<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-21860
DATAWARE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1232140
(State or other jurisdiction of (I.R.S Employer
incorporation identification No.) or organization)
One Canal Park
Cambridge, MA 02141
(Address of principal executive offices) (Zip Code)
(617) 621-0820
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE
SECURITIES EXCHANGE ACT OF 1934:
Common Stock, Par Value $.01 Per Share
Junior Participating Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of Registrant's voting stock held by non-affiliates of
the Registrant as of February 28, 1998: $28,416,751
Shares of Common Stock outstanding as of February 28, 1998: 9,296,569
___________________
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders to be held on May 21, 1998 (the "1998 Proxy Statement") are
incorporated by reference into Part III of this Report.
Exhibits Index at Page 45
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PART I
ITEM 1. BUSINESS
OVERVIEW
Dataware provides software for enterprise information access ("knowledge
management") and professional electronic publishing applications, as well as
multimedia services for CD-ROM and Web-based publishing. Through its direct
sales and service organizations and growing number of indirect channels, the
Company has developed relationships with more than 2,000 customers serving over
1,000,000 end users.
Dataware's innovative software products and multimedia services permit the
integration of information from a wide variety of sources and enable access and
publishing via the latest information technologies, such as the Internet,
intranets, enterprise networks, CD-ROM, commercial on-line services, print-on-
demand, and combinations of these media. Dataware derives recurring revenues
from software licenses, software maintenance and service revenues from updating
existing customers' applications.
The Company was incorporated in Delaware on March 15, 1988. Significant
operations began with the 1988 purchase of the worldwide rights to certain
software developed by Dataware 2000 GmbH and the acquisition of its United
States distributor, and subsequent acquisitions have contributed significantly
to the Company's growth. Among the most recent have been the acquisitions of
software developers Status/IQ Ltd., Ntergaid Inc., and Green Book International
("Gbook"), as well as two multimedia services and software companies, Ledge
Multimedia, Inc. and Creative Multimedia Corporation. On September 30, 1997,
Dataware sold a portion of its data services business to Information Handling
Services Group, Inc. ("IHS"), together with five foreign subsidiaries that had
been primarily engaged in distributing the Company's software and providing
services to customers. As a result, IHS became a significant international
value-added reseller ("VAR") for Dataware. Additional information about the
development of the Company's business during the past year is contained in Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
INDUSTRY DEVELOPMENT AND DATAWARE'S RESPONSE
The Company's focus on knowledge management and electronic publishing software
products and on high-end multimedia services has developed from the four major
application areas in which it has historically competed: CD-ROM software and
services, text management software, software and services for on-line/Internet
applications, and electronic publishing management systems. With the sale to
IHS, the Company has largely exited the business of providing data services to
customers, concentrating instead on software development and multimedia
services.
Knowledge management
The emerging field of knowledge management addresses the broad process of
locating, organizing, sharing and using information within an organization. The
Company believes that a good knowledge management system must provide users with
a single point of access to contribute to and tap into all knowledge assets
within an organization. Information and expertise that has historically been
created and maintained in isolated systems targeted at specific workgroups is
integrated, accessed and manipulated on a company-wide basis through an
intranet. Knowledge assets include human assets as well as documents and data
stored in files. Accordingly, knowledge management integrates and goes beyond
the capabilities of any of the following used alone: document management
systems, information retrieval engines, databases and data mining tools,
electronic publishing systems, groupware and workflow systems, push technologies
and help-desk applications.
The Company's new Dataware II Knowledge Management Suite ("KMS") meets these
requirements by identifying and connecting users to experts within the
organization, as well as to files and URLs. Enterprise-wide
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access to all types of digital information is provided using cartridges that
translate over 200 source information types, including Web pages, server file
systems, relational databases and groupware applications. Introduced in the 4th
quarter of 1997, KMS allows users to contribute information either directly to a
knowledge warehouse or through an existing knowledge silo, such as a groupware
or document management system, from which it can be shared and managed by
others. It contains features such as content analysis with knowledge maps of the
organization and sophisticated searching techniques that help users quickly
locate desired information.
Dataware's Knowledge Management products have evolved from the Company's
classic text management product line, BRS/Search. Organizations require the
ability to manage and retrieve the contents of large collections of text and
other unstructured information. Text management and retrieval software (which
is different from that used for structured database management, but can be
integrated with it) permits fast, accurate, and thorough updating and retrieval
of such information.
Dataware BRS/Search provides fast, authoritative and uniform multi-user access
to all types of information including text, images, data, graphics, and
multimedia such as audio and video. BRS/Search is an open product, which can be
integrated with other systems through the use of add-on products such as
WordPlus. BRS can be integrated with relational databases (RDBMS), word
processors, document image processing (DIP) systems, and other office automation
systems. BRS/Search provides multiple customization options which conform to
established working practices, including Dataware software tools and other 4GL
tools such as Visual Basic(R), Powersoft(R), and SQL Forms(R). State-of-the-art
technological innovations in information searching including natural language,
concept searching and semantic networks can be added to BRS/Search to enhance
applications.
Electronic publishing and distribution
Over the last ten years, Dataware has developed and continues to market
several innovative software products to meet the needs of corporations,
government agencies and publishers for electronic publishing systems and
physical electronic media distribution.
. Electronic publishing systems
Providing timely and accurate information to knowledge workers within an
organization or to customers, contractors and other end-users outside it is a
publishing process that must be done efficiently and effectively by a broad
variety of organizations. State of the art electronic publishing systems that
bring under one roof the distribution of information on-line, on the Internet
and on corporate intranets can be used by organizations that have historically
used widely differing methods to distribute their information. Dataware sells
two main products to assist these organizations in making their publishing
processes run efficiently and effectively.
The new Dataware II Publisher product enables broad electronic publishing
capabilities. It helps organizations to create electronic publications from a
wide variety of source information types, such as word processors, groupware,
database management, document management, composition, HTML and SGML systems.
Information is managed within an industry-standard (SGML ISO-8879) open
publishing repository, and can be refined and packaged for delivery
simultaneously to the Internet, intranet, CD-ROM, DVD-ROM and client/server
systems, providing the flexibility to deliver cost-effective, custom
publications to highly targeted audiences. It contains many of the same
sophisticated searching capabilities that are features of Dataware's other
products, allowing end users to find required information quickly.
The Company's NetAnswer product is a comprehensive, off-the-shelf, Internet
software offering. A robust information management, query and retrieval system
for the World Wide Web, NetAnswer software enables information providers to
distribute large volumes of data, text, and multimedia content via the Internet
or intranets. Based on BRS/Search, NetAnswer includes extensive accounting and
security features for publishers planning to
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sell or monitor access to information and is optimized for many users accessing
large databases. The software includes sophisticated capabilities such as multi-
fielded searches, thesauri and concept searching, relevance ranking, and user-
customized search and display formats.
. Physical electronic media distribution
Many organizations need to distribute large amounts of information to multiple
locations in a compact, cost-effective format. This may be done using CD-ROM or
diskettes. For example, magazine and newspaper publishers distribute historical
information on CD-ROM for purchase by libraries, industry analysts and other
professionals. Manufacturers improve the effectiveness of sales and service
personnel by distributing broad-based and constantly changing product
information on CD-ROM, including comprehensive parts, prices and specifications
databases. Government agencies distribute the equivalent of warehouses full of
policy and procedure manuals, regulations and forms with CD-ROM based
information products. Similarly, recent regulatory initiatives have allowed
financial services companies selling insurance and mutual fund products, health
care organizations, and others, to realize significant cost savings by
distributing prospectuses and other disclosure documents on diskette.
Dataware's CD-ROM software products allow integration of data, text, graphics
and multimedia in the same CD-ROM application. The Company has optimized its CD-
ROM software products for enhanced retrieval performance and user-friendliness
across a broad range of delivery platforms. Dataware's major CD-ROM software
products are CD Author Development System, CD Answer retrieval software and CD
Author Advanced Design Library.
With its January 1998 acquisition of Green Book International Corporation,
Dataware acquired what it believes is the best software package for electronic
publishing of financial prospectuses and other regulated financial information.
While the Company is just beginning to distribute the Gbook software, and
significant progress must be made to ensure market acceptance, the Company
believes that the product has great commercial potential. Using the Gbook
software, prospectus information can be digitized and duplicated onto a diskette
at costs that may be significantly lower than for paper production. A Gbook
prospectus diskette contains a full-featured browser in a small, one-megabyte
package and uses a secure file format to ensure the integrity of the content.
Ancillary services
Since its inception, Dataware has provided an extensive range of one-time and
recurring data capture and data preparation services to support customers in
their use of Dataware software products, and the Company's revenues have
historically been somewhat more heavily oriented toward services. A large
portion of this business was transferred to IHS on September 30, 1997.
Management anticipates that, as a result of the IHS transaction, there will be a
larger proportion of higher margin software sales in the revenue mix going
forward. The Company has also provided and continues to provide database
hosting, software support, training, software maintenance and custom software
development services.
Multimedia services
Dataware's Ledge Multimedia division ("Ledge") provides a complete array of
multimedia application development services to corporations, publishers and
professional firms. Ledge is focused on three key application/market areas:
financial services, marketing communications and professional publishing. Ledge
helps these customers combine media and information types in new and innovative
ways. For example, Ledge works with customers to create Internet/CD-ROM hybrids
to take advantage of both the immediacy of the Internet and the storage capacity
of CD-ROM.
During 1997, the Company expanded the activities of the Ledge Multimedia
division with the acquisition
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of Creative Multimedia Corporation, formerly a leading consumer-oriented
multimedia company. Dataware believes that the combined entity is the largest
high-end multimedia services company in the United States, with more than 60
professional applications developed to date.
DATAWARE'S CORPORATE STRATEGY
The Company's key objectives are to address the evolving needs of its
customers and create high levels of customer satisfaction, deliver superior
long-term returns for shareholders, and foster a challenging and enjoyable work
environment for employees. To achieve these objectives, Dataware is pursuing a
strategy that includes the following key elements: a focus on areas of core
competency; close relationships with customers; developing and maintaining
recurring business; product and technology leadership; and a diversified revenue
base.
. Dataware focuses on market areas where the Company's core competencies
apply. During 1997, the Company narrowed its focus by divesting a portion
of its data services business. As a result, the Company enters 1998 with
the strong foundation of its historical text management, publishing and
retrieval products supporting its pathbreaking entry into knowledge
management.
. Dataware views the long-term partnerships with its customers as a
critical element in the Company's historical and future success. In order
to continue to meet their needs in a timely fashion, the Company works
directly with existing and prospective customers to identify and develop
new product features and functionality and to offer new and improved
services.
. The Company's marketing, pricing and support strategies are focused on
the generation of both one-time and recurring revenues. Customers may
license software from the Company and wish to acquire annual maintenance
contracts for the updating and support of these software products. Many of
the Company's customers are also involved in developing applications where
the information content by its nature needs to be updated on a regular
basis, thus providing Dataware with recurring software licenses or update
service revenues. In 1997, recurring revenues represented approximately 45%
of total revenues.
. Dataware continuously strives to develop and market the technologically
leading products in its field through a combination of internal
development, as well as through licensing and selected acquisitions.
. The Company has created and intends to maintain a diversified revenue
base along several dimensions: geographic, customer and product mix. Since
its founding, Dataware has devoted substantial resources to international
product development, marketing and sales, and a significant proportion of
the Company's revenues is derived from international customers. The
Company sells products and services to customers in several market
segments, including commercial publishing, corporate, government, higher
education and legal. These customers, in turn, employ the Company's
products and services to create a wide variety of different applications.
During 1997, the Company's various distribution, license and services
agreements with IHS accounted for $4.7 million, or 13%, of the Company's
total revenues.
In addition, the Company's strategy includes selective acquisitions intended
to broaden its customer base, allow the development of more direct customer
relationships, or provide important new products and services for customers.
The Company adheres to a policy of not commenting publicly on the status of any
potential acquisition activity until documents have been signed. This is
intended to help prevent disruption to the business and employees of any firm
with whom the Company may be in discussions and to protect the shareholders from
unwarranted or premature speculation in the market.
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SALES AND MARKETING
The Company's sales and marketing organization, consisting of 54 persons,
operates from the Company's headquarters in Cambridge, Massachusetts and its
Eurasian headquarters in Denham, England. In addition, the Company maintains
sales offices in five other cities in the United States, Denmark and Singapore.
This reflects the significant reduction in the Company's direct sales
organization that resulted from the sale of five of the Company's foreign
subsidiaries to IHS on September 30, 1997.
The Company's direct sales force allows Dataware to better assess and meet
customer needs. The direct sales effort is closely supported by sales
engineering and pre-sales consulting personnel. These individuals assist the
sales force in understanding the technical needs of customers and provide
responses to these needs, including product demonstrations and prototypes,
pricing quotations and time estimates.
The Company conducts marketing at three levels: corporate marketing, business
unit marketing and product marketing. Corporate marketing is focused on company
positioning, public relations and investor relations. Business unit marketing
is focused on generating leads for the local sales organizations through trade
shows, mailings, telemarketing, etc. in order to more deeply penetrate the key
market segments in each local country. Product marketing is focused on creating
more demand for Dataware's software products through installed base and new
product marketing.
The Company's direct sales and marketing organization is complemented by its
network of authorized distributors and VARs throughout the world. This network
was significantly increased with the sale to IHS of the five foreign
subsidiaries that had previously been included in the Company's direct
distribution network. Dataware continuously evaluates new potential distribution
partners who may provide improved access to selected vertical or geographic
markets.
CUSTOMERS
Close to 1,000 customers did business with Dataware Technologies in 1997, and
Dataware software has been deployed by more than 2,000 customers worldwide.
Dataware software has now been used to produce 1,210 CD-ROM titles. There are
more than 1,000,000 end users of Dataware software products.
Dataware's customer base is broad and diverse. Sales from operations outside
North America comprised about 40% of Dataware revenues in 1997, 48% in 1996, and
42% in 1995. As indicated above, sales to IHS accounted for $4.7 million, or
13%, of the Company's total revenues during 1997. No single customer accounted
for more than 5% of total revenues during 1996 and 1995.
An estimated 45% of total 1997 revenues came from recurring sources, such as
annual renewals of retrieval software subscriptions and per disc licenses, CD-
ROM update services, and software maintenance fees.
PRODUCT DEVELOPMENT
Software products are developed in small to medium sized teams typically
consisting of a product marketing specialist, product manager, development
manager, software architect, software engineers, QA and documentation
specialists. All newer development projects are focused on object-oriented
design and development using C++ or Java, with a further focus on Windows NT as
the strategic operating system platform.
The Company's current development focus is to continue to enhance the
features, performance and functionality of its products, to port its products to
new development and distribution platforms and to develop or license additional
complementary products and technologies.
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The key areas of planned software development include Internet-related
software, improved information presentation and display (e.g. formatted data,
text, tables, mathematics, images, multimedia, etc.), enhanced information
retrieval (e.g. natural language, relevance ranking, semantic networks,
associative indexing, document clustering, etc.), more extensive information
processing capabilities (e.g. SGML parsing, word processor conversions), better
graphics processing, faster indexing, and improved compression. In addition to
internal development, the Company may also license or acquire appropriate third
party technology to achieve its goals.
During 1997, 1996 and 1995, the Company's expenditures in research and
development, including capitalized software costs, were $8,509,000, $10,100,000,
and $6,602,000, representing 23%, 27% and 16% of revenues, respectively. As of
December 31, 1997, the Company had 66 full-time employees engaged in product
development activities.
COMPETITION
Competition in Dataware's historical business varies by (a) geography, e.g.
North America, Europe, Asia; (b) type of customer, e.g. commercial, corporate,
government agency; (c) market segment, e.g. yellow page telephone directory
publishers, and (d) application category - from high-end, complete software and
service solutions to pure software sales. In North America, competitors include
Folio (OMKT), Electronic Book Technologies (INSO), Fulcrum (FULCF), Verity
(VRTY), Excalibur (EXCA) and IDI. In Europe and Asia, competitors include MPW
Lasec, TRIP (Fulcrum) and IDI. Dataware believes that it is differentiated from
its competitors by its more complete set of products and services. Some of the
competitors sell only software with few supporting services, and some are search
engine companies without Dataware's broader focus on complete applications.
Competition for knowledge management offerings includes several of these
traditional competitors, as well as very significant potential players such as
Lotus (IBM), Netscape and Microsoft, all of whom approach knowledge management
system development from a different product base.
Many of the Company's existing and potential competitors have longer operating
histories and significantly greater financial, technical, sales, marketing and
other resources than the Company. Furthermore, as the markets grow, a number of
companies with significantly greater resources than the Company could attempt to
increase their presence in the Company's market areas by acquiring or forming
strategic alliances with competitors of the Company or by introducing products
or services specifically designed for these markets.
The principal competitive factors affecting the market for the Company's
products and services include vendor and product reputation, breadth of product
and services offering, direct and indirect sales presence, product performance,
functionality, price, ease of use, architecture, platform coverage, quality of
support and international language support. Based on these factors, the Company
believes that it has competed effectively to date. The Company expects
competition to increase and such increased competition could result in price
reductions and loss of market share for the Company. The Company must continue
to introduce enhancements to its existing products and services and new products
and services in a timely manner in order to remain competitive. In particular,
as the market for managing and distributing information grows, both new entrants
and existing customers are becoming increasingly price sensitive. Certain of
the Company's competitors are already addressing this situation with lower
priced, less sophisticated products. There can be no assurance that the Company
will be able to compete successfully or that competition will not have a
material adverse effect on the Company's business, operating results and
financial condition.
INTELLECTUAL PROPERTY
The Company regards its software as proprietary and attempts to protect it
with a combination of copyright, trademark and trade secret laws, employee and
third party non-disclosure agreements and other methods of protection. The
Company does not rely on patent protection for its software products and
existing copyright laws afford only limited protection.
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The Company generally provides its software products under non-exclusive, non-
transferable license agreements. As is customary in the software industry, in
order to protect its intellectual property rights, the Company does not sell or
transfer title to its software products to customers. Under the Company's
current standard form of license agreement, licensed authoring software may be
used solely for the customer's internal operations and only on designated
computers at specified sites. The Company relies primarily on "shrink wrap"
licenses for the protection of its retrieval software products. A shrink wrap
license agreement is a printed license agreement included within packaged
software that sets forth the terms and conditions under which the purchaser can
use the product and binds the purchaser by its acceptance and purchase of the
software products to such terms and conditions. Shrink wrap licenses typically
are not signed by the licensee and therefore may be unenforceable under the laws
of certain jurisdictions.
The Company has entered into source code escrow agreements with a number of
customers that require release of source code to such parties with a limited,
non-exclusive right to use such code in the event there is a bankruptcy
proceeding by or against the Company, the Company ceases to do business or the
Company breaches its contractual obligations to the customer. The Company has,
in certain cases, licensed its source code, or portions thereof, to customers
for specific uses.
There can be no assurance that third parties will not assert infringement
claims against the Company in the future with respect to current or future
products or trademarks or that any such assertion will not result in costly
litigation or require the Company to obtain a license to intellectual property
rights of third parties. There can be no assurance that such licenses will be
available on reasonable terms or at all. As the number of software products in
the industry increases and the functionality of these products further overlap,
the Company believes that software developers may become increasingly subject to
infringement claims. Any such claims, with or without merit, can be time
consuming and expensive to defend.
EMPLOYEES
As of December 31, 1997 the Company had 205 full-time employees, including 66
in product development, 54 in sales and marketing, 55 in customer services and
30 in finance and administration. The Company's employees are not represented by
any collective bargaining organization and the Company has never experienced a
work stoppage.
ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the executive officers of the Company called for by
Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G to Form
10-K is incorporated herein by reference from Part III, Item 10 hereof.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Cambridge, Massachusetts,
in leased facilities consisting of approximately 26,000 square feet of office
space occupied under leases expiring in November 1999 and May 2001. The Company
leases additional facilities and offices, including locations in Denham, UK;
Copenhagen, Denmark; Singapore; Bethesda, Maryland; Albany, New York; and
Maplewood, New Jersey. The Company believes that its existing facilities and
offices and additional space available to it are adequate to meet its
requirements through 1998, and that suitable additional or alternate space
sufficient to serve the Company's foreseeable needs will be available on
commercially reasonable terms.
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ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS
The Company's common stock is traded in the over-the-counter market and prices
are quoted on the Nasdaq National Market under the symbol DWTI. The following
table sets forth, for the periods indicated, the high and low sale prices for
the Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997:
First Quarter $6 5/8 $2 7/8
Second Quarter 4 3/8 2 5/8
Third Quarter 5 3/8 2 1/4
Fourth Quarter 4 7/8 2 1/4
1996:
First Quarter $9 1/2 $6 1/4
Second Quarter 8 5 3/4
Third Quarter 6 1/8 3 3/4
Fourth Quarter 4 1/8 2 5/8
</TABLE>
On March 6, 1998, there were 483 holders of record of the Common Stock.
No dividends have been paid on the Common Stock to date, and the Company does
not anticipate paying dividends in the foreseeable future.
On December 9, 1997, the Company issued 175,000 shares of Common Stock,
pursuant to the settlement of securities litigation originally brought in 1994,
to the plaintiffs. The issuance was exempt from registration under Section
3(a)(10) of the Securities Act of 1933, since the court approved the fairness of
the terms and conditions of the issuance of the shares after holding a hearing,
of which all persons to whom the shares were to be issued were given notice, and
being advised that, were the settlement approved, registration of the issuance
of the shares would not be required under the Securities Act by virtue of the
court's approval.
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SELECTED CONSOLIDATED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------
(In thousands, except per share data) 1997 1996 1995 1994 (1) 1993 (1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Software license fees $ 19,534 $ 16,502 $ 19,996 $ 14,334 $ 7,802
Services 17,785 20,957 21,128 19,525 12,231
-------- -------- -------- -------- --------
Total revenues 37,319 37,459 41,124 33,859 20,033
Cost of revenues:
Software license fees 2,544 3,437 3,125 2,057 1,023
Write down of intangible
assets ----- 1,926 ----- ----- -----
Services 10,966 12,938 11,923 10,799 6,165
-------- -------- -------- -------- --------
Total cost of revenues 13,510 18,301 15,048 12,856 7,188
-------- -------- -------- -------- --------
Gross profit 23,809 19,158 26,076 21,003 12,845
Operating expenses:
Sales and marketing 16,603 17,679 13,754 11,118 6,447
Product development 6,721 8,144 5,040 3,954 2,080
General and administrative 5,884 6,603 5,337 4,895 3,198
Write down of goodwill and
other non-recurring
charges ----- 1,889 ----- ----- -----
Merger costs ----- ----- 171 ----- -----
Charge for purchased research and
development ----- 1,861 ----- ----- 2,100
-------- -------- -------- -------- --------
Total operating expenses 29,208 36,176 24,302 19,967 13,825
-------- -------- -------- -------- --------
Income (loss) from operations (5,399) (17,018) 1,774 1,036 (980)
-------- -------- -------- -------- --------
Interest income (expense), net (160) 386 586 549 334
Settlement of litigation ----- (2,823) ----- ----- -----
Other income (expense), net (149) 144 86 (5) (27)
-------- -------- -------- -------- --------
Income (loss) before income taxes (5,708) (19,311) 2,446 1,580 (673)
-------- -------- -------- -------- --------
Provision for income taxes 80 ---- 733 369 325
-------- -------- -------- -------- --------
Net income (loss) (5,788) (19,311) 1,713 1,211 (998)
-------- -------- -------- -------- --------
Accretion of preferred stock 677 ---- ---- ---- 480
-------- -------- -------- -------- --------
Net income (loss) to common stockholders $ (6,465) $(19,311) $ 1,713 $ 1,211 $ (1,478)
======== ======== ======== ======== ========
Net income (loss) per common share - basic $ (0.85) $ (3.01) $ 0.28 $ 0.22 $ (0.44)
======== ======== ======== ======== ========
Net income (loss) per common share
- diluted (2) $ (0.85) $ (3.01) $ 0.26 $ 0.19 $ (0.21)
======== ======== ======== ======== ========
Weighted average number of common
shares outstanding - basic 7,632 6,425 6,121 5,610 3,371
======== ======== ======== ======== ========
Weighted average number of
common shares outstanding -
diluted (2) 7,632 6,425 6,511 6,211 4,644
======== ======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
BALANCE SHEET DATA December 31,
-----------------------------------------------------------------
(In thousands) 1997 1996 1995 1994 (1) 1993 (1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 9,273 $ 2,649 $ 11,121 $ 10,200 $ 8,867
Total assets 29,053 25,376 41,314 36,456 32,396
Notes, software license payable, and capital leases,
less current portion ----- ----- 4 210 448
Stockholders' equity 16,466 14,418 32,216 28,738 27,600
</TABLE>
(1) Restated to reflect pooling of interests with Ledge Multimedia, Inc.
(2) Reflects the conversion of all issued and outstanding shares of
Redeemable Convertible Preferred Stock into 2,313,463 shares of Common Stock
in 1993
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Statements concerning the Company's anticipated performance including future
revenues, costs, and profits, or about the development of the Company's markets,
made throughout this Annual Report, may be deemed forward-looking statements.
Such statements are based on the current assumptions of Dataware management,
which are believed to be reasonable. However, they are subject to significant
risks and uncertainties, including but not limited to the important factors
described under "Certain Factors That May Affect Future Results" below and in
Exhibit 99.1 to this Annual Report (which is incorporated herein by reference)
that could cause actual results to differ materially from those described in the
forward-looking statements.
OVERVIEW:
Dataware's revenues are composed of software license fees and service revenues.
The overall gross margin of the Company fluctuates depending upon the mix of
business among these categories of revenues.
In recent years, recurring revenue has been a significant portion of total
revenues, comprising approximately 45%, 51% and 44% of total revenues for 1997,
1996 and 1995, respectively. Recurring software license revenues result from
annual renewal of retrieval licenses and certain other fees. Recurring service
revenues have historically resulted from data services to support customers in
their use of Dataware software products, database hosting and software
maintenance fees. The decrease in recurring revenue as a percentage of total
revenues from 1996 to 1997 was primarily due to the sale of a portion of the
data services business to Information Handling Services Group, Inc. ("IHS".)
The Company currently anticipates that recurring revenues will comprise a
smaller portion of total revenues going forward.
Acquisitions have contributed significantly to the Company's growth. Among the
most recent have been the acquisitions of software developers Status/IQ Ltd.,
Ntergaid Inc., and Green Book International Corporation, as well as two
multimedia services and software companies, Ledge Multimedia, Inc. and Creative
Multimedia Corporation.
On September 30, 1997, Dataware sold a portion of its data services business to
IHS in exchange for cash and the stock of IHS's subsidiary, Creative Multimedia
Corporation of Portland, Oregon. The portion of the business sold included
certain contracts and other assets of Dataware, as well as the stock of the
Company's Australian, Canadian, German, Italian and Swedish subsidiaries. The
activities of the data services business sold consisted of processing customer
text and data and using it to create information-distribution products.
At the same time, the Company entered into a distribution agreement with IHS
under which IHS took over the software distribution activities formerly
performed by the five divested foreign subsidiaries. Following this
transaction, the Company is a leaner organization, having reduced headcount from
329 immediately before the transaction to 205 as of December 31, 1997. Expenses
are expected to be commensurately lower going forward. It is anticipated that
the IHS transaction will have an effect on other aspects of the Company's
financial performance as well. For example, services revenues are anticipated
to be substantially lower in the future as the Company focuses on its software
and multimedia businesses. The Company also entered into agreements with IHS
under which it will provide software and multimedia services for use by IHS in
its publishing activities.
Since its inception, Dataware has generated significant revenues outside of
North America. Until the IHS transaction on September 30, 1997, Dataware had
international direct sales organizations in Germany, the United Kingdom, Italy,
France, Sweden, Denmark, Australia, Singapore, and Canada. As of December 31,
1997, the Company had direct sales organizations in the United Kingdom, Denmark
and Singapore and has distribution agreements covering other European countries,
the Pacific Rim, and South America. The Company's sales from operations outside
of North America accounted for approximately 40%, 48% and 42% of total revenues
for 1997, 1996 and 1995, respectively. The Company's foreign subsidiaries are
principally engaged in software sales, customer service and distribution
activities.
12
<PAGE>
RESULTS OF OPERATIONS:
The Company's results for the twelve month period ended December 31, 1995, have
been restated to combine the former systems integration category with the
services category in the revenues and cost of revenues sections in the statement
of operations.
1997 AS COMPARED TO 1996
Revenues
The Company's total revenues remained relatively flat at $37.3 million in 1997
and $37.5 million in 1996.
Software license fees increased 18% to $19.5 million in 1997 from $16.5 million
in 1996, a $3.0 million increase. Software license fees include revenues from
systems and tools, applications and custom software products. Software license
revenue growth in 1997 was primarily due to $3.1 million in software revenues
under the new agreements with IHS.
Service revenues decreased 15% to $17.8 million in 1997 from $21.0 million in
1996, a $3.2 million decrease. Service revenues are primarily derived from
project management, custom software development, production services, software
maintenance and Ledge multimedia development. This decrease in service revenue
reflects the Company's continuing shift away from the provision of services, and
towards increased sales of software products. This shift was furthered by the
agreement with IHS, under which a portion of the data services business was
sold.
The Company expects that, as a result of the IHS transaction, its services
revenues will be lower going forward. Accordingly, overall revenues may be
reduced significantly in the near term.
Cost of Revenues
The total cost of revenues in 1997 was $13.5 million or 26% lower than costs of
$18.3 million in 1996. As a percent of total revenues, total cost of revenues
was 36% of revenues in 1997, as compared to 49% of revenues in 1996. This
decrease is largely due to a $1.9 million one-time charge that was recorded in
the second quarter of 1996 for the write-down of less productive software assets
to their net realizable value. A continuing shift away from the higher cost
services business also contributed to the decrease.
Excluding the effect of the $1.9 million one-time charge referred to above, cost
of software licenses represented 13% of software license revenue in 1997, down
from 21% in 1996. Cost of software licenses consists of the amortization of
capitalized software, license fees to third party suppliers, the cost of
software product packaging, media, documentation, and certain employee costs
related to software support. The primary reason for this decrease in costs was
the increase in software license fees as fixed expenses decreased. The decrease
in fixed costs is in large part related to the completion of a contractual
royalty commitment with a third party in the second quarter of 1996.
Cost of services represented 62% of service revenue in both 1997 and 1996. Cost
of services consists primarily of personnel expenses, certain overhead costs and
the cost of third party services.
Gross Profit
Total gross profit was $23.8 million, up from $19.2 million in 1996,
representing 64% of total revenues in 1997 and 51% in 1996. In addition to the
one-time charge mentioned previously, the increase in total gross profit from
year to year was due to lower costs within each revenue category and a shift in
product mix to higher margin software products from relatively lower margin
services.
Management anticipates that gross profit as a percentage of revenues will
continue to improve because the IHS transaction has greatly reduced the portion
of lower margin services in the Company's product mix. However, there are a
number of important factors that could adversely affect the Company's future
gross profit, resulting in higher than anticipated costs and/or lower than
anticipated revenues. These factors include: the existence of strong
competition for the Company's products and services, including the introduction
of new products from competitors, the timing of which cannot be foreseen by the
Company; the inherent risks of new product introductions, including uncertainty
of customer acceptance; and the Company's reliance on third parties for supply
of certain product components.
13
<PAGE>
Sales and Marketing Expenses
Sales and marketing expenses decreased 6% to $16.6 million in 1997 from $17.7
million in 1996. The decrease in sales and marketing expenses was primarily
caused by the IHS transaction, which divested the Company of certain business
activities in the U.S. and U.K., as well as five foreign subsidiaries that had
been principally involved in distributing Dataware products. Sales and
marketing expenses as a percentage of total revenues decreased from 47% in 1996
to 44% in 1997. It is anticipated that sales and marketing expenses will
continue to decrease in the near term, as the Company receives the benefit of
the divested subsidiaries for the full year.
Product Development Expenses
Product development expenses excluding capitalized software expenditures
decreased 17% to $6.7 million in 1997 from $8.1 million in 1996. Product
development expense as a percentage of total revenue decreased to 18% in 1997
from 22% in 1996. The decrease in product development expenses in real dollars,
as well as in relation to total revenues, is due in part to expenses related to
Northern Light Technology Corporation, a subsidiary whose assets were sold on
April 7, 1997, as described in "Liquidity and Capital Resources" below. These
expenses amounted to $2.2 million in 1996 as compared to $0.7 million in 1997.
Product development expenses other than those related to Northern Light
Technology Corporation remained relatively flat at $5.9 million in 1996 and $6.0
million in 1997.
In 1997 the Company capitalized approximately $1.8 million of internally
developed computer software costs as compared with $2.0 million in 1996.
The Company's expenditures in research and development, including capitalized
software costs, were $8.5 million and $10.1 million for the years ended December
31, 1997 and 1996, representing 23% and 27% of revenues, respectively.
General and Administrative Expenses
General and administrative expenses decreased 11% to $5.9 million in 1997 from
$6.6 million in 1996. This decrease in 1997 was primarily caused by the IHS
transaction, which offset certain increased costs in the second half of 1997,
such as the cost of closing a foreign sales office and a provision for bad debts
related to foreign accounts receivable. General and administrative expenses as
a percentage of total revenues decreased from 18% in 1996 to 16% in 1997, due to
decreased costs while revenues remained flat.
Write Down of Goodwill and Other Non-Recurring Charges
The Company periodically reviews and evaluates the recoverability of goodwill
when events or changes in circumstances indicate that the carrying amount of
goodwill may not be recoverable. The Company's assessment of impairment
considers the expected future cash flows of the acquired entity. There was no
goodwill recorded as of December 31, 1997. During 1996, the Company recorded a
one-time charge, which was included in cost of revenues in the consolidated
statement of operations, in the amount of $1.9 million for the write down of
less productive software assets to their net realizable value, prepaid royalties
and inventory. In addition, in 1996 the Company recorded write downs of
goodwill, facilities consolidations, and smaller amounts for severance and
miscellaneous items amounting to $1.9 million, which was included in operating
expenses in the consolidated statement of operations. There were no such non-
recurring charges recorded in 1997.
Charge for Purchased In-Process Research and Development
In conjunction with the acquisitions of Status/IQ Ltd. in March 1996 and
Ntergaid, Inc. in July 1996, the Company acquired certain technologies under
development that the Company hoped would prove valuable to the future growth of
the Company. Purchased research and development that had not reached
technological feasibility and had no alternative future use was valued using a
risk adjusted cash flow model, under which future cash flows were discounted
taking into account risks related to existing and future markets and an
assessment of the life expectancy of the purchased software. Expected future
cash flows associated with in-process research and development were discounted
considering risks and uncertainties related to the viability of, and potential
changes in, future target markets and to the completion of the products that
will ultimately be marketed by the Company. Such technology, valued at
approximately $1.2 million for Status/IQ and $668,000 for Ntergaid, was charged
to operations during the first and third quarters of 1996, respectively, as
purchased in-process research and development. There were no charges for
purchased research and development in 1997.
Settlement of Litigation
Pursuant to the settlement with the plaintiffs of a securities class-action
lawsuit pending since November 1994 against the Company and certain of its
current and former directors and officers, the Company agreed in 1996 to
distribute $1.8 million in cash and 250,000 shares of its common stock in
exchange for a full release of all claims against the Company and its current
and former directors and officers. The Company's insurance carrier contributed
$1.0 million in cash towards the settlement and associated legal fees. The
Company reported an expense of $2.8 million in the consolidated statements of
operations for the year ended December 31, 1996 related to the settlement and
issued 75,000 of the shares in 1996. The remaining 175,000 shares were issued
in December 1997.
14
<PAGE>
Other Income (Expense), Net
During 1997 the Company reported approximately $160,000 of net interest expense
as compared with approximately $386,000 in net interest income in 1996. The
change resulted from decreases in the average balances of cash and investments
during 1997 as compared to 1996 as well as interest expense related to the
Company's lines of credit during 1997. Other expense, net, amounting to
$149,000 in 1997 and other income, net, of $144,000 in 1996 consist primarily of
foreign exchange gains and losses caused by the effect of changes in exchange
rates on intercompany balances with the Company's foreign subsidiaries.
Provision for Income Taxes
The Company recorded a provision for income taxes of $80,000, related to
profitable foreign operations, for the year ended December 31, 1997, and no
provision for the year ended December 31, 1996, because of the losses incurred
and net operating loss carryforwards from prior periods. At December 31, 1997,
the Company had a net operating loss carryforward of $16.7 million. Use of the
Company's net operating loss carryforwards is limited due to changes in
ownership of the Company's stock.
As required by Statement of Financial Accounting Standard No. 109, management of
the Company has evaluated the positive and negative evidence bearing upon the
realizability of its deferred tax assets, which are comprised principally of net
operating loss and tax credit carryforwards. In the fourth quarter of 1996, the
Company recorded a full valuation allowance of $5,221,000 to offset the entire
net deferred tax assets as a result of the uncertainties surrounding the
realization of the assets due to large cumulative pretax losses during the prior
three years. Accordingly, the deferred tax assets have been fully reserved.
Management re-evaluates the positive and negative evidence on a quarterly basis
and determined that no net adjustment was necessary in 1997.
1996 AS COMPARED TO 1995
Revenues
The Company's total revenues decreased 9% from $41.1 million in 1995 to $37.5
million in 1996. This decline was due primarily to customer delays during the
early part of 1996, lower spending than anticipated by US Government agencies
due in part to the partial shut-down of Government functions, and increased
competition.
Software license fees decreased 17% to $16.5 million in 1996 from $20.0 million
in 1995, a $3.5 million decrease. This decrease reflected customer delays during
the first two quarters of 1996, as our customers reviewed the impact of the
Internet on their businesses, as well as increased competition in the industry.
Service revenues decreased slightly to $21.0 million in 1996 from $21.1 million
in 1995, a $171,000 decrease. This minor change in service revenue reflected
the fact that the Company had moved away from the systems integration business
while increasing revenues from service projects.
Cost of Revenues
The total cost of revenues in 1996 was $18.3 million or 22% higher than the
$15.0 million in 1995. As a percent of total revenues, total cost of revenues
was 49% of revenues in 1996, as compared to 37% of revenues in 1995. This
increase was largely due to a $1.9 million one-time charge that was recorded in
the second quarter of 1996 for the write-down of less productive software assets
to their net realizable value. A continuing shift in product mix from software
license fees to higher cost services business due in part to acquisitions, as
well as increased fixed costs, also contributed to the increase.
Excluding the $1.9 million one-time charge referred to above, cost of software
licenses represented 21% of software license revenue in 1996, up from 16% in
1995. The primary reason for this relative increase in costs was the decline in
software license fees as certain fixed expenses increased, principally the
amortization of capitalized software.
15
<PAGE>
Cost of services represented 62% of service revenue in 1996 and 56% in 1995. The
increase primarily reflected higher direct and indirect expenses for services
projects.
Gross Profit
Total gross profit was $19.2 million, down from $26.1 million in 1995,
representing 51% of revenues in 1996 and 63% in 1995. In addition to the one-
time charge mentioned previously, the decrease in total gross profit from period
to period was due to lower total revenue volume, higher costs within each
revenue category, and a shift in product mix from higher margin software
products to relatively lower margin services.
Sales and Marketing Expenses
Sales and marketing expenses increased 29% to $17.7 million in 1996 from $13.8
million in 1995. The increase in sales and marketing expenses reflected the
Company's continuing investment in the development of new distribution channels,
strengthening the Company's marketing capabilities, and the incremental expense
associated with recent acquisitions. Sales and marketing expenses as a
percentage of total revenues increased from 33% in 1995 to 47% in 1996. This
increase reflected the investments described above, compounded by the decline in
total revenues from 1995 to 1996.
Product Development Expenses
Product development expenses excluding capitalized software expenditures
increased 62% to $8.1 million in 1996 from $5.0 million in 1995. Product
development expense as a percentage of total revenue increased to 22% in 1996
from 12% in 1995.
In 1996 the Company capitalized approximately $2.0 million of internally
developed computer software costs as compared with $1.4 million in 1995. This
increase also reflected the Company's continuing investment as described above.
General and Administrative Expenses
General and administrative expenses increased 24% to $6.6 million in 1996 from
$5.3 million in 1995. This increase in general and administrative expenses
during 1996 was primarily due to the build-up of the Company's financial and
administrative infrastructure during the second half of 1995. General and
administrative expenses as a percentage of total revenues increased from 13% in
1995 to 18% in 1996, due to increased fixed costs and the decline in revenues
during 1996.
Other Income (Expense), Net
During 1996 the Company earned approximately $386,000 in net interest income as
compared with $586,000 in 1995. The change resulted primarily from the decrease
in the average balances of cash and investments during 1996 as compared to 1995.
Other income, net, which amounted to $144,000 in 1996 and $86,000 in 1995,
consists primarily of foreign exchange gains caused by the effect of changes in
exchange rates on intercompany balances with the Company's foreign subsidiaries.
Provision for Income Taxes
The Company did not record a provision for income taxes for the year ended
December 31, 1996 as compared with a $733,000 provision recorded for the year
ended December 31, 1995. A tax provision was not recorded during 1996 because
of the losses incurred during that year and the net operating loss carryforward
from prior periods. At December 31, 1996, the Company had a net operating loss
carryforward of $12.4 million.
LIQUIDITY AND CAPITAL RESOURCES:
Aggregating the proceeds of the sale of its data services business, initial
payments under its new distribution and licensing agreements with IHS, and the
private placement of its common stock described below, the Company received
$14.3 million in cash on September 30, 1997. The Company used $2.2 million in
the third quarter of 1997 to repay indebtedness under its bank line of credit.
At December 31, 1997 the Company had cash and cash equivalents aggregating $13.2
million.
During 1997, the Company's operating activities used cash of approximately $1.6
million, primarily to fund operating losses. The Company's days sales
outstanding, based on revenues for each calendar quarter, ranged from 86 days to
65 days in 1997. This fluctuation has impacted, and may continue to impact, the
Company's liquidity. Days sales outstanding were 65 days during the fourth
quarter of 1997. This decrease compared with earlier quarters in 1997 was
primarily due to an increased focus on collections in the second half of 1997,
the collection of payments under the distribution and licensing agreements with
IHS, and the sale of foreign accounts receivable associated with the IHS
transaction.
16
<PAGE>
During 1997, the Company's investing activities provided cash of $5.3 million.
Proceeds from the IHS transaction were partially offset by investment in
property, plant and equipment of $1.4 million and $1.8 million in capitalized
software costs.
The Company's financing activities during 1997 provided cash of approximately
$7.3 million. The cash consisted primarily of proceeds from the issuance of
common and preferred stock.
Several events took place during the year ended December 31, 1997, which had an
important impact on the Company's liquidity. On April 7, 1997, the Company
completed a funding arrangement involving its subsidiary, Northern Light
Technology Corporation, which had been developing the next-generation Internet
search and guide service for consumers. In the transaction, Northern Light
Technology Corporation dissolved, sold substantially all of its assets to a
newly formed limited liability company, and terminated operations. The Company
received, as a liquidating distribution from Northern Light Technology
Corporation, an equity interest in the buyer representing approximately 34% of
the buyer in the form of preferred units and a secured note. The Company's
equity interest has since been reduced as a result of the buyer's obtaining
additional equity financing. The Company has a 15% or less voting interest in
the buyer and is accounting for its $512,000 investment in the buyer using the
cost method. Northern Light Technology Corporation accounted for $2.4 million
and $1.0 million of the Company's operating expenses in the twelve months ended
December 31, 1996 and 1997, respectively.
On April 14, 1997, the Company closed $3 million of new financing through the
private placement of 3,000 shares of Series B Convertible Preferred Stock. All
shares of such preferred stock were converted into 1.2 million shares of common
stock during 1997 on the terms described in the Company's Form 8-K filed April
17, 1997.
On June 23, 1997, the Company entered into a secured, one-year line of credit
agreement in the amount of $2 million with a major U.S. bank. Interest was
payable at 1% over the prime rate of interest, or 9 1/2 % during the period
ended September 30, 1997. On September 10, 1997, the agreement was amended to
include an overadvance facility in the amount of $750,000. Interest during the
overadvance period was payable at 3% over the prime rate of interest, or 11 1/2%
during the third quarter of 1997. On September 30, 1997, the Company paid down
all amounts borrowed against this line of credit and terminated the line.
On September 30, 1997, the Company sold an aggregate of 1.1 million shares of
its common stock to two private investment funds in a private placement for
gross proceeds of $3.8 million.
The Company continues to implement and refine its revitalization programs which
are intended to minimize future losses from continuing operations. These
programs include cost reductions, higher employee productivity, repositioning of
product lines and intensified asset management. The Company believes that its
cash and cash equivalents, together with anticipated cash from operations, will
be sufficient to meet its liquidity needs for the foreseeable future. However,
working capital and other capital requirements may change because of
unanticipated changes in business conditions or delays in market acceptance of
new products, in addition to such other considerations as expansion of
operations or research and development activities, competitive and technological
developments and possible future acquisitions of businesses and/or product
rights. There can be no assurance that the Company may not experience liquidity
problems because of adverse market conditions or other unfavorable events.
SUBSEQUENT EVENTS:
In January 1998 the Company acquired for cash 100% of the shares of Green Book
International Corporation, developers of a leading software package for
electronic publishing of financial prospectuses. The Green Book technology will
be managed by Dataware's Ledge Multimedia division.
In consideration for the sale of a portion of its data services business to
IHS, the Company received $6.8 million in cash and 100% of the stock of IHS's
subsidiary, Creative Multimedia Corporation. The preliminary results announced
by the Company for 1997 included an estimated $2.2 million gain on this
transaction, subject to revision when the final settlement required by the
Company's agreement with IHS was complete. The parties are currently working
out this settlement, taking into account, among other things, the closing date
balance sheets and subsequent receivables collections. Due to the uncertainty
of the results of the pending discussions, the Company is unable at this time to
make a reasonable estimate of the final gain from the IHS transaction.
Accordingly, the Company has reversed the $2.2 million gain recorded in the
third quarter of 1997. The ultimate accounting for the transaction will be
reflected in the Company's results when it occurs, currently expected to be in
the second quarter of 1998.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("SFAS 130"). This Statement requires
businesses to disclose comprehensive income and its components in general
purpose financial statements, with reclassification of prior period financial
statements. SFAS 130 is effective for fiscal periods beginning after December
15, 1997. The Company is currently evaluating the impact this statement will
have on its financial statements; however, because the statement requires only
additional disclosure the Company does not expect it to have a material impact
on its financial position or results of operations.
17
<PAGE>
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued. Based on the management approach to segment
reporting, SFAS No. 131 establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about products and
services, major customers and the material countries in which the entity holds
assets and reports revenue. Management is currently evaluating the effects of
this change on its reporting of segment information. The Company will adopt
SFAS No. 131 for its fiscal year ending December 31, 1998.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions and supersedes SOP 91-1, "Software Revenue
Recognition." Management does not believe that this pronouncement will have a
material impact on its business or results of operations. The Company will
adopt SOP 97-2 effective January 1, 1998.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS:
SALE OF PORTION OF SERVICES BUSINESS TO IHS
The transactions with IHS described above will necessarily result in significant
changes in the Company's manner and results of operations, some of which have
been described above, but not all of which can be anticipated at this time.
Factors that cannot be predicted and may significantly affect results include,
but are not limited to, the extent to which IHS will be able to perform the same
types of services as the Company has been providing and the quality of such
services, the ability of IHS to distribute the Company's software effectively,
increased competition that may result from the access that IHS now has to the
Company's customers and former employees, and the extent of changes that the
Company must make internally to adjust to its new configurations. Any of these
factors could cause actual results to differ materially from those anticipated
in any forward-looking statements in this Form 10-K or in any other written or
oral statements made by the Company or its officers.
YEAR 2000
The Company recognizes the potential problems that may arise if its products and
operations are adversely impacted by problems related to "Year 2000" systems and
software failures which can arise when dates go beyond the year 1999. The
Company believes that all of its products are currently Year 2000 compliant and,
therefore, the Company does not expect to undertake additional research and
development efforts in this regard. The Company is in the process of
identifying anticipated costs, problems and uncertainties associated with making
its internal-use operating systems Year 2000 compliant. The Company expects to
implement successfully the systems and programming changes necessary to address
Year 2000 issues, and does not believe that the cost of such actions will have a
material effect on the Company's results of operations or financial condition.
Any such costs will be expensed as incurred. There can be no assurance,
however, that there will not be a delay in, or increased costs associated with,
the implementation of such changes, and the Company's inability to implement
such changes could have an adverse effect on future results of operations. In
addition, the Company is surveying all major suppliers to determine the status
and schedule for their Year 2000 compliance. Where it believes that a
particular supplier's situation poses unacceptable risks, the Company plans to
identify an alternate source during fiscal 1998. The additional information
concerning Year 2000 issues contained in Exhibit 99.1 hereto is incorporated
herein by reference.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Dataware Technologies, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of Dataware Technologies, Inc. listed in Item 14(a) of this
form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dataware
Technologies, Inc. as of December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 12, 1998, except as to the
information presented in the second
paragraph of Note O, for which the
date is March 30, 1998
19
<PAGE>
DATAWARE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,231 $ 2,368
Accounts receivable, less allowance for doubtful
accounts of $750 and $934 at December 31, 1997
and 1996, respectively 6,678 9,271
Receivable related to sale of services business 490 ---
Prepaid expenses and other current assets 1,461 1,968
---------- ----------
Total current assets 21,860 13,607
Property and equipment, net 4,198 7,298
Computer software costs, net 2,483 2,239
Investment in Northern Light LLC 512 ---
Goodwill --- 2,232
---------- ----------
Total assets $ 29,053 $ 25,376
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ --- $ 45
Accounts payable 2,677 3,232
Payable related to sale of services business 2,466 ---
Accrued acquisition--related costs 972 ---
Accrued expenses 1,306 1,377
Accrued litigation and non-recurring charges --- 982
Accrued compensation 1,786 2,046
Income taxes payable 830 1,140
Deferred revenue 2,550 2,136
---------- ----------
Total current liabilities 12,587 10,958
Commitments and Contingencies (Notes B and J) --- ---
Stockholders' equity:
Common stock, $.01 par value: 14,000,000 shares authorized;
9,267,217 and 6,640,597 shares issued and outstanding
at December 31, 1997 and 1996, respectively 93 66
Additional paid-in capital 46,800 38,473
Accumulated deficit (30,221) (23,756)
Cumulative translation adjustment (206) (365)
---------- ----------
Total stockholders' equity 16,466 14,418
---------- ----------
Total liabilities and stockholders' equity $ 29,053 $ 25,376
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
20
<PAGE>
DATAWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues:
Software license fees $ 19,534 $ 16,502 $ 19,996
Services 17,785 20,957 21,128
--------- --------- --------
Total revenues 37,319 37,459 41,124
Cost of revenues:
Software license fees 2,544 3,437 3,125
Write down of capitalized software
and intangible assets --- 1,926 ---
Services 10,966 12,938 11,923
--------- --------- --------
Total cost of revenues 13,510 18,301 15,048
--------- --------- --------
Gross profit 23,809 19,158 26,076
Operating expenses:
Sales and marketing 16,603 17,679 13,754
Product development 6,721 8,144 5,040
General and administrative 5,884 6,603 5,337
Write down of goodwill and
other non-recurring charges --- 1,889 ---
Merger costs --- --- 171
Charge for purchased in-process
research and development --- 1,861 ---
--------- --------- --------
Total operating expenses 29,208 36,176 24,302
--------- --------- --------
Income (loss) from operations (5,399) (17,018) 1,774
Interest income 116 405 611
Interest expense (276) (19) (25)
Settlement of litigation --- (2,823) ---
Other income (expense), net (149) 144 86
--------- --------- --------
Income (loss) before provision for income taxes (5,708) (19,311) 2,446
--------- --------- --------
Provision for income taxes 80 --- 733
--------- --------- --------
Net income (loss) (5,788) (19,311) 1,713
Accretion of preferred stock 677 --- ---
--------- --------- --------
Net income (loss) to common stockholders $ (6,465) $ (19,311) $ 1,713
========= ========= ========
Net income (loss) per common share - basic $ (0.85) $ (3.01) $ 0.28
========= ========= ========
Net income (loss) per common share - diluted $ (0.85) $ (3.01) $ 0.26
========= ========= ========
Weighted average number of common shares
outstanding - basic 7,632 6,425 6,121
========= ========= ========
Weighted average number of common shares
outstanding - diluted 7,632 6,425 6,511
========= ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
21
<PAGE>
DATAWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
NET
UNREALIZED TOTAL
COMMON STOCK ADDITIONAL CUMULATIVE GAIN (LOSS) STOCK-
--------------- PAID-IN ACCUMULATED TRANSLATION ON HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT INVESTMENTS EQUITY
------ ------ ------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 5,927 $ 59 $35,332 $(6,158) $ (372) $(123) $28,738
------ ---- ------- ------- ------ ----- -------
Stock options exercised and shares issued
in conjunction with employee stock purchase plan 312 3 1,450 1,453
Translation adjustment 163 163
Unrealized gain on marketable securities 149 149
Net income 1,713 1,713
------ ---- ------- ------- ------ ----- -------
Balance at December 31, 1995 6,239 62 36,782 (4,445) (209) 26 32,216
------ ---- ------- ------- ------ ----- -------
Stock options exercised and shares issued
in conjunction with employee stock purchase plan 202 2 451 453
Stock options issued in conjunction with acquisitions 107 107
Stock options issued to consultants 200 200
Shares issued in settlement of litigation 75 1 280 281
Shares issued in connection with acquisitions 125 1 653 654
Translation adjustment (156) (156)
Unrealized loss on marketable securities (26) (26)
Net loss (19,311) (19,311)
------ ---- ------- ------- ------ ----- -------
Balance at December 31, 1996 6,641 66 38,473 (23,756) (365) -- 14,418
------ ---- ------- ------- ------ ----- -------
Stock options exercised and shares issued
in conjunction with employee stock purchase plan 148 2 292 294
Translation adjustment (254) (254)
Change in translation adjustment due to disposal 413 413
of foreign subsidiaries
Shares issued in settlement of litigation 175 2 654 656
Stock options issued in conjunction with
sale of portion of services business 68 68
Stock options and warrants issued to consultants and bank 157 157
Shares issued in connection with private placements 1,085 11 3,825 3,836
Conversion of preferred stock to common stock 1,218 12 3,331 3,343
Accretion of preferred stock (677) (677)
Net loss (5,788) (5,788)
------ ---- ------- ------- ------ ----- -------
Balance at December 31, 1997 9,267 $ 93 $46,800 $(30,221) $(206) $ -- $16,466
====== ==== ======= ======== ====== ===== =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
22
<PAGE>
DATAWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ (5,788) $ (19,311) $ 1,713
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,780 3,415 3,077
Amortization of goodwill 263 373 443
Provision for doubtful accounts 778 810 467
Loss (gain) on foreign currency transactions 230 (122) (61)
Deferred taxes --- 620 (620)
Non-cash portion of write down of intangibles and
litigation settlement --- 3,461 ---
Charge for purchased in-process research and development --- 1,861 ---
Stock options and warrants issued to consultants and bank 157 200 ---
Changes in operating assets and liabilities, net
of effects from acquisitions and dispositions of businesses:
Accounts receivable (2,174) 50 (622)
Prepaid expenses and other current assets (533) 324 81
Accounts payable (1,007) 1,099 (114)
Accrued expenses and compensation 2,292 (13) 398
Accrued litigation and non-recurring charges (326) 982 ---
Income taxes payable (284) (787) 1,238
Deferred revenue 1,054 (97) 55
--------- --------- ---------
Net cash provided by (used in) operating activities (1,558) (7,135) 6,055
--------- --------- ---------
Cash flows provided by (used in) investing activities:
Purchase of marketable securities --- (4,080) (10,516)
Proceeds from sales and maturities of marketable securities --- 12,963 10,738
Additions to property and equipment (1,411) (3,758) (2,697)
Proceeds from sale of portion of services business,
net of cash acquired (disposed) 8,546 --- ---
Acquisition of businesses, net of cash acquired --- (1,520) ---
Additions to capitalized software costs (1,788) (1,956) (1,562)
--------- --------- ---------
Net cash provided by (used in) investing activities 5,347 1,649 (4,037)
--------- --------- ---------
Cash flows provided by financing activities:
Proceeds from issuance of common stock and exercise
of stock options 4,130 453 1,453
Principal payments on notes, software license payable
and capital leases --- (340) (394)
Proceeds from issuance of preferred stock 3,000 --- ---
Dividends and issuance costs related to preferred stock (267) --- ---
Increase in short-term borrowings, net 403 42 50
--------- --------- ---------
Net cash provided by financing activities 7,266 155 1,109
--------- --------- ---------
Effect of exchange rate changes on cash (192) (35) (35)
--------- --------- ---------
Net change in cash and cash equivalents 10,863 (5,366) 3,092
Cash and cash equivalents at beginning of year 2,368 7,734 4,642
--------- --------- ---------
Cash and cash equivalents at end of year $ 13,231 $ 2,368 $ 7,734
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 276 $ 19 $ 25
Taxes paid $ --- $ --- $ 90
Supplemental disclosure of non-cash investing and financing transactions:
Conversion of preferred stock into common stock $ 3,343 $ --- $ ---
Accretion of preferred stock $ 677 $ --- $ ---
Warrants issued in connection with issuance of preferred stock $ 83 $ --- $ ---
Investment in Northern Light LLC in exchange for assets $ 512 $ --- $ ---
Stock issued in connection with acquisitions and settlement of litigation $ 656 $ 1,042 $ ---
Note payable assumed in connection with acquisition $ --- $ 101 $ ---
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
23
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Dataware Technologies, Inc. (the "Company") was incorporated on March 15, 1988.
Significant operations of the Company did not commence until October 1, 1988,
upon the purchase of the worldwide rights to certain software developed by
Dataware 2000 GmbH and the acquisition of its United States distributor. The
Company provides software for enterprise information access ("knowledge
management") and professional electronic publishing applications, as well as
multimedia services for CD-ROM and Web-based publishing.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries from the date of their acquisition. All material
intercompany transactions and accounts have been eliminated. The financial
statements have been restated for the December 30, 1995 merger with Ledge
Multimedia, Inc. ("Ledge"). The merger has been accounted for as a pooling of
interests and the historical consolidated financial statements of the Company
for all periods prior to the merger presented herein have been restated to
include the results of operations and cash flows of Ledge.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Foreign Currency
The accounts of foreign subsidiaries are translated into U.S. dollars using
exchange rates in effect at period-end for assets and liabilities and at average
exchange rates during the period for results of operations. The local currency
for all foreign subsidiaries is the functional currency. The related
translation adjustments are reported as a separate component of stockholders'
equity. Gains and losses resulting from foreign currency transactions are
included in other income (expense), net.
Reclassification
Certain reclassifications have been made to the prior years' financial
statements to conform to the current presentation.
Revenue Recognition
Revenues from software license fees are recorded upon execution of the contract
and shipment of the product provided that no significant vendor obligations
remain outstanding and collection of the related receivable is deemed probable
by management. Revenues from services are recognized as the Company performs
the service in accordance with the contract. Revenue from maintenance
contracts, including amounts bundled in initial software licenses, is recognized
ratably over the term of the agreement, generally one year.
Income Taxes
The Company provides for income taxes using the liability method whereby
deferred tax liabilities and assets are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using current statutory tax rates. A valuation allowance is
established against net deferred tax assets if, based on the weighted available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
24
<PAGE>
Cash Equivalents and Marketable Securities
Cash equivalents consist of highly liquid investments purchased with an original
maturity of three months or less. Those securities with maturities of three
months to twelve months as of the balance sheet date are classified as short
term securities and securities with maturities of greater than twelve months are
classified as long term securities.
At December 31, 1996, all marketable securities are classified as available for
sale and are stated at fair value, with unrealized gains (losses) reported as a
separate component of stockholders' equity. There were no marketable securities
held at December 31, 1997.
The amortized cost of marketable debt securities is adjusted for the
amortization of premiums and accretion of discounts over the life of the
security. Such amortization and interest as well as realized gains and losses
are included in interest income.
Property and Equipment
Property and equipment is stated at cost, and is depreciated on a straight-line
basis over the estimated useful life of the asset, generally three to five
years. Leasehold improvements are amortized over the lesser of the estimated
useful life of the assets or the lease term.
Major additions and improvements are capitalized, while repairs and maintenance
are charged to expense as incurred. When assets are sold or retired, the related
cost and accumulated depreciation are removed from the accounts and any gain or
loss is included in net income (loss).
Goodwill
The Company periodically reviews and evaluates the recoverability of goodwill
when events or changes in circumstances indicate that the carrying amount of
goodwill may not be recoverable. The Company's assessment of impairment
considers the expected future cash flows of the acquired entity. Goodwill is
generally amortized over a ten year period.
Product Development and Capitalized Software Costs
Expenditures for research and development incurred prior to the establishment of
technological feasibility are charged to operations as incurred. The Company
capitalizes certain computer software development costs after technological
feasibility has been established. Upon shipment, these costs are amortized over
the shorter of the estimated future revenue streams or the estimated economic
lives of the software products, generally two years, and are included in cost of
revenues for software license fees. It is reasonably possible that those
estimates of future revenue streams, the remaining economic estimated life of
the product, or both, will be reduced significantly in the near term due to
competitive pressures.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk at December 31, 1997, consist of temporary cash investments and
trade receivables.
The Company invests its cash in deposits and money market instruments with
several financial institutions. These investments typically mature within 90
days.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base and
their dispersion across many different industries and geographies. The Company
performs ongoing credit evaluations of its customers, but does not require
collateral or other security to support customer receivables, and maintains
reserves for potential credit losses. Such losses to date have been within
management's expectations.
25
<PAGE>
Computation of Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS
128"), which is effective for the Company in 1997. SFAS 128 is designed to
improve the net income per share information provided in financial statements by
simplifying the existing computational guidelines embodied in Accounting
Principles Board Opinion No. 15, "Earnings Per Share", revising the disclosure
requirements, and increasing the comparability of net income per share data on
an international basis.
SFAS 128 replaced the calculation of primary and fully diluted net income per
share with basic and diluted net income per share. Unlike primary net income
per share, basic net income per share excludes any dilutive effect of options,
warrants and convertible securities. Diluted net income per share is very
similar to the previously reported fully diluted net income per share, except
that the new treasury stock method used in determining the dilutive effect of
options uses the average market price for the period rather than the higher of
the average market price or the ending market price. Net income per common share
amounts for 1996 and 1995 have been restated to conform to the SFAS 128
requirements.
New Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("SFAS 130"). This Standard requires
businesses to disclose comprehensive income and its components in general
purpose financial statements, with reclassification of prior period financial
statements. SFAS 130 is effective for fiscal periods beginning after December
15, 1997; its adoption is not expected to have a material impact on the
Company's disclosures.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued. Based on the management approach to segment
reporting, SFAS No. 131 establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about products and
services, major customers and the countries in which the entity holds material
assets and reports material revenue. Management is currently evaluating the
effects of this change on its reporting of segment information. The Company
will adopt SFAS No. 131 for its fiscal year ending December 31, 1998.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2, "Software Revenue Recognition," which provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions and supersedes SOP 91-1, "Software Revenue
Recognition." Management does not believe that this pronouncement will have a
material impact on its business or results of operations. The Company will
adopt SOP 97-2 effective January 1, 1998.
B. BUSINESS COMBINATIONS AND DISPOSALS
Sale and Exchange of Services Businesses
On September 30, 1997, the Company sold a portion of its data services business,
consisting of the stock of five foreign subsidiaries in Australia, Canada,
Germany, Italy and Sweden and certain other assets of the Company, to
Information Handling Services Group, Inc. ("IHS") in exchange for cash and the
stock of IHS's subsidiary, Creative Multimedia Corporation ("CMC"), subject to
final adjustment (see Note O).
The acquisition of CMC has been accounted for as a purchase and, accordingly,
the assets, liabilities and results of operations are included from the
acquisition date. The results of the continuing operations of CMC for the years
ended December 31, 1997, and December 31, 1996, are immaterial in the context of
the results of the Company. As a result, proforma financial information has not
been presented.
26
<PAGE>
Purchase Method Acquisitions
On March 29, 1996 the Company completed the acquisition of all of the
outstanding shares of Status/IQ Ltd. ("Status"), located in the United Kingdom,
in exchange for approximately $1,394,000 (including acquisition expenses),
consisting of cash, common stock of the Company, and warrants to purchase
additional common stock of the Company. The acquisition was accounted for as a
purchase and, accordingly, the assets, liabilities and results of operations
were included in the financial statements from the acquisition date. Purchased
research and development that had not reached technological feasibility and that
had no alternative future use was valued using a risk adjusted cash flow model
under which future cash flows were discounted, taking into account risks related
to existing and future markets and an assessment of the life expectancy of the
purchased software. Expected future cash flows associated with in-process
research and development were discounted considering risks and uncertainties
related to the viability of and potential changes in future target markets and
to the completion of the products that will ultimately be marketed by the
Company. This analysis resulted in an allocation of $1,193,000 to purchased
research and development expense. In addition, $175,000 of the purchase price
was allocated to computer software costs and amortized over a one year period.
On May 15, 1996 the Company completed the acquisition of substantially all of
the assets and assumed the liabilities of S Cube srl ("S Cube") of Milan for
approximately $389,000 in cash (including acquisition expenses). The
acquisition was accounted for as a purchase and, accordingly, the assets,
liabilities, and results of operations were included in the financial statements
from the acquisition date. The purchase price was allocated to the assets and
liabilities of S Cube based on their estimated respective fair values. The
excess purchase price over the fair value of net assets acquired, totaling
$155,000, was included in intangible assets and amortized using a five-year
life. As a result of the sale of the stock of the Company's Italian subsidiary
to IHS as noted above, the unamortized portion of the intangible asset was
removed from the Company's books as of September 30, 1997.
On July 31, 1996 the Company acquired Ntergaid, Inc. ("Ntergaid") of Milford,
Connecticut, through the merger of a wholly-owned subsidiary with Ntergaid for a
cost of approximately $685,000 (including acquisition expenses), consisting of
cash and common stock of the Company. The acquisition was accounted for as a
purchase and, accordingly, the assets, liabilities, and results of operations
have been included in the financial statements from the acquisition date.
Purchased research and development that had not reached technological
feasibility and that had no alternative future use was valued using a risk
adjusted cash flow model under which future cash flows were discounted, taking
into account risks related to existing and future markets and an assessment of
the life expectancy of the purchased software. Expected future cash flows
associated with in-process research and development were discounted considering
risks and uncertainties related to the viability of and potential changes in
future target markets and to the completion of the products that will ultimately
be marketed by the Company. This analysis resulted in an allocation of $668,000
to purchased research and development expense in 1996.
Merger-Pooling of Interests
On December 30, 1995, the Company completed the acquisition of all of the
outstanding shares of Ledge Multimedia, Inc. ("Ledge"), located in Cambridge,
Massachusetts, in exchange for 110,000 shares of Dataware Technologies, Inc.
common stock. The merger was accounted for as a pooling of interests and,
accordingly, the Company's comparative financial statements for all years prior
to the merger have been restated to include the financial position, results of
operations and cash flows of Ledge.
27
<PAGE>
Revenues and net income for the individual entities consist of the following:
<TABLE>
<CAPTION>
1995
---------
<S> <C>
Revenues:
Dataware Technologies, Inc. $39,569
Ledge Multimedia, Inc. 1,555
-------
Total $41,124
=======
Net income:
Dataware Technologies, Inc. $ 1,840
Ledge Multimedia, Inc. (127)
-------
Total $ 1,713
=======
</TABLE>
C. WRITE DOWN OF ASSETS AND OTHER NON-RECURRING CHARGES
During the second quarter of 1996, the Company wrote down approximately
$3,815,000 (or $.59 per share) in intangible assets and other non-recurring
charges. These charges were the result of the Company's focus on next
generation products, strengthening the Company's sales organizations, and
consolidation of certain facilities. Detail of the items written off are as
follows:
<TABLE>
<S> <C>
Charged to Cost of Revenues:
Capitalized software $1,585,000
Product royalties 279,000
Inventory 62,000
----------
Total $1,926,000
==========
Charged to Operating Expenses:
PCD goodwill $ 812,000
Facilities charge 315,000
Severance payments 258,000
Product development royalties 200,000
Fixed assets 149,000
Other incidental charges 155,000
----------
Total $1,889,000
==========
</TABLE>
28
<PAGE>
D. MARKETABLE SECURITIES
The Company has no marketable securities at December 31, 1997.
The following is a summary of marketable securities at December 31, 1996 (in
thousands):
<TABLE>
<CAPTION>
1996
---------------------
Value Based
on Market
Amortized Quotations
Security Type Cost at Year End
- ------------- --------- -----------
<S> <C> <C>
Cash equivalents:
Repurchase agreement $ 419 $ 419
----- -----
Total cash equivalents $ 419 $ 419
===== =====
</TABLE>
Proceeds from the sale of marketable securities during 1996 amounted to $7.1
million. Proceeds from maturities of marketable securities during 1997 and 1996
amounted to $0 and $5.9 million, respectively. During 1996, $18,000 in realized
gains were offset by $13,000 in realized losses. No gains or losses were
realized during 1997 and 1995.
E. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31
-----------------
1997 1996
------- --------
<S> <C> <C>
Computer and office equipment $8,530 $11,361
Furniture and fixtures 807 1,940
Leasehold improvements 327 507
Computer equipment and computer software
under capital lease arrangement 50 50
------ -------
9,714 13,858
Less: accumulated depreciation
and amortization 5,516 6,560
------ -------
$4,198 $ 7,298
====== =======
</TABLE>
Depreciation and amortization expense was $2,255,000, $2,106,000 and $1,622,000
for the years ended December 31, 1997, 1996 and 1995, respectively. Cumulative
amortization related to computer equipment and computer software under the
capital lease arrangement amounted to $50,000 for the year ended December 31,
1997, and $46,000 for the year ended December 31, 1996.
During the year ended December 31, 1996, the Company recorded a $149,000 one-
time charge for the write-off of the net book value of selected property and
equipment as part of the write down of certain assets and other non-recurring
charges (see Note C).
F. PRODUCT DEVELOPMENT AND CAPITALIZED SOFTWARE COSTS
During 1997, 1996 and 1995, the Company capitalized $1,788,000, $1,956,000 and
$1,562,000 , respectively, of internally developed software costs. These costs,
net of accumulated amortization, amounted to $2.5 million at December 31, 1997,
and $2.2 million at December 31, 1996. Amortization of internally developed
capitalized software costs was $1,544,000, $814,000, and $969,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
29
<PAGE>
The cost of purchased computer software is capitalized and amortized on a
straight-line basis over its estimated useful life, generally five years. During
the year ended December 31, 1996 the Company capitalized approximately $175,000
of purchased software costs related to the acquisition of Status/IQ, Ltd. All
purchased software costs were fully amortized as of December 31, 1996.
Amortization expense related to purchased software was $495,000 and $311,000 for
the years ended December 31, 1996 and 1995, respectively.
During the year ended December 31, 1996 the Company recorded a one-time charge
for the write-down of $1,585,000 in less productive capitalized software assets
to their net realizable value as part of the write down of certain assets and
other non-recurring charges (see Note C).
G. GOODWILL
Goodwill consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Goodwill ---- $3,392
Less: accumulated amortization ---- 1,160
------ ------
---- $2,232
====== ======
</TABLE>
The goodwill balance as of December 31,1996, was related to subsidiaries that
were sold to IHS in 1997 (see Note B); these balances were removed from the
Company's books in accounting for this transaction.
H. DEBT
Lines of Credit
On June 23, 1997, the Company entered into a secured, one-year line of credit
agreement in the amount of $2,000,000 with a major U.S. bank. Interest was
payable at 1% over the prime rate of interest, or 9 1/2% during the period ended
September 30, 1997. On September 10, 1997, the agreement was amended to include
an overadvance facility in the amount of $750,000. Interest during the
overadvance period was payable at 3% over the prime rate of interest, or 11 1/2%
during the third quarter of 1997. As of September 30, 1997, the Company had
paid down all amounts borrowed against this line of credit and had terminated
the line. In connection with the line of credit, on June 23, 1997, the Company
issued a seven-year warrant to purchase shares of the Company's common stock at
$3.42 per share. Based on the amount of the Company's borrowings under the line
of credit, this warrant is now exercisable for 46,783 shares. An additional
seven-year warrant, for the purchase of 24,767 shares of common stock at $3.23
per share, was issued to the bank on September 10, 1997, in connection with the
overadvance facility.
Factoring Agreement
In December, 1996, the Company entered into a factoring agreement with full
recourse, to a maximum of $1,250,000 of its account receivable balances. The
factoring charge amounted to 0.5% of the face amount of the factored receivable
balances. Interest was charged at 1.5% per month on the average daily account
balance outstanding. The Company was permitted to receive up to 80% of the
receivable balances factored. The Company was obligated to pay to the buyer the
full face amount, or any unpaid portion of any factored receivable balance which
remained unpaid ninety calendar days after the invoice date. As of December 31,
1996, factored receivable balances amounted to $940,000 for which the Company
received $752,000 or 80% of the face value of the account receivable balances.
There were no factored receivable balances as of December 31, 1997.
30
<PAGE>
I. STOCKHOLDERS' EQUITY
Common Stock
On September 30, 1997, the Company issued 1,085,000 shares of common stock to
two investors in a private placement for gross proceeds of $3,770,375. A
financial investor purchased 865,000 of these shares and the remaining 220,000
shares were issued to an affiliate of IHS in connection with the sale and
exchange of services businesses transaction described in Note B above.
As of December 31, 1997, the Company had outstanding five- and seven-year
warrants to purchase approximately 200,000 shares of common stock at purchase
prices ranging between $3.23 and $6.00 per share.
Preferred Stock
The Company has authorized a total of 8,000,000 shares of Preferred Stock with a
par value of $.01 per share, of which 300,000 shares are designated Series A
Junior Participating Preferred Stock, 3,000 shares are Series B Convertible
Preferred Stock, and the balance of which are not currently designated in any
series. Prior to the initial public offering in July 1993, the Preferred Stock
was designated into several series with differing terms, including 7,038,805
shares of Redeemable Convertible Preferred Stock, 369,767 shares of preferred
stock and 591,428 shares of Series D Preferred Stock. There were no shares of
preferred stock issued and outstanding at December 31, 1997 and 1996.
On April 14, 1997, the Company closed $3 million of new financing through the
private placement of 3,000 shares of Series B Convertible Preferred Stock. As
of September 30, 1997, all such shares of preferred stock had been converted
into common stock.
The Board of Directors may, without further action of the stockholders of the
Company, issue preferred stock in one or more series and fix the rights and
preferences thereof, including the dividend rights, dividend rate, conversion
rights, voting rights, terms of redemption (including sinking fund provisions),
redemption prices and liquidation preferences.
Shareholder Rights Plan
On June 28, 1996, the Board of Directors of the Company adopted a Shareholder
Rights Plan and declared a dividend distribution of one share purchase right (a
"Right") for each outstanding share of common stock of the Company to
stockholders of record at the close of business on July 8, 1996. Each share of
common stock newly issued after that date also carries with it one Right. Each
Right entitles the record holder to purchase from the Company one one-hundredth
of a share (a "Unit") of the Company's Series A Junior Participating Preferred
Stock at a price of $30 per Unit subject to adjustment. The Rights are not
exercisable apart from the common stock until 10 days after a person or group
has acquired beneficial ownership (as defined in the Rights Plan) of a number of
shares equal to 15% or more, or makes a tender offer of 15% or more of the
Company's outstanding Common Stock. In the event that, after the distribution
date, any person or group becomes the beneficial owner of 15% or more of the
outstanding common stock (an "acquiring person"), then each holder of a Right
other than the acquiring person will thereafter have the right to receive, upon
exercise, Common Stock (or, in certain circumstances, cash, property, or other
securities of the Company) having a value equal to two times the purchase price
of the Right. In addition, if after the acquisition of beneficial ownership of
15% or more of the Company's outstanding common stock, the Company is acquired
in certain specified mergers or other business combination transactions or if
50% or more of the assets or earning power of the Company and its subsidiaries
are sold, each holder of a Right (except Rights held by an acquiring person
which previously have been voided) shall thereafter have the right to receive,
upon exercise, shares of the common stock of the acquiring company having a
value equal to two times the Purchase Price of the Right. The Rights expire on
July 8, 2006 and are redeemable prior to the time an acquiring person or group
acquires beneficial ownership of 15% or more of the Company's common stock at
one cent per Right.
31
<PAGE>
Equity Incentive Plan
The Company adopted the 1988 Stock Option Plan during 1988. On May 19, 1993, the
stockholders of the Company approved the 1993 Equity Incentive Plan ("the Plan")
as successor to the 1988 Stock Option Plan. The Plan provides for options and
other awards to purchase up to an aggregate of 3,000,000 shares of common stock.
The Plan provides for the grant of nonqualified and incentive stock options to
employees. Incentive stock options are granted at a price set by the Board of
Directors not to be less than 100% of the fair value of the stock on the date of
the grant. Nonqualified stock options are granted at prices determined by the
Board of Directors. All stock options granted to date have been granted at not
less than the fair market value of the common stock at the date of grant. The
term of the outstanding options is ten years. The options granted to date vest
at various rates over periods up to five years.
Director Stock Option Plan
On May 19, 1993, the stockholders of the Company approved the 1993 Director
Stock Option Plan ("the Plan"). On May 23, 1996, stockholders of the Company
approved an amendment of the Plan, increasing the number of shares issuable
under the Plan to 130,000 shares of common stock from 60,000 shares. The Plan
provides for the grant of nonqualified stock options to directors. These option
grants were granted at fair market value on the date of the grant. The term of
the outstanding options is ten years. All options granted under the Plan become
exercisable ratably over a twelve month period.
Ledge Stock Options
In January 1996 the Company granted nonqualified stock options providing for the
issuance of up to 175,000 shares to former employees of Ledge who became
employees of the Company upon the merger. These options were granted at fair
market value on the date of the grant. The term of the outstanding options is
ten years. All options granted under the Plan become exercisable at various
rates, beginning in the initial year of grant.
Consultant Stock Option Plan
In December 1995 the Company established the Consultant Stock Option Plan ("the
Plan"), providing for the issuance of up to 250,000 shares of common stock. The
Plan provides for the issuance of nonqualified stock options to outside
consultants of the Company. These option grants are granted at fair market value
on the date of the grant. The term of the outstanding options is ten years.
Options granted under the Plan typically become exercisable ratably during the
term of the respective consultant's contract with the Company.
CMC Stock Options
In September and December 1997, the Company granted nonqualified stock options
providing for the issuance of up to an aggregate of 32,300 shares of common
stock to employees of Creative Multimedia Corporation ("CMC") in substitution
for the options to purchase IHS stock that they had held before IHS sold CMC to
Dataware. These options have a ten-year term and an exercise price of $4.625 per
share, the fair market value on the date of grant, and vest ratably over four
years.
Supplemental Disclosures for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation", which is effective for periods beginning after December 15, 1995.
SFAS No. 123 requires that companies either recognize compensation expense for
grants of stock, stock options, and other equity instruments based on fair
value, or provide pro forma disclosures of net income and earnings per share in
the notes to the financial statements. The Company adopted SFAS No. 123 in 1996
and elected the disclosure-only alternative provisions. The Company has chosen
to continue to account for stock-based compensation granted to employees and
directors using the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock issued to Employees", and related
interpretations. Accordingly, compensation cost for stock options granted to
employees and directors is measured as the excess, if any, of the fair value of
the Company's stock at the date of the grant over the amount that must be paid
to acquire the stock. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for the awards under these plans consistent with the methodology prescribed
under SFAS No. 123, the Company's net income (loss) and earnings per share would
have been reduced to the pro forma amounts indicated below:
32
<PAGE>
<TABLE>
<CAPTION>
Net income (loss) Earnings per Earnings per
to Common Stockholders Share -Basic Share - Diluted
---------------------- -------------- -----------------
<S> <C> <C> <C>
As reported:
1997 $ (6,465) $(0.85) $(0.85)
1996 (19,311) (3.01) (3.01)
1995 1,713 0.28 0.26
Pro forma:
1997 $ (8,153) $(1.07) $(1.07)
1996 (21,692) (3.38) (3.38)
1995 1,172 0.19 0.18
</TABLE>
The fair value of each option granted during 1997, 1996 and 1995 is estimated on
the date of grant using the Black-Scholes option-pricing model utilizing the
following weighted-average assumptions: (1) expected risk-free interest rate of
6%, (2) expected option life of 5 years in 1997 and 4 years in 1996 and 1995,
(3) expected stock volatility of 65% in 1997 and 70% in 1996 and 1995, and (4)
expected dividend yield of 0.0%. The amount of compensation expense, net of
income taxes, included in the pro forma net income (loss) and earnings per share
detailed in the table above, is approximately $1,562,000, $2,293,000 and
$498,000 for 1997, 1996 and 1995, respectively.
The effects of applying SFAS No. 123 for the purposes of pro forma disclosures
may not be indicative of the effects on reported net income (loss) and earnings
per share for future years, as the pro forma disclosures include the effects of
only those awards granted after January 1, 1995.
Information with respect to stock options granted under all stock option plans
is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Weighted Fair Value
Average of Options
Shares Exercise Price Granted
---------- -------------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1994 1,631,609 $ 8.22
Granted 418,470 12.12 $ 6.51
Exercised (284,373) 4.28
Cancelled (116,227) 11.86
----------
Outstanding at December 31, 1995 1,649,479 9.61
Granted 1,778,329 6.51 $ 2.77
Exercised (112,862) 0.75
Cancelled (1,440,931) 11.39
----------
Outstanding at December 31, 1996 1,874,015 5.83
Granted 1,486,994 3.26 $ 3.23
Exercised (46,017) 0.50
Cancelled (1,318,006) 6.58
----------
Outstanding at December 31, 1997 1,996,986 3.39
==========
</TABLE>
33
<PAGE>
The following table summarizes option information about stock options
outstanding as of December 31, 1997:
<TABLE>
<CAPTION>
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------- ---------------- ---------------------- ------------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.3000-$2.9380 381,809 6.70 $ 1.8108 238,678 $ 1.1349
$3.0000-$3.0000 64,000 7.53 $ 3.0000 64,000 $ 3.0000
$3.1250-$3.1250 879,253 7.36 $ 3.1250 659,635 $ 3.1250
$3.1410-$3.2500 205,450 9.03 $ 3.1592 99,862 $ 3.1565
$3.3750-$4.9840 271,085 8.62 $ 4.2561 109,420 $ 4.0950
$5.4380-$10.5000 191,889 7.78 $ 6.7277 34,782 $ 7.6940
$11.0000-$15.2500 3,500 6.27 $12.7357 3,300 $12.7765
----------- ----------
$0.3000-$15.2500 1,996,986 7.62 $ 3.3898 1,209,677 $ 2.9738
=========== ======== =========== ========== ===========
</TABLE>
In conjunction with the grant of incentive stock options to certain key
employees during 1990, the Company entered into an agreement to repurchase from
certain stockholders up to 86,391 shares of common stock at a per share price of
$.33 if and when the stock options are exercised. At December 31, 1997, no
shares had been repurchased.
There were 1,123,561 and 1,015,785 stock options exercisable at December 31,
1996 and 1995, respectively, with weighted average exercise prices of $5.31 and
$8.49. There were 859,154, 1,028,142 and 1,365,540 options available for future
grant as of December 31, 1997, 1996 and 1995, respectively.
Re-pricing "Underwater" Stock Options
On May 23, 1996, the Board of Directors of the Company approved a plan ("re-
pricing plan") to re-price all employee stock options under the 1993 Equity
Incentive Plan and the Ledge Stock Option Plan. In accordance with the re-
pricing plan, all stock options held by current employees with exercise prices
above the May 22, 1996 price of $6.969, and approved by the individual
optionholder, were cancelled and replaced by options for a number of shares
equal to 90% of those subject to the cancelled options, exercisable at $6.969
per share. Vesting provisions were not changed. This plan did not include
outside directors or consultants of the Company. Executive officers of the
Company were restricted from exercise of any re-priced options for six months
from the re-pricing date. The re-pricing plan resulted in the cancellation of
1,033,363 stock options and issuance of 930,027 new options.
On September 18, 1997, the Board of Directors of the Company approved a plan
("re-pricing plan") to re-price all employee stock options under the 1993 Equity
Incentive Plan and the Ledge Stock Option Plan. In accordance with the re-
pricing plan, all stock options held by current employees with exercise prices
above the September 17, 1997 price of $3.125, and approved by the individual
optionholder, were cancelled and replaced by options for a number of shares
equal to 90% of those subject to the cancelled options, exercisable at $3.125
per share. Vesting provisions were not changed. This plan did not include
outside directors or consultants of the Company. The re-pricing plan resulted in
the cancellation of 974,213 stock options and issuance of 875,917 new options.
In addition, on May 23, 1997, the Company's shareholders approved an amendment
to the 1993 Director Stock Option Plan permitting the amendment of outstanding
options and implementing a repricing of the outstanding Director Plan options
that had been approved by the Board of Directors in December 1996. As a result,
all outstanding nonqualified stock options were cancelled and replaced
with the same number having an exercise price of $3.00 per share, the fair
market value of the common stock on the date the directors took such action.
Vesting provisions were not changed.
Employee Stock Purchase Plan
The Company established an employee stock purchase plan in 1993 entitling
employees to purchase up to 250,000 shares of the Company's stock at 85% of fair
market value. During 1997 and 1996, 113,083 and 86,145 shares were issued to
employees. The weighted average fair values of shares issued under the 1993
plan during 1997, 1996 and 1995 were $.99, $4.26 and $7.98, respectively.
The fair value of the options granted under the employee stock purchase plan
during 1997, 1996 and 1995 is estimated on the date of grant using the Black-
Scholes option pricing model utilizing the following weighted-average
assumptions: (1) expected risk-free interest rate of 5.39%, 5.14% and 6.13%,
respectively, (2) expected life of 6.3, 5.5 and 9.5 months, respectively, (3)
expected stock volatility of 65% in 1997 and 70% in 1996 and 1995, and (4)
expected dividend yield of 0.0%. The amount of compensation expense, net of
income taxes, is $126,403, $88,024 and $43,439 for 1997, 1996 and 1995,
respectively.
34
<PAGE>
J. COMMITMENTS AND CONTINGENCIES
Leases
The Company occupies office facilities in the United States, Singapore, and
various locations in Europe under certain long-term lease agreements. These
leases require the Company to pay utilities, contain escalation clauses for
increases in taxes and operating expenses or require the Company to pay for its
proportionate share of certain operating expenses.
Future minimum rental payments under these operating leases are as follows (in
thousands):
<TABLE>
<S> <C>
1998 $1,395
1999 1,223
2000 846
2001 518
2002 and thereafter 500
------
Future minimum lease payments $4,482
======
</TABLE>
The Company has entered into sublease agreements which offset the future minimum
lease payments by $837,000. Rent expense, net consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
Basic expense $1,634 $2,012 $1,574
Sublease income (144) --- ---
------ ------ ------
Rent expense, net $1,490 $2,012 $1,574
====== ====== ======
</TABLE>
Litigation
On November 14, 1994, two class action suits were filed against the Company,
several officers of the Company, and the underwriters of the Company's 1993
initial public offering. The complaints alleged violation of securities laws
and fraud. A settlement agreement was finalized and approved by the court on
October 24, 1996, stipulating the Company pay to the plaintiffs $1,825,000 in
cash plus 250,000 shares of the Company's common stock. In the second quarter
of 1996, the Company recorded a charge of $4,073,000 to reflect the maximum
possible litigation expense at that time, in accordance with the settlement
agreement. In the fourth quarter of 1996, this charge was reduced by
$1,250,000, to reflect the stock price at November 14, 1996 (settlement date)
per the final settlement agreement. The Company's insurance carrier contributed
$1,000,000 in cash towards the settlement. The Company's total expenses related
to settlement of the litigation amounted to $2,823,000, consisting of cash and
stock payable to the plaintiffs, and legal bills. As of December 31, 1997, all
related expenses had been paid and all stock issued. This settlement was not an
admission on the part of the defendants of any wrongdoing or lack of merit in
the defenses.
K. BENEFIT PLAN
In 1991, the Board of Directors approved the establishment of the Dataware
Technologies, Inc. 401(k) Plan (the "401(k) Plan") effective January 1, 1991.
Employees are eligible to participate in the 401(k) Plan by meeting certain
requirements, including length of service and minimum age. The Company may make
a discretionary contribution to the 401(k) Plan, but no Company contributions
have been made through December 31, 1997.
35
<PAGE>
L. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $ --- $ (775) $1,058
State --- (75) 75
Foreign 80 230 220
------- -------- ------
$ 80 $ (620) $1,353
======= ======== ======
Deferred:
Federal $ --- $ 695 $ (695)
State --- (75) 75
Foreign --- --- ---
------- -------- ------
$ --- $ 620 $ (620)
======= ======== ======
</TABLE>
Income (loss) before income taxes for domestic and foreign
operations are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Domestic $(5,568) $(20,170) $1,788
Foreign (140) 859 658
------- -------- ------
$(5,708) $(19,311) $2,446
======= ======== ======
</TABLE>
The following is a reconciliation between the U.S. Federal statutory rate and
the effective tax rate:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
U.S. federal statutory rate (34.0)% (34.0)% 34.0%
State taxes, net of federal tax benefit --- (.6) 5.0
Foreign operations 2.2 1.2 2.5
Utilization of net operating loss
carryforward --- --- (17.0)
Tax exempt interest --- (.6) ---
Nondeductible acquisition costs 4.3 --- 7.3
Goodwill 0.4 4.5 4.3
In-process research and development --- 6.2 ---
Other non-deductible items 0.7 --- 26.9
Change in valuation allowance 27.8 27.0 (36.3)
Other, net --- (3.7) 3.3
------- ------ ------
Effective tax rate 1.4% 0.0% 30.0%
======= ====== ======
</TABLE>
36
<PAGE>
Deferred taxes result from temporary differences in the recognition of
revenues and expenses for tax and financial reporting purposes. The components
of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
Deferred tax asset:
Bad debts $ 315 $ 153
Compensation 247 266
Other 310 588
Net operating loss carryforwards 6,698 4,971
Research tax credits 896 582
------ ------
Total asset 8,466 6,560
Valuation allowance (7,059) (5,221)
------ ------
Net deferred tax asset 1,407 1,339
------ ------
Deferred tax liabilities:
Capitalized software costs 993 881
Depreciation 414 421
Other --- 37
------ ------
Total liabilities 1,407 1,339
------ ------
Net deferred tax asset $ --- $ ---
====== ======
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $16.7 million which expire at
various dates through 2012. Under the Tax Reform Act of 1986, certain
substantial changes in the Company's ownership would result in an annual
limitation on the amount of net operating loss carryforwards which could be
utilized.
As required by Statement of Financial Accounting Standard No. 109, management
of the Company has evaluated the positive and negative evidence bearing upon the
realizability of its deferred tax assets, which are comprised principally of net
operating loss and tax credit carryforwards. In the fourth quarter of 1996, the
Company recorded a full valuation allowance of $5,221,000 to offset the entire
net deferred tax assets as a result of the uncertainties surrounding the
realization of the assets due to large cumulative pretax losses during the prior
three years. Management evaluates the positive and negative evidence impacting
the realizability of the Company's deferred tax assets on a quarterly basis.
The Company had increased its valuation allowance by $1,838,000 in 1997, based
upon management's estimate of the amount of deferred tax assets that were more
likely than not to be realized.
37
<PAGE>
M. SEGMENTAL DATA
The Company has subsidiaries in various foreign countries, which sell the
Company's products and services in their respective geographic areas. Revenues
are reflected in the geographic areas from which the sales are made. Financial
information, summarized by geographic area, is as follows (in thousands):
<TABLE>
<CAPTION>
North Rest of
America Europe World Eliminations Consolidated
---------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Total revenues:
Unaffiliated customers $ 22,576 $ 12,923 $ 1,820 $ --- $ 37,319
Inter-company transfers 3,731 --- --- (3,731) ---
---------- ---------- ---------- -------------- --------------
Total $ 26,307 $ 12,923 $ 1,820 $ (3,731) $ 37,319
========== ========== ========== ============== ==============
Segment operating income $ 3,679 $ 2,816 $ 63 $ --- 6,558
========== ========== ========== ==============
Product development and corporate
sales, general and administrative expenses 11,957
--------------
Loss from operations $ (5,399)
==============
Identifiable assets $ 24,403 $ 3,400 $ 1,250 $ --- $ 29,053
========== ========== ========== ============== ==============
Year ended December 31, 1996:
Total revenues:
Unaffiliated customers $ 19,477 $ 14,743 $ 3,239 $ --- $ 37,459
Inter-company transfers 3,627 --- --- (3,627) ---
---------- ---------- ---------- -------------- --------------
Total $ 23,104 $ 14,743 $ 3,239 $ (3,627) $ 37,459
========== ========== ========== ============== ==============
Segment operating income $ 1,062 $ 621 $ 1,044 $ --- 2,727
========== ========== ========== ==============
Product development and corporate
sales, general and administrative expenses 14,069
Write down of intangible assets and
other non-recurring charges 3,815
Charge for purchased research and
development 1,861
--------------
Loss from operations $ (17,018)
==============
Identifiable assets $ 16,726 $ 6,943 $ 1,707 $ --- $ 25,376
========== ========== ========== ============== ==============
Year ended December 31, 1995:
Total revenues:
Unaffiliated customers $ 23,698 $ 14,174 $ 3,252 $ --- $ 41,124
Inter-company transfers 3,020 8 --- (3,028) ---
---------- ---------- ---------- -------------- --------------
Total $ 26,718 $ 14,182 $ 3,252 $ (3,028) $ 41,124
========== ========== ========== ============== ==============
Segment operating income $ 6,297 $ 3,018 $ 1,768 $ --- 11,083
========== ========== ========== ==============
Product development and corporate
sales, general and administrative expenses 9,309
--------------
Income from operations $ 1,774
==============
Identifiable assets $ 33,218 $ 7,071 $ 1,025 $ --- $ 41,314
========== ========== ========== ============== ==============
</TABLE>
38
<PAGE>
Inter-company transfers primarily represent shipments of software to
international subsidiaries and are eliminated from consolidated revenues.
Segment operating income excludes product development and corporate sales,
general and administrative expenses. Export sales to unaffiliated customers were
approximately $498,000, $994,000 and $1,841,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
During 1997, the Company's various distribution, license and services agreements
with IHS accounted for $4.7 million, or 13% of the Company's total revenues.
N. Disposal of Product Development Project
On April 7, 1997 the Company completed a funding arrangement involving its
subsidiary, Northern Light Technology Corporation, which had been developing the
next-generation Internet search and guide service for consumers. In the
transaction, Northern Light Technology Corporation dissolved, sold substantially
all of its assets to a newly formed limited liability company, and terminated
operations. The Company received, as a liquidating distribution from Northern
Light Technology Corporation, an equity interest in the buyer representing
approximately 34% of the buyer in the form of preferred units and a secured
note. The Company's equity interest has since been reduced as a result of the
buyer obtaining additional equity financing. The Company has a 15% or less
voting interest in the buyer and is accounting for its $512,000 investment in
the buyer using the cost method. Northern Light Technology Corporation accounted
for $2.4 million and $1.0 million of the Company's operating expenses in the
twelve months ended December 31, 1996 and 1997, respectively.
O. SUBSEQUENT EVENTS
In January 1998 the Company acquired for cash 100% of the shares of Green Book
International Corporation, developers of a leading software package for
electronic publishing of financial prospectuses. The Green Book technology will
be managed by Dataware's Ledge Multimedia division.
The preliminary results announced by the Company for 1997 included an estimated
$2.2 million gain on this transaction, subject to revision when the final
settlement required by the Company's agreement with IHS was complete. The
parties are currently working out this settlement, taking into account, among
other things, the closing date balance sheets and subsequent receivables
collections. Due to the uncertainty of the results of the pending discussions,
the Company is unable at this time to make a reasonable estimate of the final
gain from the IHS transaction. Accordingly, the Company has reversed the $2.2
million gain recorded in the third quarter of 1997. The ultimate accounting for
the transaction will be reflected in the Company's results when it occurs,
currently expected to be in the second quarter of 1998.
P. NET INCOME (LOSS) PER SHARE
The Company computes basic and diluted earnings per share in accordance with
Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share", which
the Company adopted as of December 31, 1997. The following table reconciles the
numerator and denominator of the basic and diluted earnings per share
computations shown on the Consolidated Statements of Operations:
<TABLE>
<CAPTION>
For the Years Ended December 31,
(In thousands, except per share data) 1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Basic EPS
Numerator:
Net income (loss) $(6,465) $(19,311) $1,713
Denominator:
Common shares outstanding 7,632 6,425 6,121
Basic EPS $ (0.85) $ (3.01) $ 0.28
============================================
Diluted EPS
Numerator:
Net income (loss) $(6,465) $(19,311) $1,713
Denominator:
Common shares outstanding 7,632 6,425 6,121
Common stock equivalents --- --- 390
------------ ----------- -----------
7,632 6,425 6,511
Diluted EPS $ (0.85) $ (3.01) $ 0.26
============================================
</TABLE>
Options to purchase 1,996,986 and 1,874,015 shares of common stock outstanding
as of December 31, 1997 and 1996, respectively, were excluded from the year-to-
date calculation of diluted net loss per share as the effect of their inclusion
would have been anti-dilutive.
Earnings per share data has been restated for all periods presented to reflect
the adoption of SFAS 128.
39
<PAGE>
DATAWARE TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------
Additions
----------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of period Expenses Accounts Deductions of Period
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
1997 $934 $778 $962 $750
1996 610 810 486 934
1995 503 467 360 610
</TABLE>
40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
------ ----- ----------
<S> <C> <C>
Kurt Mueller 41 Chief Executive Officer, President and Chairman of the Board
Jeffrey O. Nyweide 42 Senior Executive VP, Business Development and Vice Chairman of the Board
Charles E. Rabie 46 Vice President, Software Products
Howard A. York 50 Vice President, Software Solutions
Fredric Gluck 42 Vice President, Marketing
Stephen H. Beach (2) 82 Director, Secretary
Julie M. Donahue (1) 39 Director
William R. Lonergan (1)(2) 73 Director
Jochen Tschunke 53 Director
</TABLE>
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
In addition to the foregoing executive officers, Michael Gonnerman, an
independent consultant, is serving as Acting Chief Financial Officer while the
Company seeks to hire a full-time CFO.
Mr. Mueller has served as Chief Executive Officer and Chairman of the Board of
Directors since the inception of the Company in 1988 and was President of the
Company from 1988 through 1993 and from April, 1997 to the present. He
previously founded and served as General Manager of Dataware 2000 GmbH from 1986
to 1988. From 1984 to 1986 he started up and served as General Manager of Lotus
Development GmbH and before that was a consultant with Bain & Company in the
United States and Europe.
Mr. Nyweide has served as Vice Chairman of the Board of Directors and Senior
Executive Vice President, Business Development since April, 1997 and was
President and Chief Operating Officer from 1993 to April, 1997. He was Vice
President of Operations of the Company from its inception until 1989 and
Executive Vice President of the Company from 1989 to 1993. Mr. Nyweide has also
served as a member of the Board of Directors since the inception of the Company.
From 1987 to 1988 Mr. Nyweide was President of Dataware, Inc., a CD-ROM
distribution company, and from 1978 to 1987 he served in various sales,
marketing and management positions with The Service Bureau Company, a subsidiary
of Control Data Corporation.
Mr. Rabie has served as Vice President, Software Products since April of 1996.
From 1994 to 1996, he served as General Manager, Canadian operations. From 1986
to 1993, Mr. Rabie was the founder and CEO of Megalith Technologies, a Canadian
CD-ROM and text retrieval software and service company acquired by Dataware in
1993. Prior to 1986, Mr. Rabie held various management and technical positions
with Monenco, an international engineering consulting organization.
41
<PAGE>
Mr. York has served as Vice President, Software Solutions since December
1996. The Software Solutions group includes the Ledge Multimedia, Internet
Hosting and BRS Services Divisions. From June of 1995 to December of 1996, he
was Director of Software Solutions with responsibility for the BRS and CD Author
product lines. Prior to joining Dataware, Mr. York served in various managerial
positions with NYNEX Information Resources (Yellow Pages) and New York Telephone
from 1966 to 1995.
Mr. Gluck has served as Vice President of Marketing since September 1997. He
previously held positions with CrossComm/Olicom Enterprise Networks as Director
of Corporate Communications and Channel Marketing Manager from 1995 to 1997.
From 1989 to 1995, Mr. Gluck held Product Marketing and Channel Marketing
positions at Datamedia/Axent Technologies, a manufacturer and provider of PC
and network security software and Racal Interlan, a maker of PC network
interface cards.
Mr. Beach has been a director and Secretary of the Company since its
inception. Since 1985, Mr. Beach has practiced law in Connecticut, specializing
in, among other fields, computer, software and software licensing law. Mr. Beach
also served in several capacities for Control Data Corporation from 1973 to
1985, most recently as Senior Vice President and Secretary.
Ms. Donahue was elected to the Board of Directors in April 1997. In 1997,
she founded Venture Forward, a recognized leader in strategic planning, business
development and marketing for technology companies. Prior to founding Venture
Forward, she was a principal of The Chasm Group, a marketing consultancy, since
1995. From 1993 to 1995 she was Chief Executive Officer of BBN Hark Corporation
and from 1991 to 1993 Chief Executive Officer of Voice Processing Corporation.
Ms. Donahue also is a director of NovaLink, Inc.
Mr. Lonergan has been a director of the Company since 1988. From 1983 to
1994, Mr. Lonergan was a general partner of Oxford Partners, a venture capital
firm, where he continues as a consultant. Prior to joining Oxford Partners, Mr.
Lonergan was Vice President of Business Development at Xerox Corporation. Mr.
Lonergan is also a director of Zitel Corporation, Kurzweil Applied Intelligence,
and Medical Sterilization, Inc.
Mr. Tschunke, who became a director of the Company in 1995, founded Computer
2000 AG, the Munich-based multinational computer firm, which he managed from
1983 to 1993 and which he continues to serve as supervisory board chairman.
Before founding Computer 2000 AG, Mr. Tschunke was General Manager of Central
Europe for Rockwell International and, before that, served in various management
positions with Texas Instruments. Mr. Tschunke is a member or chairman of the
board of directors of a number of companies, including Computer-Elektronik
Dresden GmbH, MagnaMedia Verlag AG, SPEA Software AG, Adolf Wurth GmbH & Co.
KG, and FC Bayern Munchen.
Executive officers of the Company are elected by the Board of Directors on an
annual basis and serve at the discretion of the Board of Directors.
Information contained in the section entitled "Section 16(a) Beneficial
Ownership Reporting Compliance" in the 1998 Proxy Statement is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled "Election of Directors - Director Compensation" and
"Executive Compensation" in the 1998 Proxy Statement are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Share Ownership" in the 1998 Proxy Statement is
incorporated herein by reference.
42
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Relevant information from the section entitled "Election of Directors" in the
1998 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
The financial statements, schedule, and exhibits listed below are included in
or incorporated by reference as
part of this Report:
1. Financial statements:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31, 1997,
1996, and 1995
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996, and 1995
Notes to Consolidated Financial Statements
2. Schedule:
Report of Independent Accountants
II. Valuation and Qualifying Accounts
Schedules not listed above are omitted because they are not applicable or
because the required information is included in the consolidated financial
statements or notes submitted.
3. Exhibits:
The exhibits are listed below under Part IV, Item 14 (c) of this report.
(B) REPORTS ON FORM 8-K
On October 14, 1997, the Company filed a report on Form 8-K reporting the sale
of certain of its businesses to Information Handling Services Group, Inc. and
the acquisition of all of the assets and liabilities of Creative Multimedia
Corporation. On December 11, 1997, the Company filed an amendment to the October
14, 1997 report on Form 8-K to add pro forma financial information.
(C) EXHIBITS
The Company hereby files as part of this Annual Report on Form 10-K the
Exhibits listed in the attached Exhibit Index.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Cambridge,
Massachusetts on the 31st day of March 1998.
DATAWARE TECHNOLOGIES, INC.
/s/ Kurt Mueller
--------------------------
Kurt Mueller, Chairman of the Board,
President and Chief Executive Officer
<TABLE>
<CAPTION>
Signatures Title Date
------------ ------- ------
<S> <C> <C>
/s/ KURT MUELLER Chairman of the Board, President, Director March 31, 1998
- ------------------------ (Principal Executive Officer)
KURT MUELLER
/s/ JEFFREY O. NYWEIDE Vice-Chairman of the Board, Senior Executive March 31, 1998
- ------------------------ Vice President, Business Development, Director
JEFFREY O. NYWEIDE
/s/ MICHAEL GONNERMAN Acting Chief Financial Officer March 31, 1998
- ------------------------ (Acting Principal Financial and Accounting Officer)
MICHAEL GONNERMAN
/s/ STEPHEN H. BEACH Director March 31, 1998
- ------------------------
STEPHEN H. BEACH
/s/ JULIE DONAHUE Director March 31, 1998
- ------------------------
JULIE DONAHUE
/s/ WILLIAM R. LONERGAN Director March 31, 1998
- ------------------------
WILLIAM R. LONERGAN
/s/ JOCHEN TSCHUNKE Director March 31, 1998
- ------------------------
JOCHEN TSCHUNKE
</TABLE>
44
<PAGE>
EXHIBIT INDEX
-------------
2.1 Agreement dated September 26, 1997 between Dataware Technologies, Inc. and
Information Handling Services Group, Inc. (Exhibit 2 to Form 8-K dated
October 10, 1997).*
3.1 Restated Certificate of Incorporation, as amended through April 14, 1997
(Exhibit to Form 8-K dated April 17, 1997).*
3.2 Bylaws as amended through May 23, 1997 (Exhibit to June 30,
1997 Form 10-Q).*
4.1 Rights Agreement dated July 8, 1996 by and between American Stock
Transfer & trust Company as Rights Agent and the Registrant
(the "Rights Agreement"). (Exhibit to Form 8-K dated July 18, 1996).*
4.2 First Amendment to Rights Agreement, dated April 14, 1997
(Exhibit to 8-K dated April 17, 1997).*
4.3 Warrant Agreements, dated as of November 21, 1996 and April 14, 1997,
between the Company and Advest, Inc. (Exhibit to June 30, 1997 Form
10-Q).*
4.4 Warrant Agreement, dated as of April 14, 1997, between the Company and
Wharton Capital Partners Ltd. (Exhibit to June 30, 1997 Form 10-Q).*
4.5 Warrant Agreements dated as of June 23, 1997 and September 10, 1997,
between the Company and Imperial Bank (Exhibits to June
30, 1997 and September 30, 1997 Forms 10-Q, respectively).*
4.6 Warrant Agreement, dated as of March 31, 1996, between the Company and
Entrust Nominees Limited (Exhibit to June 30, 1997 Form 10-Q).*
10.1 1993 Equity Incentive Plan, as amended through December 9, 1996
(Exhibit to 1996 Form 10-K). #
10.2 1993 Employee Stock Purchase Plan. (Registration Statement No. 33-63308)*#
10.3 1993 Stock Option Plan for Directors, as amended through December 9, 1996
(Exhibit to 1996 Form 10-K).#
10.4 Form of stock option agreement terms (executive officers).
(Exhibit to June 30, 1996 Form 10-Q)*#
10.5 Form of stock option agreement terms (Kurt Mueller, Jeffrey O.
Nyweide). (Exhibit to June 30, 1996 Form 10-Q)*#
10.6 Employment Agreement between the Registrant and Kurt Mueller dated
October 28, 1988, as amended. (Registration Statement No. 33-63308)*#
10.7 Employment Agreement between the Registrant and Jeffrey O. Nyweide dated
October 28, 1988, as amended. (Registration Statement No. 33-63308)*#
10.9 Subscription Agreement, dated as of April 10, 1997, by and between GFL
Advantage Fund Limited and the Registrant. (Exhibit to Form 8-K dated
April 17, 1997).*
10.10 Registration Rights Agreement, dated as of April 10, 1997, by and
between GFL Advantage Fund Limited and the Registrant.
(Exhibit to Form 8-K dated April 17, 1997).*
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
99.1 Important Factors Regarding Future Results.
* Incorporated by reference to the filing indicated in parentheses.
# Denotes management contracts and compensation plans.
45
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary Jurisdiction of Organization
- ---------- ----------------------------
<S> <C>
Dataware Technologies (UK) Ltd. England
Dataware Technologies France s.a.r.l. France
Dataware Technologies Pte Ltd. Singapore
Dataware Technologies A/S Denmark
Dataware Securities Corporation Massachusetts
Ntergaid, Inc. Connecticut
Creative Multimedia Corporation Oregon
Green Book International Corporation Canada
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Dataware Technologies, Inc. on Form S-3 (File Nos. 333-27007 and 333-39633)
and Form S-8 (File Nos. 33-740496, 33-70498, 33-70500, 333-594, 333-596, 333-
04487 and 333-28545) of our report dated February 12, 1998, except for the
information in the second paragraph of Note O, as to which the date is March
30, 1998, on our audits of the consolidated financial statements and financial
statement schedule of Dataware Technologies, Inc. as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
which report is included in this Annual Report on Form 10-K.
COOPERS AND LYBRAND L.L.P.
Boston, Massachusetts
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,231
<SECURITIES> 0
<RECEIVABLES> 7,428
<ALLOWANCES> 750
<INVENTORY> 0
<CURRENT-ASSETS> 21,860
<PP&E> 9,664
<DEPRECIATION> 5,465
<TOTAL-ASSETS> 29,053
<CURRENT-LIABILITIES> 12,587
<BONDS> 0
0
0
<COMMON> 93
<OTHER-SE> 16,373
<TOTAL-LIABILITY-AND-EQUITY> 29,053
<SALES> 37,319
<TOTAL-REVENUES> 37,319
<CGS> 13,510
<TOTAL-COSTS> 13,510
<OTHER-EXPENSES> 29,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 276
<INCOME-PRETAX> (5,708)
<INCOME-TAX> 80
<INCOME-CONTINUING> (5,788)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,788)
<EPS-PRIMARY> $(0.85)
<EPS-DILUTED> $(0.85)
</TABLE>
<PAGE>
Exhibit 99.1
DATAWARE TECHNOLOGIES, INC.
Important Factors Regarding Future Results
Information provided by the Company or its spokespersons from time to time may
contain forward-looking statements concerning projected financial performance,
the development of the Company's markets, product development and
commercialization or other aspects of future operations. Such statements will be
based on the assumptions and expectations of the Company's management at the
time such statements are made. The Company cautions investors that any forward-
looking statements made by the Company are not guarantees of future performance.
Various important factors, including but not limited to the following, have
affected the Company's results in the past and may cause its future results to
differ materially from those projected in the forward-looking statements.
Rapid Technological and Market Changes
The market for the Company's products and services is characterized by rapidly
changing technology. The Company's products and services historically were
based on CD-ROM technology and on-line information management and distribution
technology, the core elements of which were developed prior to or during the
early 1990s. With the recent popularity of the Internet and internal corporate
"intranets," the environment for information management and distribution
products and services has changed rapidly and continues to change.
Beginning in 1995, the Company has been devoting substantial resources to the
development of new products to utilize these communications media. As with any
new product, the Company's most innovative offerings (Dataware II Knowledge
Management Suite and Dataware II Publisher) may be subject to delays in
production and will require a period of adjustment to ensure that they are
meeting customer-specific requirements. The Company will need to be successful
in its ongoing research and development for these products, to keep up with
developments, including next-generation user interfaces, semantic modeling, and
collaborative filtering technology, and other features introduced by competitors
if they are to realize management's current hopes for them. In addition, many
of the Company's traditional competitors and other companies selling related
products, some with substantially greater resources than the Company, are
positioning their products as "knowledge management" systems.
The Company historically has distributed its products and services largely
through direct channels. With the sale of a portion of its data services
business to Information Handling Services Group, Inc. ("IHS") in September 1997,
including five foreign subsidiaries that had been distributing products and
services, the Company now must rely more heavily on indirect channels, such as
value-added resellers. IHS is now the Company's biggest customer, accounting
for 13% of total revenues in 1997. Disruptions in any of the Company's
distributor relationships, or the Company's inability to develop and manage
these relationships effectively, may have a material adverse effect on the
Company's business.
More generally, the Company's ability to realize its expectations will depend on
its success at enhancing its current offerings, developing new products and
services that keep pace with developments in technology and meet evolving
customer requirements, and delivering those products through appropriate
distribution channels. This will require, among other things, correctly
anticipating customer needs, hiring and retaining personnel with the necessary
skills and creativity, providing adequate funding for the development efforts,
and managing distribution channels effectively. Failure by the Company to
anticipate or respond adequately to technological developments and customer
requirements, significant delays in the development, production, testing,
marketing or availability of new or enhanced products or services, or the
failure of customers to accept such products or services could adversely affect
the Company's competitive position and operating results.
Competition
The market areas where the Company competes are intensely competitive and
rapidly changing. The Company's
<PAGE>
historical competition from direct competitors that offer CD-ROM software and/or
services, text management software, and software and services for on-
line/internet applications continues. As noted above, many companies with
related products are positioning them as "knowledge management" products. The
Company also competes with large organizations that may also be customers,
including software publishers, publishing houses and systems integrators. The
Company expects that competition from these sources will increase. Furthermore,
it is likely that new competitors will enter the markets as they continue to
grow.
Many of the Company's existing and potential competitors have longer operating
histories and significantly greater financial, technical, sales, marketing and
other resources than the Company. Furthermore, as the markets grow, a number of
companies with significantly greater resources than the Company could attempt to
increase their presence in the Company's market areas by acquiring or forming
strategic alliances with competitors of the Company or by introducing products
or services specifically designed for these markets.
The principal competitive factors affecting the market for the Company's
products and services include vendor and product reputation, breadth of product
and services offering, direct and indirect sales presence, product performance,
functionality, price, ease of use, architecture, platform coverage, quality of
support and international language support. Based on these factors, the Company
believes that it has competed effectively to date. The Company expects
competition to increase and such increased competition could result in price
reductions and loss of market share for the Company. The Company must continue
to introduce enhancements to its existing products and services and new products
and services in a timely manner in order to remain competitive. There can be no
assurance that the Company will be able to compete successfully or that
competition will not have a material adverse effect on the Company's business,
operating results and financial condition.
Fluctuations in Operating Results
The Company has experienced and may in the future experience significant period-
to-period fluctuations in operating results. The Company's software license fee
revenues in any quarter are substantially dependent on the timing of product
shipments and receipt of license reports (with respect to which sales are often
difficult to forecast), the Company's ability to close significant sales in that
quarter, external market conditions and competition. The Company's sales cycle
varies substantially from customer to customer and, like many other high
technology companies, a disproportionately large percentage of quarterly sales
occur in the closing weeks of each quarter. The Company's orders early in a
quarter will not generally be large enough to assure that it will meet its
revenue targets for any particular quarter. Accordingly, the Company's quarterly
results will be difficult to predict until the end of the quarter. Any forward-
looking statements about operating results made by members of management will be
based on historically reasonable assumptions about the likelihood of closing
sales then in the pipeline. The failure to consummate any of those sales may
have a disproportionately negative impact on operating results, given the
Company's relatively fixed costs, and may thus prevent management's projections
from being realized.
Other factors that affect the Company's operating results and that management
takes into account include worldwide and regional economic trends, such as the
turmoil in the economies of Asia that began during 1997, the conversion of
European currencies to the Euro scheduled to take place at the beginning of
1999, changes in the value of major foreign currencies in which the Company
conducts business and other changes in the cost of revenues. Changes in the
factors underlying management's assumptions may result in a material variation
between actual results and those forecast in any forward-looking statements made
during a particular period.
Dependence on Certain Classes of Customer
Although the Company's customer base is broad and diverse, the Company's
revenues depend in part on maintaining its relationships with certain classes of
customer, particularly including government agencies in the United States,
Canada, Germany, and the United Kingdom, corporate and commercial publishers,
and (for certain online products) law firms. The Company's newer Knowledge
Management offerings are aimed at corporate intranet users, and its electronic
prospectus product will be used by financial printers, issuers of securities,
and financial services and health care organizations. Factors generally
affecting any of these customer groups may have a substantial adverse
<PAGE>
effect on the Company's earnings. For example, political pressures have in the
past and may in the future cause governmental customers to reduce spending on
the Company's products and services. A reduction in the amount of orders
received from any such customer class would have a material adverse effect on
the Company's earnings and may cause actual results to differ from those
projected in management's forward-looking statements.
Dependence on Licensed Proprietary Technology
Certain proprietary technology is incorporated into the Company's products under
license agreements with third parties who may be competitors. Management's
forward-looking statements are necessarily based on assumptions about the costs
associated with the Company's use of such technology, but such costs are subject
to change from time to time for reasons not under the Company's control. Changes
in such costs or in the availability of such licenses could have a material
effect on the Company's operating results, and may cause actual results to
differ from those projected in management's forward-looking statements.
Dependence on Key Personnel
The Company's success depends on its ability to attract and retain highly
skilled technical, management, sales and marketing personnel. Competition for
such personnel in the computer software and services industry is intense, and
the Company is always at risk of losing key personnel to competitors offering
attractive compensation. Management's projections necessarily assume that the
Company will continue to attract and retain such personnel, so the failure to do
so could have a material adverse effect on the Company's ability to develop and
market competitive products and, thus its ability to achieve projected operating
results.
Management of Growth Through Acquisitions
The Company's product range and customer base have grown rapidly in the past due
in part to acquisitions. The Company may acquire additional businesses or assets
in the future. Any forecasts of the probability of success of an acquisition are
dependent upon the Company's ability to integrate the acquired business or
assets successfully. Failure to do so, or a material increase in the cost of
integration, could cause actual results to differ from those projected in
management's forward-looking statements.
Year 2000 Problem
Like all businesses world-wide, the Company faces uncertainties and potential
risks arising from the inability of date fields in computer software or embedded
chips to properly recognize the symbol "00" as indicating the year 2000. The
Company is reviewing its own systems and monitoring the upgrade process of its
suppliers. However, due to the interrelationships and complexity of modern
computer systems, there may be systems used by the Company or third parties that
may fail as a result of the Year 2000 problem, potentially having a material
adverse effect on the Company's business.
