<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________
FORM 10-Q
_____________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from __________ to
__________
Commission file number: 0-26394
ACCENT SOFTWARE INTERNATIONAL LTD.
- -------------------------------------------------------------------------
(Exact Name of Registrant in its Charter)
ISRAEL N/A
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
28 PIERRE KOENIG STREET, JERUSALEM 91530 ISRAEL
011-972-2-679-3723
- -------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Executive Offices)
N/A
- -------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
On August 1, 1997, the registrant had outstanding 11,696,442 Ordinary Shares
(including 1,800,000 Ordinary Shares included in the registrant's outstanding
Units).
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars and shares in thousands
DECEMBER 31 JUNE 30
1996 1997
----------- -----------
ASSETS (Audited) (Unaudited)
Current Assets
Cash and cash equivalents $ 8,723 $ 1,236
Trade receivables, net of allowance of
$2,245 in 1996 and $2,113 in 1997 984 874
Other receivables 172 140
Prepaid expenses 595 372
Inventories 1,021 750
-------- --------
Total current assets 11,495 3,372
-------- --------
Equipment
Cost 2,462 2,558
Less - accumulated depreciation 723 961
-------- --------
Equipment, net 1,739 1,597
-------- --------
Capitalized software development costs, net of
accumulated amortization of $1,098 in 1996 and
$1,320 in 1997 555 333
-------- --------
Total assets $ 13,789 $ 5,302
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current maturities of long-term debt 1,443 1,554
Accounts payable and accrued expenses 6,424 3,266
-------- --------
Total current liabilities 7,867 4,820
Long-term bank loans 2,619 1,920
Accrued severance liability 329 278
-------- --------
Total liabilities 10,815 7,018
-------- --------
Shareholders' Equity (Deficit)
Share capital 28 28
Ordinary shares of NIS 0.01 par value.
Authorized 30,000 shares; issued and
outstanding 11,670 at December 31, 1996,
and 11,696 at June 30, 1997
Share premium 36,193 36,255
Accumulated deficit (33,247) (37,999)
-------- --------
Total shareholders' equity (deficit) 2,974 (1,716)
-------- --------
Total liabilities and shareholders'
equity (deficit) $ 13,789 $ 5,302
-------- --------
-------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED BALANCE SHEETS.
-2-
<PAGE>
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
U.S. dollars and shares in thousands (except per share amounts)
(Unaudited)
<TABLE>
For the three months For the six months
ended June 30 ended June 30
1996 1997 1996 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net sales $ 1,285 $ 722 $ 4,128 $ 1,449
Operating costs and expenses
Cost of sales 1,773 632 3,140 1,207
Product development costs 821 1,321 1,469 2,439
Marketing expenses 2,998 753 6,271 1,320
General and administrative costs 1,735 687 3,215 1,199
-------- -------- -------- -------
Total operating costs and expenses 7,327 3,393 14,095 6,165
-------- -------- -------- -------
Operating loss (6,042) (2,671) (9,967) (4,716)
Other expense (49) (54) (56) (36)
-------- -------- -------- -------
Net loss $ (6,091) $ (2,725) $(10,023) $(4,752)
-------- -------- -------- -------
-------- -------- -------- -------
Net loss per share $ (0.63) $ (0.23) $ (1.05) $ (0.41)
-------- -------- -------- -------
-------- -------- -------- -------
Weighted average number of shares outstanding 9,732 11,696 9,555 11,691
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
-3-
<PAGE>
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT)
U.S. dollars and shares in thousands
(Unaudited)
<TABLE>
NUMBER OF
ORDINARY SHARE SHARE ACCUMULATED
SHARES CAPITAL PREMIUM DEFICIT TOTAL
--------- -------- ------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1995 9,481 $21 $22,325 $(12,213) $10,133
Warrants exercised 192 1 640 - 641
Net loss - (3,932) (3,932)
------ --- ------- -------- -------
Balance as of March 31, 1996 9,673 $22 $22,965 $(16,145) $ 6,842
Warrants exercised 105 - 317 - 317
Net loss - - - (6,091) (6,091)
------ --- ------- -------- -------
Balance as of June 30, 1996 9,778 $22 $23,282 $(22,236) $ 1,068
------ --- ------- -------- -------
------ --- ------- -------- -------
Balance as of December 31, 1996 11,670 $28 $36,193 $(33,247) $ 2,974
Warrants exercised 26 - 62 - 62
Net loss - - - (2,027) (2,027)
------ --- ------- -------- -------
Balance as of March 31, 1997 11,696 $28 $36,255 $(35,274) $ 1,009
Net loss - - - (2,725) (2,725)
------ --- ------- -------- -------
Balance as of June 30, 1997 11,696 $28 $36,255 $(37,999) $(1,716)
------ --- ------- -------- -------
------ --- ------- -------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
-4-
<PAGE>
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
U.S. dollars in thousands
(Unaudited)
<TABLE>
FOR THE SIX MONTHS ENDED JUNE 30
1996 1997
--------- --------
<S> <C> <C>
Operating activities
Net loss $(10,023) $(4,752)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities (see below) 1,929 (2,113)
-------- -------
Net cash used in operating activities (8,094) (6,865)
-------- -------
Investing activities
Acquisition of equipment (768) (96)
Capitalized software development costs (46) -
-------- -------
Net cash used in investing activities (814) (96)
-------- -------
Financing activities
Repayment of long-term bank loans (8) (588)
Increase in short-term bank borrowing 999
Proceeds received on exercise of options and
warrants, net 958 62
-------- -------
Net cash provided by (used by) financing activities 1,949 (526)
-------- -------
Decrease in cash and cash equivalents (6,959) (7,487)
Cash and cash equivalents, beginning of period 9,633 8,723
-------- -------
Cash and cash equivalents, end of period $ 2,674 $ 1,236
-------- -------
-------- -------
Adjustments to reconcile net loss to net cash provided by
(used by) operating activities
Items not involving cash flow
Depreciation and amortization $ 460 $ 460
Increase (decrease) in severance liability 68 (51)
Increase (decrease) in allowance for doubtful
accounts and sales returns, net 827 (132)
Changes in operating assets and liabilities
(Increase) decrease in trade receivables (1,259) 242
(Increase) decrease in other receivables (123) 32
(Increase) decrease in prepaid expenses (232) 223
(Increase) decrease in inventories (553) 271
Increase (decrease) in accounts payable
and accruals 2,741 (3,158)
-------- -------
Net adjustments $ 1,929 $(2,113)
-------- -------
-------- -------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
-5-
<PAGE>
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share data
(Information as of June 30, 1997, and for the six months ended June 30, 1996,
and 1997 is unaudited)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Accent Software International Ltd., and its
subsidiaries ("Accent" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim
financial information. The significant accounting policies, certain
financial information and footnote disclosures which are normally
included in financial statements prepared in accordance with
generally accepted accounting principles, but which are not required
for interim reporting purposes, have been condensed or omitted. In
the opinion of management, all adjustments (consisting of adjustments
of a normal, recurring nature) necessary for a fair presentation of
these financial statements have been reflected in the interim periods
presented. Operating results for the three-month and six-month
periods ended June 30, 1997, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
Although the Company believes that the disclosures presented herein
are adequate to make the information presented not misleading, it is
suggested that these condensed consolidated financial statements be
read in conjunction with the audited financial statements and
footnotes included in the Company's 1996 Annual Report on Form 10-K
for the year ended December 31, 1996.
NOTE 2 INVENTORIES
JUNE 30 Dec. 31 JUNE 30
1996 1996 1997
-------------------------------
Material and components $ 667 $ 230 $180
Finished goods 1,545 791 570
-------------------------------
Total $2,212 $1,021 $750
-------------------------------
-------------------------------
NOTE 3 SHARE CAPITAL
On June 6, 1996, the Company effected a three-for-two stock split.
All share and per share data have been retroactively restated in the
accompanying financial statements to give effect to this stock split.
NOTE 4 LIQUIDITY
As of December 31, 1996, and June 30, 1997, the Company had
accumulated deficits of $33,247 and $37,999, respectively, and
anticipates that it will continue to incur losses for some time.
Working capital decreased from $3,628 at December 31, 1996, to
$(1,448) at June 30, 1997, due primarily to the Company's continuing
operating losses and working capital needs.
The Company initiated a restructuring and refocusing effort
during the fourth quarter, 1996, which included a substantial
reduction in the number of employees, major reductions in sales and
marketing activities and the elimination or reduction of various
other expenses. These efforts have reduced operating expenses and
the level of funding required to operate the Company.
-6-
<PAGE>
Subsequent to June 30, 1997, on August 5, 1997, the Company
completed a financing arrangement with CC Investments LDC (the
"Investor"), pursuant to Regulation D under the Securities Act of
1933. The Company received $2,000 in cash before expenses
(approximately $1,850 net of expenses) and, in return, issued the
Investor an unsecured debenture carrying 6% annual interest and
convertible into the Company's Ordinary Shares at the lesser of
$2.13469 (135% of the average closing bid price for the five-day
period preceding the closing date) or 75% of the average closing
bid price of the Ordinary Shares for the five-day period preceding
the date of conversion. The debenture automatically converts into
Ordinary Shares on August 5, 1999, and may be converted anytime after
November 2, 1997. The Company, at its option, may require the
Investor to convert the debenture into Preferred Shares of the
Company at any time prior to November 3, 1997. Terms of the
Preferred Shares will be identical to the debentures. Conversion of
the debentures (or Preferred Shares) will result in dilution to the
Company's current shareholders. Assuming the Company's share price
remains at its August 5, 1997, level, the percentage dilution will
approximate 12%. If the share price increases from its August 5
level, the amount of dilution will decrease and, conversely, if the
share price decreases, the amount of dilution will increase. There
can he no assurance that the share price will either increase or
decrease.
Additional financing will be required for the Company to meet its
operating objectives during the balance of 1997 and the Company has
prepared plans to obtain additional financing. There can be no
assurance, however, that the Company will be successful in carrying
out its plans. Any failure to obtain additional financing when
needed will have a material adverse impact on the Company, including
possibly requiring the Company to curtail or cease operations.
NOTE 5 EQUITY
The Company's cumulative net loss has placed it in a negative equity
position as of June 30, 1997. The recent financing transaction
referred to in Note 4, above, contains a provision allowing the
Company, at its option, to convert the convertible debentures into
convertible Preferred Shares of the Company.
NOTE 6 EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share." This statement establishes standards for computing and
presenting earnings per share (EPS), replacing the presentation of
currently required Primary EPS with a presentation of Basic EPS.
For entities with complex capital structures, the statement requires
the dual presentation of both Basic EPS and Diluted EPS on the face
of the statement of operations. Under the new standard, Basic EPS is
computed based on weighted average shares outstanding and excludes
any potential dilution. Diluted EPS reflects potential dilution for
the exercise or conversion of securities into common stock or from
other contracts to issue common stock and is similar to the currently
required fully diluted EPS. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, and
earlier application is not permitted. When adopted, the Company will
be required to restate its EPS data for all prior periods presented.
The Company does not expect that the adoption of this statement will
have a material effect on previously reported EPS amounts.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITIONS
OVERVIEW
This Form 10-Q for Accent Software International Ltd. and its subsidiaries
("Accent" or the "Company") contains historical information and forward-looking
statements. Statements looking forward in time are included in this Form 10-Q
pursuant to the "safe harbor" provision of the Private Securities Litigation
Reform Act of 1995. Such statements involve known and unknown risks and
uncertainties including, but not limited to, the timely availability of new
products, market acceptance of the Company's existing products and products
under development, the impact of competing products and pricing, the
availability of sufficient resources including short- and long-term financing
to carry out the Company's product development and marketing plans, and
quarterly fluctuations in operating results. The Company's actual results in
future periods may be materially different from any future performance
suggested herein. Further, the Company operates in an industry sector where
securities' values may be volatile and may be influenced by economic and other
factors beyond the Company's control. In the context of the forward-looking
information provided in this Form 10-Q, please refer to the Company's most
recent Form 10-K and the Company's other filings with the Securities and
Exchange Commission.
Accent is a language solutions company which designs, develops, markets
and supports multilingual software development tools and multilingual Internet
and text-processing software applications. Through its majority-owned
subsidiary, AgentSoft, the Company also develops and markets intelligent agent-
based software tools and products for Internet process automation. Since it
first began to develop multilingual software in 1988, Accent has invested
substantial funds on research and development, established a sales and
marketing force, introduced new products and established the customer support
services and administrative infrastructure necessary to conduct its operations.
As a result of the start-up nature of its business efforts during this period,
Accent has incurred net losses each year since 1992, including net losses of
$21,034,000 during the fiscal year ended December 31, 1996, and $4,752,000
during the first six months of 1997.
In October 1996, the Company initiated a restructuring and refocusing
effort including a substantial reduction in the number of employees, large
reductions in sales and marketing expenses and the elimination or reduction of
various other costs. A new chief executive officer and a new chief financial
officer joined the Company during the first quarter, 1997. In addition to
furthering the restructuring efforts begun in October, the new management has
shifted the Company's product mix and customer orientation away from the retail
market and in the direction of original equipment manufacturers (OEMs) and
business-to-business transactions. The Company has also established a new
office in Colorado Springs, Colorado. The U.S. location will become the focal
point of the Company's future sales, marketing and customer support efforts as
well as certain general and administrative functions.
The quarter ending June 30, 1997, was the Company's first full quarter
under new management. Revenue during the quarter of $722,000 represented a
slight decrease from the $727,000 reported in the preceding quarter. Whereas
revenue in earlier periods was derived primarily from the retail market, the
Company has now sharply curtailed its retail sales and marketing efforts and
anticipates that its new focus on the OEM and business-to-business markets will
begin to produce increasing revenue during the second half of 1997. There can
be no assurance, however, that the Company's new sales and marketing focus will
be successful. Failure of the new sales and marketing approach to achieve
increasing revenue could have a material adverse effect on the Company.
The Company's ability to generate increased revenue and to fund planned
expenditures is dependent on a number of factors, many of which are outside its
control. 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
-8-
<PAGE>
other factors could have a material adverse effect on the Company's business,
operating results and financial condition.
Subsequent to June 30, 1997, the Company completed a financing
arrangement providing approximately $1,850,000, net of expenses, which will
be used to further develop the Company's software language solutions products
and services and for the expansion of the United States sales and marketing
group. (See Note 4 to the Consolidated Financial Statements beginning on
page 6 and also Item 5 in Part II of this Form 10-Q.) The Company will
continue to pursue additional financing through new or restructured
borrowings or the sale of equity. If additional funds are raised through the
issuance of equity or convertible debt securities, the Company's current
shareholders will experience additional dilution. While management of the
Company believes additional funding will be available if and when needed,
there can be no assurance that additional financing will be available on
terms acceptable to the Company, if at all. The inability to obtain
additional financing, if and when needed, would have a material adverse
effect on the Company, including possibly requiring the Company to curtail or
cease operations.
RESULTS OF OPERATIONS
Accent achieved sales of approximately $722,000 during the three months
ended June 30,1997, and incurred an operating loss of approximately $2,671,000
For the year earlier quarter, the Company recorded sales of $1,285,000 and an
operating loss of $6,042,000.
For the six-month period ended June 30, 1997, the Company achieved sales
of $1,449,000 and incurred an operating loss of $4,716,000; compared to sales
of $4,128,000 and an operating loss of $9,967,000 for the six months ended
June 30, 1996.
The following table sets forth for the periods indicated the percentage of
sales represented by certain expense items reflected in the Company's
Consolidated Statement of Operations.
For the three months For the six months
ended June 30 ended June 30
1996 1997 1996 1997
------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 138.0% 87.5% 76.1% 83.3%
Product development costs 63.9% 182.9% 35.6% 168.3%
Marketing expenses 233.3% 104.3% 151.9% 91.1%
General & administrative costs 135.0% 95.2% 77.0% 82.7%
------------------------------------------
Total operating costs and expenses 570.2% 469.9% 341.4% 425.4%
------------------------------------------
Operating loss (470.2)% (369.9)% (241.4)% (325.4)%
------------------------------------------
------------------------------------------
NET SALES. Net sales decreased to $722,000 in the three months ended
June 30, 1997, from $1,285,000 in the three months ended June 30, 1996.
Revenue in the year earlier period was generated almost entirely in the retail
market. The Company is shifting the focus of its sales and marketing efforts
away from the retail market and has sharply curtailed its retail advertising
and marketing efforts while it begins to develop new sales and marketing
strategies aimed at the OEM and business-to-business market. The Company
believes that its new sales and marketing strategy will begin generating
increasing results during the second half of 1997.
-9-
<PAGE>
For the six-month period ended June 30, 1997, Accent recognized revenue of
$1,449,000 versus $4,128,000 for the year earlier period. Revenue during the
first half of 1996 included a single non-recurring sale of approximately
$1,000,000 while the first half 1997 results reflect the Company's transition
away from the retail marketplace.
COST OF SALES. Cost of sales was $632,000 during the three months ended
June 30, 1997; a reduction of 64% from $1,773,000 during the three months ended
June 30, 1996. The decline is primarily attributable to the reduced sales
volume during the latest quarter. Manufacturing, production, warehousing and
shipping expenses have all been reduced proportionally from the year earlier
period. Cost of sales during the year earlier period was also increased by a
write-down in the value of the inventory for excess and obsolete product. The
Company's cost of sales as a percentage of revenue continues to be impacted by
fixed royalty expenses and the amortization of capitalized software costs,
although both of these costs were reduced from the year earlier period and are
expected to be fully amortized by the first quarter 1998.
Cost of sales during the most recent six months was $1,207,000;
approximately one-third of the $3,140,000 incurred during the first half of
1996 and consistent with the reduction in revenue and associated manufacturing,
production and shipping expenses.
PRODUCT DEVELOPMENT COSTS. Product development costs increased to
$1,321,000 during the three months ended June 30, 1997, from $821,000 during
the year earlier period; an increase of approximately 61%. The Company has
accelerated its product development cycle and therefore is currently expensing
software development costs. The Company has also placed increased emphasis on
the development of new products aimed at the OEM and business-to-business
market and has continued to expand the agent-related development efforts at its
majority-owned subsidiary, AgentSoft. The number of employees in product
development increased to 73 at June 30, 1997, from 65 at June 30, 1996,
including 17 employees at AgentSoft at the end of the most recent quarter,
compared with 2 at the end of the year earlier quarter.
For the six months ended June 30, 1997, product development costs were
$2,439,000; approximately $1,000,000 greater than the $1,469,000 incurred
during the first half of 1996. First half 1996 expenses were lower due to the
capitalization of software development costs during the first quarter of 1996.
AgentSoft was established during the first half of 1996 and costs related to
this segment of the business were minimal during the first months of the year.
MARKETING EXPENSES. The Company's marketing expenses were $753,000 in the
three months ended June 30, 1997; a reduction of approximately 75% from
$2,998,000 in the three months ended June 30, 1996. Staffing in the sales and
marketing areas was 10 at the end of the latest quarter, compared with 37
during the year earlier quarter. The Company's shift away from the retail
market allows it to function with fewer sales and marketing personnel and has
also led to significant reductions in non-personnel expenses such as
participation in trade shows, advertising and public relations costs. The
Company closed its U.S. sales office in Newport Beach, California, during the
first quarter 1997, resulting in additional personnel and cost reductions. As
the Company completes development of products for the OEM and business-to-
business markets, it expects to add additional sales and marketing staff and
will incur increased marketing expenses; however, the staffing and expense
levels are expected to remain significantly below their peak 1996 levels.
Sales and marketing expenses were $1,320,000 during the first half of
1997; an almost 80% reduction from the $6,271,000 incurred during the first
half of 1996. The first quarter of 1996 was characterized by a strong sales
and marketing effort in the retail sector with related large expenses for
advertising, marketing and participation in trade shows and other promotional
activity. These expenses have been largely curtailed during the current year
as the Company has refocused its sales and marketing activity away from the
retail marketplace.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company reduced general and
administrative expenses by approximately 60% to $687,000 during the three
months ended June 30, 1997, from $1,735,000 during the three
-10-
<PAGE>
months ended June 30, 1996. The reduction in general and administrative
expenses resulted from a reduction in the total number of employees in the
various general and administrative functions decreased to 19 at June 30,
1997, from 34 a year earlier. General and administrative expenses include
the costs incurred by the Company's executive management, legal, finance,
human resources, MIS and office administration departments.
General and administrative expenses for the most recent six-month period
were approximately 36% of their total during the first half of 1996;
specifically $1,199,000 versus $3,215,000 for the six months ended June 30,
1997, and 1996, respectively. The higher costs in the year earlier period
reflect significantly higher staffing levels in virtually all of the general
and administrative functions.
OTHER INCOME (EXPENSE). The Company incurred $54,000 in net other expense
during the three months ended June 30, 1997, compared with $49,000 during the
three months ended June 30, 1996. Other expense consists primarily of interest
expense on long-term debt.
For the six-month period ended June 30, 1997, net other expense was
$36,000, including a $120,000 gain on foreign currency translations recognized
during the first quarter of the year. Other expense during the first half of
1996 totaled $56,000.
NET LOSS. The net loss during the three months ended June 30, 1997, was
$2,725,000 or $0.23 per share, a reduction of approximately 56% compared with a
net loss of $6,091,000 or $0.63 per share during the three months ended
June 30, 1996.
Accent experienced a net loss of $4,752,000 ($0.41 per share) for the
first six months of 1997 versus a net loss of $10,023,000 ($1.05 per share) for
the year earlier period. Although revenue was greater during the year earlier
period and the Company has increased its expenditures on product development
during the current year, cost of sales, sales and marketing expenses, and
general and administrative expenses were all significantly higher during the
first half of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Future sales of the Company's current and proposed products and services
will depend principally on customer demand for multilingual software programs
and services, multilingual Internet products and services, and products and
services utilizing intelligent agent technology. The technology industry has
historically been volatile and, as is typically the case with newly introduced
products, the ultimate level of demand for the Company's products is subject to
a high degree of uncertainty. As discussed earlier, the Company has narrowed
the focus of its marketing efforts primarily to OEM and business-to-business
customers because the Company believes this approach will result in both
increased sales and more efficient utilization of its marketing resources.
Although Accent has refocused its sales and marketing efforts towards OEM
and business-to-business sales, it will continue to place product in the retail
channel where appropriate. It therefore expects that certain consequences of
participation in the retail channel, such as unexpected product returns or
excess inventory and increased working capital requirements necessitated by
transfers of products to distributors on consignment, may occur.
The Company's sales are made on credit terms which vary significantly
depending on the nature of the sale and size of the customer. In addition, the
Company does not hold collateral to secure payment from its customers.
Therefore, defaults on payment by several of the Company's customers have
adversely affected, and in the future could adversely affect, the Company's
business, results of operations and financial condition.
The Company believes it has established sufficient reserves to accurately
reflect the likelihood of product returns or credits and uncollectible
receivables. There can be no assurance, however, that actual returns or
-11-
<PAGE>
uncollected accounts receivable beyond the reserves established would not have
a material adverse effect on the Company's business, results of operations and
financial condition.
The Company's operating activities used cash of $6,865,000 and $8,094,000
during the six months ended June 30, 1997, and 1996, respectively. Of the cash
used during the first half of 1997, $3,158,000 was used to bring certain
creditors current in the amounts owed them resulting in a corresponding
reduction in the amount of accounts payable on the Company's balance sheet at
June 30, 1997. The Company reduced its investing activities, which consist
primarily of the purchase of hardware and software for the product development
organization, to $96,000 in the first half of 1997 from $768,000 in the first
half of 1996. The Company's financing activities used cash of $526,000 during
the six-month period ended June 30, 1997, primarily to reduce its long-term
debt, and provided cash of $1,949,000 during the six-month period ended
June 30, 1996, primarily related to the sale of equity.
Accent had negative working capital of $1,448,000 at June 30, 1997,
compared to positive working capital of $3,628,000 at December 31, 1996. The
change in working capital primarily reflects the Company's continuing operating
losses and efforts to bring its creditors current with respect to amounts owed
them. The new management has significantly reduced the Company's operating
losses through reductions in sales and marketing expenses and general and
administrative expenses and is taking steps to raise additional capital. (See
Note 4 to the Consolidated Financial Statements beginning on page 6 and also
Item 5 in Part II of this Form 10-Q.) Failure to obtain adequate capital will
have a material adverse impact on the Company, including possibly requiring the
Company to curtail or cease operations. The development of the Company's
software language solutions products and services and the expansion of the
United States sales and marketing group will continue to require working
capital.
The Company has historically financed its operating requirements through
bank loans and the sale of equity. Long-term bank loans received as part of the
Israel Approved Enterprise Program totaled $4,100,000 as of December 31, 1996.
Repayment of the loans began in March 1997, and is expected to continue at a
rate of approximately $122,500 per month (at current exchange rates) until the
loans are repaid. The balance of the loans at June 30,1997, was $3,474,000. The
Company believes it is in compliance with, and will continue to comply with,
all loan covenants and other requirements of the Israel Approved Enterprise
Program; however, there can be no assurance of such continued compliance.
Subsequent to June 30, 1997, the Company obtained additional financing of
approximately $1,850,000, net of expenses, through the sale of convertible
debentures. (See Note 4 to the Consolidated Financial Statements beginning on
page 6 and also Item 5 in Part II of this Form 10-Q.) The Company anticipates,
based on its current operational plans and assumptions, that it will require
additional financing to allow it to operate consistent with its plans through
the remainder of 1997. If additional funds are raised through the issuance of
equity or convertible debt securities, the Company's shareholders will
experience dilution. While the Company has been successful in raising
additional funds when needed in the past there can be no assurance that the
Company will continue to be successful in obtaining required funds if and when
needed, or that additional funds will be available on commercially reasonable
terms, if at all. The failure to obtain additional financing as required would
have a material adverse impact on the Company and could require it to sharply
curtail or cease operations.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." This statement establishes standards for computing and presenting
earnings per share (EPS), replacing the presentation of currently required
Primary EPS with a presentation of Basic EPS. For entities with complex
capital structures, the statement requires the dual presentation of both Basic
EPS and Diluted EPS on the face of the statement of operations. Under the new
-12-
<PAGE>
standard, Basic EPS is computed based on weighted average shares outstanding
and excludes any potential dilution. Diluted EPS reflects potential dilution
for the exercise or conversion of securities into common stock or from other
contracts to issue common stock and is similar to the currently required fully
diluted EPS. SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, and earlier application is not permitted. When
adopted, the Company will be required to restate its EPS data for all prior
periods presented. The Company does not expect that the adoption of this
statement will have a material effect on previously reported EPS amounts.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual General Meeting of Shareholders was held on May 28,
1997, in Jerusalem, Israel. The following directors were elected during the
meeting, and the voting of each individual is as shown in the table (there were
no abstentions or non-votes in the voting for directors):
Name of Nominee Vote For Votes Against
--------------- -------- -------------
Roger R. Cloutier, II (Co-Chairman) 10,240,980 154,075
Robert S. Rosenschein (Co-Chairman) 10,242,780 152,275
Todd A. Oseth 10,242,780 152,275
Dr. Jeffrey S. Rosenschein 10,242,780 152,275
Elliott B. Broidy 10,242,780 152,275
Esther Dyson 10,242,780 152,275
Meldon E. Levine 10,242,780 152,275
Mark A. Tebbe 10,242,780 152,275
The following matters, in addition to the election of directors, were
voted upon and approved at the meeting:
1. Pursuant to Israeli law, the compensation of Todd A. Oseth,
president, chief executive officer and a director of the Company. The vote
total was: 9,611,808 for; 78,705 against; 160,257 abstentions; and 544,285 not
voted.
2. The appointment of Luboshitz, Kasierer & Co., a member of the
Andersen Worldwide organization, as independent auditors to audit the financial
statements of the Company and its subsidiaries for the year ending December 31,
1997, and authorization for the Board of Directors of the Company to determine
the level of compensation of the independent auditors. The vote total was;
10,160,227 for; 14,887 against; 22,053 abstentions; and 470,300 not voted.
No other business came before the meeting and no other matters were
submitted to a vote of shareholders during the quarter ending June 30, 1997.
ITEM 5. OTHER EVENTS
On August 5, 1997, the Company completed a financing arrangement with CC
Investments LDC (the "Investor"), pursuant to Rule 505 of Regulation D of the
Securities Act of 1933. Rule 505 was available because the issuance was to
fewer than 35 unaccredited investors. The Company received $2,000,000 in
cash before expenses (approximately $1,850,000 net of expenses) and, in
return, issued the Investor an unsecured debenture carrying 6% annual
interest and convertible into the Company's Ordinary Shares at the lesser of
$2.13469 (135% of the average closing
-13-
<PAGE>
bid price for the five-day period preceding the closing date) or 75% of the
average closing bid price of the Ordinary Shares for the five-day period
preceding the date of conversion. The debenture automatically converts into
Ordinary Shares on August 5, 1999, and may be converted anytime after
November 2, 1997. The Company, at its option, may require the Investor to
convert the debenture into Preferred Shares of the Company at any time prior
to November 3, 1997. Terms of the Preferred Shares will be identical to the
debentures. Conversion of the debentures (or Preferred Shares) will result
in dilution to the Company's current shareholders. Assuming the Company's
share price remains at its August 5, 1997, level of $1.62 per share, the
debentures (or Preferred Shares) will be convertible into approximately
1,646,000 Ordinary Shares and the percentage dilution will amount to
approximately 12%. If the share price increases from its August 5 level, the
conversion price will increase and there would be a corresponding decrease in
the number of shares into which the debentures would be converted and in the
amount of dilution which would be experienced by the shareholders. If the
share price decreases from its August 5 level, the conversion price will
decrease and there would be a corresponding increase in the number of shares
into which the debentures would be converted and in the amount of dilution
which would be experienced by the shareholders. There can be no assurance
that the share price will either increase or decrease.
The Investor was also granted warrants to purchase 250,000 Ordinary Shares
of the Company at an exercise price of $2.80 and additional warrants to
purchase 50,000 Ordinary Shares at an exercise price of $3.20. The placement
agents for the transaction were The Shemano Group, Inc., San Francisco,
California, and Equity Management Partners, Atlanta, Georgia. The placement
agents were granted warrants to purchase 300,000 Ordinary Shares at an exercise
price equal to 115% of the closing bid price on the day of closing. The
warrants are valid for five years. Exercise of all 600,000 warrants granted to
the Investor and to the placement agents will result in a percentage dilution
to existing shareholders of approximately 5%.
Pursuant to the terms of the registration rights agreement which was part
of the financing arrangement, the Company is required to file a registration
statement on Form S-3 for the Ordinary Shares reserved for issuance upon
conversion of the debenture (or Preferred Shares) and exercise of the warrants
within 15 days of the closing which took place on August 5, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (those marked with an * are incorporated by reference)
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).*
-14-
<PAGE>
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).*
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).*
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 as of
May 11, 1994, as amended July 20, 1995 (filed as Exhibit 10.2 to the
Company's Form 10-K on April 1, 1996).*
10.3(a) - Option Agreement dated March 23, 1993
between the Company and Robert S. Rosenschein (filed as
Exhibit 10.3(a) to the Company's Registration Statement
No. 33-92754).*
10.3(b) - Schedule of other option agreements
substantially identical in all material respects to the option
agreement filed as Exhibit 10.3(a) (filed as Exhibit 10.3(b) to the
Company's Registration Statement No. 33-92754).*
10.4(a) - Warrant Acquisition Agreement dated
January 1, 1995 between 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).*
-15-
<PAGE>
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).*
10.7(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
Moshe Kranc, dated September 12, 1996.*
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 - 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).*
10.9 - Debenture between the Company and Bank Leumi
(filed as Exhibit 10.11 to the Company's Registration Statement
No. 333-7637).*
27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCENT SOFTWARE INTERNATIONAL LTD.
(REGISTRANT)
Date: August 14, 1997 By: /s/ ROBERT J. BEHR
-----------------------------------
Robert J. Behr
Chief Financial Officer
(Principal Financial and Accounting Officer)
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,236
<SECURITIES> 0
<RECEIVABLES> 874
<ALLOWANCES> 2,113
<INVENTORY> 750
<CURRENT-ASSETS> 3,372
<PP&E> 2,558
<DEPRECIATION> 961
<TOTAL-ASSETS> 5,302
<CURRENT-LIABILITIES> 4,820
<BONDS> 1,920
0
0
<COMMON> 28
<OTHER-SE> (1,744)
<TOTAL-LIABILITY-AND-EQUITY> 5,302
<SALES> 722
<TOTAL-REVENUES> 722
<CGS> 632
<TOTAL-COSTS> 2,761
<OTHER-EXPENSES> 54
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108
<INCOME-PRETAX> (2,725)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,725)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,725)
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>