax, the
statutory tax rate for the purposes of the reconciliation of tax expense is
zero.
TAX ASSESSMENTS
The Company has received final tax assessments through December 31,
1991. According to Israeli Tax Law, tax assessments up to and including
December 31, 1993 are considered final.
42
ACCENT SOFTWARE INTERNATIONAL LTD.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands
NOTE 16 - TRANSACTIONS WITH RELATED PARTIES
The Company recorded revenue of $100 from the sale of a software license
to a shareholder during 1998. There were no material sales to shareholders or
other related parties during 1997 or 1996.
The Company borrowed and issued a promissory note in 1997 to a
shareholder in the amount of $44 as part of a short-term financing. The note
was repaid in full with the proceeds from the November, 1997 financing
transaction.
NOTE 17 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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
documents, designate and assess the effectiveness of the 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.
43
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT DEDUCTIONS BALANCE AT
BEGINNING CHARGE TO AND END
OF PERIOD EXPENSE WRITE-OFFS OF PERIOD
---------- --------- ---------- ----------
YEAR-ENDED DECEMBER 31, 1998
Allowance for Doubtful Accounts $ 63 $ 218 $ (89) $ 192
Allowance for Sales Returns -- 27 -- 27
YEAR-ENDED DECEMBER 31, 1997
Allowance for Doubtful Accounts 1,109 209 (1,255) 63
Allowance for Sales Returns 1,136 -- (1,136) --
YEAR-ENDED DECEMBER 31, 1996
Allowance for Doubtful Accounts 596 1,728 (1,215) 1,109
Allowance for Sales Returns 401 735 -- 1,136
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information to be included under the caption "ELECTION OF DIRECTORS"
in the Proxy Statement is incorporated herein by reference.
The information to be included under the caption "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information to be included under the caption "EXECUTIVE
COMPENSATION" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information to be included under the caption "PRESENT BENEFICIAL
OWNERSHIP OF ORDINARY SHARES" in the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information to be included under the caption "EXECUTIVE
COMPENSATION--Certain Relationships and Related Transactions" in the Proxy
Statement is incorporated herein by reference.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
See Index to Financial Statements and Financial Statements which
appear under Item 8 herein.
(2) Financial Statement Schedules.
See Index to Financial Statements and Financial Statement Schedule
which appear under Item 8 herein.
(3) 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 - Articles of Association of Registrant (filed as Exhibit
3.2 to the Company's Registration Statement No.
33-92754).*
4.1 - Form of Ordinary Share Certificate (filed as Exhibit 4.1
to the Company's 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
November 22, 1996 between the Company, Sands 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).*
46
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).*
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).*
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.
47
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).*
10.6(f) - CEO Share Option Plan (1997) (filed as Exhibit 10.6(f)
to the Company's Form 10-K on March 31, 1998).*
10.6(g) - Non-Employee Share Option Plan (1998) (filed as Exhibit
B to the Company's Form 14-A on April 29, 1998)*
10.7(a) - Employment Agreement between the Company and Robert S.
Rosenschein, dated July 26, 1995 (filed as Exhibit
10-7(a) to the Company's Form 10-K on April 1, 1996).*
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).*
- -------------------
* Incorporated by reference.
48
10.7(c) - Employment Agreement between the Company and Herbert
Zlotogorski, dated July 26, 1995 (filed as Exhibit
10-7(c) to the Company's Form 10-K on April 1, 1996).*
10.7(d) - Employment Agreement between the Company and Jeffrey
Rosenschein, dated July 26, 1995 (filed as Exhibit
10-7(d) to the Company's Form 10-K on April 1, 1996).*
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 16,1 997, 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)*
21 - Subsidiaries of Registrant (filed as Exhibit 21 to the
Company's Form 10-K filed on April 2, 1996).*
27 - Financial Data Schedule
(4) Executive Compensation Plans and Arrangements.
Employee Share Option Plan (1995) (filed as Exhibit 10.7(a) to the
Company's Registration Statement No. 33-92754).*
Amended and Restated Employee Share Option Plan (1995) (filed as
Exhibit 4.2 to the Company's Registration Statement No. 333-04285).*
Non-Employee Director Share Option Plan (1995) (filed as Exhibit
10.7(b) to the Company's Registration Statement No. 33-92754).*
Amended and Restated Non-Employee Share Option Plan (1995) (filed as
Exhibit 4.2 to the Company's Registration Statement No. 333-07965).*
Amended and Restated Non-Employee Share Option Plan (1995). CEO Share
Option Plan (1997)
Employment Agreement between the Company and Todd A. Oseth, dated
February 3, 1997.
- -------------------
* Incorporated by reference.
49
(b) Reports on Form 8-K.
None.
- -------------------
* Incorporated by reference.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 26, 1999 By: /s/ TODD A. OSETH
-------------------------------
Todd A. Oseth
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the dates indicated.
SIGNATURE TITLE DATE
- --------- ---- ----
/s/ TODD A. OSETH President, Chief Executive March 26, 1999
- -------------------------- Officer (principal Executive
Todd A. Oseth Officer), Director and acting
principal Financial Officer
/s/ ESTHER DYSON Director March 26, 1999
- --------------------------
Esther Dyson
/s/ BOB KUTNICK Director March 26, 1999
- --------------------------
Bob Kutnick
/s/ FRANCIS VANDERHOYDONCK Interim Director March 26, 1999
- --------------------------
Francis Vanderhoydonck
/s/ CHANTAL MESTDAGH Interim Director March 26, 1999
- --------------------------
Chantal Mestdagh
51