<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 March 31, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _________ to
__________.
Commission file number: 0-26394
ACCENT SOFTWARE INTERNATIONAL LTD.
____________________________________________________________________________
(Exact Name of Registrant in its Charter)
Israel N/A
____________________________________ ____________________________________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
C/O Yigal Arnon & Co., 22 Rivlin Street, Jerusalem 91000, Israel
011-972-2-623-9200
___________________________________________________________________________
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Executive Offices.)
N/A
________________________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
On May 3, 1999, the registrant had outstanding 29,291,504 Ordinary Shares
(including 2,000 Ordinary Shares included in the registrant's outstanding
Units).
<PAGE>
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
U. S. dollars and shares in thousands
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- ------------
<S> <C> <C>
Assets (Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 254 $ 141
Trade receivables, net of allowance of
$102 in 1999 and $219 in 1998 445 265
Other receivables 26 91
Prepaid expenses - 5
Inventories - 7
--------------- ---------------
Total current assets 725 509
Equipment
Cost 239 238
Less - Accumulated depreciation 221 198
--------------- ---------------
Equipment, net 18 40
Other Long Term Assets - 50
--------------- ---------------
Total assets $ 743 $ 599
=============== ===============
Liabilities and Shareholders' Equity
Current Liabilities
Short-term and current maturities of long-term debt $ 600 $ 1,180
Accounts payable and accrued expenses 774 785
--------------- ---------------
Total current liabilities 1,374 1,965
Long-term debt - -
Accrued severance liability 16 15
--------------- ---------------
Total liabilities 1,390 1,980
--------------- ---------------
Shareholders' Equity (Deficit)
Preferred Shares, par value NIS 0.01, authorized
10,000 shares, issued and outstanding 4 at
March 31, 1999 and December 31, 1998 - -
Ordinary Shares, par value NIS 0.01, authorized 65,000
shares, issued and outstanding 29,292
at March 31, 1999 and 29,223 at December 31, 1998 77 77
Share premium 52,082 52,082
Warrants 73 -
Accumulated deficit (52,879) (53,540)
--------------- ---------------
Total shareholders' equity (deficit) (647) (1,381)
--------------- ---------------
Total liabilities and shareholders' equity $ 743 $ 599
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars and shares in thousands (except per share information)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
-----------------------------------------------
1999 1998
----------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $ 471 $ 705
Operating costs and expenses
Cost of sales 243 206
Product development costs 21 1,125
Marketing expenses 130 458
General and administrative expenses 505 712
----------------- -----------------
Total operating costs and expenses 899 2,501
----------------- -----------------
Operating loss (428) (1,796)
Other Income (Expense) (27) (45)
----------------- -----------------
Net loss before extraordinary item (455) (1,841)
Extraordinary gain from debt extinguishment (less income
taxes of $0) 1,117 -
----------------- -----------------
Net income (loss) $ 662 $ (1,841)
================= =================
Net income (loss) per share:
Before extraordinary gain $ (0.02) $ (0.08)
Extraordinary gain 0.04 -
----------------- -----------------
Net income (loss) per share $ 0.02 $ (0.08)
================= =================
Weighted average number of shares outstanding 29,292 22,792
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars and shares in thousands
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
1999 1998
---------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net loss before extraordinary gain $ (455) $ (1,841)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 82 190
Change in allowance for doubtful accounts (117) 40
Changes in assets and liabilities
(Increase) decrease in trade receivables (63) (184)
(Increase) decrease in other receivables 65 (76)
Decrease in prepaid expenses 5 351
Decrease in inventories 7 15
Increase (decrease) in payables & accruals (11) 130
Increase (decrease) in severance liability 1 30
---------------- ----------------
Net cash used in operating activities (486) (1,345)
---------------- ----------------
Investing activities
Acquisition of equipment (1) (4)
---------------- ----------------
Net cash used in investing activities (1) (4)
---------------- ----------------
Financing activities
Repayment of bank loans - (499)
Loan proceeds 600 -
Cancellation of shares issued in payment for services - (61)
---------------- ----------------
Net cash used for financing activities 600 (560)
---------------- ----------------
Decrease in cash and cash equivalents 113 (1,909)
Cash and cash equivalents, beginning of period 141 2,499
---------------- ----------------
Cash and cash equivalents, end of period $ 254 $ 590
================ ================
Supplemental Schedule of Non-Cash Investing and Financing Activities
Debt extinguished in exchange for warrants $ 1,191 $ -
================ ================
Prepaid assets received in exchange for shares $ - $ (61)
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Accent Software International Ltd., and its subsidiaries ("Accent"
or "the Company") have been prepared in accordance with United States
generally accepted accounting principles for interim financial
information. The significant accounting policies, certain financial
information and footnote disclosures which are normally included in
financial statements prepared in accordance with generally accepted
accounting principles, but which are not required for interim
reporting purposes, have been condensed or omitted. In the opinion of
management, all adjustments (consisting of adjustments of a normal,
recurring nature) necessary for a fair presentation of these financial
statements have been reflected in the interim periods presented.
Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1999. Although the Company believes that the
disclosures presented herein are adequate to make the information
presented not misleading, it is suggested that these condensed
consolidated financial statements be read in conjunction with the
audited financial statements and footnotes included in the Company's
1998 Annual Report on Form 10-K for the year ended December 31, 1998.
Note 2 - GOING CONCERN
The consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The report of the Company's
Independent Auditors (included in the Company's 1998 Annual Report on
Form 10-K), however, raises doubt about the Company's ability to
continue as a going concern. Management acknowledges that the
Company's history of operating losses and operating cash flow deficits
raises legitimate concern about the Company's longer term prospects.
To enhance the Company's longer term prospects, management will
continue to focus on increasing revenue, reducing expenses and
obtaining additional external financing.
To increase revenue, the Company has developed new products to serve
the language information industry, has redirected its operations
toward Internet products and services, entered into alliances with
other companies in the industry aimed at broadening the Company's
market reach and has expanded its translation services business.
To reduce expenses, the Company has reduced its staffing level (which
is its largest element of expense) from approximately 170 employees at
its peak in 1996 to the 15 at March 31, 1999.
Related expenses such as rent, telephone, travel and training costs
have been reduced proportionately. The shift away from the retail
market has led to reductions in production and inventory carrying
costs. Product development costs
5
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ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
have been reduced by closing the Company's product development
facility in Jerusalem, narrowing the number of new products under
development and focusing on those opportunities that provide the
greatest near-term revenue potential. The Company has reduced
discretionary spending on advertising and marketing as well as the
amount it spends on exhibitions and trade shows and has closed its
sales offices in London, England, and Newport Beach, California. The
sale in 1998 of the assets of the Company's subsidiary, AgentSoft,
also reduced costs with no decrease in total revenue.
To obtain additional external financing, the Company sold convertible
debentures and convertible preferred stock in the third and fourth
quarters of 1997 and again in the second quarter of 1998. In the
first quarter of 1999 the Company obtained $600 in the form of a
short-term loan convertible, at the discretion of the lender, into
convertible preferred stock. The Company continues to explore sources
of additional financing to satisfy its continuing operational
requirements.
In the first quarter of 1999, an extraordinary gain of $1,117 was
recognized by the Company related to the extinguishment of $1,180 of
long-term debt, plus $11 of accrued interest, in exchange for the
issuance of a warrant to the lender to receive 2,448,000 shares of the
Company's Ordinary Shares anytime after January 25, 2001, but before
January 25, 2006.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability or classification of asset
carrying amounts or the amounts and classification of liabilities that
may result should the company be unable to continue as a going
concern.
Note 3 - LIQUIDITY
As of March 31, 1999 and December 31, 1998, the Company had
accumulated deficits of $52,873 and $53,540, respectively. For the
three months ended March 31, 1999, the Company incurred a loss of $455
before the extraordinary gain from debt extinguishment mentioned above
and recognizes that it may continue to incur operating losses through
the remainder of 1999 and possibly beyond. Furthermore, the Company
has not generated sufficient cash to finance its operations and has
been dependent upon external sources to meet its liquidity
requirements.
In addition to the cost reduction initiatives completed during the
first quarter of 1999 and the fourth quarter of 1998, the Company will
continue to explore new methods to increase revenues and reduce costs
and working capital requirements. As mentioned above the Company
obtained $600 of short-term financing under a Loan Agreement it
executed with L&H Investment Company, N.V. ("LHIC") on March 3, 1999.
The loan matures on June 30, 1999 and accrues interest at an annual
percentage rate equal to four percent (4%) above the prime rate as
determined by the Wall Street Journal. Upon maturity the principal of
the loan can be converted, at the option of LHIC, into Series C
Preferred shares of the Company at a price per share of eighty-five
percent (85%) of the average closing
6
<PAGE>
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
bid price of the Company's Ordinary Shares for twenty trading days
prior to March 12, 1999. Accrued interest is due and payable upon
maturity. Additionally, pursuant to the terms of the loan agreement,
the Company issued to LHIC a warrant to purchase three million
Ordinary Shares of the Company at a price equal to the average trading
price for twenty (20) trading days prior to March 3, 1999. The Company
continues to explore sources of additional financing to satisfy its
operational requirements.
Note 4 - SHARE CAPITAL
Accent executed a Preferred Share Purchase Agreement with Lernout &
Hauspie Speech Products, N.V. ("L&H"), an affiliate of LHIC, on June
4, 1998 pursuant to which the Company issued 4,000 Series C Preferred
shares in exchange for $4,000. Fees and expenses related to the
transaction totaled approximately $250 resulting in net proceeds to
the Company of $3,750. 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%.
During the second and third quarters of 1998, Accent reached
agreements with several of its major creditors pursuant to which these
creditors agreed to accept Ordinary Shares in the Company in payment
for all or a portion of amounts due them. Approximately 1,000,000
shares were issued to these creditors at market value which averaged
approximately $0.45 per share. Dilution to existing shareholders from
the issuance of these shares amounted to approximately 3%.
As mentioned in the preceding Note 2, the Company recognized an
extraordinary gain of $1,117 from the extinguishment of bank debt. On
January 25, 1999, the Company executed an agreement with its prime
lending bank in Israel pursuant to which the balances of $1,180 in
principal and approximately $11 in interest due the bank were
extinguished in exchange for the Company issuing to the bank a warrant
to receive 2,448,000 of the Company's Ordinary Shares. The warrant
will fully vest on January 25, 2001 and expires on January 25, 2006.
7
<PAGE>
ACCENT SOFTWARE INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands, except per share figures
(Unaudited)
Note 5 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
(a) SOP 97-2, regarding software revenue recognition became effective for
all transactions entered into, in fiscal years commencing December 15,
1997. The Company recognizes revenue in accordance with this Standard.
(b) In June 1998, the Financial Accounting Standards Board issued SFAS
133, Accounting for Derivative Instruments and Hedging Activities.
The Statement establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative
instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allow a derivative's gains and losses
to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge
accounting.
Statement 133 is effective for fiscal years commencing after June 15,
1999. Statement 133 cannot be applied retroactively. Statement 133
must be applied to (a) derivative instruments and (b) certain
derivative instruments embedded in hybrid contracts that were issued,
acquired, or subsequently modified after December 31,1997.
The Company believes that the adoption of Statement 133 will not have
a material effect on its financial statements.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Conditions. (U.S. dollars in thousands, except per share
data.)
Introduction
This Form 10-Q for Accent Software International Ltd., and its
subsidiaries ("Accent" or "the Company") contains historical information and
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q pursuant to the "safe harbor" provision of the Private Securities
Litigation Reform Act of 1995. Such statements involve known and unknown risks
and uncertainties including, but not limited to, the timely availability of new
products, market acceptance of the Company's existing products and products
under development, the impact of competing products and pricing, the
availability of sufficient resources including short- and long-term financing to
carry out the Company's product development and marketing plans, and quarterly
fluctuations in operating results. The Company's actual results in future
periods may be materially different from any future performance suggested
herein. Further, the Company operates in an industry sector where securities'
values may be volatile and may be influenced by economic and other factors
beyond the Company's control. In the context of the forward-looking information
provided in this Form 10-Q, please refer to the Company's most recent Form 10-K
and the Company's other filings with the Securities and Exchange Commission.
Accent Software International designs develops and markets Language
Information Technologies (LIT) over the Internet. These technologies include
software products and services that help businesses easily localize their
products and information into other natural languages. Accent commenced
operations in 1988 in Jerusalem, Israel, and has since moved its operations to
Colorado Springs, Colorado in 1997. Over the last year Accent has changed its
direction toward Internet products and services for corporate customers that are
reaching international markets. Revenues are currently being generated through
Internet portals, translation services and software products that increase the
efficiencies of localizing media and products.
The Company has accumulated deficits in excess of $52 million since its
inception through March 31, 1999, and it may continue to incur deficits through
the remainder of 1999 and possibly beyond. Accent historically has generated
operating cash flow deficits and its liquidity is essentially exhausted. To
enhance the Company's longer term prospects, management has focused on
increasing revenue by changing its direction toward Internet products and
services, reducing expenses and obtaining additional external financing. There
can be no assurance that the Company will be successful in reversing the trend
of operating losses and in generating sufficient working capital to meet its
operating requirements and any failure on the part of the Company to do so will
have a material adverse impact on the Company and could force it to cease
operations. Although the Company believes it has made substantial progress in
penetrating Internet markets and reducing its operating expenses and annual
losses, its historical failure to generate adequate operating income and cash
flow to meet its working capital requirements create doubt about the Company's
ability to continue as a going concern and there can be no assurance that the
Company will be able to continue as a going concern.
The Company completed a restructuring during 1998 designed to reduce its
working capital requirements and to align its operating expenses with its
revised revenue projections. The restructuring eliminated the Company's Israeli-
based product development, sales and marketing functions and various general and
administrative activities. Staffing was reduced to 15 people as of March 31,
1999.
The Company is continuing to work on significant new sales opportunities
and intends to gradually expand its sales and marketing operations through the
expanded use of sales representatives and cooperative agreements with other
businesses. There can be no assurance, however, that future revenue will meet
management's expectations.
9
<PAGE>
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 Company secured $600 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 through the end of June, 1999. Beyond that time, the Company
believes that its operations may not generate adequate cash flow to meet its
needs without additional external financing. The inability of the Company to
obtain such financing will have a material adverse impact on the Company and may
cause the Company to cease operations.
Results of Operations
The Company incurred a loss of $455 before an extraordinary gain from
debt extinguishment during the first quarter of 1999 on revenue of $471 compared
to an operating loss of $1,841 on revenue of $705 during the first quarter of
1998.
The improvement in the Company's operating results was achieved through
significant cost reduction efforts in all facets of the business. Spending
cutbacks, coupled with the redirection of the Company's operating strategy, have
also contributed to depressed levels of revenue. The Company believes it has now
reduced spending to the minimum sustainable level and has recently begun to
rebuild the sales and marketing organization in the United States.
Net Sales. Commencing early in the first quarter of calendar 1999,
management has shifted Accent's focus to generating revenue through Internet
portals. Customer interest in Accent's newest products offered on the Internet,
Loc@le and LanquageWare, has been positive. Additionally, the Company is
- ------
encouraged by the number of requests for proposals for translation services from
customers visiting the Company's web site.
Revenue recorded in the first quarter of 1998 included sales of products
that were dropped and/or not supported by the Company in the comparable period
of 1999. Revenues in the first quarter of 1999 primarily include sales of
translation services generated through traditional sales methods. Because the
Company is in the early stages of focusing its marketing and sales efforts over
the Internet, the benefits, if any, from such efforts have yet to be realized.
Cost of Sales. Manufacturing, production, warehousing and shipping
expenses have all been eliminated or significantly reduced from the year earlier
period consistent with the Company's shift away from the retail market and
toward the business-to-business market through Internet portals where
manufacturing and support costs are significantly lower. At the same time, the
Company has increased its emphasis on translation services which have a
relatively high cost of sales due to its reliance on external translators to
meet fluctuating demand.
Cost of sales during the first quarter of 1999 was $243, or 52% of
sales, compared to $206 in cost of sales, 29% of sales, during the same quarter
of 1998.
10
<PAGE>
Product Development Costs. Product development costs during the first
quarter of 1999 were $21 compared to $1,125 during the first quarter of 1998.
The reduction of $1,104 in such costs from the first quarter of 1998 reflects
primarily the cost savings realized from the closure of the Company's product
development center in Jerusalem.
Product development costs have historically also included costs incurred
by the Company's subsidiary, AgentSoft. Founded in 1996, AgentSoft was a
Jerusalem-based start-up business focused on developing "intelligent agent"
technology for use on the Internet. Because the Company did not anticipate near-
term revenue or profit from AgentSoft and also to allow the Company to focus all
of its energies on its core competencies in the Language Information Industry,
the Board of Directors concluded early in 1998 that the divestiture of AgentSoft
would be in the best interests of all concerned. The assets of AgentSoft were
sold for $225 in September, 1998.
Marketing Expenses. The Company's marketing expenses were $130 in the
three months ended March 31, 1999; a reduction of 72% from $458 during the three
months ended March 31, 1998.
Sales and marketing personnel were eliminated from the Jerusalem
operation during the third quarter of 1998 as the Company concluded it would be
more economical to rely on sales representatives for its Middle East activity
rather than full time employees. At the same time, the Company commenced
establishing the sales and marketing capability at its U.S. base in Colorado
Springs. The Company's shift away from the retail market allows it to function
with fewer sales and marketing personnel and has also led to reductions in non-
personnel expenses such as trade shows, advertising and public relations costs.
General and Administrative Expenses. General and administrative expenses
during the most recent quarter were $505 compared to $712 during the same
quarter of 1998. The reduction of $207, 29%, is primarily attributable to staff
reductions from the closure of its offices in Jerusalem.
Other expenses, net. The Company incurred $27 in net other expenses
during the three months ended March 31, 1999, compared to $61 in net other
expenses during the three months ended March 31, 1998. Other expenses for both
periods consist primarily of interest and expense arising from foreign exchange
rate fluctuations.
Net loss before extraordinary item. Accent's net loss before an
extraordinary item during the first quarter of 1999 of $455 was less than the
year earlier figure of $1,841 reflecting the impact of the Company's cost
reduction initiatives. On a per share basis, the Company lost $0.02 per share
before the extraordinary item during the first quarter of 1999 compared to a net
loss of $0.08 per share during the first quarter of 1998.
Extraordinary gain from debt extinguishment. As previously mentioned,
the Company recognized an extraordinary gain of $1,117 in the first quarter of
1999 as a result of the extinguishment of $1,180 of long-term debt, plus $11 of
accrued interest, in exchange for the issuance of a warrant to the lender to
receive 2,448,000 shares of the Company's Ordinary Shares anytime after January
25, 2001, but before January 25, 2006. No such gain or loss was reported in the
first quarter of 1998. The extraordinary gain amounted to $0.04 per share on a
per share basis.
Net Income (Loss). The Company recognized net income of $662, or $0.02
per share, for the three months ended March 31, 1999 compared to a net loss of
$1,841, or $0.08 per share, for the comparable period of 1998.
11
<PAGE>
Liquidity and Capital Resources
For the three month period ended March 31, 1999, the Company's operating
activities used cash of $486 compared to $1,345 used during the comparable
period of 1998.
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 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 through June, 1999. 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 will need to seek
additional financing. Although management currently is seeking additional
financing, there is no assurance that the Company will be successful in securing
additional working capital and any failure on the part of the Company to do so
will have a material adverse impact on the Company and may cause the Company to
cease operations.
On January 25, 1999 the Company entered into an agreement with the
government of Israel and various Israeli banking officials whereby the Company
issued a warrant to the bank to issue to the bank 2,448,000 Ordinary Shares in
full satisfaction of the balance of the loan. The warrant vests on the second
anniversary of the grant (that is, January 25, 2001) and expires on January 25,
2006.
Management has taken additional steps in securing additional external
financing and increasing revenues. At its next annual meeting, tentatively
scheduled for June 25, 1999, shareholders will be asked to approve a reverse
stock split and an increase in the Company's capitalization. Management believes
that shareholder approval of these actions will provide a sufficient number of
unreserved and unissued shares to pursue, among other things, equity financing
transactions and strategic alliances and enhance the marketability of the
Company's outstanding Ordinary Shares to the investment community.
Additionally, shareholders will be asked to approve a change in the
Company's name with a ".net" extension which would, in the opinion of
management, better reflect the Company's movement toward Internet products and
services and away from its historical product line. Any such name change also
would require approval by the Israeli Registrar of Companies.
The Company's investing activities for both the first three months of
1999 and 1998 were immaterial wherein cash of $1 and $4 was used during the
respective periods.
Financing activities provided cash of $600 and used cash of $560 during
the three month periods ending March 31, 1999, and 1998, respectively. Proceeds
from a short-term loan provided cash of $600 during the first quarter of 1999
compared to cash used of $499 to retire bank loans during the first quarter of
1998. Additionally, cash of $61 was used in the first quarter of 1998 related to
the cancellation of shares issued in payment for services.
The Company obtained $600 of short-term financing under a Loan Agreement
it executed with L&H Investment Company, N.V. ("LHIC") on March 3, 1999. The
loan matures on June 30, 1999 and accrues interest at an annual percentage rate
equal to four percent (4%) above the prime rate as determined by the Wall Street
Journal. Upon maturity the principal of the loan can be converted, at the option
of LHIC, into Series C Preferred Shares of the Company at a price per share of
eighty-five percent (85%) of the average closing bid price of the Company's
Ordinary Shares for twenty trading days prior to March 12, 1999. Accrued
interest is due and payable upon maturity. Additionally, pursuant to the terms
of the loan agreement, the Company issued to LHIC a warrant to purchase three
million Ordinary Shares of the Company at a price equal to the
12
<PAGE>
average trading price for twenty (20) trading days prior to March 3, 1999. As
previously mentioned, the Company anticipates that the funds obtained from the
short-term loan will become exhausted by the end of June, 1999. The Company
currently does not have, nor is it forecasted to generate from its operations,
sufficient cash to repay the short-term loan. In the event the Company is unable
to secure additional external financing by the maturity date of the short-term
loan, and LHIC declines to convert the loan into Preferred Shares, the Company
would be in default under the terms of the Loan Agreement, which event would
have a material adverse impact on the Company and its ability to raise
additional external financing.
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.
13
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1(a) - Memorandum of Association of Registrant (filed as Exhibit
3.1(a) to the Company's Registration Statement No. 33-92754).*
3.1(b) - Certificate of Name Change dated October 23, 1994 (filed as
Exhibit 3.1(b) to the Company's Registration Statement No. 33-
92754).*
3.1(c) - Certificate of Name Change dated April 23, 1995 (filed as
Exhibit 3.1(c) to the Company's Registration Statement No. 33-
92754).*
3.2 - 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 Exhibit 4.6
to the Company's Registration November 22, 1996 between the
Company, Sands Statement No. 333-7637).* Brothers & Co., Ltd.,
as representative of the several underwriters, and American
Stock Transfer & Trust Company (filed as Exhibit 4.6 to the
Company's Registration Statement No. 333-7637).*
4.7 - Form of Redeemable Warrant Certificate (filed as Exhibit 4.6
to the Company's Registration Statement No. 333-7637).*
4.8 - Form of Unit Certificate (filed as Exhibit 4.6 to the
Company's Registration Statement No. 333-7637).*
4.9 - Securities Purchase Agreement dated August 5, 1997, between CC
Investments LDC and Accent Software International Ltd., which
includes the Convertible Debenture, two Warrant Agreements and
the Registration Rights Agreement as exhibits thereto. (filed
as Exhibit 4.1 to the Company's Registration Statement filed
on August 27, 1997, Reg. No. 333-34455).*
- --------------------------
*Incorporated by reference
14
<PAGE>
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).*
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).*
- --------------------------
*Incorporated by reference
15
<PAGE>
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 Exhibit 4.2 to the
Company's Registration Option Plan (1995) (filed as 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).*
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).*
- --------------------------
*Incorporated by reference
16
<PAGE>
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.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCENT SOFTWARE INTERNATIONAL LTD.
(Registrant)
Date: May 15, 1999 by: /S/ Todd A. Oseth
------------ -------------------
Todd A. Oseth
(Principal Executive Officer and acting
Principal Financial Officer)
- --------------------------
*Incorporated by reference
17
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