10-Q 1 d81526e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------- FORM 10-Q ----------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2000. or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to ---------- ----------. Commission file number: 0-26394 LANGUAGEWARE.NET (COMPANY)LTD. -------------------------------------------------------------------------------- (Exact Name of Registrant in its Charter) Israel N/A ------------------------------------ ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 102 South Tejon Street, Suite 320, Colorado Springs, Colorado 80903 719-955-3400 -------------------------------------------------------------------------------- (Address, Including Zip Code, and Telephone Number, Including Area Code of Registrant's Principal Executive Offices.) N/A -------------------------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] On November 2, 2000, the registrant had outstanding 106,756,054 Ordinary Shares (including 2,000 Ordinary Shares included in the registrant's outstanding Units). 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS U. S. dollars and shares in thousands

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. -2- 3 LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS U.S. dollars and shares in thousands (except per share information)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. -3- 4 LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) U.S. dollars and shares in thousands

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. -4- 5 LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS U.S. dollars and shares in thousands

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. -5- 6 LANGUAGEWARE.NET (COMPANY) LTD. 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 nine months ended September 30, 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 3), are being amortized over the estimated period the assets are expected to benefit the Company as indicated in the following table.

NET 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 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 nine month periods ended September 30, 2000 and 1999, total stock options of 10,700,843 and 3,888,625, total stock warrants of 14,527,444 and 14,894,194 and convertible preferred stock convertible into common stock of 0 and 11,773,763 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), 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. -6- 7 LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) As of September 30, 2000 and December 31, 1999, the Company had accumulated deficits of $63.8 million and $53.4 million, respectively. For the nine months ended September 30, 2000, the Company incurred a loss of $10.3 million and recognizes that it may continue to incur operating losses through the remainder of 2000 and possibly beyond. Furthermore, the Company embarked on a new business operating strategy commencing January 2000, with such business operating strategy being revised in September 2000 based upon the results of operations during the first nine months of fiscal 2000. The Company does not expect to generate sufficient cash from such new operating strategy to finance its operations in the near term. 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. 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. To further enhance its competitive advantage, the Company acquired Star+Globe Technologies Pte. Ltd. ("Star+Globe") on January 14, 2000 (see Note 3). Star+Globe owns proprietary Asian character processing technology and provides Asian languages translation services. As of September 30, 2000 the Company's cash balance was $1.6 million compared to $249,000 at December 31, 1999. The increase is primarily attributable to cash raised in the amount of $6.0 million from the sale of common stock, approximately $1.5 million of cash acquired from the acquisition of Star+Globe Technologies Pte. Ltd., $750,000 received upon the issuance of convertible debt and $845,000 received from the exercise of stock options and stock warrants attached to convertible debentures sold in calendar 1999 and February 2000, net of cash used since the beginning of the fiscal year. 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 (see additional discussion in Management's Discussion and Analysis of Results of Operations and Financial Condition - Liquidity and Capital Resources). NOTE 3 - 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. In connection with the transaction, the Company 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 shares of the Company's common stock, valued at $1,735,183 using the Black-Scholes option pricing model, at -7- 8 LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) an exercise price of $0.093 per share. The stock options are exercisable immediately and expire ten years from the date of grant so long as the option holder remains an employee of the Company. 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 4 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.

NOTE 4 - SUPPLEMENTAL DATA TO STATEMENTS OF CASH FLOWS

-8- 9 LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 5 - 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 were valued at $62,000 which was amortized as additional interest expense through the date that the holders could 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 raised $250,000 from the sale of a convertible debenture to Technology Fund II Pte. Ltd., 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 equal to 50% of the number of shares issuable upon conversion of the outstanding principal and accrued interest at a $0.15 per share exercise price. At the date of issuance, the warrants and the beneficial conversion feature were valued at $250,000 (the total proceeds received) which was amortized as additional interest expense through the date that the holders could 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. -9- 10 LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) In March 2000, the Company received $1.5 million from Technology Fund II Pte. Ltd., and in April 2000, the Company raised another $1.0 million from two other related party investors, for a total of $2.5 million. Pursuant to the terms of an agreement dated effective May 15, 2000, the Company issued 2,857,143 shares of its common stock to the above mentioned three investors for a purchase price equal to $0.875 per share. In May 2000, Lernout &Hauspie Speech Products converted its 4,000 shares of convertible Class C preferred stock into 8,888,889 shares of the Company's common stock at a conversion price of $0.45 per share. In May 2000, LHIC converted its 2,884,874 shares of convertible Class D preferred stock into 2,884,874 shares of the Company's common stock at a conversion rate of one common share per each preferred share converted. In June 2000, the Company entered into an agreement to sell 5,000,000 common shares for $2.0 million, of which $1.0 million was received from Technology Fund II Pte. Ltd. and $1.0 million was received from the brother of Mr. Thomas Denys, LHIC's designee member to the Company's board of directors. Pursuant to the terms of the agreement, dated effective June 30, 2000, the Company issued 2,500,000 shares of its common stock to Technology Fund II Pte. Ltd. and 2,500,000 shares of its common stock to the brother of Mr. Thomas Denys, for a purchase price equal to $0.40 per share. On September 22, 2000, the Company entered in to a convertible promissory note agreement with Technology Fund II Pte Ltd. with a maximum amount available of $3,000,000. The note has a maturity date of March 22, 2001, and accrues interest at 11.5%. The agreement allows for the conversion of the unpaid principal balance plus unpaid accrued interest at any time into common stock at a conversion price equal to the lesser of (a) $0.20 per share; or (b) the lowest price per share received by the Company from a sale of its common stock to a third party in an aggregate amount in excess of $6,000,000 between the date of the agreement and the maturity date. The note agreement provides that the Company will issue the Lender warrants to purchase a number of shares of common stock equal to 100% of the number of shares issuable upon conversion of the outstanding principal and accrued interest whether or not converted. The exercise price of the warrants equals the conversion price of the note. Such warrants shall be exercisable upon issuance and expire on December 31, 2001. On September 28, 2000, the Company received its first monthly disbursement under the note agreement in the amount of $500,000. Based on the agreement, the warrants attributable to the first advance total 2,500,000 and were valued at $500,000 (the total proceeds received) which was amortized as additional interest expense through the date that the holders could first convert. The Company fully amortized the $500,000 to interest expense as of the date of issuance. For the nine months ended September 30, 2000, the Company issued 916,240 shares of its common stock upon the exercise of stock options for cash proceeds of $212,104. For the nine months ended September 30, 2000, the Company issued 4,219,784 shares of its common stock upon the exercise of stock warrants for cash proceeds of $632,968. For the nine months ended September 30, 2000, the Company issued options in payment of certain consulting fees, contract work and director's fees. The Black-Scholes value of the vested portion of such options was approximately $142,000 as of September 30, 2000. NOTE 6 - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") 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. 138, 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. -10- 11 LANGUAGEWARE.NET (COMPANY) LTD. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) In March 2000, the FASB issued Emerging Issues Task Force Issue No. 00-2, "Accounting for Web Site Development Costs" ("EITF 00-2"), which is effective for all such costs incurred for fiscal quarters beginning after June 30, 2000. This Issue establishes accounting and reporting standards for costs incurred to develop a web site based on the nature of the cost. Currently, as the Company has no web site development costs, the adoption of EITF 00-2 would have no impact on the Company's financial condition or results of operations. To the extent the Company begins to enter into such transactions in the future, the Company will adopt the Issue's disclosure requirements in the quarterly and annual financial statements for the year ending December 31, 2000. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44"), which was effective July 1, 2000, except that certain conclusions in this interpretation which cover specific events that occur after either December 15, 1998 or January 12, 2000 are recognized on a prospective basis from July 1, 2000. This interpretation clarifies the application of APB Opinion 25 for certain issues relating to stock issued to employees. The Company believes that its existing stock based compensation policies and procedures are in compliance with FIN 44 and therefore, the adoption of FIN 44 had no material impact on the Company's financial condition, results of operations or cash flows. In December 1999, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements" which provides additional guidance in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 is effective the fourth fiscal quarter of fiscal years beginning after December 15, 1999. Management believes that the adoption of this bulletin will have no material impact on the Company's financial statements. -11- 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. INTRODUCTION This Form 10-Q for LanguageWare.net (Company) Ltd., and its subsidiaries (the "Company") contains historical information and forward-looking statements. Statements looking forward in time are included in this Form 10-Q pursuant to the "safe harbor" provision of the Private Securities Litigation Reform Act of 1995. Such statements involve known and unknown risks and uncertainties including, but not limited to, the timely availability of new products and services, market acceptance of the Company's existing products and services, and products and services under development, the impact of competing products, services and pricing, the availability of sufficient resources including short and long-term financing to carry out the Company's product development and marketing plans, and quarterly fluctuations in operating results. The Company's actual results in future periods may be materially different from any future performance suggested herein. Further, the Company operates in an industry sector where securities' values may be volatile and may be influenced by economic and other factors beyond the Company's control. In the context of the forward-looking information provided in this Form 10-Q, please refer to the Company's most recent Form 10-K and the Company's other filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS The Company incurred a net loss of $3.0 million during the third quarter of 2000 on revenue of $422,000 compared to a net loss of $454,000 on revenue of $550,000 during the third quarter of 1999. The Company incurred a net loss of $10.3 million for the nine months ended September 30, 2000 on revenue of $1.9 million, compared to a net loss of $951,000 on revenue of $1.6 million for the comparable period of 1999. The decrease in the Company's operating results was primarily the result in increases of all categories of operating costs and expenses, which increases are due to the implementation of the Company's new business operating strategy, beginning in the first quarter and continuing through the third quarter of 2000. 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. Although customer interest in the Company's new services was positive as supported by the number of requests for proposals for such services from potential customers, the Company was not able to close significant engagements with customers. Management believes that the weak financial condition of the Company as compared to successful competitors was the primary reason for its inability to effectively compete. Net sales decreased 23.3% to $422,000 during the third quarter of 2000 from $550,000 in the comparable period of 1999. For the first nine months of 2000, net sales increased 20.5% to $1,881,000 from $1,561,000 in the comparable period of 1999. The decrease in net sales for the third quarter is primarily a result of the decrease in the volume of translation services being provided in 2000 as compared to 1999. The increase for the first nine months of 2000 is primarily a result of the acquisition of Star+Globe in January 2000. The three month and nine month periods of 2000 include revenues of Star+Globe whereas the 1999 comparable periods do not. For the three month and nine month periods of both 2000 and 1999, revenues were primarily derived from sale of translation services generated through traditional sales methods. Because of the considerable lead time associated with the Company's focus on e-business solutions, the benefits, if any, from such efforts have yet to be fully realized. PROFESSIONAL SERVICES. Professional services represents third party and internal costs of providing services to the Company's customers. Primarily due to the decrease in translation services provided during the third quarter of 2000 and the increase in staffing levels during the first nine months of 2000 of professional staff employed by the Company to pursue its new business strategy, such costs decreased $34,000, or 7.9%, and increased $391,000, or 39.9%, from $432,000 and -12- 13 $980,000 during the third quarter and the first nine months of 1999 to $398,000 and $1.4 million in the comparable periods of 2000. As a result of the increase in professional staff during fiscal 2000, the Company employed thirteen (13) staff members who provided such services as compared to two (2) employed during the first nine months of 1999. 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 $194,000 and $629,000 from $83,000 and $137,000 during the third quarter and the first nine months of 1999 to $277,000 and $766,000 in the comparable periods of 2000 primarily as a result of the software engineers acquired with the purchase of Star+Globe in January 2000. SALES AND MARKETING EXPENSES. The Company's sales and marketing expenses were $996,000 and $5,236,000 for the third quarter of 2000 and the first nine months of 2000, an increase of $795,000 and $4,757,000 from $201,000 and $479,000 during the comparable periods of 1999. Sales and marketing staff was increased from five (5) personnel during the first nine months of 1999 to twenty-five (25) during the first nine months of 2000, plus, marketing and advertising costs of approximately $425,000 and $3.6 million were incurred in the third quarter and the first nine months of 2000, whereas no such costs were incurred in the comparable periods of 1999. The significant increases in the third quarter and first nine months of 2000 in the sales and marketing staff and marketing and advertising costs reflect the Company's efforts to implement its new business strategy in addition to the acquisition of Star+Globe in January 2000. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses during the third quarter and first nine months of 2000 were $1,266,000 and $4,105,000 compared to $288,000 and $1,177,000 during the same periods of 1999. The increases of $978,000, or 339.6%, and $2,928,000, or 248.8%, are primarily attributable to an increase in depreciation and amortization of intangible assets resulting from the acquisition of Star+Globe, 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 EXPENSE, NET. The Company recognized $439,000 and $730,000 in other expense, net for the three and nine months ended September 30, 2000, compared to $0 and $624,000 in net other expenses during the three and nine months ended September 30, 1999 for an increase of $439,000, or 100% and $106,000, or 17.0%. The amount recorded in the first nine months of 1999 consists primarily of amortized interest expense related to convertible debt and convertible preferred stock issued in such periods. The amounts recorded in other expense for the three and nine months ended September 30, 2000 consist primarily of amortized interest expense related to convertible debt. EXTRAORDINARY GAIN ON DEBT EXTINGUISHMENT. The Company recognized an extraordinary gain of $885,000 during the nine months ended September 30, 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 any time 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 during the first nine months of 2000. The extraordinary gain amounted to $0.03 per share on a per share basis. NET LOSS. The Company recognized a net loss of $2,954,000 and $10,327,000, or $0.03 and $0.11 per share, for the three and the nine months ended September 30, 2000, compared to a net loss of $454,000 and $951,000, or $0.01 and $0.03 per share, for each of the three and the nine months ended September 30, 1999. -13- 14 LIQUIDITY AND CAPITAL RESOURCES NEW BUSINESS STRATEGY The results reported here for the quarter and nine months ended September 30, 2000 are those of a company in transition. LanguageWare.net (Company) Ltd., formerly Accent Software International Ltd., (the "Company" or "Languageware") was restructured 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, the Company currently is focused in a new direction. In October 1999, the Company changed its name to LanguageWare.net (Company) Ltd., recognizing that it now provides 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. The Company completed a restructuring during 1998 designed to position itself to change its operating strategy from a consumer software products company to a global e-commerce solutions company. The restructuring moved the Company's operations to Colorado Springs, Colorado and eliminated its Israeli-based product development, sales and marketing functions and various general and administrative activities. In calendar 1999, as part of its efforts to transition into a global e-commerce solutions company, the Company's operations were changed to focus primarily on translation services and products offered to other business. Commencing in January 2000, the Company implemented a new business strategy 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 its plan to provide such services, on January 14, 2000, the Company acquired Star+Globe, a company that provides proprietary Asian character processing technology. The acquisition provided the Company a unique competitive advantage in developing multilingual web sites and e-business solutions for customers serving Asian markets. In order to implement its new business strategy, the Company embarked on an aggressive marketing and advertising campaign and significantly increased its staff in the administrative, sales and operations departments. During the second and third quarters of fiscal 2000, the Company had approximately 70 full time employees compared to the 17 full time employees it had at December 31, 1999. The Company has experienced a significant increase in its costs and expenditures as a result of its marketing and advertising campaign, increase in employees and related costs such as office lease expense, travel and entertainment, computer, furniture and other equipment costs. Through September 30, 2000, revenues have lagged behind the aforementioned costs and expenses. Based upon the results of operations for the first nine months of fiscal 2000, the Company's management revised its business strategy to allow it to focus on the development and procurement of strategic alliances and partnerships as a means of distributing its products and services rather than focusing only on revenue growth through business-to-business sales and application of its proprietary technology. As a result of the change in the business strategy, the Company reduced its workforce by 18%, from 71 to 58 employees in late September 2000 in order to reduce its operating expenses to focus more effectively on the revised business strategy. In addition, four members of the board of directors, including the President of the Company resigned, and the Company gained two new members to the board of directors and appointed a new CEO. The Company's ability to generate increased revenue from its new strategy and to fund planned expenditures is dependent on a number of factors, some of which are outside its control. In particular, revenue growth and profitability, if any, will depend on the ability of the Company to market its services, demand for the Company's services, the level of competition, the success of the Company in attracting and retaining motivated and qualified personnel, the ability of the Company to control its costs and general economic conditions. There can be no assurance that the Company will meet such challenges successfully. Any of these or other factors could have a material adverse effect on the Company's business, operating results or financial condition. From its inception through September 30, 2000, the Company has accumulated deficits of $63.8 million, including a net loss of $10.3 million for the nine months ended September 30, 2000, and it may continue to incur deficits through the remainder of 2000 and possibly beyond. Although the Company believes it has made substantial progress in reducing its operating expenses and operating losses, its failure to achieve its revenue plan coupled with its efforts in calendar 2000 to implement the revised operating strategy has significantly affected the Company's ability to generate adequate cash flow to -14- 15 meet its working capital requirements. These factors create substantial doubt about the Company's ability to continue as a going concern and there can be no assurance that the Company will be able to continue as a going concern. Through October 30, 2000 of calendar 2000, the Company obtained additional working capital of approximately $9.0 million, net of debt repayments of $59,000, from (1) $1.48 million acquired from the acquisition of Star+Globe; (2) the sale of $1.5 million of common stock pursuant to an agreement dated July 14, 1999; (3) the receipt of $845,000 from the exercise of options and warrants associated with convertible debentures sold in 1999 and 2000; (4) the sale of a $250,000 convertible debenture which was converted into common stock in February 2000; (5) the sale of $2.5 million of common stock pursuant to an agreement dated May 15, 2000; (6) the sale of $2.0 million of common stock pursuant to an agreement dated June 30, 2000; and (7) the receipt of $500,000 pursuant to a $3,000,000 convertible note agreement dated September 22, 2000. The Company believes that these accomplishments, coupled with an improved revenue outlook, will be sufficient to meet its requirements through approximately the first three months of calendar year 2001. Beyond that time, the Company believes that, based on its revised business plan, it may not generate sufficient operating cash flow to meet its needs without additional external financing. There is no assurance that the Company's efforts to reach operating profitability will be successful. Any failure on the part of the Company to achieve such goals will have a material adverse impact on the Company's ability to continue as a going concern and may cause the Company to cease operations. Management is currently pursuing various sources of equity financing. The Company has retained an investment banking firm to pursue a private placement of equity or equity-linked securities. However, no assurance can be given that the Company will be able to raise sufficient funds to meet its operating needs. Management has also taken steps to assist in securing additional external financing. At its last annual meeting on June 7, 2000, shareholders approved an increase of 60,000,000 shares of authorized common stock from 130,000,000 to 190,000,000 shares. Management believes that the increase in the Company's 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 delivering its products and services primarily through alliances and partnerships. OPERATING ACTIVITIES For the nine month period ended September 30, 2000, the Company's operating activities used cash of $7,214,000 compared to $1,220,000 used during the comparable period of 1999. The increase in the useage of cash is primarily attributable to expenses resulting from the acquisition of Star+Globe and expenses incurred as a result of implementing its new business strategy. INVESTING ACTIVITIES The Company's investing activities for the first nine months of 2000 provided cash of $1,035,000. The Company received $1,481,000 in cash from the acquisition of Star+Globe on January 14, 2000 and used cash of $446,000 for expenditures on furniture, equipment and other assets necessary to implement its new business strategy. Such amounts were immaterial in the comparable period of 1999. FINANCING ACTIVITIES Financing activities provided cash of $7,536,000 and $1,110,000 during the nine month periods ending September 30, 2000 and 1999, respectively. During the nine month period of 2000, the Company (1) sold common stock for $1,500,000 pursuant to an agreement dated July 14, 1999; (2) sold common stock for $2,500,000 pursuant to an agreement dated May 15, 2000; (3) received $845,000 from the exercise of warrants and employee and non-employee options; (4) sold a convertible debenture for $250,000 which was converted into common stock in February 2000; (5) sold another $2,000,000 in common stock to be issued pursuant to an agreement dated June 30, 2000; (6) received $500,000 pursuant to a $3,000,000 convertible note agreement dated September 22, 2000 and (7) repaid its bank loan of $59,000. -15- 16 There is no provision for U.S. income taxes required for the nine months ended September 30, 2000 due to the Company's operating losses. At December 31, 1999, the Company had available U.S. net operating loss carryforwards of approximately $8,018,000 for tax reporting purposes. These carryforwards expire through 2020 and are subject to various limitations imposed by the rules and regulations of the Internal Revenue Service. There are 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. YEAR 2000 Since the beginning of 2000, the Company did not have any interruptions of its business due to the Year 2000 issue. During the next few months, the Company will continue to monitor its operations and assess whether the Year 2000 issue will have an impact on the Company. -16- 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk through interest rates related to its 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. The Company's line of credit has a variable interest rate. The Company's management believes that fluctuations in interest rates in the near term will not materially affect the Company's consolidated operating results, financial position or cash flow. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 3.1(a) - Memorandum of Association of Registrant (filed as Exhibit 3.1(a) to the Company's Registration Statement No. 33-92754).* 3.1(b) - Certificate of Name Change dated October 23, 1994 (filed as Exhibit 3.1(b) to the Company's Registration Statement No. 33-92754).* 3.1(c) - Certificate of Name Change dated April 23, 1995 (filed as Exhibit 3.1(c) to the Company's Registration Statement No.33-92754).* 3.1(d) - Certificate of Name Change 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).* 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).*

---------- * Incorporated by reference. -17- 18 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).* 4.16 - Form of Warrant to Lernout & Hauspie Speech Products, N.V. (filed as Exhibit 4.16 to the Company's Form 10-Q on 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)*

---------- * Incorporated by reference. -18- 19 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).* 10.6(a) - Employee Share Option Plan (1995) (filed as Exhibit 10.7(a) to the Company's Registration Statement No. 33-92754).* 10.6(b) - Amended and Restated Employee Share Option Plan (1995) (filed as Exhibit 4.2 to the Company's Registration Statement No. 333-04285).* 10.6(c) - Non-Employee Director Share Option Plan (1995) (filed as Exhibit 10.7(b) to the Company's Registration Statement No. 33-92754).* 10.6(d) - Amended and Restated Non-Employee Share Option Plan (1995) (filed as Exhibit 4.2 to the Company's Registration Statement No. 333-07965).* 10.6(e) - Amended and Restated Non-Employee Share Option Plan (1995) (filed as Exhibit 10-6(e) to the Company's Form 10-K on March 31, 1998).* 10.6(f) - CEO Share Option Plan (1997) (filed as Exhibit 10.6(f) to the Company's Form 10-K on March 31, 1998).* 10.6(g) - Non-Employee Share Option Plan (1998) (filed as Exhibit B to the Company's Form 14-A on April 29, 1998)* 10.6(h) - CEO Share Option Plan (1999) (filed as Exhibit 10.6(f) to the Company's Form 10-Q on August 11, 1999)*

---------- * Incorporated by reference. -19- 20 10.6(i) - LanguageWare.net (Company) Ltd. Star+Globe Share Option Plan (2000) (filed as Exhibit 10.6(i) to the Company's Form 10-K on March 30, 2000)* 10.7(a) - Employment Agreement between the Company and Robert S. Rosenschein, dated July 26, 1995 (filed as Exhibit 10-7(a) to the Company's Form 10-K on April 1, 1996).* 10.7(b) - Employment Agreement between the Company and Todd A. Oseth, dated February 3, 1997 (filed as exhibit 10.7(b) to the Company's Form 10-K on March 31, 1998).* 10.7(c) - Employment Agreement between the Company and Herbert Zlotogorski, dated July 26, 1995 (filed as Exhibit 10- 7(c) to the Company's Form 10-K on April 1, 1996).* 10.7(d) - Employment Agreement between the Company and Jeffrey Rosenschein, dated July 26, 1995 (filed as Exhibit 10- 7(d) to the Company's Form 10-K on April 1, 1996).* 10.8 - Consulting Agreement, dated August 4, 1997, between the Company and Investor Resource Services, Inc. (filed as Exhibit 4.1 to the Company's Registration Statement filed on October 16, 1997, Reg. No. 333-38043).* 10.9 - Amendment to the Consulting Agreement, dated January 30, 1998, between Company and Investor Resource Services, Inc. (filed as Exhibit 10-9 to the Company's Form 10-K on March 31, 1998).* 10.10 - Shareholders Agreement by and between Accent Software International Limited and Gilad Zlotkin, dated February 21, 1996 (filed as Exhibit 10.10 to the Company's Form 10-K on April 1, 1996).* 10.11 - Debenture between the Company and Bank Leumi (filed as Exhibit 10.11 to the Company's Registration Statement No. 333-7637).* 10.12 - Agreement between the Company and The Bank for Industrial Development (filed as Exhibit 4-1 to the Company's Form S-3 on August 4, 1998).* 10.13 - Stock Purchase Agreement between the Company and Gotham Bay partners LLC dated July 14, 1999 (filed as Exhibit 10.13 to the Company's Form 10-Q on August 11, 1999).* 10.14 - 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).* 10.15 - Stock Purchase Agreement, dated as of May 15, 2000, by and among LanguageWare.net (Company) Ltd., Technology Fund II Pte. Ltd., NIF Asian Pre-IPO Fund Limited and Asia-Pacific Ventures II Ltd. 10.16 - Stock Purchase Agreement, dated as of June 8, 2000, by and among LanguageWare.net (Company) and Bruno Denys.

---------- * Incorporated by reference. -20- 21 10.17 - Stock Purchase Agreement, dated as of June 30, 2000, by and among LanguageWare.net (Company) Ltd. and Technology Fund II Pte. Ltd. 10.18 - Secured Convertible Promissory Note, dated as of September 22, 2000, by and among LanguageWare.net (Company) Ltd. and Technology Fund II Pte. Ltd. 10.19 - Stock Option Extension Agreement, dated as of October 17, 2000, by and among LanguageWare.net (Company) Ltd. and Todd A. Oseth. 21 - Subsidiaries of Registrant (filed as Exhibit 21 to the Company's Form 10-K filed on March 30, 2000)* 27 - Financial Data Schedule

--------- * Incorporated by reference. -21- 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LANGUAGEWARE.NET (COMPANY) LTD. (Registrant) Date: November 2, 2000 by: /S/ Thomas B Foster ---------------- --------------------- Thomas B. Foster (Principal Financial Officer) 23 INDEX TO EXHIBITS

LANGUAGEWARE NET CO LTD 10-Q