<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 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 July 31, 2000:
Class Number of Shares Outstanding
-------------------------------------- ----------------------------
Common Stock, par value $.01 per share 10,623,363
<PAGE>
EXPLANATORY NOTE
This amendment to the Company's Quarterly Report on Form 10-Q/A for the
period ended June 30, 2000 replaces the Condensed Consolidated Balance Sheets in
order to correct an error in the number of shares outstanding, (ii) updates a
disclosure relating to pending litigation appearing in the first paragraph of
Note F to the Consolidated Financial Statements, and (iii) re-files Exhibit 4.1
to correct a reference to an individual as a director of the Company.
DATAWARE TECHNOLOGIES, INC.
INDEX
PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports Filed on Form 8-K 16
SIGNATURE 17
EXHIBIT INDEX 18
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Dataware Technologies, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,315 $ 9,361
Accounts receivable, less allowance for doubtful
accounts of $768 and $803 at June 30, 2000
and December 31, 1999, respectively 4,509 5,292
Prepaid expenses and other current assets 828 862
-------- --------
Total current assets 6,652 15,515
Property and equipment, net 3,182 3,092
Computer software costs, net 907 1,927
Investment in Northern Light 256 256
Goodwill, net 1,938 2,584
-------- --------
Total assets $ 12,935 $ 23,374
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ -- $ 1,350
Accounts payable 1,288 1,499
Other accrued expenses 1,588 2,094
Accrued compensation 1,511 1,355
Income taxes payable 199 232
Deferred revenue 4,664 4,069
-------- --------
Total current liabilities 9,250 10,599
-------- --------
Commitments and contingencies (Note F) -- --
Stockholders' equity:
Preferred stock, $.01 par value, 8,000,000 shares authorized;
none issued and outstanding -- --
Common stock, $.01 par value, 30,000,000 shares authorized;
10,535,127 shares issued and 10,461,127 shares outstanding at
June 30, 2000; 10,006,273 shares issued and 9,932,273 shares
outstanding at December 31, 1999 105 100
Additional paid-in capital 51,718 49,184
Accumulated deficit (47,243) (35,555)
Unearned compensation (412) (469)
Accumulated other comprehensive loss (225) (227)
Treasury stock, 74,000 shares at cost (258) (258)
-------- --------
Total stockholders' equity 3,685 12,775
-------- --------
Total liabilities and stockholders' equity $ 12,935 $ 23,374
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
3
<PAGE>
Dataware Technologies, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Software license fees $ 1,504 $ 2,865 $ 2,445 $ 6,794
Services 3,502 3,139 5,540 6,269
-------- ------- -------- -------
Total revenues 5,006 6,004 7,985 13,063
-------- ------- -------- -------
Cost of revenues:
Software license fees 512 795 1,070 1,659
Services 3,606 2,438 7,349 4,507
-------- ------- -------- -------
Total cost of revenues 4,118 3,233 8,419 6,166
-------- ------- -------- -------
Gross profit 888 2,771 (434) 6,897
-------- ------- -------- -------
Operating expenses:
Sales and marketing 1,610 3,522 3,528 6,385
Product development 414 1,739 689 3,777
General and administrative 3,219 1,885 5,722 3,083
Restructuring and special items 225 -- 1,035 --
Restructuring and special items - noncash (2,528) -- 308 --
-------- ------- -------- -------
Total operating expenses 2,940 7,146 11,28 13,245
-------- ------- -------- -------
Loss from operations (2,052) (4,375) (11,716) (6,348)
Interest income (expense), net (139) 73 (55) 478
Gain on Investment in Northern Light, LLC -- 5,056 --- 5,056
Other income, net 137 61 83 18
-------- ------- -------- -------
Income (loss) before income taxes (2,054) 815 (11,688) (796)
Provision for income taxes -- 13 -- 13
-------- ------- -------- -------
Net income (loss) $ (2,054) $ 802 $(11,688) $ (809)
======== ======= ======== =======
Net income (loss) per common share -- basic $ (0.20) $ 0.08 $ (1.13) $ (0.09)
======== ======= ======== =======
Net income (loss) per common share -- diluted $ (0.20) $ 0.08 $ (1.13) $ (0.09)
======== ======= ======== =======
Weighted average number of common shares outstanding -- basic 10,456 9,501 10,339 9,465
======== ======= ======== =======
Weighted average number of common shares outstanding -- diluted 10,456 9,565 10,339 9,465
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
4
<PAGE>
Dataware Technologies, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $(11,688) $ (809)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,356 2,521
Provision for doubtful accounts 198 184
Gain on Investment in Northern Light -- (5,056)
Gain on foreign currency transactions (40) (44)
Noncash stock option compensation 251 --
Stock options issued to consultants, partners and bank 158 116
Stock options issued at below fair market value 57 --
Changes in operating assets and liabilities:
Accounts receivable 997 (926)
Prepaid expenses and other current assets 4 154
Accounts payable (242) (859)
Accrued expenses and compensation (319) (864)
Accrued acquisition costs -- (140)
Income taxes payable (16) (77)
Deferred revenue 139 1,645
-------- --------
Net cash used in operating activities (8,145) (4,155)
-------- --------
Cash flows provided by (used in) investing activities:
Additions to property and equipment (807) (812)
Proceeds from Investment in Northern Light, net of costs incurred -- 5,312
Acquisition of third party software license -- (130)
Additions to capitalized software costs -- (801)
-------- --------
Net cash provided by (used in) investing activities (807) 3,569
-------- --------
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 2,129 204
-------- --------
Net cash provided by financing activities 779 204
-------- --------
Effect of exchange rate changes on cash and cash equivalents 127 42
-------- --------
Net change in cash and cash equivalents (8,046) (340)
Cash and cash equivalents at beginning of period 9,361 12,468
-------- --------
Cash and cash equivalents at end of period $ 1,315 $ 12,128
======== ========
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
<PAGE>
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 June 30, 2000 and for the six months ended June 30, 2000
and June 30, 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 Income (Loss) per Share
The Company computes basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per
Share." The following table reconciles the numerator and denominator of the
basic and diluted earnings per share computations shown in the Condensed
Consolidated Statements of Operations:
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended June 30, Months Ended June 30,
2000 1999 2000 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
(In thousands, except
per share data)
Basic and Diluted EPS
NUMERATOR:
Net income (loss) ..... $(2,054) $ 802 $(11,688) $ (809)
======= ====== ======== ======
DENOMINATOR:
Common shares
outstanding-basic ... 10,456 9,501 10,339 9,465
Dilutive options....... -- 64 -- --
Dilutive warrants...... -- -- -- --
------- ------ -------- ------
Common shares
outstanding-diluted.. 10,456 9,565 10,339 9,465
======= ====== ======== ======
Basic and
Diluted EPS... $ (0.20) $ 0.08 $ (1.13) $(0.09)
======= ====== ======== ======
</TABLE>
Options to purchase 2,677,227 and 3,520,845 shares of common stock outstanding
with weighted average exercise prices of $2.53 and $4.30 as of the three month
periods ended June 30, 1999 and 2000, respectively, and 1,995,461 and 3,520,845
shares of common stock outstanding with weighted average exercise prices of
$3.04 and $4.30 as of the six month periods ended June 30, 1999 and 2000,
respectively, were excluded from the calculation of diluted net income (loss)
per share as the effect of their inclusion would have been anti-dilutive.
Warrants to purchase 336,550 shares of common stock outstanding with weighted
average exercise prices of $3.83 as of the three and six month periods ended
June 30, 1999 and 222,653 shares of common stock outstanding with weighted
average exercise prices of $3.85 as of the three and six month periods ended
June 30, 2000 were also excluded from the calculation of diluted net income
(loss) per share as the effect of their inclusion would have been anti-dilutive.
6
<PAGE>
C. Comprehensive Loss
The Company's comprehensive losses were as follows:
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended June 30, Months Ended June 30,
2000 1999 2000 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
(In thousands)
Net income (loss) ......... $(2,054) $ 802 $(11,688) $(809)
Foreign currency
translation adjustment... (101) (19) 2 (68)
------- ----- -------- -----
Total comprehensive
income (loss)....... $(2,155) $ 783 $(11,686) $(877)
======= ===== ======== =====
</TABLE>
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 and SAB 101B, which is effective no later than the quarter
ending December 31, 2000. SAB 101 clarifies the Securities and Exchange
Commission's views regarding recognition of revenue. The Company is currently
evaluating the effects of this change but 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 established 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).
7
<PAGE>
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. 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 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
SIX MONTHS ENDED JUNE 30, 2000 AMERICA INTERNATIONAL ELIMINATIONS TOTAL
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers..... $ 4,491 $ 3,494 $ -- $ 7,985
Operating loss........................... (3,209) (1,033) (7,474) (11,716)
Total assets............................. 3,244 2,566 7,125 12,935
NORTH CORPORATE AND
SIX MONTHS ENDED JUNE 30, 1999 AMERICA INTERNATIONAL ELIMINATIONS TOTAL
--------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers..... $8,903 $4,160 $ -- $13,063
Operating income (loss).................. 2,001 790 (9,139) (6,348)
Total assets............................. 1,571 4,878 21,321 27,770
</TABLE>
F. Pending Litigation
A lawsuit was filed against the Company by a former consultant, with allegations
related to the value of compensation received and emotional distress. After a
trial, a jury found in favor of the Company on all counts.
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.
8
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G. Restructuring
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. Headcount was reduced from 209 at
December 31, 1999 to 171 at March 31, 2000. During the second quarter of 2000,
headcount increased to 183, consisting of key hires, partially offset by
additional reductions that further aligned skills and staffing to the new
business model. The reductions included 42 and 12 involuntary terminations in
the quarters ended March 31, 2000 and June 30, 2000, respectively, primarily in
the field sales and product engineering groups. These terminations resulted in a
charge of $0.8 million and $0.2 million for severance and related outplacement
and medical benefit costs in the quarters ended March 31, 2000 and June 30,
2000, respectively. Approximately $0.3 million of these charges had not been
paid as of June 30, 2000 and will be paid through May of 2001.
The Company also recorded a non-cash charge in the amount of $2.8 million in the
first quarter of 2000, representing the effect of modifications for changes in
stock options related to terminating employees and a director. During the second
quarter, the Company recorded a net non-cash credit in the amount of $2.5
million for the effects of variable accounting for these options as well as a
small amount for additional option modifications related to second quarter
terminations. Variable accounting will not be applied to these options going
forward as the terms of the agreements were fixed during the second quarter of
2000.
H. Special Items
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 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 and second quarters of
2000, resulting in a charge of $646,000 for the six months ended June 30, 2000,
and compared with $162,000 recorded in the first and second quarters of 1999 and
$324,000 for the six months ended June 30, 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 $493,000 and $1.0
million in the three and six-month periods ended June 30, 2000, respectively, as
compared with $765,000 and $1.1 million in the three and six-month periods ended
June 30, 1999.
9
<PAGE>
Dataware Technologies, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Statements concerning the Company's anticipated performance, including future
revenues, costs and profits, or about the development of the Company's products
or markets, made throughout this Form 10-Q, may be deemed forward-looking
statements. Such statements are based on the current assumptions of the
Company's management, which are believed to be reasonable. However, they are
subject to significant risks and uncertainties, including but not limited to the
important factors described under "Gross Profit," "Liquidity and Capital
Resources" 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 4% of total
revenues in the second quarter of 2000 compared with 23% during the second
quarter of 1999. IHS accounted for 5% of total revenues for the first six months
of 2000, compared with 25% in the first six months 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 half of 2000, the
Company aggressively continued this shift, reducing product sales activity in
favor of large solutions engagements. At the same time, the Company reduced
headcount in the product engineering and field sales groups, made some key
management hires and reorganized its remaining employees, moving the majority of
individuals who had been engaged in component development activities into the
solutions delivery organization. The Company also increased headcount in the
solutions delivery group, resulting in a net 12% reduction in headcount during
the first half of 2000. These and other related changes had a significant impact
on revenues as well as all classifications of expenses during the first half 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 17% from $6.0 million in the second
quarter of 1999 to $5.0 million in the second quarter of 2000. The Company's
total revenues decreased 39% from $13.1 million in the first half of 1999 to
$8.0 million in the first half 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 48% from $2.9 million to
$1.5 million. Software license fees include revenues from source code licenses,
10
<PAGE>
systems and tools, applications and custom software products. For the first six
months of 2000, software licenses decreased 64% from $6.8 million to $2.4
million at June 30, 1999 and 2000, respectively.
Revenues in the second quarter of 2000 and 1999 included $0.2 and $1.4 million,
respectively, related to agreements with IHS. For the six months ended June 30,
2000 and 1999, these revenues included $0.4 and $3.2 million, respectively. 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 quarter and first six months of 1999 included $0.7 and $1.5 million of
such discounted payments accelerated from future periods. There were no such
revenues in the first half of 2000, as all guaranteed payments under these
agreements had been made as of December 31, 1999.
Service revenues increased 12% from $3.1 million in the second quarter of 1999
to $3.5 million in the same period for 2000. Service revenues decreased 12%
from $6.3 million in the first half of 1999 to $5.5 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 year to date decrease
in service revenues resulted because the Company is not yet fully utilizing its
solutions delivery organization. However, the increase quarter to quarter shows
improvement in the Company's utilization rates. Additionally, the services
revenues for the second quarter of 2000 do not include approximately $1.0
million in revenues related to additional work completed on a significant
solutions engagement that the Company is accounting for on a cash basis due to
collection uncertainties.
Software revenues decreased from 48% of total revenues in the second quarter of
1999 to 30% in the second quarter of 2000, and services revenues increased from
52% of total revenues in the second quarter of 1999 to 70% in the second quarter
of 2000. Software revenues decreased from 52% of total revenues in the first
half of 1999 to 31% in the same period in 2000, and services revenues increased
from 48% of total revenues in the first half of 1999 to 69% in the first half of
2000.
Cost of Revenues
Cost of revenues increased 27% from $3.2 million in the second quarter of 1999
to $4.1 million during the same period in 2000. Cost of revenues increased 37%
from $6.2 million in the first six months of 1999 to $8.4 million in the first
six months of 2000. As a percentage of revenues, total cost of revenues
increased from 54% of total revenues for the three months ended June 30, 1999 to
82% for the three months ended June 30, 2000 and from 47% to 105% for the six
months ended June 30, 1999 and 2000, respectively. 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 28% in the second quarter of 1999 to 34% during the second quarter of 2000
and from 24% in the first half of 1999 to 44% in the first half of 2000. The
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 78% for
the second quarter of 1999 to 103% during the second quarter of 2000 and from
72% to 133% for the first half of 1999 and 2000, respectively. The increase
resulted primarily from the transfer of a significant portion of the Company's
component development employees into the solutions delivery organization in the
first half of 2000 and the resulting underutilization of the solutions delivery
group.
Gross Profit
Total gross profit was $2.8 million or 46% of total revenues for the second
quarter of 1999 compared to a gross profit of $0.9 million, or 18% of total
revenues for the second quarter of 2000. For the first six months of 1999, total
gross profit amounted to $6.9 million as compared with a negative gross profit
of $0.4 million for the same period in 2000, representing 53% and (5%),
respectively. Quarter to quarter, software margins decreased from 72% in 1999 to
66% in 2000 and services margins decreased from 22% in 1999 to (3%) in 2000. On
a year-to-year basis, software margins decreased from 76% to 56% and services
margins decreased from 28% to (33%) in 1999 and 2000, respectively.
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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.
Sales and Marketing Expenses
Sales and marketing expenses decreased 54%, from $3.5 million to $1.6 million,
during the second quarters of 1999 and 2000, respectively, and 45%, from $6.4
million to $3.5 million, during the first six months of 1999 and 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 59% to 32% on a quarter-to-quarter basis and from 49% to 44% on a
year-to-year basis due to the decline in revenues and spending.
Product Development Expenses
Product development expenses, which exclude capitalized software costs,
decreased 76% from $1.7 million in the second quarter of 1999 to $0.4 million in
the second quarter of 2000, and decreased 82% from $3.8 million during the first
six months of 1999 to $0.7 million during the same period in 2000. The decrease
is due to the 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 $0.4 million
in the second quarter and $0.8 million in the first six months of 1999. There
were no software development costs capitalizable in accordance with Financial
Accounting Standard No. 86 in the first half of 2000.
Product development expenses as a percentage of total revenues decreased from
29% for the three months ended June 30, 1999 to 8% for the three months ended
June 30, 2000 and from 29% to 9% for the six months ended June 30, 1999 and
2000, respectively.
General and Administrative Expenses
General and administrative expenses were $1.9 million in the second quarter of
1999 and $3.2 million in the second quarter of 2000, and $3.1 million in the
first half of 1999 as compared with $5.7 million in the first half of 2000. This
increase was caused by: additional headcount in key management positions
worldwide as well as the human resources and internal systems areas; an increase
in goodwill amortization; and credits recorded in the first half of 1999.
General and administrative expenses as a percent of total revenues were 31% and
64% for the quarters ended June 30, 1999 and 2000, respectively, and 24% and 72%
for the comparative six-month periods.
The Company's full-time employee headcount at June 30, 2000 was 183, 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. Headcount was reduced from 209 at
December 31, 1999 to 171 at March 31, 2000. During the second quarter, headcount
increased to 183, consisting of key hires, partially offset by additional
reductions that further aligned skills and staffing to the new business model.
The reductions included 42 and 12 involuntary terminations in the quarters ended
March 31, 2000 and June 30, 2000, primarily in the field sales and product
engineering groups. These terminations resulted in a charge of $0.8 million and
$0.2 million for severance and related outplacement and medical benefit costs in
the quarters ended March 31, 2000 and June 30, 2000, respectively. Approximately
$0.3 million of these charges had not been paid as of June 30, 2000 and will be
paid through May of 2001.
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The Company also recorded a non-cash charge in the amount of $2.8 million in the
first quarter of 2000, representing the effect of modifications for changes in
stock options related to terminating employees and a director. During the second
quarter, the Company recorded a net non-cash credit in the amount of $2.5
million for the effects of variable accounting for these options as well as a
small amount for additional option modifications related to second quarter
terminations. Variable accounting will not be applied to these options going
forward as the terms of the agreements were fixed during the second quarter of
2000.
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 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 and second quarters of
2000, resulting in a charge of $646,000 for the six months ended June 30, 2000,
and compared with $162,000 recorded in the first and second quarters of 1999 and
$324,000 for the six months ended June 30, 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 $493,000 and $1.0
million in the three and six-month periods ended June 30, 2000, respectively as
compared with $765,000 and $1.1 million in the three and six-month periods ended
June 30, 1999.
Other Income (Expense), Net
During the second quarter of 2000, the Company reported approximately $139,000
in net interest expense as compared with approximately $73,000 of net interest
income in the second quarter of 1999. During the first six months of 2000, the
Company recorded $55,000 in net interest expense as compared with $478,000 in
net interest income during the same period in 1999. The interest income earned
during the first half of 1999 included interest collected on a secured note
receivable. For the three months ended June 30, 2000, the Company recorded
$137,000 in net other income compared with $61,000 during the same period in
1999. For the first half of 2000, the Company recorded approximately $83,000 in
net other income compared with $18,000 in the first half of 1999 (mostly foreign
exchange gains on intercompany balances).
Provision for Income Taxes
The Company did not record a provision for income taxes for the three or six-
month periods ended June 30, 2000, respectively. In the second quarter of 1999,
the company recorded a $13,000 provision for income taxes related to a foreign
subsidiary. At June 30, 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 June 30, 2000, the Company had cash and cash equivalents of $1.3 million
and negative working capital of $2.6 million. Operating activities used $8.1
million of the Company's cash during the first six months of 2000. Days sales
outstanding decreased from 74 days at December 31, 1999, to 70 days at June 30,
2000.
The Company's investing activities used cash of $0.8 million during the first
half of 2000, consisting of additions to property and equipment.
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The Company's financing activities provided cash of $0.8 million during the
first six 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 renegotiated the line of credit during the second quarter to reduce
certain covenant restrictions to a level that management believes will provide
access to the minimum level of capital required to support operations. The
Company may borrow up to $2 million under the new line of credit; this amount
will increase to $3 million in December of 2000 provided that the Company
demonstrates full compliance with all terms and conditions of the loan
agreement. However, the Company was not in compliance with the covenants at June
30, 2000 and had not drawn on this line of credit as of that date.
The Company believes that its cash and cash equivalents are not sufficient to
meet its liquidity needs through fiscal year 2000. The Company's line of credit
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. In June 2000, the Company retained an investment banker and is
currently discussing a potential equity financing arrangement with an identified
capital source. 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 significant 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 hire sufficient qualified
personnel to deliver the level of business it is anticipating; it may not
finalize pending customer agreements on which it has begun work; it may not be
able to develop appropriate new 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 it 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; customers may be less able to buy the Company's services due to
reduced support from the capital markets; and reliance on third parties for
supply of certain product components.
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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. The company may not secure
additional financing when required, and 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.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities
On May 19, 2000, the Company issued seven-year warrants to purchase a total of
57,653 shares of Common Stock at $3.47 per share to Silicon Valley Bank in
connection with the renegotiation of the Company's line of credit. 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
investor.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders on April 13, 2000, the Company's
stockholders voted as follows:
To reelect David Mahoney to the Board of Directors for a three-year term.
Total Vote For 9,065,505
Total Vote Against 103,226
Total Abstentions 14,619
To amend the Company's Restated Certificate of Incorporation to increase the
number of authorized shares of common stock from 14,000,000 to 30,000,000.
Total Vote For the Proposal 8,478,316
Total Vote Against the Proposal 684,862
Total Abstentions 20,172
To amend the Company's Equity Incentive Plan to increase the number of shares of
common stock available for issuance by 2,000,000.
Total Vote For the Proposal 2,968,850
Total Vote Against the Proposal 896,169
Total Abstentions 25,257
Broker Non-votes 5,293,074
To amend the Company's 1993 Employee Stock Purchase Plan to increase the number
of shares of common stock available for issuance by 500,000.
Total Vote For the Proposal 3,530,281
Total Vote Against the Proposal 338,750
Total Abstentions 21,245
Broker Non-votes 5,293,074
Item 6. Exhibits and Reports Filed on Form 8-K
(a) Exhibits. See exhibit list on page 18.
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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: August 11, 2000 By: /s/ Michael Gonnerman
--------------------------------
Michael Gonnerman
Vice President, Chief Financial
Officer, Treasurer (Principal
Financial and Principal
Accounting Officer)
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Exhibit Index
4.1 Warrant Agreement between the Registrant and Silicon Valley Bank dated
as of June 9, 2000. Filed herewith.
10.1 Equity Incentive Plan, as amended through April 13, 2000. Filed as
Exhibit 10.1 to Dataware's Quarterly Report on Form 10-Q for the period
ended June 30, 2000, and incorporated herein by reference.
10.3 Amendment dated April 18, 2000 to Severance Agreement between the
Registrant and Jeffrey O. Nyweide dated February 24, 2000. Filed as
Exhibit 10.3 to Dataware's Quarterly Report on Form 10-Q for the period
ended June 30, 2000, and incorporated herein by reference.
10.4 Amendment dated April 14, 2000 to Severance Agreement between the
Registrant and Kurt Mueller dated December 31, 1998. Filed as Exhibit
10.4 to Dataware's Quarterly Report on Form 10-Q for the period ended
June 30, 2000, and incorporated herein by reference.
27.1 Financial Data Schedule. (previously filed)
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.
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