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As filed with the Securities and Exchange Commission on May 23, 2000
Registration No. 333- _________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-2
REGISTRATION STATEMENT
under the
SECURITIES ACT OF 1933
LANGUAGEWARE.NET (COMPANY) LTD.
(Name of small business issuer in its charter)
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Israel 7372 N/A
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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102 SOUTH TEJON
SUITE 320
COLORADO SPRINGS, CO 80903
(719) 955-3400
(Address, Including Zip Code and Telephone
Number, Including Area Code, of
Registrant's Principal Executive Offices)
-------------------------
Todd A. Oseth, 102 South Tejon, Suite 320,
Colorado Springs, CO 80903, (719) 955-3400
(Name, Address, Including Zip Code and
Telephone Number,
Including Area Code, of Agent for Service for
the Registrant)
-------------------------
Copies of all communications to:
Herbert H. Davis III, Esq.
Rothgerber Johnson & Lyons LLP
1200 Seventeenth Street, Suite 3000
Denver, Colorado 80202
(303) 623-9000
(303) 623-9222 FAX
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: AS SOON AS PRACTICABLE AFTER THE
EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legible facsimile thereof, pursuant to Item
11(a) (1) of this form, check the following box. [ ]
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
OFFERING MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT (1) OFFERING PRICE FEE
- -------------------------------------- --------------------- -------------- -------------------- -------------------
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ordinary shares, par value NIS $0.01 78,749,832 (2) $0.785 $61,818,618 $16,321
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(1) Based upon the average of the bid and asked prices of LanguageWare.net
(Company) Ltd. as reported on the OTC Bulletin Board on May 16, 2000,
in accordance with Rule 457(c) under the Securities Act of 1933, as
amended.
(2) Includes 7,444,444 ordinary shares issuable upon exercise of warrants.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
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PROSPECTUS
78,749,832 SHARES
LANGUAGEWARE.NET (COMPANY) LTD.
ORDINARY SHARES
This prospectus relates to the resale by certain shareholders of
LanguageWare.net (Company) Ltd. of up to 78,749,832 ordinary shares.
The shares offered include:
- 71,305,388 ordinary shares which are presently outstanding; and
- up to 7,444,444 ordinary shares issuable upon the exercise of
warrants held by certain private investors.
We will not receive any proceeds from the sale of the shares. However,
we would receive proceeds from the sale of shares to selling shareholders upon
exercise of the warrants.
The selling shareholders identified in this prospectus, or their
pledgees, donees, transferees or other successors-in-interest, may offer the
shares from time to time through public or private transactions at prevailing
market prices, at prices related to prevailing market prices or at privately
negotiated prices.
Our ordinary shares trade on the OTC Bulletin Board under the trading
symbol LWNTF. On May 16, 2000, the last reported bid and asked prices of the
Common Stock on the OTC Bulletin Board were $0.76 and $0.81 per share.
INVESTING IN OUR STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 23, 2000
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We have not authorized anyone to provide you with information different
from that contained or incorporated by reference in this prospectus. The selling
shareholders are offering to sell, and seeking offers to buy, our ordinary
shares only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of ordinary shares.
TABLE OF CONTENTS
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PROSPECTUS SUMMARY................................................................................................3
SUMMARY CONSOLIDATED FINANCIAL DATA...............................................................................4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.................................................................5
RISK FACTORS......................................................................................................6
USE OF PROCEEDS..................................................................................................11
SELLING SECURITY HOLDERS.........................................................................................12
MARKET FOR COMMON EQUITY, DIVIDEND POLICY AND
RELATED SHAREHOLDER MATTERS......................................................................................13
SUPPLEMENTARY CONSOLIDATED FINANCIAL DATA........................................................................14
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.......................................................15
BUSINESS.........................................................................................................25
DESCRIPTION OF SECURITIES........................................................................................30
PLAN OF DISTRIBUTION.............................................................................................31
LEGAL MATTERS....................................................................................................33
EXPERTS..........................................................................................................33
WHERE YOU CAN FIND MORE INFORMATION..............................................................................33
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................................33
INDEX TO FINANCIAL STATEMENTS....................................................................................35
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Unless the context otherwise requires, references in this prospectus to
"LanguageWare.net," "we," "us" and "our" refer to LangaugeWare.net (Company)
Ltd.
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PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and LanguageWare.net's financial statements and the notes to those
statements appearing elsewhere in this prospectus.
This prospectus contains forward-looking statements based on our
current expectations, assumptions, estimates and projections about
LanguageWare.net and our industry. These forward-looking statements involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
as more fully described in the "Risk Factors" section and elsewhere in this
prospectus.
OUR BUSINESS
Our principal executive offices are located at 102 South Tejon Street,
Suite 320, Colorado Springs, Colorado 80903 and, and our telephone number is
(719) 955-3400. Our World Wide Web sites are "www.languageware.net" and
"www.wholetree.com." The information in our Web sites is not incorporated by
reference into this prospectus.
THE OFFERING
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Ordinary shares offered by selling
shareholders......................... 78,749,832 ordinary shares
Price per share to the public.......... Market price at the time of resale
Proceeds from offering................. We will not receive any of the proceeds from the sale of the
ordinary shares in this offering; however, we would receive
proceeds from the sale of shares issuable upon the exercise
of warrants. Proceeds from the exercise of warrants will be
used for working capital and general corporate purposes.
Risk Factors........................... The ordinary shares offered by the selling Shareholders are
highly speculative, involve a high degree of risk and should
not be purchased by an investor who cannot afford the loss
of his or her entire investment.
Over-the-Counter Trading Symbol......... ordinary shares: LWNTF
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following is a summary of selected historical and pro forma
consolidated financial data of LanguageWare for the periods ended and as of the
dates indicated. The summary pro forma consolidated financial data as of and for
the year ended December 31, 1999 reflect adjustments where appropriate, to our
historical financial data to give effect to the January 14, 2000 acquisition of
Star+Globe Technologies Pte. Ltd. A pro forma for the three months ended March
31, 2000 is not required as the results of operations of Star+Globe were
included with our results of operations effective January 1, 2000. The
historical consolidated financial data as of March 31, 2000 and for the three
months ended March 31, 2000 and 1999 have been derived from our unaudited
interim consolidated financial statements included elsewhere in this prospectus
and, in the opinion of management, include all adjustments necessary for the
fair presentation of such data. The results of operations for the interim
periods presented are not necessarily indicative of the results that may be
expected for a full financial year. This data should be read in conjunction
with, and are qualified in their entirety by reference to, our Consolidated
Financial Statements and the related Notes, our unaudited Pro Forma Condensed
Consolidated Financial Statements and the related Notes and the "Management's
Discussion and Analysis of Financial Condition" section appearing elsewhere in
this prospectus.
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THREE MONTHS ENDED PRO FORMA
MARCH 31, YEARS ENDED DECEMBER 31, YEAR ENDED
--------------------- ---------------------------------------------------- DECEMBER 31,
2000(1) 1999 1999 1998(2)(3) 1997(3) 1996 1995 1999(4)
--------------------- ---------------------------------------------------- --------------
(Unaudited)
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CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net Sales $ 801 $ 471 $ 1,714 $ 1,949 $ 3,125 $ 4,953 $ 5,135 $ 2,823
Cost of Sales and Professional
Services 514 243 1,163 997 3,062 6,767 2,972 1,338
Operating Expenses 3,808 656 2,154 7,666 10,159 19,065 9,848 5,683
--------------------- ---------------------------------------------------- --------------
Operating Loss (3,521) (428) (1,603) (6,714) (10,096) (20,879) (7,685) (4,198)
Interest and Other, net 293 227 679 78 1,912 155 163 357
--------------------- ---------------------------------------------------- --------------
Loss Before Extraordinary Item (3,814) (655) (2,282) (6,792) (12,008) (21,034) (7,848) (4,555)
Extraordinary Gain on Debt
Extinguishment - 885 885 - - - - 885
--------------------- ---------------------------------------------------- --------------
Net Income (Loss) (3,814) 230 (1,397) (6,792) (12,008) (21,034) (7,848) (3,670)
Deemed Dividend on Preferred Shares - - - 2,535 1,844 - - -
--------------------- ---------------------------------------------------- --------------
Income (Loss) Applicable to
Ordinary Shares $ (3,814) $ 230 $ (1,397) $(9,327) $(13,852) $(21,034) $(7,848) $ (3,670)
===================== ==================================================== ==============
Basic and Diluted Loss per Ordinary
Share:
Loss Before Extraordinary Item $ (0.05) $(0.02) $ (0.08) $ (0.34) $ (1.11) $ (2.12) $ (1.22) $ (0.07)
Extraordinary Item - 0.03 0.03 - - - - 0.01
--------------------- ---------------------------------------------------- --------------
Income (Loss) Applicable to
Ordinary Shares $ (0.05) $ 0.01 $ (0.05) $ (0.34) $ (1.11) $ (2.12) $ (1.22) $ (0.06)
===================== ==================================================== ==============
Weighted Average Number
of Ordinary Shares Outstanding 70,222 29,292 30,407 27,242 12,495 9,926 6,421 64,080
===================== ==================================================== ==============
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AS OF
MARCH 31, AS OF DECEMBER 31,
------------ ----------------------------------------------------
2000 1999 1998 1997 1996 1995
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(Unaudited)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and Cash Equivalents $ 3,811 $ 249 $ 141 $ 2,499 $ 8,723 $ 9,633
Working Capital (Deficit) $ 2,683 $ (606) $ (1,456) $ 109 $ 3,628 $ 10,329
Total Assets $ 9,126 $ 909 $ 599 $ 6,438 $ 13,789 $ 17,650
Long-Term Obligations $ - $ - $ 15 $ 1,162 $ 2,948 $ 2,541
Total Liabilities $ 1,723 $ 1,445 $ 1,980 $ 5,415 $ 4,062 $ 2,358
Accumulated Deficit $(57,258) $(53,444) $(52,047) $(45,255) $(33,247) $(12,213)
Shareholders' Equity (Deficit) $ 7,403 $ (536) $ (1,381) $ 1,023 $ 2,974 $ 10,133
</TABLE>
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(1) The consolidated statement of operations data for the three months ended
March 31, 2000 includes the results of operations of Star+Globe effective
January 1, 2000.
(2) In 1998, we recognized a restructuring charge of $1,257,000 related
primarily to severance costs and the disposal of excess capital equipment.
See Management's Discussion and Analysis and Note 1 to our December 31,
1999 consolidated financial statements.
(3) In 1997 and 1998, we issued convertible preferred shares at a discount and
have reflected as a deemed dividend on preferred shares the amount of the
beneficial conversion feature.
(4) The pro forma data gives effect to the acquisition of Star+Globe as if it
had occurred on January 1, 1999.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis or Plan of Operations," "Business" and
elsewhere in this Prospectus and in our periodic filings with the Commission
constitute forward-looking statements. These statements involve known and
unknown risks, significant uncertainties and other factors what may cause our
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology. These statements are
only predictions. In evaluating these statements, you should specifically
consider various factors, including the risks outlined below. These factors may
cause our actual results to differ materially from any forward-looking
statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus.
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RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks described below before you decide to buy our common stock. If
any of the following risks were to occur, our business, financial condition or
results of operations would likely suffer. In that event, the trading price of
our common stock could decline, and you may lose all or part of your investment.
You also should refer to the other information set forth in this prospectus,
including our consolidated financial statements and the related notes.
RISKS RELATED TO OUR OPERATIONS
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
From our inception through December 31, 1999, we have accumulated
deficits in excess of $53.4 million, including net losses of $1.4 million, $6.8
million and $12.0 million for the fiscal years ended December 31, 1999, 1998 and
1997, respectively. Although we believe we have made substantial progress in
reducing our operating expenses and annual losses, our failure to achieve our
historical revenue plans has significantly affected our ability to generate
adequate cash flow to meet our operating requirements. Additionally, commencing
in January 2000 we embarked on a new business strategy of providing e-commerce
solutions. These factors create substantial doubt about our ability to continue
as a going concern and our auditors report relating to their audits of recent
annual financial statements have included an explanatory paragraph stating that
there is substantial doubt about our ability to continue as a going concern.
ADDITIONAL CAPITAL WILL BE NEEDED TO CONTINUE OUR OPERATIONS.
We have been successful on several occasions during the past three
years in raising additional working capital through the sale of ordinary shares
and convertible debt and equity securities. We secured $2.2 million in
additional working capital during 1999 and successfully converted all of our
long-term debt into equity. Through May 16, 2000 we raised an additional $5.0
million from (1) the sale of $2.5 million of ordinary shares pursuant to an
agreement dated May 15, 2000; (2) the sale of $1.5 million of ordinary shares
pursuant to an agreement dated July 14, 1999; (3) the receipt of $633,000 from
the exercise of warrants associated with convertible debentures sold in 1999;
(4) the sale of a $250,000 convertible debenture which was converted into
ordinary shares in February 2000; and (5) the receipt of $186,000 from the
exercise of employee and non-employee share options. We believe that these
accomplishments will be sufficient to meet our requirements for approximately
six months. Beyond that time, we believe that we will need additional external
financing to meet our operational needs. If we fail to achieve our projected
results and are required to seek additional financing, there is no assurance
that our efforts to obtain such financing will be successful. Any failure on our
part to secure required financing will have a material adverse impact on us and
may cause us to cease operations.
OUR FUTURE SUCCESS IS DEPENDENT UPON INCREASED ACCEPTANCE AND USE OF THE
INTERNET AS A MEANS FOR CONDUCTING COMMERCE.
We focus our services on the development and implementation of Internet
strategies and solutions. If commerce on the Internet does not continue to grow,
or grows more slowly than expected, revenue growth would slow or decline and our
business, financial condition and results of operations would be materially
adversely affected. Consumers and businesses may reject the Internet as a viable
medium for commerce for a number of reasons, including:
- inadequate network infrastructure;
- delays in the development of Internet enabling technologies and
performance improvements;
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- delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet
activity;
- delays in the development of security and authentication
technology necessary to effect secure transmission of confidential
information;
- changes in, or insufficient availability of, telecommunications
services to support the Internet; and
- failure of companies to meet their customers' expectations in
delivering goods and services over the Internet.
OUR INTERNET BASED OPERATIONS HAVE A LIMITED OPERATING HISTORY AND THEREFORE YOU
CANNOT EVALUATE ITS PROSPECTS BASED ON PAST RESULTS.
In 1999, we shifted our focus from the design, development and sale of
translation related software to an Internet based language information
technologies company providing products and services to corporate customers who
are reaching international markets. Since the main focus of our operations has a
limited operating history upon which you can evaluate our business and
prospects, you should consider all of the risks, expenses and uncertainties
typically encountered by young companies that operate in the new and rapidly
evolving markets for Internet products and services. Any inability on our part
to manage such risks and expenses could have a material adverse impact on our
business, financial condition and results of operations. These risks include:
- evolving and unpredictable business models;
- intense competition;
- the need and ability to manage growth;
- the rapid evolution of technology in electronic commerce; and
- insufficient capital.
We may not be successful in managing the above risks
WE ARE DEPENDENT UPON ATTRACTING AND RETAINING PROFESSIONAL PERSONNEL.
Our business is labor intensive and our success will depend in large
part upon our ability to attract, retain, train and motivate highly-skilled
employees. Because of the rapid growth of the Internet, there is intense
competition for employees who have strategic, experience modeling, creative
design, technical or program management experience. In addition, the Internet
has created many opportunities for people with the skills we seek to form their
own companies or join startup companies and these opportunities frequently offer
the potential for significant future financial profit through equity incentives
which we cannot match. We may not be successful in attracting a sufficient
number of highly skilled employees in the future, or in retaining, training and
motivating the employees we are able to attract. Any inability to attract,
retain, train and motivate employees could impair our ability to adequately
manage and complete projects.
OUR SUCCESS IS DEPENDENT UPON OUR ABILITY TO MANAGE ANTICIPATED GROWTH
EFFECTIVELY.
Our future success will depend on our ability to manage growth
effectively, including by:
- developing and improving operational, financial and other internal
systems;
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- integrating and managing acquired businesses, joint ventures and
strategic investments;
- training, motivating and managing employees;
- estimating fixed-price fees and project timeframes accurately;
- maintaining high rates of employee utilization; and
- maintaining project quality and client satisfaction.
If we are unable to manage growth and projects effectively, the quality
of our services and products, our ability to retain key personnel and our
business, financial condition and results of operations may be materially
adversely affected.
WE INCUR SIGNIFICANT FIXED OPERATING COSTS.
A high percentage of our operating expenses, particularly personnel and
rent, are fixed in advance of any particular quarter. As a result, unanticipated
variations in the number, or progress toward completion, of customer projects
may cause significant variations in operating results in any particular quarter
and could result in losses for that quarter. An unanticipated termination of a
major project, a client's decision not to proceed with a project as anticipated,
or the completion during a quarter of several major client projects could
require us to maintain underutilized employees and could therefore have a
material adverse effect on our business, financial condition and results of
operations. Our revenues and earnings may also fluctuate from quarter to quarter
based on such factors as:
- the contractual terms and timing of completion of projects;
- any delays incurred in connection with projects;
- the adequacy of provisions for losses;
- the accuracy of estimates of resources required to complete
ongoing projects; and
- general economic conditions.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH FIXED-PRICE CONTRACTS.
We anticipate that some of our projects will be based on fixed-price,
fixed-timeframe contracts, rather than contracts in which payment is determined
on a time and materials basis. Failure to accurately estimate the resources
required for a project or to complete contractual obligations in a manner
consistent with the project plan upon which a fixed-price, fixed-timeframe
contract was based would adversely affect our overall profitability and could
have a material adverse effect on our business, financial condition and results
of operations. In addition, the price for some projects may be fixed at an early
stage of the process, which could result in a fixed price that turns out to be
too low and therefore would adversely affect profitability.
WE FACE THE POSSIBILITY OF NOT ACHIEVING THE ANTICIPATED BENEFITS FROM OUR
RECENT ACQUISITION.
On January 14, 2000 we acquired Star+Globe Technologies Pte, Ltd. which
was a privately held Singapore corporation. The anticipated benefits from the
acquisition, and any future acquisitions, joint ventures and strategic
investments may not be achieved. For example, we cannot be certain that
customers of the acquired business will continue to do business with us or that
employees of the acquired business will continue their employment or
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become well integrated into our operations and culture. The identification,
consummation and integration of acquisitions, joint ventures and strategic
investments requires substantial attention from management. The diversion of the
attention of management relating to these activities, as well as any
difficulties encountered in the integration process, could have an adverse
impact on our business, financial condition and results of operations.
WE FACE THE POSSIBILITY OF THE UNEXPECTED TERMINATION OF CONTRACTS.
It is anticipated that some of the contracts that we enter in the
future could contain provisions permitting cancellation of a project by the
client with limited advance notice and without significant penalty. Termination
by any client of a contract for our services could result in a loss of expected
revenues and additional expenses for staff which were allocated to that client's
project. The cancellation or a significant reduction in the scope of a large
project could have a material adverse effect on our business, financial
condition and results of operations.
OUR BUSINESS IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE.
The markets and the technologies used in our e-commerce solutions are
characterized by rapid technological change. Failure to respond in a timely and
cost-effective way to these technological developments would have a material
adverse effect on our business, financial condition and results of operations.
We expect to derive a substantial portion of our revenues from providing
Internet solutions that are based upon leading technologies capable of adapting
to future technologies. As a result, our success will depend on our ability to
offer services that keep pace with continuing changes in technology, evolving
industry standards and changing client preferences. We may not be successful in
addressing future developments on a timely basis. Our failure to keep pace with
the latest technological developments would have a material adverse effect on
our business, financial condition and results of operations.
WE FACE A HIGH LEVEL OF COMPETITION FROM MAJOR COMPETITORS.
The markets for the services we provide are highly competitive. We
believe that our major competitors are strategy consulting firms, Internet
professional services firms, systems integration firms, technology vendors and
internal information systems groups. Many of our competitors have significantly
greater financial, technical and marketing resources than we do and generate
greater revenues and have greater name recognition than we do. In addition,
there are relatively low barriers to entry into our target markets, and we
expect to face fierce competition from existing competitors and from new
entrants into our markets.
We believe that the principal competitive factors in our markets
include:
- ability to integrate strategy, experience modeling, creative
design and technology services;
- quality of service, speed of delivery and price;
- industry knowledge;
- sophisticated project and program management capability; and
- Internet technology expertise and talent.
Our ability to compete also depends in part on a number of competitive
factors outside our control, including:
- the ability of competitors to hire, retain and motivate
professional staff;
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- the development by others of Internet services or software that is
competitive with our solutions; and
- the extent of our competitors' responsiveness to client needs.
There can be no assurance that we will be able to compete successfully in our
markets.
OUR SERVICES ARE SUBJECT TO FUTURE GOVERNMENT REGULATION.
Any new laws and regulations applicable to the Internet and electronic
commerce that are adopted by federal, state or foreign governments could dampen
the growth of the Internet and decrease its acceptance as a commercial medium.
If this occurs, companies may decide in the future not to pursue Internet
initiatives, which would decrease demand for our services. A decrease in the
demand for our services would have a material adverse effect on our business,
financial condition and results of operations.
OUR SUCCESS DEPENDS ON OUR PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
RIGHTS.
Our success depends, in part, upon our proprietary software tools and
other intellectual property rights. We rely upon a combination of trade secrets,
nondisclosure and other contractual arrangements, and copyright and trademark
laws to protect our proprietary rights. We limit access to and distribution of
such proprietary information. There can be no assurance that the steps we take
in this regard will be adequate to deter appropriation of proprietary
information or that we will be able to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights. In addition,
although we believe that our services and products do not infringe on the
intellectual property rights of others, there can be no assurance that
infringement claims will not be asserted against us in the future, or that if
asserted that any infringement claim will be successfully defended. A successful
claim against us could materially adversely affect our business, financial
condition and results of operations.
OUR SUCCESS DEPENDS ON RETAINING KEY PERSONNEL.
Our success will depend in large part upon the continued services of a
number of key employees, including Todd Oseth, our Chief Executive Officer. We
do not have key-man insurance on our Chief Executive Officer or any other
employee. Our employment contract with Mr. Oseth provides that employment is
terminable at will by either party. The loss of the services of Mr. Oseth or of
one or more of our other key personnel could have a material adverse effect on
our business, financial condition and results of operations. In addition, if one
or more of our key employees resigns to join a competitor or to form a competing
company, the loss of such personnel and any resulting loss of existing or
potential clients to any such competitor could have a material adverse effect on
our business, financial condition and results of operations. In the event of the
loss of any personnel, there can be no assurance we would be able to prevent the
unauthorized disclosure or use of its technical knowledge, practices or
procedures by such personnel.
RISKS RELATED TO THE OFFERING
THE MARKET PRICE OF OUR SHARES HAS EXPERIENCED, AND MAY CONTINUE TO BE SUBJECT
TO, EXTREME PRICE AND VOLUME FLUCTUATIONS.
The stock market has, from time to time, experienced extreme price and
volume fluctuations. The market prices of the securities of internet related
companies have been especially volatile, including fluctuations that are often
unrelated to the operating performance of the affected companies. Broad market
fluctuations of this type may adversely affect the market price of our ordinary
shares.
The market price of our common stock has experienced, and may continue
to be subject to be subject to extreme fluctuations due to a variety of factors,
including:
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- public announcements concerning us, our competitors or of the
internet industry;
- fluctuations in operating results;
- introductions of new products or services by us or our
competitors;
- changes in analysts' earnings estimates; and
- announcements of technological innovations.
In the past, companies that have experienced volatility in the market
price of their stock have been the object of securities class action litigation.
If we were the object of securities class action litigation, we could incur
substantial costs and experience a diversion of our management's attention and
resources and such securities class action litigation could have a material
adverse effect on our business, financial condition and results of operations.
THE SALE OF OUR ORDINARY SHARES UNDER THIS OFFERING MAY NEGATIVELY AFFECT OUR
STOCK PRICE.
If the selling shareholders sell substantial amounts of our ordinary
shares under this offering, the market price of our common stock could fall.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the ordinary
shares by the selling shareholders. However, we would receive proceeds from the
exercise of warrants. The maximum proceeds that we would receive from the
exercise of warrants would be $3,251,444. We intend to use the proceeds from the
exercise of warrants for working capital and general corporate purposes.
The selling shareholders will pay any underwriting discounts and
commissions and expenses incurred by the selling shareholders for brokerage,
accounting, tax or legal services or any other expenses incurred by the selling
shareholders in disposing of the shares. We will bear all other costs, fees and
expenses incurred in effecting the registration of the shares covered by this
prospectus, including, without limitation, all registration and filing fees, and
fees and expenses of our counsel and our accountants.
11
<PAGE> 14
SELLING SECURITY HOLDERS
We issued the ordinary shares covered by this prospectus in various
private placements and in connection with our acquisition of Star+Globe
Technologies Pte Ltd. in January 2000. The following table sets forth the names
of the selling shareholders, the number of ordinary shares beneficially owned by
each selling shareholder as of May 16, 2000, and the number of shares that may
be offered pursuant to this prospectus.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR
TO THE OFFERING
-------------------- SHARES
NAME(5) NUMBER PERCENT OFFERED(1)
------- ---------- ------- ----------
<S> <C> <C> <C>
Technology Fund II Pte Ltd 15,216,586 15.0% 15,216,586
L&H Investment Company N.V. 14,175,062 13.5% 14,050,062(2)
Lernout & Hauspie Speech Products, N.V. 13,333,333 13.1% 13,333,333(3)
KRDL Holdings Pte Ltd. 6,420,249 6.3% 6,420,249
Vertex Technology Fund Ltd. 5,313,712 5.2% 5,313,712
InfoTech Ventures Limited 2,941,310 2.9% 2,941,310
Seed Ventures II Limited 2,941,310 2.9% 2,941,310
Jack A. Vickers III 2,222,223 2.2% 2,222,223
WIIG Global Ventures Pte Ltd. 2,087,941 2.1% 2,087,941
Virginia Cha 2,000,665 2.0% 2,000,665
Jonathan M. Thomas 1,984,127 2.0% 1,984,127(4)
Asian-Pacific Ventures II Ltd. 1,899,859 1.9% 1,899,859
NIF Asian Pre-IPO Fund Limited 1,899,854 1.9% 1,899,854
British Colony Investments, LLC 1,507,937 1.5% 1,507,937
Rivers Investment & Finance Ltd. 1,190,476 1.2% 1,190,476
Barbara M. Thomas Trust 1,190,476 1.2% 1,190,476
Carolyn C. Vickers 952,381 0.9% 952,381
Vulcan Investments, Inc. 740,917 0.7% 740,917
Charles B. Pugh 476,191 0.5% 476,191
James L. Kelly 303,180 0.3% 303,180
Theresa Chan 77,043 0.1% 77,043
</TABLE>
- ------------------
(1) Assuming all of the shares offered under this Prospectus are sold pursuant
to this Prospectus see "Plan of Distribution." Under these circumstances,
none of the selling shareholders will own more than one percent of the
outstanding common stock after the shares are sold.
(2) Includes warrants to purchase 3,000,000 ordinary shares.
(3) Includes warrants to purchase 4,444,444 ordinary shares.
(4) Mr. Thomas was appointed to the Board of Directors on January 21, 2000 and
resigned on May 5, 2000.
(5) None of the selling security holders held offices or had material relations
with the Company over the last three years unless indicated.
12
<PAGE> 15
MARKET FOR COMMON EQUITY, DIVIDEND POLICY AND
RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Our ordinary shares and units (consisting of one ordinary share and one
warrant) are quoted on the OTC Bulletin Board under the symbols "LWNTF" and
"LWNUF," respectively. Prior to March 12, 1999, the shares and units were traded
on the Nasdaq SmallCap Market. The following table sets forth, for the periods
indicated, the high and low closing bid prices of our ordinary shares and units
as reported on the OTC Bulletin Board.
<TABLE>
<CAPTION>
ORDINARY SHARES UNITS
------------------------------ --------------------------------
LOW HIGH LOW HIGH
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
2000
First Quarter $ 0.60 $ 3.00 $ 0.25 $ 3.50
Second Quarter* $ 0.76 $ 1.94 $ 0.75 $ 2.00
1999
First Quarter $ 0.13 $ 0.44 $ 0.09 $ 0.38
Second Quarter $ 0.16 $ 0.38 $ 0.13 $ 0.38
Third Quarter $ 0.19 $ 0.28 $ 0.19 $ 0.31
Fourth Quarter $ 0.13 $ 0.92 $ 0.13 $ 1.00
1998
First Quarter $ 0.41 $ 1.16 $ 0.38 $ 1.25
Second Quarter $ 0.38 $ 0.78 $ 0.34 $ 0.77
Third Quarter $ 0.22 $ 0.52 $ 0.25 $ 0.69
Fourth Quarter $ 0.13 $ 0.34 $ 0.06 $ 0.34
</TABLE>
- --------------
* Through May 16, 2000
Market quotations for our ordinary shares and units reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions. On May 16, 2000, the last
reported sales price of the ordinary shares and units on the OTC Bulletin Board
was $0.76 per ordinary share and $1.125 per unit, respectively.
HOLDERS
As of May 16, 2000, there were approximately 6,800 record holders of
the ordinary shares (including 2 record holders of the units). Such number of
record holders was determined from our shareholder records, and does not include
beneficial owners of the ordinary shares whose shares are held in the names of
various shareholders, dealers and clearing agencies.
DIVIDENDS
We have never declared or paid any cash dividends on our ordinary
shares and we do not anticipate paying such dividends in the foreseeable future.
We currently intend to retain earnings, if any, to fund the development and
growth of our business.
13
<PAGE> 16
SUPPLEMENTARY QUARTERLY CONSOLIDATED FINANCIAL DATA
The following supplementary quarterly financial data have been
summarized from our consolidated financial statements and are qualified in their
entirety by reference to, and should be read in conjunction with, the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 2000
-----------------------------------------
<S> <C>
Net Sales $ 801
Gross Margin 287
Net Loss (3,814)
Basic and Diluted Loss per Ordinary Share $ (0.05)
Weighted Average Number of Ordinary Shares
Outstanding 70,222
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
------------------------------------
QUARTER
-------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Net Sales $ 471 $ 540 $ 550 $ 153 $ 1,714
Gross Margin (Loss) 228 235 118 (30) 551
Loss Before Extraordinary Item (655) (727) (454) (446) (2,282)
Extraordinary Gain on Debt Extinguishment 885 - - - 885
Net Income (Loss) 230 (727) (454) (446) (1,397)
Basic and Diluted Loss per Ordinary Share:
Loss Before Extraordinary Item $(0.02) $(0.02) $(0.01) $(0.01) $ (0.08)
Extraordinary Item 0.03 - - - 0.03
Income (Loss) Applicable to Ordinary Share 0.01 (0.02) (0.01) (0.01) (0.05)
Weighted Average Number of Ordinary Shares
Outstanding 29,292 29,292 31,336 30,407 30,407
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------
QUARTER
-------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
Net Sales $ 705 $ 490 $ 514 $ 240 $ 1,949
Gross Margin (Loss) 499 320 188 (55) 952
Net Loss (1,841) (1,437) (1,831) (1,683) (6,792)
Dividend on Preferred Shares - 2,535 - - 2,535
Net loss Applicable to Ordinary Shares (1,841) (3,972) (1,831) (1,683) (9,327)
Basic and Diluted Loss per Ordinary Share $ (0.08) $ (0.14) $ (0.07) $ (0.06) $ (0.34)
Weighted Average Number of Ordinary Shares
Outstanding 22,792 27,620 28,155 27,242 27,242
</TABLE>
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This prospectus contains forward-looking statements that involve risks
and uncertainties. Actual results may differ materially from those indicated in
such forward-looking statements. See "Special Note Regarding Forward-Looking
Statements."
The following discussion of our financial condition and results of also
should be read in conjunction with the consolidated financial statements and
related notes thereto included elsewhere in this prospectus.
OVERVIEW
The 1999 results reported here are those of a company in transition. In
1998, we began a significant restructuring after recognizing that a different
type of business was needed to meet the language technology demands of today's
fast-paced, Internet-based economy. Founded in 1988 as a developer of language
technology and translation software, we are today focused in a new direction. In
October 1999, we changed our name to LanguageWare.net (Company) Ltd. from Accent
Software International Ltd., recognizing that we now provide a full range of
multilingual and multicultural products and services, rather than just software,
to enable the demands of electronic business on a global scale.
We provide strategic solutions designed to help businesses, their
customers, vendors, suppliers and employees around the world communicate with
each other in their native languages. We operate primarily through our wholly
owned subsidiaries, WholeTree.com, Inc. in the U.S. and WholeTree.com (Asia) Pte
Ltd. in Singapore, which enable global business over the Internet and bring
special expertise that fosters commerce between U.S. and Asian markets.
From our inception through December 31, 1999, we have accumulated
deficits in excess of $53.4 million, including net losses of $1.4 million, $6.8
million and $12.0 million for the fiscal years ended December 31, 1999, 1998 and
1997, respectively. Although we believe we have made substantial progress in
reducing our operating expenses and annual losses, our failure to achieve our
revenue plan coupled with our efforts in calendar 1999 to implement the revised
operating strategy of providing business-to-business e-commerce solutions has
significantly affected our ability to generate adequate cash flow to meet our
working capital requirements. These factors create substantial doubt about our
ability to continue as a going concern and there can be no assurance that we
will be able to continue as a going concern.
We completed a restructuring during 1998 designed to position the
company to change our operating strategy from a consumer software products
company to a global e-commerce solutions company. The restructuring moved our
operations to Colorado Springs, Colorado and eliminated our Israeli-based
product development, sales and marketing functions and various general and
administrative activities. In calendar 1999, as part of our efforts to
transition into a global e-commerce solutions company, our operations were
changed to focus primarily on translation services and products offered to other
businesses. Commencing in January 2000, we implemented our plan to become a
provider of a full range of multilingual, multicultural and multi-commerce
products and services that enable customer companies to conduct business on a
global scale on web sites over the Internet. As part of our plan to provide such
services, on January 14, 2000, we acquired Star+Globe Technologies Pte, Ltd., a
company that provides proprietary Asian character processing technology. The
acquisition provided us with a unique competitive advantage in developing
multilingual web sites and e-business solutions for customers serving Asian
markets.
Our ability to generate increased revenue and to fund planned
expenditures depends on a number of factors, some of which are outside of our
control. In particular, revenue growth and profitability, if any, will depend on
our ability to market our services, demand for our services, the level of
competition, our success in attracting and retaining motivated and qualified
personnel, our ability to control costs and general economic conditions. There
can
15
<PAGE> 18
be no assurance that we will meet such challenges successfully. Any of these or
other factors could have a material adverse effect on our business, operating
results or financial condition.
The decline in revenue experienced during 1999, 1998 and 1997 created
pressure on our working capital and our ability to fund our current operations.
Although we have been successful on several occasions during the past three
years in raising additional working capital, primarily through the sale of
convertible securities, those funds are not sufficient to meet our expected
working capital requirements for calendar year 2000.
We successfully converted all of our long-term debt into equity in
January 1999, secured $600,000 in additional working capital during the first
quarter of 1999, sold $1,100,000 of additional convertible securities in the
third and fourth quarters of 1999, and sold, through a private placement,
ordinary shares for $500,000 under an agreement dated July 14, 1999. Through May
16, 2000 we raised an additional $5.0 million from (1) the sale of $2.5 million
of ordinary shares pursuant to an agreement dated May 15, 2000; (2) the sale of
$1.5 million of ordinary shares under the July 14, 1999 agreement; (3) the
receipt of $633,000 from the exercise of warrants associated with convertible
debentures sold in 1999; (4) the sale of a $250,000 convertible debenture which
was converted into ordinary shares in February 2000; and (5) the receipt of
$186,000 from the exercise of employee and non-employee share options. We
believe that these accomplishments, coupled with an improved revenue outlook and
cost reduction efforts that have substantially reduced our working capital
requirements, will be sufficient to meet our requirements for approximately the
first six months of calendar year 2000. Beyond that time, we believe we will not
generate sufficient operating cash flow to meet our needs without additional
external financing. There is no assurance that our efforts to obtain such
financing will be successful. Any failure on our part to secure required
financing will have a material adverse impact on us and may cause us to cease
operations.
Revenue Recognition
As required by U.S. generally accepted accounting principles, revenue
from the sale of software products to end-users and resellers (including
distributors and OEMs) is generally recognized when a customer purchase order
has been received, the software has been shipped, we have a right to invoice the
customer, collection of the receivable is determined to be probable and there
are no significant obligations remaining on our part. Revenue recognition is
deferred if any of these conditions are not met. We also maintain appropriate
allowances for anticipated returns.
OEM and licensing arrangements may include non-refundable payments in
the form of guaranteed sublicense and license fees. These guaranteed fees are
recognized as revenue upon shipment of the master copy of all software to which
the fees relate provided there are no significant post-delivery obligations and
the customer is creditworthy. Additionally, such revenue is recognized only to
the extent that the obligation to pay such fees is not subject to price
adjustment, is non-recoverable and non-refundable, and is due within twelve
months.
Currency
Our functional currency is the dollar, which is the currency of the
primary economic environment in which our operations are conducted. The majority
of our sales and expenses are made or incurred in the United States.
Transactions and balances originally denominated in dollars are presented at
their original amounts. Transactions and balances in other currencies (including
the New Israeli Shekel (NIS)) are remeasured into dollars in accordance with
principles set forth in FASB Statement No. 52. Exchange gains and losses arising
from remeasurement are reflected in other income or expenses, as applicable.
16
<PAGE> 19
Results of Operations
The following table sets forth for the periods indicated the percentage
of sales represented by certain items reflected in our Consolidated Statements
of Operations.
<TABLE>
<CAPTION>
COST OF SALES AND OPERATING EXPENSES AS A PERCENTAGE OF SALES
--------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED DECEMBER 31,
------------------------------ -----------------------------------------------
2000 1999 1999 1998 1997
-------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales and
Professional Services 64.2% 51.6% 67.9% 51.2% 98.0%
-------------- -------------- ------------- -------------- --------------
Gross Margin 35.8% 48.4% 32.1% 48.8% 2.0%
-------------- -------------- ------------- -------------- --------------
Product Development 31.0% 4.5% 16.5% 130.3% 154.0%
Marketing Expenses 282.1% 27.6% 42.1% 72.0% 69.7%
General & Administrative 162.3% 107.2% 67.0% 126.5% 101.4%
Restructuring Charge 0.0% 0.0% 0.0% 64.5% 0.0%
-------------- -------------- ------------- -------------- --------------
Operating Expenses 475.4% 139.3% 125.6% 393.3% 325.1%
-------------- -------------- ------------- -------------- --------------
Operating Loss (439.6%) (90.9%) (93.5%) (344.5%) (323.1%)
============== ============== ============= ============== ==============
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999
NET SALES. Commencing in the first quarter of calendar 2000, management
shifted the Company's focus to generating revenue from business customers for
whom the Company will develop multilingual web sites and e-business solutions.
Customer interest in the Company's new services has been positive as supported
by the number of requests for proposals for such services from potential
customers.
Net sales increased 70.1% to $801,000 in the first quarter of 2000 from
$471,000 in the comparable period of 1999. The increase is primarily as result
of the acquisition of Star+Globe in January 2000. The three month period of 2000
includes revenues of Star+Globe whereas the 1999 comparable period does not. For
the three month periods of both 2000 and 1999 revenues were primarily derived
from sales of translation services generated through traditional sales methods.
Because the Company is in the early stages of focusing its marketing and sales
efforts on e-business solutions, the benefits, if any, from such efforts have
yet to be realized.
PROFESSIONAL SERVICES. Professional services represents third party and
internal costs of providing services to the Company's customers. Primarily due
to the increase in the first quarter of 2000 of professional staff employed by
the Company to pursue its new business strategy, such costs increased $271,000,
or 111.5%, from $243,000 in the three month period of 1999 to $514,000 in the
comparable period of 2000. At March 31, 1999, the Company employed two (2) staff
members who provided such services as compared to twenty (20) employed at March
31, 2000. The significant increase in the number of such employees reflects the
Company's anticipation of its need to service new customers acquired as a result
of its efforts to implement its new business strategy.
PRODUCT DEVELOPMENT COSTS. Product development costs are comprised
primarily of salaries of software engineers employed by the Company. Such costs
increased $227,000 from $21,000 in the first quarter of 1999 to $248,000 in the
comparable period of 2000 primarily as a result of the software engineers
acquired with the purchase of Star+Globe in January 2000.
17
<PAGE> 20
SALES AND MARKETING EXPENSES. The Company's marketing expenses were
$2,260,000 during the three months ended March 31, 2000, an increase of
$2,130,000 from $130,000 during the three months ended March 31, 1999.
Sales and marketing staff was increased from five (5) personnel at March 31,
1999 to twenty-seven (27) at March 31, 2000, plus, marketing and advertising
costs of approximately $1.7 million were incurred in the first quarter of 2000,
whereas no such costs were incurred in the comparable period of 1999. The
significant increases in the first quarter of 2000 in the sales and marketing
staff and marketing and advertising costs reflects the Company's efforts to
implement its new business strategy and the acquisition of Star+Globe in January
2000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
during the most recent quarter were $1,300,000 compared to $505,000 during the
same quarter of 1999. The increase of $795,000, 157%, is primarily attributable
to an increase in depreciation and amortization of intangible assets,
administrative personnel and related additional costs such as office space,
telephone and supplies resulting from the acquisition of Star+Globe in January
2000. Additionally, the Company incurred an increase in such expenses as a
result of implementing its new business strategy.
OTHER EXPENSES. The Company incurred $293,000 in net other expenses
during the three months ended March 31, 2000, compared to $227,000 in net other
expenses during the three months ended March 31, 1999 for an increase of
$66,000, or 29%. The amounts recorded in the three month periods of both 2000
and 1999 consist primarily of amortized interest expense related to convertible
debt issued in such periods.
EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT. The Company recognized an
extraordinary gain of $885,000 in the first quarter of 1999 as a result of the
extinguishment of $1,180,000 of long-term debt, plus $11,000 of accrued
interest, in exchange for the issuance of a warrant to the lender to receive
2,448,000 shares of the Company's common stock anytime after January 25, 2001,
but before January 25, 2006. The warrant was valued at $306,000 using the
Black-Scholes option pricing model. No such gain or loss was reported in the
first quarter of 2000. The extraordinary gain amounted to $0.03 per share on a
per share basis.
NET INCOME (LOSS). The Company recognized a net loss of $(3,814,000), or
$(0.05) per share, for the three months ended March 31, 2000, compared to net
income of $230,000, or $0.01 per share, for the three months ended March 31,
1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales decreased approximately 12% to $1,714,000 in 1999 from
$1,949,000 in 1998. As a percentage of revenues, translation services increased
to 71% of total revenue from approximately 40% in 1998. Such increase reflects
the transition of our operating strategy away from consumer software products
into business-to-business, multilingual, multicultural products and services
over the Internet.
COST OF SALES. Cost of sales increased $166,000, or 17%, to $1,163,000 in 1999
from $997,000 in 1998. As a percentage of sales, cost of sales increased to 68%
of sales in 1999 compared to 51% in 1998. The 1999 increases reflect the higher
cost of engaging translators associated with the increased emphasis on
translation services. Additionally, in 1999, 61% of our sales of translation
services was derived from Star+Globe Technologies Pte Ltd. which sales generated
a lower than average gross margin of 2%, the results of which was the increase
in cost of sales as a percentage of revenues.
GROSS MARGIN. In 1999 gross margin declined to 32% of sales compared to 49% of
sales in 1998. The decline is primarily attributable to the sales of translation
services to Star+Globe Technologies Pte Ltd. as described above.
18
<PAGE> 21
PRODUCT DEVELOPMENT COSTS. Product development costs historically were comprised
of software engineer employees assigned to consumer software product
development. The shift away from the consumer software products market allowed
us to eliminate the majority of such costs. Consequently, such costs declined
$2,257,000, or 89%, to $283,000 in 1999 from $2,540,000 in 1998.
MARKETING EXPENSES. Sales and marketing expenses were reduced approximately 49%
to $722,000 in 1999 from $1,404,000 in 1998. The decreases are primarily
attributable to the reduction of expenditures for advertising, printing, travel
and trade shows as a part of our plan to conserve working capital.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative costs continued
to decline in 1999 as part of management's efforts to conserve working capital
through the reduction of costs. Such costs were decreased $1,316,000, or 53%, to
$1,149,000 in 1999 from $2,465,000 in 1998. Additionally, in 1998 several large
charges were incurred for consulting services related to our efforts to raise
new capital and to sell our subsidiary, AgentSoft. These charges were
nonrecurring by their nature and not incurred in 1999.
OPERATING LOSS. The operating loss for 1999 of $1,603,000 was $5,111,000, or 76%
lower than the operating loss of $6,714,000 incurred in 1998. The significant
improvement in the operating results reflects our cost reduction efforts and its
shift away from the consumer software products market.
OTHER EXPENSES. Other expenses of $679,000 in 1999 compared to $78,000 in 1998,
consisted primarily of $600,000 of interest charges related to cost of warrants
we granted in connection with the placement of convertible debt with a related
party in February 1999.
EXTRAORDINARY GAIN - DEBT EXTINGUISHMENT. In 1999 we recognized an extraordinary
gain of $885,000 as a result of negotiating the elimination of $1,180,000 of
long-term bank debt, plus $11,000 of accrued interest, in exchange for the
issuance of a warrant valued at $306,000 to our primary lending bank in Israel
to receive 2,448,000 ordinary shares anytime after January 25, 2001, but before
January 25, 2006.
NET LOSS. We experienced a net loss of $1,397,000 for 1999 compared to a net
loss of $6,792,000 for the prior year.
DEEMED DIVIDEND ON PREFERRED SHARES. A deemed dividend on preferred shares is
the imputed amount calculated when there is a discount from fair market value,
or there is additional consideration given, upon the sale of convertible
preferred shares. The deemed dividend is deducted from net income or loss in
order to arrive at a net income or loss attributable to ordinary shareholders.
In 1998, we issued convertible preferred shares and were required to calculate
a deemed dividend in the amount of $2,535,000.
NET LOSS APPLICABLE TO ORDINARY SHAREHOLDERS. For the year ended December 31,
1999, the net loss applicable to ordinary shareholders was the same as our net
loss of $1,397,000 or $0.05 per share. For the year ended December 31, 1998, we
recorded $2,535,000 of deemed dividend. Our net loss applicable to ordinary
shareholders was $9,327,000 or $1.11 per share compared to net loss of
$6,792,000.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales decreased approximately 37% to $1,949,000 in 1998 from
$3,125,000 in 1997. Sales of consumer software products fell short of management
expectations, we believe, due to potential customers' concerns about our ability
to continue to support and expand our product offerings.
The percentage of our total sales derived from our translation services business
increased substantially during 1998 and accounted for approximately 40% of total
revenue.
COST OF SALES. Our cost of sales improved to just over 50% of sales in 1998, or
$997,000 on sales of $1,949,000, from almost 100% of sales, $3,062,000 on sales
of $3,125,000 in the year earlier. Our continuing movement away from consumer
software products and relatively high cost of goods sold towards the OEM and
business-to-business market where manufacturing and production costs are
minimal, is primarily responsible for the improved cost of sales. The
translation services businesses, which received expanded emphasis in 1998,
relies on an international network of human translators and a correspondingly
higher cost of sales.
Cost of sales during 1997 included a charge of $555,000 to amortize capitalized
software development costs compared to no charge for this expense in 1998. 1997
cost of sales also included the cost of technical support which we provided
primarily in support of its retail sales and a $666,000 charge related to the
sale of excess inventory.
19
<PAGE> 22
GROSS MARGIN. Although net sales declined by over one-third from 1997 to 1998,
the significant reduction in the cost of sales as a percentage of revenue led to
an improvement in our gross margin to 49% in 1998 from just 2% in 1997.
PRODUCT DEVELOPMENT COSTS. Product development costs consist almost entirely of
compensation and other personnel-related costs for our staff of software
engineers. As our sales and marketing focus shifted away from "boxed software"
for the retail market and towards software developers, software content
providers and software localizers/translators, new lines of products were
developed and introduced with corresponding large increases in product
development costs in 1997 compared to 1996 and continuing into 1998. By the
latter quarters of 1998, however, much of the personnel-intensive development
effort had been concluded and it became possible to achieve significant cost
reductions in this area. Product development costs for the full year, 1998, were
$2,540,000, a 47% reduction from the $4,813,000 spent on product development
during 1997.
During the fourth quarter of 1998, because significant development efforts had
been concluded and also due to the need to reduce our overall expenses and
working capital requirements, the Israeli-based product development department
was disbanded. The product development staff in Israel consisted of 44
individuals at the beginning of 1998. We reestablished a small portion of our
product development capability in the United States.
Product development costs included costs of our former subsidiary, AgentSoft, of
$674,000 in 1998 and $1,265,000 in 1997. During 1998, we concluded that
AgentSoft no longer fit in our long-range strategic plans and, furthermore, that
AgentSoft required a significant investment if it were to realize its market
potential. Our liquidity constraints precluded us from making the necessary
investment in AgentSoft.
MARKETING EXPENSES. Sales and marketing expenses were reduced approximately 36%
to $1,404,000 in 1998 from $2,177,000 in 1997. Pressure to reduce operating
expenses and to conserve working capital led to staffing reductions in the sales
and marketing functions, including the elimination of the Jerusalem-based sales
office, and greater reliance on sales representatives to augment our sales
efforts. Related costs such as advertising, printing, travel and participation
in trade shows were also reduced.
GENERAL AND ADMINISTRATIVE EXPENSES. Efforts to streamline our management began
in 1997, continued throughout 1998 and led to a 22% reduction in total general
and administrative expenses in 1998 compared to the year earlier.
By the end of 1998, we had eliminated or out-sourced our human resources and
payroll activity, our in-house legal counsel, and significant portions of our
accounting and office management functions. 1998 was also impacted by several
large charges for consulting services related to our efforts to raise new
capital and to sell our subsidiary, AgentSoft. These charges are nonrecurring by
their nature.
RESTRUCTURING CHARGE. Beginning with the arrival of a new management team in
early 1997 and continuing into the fourth quarter of 1998, we completed a
significant restructuring effort. The restructuring effort included a complete
reorientation of our products away from the retail market and towards software
developers, software content providers and software localizers/translators,
increased emphasis on translation services as an important source of revenue,
corresponding shifts in the composition and direction of our sales and marketing
activities, and movement of our executive offices from Israel to the United
States.
The restructuring activities led to closing sales offices in Israel, England and
Canada; the disposition of the net assets of our Jerusalem-based subsidiary;
AgentSoft, the closing of the Israeli-based product development function and
elimination of almost 90% of our total staffing. The staffing reductions
resulted in large cash outlays for severance and other employee benefits and
left us with a substantial amount of excess equipment. Further, our greatly
reduced size following the personnel reductions made it unlikely that we would
realize significant benefit from certain long-term assets.
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The restructuring activities also led to a one-time restructuring charge during
1998 of $1,257,000 related primarily to severance costs and the disposal of
excess capital equipment.
OPERATING LOSS. Despite the roughly 37% reduction in revenue and the $1,257,000
restructuring charge, our cost reduction efforts allowed us to reduce our
operating loss by approximately one-third to $6,714,000 in 1998 from $10,096,000
in the year earlier. Without the one-time restructuring charge, our operating
loss would have been $5,457,000, almost one-half of the year earlier figure.
OTHER EXPENSES. Other expenses, which totaled $78,000 during 1998 compared to
$1,912,000 in 1997, consisted primarily of interest expenses on our debt and
costs related to currency conversions and exchange rate fluctuations between the
U.S. dollar and the Israeli shekel. Other expenses during 1997 included
substantial charges related to two offerings of convertible securities. These
financing costs amounted to $1,845,000 relating to the discount, beneficial
conversion and issuance of warrants pertaining to placement of convertible debt
during 1997.
NET LOSS. We experienced a net loss of $6,792,000 during 1998 compared to a net
loss of $12,008,000 during the prior year.
DEEMED DIVIDEND ON PREFERRED SHARES. A deemed dividend on preferred shares is
the imputed amount calculated when there is a discount from fair market value,
or there is additional consideration given, upon the sale of convertible
preferred shares. The deemed dividend is deducted from net income or loss in
order to arrive at net income or loss attributable to ordinary shareholders. In
both 1998 and 1997 we issued convertible preferred shares and was required to
calculate a deemed dividend in both years. In 1998 the amount of deemed dividend
was $2,535,000 compared to $1,844,000 in 1997.
NET LOSS APPLICABLE TO ORDINARY SHAREHOLDERS. As a result of recording deemed
dividends on preferred shares as described above, the net loss applicable to
ordinary shareholders was $9,327,000 or $0.34 per share in 1998 and $13,852,000
or $1.11 per share in 1997.
LIQUIDITY AND CAPITAL RESOURCES
We have been successful on several occasions during the past three
years in raising additional working capital through the sale of ordinary shares
and convertible debt and equity securities. We raised $2.2 million in calendar
year 1999 of which $1.7 million was secured in the form of short-term
convertible debt and $500,000 was secured from a private placement of ordinary
shares. Through May 16, 2000 we raised an additional $5.0 million from (1) the
sale of $2.5 million of ordinary shares pursuant to an agreement dated May 15,
2000; (2) the sale of $1.5 million of ordinary shares under the July 14, 1999
agreement; (3) the receipt of $633,000 from the exercise of warrants associated
with convertible debentures sold in 1999; (4) the sale of a $250,000 convertible
debenture which was converted into ordinary shares in February 2000; and (5) the
receipt of $186,000 from the exercise of employee and non-employee share
options. We believe that these accomplishments, coupled with an improved revenue
outlook and cost reduction efforts that have substantially reduced our working
capital requirements, will be sufficient to meet our requirements for
approximately the first six months of calendar year 2000. Beyond that time, our
believe we will not generate sufficient operating cash flow to meet its needs
without additional external financing. There is no assurance that our efforts to
obtain such financing will be successful. Any failure on our part to do so will
have a material adverse impact on us and may cause us to cease operations.
On January 25, 1999, we entered into an agreement with the government
of Israel and various Israeli banking officials whereby we issued warrants to
the bank to receive 2,448,000 ordinary shares in full satisfaction of the
balance of the loan, which balance was $1,180,000, plus $11,000 of accrued
interest. The warrants vest on the second anniversary of the grant, January 25,
2001, and expire on January 25, 2006.
On February 19, 1999, we obtained $600,000 of short-term financing
under a convertible loan agreement we executed with L&H Investment Company, N.V.
("LHIC"). On June 30, 1999, pursuant to the terms of the loan
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agreement, the principal of the loan, plus $25,000 of accrued interest, was
converted into 2,884,874 Series D Convertible Preferred Shares. Additionally,
pursuant to the terms of the loan agreement, we issued to LHIC a warrant to
purchase 3.0 million ordinary shares at a price of $0.269 per share.
On November 15, 1999, we sold $1,000,000 of convertible debentures to
LHIC. Under the terms of the debentures, any time after March 1, 2000, LHIC had
the right to convert all or any portion of the unpaid principal and accrued
interest into our ordinary shares at a conversion price of $0.15 per share. Also
under the terms of the debentures, warrants were issued to LHIC to purchase a
number of ordinary shares equal to fifty percent (50%) of the number of shares
issuable upon the conversion of all the outstanding principal and accrued and
unpaid interest. The exercise price of the warrants was $0.15 per share.
Additionally, LHIC was granted the right to assign one-half, or $500,000, of the
convertible debentures, which it elected to do on February 3, 2000. On February
15, 2000, we offered to allow LHIC and its assignees the option to convert
principal and interest into ordinary shares on such date only if the warrants
were exercised concurrent with such conversion. LHIC and its assignees agreed to
our offer and converted all outstanding principal and accrued interest into
ordinary shares and exercised all warrants we had granted. Consequently, on
February 15, 2000, we issued 6.7 million shares to LHIC and its assigns upon
conversion of the principal and interest; and issued 3.4 million ordinary shares
upon receipt of $507,000 for the exercise of the warrants.
On February 2, 2000, we raised $250,000 from the sale to Technology
Fund II Pte Ltd of a convertible debenture under a commitment entered into on
November 15, 1999, which debenture contained essentially the same terms as the
LHIC convertible debentures mentioned above. Also, under the same terms granted
to LHIC and its assigns, of which Technology Fund II Pte Ltd. was one assignee,
on February 15, 2000, the outstanding principal and accrued interest of the
$250,000 debenture was converted into 1.7 million ordinary shares. Concurrent
with the conversion of principal and accrued interest, Technology Fund II Pte
Ltd. paid us $126,000 for the exercise price of the warrants contained in the
$250,000 convertible debenture agreement, causing us to issue an additional
837,000 ordinary shares to Technology Fund II Pte Ltd.
On May 15, 2000, we entered into an agreement with a group of three
investors whereby the investors purchased for $2,500,000, approximately 2.9
million shares. This private placement transaction was exempt from registration
pursuant to Regulation D of the Securities Act of 1933, as amended, as all of
the investors are accredited investors.
On July 14, 1999, we entered into an agreement with a group of three
investors whereby the investors purchased for $500,000, 2.4 million ordinary
shares, which after related fees, provided us with $459,000. Under the terms of
the agreement, one of the investors, or his assigns, was required to purchase an
additional 7.1 million shares for $1,500,000 when we obtained a strategic
partner and entered into a strategic alliance with such partner. In February
2000, we fulfilled our obligations under the agreement by completing the
acquisition of Star+Globe Technologies, and the investor and his assigns
purchased the remaining 7.1 million ordinary shares for $1,500,000. The
investor, Jonathan Thomas, also loaned us $100,000 on October 12, 1999,
evidenced by a Convertible Promissory Note. The principal balance of that note
bears interest at the prime rate at the date of the note plus 200 basis points.
The principal balance, plus all accrued and unpaid interest, became due and
payable on December 31, 1999. Under the terms of the note, the investor had the
right at any time to convert all or any portion of the outstanding principal and
unpaid interest into ordinary shares based on the average of the five (5) lowest
closing trading prices of our ordinary shares between the date of the note and
the conversion date. On December 30, 1999, the investor converted all the unpaid
principal and accrued interest of the note into 741,000 ordinary shares.
We believe that we have established sufficient reserves to accurately
reflect the likelihood of uncollectable receivables. There can be no assurance,
however, that uncollected accounts receivable beyond the reserves established
would not have a material adverse effect on our business, results of operations
and financial condition.
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For the three month period ended March 31, 2000, our operating
activities used cash of $1,743,000 compared to $486,000 used during the
comparable period of 1999.
Although we have been successful on several occasions during the past
three years in raising additional working capital, primarily through the sale of
convertible securities and common stock, those funds are not sufficient to meet
our expected working capital requirements for calendar year 2000. We secured
approximately $5.4 million, net of debt repayments of $59,000, in additional
working capital during the first quarter of 2000 from the acquisition of
Star+Globe, the sale of common stock, the exercise of warrants and options, and
the issuance of a convertible debenture. We believe these funds will be
sufficient to meet our requirements through June, 2000. When these funds are
exhausted or if our current working capital falls short of our requirements due
to revenue shortfalls or other unanticipated contingencies, we will need to seek
additional financing. Although management currently is seeking additional
financing, there is no assurance that we will be successful in securing
additional working capital and any failure on our part to do so will have a
material adverse impact on the Company and may cause the Company to cease
operations.
Management has taken additional steps in securing additional external
financing. At its next annual meeting, scheduled for June 7, 2000, shareholders
will be asked to approve an increase of 60,000,000 shares of authorized common
stock. Management believes that shareholder approval of an increase in its
capitalization will provide a sufficient number of unreserved and unissued
shares to pursue, among other things, equity financing transactions and
strategic alliances. To increase revenues, management is actively proceeding
with the implementation of its new business strategy of providing
business-to-business e-commerce solutions.
Our investing activities for the first three months of 2000 provided
cash of $1,347,000. We received $1,481,000 in cash from the acquisition of
Star+Globe on January 14, 2000 and used cash of $121,000 for expenditures on
furniture and equipment necessary to implement our new business strategy. Such
amounts were immaterial in the comparable period of 1999.
Financing activities provided cash of $3,958,000 and $600,000 during
the three month periods ending March 31, 2000 and 1999, respectively. During the
three month period of 2000, we (1) sold common stock for $1,500,000 pursuant to
an agreement dated July 14, 1999; (2) sold another $1,500,000 of common stock to
be issued pursuant to an agreement tentatively scheduled for closing in May
2000; (3) received $633,000 from the exercise of warrants attached to
convertible debentures sold in 1999 and February 2000; (5) sold a convertible
debenture for $250,000 which was converted into common stock in February 2000;
(6) received $134,000 from the exercise of employee and non-employee share
options; and (7) repaid our bank loan of $59,000.
Our working capital was $(606,000) at December 31, 1999, compared to
$(1,456,000) at December 31, 1998. The change in working capital primarily
reflects our continuing operating losses. Included in our working capital at
December 31, 1999 was the liability of $965,000 pertaining to the convertible
debentures which were converted into ordinary shares on February 15, 2000.
Our operating activities used cash of $2,061,000, $4,796,000, and
$11,941,000 for the years ended December 31, 1999, 1998, and 1997, respectively.
The major factors contributing to the lower 1999 figure are our improved
operating results. Our accounts payable and accruals balance was reduced by
$4,057,000 during 1997 and by $1,222,000 during 1998 as our Israeli operations
wound down. During 1997, we retained the services of a marketing specialist and
a marketing and public/investor relations firm, both of which were compensated
through the issuance of warrants or shares rather than in cash. During 1999, we
recognized an extraordinary gain of $885,000 as a result of negotiating the
elimination of $1,180,000 of long-term debt, plus $11,000 of accrued interest,
in exchange for the issuance of a warrant, valued at $306,000, to our primary
lending bank in Israel. During 1999 and 1997, we issued convertible debentures
and issued warrants in connection with the convertible debentures. We recorded
$627,000 in 1999 and $1,844,000 in 1997 for non-cash interest expense associated
with the beneficial conversion features and the issuance of warrants in
connection with the issuance of the convertible debentures.
Our investing activities used cash of $87,000, $40,000, and $168,000
during the years ended December 31, 1999, 1998, and 1997, respectively. The
reductions in 1999 and 1998 compared to 1997 reflect a reduction in spending on
capital equipment, such as computers, due to the winding down of our Israeli
operations.
Financing activities provided cash of $2,256,000, $2,478,000, and
$5,885,000 during the years ended December 31, 1999, 1998, and 1997,
respectively. The cash provided in 1999 includes the net proceeds from the sale
of $1,600,000 of convertible debentures to Lernout and Hauspie Investment
Company N.V. ("LHIC"), $100,000 from the convertible loan from Vulcan
Investments, Inc., and $459,000, net of costs, from the sale of ordinary shares
under an agreement dated July 14, 1999, both of which were discussed earlier in
this section. During 1998, we retired long term debt in the amount of
$1,550,000, of which $1,321,000 was retired through cash payments and $229,000
was retired through the issuance of ordinary shares. Also during 1998 we sold
Series C convertible preferred shares to Lernout & Hauspie Speech Products N.V.,
an affiliate of LHIC, for $4,000,000. During 1997, $1,332,000 of our long-term
debt was retired.
During August 1997, we completed a financing transaction pursuant to
Rule 505 of Regulation D under the Securities Act of 1933. Rule 505 was
applicable because the issuance involved fewer than 35 unaccredited investors.
We received $1,850,000 in cash net of $150,000 in expenses and, in return,
issued the investor an unsecured convertible debenture carrying six percent (6%)
annual interest. The total investment of $2,000,000 was converted into 1,959,000
ordinary shares prior to December 31, 1997.
During November and December, 1997, we completed a financing
transaction with a group of investors in which we received a total of $5,750,000
in cash before expenses (approximately $5,305,000 net of expenses). In return,
we issued the investors convertible securities in the amount of $5,750,000,
carrying six percent (6%) annual interest. As of December 31 1997, $2,140,000 of
the securities had been converted into 2,871,000 ordinary shares. The balance of
the securities was converted into an additional 9,623,000 ordinary shares during
the first quarter of 1998.
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
The dollar cost of our operations in Israel is influenced by the extent
to which any increase in the rate of inflation in Israel over the rate of
inflation in the United States is offset by the devaluation of the NIS in
relation to the dollar. Inflation in Israel will have a negative effect on the
profitability of contracts under which we are to receive payment in dollars or
other foreign currencies while incurring expenses in NIS linked to the Israeli
CPI, unless such
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inflation is offset by a devaluation of the NIS. Inflation in Israel and
currency fluctuations will also have a negative effect on the profitability of
fixed price contracts under which we are to receive payment in NIS.
A devaluation of the NIS in relation to the dollar will have the effect
of decreasing the dollar value of any asset that consists of NIS or receivables
payable in NIS (unless such receivables are linked to the dollar). Such a
devaluation would also have the effect of reducing the dollar amount of our
liabilities that are payable in NIS (unless such payables are linked to the
dollar). Conversely, any increase in the value of the NIS in relation to the
dollar will have the effect of increasing the dollar value of any unlinked NIS
assets and the dollar amounts of any unlinked NIS liabilities.
Because exchange rates between the NIS and the other currencies in
which we conduct our business, including the dollar, fluctuate continuously
(albeit with a historically declining trend in the value of the NIS), exchange
rate fluctuation, and especially larger periodic devaluations, have an impact on
our profitability and period-to-period comparisons of our results. Such impact
is recorded in our financial statements as Other Expense. Favorable exchange
rates will tend to increase reported financial income and unfavorable exchange
rates will tend to reduce reported income. To date, we have not engaged in
currency-hedging transactions intended to reduce the effect of fluctuations in
foreign currency exchange rates on our results of operations.
EFFECTIVE CORPORATE TAX RATE
To date, none of our operations in any of the countries in which we
operate has been profitable and, therefore, we have not paid income taxes nor do
we have any income tax liability.
Virtually all of our facilities and investment programs have been
granted "Approved Enterprise" status under Israel's Law for Encouragement of
Capital Investments, 1959. Under the Approved Enterprise program, we are
entitled to reductions in the tax rate normally applicable to Israeli companies
with respect to income generated from Approved Enterprise investments. We have
derived, and expect to continue to derive, a substantial portion of our income
from Approved Enterprise investments. We are entitled to a ten-year tax
exemption commencing in the first year in which taxable income is earned,
subject to certain time restrictions, the benefit period for which has not yet
commenced. In addition, we have U.S. net operating loss carryforwards that we
intend to utilize to reduce its future income tax liability.
As of December 31, 1999 and 1998, we have net deferred tax assets offset by a
full valuation allowance at December 31, 1999 and 1998. Management is not able
to determine if it is more likely than not that the net deferred tax assets will
be realized.
YEAR 2000
Since the beginning of 2000, we have not had any interruptions of our
business due to the Year 2000 issue. During the next few months we will continue
to monitor our operations and assess whether the Year 2000 issue has an impact
on us. We have not incurred any significant costs to become Year 2000 compliant.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Luboshitz Kasierer & Co., a member firm of Arthur Andersen and the
Company's independent auditors for the year ended December 31, 1998, resigned
effective February 14, 2000. Luboshitz Kasierer's reports on the Company's
financial statements for the fiscal years ended December 31, 1998 and December
31, 1997, did not contain an adverse opinion or a disclaimer of opinion, and
were not qualified or modified as to uncertainty, audit scope or accounting
principles, except as to the going concern nature of the Company.
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During the Company's two most recent fiscal years and through February
14, 2000, there were no disagreements with Luboshitz Kasierer on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction
Luboshitz Kasierer, would have caused it to make reference to the subject matter
of the disagreement in connection with its report. During the Company's two most
recent fiscal years and through February 14, 2000, Luboshitz Kasierer did not
advise the Company of any "reportable events" as defined in Item 304(a)(1)(v) of
Regulation S-K.
Luboshitz Kasierer furnished the Company with a letter addressed to the
Securities and Exchange Commission stating that they agree with the statements
in the preceding two paragraphs.
The Company retained BDO Seidman, LLP as its independent certified
public accountants to audit the consolidated financial statements of the Company
for the year ended December 31, 1999, and BDO Shlomo Ziv & Co. was engaged to
re-audit the consolidated financial statements of the Company for the years
ended December 31, 1998 and 1997. The Company's Audit Committee and Board of
Directors approved the change in auditors.
During the fiscal year ended December 31, 1998, and through February
14, 2000, the Company had not consulted with BDO Seidman, LLP regarding (1) the
application of accounting principals to any transaction; (2) the type of audit
opinion that might be rendered on the Company's financial statements; (3) any
disagreement or reportable event as those items are described or defined in
Items 304(a)(1)(iv) and 304(a)(1)(v) of Regulation S-K; or (4) any other matter
set forth in Item 304(a)(2) of Regulation S-K.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk through interest rates related to our
investment of current cash and cash equivalents. These funds are generally
highly liquid with short term maturities, and the related market risk is not
considered material. Management believes that fluctuations in interest rates in
the near term will not materially affect our consolidated operating results,
financial position or cash flows.
BUSINESS
OVERVIEW
We enable businesses to communicate, carry out transactions and provide
customer support multinationally and multiculturally through web sites via the
Internet. Founded in 1988 in Jerusalem as Accent Software International Ltd., we
provide a wide range of language-related solutions and services that ensure that
e-business web sites are dynamically interactive and capable of being used by
customers around the globe, regardless of their native language, culture or
currency.
We have undergone extensive restructuring from 1997 through 1999,
positioning the company to take advantage of the growing e-business marketplace
and the shift in that market toward non-English speaking users. We have been
transformed from a seller of language technology and translation software into a
provider of a full range of multilingual, multicultural and multi-commerce
products and services that enable customer companies to truly conduct business
on a global scale over the Internet.
In October 1999, we changed our name from Accent Software International
Ltd. to LanguageWare.net (Company) Ltd. In calendar 1999 we improved our
financial position by exchanging $1.19 million in outstanding debt owed to the
Government of Israel with warrants that are convertible to ordinary shares, and
by obtaining $2.2 million in additional working capital primarily through the
sale of convertible securities and ordinary shares in a series of private equity
placements with a group of private investors and related parties.
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We began an alliance that culminated in the acquisition of Star+Globe
Technologies Pte Ltd., a closely-held Singapore company that provides
proprietary Asian character processing technology. The transaction, which closed
on January 14, 2000, gives us a unique competitive advantage in developing
multilingual web sites and e-business solutions for customers serving Asian
markets.
In 1999, we released the world's first multilingual customer support
solution product. NativeTongue(TM) allows Internet communication between
companies and their customers, vendors and suppliers around the world in the
language the individual is most comfortable with.
In the U.S., we operate through our wholly-owned subsidiary,
WholeTree.com, Inc., which was formed in January 2000. Our customers include
Hewlett-Packard Company, Lucent Technologies Inc., Dell Computer Corp., Unisys
Corp. and other Fortune 1000 companies. International operations, focusing on
Asia, are handled through the recently-acquired Star+Globe Technologies in
Singapore.
By the end of 2000 we expect to have 16 sales teams operating from
Colorado Springs, Colorado; Irvine, California; Sarasota, Florida; Singapore,
Hong Kong and Tokyo.
INDUSTRY BACKGROUND
The global e-commerce market is exploding, with sales expected to reach
$1.3 trillion by 2001.(1) That, in turn, is creating tremendous demand for
language information technology (IT) and language IT services.
While 78 percent of web site content currently is written in English,
that is the native language for only 6.2 percent of the world's population.
(2)(3) By 2005, it's estimated that more than one billion people will be using
the Internet -- about 700 million of them outside the United States. In just
three years, 50 percent of Internet sales are expected to be outside the U.S.
(4)
Sources:
1 - International Data Corporation
2 - The Industry Standard
3 - Business 2.0
4 - NUA Limited
To effectively compete in this global marketplace, companies need more
than simple translation of English-based web sites into different languages.
They also need a working knowledge of a country's business practices, cultural
attitudes, marketing ethics, public relations and advertising standards. They
need financial systems that account for daily fluctuations in currency exchange
rates and local tax requirements. They also must provide quality technical
support in the appropriate language and respond quickly to e-mail questions,
whether of a technical nature, or requests for corporate or investor
information.
LANGUAGEWARE.NET STRATEGY We offer the only comprehensive source for
global e-business solutions currently available to help corporations improve
their competitive advantage in a worldwide marketplace. Global e-business
requires not only translation services, but also ways to communicate rapidly,
calculate local currency options and tools that make customers, of any country
or language, feel at home at a Web site.
Our strategic solutions include:
o Multilingual Web site development, maintenance and e-commerce solutions.
o The unique ability to view, search and build multilingual databases on
English operating systems.
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o Database and desktop capabilities that allow Asian (double-byte) characters
to be viewed on English operating systems.
o An integrated on line machine and human translation portal.
o Real-time multilingual, multicultural customer support and sales system
development.
o Industry leading software localization services.
o Worldwide network of thousands of in-country native-speaking translators
that are instantly screened and accessed via our Internet server
technology.
PRODUCTS AND SERVICES
Our language-related solutions ensure companies can conduct business with
consumers worldwide, regardless of their spoken native language. Those solutions
include:
o NATIVETONGUE(TM) - An integrated, Web-based customer support application,
combining machine and human translation, that enables companies to respond
quickly to queries from Web site users located around the world. Instant
machine translation provides a company's customer support staff with
immediate access to foreign correspondence. Our proprietary server system
also links customers to a network of pre-screened, specialized human
translators. NativeTongue also lets companies build a database of
Frequently Asked Questions (FAQs) to reduce the need for and cost of
repeated translations.
o IMEASE(TM) - A tool that provides Input Method Editors (IME's) for
virtually all written languages which enables visitors to a web site to
input any language from any language operating system. It makes possible
the creation of a web-based, fully functional, multilingual database and
puts multilingual search capability on a web site enabling visitors to
rapidly find any data in any of the languages included on a web site.
o TRANSERVER(TM) - A dedicated server residing at WholeTree.com which
receives all customer submitted files that need translating. The TranServer
automatically performs either machine translations on desired files or
sends files to human translators for translation. Upon translation, the
TranServer returns the files to the appropriate location.
o LOC@ALE - A unique suite of management, administrative and translation
tools allowing a user interface of any MS Windows(TM) application to be
localized into virtually any language. Loc@ale enables international
solutions for any C/C++, Java, or Visual Basic development environment.
o Web site and e-commerce solutions - Allow companies to enable existing
databases for multilingual searches by customers; calculate currency
conversion rate for purchases; and negotiate complex legal issues,
purchasing traditions and delivery restrictions.
SALES AND MARKETING
Our primary market is non-technology companies that use the Internet to
conduct business on a global scale. We reach this market through a combination
of direct sales, telemarketing and other types of marketing programs. Given our
recent shift to a customized solutions company, direct sales efforts are
increasingly more critical. With the acquisition of Star+Globe, which is based
in Singapore, we are currently focused on products and services based on Asian
languages that enhance trade between the U.S. and Asia. Other solutions for all
areas of the world also are being developed.
MARKETING. We have historically utilized a variety of marketing
programs to stimulate and build long-term demand for our products, including
public relations, advertising, trade shows, direct mail, catalogs and ongoing
customer communications. In the past, we have used marketing programs that were
specifically sales-oriented, rather
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than image or brand-awareness-oriented; however, our recent transformation has
brought about the need for enhanced marketing efforts. In January 2000, we
launched an international advertising and branding campaign for WholeTree.com.
This advertising platform features newspaper, magazine and television creative,
including full-page ads in the Wall Street Journal and placements in industry
publications, such as Business 2.0, WIRED Magazine, Red Herring and Industry
Standard. The broadcast creative runs in New York, Chicago, San Francisco,
Washington D.C., Denver and Atlanta on cable networks, including CNN, CNBC,
USA-Bloomberg, MSNBC, and others. We will continue to advertise in other
software development and translation industry publications, as well as attend
appropriate trade shows. These highly-focused efforts are designed to build
awareness of our company and develop an understanding of our services in order
to get products into the hands of potential customers.
PRODUCT DEVELOPMENT. Product and solution development plays a
significant role at Languageware. The development of NativeTongue(TM) generated
a vast amount of market awareness that has been leveraged to define the
direction of future products and services. One such product is Site Trak(TM), a
solution that enables companies, whose Web sites are available in other
languages to easily incorporate Web site updates from the source site into each
language's site. We commercially launched Site Trak(TM) in March 2000.
COMPETITION
Through our operating subsidiary, WholeTree.com, we have created our
own competitive niche through our unique combination of multilingual software,
Web site development and multilingual content management. We currently have no
direct competition due, in part, to our ability to offer Asian character
processing among a full range of global e-business solutions. The globalization
of e-commerce through the Internet likely will see a movement of pure
translation companies into customer services, systems integration, consulting
and solution design during the coming years.
Our Web site development business faces competition from much larger
companies that offer a variety of business-to-business professional services to
companies wishing to expand e-business operations. These include Scient
Corporation, Viant Corporation and USWeb Corporation.
PRODUCT SUPPORT AND MAINTENANCE
Our technical support group provides the services needed to deliver and
support our solutions in the marketplace. These services include translation and
technical support that are generally available to customers worldwide via
Internet e-mail.
PROPRIETARY RIGHTS
We regard our products and the processes used to produce them as
proprietary trade secrets and confidential information. With regard to our
software, we rely on a combination of trademarks, trade secret and copyright law
to establish and protect proprietary rights in our products. In addition, we
attempt to protect trade secrets and other proprietary information through
confidentiality agreements with our employees, outside consultants and potential
business partners. We require all of our employees to sign confidentiality
agreements as a condition of employment.
We currently holds no patents. We have established an internal process,
however, which has resulted in the filing of two patent applications (both of
which have been transferred to third parties for appropriate consideration) and
which will ensure that protection will be sought for any future patentable
inventions. There can be no assurance that we will develop any further
patentable inventions or that any patent applications we file for technology or
products derived therefrom will be granted.
28
<PAGE> 31
Historically, we have provided our products to customers under
non-exclusive, non-transferable licenses. We have not required end-users of our
retail, mass-market products to sign license agreements. Instead, we include an
on-line "click wrap" license and/or a printed "shrink wrap" license with each
copy of our products. It is uncertain whether license agreements of this type
are legally enforceable in all countries and jurisdictions in which the products
are marketed.
We believe that our products are proprietary and are protected by
copyright, trade secret and trademark law, as well as by the contractual
agreements described above. However, certain protections, such as limitations on
use of a product and limitations on warranties and liability, are not afforded
by copyright law and may not be available without an enforceable license
agreement. Moreover, there can be no assurance that our proprietary technology
of will continue to be secret or that others will not develop similar technology
and use such technology to compete with us. We do not currently include in our
products any mechanism to prevent or inhibit unauthorized copying or usage.
We do not believe that our products or their trademarks infringe upon
the proprietary rights of third parties. However, there can be no assurance that
a third party will not make a contrary assertion. The cost of responding to such
assertions may be material whether or not the assertions are validated.
We license, pursuant to non-exclusive licenses, proprietary technology
from other companies including Lernout & Hauspie Speech Products N.V. (machine
translation), Bitstream, Inc. (fonts) and URW, GmbH (fonts), for inclusion in
our products. These licenses are generally for a one year term with automatic
renewal. There can be no assurance that these third parties will continue to
license their software programs to us on commercially reasonable terms,
particularly if such companies develop products which they perceive as
competitive with those developed and marketed by us. Although we believe that
multiple sources are available for such licensed products, if any of our license
agreements were terminated and we were unable to replace those licenses with
comparable licenses from alternate suppliers, such terminations could have a
material adverse effect on our ability to market certain of its products.
EMPLOYEES
As of December 31, 1999, we had 17 full time employees. Following our
acquisition of Star+Globe in January 2000, and embarking on the new business
strategy of providing e-commerce solutions, we had 73 full time employees as of
May 1, 2000, including 48 in the United States and 25 in Singapore. We had 8
employees in administrative areas, 5 employees in marketing functions, 23 sales
people, 21 employees engaged in web site design and development and 16 software
engineers. Future staffing requirements will be dependent upon our success in
implementing our new business strategy, and consequently, cannot be predicted at
this time.
LEGAL PROCEEDINGS
There are no material pending legal proceedings as of the date of this
filing, and we are not aware of any other pending or threatened litigation that
could have a material adverse effect on us.
In the course of our business, we may become subject to various claims,
some or which may mature into litigation. Although we are aware of claims
asserted against us, we are not aware of any claims that have a reasonable
possibility of adverse outcome in a material amount. There can be no assurance,
however, that unforeseen circumstances will not cause such claims, or other,
currently unknown claims, to result in adverse outcomes in material amounts.
29
<PAGE> 32
DESCRIPTION OF SECURITIES
ORDINARY SHARES
We are currently authorized to issue up to 130,000,000 ordinary shares,
NIS 0.01 par value. As of May 16, 2000 there were 101,525,267 ordinary shares
issued and outstanding. There are approximately 6,800 holders of record of our
ordinary shares.
GENERAL. All of our outstanding ordinary shares are, and the ordinary
shares offered hereby when issued and paid for will be, validly issued, fully
paid and non-assessable. The ordinary shares do not have preemptive rights. The
ownership or voting of ordinary shares by non-residents of Israel is not
restricted in any way by our Memorandum of Association or Articles of
Association or by the laws of the State of Israel, except with respect to
subjects of countries that are at a state of war with Israel.
MODIFICATION OF CLASS RIGHTS. The rights of any class of our share
capital, such as voting rights and rights to dividends, may be varied with the
consent in writing of the holders of all of the voting rights of the issued
shares of that class or upon the adoption of a special resolution passed at a
separate general meeting of the holders of the shares of such class. Shares that
confer preferential or subordinate rights relating to, among other things,
dividends, voting and payment of capital, can be created only by a special
resolution of the shareholders. The rights attached to a class of shares may be
altered by a special resolution of the shareholders, provided that the holders
of 75% of the voting rights of the issued shares of that class approve such
change by agreement in writing, subject to the terms of such class and special
requirements of Israeli law.
ELECTION OF DIRECTORS. The ordinary shares do not have cumulative
voting rights in the election of directors. As a result, the holders of ordinary
shares representing more than 50% of the voting power have the power to elect
all the directors.
DIVIDEND AND LIQUIDATION RIGHTS. We may declare a dividend to be paid
to the holders of ordinary shares according to their rights and interests in the
profits of the company. In the event of liquidation of the company, after
satisfaction of liabilities to creditors, the assets of the company shall be
distributed to the holders of ordinary shares in proportion to the nominal value
of their respective holdings. Such right may be affected by the grant of
preferential dividend or distribution rights to the holders of a class of shares
with preferential rights that may be authorized in the future. The Board of
Directors may declare interim dividends and propose the final dividend with
respect to any fiscal year out of profits. Declaration of a final dividend
(which cannot exceed the amounts proposed by the Board) requires shareholder
approval by adoption of an ordinary resolution. Failure to obtain such
shareholder approval does not affect previously paid interim dividends.
UNITS
We currently have 2,000 units outstanding. Each unit consists of one
ordinary share and one warrant to purchase one ordinary. Each warrant included
in the units entitles the warrant holder to purchase one ordinary share at a
price of $11.50, subject to adjustment in certain circumstances until 5:00 p.m.,
Eastern Time, on November 21, 2001. The securities comprising the units became
separately transferable on November 21, 1997. There are currently 1,800,000
warrants outstanding that were originally issued as part of the units.
PREFERRED SHARES
Our Articles of Association authorize us to issue up to a total of
10,000,000 preferred shares, NIS 0.01 par value, with the shares to be issued in
series by the Board of Directors.
30
<PAGE> 33
On May 25, 1998, the Board of Directors designated 4,000 preferred
shares as Series C Preferred Shares, and issued 4,000 shares of Series C
Preferred to Lernout & Hauspie Speech Products, N.V. Each share of Series C
Preferred has a liquidation preference of $1,000. Each share of Series C
Preferred is convertible at any time into 2222.22 ordinary shares and each share
has the right to vote on all matters as if converted into 2222.22 ordinary
shares. As of May 16, 2000, all Series C Preferred Shares previously issued had
been converted to ordinary shares.
On June 30, 1999, our Board of Directors designated 2,884,874 preferred
shares as Series D Preferred Shares, and issued 2,884,874 shares of Series D
Preferred to L & H Investment Company, N.V. Each share of Series D Preferred has
a liquidation preference of $0.216484375 per share. Each share of Series D
Preferred is convertible at any time into one ordinary share and each share has
the right to vote on all matters as if converted into one ordinary share. As of
May 16, 2000, all Series D Preferred Shares previously issued had been converted
into ordinary shares.
The remaining Preferred Shares may be issued in one or more series from
time to time with such designations, rights, preferences and limitations as the
Board of Directors may determine without approval of its shareholders. The
rights, preferences and limitations of separate series of serial Preferred
Shares may differ with respect to such matters as may be determined by the Board
of Directors, including without limitation, the rate of dividends, method or
nature or prepayment of dividends, terms of redemption, amounts payable on
liquidation, sinking fund provisions, conversion rights and voting rights. The
ability of the Board to issue Preferred Shares could also be used by it as a
means for resisting a change of control of the company and can therefore be
considered an "anti-takeover" device. We currently have no plans to issue any
shares of Preferred Shares.
REPORTS TO SHAREHOLDERS
We are a publicly held company which files periodic reports, including
Annual Reports containing consolidated financial statements of the company
audited by independent certified public accountants, and quarterly reports,
which contain unaudited financial statements, with the Securities and Exchange
Commission.
TRANSFER AGENT
The transfer agent for our ordinary shares and units is American Stock
Transfer & Trust Company.
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from time
to time by the selling shareholders. The term "selling shareholders" includes
donees, pledgees, transferees or other successors-in-interest selling shares
received after the date of this prospectus from a selling stockholder as a gift,
pledge, partnership distribution or other non-sale related transfer. The selling
shareholders will act independently of us in making decisions with respect to
the timing, manner and size of each sale. Such sales may be made on one or more
exchanges or in the over-the-counter market or otherwise, at prices and under
terms then prevailing or at prices related to the then current market price or
in negotiated transactions. The selling shareholders may sell their shares by
one or more of, or a combination of, the following methods:
- purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
- block trades in which the broker-dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
- an over-the-counter distribution in accordance with the rules of
the Nasdaq National Market;
31
<PAGE> 34
- in privately negotiated transactions; and
- in options transactions.
In addition, any shares that qualify for sale pursuant to Rule 144 may
be sold under Rule 144 rather than pursuant to this prospectus.
To the extent required, this prospectus may be amended or supplemented
from time to time to describe a specific plan of distribution. In connection
with distributions of the shares or otherwise, the selling shareholders may
enter into hedging transactions with broker-dealers or other financial
institutions. In connection with such transactions, broker-dealers or other
financial institutions may engage in short sales of the common stock in the
course of hedging the positions they assume with selling shareholders. The
selling shareholders may also sell the common stock short and redeliver the
shares to close out such short positions. The selling shareholders may also
enter into option or other transactions with broker-dealers or other financial
institutions which require the delivery to such broker-dealer or other financial
institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction). The selling
shareholders may also pledge shares to a broker-dealer or other financial
institution, and, upon a default, such broker-dealer or other financial
institution, may effect sales of the pledged shares pursuant to this prospectus
(as supplemented or amended to reflect such transaction).
In effecting sales, broker-dealers or agents engaged by the selling
shareholders may arrange for other broker-dealers to participate. Broker-
dealers or agents may receive commissions, discounts or concessions from the
selling shareholders in amounts to be negotiated immediately prior to the sale.
In offering the shares covered by this prospectus, the selling
shareholders and any broker-dealers who execute sales for the selling
shareholders may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. Any profits realized by the
selling shareholders and the compensation of any broker-dealer may be deemed to
be underwriting discounts and commissions.
In order to comply with the securities laws of certain states, if
applicable, the shares must be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
We have advised the selling shareholders that the anti-manipulation
rules of Regulation M under the Exchange Act may apply to sales of shares in the
market and to the activities of the selling shareholders and their affiliates.
In addition, we will make copies of this prospectus available to the selling
shareholders for the purpose of satisfying the prospectus delivery requirements
of the Securities Act. The selling shareholders may indemnify any broker-dealer
that participates in transactions involving the sale of the shares against
certain liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of shares is made, if required, a
prospectus supplement will be distributed that will set forth the number of
shares being offered and the terms of the offering, including the name of any
underwriter, dealer or agent, the purchase price paid by any underwriter, any
discount, commission and other item constituting compensation, any discount,
commission or concession allowed or reallowed or paid to any dealer, and the
proposed selling price to the public.
We have agreed with the selling shareholders to keep the Registration
Statement of which this prospectus constitutes a part effective until the
earlier of (i) such time as all of the shares covered by this prospectus have
been disposed of pursuant to and in accordance with the Registration Statement
or (ii) the selling shareholders become
32
<PAGE> 35
eligible to resell the shares covered by this prospectus pursuant to Rule 144(k)
under the Securities Act.
We are responsible for all costs, expenses and fees incurred in
registering the shares offered hereby. The selling shareholders are responsible
for brokerage commissions, if any, attributable to the sale of the ordinary
shares.
LEGAL MATTERS
The validity of the ordinary shares offered hereby will be passed upon
for LanguageWare.net by Yigal Arnon & Co., Jerusalem, Israel .
EXPERTS
The financial statements of LanguageWare.net (Company) Ltd. and
subsidiary included and incorporated by reference in this Prospectus have been
audited by BDO Seidman, LLP, and by BDO Shlomo Ziv & Co., independent certified
public accountants, to the extent and for the periods set forth in the
respective reports of such firms (which contain an explanatory paragraph
regarding the Company's ability to continue as a going concern) appearing
elsewhere herein and incorporated herein by reference, and are included and
incorporated herein in reliance upon such report given upon the authority of
such firms as experts in auditing and accounting.
The financial statements of Star+Globe Technologies Pte. Ltd. and
subsidiary included and incorporated by reference in this Prospectus have been
audited by BDO International, independent certified public accountants, to the
extent and for the periods set forth in their report appearing elsewhere herein
and incorporated herein by reference, and are included and incorporated herein
in reliance upon such report given upon the authority of such firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports and other documents with
the United States Securities and Exchange Commission ("SEC"). You may read and
copy any document we file at the SEC's public reference room at Room 1024,
Judiciary Plaza Building, 450 Fifth Street, N.W., Washington, D.C. 20549 without
charge. You should call 1-800-SEC-0330 for more information on the public
reference room. The SEC also maintains an Internet site at http://www.sec.gov
where certain information regarding issuers (including LanguageWare.net) may be
found.
This Prospectus is part of a registration statement that we filed with
the SEC. The registration statement contains more information than this
Prospectus regarding LanguageWare.net and its ordinary shares, including certain
exhibits and schedules. You can obtain a copy of the registration statement from
the SEC at the address listed above or from its Internet site.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate" into this prospectus information
that we file with the SEC in other documents. This means that we can disclose
important information to you by referring to other documents that contain that
information. The information incorporated by reference is considered to be part
of this prospectus. Information contained in this prospectus automatically
updates and supersedes previously filed information. We are incorporating by
reference the documents listed below and all of our filings pursuant to the
Exchange Act after the date of filing the initial registration statement and
prior to effectiveness of the registration statement.
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<PAGE> 36
The following documents filed by LanguageWare.net with the SEC are
incorporated herein by reference:
- Our Annual Report on Form 10-K for the year ended December 31,
1999, as filed with the SEC on March 31, 2000.
- Our definitive proxy statement for the 2000 General and
Extraordinary Meeting of Shareholders, as filed with the SEC on
May 1, 2000.
- Our Quarterly Report on Form 10-Q for the quarter ended March 31,
2000, as filed with the SEC on May 15, 2000.
- Our Current Report on Form 8-K, as filed with the SEC on February
22, 2000, as amended on February 25, 2000 to announce Change in
Registrant's Certifying Accountant.
- Our Current Report on Form 8-K, as filed with the SEC on January
28 , 2000, as amended on March 29, 2000 to announce the
acquisition of Star+Globe Technologies Pte. Ltd.
You may request a copy of these documents, at no cost, by telephone or
email or by writing to:
LanguageWare.net Ltd.
102 S. Tejon, Suite 320
Colorado Springs, CO 80903
Attention: Tom Foster
(719) 955-3400
[email protected]
34
<PAGE> 37
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
LanguageWare.net (Company) Ltd. for the Periods Ended
March 31, 2000 and 1999
Consolidated Balance Sheet (Unaudited) F-1
Consolidated Statements of Operations (Unaudited) F-2
Consolidated Statements of Cash Flows (Unaudited) F-3
Notes to Consolidated Financial Statements (Unaudited) F-4 - F-8
LanguageWare.net (Company) Ltd. for the Years Ended
December 31, 1999, 1998 and 1997
Reports of Independent Certified Public Accountants F-9 - F-10
Consolidated Balance Sheets F-11 - F-12
Consolidated Statements of Operations F-13
Consolidated Statements of Stockholders' Equity (Deficit) F-14 - F-15
Consolidated Statements of Cash Flows F-16
Summary of Accounting Policies F-17 - F-23
Notes to Consolidated Financial Statements F-24 - F-47
Star+Globe Technologies Pte Ltd and its Subsidiary for the Years Ended
December 31, 1999 and 1998
Report of Independent Certified Public Accountants F-48
Consolidated Balance Sheets F-49 - F-50
Consolidated Statements of Operations F-51
Consolidated Statements of Stockholders' Equity F-52
Consolidated Statements of Cash Flows F-53
Summary of Accounting Policies F-54 - F-57
Notes to Consolidated Financial Statements F-58 - F-65
LanguageWare.net (Company) Ltd. Unaudited Pro Forma Condensed Consolidated
Statement of Operations F-66
Unaudited Pro Forma Condensed Consolidated Statement of Operations F-67
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations F-68
</TABLE>
35
<PAGE> 38
LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
U. S. dollars and shares in thousands
<TABLE>
<CAPTION>
March 31,
2000
-------------------------
<S> <C>
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 3,811
Trade receivables, net of allowance of
$119 and $113 504
Other receivables -
Prepaid expenses 91
-------------------------
Total current assets 4,406
Equipment
Cost 431
Less - accumulated depreciation 183
-------------------------
Equipment, net 248
Intangible Assets
Completed technology 3,350
Other intangible assets 800
Goodwill 672
-------------------------
4,822
Less - accumulated amortization 378
-------------------------
Intangible assets, net 4,444
Other Long-Term Assets 28
-------------------------
Total assets $ 9,126
=========================
Liabilities and Shareholders' Equity ( Deficit)
Current Liabilities
Accounts payable $ 1,212
Accrued liabilities 511
Line-of-credit -
Convertible debentures -
-------------------------
Total liabilities 1,723
Shareholders' Equity (Deficit)
Convertible preferred stock -- NIS 0.01 par value,
10,000 shares authorized, 2,889 issued and outstanding;
Series C liquidation value of $1,000 per share or $4,000
in the aggregate; Series D liquidation value of $0.22 per
share or $625 in the aggregate 7
Common stock, par value NIS 0.01, authorized 130,000
shares; issued and outstanding 83,366 and 32,721 209
Additional paid-in capital 62,945
Common stock to be issued 1,500
Accumulated deficit (57,258)
Total shareholders' equity (deficit) 7,403
-------------------------
Total liabilities and shareholders' equity (deficit) $ 9,126
=========================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-1
<PAGE> 39
LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars and shares in thousands (except per share information)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------------------------------
2000 1999
-------------------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $ 801 $ 471
Operating costs and expenses
Professional services 514 243
Product development costs 248 21
Sales and marketing expenses 2,260 130
General and administrative expenses 1,300 505
-------------------------- -----------------------
Total operating costs and expenses 4,322 899
-------------------------- -----------------------
Operating loss (3,521) (428)
Other income (expense)
Interest expense (308) (217)
Other expense 15 (10)
-------------------------- -----------------------
Loss before extraordinary item (3,814) (655)
Extraordinary gain on debt extinguishment (less income
taxes of $0) - 885
-------------------------- -----------------------
Net income (loss) $(3,814) $ 230
========================== =======================
Basic and diluted income (loss) per common share
Loss before extraordinary item $ (0.05) $ (0.02)
Extraordinary item - 0.03
-------------------------- -----------------------
Net income (loss) per common share $ (0.05) $ 0.01
========================== =======================
Basis and diluted weighted average
number of common shares outstanding 70,222 29,292
========================== =======================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-2
<PAGE> 40
LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars and shares in thousands
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------------------------
2000 1999
------------------------ ----------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities
Net income (loss) $(3,814) $ 230
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 438 23
Change in allowance for doubtful accounts 7 (117)
Change in realizable value of trade credits - 50
Non-cash interest 300 200
Extraordinary item - (885)
Changes in assets and liabilities, net of business combination:
(Increase) decrease in trade receivables 682 (63)
Decrease in other receivables 53 65
(Increase) decrease in prepaid expenses (13) 5
Decrease in inventories - 7
Increase (decrease) in payables & accruals 604 (2)
Increase in severance liability - 1
------------------------ ----------------------
Net cash used in operating activities (1,743) (486)
------------------------ ----------------------
Investing activities
Cash acquired in business acquisition 1,481 -
Acquisition of equipment (121) (1)
Increase in other assets (13) -
------------------------ ----------------------
Net cash provided by (used in) investing activities 1,347 (1)
------------------------ ----------------------
Financing activities
Repayment of bank loans (59) -
Net proceeds received on issuance of common stock 1,500 -
Net proceeds received from common stock to be issued 1,500 -
Net proceeds received on exercise of warrants and options 767 -
Net proceeds received on issuance of convertible debenture 250
Net proceeds received on issuance of convertible debt - 600
------------------------ ----------------------
Net cash provided by financing activities 3,958 600
------------------------ ----------------------
Increase in cash and cash equivalents 3,562 113
Cash and cash equivalents, beginning of period 249 141
------------------------ ----------------------
Cash and cash equivalents, end of period $ 3,811 $ 254
======================== ======================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 41
LANGUAGEWARE.NET (COMPANY) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
- ---------------------
The accompanying unaudited condensed consolidated financial statements of
LanguageWare.net (Company)Ltd., and its subsidiaries ("the Company") have been
prepared in accordance with United States generally accepted accounting
principles for interim financial information. 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, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. 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 1999 Annual Report on Form 10-K for the year
ended December 31, 1999.
Intangible Assets
Intangible assets, arising from the Company's acquisition of Star+Globe
Technologies Pte. Ltd. (see Note 4), are being amortized over the estimated
period the assets are expected to benefit the Company as indicated in the
following table.
<TABLE>
<CAPTION>
Estimated Life
In Years
--------------
<S> <C>
Completed technology 3
Other intangible assets 3 to 4
Goodwill 5
</TABLE>
Net Income (Loss) Per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
provides for the calculation of "Basic" and "Diluted" earnings per share. Basic
earnings per share includes no dilution and is computed by dividing net income
(loss) applicable to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect the
potential dilution of securities that could share in the earnings of an entity,
similar to fully diluted earnings per share.
For the period ended March 31, 2000 and 1999, total stock options of 7,082,680
and 3,920,750, total stock warrants of 14,894,194 and 15,353,694 and convertible
preferred stock of 11,773,763 and 8,888,889 were not included in the computation
of diluted income (loss) per share because their effect was anti-dilutive.
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 1999 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.
F-4
<PAGE> 42
LANGUAGEWARE.NET (COMPANY) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
To enhance the Company's longer term prospects, effective January 2000
management has embarked on a new operating strategy designed to increase
revenue. In the years preceding 1999, the Company was a seller of language
technology and translation software to the consumer retail market, transforming
in calendar 1999 primarily to a provider of translation services to other
businesses. Beginning January 2000, the Company changed its focus to providing
a full range of multilingual, multicultural and multi-commerce products and
services that enable its business customers to conduct business on web sites via
the Internet.
Since its inception in 1988, the Company has developed proprietary software
serving the language information technology industry. To enhance its competitive
position under its new operating strategy, the Company intends to utilize some
of such proprietary software as tools to provide superior service to potential
customers. Additionally, the Company has 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 further enhance its competitive advantage, the Company acquired Star+Globe
Technologies Pte. Ltd. ("Star+Globe") on January 14, 2000. Star+Globe owns
proprietary Asian character processing technology and provides Asian languages
translation services.
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, 2000 and December 31, 1999, the Company had accumulated deficits
of $57.3 million and $53.4 million, respectively. For the three months ended
March 31, 2000, the Company incurred a loss of $3.8 million and recognizes that
it may continue to incur operating losses through the remainder of 2000 and
possibly beyond. Furthermore, the Company has embarked on a new business
operating strategy commencing January 2000 and does not expect to generate
sufficient cash from such new operating strategy to finance its operations.
Consequently, the Company will be dependent upon external sources to meet its
liquidity requirements for the foreseeable future. Additionally, the Company
plans to increase revenues through the successful implementation of its new
business strategy of providing multilingual, multicultural and multi-commerce
products and services enabling business to be conducted on web sites via the
Internet.
As of March 31, 2000 the Company's cash balance was $3.8 million compared to
$249,000 at December 31, 1999. The increase is primarily attributable to $3.0
million from the sale of common stock, approximately $1.5 of cash acquired
from the acquisition of Star+Globe Technologies Pte. Ltd., and $633,000 received
from the exercise of warrants attached to convertible debentures sold in
calendar 1999 and February 2000.
On February 2, 2000, the Company issued a $250,000 convertible debenture to an
existing shareholder of the Company bearing interest at 10.25% with principal
and accrued interest convertible into common stock of the Company at a
conversion price of $0.15 per share. The holder of the debenture also received
warrants with an exercise price of $0.15 per share to purchase a number of
shares of the Company's common stock equal to 50% of the number of shares
issuable upon conversion of principal and accrued interest. At the date of
issuance, the warrants and the beneficial conversion feature were valued at
$250,000 (the total proceeds received), which will be amortized as interest
expense over the life of the debenture. On February 15, 2000, the holder of the
debenture converted its debt plus accrued interest into 1,673,379 shares of
common stock of the Company. In addition, on February 15, 2000, the holder
exercised its warrants, and the Company issued 836,690 shares of common stock
for cash proceeds of approximately $126,000.
F-5
<PAGE> 43
LANGUAGEWARE.NET (COMPANY) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 4 - BUSINESS ACQUISITION
On January 14, 2000, the Company acquired all of the capital stock of Star+Globe
Technologies Pte. Ltd. ("Star+Globe"), a privately-held Singapore company, in a
transaction valued at approximately $6.5 million. As a result of the
acquisition, Star+Globe will operate as a wholly-owned subsidiary of the
Company. The operating results of this acquisition have been included in the
accompanying consolidated financial statements from the date of acquisition.
Subsequent to the acquisition, the name of Star+Globe was changed to
WholeTree.com (Asia) Pte. Ltd.
In consideration for the Star+Globe stock, the Company issued 33,673,361 shares
of its common stock valued at $4,734,475 ($0.14 per share quoted market
price). At the closing, the Company issued an aggregate of 30,306,025 shares of
its common stock (the "Closing Consideration"), and was required to issue up to
3,367,336 additional shares of its common stock (the "Holdback Shares") within
ninety (90) days of January 14, 2000, which shares could have been reduced by
any indemnification claims pursuant to the provisions of the Agreement. All
Holdback Shares were issued, without reduction, on April 14, 2000. The Company
has agreed to use its best efforts to register, in calendar year 2000, all of
the common stock issued as consideration.
In connection with the transaction, the Company has also agreed to provide a
non-qualified share option plan for employees and a director of Star+Globe
wherein stock options have been granted to such employees and director to
purchase an aggregate of 2,266,639 the Company's common stock valued at
$1,735,183 using the Black-Scholes option pricing model at an exercise price of
$0.093 per share. The stock options are exercisable immediately and expire on
January 15, 2001.
The acquisition was recorded using the purchase method of accounting by which
the assets were valued at fair market value at the date of acquisition. The
allocation of the purchase is reflected in Note 5 below.
The following unaudited pro forma information presents the consolidated results
of the operations of the Company as if the acquisition of Star+Globe occurred on
January 1, 1999. The unaudited pro forma financial data does not purport to be
indicative of the results which actually would have been obtained had the
purchase been effected on January 1, 1999, or the results which may be obtained
in the future.
<TABLE>
<CAPTION>
Three Months
Ended
March 31, 1999
----------------------
(Dollars and shares in thousands)
<S> <C>
Net Sales $ 602
Loss before extraordinary item $ (1,282)
Net loss $ (397)
Basic and diluted net loss per share:
Before extraordinary item $ (0.02)
Net loss per share $ (0.01)
Basic and diluted weighted average
number of common shares outstanding 62,965
</TABLE>
F-6
<PAGE> 44
LANGUAGEWARE.NET (COMPANY) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 5 - SUPPLEMENTAL DATA TO STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------------
2000 1999
---------------------- ----------------------
<S> <C> <C>
Supplemental Schedule of Non-Cash Investing and Financing Activities:
Common stock issued in satisfaction of
convertible debentures and accrued interest $ 998 $ -
====================== ======================
Common stock and stock options issued in business acquisition $ 6,470 $ -
====================== ======================
Issuance of stock warrants in connection with
debt extinguishments $ - $ 306
====================== ======================
Supplemental Schedule of Non-Cash Activity in Conjunction with Acquisition
Activities
(see Note 4 above):
Working capital less cash acquired $ 34 $ -
Property and equipment 133 -
Completed technology 3,350 -
Other intangible assets 800 -
Goodwill 672 -
Common stock and stock options issued (6,470) -
---------------------- ----------------------
Cash acquired in business acquisition $ 1,481 $ -
====================== ======================
</TABLE>
Note 6 - STOCKHOLDERS' EQUITY
On July 14, 1999, the Company entered into an agreement with a group of three
investors whereby the investors purchased for $500,000, 2.4 million shares of
common stock of the Company, which, after related fees, provided $459,000 to the
Company. Pursuant to the terms of the agreement, one of the investors, or his
assigns, was required to purchase an additional 7.1 million shares for
$1,500,000 when the Company obtained a strategic partner and entered into a
strategic alliance with such partner. In February 2000, the Company fulfilled
its obligations under the terms of the agreement, and the investor and his
assigns purchased the remaining 7.1 million shares of common stock for
$1,500,000.
On November 15, 1999, the Company sold $1,000,000 of convertible debentures to
L&H Investment Company, N.V. ("LHIC"). Pursuant to the terms of the debentures,
any time after March 1, 2000, LHIC had the right to convert all or any portion
of the unpaid principal and accrued interest into common stock of the Company at
a conversion price of $0.15 per share. Also pursuant to the terms of the
debentures, warrants were issued to LHIC to purchase a number of shares of
common stock of the Company equal to fifty percent (50%) of the number of shares
issuable upon the conversion of all the outstanding principal and accrued and
unpaid interest. The exercise price of the warrants was $0.15 per share. At the
date of issuance, the warrant and the beneficial conversion feature have been
valued at $62,000 which was amortized as additional interest expense through the
date that the holders can first convert. The unamortized discount of $35,000 as
of December 31, 1999 was fully amortized to interest expense as of the date that
the holders converted their debentures. Additionally, LHIC was granted the right
to assign one-half, or $500,000, of the convertible debentures, which it elected
to do on February 3, 2000. On February 15, 2000, the Company allowed LHIC and
its assignees to convert the principal and interest into common stock and
exercise the warrants in accordance with the original terms of the debentures.
Consequently, on February 15, 2000, the Company issued 6.7 million shares of
common stock to LHIC and its assigns upon conversion of the principal and
interest; and issued 3.4 million shares of common stock upon receipt of $507,000
for the exercise of the warrants.
On February 2, 2000, the Company received $250,000 from the sale to Technology
Fund II Pte. Ltd of a convertible debenture, which debenture contained
essentially the same terms as the LHIC convertible debentures mentioned above,
including the right of the holder of the debenture to receive warrants to
purchase shares of the Company's common stock
F-7
<PAGE> 45
LANGUAGEWARE.NET (COMPANY) AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
equal to 50% of the number of shares issuable upon conversion of the outstanding
principal and accrued interest at a $0.15 exercise price. At the date of
issuance, the warrants and the beneficial conversion feature have been valued at
$250,000 (the total proceeds received) which was amortized as additional
interest expense through the date that the holders can first convert. The
Company fully amortized the $250,000 beneficial conversion feature to interest
expense as of the date that the holders converted their debentures. Also, under
the same terms granted to LHIC and its assigns, of which Technology Fund II Pte
Ltd. was one assignee, on February 15, 2000, the outstanding principal and
accrued interest of the $250,000 debenture was converted into 1.7 million shares
of common stock of the Company. Concurrent with the conversion of principal and
accrued interest, Technology Fund II Pte. Ltd. gave the Company $126,000 as the
exercise price of the warrants contained in the $250,000 convertible debenture
agreement, causing the Company to issue an additional 837,000 shares of common
stock to Technology Fund II Pte. Ltd.
In March 2000, the Company received an additional $1,500,000 (reflected as
common stock to be issued in the consolidated balance sheet at March 31, 2000)
from Technology Fund II Pte. Ltd., and in April 2000, the Company raised another
$1,000,000 from two other related party investors, for a total of $2,500,000.
Pursuant to the terms of an agreement dated effective May 5, 2000, the
Company will issue 2.5 million shares of its common stock to the above mentioned
three investors for a purchase price equal to $1.00 per share.
For the three months ended March 31, 2000, the Company issued 537,584 shares of
its common stock upon the exercise of stock options for cash proceeds of
$134,000.
Note 7 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has recently issued Statement on
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, amended by SFAS No. 137,
established standards for recognizing all derivative instruments including those
for hedging activities as either assets or liabilities in the statement of
financial position and measuring those instruments at fair value. This Statement
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. Management believes the adoption of this statement will have no
material impact on the Company's consolidated financial statements.
F-8
<PAGE> 46
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors
LanguageWare.net (Company), Ltd.
Colorado Springs, Colorado
We have audited the accompanying consolidated balance sheet of LanguageWare.net
(Company), Ltd. (formerly Accent Software International Ltd.) and its subsidiary
(the "Company") as of December 31, 1999 and the related consolidated statements
of operations, stockholders' deficit and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1999 and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's significant operating losses and working
capital deficit raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/BDO Seidman, LLP
March 10, 2000
Denver, Colorado
F-9
<PAGE> 47
Report of Independent Certified Public Accountants
To the Stockholders and Board of Directors
LanguageWare.net (Company), Ltd.
Colorado Springs, Colorado
We have audited the accompanying consolidated balance sheet of LanguageWare.net
(Company), Ltd. (formerly Accent Software International Ltd.) and its subsidiary
(the "Company") as of December 31, 1998 and the related consolidated statements
of operations, stockholders' deficit and cash flows for the years ended December
31, 1998 and 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1998 and the results of their operations and their cash flows for
the years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's significant operating losses and working
capital deficit raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters also are described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
As discussed in Note 2, the consolidated financial statements have been restated
to reflect the effect of the intrinsic value of beneficial conversion features
associated with certain debt and equity transactions entered into during 1998
and 1997.
/s/BDO Shlomo Ziv & Co.
March 14, 2000
Tel Aviv, Israel
F-10
<PAGE> 48
LanguageWare.net
(Company) Ltd.
Consolidated Balance Sheets
Dollars and Shares in Thousands
<TABLE>
<CAPTION>
December 31, 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Assets (Note 3)
Current:
Cash and cash equivalents $ 249 $ 141
Accounts receivable, net of allowance for doubtful 460 265
accounts of $113 and $219 (Note 10)
Other receivables 53 91
Inventories - 7
Prepaid expenses and other current assets 77 5
- -----------------------------------------------------------------------------------
Total current assets 839 509
- -----------------------------------------------------------------------------------
Property and equipment:
Computer equipment 150 179
Office furniture and equipment 32 59
- -----------------------------------------------------------------------------------
182 238
Less accumulated depreciation 128 198
- -----------------------------------------------------------------------------------
Net property and equipment 54 40
Other assets 16 50
- -----------------------------------------------------------------------------------
$ 909 $ 599
- -----------------------------------------------------------------------------------
</TABLE>
See accompanying reports of independent certified public accountants,
summary of accounting policies and notes to consolidated financial statements.
F-11
<PAGE> 49
LanguageWare.net
(Company) Ltd.
Consolidated Balance Sheets
(Continued)
Dollars and Shares in Thousands
<TABLE>
<CAPTION>
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 282 $ 467
Accrued liabilities 139 318
Line-of-credit (Note 4) 59 -
Convertible debentures (Note 3) 965 -
Current maturities of long-term debt (Note 3) - 1,180
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,445 1,965
Accrued severance liability - 15
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,445 1,980
- ----------------------------------------------------------------------------------------------------------------------
Commitments (Note 6)
Stockholders' deficit (Note 5):
Convertible preferred stock - NIS 0.01 par value, 10,000 shares 7 -
authorized, 2,889 and 4 issued and outstanding; Series C liquidation
value of $1,000 per share or $4,000 in the aggregate; Series D
liquidation value of $0.22 per share or $625 in the aggregate
Common stock - NIS 0.01 par value, 130,000 shares authorized, 32,721 and 85 77
29,223 issued and outstanding
Additional paid-in capital 52,816 50,589
Accumulated deficit (53,444) (52,047)
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (536) (1,381)
- ----------------------------------------------------------------------------------------------------------------------
$ 909 $ 599
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying reports of independent certified public accountants,
summary of accounting policies and notes to consolidated financial statements.
F-12
<PAGE> 50
LanguageWare.net
(Company) Ltd.
Consolidated Statements of Operations
Dollars and Shares in Thousands Except Per Share Amounts
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (Notes 9, 10 and 11) $ 1,714 $ 1,949 $ 3,125
Cost of sales 1,163 997 3,062
- ----------------------------------------------------------------------------------------------------------------------
Gross profit 551 952 63
- ----------------------------------------------------------------------------------------------------------------------
Operating expenses:
Product development costs 283 2,540 4,813
Marketing expenses 722 1,404 2,177
General and administrative expenses 1,149 2,465 3,169
Restructuring charge (Note 1) - 1,257 -
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,154 7,666 10,159
- ----------------------------------------------------------------------------------------------------------------------
Loss from operations (1,603) (6,714) (10,096)
Interest and other, net 679 78 1,912
- ----------------------------------------------------------------------------------------------------------------------
Net loss before extraordinary item (2,282) (6,792) (12,008)
Extraordinary gain on extinguishment of debt (Note 3) 885 - -
- ----------------------------------------------------------------------------------------------------------------------
Net loss (1,397) (6,792) (12,008)
Deemed dividends on preferred stock (Note 5) - 2,535 1,844
- ----------------------------------------------------------------------------------------------------------------------
Net loss applicable to common stockholders $(1,397) $(9,327) $(13,852)
- ----------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share:
Loss before extraordinary item $ (.08) $(.34) $(1.11)
Extraordinary item .03 - -
- ----------------------------------------------------------------------------------------------------------------------
Net loss per common share $ (.05) $(.34) $(1.11)
- ----------------------------------------------------------------------------------------------------------------------
Basic and diluted weighted-average number of common
shares outstanding 30,407 27,242 12,495
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying reports of independent certified public accountants,
summary of accounting policies and notes to consolidated financial statements.
F-13
<PAGE> 51
LanguageWare.net
(Company) Ltd.
Consolidated Statements of Stockholders' Equity (Deficit)
Dollars and Shares in Thousands
<TABLE>
<CAPTION>
Convertible
Preferred Stock Total
(Note 5) Common Stock Additional Stockolders'
------------------- ------------------- Paid-In Accumulated Equity
Years Ended December 31, 1997, 1998, and 1999 Shares Par Value Shares Par Value Capital Deficit (Decifit)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 - $ - 11,670 $28 $ 36,193 $(33,247) $ 2,974
Issuance of preferred stock for cash, net of $170 in
offering costs (Note 5) 2 - 1,580 - - 1,580
Issuance of preferred stock upon conversion of debentures 5 - - - 4,188 - 4,188
(Note 5)
Issuance of common stock upon conversion of debentures
(Note 5) - - 846 2 1,386 - 1,388
Issuance of common stock upon conversion of preferred
stock (Note 5) (3) - 3,985 11 (11) - -
Issuance of common stock for services (Note 5) - - 612 2 993 - 995
Issuance of common stock upon exercise of stock warrants - - 27 - 62 - 62
Issuance of stock warrants net of unamortized discount of - - - - 34 - 34
$291 (Note 5)
Contribution of capital associated with the beneficial
conversion feature of convertible debentures (Note 5) - - - - 1,810 - 1,810
Net loss - - - - - (12,008) (12,008)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 4 - 17,140 43 46,235 (45,255) 1,023
</TABLE>
See accompanying reports of independent certified public accountants,
summary of accounting policies and notes to consolidated financial statements.
F-14
<PAGE> 52
LanguageWare.net
(Company) Ltd.
Consolidated Statements of Stockholders' Equity (Deficit)
Dollars and Shares in Thousands
<TABLE>
<CAPTION>
Convertible
Preferred Stock Total
(Note 5) Common Stock Additional Stockolders'
------------------- ------------------- Paid-In Accumulated Equity
Years Ended December 31, 1997, 1998, and 1999 Shares Par Value Shares Par Value Capital Deficit (Decifit)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of preferred stock for cash, net of $232 in
offering costs (Note 5) 4 - - - 3,768 - 3,768
Issuance of common stock upon conversion of preferred
stock (Note 5) (4) - 9,623 27 (27) - -
Issuance of common stock in satisfaction of accounts
payable (Note 5) - - 1,620 4 356 - 360
Issuance of common stock upon satisfaction of long-term
debt (Notes 3 and 5) - - 732 2 227 - 229
Issuance of common stock upon exercise of stock options - - 108 1 30 - 31
Net loss - - - - - (6,792) (6,792)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 4 - 29,223 77 50,589 (52,047) (1,381)
Issuance of preferred stock upon conversion of
debentures (Note 5) 2,885 7 - - 618 - 625
Issuance of common stock for cash, net of $41 in
offering costs (Note 5) - - 2,381 6 453 - 459
Issuance of common stock upon conversion of
debentures (Note 5) - - 741 2 100 - 102
Issuance of common stock upon exercise of stock options
(Note 5) - - 376 - 88 - 88
Issuance of stock warrants (Notes 3 and 5) - - - - 906 - 906
Contribution of capital associated with the beneficial
conversion feature of convertible debentures (Note 3) - - - - 62 - 62
Net loss - - - - - (1,397) (1,397)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 2,889 $ 7 32,721 $ 85 $ 52,816 $(53,444) $ (536)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying reports of independent certified public accountants, summary
of accounting policies and notes to consolidated financial statements.
F-15
<PAGE> 53
LanguageWare.net
(Company) Ltd.
Consolidated Statements of Cash Flows
Dollars in Thousands
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net loss $(1,397) $(6,792) $(12,008)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 44 1,312 1,052
Write-down of property and equipment 13 - -
Change in realizable value of trade credits and equipment
(Note 1) 50 714 -
Bad debt expense 73 245 209
Common stock issued for services - - 995
Non-cash interest expense 627 - 1,844
Extraordinary gain (Note 3) (885) - -
Changes in operating assets and liabilities: - - -
Accounts receivable (268) 245 (645)
Other receivables 88 26 55
Inventories 7 78 936
Prepaid expenses and other current assets (72) 901 (311)
Accounts payable and accrued liabilities (326) (1,222) (4,057)
Accrued severance liability (15) (303) (11)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (2,061) (4,796) (11,941)
- -----------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of property and equipment (71) (40) (168)
Increase in other assets (16) - -
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (87) (40) (168)
- -----------------------------------------------------------------------------------------------------------------------
Financing activities:
Repayment of long-term debt - (1,321) (1,332)
Proceeds on the issuance of convertible debentures, related
party 1,700 - 6,000
Proceeds from the line-of-credit 59 - -
Proceeds on the issuance of common stock 500 - -
Proceeds on the issuance of convertible preferred stock - 4,000 1,750
Proceeds from the exercise of stock warrants and options 38 31 62
Payments for debt issue costs - - (425)
Payment for offering costs (41) (232) (170)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,256 2,478 5,885
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 108 (2,358) (6,224)
Cash and cash equivalents, beginning of year 141 2,499 8,723
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 249 $ 141 $ 2,499
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying reports of independent certified public accountants,
summary of accounting policies and notes to consolidated financial statements.
F-16
<PAGE> 54
LanguageWare.net
(Company) Ltd.
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Basis of LanguageWare.net (Company) Ltd., formerly Accent
Presentation Software International Ltd., and its subsidiary (the
"Company") provide multilingual, multicultural and
multi-commerce products and services enabling
business to be conducted on web sites via the
Internet. The Company was incorporated in 1988 in
Jerusalem, Israel. In 1991, the Company formed a
wholly-owned subsidiary, Accent Worldwide, Inc.
("Accent"), a Delaware corporation. Accent is
located in Colorado Springs, Colorado, and provides
sales, marketing, software development, and
executive management functions for the Company.
During 1999, the Company moved its operations to
Colorado Springs, Colorado.
The Company considers the U.S. dollar to be its
functional currency.
Transactions and balances originally denominated in
U.S. dollars are presented at their original
amounts. Transactions and balances in other
currencies are remeasured into U.S. dollars in
accordance with Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation".
Exchange gains and losses from the aforementioned
remeasurements are reflected in the statements of
operations. The representative rate of exchange
prevailing on December 31, 1999 was U.S. $1 = New
Israeli Shekel ("NIS") 4.149; on December 31, 1998
it was U.S. $1 = NIS 4.160 and on December 31, 1997
it was U.S. $1 = NIS 3.536.
Principles of The accompanying consolidated financial statements
Consolidation include the accounts of the Company and its wholly-
owned subsidiary. All significant intercompany
accounts and transactions have been eliminated in
consolidation.
Cash The Company considers highly liquid investments
Equivalents purchased with original maturities of three months
or less and money market accounts to be cash
equivalents.
F-17
<PAGE> 55
LanguageWare.net
(Company) Ltd.
Summary of Accounting Policies
<TABLE>
<S> <C>
Property, Equipment, Property and equipment are stated at cost. Depreciation and amortization
Depreciation and expense are computed using the straight-line method over the estimated useful
Amortization lives of the assets, which range from two to five years. Maintenance and
repairs are expensed as incurred. Major renewals and improvements are
capitalized. When property and equipment is retired or otherwise disposed
of, the asset and accumulated depreciation or amortization are removed from
the accounts and the resulting profit or loss is reflected in operations.
Research and Research and development costs are expensed as incurred. Statement of
Development Financial Accounting Standards 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed", does not materially
affect the Company, as all previously capitalized software development costs
were fully amortized by December 31, 1997.
Long-Lived Assets Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
the expected future cash flow from the use of the asset and its eventual
disposition is less than the carrying amount of the asset, an impairment loss
is recognized and measured using the asset's fair value.
Debt Issue Costs Debt issue costs are being amortized using the interest method over the term of the
debt.
Revenue Recognition Translation Services and Web Page Design
During 1999, the Company began providing translation services and web page design
services. The Company recognizes revenue on translation and web page design services
when the service is performed.
</TABLE>
F-18
<PAGE> 56
LanguageWare.net
(Company) Ltd.
Summary of Accounting Policies
<TABLE>
<S> <C>
Software Sales
Original Equipment Manufacturer ("OEM") software sales are typically made to
another hardware or software manufacturer who wishes to "bundle" the
Company's product with its product for sale to an end-user. The Company
recognizes the revenue from OEM sales once the order has been received, the
software has been shipped, collection of the receivable is determined to be
probable, and no significant obligations on the Company's part remain
outstanding. End-user acceptance of the software is irrelevant to the
Company's revenue recognition because the OEM's do not have an option to
return or receive credit for product once it has been accepted by the OEM
even though it may subsequently be returned to the OEM by the end-user.
The Company recognizes revenue under the "try before you buy" arrangement
only upon acceptance of the product by the customer. Under the "try before
you buy" arrangement, a potential customer can either download the software
from the Company's web site or request the software from the Company. In
either case, the software is "time bombed," meaning that it will operate for
only a limited trial period. If the user wishes to continue using the
software after the trial period, the user must "unlock" the software with
instructions provided by the Company. To receive the instructions, the
customer must accept and agree to pay for the product. Revenue recognition
occurs only at that point.
License Agreements
OEM arrangements may include non-refundable payments in the form of
guaranteed sublicense fees. Guaranteed sublicense fees from OEMs are
recognized as revenue upon shipment of the master copy of all software to
which the sublicense fees relate if there are not significant post-delivery
obligations and the obligation is not subject to price adjustment, is
non-recoverable and non-refundable and due within twelve months.
</TABLE>
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(Company) Ltd.
Summary of Accounting Policies
<TABLE>
<S> <C>
License fees are earned under software license agreements to end-users and
resellers (including OEMs and distributors). Such fees are generally
recognized when a customer purchase order has been received, the software has
been shipped, the Company has a right to invoice the customer, collection of
the receivable is determined to be probable, and there are no significant
obligations remaining.
Income Taxes The Company accounts for income taxes under the liability method, which
requires an entity to recognize deferred tax assets and liabilities.
Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years.
Advertising Costs Statement of Position 93-7, "Reporting on Advertising Costs" ("SOP 93-7")
requires that the cost of an advertising campaign that is not "Direct
Response" advertising should be expensed as incurred or upon the first time
the advertising takes place. As the Company does not have "Direct Response"
advertising, costs are expensed in accordance with SOP 93-7. For the years
ended December 31, 1999, 1998 and 1997, the Company expensed approximately
$78,000, $234,000 and $395,000 in advertising costs.
Net Loss per Common Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
Share provides for the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing
loss applicable to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflect
the potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share.
</TABLE>
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Summary of Accounting Policies
<TABLE>
<S> <C>
For the years ended December 31, 1999, 1998 and 1997, total stock options
of 4,378,625, 1,508,717 and 1,436,126, total stock warrants of 18,227,528,
9,905,694 and 5,607,413 and convertible preferred stock and convertible debentures
of 18,526,550, 8,888,889 and 7,928,571 were not included in the computation of
diluted loss per share because their effect was anti-dilutive.
Concentrations of The Company's financial instruments that are exposed to concentrations of
Credit Risk credit risk consist primarily of cash and accounts receivable.
The Company's cash is in demand deposit accounts placed with federally
insured financial institutions. Such deposit accounts at times may exceed
federally insured limits. The Company has not experienced any losses on such
accounts.
Concentrations of credit risk exist with respect to accounts receivable. The
balances are due from a few customers and are limited as they are dispersed
across geographic areas. The Company reviews a customer's credit history
before extending credit and establishes an allowance for doubtful accounts
based upon the credit risk of specific customers, historical trends and other
information. Generally, the Company does not require collateral from its
customers.
Use of The preparation of financial statements in conformity with generally accepted
Estimates accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
</TABLE>
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Summary of Accounting Policies
<TABLE>
<S> <C>
Fair Value of The following methods and assumptions were used to estimate the fair value of
Financial each class of financial instruments for which it is practicable to estimate
Instruments that value:
Cash, Accounts Receivable, Accounts Payable and Accrued Liabilities
Fair values of cash, accounts receivables, accounts payable, and accrued
liabilities are assumed to approximate carrying values for these financial
instruments since they are short term in nature and their carrying amounts
approximate fair value or they are receivable or payable on demand.
Long-Term Debt and Convertible Debentures
Long-term debt and convertible debentures bear interest at a rate of interest
based upon current lending rates of interest at the date they are issued and
the book value approximates fair value.
Stock Option Plan The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees" ("APB Opinion 25") and related Interpretations in accounting for
all stock option plans. Under APB Opinion 25, compensation cost is recognized
for stock options issued to employees when the exercise price of the
Company's stock options granted is less than the market price of the
underlying common stock on the date of grant. Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123") requires the Company to provide pro forma information
regarding net income (loss) as if compensation cost for the Company's stock
options plans had been determined in accordance with the fair value based
method prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock option at the
date of grant by using the Black-Scholes Option Pricing Model.
</TABLE>
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Summary of Accounting Policies
<TABLE>
<S> <C>
Comprehensive Loss Comprehensive loss is comprised of net loss and all changes to the
consolidated statement of stockholders' deficit, except those changes made
due to investments by stockholders, changes in paid-in capital and
distributions to stockholders. The Company had no components of
comprehensive loss except for net losses for the three years ended December
31, 1999.
Recent Accounting The Financial Accounting Standards Board has recently issued Statement on
Pronouncements Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, amended
by SFAS No. 137, established standards for recognizing all derivative
instruments including those for hedging activities as either assets or
liabilities in the statement of financial position and measuring those
instruments at fair value. This Statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. Management
believes the adoption of this statement will have no material impact on the
Company's consolidated financial statements.
Reclassifications Certain reclassifications have been made to the 1998 and 1997 financial statements
in order for them to conform to the 1999 presentation. See Note 2 for restatement
of 1998 and 1997 financial statements.
</TABLE>
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Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
1. Going Concern The consolidated financial statements have been prepared assuming the Company
will continue as a going concern. Management believes the Company will
remain a going concern but acknowledges that the Company's history of
operating losses and operating cash flow deficits raises legitimate concern
about the Company's longer term prospects.
To enhance the Company's longer term prospects, effective January 2000
management has embarked on a new operating strategy designed to increase
revenue. In the years preceding 1999, the Company was a seller of language
technology and translation software to the consumer retail market,
transforming in calendar 1999 primarily to a provider of translation services
to other businesses. Beginning January 2000, the Company has changed its
focus by providing a full range of multilingual, multicultural and
multi-commerce products and services that enable its business customers to
conduct business on web sites via the Internet, primarily in the U.S. to Asia
market. Management's decision to pursue the new strategy was based on in
depth analysis of the market it desired to target.
Since its inception in 1988, the Company has developed proprietary software
serving the language information technology industry. To enhance its
competitive position in the newly targeted market under its new operating
strategy, the Company intends to utilize such proprietary software as tools
to provide superior service to potential customers. Additionally, the Company
has 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 further enhance its competitive advantage in its target market of U.S. to
Asia e-business solutions, the Company acquired Star+Globe Technologies Pte.
Ltd. ("Star+Globe") on January 14, 2000. Star+Globe owns proprietary Asian
character processing technology and provides Asian languages translation
services.
</TABLE>
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Notes to Consolidated Financial Statements
To reduce expenses, the Company reduced its staffing
level from approximately 170 employees at its peak
in 1996 to 17 employees at December 31, 1999.
Related expenses such as rent, telephone, travel and
training costs were reduced proportionately. The
shift away from the retail market has led to a
reduction in production and inventory carrying
costs. Upon completion of several product
development activities during the fourth quarter,
1998, the Israel-based product development function
was disbanded. The Company reestablished a product
development capability in the United States. During
1999, the Company reduced discretionary spending on
advertising and marketing as well as the amount it
spends on exhibitions and trade shows and, over the
past few years, it has closed its sales offices in
England, California, Canada and Israel. General and
administrative expenses have been reduced through
out-sourcing and the elimination of non-essential
activities.
During both the third and fourth quarters of 1997,
the second quarter of 1998 and during all quarters
of 1999, the Company successfully obtained external
financing through the sale of convertible securities
and common stock. The Company continues to explore
sources of additional financing to satisfy its
operational requirements. Such sources may not be
available on terms acceptable to the Company.
The accompanying consolidated financial statements
do not include any adjustments relating to the
recoverability or classification of asset carrying
amounts or the amounts and classification of
liabilities that may result should the Company be
unable to continue as a going concern.
Restructuring
In response to the fact that actual revenue was
short of management's expectations and that the
Company was unable to generate sufficient cash flow
from its operations to sustain the business,
management instituted restructuring initiatives
designed to reduce operating expenses and working
capital requirements. During 1997 as the Company
shifted away from the retail market, it recognized
that it had a large amount of inventory that was
surplus to its foreseeable requirements and during
the second quarter of 1997, the Company completed an
exchange of its "excess" inventory in which it sold
inventory with a book value of $666,000 and received
$1,600,000 in "trade credits." The Company recorded
the trade credits as a long-term asset with a value
equal to the inventory surrendered, that is,
$666,000. No gain or loss was recorded on the
transaction. The trade credits were available to use
over a period of three years and could be exchanged,
with cash, for a variety of products and services.
From its receipt of the credits in 1997 through the
end of 1998, the Company realized approximately
$104,000 from use of the trade credits. Following
the restructuring which the Company substantially
completed during 1998, it recognized that it was
unlikely to realize more than a relatively small
additional amount of value from the trade credits
and took a charge of $512,000 to bring the carrying
cost of the credits in line with the estimated fair
value. In 1999 the Company took a charge of $50,000
to write off the remaining balance in trade credits.
The restructuring activities, which are also
discussed in the going concern paragraphs are
summarized below:
<TABLE>
<CAPTION>
Balance Balance Balance
December 31, Reductions/ December 31, Reductions/ December 31,
(Dollars in Thousands) 1997 Expense Payments 1998 Expense Payments 1999
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Trade credits $666 $512 $104 $ 50 $ 50 $ - $ -
Property and equipment 202 202 - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
$868 $714 $104 $ 50 $ 50 $ - $ -
- -------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Severance and employee
costs $318 $ - $303 $ 15 $ - $ 15 $ -
Operating leases and
other - 543 543 - - - -
- -------------------------------------------------------------------------------------------------------------------------------
$318 $543 $846 $ 15 $ - $ 15 $ -
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
2. Restatement of The Company determined that it did not properly record the intrinsic value of
1998 and 1997 the beneficial conversion feature associated with certain debt and equity
Financial transactions entered into during 1998 and 1997.
Statements
During 1997, the Company did not properly account for the intrinsic value of
the beneficial conversion feature associated with the convertible debenture
and warrants issued in August 1997 (see Note 5) or the beneficial conversion
feature and warrants associated with the November and December 1997 issuance
of the convertible debentures, Series B convertible preferred stock and
warrants (see Note 5). Accordingly, the 1997 financial statements have been
restated to correct this error. As a result of reducing interest expense
from $3,311,000 to $1,845,000, and recording deemed dividends of $1,844,000
associated with the issuance of convertible preferred stock, additional
paid-in capital was reduced to $46,235,000 from $47,701,000, the net loss was
reduced from $13,474,000 to $12,008,000 and net loss applicable to common
stockholders increased to $13,852,000 from $13,474,000. Basic and diluted
net loss per share increased from $1.08 per share to $1.11 per share.
During 1998, the Company should have recorded $2,535,000 in deemed dividends
associated with the beneficial conversion feature on the June 1998 issuance
of the Series B convertible preferred stock and warrants (see Note 5).
Accordingly, the 1998 financial statements have been restated to correct this
error, the effect of which reduces net loss to $6,792,000 from $6,819,000 and
increases net loss applicable to common stockholders from $6,819,000 to
$9,327,000. Basic and diluted net loss per share increased from $.25 per
share to $.34 per share.
</TABLE>
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Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
3.Long-Term On November 15, 1999, the Company issued two $500,000 convertible debentures
Debt and to an existing stockholder of the Company. The debentures mature on May 31,
Convertible 2000. The debentures bear interest at 10.25%. The first debenture is
Debentures assignable. The debentures are collateralized by substantially all assets
of the Company. The agreements allowed for the conversion of the unpaid
principal plus unpaid accrued interest at any time after March 1, 2000
into shares of the Company's common stock at a conversion price of $.15 per
share. In addition, the holders of the debentures received warrants to purchase
shares of the Company's common stock equal to 50% of the number of shares
issuable upon conversion of the outstanding principal and accrued interest
at a $.15 exercise price. The warrants will expire on February 15, 2005. At
the date of issuance, the warrant and the beneficial conversion feature have
been valued at $62,000 which will be amortized as additional interest expense
over the life of the related debentures. The unamortized discount was $35,000
at December 31, 1999.
On February 3, 2000, the Comapany accelerated the conversion date to February 15,
2000. The acceleration in the conversion date did not increase the intrinsic
value of the conversion feature; accordingly, no additional debt discount was
recorded. On February 15, 2000, each of the holders of the debentures converted
their debt plus accrued interest into 6,766,18 shares of the Company's common
stock. In addition, on February 15, 2000, the holders exercised their warrants,
and the Company issued 3,383,094 shares of its common stock for cash proceeds
of approximately $507,000.
During 1998, the Company entered into an agreement with the government of
Israel and various Israeli banking officials, which allowed the Company to
convert a portion of its government-guaranteed long-term debt into common
stock of the Company. In 1998 approximately $229,000 of the debt was
converted into 732,000 shares of the Company's common stock. During January
1999, the Company agreed to issue the Bank warrants to purchase 2,448,000
shares of the Company's common stock at no exercise price in exchange
for payment on the outstanding $1,180,000 in debt and accrued interest
totaling
</TABLE>
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Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
$11,000. The warrants were valued at $306,000 using the Black-Scholes option
pricing model and are exercisable on January 25, 2001 and expire on January
25, 2006. The Company recognized a $885,000 extraordinary gain from this
debt extinguishment in 1999.
On February 2, 2000, the Company issued a $250,000 convertible debenture to
an existing stockholder of the Company under the same terms as the November
15, 1999 debentures, including the right of the holder of the debenture to
receive warrants to purchase shares of the Company's common stock equal to 50%
of the number of shares issuable upon conversion of the outstanding principal and
accrued interest at a $.15 exercise price. At the date of issuance, the warrants
and the beneficial conversion feature have been valued at $250,000 (the total
proceeds received) which will be amortized as additional interest expense over
the life of the related debenture. On February 15, 2000, the holder of the
debenture converted its debt plus accrued interest into 1,673,379 shares
of the Company's common stock. In addition, on February 15, 2000, the
holder exercised its warrants, and the Company issued 836,690 shares of its
common stock for cash proceeds of approximately $126,000.
4. Line-of-Credit The Company has a $75,000 revolving line-of-credit with a bank which expires
during February 2000. The line-of-credit had an outstanding balance at
December 31, 1999 of $58,657 at an interest rate of 10.65%.
5. Stockholders' Increase In Authorized Shares
Deficit
During the annual stockholders' meeting held on June 25, 1999, the
stockholders approved an amendment to its Articles of Association to
increase the number of authorized shares of common stock from 65,000,000 to
130,000,000.
Preferred Stock
The Company has 10,000,000 authorized shares of preferred stock divided into
five classes of preferred stock. As of December 31, 1999, the Company has
the following series of preferred stock.
</TABLE>
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Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
Series C Convertible Preferred Stock - As of December 31, 1999 and 1998,
4,000 shares of Series C convertible preferred stock were issued and
outstanding. The holders of the Series C convertible preferred stock shall
be entitled to receive dividends, when as and if declared by the Company's
Board of Directors out of any funds legally available therefor, equal in
amount per share to the dividends paid on the common stock. Dividends on the
Series C convertible preferred stock shall be cumulative. The Series C
convertible preferred stock are convertible into common stock at the option
of the holder at a conversion price of $.45 per share. The holders of the
Series C convertible preferred stock have the right to vote the shares as if
they had all been converted into common stock, and the holders of the Series
C convertible preferred stock shall vote with the common stock as a single
class. The holders of the Series C convertible preferred stock have been
granted one seat on the Company's Board of Directors, subject to shareholder
approval.
Series D Convertible Preferred Stock - As of December 31, 1999, 2,884,874 shares
of Series D convertible preferred stock were issued and outstanding. As of
December 31, 1998, no shares of Series D convertible preferred stock were issued
and outstanding. The holders of the Series D convertible preferred stock shall be
entitled to receive dividends, when as and if declared by the Company's Board
of Directors out of any funds legally available therefor, equal in amount per
share to the dividends paid on
</TABLE>
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Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
the common stock. Dividends on the Series D convertible preferred stock
shall be cumulative. The Series D convertible preferred stock shall rank
prior to all other shares of the Company, except the Series C Preferred
stock, with which the Series D Preferred Stock shall rank on par. The Series
D convertible preferred stock are convertible at any time at the option of
the holder into one share of common stock for each preferred share converted.
The holders of the Series D convertible preferred stock have the right to
vote the shares as if they had all been converted into common stock, and the
holders of the Series D convertible preferred stock shall vote with the
common stock as a single class. The holders of the Series D convertible
preferred stock have been granted one seat on the Company's Board of Directors,
subject to shareholders approval.
Private Placements Pursuant to Regulation D
On August 5, 1997, the Company completed a private placement of a debenture
with an investor pursuant to Regulation D of the Securities Act of 1933.
The Company received $2,000,000 in cash before offering costs of
approximately $150,000. The debenture bore interest at 6% and matured
on August 5, 1999. The debenture is convertible into the Company's
common stock at the earlier of 90 days after the date of the issuance
or upon which a registration statement covering the resale of the shares
of the common stock issuable upon conversion is declared effective by the
SEC. The debenture is convertible at the lesser of 75% of the average
of the closing bid prices for the Company's common stock for the five
consecutive trading days ending on the trading day immediately preceding
such date of conversion or multiplying the average of the closing bid
prices for the five consecutive trading days ending on the trading date
immediately preceding the issue date of the debenture by 1.35. At any
time prior to 90 days following the date of the issuance of the debenture,
the Company has the right to convert the debenture and all accrued and
unpaid interest into the Company's Series A convertible preferred stock at
a conversion ratio of one share of Series A convertible preferred for each
$1,000 in debenture. The Company has recorded a discount for the beneficial
conversion feature in the amount of $771,000 as original issued discount
on the debenture and is being amortized to interest expense
</TABLE>
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Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
over the period in which the holder can first convert the debenture using the
interest method. Under the private placement, the Company issued the investor
warrants to purchase 250,000 shares of the Company's common stock at an
exercise price of $2.80 per share and warrants to purchase an additional
50,000 shares of the Company's common stock at an exercise price of $3.20
per share. In addition, the Company issued to the placement agents warrants
to purchase 30,000 shares of the Company's common stock at an exercise price
of $1.73 per share. The August Investor's warrants and those of the placement
agents all expire on August 5, 2002 and have been valued at $325,000. The
Company has recorded the value of the warrants as original issue discount
on the debenture and is being amortized to interest expense over the
life of the related debt using the interest method. During October 1997,
the Company elected to convert $500,000 of the debenture into 500 shares
of Series A convertible preferred stock. The $500,000 debenture was converted
into Series A preferred stock net of $37,000 in unamortized debt issue costs.
By the end of 1997, the investor converted the remaining $1,500,000
debenture net of $112,000 unamortized debt issue costs into 846,540 shares
of common stock, and the investor converted its 500 shares of Series A
preferred stock of $463,000 into 1,112,769 shares of common stock. The
Company expensed the remaining unamortized discount associated with the
beneficial conversion feature of the debenture to interest expense at the
time that the debenture was converted into common stock. The Company recorded
the remaining $291,000 unamortized discount associated with the warrants to
additional paid-in capital at the time that the debenture was converted into
Series A convertible preferred stock and common stock.
During November and December 1997, the Company completed a private placement
with four investors pursuant to Regulation D of the Securities Act of 1933.
The Company received $5,750,000 in cash before offering costs of
approximately $445,000. Under the private placement, the Company issued the
investors debentures in the amount of $4,000,000 and 1,750 shares of its
Series B convertible preferred stock in the amount of $1,750,000, and
warrants to purchase 1,150,000 shares of the Company's common stock at an
exercise price of $2.45 per share. In addition, the Company issued to
</TABLE>
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Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
the placement agent warrants to purchase 795,000 shares of the Company's
common stock at an exercise price of $2.44 per share.
The November Investors' warrants and those of the placement agent all expire
on November 30, 2002. Both the debentures and Series B convertible preferred
stock paid interest and dividends of 6% per year. The debentures matured on
November 6, 1999. Any time at the earlier of November 11, 1997 or upon which
a registration statement covering the resale of the shares of the common
stock issuable upon conversion hereof is declared effective by the SEC, the
holder can elect to convert the debentures and the Series B convertible
preferred stock into shares of the Company's common stock. The debentures
and the Series B convertible preferred stock are convertible at the lesser of
80% of the average of the closing bid prices for the Company's common stock
for the five consecutive trading days ending on the trading day immediately
preceding such date of conversion or $2.45. The Company has the right to
convert the debentures and all accrued and unpaid interest into the Company's
Series B convertible preferred stock at any time prior to 90 days following
the date of the issuance of the debenture at a conversion ratio of one share
of Series B convertible preferred stock for each $1,000 in debenture. The
Company has recorded the beneficial conversion feature in the amount of $1,039,000
as original issued discount on the debentures and is being amortized to
interest expense over the period in which the holders can first convert the
debentures using the interest method. The Company did not record any beneficial
conversion feature on the Series B convertible preferred stock as the market
price of the Company's common stock at the date of Series B convertible
preferred stock issuance was greater than the conversion price. The Company has
recorded the $1,844,000 value of the 1,150,000 warrants as a deemed dividend in
the December 31, 1997 statement of operations. On November 6, 1997, the Company
elected to convert the $4,000,000 debentures net of $275,000 in unamortized debt
issue costs into 4,000 shares of Series B convertible preferred stock. During 1998
and 1997, the investors converted all
</TABLE>
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Notes to Consolidated Financial Statements
of the Series B convertible preferred stock of $3,330,000 and $1,975,000 into
9,623,372 shares and 2,871,248 shares of the Company's common stock.
On June 4, 1998, the Company issued 4,000 shares of Series C convertible
preferred stock at $10 per share together with warrants to purchase 4,444,444
shares of the Company's common stock at an exercise price of $0.55 per share.
The Company received $4,000,000 in cash before offering costs of approximately
$232,000. The investor can elect to convert the Series C convertible preferred
stock at any time into the Company's common stock at a conversion price of $.45
per share. The Company has recorded the beneficial conversion feature in the
amount of $445,000 as original issued discount on the Series C convertible
preferred stock and is being amortized as a deemed dividend over the period in
which the holders can first convert the Series C convertible preferred stock
using the interest method. The Company has recorded the $2,090,000 value of the
warrants as original issue discount on the Series C convertible preferred stock
and is being amortized to deemed dividend over the period in which the holders
can first convert the Series C convertible preferred stock using the interest
method.
During February 1999, the Company issued a $600,000 debenture to an existing
stockholder of the Company. The debenture bore interest at 11.75% and matured on
June 30, 1999. At the maturity date of the debenture, the holder can elect to
convert the debenture into the Company's Series D convertible preferred stock at
a price per share equal to 85% of the average closing bid price of the Company's
common stock for the 20 days prior to conversion. If the Company's common stock
is delisted from NASDAQ as of the date of conversion, the price per share shall
be equal to the average closing bid price of the Company's common stock as of
the last 20 days before being delisted. The Series D convertible preferred stock
is convertible any time at the option of the holder into one share of common
stock for each preferred share converted. In addition, the holder received
3,000,000 warrants to purchase shares of the Company's common stock at an
exercise price equal to 85% of the
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Notes to Consolidated Financial Statements
Company's common stock for the twenty trading days preceding the date of
conversion. The warrants expire on February 18, 2004. The Company recorded a
$600,000 discount on the debenture attributable to the value of the warrants
issued as of the date of the debenture. The Company amortized the discount as
interest expense over the term of the debenture. On June 30, 1999, the holder
converted the debenture, plus accrued interest totaling $625,000, into 2,884,874
shares of the Company's Series D convertible preferred stock.
During October 1999, the Company issued a $100,000 convertible promissory note.
The note bore interest at 10.25% and matured on December 31, 1999. At any time
between the date of the note and the maturity date, the holder of the note has
the right to convert all or any portion of the outstanding principal amount of
the note and accrued interest into shares of the Company's common stock. The
note is convertible into common stock at the average of the five lowest closing
trades of the Company's common stock between the date of the note and the
conversion date. At the date of issuance, the market price of the Company's
common stock is equal to the conversion price. On December 30, 1999, the lender
converted the loan, plus accrued interest totaling $102,000, into 740,917 shares
of the Company's common stock.
During fiscal 1999, the Company issued 2,380,953 shares of its common stock for
$500,000 in cash before offering costs of approximately $41,000. During January
and February 2000, the Company issued 7,142,858 shares of its Company stock for
$1,500,000 in cash to the same investors.
During fiscal 1999, the Company issued 376,125 shares of its common stock upon
the exercise of stock options for cash proceeds of approximately $38,000 and
stock subscription receivables of $50,000 which is included in prepaid expenses
and other current assets in the accompanying December 31, 1999 balance sheet.
Subsequent to 1999, the Company received the $50,000 on the stock subscription
receivables. During first quarter of 2000, the Company issued 359,250 shares of
its common stock upon the exercise of stock options for cash proceeds of
approximately $97,000.
F-34
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(Company) Ltd.
Notes to Consolidated Financial Statements
Issuance Of Common Stock In Satisfaction Of Debt and Trade Payables and
Services
During 1998, the Company reached agreements with several of its largest
creditors whereby the creditors agreed to accept shares of the Company's common
stock in satisfaction of all or a portion of the amounts due them. First, the
Company reached an agreement with the Bank for Industrial Development (the
"Bank") to repay a loan guaranteed by the Israeli government which the Company
received pursuant to the Government's Approved Enterprise Program. The shares
were to be sold by the Bank so that the proceeds would repay the bank debt and
any other associated commissions and costs. During 1998, the Company issued
732,000 shares of common stock to the bank in partial repayment of approximately
$229,000 of the loan (See Note 3). Second, during 1998, the Company issued
1,620,000 shares of common stock in satisfaction of $360,000 of trade payables.
During 1997, the Company issued 612,000 shares of its common stock with a market
value of approximately $995,000 as compensation for marketing and
public/investor relations services.
Stock Options and Stock Warrants
The Company's board of directors have adopted formal stock option plans which
allow for the issuance of incentive stock options, within the meaning of the
Internal Revenue Code, and other options issued pursuant to the plan that
constitute non-qualifed options for the issuance of common stock in the Company.
The following table is a summary of the Company's stock option plans as of
December 31, 1999.
F-35
<PAGE> 73
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(Company) Ltd.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Plan Reserved Outstanding
Shares Options
- --------------------------------------------------------------------------------
<S> <C> <C>
Founders' Share Option Plan (1) 190,000 152,625
Employee Share Option Plan (2) 2,500,000 2,012,000
Non-Employee Share Option Plan (1998) 600,000 402,000
CEO Share Option Plan (3) 2,000,000 1,812,000
- --------------------------------------------------------------------------------
5,290,000 4,378,625
- --------------------------------------------------------------------------------
</TABLE>
(1) No additional stock options may be granted under this plan.
(2) During the Annual Stockholders' Meeting held on June 25, 1999, the
stockholders approved to increase the number of shares of common stock
reserved for issuance from 1,875,000 to 2,500,000.
(3) During 1999, the Company granted 1,812,000 options under the plan to the
Company's chief executive officer. The officer received 1,000,000 options at an
exercise price of $.16 which was equal to the Company's market price of the
Company's common stock at the date of grant. These options vest over a three-
year period and expire on March 22, 2004. The officer received 812,000 options
at an exercise price of $.34 per share which was equal to the market price of
the Company's common stock at the date of grant. These options vest over a
three-year period and expire on July 19, 2003.
In accordance with the Plans, the price per share covered by each option award
shall be 100% of the fair market value of each share on the date of grant, or
such other percentage as determined by the Share Option Committee; provided,
however, that in the case of an incentive option granted to an employee who, at
the time such option is granted, owns more than 10% of the total combined voting
power of all classes of shares of the Company or any subsidiary corporation or
parent corporation, the purchase price for each share will be not less than 110%
of the fair market value per share at the date the option is granted. Option
awards shall be exercisable pursuant to the terms under which they are awarded
and subject to the terms and conditions of the Plans. In no event shall an
incentive option be exercisable after the expiration of ten years from the date
such option award is granted. In the case of an incentive option granted to a
person who, at the time such option is granted, owns more than 10% of the total
combined voting power of all classes of shares of the Company or any subsidiary
corporation or parent corporation, such incentive option shall not be
exercisable after the expiration of five years from the date the option is
granted.
On January 10, 2000, the Company's Board of Directors approved the Star+Globe
Share Option Plan (2000) which allows for the issuance of non-qualified options
(see Note 12). The Company reserved 2,266,639 shares of the Company's common
stock for issuance under the plan. The plan will expire on January 15, 2001.
F-36
<PAGE> 74
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(Company) Ltd.
Notes to Consolidated Financial Statements
The following table summarizes information on stock option activity:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Weighted
Average
Number of Exercise Price Exercise Price Expiration
Shares per Share $ per Share $ Dates
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January 1, 1997 993,459 .24 - 32.65 4.156 1999 - 2000
Granted 829,250 1.63 - 4.50 2.564 2002
Exercised (16,667) 3.03 - 4.37 3.77 -
Expired/forfeited (369,916) 1.63 - 4.50 3.051 -
- --------------------------------------------------------------------------------
December 31, 1997 1,436,126 .24 - 32.65 3.526 1999 - 2002
Granted 2,525,250 .34 - .47 .344 1999 - 2005
Exercised (107,168) .24 - .34 .27 -
Expired/forfeited (2,345,491) .34 - 32.65 2.584 -
- --------------------------------------------------------------------------------
December 31, 1998 1,508,717 .24 - 3.03 1.05 1999 - 2005
Granted 3,963,334 .12 - .45 .212 1999 - 2004
Exercised (307,125) .12 - .34 .289 -
Expired/forfeited (786,301) .34 - 1.87 1.042 -
- --------------------------------------------------------------------------------
December 31, 1999 4,378,625 .12 - 3.03 .347 2000 - 2005
- --------------------------------------------------------------------------------
</TABLE>
The following table summarizes stock options exercisable:
<TABLE>
<CAPTION>
Weighted
Average
Options Exercise
Exercisable Price
- ---------------------------------------------------------------------
<S> <C> <C>
December 31, 1999 1,991,294 $ 0.347
December 31, 1998 1,058,187 $ 1.11
December 31, 1997 697,835 $ 4.43
</TABLE>
F-37
<PAGE> 75
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(Company) Ltd.
Notes to Consolidated Financial Statements
The following table summarizes information on stock warrant activity:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Price Exercise Price Expiration
Shares per Share $ per Share $ Dates
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January 1, 1997 3,254,913 1.83 - 14.03 9.263 1998 - 2003
Granted 2,367,500 1.73 - 3.20 2.39 1998 - 2003
Exercised (15,000) 1.83 1.83 2002
Expired - - - -
- --------------------------------------------------------------------------------
December 31, 1997 5,607,413 1.73 - 14.03 6.381 1998 - 2003
Granted 4,444,444 .55 .55 2003
Exercised - - - -
Expired (146,163) 3.33 3.33 -
- --------------------------------------------------------------------------------
December 31, 1998 9,905,694 .55 - 14.03 3.81 1999 - 2003
Granted 8,781,334 .00 - 2.69 .149 2004 - 2006
Expired (459,500) 1.83 1.83 -
- --------------------------------------------------------------------------------
December 31, 1999 18,227,528 .00 - 14.03 2.096 2000 - 2006
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Options Warrants
- --------------------------------------------------------------------------------
<S> <C> <C>
Weighted average fair value of options and
warrants granted during 1999 $ .179 $ .146
Weighted average fair value of options and
warrants granted during 1998 .15 .46
Weighted average fair value of options and
warrants granted during 1997 .163 1.52
- --------------------------------------------------------------------------------
</TABLE>
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees", and related Interpretations in accounting for the plans. Under
APB Opinion 25, when the exercise price of the Company's employee stock
options is less than the market price of the underlying stock on the date of
grant, compensation cost is recognized.
F-38
<PAGE> 76
LanguageWare.net
(Company) Ltd.
Notes to Consolidated Financial Statements
FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
requires the Company to provide pro forma information regarding net loss and net
loss per share as if compensation costs for the Company's stock option plans and
other stock awards had been determined in accordance with the fair value based
method prescribed in SFAS No. 123. The Company estimates the fair value of each
stock award at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1999, 1998
and 1997, respectively: dividend yield of 0 percent for all years; expected
volatility of 76 to 228 percent in 1999, 157 to 247 percent in 1998, and 91 to
244 percent in 1997; risk-free interest rates of 4.64 to 6.02 percent in 1999,
5.57 to 6 percent in 1998 and 5.81 to 6 percent in 1997; and expected lives of
less than one to seven years in 1999, two to seven years in 1998, and two to
five years in 1997.
Under the accounting provisions for SFAS No. 123, the Company's net loss and net
loss per share would have been increased by the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
Dollars in Thousands
<S> <C> <C> <C>
Net loss
As reported $ (1,397) $ (6,792) $ (12,008)
Pro forma $ (2,027) $ (7,119) $ (13,356)
Basic and diluted loss per common
share:
As reported $ (.05) $(.34) $ (1.11)
Pro forma $ (.07) $(.35) $ (1.22)
</TABLE>
F-39
<PAGE> 77
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(Company) Ltd.
Notes to Consolidated Financial Statements
The following information summarizes stock options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
- ---------------------------------------------------- -------------------------
Weighted Average
--------------------------
Remaining Weighted
Range of Contractual Average
Exercise Number Life in Exercise Number Exercise
Prices $ Outstanding Years Price $ Exercisable Price $
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
.12 - .47 4,138,625 4 .221 1,751,294 .252
1.00 60,000 1 1.00 60,000 1.00
3.03 180,000 1 3.03 180,000 3.03
- --------------------------------------------------------------------------------
.12 - 3.03 4,378,625 3.8 .347 1,991,294 .53
- --------------------------------------------------------------------------------
</TABLE>
The following information summarizes stock warrants outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
- ---------------------------------------------------- --------------------------
Weighted Average
--------------------------
Remaining Weighted
Range of Contractual Average
Exercise Number Life in Exercise Number Exercise
Prices $ Outstanding Years Price $ Exercisable Price $
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
.00 - .55 13,225,778 5 .284 13,225,778 .284
1.73 300,000 3 1.726 300,000 1.726
2.00 - 2.80 2,025,000 3 2.468 2,025,000 2.468
3.20 50,000 3 3.20 50,000 3.20
7.00 - 7.15 344,500 2 7.106 344,500 7.106
8.50 122,250 1 8.50 122,250 8.50
11.50 1,980,000 1 11.50 1,980,000 11.50
14.03 180,000 2 14.03 180,000 14.03
- --------------------------------------------------------------------------------
.00 - 14.03 18,227,528 4.2 2.096 18,227,528 .50
- --------------------------------------------------------------------------------
</TABLE>
F-40
<PAGE> 78
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(Company) Ltd.
Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
6. Commitments Employee Agreements
During 1997, the Company entered into an employment agreement with its chief
executive officer, expiring in February 2000. The employment agreement sets
forth annual compensation to the chief executive officer of $200,000.
Compensation is adjusted annually based upon an annual review by the
compensation committee of the Board of Directors. During February 2000, the
Company's Board of Directors extended the employment agreement for a period
of one year at an annual base salary of $250,000 with an immediate bonus of
$75,000.
Employee Benefit Plans
During fiscal 1997, the Company established a 401(k) plan. Employees who are at
least 21 years of age are eligible to participate in the plan. Employees may
contribute from 1% to 15% of their compensation to the plan. Employer matching
contributions are discretionary and vest ratably over a five year period. The
Company did not make any contributions to the Plan for the years ended December
31, 1999, 1998 and 1997.
During 1999, the Company adopted a flexible benefits plan. The plan is
administrated by the Company.
Operating Leases
The Company leases office space under various non-cancelable leases, which
expire through January 2005.
Future minimum lease payments as of December 31, 1999 are as follows:
Year Ending December 31, Dollars in Thousands
----------------------------------------------------------------------
2000 $ 174
2001 145
2002 133
2003 135
2004 138
Thereafter 11
----------------------------------------------------------------------
Total $ 736
----------------------------------------------------------------------
Total rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $59,000, $106,000 and $120,000.
</TABLE>
F-41
<PAGE> 79
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(Company) Ltd.
Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
7. Taxes on Income Tax Benefits Under The Law For The Encouragement Of Capital Investments, 1959
The Company has been granted "approved enterprise" status under the Isreal Law
for the Encouragement of Capital Investments, 1959. The Company opted for
benefits under the "alternative path" which entitles it to a ten-year tax
exemption commencing in the first year in which taxable income will be
earned, subject to certain time restrictions. Entitlement to the benefits is
dependent upon compliance with the conditions of the letter of approval. Due
to reported losses, the benefit period has not yet commenced.
The Company has received final tax assessments through December 31, 1991.
According to Israeli Tax Law, tax assessments up to and including December
31, 1993 are considered final.
There was no provision for U.S. income taxes required for the years ended
December 31, 1999, 1998 and 1997 due to operating losses in those years. At
December 31, 1999, the Company had available U.S. net operating loss
carryforwards of approximately $8,018,000 for tax reporting purposes. These
U.S. net operating loss carry forwards expire through 2020. These carry
forwards are subject to various limitations imposed by the rules and
regulations of the Internal Revenue Service.
Income taxes consisted of the following:
Year Ended December 31, 1999 1998 1997
-----------------------------------------------------------------
Dollars in Thousands
Deferred benefit:
Federal $ (464) $ (130) $ (589)
Foreign - - -
State (24) (115) (204)
-----------------------------------------------------------------
Change in valuation allowance 488 245 793
-----------------------------------------------------------------
Income tax benefit $ - $ - $ -
=================================================================
There were no tax credits established in the statements of operations since
the Company has a 100 percent valuation allowance for the tax benefit of net
deductible temporary differences and operating loss carryforwards. Management
is not able to determine if it is more likely than not that the deferred tax
assets will be realized. The Company has deferred tax assets with a 100
percent valuation allowance at December 31, 1999 and 1998. The tax effect on
the components is as follows:
</TABLE>
F-42
<PAGE> 80
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(Company) Ltd.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
December 31, 1999 1998
--------------------------------------------------------------------------------
Dollars in Thousands
<S> <C> <C>
U.S. net operating loss carryforwards $ 2,992 $ 2,509
Accounts receivable 5 -
--------------------------------------------------------------------------------
2,997 2,509
Valuation allowance (2,997) (2,509)
--------------------------------------------------------------------------------
$ - $ -
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
A reconciliation of the income taxes at the federal statutory rate to the
effective tax rate is as follows:
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
--------------------------------------------------------------------------------
Dollars in Thousands
<S> <C> <C> <C>
Federal income tax benefit computed $ (475) $ (2,309) $ (4,083)
at the Federal statutory rate
State income tax benefit net of (24) (115) (204)
Federal benefit
Exempt from Israel income taxes 11 2,179 3,494
Other - permanent differences - - -
Change in valuation allowance 488 245 793
--------------------------------------------------------------------------------
Income tax benefit $ - $ - $ -
--------------------------------------------------------------------------------
</TABLE>
F-43
<PAGE> 81
LanguageWare.net
(Company) Ltd.
Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
8. Supplemental Year Ended December 31, 1999 1998 1997
Data to -----------------------------------------------------------------------------
Statements of Dollars in Thousands
Cash Flows
Cash payments for interest $ 12 $ 78 $ 67
-----------------------------------------------------------------------------
Excluded from the statements of cash flows were the effects of certain
noncash investing and financing activities as follows:
Year Ended December 31, 1999 1998 1997
-----------------------------------------------------------------------------
Dollars in Thousands
Issuance of common stock upon exercise $ 50 $ - $ -
of stock options for stock subscription
receivable
Issuance of common stock for accounts - 360 -
payable
Issuance of common stock for 102 229 1,388
convertible debentures and accrued
interest
Issuance of convertible preferred stock 625 - 4,188
for convertible debentures and accrued
interest
Issuance of stock warrants in 600 - -
connection with convertible preferred
stock
Issuance of stock warrants for debt 306 - -
extinguishment
Issuance of stock warrants in 62 - -
connection with convertible debt
Trade credits received as payment on - - 666
accounts receivable
-----------------------------------------------------------------------------
9. Related Party The Company recorded revenue of $100,000 from the sale of a software
Transactions license to a stockholder during 1998. There were no material sales to
stockholders or other related parties during 1999 or 1997.
</TABLE>
F-44
<PAGE> 82
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(Company) Ltd.
Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
10. Significant As of December 31, 1999, one customer accounted for 85% of total accounts
Customers receivable and as of December 31, 1998, one customer accounted for 16%
of total accounts receivable. For the year ended December 31, 1999, two
customers accounted for 47% and 14% of total revenues. For the
year ended December 31, 1997, one customer accounted for 21% of total
revenues.
11. Geographic For purposes of allocating sales by geographic area, the Company uses the
Segments physical location of its customers as its basis.
Year Ended December 31, 1999 1998 1997
-----------------------------------------------------------------------------
Dollars in Thousands
Sales By Geographic Area:
Domestic (Israel) $ 53 $ 526 $ 650
North America 794 1,326 1,197
Other 867 97 1,278
-----------------------------------------------------------------------------
$1,714 $ 1,949 $3,125
-----------------------------------------------------------------------------
12. Subsequent Business Acquisition
Event
On January 14, 2000, the Company acquired all of the capital stock of
Star+Globe Technologies Pte. Ltd. ("Star+Globe"), a privately-held
Singapore company, in a transaction valued at approximately $6.5 million.
As a result of the acquisition, Star+Globe will operate as a wholly-owned
subsidiary of the Company.
In consideration for the Star+Globe stock, the Company may issue up to
33,673,361 shares of its common stock valued at $4,734,475 ($0.14 per
share quoted market price). At the closing, the Company issued an
aggregate of 30,306,025 shares of its common stock (the "Closing
Consideration"), and was required to issue up to 3,367,336 additional
shares of its common stock (the "Holdback Shares") within ninety (90)
days of January 14, 2000. The Holdback Shares may be reduced by
any indemnification claims pursuant to the
</TABLE>
F-45
<PAGE> 83
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(Company) Ltd.
Notes to Consolidated Financial Statements
<TABLE>
<S> <C>
provisions of the Agreement. The Company has agreed to use its best
efforts to register, in calendar year 2000, all of the common stock issued
as consideration.
In connection with the transaction, the Company has also agreed to provide
a non-qualified share option plan for employees and a director of
Star+Globe wherein stock options have been granted to such employees
and director to purchase an aggregate of 2,266,639 the Company's common
stock valued at $1,735,183 using the Black-Scholes options pricing model
at an exercise price of $0.093 per share. The stock options are exercisable
immediately and expire on January 15, 2001.
The acquisition was recorded using the purchase method of accounting by
which the assets were valued at fair market value at the date of
acquisition. Based upon the contingency related to the Holdback Shares as
described above, the value of the acquisition consideration may decrease
up to approximately $473,000.
The following unaudited pro forma information presents the consolidated results
of the operations of the Company as if the acquisition of Star+Globe occurred on
January 1, 1999. The unaudited pro forma financial data does not purport to be
indicative of the results which actually would have been obtained had the
purchase been effected on the dates indicated or of the results which may be
obtained in the future.
Year Ended December 31, 1999
-----------------------------------------------------------------
Dollars in Thousands
Revenues $ 2,823
Loss before extraordinary item $ (4,554)
Net Loss $ (3,669)
Basic and diluted net loss per share:
Before extraordinary item $ (0.06)
Net loss per share $ (0.07)
Basic and diluted weighted average
number of shares outstanding 64,080
13. Fourth The Company recorded in the fourth quarter of 1999 certain adjustments relative to
Quarter non-cash interest expense related to a convertible debenture amounting to
Adjustments $600,000 and an adjustment to reduce the Company's extraordinary gain from
debt extinguishment due to the change in the valuation of the warrants
issued in connection with the debt extinguishment amounting to $232,471.
Of the aggregate amount, $432,472 and $399,999 relate to the first and
second quarters, respectively. The Company will file an amended Form 10-Q
for the quarters ended March 31, 1999 and June 30, 1999.
</TABLE>
F-46
<PAGE> 84
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(Company) Ltd.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
14. Valuation and
Qualifying Balance at Deductions Balance
Accounts Beginning Charge to and at End of
of Period Expense Write-Offs Period
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
Allowance for doubtful $ 192 $ 73 $ (152) $ 113
accounts
Allowance for sales returns $ 27 $ - $ (27) $ -
Year Ended December 31, 1998
Allowance for doubtful $ 63 $ 218 $ (89) $ 192
accounts
Allowance for sales returns $ - $ 27 $ - $ 27
Year Ended December 31, 1997
Allowance for doubtful $1,109 $ 209 $(1,255) $ 63
accounts
Allowance for sales returns $1,136 $ - $(1,136) $ -
-----------------------------------------------------------------------------
</TABLE>
F-47
<PAGE> 85
Report of Independent Certified Public Accountants
Board of Directors
Star + Globe Technologies Pte Ltd and Its Subsidiary
Singapore
We have audited the accompanying consolidated balance sheets as of December 31,
1999 and 1998 of Star + Globe Technologies Pte Ltd and subsidiary (the
"Company") and the related consolidated statements of operations and
comprehensive loss, shareholders' equity (deficit) and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 1999 and 1998, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
United States generally accepted accounting principles.
/s/ BDO INTERNATIONAL
Certified Public Accountants
March 8, 2000
Singapore
F-48
<PAGE> 86
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
These accounts are expressed in U.S. Dollars.
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $2,006,513 $2,813,884
Accounts receivable:
Trade (Note 7) 590,990 172,850
Grants (Note 3) 44,377 90,189
Interest 25,579 30,207
Other 71,900 152,164
Inventories - 4,514
- ------------------------------------------------------------------------------------------------------------------
Total current assets 2,739,359 3,263,808
- ------------------------------------------------------------------------------------------------------------------
Property and equipment, net (Note 1) 132,589 150,389
- ------------------------------------------------------------------------------------------------------------------
$2,871,948 $3,414,197
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-49
<PAGE> 87
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
These accounts are expressed in US dollars.
December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities, Redeemable Preferred Stock and
Shareholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 367,787 $ 95,399
Other payable and accrued expenses 229,975 232,262
Billings in advance 100,891 112,632
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 698,653 440,293
- ---------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 2 and 3)
Redeemable convertible series A preferred stock of
S$0.01 par value; 2,500,000 shares authorized;
2,350,000 shares issued and outstanding; redeemable at S$2 per share
(US$1.20) (in the aggregate $2,820,000) 2,820,000 2,820,000
- ---------------------------------------------------------------------------------------------------------------------
Shareholders' equity (deficit) (Note 4):
Common stock of S$1 par value; 6,975,000 shares authorized; 1,901,250 1,867,500
3,168,750 and 3,112,500 shares issued and outstanding
Additional paid-in capital 141,805 -
Unearned compensation (Note 4) (114,691) -
Other accumulated comprehensive loss (754) -
Accumulated deficit (2,574,315) (1,713,596)
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (646,705) 153,904
- ---------------------------------------------------------------------------------------------------------------------
$ 2,871,948 $ 3,414,197
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-50
<PAGE> 88
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Consolidated Statements of Operations
and Comprehensive Loss
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
These accounts are expressed in US dollars.
Year Ended December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues, net (Note 7) $ 1,868,989 $ 932,890
Cost of revenues 935,290 171,851
- --------------------------------------------------------------------------------------------------------------------
Gross profit 933,699 761,039
Operating expenses:
Selling, general and administrative 1,469,839 818,503
Research and development expenditure 546,411 599,472
Depreciation 100,936 69,021
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,117,186 1,486,996
- --------------------------------------------------------------------------------------------------------------------
Operating loss (1,183,487) (725,957)
Other income (expense):
Interest income, net 124,790 48,212
Exchange gain(loss) 38,569 (5,392)
Grants received 159,409 191,897
- --------------------------------------------------------------------------------------------------------------------
Total other income 322,768 234,717
- --------------------------------------------------------------------------------------------------------------------
Net loss (860,719) (491,240)
Other comprehensive loss -
Foreign currency translation adjustment (754) -
- --------------------------------------------------------------------------------------------------------------------
Comprehensive loss $ (861,473) $ (491,240)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-51
<PAGE> 89
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Consolidated Statements of Shareholders' Equity (Deficit)
These accounts are expressed in US dollars.
<TABLE>
<CAPTION>
Total
Common Stock Additional Accumulated Shareholders'
--------------------- Paid-in Unearned Comprehensive Accumulated Equity
Shares Par Value Capital Compensation Loss Deficit (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 3,000,000 $1,800,000 $ - $ - $ - $(1,222,356) $ 577,644
Issuance of common stock
for services
(Note 4) 112,500 67,500 - - - - 67,500
Net loss - - - - - (491,240) (491,240)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 3,112,500 1,867,500 - - - (1,713,596) 153,904
Issuance of common stock
for services
(Note 4) 56,250 33,750 - - - - 33,750
Issuance of stock options to
employees for services
(Note 4) - - 141,805 (114,691) - - 27,114
Net loss - - - - - (860,719) (860,719)
Foreign currency translation
adjustment - - - - (754) - (754)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 3,168,750 $1,901,250 $141,805 $(114,691) $ (754) $(2,574,315) $ (646,705)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-52
<PAGE> 90
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
These accounts are expressed in US dollars.
Increase (Decrease) in Cash and Cash Equivalents
Year Ended December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (860,719) $ (491,240)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation 100,936 69,021
Common stock issued for services 33,750 67,500
Stock options issued for services 27,114 -
Fixed assets written off 379 -
Change in operating assets and liabilities:
Accounts receivable and other receivables (287,436) (191,113)
Inventories 4,514 (1,466)
Accounts payable, other payable and accrued expenses 270,101 93,435
Billings in advance (11,741) 78,562
- ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (723,102) (375,301)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (91,704) (60,184)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock - 2,820,000
Capital grants received 8,189 1,466
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,189 2,821,466
- ----------------------------------------------------------------------------------------------------------
Effect of foreign exchange rates on cash (754) -
Increase (decrease) in cash and cash equivalents (807,371) 2,385,981
Cash and cash equivalents, beginning of year 2,813,884 427,903
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $2,006,513 $2,813,884
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-53
<PAGE> 91
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Summary of Accounting Policies
- -------------------------------------------------------------------------------
Nature of Operations Star + Globe Technologies Pte Ltd (the "Company")
was incorporated in the Republic of Singapore on
April 23, 1996. Star + Globe Technologies, Inc., a
wholly owned subsidiary of the Company, was
incorporated on February 28, 1998 in the State of
California, USA.
The principal activities of the Company and the
subsidiary are the development and sale of multi-
lingual end-user and information service software
tools.
Principles of The accompanying consolidated financial statements
Consolidation include the accounts of the Company and its wholly
owned subsidiary. All significant inter-company
accounts and transactions have been eliminated in
consolidation.
Cash and Cash For the purposes of the statement of cash flows,
Equivalents the Company considers all highly liquid
investments including demand deposits with an
original maturity of three months or less to be
cash equivalents.
Revenue Recognition The Company recognizes revenue earned from the
sale of products net of sales returns, trade
allowances and duties and taxes paid. Sales are
recognized upon delivery to customers.
Fees billed in advance for maintenance contracts
are held in the balance sheet as advance billings
and earned over the period of the contract.
Grants for research and development are recognized
in the period in which the related costs are
incurred.
Inventories Inventories consist of packing materials and are
stated at the lower of cost or market value. Cost
is determined on a first-in first-out basis.
F-54
<PAGE> 92
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Property and Equipment Property and equipment are stated at cost. Upon
retirement, sale or other disposition of property
and equipment, the cost and accumulated
depreciation are eliminated from the accounts and
gain or loss is included in operations.
Depreciation is computed principally using the
straight-line method of accounting over the
estimated useful lives of three years. Leasehold
improvements are amortized over the lesser of the
estimated useful life or over the term of the
lease.
Long-Lived Assets Long-lived assets are reviewed for impairment
whenever events or changes in circumstances
indicate that the carrying amount may not be
recoverable. If the expected future cash flow from
the use of the asset and its eventual disposition
is less than the carrying amount of the asset, an
impairment loss is recognized and measured using
the asset's fair value.
Income Taxes The Company accounts for income taxes under the
liability method, which requires an entity to
recognize deferred tax assets and liabilities.
Temporary differences are differences between the
tax basis of assets and liabilities and their
reported amounts in the financial statements that
will result in taxable or deductible amounts in
future years.
Research and Development Research and development costs are expensed as
incurred. Statement of Financial Accounting
Standards 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise
Marketed", does not materially affect the Company.
Foreign Currency The Company maintained its accounting records in
Singapore dollars as it considers Singapore
dollars to be its functional currency.
The accompanying financial statements have been
translated into the U.S. dollar. Assets and
liabilities are translated at the rate of exchange
in effect on the balance sheet date; income and
expenses are translated at the average rates of
exchange prevailing during the year. The related
translation adjustments are reflected as a
cumulative translation adjustment in consolidated
shareholders' equity (deficit). Foreign currency
gains and losses resulting from transactions are
included in results of operations in the period in
which the transactions occurred.
The exchange rate used for translating the
Singapore dollar denominated financial statements
into US dollars was S$1 = US$.60 as of December
31, 1999 and 1998.
F-55
<PAGE> 93
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Stock Options The Company applies APB Opinion 25, "Accounting
for Stock Issued to Employees" ("APB Opinion 25")
and related Interpretations in accounting for all
stock option plans. Under APB Opinion 25,
compensation cost is recognized for stock options
issued to employees when the exercise price of the
Company's stock options granted is less than the
market price of the underlying common stock on the
date of grant. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") requires the
Company to provide pro forma information regarding
net income (loss) as if compensation cost for the
Company's employee stock options plans had been
determined in accordance with the fair value based
method prescribed in SFAS No. 123. To provide the
required pro forma information, the Company
estimates the fair value of each stock option at
the date of grant by using the Black-Scholes
option-pricing model. The Company accounts for
options to non-employees using SFAS No. 123.
Comprehensive Loss Comprehensive loss is comprised of net loss and
all changes to the consolidated statement of
shareholders' equity, except those due to
investments by shareholders, changes in paid-in
capital and distributions to shareholders.
F-56
<PAGE> 94
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Use of Estimate The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of
the financial statements, and the reported amounts
of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Concentrations of The Company's financial instruments that are
Credit Risk exposed to concentrations of credit risk consist
primarily of cash and accounts receivable.
The Company at times maintains large cash balances
at financial institutions. The Company has not
experienced any losses in its cash accounts. The
Company reviews a customer's credit history before
extending credit and establishes an allowance for
doubtful accounts based upon the credit risk of
specific customers, historical trends and other
information. Management of the Company has
determined that there are no anticipated credit
losses in its accounts receivable at December 31,
1999 and 1998. Generally, the Company does not
require collateral from its customers.
F-57
<PAGE> 95
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
1. Property and Property and equipment are as follows:
Equipment
December 31, 1999 1998
---------------------------------------------------------------------------
Leasehold improvements $ 82,257 $ 80,893
Furniture and fixtures 27,203 17,119
Office equipment 23,020 22,928
Computer equipment 148,254 87,030
Computer software 35,198 46,117
---------------------------------------------------------------------------
315,932 254,087
Accumulated depreciation and
amortization 183,343 103,698
---------------------------------------------------------------------------
Net property and equipment $ 132,589 $ 150,389
---------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
2. Lease The Company leases office space under operating leases. Future minimum
Commitments lease payments under such leases follow:
Year Ending December 31, 1999
---------------------------------------------------------------------------
2000 $ 107,608
2001 72,317
2002 60,264
---------------------------------------------------------------------------
$ 240,189
---------------------------------------------------------------------------
Total rent expense for the years ended December 31, 1999 and 1998 was
approximately $107,600 and $99,000.
</TABLE>
F-58
<PAGE> 96
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Notes to Consolidated Financial Statements
3. Contingencies During 1999, the Company received a research and
development grant from the National Science &
Technology Board ("NSTB") in the amount of
S$168,150 (US$100,890). This project commenced
from March 15, 1999 and ends on September 1, 2000.
The Company will be reimbursed as costs are
incurred. Under the terms of the grant, the grant
is subject to termination, as subsequent to year
end, the Company's ownership and control has
changed (see Note 6). The Company may not be
entitled to future reimbursement of funds under
the grant. As of December 31, 1999, the Company
has an amount receivable under the grant of
S$73,962 (US$44,377).
The Company is currently in discussions with its
largest customer (see Note 7) with respect to a
number of issues arising from a Globalization
Service Agreement (the "Agreement") dated November
23, 1998. The customer is asserting that certain
deliverables under the Agreement may have not met
the acceptable standards as well as the
determination of independent bench-markers. Also,
there is an issue as to whether the customer
provided proper notification and description of
errors and accuracies in the deliverables in
accordance with the terms of the Agreement. As
this matter involves questions of fact which have
not yet been ascertained, the Company and its
legal counsel are unable to render an opinion on
the extent of potential liability of the Company,
if any, with respect to this matter. As such, the
Company has not recorded a liability as of
December 31, 1999.
4. Shareholders' Redeemable Convertible Series A Preferred Stock
Equity
During the latter part of 1998, the Company issued
a total of 2,350,000 shares of redeemable
convertible Series A preferred stock of S$0.01
(US$0.006) each at S$2 (US$1.20) per share. The
preferred stock provides for an annual dividend of
S$0.16 (US$0.096) per share and are redeemable at
the option of the holders at any time for cash at
S$2 (US$1.20) per share plus unpaid dividends or
convertible into common stock at a conversion
price of S$2 (US$1.20) per share.
Common Stock Issued for Services
For the years ended December 31, 1999 and 1998,
the Company issued 56,250 and 112,500 shares of
common stock of S$1 (US$0.60) valued at $33,750
and $67,500 to a Director.
Employee Stock Option Plan
On July 22, 1998, the stockholders of the Company
approved The Employee Share Option Plan (the
"Plan"). On February 12, 1999, the Company
approved and increased its share allocation under
the Plan from 400,000 common stock to 657,350
common stock of S$1 each.
F-59
<PAGE> 97
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Exercise Price and
Weighted Average
Number of Exercise Price per Expiration
Shares Share $ Dates
-----------------------------------------------------------------------
January 1, 1998 - - -
Granted 181,500 .60 2000 - 2002
-----------------------------------------------------------------------
December 31, 1998 181,500 .60 2000 - 2002
Granted 227,118 .60 2004 - 2008
-----------------------------------------------------------------------
December 31, 1999 408,618 .60 2000 - 2008
-----------------------------------------------------------------------
Options
-----------------------------------------------------------------------
Weighted average fair value of options $.72
granted during 1999
Weighted average fair value of options
granted during 1998 $.11
-----------------------------------------------------------------------
F-60
<PAGE> 98
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
The Company applies APB Opinion 25, "Accounting
for Stock Issued to Employees", and related
Interpretations in accounting for the plans. Under
APB Opinion 25, when the exercise price of the
Company's employee stock options is less than the
market price of the underlying stock on the date
of grant, compensation cost is recognized.
During 1999, the Company granted stock options to
its employees at an exercise price that was less
than the market price at the date of the grant.
These options vest over a five to ten year period.
During 1999, the Company recognized $27,114 in
compensation expense, and as of December 31, 1999,
the Company has recorded $114,691 as unearned
compensation.
FASB Statement 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), requires the
Company to provide pro forma information regarding
net loss and net loss per share as if compensation
costs for the Company's stock option plans and
other stock awards had been determined in
accordance with the fair value based method
prescribed in SFAS No. 123. The Company estimates
the fair value of each stock award at the grant
date by using the Black-Scholes option-pricing
model with the following weighted-average
assumptions used for grants in 1999 and 1998:
dividend yield of 0 percent for both years;
expected volatility of 0 percent for both years;
risk-free interest rates of 4.18% and 5.94% and
expected lives of 5 to 10 years.
Under the accounting provisions for SFAS No. 123,
the Company's net loss and net loss per share
would have been increased by the pro forma amounts
indicated below:
Year Ended December 31, 1999 1998
---------------------------------------------------
Net loss:
As reported $(860,719) $(491,240)
Pro forma $(872,023) $(495,668)
F-61
<PAGE> 99
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
The following information summarizes stock options outstanding and
exercisable at December 31, 1999.
Outstanding
------------------------------------
Weighted Average Exercisable
---------------------- ----------------------
Remaining
Range of Contractual Number Weighted
Exercise Number Life in Exercise Exercis- Average
Prices $ Outstanding Years Price $ able Exercise $
-------------------------------------------------------------------------
.60 408,618 7 .60 142,868 .60
5. Supplemental No payments for income taxes were made in 1999 or 1998.
Disclosures of Cash payments for interest amounted to $10 and $134 in
Cash Flow 1999 and 1998.
Information
6. Subsequent On January 14, 2000, LanguageWare.net (Company) Ltd.
Events ("LanguageWare.net") acquired all of the issued and
outstanding common stock and redeemable convertible
Series A preferred stock of the Company.
Upon the acquisition of the Company by LanguageWare.net,
the 1997 Employee Share Option Plan was modified so that
any stock option granted up to that date under the Plan
became immediately exercisable by each grantee. 86,618
shares under the Plan were exercised on January 12, 2000.
7. Significant As of December 31, 1999, one customer represented 98% of
Customers trade accounts receivable. As of December 31, 1998, one
customer represented 40% of trade accounts receivable.
For the year ended December 31, 1999, one customer
represented 82% of total revenues. For the year ended
December 31, 1998, two customers represented 38% and 11%
of total revenues.
F-62
<PAGE> 100
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Notes to Consolidated Financial Statements
8. Income Taxes At December 31, 1999, the Company has tax losses
of approximately US$2,266,133 available for offset
against future taxable income subject to
confirmation by the Singapore tax authorities and
also subject to the provisions of Section 37 of
the Singapore Income Tax Act.
At December 31, 1999, the Company had available
U.S. net operating loss carryforwards of
approximately $154,000 for tax reporting purposes.
These U.S. net operating loss carryforwards expire
through 2020. These carryforwards are subject to
various limitations imposed by the rules and
regulations of the Internal Revenue Service.
Under Section 37 (5) of the Singapore Income Tax
Act, a Company utilizing the unabsorbed losses
against its chargeable income is required to
satisfy the Tax Comptroller that there has been no
substantial change in the Company's shareholders
in the relevant periods.
In the event that there is a substantial change in
the Company's shareholders, the Company can apply
under Section 37 (8) of the Singapore Income Tax
Act for a waiver from the requirement to meet the
continuity of ownership test as set out in Section
37 (5). In this respect, the Company would have to
prove to the Comptroller's satisfaction that the
change in shareholders was not motivated by any
tax advantage or benefit.
Due to a substantial change of shareholders in the
relevant dates, the Company applied for a waiver
of substantial shareholders test for financial
years 1997 and 1998 but to date has not received a
reply.
F-63
<PAGE> 101
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
There has been a further substantial change in
shareholders in January 2000. The Company has not
yet applied for a waiver in respect of this
change. If no waiver is applied for by the Company
or if applied for but not granted, none of the
accumulated unabsorbed tax losses will be
available for offset against the future profit.
There were no tax credits established in the
statements of operations since the Company has a
100 percent valuation allowance for the tax
benefit of net deductible temporary differences
and operating loss carryforwards. Management is
not able to determine if it is more likely than
not that the deferred tax assets will be realized.
The Company has deferred tax assets with a 100
percent valuation allowance at December 31, 1999
and 1998. The tax effect on the components is as
follows:
December 31, 1999 1998
-------------------------------------------------
Singapore net operating loss
carryforwards $ 589,000 $ 411,000
Basis difference in current
liabilities - (14,000)
U.S. net operating loss
carryforwards 58,000 26,000
-------------------------------------------------
647,000 423,000
Valuation allowance (647,000) (423,000)
-------------------------------------------------
$ - $ -
-------------------------------------------------
F-64
<PAGE> 102
Star + Globe Technologies Pte Ltd
and Its Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
A reconciliation of the income taxes at the federal statutory
rate to the effective tax rate is as follows:
Year Ended December 31, 1999 1998
-------------------------------------------------------------
Income tax benefit computed at the
statutory rate $ (292,000) $ (167,000)
Singapore tax statutory rate
differences 72,000 48,000
State income tax benefit net of U.S.
Federal income tax benefit (14,000) (8,000)
Other - permanent differences 10,000 -
Change in valuation allowance 224,000 127,000
-------------------------------------------------------------
Income tax benefit $ - $ -
-------------------------------------------------------------
F-65
<PAGE> 103
LanguageWare.net (Company) Ltd.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
The following Unaudited Pro Forma Condensed Consolidated Statement of Operations
give effect to the acquisition by the Company of Star+Globe and are based on the
estimates and assumptions set forth herein. This pro forma presentation has
been prepared utilizing historical financial statements and notes thereto,
certain of which are included herein as well as pro forma adjustments as
described in the Notes to the unaudited Pro Forma Condensed Consolidated
Financial Statement. The pro forma financial data does not purport to be
indicative of the results which actually would have been obtained had the
acquisition been effected on the date indicated or the results which may be
obtained in the future.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations for the
year ended December 31, 1999 includes the operating results of the Company and
Star+Globe assuming the acquisition occurred on January 1, 1999.
The Unaudited Pro Forma Condensed Consolidated Statement of Operations is
presented for illustrative purposes only and do not purport to represent what
the Company's results of operations would have been had the acquisition
described herein occurred on the date indicated for any future period or at any
future date, and are therefore qualified in their entirety by reference to and
should be read in conjunction with the historical consolidated financial
statements of the Company for the year ended December 31, 1999 and the
historical financial statements of Star+Globe contained elsewhere herein.
Acquisition
On January 14, 2000, LanguageWare.net acquired all of the capital stock of
Star+Globe, a privately-held Singapore company, for an aggregate purchase price
of approximately $6.5 million.
Star+Globe provides proprietary Asian character processing technology for the
Internet. It is located in Singapore. The assets of Star+Globe consist
primarily of cash, accounts receivables, property and equipment and certain
intangible assets. The Company intends to continue the business of Star+Globe
substantially in accordance with past practices, with modification to fit the
Company's systems and procedures.
F-66
<PAGE> 104
LanguageWare.net (Company) Ltd.
Unaudited Pro Forma Condensed Consolidated Statement of Operations
Year Ended December 31, 1999
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
LanguageWare.net Star + Globe Adjustments Pro Forma
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,714,462 $ 1,868,989 $ (760,739)(2) $ 2,822,712
Cost of sales 1,163,093 935,290 (760,739)(2) 1,337,644
- ----------------------------------------------------------------------------------------------------------------
Gross profit 551,369 933,699 - 1,485,068
- ----------------------------------------------------------------------------------------------------------------
Costs and expenses
Product development costs 283,182 546,411 - 829,593
Marketing expenses 722,305 - - 722,305
General and administrative
expenses 1,148,501 1,570,775 1,411,541 (1) 4,130,817
- ----------------------------------------------------------------------------------------------------------------
Total costs and expenses 2,153,988 2,117,186 1,411,541 5,682,715
- ----------------------------------------------------------------------------------------------------------------
Loss from operations (1,602,619) (1,183,487) (1,411,541) (4,197,647)
- ----------------------------------------------------------------------------------------------------------------
Interest and other
Interest expense (679,615) - - (679,615)
Interest income - 124,790 - 124,790
Exchange gain - 38,569 - 38,569
Grants earned - 159,409 - 159,409
- ----------------------------------------------------------------------------------------------------------------
Total interest and other (679,615) 322,768 - (356,847)
- ----------------------------------------------------------------------------------------------------------------
Loss before extraordinary
item $(2,282,234) $ (860,719) $(1,411,541) $(4,554,494)
- ----------------------------------------------------------------------------------------------------------------
Net loss per share before
extraordinary item
Basic and diluted $ (0.08) $ (0.07)
Basic and diluted weighted
average number of shares
outstanding 30,406,700 - 33,673,361 (3) 64,080,061
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to the unaudited pro forma condensed consolidated statement of
operations.
F-67
<PAGE> 105
LanguageWare.net (Company) Ltd.
Notes to Unaudited Pro Forma Condensed Consolidated Statement of Operations
Note 1 To reflect the acquisition of Star + Globe.
The following is the preliminary allocation of the purchase price based on the
fair value of the assets acquired and the liabilities assumed.
<TABLE>
<CAPTION>
Annual
Estimated Life Purchase Price Depreciation and
Years Allocation Amortization
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Allocation of purchase price:
Cash N/A $ 2,006,513
Accounts receivable, net N/A 590,990
Other current assets N/A 141,856
Property and equipment N/A 132,589*
Completed technology 3 3,350,000 $1,116,667
Other intangible assets 3 to 4 800,000 262,500
Goodwill 5 161,872 32,374
- -------------------------------------------------------------------------------------------------------------
7,183,820 $1,411,541
Less:
Accounts payable 367,787
Other current liabilities 330,866
- -------------------------------------------------------------------------------------------------------------
Total purchase price 6,485,167
Purchase consideration:
Value of common stock (4,734,475)
Value of options (1,735,183)
Direct costs of the acquisition (15,509)
- -------------------------------------------------------------------------------------------------------------
$ -
- -------------------------------------------------------------------------------------------------------------
</TABLE>
*Depreciation expense of Star + Globe included in the historical statements of
operations totaled $100,936 and is reflective of the proforma depreciation
expense.
Note 2 To eliminate intercompany revenues and expenses.
Note 3 To reflect the 33,673,361 shares of LanguageWare.net common stock issued
in the acquisition of Star + Globe.
F-68
<PAGE> 106
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities registered under this Registration Statement are estimated to be as
follows:
Securities and Exchange Commission Registration Fee...............$ 16,320
Printing and Engraving Expenses................................... 5,000
Legal Fees and Expenses........................................... 5,000
Accounting Fees and Expenses...................................... 10,000
Transfer Agent Fees............................................... 1,000
Total....................................................$ 37,320
---------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Association of the Company provide that, to the fullest
extent permitted by the Israeli Companies' Ordinance (New Version), 1983, as
amended (the "Companies Ordinance"), the Company may indemnify its directors and
officers for (i) any financial liability imposed upon them for the benefit of a
third party by a judgment, including a settlement or arbitration decision
certified by a court, as a result of an act or omission of such person in his
capacity as a director or officer of the Company; and (ii) reasonable litigation
expenses, including legal fees, incurred by such director or officer or which he
is obligated to pay by a court order, in a proceeding brought against him by or
on behalf of the Company or by others, or in connection with a criminal
proceeding in which he was acquitted, in each case relating to acts or omissions
of such person in his capacity as a director or officer of the Company
("Indemnifiable Event").
The Company's Articles of Association provide that, to the fullest
extent permitted by the Companies Ordinance, the Company may procure directors'
and officers' liability insurance for (i) breach of the duty of care by any
director or officer owed to the Company or to any other person; (ii) breach of
fiduciary duty by any officer or director owed to the Company, provided such
person acted in good faith and had reasonable cause to assume that the action
would not prejudice the interests of the Company; and (iii) any financial
liability imposed upon any director or officer for the benefit of a third party
by reason of an act or omission of such person in his capacity as a director or
officer of the Company. The Company has a directors' and officers' liability
insurance policy that insures the Company's officers and directors against
certain liabilities.
Under the Companies Ordinance, the Company may not indemnify or procure
insurance coverage for the liability of its Office Holders (as defined in the
Companies Ordinance) in respect of any monetary obligation imposed by reason of
(i) an act or omission which constitutes a breach of fiduciary duty, except to
the extent described above; (ii) a willful breach of the duty of care or
reckless disregard of the
II-1
<PAGE> 107
circumstances or consequences of such breach; (iii) an act or omission done with
the intent to unlawfully realize personal gain; or (iv) a fine or penalty
imposed for a criminal offense.
The Companies Ordinance defines an "Office Holder" to include a
director, general manager, chief executive officer, executive vice president,
vice president, other managers directly subordinate to the general manager, and
any person assuming the responsibilities of the foregoing positions without
regard to such person's title.
In addition, pursuant to the Companies Ordinance, indemnification of,
and procurement of insurance coverage for, an Office Holder of the Company is
permitted if it is approved by the Company's Audit Committee and Board of
Directors. In certain circumstances, the Companies Ordinance also requires
approval of such indemnification and insurance by the Company's shareholders.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
3.1(a) Memorandum of Association of Registrant (filed as Exhibit 3.1(a) to the Company's Registration Statement
No. 33-92754).*
3.1(b) Certificate of Name Change dated October 23, 1994 (filed as Exhibit 3.1(b) to the Company's Registration
Statement No. 33-92754).*
3.1(c) Certificate of Name Change dated April 23, 1995 (filed as Exhibit 3.1(c) to the Company's Registration
Statement No.33-92754).*
3.1(d) Certificate of Name Change dated October 6, 1999 (filed as Exhibit 99.1 to the Company's Form 8-K on
October 18, 1999)*
3.2(a) Articles of Association of Registrant (filed as Exhibit 3.2 to the Company's Registration Statement No.
33-92754).*
3.2(b) Authorization of Registration of Increase in Share Capital dated July 18, 1999 (filed as Exhibit 3.2(b) to
the Company's Form 10Q on May 12, 1999)*
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).*
</TABLE>
II-2
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
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).*
4.9 Securities Purchase Agreement dated August 5, 1997, between CC Investments LDC and Accent Software
International Ltd., which includes the Convertible Debenture, two Warrant Agreements and the Registration
Rights Agreement as exhibits thereto. (filed as Exhibit 4.1 to the Company's Registration Statement filed
on August 27, 1997, Reg. No. 333-34455).*
4.10 Warrant Agreement with The Shemano Group, Inc. (filed as Exhibit 4.6 to the Company's Registration
Statement filed on October 16, 1997, Reg. No. 333-380043).*
4.11 Warrant Agreement with Equity Management Partners LLP (filed as Exhibit 4.7 to the Company's Registration
Statement filed on October 16, 1997, Reg. No. 333-38043).*
4.12 Warrant Agreement with Brad Gillingham (filed as Exhibit 4.8 to the Company's Registration Statement filed
on October 16, 1997, Reg. No. 333-38043).*
4.13 Form of Warrant Agreement covering warrant agreements with Robert J. Laikin, Michael Mosher and
Manufacturers Indemnity and Insurance Company of America (filed as Exhibit 4.9 to the Company's
Registration Statement filed on October 16, 1997, Reg. No. 333-38043).*
4.14 Form of Securities Purchase Agreement dated November 6, 1997, between Accent Software International Ltd.,
and CC Investments LDC, Nelson Partners, Olympus Securities, Ltd., Marshall Companies, Profinsa Investments,
which includes the Convertible Debenture, the Warrant Agreement, Registration Rights Agreement and Certificate
of Designation as exhibits thereto. (filed as Exhibit 4.1 to the Company's Registration Statement filed on
November 6, 1997, Reg. No. 333-39697).*
4.15 Warrant Agreement with The Shemano Group, Inc. (filed as Exhibit 4.1 to the Company's Form S-3 filed on
November 6, 1997, Reg. No. 333-39697).*
</TABLE>
II-3
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
4.1 Form of Warrant to Lernout & Hauspie Speech Products, N.V. (filed as Exhibit 4.16 to the Company's Form
10-Q on May 12, 1999)*
4.17 Form of Warrant to L&H Investment Company, N.V. (filed as Exhibit 4.17 to the Company's Form 10-Q on May
12, 1999)*
4.18 Certificate of Designation for Series C Preferred Stock (filed as Exhibit 4.18 to the Company's Form 10Q
on November 12, 1999)*
4.19 Certificate of Designation for Series D Preferred Stock (filed as Exhibit 4.19 to the Company's Form 10Q on
November 12, 1999)*
5.1 Opinion of Yigal Arnon & Co. regarding the legality of the securities being issued.**
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).*
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).*
</TABLE>
II-4
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
10.6(a) Employee Share Option Plan (1995) (filed as Exhibit 10.7(a) to the Company's Registration Statement No.
33-92754).*
10.6(b) Amended and Restated Employee Share Option Plan (1995) (filed as Exhibit 4.2 to the Company's Registration
Statement No. 333-04285).*
10.6(c) Non-Employee Director Share Option Plan (1995) (filed as Exhibit 10.7(b) to the Company's Registration
Statement No. 33-92754).*
10.6(d) Amended and Restated Non-Employee Share Option Plan (1995) (filed as Exhibit 4.2 to the Company's
Registration Statement No. 333-07965).*
10.6(e) Amended and Restated Non-Employee Share Option Plan (1995) (filed as Exhibit 10-6(e) to the Company's
Form 10-K on March 31, 1998).*
10.6(f) Non-Employee Share Option Plan (1998) (filed as Exhibit B to the Company's Form 14-A on April 29, 1998)*
10.6(g) CEO Share Option Plan (1999) (filed as Exhibit 10.6(f) to the Company's Form 10-Q on August 11, 1999)*
10.6(h) LanguageWare.net (Company) Ltd. Star+Globe Share Option Plan (2000) (filed as Exhibit 10.6(g) to the
Company's Form 10-K on March 31, 2000)*
10.7 Employment Agreement between the Company and Todd A. Oseth, dated February 3, 1997 (filed as exhibit
10.7(b) to the Company's Form 10-K on March 31, 1998).*
10.8 Agreement between the Company and The Bank for Industrial Development (filed as Exhibit 4-1 to the Company's
Form S-3 on August 4, 1998)*
10.9 Stock Purchase Agreement between the Company and Gotham Bay partners LLC dated July 14, 1999 (filed as
Exhibit 10.13 to the Company's Form 10-Q on August 11, 1999)*
10.10 Stock Purchase Agreement, dated as of January 14, 2000, by and among LanguageWare.net (Company) Ltd., Star+Globe
Technologies Pte. Ltd., Technology Fund Pte. Ltd., KRDL Holdings Pte. Ltd., Technology Fund II Pte. Ltd.,
Seed Ventures II Limited, Info Tech Ventures Limited, Vertex Technology Fund Pte. Ltd., NIF Asian Pre-IPO
Fund Limited, Asia-Pacific Ventures II Ltd., Virginia Cha, James L. Kelly, Lernout & Hauspie Investment
Co., N.V. and WIIG Global Ventures Pte. Ltd. (filed as Exhibit 2 to the Company's Form 8-K on January 28,
2000)*
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of BDO Shlomo Ziv & Co.
23.3 Consent of BDO International
</TABLE>
II-5
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
23.4 Consent of Yigal Arnon & Co. (included in Exhibit 5.1).
24.1 Power of Attorney (see signature page).
</TABLE>
- ----------------------
* Incorporated by reference.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement;
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933, as amended (the
"Securities Act");
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form
of prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate, with
changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement; and (iii)To include any
material information with respect to the plan of distribution
not previously disclosed in the registration statement or any
material change to such information in the registration
statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in this Registration Statement or any material change to such
information in this Registration Statement
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering; and
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or
II-6
<PAGE> 112
15(d) of the Exchange Act that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described under Item 15 above, or
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-7
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Languageware.net (Company) Ltd. has duly caused this Registration Statement on
Form S-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Colorado Springs, State of Colorado, on this 23rd day
of May, 2000.
LANGUAGEWARE.NET (COMPANY) LTD.
By: /s/ Todd Oseth
-----------------------------------
Todd A. Oseth,
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Todd A. Oseth and Tom Foster and each one
of them, acting individually and without the other, as his or her
attorney-in-fact, each with full power of substitution, for him and his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that such attorneys-in-fact and
agents or any of them, or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Todd Oseth
- -------------------------- Director, President May 23, 2000
Todd A. Oseth and CEO
(Principal Executive Officer)
/s/ Thomas Foster
- -------------------------- Chief Financial Officer May 23, 2000
Thomas B. Foster (Principal Accounting and
Financial Officer)
/s/ Fred Snow
- -------------------------- Director, Chairman May 23, 2000
Fred A. Snow of the Board
</TABLE>
II-8
<PAGE> 114
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<CAPTION>
<S> <C> <C>
/s/ Francis Vanderhoydonck
- -------------------------- Director May 23, 2000
Francis Vanderhoydonck
/s/ Thomas Denys
- -------------------------- Director May 23, 2000
Thomas Denys
/s/ Juzar Motiwalla
- -------------------------- Director May 23, 2000
Juzar Motiwalla
/s/ Harold L. Covert
- -------------------------- Director May 23, 2000
Harold L. Covert
/s/ Daniel Foreart
- -------------------------- Director May 23, 2000
Daniel Foreart
/s/ John O'Neil
- -------------------------- Director May 23, 2000
John O'Neil
</TABLE>
II-9
<PAGE> 115
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
3.1(a) Memorandum of Association of Registrant (filed as Exhibit 3.1(a) to the Company's Registration Statement
No. 33-92754).*
3.1(b) Certificate of Name Change dated October 23, 1994 (filed as Exhibit 3.1(b) to the Company's Registration
Statement No. 33-92754).*
3.1(c) Certificate of Name Change dated April 23, 1995 (filed as Exhibit 3.1(c) to the Company's Registration
Statement No.33-92754).*
3.1(d) Certificate of Name Change dated October 6, 1999 (filed as Exhibit 99.1 to the Company's Form 8-K on
October 18, 1999)*
3.2(a) Articles of Association of Registrant (filed as Exhibit 3.2 to the Company's Registration Statement No.
33-92754).*
3.2(b) Authorization of Registration of Increase in Share Capital dated July 18, 1999 (filed as Exhibit 3.2(b) to
the Company's Form 10Q on May 12, 1999)*
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).*
</TABLE>
<PAGE> 116
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
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).*
4.9 Securities Purchase Agreement dated August 5, 1997, between CC Investments LDC and Accent Software
International Ltd., which includes the Convertible Debenture, two Warrant Agreements and the Registration
Rights Agreement as exhibits thereto. (filed as Exhibit 4.1 to the Company's Registration Statement filed
on August 27, 1997, Reg. No. 333-34455).*
4.10 Warrant Agreement with The Shemano Group, Inc. (filed as Exhibit 4.6 to the Company's Registration
Statement filed on October 16, 1997, Reg. No. 333-380043).*
4.11 Warrant Agreement with Equity Management Partners LLP (filed as Exhibit 4.7 to the Company's Registration
Statement filed on October 16, 1997, Reg. No. 333-38043).*
4.12 Warrant Agreement with Brad Gillingham (filed as Exhibit 4.8 to the Company's Registration Statement filed
on October 16, 1997, Reg. No. 333-38043).*
4.13 Form of Warrant Agreement covering warrant agreements with Robert J. Laikin, Michael Mosher and
Manufacturers Indemnity and Insurance Company of America (filed as Exhibit 4.9 to the Company's
Registration Statement filed on October 16, 1997, Reg. No. 333-38043).*
4.14 Form of Securities Purchase Agreement dated November 6, 1997, between Accent Software International Ltd.,
and CC Investments LDC, Nelson Partners, Olympus Securities, Ltd., Marshall Companies, Profinsa Investments,
which includes the Convertible Debenture, the Warrant Agreement, Registration Rights Agreement and Certificate
of Designation as exhibits thereto. (filed as Exhibit 4.1 to the Company's Registration Statement filed on
November 6, 1997, Reg. No. 333-39697).*
4.15 Warrant Agreement with The Shemano Group, Inc. (filed as Exhibit 4.1 to the Company's Form S-3 filed on
November 6, 1997, Reg. No. 333-39697).*
</TABLE>
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
4.1 Form of Warrant to Lernout & Hauspie Speech Products, N.V. (filed as Exhibit 4.16 to the Company's Form
10-Q on May 12, 1999)*
4.17 Form of Warrant to L&H Investment Company, N.V. (filed as Exhibit 4.17 to the Company's Form 10-Q on May
12, 1999)*
4.18 Certificate of Designation for Series C Preferred Stock (filed as Exhibit 4.18 to the Company's Form 10Q
on November 12, 1999)*
4.19 Certificate of Designation for Series D Preferred Stock (filed as Exhibit 4.19 to the Company's Form 10Q on
November 12, 1999)*
5.1 Opinion of Yigal Arnon & Co. regarding the legality of the securities being issued.**
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).*
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).*
</TABLE>
<PAGE> 118
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
10.6(a) Employee Share Option Plan (1995) (filed as Exhibit 10.7(a) to the Company's Registration Statement No.
33-92754).*
10.6(b) Amended and Restated Employee Share Option Plan (1995) (filed as Exhibit 4.2 to the Company's Registration
Statement No. 333-04285).*
10.6(c) Non-Employee Director Share Option Plan (1995) (filed as Exhibit 10.7(b) to the Company's Registration
Statement No. 33-92754).*
10.6(d) Amended and Restated Non-Employee Share Option Plan (1995) (filed as Exhibit 4.2 to the Company's
Registration Statement No. 333-07965).*
10.6(e) Amended and Restated Non-Employee Share Option Plan (1995) (filed as Exhibit 10-6(e) to the Company's
Form 10-K on March 31, 1998).*
10.6(f) Non-Employee Share Option Plan (1998) (filed as Exhibit B to the Company's Form 14-A on April 29, 1998)*
10.6(g) CEO Share Option Plan (1999) (filed as Exhibit 10.6(f) to the Company's Form 10-Q on August 11, 1999)*
10.6(h) LanguageWare.net (Company) Ltd. Star+Globe Share Option Plan (2000) (filed as Exhibit 10.6(g) to the
Company's Form 10-K on March 31, 2000)*
10.7 Employment Agreement between the Company and Todd A. Oseth, dated February 3, 1997 (filed as exhibit
10.7(b) to the Company's Form 10-K on March 31, 1998).*
10.8 Agreement between the Company and The Bank for Industrial Development (filed as Exhibit 4-1 to the Company's
Form S-3 on August 4, 1998)*
10.9 Stock Purchase Agreement between the Company and Gotham Bay partners LLC dated July 14, 1999 (filed as
Exhibit 10.13 to the Company's Form 10-Q on August 11, 1999)*
10.10 Stock Purchase Agreement, dated as of January 14, 2000, by and among LanguageWare.net (Company) Ltd., Star+Globe
Technologies Pte. Ltd., Technology Fund Pte. Ltd., KRDL Holdings Pte. Ltd., Technology Fund II Pte. Ltd.,
Seed Ventures II Limited, Info Tech Ventures Limited, Vertex Technology Fund Pte. Ltd., NIF Asian Pre-IPO
Fund Limited, Asia-Pacific Ventures II Ltd., Virginia Cha, James L. Kelly, Lernout & Hauspie Investment
Co., N.V. and WIIG Global Ventures Pte. Ltd. (filed as Exhibit 2 to the Company's Form 8-K on January 28,
2000)*
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of BDO Shlomo Ziv & Co.
23.3 Consent of BDO International
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
<S> <C>
23.4 Consent of Yigal Arnon & Co. (included in Exhibit 5.1).
24.1 Power of Attorney (see signature page).
</TABLE>
- ----------------------
* Incorporated by reference.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
LanguageWare.net (Company) Ltd.
Colorado Springs, Colorado
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 10, 2000 relating to the
consolidated financial statements of LanguageWare.net (Company) Ltd., which is
contained in that Prospectus, and to the incorporation in the Prospectus by
reference of our report dated March 10, 2000 (which contains an explanatory
paragraph regarding the Company's ability to continue as a going concern),
relating to the consolidated financial statements of LanguageWare.net (Company)
Ltd. appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/BDO SEIDMAN, LLP
Denver, Colorado
May 19, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
LanguageWare.net (Company) Ltd.
Colorado Springs, Colorado
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 14, 2000 relating to the
consolidated financial statements of LanguageWare.net (Company) Ltd., which is
contained in that Prospectus, and to the incorporation in the Prospectus by
reference of our report dated March 14, 2000 (which contains an explanatory
paragraph regarding the Company's ability to continue as a going concern),
relating to the consolidated financial statements of LanguageWare.net (Company)
Ltd. appearing in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/BDO Shlomo Ziv & Co.
Tel Aviv, Israel
May 19, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Star+Globe Technologies Pte. Ltd.
Singapore
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 8, 2000 relating to the
consolidated financial statements of Star+Globe Technologies Pte. Ltd., which is
contained in that Prospectus, and to the incorporation in the Prospectus by
reference of our report dated March 8, 2000, relating to the consolidated
financial statements of Star+Globe Technologies Pte. Ltd. appearing in
LanguageWare.net (Company) Ltd.'s Current Report on Form 8-K as filed with the
SEC as amended on March 29, 2000.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/BDO International
Singapore
May 19, 2000
