<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000 Commission File Number 0-21860
DATAWARE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1232140
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Canal Park 02141
Cambridge, MA (Zip Code)
(Address of principal executive offices)
617-621-0820
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No____
---
Number of shares outstanding of the issuer's classes of common stock as of
April 30, 2000:
Class Number of Shares Outstanding
-------------------------------------- ----------------------------
Common Stock, par value $.01 per share 10,530,034
<PAGE>
DATAWARE TECHNOLOGIES, INC.
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities 15
Item 6. Exhibits and Reports Filed on Form 8-K 15
SIGNATURE 16
EXHIBIT INDEX 17
<PAGE>
Item 1. Condensed Consolidated Financial Statements
Dataware Technologies, Inc.
Condensed Consolidated Balance Sheets
(in thousands except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 6,022 $ 9,361
Accounts receivable, less allowance for doubtful
accounts of $798 and $803 at March 31, 2000
and December 31, 1999, respectively 3,173 5,292
Prepaid expenses and other current assets 1,138 862
---------- ----------
Total current assets 10,333 15,515
Property and equipment, net 3,214 3,092
Computer software costs, net 1,400 1,927
Investment in Northern Light 256 256
Goodwill, net 2,261 2,584
---------- ----------
Total assets $ 17,464 $ 23,374
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ --- $ 1,350
Accounts payable 1,465 1,499
Other accrued expenses 2,055 2,094
Accrued compensation 1,289 1,355
Income taxes payable 220 232
Deferred revenue 4,527 4,069
---------- ----------
Total current liabilities 9,556 10,599
---------- ----------
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;
10,499,362 shares issued and 10,425,362 shares outstanding at March
31, 2000; 10,006,273 shares issued and 9,932,273 shares
outstanding at December 31, 1999 105 100
Additional paid-in capital 54,017 49,184
Accumulated deficit (45,190) (35,555)
Unearned compensation (440) (469)
Accumulated other comprehensive loss (326) (227)
Treasury stock, 74,000 shares at cost (258) (258)
---------- ----------
Total stockholders' equity 7,908 12,775
---------- ----------
Total liabilities and stockholders' equity $ 17,464 $ 23,374
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
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Dataware Technologies, Inc.
Condensed Consolidated Statements of Operations
(in thousands except per share data, unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Software license fees $ 941 $ 3,929
Services 2,038 3,130
----------- -----------
Total revenues 2,979 7,059
----------- -----------
Cost of revenues:
Software license fees 558 864
Services 3,743 2,069
----------- -----------
Total cost of revenues 4,301 2,933
----------- -----------
Gross profit (1,322) 4,126
----------- -----------
Operating expenses:
Sales and marketing 1,918 2,863
Product development 275 2,038
General and administrative 2,503 1,198
Restructuring and special items 810 ---
Restructuring and special items - non-cash 2,836 ---
----------- -----------
Total operating expenses 8,342 6,099
----------- -----------
Loss from operations (9,664) (1,973)
Interest income, net 84 405
Other expense, net (54) (43)
----------- -----------
Loss before income taxes (9,634) (1,611)
Provision for income taxes --- ---
----------- -----------
Net loss $ (9,634) $ (1,611)
=========== ===========
Net loss per common share -- basic $ (0.94) $ (0.17)
=========== ===========
Net loss per common share -- diluted $ (0.94) $ (0.17)
=========== ===========
Weighted average number of common shares outstanding -- basic 10,223 9,429
=========== ===========
Weighted average number of common shares outstanding -- diluted 10,223 9,429
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
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Dataware Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
--------- ----------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $ (9,634) $ (1,611)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,193 1,246
Provision for doubtful accounts 30 106
Gain on foreign currency transactions (29) (43)
Noncash stock option compensation 2,836 ---
Stock options issued at below fair market value 29 ---
Changes in operating assets and liabilities, net
of effects from acquisitions of businesses:
Accounts receivable 2,581 (578)
Prepaid expenses and other current assets (287) (2)
Accounts payable (28) (126)
Accrued expenses and compensation (480) (1,686)
Accrued restructuring and special items 394 ---
Income taxes payable (12) (72)
Deferred revenue (34) 1,428
---------- ----------
Net cash used in operating activities (3,441) (1,338)
---------- ----------
Cash flows used in investing activities:
Additions to property and equipment (472) (471)
Acquisition of third party software license --- (130)
Additions to capitalized software costs --- (392)
---------- ----------
Net cash used in investing activities (472) (993)
---------- ----------
Cash flows provided by financing activities:
Paydown of short-term borrowings (1,350) ---
Proceeds from issuance of common stock and exercise of
stock options and warrants 2,040 95
---------- ----------
Net cash provided by financing activities 690 95
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (116) 57
---------- ----------
Net change in cash and cash equivalents (3,339) (2,179)
Cash and cash equivalents at beginning of period 9,361 12,468
---------- ----------
Cash and cash equivalents at end of period $ 6,022 $ 10,289
========== ==========
Supplemental disclosure of non-cash operating and financing transactions:
Waiver of escrow shares transferred from accrued liabilities to additional
paid-in capital $ --- $ 200
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
5
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DATAWARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A. Basis of Presentation
These consolidated financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1999, and the financial statements and footnotes included therein. The interim
financial data as of March 31, 2000 and for the three months ended March 31,
2000 and March 31, 1999 is unaudited; however, in the opinion of the Company's
management, the interim data includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods. The year-end balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to Securities and
Exchange Commission rules and regulations.
B. Net Loss per Share
The Company computes basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per
Share." The following table reconciles the numerator and denominator of the
basic and diluted earnings per share computations shown in the Condensed
Consolidated Statements of Operations:
For the Three Months
Ended March 31,
(In thousands, except per share data) 2000 1999
---- ----
Basic and Diluted EPS
Numerator:
Net loss $(9,634) $(1,611)
===========================
Denominator:
Common shares outstanding-basic 10,223 9,429
Dilutive options --- ---
---------------------------
Common shares outstanding-diluted 10,223 9,429
===========================
Basic and Diluted EPS $ (0.94) $ (0.17)
===========================
Options to purchase 2,627,883 and 2,147,377 shares of common stock outstanding
with weighted average exercise prices of $3.69 and $3.22 and warrants to
purchase 165,000 and 236,550 shares of common stock outstanding with weighted
average exercise prices of $3.99 and $4.88 for the three month periods ended
March 31, 2000 and 1999, respectively, were excluded from the calculation of
diluted net loss per share as the effect of their inclusion would have been
anti-dilutive.
C. Comprehensive Loss
The Company's comprehensive losses were as follows:
For the Three Months
Ended March 31,
(In thousands) 2000 1999
---- ----
Net loss $(9,634) $(1,611)
Foreign currency translation adjustment (99) (49)
---------------------
Total comprehensive loss $(9,733) $(1,660)
=====================
6
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D. New Accounting Standards
In March 2000, the Financial Accounting Standards Board released FASB
Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions
involving Stock Compensation - an interpretation of APB Opinion No. 25." FIN 44
provides guidance for certain issues that arise in applying Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees." The Company does not expect that the adoption of FIN No. 44 will
have a significant impact on the Company's results of operations or financial
position.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," ("SAB 101") as
amended by SAB 101A, which is effective no later than the quarter ending June
30, 2000. SAB 101 clarifies the Securities and Exchange Commission's views
regarding recognition of revenue. The Company will adopt SAB 101 in the second
quarter of 2000 and is currently evaluating the effects it will have. The
Company anticipates that the adoption of SAB 101 will not have a material effect
on the Company's 2000 financial position and results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement was originally effective for all fiscal
year ends beginning after June 15, 1999. In June 1999, the FASB issued Statement
137, which delayed the effective date of Statement 133 by one year. Statement
133 will be effective for the Company's fiscal year beginning January 1, 2001.
SFAS 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value 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,
the type of hedge transaction. The Company is currently evaluating the effects
of this change but anticipates that the adoption of SFAS 133 will not have a
significant effect on the Company's financial position or results of operations
in the near term.
E. Segment Information
On December 31, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for public
companies 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 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 prepared full balance sheets for the Eurasian business
unit, it reported to management only certain assets for the USLA and Multimedia
segments. These segments were 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.
7
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During the third quarter of 1999, management began 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 an executive 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 worldwide.
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: North America and International. Prior year information has
been restated to reflect the change in structure.
Although the Company prepares full balance sheets for the International business
unit, it reports only certain assets for the North America segment. This segment
is not considered capital-intensive and, thus, other balance sheet information
is not considered meaningful on a segment basis.
A summary of the segment financial information reported is as follows:
<TABLE>
<CAPTION>
NORTH CORPORATE AND
Three months ended March 31, 2000 AMERICA INTERNATIONAL ELIMINATIONS TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers $ 1,829 $ 1,150 $ - $ 2,979
Operating loss (2,347) (603) (6,714) (9,664)
NORTH CORPORATE AND
Three months ended March 31, 1999 AMERICA INTERNATIONAL ELIMINATIONS TOTAL
----------------------------------------------------------------------
Revenues from unaffiliated customers $ 4,946 $ 2,113 $ - $ 7,059
Operating income (loss) 1,789 438 (4,200) (1,973)
</TABLE>
F. Pending Litigation
A lawsuit has been filed against the Company by a former consultant, with
allegations related to the value of compensation received and emotional
distress. The Company's motion for summary judgment was allowed in part and a
trial has not yet been scheduled.
The Company denies these charges and is vigorously defending them. At this
time, it is not possible to estimate the likelihood of damages related to these
charges.
The Company is engaged in a dispute with a customer arising from an agreement to
develop a product. The Company believes that the customer's claim would not be
supported in litigation and the parties are negotiating a compromise that is
expected to be satisfactory to both. However, if the dispute cannot be
satisfactorily resolved, it could have a material adverse effect on the Company.
The Company has recently been named in a suit brought by the former employer of
several of the Company's senior managers, which alleges a number of claims
arising primarily out of the alleged breach of the employees' obligations to the
former employer. The Company strongly denies the claims and intends to defend
itself vigorously, as do the individual employees. However, any adverse ruling
against the Company or any of the employees could have a material adverse effect
on the Company.
G. Restructuring and Special Items
As described above, during 1999 the Company announced a program to reposition
and restructure as an e-Business solutions provider and began making strategic
and organizational changes toward that goal. During the first quarter of 2000
headcount was reduced from 209 at December 31, 1999 to 171 at March 31, 2000,
aligning current skills and staffing to the new business model. These
reductions included 42 involuntary terminations, primarily in the field sales
and product engineering groups, which resulted in a charge of $0.8 million for
severance and related outplacement and medical benefit costs. Approximately
$0.4 million of these charges had not been paid as of March 31, 2000 and will be
paid out through May of 2001. The Company anticipates that there will be
further headcount reductions in the second quarter of 2000, although they will
be less significant.
The Company also recorded a non-cash charge in the amount of $2.8 million in the
first quarter representing the effect of modifications for changes in stock
options related to terminating employees and a director.
The Company periodically reviews and evaluates the recoverability of its long-
term assets when events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. The Company's assessment of
impairment considers the future cash flows that are expected to be realized from
the assets. Because of the Company's shift from a product licensing-oriented
business model to one emphasizing e-Business services, it was determined that
goodwill related to the acquisition of Sovereign Hill Software, Inc. in December
of 1998 should be amortized over 3 years rather than the 5 year
8
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life that had previously been estimated. As of January 1, 2000, the Company
began amortizing the $2.6 million of goodwill that was on the balance sheet at
December 31, 1999 prospectively over the remaining period. The Company,
therefore, recorded goodwill amortization amounting to $323,000 in the first
quarter of 2000, compared with $162,000 recorded in the first quarter of 1999.
The Company also determined that, because of this change in focus, capitalized
software costs of $1.9 million on the balance sheet at December 31, 1999 should
be amortized prospectively over one year as opposed to the two-year life
previously used. This resulted in amortization expense of $527,000 in the first
quarter of 2000 as compared with $429,000 in the first quarter of 1999.
9
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Dataware Technologies, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements concerning the Company's anticipated performance, including future
revenues, costs and profits, or about the development of the Company's products
or markets, made throughout this Form 10-Q, may be deemed forward-looking
statements. Such statements are based on the current assumptions of the
Company's management, which are believed to be reasonable. However, they are
subject to significant risks and uncertainties, including but not limited to the
important factors described under "Gross Profit" and "Certain Factors That May
Affect Future Results" below and in Exhibit 99.1 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999 (which is incorporated herein
by reference), that could cause actual results to differ materially from those
described in the forward-looking statements.
Relationship with IHS
On September 30, 1997, the Company sold a portion of its data services business
to Information Handling Services Group, Inc. ("IHS") in exchange for cash and
the stock of IHS's subsidiary, Creative Multimedia Corporation. The portion of
the business sold included certain contracts and other assets of Dataware, as
well as the stock of the Company's Australian, Canadian, German, Italian and
Swedish subsidiaries. The activities of the data services business sold
consisted of processing customer text and data and using it to create
information-distribution products.
The Company also entered into a distribution agreement with IHS on September 30,
1997, under which IHS took over the software distribution activities formerly
performed by the five divested foreign subsidiaries (primarily involving the
Company's legacy products). In addition, the Company entered into agreements
with IHS under which it 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. IHS accounted for 7% of
total revenues in the first quarter of 2000, compared with 27% in the first
quarter of 1999. The final guaranteed payments under these agreements were made
to the Company during the fourth quarter of 1999; revenues from IHS will,
therefore, continue to be materially lower going forward.
RESULTS OF OPERATIONS
General
In 1999, the Company made several major changes to its business and operational
models as it began its transition from a product licensing-oriented business
model to one emphasizing e-Business services. During the first quarter of 2000,
the Company aggressively continued this shift, reducing product sales activity
rapidly in favor of large solutions engagements. At the same time, the Company
reduced headcount by 18% and reorganized its remaining employees, moving the
majority of individuals who had been engaged in component development activities
into the solution delivery organization. These and other related changes had a
significant negative impact on revenues as well as all classifications of
expenses during the first quarter of 2000. Because of this, comparisons with
prior periods are difficult to make at a detailed level and percentage changes
from period to period are, in many cases, not meaningful.
Revenues
The Company's total revenues decreased 58% from $7.1 million in the first
quarter of 1999 to $3.0 million in the first quarter of 2000. The decline in
revenues was a direct result of the Company's accelerated shift from a product
licensing-oriented business model to one emphasizing e-Business services.
Quarter over quarter, software license fees decreased 76% from $3.9 million to
$0.9 million. Software license fees include revenues from systems and tools,
applications and custom software products.
Revenues in the first quarter of 2000 and 1999 included $0.2 and $1.7 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 the first quarter of 1999 included $0.8
million of such discounted payments
10
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accelerated from future periods. There were no such revenues in the first
quarter of 2000, as all guaranteed payments under these agreements had been made
as of December 31, 1999.
Service revenues decreased 35% from $3.1 million in the first quarter of 1999 to
$2.0 million in the same period for 2000. Service revenues are primarily derived
from interactive multimedia development, production services, software
maintenance, web site hosting, custom software development and project
management. The decrease in service revenues resulted because the Company is not
yet fully utilizing its solutions delivery organization and from delays in
finalizing statements of work for new solutions business. The services revenues
for the first quarter of 2000 do not include revenues related to work begun on
significant solutions engagements under preliminary arrangements that were
pending final contract at March 31, 2000.
Software revenues decreased from 56% of total revenues in the first quarter of
1999 to 32% in the first quarter of 2000, and services revenues increased from
44% of total revenues in the first quarter of 1999 to 68% in the first quarter
of 2000.
Cost of Revenues
Cost of revenues increased 47% from $2.9 million in the first quarter of 1999 to
$4.3 million during the same period in 2000. As a percentage of revenues, total
cost of revenues increased from 42% of total revenues for the three months ended
March 31, 1999 to 144% for the three months ended March 31, 2000. The increase
was in both the cost of services and software license fees as described below.
The cost of software licenses as a percentage of software license fees increased
from 22% in the first quarter of 1999 to 59% during the first quarter of 2000.
This increase was caused by the decline in software revenues while fixed costs
such as amortization of capitalized software were accelerated due to the
reduction of their estimated useful lives.
The cost of services as a percentage of service revenues increased from 66% for
the first quarter of 1999 to 184% during the first quarter of 2000. The
increase resulted primarily from the transfer of a significant portion of the
Company's component development employees into the solution delivery
organization in the first quarter of 2000 and the resulting underutilization of
the solutions delivery group.
Gross Profit
Total gross profit was $4.1 million or 58% of total revenues for the first
quarter of 1999 compared to a negative gross profit of ($1.3 million), or (44%)
of total revenues for the first quarter of 2000. Quarter to quarter, software
margins decreased from 78% in 1999 to 41% in 2000 and services margins decreased
from 34% in 1999 to (84%) in 2000.
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, rather than licensing software,
will involve an increasing proportion of lower margin services. Other factors
include: the inherent risks and costs of providing a unique solution for each
customer, including uncertainty of customer acceptance; increased employment
costs stemming from the high level of competition for qualified personnel in the
e-commerce and software industries; and the Company's reliance on third parties
for supply of certain product components. In addition, the Company expects to
see further voluntary and involuntary employee turnover, with attendant costs,
as the transition to an e-Business solutions provider is completed.
Sales and Marketing Expenses
Sales and marketing expenses decreased 33% from $2.9 million during the first
quarter of 1999 to $1.9 million during the same period in 2000. This decrease
was caused by a reduction in the number of sales employees and spending on
marketing programs. Sales and marketing expenses increased as a percentage of
revenues from 41% to 64% on a quarter-to-quarter basis due to the decline in
revenues and spending.
Product Development Expenses
Product development expenses, which exclude capitalized software costs,
decreased 87% from $2.0 million in the first quarter of 1999 to $0.3 million in
the first quarter of 2000. The decrease is due to the
11
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Company's transition to a solutions model from a product-based model and the
redeployment of a significant portion of product development employees to the
solutions delivery group at the beginning of 2000.
The Company capitalized software development costs in the amount of $575,000 in
the first quarter of 1999. There were no software development costs
capitalizable in accordance with Financial Accounting Standard No. 86 in the
first quarter of 2000.
Product development expenses as a percentage of total revenues decreased from
29% for the three months ended March 31, 1999 to 9% for the three months ended
March 31, 2000.
General and Administrative Expenses
General and administrative expenses were $1.2 million in the first quarter of
1999 and $2.5 million in the first quarter of 2000. This increase was caused
by: additional headcount in the human resources and internal systems areas; an
increase in goodwill amortization; and credits recorded in the first quarter of
1999. General and administrative expenses as a percent of total revenues were
17% and 84% for the quarters ended March 31, 1999 and 2000, respectively.
Our full-time employee headcount at March 31 was 171, compared with 209 at
December 31, 1999.
Restructuring and Special Items
As described above, during 1999 the Company announced a program to reposition
and restructure as an e-Business solutions provider and began making strategic
and organizational changes toward that goal. During the first quarter of 2000
headcount was reduced from 209 at December 31, 1999 to 171 at March 31, 2000,
aligning current skills and staffing to the new business model. These
reductions included 42 involuntary terminations, primarily in the field sales
and product engineering groups, which resulted in a charge of $0.8 million for
severance and related outplacement and medical benefit costs. Approximately
$0.4 million of these charges had not been paid as of March 31, 2000 and will be
paid out through May of 2001. The Company anticipates that there will be
further headcount reductions in the second quarter of 2000, although they will
be less significant. However, the Company is actively recruiting individuals
with skills that complement the new business model and does not expect long-term
cost savings from the reductions in headcount.
The Company also recorded a non-cash charge in the amount of $2.8 million as a
result of modifications made to pre-existing awards held by former officers and
employees of the Company.
The Company periodically reviews and evaluates the recoverability of its long-
term assets when events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. The Company's assessment of
impairment considers the future cash flows that are expected to be realized from
the assets. Because of the Company's shift from a product licensing-oriented
business model to one emphasizing e-Business services, it was determined that
goodwill related to the acquisition of Sovereign Hill Software, Inc. in December
of 1998 should be amortized over 3 years rather than the estimated 5 year life
that had previously been used. As of January 1, 2000, the Company began
amortizing the $2.6 million of goodwill that was on the balance sheet at
December 31, 1999 prospectively over a 2-year period. The Company, therefore,
recorded goodwill amortization amounting to $323,000 in the first quarter of
2000, compared with $162,000 recorded in the first quarter of 1999.
The Company also determined that, because of this change in focus, capitalized
software costs of $1.9 million on the balance sheet at December 31, 1999 should
be amortized prospectively over one year as opposed to the two-year life
previously used. This resulted in amortization expense of $527,000 in the first
quarter of 2000 as compared with $429,000 in the first quarter of 1999.
Other Income (Expense), Net
During the first quarter of 2000, the Company reported approximately $84,000 in
net interest income as compared with approximately $405,000 in the first quarter
of 1999. The interest income earned during the first quarter of 1999 included
interest collected on a secured note receivable. For the three months ended
March 31, 2000, the Company recorded $54,000 in net other expense compared with
$43,000 during the same period in 1999 (mostly foreign exchange losses on
intercompany balances).
12
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Provision for Income Taxes
The Company did not record a provision for income taxes for the quarters ended
March 31, 2000 or 1999, because of the losses incurred during those periods and
the substantial net operating loss carryforward from prior periods. At March
31, 2000, 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.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had cash and cash equivalents of $6.0 million
and working capital of $0.8 million. Operating activities used $3.4 million of
the Company's cash during the first three months of 2000. Days sales
outstanding increased from 50 days at December 31, 1999, to 126 days at March
31, 2000.
The Company's investing activities used cash of $0.5 million during the first
three months of 2000, consisting of additions to property and equipment.
The Company's financing activities provided cash of $0.7 million during the
first three months of 2000, which consisted of proceeds from the issuance of
common stock under the Company's Equity Incentive and Employee Stock Purchase
Plans and warrant agreements with third parties offset against amounts paid down
on short-term borrowings.
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 was not in compliance with the covenants at March 31, 2000 and had not
drawn on this line of credit as of that date. 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 are not sufficient to
meet its liquidity needs through fiscal year 2000. The Company may not be able
to negotiate an acceptable line of credit and, even if it does, this resource
alone may not support the more aggressive expansion it desires. The Company,
therefore, intends to raise additional capital through a private placement or
public offering of securities and/or obtaining additional debt financing from a
bank during 2000 and is considering various alternatives. The Company has made
no decisions on the amount of external funding that it will 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Forward looking statements in this Form 10-Q are subject to significant risks
and uncertainties, including but not limited to the important factors described
below that could cause actual results to differ materially from those described
in the forward-looking statements:
The Company's e-Business solutions model involves an extensive personnel
reorganization, as well as new sales and marketing strategies that it may not be
able to implement successfully. Some of the risks associated with the revised
approach include that: the Company may not effectively complete the necessary
reorganization of its personnel; it may not be able to develop appropriate new
13
<PAGE>
distribution channels capable of delivering these offerings economically and on
time; and as it phases out older product lines, it may not be able to replace
those revenues with revenues from newer offerings.
In recent years the Company has had significant operating losses, and it expects
losses to continue at least for the next few quarters, and possibly longer. The
Company expects its operating expenses and capital expenditures to continue to
increase as its completes the transition to an e-Business solutions provider.
The Company cannot be certain that it will become profitable after it fully
implements the e-Business solutions model. There are a number of important
factors that could adversely affect profitability, resulting in higher than
anticipated costs and/or lower than anticipated revenues including: the impact
of significant fixed costs while sales cycles lengthen due to the move from
selling software products to providing solutions; the inherent risks and costs
of providing a unique solution for each customer, including uncertainty of
customer acceptance; increased employment costs and turnover stemming from the
high level of competition for qualified personnel in the e-commerce and software
industries; and reliance on third parties for supply of certain product
components.
If the Company's revenue does not increase as expected or operating expenditures
exceed projections, the Company's business, prospects, financial condition and
results of operations could be adversely affected. Even if the Company raises
additional capital, it may not be able to expand or may have to cut back
operations. If the Company cannot increase revenues or suffers additional
liquidity problems, it may be required to cut back operations to extend its
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 solutions; 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.
Other factors, including those described in Exhibit 99.1 to Dataware's 1999 Form
10-K and in its other filings with the Securities and Exchange Commission also
could cause future results to differ materially from those depicted in forward-
looking statements made in this Form 10-Q or elsewhere by the Company and its
officers.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change from the information provided in response to
Item 7A of the Company's 1999 annual report on Form 10-K.
14
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
---------------------
(1) In January 2000, the Company issued a total of 100,000 shares of
its common stock to Advest, Inc. and Wharton Capital, Inc. for gross proceeds of
$525,000 upon exercise of warrants granted to Advest, Inc. and Wharton Capital,
Inc. in connection with a private placement the Company undertook in 1997. This
issuance was exempt from registration under Section 4(2) of the Securities Act
based on the nonpublic nature of the transaction and the qualifications of the
investors.
(2) In February 2000, the Company issued a total of 48,824 shares of
its common stock to Imperial Bank in a net exercise transaction related to
warrants granted to Imperial Bank in connection with the establishment of an
overadvance facility for a line of credit agreement with Imperial bank in 1997.
This issuance was exempt from registration under Section 4(2) of the Securities
Act based on the nonpublic nature of the transaction and the qualifications of
the investor.
Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits. See exhibit list on page 17.
15
<PAGE>
DATAWARE TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATAWARE TECHNOLOGIES, INC.
(Registrant)
Date: May 12, 2000 By: /s/ Michael Gonnerman
---------------------
Michael Gonnerman
Vice President, Chief Financial Officer,
Treasurer
(Principal Financial and Principal
Accounting Officer)
16
<PAGE>
Exhibit Index
27.1 Financial Data Schedule.
99.1 Important Factors Regarding Future Results. Filed as Exhibit 99.1 to
Dataware's Annual Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.
17
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