<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999 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 (IRS Employer Identification No.)
incorporation or organization)
One Canal Park 02141
Cambridge, MA (Zip Code)
(Address of principal executive offices)
617-621-0820
(Registrant's telephone number, including area code)
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
---- ____
Number of shares outstanding of the issuer's classes of common stock as of
October 31, 1999:
Class Number of Shares Outstanding
-------------------------------------- ----------------------------
Common Stock, par value $.01 per share 9,646,176
<PAGE>
DATAWARE TECHNOLOGIES, INC.
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations (unaudited) for
the Three and Nine Months Ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (unaudited) for
the Nine Months Ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports Filed on Form 8-K 13
SIGNATURE 14
EXHIBIT INDEX 15
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Dataware Technologies, Inc.
Consolidated Balance Sheets
(in thousands except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,986 $ 12,468
Accounts receivable, less allowance for doubtful
accounts of $971 and $846 at September 30, 1999
and December 31, 1998, respectively 5,586 4,248
Prepaid expenses and other current assets 1,148 1,355
------------- ------------
Total current assets 16,720 18,071
Property and equipment, net 2,874 3,394
Computer software costs, net 2,614 3,540
Investment in Northern Light, LLC 256 512
Goodwill, net 2,746 3,232
------------- ------------
Total assets $ 25,210 $ 28,749
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,350 $ 1,350
Accounts payable 1,764 2,538
Accrued acquisition-related costs 179 578
Accrued non-recurring charges 281 559
Accrued compensation 1,787 1,976
Other accrued expenses 2,287 2,345
Income taxes payable 249 720
Deferred revenue 3,588 2,330
------------- ------------
Total current liabilities 11,485 12,396
============= ============
Stockholders' equity:
Preferred stock, $.01 par value, 8,000,000 shares authorized;
none issued and outstanding --- ---
Common stock, $.01 par value, 14,000,000 shares authorized;
9,617,633 shares issued and 9,543,633 shares outstanding at September
30, 1999; 9,465,305 shares issued and 9,391,305 shares
outstanding at December 31, 1998 96 95
Additional paid-in capital 47,914 47,323
Accumulated deficit (33,800) (30,625)
Accumulated other comprehensive loss (227) (182)
Treasury stock, 74,000 shares at cost (258) (258)
------------- ------------
Total stockholders' equity 13,725 16,353
============= ============
Total liabilities and stockholders' equity $ 25,210 $ 28,749
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE>
Dataware Technologies, Inc.
Consolidated Statements of Operations
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 4,122 $ 4,896 $ 10,916 $ 14,257
Services 2,880 3,605 9,149 10,183
------------ ------------ ------------ ------------
Total revenues 7,002 8,501 20,065 24,440
------------ ------------ ------------ ------------
Cost of revenues:
Software license fees 839 619 2,498 1,658
Services 2,388 1,812 6,895 5,542
------------ ------------ ------------ ------------
Total cost of revenues 3,227 2,431 9,393 7,200
------------ ------------ ------------ ------------
Gross profit 3,775 6,070 10,672 17,240
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 2,855 2,757 9,240 8,237
Product development 1,690 1,453 5,467 4,532
General and administrative 2,155 1,401 5,238 3,888
Acquired in-process research and development --- --- --- 450
============ ============ ============ ============
Total operating expenses 6,700 5,611 19,945 17,107
============ ============ ============ ============
Income (loss) from operations (2,925) 459 (9,273) 133
Interest income, net 79 138 557 358
Gain on investment in Northern Light, LLC --- --- 5,056 ---
Other income, net 107 22 125 1
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,739) 619 (3,535) 492
Benefit from income taxes (373) --- (360) ---
------------ ------------ ------------ ------------
Net income (loss) $ (2,366) $ 619 $ (3,175) $ 492
============ ============ ============ ============
Net income (loss) per common share -- basic $ (0.25) $ 0.07 $ (0.33) $ 0.05
============ ============ ============ ============
Net income (loss) per common share -- diluted $ (0.25) $ 0.07 $ (0.33) $ 0.05
============ ============ ============ ============
Weighted average number of common shares outstanding -- basic 9,536 9,220 9,489 9,450
============ ============ ============ ============
Weighted average number of common shares outstanding -- diluted 9,536 9,379 9,489 9,542
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
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Dataware Technologies, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 1998
---------- -----------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ (3,175) $ 492
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,321 2,954
Provision for doubtful accounts 235 532
Gain on investment in Northern Light LLC (5,056) ----
Gain on foreign currency transactions (11) (3)
Acquired in-process research and development ---- 450
Stock options issued to consultants and partners 116 88
Changes in operating assets and liabilities, net of effects from
acquisitions of businesses:
Accounts receivable (1,698) 2,241
Prepaid expenses and other current assets 198 35
Accounts payable (768) (756)
Accrued expenses and compensation (307) (965)
Accrued acquisition costs (401) (802)
Income taxes payable (468) (129)
Deferred revenue 1,332 (253)
----------- -----------
Net cash provided by (used in) operating activities (5,682) 3,884
----------- -----------
Cash flows provided by (used in) investing activities:
Additions to property and equipment (1,142) (995)
Acquisition of business ---- (450)
Proceeds from investment in Northern Light LLC, net of costs incurred 5,312 ----
Acquisition of third party software license (130) (1,290)
Additions to capitalized software costs (1,122) (1,378)
----------- -----------
Net cash provided by (used in) investing activities 2,918 (4,113)
----------- -----------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock and exercise of stock options 276 315
Purchase of treasury stock ---- (952)
----------- -----------
Net cash provided by (used in) financing activities 276 (637)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 6 31
----------- -----------
Net change in cash and cash equivalents (2,482) (835)
Cash and cash equivalents at beginning of period 12,468 13,231
----------- -----------
Cash and cash equivalents at end of period $ 9,986 $ 12,396
=========== ===========
Supplemental disclosure of non-cash operating and financing transactions:
Waiver of escrow shares transferred from accrued liabilities to additional paid-in
capital $ 200 $ ----
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
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DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. Basis of Presentation
These consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, and the financial statements and footnotes included therein. The interim
financial data as of September 30, 1999 and for the nine months ended September
30, 1999 and September 30, 1998 is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. The year-end balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to Securities and
Exchange Commission rules and regulations.
B. Net Income (Loss) per Share
The Company computes basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per
Share." The following table reconciles the numerator and denominator of the
basic and diluted earnings per share computations shown in the Consolidated
Statements of Operations:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ (2,366) $ 619 $ (3,175) $ 492
=========================================================
Denominator:
Common shares outstanding-basic 9,536 9,220 9,489 9,450
Dilutive options ---- 159 ---- 92
Dilutive warrants ---- ---- ---- ----
---------------------------------------------------------
Common shares outstanding-diluted 9,536 9,379 9,489 9,542
=========================================================
Basic and Diluted EPS $ (0.25) $ 0.07 $ (0.33) $ 0.05
=========================================================
</TABLE>
Options to purchase 1,578,628 and 2,912,725 shares of common stock outstanding
with weighted average exercise prices of $3.06 and $2.22 for the three month
periods ended September 30, 1998 and 1999, respectively, and 437,027 and
2,201,036 shares of common stock outstanding with weighted average exercise
prices of $3.34 and $2.68 for the nine month periods ended September 30, 1998
and 1999, respectively, were excluded from the calculation of diluted net income
(loss) per share as the effect of their inclusion would have been anti-dilutive.
C. Comprehensive Income (Loss)
The Company's comprehensive earnings were as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
(In thousands) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income (loss) $ (2,366) $ 619 $ (3,175) $ 492
---------------------------------------------------------------
Foreign currency translation adjustment 23 (2) (45) 22
---------------------------------------------------------------
Total comprehensive income (loss) $ (2,343) $ 617 $ (3,220) $ 514
===============================================================
</TABLE>
6
<PAGE>
D. New Accounting Standard
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal years
beginning after June 15, 2000. SFAS 133 requires that all derivative instruments
be recorded on the balance sheet at their fair values. Changes in fair values of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, depending on the type of hedge transaction. The
Company has not yet completed its evaluation of the impact of the adoption of
this new standard; however, it is not expected to have a material impact on the
Company's financial position and results of operation in the near term.
E. Segment Information
On December 31, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for public
companies related to the reporting of financial information about operating
segments.
Upon adoption of SFAS 131, the Company began to present segment financial
information for its three reportable operating segments: USLA (a unit focusing
on the sale of software and services for enterprise information access
("knowledge management") and professional electronic publishing applications in
the United States and Latin America); Eurasia (a unit focusing on knowledge
management and professional electronic publishing applications in Europe and the
Pacific Rim); and Multimedia (providing a complete array of multimedia
application development and web site hosting services to corporations,
publishers and professional firms, mostly in the United States).
The Company's executive management team reviews and evaluates performance based
on several factors, of which the primary financial measure is business segment
profit or loss from operations. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
Early in 1999, the Company announced a program to reposition and restructure to
be an e-business solutions provider and began making strategic and
organizational changes toward that goal. During the third quarter of 1999
management introduced a series of organizational changes designed to enable the
Company to grow and deliver solutions to customers. One of these changes was to
bring the Multimedia and USLA operating segments together under a senior vice
president in order to closely align the sales organization and the solutions
delivery resources. This newly created executive management position is
responsible for managing and coordinating all field operations.
Because of this change in structure, the Company's executive management team now
reviews and evaluates the results of the Company in terms of its two reportable
operating segments: USLA and Eurasia.
Although the Company prepares full balance sheets for the Eurasian business
unit, it reports only certain assets for the USLA segment. This segment is not
considered capital-intensive and, thus, other balance sheet information is not
considered meaningful on a segment basis.
A summary of the segment financial information reported is as follows:
<TABLE>
<CAPTION>
CORPORATE AND
Nine months ended September 30, 1999 USLA EURASIA ELIMINATIONS TOTAL
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers $ 13,748 $ 6,317 $ -- $ 20,065
Operating income (loss) 5,177 (562) (13,888) (9,273)
</TABLE>
<TABLE>
<CAPTION>
CORPORATE AND
Nine months ended September 30, 1998 USLA EURASIA ELIMINATIONS TOTAL
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers $ 18,253 $ 6,187 $ -- $ 24,440
Operating income (loss) 10,445 1,447 (11,759) 133
</TABLE>
7
<PAGE>
F. Pending Litigation
A lawsuit has been filed against the Company by a former consultant, with
allegations related to the value of compensation received and emotional
distress. The Company's motion for summary judgement was allowed in part and a
trial has not yet been scheduled.
The Company denies these charges and is vigorously defending them. At this time,
it is not possible to estimate the likelihood of damages related to these
charges.
G. Gain on Investment in Northern Light LLC
During the second quarter of 1999, Northern Light Technology LLC, developer of
the world's first research engine, announced that it had completed a $35 million
equity financing. Following this announcement, Dataware sold one-half of its
interest in the LLC back to Northern Light for $4.1 million in cash. In
addition, Northern Light repaid the Company for its $1.2 million promissory note
held by Dataware. These transactions resulted in a $5.1 million gain after
adjusting for legal costs incurred and the investment in Northern Light that was
carried on the Company's books. After these transactions, Dataware retained an
approximate 5% interest in Northern Light.
H. Income Tax Benefit
The Company recorded a $373,000 income tax benefit in the three months ended
September 30, 1999. The benefit represents the reversal of a reserve established
in previous years for taxes on a foreign subsidiary that the Company now
believes are not owed.
8
<PAGE>
Dataware Technologies, Inc.
Item 2. 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 products
or markets, made throughout this Form 10-Q, may be deemed forward-looking
statements. Such statements are based on the current assumptions of the
Company's 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 the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 (which is incorporated herein by
reference), that could cause actual results to differ materially from those
described in the forward-looking statements.
Relationship with IHS
On September 30, 1997, the Company sold a portion of its data services business
to Information Handling Services Group, Inc. ("IHS") in exchange for cash and
the stock of IHS's subsidiary, Creative Multimedia Corporation. 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.
The Company also entered into a distribution agreement with IHS on September 30,
1997, under which IHS took over the software distribution activities formerly
performed by the five divested foreign subsidiaries (primarily involving the
Company's legacy products). In addition, the Company entered into agreements
with IHS under which it provides software and multimedia services for use by IHS
internally and in its publishing activities, and IHS provides software that the
Company incorporates into certain of its products. These agreements may be
periodically reviewed and revised according to the circumstances of the parties.
As Dataware's largest distributor, IHS accounted for 29% of software license
revenues (20% of total revenues) in the third quarter of 1999 compared with 36%
and 25%, respectively, during the third quarter of 1998. IHS accounted for 36%
of software license revenues (23% of total revenues) for the first nine months
of 1999 compared with 57% and 37%, respectively, in the first nine months of
1998. While no assurances can be provided, the Company's plan is that, as
revenues from the existing IHS arrangements continue to diminish during 1999 and
thereafter due to the winding down of the current agreements, they will be
replaced by revenues from sales of the Company's newer offerings through IHS and
other channels. However, the current IHS relationship will remain important for
the near term and any unexpected disruption would likely have a material adverse
effect on the Company.
RESULTS OF OPERATIONS
Revenues
The Company's total revenues decreased 18% from $8.5 million in the third
quarter of 1998 to $7.0 million in the third quarter of 1999. The Company's
total revenues decreased 18% from $24.4 million in the first nine months of 1998
to $20.1 million in the first nine months of 1999. The decline in revenues
resulted, in part, from decreased productivity of the Company's sales force and
delays in finalizing statements of work, as well as from distractions resulting
from management changes made since the end of 1998. The Company has taken steps
at both the strategic and tactical levels during 1999 to further its previously
communicated plan to become a provider of enterprise-scale, intranet-based
knowledge management solutions, which were designed to improve the Company's
execution and deliver more predictable results through the end of the year.
However, there is a lag time before these steps can prove their potential. Other
contributing factors included delays in finalizing the Company's knowledge
management products and in establishing strong reference accounts to support
further sales.
Quarter over quarter, software license fees decreased 16% from $4.9 million to
$4.1 million. Software license fees include revenues from systems and tools,
applications and custom software products. Year over year, software licenses
decreased 23% from $14.3 million to $10.9 million.
9
<PAGE>
Software license fees in the third quarter of 1998 and 1999 included $1.7 and
$1.2 million, respectively, in software revenues under agreements with IHS. For
the nine months ended September 30, 1998 and 1999, software license fees
included $8.1 and $4.7 million, respectively, of revenues from IHS. As part of
the ongoing relationship, the Company and IHS amended existing agreements during
the third quarter of 1998 to provide for IHS to make guaranteed minimum payments
called for by those agreements, at the discretion of the Company, on an
accelerated, discounted basis. Software revenues in the third quarter of 1999
include $0.8 million of such discounted payments accelerated from the year 2000.
For the first nine months of 1999 software revenues include $2.3 million of
these discounted payments. The Company anticipates that all guaranteed payments
under these agreements with IHS will terminate in the fourth quarter of 1999.
Service revenues decreased 20% from $3.6 million in the third quarter of 1998 to
$2.9 million in the same period for 1999. Service revenues are primarily derived
from interactive multimedia development, production services, software
maintenance, web site hosting, custom software development and project
management. These revenues decreased 10% from $10.2 to $9.1 million for the nine
month periods ended September 30, 1998 and 1999.
Software revenues increased slightly from 58% of total revenues in the third
quarter of 1998 to 59% in the third quarter of 1999, and services revenues
decreased slightly from 42% of total revenues in the third quarter of 1998 to
41% in the third quarter of 1999. Software revenues decreased from 58% of total
revenues in the nine months ended September 30, 1998 to 54% in the same period
of 1999, and services revenues increased from 42% of total revenues during this
nine-month period in 1998 to 46% in the first nine months of 1999. This shift
from software to service revenues is consistent with the Company's plan to move
toward more solution-based sales.
The mix within the software revenues continues to favor the Company's legacy
products, although the newer Knowledge Management Suite and Dataware II
Publisher products have been gaining momentum since late 1998 despite stiff
competition in the market.
The Company anticipates that revenues at year-end may be affected by the general
concern over "Year 2000" problems and the resulting hesitancy of many
organizations to undertake transactions, apart from any actual problems
experienced by Dataware's customers.
Cost of Revenues
Cost of revenues increased 33% from $2.4 million in the third quarter of 1998 to
$3.2 million during the same period in 1999. Cost of revenues increased 30% from
$7.2 million in the first nine months of 1998 to $9.4 million during the same
period in 1999. As a percentage of revenues, total cost of revenues increased
from 29% of total revenues for the three months ended September 30, 1998 to 46%
for the three months ended September 30, 1999 and from 29% to 47% for the nine
months ended September 30, 1998 and 1999, respectively.
The cost of software licenses as a percentage of software license fees increased
from 13% in the third quarter of 1998 to 20% during the third quarter of 1999.
During the first nine months of 1999, the cost of software licenses as a
percentage of software license fees increased to 23% from 12% for the same
period in 1998. This increase on a quarterly and year to date basis is
principally caused by the decline in software revenues while fixed costs, such
as amortization of capitalized software, increased due to the addition of
purchased software in 1998.
The cost of services, as a percentage of service revenues, increased from 50%
for the third quarter of 1998 to 83% during the third quarter of 1999. During
the first nine months of 1999, the cost of services as a percentage of service
revenues increased to 75% from 54% for the same period in 1998. The increase
quarter over quarter and year over year is primarily caused by underutilization
of the multimedia web site development and knowledge management consulting
groups.
Gross Profit
Total gross profit was $6.1 million or 71% of total revenues for the third
quarter of 1998 and $3.8 million or 54% of total revenues for the third quarter
of 1999. For the first nine months of 1998, total gross profit amounted to $17.2
million as compared with $10.7 million for the same period in 1999, representing
71% and 53% of total revenues, respectively. Quarter to quarter, software
margins decreased from 87% in 1998 to 80% in 1999 and service margins decreased
from 50% in 1998 to 17% in 1999. On a year-to-year basis, software margins
decreased from 88% to
10
<PAGE>
77% and services margins decreased from 46% to 25% in 1998 and 1999,
respectively.
Gross margins may improve in the long run if the Company attains additional
improvements in service margins. However, there are a number of important
factors that could adversely affect the Company's future gross margins,
resulting in higher than anticipated costs and/or lower than anticipated
revenues. In particular, the Company's increasing emphasis on providing
solutions in the knowledge management field, not just selling software, will
involve an increasing proportion of lower margin services. Other factors
include: the inherent risks and costs of new product introductions, including
uncertainty of customer acceptance; increased employment costs stemming from the
high level of competition for qualified personnel in the software industry; and
the Company's reliance on third parties for supply of certain product
components.
Sales and Marketing Expenses
Sales and marketing expenses increased slightly, from $2.8 to $2.9 million,
during the third quarters of 1998 and 1999, respectively, and 12%, from $8.2 to
$9.2 million, during the first nine months of 1998 and 1999, respectively. These
increases reflect costs incurred in connection with reorganizing the sales
process as well as spending on marketing programs, including corporate identity
and branding projects, during the first half of 1999.
Sales and marketing expenses increased as a percentage of revenues from 32% to
41% on a quarter-to-quarter basis and from 34% to 46% year over year due to the
decline in revenues and increase in costs.
Product Development Expenses
Product development expenses, which exclude capitalized software costs,
increased 16% from $1.5 million in the third quarter of 1998 to $1.7 million in
the third quarter of 1999, and increased 21% from $4.5 million during the first
nine months of 1998 to $5.5 million during the same period in 1999. The Company
capitalized software development costs in the amount of $298,000 in the third
quarter of 1999 as compared to $432,000 in the third quarter of 1998. During the
first nine months of 1999, the Company capitalized $1,099,000 in internally
developed software costs as compared with $1,378,000 during the same period in
1998. The Company also capitalized $130,000 in purchased software during 1999.
Product development expenses as a percentage of total revenues increased from
17% to 24% quarter to quarter and from 19% to 27% on a year-to-year basis.
General and Administrative Expenses
General and administrative expenses increased 54%, from $1.4 million in the
third quarter of 1998 to $2.2 million in the third quarter of 1999. These
expenses increased 35%, from $3.9 million in the first nine months of 1998 to
$5.2 million during the same period in 1999. The increase quarter to quarter is
primarily related to a one-time, $400,000 write down of computer hardware and
software as well as the cost of moving the Cambridge organization to new office
space. On a year-to-year basis, the increase also includes reorganization costs
incurred during the first half of 1999. General and administrative expenses as a
percentage of total revenues increased from 16% to 31% on a quarter-to-quarter
basis and from 16% to 26% on a year-to-year basis.
The Company's full-time employee headcount at September 30, 1999 was 231, which
compares with 205 at December 31, 1998 and 238 at June 30, 1999. The increase
year to date includes 14 employees that came to Dataware as part of the
Sovereign Hill acquisition at the beginning of 1999.
Purchased In-Process Research and Development
On January 23, 1998, the Company completed the acquisition of all of the
outstanding shares of Green Book International Corporation ("Gbook"), in
exchange for approximately $300,000 in cash. The Company incurred direct
expenses of $150,000 related to the transaction. Prior to the acquisition, Gbook
was the developer of a software package for the electronic publishing of
financial prospectuses. The acquisition was accounted for as a purchase and,
accordingly, the assets, liabilities and results of operations of Gbook are
included in the financial statements from the acquisition date. The results of
the continuing operations of Gbook are immaterial in the context of the results
of the Company. Because the acquired technology was incomplete and required
substantial additional development, the Company recorded a charge of $450,000
for purchased R&D in the first quarter of 1998.
Other Income (Expense), Net
During the third quarter of 1999, the Company reported $79,000 in net interest
income as compared with $138,000
11
<PAGE>
in the third quarter of 1998. During the first nine months of 1999, the Company
reported $557,000 in net interest income as compared with $358,000 in the same
period in 1998. The interest income earned during 1999 includes interest
collected on a secured note receivable during the first quarter.
For the three months ended September 30, 1999, the Company recorded $107,000 in
net other income compared with $22,000 during the same period in 1998. For the
nine months of 1999, the Company recorded approximately $125,000 in net other
income as opposed to $1,000 during the same period in 1998 (made up of foreign
exchange gains and losses on intercompany balances as well as income from a
third-party sublease).
Provision for Income Taxes
The Company recorded a $373,000 income tax benefit in the three months ended
September 30, 1999. The benefit represents the reversal of a reserve established
in previous years for taxes on a foreign subsidiary that the Company now
believes are not owed. The Company did not record a provision for income taxes
for the three or nine-month periods ended September 30, 1998, because of the
losses incurred during those periods and the substantial net operating loss
carryforward from prior periods. At September 30, 1999, the Company had a net
operating loss carryforward of approximately $13.2 million. Use of the Company's
net operating loss carryforward is limited due to changes in ownership of the
Company's stock.
Year 2000
The "Year 2000 problem" refers to the operational failures that are expected to
arise in computer systems, microprocessors, and software that are not able to
properly interpret and sort dates beyond the year 1999. For present purposes,
"Year 2000 Compliant" means that a computer program or system can accurately
store, sort, display, process, provide, and/or receive data from, into, and
between the 20th and 21st centuries when used properly and in conformity with
the product information furnished by the Company; provided that there was no
hard coding of dates to force a prefix of "19" during the production process,
that all digits of the date are provided as input, and that all other technology
used in combination with the software or system properly exchanges date data
with it. The Company recognizes that the Year 2000 problem may have a material
adverse effect on its results of operations if its products and systems are not
Year 2000 Compliant or if those of its principal suppliers and/or customers are
not Year 2000 Compliant. The Company is continuing to implement the Year 2000
readiness program as described in the Form 10-K for 1998, to try to assess this
potential effect, to remediate it where possible, and to develop contingency
plans where management believes them to be appropriate and cost-effective.
The Company has completed testing of its current, updated product offerings
(including third party software incorporated in the products), and believes that
they are all Year 2000 Compliant. (The Company has not made a general evaluation
of individual products customized for particular customers, but will work with
those customers as requested.) The Company has reviewed the computer systems,
including servers for web hosting, through which it provides certain services to
customers and believes that they also are Year 2000 Compliant. The Company
continues to test its internal-use systems and to identify anticipated costs,
problems and uncertainties associated with making them Year 2000 Compliant.
Finally, the Company is reviewing all major suppliers to determine the status of
their Year 2000 Compliance, since their noncompliance may have a material
adverse impact on the Company's business. To the extent that its review shows
that a particular supplier's situation poses unacceptable risks to the Company,
the Company expects to identify an alternate source.
To date, the Company has incurred costs of approximately $50,000 on these
activities. There can be no assurance that the program will be successful, and
the extent of the impact on the Company if such problems cannot be assessed or
remediated is not fully known.
Gain on Investment in Northern Light LLC
During the second quarter of 1999, Northern Light Technology LLC, developer of
the world's first research engine, announced that it had completed a $35 million
equity financing. Following this announcement, Dataware sold one-half of its
interest in the LLC back to Northern Light for $4.1 million in cash. In
addition, Northern Light repaid the Company for its $1.2 million promissory note
held by Dataware. These transactions resulted in a $5.1 million gain after
adjusting for legal costs incurred and the investment in Northern Light that was
carried on the Company's books. After these transactions, Dataware retained an
approximate 5% interest in Northern Light.
12
<PAGE>
Certain Factors That May Affect Future Results
Statements in this Form 10-Q about the Company's prospects, including references
to its revenues, profits and markets, are forward looking statements based on
assumptions that may not be realized for various reasons. Important factors that
could cause actual results to differ materially include: that the Company may
not effectively complete the personnel reorganization necessary to implement its
increasing focus on business solutions; that an excessive level of high-cost
customized services will be required to provide solutions meeting individual
customers' needs; that the Company may not be able to develop appropriate new
distribution channels capable of delivering these offerings economically and on
time; that sales of the Company's older product lines may decline more rapidly
than they can be replaced by revenues from newer offerings; that costs related
to the possible failure of the Company's products or services, or those of any
of the Company's suppliers, to be Year 2000 Compliant may be higher than
management currently believes; that the Company's competitors, some of whom have
significantly more resources than the Company, may meet the needs of the market
more quickly and effectively; and that increases in various cost and expense
categories may exceed management's current expectations. In general, for the
Company to be successful it also must continue to attract and retain highly
skilled technical, management, sales and marketing personnel despite the stiff
competition for such personnel that exists in today's market, and worldwide and
regional economic conditions must not significantly deteriorate.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had cash and cash equivalents of $10.0
million and working capital of $5.2 million. Operating activities used $5.7
million of the Company's cash during the first nine months of 1999. Days sales
outstanding increased from 44 days at December 31, 1998, to 66 days at September
30, 1999. The Company previously reported that it anticipated that its days
sales outstanding would increase to their traditional levels during 1999.
The Company's investing activities provided cash of $2.9 million during the
first nine months of 1999, consisting of $5.3 million received in connection
with the Company's investment in Northern Light LLC, offset by additions to
property and equipment, internally developed capitalized software, and a third
party license for software that is being included in the Company's products and
used to develop custom applications for customers.
The Company's financing activities provided cash of $0.3 million during the
first nine months of 1999, which consisted of proceeds from the issuance of
common stock under the Company's Employee Stock Purchase Plan.
The Company believes that its cash, cash equivalents and marketable securities,
together with anticipated cash from operations, will be sufficient to meet its
liquidity needs into fiscal 2000. The Company expects that increased revenues
from operations will then support and continue to enhance its liquidity.
However, market acceptance of new products and solutions may take longer than
anticipated, and working capital and other capital requirements may change
because of unanticipated changes in business conditions, in addition to such
other considerations as expansion of operations or research and development
activities, competitive and technological developments, costs of remediation of
Year 2000 computer problems, 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. In such a case, the Company may need to seek additional
financing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change from the information provided in response to
Item 7A of the Company's 1998 annual report on Form 10-K.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits. See exhibit list on page 15.
(b) The Company filed no reports on Form 8-K during the quarter.
13
<PAGE>
DATAWARE TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATAWARE TECHNOLOGIES, INC.
(Registrant)
Date: November 11, 1999 By: /s/ Michael Gonnerman
---------------------
Michael Gonnerman
Vice President, Chief Financial Officer, Treasurer
(Principal Financial and Principal Accounting Officer)
14
<PAGE>
Exhibit Index
10.1 Employment Agreement between the Company and Michael Gonnerman
dated August 16, 1999.
27.1 Financial Data Schedule.
99.1 Important Factors Regarding Future Results (Exhibit 99.1 to
1998 Form 10-K)*.
* Incorporated by reference to the filing indicated in parentheses.
<PAGE>
Exhibit 10.1
------------
August 16, 1999
Michael Gonnerman
65 Washington Drive
Sudbury, MA 01776
Dear Mike,
I am very pleased to confirm our offer to you to join Dataware Technologies,
Inc. as Treasurer, Chief Financial Officer and Vice President -- Finance
reporting to the President and Chief Executive Officer.
The terms of our offer of employment are summarized in the attached Proposed
Employment Terms.
In order to accept this position, please sign a copy of this letter and return
it to me. Retain a copy for your records.
We are looking forward to working with you at Dataware.
Best regards,
DATAWARE TECHNOLOGIES, INC.
/s/ Ann C. Smith
- ----------------------------------
Ann C. Smith
Vice President Corporate Resources
Offer Accepted:
By /s/ Michael Gonnerman Date 8/16/99
-------------------------------- -------------------
Enclosure
<PAGE>
Michael Gonnerman
Proposed Employment Terms
Position: Treasurer, Chief Financial Officer and Vice President - Finance,
- -------- reporting to the President.
Term: Your employment will commence on August 16,1999 (the "Start
- ---- Date"). Employment with Dataware is "at will" and can be
terminated at any time at the option of either you or the
Company.
Base Salary: $180,000 per year, payable semi-monthly.
- -----------
Auto None.
- ----
Bonus: 45% of base salary, or $81,000, per calendar year at plan. Bonus
- ------ will be based 100% on overall Company performance.
Benefits: You will be entitled to medical, dental, disability, and life
- -------- insurance, 15 days paid vacation, 5 paid personal days and 5 paid
sick days (accruing in proportion to the time worked during a
calendar year) and 10 paid holidays per calendar year and other
benefits provided to our executive employees.
Expenses: The Company will reimburse you for reasonable business related
- -------- expenses, including travel in accordance with the Company travel
policy. Mileage reimbursements for business-related travel by
private car will be at the latest IRS approved rate.
Equity: The Company will grant you a qualified (ISO) stock option
- ------- for 40,000,shares, subject to approval by the Dataware Board of
Directors. The exercise price will be the fair market value on
the grant date, defined as the closing price on the day before.
The vesting is as follows:
2,500 Immediately
2,500 February 15, 2000
8,750 August 15, 2000
8,750 August 15, 2001
8,750 August 15, 2002
8,750 August 15, 2003
Vesting will be accelerated should the Company be acquired or
merged with another company. upon a "Change in Control" of the
Company, as defined in the Company's Equity Incentive Plan.
The option granted to you on June 18, 1998, will continue to vest
while you are employed by Dataware, notwithstanding the
termination of your consulting agreement with Dataware. Vesting
of this option also will be accelerated upon a "Change in
Control" of the Company, as defined in the Company's Equity
Incentive Plan, in lieu of the acceleration provision in your
June 18, 1998 Consulting Agreement.
Severance: Should the Company terminate you "without "Cause" or should
- ---------- there be a Change in Control of the Company be acquired or merged
with another company, and, as a result, your employment with the
Company is terminated, the Company will continue your base salary
plus earned pro-rata bonus for a period of four (4) months, plus
one additional month for each full year of service with the
Company. Total severance will be limited to twelve (12) months
base salary plus earned pro-rata bonus. Severance payments will
be reduced by any amounts you receive from subsequent employment
during the severance period. "Cause" shall have the meaning given
in your June 18, 1998 Consulting Agreement.
Other: You will need to sign non-disclosure and non-competition
- ----- agreements satisfactory to the Company prior to your start date.
You will also need to certify that you have no outstanding non-
disclosure, non-compete or employment obligations that would
interfere with your full-time employment by Dataware.
Offer Accepted:
By /s/ Michael Gonnerman Date 8/16/99
------------------------------------ -------------------
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