<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, 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 (I.R.S. Employer Identification
Incorporation or Organization) No.)
One Canal Park 02141
Cambridge, MA (Zip Code)
(Address of Principal Executive
Offices)
(617) 621-0820
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
Title of Each Class Name of Exchange on Which Registered
------------------- ------------------------------------
None None
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $.01 Per Share
(Title of Class)
Junior Participating Preferred Stock Purchase Rights
(Title of Class)
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. [X]
Aggregate market value of Registrant's voting common stock held by non-
affiliates of the Registrant as of
February 18, 2000: $97,902,731
Shares of Common Stock outstanding as of February 18, 2000: 10,309,579
----------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2000 Annual Meeting of
Shareholders to be held on April 13, 2000 (the "2000 Proxy Statement") are
incorporated by reference into Part III of this Report.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Part I
Item 1. Business..................................................... 3
Item 1A. Executive Officers of the Registrant......................... 8
Item 2. Properties................................................... 8
Item 3. Legal Proceedings............................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.......... 8
Part II
Market for Registrant's Common Equity and Related
Item 5. Stockholders' Matters........................................ 9
Item 6. Selected Financial Data...................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 19
Item 8. Financial Statements and Supplementary Data.................. 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 44
Part III
Item 10. Directors and Executive Officers of the Registrant........... 44
Item 11. Executive Compensation....................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 45
Item 13. Certain Relationships and Related Transactions............... 45
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.......................................................... 45
Signatures ............................................................ 47
Exhibit Index.......................................................... 48
</TABLE>
2
<PAGE>
Forward-Looking Statements
Statements concerning the Company's anticipated performance, including
future revenues, costs, and profits or losses, about the anticipated
development of the Company's products and services offerings, or about the
development of the Company's markets, made throughout this Annual Report, are
"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 throughout this Annual Report,
under "Certain Factors That May Affect Future Results" in Part II, Item 7
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.
PART I
ITEM 1. BUSINESS
GENERAL
Dataware Technologies, Inc. is a full service provider of "e-Business
solutions:" integrated Internet business and technology solutions to business
challenges facing its clients. Dataware offers integrated, Internet related
services using the Dataware Xcellera(TM) Methodology to help clients achieve
critical e-Business objectives reliably and fast. Dataware's goal is to
distinguish itself by combining its methodology, skills, experience, and
technologies to quickly provide competitive and operational advantages for its
clients. Dataware currently serves a global customer base through regional
"footprint" solution-centers in the U.S. and Europe.
Dataware was incorporated in Delaware in 1988 and has spent the majority of
its 12 year history acquiring and developing advanced technologies for handling
business knowledge assets in the form of digital information and broadband
media. A knowledge asset, in this context, is an electronic document or record
that encapsulates information or knowledge on some subject or combination of
related subjects. Prior to 1999, Dataware's business model was to generate
return on its investment in technology and technical expertise through the
licensed sale of software products and related services.
In 1999, the Company made several major changes to its business and
operational models. Analysis of opportunities available to the Company showed
that Dataware could create a higher return on invested capital by offering
value-added e-Business solutions. The Company's existing proven services
methodology, employee skills, Internet experience and differentiating
technology allowed it to enter the high-growth e-Business solution market
quickly.
Additional information about the development of the Company's business
during the past year and some of the risks the Company faces is contained in
Part II, Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
SOLUTIONS
Dataware offers integrated e-Business strategy consulting, design and
development of Internet applications, implementation and integration of Company
and third-party Internet technology solutions, design and development of custom
Internet technology solutions, and application and solution level hosting and
support.
Dataware partners with clients to accelerate the creation and implementation
of e-Business strategies and solutions that enable the clients to create value
through the use of information technology, in particular, the Internet.
Dataware has assembled a global pool of multi-disciplinary talents, approaches,
methodologies and technology components that encompass strategy, definition,
design, specification, creation and enhancement of solutions.
3
<PAGE>
Recent examples of solutions developed by Dataware include a solution to
migrate the sale process of a large U.S. mutual fund company from a manual to
an e-Business model. Distributor education and sales of mutual fund products
through wholesalers were enhanced through the use of information technology. In
this case, Dataware provided a full life-cycle solution that spanned from
strategy consulting through implementation and support. Other sample solutions
include the conception and launch of several business-to-business (B2B)
portals, for both brick and mortar businesses and "dot-com" start-ups.
THE DATAWARE XCELLERA(TM) METHODOLOGY
Dataware delivers its solutions using its Xcellera Methodology. The Dataware
Xcellera Methodology is a proven 5-step approach intended to ensure e-Business
success with an emphasis on speed. Xcellera is collaborative and iterative,
with specific deliverables at each step. Xcellera has been embraced by Global
2000 and "dot-com" businesses alike for its ability to create strategy from
ideas, minimize risk, and promote fast and successful deployment of global e-
Business solutions.
The Dataware Xcellera Methodology consists of the following five steps:
1.Strategy and Vision
Listen, understand, apply expertise, define vision, define objectives,
and deliver business strategy--leverage Dataware knowledge to create
direction
2.Define
Gather information, understand business and technical requirements,
apply expertise, document requirements--create projects/activities that
support the strategy and vision
3.Design
Develop functional and technical specifications, design system
architecture and user interface, generate prototypes, and deliver
design--blueprint applications that encompass the projects/activities
4.Create
Build and deliver solution--integrate legacy data, integrate solution
into host environment, roll out solution to user community--implement
applications to create customer advantage
5.Enhance
Host the solution, provide support, deliver training, manage content,
and close feedback loop--provide sustainable environment and continued
business objective alignment
The Company believes that Xcellera offers the following advantages:
. Speed. Xcellera combines the structured expertise, appropriate resource
loads, and structure necessary to move e-Business initiatives forward at
high speed. Frequent deliverables are designed to enable large
businesses and "dot-com" companies to move quickly in executing critical
initiatives.
. e-Business Alignment with Business Objectives. Xcellera's steps contain
specific task-level plans to ensure e-Business initiatives remain
consistent with the client's business objectives. Xcellera provides for
constant alignment through all steps and anticipates shifts in business
objectives that will need to be considered in e-Business initiatives.
. Complete Solutions. Xcellera can rapidly turn a client's ideas and
strategic direction into vision and executable strategy that meets the
business objectives throughout the full solution lifecycle from solution
definition, design, and implementation to support. This can be greatly
enhanced by Dataware's 5 years' experience in application hosting.
Dataware's offering and experience in this area provides clients with
the ability to get solutions "up and running" faster and manage support
and enhancement with one partner.
4
<PAGE>
CLIENTS, MARKETS, COMPETITION
Dataware focuses its new business development efforts on targeted Global
2000 companies with substantial operations near the Company's operations in the
U.S., Europe, and Asia. The Company also focuses on well financed newer
companies formed to distribute products or services over the Internet, often
referred to as "dot-coms."
Most Global 2000 companies are moving to use the Internet for key business
processes and require the type of solutions provided by the Company.
Additionally, "dot-com" companies often need considerable assistance with the
technology needed to implement their Internet-oriented business models. As a
result, the Company sees a demand for its solutions to translate "dot-com"
business objectives into technical reality. The market for the type of
solutions offered by the Company is considered by industry sources to be one of
the fastest growing information technology markets, with the potential to be
one of the largest.
Within these two groups, the Company has targeted clients who are determined
to gain a competitive advantage and increase value for their customers through
the creation of new products, services and business models facilitated by e-
Business solutions.
More than 575 customers did business with Dataware in 1999, and its software
has been deployed by more than 2,000 customers worldwide. Sales from operations
outside North America represented about 32% of Dataware revenues in 1999. An
estimated 36% of total 1999 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. The Company's various
distribution, license and services agreements with IHS accounted for 21% of the
Company's total revenues during 1999. However, no further guaranteed payments
under these agreements are due to the Company after December 31, 1999, and the
Company anticipates that revenues from IHS will be materially lower in 2000 and
beyond.
Dataware's customer base has traditionally been broad and diverse. As it
moves from a focus on licensing proprietary software to providing customized
solutions, the Company believes that it will increasingly derive a significant
portion of its revenues from a more limited number of clients. The Company's
sales and marketing activities are described in "Selling and Marketing" below.
The markets for the Company's services are highly competitive. The Company
currently competes principally with a wide range of consulting and software
integration firms and internal information systems groups. Its present and
future competitors include: Sapient (SAPE), Extraprise, Andersen Consulting,
Razorfish (RAZF), Scient (SCNT), and Viant (VIAN), among others. Many of
Dataware's competitors have greater financial, technical and marketing
resources than the Company, generate greater revenues and have greater name
recognition. In addition, the barriers to entry into the Company's markets are
relatively low, and the Company expects to face additional competition from new
entrants.
The Company believes that the principal competitive factors in these markets
include speed of development and implementation, quality of lead-consulting
personnel, price, overall project management capability, and technical and
business expertise. The Company believes it competes favorably in this
environment and that its Xcellera methodology, Internet expertise, depth of
integrated skills, unique proprietary technology components, ability to provide
end-to-end solutions, and customer focus distinguish it from its competitors.
However, the Company's ability to continue to compete successfully depends on a
number of factors, including its ability to hire, retain and motivate top
quality new business development staff, project managers and other senior
technical staff.
SELLING AND MARKETING
During 1999, a majority of the Company's dedicated business development
team, which consisted of 43 employees at December 31, 1999, were asked to
transition from selling the Company's integrated suite of technology components
to selling complete e-Business solutions. This transition required significant
re-training,
5
<PAGE>
development of new skill sets, and cultivation of new sales relationships for
most of the Company's new business development team. During this transition,
the new business development teams were also asked to continue to generate
revenue from the Company's traditional product revenue sources. For these
reasons, the company's new business development efforts were less effective
during the last half of 1999. During this time, the Company experienced a large
amount of turnover in new business development staff and used the opportunity
to bring on new sales management and new business development resources from
outside the Company with proven experience in selling e-Business solutions.
The Company believes it is entering 2000 with experienced sales management
and proven new business development staff applied to a selling model that is
appropriate to the company's e-Business solution offering. The Company enters
2000 with fewer salespeople focused on fewer accounts, but with each person
carrying larger quotas to achieve the Company's revenue goals for the year
2000.
The company's solutions are sold directly by a new business development team
comprised of 15-20 individuals worldwide. A separate, corporate marketing team
of 4-6 people support the business development team in targeting specific
clientele, including, attendance at targeted conferences and trade shows,
private briefings with individual companies, live and web-based events which
demonstrate the Company's unique expertise, and partnerships with other
industry players. The Company uses multiple vendors to support a scalable
worldwide marketing effort. In addition, the Company expects to mine its
existing customer base for opportunities that match the Company's new business
model.
The Company's solutions require a substantial financial commitment from
clients. The Company's sales cycles typically range from two to six months from
the time the Company initially meets with a prospective client until the client
authorizes commencement of an engagement. In certain industries, such as
Government, sales cycles can be significantly longer than six months.
The Company generally enters into written commitment letters with its
clients prior to commencing work on a project. These commitment letters
contemplate that Dataware and the client will enter into a more detailed
agreement. Because these written commitments and contracts often provide that
the arrangement can be terminated with limited advance notice, the Company does
not believe that the projects in process at any one time are a reliable measure
of expected future revenues.
COMPONENT DEVELOPMENT
The Company's small software development teams work on software components
that are used to implement e-Business solutions. Dataware components enable
next-generation information retrieval, categorization, profiling, accessing,
collecting, searching, mining, browsing, and sharing knowledge assets within e-
Business solution applications. Dataware component development focuses
primarily on tools and utilities for handling unstructured and semi-structured
knowledge assets in Web forms. Assets of this type represent as much as 90% of
all on-line information today and include Web content, word processing
documents, news articles, XML and SGML content, email, discussion database
information, etc. In addition to internal development, the Company may also
license or acquire appropriate third party technology to achieve its goals.
During 1999, the Company's expenditures for research and development, net of
capitalized internally developed software costs, were $7.1 million,
representing 27% of total revenues. As of December 31, 1999, the Company had 61
full-time employees engaged in component development activities. Going forward,
a large portion of this group will be merged into the solution delivery
organization to work on solutions for customers.
EMPLOYEES
Management believes that key employee characteristics, including: client-
focus, leadership, long-term relationship orientation, and professional growth,
are critical to attaining success and has developed a strong corporate
commitment to these values. To encourage the achievement of these values,
Dataware fosters and rewards teamwork and promotes individuals who demonstrate
these characteristics.
6
<PAGE>
The Company believes that its future growth and success will be based in
large part on its ability to attract and retain high caliber employees. The
Company believes that it has been successful in its efforts to attract new,
high quality professionals and retain key contributors needed to support
present operations. The Company also believes it can be successful in
continuing to attract the professionals needed to support anticipated growth.
The Company intends to continue to recruit, hire and promote employees who
demonstrate the Company's values.
There is significant competition for employees with the skills required to
perform the services the Company offers. Senior solution managers and senior
technical staff are in high demand and will remain a limited resource for the
foreseeable future.
As of December 31, 1999, the Company had 209 full-time employees, comprised
of 74 project personnel, 31 in finance and administration, 61 in component
development, and 43 employees in business development. None of the Company's
employees are subject to a collective bargaining agreement.
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of trade secret, nondisclosure and
other contractual arrangements, and copyright and trademark laws, to protect
its proprietary rights. The Company enters into confidentiality agreements with
its employees, generally requires that its consultants and clients enter into
such agreements, and limits access to and distribution of its proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of its proprietary
information or that the Company will be able to detect unauthorized use and
take appropriate steps to enforce its intellectual property rights.
The Company regards its software components as proprietary and attempts to
protect them 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
components and existing copyright laws afford only limited protection.
The Company sometimes provides its software components 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 components to customers. The Company relies
primarily on "shrink wrap" licenses for the protection of its retrieval
software components. 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
components 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/components in the industry increases and the functionality of these
products/components 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.
7
<PAGE>
A portion of the Company's business involves the development of software
applications for specific client engagements. Ownership of such software is the
subject of negotiation and is frequently assigned to the client, with the
Company frequently retaining rights for certain uses. Issues relating to the
ownership of and rights to use software applications can be complicated and
there can be no assurance that disputes will not arise that affect the
Company's ability to resell or reuse such applications.
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 31,000 square
feet of office space occupied under a lease that expires in December 2004. The
Company leases additional facilities and offices, including locations in
Denham, UK; Copenhagen, Denmark; Singapore; Bethesda, Maryland; Albany, New
York; Portland, Oregon; and Hadley, Massachusetts. The Company believes that
its existing facilities and offices and additional space available to it are
adequate to meet its near-term requirements, and that suitable additional or
alternate space sufficient to serve the Company's foreseeable needs will be
available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
<PAGE>
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 per share for the Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1999:
First Quarter.......................................... $4 7/16 $2 15/32
Second Quarter......................................... 3 3/16 2
Third Quarter.......................................... 3 1/16 1 9/16
Fourth Quarter......................................... 17 1/4 1 7/8
1998:
First Quarter.......................................... $4 1/16 $2 3/8
Second Quarter......................................... 4 3/4 2 3/4
Third Quarter.......................................... 3 7/8 2 1/8
Fourth Quarter......................................... 3 3/4 1 1/2
</TABLE>
On February 18, 2000, there were 327 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 May 5, 1999, the Company issued to NEC USA Inc. a warrant to purchase
100,000 shares of Common Stock at an exercise price of $2.68 per share (which
was $0.50 above the average trading price of the Common Stock at the time the
agreement was made). The warrant was issued in consideration for the license of
technology from NEC USA Inc. The issuance was exempt from registration under
Section 4(2) of the Securities Act of 1933, based on the nonpublic nature of
the transaction and the qualifications of the recipient.
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- -------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues:
Software license fees.......... $ 14,829 $19,258 $19,534 $ 16,502 $19,996
Services....................... 11,905 13,732 17,785 20,957 21,128
-------- ------- ------- -------- -------
Total revenues............... 26,734 32,990 37,319 37,459 41,124
Cost of revenues:
Software license fees.......... 3,658 2,911 2,544 5,363 3,125
Services....................... 9,320 7,288 10,966 12,938 11,923
-------- ------- ------- -------- -------
Total cost of revenues....... 12,978 10,199 13,510 18,301 15,048
-------- ------- ------- -------- -------
Gross profit..................... 13,756 22,791 23,809 19,158 26,076
Operating expenses:
Sales and marketing............ 11,695 10,953 16,603 17,679 13,754
Product development............ 7,123 6,406 6,721 10,005 5,040
General and administrative..... 6,254 5,988 5,884 8,492 5,337
Merger costs................... -- -- -- -- 171
-------- ------- ------- -------- -------
Total operating expenses......... 25,072 23,347 29,208 36,176 24,302
-------- ------- ------- -------- -------
Income (loss) from operations.... (11,316) (556) (5,399) (17,018) 1,774
-------- ------- ------- -------- -------
Interest income (expense), net... 634 476 (160) 386 586
Settlement of litigation......... -- -- -- (2,823) --
Gain on investment in Northern
Light LLC....................... 5,056 -- -- -- --
Other income (expense), net...... 543 (22) (149) 144 86
-------- ------- ------- -------- -------
Income (loss) before income
taxes........................... (5,083) (102) (5,708) (19,311) 2,446
-------- ------- ------- -------- -------
Income tax provision (benefit)... (153) 105 80 -- 733
-------- ------- ------- -------- -------
Net income (loss)................ (4,930) (207) (5,788) (19,311) 1,713
-------- ------- ------- -------- -------
Accretion of preferred stock..... -- -- 677 -- --
-------- ------- ------- -------- -------
Net income (loss) to common
stockholders.................... $ (4,930) $ (207) $(6,465) $(19,311) $ 1,713
======== ======= ======= ======== =======
Net income (loss) per common
share--basic.................... $ (0.52) $ (0.02) $ (0.85) $ (3.01) $ 0.28
======== ======= ======= ======== =======
Net income (loss) per common
share--diluted.................. $ (0.52) $ (0.02) $ (0.85) $ (3.01) $ 0.26
======== ======= ======= ======== =======
Weighted average number of common
shares
outstanding--basic.............. 9,516 9,265 7,632 6,425 6,121
======== ======= ======= ======== =======
Weighted average number of common
shares
outstanding--diluted............ 9,516 9,265 7,632 6,425 6,511
======== ======= ======= ======== =======
Working capital.................. $ 4,916 $ 5,675 $ 9,273 $ 2,649 $11,121
Total assets..................... 23,374 28,749 29,053 25,376 41,314
Notes, software license payable,
and capital leases,
less current portion............ -- -- -- -- 4
Stockholders' equity............. 12,775 16,353 16,466 14,418 32,216
</TABLE>
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
In General
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. Since its inception,
Dataware has generated significant revenues outside of North America. Until the
1997 IHS transaction described below, Dataware had international direct sales
organizations in Germany, the United Kingdom, Italy, France, Sweden, Denmark,
Australia, Singapore, and Canada. As of December 31, 1999, the Company has
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 32%, 27% and 40% of total revenues for 1999, 1998
and 1997, respectively. The Company's foreign subsidiaries are principally
engaged in software sales, services and distribution activities.
Early in 1999, the Company announced a program to reposition and restructure
the company as an e-Business solutions provider and began making strategic and
organizational changes toward that goal. The Company had previously been
focused on providing software for enterprise information access ("knowledge
management") and professional electronic publishing applications, as well as
multimedia services for CD-ROM and web-based publishing. The Company is now a
Full Service Provider, working with its clients to create e-Business solutions
that efficiently translate their business to a web-oriented model by
incorporating the client's information with the Company's technology and
methodology to deliver solutions built around the web, such as portals, e-
commerce sites and web-based training. The Company also develops interactive
multimedia, intelligent information retrieval, distributed media and knowledge
management solutions.
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 provided software and multimedia services
for use by IHS internally and in its publishing activities, and IHS provided
software that the Company incorporated into certain of its products. As
Dataware's largest distributor, IHS accounted for 30% of software license
revenues (21% of total revenues) during 1999, compared with 36% and 23%,
respectively, during 1998. However, no further guaranteed payments under these
agreements are due to the Company after December 31, 1999, and the Company
anticipates that revenues from IHS will be materially lower in 2000 and beyond.
11
<PAGE>
RESULTS OF OPERATIONS
1999 as Compared to 1998
Revenues
The Company's total revenues decreased 19% from $33.0 million in 1998 to
$26.7 million in 1999. The decline in revenues resulted from a number of
factors, including decreased productivity of the Company's sales force, delays
in finalizing statements of work, and delays in finalizing aspects of the
Company's knowledge management products, as well as from the inevitable
distractions resulting from the significant refocusing of the Company's
business goals and the resulting management changes made during 1999. The
Company took steps at both the strategic and tactical levels during 1999 to
enhance its position as a leading provider of enterprise-scale, internet and
intranet-based knowledge management solutions. These steps were designed to
improve the Company's execution and deliver more predictable results going
forward. However, there will be a time lag before these steps can prove their
potential. Another contributing factor was the general concern in the
marketplace over possible "Year 2000" problems and the resulting hesitancy of
many organizations to make any significant expenditures as the new year
approached.
Software license fees decreased 23% from $19.3 million in 1998 to $14.8
million in 1999. Software license fees include revenues from systems and tools,
applications and custom software products. 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.
Software license fees in 1998 and 1999 included $9.1 and $4.5 million,
respectively, related to agreements with 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 1998 and 1999 included $1.4 and $2.5
million, respectively, of such discounted payments accelerated from the years
1999 through 2002. All guaranteed payments under these agreements had been made
as of December 31, 1999.
Service revenues decreased 13% from $13.7 million in 1998 to $11.9 million
in 1999. Service revenues are primarily derived from interactive multimedia
development, production services, software maintenance, web site hosting,
custom software development and project management.
Software revenues decreased slightly from 58% of total revenues in 1998 to
55% in 1999, and service revenues increased slightly from 42% of total revenues
in 1998 to 45% in 1999. This shift from software to service revenues is
consistent with the Company's plan to move more toward providing solutions to
its customers.
Cost of Revenues
The total cost of revenues in 1999 was $13.0 million or 27% higher than
costs of $10.2 million in 1998. As a percent of total revenues, total cost of
revenues was 49% of revenues in 1999, as compared to 31% of revenues in 1998.
Cost of software licenses represented 25% of software revenue in 1999, up
from 15% in 1998. Early in the fourth quarter of 1998, the Company purchased
approximately $1.8 million of software, of which $885,000 was written off to
cost of software licenses as it was rendered obsolete due to the Company's
acquisition of Sovereign Hill Software, Inc. ("Sovereign Hill") on December 31,
1998. The remaining software was placed in service in January 1999 and has been
fully amortized as of December 31, 1999. The increase to 25% of software
revenue in 1999 was primarily caused by the decline in software revenues at the
same time that amortization of purchased software, as well as internally
developed software costs related to shipments of new versions of the Knowledge
Management Suite and Dataware II Publisher products, increased.
12
<PAGE>
Cost of services increased to 78% of service revenue in 1999 from 53% in
1998. Cost of services consists primarily of personnel expenses, certain
overhead costs and the cost of third party services. The increase year over
year was caused by underutilization of the multimedia web site development and
knowledge management consulting groups during 1999.
Gross Profit
Total gross profit was $13.8 million, down from $22.8 million in 1998,
representing 51% of total revenues in 1999 and 69% in 1998. The decrease in
gross margins was caused by lower revenues and higher fixed software and
services costs as described above.
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. In addition, the Company expects to see higher than average
voluntary and involuntary employee turnover, with attendant costs, as the
transition to an e-Business solution provider is completed.
Sales and Marketing Expenses
Sales and marketing expenses increased 7% to $11.7 million in 1999 from
$11.0 million in 1998, principally due to an increase in the Company's sales
staff early in 1999. Sales and marketing expenses as a percentage of total
revenues increased to 44% in 1999 from 33% in 1998, due to decreased revenues
and increased fixed compensation-related costs.
Product Development Expenses
Product development expenses increased 20% to $7.1 million in 1999 from $6.0
million in 1998. Product development expense as a percentage of total revenues
increased to 27% in 1999 from 18% in 1998. The increase in product development
costs reflects the Company's efforts toward the 1999 release of versions of its
newer products as well as a reduced overall percentage of development costs
being capitalized.
In 1999 the Company capitalized approximately $1.4 million of internally
developed software costs as compared with $1.9 million in 1998. The Company
also capitalized approximately $0.3 million of purchased application
development tool software during 1999 as compared with $1.8 million during
1998.
The Company's expenditures in product development, including capitalized
internally developed software costs, were $8.5 million and $7.9 million for the
years ended December 31, 1999 and 1998, representing 32% and 24% of revenues,
respectively.
General and Administrative Expenses
General and administrative expenses increased 4% to $6.3 million in 1999
from $6.0 million in 1998. General and administrative expenses as a percentage
of total revenues increased to 23% in 1999 from 18% in 1998. The increase in
general and administrative expense was primarily caused by the amortization of
goodwill related to the acquisition of Sovereign Hill in December of 1998.
13
<PAGE>
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. The Company successfully
completed the further development necessary to complete the acquired technology
during 1998.
Other Income (Expense), Net
During 1999 the Company reported approximately $634,000 of net interest
income as compared with approximately $476,000 in 1998. The interest income
earned during 1999 includes interest collected on a secured note receivable
during the first quarter. The Company also reported approximately $543,000 in
other income, net, in 1999 as compared with $22,000 in other expense, net, in
1998. The change included income from the buyout of one of the Company's office
space leases during the fourth quarter of 1999 for $400,000, net of direct
expenses, resulting in a gain that was recorded as Other Income, as well as
foreign exchange losses caused by the effect of changes in exchange rates on
intercompany balances with the Company's foreign subsidiaries.
Gain on Investment in Northern Light
During the second quarter of 1999, Dataware sold one-half of its interest in
Northern Light Technology LLC ("Northern Light") back to Northern Light for
$4.1 million in cash. In addition, Northern Light repaid the Company the
principal and interest due on a $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. Northern Light has since incorporated.
Provision for Income Taxes
The Company recorded an income tax benefit of $153,000 and an income tax
provision of $105,000 for the years ended December 31, 1999 and 1998,
respectively. The Company recorded a $373,000 income tax benefit in the third
quarter of 1999, representing the reversal of a reserve established in previous
years for taxes on a foreign subsidiary that the Company now believes are not
owed. This benefit was partially offset by an income tax provision related to
profitable foreign operations. The provision booked in 1998 was also related to
profitable foreign operations.
At December 31, 1999, the Company had a net operating loss carryforward of
approximately $26.9 million. Use of the Company's net operating loss
carryforward 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 its ability to realize 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 $5.2 million to offset the entire net deferred tax
assets because it was considered unlikely that the Company would be able to
realize those assets. Accordingly, the deferred tax assets have been fully
reserved.
14
<PAGE>
1998 as Compared to 1997
Revenues
The Company's total revenues decreased 12% from $37.3 million in 1997 to
$33.0 million in 1998. This decline was primarily due to the reduction in
service revenues following the sale of a portion of the services business to
IHS in 1997.
Software license fees remained relatively flat at $19.3 million in 1998 and
$19.5 million in 1997. Software license fees included revenues from systems and
tools, applications and custom software products. The mix within the software
revenues continued to favor the Company's legacy products in 1998, although the
newer Knowledge Management Suite and Dataware II Publisher products gained
momentum.
Software license revenue in 1998 included $9.1 million related to agreements
with 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
second half of 1998 included $1.4 million of such discounted payments
accelerated from the years 1999 and 2000.
Service revenues decreased 23% to $13.7 million in 1998 from $17.8 million
in 1997, a $4.1 million decrease. Service revenues were primarily derived from
Ledge multimedia development, production services, software maintenance, custom
software development and project management. The decrease in service revenue
reflected the impact of the 1997 IHS transaction.
Recurring revenues comprised approximately 29%, 45% and 51% of total
revenues for 1998, 1997 and 1996, respectively. Recurring software license
revenues resulted from annual renewal of retrieval licenses and certain other
fees. Recurring service revenues 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 1998 was primarily due to the impact of the 1997
IHS transaction.
Cost of Revenues
The total cost of revenues in 1998 was $10.2 million, or 25% lower than
costs of $13.5 million in 1997. As a percent of total revenues, total cost of
revenues was 31% of revenues in 1998, as compared to 36% of revenues in 1997.
This decrease was primarily caused by the sale of a portion of the lower-margin
services business to IHS in 1997.
The Company recorded a $0.9 million one-time charge in the fourth quarter of
1998 for the write down of abandoned software assets to their estimated net
realizable value. Excluding the effect of this one-time charge, cost of
software licenses represented 11% of software license revenue in 1998, down
from 13% in 1997. This decrease was a result of reduced fixed costs due to a
lower portion of third-party software sales in the mix (and, thus, lower third-
party license fee payments).
Cost of services decreased to 53% of service revenue in 1998 from 62% in
1997. Cost of services consisted primarily of personnel expenses, certain
overhead costs and the cost of third party services. The decrease was caused by
the 1997 transfer of a portion of the lower-margin services business to IHS as
well as increases in service fees charged by the Company's remaining services
business.
Gross Profit
Total gross profit in 1998 was $22.8 million, down from $23.8 million in
1997, representing 69% of total revenues in 1998 and 64% in 1997. Excluding the
one-time charge mentioned previously, total gross profit was relatively flat in
absolute terms from year to year and represented 72% of revenues in 1998
compared with 64% in 1997. The increase in gross margins was primarily due to
the 1997 transfer of a portion of the lower-margin services business to IHS.
15
<PAGE>
Sales and Marketing Expenses
Sales and marketing expenses decreased 34% to $11.0 million in 1998 from
$16.6 million in 1997. Sales and marketing expenses as a percentage of total
revenues decreased to 33% in 1998 from 44% in 1997. The decrease in sales and
marketing expenses was primarily caused by the 1997 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. This decrease in costs was partially offset by
the Company's increased marketing activities during 1998 related to the rollout
of new products.
Product Development Expenses
Product development expenses excluding capitalized software expenditures
decreased 11% to $6.0 million in 1998 from $6.7 million in 1997. Product
development expense as a percentage of total revenue remained flat at 18% in
1998 and 1997. The decrease in product development expenses in terms of dollars
was due to expenses related to Northern Light Technology Corporation, a
subsidiary whose assets were sold on April 7, 1997. These expenses amounted to
$0.7 million in 1997. Product development expenses other than those related to
Northern Light Technology Corporation remained flat at $6.0 million in 1998 and
1997.
In 1998 the Company capitalized approximately $1.9 million of internally
developed software costs as compared with $1.8 million in 1997. The Company
also capitalized approximately $1.8 million of application development tool
software that was purchased during 1998. The Company's expenditures in research
and development, including capitalized internally developed software costs,
were $7.9 million and $8.6 million for the years ended December 31, 1998 and
1997, representing 24% and 23% of revenues, respectively.
General and Administrative Expenses
General and administrative expenses increased 2% to $6.0 million in 1998
from $5.9 million in 1997. General and administrative expenses as a percentage
of total revenue increased to 18% in 1998 from 16% in 1997. The increase in
general and administrative expense was primarily due to the IHS transaction,
offset by a write down in fixed assets, charges related to the separation of
the CEO and a waiver of certain call options.
Purchased In-Process Research and Development
The 1998 treatment of in-process research and development purchased from
GreenBook International Corporation is described above under "1999 as compared
to 1998".
Other Income (Expense), Net
During 1998 the Company reported approximately $476,000 of net interest
income as compared with approximately $160,000 in net interest expense in 1997.
The change resulted from increases in the average balances of cash and
investments beginning with the IHS transaction in September of 1997 as well as
the decrease in interest expense related to the Company's lines of credit that
was incurred during 1997. Other expense, net, amounting to $22,000 in 1998 and
$149,000 in 1997 consisted primarily of foreign exchange 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 $105,000 and $80,000
for the years ended December 31, 1998 and 1997, respectively, related to
profitable foreign operations. At December 31, 1998, the Company had a net
operating loss carryforward of approximately $13.2 million.
As required by Statement of Financial Accounting Standard No. 109,
management of the Company evaluated its ability to realize its deferred tax
assets, which are comprised principally of net operating loss and
16
<PAGE>
tax credit carryforwards. In the fourth quarter of 1996, the Company recorded a
full valuation allowance of $5.2 million to offset the entire net deferred tax
assets because it was unlikely whether it would be able to realize 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 issue on a quarterly basis and determined that no net adjustment
was necessary in 1998 or 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had cash and cash equivalents of $9.4
million and working capital of $4.9 million. Operating activities used $6.1
million of the Company's cash during 1999. Days sales outstanding, based on
revenues for each calendar quarter, ranged from 74 days to 50 days during 1999.
As the Company had anticipated, days sales outstanding increased to 74 days
during the fourth quarter of 1999.
The Company's investing activities provided cash of $2.0 million during
1999, consisting of $5.3 million in proceeds from the sale of one-half its
interest in Northern Light and the principal and interest due on a $1.2 million
promissory note held by Dataware. These proceeds were offset by $1.7 million
for additions to property and equipment and $1.6 million for internally
developed capitalized software as well as a third party license that will be
included in the Company's products and used to develop custom applications for
customers.
The Company's financing activities provided cash of $1.1 million during
1999, which consisted of proceeds from the issuance of common stock under the
Company's Equity Incentive, Consultant Stock Option and Employee Stock Purchase
Plans.
The Company has a line of credit with a financial institution under which it
can borrow up to $3 million, assuming that covenants related to certain assets
and tangible net worth are met. At December 31, 1999 the Company had borrowed
$1.4 million under this line of credit, which was paid in full in January 2000.
The Company expects to renegotiate the line of credit to reduce the covenant
restrictions to a level that management believes will provide access to the
minimum level of capital required to support operations.
The Company believes that its cash and cash equivalents, together with the
Company's ability to borrow against its line of credit, will be sufficient to
meet its liquidity needs through fiscal year 2000. However, the Company may not
be able to negotiate an acceptable line of credit and, even if it does, these
resources may not by themselves support the more aggressive expansion it
desires. The Company, therefore, intends to raise additional capital through a
private placement offering and/or obtaining additional debt financing from a
bank during the first half of 2000 and is considering various alternatives. The
Company has made no decisions on the amount of external funding that it might
seek to raise, or the type of securities that might be offered, or on any other
terms of any possible financing.
The Company's working capital and other capital requirements may change
because of unanticipated changes in business conditions or delays in market
acceptance of new products. Other considerations such as further expansion of
operations or research and development activities, competitive and
technological developments, and possible future acquisitions of businesses
and/or product rights may also affect the Company's capital requirements. There
is no assurance that the Company will be able to raise sufficient debt or
equity capital on terms that it considers acceptable, if at all. Accordingly,
there can be no assurance that the Company may not experience liquidity
problems as a result or because of adverse market conditions or other
unfavorable events. In addition to or as an alternative to raising capital, the
Company may be required to cut back operations to extend its resources.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. 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 operations.
17
<PAGE>
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" ("SOP 98-9"), which
addresses software revenue recognition as it applies to certain multiple-
element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2," to extend the deferral of application of
certain passages of SOP 97-2 through fiscal years beginning on or before March
15, 1999. The Company adopted SOP 98-9 during the first quarter of 1999. The
Company's compliance with this SOP, including the deferral provisions, did not
have a material effect on its 1999 revenues and earnings.
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 or results of
operations in the near term.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS:
Year 2000 Compliance
During the latter part of the 1990s, concerns were widely expressed that
certain computer programs would be unable to properly process certain date
information, particularly beyond the year 1999. These concerns focused on the
impact of the "Year 2000 problem" on business operations and the potential
costs associated with identifying and addressing the problem.
The Company developed a Year 2000 readiness plan focusing on: (i) assessing
the readiness of the Company's product offerings, internal business systems and
major vendors and suppliers; (ii) addressing known risks; and (iii) planning
and budgeting for reasonably likely contingencies. The Company completed
testing of its current product offerings for Year 2000 compliance (including
third party software incorporated in the products), and based on its review
believes that they are all Year 2000 compliant. The Company has not been
notified of any Year 2000-related problems experienced by its customers or
their end users. The Company also reviewed the computer systems, including
servers for web hosting, through which it provides services to customers to
ensure their Year 2000 compliance. Finally, the Company surveyed all major
suppliers to determine the status of their Year 2000 compliance. To the extent
that its review showed that a particular supplier's situation posed an
unacceptable risk to the Company, the Company sought to identify an alternate
source.
Costs incurred in the Year 2000 compliance effort included the allocation of
personnel to testing the Company's products and systems as well as to upgrading
internal systems. During 1999, the Company incurred costs of less than $100,000
on its compliance project. Costs were expensed as incurred.
The Company does not at this time foresee any further material impact on its
business or operating results from the Year 2000 problem. It cannot, of course,
predict the nature or materiality of the impact on its operations or operating
results of Year 2000 disruption affecting parties over whom it has no control.
The worst case Year 2000 scenarios would include: (i) undetected errors or
uncorrected defects in the Company's current product offerings; (ii) corruption
of data contained in the Company's internal information systems that would
inhibit core business functions; and (iii) the failure of infrastructure
services provided by third parties and government agencies (e.g., electricity,
phone/fax service, internet/email, shipping and banking services, etc.). The
Company has contingency plans in all of these areas that include among other
things, the availability of support personnel to assist with customer support
issues, manual "work arounds" for internal software failure and substitution of
systems, if needed.
18
<PAGE>
Other Factors
Exhibit 99.1 hereto contains additional information about important factors
that may cause the Company's actual results to differ from those contemplated
by any forward-looking statements in this Annual Report. That information is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that exposure to market risk related to changes in
foreign currency exchange rates and trade accounts receivable is immaterial.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Dataware Technologies, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) on page 45 present fairly, in all material
respects, the financial position of Dataware Technologies, Inc. (the "Company")
and its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14 (a)(2) on page 46 presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related consolidated financial statements. 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 based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has incurred recurring losses
from operations and requires additional financing to support operations at the
current level. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note A. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 8, 2000
20
<PAGE>
DATAWARE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 9,361 $12,468
Accounts receivable, less allowance for doubtful accounts
of $803 and $846 at December 31, 1999 and 1998,
respectively.............................................. 5,292 4,248
Prepaid expenses and other current assets.................. 862 1,355
------- -------
Total current assets..................................... 15,515 18,071
Property and equipment, net................................ 3,092 3,394
Computer software costs, net............................... 1,927 3,540
Investment in Northern Light, at cost...................... 256 512
Goodwill, net.............................................. 2,584 3,232
------- -------
Total assets............................................. $23,374 $28,749
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings...................................... $ 1,350 $ 1,350
Accounts payable........................................... 1,499 2,538
Accrued expenses........................................... 2,094 3,482
Accrued compensation....................................... 1,355 1,976
Income taxes payable....................................... 232 720
Deferred revenue........................................... 4,069 2,330
------- -------
Total current liabilities................................ 10,599 12,396
Commitments and contingencies (Note I)....................... -- --
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;
10,006,273 shares issued and 9,932,273 shares outstanding
at December 31, 1999; 9,465,305 shares issued and
9,391,305 shares outstanding at December 31, 1998......... 100 95
Additional paid-in capital................................. 49,184 47,323
Accumulated deficit........................................ (35,555) (30,625)
Unearned compensation...................................... (469) --
Accumulated other comprehensive loss....................... (227) (182)
Treasury stock, 74,000 shares at cost...................... (258) (258)
------- -------
Total stockholders' equity............................... 12,775 16,353
------- -------
Total liabilities and stockholders' equity............... $23,374 $28,749
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
21
<PAGE>
DATAWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Software license fees........................... $ 14,829 $19,258 $19,534
Services........................................ 11,905 13,732 17,785
-------- ------- -------
Total revenues................................ 26,734 32,990 37,319
Cost of revenues:
Software license fees........................... 3,658 2,911 2,544
Services........................................ 9,320 7,288 10,966
-------- ------- -------
Total cost of revenues........................ 12,978 10,199 13,510
-------- ------- -------
Gross profit...................................... 13,756 22,791 23,809
Operating expenses:
Sales and marketing............................. 11,695 10,953 16,603
Product development............................. 7,123 6,406 6,721
General and administrative...................... 6,254 5,988 5,884
-------- ------- -------
Total operating expenses...................... 25,072 23,347 29,208
-------- ------- -------
Loss from operations.............................. (11,316) (556) (5,399)
Interest income................................... 662 482 116
Interest expense.................................. (28) (6) (276)
Gain on investment in Northern Light.............. 5,056 -- --
Other income (expense), net....................... 543 (22) (149)
-------- ------- -------
Loss before income tax provision (benefit)........ (5,083) (102) (5,708)
-------- ------- -------
Income tax provision (benefit).................... (153) 105 80
-------- ------- -------
Net loss.......................................... (4,930) (207) (5,788)
Accretion of preferred stock...................... -- -- 677
-------- ------- -------
Net loss to common stockholders................... $ (4,930) $ (207) $(6,465)
======== ======= =======
Net loss per common share--basic and diluted...... $ (0.52) $ (0.02) $ (0.85)
======== ======= =======
Weighted average number of common shares
outstanding--basic and diluted................... 9,516 9,265 7,632
======== ======= =======
</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,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows provided by (used in) operating
activities:
Net loss............................................. $(4,930) $ (207) $(5,788)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 4,827 3,717 3,780
Amortization of goodwill............................ 648 -- 263
Provision for doubtful accounts..................... 41 596 778
Loss on foreign currency transactions............... 33 24 230
Gain on investment in Northern Light................ (5,056) -- --
Write down of property, plant and equipment......... 426 201 --
Acquired in-process research and development........ -- 450 --
Write down of abandoned capitalized software........ -- 885 --
Stock options and warrants issued to consultants,
partners, executives and bank...................... 116 288 157
Changes in operating assets and liabilities, net of
effects from acquisitions and
dispositions of businesses:
Accounts receivable............................... (1,177) 2,070 (2,174)
Prepaid expenses and other current assets......... 475 645 (533)
Accounts payable.................................. (1,026) (719) (1,007)
Accrued expenses and compensation................. (1,649) (1,673) 2,292
Accrued litigation, acquisition and other......... (124) (559) (326)
Income taxes payable.............................. (483) (112) (284)
Deferred revenue.................................. 1,750 (261) 1,054
------- ------- -------
Net cash provided by (used in) operating
activities..................................... (6,129) 5,345 (1,558)
------- ------- -------
Cash flows provided by (used in) investing
activities:
Acquisition of third party software license......... (285) -- --
Proceeds from investment in Northern Light, net of
costs incurred..................................... 5,312 -- --
Additions to property and equipment................. (1,654) (1,313) (1,411)
Proceeds from sale of portion of services business,
net of cash acquired............................... -- -- 8,546
Acquisition of businesses........................... -- (400) --
Additions to capitalized software costs............. (1,404) (3,693) (1,788)
------- ------- -------
Net cash provided by (used in) investing
activities..................................... 1,969 (5,406) 5,347
------- ------- -------
Cash flows provided by (used in) financing
activities:
Proceeds from issuance of common stock and exercise
of stock options................................... 1,082 390 4,130
Purchase of treasury stock.......................... -- (952) --
Principal payments on notes and capital leases...... -- (117) --
Proceeds from issuance of preferred stock........... -- -- 3,000
Dividends and issuance costs related to preferred
stock.............................................. -- -- (267)
Increase in short-term borrowings, net.............. -- -- 403
------- ------- -------
Net cash provided by (used in) financing
activities..................................... 1,082 (679) 7,266
------- ------- -------
Effect of exchange rate changes on cash.............. (29) (23) (192)
------- ------- -------
Net change in cash and cash equivalents.............. (3,107) (763) 10,863
Cash and cash equivalents at beginning of year....... 12,468 13,231 2,368
------- ------- -------
Cash and cash equivalents at end of year............. $ 9,361 $12,468 $13,231
======= ======= =======
Supplemental disclosure of cash flow information:
Interest paid....................................... $ -- $ -- $ 276
======= ======= =======
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 and acquisition.................... $ -- $ 45 $ 83
======= ======= =======
Investment in Northern Light in exchange for
assets............................................. $ -- $ -- $ 512
======= ======= =======
Stock issued in connection with acquisitions and
settlement of litigation........................... $ -- $ 497 $ 656
======= ======= =======
Note payable assumed in connection with
acquisition........................................ $ -- $ 1,350 $ --
======= ======= =======
Capitalized lease in connection with equipment...... $ -- $ 287 $ --
======= ======= =======
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
23
<PAGE>
DATAWARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Accumu-
lated
Other Treasury Total
Common Stock Additional Unearned Compre- Stock Compre- Stock-
------------- Paid-in Accumulated Compen- hensive ------------- hensive holders'
Shares Amount Capital Deficit sation Loss Shares Amount Loss Equity
------ ------ ---------- ----------- -------- ------- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Change in translation
adjustment due to
disposal of foreign
subsidiaries........... 413 413
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)
Comprehensive loss:
Net loss............... (5,788) $(5,788) (5,788)
Translation
adjustment............ (254) (254) (254)
-------
Comprehensive loss..... (6,042)
------ ---- ------- -------- ----- ----- ---- ----- ======= -------
Balance at December 31,
1997................... 9,267 93 46,800 (30,221) -- (206) -- -- 16,466
------ ---- ------- -------- ----- ----- ---- ----- -------
Stock options exercised
and shares issued in
conjunction with
employee stock purchase
plan................... 198 2 390 392
Stock options and
warrants issued to
consultants and bank... 88 88
Warrants issued in
connection with
acquisition............ 45 45
Treasury shares
purchased.............. 274 $(952) (952)
Treasury shares issued
in connection with
acquisition............ (197) (200) 694 497
Comprehensive loss:
Net loss............... (207) (207) (207)
Translation
adjustment............ 24 24 24
-------
Comprehensive loss..... (183)
------ ---- ------- -------- ----- ----- ---- ----- ======= -------
Balance at December 31,
1998................... 9,465 95 47,323 (30,625) -- (182) 74 (258) 16,353
------ ---- ------- -------- ----- ----- ---- ----- -------
Stock options exercised
and shares issued in
conjunction with
employee stock purchase
plan................... 541 5 1,049 1,054
Waiver on escrow
shares................. 200 200
Options issued at below
fair market value...... 469 $(469)
Warrants issued to
consultants and
partners............... 143 143
Comprehensive loss:.....
Net loss............... (4,930) (4,930) (4,930)
Translation
adjustment............ (45) (45) (45)
-------
Comprehensive loss..... $(4,975)
------ ---- ------- -------- ----- ----- ---- ----- ======= -------
Balance at December 31,
1999................... 10,006 $100 $49,184 $(35,555) $(469) $(227) 74 $(258) $12,775
====== ==== ======= ======== ===== ===== ==== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
24
<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 commenced on October 1, 1988 with
the purchase of the worldwide rights to certain software developed by Dataware
2000 GmbH and the acquisition of its United States distributor. Early in 1999,
the Company announced a program to reposition and restructure the company as an
e-Business solutions provider and began making strategic and organizational
changes toward that goal. The Company had previously been focused on providing
software for enterprise information access ("knowledge management") and
professional electronic publishing applications, as well as multimedia services
for CD-ROM and web-based publishing. The Company is now a Full Service
Provider, working with its clients to create e-Business solutions that
efficiently translate their business to a web-oriented model by incorporating
the client's information with the Company's technology and methodology to
deliver solutions built around the web, such as portals, e-commerce sites and
web-based training. The Company also develops interactive multimedia,
intelligent information retrieval, distributed media and knowledge management
solutions.
The accompanying financial statements have been prepared on a basis that
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company has incurred
recurring losses over the past four years and generated a negative cash flow
from operations in three of those years, including the year ended December 31,
1999. Management intends to raise additional capital through a private
placement offering and/or obtaining debt financing that, upon successful
closing, is expected to provide additional capital to sustain and grow
operations. The Company is considering various alternatives for a financing and
has made no decisions on the amount of external funding that it might seek to
raise, or the type of securities that might be offered, or on any other terms.
The future viability of the Company is dependent on its ability to successfully
restructure itself as an e-Business solutions provider and ultimately generate
positive cash flow.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries from the date of their acquisition.
Intercompany transactions and accounts have been eliminated.
Use of Estimates
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 in Accumulated Other Comprehensive Loss, 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.
25
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company recognizes software revenues in accordance with the provisions
of Statement of Position 97-2, "Software Revenue Recognition." Revenue from
software license fees is recorded upon execution of the contract provided that
delivery has occurred, fees are fixed or determinable, and collection is deemed
probable. Revenue from maintenance contracts, including amounts bundled in
initial software licenses, is deferred and recognized ratably over the term of
the agreement, generally one year. Revenues from services are recognized as the
Company performs the service in accordance with the contract. Maintenance and
services revenues are combined in the Company's Consolidated Statements of
Operations.
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.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments purchased
with an original maturity of three months or less. Cash and cash equivalents
are stated at cost, which approximates fair value because of the short maturity
of these investments.
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 assets, 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).
Product Development and Capitalized Software Costs
Expenditures for research and development incurred prior to the
establishment of technological feasibility are expensed as incurred. The
Company capitalizes certain computer software development costs after
technological feasibility has been established. These costs are amortized on a
product-by-product basis, using the greater of the straight-line basis over the
estimated economic lives of the software products, generally two years, or the
ratio of current gross revenue to total current and expected future gross
revenue of the software products, also generally two years, and are included in
cost of revenues for software license fees. The straight-line basis has
produced a greater charge and, accordingly, has been used exclusively to date.
Concentrations of Credit Risk
Financial instruments that potentially subjected the Company to
concentrations of credit risk at December 31, 1999, consisted of temporary cash
investments and trade receivables.
The Company invests its cash in deposits and money market instruments with
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 around the world. 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.
26
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets
The Company periodically reviews the value of long-lived assets, including
goodwill, for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable or
that the useful lives of these assets are no longer appropriate. Each
impairment test is based on a comparison of the undiscounted cash flows to the
recorded value of the asset. If an impairment is indicated, the asset is
written down to its estimated fair value on a discounted cash flow basis.
Computation of Net Income (Loss) Per Share
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
("SFAS 128"), which has applied to the Company since 1997, requires the
calculation of basic and diluted net income per share. Basic net income per
share excludes any dilutive effect of options, warrants and convertible
securities. Diluted net income per share uses the treasury stock method, which
considers the effect of all dilutive equity instruments using the average
market price for the period in determining the dilutive effect of options.
Comprehensive Income (Loss)
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income"
which became effective for the Company in 1998. SFAS 130 requires the Company
to report the total changes in equity that do not result directly from
transactions with stockholders, including those that do not affect retained
earnings. Other comprehensive income recorded by the Company is solely
comprised of accumulated foreign currency translation adjustments.
New Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. 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 operations.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" ("SOP 98-9"), which
addresses software revenue recognition as it applies to certain multiple-
element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2," to extend the deferral of application of
certain passages of SOP 97-2 through fiscal years beginning on or before March
15, 1999. All other provisions of SOP 98-9 are effective for transactions
entered into in fiscal years beginning after March 15, 1999. The Company will
comply with the requirements of this SOP as they become effective and does not
expect that its revenues and earnings will be materially affected.
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.
27
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. Business Combinations and Disposals
Information Handling Services Group, Inc.
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").
Creative Multimedia Corporation
The acquisition of CMC was accounted for as a purchase and, accordingly, the
assets, liabilities and results of operations were included from the
acquisition date. The results of the continuing operations of CMC for the years
ended December 31, 1997, and December 31, 1996, were immaterial to the results
of the Company. As a result, proforma financial information has not been
presented.
Sovereign Hill Software, Inc.
On December 31, 1998, the Company acquired substantially all of the assets
and assumed selected liabilities of Sovereign Hill Software, Inc. ("Sovereign
Hill") for approximately $1,181,000. Sovereign Hill developed, marketed and
distributed advanced information retrieval and information-processing products
designed to access and analyze large-scale heterogeneous, distributed
multimedia document databases.
The purchase of Sovereign Hill's net liabilities of $2,051,000 was funded by
the following: (i) 200,000 shares of Dataware Common Stock with a fair value of
approximately $497,000 at the date of acquisition, (ii) 5-year warrants to
purchase 40,000 additional shares of Dataware Common Stock at an exercise price
of $6.00 per share valued at $45,000, and (iii) $100,000 in cash. The Company
incurred approximately $500,000 of direct acquisition expenses related to the
transaction.
The acquisition was accounted for as a purchase and, accordingly, the
operating results of Sovereign Hill were included in the Company's financial
statements from the date of acquisition. The excess of the aggregate purchase
price over the fair market value of net liabilities assumed of approximately
$3,232,000 was recorded as goodwill and is being amortized over 5 years.
The following unaudited pro forma consolidated results of operations for the
years ended December 31, 1998 and 1997 assume the Sovereign Hill acquisition
occurred as of January 1, 1997:
<TABLE>
<CAPTION>
Year Ended
December 31
----------------
(in thousands,
except per
share data)
1998 1997
------- -------
<S> <C> <C>
Net sales.............................................. $34,039 $38,684
Net loss available to common stockholders.............. (2,444) (10,782)
Earnings per share:
Basic................................................ (0.26) (1.38)
Diluted.............................................. (0.26) (1.38)
</TABLE>
The pro forma data is for informational purposes only and does not purport
to be indicative of what would have occurred had the acquisition taken place at
the beginning of 1997, or the results that may occur in the future.
28
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Green Book International Corporation
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. 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 were
included in the financial statements from the acquisition date. The results of
the continuing operations of Gbook were immaterial in the context of the
results of the Company. As a result, pro-forma financial information has not
been presented.
The purchase price, including direct expenses of approximately $150,000, was
allocated to the tangible net assets acquired and to purchased in-process
research and development ("R&D") based on the fair market values of those
assets using a risk adjusted discounted cash flow approach. Specifically, the
purchased technology underlying Gbook's electronic file compression and viewing
software and its object oriented electronic authoring system was evaluated
through extensive interviews and analysis of data concerning the state of the
technology and additional development work required to incorporate it into a
product and service offering by the Company's Ledge division to its financial,
health care and technology customers. The evaluation of the underlying
technology acquired considered the inherent difficulties and uncertainties in
completing the development, and thereby achieving technological feasibility,
and the risks related to the viability of, and potential changes in, future
target markets.
The purchased technology was incomplete inasmuch as the Company needed to
make substantial modifications to change user interfaces, fix software bugs,
enhance features and integrate the software into the Company's future products
and services. The underlying technology had no alternative future use in its
purchased state, in other research and development projects or otherwise, since
it was acquired for the purpose of significantly improving and integrating such
technology into a product and service offering by the Company's Ledge division
to its financial, health care and technology customers, and was not to be
marketed as a stand-alone product without significant further development.
Accordingly, the Company recognized a charge of $450,000 for purchased in-
process R&D in the first quarter of 1998.
The Company successfully completed the further development necessary to
complete the required technology during 1998. The cost of completing the
development effort was in line with management's estimates at the time that the
technology was purchased, and the product began shipping in June of 1998.
C. Write Down of Assets and Other Special Charges and Credits
During the fourth quarter of 1999, the Company recorded $400,000 in other
income related to the termination of a lease agreement for office space and a
sublease agreement with a related party.
During the fourth quarter of 1998, the Company recorded non-recurring
charges of approximately $1,644,000 (or $.18 per share) in capitalized software
and other non-recurring charges. These charges were the result of the Company's
focus on next generation products, internal systems and certain management
changes. Detail of the items written off are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Charged to Cost of Revenues:
Capitalized software................................... $ -- $885(A)
====== ======
Charged to General and Administrative Expenses:
Severance payments..................................... $ -- $358(B)
Fixed assets........................................... 426(E) 201(C)
Other charges.......................................... -- 200(D)
------ ------
Total.................................................. $426 $759
====== ======
</TABLE>
29
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A. During the fourth quarter of 1998, the Company abandoned a portion of
purchased capitalized software, resulting in a charge of $885,000. In
connection with the acquisition of Sovereign Hill, a portion of the
purchased capitalized software that was to be implemented was replaced with
Sovereign Hill technology and the purchased capitalized software was written
down to net realizable value. The Company also determined that the portion
of purchased capitalized software that was replaced with Sovereign Hill
technology had no alternative future uses.
B. Severance charge of $358,000 relates to the voluntary separation of the
Chief Executive Officer on December 31, 1998. Severance will be paid over a
one-year period from July 1999 to June 2000.
C. During the fourth quarter of 1998, the Company abandoned a portion of its
internally developed computer software system, resulting in a charge of
$201,000. The system was not year 2000 compliant and management had begun
using alternative applications in its place. The Company determined that
this computer software was obsolete and there was no alternative future use.
D. In January 1999, the Company waived the right to call for the redemption of
86,391 shares owned by three of the Company's founders, resulting in a
charge of approximately $200,000 that was recorded in December 1998. In
early 1990, software developers had requested equity compensation, which had
not yet been formalized in the grant of stock or options. The three
shareholders agreed to make the shares available out of their own holdings.
The Company granted stock options to the developers and the three founding
shareholders were to sell back to the Company the 86,391 shares if the
Company called for redemption. The Company did not call for redemption and
the call was waived.
E. During the third quarter of 1999, the Company wrote off approximately
$426,000 in computer equipment that was retired.
D. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------- ------
<S> <C> <C>
Computer and office equipment and software.................. $ 8,442 $9,597
Furniture and fixtures...................................... 829 894
Leasehold improvements...................................... 52 287
Computer equipment under capital lease arrangement.......... 263 263
------- ------
9,586 11,041
Less: accumulated depreciation and amortization........... 6,494 7,647
------- ------
$ 3,092 $3,394
======= ======
</TABLE>
Depreciation and amortization expense was $1,525,000, $1,966,000 and
$2,255,000 for the years ended December 31, 1999, 1998 and 1997, respectively,
including amortization related to computer equipment under capital lease
arrangements amounting to $53,000, $41,000 and $50,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
During the third quarter of 1999, the Company wrote off approximately
$426,000 in computer equipment that was retired. During the fourth quarter of
1998, the Company abandoned a portion of its internally developed computer
software system, resulting in a charge of $201,000. The system was not year
2000 compliant and management had begun using alternative applications in its
place. The Company determined that this computer software was obsolete and
there was no alternative future use (see Note C).
In the fourth quarter of 1999 the Company changed its depreciation policy
for computer office equipment and software from five to three years on a
prospective basis.
30
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
E. Product Development and Capitalized Software Costs
Capitalized purchased and internally developed software costs at December
31, 1999 and 1998 consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------- ------
<S> <C> <C>
Capitalized software development costs.................... $ 7,830 $9,555
Less: accumulated amortization............................ 5,903 6,015
------- ------
$ 1,927 $3,540
======= ======
</TABLE>
During 1999, 1998 and 1997, the Company capitalized $1,405,000, $1,898,000
and $1,788,000, respectively, of internally developed software costs. These
costs, net of accumulated amortization, amounted to $1,927,000 at December 31,
1999, and $2,630,000 at December 31, 1998. Amortization of internally developed
capitalized software costs was $2,107,000, $1,751,000, and $1,544,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The cost of purchased computer software is capitalized and amortized on a
straight-line basis over its estimated useful life, generally one to five
years. The Company capitalized $285,000 and $1,795,000, respectively, during
the years ended December 31, 1999 and 1998. Of the amount capitalized in 1998,
$885,000 was written off as a one-time charge of purchased development software
during that year as a result of abandoning such purchased software in favor of
technology acquired in the purchase of Sovereign Hill. Amortization of these
assets commenced when the asset was placed in service in January 1999 and the
assets were fully amortized as of December 31, 1999.
F. Goodwill
Goodwill consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1999 1998
------ ------
<S> <C> <C>
Goodwill................................................... $3,232 $3,232
Less: accumulated amortization............................. 648 --
------ ------
$2,584 $3,232
====== ======
</TABLE>
The goodwill balances as of December 31, 1999 and 1998 are related to the
acquisition of Sovereign Hill on December 31, 1998 (see Note B). The balance is
being amortized over a five-year period that began in January of 1999.
G. Debt
Short-term Debt
On December 31, 1998 the Company assumed $1,350,000 in short-term borrowings
from a financial institution as part of the purchase of Sovereign Hill
Software, Inc. The Company repaid the full amount in January of 1999.
The Company has a line of credit with a financial institution under which it
can borrow up to $3,000,000, assuming that covenants related to certain assets
and tangible net worth are met. At December 31, 1999 the Company had borrowed
$1,350,000 under this line of credit; the amount was paid in full in January of
2000. The weighted average interest rate on these funds was approximately 9% in
1999.
31
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
H. 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 business transaction described in Note B above.
On December 31, 1998, the Company issued 200,000 shares of common stock and
warrants to purchase an additional 40,000 shares to Sovereign Hill Software,
Inc. in consideration for the acquisition of Sovereign Hill's net liabilities
(see Note B). The warrants were issued with an exercise price of $6.00 per
share (which is $3.44 above the trading price of the Common Stock at the time
of the agreement). The warrants were exercisable immediately and expire on
December 31, 2003. The estimated fair value of these warrants at the date
issued was $1.13 per share using a Black-Scholes option pricing model and
assumptions similar to those used for valuing the Company's stock options as
described below. The charge of approximately $45,000 was included in the
calculation of goodwill and is being amortized over a five-year period that
began in January of 1999.
On May 5, 1999, the Company issued to NEC USA Inc. a warrant to purchase
100,000 shares of Common Stock at an exercise price of $2.68 per share (which
was $0.50 above the average trading price of the Common Stock for the five days
prior to the date the agreement was made). The warrant was issued in
consideration for the license of technology from NEC USA Inc. The warrants were
exercisable immediately and expire on May 27, 2009. The estimated fair value of
these warrants at the date issued was $1.16 per share using a Black-Scholes
option pricing model and assumptions similar to those used for valuing the
Company's stock options as described below. The charge was included in cost of
software license fees on the Company's Consolidated Statement of Operations for
the period ending December 31, 1999.
As of December 31, 1999, the Company had outstanding warrants to purchase
336,550 shares of its common stock at purchase prices ranging between $2.68 and
$6.00 per share and expiring between November 21, 2001 and May 27, 2009.
Common Stock Repurchase Program
In the third quarter of 1998, the Company's Board of Directors authorized a
program allowing for the repurchase of up to an aggregate of 1,000,000 shares
of its common stock, $0.01 par value, subject to an aggregate cap of
$3,000,000, through open market purchases and privately negotiated
transactions.
During 1998, the Company repurchased 274,000 shares of Dataware common stock
in accordance with the stock repurchase program for $952,000 ($3.47 per share).
No repurchases took place in 1999.
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 designated
Series B Convertible Preferred Stock, and the balance of which are not
currently designated in any series. There were no shares of preferred stock
issued and outstanding at December 31, 1999 and 1998.
On April 14, 1997, the Company closed $3,000,000 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.
32
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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. Through May 1998,
stockholders of the Company had approved amendments of the Plan providing for a
cumulative aggregate number of shares issuable under the plan of 3,500,000. On
April 13, 1999, the Board of Directors voted to merge the Director Stock Option
Plan into and with the 1993 Equity Incentive Plan, bringing the cumulative
aggregate number of shares issuable under the Plan to 3,630,000. The Plan
provides for the grant of nonqualified and incentive stock options to employees
and directors. 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, and have generally also been at fair market value.
Outside directors receive automatic grants of options upon joining the Board
and also receive their annual retainer in the form of options granted under the
Plan. The term of the outstanding options is ten years. The options granted to
date vest at various rates over periods up to five years.
Ledge Stock Options
On December 30, 1995, the Company acquired Ledge Multimedia, Inc. ("Ledge").
In January 1996 the Company granted nonqualified stock options providing for
the issuance of up to 175,000 shares to former
33
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and 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 options 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 consultants' contracts with the Company.
Options Issued in Connection with Employment Agreement
In January 1999, in order to induce the Company's new President and Chief
Executive Officer to enter into an employment agreement, the Company granted
him nonqualified stock options to purchase 352,750 shares of common stock
outside the Equity Incentive Plan, all at fair market value on the date of
grant. The options vested 22% on December 31, 1999, and the balance vest
ratably at the end of the following three 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 loss and loss per
common share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Net Loss per
Net Loss to Net Loss per Share--
Common Stockholders Share--Basic Diluted
------------------- ------------ ------------
(in thousands)
<S> <C> <C> <C>
As reported:
1999......................... $(4,930) $(0.52) $(0.52)
1998......................... (207) (0.02) (0.02)
1997......................... (6,465) (0.85) (0.85)
Pro forma:
1999......................... $(6,489) $(0.68) $(0.68)
1998......................... (1,211) (0.13) (0.13)
1997......................... (8,909) (1.17) (1.17)
</TABLE>
The fair value of each option granted during 1999, 1998 and 1997 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 5.5% in 1999, 5% in 1998 and 6% in 1997, (2) expected option
life of 5 years in 1999, 1998 and 1997, (3) expected stock volatility of 90% in
1999, 75% in 1998 and 65% in 1997, and (4) expected dividend yield of 0%.
34
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information with respect to stock options granted under all stock option
plans is as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average Fair
Average Value of
Shares Exercise Price Options Granted
---------- -------------- ---------------
<S> <C> <C> <C>
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
Granted.................... 567,175 3.41 $3.02
Exercised.................. (91,229) 1.71
Cancelled.................. (309,988) 3.41
----------
Outstanding at December 31,
1998........................ 2,162,944 3.39
Granted.................... 1,494,468 3.42 $2.76
Exercised.................. (407,940) 2.51
Cancelled.................. (238,855) 3.18
----------
Outstanding at December 31,
1999........................ 3,010,617 $3.56
==========
</TABLE>
There were 1,573,917, 1,364,555 and 1,209,677 stock options exercisable at
December 31, 1999, 1998 and 1997, respectively, with weighted average exercise
prices of $3.27, $3.03 and $2.97, respectively. There were 83,399, 1,339,012
and 859,154 options available for future grant at December 31, 1999, 1998 and
1997, respectively.
The following table summarizes option information about stock options
outstanding as of December 31, 1999:
<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>
$ 0.3300-
$2.0940 85,415 7.15 $ 1.662 36,619 $ 1.115
2.5630-
2.5630 533,250 9.02 2.563 188,811 2.563
2.6250-
2.7500 412,325 9.38 2.681 156,958 2.699
2.9380-
3.0000 222,474 7.25 2.956 180,852 2.960
3.1250-
3.1250 688,219 6.59 3.125 562,612 3.125
3.1410-
3.5000 373,876 8.32 3.317 234,828 3.229
3.5630-
6.5000 396,124 7.50 5.164 124,053 3.965
6.5630-
10.5000 296,734 8.45 6.735 86,984 7.151
13.0000-
13.0000 2,000 3.55 13.000 2,000 13.000
15.2500-
15.2500 200 5.29 15.250 200 15.250
--------- ---------
$0.3300-
$15.2500 3,010,617 7.98 $ 3.566 1,573,917 $ 3.268
========= ==== ======= ========= =======
</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 $0.33 if and when the stock options were exercised. At December 31, 1998, no
shares had been repurchased. On January 1, 1999, the Company formally waived
its right to repurchase these shares. During the year ended December 31, 1998,
the Company recorded a $200,000 one-time charge for this waiver (see Note C).
35
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All options were granted at fair market value during 1999, 1998 and 1997
with the exception of 150,000 shares in December of 1999. The weighted average
exercise price and fair value of the options granted at less than fair market
value were $3.50 and $5.31, respectively. This resulted in approximately
$469,000 of unearned compensation that will be amortized to compensation
expense over the 4-year vesting period, beginning in 2000.
Repricing Stock Options
On September 18, 1997, the Board of Directors of the Company approved a plan
("repricing plan") to reprice all employee stock options under the 1993 Equity
Incentive Plan and the Ledge Stock Option Plan. In accordance with the
repricing 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 repricing 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. On May 21, 1998, the shareholders approved an amendment
increasing the number of shares issuable under the Plan by 600,000. During
1999, 1998 and 1997, 104,491, 102,626 and 113,083 shares were issued to
employees. The weighted average fair values of purchase rights issued under the
1993 plan during 1999, 1998 and 1997 were $1.06, $1.20 and $0.99, respectively.
The fair value of the options granted under the employee stock purchase plan
during 1999, 1998 and 1997 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 5.08%, 5.68% and 5.39%,
respectively, (2) expected life of 8.8, 11.8 and 6.3 months, respectively, (3)
expected stock volatility of 90% in 1999, 75% in 1998 and 65% in 1997, and (4)
expected dividend yield of 0%.
I. Commitments and Contingencies
Operating Leases
The Company occupies office facilities in the United States, Singapore, and
various locations in Europe under certain 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.
36
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum rental payments under these operating leases are as follows
(in thousands):
<TABLE>
<S> <C>
2000............................................................. $1,646
2001............................................................. 1,538
2002............................................................. 1,477
2003............................................................. 1,452
2004 and thereafter.............................................. 1,141
------
Future minimum lease payments.................................... $7,254
======
</TABLE>
The Company entered into sublease agreements with a related party that
offset a portion of its rent expense during the periods ended December 31,
1999, 1998 and 1997. This agreement was terminated during the fourth quarter of
1999 when the landlord bought out the Company's lease for $400,000, net of
direct expenses, resulting in a gain that was recorded as Other Income in 1999.
Rent expense, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Rent expense...................................... $1,925 $1,504 $1,634
Sublease income................................... ( 236) (86) (144)
------ ------ ------
Rent expense, net................................. $1,689 $1,418 $1,490
====== ====== ======
</TABLE>
Capital Lease
The Company entered into a capital lease agreement for equipment in August
of 1998. The original lease obligation was $287,000, payable monthly over a 12-
month period. In September 1999, the Company terminated the lease agreement and
exercised its option to purchase the equipment.
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 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.
J. Defined Contribution 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 service level and minimum age. The Company may make
discretionary contributions to the 401(k) Plan. No Company contributions had
been made through December 31, 1999. In December 1999, the Board of Directors
authorized the Company to make matching contributions of 50% of a participant's
contribution up to 4% of the participant's qualifying pay in fiscal quarters in
which the Company has an operating profit after giving effect to such
contributions. A participant's entitlement to the Company's matching
contributions is subject to vesting based on length of service.
K. Income Taxes
The Company recorded a $373,000 income tax benefit in the third quarter of
1999, representing the reversal of a reserve established in previous years for
taxes on a foreign subsidiary that the Company now believes are not owed.
37
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the provision (benefit) for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998 1997
------ ----- ----
<S> <C> <C> <C>
Current:
Federal.............................................. $( 390) $ -- $ --
State................................................ 4 8 --
Foreign.............................................. 233 97 80
------ ----- ----
$ (153) $ 105 $ 80
====== ===== ====
</TABLE>
Loss before income taxes for domestic and foreign operations are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998 1997
-------- ------ -------
<S> <C> <C> <C>
Domestic........................................ $ (4,343) $ (51) $(5,568)
Foreign......................................... (740) (51) (140)
-------- ------ -------
$ (5,083) $ (102) $(5,708)
======== ====== =======
</TABLE>
The following is a reconciliation between the U.S. Federal statutory rate
and the effective tax rate:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998 1997
----- ------ -----
<S> <C> <C> <C>
U.S. federal statutory
rate................... (34.0)% (34.0)% (34.0)%
State taxes, net of
federal tax benefit.... 0.1 5.0 --
Foreign operations...... 9.5 4.9 2.2
Utilization of net
operating loss
carryforward........... -- (169.0) --
Non-deductible
acquisition costs...... -- -- 4.3
Goodwill................ -- -- 0.4
In-process research and
development............ -- 150.1 --
Other non-deductible
items.................. 1.0 38.4 0.7
Change in valuation
allowance.............. 20.4 107.2 27.8
Other, net.............. -- -- --
----- ------ -----
Effective tax rate...... (3.0)% 102.6% 1.4%
===== ====== =====
</TABLE>
38
<PAGE>
DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Deferred tax assets:
Bad debts.............................................. $ 738 $ 587
Compensation........................................... 324 510
Depreciation........................................... 11 --
Other.................................................. 818 1,577
Net operating loss carryforward........................ 10,777 5,283
Research tax credits................................... 1,548 1,216
-------- -------
Total assets........................................... 14,216 9,173
-------- -------
Deferred tax liabilities:
Capitalized software costs............................. 859 1,052
Depreciation........................................... -- 388
Other.................................................. -- --
-------- -------
Total liabilities...................................... 859 1,440
-------- -------
Valuation allowance.................................... (13,357) (7,733)
-------- -------
Net deferred tax asset................................. $ -- $ --
======== =======
</TABLE>
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $26.9 million, which expire at
various dates through 2019. 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 that could be
utilized. The Company also has research and development tax credits for federal
income tax purposes of approximately $1.5 million that expire at various dates
through 2019.
Approximately $4.6 million of the net operating loss carryforwards available
for federal income tax purposes relate to exercises of non-qualified stock
options and disqualifying disposition of incentive stock options, the tax
benefit from which, if realized, will be credited to additional paid-in
capital.
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. Management
evaluates the positive and negative evidence impacting the realizability of the
Company's deferred tax assets on a quarterly basis. The Company increased its
valuation allowance by $5,624,000 in 1999 and $674,000 in 1998, based upon
management's estimate of the amount of deferred tax assets that were more
likely than not to be realized.
L. 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 relating 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
39
<PAGE>
information access ("knowledge management") and professional electronic
publishing applications in the United States and Latin America); Eurasia (a
unit focusing on the sale of software and services for enterprise information
access ("knowledge management") and professional electronic publishing
applications in Europe and the Pacific Rim); and Multimedia (providing a
complete array of multimedia application development 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.
Although the Company prepares full balance sheets for the Eurasian business
unit, it reported to management only certain assets for the USLA and Multimedia
segments. These segments are not considered capital-intensive and, thus, other
balance sheet information was not considered meaningful on a segment basis.
Early in 1999, the Company announced a program to reposition and restructure
the Company as 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. Prior year information has
been restated to reflect the change in structure.
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 (in
thousands):
<TABLE>
<CAPTION>
Corporate and
USLA EURASIA Eliminations Total
Twelve months ended December 31, 1999 ------- ------- ------------- --------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers... $18,295 $ 8,439 $ -- $ 26,734
Operating income (loss)................ 5,574 1,631 (18,521) (11,316)
Depreciation and amortization.......... 262 154 5,059 5,475
Property and equipment additions....... 434 413 807 1,654
Total assets........................... 2,911 4,483 15,980 23,374
<CAPTION>
Corporate and
USLA EURASIA Eliminations Total
Twelve months ended December 31, 1998 ------- ------- ------------- --------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers... $24,217 $ 8,773 $ -- $ 32,990
Operating income (loss) (1)............ 13,657 2,268 (14,387) 1,538
Depreciation and amortization.......... 221 295 3,201 3,717
Property and equipment additions....... 356 341 616 1,313
Total assets........................... 2,953 4,552 21,244 28,749
<CAPTION>
Corporate and
USLA EURASIA Eliminations Total
Twelve months ended December 31, 1997 ------- ------- ------------- --------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers... $22,576 $14,743 $ -- $ 37,319
Operating income (loss)................ 3,425 2,053 (10,877) (5,399)
Depreciation and amortization.......... 262 475 3,306 4,043
Property and equipment additions....... 156 705 550 1,411
Total assets........................... 2,984 5,286 20,783 29,053
</TABLE>
- --------
(1) Before non-recurring charges
40
<PAGE>
Geographically, revenues are reflected in the geographic areas from which the
sales are made. Information related to the Company's revenues to unaffiliated
customers in different geographical areas is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
United States..................................... $ 18,295 $24,217 $20,621
United Kingdom.................................... 5,846 6,256 7,252
Other............................................. 2,593 2,517 9,446
-------- ------- -------
$ 26,734 $32,990 $37,319
======== ======= =======
Information related to the Company's long-lived assets by geographical area
is as follows (in thousands):
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
United States..................................... $7,392 $10,338 $ 6,647
United Kingdom.................................... 347 258 404
Other............................................. 120 82 142
-------- ------- -------
$7,859 $10,678 $ 7,193
======== ======= =======
</TABLE>
M. Gain on Investment in Northern Light
During the second quarter of 1999, Dataware sold one-half of its interest in
Northern Light Technology LLC back to Northern Light for $4.1 million in cash.
In addition, Northern Light repaid the Company the principal and interest due
on a $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 had been carried on the Company's books.
Northern Light has since incorporated.
N. Major Customer
On September 30, 1997, Dataware sold a portion of its data services business
to IHS. The Company entered into a distribution agreement with IHS on September
30, 1997, under which IHS took over the software distribution activities
formerly performed by five divested foreign subsidiaries (primarily involving
the Company's legacy products). In addition, the Company entered into
agreements with IHS under which it provided software and multimedia services
for use by IHS internally and in its publishing activities, and IHS provided
software that the Company incorporated into certain of its products.
Revenues in 1999 and 1998 included approximately $4.5 and $9.1 million, or
21% and 28% of total revenues, respectively, related to agreements with IHS. As
part of the ongoing relationship with IHS, 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
years ended December 31, 1999 and 1998 include approximately $2.5 and $1.4
million, respectively, of such discounted payments accelerated from the years
1999 through 2002. All guaranteed payments under these agreements have been
made to the Company as of December 31, 1999.
41
<PAGE>
O. Net 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", 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,
-----------------------------------------
1999 1998 1997
------------- ------------ -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Basic EPS
Numerator:
Net loss to common
stockholders................... $ (4,930) $ (207) $ (6,465)
Denominator:
Common shares outstanding....... 9,516 9,265 7,632
------------- ----------- -------------
Basic EPS......................... $ (0.52) $ (0.02) $ (0.85)
============= =========== =============
Diluted EPS
Numerator:
Net loss to common
stockholders................... $ (4,930) $ (207) $ (6,465)
Denominator:
Common shares outstanding....... 9,516 9,265 7,632
Common stock equivalents........ -- -- --
------------- ----------- -------------
9,516 9,265 7,632
Diluted EPS....................... $ (0.52) $ (0.02) $ (0.85)
============= =========== =============
</TABLE>
Options to purchase 3,010,617, 2,162,944 and 1,996,986 shares and warrants
to purchase 336,550, 236,550 and 196,550 shares of common stock outstanding as
of December 31, 1999, 1998 and 1997, 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.
42
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------
Allowance for Doubtful Accounts
1999......................... $ 846 $ 308 -- $ 351 $ 803
1998......................... 750 596 -- 500 846
1997......................... 934 778 -- 962 750
</TABLE>
43
<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>
David Mahoney........... 55 Chairman of the Board, Chief Executive Officer, President, Director
Michael Gonnerman....... 57 Chief Financial Officer, Treasurer, VP, Finance and Administration
Robert J. Farrell....... 36 Chief Operating Officer, Executive Vice President, Field Operations
Ann Smith............... 47 Vice President, Corporate Resources
Stephen H. Beach
(1)(2)................. 83 Director, Secretary
William R. Lonergan
(1)(2)................. 74 Director
Jeffrey O. Nyweide...... 44 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mr. Mahoney became Chairman of the Board of Directors in February 2000. He
has served as President and Chief Executive Officer since January 1999 and has
been a Director of the Company since February 1999. Before joining the Company,
he served as President and CEO of Sovereign Hill Software, Inc., a supplier of
advanced information retrieval software products that was acquired by the
Company on December 31, 1998. Mr. Mahoney was the founder and, from 1983 to
1998, the Chairman and CEO of Banyan Systems Incorporated, a provider of
Enterprise Networking Software and services and Internet directory services.
Mr. Mahoney is also a Director of Banyan Systems Incorporated and its
subsidiary, Switchboard Incorporated, Applix Incorporated and several smaller
early stage software companies.
Mr. Gonnerman has served as Chief Financial Officer and Vice President,
Finance and Administration since June 1998, and was Acting Chief Financial
Officer from August 1997 to June 1998. Mr. Gonnerman was the founder and has
been President of Corporate Financial Group, a financial consulting firm, since
1990. Mr. Gonnerman is also a Director of Agranat Systems, Inc. and works in an
advisory capacity with Cytel Software, Inc.
Mr. Farrell has served as Executive Vice President, Field Operations and
Chief Operating Officer since December 1999. Before joining Dataware, he spent
4 years at Computer Horizons Corp., a diversified information technology
services company (Nasdaq: CHRZ), where he held the positions of Executive Vice
President Operations, Executive Vice President International, and Senior Vice
President Banking and Financial Services. Previously, Mr. Farrell was founder
and President of Innovative Information Concepts, Inc., an information
technology consulting firm, and held technical and management positions at EF
Hutton & Company and American Express.
Ms. Smith has served as Vice President, Corporate Resources since June 1999.
From June 1997 through June 1999, she was Vice President of Administration at
Eastman Software, a subsidiary of Kodak and a leading provider of Enterprise
Work Management technology. From July 1995 through June 1997 she served as Vice
President of Human Resources and Information Systems at Banyan Systems
Incorporated, a provider of Enterprise Networking Software and services and
Internet directory services. Prior to July 1995, Ms. Smith held various human
resource management roles at Data General, Motorola and Harvard Pilgrim Health
Care.
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.
44
<PAGE>
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. Mr. Lonergan is also a Director of
Zitel Corporation.
Mr. Nyweide served as Vice Chairman of the Board of Directors and Senior
Executive Vice President, Business Development from April 1997 until February
2000, when he began a leave of absence. He was President and Chief Operating
Officer from 1993 to April 1997. Mr. Nyweide has also served as a member of
the Board of Directors since the inception of the Company.
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 2000 Proxy Statement is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled "Election of Directors--Director Compensation" and
"Executive Compensation" in the 2000 Proxy Statement are incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Share Ownership" in the 2000 Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Executive Compensation--Executive Employment and
Severance Agreements" in the 2000 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, schedules, 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, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
45
<PAGE>
2.Schedules:
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
None.
(c)Exhibits
The Company hereby files as part of this Annual Report on Form 10-K the
Exhibits listed in the attached Exhibit Index.
46
<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 6th day of March 2000.
DATAWARE TECHNOLOGIES, INC.
/s/ David Mahoney
-------------------------------------
David Mahoney, Chairman of the
Board,
President and Chief Executive
Officer
<TABLE>
<CAPTION>
Signatures Title Date
---------- -------------------------------------------- -------------
<S> <C> <C>
/s/ David Mahoney Chief Executive Officer, President, Director March 6, 2000
___________________
David Mahoney
/s/ Michael Chief Financial Officer, Treasurer March 6, 2000
Gonnerman (Principal Financial and Accounting Officer)
___________________
Michael Gonnerman
/s/ Stephen H. Beach Director March 6, 2000
___________________
Stephen H. Beach
/s/ William R. Director March 6, 2000
Lonergan
___________________
William R. Lonergan
/s/ Jeffrey O. Director March 6, 2000
Nyweide
___________________
Jeffrey O. Nyweide
</TABLE>
47
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
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 February 9, 1999 (Exhibit 3.2 to 1998 Form 10-
K).*
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 Second Amendment to Rights Agreement, dated December 14, 1999.
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 Agreement dated as of December 31, 1998, between the Registrant
and Sovereign Hill Software, Inc. (Exhibit to December 31, 1998 Form 10-
K).*
4.6 Warrant Agreement dated as of May 5, 1999, between the Registrant and NEC
USA, Inc.
10.1 Equity Incentive Plan, as amended through February 8, 2000.#
10.2 1993 Employee Stock Purchase Plan, as amended through May 20, 1998
(Exhibit to December 31, 1998 Form 10-K).* #
10.3 Form of stock option agreement terms (executive officers). (Exhibit to
June 30, 1996 Form 10-Q).*#
10.4 Severance Agreement between the Registrant and Kurt Mueller dated
December 31, 1998 (Exhibit to December 31, 1998 Form 10-K).* #
10.5 Amendment dated February 10, 2000, to Mueller Severance Agreement.#
10.6 Severance Agreement between the Registrant and Jeffrey O. Nyweide dated
February 24, 2000.#
10.7 Employment Agreement between the Registrant and David Mahoney dated
December 31, 1998 (Exhibit to December 31, 1998 Form 10-K).* #
10.8 Employment Agreement between the Company and Michael Gonnerman dated
August 16, 1999. (Exhibit to Form 10-Q dated September 30, 1999).* #
10.9 Employment Agreement between the Registrant and Robert J. Farrell dated
November 15, 1999.#
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
99.1 Important Factors Regarding Future Results.
</TABLE>
- --------
* Incorporated by reference to the filing indicated in parentheses.
# Denotes management contracts and compensation plans.
48
<PAGE>
Exhibit 4.3
SECOND AMENDMENT
TO
SHAREHOLDER RIGHTS AGREEMENT
This SECOND AMENDMENT TO THE SHAREHOLDER RIGHTS AGREEMENT dated July 8, 1996,
between Dataware Technologies, Inc., a Delaware corporation (the "Company"), and
American Stock Transfer & Trust Company, a New York corporation, as Rights
Agent, as amended (the "Agreement"), is dated as of December 14, 1999.
Capitalized terms used and not defined herein have the same respective meanings
as in the Agreement. Except as set forth herein, the Agreement shall remain in
force without change.
On December 14, 1999 the Board of Directors approved the Second Amendment to
the Agreement (the "Second Amendment") for the purpose of deleting from the
Agreement all requirements that the approval or concurrence of the Continuing
Directors be obtained to effect certain actions under the Agreement.
Accordingly, in consideration of the premises and the mutual agreements herein
set forth, the parties agree as follows:
Section 1. Amendments. The Agreement is hereby amended as follows:
-----------
(a) The text of Section 1(i) of the Agreement is hereby deleted in its
entirety and the phrase "[Deleted]" is substituted in place thereof.
(b) The phrase "a majority of Continuing Directors who are not officers of
the Company and who are not representatives, nominees, Affiliates or Associates
of an Acquiring Person or Persons making such tender or exchange offer" in
Section 11(a)(iii) of the Agreement, is hereby deleted, and the phrase "two-
thirds of the Directors of the Company then in office," is substituted in place
thereof.
(c) The phrase "which such Continuing Directors deem relevant," in Section
11(a)(iii) is hereby deleted and the phrase "which such Directors deem
relevant," is substituted in place thereof.
(d) The phrase "a majority of the Continuing Directors then in office," in
each instance that it appears in Sections 11(a)(iv) of the Agreement, is hereby
deleted, and the phrase "two-thirds of the Directors of the Company then in
office," is substituted in place thereof.
(e) The text "then the Continuing Directors on the Board of Directors of the
Company (or, if none, a committee composed of one or more of the Continuing
Directors who were in office immediately before the transaction described in the
first sentence of Section 13(a))" in Section 13(c) of the Agreement, is hereby
deleted, and the phrase "then the Board of Directors of the Company," is
substituted in place thereof.
<PAGE>
(f) The text in Section 23(a), "then there must be Continuing Directors then
in office and such authorization shall require the approval of a majority of
such Continuing Directors," is hereby deleted and the clause, "then such
authorization shall require the approval of two-thirds of the Directors of the
Company then in office," is substituted in place thereof.
(g) The parenthetical clause "shall be effective only if there are
Continuing Directors and shall require the concurrence of a majority of such
Continuing Directors" as it appears in Section 27 of the Agreement is hereby
deleted, and the clause, "shall require the concurrence of two-thirds of the
Directors of the Company then in office," is substituted in place thereof.
Section 2. Effect of Amendment; Ratification. Except as expressly amended
----------------------------------
hereby, the Rights Plan is hereby ratified and confirmed in all respects and
shall continue in full force and effect. All references in the Agreement, any
Rights Certificate or any related agreement, instrument or document shall
hereafter refer to the Agreement as amended hereby.
Section 3. Counterparts. The Second Amendment may be executed in any number
-------------
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
[CORPORATE SEAL] DATAWARE TECHNOLOGIES, INC.
Attest
By: /s/ Matthew C. Dallett By: /s/ David Mahoney
------------------------ -----------------------
Matthew C. Dallett, David Mahoney, President and
Assistant Secretary Chief Executive Officer
[CORPORATE SEAL] AMERICAN STOCK TRANSFER AND
TRUST COMPANY
Attest
By: /s/ Herbert Lemmer
By:------------------------ ------------------------
Name: Name: Herbert Lemmer
Title: Title: Vice President
-2-
<PAGE>
Exhibit 4.6
DATAWARE TECHNOLOGIES, INC.
Nonstatutory Stock Option Agreement
-----------------------------------
NEC USA 100,000 Shares
Dataware Technologies, Inc. (the "Company"), a Delaware corporation, hereby
grants to NEC USA, Inc. an option to purchase 100,000 shares of Common Stock,
$0.01 par value, of the Company (the "Option"), exercisable on the following
terms and conditions:
Option Price: $2.68
Date of Grant: May 5, 1999
Expiration Date: May 5, 2009
1. Equity Incentive Plan Incorporated by Reference. This Option is
-----------------------------------------------
issued on the terms set forth herein and in the Company's Equity Incentive Plan
(the "Plan") to the extent not inconsistent with the terms hereof, although this
Option is not issued under the Plan. This certificate does not set forth all of
the terms and conditions of the Plan, which are incorporated herein by
reference. This Option may be amended as provided in the Plan. Capitalized
terms used and not otherwise defined in this certificate have the meanings given
to them in the Plan. The Committee administers the Plan and its determinations
regarding the operation of the Plan are final and binding. A copy of the Plan
may be obtained upon written request without charge from the Company.
2. Option Price. The price to be paid for each share of Common Stock
------------
issued upon exercise of the whole or any part of this Option is the Option Price
set forth above.
3. Exercisability Schedule. This Option may be exercised at any time
-----------------------
and from time to time after the Date of Grant up to the number of shares set
forth above, but only for the purchase of whole shares. This Option may not be
exercised as to any shares after the Expiration Date.
4. Method of Exercise. To exercise this Option, the Optionholder
------------------
shall deliver written notice of exercise to the Company specifying the number of
shares with respect to which the Option is being exercised accompanied by
payment of the Option Price for such shares in cash, by certified check or in
such other form, including shares of Common Stock of the Company valued at their
Fair Market Value on the date of delivery, as the Committee may at the time of
exercise approve. Following such notice, the Company will deliver to the
Optionholder a certificate representing the number of shares with respect to
which the Option is being exercised.
5. Rights as a Stockholder or Employee. The Optionholder shall not
-----------------------------------
have any rights in respect of shares to which the Option shall not have been
exercised and payment made as provided above. The Optionholder shall not have
any rights to employment or any other arrangements by the Company or its
Affiliates by virtue of the grant of this Option.
6. Recapitalization, Mergers, Etc. As provided in the Plan, in the
-------------------------------
event of corporate transactions affecting the Company's outstanding Common
Stock, the Committee shall equitably adjust the number and kind of shares
subject to this Option and the exercise price hereunder or make provision for a
cash payment. If such transaction involves a consolidation or merger of the
Company with another entity, the sale or exchange of all or substantially all of
the assets of the Company or a reorganization or liquidation of the Company,
then in lieu of the foregoing, the Committee may upon written notice to the
Optionholder provide that this Option shall terminate on a date not less than 20
days after the date of such notice unless theretofore exercised. In connection
with such notice, the Committee may in its discretion accelerate or waive any
deferred exercise period.
7. Limitations on Transfer. This Option is not transferable except
-----------------------
(i) as provided in that certain COIR/AMORE SOFTWARE LICENSING AGREEMENT of even
date herewith, (ii) (in the case of an individual
<PAGE>
Optionholder) by will or the laws of descent and distribution, or (iii) with the
prior written consent of the Company, and is exercisable only by the
Optionholder (or, in the case of an individual Optionholder, by his legal
representative).
8. Compliance with Securities Laws. It shall be a condition to the
-------------------------------
Optionholder's right to purchase shares of Common Stock hereunder that the
Company may, in its discretion, require (a) that the shares of Common Stock
reserved for issue upon the exercise of this Option shall have been duly listed,
or, if not listed, the Company shall agree to list the shares of Common Stock at
its sole cost and expense, upon official notice of issuance, upon any national
securities exchange or automated quotation system on which the Company's Common
Stock may then be listed or quoted, (b) that either (i) a registration statement
under the Securities Act of 1933 with respect to the shares shall be in effect,
or (ii) in the opinion of counsel reasonably acceptable to the Company, the
proposed purchase shall be exempt from registration under that Act and the
Optionholder shall have made such undertakings and agreements with the Company
as the Company may reasonably require, and (c) that such other steps, if any, as
counsel for the Company shall consider necessary to comply with any law
applicable to the issue of such shares by the Company shall have been taken by
the Company (at the Company's expense) or the Optionholder, or both. The
certificates representing the shares purchased under this Option may contain
such legends as counsel for the Company shall consider necessary to comply with
any applicable law.
9. Payment of Taxes. The Optionholder shall pay to the Company, or
----------------
make provision satisfactory to the Company for payment of, any taxes required by
law to be withheld with respect to the exercise of this Option. The Committee
may, in its discretion, require any other Federal or state taxes imposed on the
sale of the shares to be paid by the Optionholder. The Company and its
Affiliates may, to the extent permitted by law, deduct any such tax obligations
from any payment of any kind otherwise due to the Optionholder.
10. Nonstatutory Stock Option. This Option shall not be treated as
-------------------------
an Incentive Stock Option under section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
DATAWARE TECHNOLOGIES, INC.
By: /s/ Howard York
Howard York
Title: ____________________________
The Optionholder agrees to the terms and conditions hereof.
NEC USA, INC.
By: /s/ Kojiro Watanabe
Kojiro Watanabe
Title: ____________________________
2
<PAGE>
Exhibit 10.1
Amended and Restated
February 8, 2000
DATAWARE TECHNOLOGIES, INC.
EQUITY INCENTIVE PLAN
(as Amended and Restated)
This Equity Incentive Plan (the "Plan") constitutes an amendment and
restatement of the Dataware Technologies, Inc. 1993 Equity Incentive Plan, and
incorporates the former Dataware Technologies, Inc. 1988 Stock Option Plan and
1993 Director Stock Option Plan (the "Merged Plans"), which have been merged
into this Plan. The rights and privileges of holders of outstanding options or
rights under the Merged Plans shall not be adversely affected by such merger or
restatement.
Section 1. Purpose
-------
The purpose of the Plan is to attract and retain key employees and
directors and consultants of the Company and its Affiliates, to provide an
incentive for them to achieve long-range performance goals, and to enable them
to participate in the long-term growth of the Company.
Section 2. Definitions
-----------
"Affiliate" means any business entity in which the Company owns directly or
indirectly 50% or more of the total combined voting power or has a significant
financial interest as determined by the Committee.
"Award" means any Option, Stock Appreciation Right, Performance Share,
Restricted Stock, Stock Unit or Other Stock-Based Award awarded or granted under
the Plan.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor to such Code.
"Committee" means a committee of not less than two members of the Board
appointed by the Board to administer the Plan, each of whom is a "Non-Employee
Director" within the meaning of Rule 16b-3 under the Securities Exchange Act of
1934 or any successor provision, as applicable to the Company at the time ("Rule
16b-3").
"Common Stock" or "Stock" means the Common Stock, $0.01 par value, of the
Company.
"Company" means Dataware Technologies, Inc.
"Designated Beneficiary" means the beneficiary designated by a Participant,
in a manner determined by the Committee, to receive amounts due or exercise
rights of the Participant in the
<PAGE>
event of the Participant's death. In the absence of an effective designation by
a Participant, "Designated Beneficiary" shall mean the Participant's estate.
"Effective Date" means May 19, 1993.
"Fair Market Value" means, with respect to Common Stock or any other
property, the fair market value of such property as determined by the Committee
in good faith or in the manner established by the Committee from time to time.
"Incentive Stock Option" means an option to purchase shares of Common Stock
awarded to a Participant under Section 6 that is intended to meet the
requirements of Section 422 of the Code or any successor provision.
"Nonstatutory Stock Option" means an option to purchase shares of Common
Stock awarded to a Participant that is not intended to be an Incentive Stock
Option.
"Option" means an Incentive Stock Option or a Nonstatutory Stock Option.
"Other Stock-Based Award" means an Award, other than an Option, Stock
Appreciation Right, Performance Share, Restricted Stock or Stock Unit, having a
Common Stock element and awarded to a Participant under Section 11.
"Outside Director" means a member of the Board who is not an employee of
the Company or any Affiliate.
"Participant" means a person who receives an Award under the Plan.
"Performance Cycle" or "Cycle" means the period of time selected by the
Committee during which performance is measured for the purpose of determining
the extent to which an award of Performance Shares has been earned.
"Performance Shares" mean shares of Common Stock, which may be earned by
the achievement of performance goals, awarded to a Participant under Section 8.
"Reporting Person" means a person subject to Section 16 of the Securities
Exchange Act of 1934 or any successor provision.
"Restricted Period" means the period of time during which an Award may be
forfeited to the Company pursuant to the terms and conditions of such Award.
"Restricted Stock" means shares of Common Stock subject to forfeiture
awarded to a Participant under Section 9.
"Stock Appreciation Right" or "SAR" means a right to receive any excess in
value of shares of Common Stock over the exercise price awarded to a Participant
under Section 7.
2
<PAGE>
"Stock Unit" means an award of Common Stock or units that are valued in
whole or in part by reference to, or otherwise based on, the value of Common
Stock, awarded to a Participant under Section 10.
Section 3. Administration
--------------
The Plan shall be administered by the Committee, provided that the Board
may in any instance perform any of the functions of the Committee. The
Committee shall have authority to adopt, alter and repeal such administrative
rules, guidelines and practices governing the operation of the Plan as it shall
from time to time consider advisable, and to interpret the provisions of the
Plan. The Committee's decisions shall be final and binding. To the extent
permitted by applicable law, the Committee may delegate to one or more executive
officers of the Company the power to make Awards to Participants who are not
Reporting Persons and all determinations under the Plan with respect thereto,
provided that the Committee shall fix the maximum amount of such Awards for all
such Participants and a maximum for any one Participant.
Section 4. Eligibility
-----------
All employees and, in the case of Awards other than Incentive Stock
Options, directors and consultants of the Company or any Affiliate, capable of
contributing significantly to the successful performance of the Company, other
than a person who has irrevocably elected not to be eligible, are eligible to be
Participants in the Plan. Incentive Stock Options may be granted only to
persons eligible to receive such Options under the Code.
Section 5. Stock Available for Awards
--------------------------
(a) Subject to adjustment under subsection (b), Awards may be made under
the Plan for up to 3,500,000 shares of Common Stock, provided that no more than
10% of the maximum number of shares authorized from time to time to be issued
hereunder may be granted as Restricted Stock for consideration less than 100% of
the Fair Market Value of the Common Stock on the date of the respective grant.
If any Award in respect of shares of Common Stock, including any grant of option
originally issued under either of the Merged Plans, expires or is terminated
unexercised or is forfeited, the shares subject to such Award, to the extent of
such expiration, termination or forfeiture, shall again be available for award
under the Plan. Common Stock issued through the assumption or substitution of
outstanding grants from an acquired company shall not reduce the shares
available for Awards under the Plan. Shares issued under the Plan may consist
in whole or in part of authorized but unissued shares or treasury shares.
(b) In the event that the Committee determines that any stock dividend,
extraordinary cash dividend, creation of a class of equity securities,
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination, exchange of shares, warrants or rights offering to purchase Common
Stock at a price substantially below fair market value, or other similar
transaction affects the Common Stock such that an adjustment is required in
order to preserve the benefits or potential benefits intended to be made
available under the Plan, then the Committee (subject, in the case of Incentive
Stock Options, to any limitation required under the Code) shall equitably adjust
any or all of (i) the number and kind of shares in respect of which Awards may
3
<PAGE>
be made under the Plan, (ii) the number and kind of shares subject to
outstanding Awards, and (iii) the award, exercise or conversion price with
respect to any of the foregoing, and if considered appropriate, the Committee
may make provision for a cash payment with respect to an outstanding Award,
provided that the number of shares subject to any Award shall always be a whole
number.
Section 6. Stock Options
-------------
(a) Subject to the provisions of the Plan, the Committee may award
Incentive Stock Options and Nonstatutory Stock Options and determine the number
of shares to be covered by each Option, the option price therefor and the
conditions and limitations applicable to the exercise of the Option. The terms
and conditions of Incentive Stock Options shall be subject to and comply with
Section 422 of the Code or any successor provision and any regulations
thereunder, and no Incentive Stock Option may be granted hereunder more than ten
years after the Effective Date.
(b) The Committee shall establish the option price at the time each
Option is awarded, which price shall not be less than 100% of the Fair Market
Value of the Common Stock on the date of award with respect to Incentive Stock
Options. Nonstatutory Stock Options may be granted at such prices as the
Committee may determine.
(c) Each Option shall be exercisable at such times and subject to such
terms and conditions as the Committee may specify in the applicable Award or
thereafter. The Committee may impose such conditions with respect to the
exercise of Options, including conditions relating to applicable federal or
state securities laws, as it considers necessary or advisable.
(d) No shares shall be delivered pursuant to any exercise of an Option
until payment in full of the option price therefor is received by the Company.
Such payment may be made in whole or in part in cash or, to the extent permitted
by the Committee at or after the award of the Option, by delivery of a note or
shares of Common Stock owned by the optionee, including Restricted Stock, or by
retaining shares otherwise issuable pursuant to the Option, in each case valued
at their Fair Market Value on the date of delivery or retention, or such other
lawful consideration as the Committee may determine.
(e) The Committee may provide that, subject to such conditions as it
considers appropriate, upon the delivery or retention of shares to the Company
in payment of an Option, the Participant automatically be awarded an Option for
up to the number of shares so delivered.
Section 7. Stock Appreciation Rights
-------------------------
(a) Subject to the provisions of the Plan, the Committee may award SARs
in tandem with an Option (at or after the award of the Option), or alone and
unrelated to an Option. SARs in tandem with an Option shall terminate to the
extent that the related Option is exercised, and the related Option shall
terminate to the extent that the tandem SARs are exercised. SARs granted in
tandem with Options shall have an exercise price not less than the exercise
price of the related Option. SARs granted alone and unrelated to an Option may
be granted at such exercise prices as the Committee may determine.
4
<PAGE>
(b) An SAR related to an Option, which SAR can only be exercised upon or
during limited periods following a change in control of the Company, may entitle
the Participant to receive an amount based upon the highest price paid or
offered for Common Stock in any transaction relating to the change in control or
paid during the thirty-day period immediately preceding the occurrence of the
change in control in any transaction reported in the stock market in which the
Common Stock is normally traded.
Section 8. Performance Shares
------------------
(a) Subject to the provisions of the Plan, the Committee may award
Performance Shares and determine the number of such shares for each Performance
Cycle and the duration of each Performance Cycle. There may be more than one
Performance Cycle in existence at any one time, and the duration of Performance
Cycles may differ from each other. The payment value of Performance Shares
shall be equal to the Fair Market Value of the Common Stock on the date the
Performance Shares are earned or, in the discretion of the Committee, on the
date the Committee determines that the Performance Shares have been earned.
(b) The committee shall establish performance goals for each Cycle, for
the purpose of determining the extent to which Performance Shares awarded for
such Cycle are earned, on the basis of such criteria and to accomplish such
objectives as the Committee may from time to time select. During any Cycle, the
Committee may adjust the performance goals for such Cycle as it deems equitable
in recognition of unusual or non-recurring events affecting the Company, changes
in applicable tax laws or accounting principles, or such other factors as the
Committee may determine.
(c) As soon as practicable after the end of a Performance Cycle, the
Committee shall determine the number of Performance Shares that have been earned
on the basis of performance in relation to the established performance goals.
The payment values of earned Performance Shares shall be distributed to the
Participant or, if the Participant has died, to the Participant's Designated
Beneficiary, as soon as practicable thereafter. The Committee shall determine,
at or after the time of award, whether payment values will be settled in whole
or in part in cash or other property, including Common Stock or Awards.
Section 9. Restricted Stock
----------------
(a) Subject to the provisions of the Plan, the Committee may award
shares of Restricted Stock and determine the duration of the Restricted Period
during which, and the conditions under which, the shares may be forfeited to the
Company and the other terms and conditions of such Awards. Shares of Restricted
Stock may be issued for no cash consideration or such minimum consideration as
may be required by applicable law.
(b) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered, except as permitted by the Committee, during
the Restricted Period. Shares of Restricted Stock shall be evidenced in such
manner as the Committee may determine. Any certificates issued in respect of
shares of Restricted Stock shall be registered in the name of the Participant
and unless otherwise determined by the Committee, deposited by the Participant,
together with a stock power endorsed in blank, with the Company. At the
expiration of the
5
<PAGE>
Restricted Period, the Company shall deliver such certificates to the
Participant or if the Participant has died, to the Participant's Designated
Beneficiary.
Section 10. Stock Units
-----------
(a) Subject to the provisions of the Plan, the Committee may award Stock
Units subject to such terms, restrictions, conditions, performance criteria,
vesting requirements and payment rules as the Committee shall determine.
(b) Shares of Common Stock awarded in connection with a Stock Unit Award
shall be issued for no cash consideration or such minimum consideration as may
be required by applicable law.
Section 11. Other Stock-Based Awards
------------------------
(a) Subject to the provisions of the Plan, the Committee may make other
awards of Common Stock and other awards that are valued in whole or in part by
reference to, or are otherwise based on, Common Stock, including without
limitation convertible preferred stock, convertible debentures, exchangeable
securities and Common Stock awards or options. Other Stock-Based Awards may be
granted either alone or in tandem with other Awards granted under the Plan
and/or cash awards made outside of the Plan.
(b) The Committee may establish performance goals, which may be based on
performance goals related to book value, subsidiary performance or such other
criteria as the Committee may determine, Restricted Periods, Performance Cycles,
conversion prices, maturities and security, if any, for any Other Stock-Based
Award. Other Stock-Based Awards may be sold to Participants at the face value
thereof or any discount therefrom or awarded for no consideration or such
minimum consideration as may be required by applicable law.
Section 12. Grant of Options to Outside Directors
-------------------------------------
(a) Automatic Grant of Options.
(i) Immediately following his or her election, each Outside Director
of the Company newly elected to the Board shall automatically be granted
Nonstatutory Stock Options to purchase 15,000 shares of Common Stock;
(ii) Immediately following the annual meeting of stockholders each
year, each Outside Director of the Company newly elected at or continuing in
office after such meeting shall automatically be granted an annual retainer of
Nonstatutory Stock Options to purchase 7,500 shares of Common Stock; and
(iii) Immediately following his or her election, each Outside Director
of the Company newly elected to the Board at any point during the year between
annual meetings of stockholders shall automatically be granted Nonstatutory
Stock Options to purchase 1,875 shares
6
<PAGE>
of Common Stock for each calendar quarter beginning after such election and
before the next anniversary date of the preceding annual meeting of
stockholders.
(b) Date of Grant. The "Date of Grant" for Options granted under this
Section 12 shall be (x) the date of the respective annual meeting of
stockholders, for each grant pursuant to clause (ii) of subsection (a) and (y)
the date of the respective director's election, for each grant pursuant to
clauses (i) and (iii) of subsection (a).
(c) Option Price. The option price for each option granted under this
Section 12 shall be the last sale price for a share of the Company's Common
Stock as reported by the Nasdaq National Market System, or the principal
exchange on which the Common Stock is then traded, as the case may be, for the
business day immediately preceding the Date of Grant.
(d) Term of Option. The term of each Option granted under this Section 12
shall be ten years from the Date of Grant.
(e) Exercisability of Options. Options granted under this Section 12
shall become exercisable, during the optionee's term in office, with respect to:
(i) 7,500 shares on each of the first two anniversaries of the Date of
Grant, for each grant pursuant to clause (i) of subsection (a); and
(ii) 1,875 shares at the beginning of each calendar quarter following
the Date of Grant, for each grant pursuant to clause (ii) or clause (iii) of
subsection (a).
(f) General Exercise Terms. An optionee holding exercisable Options under
this Section 12 who ceases to serve as a member of the Board may, during his or
her lifetime, exercise the rights he or she had under such Options at the time
he or she ceases to serve for the full unexpired term of such Option. Any
rights that have not yet become exercisable shall terminate upon cessation of
membership on the Board. Upon the death of a director, those entitled to do so
shall have the right, at any time within twelve months after the date of death,
to exercise in whole or in part any rights that were available to the director
at the time of his or her death. The rights of the optionee may be exercised by
the optionee's guardian or legal representative in the case of disability and by
the beneficiary designated by the optionee in writing delivered to the Company
or, if none has been designated, by the optionee's estate or his or her
transferee on death in accordance with this Section 12, in the case of death.
Options granted hereunder shall terminate, and no rights thereunder may be
exercised, after the expiration of the applicable exercise period.
Notwithstanding the foregoing provisions of this section, no rights under any
Options may be exercised after the expiration of ten years from their Date of
Grant.
(g) Method of Exercise and Payment. Options granted under this Section 12
may be exercised as provided in Section 6(d). Upon receipt of such notice and
payment, the Company shall promptly issue and deliver to the optionee (or other
person entitled to exercise the Option) a certificate or certificates for the
number of shares as to which the exercise is made.
(h) Merger. In the event of a Change in Control (as defined in Section
13(h)), or a reorganization or liquidation of the Company, any deferred exercise
period shall be automatically accelerated and each holder of an outstanding
option granted under this Section 12
7
<PAGE>
shall be entitled to receive upon exercise and payment in accordance with the
terms of the option the same shares, securities or property as he or she would
have been entitled to receive upon the occurrence of such event if he or she had
been, immediately prior to such event, the holder of the number of shares of
Common Stock purchasable under his or her option; provided, however, that in
lieu of the foregoing the Board may upon written notice to each holder of an
outstanding option or right under this Section 12, provide that such option or
right shall terminate on a date not less than 20 days after the date of such
notice unless theretofore exercised.
Section 13. General Provisions Applicable to Awards
---------------------------------------
(a) Limitations on Grants of Options and SARs. Subject to adjustment under
Section 5(b), the number of shares subject to Options and SARs granted to any
one individual during any fiscal year may not exceed 250,000 shares of Common
Stock.
(b) Transferability. An Award under this Plan may be transferred only to
the extent expressly permitted by the Committee and subject to such conditions
as the Committee may in its discretion impose.
(c) Documentation. Each Award under the Plan shall be evidenced by a
writing delivered to the Participant specifying the terms and conditions thereof
and containing such other terms and conditions not inconsistent with the
provisions of the Plan as the Committee considers necessary or advisable to
achieve the purposes of the Plan or to comply with applicable tax and regulatory
laws and accounting principles.
(d) Committee Discretion. Each type of Award may be made alone, in
addition to or in relation to any other type of Award. The terms of each type
of Award need not be identical, and the Committee need not treat Participants
uniformly. Except as otherwise provided by the Plan or a particular Award, any
determination with respect to an Award may be made by the Committee at the time
of award or at any time thereafter.
(e) Settlement. The Committee shall determine whether Awards are settled
in whole or in part in cash, Common Stock, other securities of the Company,
Awards or other property. The Committee may permit a Participant to defer all or
any portion of a payment under the Plan, including the crediting of interest on
deferred amounts denominated in cash and dividend equivalents on amounts
denominated in Common Stock.
(f) Dividends and Cash Awards. In the discretion of the Committee, any
Award under the Plan may provide the Participant with (i) dividends or dividend
equivalents payable currently or deferred with or without interest, and (ii)
cash payments in lieu of or in addition to an Award.
(g) Termination of Employment. The Committee shall determine the effect on
an Award of the disability, death, retirement or other termination of employment
of a Participant and the extent to which, and the period during which, the
Participant's legal representative, guardian or Designated Beneficiary may
receive payment of an Award or exercise rights thereunder.
8
<PAGE>
(h) Change in Control. In order to preserve a Participant's rights under
an Award in the event of a Change in Control (as defined below), the Committee
in its discretion may, at the time an Award is made or at any time thereafter,
take one or more of the following actions: (i) provide for the acceleration of
any time period relating to the exercise or realization of the Award, (ii)
provide for the purchase of the Award upon the Participant's request for an
amount of cash or other property that could have been received upon the exercise
or realization of the Award had the Award been currently exercisable or payable,
(iii) adjust the terms of the Award in a manner determined by the Committee to
reflect the Change in Control, (iv) cause the Award to be assumed, or new rights
substituted therefor, by another entity, or (v) make such other provision as the
Committee may consider equitable and in the best interests of the Company.
As used herein, a "Change in Control" of the Company shall be deemed to
have occurred upon the occurrence of any of the following:
(A) Any transaction or series of transactions, as a result of which
any "person" (as defined in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended, and the rules and
regulations thereunder) (a "Person") is or becomes a "beneficial
owner" (as defined in Rule 13d-3 under such act), directly or
indirectly, of securities of the Company representing thirty
percent (30%) or more of the combined voting power of the
Company's then outstanding voting securities (the "Company's
Outstanding Voting Securities"); provided, however, that a Change
in Control shall not be deemed to have occurred solely because of
the acquisition of securities of the Company by (1) one or more
employee benefit plans or related trusts established for the
benefit of the employees of the Company or any Affiliate of the
Company; or (2) any Person when such acquisition (a) is effected
primarily to prevent the Company from being declared insolvent
and (b) is approved by the Board of Directors of the Company (the
"Board").
(B) Any change in the membership of the Board such that individuals
who are Incumbent Directors (as defined herein) cease for any
reason to constitute at least a majority of the Board. The
Incumbent Directors shall be (1) those members of the Board who
were Directors as of April 15, 1996 and who have served
continuously as Directors since such date, and (2) any other
member of the Board who subsequently became a Director and whose
election or nomination for election by the Company's stockholders
at the beginning of his or her current tenure was approved by a
vote of at least a majority of the Directors who were then
Incumbent Directors, except that no individual shall be an
Incumbent Director if such individual's initial assumption of
office as a Director occurred as a result of an actual or
threatened election contest with respect to the election or
removal of Directors, or other actual or threatened solicitation
of proxies or consents, by, or on behalf of, a Person other than
the Board.
(C) The consummation of a reorganization, merger, consolidation, sale
or other disposition of all or substantially all of the assets of
the Company, or
9
<PAGE>
similar transaction (a "Business Combination"), unless all of the
following conditions are met:
(1) the individuals and entities who are the beneficial owners
of the Company's Outstanding Voting Securities immediately
before the consummation of the Business Combination would
beneficially own, directly or indirectly, securities
representing more than 50% of the outstanding combined
voting power of the voting securities that would be
outstanding and entitled to vote generally in the election
of the governing body of the corporation or other entity
resulting from such Business Combination (including, without
limitation, a corporation or other entity that as a result
of such transaction would own the Company or all or
substantially all of the Company's assets, either directly
or through one or more subsidiaries) (the "Resulting
Entity"), and the securities of the Resulting Entity that
would be owned by such beneficial owners of the Company's
Outstanding Voting Securities would be owned by them in
substantially the same proportions as they own the Company's
Outstanding Voting Securities;
(2) no Person (excluding any corporation or other entity
resulting from such Business Combination, and excluding any
employee benefit plan or related trust of the Company or of
such corporation or other entity resulting from such
Business Combination) would beneficially own, directly or
indirectly, 30% or more of the combined voting power of the
outstanding voting securities of the Resulting Entity except
to the extent that such ownership existed before the
Business Combination; and
(3) at least a majority of the members of the board of directors
of the Resulting Entity would be persons who were Incumbent
Directors at the time of the execution of the initial
agreement or of the action of the Board providing for such
Business Combination.
(D) Approval by the Company's stockholders of a liquidation or
dissolution of the Company (unless the liquidation or dissolution
is part of a Business Combination excepted from clause (C)
above).
(E) The close of business on the latest of the following dates:
(1) the date that a tender or exchange offer by any Person
(other than the Company, any Affiliate of the Company, or
any employee benefit plan or related trust established for
the benefit of the employees of the Company or any Affiliate
of the Company) that, if consummated, would result in such
Person becoming a "beneficial owner" (as defined in clause
(A) above), directly or indirectly, of securities of the
Company representing thirty percent
10
<PAGE>
(30%) or more of the combined voting power of the Company's
then outstanding voting securities, is first published or
sent or given within the meaning of Rule 14d-2(a) of the
Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder;
(2) the date upon which all regulatory approvals required for
the acquisition of securities pursuant to the tender or
exchange offer referred to in clause (1) have been obtained
or waived; or
(3) the date upon which any approval of the security holders of
the Person publishing or sending or giving the tender or
exchange offer referred to in clause (1) required for the
acquisition of securities pursuant to such tender or
exchange offer is obtained or waived."
(i) Loans. The Committee may authorize the making of loans or cash
payments to Participants in connection with any Award under the Plan, which
loans may be secured by any security, including Common Stock, underlying or
related to such Award (provided that such Loan shall not exceed the Fair Market
Value of the security subject to such Award), and which may be forgiven upon
such terms and conditions as the Committee may establish at the time of such
loan or at any time thereafter.
(j) Withholding Taxes. The Participant shall pay to the Company, or make
provision satisfactory to the Committee for payment of, any taxes required by
law to be withheld in respect of Awards under the Plan no later than the date of
the event creating the tax liability. In the Committee's discretion, such tax
obligations may be paid in whole or in part in shares of Common Stock, including
shares retained from the Award creating the tax obligation, valued at their Fair
Market Value on the date of delivery. The Company and its Affiliates may, to
the extent permitted by law, deduct any such tax obligations from any payment of
any kind otherwise due to the Participant.
(k) Foreign Nationals. Awards may be made to Participants who are foreign
nationals or employed outside the United States on such terms and conditions
different from those specified in the Plan as the Committee considers necessary
or advisable to achieve the purposes of the Plan or to comply with applicable
laws.
(l) Amendment of Award. The Committee may amend, modify or terminate any
outstanding Award, including substituting therefor another Award of the same or
a different type, changing the date of exercise or realization and converting an
Incentive Stock Option to a Nonstatutory Stock Option, provided that the
Participant's consent to such action shall be required:
(i) if such action would terminate, or reduce the number of shares
issuable under, an Option unless any time period relating to the exercise of
such Option or the eliminated portion, as the case may be, is waived or
accelerated before such termination or reduction (and in such case the Committee
may provide for the Participant to receive cash or other property equal
11
<PAGE>
to the net value that would have been received upon exercise of the terminated
Option or the eliminated portion, as the case may be); and
(ii) in any case not involving the termination of, or reduction of
shares issuable under, an Option unless the Committee determines that the
action, taking into account any related action, would not materially and
adversely affect the Participant.
Section 14. Miscellaneous
-------------
(a) No Right To Employment. Except as provided in Section 12, no
person shall have any claim or right to be granted an Award. The grant of an
Award shall not be construed as giving a Participant the right to continued
employment. The Company expressly reserves the right at any time to dismiss a
Participant free from any liability or claim under the Plan, except as expressly
provided in the applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
under the Plan until he or she becomes the holder thereof. A Participant to
whom Common Stock is awarded shall be considered the holder of the Stock at the
time of the Award except as otherwise provided in the applicable Award.
(c) Effective Date. The Plan became effective on the Effective Date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the
Plan or any portion thereof at any time, subject to any stockholder approval
that the Board determines to be necessary or advisable.
(e) Governing Law. The provisions of the Plan shall be governed by
and interpreted in accordance with the laws of Delaware.
12
<PAGE>
____________________________________________
. Plan, including merger of 1988 Stock Option Plan, adopted by the Board
of Directors and approved by the Stockholders on May 19, 1993.
. Increase in shares issuable adopted by the Board of Directors April
15, 1994 and approved by the Stockholders May 25, 1994.
. Amendments adopted by the Board of Directors April 15, 1996 and
approved by the Stockholders May 23, 1996.
. Amendments adopted by the Board of Directors December 9, 1996.
. Increase in shares issuable adopted by the Board of Directors
February 11, 1997 and approved by the Stockholders May 23, 1997.
. Increase in shares issuable adopted by the Board of Directors April
14, 1998 and approved by the Stockholders May 21, 1998.
. Amendment and restatement, including merger of 1993 Director Stock
Option Plan, adopted by the Board of Directors April 13, 1999.
. Amendments adopted by the Board of Directors February 8, 2000.
13
<PAGE>
Exhibit 10.5
Amendment dated February 10, 2000 to
the Agreement between the Company and Kurt Mueller, dated December 31, 1998
Kurt Mueller
Stuberstrasse 11A
80638 Munchen
GERMANY
Dear Mr. Mueller:
You have resigned from the Board of Directors of Dataware Technologies, Inc.
effective February 8, 2000. This letter confirms the amendments to the
Agreement dated December 31, 1998 between Dataware Technologies, Inc. and
yourself, Kurt Mueller, to which we have agreed in connection with your
resignation. Except as amended hereby, the Agreement will continue in force.
1. We confirm that your outstanding stock options under Dataware's Equity
Incentive Plan (the "Plan") will not terminate as a result of your
resignation as a director but will remain exercisable until the respective
expiration dates provided therein. Notwithstanding your resignation, subject
to Section 3(d):
(a) to the extent they are not already exercisable, all such options will
continue to become exercisable on the dates set forth in the
respective options; provided that no option will become exercisable as
to any additional shares following your death; and
(b) to the extent not already provided, vesting of such options will be
accelerated, such that all such stock options shall become exercisable
in full, upon a "change of control" of Dataware, as defined in the
Plan.
2. Your outstanding stock options under the Plan are also hereby amended to
provide that they, or any portion thereof, may be exercised on a "net
exercise" basis in lieu of paying the exercise price in cash. You (or your
transferee) must provide the Company with notice of such election, stating
the portion of the option to be exercised, in which event the Company will
issue the number of shares of common stock computed using the following
formula:
X = Y * (A-B)
---------
A
Where: X = the number of shares of common stock to be issued by Dataware;
Y = the number of shares of common stock otherwise issuable upon
exercise of this option or a portion thereof
A = the fair market value (defined as the closing price per share
on the last trading date prior to the date of exercise) of one
share of the common stock at the date of exercise
B = the exercise price per share of the option
<PAGE>
3. Your outstanding stock options under the Plan are also hereby amended to
provide that you may sell or transfer any or all of your then-vested options
in one or more transactions to a single third party, subject to the
following conditions:
(a) in the opinion of counsel acceptable in form and substance to
counsel to the Company, such sale or transfer is exempt from the
registration requirements of the Securities Act of 1933 and any
applicable state securities laws;
(b) the buyer/transferee shall have no right to sell, transfer,
assign or otherwise dispose of any of such options, by operation
of law or otherwise, except by exercising them in accordance with
their terms;
(c) the buyer/transferee shall execute such documents as Dataware may
require to (i) support the opinion referred to in subsection 3(a)
above, (ii) evidence his or her understanding that the resale of
the shares issued on exercise of the options will be restricted
to the extent required by applicable securities laws; and (iii)
evidence his or her agreement to be bound by the terms hereof and
of the Equity Incentive Plan; and
(d) Subsections 1(a) and (b) shall not apply to any options following
their sale or transfer (so that no unvested options that have
been transferred shall thereafter become exercisable).
Any attempted sale or other transfer not complying with the foregoing shall
be void.
4. Dataware is willing to agree to the foregoing in consideration of the
following agreements by you: You agree that you shall cooperate fully with
Dataware in the defense or prosecution of any claims or actions now pending
or that may be brought in the future against or on behalf of Dataware that
relate to events transpiring while you were employed by or a director of
Dataware. Your cooperation shall include but not be limited to being
available to meet with counsel to prepare for discovery or trial and to act
as a witness on behalf of Dataware. You also shall cooperate fully with
Dataware in connection with any investigation or review by any governmental
authority relating to events transpiring while you were employed or a
director of by Dataware. The amount of time that you shall be required to be
personally present in the United States for the foregoing activities on
behalf of Dataware shall not exceed 24 days between now and March 1, 2002.
Dataware will reimburse you for any reasonable out-of-pocket expenses you
incur in connection with performing these obligations, in accordance with
its normal reimbursement policy.
Since this is a binding legal document, you should consider it carefully before
signing. You should consult with an attorney if you wish to do so. If you wish
to accept the above amendment as set out in this letter please sign the enclosed
copy of this letter and return it to me.
Sincerely,
/s/ David Mahoney
David Mahoney
President and Chief Executive Officer
2
<PAGE>
I have read the foregoing terms, fully understand them and freely accept them.
/s/ Kurt Mueller 2/10/00
- ---------------------- ----------------------
Kurt Mueller Date
3
<PAGE>
Exhibit 10.6
February 24, 2000
Mr. Jeffrey O. Nyweide
Dataware Technologies, Inc.
One Canal Park
Cambridge, MA 02141
Dear Jeff:
This letter will confirm the agreements that have been reached concerning the
termination of your employment by Dataware Technologies, Inc.:
1. Your base salary will be adjusted to $200,000 per year effective
January 1, 2000.
2. You will complete projects that you are currently working on or turn
them over to others if that is more appropriate, you will complete
the matters listed in the "projects to be completed list" provided
to you by the CEO, Dave Mahoney, and you will undertake new,
special, projects as requested by Mr. Mahoney. Dataware will pay
invoices up to $10,000 from a career coaching/outplacement agency
for services provided to you between now and May 15, 2001. Dataware
will provide references for you upon request if and to the extent
that the substance thereof is mutually agreed between you and Mr.
Mahoney. Dataware will reimburse you in accordance with its normal
policy for any approved business expenses for which you have
submitted complete reimbursement requests by April 15, 2000.
Dataware will continue to provide an office for you in Cambridge
through March 15, 2000. Dataware also will cover the reasonable
lease and telecommunications costs of an offsite office for you
through May 15, 2000, but shall not have any obligation to reimburse
you for any other expenses after the transition period, except those
expenses incurred during service as a director of Dataware or as
requested by Dataware.
3. Your employment by Dataware will continue until the earlier of (i)
May 15, 2001, (ii) the termination of your employment by you or by
Dataware for cause, or (iii) the date you begin employment with
another company. However, you will be on a leave of absence after
March 1, 2000. If your employment terminates before May 15, 2001,
Dataware will pay you severance by continuing to pay you the base
salary described in Section 1, payable in accordance with Dataware's
normal compensation policies, until May 15, 2001. Your severance
will not be reduced by the amount of any earnings you receive from
other employment. It is your affirmative obligation to notify
Dataware if you accept other employment. As used in this paragraph,
"cause" means (i) your commission of a felony; (ii) your continued
failure (other than any such failure resulting from your incapacity
due to physical or mental illness) to perform your obligations to
the Company (as described in this Agreement) after the Company has
delivered written notice of such failure; (iii) your falsification
of any records, documents or systems of the Company or any other
conduct that is materially harmful to the Company or any of its
customers or suppliers; or (iv) your violation of any material
provision of any confidentiality, assignment of invention,
noncompetition or similar agreement with the Company.
4. Dataware may request that you perform special services for it
between March 1, 2000 and May 15, 2001. You have no obligation to
provide any special services but, if you do, you will be compensated
at the rate of $3000 per day for time actually worked. In addition,
you agree that you
<PAGE>
Jeffrey O. Nyweide
February 24, 2000
Page 2 of 4
will promptly upon request (and without compensation) respond to
reasonable requests not requiring you to travel by providing any
information you have that relates to the periods of your employment
and/or your service as a director of Dataware.
5. You will not be eligible to receive stock options or other
compensation payable to nonemployee directors for service on the
Board of Directors during any period through May 31, 2001, that you
are a director of Dataware.
6. You hereby resign as trustee of Dataware's 401(k) plan effective
immediately.
7. You may continue to participate in the Dataware medical and dental
benefits plan at your current levels at Dataware's expense until May
31, 2001. You will be eligible to continue on COBRA at your own
expense for an additional 18 months beyond May 31, 2001 if you make
a timely election to do so. Your Dataware life and disability
insurance coverage will end on April 15, 2000. Dataware will
reimburse you up to $5,500 of premiums paid by you between now and
May 15, 2001 for life and disability insurance.
8. On April 15, 2000, Dataware will pay you the cash equivalent of the
vacation that you have accrued through that date in accordance with
its vacation policy. You may retain your current laptop computer
(subject to your compliance with your nondisclosure agreement with
Dataware). Dataware will provide you a company voice mailbox until
December 31, 2000, and an email address until April 15, 2000. After
April 15, 2000, you will not be entitled to receive any fringe or
other employee benefits except as provided in this Agreement.
9. Your outstanding stock options under the Dataware Equity Incentive
Plan (the "Plan"), including the options to purchase 40,000 shares
granted on December 14, 1999, at an exercise price of $6.53, will
continue to vest in accordance with their respective terms as long
as you are still active with the company as a director. To the
extent not already provided, vesting of such options will be
accelerated such that all such stock options shall become
exercisable in full upon a "change in control" of Dataware, as
defined in the Plan, or upon your resignation as a director of
Dataware.
10. Your outstanding stock options under the Plan are also hereby
amended to provide that they, or any portion thereof, may be
exercised on a "net exercise" basis, i.e., by delivering a portion
of such options to Dataware for cancellation in lieu of paying the
exercise price in cash. You must provide Dataware with notice of
such election, stating the portion of the option to be exercised, in
which event Dataware will issue the number of shares of common stock
computed using the following formula:
X = Y * (A-B)
---------
A
Where: X = the number of shares of common stock to be issued
by Dataware;
Y = the number of shares of common stock otherwise
issuable upon exercise of this option or a portion
thereof
A = the fair market value (defined as the closing price
per share on the last trading date prior to the
date of exercise) of one share of the common stock
at the date of exercise
B = the exercise price per share of the option
11. In consideration of the foregoing, you shall execute non-
competition, non-disclosure and assignment of inventions agreements
in Dataware's standard form at the time of executing this Agreement,
and you shall be bound by such agreements during your employment and
thereafter, as provided in this Agreement. Your obligations under
your non-competition agreement shall continue for one year
<PAGE>
Jeffrey O. Nyweide
February 24, 2000
Page 3 of 4
after the later of the termination of your employment or your resignation
from Dataware's Board of Directors, and your obligations under your non-
disclosure and assignment of inventions agreements shall continue as
provided therein. In addition, you agree that during and after your
employment, you shall cooperate fully with Dataware in the defense or
prosecution of any claims or actions now pending or that may be brought in
the future against or on behalf of Dataware that relate to events
transpiring while you were employed by or a director of Dataware. Your
cooperation shall include but not be limited to being reasonably available
to meet with counsel to prepare for discovery or trial and to act as a
witness on behalf of Dataware. During and after your employment, you also
shall cooperate fully with Dataware in connection with any investigation
or review by any governmental authority relating to events transpiring
while you were employed by Dataware. Dataware will reimburse you for any
reasonable out-of-pocket expenses you incur in connection with performing
these obligations, in accordance with its normal reimbursement policy .
12. Representations. You represent that: you understand the various claims
that could have been asserted by you under the laws of Massachusetts, the
Age Discrimination in Employment Act, Title VII of the Civil Rights Act of
1964, the Retirement Income Security Act, the Fair Labor Standards Act,
the National Labor Relations Act, the Equal Pay Act, or the Americans with
Disabilities Act, and other such similar laws; that you have read this
Agreement carefully and understand all of its provisions; that you
understand you have the right to and are advised to consult an attorney
concerning this Agreement and that to the extent, if any, that you
desired, you availed yourself of this right; and that you have had at
least twenty-one (21) days to consider whether to sign this Agreement. In
addition, you have seven (7) days after signing this Agreement to revoke
your acceptance of this Agreement.
13. In exchange for the payments and the other benefits outlined above, you
hereby fully, forever, irrevocably and unconditionally release, remise and
discharge Dataware from any and all manner of claims, charges, complaints,
demands, actions, causes of action, suits, rights, debts, dues, sums of
money, costs, losses, accounts, reckonings, covenants, contracts,
promises, liabilities and expenses (including attorney's fees and costs),
of every kind and nature whatsoever, whether known or unknown, either at
law in equity, or mixed which you ever had, now have or may have by reason
of any matter or thing which has happened, developed, or occurred before
the signing of this agreement, including, but not in limitation of the
foregoing general term, and claims, asserted or unasserted, arising from
your employment with or separation from Dataware, and specifically
including any claims you may have under any federal or state labor
employment or discrimination laws, including but limited to, Title VII of
the Civil Rights Act of 1964, as amended, the Age Discrimination in
Employment Act of 1967, as amended, the Fair Labor Standards Act of 1938,
as amended, the Americans with Disabilities Act of 1992, Chapter 151B of
the Massachusetts General Laws, Sections 24A-24J of Chapter 149 of the
Massachusetts General Laws, the Massachusetts Civil Rights Act, the
Massachusetts Equal Rights Law, or at common law, but excluding (i) any
-------------
claims under this agreement, (ii) any and all rights you have as a
stockholder or holder of stock options of Dataware, (iii) your rights to
indemnification by reason of your service as a director, officer, or agent
of Dataware under its Restated Certificate of Incorporation and Bylaws or
otherwise, or (iv) any and all other rights you have as a director of
Dataware. Subject to the foregoing exclusions, it is expressly agreed and
understood that this release is a general release.
Furthermore, you agree that, in exchange for the payments and the other
benefits outlined above, on and effective as of May 15, 2001, you shall
release Dataware from all liability with respect to all periods ending on
that date on the same terms as this paragraph 13, and you will execute an
additional instrument of general release confirming such release.
14. This Agreement shall be governed by Massachusetts law. This Agreement
contains the entire agreement between you and Dataware concerning payment
of severance or other compensation following the termination of your
employment and supersedes all prior agreements and
<PAGE>
Jeffrey O. Nyweide
February 24, 2000
Page 4 of 4
understandings, written or oral, including without limitation the letter
agreement dated October 28, 1988, which is hereby terminated.
Please sign and return one copy of this Agreement to indicate your acceptance of
and agreement with its terms, and retain the other copy for your records. This
Agreement shall not become effective or enforceable until the seven-day period
referred to in Paragraph 12 has expired.
Sincerely,
/s/ David Mahoney
David Mahoney
President and CEO
I have read the foregoing terms, fully understand them and freely accept them.
/s/ Jeffrey O. Nyweide 2/24/00
- --------------------------- --------------------------
Jeffrey O. Nyweide Date
<PAGE>
Exhibit 10.9
[DATAWARE TECHNOLOGIES LETTERHEAD]
November 15, 1999
Robert J. Farrell
123 Edgewood Avenue
Smithtown, NY 11787
Dear Bob:
I am very pleased to confirm our offer to you to join Dataware Technologies,
Inc. as Executive Vice President of Worldwide Field Operations, Chief Operating
Officer reporting to Dave Mahoney, 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 Smith
Ann Smith
Vice President Corporate Resources
Offer Accepted:
By /s/ Robert J. Farrell Date 11/19/99
--------------------- --------
Enclosure
AS:jag
<PAGE>
Robert Farrell
Employment Terms
Position: Executive Vice President of Field Operations, Chief Operating
- -------- Officer reporting to the Chief Executive Officer.
Term: Your employment will commence on a date to be determined following
- ---- your acceptance of the offer (the "Start Date"). Employment with
Dataware can be terminated at any time at the option of either you
or the Company.
Base Salary: $250,000 per year, payable semi-monthly.
- ------------
Bonus: $100,000 annual bonus opportunity (beginning with FY 2000) based
- ----- on the achievement of Company revenue and earning performance
targets. Fifty percent (50%) of the annual bonus opportunity,
$50,000, is guaranteed subject to continued employment for the
first 6 months of 2000. This bonus will be paid quarterly at the
rate of at $12,500 per quarter for 4 quarters. Any remaining
portion of the annual bonus opportunity will be earned based on
the Company achieving its earnings and revenue targets and will be
payable following the end of the year.
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.
In addition, you will be eligible for $750,000 of company paid
term life insurance.
Relocation: You will be reimbursed for reasonable expenses of relocating your
- ---------- family and household to the Boston area. The company would prefer
that your relocation be completed within 12 months of your date of
employment. If your relocation is completed within your first 12
months of employment, you will be granted an additional 15,000
shares of ISO options. These options will be priced according to
the provisions outlined in the equity section below. These options
will vest immediately upon the completion of your relocation
provided it occurs no later than 12 months from your date of
employment.
The Company will provide temporary living accommodations for you
at no expense to you for a period not to exceed 12 months.
Expenses: The Company will reimburse you for reasonable business related
- -------- expenses, including travel in accordance with the Company travel
policy. Since your permanent office will be at the Cambridge
headquarters, weekly travel between your home and your office will
be considered business travel and will be reimbursed. 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
- ------ 150,000 shares, subject to approval by the Dataware Board of
Directors. The exercise price will
<PAGE>
be the fair market value on the grant date, defined as the closing
price on the day before the grant is issued.
As part of this offer, options on the first 37,500 shares will
vest on December 31, 1999. If you exercise these vested options,
the Company will hold the certificate for the shares until you
relocate your family and household to the Boston area. In the
event that your employment is terminated within the first 12
months and you have not relocated to the Boston area by then, the
shares will be forfeited to the Company in exchange for repayment
of the exercise price.
The remaining options will vest at the rate of 37,500 per year
annually on December 31. Vesting will be accelerated upon a
"Change in Control" of the Company, as defined in the Company's
Equity Incentive Plan. .
Should there be a "Change in Control" of the Company, as defined
in the Company's Equity Incentive Plan, and you are not offered an
equivalent position at or above your then current compensation,
vesting will be accelerated.
Severance: Should the Company terminate you without "Cause" or should there
- --------- be a Change in Control of the 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 six (6) 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.
For this purpose, "Cause" means (i) your commission of a felony;
(ii) your continued failure (other than any such failure resulting
from your incapacity due to physical or mental illness) to perform
your duties with the Company after the Company has delivered
written notice of such failure; (iii) your falsification of any
records, documents or systems of the Company or any other conduct
that is materially harmful to the Company or any of its customers
or suppliers; or (iv) your violation of any material provision of
any confidentiality, assignment of invention, noncompetition or
similar agreement with the Company.
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/ Robert J. Farrell Date 11/19/99
--------------------------- -----------------
Start Date: TBD
--------
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Subsidiary Jurisdiction of Organization
- ---------- ----------------------------
Dataware Technologies (UK) Ltd. England
Dataware Technologies Pte Ltd Singapore
Dataware Technologies A/S Denmark
Creative Multimedia Corporation Oregon
Green Book International Corporation Canada
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (File nos. 333-27007 and 333-39633) and Form S-8 (File
nos. 333-79711, 33-70498, 33-70500, 33-79824, 333-04487, 333-28545, 333-56691
and 333-56693) of Dataware Technologies, Inc. of our report dated February 8,
2000, relating to the financial statements and financial statement schedule,
which appears in this Form 10-K.
/s/ PricewaterhouseCoopers
Boston, Massachusetts
March 10, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,361
<SECURITIES> 0
<RECEIVABLES> 6,095
<ALLOWANCES> 803
<INVENTORY> 0
<CURRENT-ASSETS> 15,515
<PP&E> 9,586
<DEPRECIATION> 6,494
<TOTAL-ASSETS> 23,374
<CURRENT-LIABILITIES> 10,599
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 12,675
<TOTAL-LIABILITY-AND-EQUITY> 23,374
<SALES> 26,734
<TOTAL-REVENUES> 26,734
<CGS> 12,978
<TOTAL-COSTS> 12,978
<OTHER-EXPENSES> 25,072
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28
<INCOME-PRETAX> (5,083)
<INCOME-TAX> (153)
<INCOME-CONTINUING> (4,930)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,930)
<EPS-BASIC> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
<PAGE>
Exhibit 99.1
DATAWARE TECHNOLOGIES, INC.
Important Risk Factors Regarding Future Results
Our SEC filings or other public announcements may contain "forward-looking
statements." These are statements that relate to the future and include
statements about our:
. projected financial performance, including but not limited to revenues,
expenses, and profits or losses;
. market opportunities;
. product development;
. commercialization of new products; and
. future operations.
These statements can be identified by the use of words like "may," "will,"
"expect," "anticipate," "estimate," "continue" or other similar words. These
statements are necessarily based on management's knowledge at the time they are
made. Although we believe that the assumptions and expectations reflected in
such forward-looking statements are reasonable, you should not view them as
guarantees of future performance.
All statements like this are subject to known and unknown risks and
uncertainties and other factors that could cause our actual results to differ
materially from those contemplated by the statements. Important factors that
could cause future results to differ materially from those projected in the
forward-looking statements include those discussed below and others.
We may have difficulty transitioning to an e-business solutions model, which
could affect our ability to meet our long-term goals.
During 1999, we began to transition our business and our corporate
organization to an e-business solutions model. This model involves an extensive
personnel reorganization, as well as new sales and marketing strategies. We
have made substantial progress in our efforts to position the company in the e-
business market by expanding our e-business solutions customer base and adding
new executives experienced in this area to the management team. However, we may
not be able to successfully implement the e-business solutions model. Some of
the risks associated with our revised approach include:
. we may not effectively complete the necessary personnel reorganization;
. an excessive level of high-cost customized services may be required to
provide solutions meeting individual customers' needs;
. we may not be able to develop appropriate new distribution channels
capable of delivering these offerings economically and on time; and
. sales of our older product lines may decline more rapidly than they can
be replaced by revenues from newer offerings.
If we are unable to keep pace with rapid technological changes in the market
for our products and services, we may miss market opportunities, which could
reduce sales.
The market for e-business solutions in general, and information management
and distribution products and services in particular, continues to change
rapidly. We must keep up with changing technology and customer demands,
including technologies and features introduced by our competitors, or we will
not be successful.
As with any new product, our most innovative offerings may be subject to
delays in development, "debugging," production, or customization, and will
require periods of adjustment to ensure that they are meeting customer
requirements. These may cause us to miss market opportunities and future sales.
<PAGE>
If we cannot raise any necessary capital, we may not be able to expand, or we
may have to cut back, our operations.
In recent years we have had significant operating losses. Our liquid assets
and borrowings may be insufficient to provide for our growth for the near
future or even for our operations at our current rate beyond the first half of
2000. Therefore, we have begun to consider various alternatives available to us
to raise additional capital during the first half of 2000 to meet our working
capital needs and to support a more aggressive expansion of our business. We
are currently evaluating our options, and have made no decisions on the amount
that we would raise, the type of securities that might be offered, or on any
other terms of any possible financing. There is no assurance that we will be
able to raise sufficient debt or equity capital on terms that we consider
acceptable, if at all. In addition to or as an alternative to raising capital,
we may be required to cut back operations to extend our resources. In general,
factors such as the following may cause liquidity problems in the future:
. unanticipated changes in business conditions or delays in market
acceptance of new products;
. expansion of operations or research and development activities;
. development of new distribution channels;
. competitive and technological developments; and
. future acquisitions of businesses and/or product rights.
We face intense competition. If we cannot develop new, improved or more cost
effective products and solutions as quickly as our competitors, we will lose
sales.
The markets in which we do business are intensely competitive. Increased
competition may result in price reductions, reduced gross margins, lost
business, and loss of market share, any of which could have a material adverse
effect on our business, operating results and financial condition.
Our competition varies by:
. geography (North America, Europe, Asia);
. type of customer (commercial, corporate, government agency);
. market segment (financial services, high technology, etc); and
. application category (from high-end, complete software and service
solutions to pure software sales).
Our competitors include traditional information retrieval competitors, as
well as very significant companies in various areas of the e-business solutions
market. It is likely that new competitors will enter these markets as they
continue to grow. Furthermore, as the markets grow, a number of companies could
attempt to increase their presence in our markets by acquiring or forming
strategic alliances with our competitors or by introducing products or services
specifically designed for these markets. Compared to us, many of our current
and future competitors have longer operating histories and significantly
greater financial, technical, sales, marketing and other resources.
We are dependent on key personnel, whose loss could delay our product
development initiatives or ability to market to customers.
Our success depends on our ability to attract, motivate and retain highly
skilled technical, management, sales and marketing personnel. Competition for
personnel in the computer software and services industry is intense, and we are
always at risk of losing key personnel to our competitors. We may not be able
to attract and retain additional highly skilled employees, which could impair
our ability to adequately manage and complete existing projects or develop and
introduce competitive products.
Our ability to provide competitive equity compensation to key employees
plays a significant role in personnel retention. Stock options are a
significant part of our compensation package, but we presently have no shares
remaining for award under our stock compensation plans. We are asking our
shareholders at the 2000 Annual Meeting to authorize an increase in the number
of shares we may issue, as well as additional shares to grant to employees
under our Equity Incentive Plan and Employee Stock Purchase Plan. If the
stockholders do not approve these increases, we may not be successful in
attracting and retaining qualified personnel.
2
<PAGE>
Since a large portion of our revenues are generated outside the United States,
changes in international markets could affect our overall sales.
We generate a significant portion of our revenues from international sales.
Currently, we have direct sales organizations in the United Kingdom, Denmark
and Singapore and have distribution agreements covering other European
countries, the Pacific Rim, and South America. Our performance could be
adversely affected by changes in the world economies. As a result of doing
business abroad, a significant percentage of our revenues and expenses are
denominated in foreign currencies that fluctuate in value. Although we may
enter into foreign exchange forward contracts and foreign exchange option
contracts to offset a portion of the foreign exchange fluctuations,
unanticipated events may have a material impact on our results. Risks of doing
business abroad include:
. unanticipated changes in regulatory requirements, tariffs and other
barriers;
. potential changes in tax and other laws;
. greater difficulty in protecting intellectual property rights;
. difficulties in managing foreign operations; and
. general economic and political conditions.
These or other factors may have a material adverse effect on our
international sales, our ability to collect international receivables, or the
value of our assets denominated in foreign currencies, any of which would hurt
our operating results.
Market factors that affect certain classes of customers may hurt our results.
Our revenues depend on our maintaining relationships with certain classes of
customers, including:
. government agencies in the United States, Canada, Germany and the United
Kingdom;
. corporate and commercial publishers, and law firms (for certain on-line
products);
. financial printers and issuers of securities; and
. financial services and health care organizations.
Factors that affect any of these customer groups may have a substantial
adverse effect on our earnings. For example, political pressures may cause
governmental customers to reduce spending on our products and services. A
reduction in the amount of orders received from any customer class could have a
material adverse effect on our earnings and may cause actual results to vary
materially from quarter to quarter.
We may not be able to obtain or enforce protection for our intellectual
property, which could limit our ability to prevent competitors from using our
technology.
Our success depends in large part on protecting our proprietary intellectual
property rights. We rely primarily on a combination of copyright, trademark and
trade secret laws, license agreements, employee and third party non-disclosure
agreements and other methods to protect our software. We rely to a limited
extent on patent protection for our software products.
Various factors create risks in this area. For example, existing copyright
laws--even in the United States--afford only limited protection, and it may be
difficult to protect proprietary rights in certain international markets where
the laws do not offer the same intellectual property protection as U.S. law.
Third parties may claim we are infringing their rights. If these claims are
made, they may result in costly litigation or require us to license
intellectual property rights of others, which may not be possible on reasonable
terms or at all. Any such claims, with or without merit, can be time consuming
and expensive to defend, which can adversely affect our financial condition.
We may have difficulty integrating acquisitions into our business, which could
increase our costs and delay our ability to take advantage of the acquired
assets.
Over the last several years, we have expanded our product range and customer
base through a number of selective acquisitions. We may acquire additional
businesses or assets in the future. The success of an
3
<PAGE>
acquisition is dependent upon our ability to integrate the acquired business or
assets into our organization. For example, we may have difficulty integrating
acquired technology into our products, or we may not be able to retain or
motivate key employees of the acquired company. Our inability to integrate an
acquired business, or an increase in the cost of integration, could materially
and adversely affect our business, operating results and financial condition.
In addition, acquisitions may result in the allocation of purchase price to
in-process R&D. The SEC has raised concerns about the methodologies used and
allocation of purchase price to in-process R&D and has required some companies
to adjust or restate prior periods to reduce allocations to in-process R&D,
thereby increasing intangible assets and future amortization expense. While we
believe that our in-process R&D allocations are appropriate, if the SEC were to
require us to change an allocation, this would result in a higher amortization
expense, which would adversely impact our operating results.
We rely on third-party distributors who may not sell enough of our products to
make our business profitable.
A significant portion of our products are sold through indirect distribution
channels, such as value-added resellers. If we cannot develop and effectively
manage these relationships, it could have a material adverse effect on our
business.
Year 2000 problems could cause interruption or failure of our internal computer
systems and those of our suppliers, which may be expensive to fix.
We have completed testing of our current, updated product offerings
(including third party software incorporated in the products) and believe that
they are all Year 2000 compliant. We have also reviewed the computer systems
through which we provide certain services to customers and believe that they
also are Year 2000 compliant.
To date, no material problems related to the Year 2000 issue have surfaced.
It is possible, however, that such problems exist but either have not yet
manifested themselves or have not yet been detected. We cannot, of course,
predict the nature or materiality of the impact on our operations or operating
results of Year 2000 disruption by parties over whom we have no control. These
Year 2000 problems may be expensive to fix and could have a material adverse
effect on our operating results.
Our operating results fluctuate from quarter to quarter, making future
operating results difficult to predict.
We have experienced, and may continue to experience, significant quarterly
fluctuations in our operating results. Our revenue from software license fees
are substantially dependent on factors including the following:
. the timing of product shipments and receipt of license reports for sales
that are often difficult to forecast;
. our ability to close significant sales in any quarter;
. external market conditions; and
. competition.
Changes in these factors may result in a material variation between
forecasted quarterly results and actual results. Moreover, our shift in
business emphasis to an e-business solutions model has resulted in increased
product development costs and less predictable sales cycles for products and
services. Also, a disproportionately large percentage of quarterly sales occur
in the closing weeks of each quarter, making any prediction of quarterly
results before the end of a quarter potentially unreliable. Given these
variations, we cannot assure you that we will be consistently profitable during
any particular period. A shortfall in revenues during any quarter could cause
our earnings for that quarter to fall below expectations, which could adversely
impact the market price of our stock.
4
