-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S++GIVECUNzopsMifqGCPmiqfJ6wlFuza1FjBh2cKWgt/O8yWSJbXvqaNHSLMfRI WKYpyYzdMyrDiFTz5K4xmA== 0000927016-00-000850.txt : 20000314 0000927016-00-000850.hdr.sgml : 20000314 ACCESSION NUMBER: 0000927016-00-000850 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000313 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATAWARE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000875942 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 061232140 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21860 FILM NUMBER: 567897 BUSINESS ADDRESS: STREET 1: ONE CANAL PARK STREET 2: SUITE 3300 CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6176210820 MAIL ADDRESS: STREET 1: 222 THIRD STREET STREET 2: SUITE 3300 CITY: CAMBRIDGE STATE: MA ZIP: 02142 10-K405 1 FORM 10-K405 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission File Number 0-21860 DATAWARE TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 06-1232140 (State or Other Jurisdiction of (I.R.S. Employer Identification Incorporation or Organization) No.) One Canal Park 02141 Cambridge, MA (Zip Code) (Address of Principal Executive Offices) (617) 621-0820 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of Each Class Name of Exchange on Which Registered ------------------- ------------------------------------ None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, Par Value $.01 Per Share (Title of Class) Junior Participating Preferred Stock Purchase Rights (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of Registrant's voting common stock held by non- affiliates of the Registrant as of February 18, 2000: $97,902,731 Shares of Common Stock outstanding as of February 18, 2000: 10,309,579 ---------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for its 2000 Annual Meeting of Shareholders to be held on April 13, 2000 (the "2000 Proxy Statement") are incorporated by reference into Part III of this Report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- Part I Item 1. Business..................................................... 3 Item 1A. Executive Officers of the Registrant......................... 8 Item 2. Properties................................................... 8 Item 3. Legal Proceedings............................................ 8 Item 4. Submission of Matters to a Vote of Security Holders.......... 8 Part II Market for Registrant's Common Equity and Related Item 5. Stockholders' Matters........................................ 9 Item 6. Selected Financial Data...................................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 19 Item 8. Financial Statements and Supplementary Data.................. 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 44 Part III Item 10. Directors and Executive Officers of the Registrant........... 44 Item 11. Executive Compensation....................................... 45 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................... 45 Item 13. Certain Relationships and Related Transactions............... 45 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................................... 45 Signatures ............................................................ 47 Exhibit Index.......................................................... 48
2 Forward-Looking Statements Statements concerning the Company's anticipated performance, including future revenues, costs, and profits or losses, about the anticipated development of the Company's products and services offerings, or about the development of the Company's markets, made throughout this Annual Report, are "forward-looking statements." Such statements are based on the current assumptions of Dataware management, which are believed to be reasonable. However, they are subject to significant risks and uncertainties, including but not limited to the important factors described throughout this Annual Report, under "Certain Factors That May Affect Future Results" in Part II, Item 7 below, and in Exhibit 99.1 to this Annual Report (which is incorporated herein by reference), that could cause actual results to differ materially from those described in the forward-looking statements. PART I ITEM 1. BUSINESS GENERAL Dataware Technologies, Inc. is a full service provider of "e-Business solutions:" integrated Internet business and technology solutions to business challenges facing its clients. Dataware offers integrated, Internet related services using the Dataware Xcellera(TM) Methodology to help clients achieve critical e-Business objectives reliably and fast. Dataware's goal is to distinguish itself by combining its methodology, skills, experience, and technologies to quickly provide competitive and operational advantages for its clients. Dataware currently serves a global customer base through regional "footprint" solution-centers in the U.S. and Europe. Dataware was incorporated in Delaware in 1988 and has spent the majority of its 12 year history acquiring and developing advanced technologies for handling business knowledge assets in the form of digital information and broadband media. A knowledge asset, in this context, is an electronic document or record that encapsulates information or knowledge on some subject or combination of related subjects. Prior to 1999, Dataware's business model was to generate return on its investment in technology and technical expertise through the licensed sale of software products and related services. In 1999, the Company made several major changes to its business and operational models. Analysis of opportunities available to the Company showed that Dataware could create a higher return on invested capital by offering value-added e-Business solutions. The Company's existing proven services methodology, employee skills, Internet experience and differentiating technology allowed it to enter the high-growth e-Business solution market quickly. Additional information about the development of the Company's business during the past year and some of the risks the Company faces is contained in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." SOLUTIONS Dataware offers integrated e-Business strategy consulting, design and development of Internet applications, implementation and integration of Company and third-party Internet technology solutions, design and development of custom Internet technology solutions, and application and solution level hosting and support. Dataware partners with clients to accelerate the creation and implementation of e-Business strategies and solutions that enable the clients to create value through the use of information technology, in particular, the Internet. Dataware has assembled a global pool of multi-disciplinary talents, approaches, methodologies and technology components that encompass strategy, definition, design, specification, creation and enhancement of solutions. 3 Recent examples of solutions developed by Dataware include a solution to migrate the sale process of a large U.S. mutual fund company from a manual to an e-Business model. Distributor education and sales of mutual fund products through wholesalers were enhanced through the use of information technology. In this case, Dataware provided a full life-cycle solution that spanned from strategy consulting through implementation and support. Other sample solutions include the conception and launch of several business-to-business (B2B) portals, for both brick and mortar businesses and "dot-com" start-ups. THE DATAWARE XCELLERA(TM) METHODOLOGY Dataware delivers its solutions using its Xcellera Methodology. The Dataware Xcellera Methodology is a proven 5-step approach intended to ensure e-Business success with an emphasis on speed. Xcellera is collaborative and iterative, with specific deliverables at each step. Xcellera has been embraced by Global 2000 and "dot-com" businesses alike for its ability to create strategy from ideas, minimize risk, and promote fast and successful deployment of global e- Business solutions. The Dataware Xcellera Methodology consists of the following five steps: 1.Strategy and Vision Listen, understand, apply expertise, define vision, define objectives, and deliver business strategy--leverage Dataware knowledge to create direction 2.Define Gather information, understand business and technical requirements, apply expertise, document requirements--create projects/activities that support the strategy and vision 3.Design Develop functional and technical specifications, design system architecture and user interface, generate prototypes, and deliver design--blueprint applications that encompass the projects/activities 4.Create Build and deliver solution--integrate legacy data, integrate solution into host environment, roll out solution to user community--implement applications to create customer advantage 5.Enhance Host the solution, provide support, deliver training, manage content, and close feedback loop--provide sustainable environment and continued business objective alignment The Company believes that Xcellera offers the following advantages: . Speed. Xcellera combines the structured expertise, appropriate resource loads, and structure necessary to move e-Business initiatives forward at high speed. Frequent deliverables are designed to enable large businesses and "dot-com" companies to move quickly in executing critical initiatives. . e-Business Alignment with Business Objectives. Xcellera's steps contain specific task-level plans to ensure e-Business initiatives remain consistent with the client's business objectives. Xcellera provides for constant alignment through all steps and anticipates shifts in business objectives that will need to be considered in e-Business initiatives. . Complete Solutions. Xcellera can rapidly turn a client's ideas and strategic direction into vision and executable strategy that meets the business objectives throughout the full solution lifecycle from solution definition, design, and implementation to support. This can be greatly enhanced by Dataware's 5 years' experience in application hosting. Dataware's offering and experience in this area provides clients with the ability to get solutions "up and running" faster and manage support and enhancement with one partner. 4 CLIENTS, MARKETS, COMPETITION Dataware focuses its new business development efforts on targeted Global 2000 companies with substantial operations near the Company's operations in the U.S., Europe, and Asia. The Company also focuses on well financed newer companies formed to distribute products or services over the Internet, often referred to as "dot-coms." Most Global 2000 companies are moving to use the Internet for key business processes and require the type of solutions provided by the Company. Additionally, "dot-com" companies often need considerable assistance with the technology needed to implement their Internet-oriented business models. As a result, the Company sees a demand for its solutions to translate "dot-com" business objectives into technical reality. The market for the type of solutions offered by the Company is considered by industry sources to be one of the fastest growing information technology markets, with the potential to be one of the largest. Within these two groups, the Company has targeted clients who are determined to gain a competitive advantage and increase value for their customers through the creation of new products, services and business models facilitated by e- Business solutions. More than 575 customers did business with Dataware in 1999, and its software has been deployed by more than 2,000 customers worldwide. Sales from operations outside North America represented about 32% of Dataware revenues in 1999. An estimated 36% of total 1999 revenues came from recurring sources, such as annual renewals of retrieval software subscriptions and per disc licenses, CD- ROM update services, and software maintenance fees. The Company's various distribution, license and services agreements with IHS accounted for 21% of the Company's total revenues during 1999. However, no further guaranteed payments under these agreements are due to the Company after December 31, 1999, and the Company anticipates that revenues from IHS will be materially lower in 2000 and beyond. Dataware's customer base has traditionally been broad and diverse. As it moves from a focus on licensing proprietary software to providing customized solutions, the Company believes that it will increasingly derive a significant portion of its revenues from a more limited number of clients. The Company's sales and marketing activities are described in "Selling and Marketing" below. The markets for the Company's services are highly competitive. The Company currently competes principally with a wide range of consulting and software integration firms and internal information systems groups. Its present and future competitors include: Sapient (SAPE), Extraprise, Andersen Consulting, Razorfish (RAZF), Scient (SCNT), and Viant (VIAN), among others. Many of Dataware's competitors have greater financial, technical and marketing resources than the Company, generate greater revenues and have greater name recognition. In addition, the barriers to entry into the Company's markets are relatively low, and the Company expects to face additional competition from new entrants. The Company believes that the principal competitive factors in these markets include speed of development and implementation, quality of lead-consulting personnel, price, overall project management capability, and technical and business expertise. The Company believes it competes favorably in this environment and that its Xcellera methodology, Internet expertise, depth of integrated skills, unique proprietary technology components, ability to provide end-to-end solutions, and customer focus distinguish it from its competitors. However, the Company's ability to continue to compete successfully depends on a number of factors, including its ability to hire, retain and motivate top quality new business development staff, project managers and other senior technical staff. SELLING AND MARKETING During 1999, a majority of the Company's dedicated business development team, which consisted of 43 employees at December 31, 1999, were asked to transition from selling the Company's integrated suite of technology components to selling complete e-Business solutions. This transition required significant re-training, 5 development of new skill sets, and cultivation of new sales relationships for most of the Company's new business development team. During this transition, the new business development teams were also asked to continue to generate revenue from the Company's traditional product revenue sources. For these reasons, the company's new business development efforts were less effective during the last half of 1999. During this time, the Company experienced a large amount of turnover in new business development staff and used the opportunity to bring on new sales management and new business development resources from outside the Company with proven experience in selling e-Business solutions. The Company believes it is entering 2000 with experienced sales management and proven new business development staff applied to a selling model that is appropriate to the company's e-Business solution offering. The Company enters 2000 with fewer salespeople focused on fewer accounts, but with each person carrying larger quotas to achieve the Company's revenue goals for the year 2000. The company's solutions are sold directly by a new business development team comprised of 15-20 individuals worldwide. A separate, corporate marketing team of 4-6 people support the business development team in targeting specific clientele, including, attendance at targeted conferences and trade shows, private briefings with individual companies, live and web-based events which demonstrate the Company's unique expertise, and partnerships with other industry players. The Company uses multiple vendors to support a scalable worldwide marketing effort. In addition, the Company expects to mine its existing customer base for opportunities that match the Company's new business model. The Company's solutions require a substantial financial commitment from clients. The Company's sales cycles typically range from two to six months from the time the Company initially meets with a prospective client until the client authorizes commencement of an engagement. In certain industries, such as Government, sales cycles can be significantly longer than six months. The Company generally enters into written commitment letters with its clients prior to commencing work on a project. These commitment letters contemplate that Dataware and the client will enter into a more detailed agreement. Because these written commitments and contracts often provide that the arrangement can be terminated with limited advance notice, the Company does not believe that the projects in process at any one time are a reliable measure of expected future revenues. COMPONENT DEVELOPMENT The Company's small software development teams work on software components that are used to implement e-Business solutions. Dataware components enable next-generation information retrieval, categorization, profiling, accessing, collecting, searching, mining, browsing, and sharing knowledge assets within e- Business solution applications. Dataware component development focuses primarily on tools and utilities for handling unstructured and semi-structured knowledge assets in Web forms. Assets of this type represent as much as 90% of all on-line information today and include Web content, word processing documents, news articles, XML and SGML content, email, discussion database information, etc. In addition to internal development, the Company may also license or acquire appropriate third party technology to achieve its goals. During 1999, the Company's expenditures for research and development, net of capitalized internally developed software costs, were $7.1 million, representing 27% of total revenues. As of December 31, 1999, the Company had 61 full-time employees engaged in component development activities. Going forward, a large portion of this group will be merged into the solution delivery organization to work on solutions for customers. EMPLOYEES Management believes that key employee characteristics, including: client- focus, leadership, long-term relationship orientation, and professional growth, are critical to attaining success and has developed a strong corporate commitment to these values. To encourage the achievement of these values, Dataware fosters and rewards teamwork and promotes individuals who demonstrate these characteristics. 6 The Company believes that its future growth and success will be based in large part on its ability to attract and retain high caliber employees. The Company believes that it has been successful in its efforts to attract new, high quality professionals and retain key contributors needed to support present operations. The Company also believes it can be successful in continuing to attract the professionals needed to support anticipated growth. The Company intends to continue to recruit, hire and promote employees who demonstrate the Company's values. There is significant competition for employees with the skills required to perform the services the Company offers. Senior solution managers and senior technical staff are in high demand and will remain a limited resource for the foreseeable future. As of December 31, 1999, the Company had 209 full-time employees, comprised of 74 project personnel, 31 in finance and administration, 61 in component development, and 43 employees in business development. None of the Company's employees are subject to a collective bargaining agreement. INTELLECTUAL PROPERTY RIGHTS The Company relies upon a combination of trade secret, nondisclosure and other contractual arrangements, and copyright and trademark laws, to protect its proprietary rights. The Company enters into confidentiality agreements with its employees, generally requires that its consultants and clients enter into such agreements, and limits access to and distribution of its proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of its proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. The Company regards its software components as proprietary and attempts to protect them with a combination of copyright, trademark and trade secret laws, employee and third party non-disclosure agreements and other methods of protection. The Company does not rely on patent protection for its software components and existing copyright laws afford only limited protection. The Company sometimes provides its software components under non-exclusive, non-transferable license agreements. As is customary in the software industry, in order to protect its intellectual property rights, the Company does not sell or transfer title to its software components to customers. The Company relies primarily on "shrink wrap" licenses for the protection of its retrieval software components. A shrink wrap license agreement is a printed license agreement included within packaged software that sets forth the terms and conditions under which the purchaser can use the product and binds the purchaser by its acceptance and purchase of the software products to such terms and conditions. Shrink wrap licenses typically are not signed by the licensee and therefore may be unenforceable under the laws of certain jurisdictions. The Company has entered into source code escrow agreements with a number of customers that require release of source code to such parties with a limited, non-exclusive right to use such code in the event there is a bankruptcy proceeding by or against the Company, the Company ceases to do business or the Company breaches its contractual obligations to the customer. The Company has, in certain cases, licensed its source code, or portions thereof, to customers for specific uses. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future components or trademarks or that any such assertion will not result in costly litigation or require the Company to obtain a license to intellectual property rights of third parties. There can be no assurance that such licenses will be available on reasonable terms or at all. As the number of software products/components in the industry increases and the functionality of these products/components further overlap, the Company believes that software developers may become increasingly subject to infringement claims. Any such claims, with or without merit, can be time consuming and expensive to defend. 7 A portion of the Company's business involves the development of software applications for specific client engagements. Ownership of such software is the subject of negotiation and is frequently assigned to the client, with the Company frequently retaining rights for certain uses. Issues relating to the ownership of and rights to use software applications can be complicated and there can be no assurance that disputes will not arise that affect the Company's ability to resell or reuse such applications. ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding the executive officers of the Company called for by Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G to Form 10-K is incorporated herein by reference from Part III, Item 10 hereof. ITEM 2. PROPERTIES The Company's corporate headquarters are located in Cambridge, Massachusetts, in leased facilities consisting of approximately 31,000 square feet of office space occupied under a lease that expires in December 2004. The Company leases additional facilities and offices, including locations in Denham, UK; Copenhagen, Denmark; Singapore; Bethesda, Maryland; Albany, New York; Portland, Oregon; and Hadley, Massachusetts. The Company believes that its existing facilities and offices and additional space available to it are adequate to meet its near-term requirements, and that suitable additional or alternate space sufficient to serve the Company's foreseeable needs will be available on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS The Company's Common Stock is traded in the over-the-counter market and prices are quoted on the Nasdaq National Market under the symbol DWTI. The following table sets forth, for the periods indicated, the high and low sale prices per share for the Common Stock as reported by Nasdaq.
HIGH LOW ---- --- 1999: First Quarter.......................................... $4 7/16 $2 15/32 Second Quarter......................................... 3 3/16 2 Third Quarter.......................................... 3 1/16 1 9/16 Fourth Quarter......................................... 17 1/4 1 7/8 1998: First Quarter.......................................... $4 1/16 $2 3/8 Second Quarter......................................... 4 3/4 2 3/4 Third Quarter.......................................... 3 7/8 2 1/8 Fourth Quarter......................................... 3 3/4 1 1/2
On February 18, 2000, there were 327 holders of record of the Common Stock. No dividends have been paid on the Common Stock to date, and the Company does not anticipate paying dividends in the foreseeable future. On May 5, 1999, the Company issued to NEC USA Inc. a warrant to purchase 100,000 shares of Common Stock at an exercise price of $2.68 per share (which was $0.50 above the average trading price of the Common Stock at the time the agreement was made). The warrant was issued in consideration for the license of technology from NEC USA Inc. The issuance was exempt from registration under Section 4(2) of the Securities Act of 1933, based on the nonpublic nature of the transaction and the qualifications of the recipient. 9 ITEM 6. SELECTED FINANCIAL DATA
Year ended December 31, --------------------------------------------- 1999 1998 1997 1996 1995 -------- ------- ------- -------- ------- (In thousands, except per share data) Statement of Operations Data Revenues: Software license fees.......... $ 14,829 $19,258 $19,534 $ 16,502 $19,996 Services....................... 11,905 13,732 17,785 20,957 21,128 -------- ------- ------- -------- ------- Total revenues............... 26,734 32,990 37,319 37,459 41,124 Cost of revenues: Software license fees.......... 3,658 2,911 2,544 5,363 3,125 Services....................... 9,320 7,288 10,966 12,938 11,923 -------- ------- ------- -------- ------- Total cost of revenues....... 12,978 10,199 13,510 18,301 15,048 -------- ------- ------- -------- ------- Gross profit..................... 13,756 22,791 23,809 19,158 26,076 Operating expenses: Sales and marketing............ 11,695 10,953 16,603 17,679 13,754 Product development............ 7,123 6,406 6,721 10,005 5,040 General and administrative..... 6,254 5,988 5,884 8,492 5,337 Merger costs................... -- -- -- -- 171 -------- ------- ------- -------- ------- Total operating expenses......... 25,072 23,347 29,208 36,176 24,302 -------- ------- ------- -------- ------- Income (loss) from operations.... (11,316) (556) (5,399) (17,018) 1,774 -------- ------- ------- -------- ------- Interest income (expense), net... 634 476 (160) 386 586 Settlement of litigation......... -- -- -- (2,823) -- Gain on investment in Northern Light LLC....................... 5,056 -- -- -- -- Other income (expense), net...... 543 (22) (149) 144 86 -------- ------- ------- -------- ------- Income (loss) before income taxes........................... (5,083) (102) (5,708) (19,311) 2,446 -------- ------- ------- -------- ------- Income tax provision (benefit)... (153) 105 80 -- 733 -------- ------- ------- -------- ------- Net income (loss)................ (4,930) (207) (5,788) (19,311) 1,713 -------- ------- ------- -------- ------- Accretion of preferred stock..... -- -- 677 -- -- -------- ------- ------- -------- ------- Net income (loss) to common stockholders.................... $ (4,930) $ (207) $(6,465) $(19,311) $ 1,713 ======== ======= ======= ======== ======= Net income (loss) per common share--basic.................... $ (0.52) $ (0.02) $ (0.85) $ (3.01) $ 0.28 ======== ======= ======= ======== ======= Net income (loss) per common share--diluted.................. $ (0.52) $ (0.02) $ (0.85) $ (3.01) $ 0.26 ======== ======= ======= ======== ======= Weighted average number of common shares outstanding--basic.............. 9,516 9,265 7,632 6,425 6,121 ======== ======= ======= ======== ======= Weighted average number of common shares outstanding--diluted............ 9,516 9,265 7,632 6,425 6,511 ======== ======= ======= ======== ======= Working capital.................. $ 4,916 $ 5,675 $ 9,273 $ 2,649 $11,121 Total assets..................... 23,374 28,749 29,053 25,376 41,314 Notes, software license payable, and capital leases, less current portion............ -- -- -- -- 4 Stockholders' equity............. 12,775 16,353 16,466 14,418 32,216
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW In General Dataware's revenues are composed of software license fees and service revenues. The overall gross margin of the Company fluctuates depending upon the mix of business among these categories of revenues. Since its inception, Dataware has generated significant revenues outside of North America. Until the 1997 IHS transaction described below, Dataware had international direct sales organizations in Germany, the United Kingdom, Italy, France, Sweden, Denmark, Australia, Singapore, and Canada. As of December 31, 1999, the Company has direct sales organizations in the United Kingdom, Denmark and Singapore and has distribution agreements covering other European countries, the Pacific Rim, and South America. The Company's sales from operations outside of North America accounted for approximately 32%, 27% and 40% of total revenues for 1999, 1998 and 1997, respectively. The Company's foreign subsidiaries are principally engaged in software sales, services and distribution activities. Early in 1999, the Company announced a program to reposition and restructure the company as an e-Business solutions provider and began making strategic and organizational changes toward that goal. The Company had previously been focused on providing software for enterprise information access ("knowledge management") and professional electronic publishing applications, as well as multimedia services for CD-ROM and web-based publishing. The Company is now a Full Service Provider, working with its clients to create e-Business solutions that efficiently translate their business to a web-oriented model by incorporating the client's information with the Company's technology and methodology to deliver solutions built around the web, such as portals, e- commerce sites and web-based training. The Company also develops interactive multimedia, intelligent information retrieval, distributed media and knowledge management solutions. Relationship with IHS On September 30, 1997, the Company sold a portion of its data services business to Information Handling Services Group, Inc. ("IHS") in exchange for cash and the stock of IHS's subsidiary, Creative Multimedia Corporation. The portion of the business sold included certain contracts and other assets of Dataware, as well as the stock of the Company's Australian, Canadian, German, Italian and Swedish subsidiaries. The activities of the data services business sold consisted of processing customer text and data and using it to create information-distribution products. The Company also entered into a distribution agreement with IHS on September 30, 1997, under which IHS took over the software distribution activities formerly performed by the five divested foreign subsidiaries (primarily involving the Company's legacy products). In addition, the Company entered into agreements with IHS under which it provided software and multimedia services for use by IHS internally and in its publishing activities, and IHS provided software that the Company incorporated into certain of its products. As Dataware's largest distributor, IHS accounted for 30% of software license revenues (21% of total revenues) during 1999, compared with 36% and 23%, respectively, during 1998. However, no further guaranteed payments under these agreements are due to the Company after December 31, 1999, and the Company anticipates that revenues from IHS will be materially lower in 2000 and beyond. 11 RESULTS OF OPERATIONS 1999 as Compared to 1998 Revenues The Company's total revenues decreased 19% from $33.0 million in 1998 to $26.7 million in 1999. The decline in revenues resulted from a number of factors, including decreased productivity of the Company's sales force, delays in finalizing statements of work, and delays in finalizing aspects of the Company's knowledge management products, as well as from the inevitable distractions resulting from the significant refocusing of the Company's business goals and the resulting management changes made during 1999. The Company took steps at both the strategic and tactical levels during 1999 to enhance its position as a leading provider of enterprise-scale, internet and intranet-based knowledge management solutions. These steps were designed to improve the Company's execution and deliver more predictable results going forward. However, there will be a time lag before these steps can prove their potential. Another contributing factor was the general concern in the marketplace over possible "Year 2000" problems and the resulting hesitancy of many organizations to make any significant expenditures as the new year approached. Software license fees decreased 23% from $19.3 million in 1998 to $14.8 million in 1999. Software license fees include revenues from systems and tools, applications and custom software products. The mix within the software revenues continues to favor the Company's legacy products, although the newer Knowledge Management Suite and Dataware II Publisher products have been gaining momentum since late 1998 despite stiff competition in the market. Software license fees in 1998 and 1999 included $9.1 and $4.5 million, respectively, related to agreements with IHS. As part of the ongoing relationship, the Company and IHS amended existing agreements during the third quarter of 1998 to provide for IHS to make guaranteed minimum payments called for by those agreements, at the discretion of the Company, on an accelerated, discounted basis. Software revenues in 1998 and 1999 included $1.4 and $2.5 million, respectively, of such discounted payments accelerated from the years 1999 through 2002. All guaranteed payments under these agreements had been made as of December 31, 1999. Service revenues decreased 13% from $13.7 million in 1998 to $11.9 million in 1999. Service revenues are primarily derived from interactive multimedia development, production services, software maintenance, web site hosting, custom software development and project management. Software revenues decreased slightly from 58% of total revenues in 1998 to 55% in 1999, and service revenues increased slightly from 42% of total revenues in 1998 to 45% in 1999. This shift from software to service revenues is consistent with the Company's plan to move more toward providing solutions to its customers. Cost of Revenues The total cost of revenues in 1999 was $13.0 million or 27% higher than costs of $10.2 million in 1998. As a percent of total revenues, total cost of revenues was 49% of revenues in 1999, as compared to 31% of revenues in 1998. Cost of software licenses represented 25% of software revenue in 1999, up from 15% in 1998. Early in the fourth quarter of 1998, the Company purchased approximately $1.8 million of software, of which $885,000 was written off to cost of software licenses as it was rendered obsolete due to the Company's acquisition of Sovereign Hill Software, Inc. ("Sovereign Hill") on December 31, 1998. The remaining software was placed in service in January 1999 and has been fully amortized as of December 31, 1999. The increase to 25% of software revenue in 1999 was primarily caused by the decline in software revenues at the same time that amortization of purchased software, as well as internally developed software costs related to shipments of new versions of the Knowledge Management Suite and Dataware II Publisher products, increased. 12 Cost of services increased to 78% of service revenue in 1999 from 53% in 1998. Cost of services consists primarily of personnel expenses, certain overhead costs and the cost of third party services. The increase year over year was caused by underutilization of the multimedia web site development and knowledge management consulting groups during 1999. Gross Profit Total gross profit was $13.8 million, down from $22.8 million in 1998, representing 51% of total revenues in 1999 and 69% in 1998. The decrease in gross margins was caused by lower revenues and higher fixed software and services costs as described above. Gross margins may improve in the long run if the Company attains additional improvements in service margins. However, there are a number of important factors that could adversely affect the Company's future gross margins, resulting in higher than anticipated costs and/or lower than anticipated revenues. In particular, the Company's increasing emphasis on providing solutions in the knowledge management field, not just selling software, will involve an increasing proportion of lower margin services. Other factors include: the inherent risks and costs of new product introductions, including uncertainty of customer acceptance; increased employment costs stemming from the high level of competition for qualified personnel in the software industry; and the Company's reliance on third parties for supply of certain product components. In addition, the Company expects to see higher than average voluntary and involuntary employee turnover, with attendant costs, as the transition to an e-Business solution provider is completed. Sales and Marketing Expenses Sales and marketing expenses increased 7% to $11.7 million in 1999 from $11.0 million in 1998, principally due to an increase in the Company's sales staff early in 1999. Sales and marketing expenses as a percentage of total revenues increased to 44% in 1999 from 33% in 1998, due to decreased revenues and increased fixed compensation-related costs. Product Development Expenses Product development expenses increased 20% to $7.1 million in 1999 from $6.0 million in 1998. Product development expense as a percentage of total revenues increased to 27% in 1999 from 18% in 1998. The increase in product development costs reflects the Company's efforts toward the 1999 release of versions of its newer products as well as a reduced overall percentage of development costs being capitalized. In 1999 the Company capitalized approximately $1.4 million of internally developed software costs as compared with $1.9 million in 1998. The Company also capitalized approximately $0.3 million of purchased application development tool software during 1999 as compared with $1.8 million during 1998. The Company's expenditures in product development, including capitalized internally developed software costs, were $8.5 million and $7.9 million for the years ended December 31, 1999 and 1998, representing 32% and 24% of revenues, respectively. General and Administrative Expenses General and administrative expenses increased 4% to $6.3 million in 1999 from $6.0 million in 1998. General and administrative expenses as a percentage of total revenues increased to 23% in 1999 from 18% in 1998. The increase in general and administrative expense was primarily caused by the amortization of goodwill related to the acquisition of Sovereign Hill in December of 1998. 13 Purchased In-Process Research and Development On January 23, 1998, the Company completed the acquisition of all of the outstanding shares of Green Book International Corporation ("Gbook"), in exchange for approximately $300,000 in cash. The Company incurred direct expenses of $150,000 related to the transaction. Prior to the acquisition, Gbook was the developer of a software package for the electronic publishing of financial prospectuses. The acquisition was accounted for as a purchase and, accordingly, the assets, liabilities and results of operations of Gbook are included in the financial statements from the acquisition date. The results of the continuing operations of Gbook are immaterial in the context of the results of the Company. Because the acquired technology was incomplete and required substantial additional development, the Company recorded a charge of $450,000 for purchased R&D in the first quarter of 1998. The Company successfully completed the further development necessary to complete the acquired technology during 1998. Other Income (Expense), Net During 1999 the Company reported approximately $634,000 of net interest income as compared with approximately $476,000 in 1998. The interest income earned during 1999 includes interest collected on a secured note receivable during the first quarter. The Company also reported approximately $543,000 in other income, net, in 1999 as compared with $22,000 in other expense, net, in 1998. The change included income from the buyout of one of the Company's office space leases during the fourth quarter of 1999 for $400,000, net of direct expenses, resulting in a gain that was recorded as Other Income, as well as foreign exchange losses caused by the effect of changes in exchange rates on intercompany balances with the Company's foreign subsidiaries. Gain on Investment in Northern Light During the second quarter of 1999, Dataware sold one-half of its interest in Northern Light Technology LLC ("Northern Light") back to Northern Light for $4.1 million in cash. In addition, Northern Light repaid the Company the principal and interest due on a $1.2 million promissory note held by Dataware. These transactions resulted in a $5.1 million gain after adjusting for legal costs incurred and the investment in Northern Light that was carried on the Company's books. Northern Light has since incorporated. Provision for Income Taxes The Company recorded an income tax benefit of $153,000 and an income tax provision of $105,000 for the years ended December 31, 1999 and 1998, respectively. The Company recorded a $373,000 income tax benefit in the third quarter of 1999, representing the reversal of a reserve established in previous years for taxes on a foreign subsidiary that the Company now believes are not owed. This benefit was partially offset by an income tax provision related to profitable foreign operations. The provision booked in 1998 was also related to profitable foreign operations. At December 31, 1999, the Company had a net operating loss carryforward of approximately $26.9 million. Use of the Company's net operating loss carryforward is limited due to changes in ownership of the Company's stock. As required by Statement of Financial Accounting Standard No. 109, management of the Company has evaluated its ability to realize its deferred tax assets, which are comprised principally of net operating loss and tax credit carryforwards. In the fourth quarter of 1996, the Company recorded a full valuation allowance of $5.2 million to offset the entire net deferred tax assets because it was considered unlikely that the Company would be able to realize those assets. Accordingly, the deferred tax assets have been fully reserved. 14 1998 as Compared to 1997 Revenues The Company's total revenues decreased 12% from $37.3 million in 1997 to $33.0 million in 1998. This decline was primarily due to the reduction in service revenues following the sale of a portion of the services business to IHS in 1997. Software license fees remained relatively flat at $19.3 million in 1998 and $19.5 million in 1997. Software license fees included revenues from systems and tools, applications and custom software products. The mix within the software revenues continued to favor the Company's legacy products in 1998, although the newer Knowledge Management Suite and Dataware II Publisher products gained momentum. Software license revenue in 1998 included $9.1 million related to agreements with IHS. As part of the ongoing relationship, the Company and IHS amended existing agreements during the third quarter of 1998 to provide for IHS to make guaranteed minimum payments called for by those agreements, at the discretion of the Company, on an accelerated, discounted basis. Software revenues in the second half of 1998 included $1.4 million of such discounted payments accelerated from the years 1999 and 2000. Service revenues decreased 23% to $13.7 million in 1998 from $17.8 million in 1997, a $4.1 million decrease. Service revenues were primarily derived from Ledge multimedia development, production services, software maintenance, custom software development and project management. The decrease in service revenue reflected the impact of the 1997 IHS transaction. Recurring revenues comprised approximately 29%, 45% and 51% of total revenues for 1998, 1997 and 1996, respectively. Recurring software license revenues resulted from annual renewal of retrieval licenses and certain other fees. Recurring service revenues resulted from data services to support customers in their use of Dataware software products, database hosting and software maintenance fees. The decrease in recurring revenue as a percentage of total revenues from 1996 to 1998 was primarily due to the impact of the 1997 IHS transaction. Cost of Revenues The total cost of revenues in 1998 was $10.2 million, or 25% lower than costs of $13.5 million in 1997. As a percent of total revenues, total cost of revenues was 31% of revenues in 1998, as compared to 36% of revenues in 1997. This decrease was primarily caused by the sale of a portion of the lower-margin services business to IHS in 1997. The Company recorded a $0.9 million one-time charge in the fourth quarter of 1998 for the write down of abandoned software assets to their estimated net realizable value. Excluding the effect of this one-time charge, cost of software licenses represented 11% of software license revenue in 1998, down from 13% in 1997. This decrease was a result of reduced fixed costs due to a lower portion of third-party software sales in the mix (and, thus, lower third- party license fee payments). Cost of services decreased to 53% of service revenue in 1998 from 62% in 1997. Cost of services consisted primarily of personnel expenses, certain overhead costs and the cost of third party services. The decrease was caused by the 1997 transfer of a portion of the lower-margin services business to IHS as well as increases in service fees charged by the Company's remaining services business. Gross Profit Total gross profit in 1998 was $22.8 million, down from $23.8 million in 1997, representing 69% of total revenues in 1998 and 64% in 1997. Excluding the one-time charge mentioned previously, total gross profit was relatively flat in absolute terms from year to year and represented 72% of revenues in 1998 compared with 64% in 1997. The increase in gross margins was primarily due to the 1997 transfer of a portion of the lower-margin services business to IHS. 15 Sales and Marketing Expenses Sales and marketing expenses decreased 34% to $11.0 million in 1998 from $16.6 million in 1997. Sales and marketing expenses as a percentage of total revenues decreased to 33% in 1998 from 44% in 1997. The decrease in sales and marketing expenses was primarily caused by the 1997 IHS transaction, which divested the Company of certain business activities in the U.S. and U.K., as well as five foreign subsidiaries that had been principally involved in distributing Dataware products. This decrease in costs was partially offset by the Company's increased marketing activities during 1998 related to the rollout of new products. Product Development Expenses Product development expenses excluding capitalized software expenditures decreased 11% to $6.0 million in 1998 from $6.7 million in 1997. Product development expense as a percentage of total revenue remained flat at 18% in 1998 and 1997. The decrease in product development expenses in terms of dollars was due to expenses related to Northern Light Technology Corporation, a subsidiary whose assets were sold on April 7, 1997. These expenses amounted to $0.7 million in 1997. Product development expenses other than those related to Northern Light Technology Corporation remained flat at $6.0 million in 1998 and 1997. In 1998 the Company capitalized approximately $1.9 million of internally developed software costs as compared with $1.8 million in 1997. The Company also capitalized approximately $1.8 million of application development tool software that was purchased during 1998. The Company's expenditures in research and development, including capitalized internally developed software costs, were $7.9 million and $8.6 million for the years ended December 31, 1998 and 1997, representing 24% and 23% of revenues, respectively. General and Administrative Expenses General and administrative expenses increased 2% to $6.0 million in 1998 from $5.9 million in 1997. General and administrative expenses as a percentage of total revenue increased to 18% in 1998 from 16% in 1997. The increase in general and administrative expense was primarily due to the IHS transaction, offset by a write down in fixed assets, charges related to the separation of the CEO and a waiver of certain call options. Purchased In-Process Research and Development The 1998 treatment of in-process research and development purchased from GreenBook International Corporation is described above under "1999 as compared to 1998". Other Income (Expense), Net During 1998 the Company reported approximately $476,000 of net interest income as compared with approximately $160,000 in net interest expense in 1997. The change resulted from increases in the average balances of cash and investments beginning with the IHS transaction in September of 1997 as well as the decrease in interest expense related to the Company's lines of credit that was incurred during 1997. Other expense, net, amounting to $22,000 in 1998 and $149,000 in 1997 consisted primarily of foreign exchange losses caused by the effect of changes in exchange rates on intercompany balances with the Company's foreign subsidiaries. Provision for Income Taxes The Company recorded a provision for income taxes of $105,000 and $80,000 for the years ended December 31, 1998 and 1997, respectively, related to profitable foreign operations. At December 31, 1998, the Company had a net operating loss carryforward of approximately $13.2 million. As required by Statement of Financial Accounting Standard No. 109, management of the Company evaluated its ability to realize its deferred tax assets, which are comprised principally of net operating loss and 16 tax credit carryforwards. In the fourth quarter of 1996, the Company recorded a full valuation allowance of $5.2 million to offset the entire net deferred tax assets because it was unlikely whether it would be able to realize the assets due to large cumulative pretax losses during the prior three years. Accordingly, the deferred tax assets have been fully reserved. Management re- evaluates the issue on a quarterly basis and determined that no net adjustment was necessary in 1998 or 1997. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1999, the Company had cash and cash equivalents of $9.4 million and working capital of $4.9 million. Operating activities used $6.1 million of the Company's cash during 1999. Days sales outstanding, based on revenues for each calendar quarter, ranged from 74 days to 50 days during 1999. As the Company had anticipated, days sales outstanding increased to 74 days during the fourth quarter of 1999. The Company's investing activities provided cash of $2.0 million during 1999, consisting of $5.3 million in proceeds from the sale of one-half its interest in Northern Light and the principal and interest due on a $1.2 million promissory note held by Dataware. These proceeds were offset by $1.7 million for additions to property and equipment and $1.6 million for internally developed capitalized software as well as a third party license that will be included in the Company's products and used to develop custom applications for customers. The Company's financing activities provided cash of $1.1 million during 1999, which consisted of proceeds from the issuance of common stock under the Company's Equity Incentive, Consultant Stock Option and Employee Stock Purchase Plans. The Company has a line of credit with a financial institution under which it can borrow up to $3 million, assuming that covenants related to certain assets and tangible net worth are met. At December 31, 1999 the Company had borrowed $1.4 million under this line of credit, which was paid in full in January 2000. The Company expects to renegotiate the line of credit to reduce the covenant restrictions to a level that management believes will provide access to the minimum level of capital required to support operations. The Company believes that its cash and cash equivalents, together with the Company's ability to borrow against its line of credit, will be sufficient to meet its liquidity needs through fiscal year 2000. However, the Company may not be able to negotiate an acceptable line of credit and, even if it does, these resources may not by themselves support the more aggressive expansion it desires. The Company, therefore, intends to raise additional capital through a private placement offering and/or obtaining additional debt financing from a bank during the first half of 2000 and is considering various alternatives. The Company has made no decisions on the amount of external funding that it might seek to raise, or the type of securities that might be offered, or on any other terms of any possible financing. The Company's working capital and other capital requirements may change because of unanticipated changes in business conditions or delays in market acceptance of new products. Other considerations such as further expansion of operations or research and development activities, competitive and technological developments, and possible future acquisitions of businesses and/or product rights may also affect the Company's capital requirements. There is no assurance that the Company will be able to raise sufficient debt or equity capital on terms that it considers acceptable, if at all. Accordingly, there can be no assurance that the Company may not experience liquidity problems as a result or because of adverse market conditions or other unfavorable events. In addition to or as an alternative to raising capital, the Company may be required to cut back operations to extend its resources. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company has not yet completed its evaluation of the impact of the adoption of this new standard; however, it is not expected to have a material impact on the Company's financial position and results of operations. 17 In December 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"), which addresses software revenue recognition as it applies to certain multiple- element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2," to extend the deferral of application of certain passages of SOP 97-2 through fiscal years beginning on or before March 15, 1999. The Company adopted SOP 98-9 during the first quarter of 1999. The Company's compliance with this SOP, including the deferral provisions, did not have a material effect on its 1999 revenues and earnings. On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal years beginning after June 15, 2000. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair values. Changes in fair values of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction. The Company has not yet completed its evaluation of the impact of the adoption of this new standard; however, it is not expected to have a material impact on the Company's financial position or results of operations in the near term. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS: Year 2000 Compliance During the latter part of the 1990s, concerns were widely expressed that certain computer programs would be unable to properly process certain date information, particularly beyond the year 1999. These concerns focused on the impact of the "Year 2000 problem" on business operations and the potential costs associated with identifying and addressing the problem. The Company developed a Year 2000 readiness plan focusing on: (i) assessing the readiness of the Company's product offerings, internal business systems and major vendors and suppliers; (ii) addressing known risks; and (iii) planning and budgeting for reasonably likely contingencies. The Company completed testing of its current product offerings for Year 2000 compliance (including third party software incorporated in the products), and based on its review believes that they are all Year 2000 compliant. The Company has not been notified of any Year 2000-related problems experienced by its customers or their end users. The Company also reviewed the computer systems, including servers for web hosting, through which it provides services to customers to ensure their Year 2000 compliance. Finally, the Company surveyed all major suppliers to determine the status of their Year 2000 compliance. To the extent that its review showed that a particular supplier's situation posed an unacceptable risk to the Company, the Company sought to identify an alternate source. Costs incurred in the Year 2000 compliance effort included the allocation of personnel to testing the Company's products and systems as well as to upgrading internal systems. During 1999, the Company incurred costs of less than $100,000 on its compliance project. Costs were expensed as incurred. The Company does not at this time foresee any further material impact on its business or operating results from the Year 2000 problem. It cannot, of course, predict the nature or materiality of the impact on its operations or operating results of Year 2000 disruption affecting parties over whom it has no control. The worst case Year 2000 scenarios would include: (i) undetected errors or uncorrected defects in the Company's current product offerings; (ii) corruption of data contained in the Company's internal information systems that would inhibit core business functions; and (iii) the failure of infrastructure services provided by third parties and government agencies (e.g., electricity, phone/fax service, internet/email, shipping and banking services, etc.). The Company has contingency plans in all of these areas that include among other things, the availability of support personnel to assist with customer support issues, manual "work arounds" for internal software failure and substitution of systems, if needed. 18 Other Factors Exhibit 99.1 hereto contains additional information about important factors that may cause the Company's actual results to differ from those contemplated by any forward-looking statements in this Annual Report. That information is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes that exposure to market risk related to changes in foreign currency exchange rates and trade accounts receivable is immaterial. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Dataware Technologies, Inc.: In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a)(1) on page 45 present fairly, in all material respects, the financial position of Dataware Technologies, Inc. (the "Company") and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14 (a)(2) on page 46 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company has incurred recurring losses from operations and requires additional financing to support operations at the current level. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 8, 2000 20 DATAWARE TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
December 31, ---------------- 1999 1998 ------- ------- ASSETS Current assets: Cash and cash equivalents.................................. $ 9,361 $12,468 Accounts receivable, less allowance for doubtful accounts of $803 and $846 at December 31, 1999 and 1998, respectively.............................................. 5,292 4,248 Prepaid expenses and other current assets.................. 862 1,355 ------- ------- Total current assets..................................... 15,515 18,071 Property and equipment, net................................ 3,092 3,394 Computer software costs, net............................... 1,927 3,540 Investment in Northern Light, at cost...................... 256 512 Goodwill, net.............................................. 2,584 3,232 ------- ------- Total assets............................................. $23,374 $28,749 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings...................................... $ 1,350 $ 1,350 Accounts payable........................................... 1,499 2,538 Accrued expenses........................................... 2,094 3,482 Accrued compensation....................................... 1,355 1,976 Income taxes payable....................................... 232 720 Deferred revenue........................................... 4,069 2,330 ------- ------- Total current liabilities................................ 10,599 12,396 Commitments and contingencies (Note I)....................... -- -- Stockholders' equity: Preferred stock, $.01 par value, 8,000,000 shares authorized, none issued and outstanding........................................... -- -- Common stock, $.01 par value, 14,000,000 shares authorized; 10,006,273 shares issued and 9,932,273 shares outstanding at December 31, 1999; 9,465,305 shares issued and 9,391,305 shares outstanding at December 31, 1998......... 100 95 Additional paid-in capital................................. 49,184 47,323 Accumulated deficit........................................ (35,555) (30,625) Unearned compensation...................................... (469) -- Accumulated other comprehensive loss....................... (227) (182) Treasury stock, 74,000 shares at cost...................... (258) (258) ------- ------- Total stockholders' equity............................... 12,775 16,353 ------- ------- Total liabilities and stockholders' equity............... $23,374 $28,749 ======= =======
The accompanying notes are an integral part of the consolidated financial statements 21 DATAWARE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Year ended December 31, -------------------------- 1999 1998 1997 -------- ------- ------- Revenues: Software license fees........................... $ 14,829 $19,258 $19,534 Services........................................ 11,905 13,732 17,785 -------- ------- ------- Total revenues................................ 26,734 32,990 37,319 Cost of revenues: Software license fees........................... 3,658 2,911 2,544 Services........................................ 9,320 7,288 10,966 -------- ------- ------- Total cost of revenues........................ 12,978 10,199 13,510 -------- ------- ------- Gross profit...................................... 13,756 22,791 23,809 Operating expenses: Sales and marketing............................. 11,695 10,953 16,603 Product development............................. 7,123 6,406 6,721 General and administrative...................... 6,254 5,988 5,884 -------- ------- ------- Total operating expenses...................... 25,072 23,347 29,208 -------- ------- ------- Loss from operations.............................. (11,316) (556) (5,399) Interest income................................... 662 482 116 Interest expense.................................. (28) (6) (276) Gain on investment in Northern Light.............. 5,056 -- -- Other income (expense), net....................... 543 (22) (149) -------- ------- ------- Loss before income tax provision (benefit)........ (5,083) (102) (5,708) -------- ------- ------- Income tax provision (benefit).................... (153) 105 80 -------- ------- ------- Net loss.......................................... (4,930) (207) (5,788) Accretion of preferred stock...................... -- -- 677 -------- ------- ------- Net loss to common stockholders................... $ (4,930) $ (207) $(6,465) ======== ======= ======= Net loss per common share--basic and diluted...... $ (0.52) $ (0.02) $ (0.85) ======== ======= ======= Weighted average number of common shares outstanding--basic and diluted................... 9,516 9,265 7,632 ======== ======= =======
The accompanying notes are an integral part of the consolidated financial statements 22 DATAWARE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, ------------------------- 1999 1998 1997 ------- ------- ------- Cash flows provided by (used in) operating activities: Net loss............................................. $(4,930) $ (207) $(5,788) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization....................... 4,827 3,717 3,780 Amortization of goodwill............................ 648 -- 263 Provision for doubtful accounts..................... 41 596 778 Loss on foreign currency transactions............... 33 24 230 Gain on investment in Northern Light................ (5,056) -- -- Write down of property, plant and equipment......... 426 201 -- Acquired in-process research and development........ -- 450 -- Write down of abandoned capitalized software........ -- 885 -- Stock options and warrants issued to consultants, partners, executives and bank...................... 116 288 157 Changes in operating assets and liabilities, net of effects from acquisitions and dispositions of businesses: Accounts receivable............................... (1,177) 2,070 (2,174) Prepaid expenses and other current assets......... 475 645 (533) Accounts payable.................................. (1,026) (719) (1,007) Accrued expenses and compensation................. (1,649) (1,673) 2,292 Accrued litigation, acquisition and other......... (124) (559) (326) Income taxes payable.............................. (483) (112) (284) Deferred revenue.................................. 1,750 (261) 1,054 ------- ------- ------- Net cash provided by (used in) operating activities..................................... (6,129) 5,345 (1,558) ------- ------- ------- Cash flows provided by (used in) investing activities: Acquisition of third party software license......... (285) -- -- Proceeds from investment in Northern Light, net of costs incurred..................................... 5,312 -- -- Additions to property and equipment................. (1,654) (1,313) (1,411) Proceeds from sale of portion of services business, net of cash acquired............................... -- -- 8,546 Acquisition of businesses........................... -- (400) -- Additions to capitalized software costs............. (1,404) (3,693) (1,788) ------- ------- ------- Net cash provided by (used in) investing activities..................................... 1,969 (5,406) 5,347 ------- ------- ------- Cash flows provided by (used in) financing activities: Proceeds from issuance of common stock and exercise of stock options................................... 1,082 390 4,130 Purchase of treasury stock.......................... -- (952) -- Principal payments on notes and capital leases...... -- (117) -- Proceeds from issuance of preferred stock........... -- -- 3,000 Dividends and issuance costs related to preferred stock.............................................. -- -- (267) Increase in short-term borrowings, net.............. -- -- 403 ------- ------- ------- Net cash provided by (used in) financing activities..................................... 1,082 (679) 7,266 ------- ------- ------- Effect of exchange rate changes on cash.............. (29) (23) (192) ------- ------- ------- Net change in cash and cash equivalents.............. (3,107) (763) 10,863 Cash and cash equivalents at beginning of year....... 12,468 13,231 2,368 ------- ------- ------- Cash and cash equivalents at end of year............. $ 9,361 $12,468 $13,231 ======= ======= ======= Supplemental disclosure of cash flow information: Interest paid....................................... $ -- $ -- $ 276 ======= ======= ======= Supplemental disclosure of non-cash investing and financing transactions: Conversion of preferred stock into common stock..... $ -- $ -- $ 3,343 ======= ======= ======= Accretion of preferred stock........................ $ -- $ -- $ 677 ======= ======= ======= Warrants issued in connection with issuance of preferred stock and acquisition.................... $ -- $ 45 $ 83 ======= ======= ======= Investment in Northern Light in exchange for assets............................................. $ -- $ -- $ 512 ======= ======= ======= Stock issued in connection with acquisitions and settlement of litigation........................... $ -- $ 497 $ 656 ======= ======= ======= Note payable assumed in connection with acquisition........................................ $ -- $ 1,350 $ -- ======= ======= ======= Capitalized lease in connection with equipment...... $ -- $ 287 $ -- ======= ======= ======= Waiver of escrow shares transferred from accrued liabilities to additional paid-in capital.......... $ 200 $ -- $ -- ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements 23 DATAWARE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended December 31, 1999, 1998 and 1997 (In thousands)
Accumu- lated Other Treasury Total Common Stock Additional Unearned Compre- Stock Compre- Stock- ------------- Paid-in Accumulated Compen- hensive ------------- hensive holders' Shares Amount Capital Deficit sation Loss Shares Amount Loss Equity ------ ------ ---------- ----------- -------- ------- ------ ------ ------- -------- Balance at December 31, 1996................... 6,641 $ 66 $38,473 $(23,756) $(365) $14,418 Stock options exercised and shares issued in conjunction with employee stock purchase plan................... 148 2 292 294 Change in translation adjustment due to disposal of foreign subsidiaries........... 413 413 Shares issued in settlement of litigation............. 175 2 654 656 Stock options issued in conjunction with sale of portion of services business............... 68 68 Stock options and warrants issued to consultants and bank... 157 157 Shares issued in connection with private placements............. 1,085 11 3,825 3,836 Conversion of preferred stock to common stock.. 1,218 12 3,331 3,343 Accretion of preferred stock.................. (677) (677) Comprehensive loss: Net loss............... (5,788) $(5,788) (5,788) Translation adjustment............ (254) (254) (254) ------- Comprehensive loss..... (6,042) ------ ---- ------- -------- ----- ----- ---- ----- ======= ------- Balance at December 31, 1997................... 9,267 93 46,800 (30,221) -- (206) -- -- 16,466 ------ ---- ------- -------- ----- ----- ---- ----- ------- Stock options exercised and shares issued in conjunction with employee stock purchase plan................... 198 2 390 392 Stock options and warrants issued to consultants and bank... 88 88 Warrants issued in connection with acquisition............ 45 45 Treasury shares purchased.............. 274 $(952) (952) Treasury shares issued in connection with acquisition............ (197) (200) 694 497 Comprehensive loss: Net loss............... (207) (207) (207) Translation adjustment............ 24 24 24 ------- Comprehensive loss..... (183) ------ ---- ------- -------- ----- ----- ---- ----- ======= ------- Balance at December 31, 1998................... 9,465 95 47,323 (30,625) -- (182) 74 (258) 16,353 ------ ---- ------- -------- ----- ----- ---- ----- ------- Stock options exercised and shares issued in conjunction with employee stock purchase plan................... 541 5 1,049 1,054 Waiver on escrow shares................. 200 200 Options issued at below fair market value...... 469 $(469) Warrants issued to consultants and partners............... 143 143 Comprehensive loss:..... Net loss............... (4,930) (4,930) (4,930) Translation adjustment............ (45) (45) (45) ------- Comprehensive loss..... $(4,975) ------ ---- ------- -------- ----- ----- ---- ----- ======= ------- Balance at December 31, 1999................... 10,006 $100 $49,184 $(35,555) $(469) $(227) 74 $(258) $12,775 ====== ==== ======= ======== ===== ===== ==== ===== =======
The accompanying notes are an integral part of the consolidated financial statements 24 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Description of Business and Summary of Significant Accounting Policies Description of Business Dataware Technologies, Inc. (the "Company") was incorporated on March 15, 1988. Significant operations of the Company commenced on October 1, 1988 with the purchase of the worldwide rights to certain software developed by Dataware 2000 GmbH and the acquisition of its United States distributor. Early in 1999, the Company announced a program to reposition and restructure the company as an e-Business solutions provider and began making strategic and organizational changes toward that goal. The Company had previously been focused on providing software for enterprise information access ("knowledge management") and professional electronic publishing applications, as well as multimedia services for CD-ROM and web-based publishing. The Company is now a Full Service Provider, working with its clients to create e-Business solutions that efficiently translate their business to a web-oriented model by incorporating the client's information with the Company's technology and methodology to deliver solutions built around the web, such as portals, e-commerce sites and web-based training. The Company also develops interactive multimedia, intelligent information retrieval, distributed media and knowledge management solutions. The accompanying financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company has incurred recurring losses over the past four years and generated a negative cash flow from operations in three of those years, including the year ended December 31, 1999. Management intends to raise additional capital through a private placement offering and/or obtaining debt financing that, upon successful closing, is expected to provide additional capital to sustain and grow operations. The Company is considering various alternatives for a financing and has made no decisions on the amount of external funding that it might seek to raise, or the type of securities that might be offered, or on any other terms. The future viability of the Company is dependent on its ability to successfully restructure itself as an e-Business solutions provider and ultimately generate positive cash flow. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries from the date of their acquisition. Intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign Currency The accounts of foreign subsidiaries are translated into U.S. dollars using exchange rates in effect at period-end for assets and liabilities and at average exchange rates during the period for results of operations. The local currency for all foreign subsidiaries is the functional currency. The related translation adjustments are reported in Accumulated Other Comprehensive Loss, a separate component of stockholders' equity. Gains and losses resulting from foreign currency transactions are included in other income (expense), net. Reclassification Certain reclassifications have been made to the prior years' financial statements to conform to the current presentation. 25 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue Recognition The Company recognizes software revenues in accordance with the provisions of Statement of Position 97-2, "Software Revenue Recognition." Revenue from software license fees is recorded upon execution of the contract provided that delivery has occurred, fees are fixed or determinable, and collection is deemed probable. Revenue from maintenance contracts, including amounts bundled in initial software licenses, is deferred and recognized ratably over the term of the agreement, generally one year. Revenues from services are recognized as the Company performs the service in accordance with the contract. Maintenance and services revenues are combined in the Company's Consolidated Statements of Operations. Income Taxes The Company provides for income taxes using the liability method whereby deferred tax liabilities and assets are recognized based on temporary differences between the financial statement and tax bases of assets and liabilities using current statutory tax rates. A valuation allowance is established against net deferred tax assets if, based on the weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments purchased with an original maturity of three months or less. Cash and cash equivalents are stated at cost, which approximates fair value because of the short maturity of these investments. Property and Equipment Property and equipment is stated at cost, and is depreciated on a straight- line basis over the estimated useful life of the assets, generally three to five years. Leasehold improvements are amortized over the lesser of the estimated useful life of the assets or the lease term. Major additions and improvements are capitalized, while repairs and maintenance are charged to expense as incurred. When assets are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in net income (loss). Product Development and Capitalized Software Costs Expenditures for research and development incurred prior to the establishment of technological feasibility are expensed as incurred. The Company capitalizes certain computer software development costs after technological feasibility has been established. These costs are amortized on a product-by-product basis, using the greater of the straight-line basis over the estimated economic lives of the software products, generally two years, or the ratio of current gross revenue to total current and expected future gross revenue of the software products, also generally two years, and are included in cost of revenues for software license fees. The straight-line basis has produced a greater charge and, accordingly, has been used exclusively to date. Concentrations of Credit Risk Financial instruments that potentially subjected the Company to concentrations of credit risk at December 31, 1999, consisted of temporary cash investments and trade receivables. The Company invests its cash in deposits and money market instruments with financial institutions. These investments typically mature within 90 days. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base and their dispersion across many different industries and around the world. The Company performs ongoing credit evaluations of its customers, but does not require collateral or other security to support customer receivables, and maintains reserves for potential credit losses. 26 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-Lived Assets The Company periodically reviews the value of long-lived assets, including goodwill, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset is written down to its estimated fair value on a discounted cash flow basis. Computation of Net Income (Loss) Per Share Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"), which has applied to the Company since 1997, requires the calculation of basic and diluted net income per share. Basic net income per share excludes any dilutive effect of options, warrants and convertible securities. Diluted net income per share uses the treasury stock method, which considers the effect of all dilutive equity instruments using the average market price for the period in determining the dilutive effect of options. Comprehensive Income (Loss) In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" which became effective for the Company in 1998. SFAS 130 requires the Company to report the total changes in equity that do not result directly from transactions with stockholders, including those that do not affect retained earnings. Other comprehensive income recorded by the Company is solely comprised of accumulated foreign currency translation adjustments. New Pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company has not yet completed its evaluation of the impact of the adoption of this new standard; however, it is not expected to have a material impact on the Company's financial position and results of operations. In December 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" ("SOP 98-9"), which addresses software revenue recognition as it applies to certain multiple- element arrangements. SOP 98-9 also amends SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2," to extend the deferral of application of certain passages of SOP 97-2 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. The Company will comply with the requirements of this SOP as they become effective and does not expect that its revenues and earnings will be materially affected. On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal years beginning after June 15, 2000. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair values. Changes in fair values of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction. The Company has not yet completed its evaluation of the impact of the adoption of this new standard; however, it is not expected to have a material impact on the Company's financial position and results of operation in the near term. 27 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B. Business Combinations and Disposals Information Handling Services Group, Inc. On September 30, 1997, the Company sold a portion of its data services business, consisting of the stock of five foreign subsidiaries in Australia, Canada, Germany, Italy and Sweden and certain other assets of the Company, to Information Handling Services Group, Inc. ("IHS") in exchange for cash and the stock of IHS's subsidiary, Creative Multimedia Corporation ("CMC"). Creative Multimedia Corporation The acquisition of CMC was accounted for as a purchase and, accordingly, the assets, liabilities and results of operations were included from the acquisition date. The results of the continuing operations of CMC for the years ended December 31, 1997, and December 31, 1996, were immaterial to the results of the Company. As a result, proforma financial information has not been presented. Sovereign Hill Software, Inc. On December 31, 1998, the Company acquired substantially all of the assets and assumed selected liabilities of Sovereign Hill Software, Inc. ("Sovereign Hill") for approximately $1,181,000. Sovereign Hill developed, marketed and distributed advanced information retrieval and information-processing products designed to access and analyze large-scale heterogeneous, distributed multimedia document databases. The purchase of Sovereign Hill's net liabilities of $2,051,000 was funded by the following: (i) 200,000 shares of Dataware Common Stock with a fair value of approximately $497,000 at the date of acquisition, (ii) 5-year warrants to purchase 40,000 additional shares of Dataware Common Stock at an exercise price of $6.00 per share valued at $45,000, and (iii) $100,000 in cash. The Company incurred approximately $500,000 of direct acquisition expenses related to the transaction. The acquisition was accounted for as a purchase and, accordingly, the operating results of Sovereign Hill were included in the Company's financial statements from the date of acquisition. The excess of the aggregate purchase price over the fair market value of net liabilities assumed of approximately $3,232,000 was recorded as goodwill and is being amortized over 5 years. The following unaudited pro forma consolidated results of operations for the years ended December 31, 1998 and 1997 assume the Sovereign Hill acquisition occurred as of January 1, 1997:
Year Ended December 31 ---------------- (in thousands, except per share data) 1998 1997 ------- ------- Net sales.............................................. $34,039 $38,684 Net loss available to common stockholders.............. (2,444) (10,782) Earnings per share: Basic................................................ (0.26) (1.38) Diluted.............................................. (0.26) (1.38)
The pro forma data is for informational purposes only and does not purport to be indicative of what would have occurred had the acquisition taken place at the beginning of 1997, or the results that may occur in the future. 28 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Green Book International Corporation On January 23, 1998, the Company completed the acquisition of all of the outstanding shares of Green Book International Corporation ("Gbook"), in exchange for approximately $300,000 in cash. Prior to the acquisition, Gbook was the developer of a software package for the electronic publishing of financial prospectuses. The acquisition was accounted for as a purchase and, accordingly, the assets, liabilities and results of operations of Gbook were included in the financial statements from the acquisition date. The results of the continuing operations of Gbook were immaterial in the context of the results of the Company. As a result, pro-forma financial information has not been presented. The purchase price, including direct expenses of approximately $150,000, was allocated to the tangible net assets acquired and to purchased in-process research and development ("R&D") based on the fair market values of those assets using a risk adjusted discounted cash flow approach. Specifically, the purchased technology underlying Gbook's electronic file compression and viewing software and its object oriented electronic authoring system was evaluated through extensive interviews and analysis of data concerning the state of the technology and additional development work required to incorporate it into a product and service offering by the Company's Ledge division to its financial, health care and technology customers. The evaluation of the underlying technology acquired considered the inherent difficulties and uncertainties in completing the development, and thereby achieving technological feasibility, and the risks related to the viability of, and potential changes in, future target markets. The purchased technology was incomplete inasmuch as the Company needed to make substantial modifications to change user interfaces, fix software bugs, enhance features and integrate the software into the Company's future products and services. The underlying technology had no alternative future use in its purchased state, in other research and development projects or otherwise, since it was acquired for the purpose of significantly improving and integrating such technology into a product and service offering by the Company's Ledge division to its financial, health care and technology customers, and was not to be marketed as a stand-alone product without significant further development. Accordingly, the Company recognized a charge of $450,000 for purchased in- process R&D in the first quarter of 1998. The Company successfully completed the further development necessary to complete the required technology during 1998. The cost of completing the development effort was in line with management's estimates at the time that the technology was purchased, and the product began shipping in June of 1998. C. Write Down of Assets and Other Special Charges and Credits During the fourth quarter of 1999, the Company recorded $400,000 in other income related to the termination of a lease agreement for office space and a sublease agreement with a related party. During the fourth quarter of 1998, the Company recorded non-recurring charges of approximately $1,644,000 (or $.18 per share) in capitalized software and other non-recurring charges. These charges were the result of the Company's focus on next generation products, internal systems and certain management changes. Detail of the items written off are as follows (in thousands):
1999 1998 ------ ------ Charged to Cost of Revenues: Capitalized software................................... $ -- $885(A) ====== ====== Charged to General and Administrative Expenses: Severance payments..................................... $ -- $358(B) Fixed assets........................................... 426(E) 201(C) Other charges.......................................... -- 200(D) ------ ------ Total.................................................. $426 $759 ====== ======
29 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A. During the fourth quarter of 1998, the Company abandoned a portion of purchased capitalized software, resulting in a charge of $885,000. In connection with the acquisition of Sovereign Hill, a portion of the purchased capitalized software that was to be implemented was replaced with Sovereign Hill technology and the purchased capitalized software was written down to net realizable value. The Company also determined that the portion of purchased capitalized software that was replaced with Sovereign Hill technology had no alternative future uses. B. Severance charge of $358,000 relates to the voluntary separation of the Chief Executive Officer on December 31, 1998. Severance will be paid over a one-year period from July 1999 to June 2000. C. During the fourth quarter of 1998, the Company abandoned a portion of its internally developed computer software system, resulting in a charge of $201,000. The system was not year 2000 compliant and management had begun using alternative applications in its place. The Company determined that this computer software was obsolete and there was no alternative future use. D. In January 1999, the Company waived the right to call for the redemption of 86,391 shares owned by three of the Company's founders, resulting in a charge of approximately $200,000 that was recorded in December 1998. In early 1990, software developers had requested equity compensation, which had not yet been formalized in the grant of stock or options. The three shareholders agreed to make the shares available out of their own holdings. The Company granted stock options to the developers and the three founding shareholders were to sell back to the Company the 86,391 shares if the Company called for redemption. The Company did not call for redemption and the call was waived. E. During the third quarter of 1999, the Company wrote off approximately $426,000 in computer equipment that was retired. D. Property and Equipment Property and equipment consists of the following (in thousands):
December 31, -------------- 1999 1998 ------- ------ Computer and office equipment and software.................. $ 8,442 $9,597 Furniture and fixtures...................................... 829 894 Leasehold improvements...................................... 52 287 Computer equipment under capital lease arrangement.......... 263 263 ------- ------ 9,586 11,041 Less: accumulated depreciation and amortization........... 6,494 7,647 ------- ------ $ 3,092 $3,394 ======= ======
Depreciation and amortization expense was $1,525,000, $1,966,000 and $2,255,000 for the years ended December 31, 1999, 1998 and 1997, respectively, including amortization related to computer equipment under capital lease arrangements amounting to $53,000, $41,000 and $50,000 for the years ended December 31, 1999, 1998 and 1997, respectively. During the third quarter of 1999, the Company wrote off approximately $426,000 in computer equipment that was retired. During the fourth quarter of 1998, the Company abandoned a portion of its internally developed computer software system, resulting in a charge of $201,000. The system was not year 2000 compliant and management had begun using alternative applications in its place. The Company determined that this computer software was obsolete and there was no alternative future use (see Note C). In the fourth quarter of 1999 the Company changed its depreciation policy for computer office equipment and software from five to three years on a prospective basis. 30 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) E. Product Development and Capitalized Software Costs Capitalized purchased and internally developed software costs at December 31, 1999 and 1998 consists of the following (in thousands):
December 31, -------------- 1999 1998 ------- ------ Capitalized software development costs.................... $ 7,830 $9,555 Less: accumulated amortization............................ 5,903 6,015 ------- ------ $ 1,927 $3,540 ======= ======
During 1999, 1998 and 1997, the Company capitalized $1,405,000, $1,898,000 and $1,788,000, respectively, of internally developed software costs. These costs, net of accumulated amortization, amounted to $1,927,000 at December 31, 1999, and $2,630,000 at December 31, 1998. Amortization of internally developed capitalized software costs was $2,107,000, $1,751,000, and $1,544,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The cost of purchased computer software is capitalized and amortized on a straight-line basis over its estimated useful life, generally one to five years. The Company capitalized $285,000 and $1,795,000, respectively, during the years ended December 31, 1999 and 1998. Of the amount capitalized in 1998, $885,000 was written off as a one-time charge of purchased development software during that year as a result of abandoning such purchased software in favor of technology acquired in the purchase of Sovereign Hill. Amortization of these assets commenced when the asset was placed in service in January 1999 and the assets were fully amortized as of December 31, 1999. F. Goodwill Goodwill consists of the following (in thousands):
December 31, ------------- 1999 1998 ------ ------ Goodwill................................................... $3,232 $3,232 Less: accumulated amortization............................. 648 -- ------ ------ $2,584 $3,232 ====== ======
The goodwill balances as of December 31, 1999 and 1998 are related to the acquisition of Sovereign Hill on December 31, 1998 (see Note B). The balance is being amortized over a five-year period that began in January of 1999. G. Debt Short-term Debt On December 31, 1998 the Company assumed $1,350,000 in short-term borrowings from a financial institution as part of the purchase of Sovereign Hill Software, Inc. The Company repaid the full amount in January of 1999. The Company has a line of credit with a financial institution under which it can borrow up to $3,000,000, assuming that covenants related to certain assets and tangible net worth are met. At December 31, 1999 the Company had borrowed $1,350,000 under this line of credit; the amount was paid in full in January of 2000. The weighted average interest rate on these funds was approximately 9% in 1999. 31 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) H. Stockholders' Equity Common Stock On September 30, 1997, the Company issued 1,085,000 shares of common stock to two investors in a private placement for gross proceeds of $3,770,375. A financial investor purchased 865,000 of these shares and the remaining 220,000 shares were issued to an affiliate of IHS in connection with the sale and exchange of services business transaction described in Note B above. On December 31, 1998, the Company issued 200,000 shares of common stock and warrants to purchase an additional 40,000 shares to Sovereign Hill Software, Inc. in consideration for the acquisition of Sovereign Hill's net liabilities (see Note B). The warrants were issued with an exercise price of $6.00 per share (which is $3.44 above the trading price of the Common Stock at the time of the agreement). The warrants were exercisable immediately and expire on December 31, 2003. The estimated fair value of these warrants at the date issued was $1.13 per share using a Black-Scholes option pricing model and assumptions similar to those used for valuing the Company's stock options as described below. The charge of approximately $45,000 was included in the calculation of goodwill and is being amortized over a five-year period that began in January of 1999. On May 5, 1999, the Company issued to NEC USA Inc. a warrant to purchase 100,000 shares of Common Stock at an exercise price of $2.68 per share (which was $0.50 above the average trading price of the Common Stock for the five days prior to the date the agreement was made). The warrant was issued in consideration for the license of technology from NEC USA Inc. The warrants were exercisable immediately and expire on May 27, 2009. The estimated fair value of these warrants at the date issued was $1.16 per share using a Black-Scholes option pricing model and assumptions similar to those used for valuing the Company's stock options as described below. The charge was included in cost of software license fees on the Company's Consolidated Statement of Operations for the period ending December 31, 1999. As of December 31, 1999, the Company had outstanding warrants to purchase 336,550 shares of its common stock at purchase prices ranging between $2.68 and $6.00 per share and expiring between November 21, 2001 and May 27, 2009. Common Stock Repurchase Program In the third quarter of 1998, the Company's Board of Directors authorized a program allowing for the repurchase of up to an aggregate of 1,000,000 shares of its common stock, $0.01 par value, subject to an aggregate cap of $3,000,000, through open market purchases and privately negotiated transactions. During 1998, the Company repurchased 274,000 shares of Dataware common stock in accordance with the stock repurchase program for $952,000 ($3.47 per share). No repurchases took place in 1999. Preferred Stock The Company has authorized a total of 8,000,000 shares of preferred stock with a par value of $.01 per share, of which 300,000 shares are designated Series A Junior Participating Preferred Stock, 3,000 shares are designated Series B Convertible Preferred Stock, and the balance of which are not currently designated in any series. There were no shares of preferred stock issued and outstanding at December 31, 1999 and 1998. On April 14, 1997, the Company closed $3,000,000 of new financing through the private placement of 3,000 shares of Series B Convertible Preferred Stock. As of September 30, 1997, all such shares of preferred stock had been converted into common stock. 32 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Board of Directors may, without further action of the stockholders of the Company, issue preferred stock in one or more series and fix the rights and preferences thereof, including the dividend rights, dividend rate, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption prices and liquidation preferences. Shareholder Rights Plan On June 28, 1996, the Board of Directors of the Company adopted a Shareholder Rights Plan and declared a dividend distribution of one share purchase right (a "Right") for each outstanding share of common stock of the Company to stockholders of record at the close of business on July 8, 1996. Each share of common stock newly issued after that date also carries with it one Right. Each Right entitles the record holder to purchase from the Company one one-hundredth of a share (a "Unit") of the Company's Series A Junior Participating Preferred Stock at a price of $30 per Unit subject to adjustment. The Rights are not exercisable apart from the common stock until 10 days after a person or group has acquired beneficial ownership (as defined in the Rights Plan) of a number of shares equal to 15% or more, or makes a tender offer of 15% or more of the Company's outstanding Common Stock. In the event that, after the distribution date, any person or group becomes the beneficial owner of 15% or more of the outstanding common stock (an "acquiring person"), then each holder of a Right other than the acquiring person will thereafter have the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property, or other securities of the Company) having a value equal to two times the purchase price of the Right. In addition, if after the acquisition of beneficial ownership of 15% or more of the Company's outstanding common stock, the Company is acquired in certain specified mergers or other business combination transactions or if 50% or more of the assets or earning power of the Company and its subsidiaries are sold, each holder of a Right (except Rights held by an acquiring person which previously have been voided) shall thereafter have the right to receive, upon exercise, shares of the common stock of the acquiring company having a value equal to two times the Purchase Price of the Right. The Rights expire on July 8, 2006 and are redeemable prior to the time an acquiring person or group acquires beneficial ownership of 15% or more of the Company's common stock at one cent per Right. Equity Incentive Plan The Company adopted the 1988 Stock Option Plan during 1988. On May 19, 1993, the stockholders of the Company approved the 1993 Equity Incentive Plan ("the Plan") as successor to the 1988 Stock Option Plan. Through May 1998, stockholders of the Company had approved amendments of the Plan providing for a cumulative aggregate number of shares issuable under the plan of 3,500,000. On April 13, 1999, the Board of Directors voted to merge the Director Stock Option Plan into and with the 1993 Equity Incentive Plan, bringing the cumulative aggregate number of shares issuable under the Plan to 3,630,000. The Plan provides for the grant of nonqualified and incentive stock options to employees and directors. Incentive stock options are granted at a price set by the Board of Directors not to be less than 100% of the fair value of the stock on the date of the grant. Nonqualified stock options are granted at prices determined by the Board of Directors, and have generally also been at fair market value. Outside directors receive automatic grants of options upon joining the Board and also receive their annual retainer in the form of options granted under the Plan. The term of the outstanding options is ten years. The options granted to date vest at various rates over periods up to five years. Ledge Stock Options On December 30, 1995, the Company acquired Ledge Multimedia, Inc. ("Ledge"). In January 1996 the Company granted nonqualified stock options providing for the issuance of up to 175,000 shares to former 33 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) employees of Ledge who became employees of the Company upon the merger. These options were granted at fair market value on the date of the grant and become exercisable at various rates, beginning in the initial year of grant. Consultant Stock Option Plan In December 1995, the Company established the Consultant Stock Option Plan ("the Plan"), providing for the issuance of up to 250,000 shares of common stock. The Plan provides for the issuance of nonqualified stock options to outside consultants of the Company. These options are granted at fair market value on the date of the grant. The term of the outstanding options is ten years. Options granted under the Plan typically become exercisable ratably during the term of the respective consultants' contracts with the Company. Options Issued in Connection with Employment Agreement In January 1999, in order to induce the Company's new President and Chief Executive Officer to enter into an employment agreement, the Company granted him nonqualified stock options to purchase 352,750 shares of common stock outside the Equity Incentive Plan, all at fair market value on the date of grant. The options vested 22% on December 31, 1999, and the balance vest ratably at the end of the following three years. Supplemental Disclosures for Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123 ("SFAS 123"), "Accounting for Stock- Based Compensation," which is effective for periods beginning after December 15, 1995. SFAS No. 123 requires that companies either recognize compensation expense for grants of stock, stock options, and other equity instruments based on fair value, or provide pro forma disclosures of net income and earnings per share in the notes to the financial statements. The Company adopted SFAS No. 123 in 1996 and elected the disclosure-only alternative provisions. The Company has chosen to continue to account for stock-based compensation granted to employees and directors using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to Employees", and related interpretations. Accordingly, compensation cost for stock options granted to employees and directors is measured as the excess, if any, of the fair value of the Company's stock at the date of the grant over the amount that must be paid to acquire the stock. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for the awards under these plans consistent with the methodology prescribed under SFAS No. 123, the Company's net loss and loss per common share would have been reduced to the pro forma amounts indicated below:
Net Loss per Net Loss to Net Loss per Share-- Common Stockholders Share--Basic Diluted ------------------- ------------ ------------ (in thousands) As reported: 1999......................... $(4,930) $(0.52) $(0.52) 1998......................... (207) (0.02) (0.02) 1997......................... (6,465) (0.85) (0.85) Pro forma: 1999......................... $(6,489) $(0.68) $(0.68) 1998......................... (1,211) (0.13) (0.13) 1997......................... (8,909) (1.17) (1.17)
The fair value of each option granted during 1999, 1998 and 1997 is estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following weighted-average assumptions: (1) expected risk-free interest rate of 5.5% in 1999, 5% in 1998 and 6% in 1997, (2) expected option life of 5 years in 1999, 1998 and 1997, (3) expected stock volatility of 90% in 1999, 75% in 1998 and 65% in 1997, and (4) expected dividend yield of 0%. 34 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Information with respect to stock options granted under all stock option plans is as follows:
Weighted Weighted Average Fair Average Value of Shares Exercise Price Options Granted ---------- -------------- --------------- Outstanding at December 31, 1996........................ 1,874,015 $5.83 Granted.................... 1,486,994 3.26 $3.23 Exercised.................. (46,017) 0.50 Cancelled.................. (1,318,006) 6.58 ---------- Outstanding at December 31, 1997........................ 1,996,986 3.39 Granted.................... 567,175 3.41 $3.02 Exercised.................. (91,229) 1.71 Cancelled.................. (309,988) 3.41 ---------- Outstanding at December 31, 1998........................ 2,162,944 3.39 Granted.................... 1,494,468 3.42 $2.76 Exercised.................. (407,940) 2.51 Cancelled.................. (238,855) 3.18 ---------- Outstanding at December 31, 1999........................ 3,010,617 $3.56 ==========
There were 1,573,917, 1,364,555 and 1,209,677 stock options exercisable at December 31, 1999, 1998 and 1997, respectively, with weighted average exercise prices of $3.27, $3.03 and $2.97, respectively. There were 83,399, 1,339,012 and 859,154 options available for future grant at December 31, 1999, 1998 and 1997, respectively. The following table summarizes option information about stock options outstanding as of December 31, 1999:
Weighted Average Range of Number Remaining Weighted Average Number Weighted Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price - --------------- ----------- ---------------- ---------------- ----------- ---------------- $ 0.3300- $2.0940 85,415 7.15 $ 1.662 36,619 $ 1.115 2.5630- 2.5630 533,250 9.02 2.563 188,811 2.563 2.6250- 2.7500 412,325 9.38 2.681 156,958 2.699 2.9380- 3.0000 222,474 7.25 2.956 180,852 2.960 3.1250- 3.1250 688,219 6.59 3.125 562,612 3.125 3.1410- 3.5000 373,876 8.32 3.317 234,828 3.229 3.5630- 6.5000 396,124 7.50 5.164 124,053 3.965 6.5630- 10.5000 296,734 8.45 6.735 86,984 7.151 13.0000- 13.0000 2,000 3.55 13.000 2,000 13.000 15.2500- 15.2500 200 5.29 15.250 200 15.250 --------- --------- $0.3300- $15.2500 3,010,617 7.98 $ 3.566 1,573,917 $ 3.268 ========= ==== ======= ========= =======
In conjunction with the grant of incentive stock options to certain key employees during 1990, the Company entered into an agreement to repurchase from certain stockholders up to 86,391 shares of common stock at a per share price of $0.33 if and when the stock options were exercised. At December 31, 1998, no shares had been repurchased. On January 1, 1999, the Company formally waived its right to repurchase these shares. During the year ended December 31, 1998, the Company recorded a $200,000 one-time charge for this waiver (see Note C). 35 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) All options were granted at fair market value during 1999, 1998 and 1997 with the exception of 150,000 shares in December of 1999. The weighted average exercise price and fair value of the options granted at less than fair market value were $3.50 and $5.31, respectively. This resulted in approximately $469,000 of unearned compensation that will be amortized to compensation expense over the 4-year vesting period, beginning in 2000. Repricing Stock Options On September 18, 1997, the Board of Directors of the Company approved a plan ("repricing plan") to reprice all employee stock options under the 1993 Equity Incentive Plan and the Ledge Stock Option Plan. In accordance with the repricing plan, all stock options held by current employees with exercise prices above the September 17, 1997 price of $3.125, and approved by the individual optionholder, were cancelled and replaced by options for a number of shares equal to 90% of those subject to the cancelled options, exercisable at $3.125 per share. Vesting provisions were not changed. This plan did not include outside directors or consultants of the Company. The repricing plan resulted in the cancellation of 974,213 stock options and issuance of 875,917 new options. In addition, on May 23, 1997, the Company's shareholders approved an amendment to the 1993 Director Stock Option Plan permitting the amendment of outstanding options and implementing a repricing of the outstanding Director Plan options that had been approved by the Board of Directors in December 1996. As a result, all outstanding nonqualified stock options were cancelled and replaced with the same number having an exercise price of $3.00 per share, the fair market value of the common stock on the date the directors took such action. Vesting provisions were not changed. Employee Stock Purchase Plan The Company established an employee stock purchase plan in 1993 entitling employees to purchase up to 250,000 shares of the Company's stock at 85% of fair market value. On May 21, 1998, the shareholders approved an amendment increasing the number of shares issuable under the Plan by 600,000. During 1999, 1998 and 1997, 104,491, 102,626 and 113,083 shares were issued to employees. The weighted average fair values of purchase rights issued under the 1993 plan during 1999, 1998 and 1997 were $1.06, $1.20 and $0.99, respectively. The fair value of the options granted under the employee stock purchase plan during 1999, 1998 and 1997 is estimated on the date of grant using the Black- Scholes option pricing model utilizing the following weighted-average assumptions: (1) expected risk-free interest rate of 5.08%, 5.68% and 5.39%, respectively, (2) expected life of 8.8, 11.8 and 6.3 months, respectively, (3) expected stock volatility of 90% in 1999, 75% in 1998 and 65% in 1997, and (4) expected dividend yield of 0%. I. Commitments and Contingencies Operating Leases The Company occupies office facilities in the United States, Singapore, and various locations in Europe under certain lease agreements. These leases require the Company to pay utilities, contain escalation clauses for increases in taxes and operating expenses or require the Company to pay for its proportionate share of certain operating expenses. 36 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Future minimum rental payments under these operating leases are as follows (in thousands): 2000............................................................. $1,646 2001............................................................. 1,538 2002............................................................. 1,477 2003............................................................. 1,452 2004 and thereafter.............................................. 1,141 ------ Future minimum lease payments.................................... $7,254 ======
The Company entered into sublease agreements with a related party that offset a portion of its rent expense during the periods ended December 31, 1999, 1998 and 1997. This agreement was terminated during the fourth quarter of 1999 when the landlord bought out the Company's lease for $400,000, net of direct expenses, resulting in a gain that was recorded as Other Income in 1999. Rent expense, net consisted of the following (in thousands):
1999 1998 1997 ------ ------ ------ Rent expense...................................... $1,925 $1,504 $1,634 Sublease income................................... ( 236) (86) (144) ------ ------ ------ Rent expense, net................................. $1,689 $1,418 $1,490 ====== ====== ======
Capital Lease The Company entered into a capital lease agreement for equipment in August of 1998. The original lease obligation was $287,000, payable monthly over a 12- month period. In September 1999, the Company terminated the lease agreement and exercised its option to purchase the equipment. Pending Litigation A lawsuit has been filed against the Company by a former consultant, with allegations related to the value of compensation received and emotional distress. The Company denies these charges and is vigorously defending them. At this time, it is not possible to estimate the likelihood of damages related to these charges. J. Defined Contribution Plan In 1991, the Board of Directors approved the establishment of the Dataware Technologies, Inc. 401(k) Plan (the "401(k) Plan") effective January 1, 1991. Employees are eligible to participate in the 401(k) Plan by meeting certain requirements, including service level and minimum age. The Company may make discretionary contributions to the 401(k) Plan. No Company contributions had been made through December 31, 1999. In December 1999, the Board of Directors authorized the Company to make matching contributions of 50% of a participant's contribution up to 4% of the participant's qualifying pay in fiscal quarters in which the Company has an operating profit after giving effect to such contributions. A participant's entitlement to the Company's matching contributions is subject to vesting based on length of service. K. Income Taxes The Company recorded a $373,000 income tax benefit in the third quarter of 1999, representing the reversal of a reserve established in previous years for taxes on a foreign subsidiary that the Company now believes are not owed. 37 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The components of the provision (benefit) for income taxes are as follows (in thousands):
December 31, ------------------ 1999 1998 1997 ------ ----- ---- Current: Federal.............................................. $( 390) $ -- $ -- State................................................ 4 8 -- Foreign.............................................. 233 97 80 ------ ----- ---- $ (153) $ 105 $ 80 ====== ===== ====
Loss before income taxes for domestic and foreign operations are as follows (in thousands):
December 31, ------------------------- 1999 1998 1997 -------- ------ ------- Domestic........................................ $ (4,343) $ (51) $(5,568) Foreign......................................... (740) (51) (140) -------- ------ ------- $ (5,083) $ (102) $(5,708) ======== ====== =======
The following is a reconciliation between the U.S. Federal statutory rate and the effective tax rate:
December 31, ---------------------- 1999 1998 1997 ----- ------ ----- U.S. federal statutory rate................... (34.0)% (34.0)% (34.0)% State taxes, net of federal tax benefit.... 0.1 5.0 -- Foreign operations...... 9.5 4.9 2.2 Utilization of net operating loss carryforward........... -- (169.0) -- Non-deductible acquisition costs...... -- -- 4.3 Goodwill................ -- -- 0.4 In-process research and development............ -- 150.1 -- Other non-deductible items.................. 1.0 38.4 0.7 Change in valuation allowance.............. 20.4 107.2 27.8 Other, net.............. -- -- -- ----- ------ ----- Effective tax rate...... (3.0)% 102.6% 1.4% ===== ====== =====
38 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Deferred taxes result from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes. The components of deferred tax assets and liabilities are as follows (in thousands):
December 31, ----------------- 1999 1998 -------- ------- Deferred tax assets: Bad debts.............................................. $ 738 $ 587 Compensation........................................... 324 510 Depreciation........................................... 11 -- Other.................................................. 818 1,577 Net operating loss carryforward........................ 10,777 5,283 Research tax credits................................... 1,548 1,216 -------- ------- Total assets........................................... 14,216 9,173 -------- ------- Deferred tax liabilities: Capitalized software costs............................. 859 1,052 Depreciation........................................... -- 388 Other.................................................. -- -- -------- ------- Total liabilities...................................... 859 1,440 -------- ------- Valuation allowance.................................... (13,357) (7,733) -------- ------- Net deferred tax asset................................. $ -- $ -- ======== =======
At December 31, 1999, the Company has net operating loss carryforwards for federal income tax purposes of approximately $26.9 million, which expire at various dates through 2019. Under the Tax Reform Act of 1986, certain substantial changes in the Company's ownership would result in an annual limitation on the amount of net operating loss carryforwards that could be utilized. The Company also has research and development tax credits for federal income tax purposes of approximately $1.5 million that expire at various dates through 2019. Approximately $4.6 million of the net operating loss carryforwards available for federal income tax purposes relate to exercises of non-qualified stock options and disqualifying disposition of incentive stock options, the tax benefit from which, if realized, will be credited to additional paid-in capital. As required by Statement of Financial Accounting Standard No. 109, management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss and tax credit carryforwards. Management evaluates the positive and negative evidence impacting the realizability of the Company's deferred tax assets on a quarterly basis. The Company increased its valuation allowance by $5,624,000 in 1999 and $674,000 in 1998, based upon management's estimate of the amount of deferred tax assets that were more likely than not to be realized. L. Segment Information On December 31, 1998 the Company adopted Statement of Financial Accounting Standard No. 131 "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"). The new rules establish revised standards for public companies relating to the reporting of financial information about operating segments. Upon adoption of SFAS 131, the Company began to present segment financial information for its three reportable operating segments: USLA (a unit focusing on the sale of software and services for enterprise 39 information access ("knowledge management") and professional electronic publishing applications in the United States and Latin America); Eurasia (a unit focusing on the sale of software and services for enterprise information access ("knowledge management") and professional electronic publishing applications in Europe and the Pacific Rim); and Multimedia (providing a complete array of multimedia application development services to corporations, publishers and professional firms, mostly in the United States). The Company's executive management team reviews and evaluates performance based on several factors, of which the primary financial measure is business segment profit or loss from operations. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Although the Company prepares full balance sheets for the Eurasian business unit, it reported to management only certain assets for the USLA and Multimedia segments. These segments are not considered capital-intensive and, thus, other balance sheet information was not considered meaningful on a segment basis. Early in 1999, the Company announced a program to reposition and restructure the Company as an e-Business solutions provider and began making strategic and organizational changes toward that goal. During the third quarter of 1999, management introduced a series of organizational changes designed to enable the Company to grow and deliver solutions to customers. One of these changes was to bring the Multimedia and USLA operating segments together under a senior vice president in order to closely align the sales organization and the solutions delivery resources. This newly created executive management position is responsible for managing and coordinating all field operations. Because of this change in structure, the Company's executive management team now reviews and evaluates the results of the Company in terms of its two reportable operating segments: USLA and Eurasia. Prior year information has been restated to reflect the change in structure. Although the Company prepares full balance sheets for the Eurasian business unit, it reports only certain assets for the USLA segment. This segment is not considered capital-intensive and, thus, other balance sheet information is not considered meaningful on a segment basis. A summary of the segment financial information reported is as follows (in thousands):
Corporate and USLA EURASIA Eliminations Total Twelve months ended December 31, 1999 ------- ------- ------------- -------- Revenues from unaffiliated customers... $18,295 $ 8,439 $ -- $ 26,734 Operating income (loss)................ 5,574 1,631 (18,521) (11,316) Depreciation and amortization.......... 262 154 5,059 5,475 Property and equipment additions....... 434 413 807 1,654 Total assets........................... 2,911 4,483 15,980 23,374 Corporate and USLA EURASIA Eliminations Total Twelve months ended December 31, 1998 ------- ------- ------------- -------- Revenues from unaffiliated customers... $24,217 $ 8,773 $ -- $ 32,990 Operating income (loss) (1)............ 13,657 2,268 (14,387) 1,538 Depreciation and amortization.......... 221 295 3,201 3,717 Property and equipment additions....... 356 341 616 1,313 Total assets........................... 2,953 4,552 21,244 28,749 Corporate and USLA EURASIA Eliminations Total Twelve months ended December 31, 1997 ------- ------- ------------- -------- Revenues from unaffiliated customers... $22,576 $14,743 $ -- $ 37,319 Operating income (loss)................ 3,425 2,053 (10,877) (5,399) Depreciation and amortization.......... 262 475 3,306 4,043 Property and equipment additions....... 156 705 550 1,411 Total assets........................... 2,984 5,286 20,783 29,053
- -------- (1) Before non-recurring charges 40 Geographically, revenues are reflected in the geographic areas from which the sales are made. Information related to the Company's revenues to unaffiliated customers in different geographical areas is as follows (in thousands):
1999 1998 1997 -------- ------- ------- United States..................................... $ 18,295 $24,217 $20,621 United Kingdom.................................... 5,846 6,256 7,252 Other............................................. 2,593 2,517 9,446 -------- ------- ------- $ 26,734 $32,990 $37,319 ======== ======= ======= Information related to the Company's long-lived assets by geographical area is as follows (in thousands): 1999 1998 1997 -------- ------- ------- United States..................................... $7,392 $10,338 $ 6,647 United Kingdom.................................... 347 258 404 Other............................................. 120 82 142 -------- ------- ------- $7,859 $10,678 $ 7,193 ======== ======= =======
M. Gain on Investment in Northern Light During the second quarter of 1999, Dataware sold one-half of its interest in Northern Light Technology LLC back to Northern Light for $4.1 million in cash. In addition, Northern Light repaid the Company the principal and interest due on a $1.2 million promissory note held by Dataware. These transactions resulted in a $5.1 million gain after adjusting for legal costs incurred and the investment in Northern Light that had been carried on the Company's books. Northern Light has since incorporated. N. Major Customer On September 30, 1997, Dataware sold a portion of its data services business to IHS. The Company entered into a distribution agreement with IHS on September 30, 1997, under which IHS took over the software distribution activities formerly performed by five divested foreign subsidiaries (primarily involving the Company's legacy products). In addition, the Company entered into agreements with IHS under which it provided software and multimedia services for use by IHS internally and in its publishing activities, and IHS provided software that the Company incorporated into certain of its products. Revenues in 1999 and 1998 included approximately $4.5 and $9.1 million, or 21% and 28% of total revenues, respectively, related to agreements with IHS. As part of the ongoing relationship with IHS, the Company and IHS amended existing agreements during the third quarter of 1998 to provide for IHS to make guaranteed minimum payments called for by those agreements, at the discretion of the Company, on an accelerated, discounted basis. Software revenues in the years ended December 31, 1999 and 1998 include approximately $2.5 and $1.4 million, respectively, of such discounted payments accelerated from the years 1999 through 2002. All guaranteed payments under these agreements have been made to the Company as of December 31, 1999. 41 O. Net Loss per Share The Company computes basic and diluted earnings per share in accordance with Statement of Financial Accounting Standard No. 128 ("SFAS 128"), "Earnings per Share", which the Company adopted as of December 31, 1997. The following table reconciles the numerator and denominator of the basic and diluted earnings per share computations shown on the Consolidated Statements of Operations:
For the Years Ended December 31, ----------------------------------------- 1999 1998 1997 ------------- ------------ ------------- (In thousands, except per share data) Basic EPS Numerator: Net loss to common stockholders................... $ (4,930) $ (207) $ (6,465) Denominator: Common shares outstanding....... 9,516 9,265 7,632 ------------- ----------- ------------- Basic EPS......................... $ (0.52) $ (0.02) $ (0.85) ============= =========== ============= Diluted EPS Numerator: Net loss to common stockholders................... $ (4,930) $ (207) $ (6,465) Denominator: Common shares outstanding....... 9,516 9,265 7,632 Common stock equivalents........ -- -- -- ------------- ----------- ------------- 9,516 9,265 7,632 Diluted EPS....................... $ (0.52) $ (0.02) $ (0.85) ============= =========== =============
Options to purchase 3,010,617, 2,162,944 and 1,996,986 shares and warrants to purchase 336,550, 236,550 and 196,550 shares of common stock outstanding as of December 31, 1999, 1998 and 1997, respectively, were excluded from the year- to-date calculation of diluted net loss per share as the effect of their inclusion would have been anti-dilutive. 42 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (In thousands) - -------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - ------------------------------------------------------------------------------------ Additions ------------------- Balance at Charged to Charged Balance beginning Costs and to Other at end Description of period Expenses Accounts Deductions of Period - ------------------------------------------------------------------------------------ Allowance for Doubtful Accounts 1999......................... $ 846 $ 308 -- $ 351 $ 803 1998......................... 750 596 -- 500 846 1997......................... 934 778 -- 962 750
43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position ---- --- -------- David Mahoney........... 55 Chairman of the Board, Chief Executive Officer, President, Director Michael Gonnerman....... 57 Chief Financial Officer, Treasurer, VP, Finance and Administration Robert J. Farrell....... 36 Chief Operating Officer, Executive Vice President, Field Operations Ann Smith............... 47 Vice President, Corporate Resources Stephen H. Beach (1)(2)................. 83 Director, Secretary William R. Lonergan (1)(2)................. 74 Director Jeffrey O. Nyweide...... 44 Director
- -------- (1) Member of the Compensation Committee (2) Member of the Audit Committee Mr. Mahoney became Chairman of the Board of Directors in February 2000. He has served as President and Chief Executive Officer since January 1999 and has been a Director of the Company since February 1999. Before joining the Company, he served as President and CEO of Sovereign Hill Software, Inc., a supplier of advanced information retrieval software products that was acquired by the Company on December 31, 1998. Mr. Mahoney was the founder and, from 1983 to 1998, the Chairman and CEO of Banyan Systems Incorporated, a provider of Enterprise Networking Software and services and Internet directory services. Mr. Mahoney is also a Director of Banyan Systems Incorporated and its subsidiary, Switchboard Incorporated, Applix Incorporated and several smaller early stage software companies. Mr. Gonnerman has served as Chief Financial Officer and Vice President, Finance and Administration since June 1998, and was Acting Chief Financial Officer from August 1997 to June 1998. Mr. Gonnerman was the founder and has been President of Corporate Financial Group, a financial consulting firm, since 1990. Mr. Gonnerman is also a Director of Agranat Systems, Inc. and works in an advisory capacity with Cytel Software, Inc. Mr. Farrell has served as Executive Vice President, Field Operations and Chief Operating Officer since December 1999. Before joining Dataware, he spent 4 years at Computer Horizons Corp., a diversified information technology services company (Nasdaq: CHRZ), where he held the positions of Executive Vice President Operations, Executive Vice President International, and Senior Vice President Banking and Financial Services. Previously, Mr. Farrell was founder and President of Innovative Information Concepts, Inc., an information technology consulting firm, and held technical and management positions at EF Hutton & Company and American Express. Ms. Smith has served as Vice President, Corporate Resources since June 1999. From June 1997 through June 1999, she was Vice President of Administration at Eastman Software, a subsidiary of Kodak and a leading provider of Enterprise Work Management technology. From July 1995 through June 1997 she served as Vice President of Human Resources and Information Systems at Banyan Systems Incorporated, a provider of Enterprise Networking Software and services and Internet directory services. Prior to July 1995, Ms. Smith held various human resource management roles at Data General, Motorola and Harvard Pilgrim Health Care. Mr. Beach has been a Director and Secretary of the Company since its inception. Since 1985, Mr. Beach has practiced law in Connecticut, specializing in, among other fields, computer, software and software licensing law. Mr. Beach also served in several capacities for Control Data Corporation from 1973 to 1985, most recently as Senior Vice President and Secretary. 44 Mr. Lonergan has been a Director of the Company since 1988. From 1983 to 1994, Mr. Lonergan was a general partner of Oxford Partners, a venture capital firm, where he continues as a consultant. Mr. Lonergan is also a Director of Zitel Corporation. Mr. Nyweide served as Vice Chairman of the Board of Directors and Senior Executive Vice President, Business Development from April 1997 until February 2000, when he began a leave of absence. He was President and Chief Operating Officer from 1993 to April 1997. Mr. Nyweide has also served as a member of the Board of Directors since the inception of the Company. Executive officers of the Company are elected by the Board of Directors on an annual basis and serve at the discretion of the Board of Directors. Information contained in the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2000 Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The sections entitled "Election of Directors--Director Compensation" and "Executive Compensation" in the 2000 Proxy Statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Share Ownership" in the 2000 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Executive Compensation--Executive Employment and Severance Agreements" in the 2000 Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)Financial Statements, Schedules and Exhibits The financial statements, schedules, and exhibits listed below are included in or incorporated by reference as part of this Report: 1.Financial statements: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements 45 2.Schedules: II. Valuation and Qualifying Accounts Schedules not listed above are omitted because they are not applicable or because the required information is included in the consolidated financial statements or notes submitted. 3.Exhibits: The exhibits are listed below under Part IV, Item 14 (c) of this report. (b)Reports on Form 8-K None. (c)Exhibits The Company hereby files as part of this Annual Report on Form 10-K the Exhibits listed in the attached Exhibit Index. 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Cambridge, Massachusetts on the 6th day of March 2000. DATAWARE TECHNOLOGIES, INC. /s/ David Mahoney ------------------------------------- David Mahoney, Chairman of the Board, President and Chief Executive Officer
Signatures Title Date ---------- -------------------------------------------- ------------- /s/ David Mahoney Chief Executive Officer, President, Director March 6, 2000 ___________________ David Mahoney /s/ Michael Chief Financial Officer, Treasurer March 6, 2000 Gonnerman (Principal Financial and Accounting Officer) ___________________ Michael Gonnerman /s/ Stephen H. Beach Director March 6, 2000 ___________________ Stephen H. Beach /s/ William R. Director March 6, 2000 Lonergan ___________________ William R. Lonergan /s/ Jeffrey O. Director March 6, 2000 Nyweide ___________________ Jeffrey O. Nyweide
47 EXHIBIT INDEX 3.1 Restated Certificate of Incorporation, as amended through April 14, 1997 (Exhibit to Form 8-K dated April 17, 1997).* 3.2 Bylaws as amended through February 9, 1999 (Exhibit 3.2 to 1998 Form 10- K).* 4.1 Rights Agreement dated July 8, 1996 by and between American Stock Transfer & Trust Company as Rights Agent and the Registrant (the "Rights Agreement"). (Exhibit to Form 8-K dated July 18, 1996).* 4.2 First Amendment to Rights Agreement, dated April 14, 1997 (Exhibit to 8-K dated April 17, 1997).* 4.3 Second Amendment to Rights Agreement, dated December 14, 1999. 4.4 Warrant Agreement, dated as of April 14, 1997, between the Company and Wharton Capital Partners Ltd. (Exhibit to June 30, 1997 Form 10-Q).* 4.5 Warrant Agreement dated as of December 31, 1998, between the Registrant and Sovereign Hill Software, Inc. (Exhibit to December 31, 1998 Form 10- K).* 4.6 Warrant Agreement dated as of May 5, 1999, between the Registrant and NEC USA, Inc. 10.1 Equity Incentive Plan, as amended through February 8, 2000.# 10.2 1993 Employee Stock Purchase Plan, as amended through May 20, 1998 (Exhibit to December 31, 1998 Form 10-K).* # 10.3 Form of stock option agreement terms (executive officers). (Exhibit to June 30, 1996 Form 10-Q).*# 10.4 Severance Agreement between the Registrant and Kurt Mueller dated December 31, 1998 (Exhibit to December 31, 1998 Form 10-K).* # 10.5 Amendment dated February 10, 2000, to Mueller Severance Agreement.# 10.6 Severance Agreement between the Registrant and Jeffrey O. Nyweide dated February 24, 2000.# 10.7 Employment Agreement between the Registrant and David Mahoney dated December 31, 1998 (Exhibit to December 31, 1998 Form 10-K).* # 10.8 Employment Agreement between the Company and Michael Gonnerman dated August 16, 1999. (Exhibit to Form 10-Q dated September 30, 1999).* # 10.9 Employment Agreement between the Registrant and Robert J. Farrell dated November 15, 1999.# 21.1 Subsidiaries of the Registrant. 23.1 Consent of PricewaterhouseCoopers LLP. 27.1 Financial Data Schedule. 99.1 Important Factors Regarding Future Results.
- -------- * Incorporated by reference to the filing indicated in parentheses. # Denotes management contracts and compensation plans. 48 EX-4.3 2 SECOND AMENDMENT TO RIGHTS AGREEMENT Exhibit 4.3 SECOND AMENDMENT TO SHAREHOLDER RIGHTS AGREEMENT This SECOND AMENDMENT TO THE SHAREHOLDER RIGHTS AGREEMENT dated July 8, 1996, between Dataware Technologies, Inc., a Delaware corporation (the "Company"), and American Stock Transfer & Trust Company, a New York corporation, as Rights Agent, as amended (the "Agreement"), is dated as of December 14, 1999. Capitalized terms used and not defined herein have the same respective meanings as in the Agreement. Except as set forth herein, the Agreement shall remain in force without change. On December 14, 1999 the Board of Directors approved the Second Amendment to the Agreement (the "Second Amendment") for the purpose of deleting from the Agreement all requirements that the approval or concurrence of the Continuing Directors be obtained to effect certain actions under the Agreement. Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties agree as follows: Section 1. Amendments. The Agreement is hereby amended as follows: ----------- (a) The text of Section 1(i) of the Agreement is hereby deleted in its entirety and the phrase "[Deleted]" is substituted in place thereof. (b) The phrase "a majority of Continuing Directors who are not officers of the Company and who are not representatives, nominees, Affiliates or Associates of an Acquiring Person or Persons making such tender or exchange offer" in Section 11(a)(iii) of the Agreement, is hereby deleted, and the phrase "two- thirds of the Directors of the Company then in office," is substituted in place thereof. (c) The phrase "which such Continuing Directors deem relevant," in Section 11(a)(iii) is hereby deleted and the phrase "which such Directors deem relevant," is substituted in place thereof. (d) The phrase "a majority of the Continuing Directors then in office," in each instance that it appears in Sections 11(a)(iv) of the Agreement, is hereby deleted, and the phrase "two-thirds of the Directors of the Company then in office," is substituted in place thereof. (e) The text "then the Continuing Directors on the Board of Directors of the Company (or, if none, a committee composed of one or more of the Continuing Directors who were in office immediately before the transaction described in the first sentence of Section 13(a))" in Section 13(c) of the Agreement, is hereby deleted, and the phrase "then the Board of Directors of the Company," is substituted in place thereof. (f) The text in Section 23(a), "then there must be Continuing Directors then in office and such authorization shall require the approval of a majority of such Continuing Directors," is hereby deleted and the clause, "then such authorization shall require the approval of two-thirds of the Directors of the Company then in office," is substituted in place thereof. (g) The parenthetical clause "shall be effective only if there are Continuing Directors and shall require the concurrence of a majority of such Continuing Directors" as it appears in Section 27 of the Agreement is hereby deleted, and the clause, "shall require the concurrence of two-thirds of the Directors of the Company then in office," is substituted in place thereof. Section 2. Effect of Amendment; Ratification. Except as expressly amended ---------------------------------- hereby, the Rights Plan is hereby ratified and confirmed in all respects and shall continue in full force and effect. All references in the Agreement, any Rights Certificate or any related agreement, instrument or document shall hereafter refer to the Agreement as amended hereby. Section 3. Counterparts. The Second Amendment may be executed in any number ------------- of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. [CORPORATE SEAL] DATAWARE TECHNOLOGIES, INC. Attest By: /s/ Matthew C. Dallett By: /s/ David Mahoney ------------------------ ----------------------- Matthew C. Dallett, David Mahoney, President and Assistant Secretary Chief Executive Officer [CORPORATE SEAL] AMERICAN STOCK TRANSFER AND TRUST COMPANY Attest By: /s/ Herbert Lemmer By:------------------------ ------------------------ Name: Name: Herbert Lemmer Title: Title: Vice President -2- EX-4.6 3 WARRANT AGREEMENT DATED MAY 5, 1999 Exhibit 4.6 DATAWARE TECHNOLOGIES, INC. Nonstatutory Stock Option Agreement ----------------------------------- NEC USA 100,000 Shares Dataware Technologies, Inc. (the "Company"), a Delaware corporation, hereby grants to NEC USA, Inc. an option to purchase 100,000 shares of Common Stock, $0.01 par value, of the Company (the "Option"), exercisable on the following terms and conditions: Option Price: $2.68 Date of Grant: May 5, 1999 Expiration Date: May 5, 2009 1. Equity Incentive Plan Incorporated by Reference. This Option is ----------------------------------------------- issued on the terms set forth herein and in the Company's Equity Incentive Plan (the "Plan") to the extent not inconsistent with the terms hereof, although this Option is not issued under the Plan. This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference. This Option may be amended as provided in the Plan. Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan. The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding. A copy of the Plan may be obtained upon written request without charge from the Company. 2. Option Price. The price to be paid for each share of Common Stock ------------ issued upon exercise of the whole or any part of this Option is the Option Price set forth above. 3. Exercisability Schedule. This Option may be exercised at any time ----------------------- and from time to time after the Date of Grant up to the number of shares set forth above, but only for the purchase of whole shares. This Option may not be exercised as to any shares after the Expiration Date. 4. Method of Exercise. To exercise this Option, the Optionholder ------------------ shall deliver written notice of exercise to the Company specifying the number of shares with respect to which the Option is being exercised accompanied by payment of the Option Price for such shares in cash, by certified check or in such other form, including shares of Common Stock of the Company valued at their Fair Market Value on the date of delivery, as the Committee may at the time of exercise approve. Following such notice, the Company will deliver to the Optionholder a certificate representing the number of shares with respect to which the Option is being exercised. 5. Rights as a Stockholder or Employee. The Optionholder shall not ----------------------------------- have any rights in respect of shares to which the Option shall not have been exercised and payment made as provided above. The Optionholder shall not have any rights to employment or any other arrangements by the Company or its Affiliates by virtue of the grant of this Option. 6. Recapitalization, Mergers, Etc. As provided in the Plan, in the ------------------------------- event of corporate transactions affecting the Company's outstanding Common Stock, the Committee shall equitably adjust the number and kind of shares subject to this Option and the exercise price hereunder or make provision for a cash payment. If such transaction involves a consolidation or merger of the Company with another entity, the sale or exchange of all or substantially all of the assets of the Company or a reorganization or liquidation of the Company, then in lieu of the foregoing, the Committee may upon written notice to the Optionholder provide that this Option shall terminate on a date not less than 20 days after the date of such notice unless theretofore exercised. In connection with such notice, the Committee may in its discretion accelerate or waive any deferred exercise period. 7. Limitations on Transfer. This Option is not transferable except ----------------------- (i) as provided in that certain COIR/AMORE SOFTWARE LICENSING AGREEMENT of even date herewith, (ii) (in the case of an individual Optionholder) by will or the laws of descent and distribution, or (iii) with the prior written consent of the Company, and is exercisable only by the Optionholder (or, in the case of an individual Optionholder, by his legal representative). 8. Compliance with Securities Laws. It shall be a condition to the ------------------------------- Optionholder's right to purchase shares of Common Stock hereunder that the Company may, in its discretion, require (a) that the shares of Common Stock reserved for issue upon the exercise of this Option shall have been duly listed, or, if not listed, the Company shall agree to list the shares of Common Stock at its sole cost and expense, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Company's Common Stock may then be listed or quoted, (b) that either (i) a registration statement under the Securities Act of 1933 with respect to the shares shall be in effect, or (ii) in the opinion of counsel reasonably acceptable to the Company, the proposed purchase shall be exempt from registration under that Act and the Optionholder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) that such other steps, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such shares by the Company shall have been taken by the Company (at the Company's expense) or the Optionholder, or both. The certificates representing the shares purchased under this Option may contain such legends as counsel for the Company shall consider necessary to comply with any applicable law. 9. Payment of Taxes. The Optionholder shall pay to the Company, or ---------------- make provision satisfactory to the Company for payment of, any taxes required by law to be withheld with respect to the exercise of this Option. The Committee may, in its discretion, require any other Federal or state taxes imposed on the sale of the shares to be paid by the Optionholder. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Optionholder. 10. Nonstatutory Stock Option. This Option shall not be treated as ------------------------- an Incentive Stock Option under section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). DATAWARE TECHNOLOGIES, INC. By: /s/ Howard York Howard York Title: ____________________________ The Optionholder agrees to the terms and conditions hereof. NEC USA, INC. By: /s/ Kojiro Watanabe Kojiro Watanabe Title: ____________________________ 2 EX-10.1 4 EQUITY INCENTIVE PLAN Exhibit 10.1 Amended and Restated February 8, 2000 DATAWARE TECHNOLOGIES, INC. EQUITY INCENTIVE PLAN (as Amended and Restated) This Equity Incentive Plan (the "Plan") constitutes an amendment and restatement of the Dataware Technologies, Inc. 1993 Equity Incentive Plan, and incorporates the former Dataware Technologies, Inc. 1988 Stock Option Plan and 1993 Director Stock Option Plan (the "Merged Plans"), which have been merged into this Plan. The rights and privileges of holders of outstanding options or rights under the Merged Plans shall not be adversely affected by such merger or restatement. Section 1. Purpose ------- The purpose of the Plan is to attract and retain key employees and directors and consultants of the Company and its Affiliates, to provide an incentive for them to achieve long-range performance goals, and to enable them to participate in the long-term growth of the Company. Section 2. Definitions ----------- "Affiliate" means any business entity in which the Company owns directly or indirectly 50% or more of the total combined voting power or has a significant financial interest as determined by the Committee. "Award" means any Option, Stock Appreciation Right, Performance Share, Restricted Stock, Stock Unit or Other Stock-Based Award awarded or granted under the Plan. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor to such Code. "Committee" means a committee of not less than two members of the Board appointed by the Board to administer the Plan, each of whom is a "Non-Employee Director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 or any successor provision, as applicable to the Company at the time ("Rule 16b-3"). "Common Stock" or "Stock" means the Common Stock, $0.01 par value, of the Company. "Company" means Dataware Technologies, Inc. "Designated Beneficiary" means the beneficiary designated by a Participant, in a manner determined by the Committee, to receive amounts due or exercise rights of the Participant in the event of the Participant's death. In the absence of an effective designation by a Participant, "Designated Beneficiary" shall mean the Participant's estate. "Effective Date" means May 19, 1993. "Fair Market Value" means, with respect to Common Stock or any other property, the fair market value of such property as determined by the Committee in good faith or in the manner established by the Committee from time to time. "Incentive Stock Option" means an option to purchase shares of Common Stock awarded to a Participant under Section 6 that is intended to meet the requirements of Section 422 of the Code or any successor provision. "Nonstatutory Stock Option" means an option to purchase shares of Common Stock awarded to a Participant that is not intended to be an Incentive Stock Option. "Option" means an Incentive Stock Option or a Nonstatutory Stock Option. "Other Stock-Based Award" means an Award, other than an Option, Stock Appreciation Right, Performance Share, Restricted Stock or Stock Unit, having a Common Stock element and awarded to a Participant under Section 11. "Outside Director" means a member of the Board who is not an employee of the Company or any Affiliate. "Participant" means a person who receives an Award under the Plan. "Performance Cycle" or "Cycle" means the period of time selected by the Committee during which performance is measured for the purpose of determining the extent to which an award of Performance Shares has been earned. "Performance Shares" mean shares of Common Stock, which may be earned by the achievement of performance goals, awarded to a Participant under Section 8. "Reporting Person" means a person subject to Section 16 of the Securities Exchange Act of 1934 or any successor provision. "Restricted Period" means the period of time during which an Award may be forfeited to the Company pursuant to the terms and conditions of such Award. "Restricted Stock" means shares of Common Stock subject to forfeiture awarded to a Participant under Section 9. "Stock Appreciation Right" or "SAR" means a right to receive any excess in value of shares of Common Stock over the exercise price awarded to a Participant under Section 7. 2 "Stock Unit" means an award of Common Stock or units that are valued in whole or in part by reference to, or otherwise based on, the value of Common Stock, awarded to a Participant under Section 10. Section 3. Administration -------------- The Plan shall be administered by the Committee, provided that the Board may in any instance perform any of the functions of the Committee. The Committee shall have authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it shall from time to time consider advisable, and to interpret the provisions of the Plan. The Committee's decisions shall be final and binding. To the extent permitted by applicable law, the Committee may delegate to one or more executive officers of the Company the power to make Awards to Participants who are not Reporting Persons and all determinations under the Plan with respect thereto, provided that the Committee shall fix the maximum amount of such Awards for all such Participants and a maximum for any one Participant. Section 4. Eligibility ----------- All employees and, in the case of Awards other than Incentive Stock Options, directors and consultants of the Company or any Affiliate, capable of contributing significantly to the successful performance of the Company, other than a person who has irrevocably elected not to be eligible, are eligible to be Participants in the Plan. Incentive Stock Options may be granted only to persons eligible to receive such Options under the Code. Section 5. Stock Available for Awards -------------------------- (a) Subject to adjustment under subsection (b), Awards may be made under the Plan for up to 3,500,000 shares of Common Stock, provided that no more than 10% of the maximum number of shares authorized from time to time to be issued hereunder may be granted as Restricted Stock for consideration less than 100% of the Fair Market Value of the Common Stock on the date of the respective grant. If any Award in respect of shares of Common Stock, including any grant of option originally issued under either of the Merged Plans, expires or is terminated unexercised or is forfeited, the shares subject to such Award, to the extent of such expiration, termination or forfeiture, shall again be available for award under the Plan. Common Stock issued through the assumption or substitution of outstanding grants from an acquired company shall not reduce the shares available for Awards under the Plan. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (b) In the event that the Committee determines that any stock dividend, extraordinary cash dividend, creation of a class of equity securities, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Stock at a price substantially below fair market value, or other similar transaction affects the Common Stock such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under the Plan, then the Committee (subject, in the case of Incentive Stock Options, to any limitation required under the Code) shall equitably adjust any or all of (i) the number and kind of shares in respect of which Awards may 3 be made under the Plan, (ii) the number and kind of shares subject to outstanding Awards, and (iii) the award, exercise or conversion price with respect to any of the foregoing, and if considered appropriate, the Committee may make provision for a cash payment with respect to an outstanding Award, provided that the number of shares subject to any Award shall always be a whole number. Section 6. Stock Options ------------- (a) Subject to the provisions of the Plan, the Committee may award Incentive Stock Options and Nonstatutory Stock Options and determine the number of shares to be covered by each Option, the option price therefor and the conditions and limitations applicable to the exercise of the Option. The terms and conditions of Incentive Stock Options shall be subject to and comply with Section 422 of the Code or any successor provision and any regulations thereunder, and no Incentive Stock Option may be granted hereunder more than ten years after the Effective Date. (b) The Committee shall establish the option price at the time each Option is awarded, which price shall not be less than 100% of the Fair Market Value of the Common Stock on the date of award with respect to Incentive Stock Options. Nonstatutory Stock Options may be granted at such prices as the Committee may determine. (c) Each Option shall be exercisable at such times and subject to such terms and conditions as the Committee may specify in the applicable Award or thereafter. The Committee may impose such conditions with respect to the exercise of Options, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. (d) No shares shall be delivered pursuant to any exercise of an Option until payment in full of the option price therefor is received by the Company. Such payment may be made in whole or in part in cash or, to the extent permitted by the Committee at or after the award of the Option, by delivery of a note or shares of Common Stock owned by the optionee, including Restricted Stock, or by retaining shares otherwise issuable pursuant to the Option, in each case valued at their Fair Market Value on the date of delivery or retention, or such other lawful consideration as the Committee may determine. (e) The Committee may provide that, subject to such conditions as it considers appropriate, upon the delivery or retention of shares to the Company in payment of an Option, the Participant automatically be awarded an Option for up to the number of shares so delivered. Section 7. Stock Appreciation Rights ------------------------- (a) Subject to the provisions of the Plan, the Committee may award SARs in tandem with an Option (at or after the award of the Option), or alone and unrelated to an Option. SARs in tandem with an Option shall terminate to the extent that the related Option is exercised, and the related Option shall terminate to the extent that the tandem SARs are exercised. SARs granted in tandem with Options shall have an exercise price not less than the exercise price of the related Option. SARs granted alone and unrelated to an Option may be granted at such exercise prices as the Committee may determine. 4 (b) An SAR related to an Option, which SAR can only be exercised upon or during limited periods following a change in control of the Company, may entitle the Participant to receive an amount based upon the highest price paid or offered for Common Stock in any transaction relating to the change in control or paid during the thirty-day period immediately preceding the occurrence of the change in control in any transaction reported in the stock market in which the Common Stock is normally traded. Section 8. Performance Shares ------------------ (a) Subject to the provisions of the Plan, the Committee may award Performance Shares and determine the number of such shares for each Performance Cycle and the duration of each Performance Cycle. There may be more than one Performance Cycle in existence at any one time, and the duration of Performance Cycles may differ from each other. The payment value of Performance Shares shall be equal to the Fair Market Value of the Common Stock on the date the Performance Shares are earned or, in the discretion of the Committee, on the date the Committee determines that the Performance Shares have been earned. (b) The committee shall establish performance goals for each Cycle, for the purpose of determining the extent to which Performance Shares awarded for such Cycle are earned, on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. During any Cycle, the Committee may adjust the performance goals for such Cycle as it deems equitable in recognition of unusual or non-recurring events affecting the Company, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine. (c) As soon as practicable after the end of a Performance Cycle, the Committee shall determine the number of Performance Shares that have been earned on the basis of performance in relation to the established performance goals. The payment values of earned Performance Shares shall be distributed to the Participant or, if the Participant has died, to the Participant's Designated Beneficiary, as soon as practicable thereafter. The Committee shall determine, at or after the time of award, whether payment values will be settled in whole or in part in cash or other property, including Common Stock or Awards. Section 9. Restricted Stock ---------------- (a) Subject to the provisions of the Plan, the Committee may award shares of Restricted Stock and determine the duration of the Restricted Period during which, and the conditions under which, the shares may be forfeited to the Company and the other terms and conditions of such Awards. Shares of Restricted Stock may be issued for no cash consideration or such minimum consideration as may be required by applicable law. (b) Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as permitted by the Committee, during the Restricted Period. Shares of Restricted Stock shall be evidenced in such manner as the Committee may determine. Any certificates issued in respect of shares of Restricted Stock shall be registered in the name of the Participant and unless otherwise determined by the Committee, deposited by the Participant, together with a stock power endorsed in blank, with the Company. At the expiration of the 5 Restricted Period, the Company shall deliver such certificates to the Participant or if the Participant has died, to the Participant's Designated Beneficiary. Section 10. Stock Units ----------- (a) Subject to the provisions of the Plan, the Committee may award Stock Units subject to such terms, restrictions, conditions, performance criteria, vesting requirements and payment rules as the Committee shall determine. (b) Shares of Common Stock awarded in connection with a Stock Unit Award shall be issued for no cash consideration or such minimum consideration as may be required by applicable law. Section 11. Other Stock-Based Awards ------------------------ (a) Subject to the provisions of the Plan, the Committee may make other awards of Common Stock and other awards that are valued in whole or in part by reference to, or are otherwise based on, Common Stock, including without limitation convertible preferred stock, convertible debentures, exchangeable securities and Common Stock awards or options. Other Stock-Based Awards may be granted either alone or in tandem with other Awards granted under the Plan and/or cash awards made outside of the Plan. (b) The Committee may establish performance goals, which may be based on performance goals related to book value, subsidiary performance or such other criteria as the Committee may determine, Restricted Periods, Performance Cycles, conversion prices, maturities and security, if any, for any Other Stock-Based Award. Other Stock-Based Awards may be sold to Participants at the face value thereof or any discount therefrom or awarded for no consideration or such minimum consideration as may be required by applicable law. Section 12. Grant of Options to Outside Directors ------------------------------------- (a) Automatic Grant of Options. (i) Immediately following his or her election, each Outside Director of the Company newly elected to the Board shall automatically be granted Nonstatutory Stock Options to purchase 15,000 shares of Common Stock; (ii) Immediately following the annual meeting of stockholders each year, each Outside Director of the Company newly elected at or continuing in office after such meeting shall automatically be granted an annual retainer of Nonstatutory Stock Options to purchase 7,500 shares of Common Stock; and (iii) Immediately following his or her election, each Outside Director of the Company newly elected to the Board at any point during the year between annual meetings of stockholders shall automatically be granted Nonstatutory Stock Options to purchase 1,875 shares 6 of Common Stock for each calendar quarter beginning after such election and before the next anniversary date of the preceding annual meeting of stockholders. (b) Date of Grant. The "Date of Grant" for Options granted under this Section 12 shall be (x) the date of the respective annual meeting of stockholders, for each grant pursuant to clause (ii) of subsection (a) and (y) the date of the respective director's election, for each grant pursuant to clauses (i) and (iii) of subsection (a). (c) Option Price. The option price for each option granted under this Section 12 shall be the last sale price for a share of the Company's Common Stock as reported by the Nasdaq National Market System, or the principal exchange on which the Common Stock is then traded, as the case may be, for the business day immediately preceding the Date of Grant. (d) Term of Option. The term of each Option granted under this Section 12 shall be ten years from the Date of Grant. (e) Exercisability of Options. Options granted under this Section 12 shall become exercisable, during the optionee's term in office, with respect to: (i) 7,500 shares on each of the first two anniversaries of the Date of Grant, for each grant pursuant to clause (i) of subsection (a); and (ii) 1,875 shares at the beginning of each calendar quarter following the Date of Grant, for each grant pursuant to clause (ii) or clause (iii) of subsection (a). (f) General Exercise Terms. An optionee holding exercisable Options under this Section 12 who ceases to serve as a member of the Board may, during his or her lifetime, exercise the rights he or she had under such Options at the time he or she ceases to serve for the full unexpired term of such Option. Any rights that have not yet become exercisable shall terminate upon cessation of membership on the Board. Upon the death of a director, those entitled to do so shall have the right, at any time within twelve months after the date of death, to exercise in whole or in part any rights that were available to the director at the time of his or her death. The rights of the optionee may be exercised by the optionee's guardian or legal representative in the case of disability and by the beneficiary designated by the optionee in writing delivered to the Company or, if none has been designated, by the optionee's estate or his or her transferee on death in accordance with this Section 12, in the case of death. Options granted hereunder shall terminate, and no rights thereunder may be exercised, after the expiration of the applicable exercise period. Notwithstanding the foregoing provisions of this section, no rights under any Options may be exercised after the expiration of ten years from their Date of Grant. (g) Method of Exercise and Payment. Options granted under this Section 12 may be exercised as provided in Section 6(d). Upon receipt of such notice and payment, the Company shall promptly issue and deliver to the optionee (or other person entitled to exercise the Option) a certificate or certificates for the number of shares as to which the exercise is made. (h) Merger. In the event of a Change in Control (as defined in Section 13(h)), or a reorganization or liquidation of the Company, any deferred exercise period shall be automatically accelerated and each holder of an outstanding option granted under this Section 12 7 shall be entitled to receive upon exercise and payment in accordance with the terms of the option the same shares, securities or property as he or she would have been entitled to receive upon the occurrence of such event if he or she had been, immediately prior to such event, the holder of the number of shares of Common Stock purchasable under his or her option; provided, however, that in lieu of the foregoing the Board may upon written notice to each holder of an outstanding option or right under this Section 12, provide that such option or right shall terminate on a date not less than 20 days after the date of such notice unless theretofore exercised. Section 13. General Provisions Applicable to Awards --------------------------------------- (a) Limitations on Grants of Options and SARs. Subject to adjustment under Section 5(b), the number of shares subject to Options and SARs granted to any one individual during any fiscal year may not exceed 250,000 shares of Common Stock. (b) Transferability. An Award under this Plan may be transferred only to the extent expressly permitted by the Committee and subject to such conditions as the Committee may in its discretion impose. (c) Documentation. Each Award under the Plan shall be evidenced by a writing delivered to the Participant specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or to comply with applicable tax and regulatory laws and accounting principles. (d) Committee Discretion. Each type of Award may be made alone, in addition to or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Committee need not treat Participants uniformly. Except as otherwise provided by the Plan or a particular Award, any determination with respect to an Award may be made by the Committee at the time of award or at any time thereafter. (e) Settlement. The Committee shall determine whether Awards are settled in whole or in part in cash, Common Stock, other securities of the Company, Awards or other property. The Committee may permit a Participant to defer all or any portion of a payment under the Plan, including the crediting of interest on deferred amounts denominated in cash and dividend equivalents on amounts denominated in Common Stock. (f) Dividends and Cash Awards. In the discretion of the Committee, any Award under the Plan may provide the Participant with (i) dividends or dividend equivalents payable currently or deferred with or without interest, and (ii) cash payments in lieu of or in addition to an Award. (g) Termination of Employment. The Committee shall determine the effect on an Award of the disability, death, retirement or other termination of employment of a Participant and the extent to which, and the period during which, the Participant's legal representative, guardian or Designated Beneficiary may receive payment of an Award or exercise rights thereunder. 8 (h) Change in Control. In order to preserve a Participant's rights under an Award in the event of a Change in Control (as defined below), the Committee in its discretion may, at the time an Award is made or at any time thereafter, take one or more of the following actions: (i) provide for the acceleration of any time period relating to the exercise or realization of the Award, (ii) provide for the purchase of the Award upon the Participant's request for an amount of cash or other property that could have been received upon the exercise or realization of the Award had the Award been currently exercisable or payable, (iii) adjust the terms of the Award in a manner determined by the Committee to reflect the Change in Control, (iv) cause the Award to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable and in the best interests of the Company. As used herein, a "Change in Control" of the Company shall be deemed to have occurred upon the occurrence of any of the following: (A) Any transaction or series of transactions, as a result of which any "person" (as defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder) (a "Person") is or becomes a "beneficial owner" (as defined in Rule 13d-3 under such act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding voting securities (the "Company's Outstanding Voting Securities"); provided, however, that a Change in Control shall not be deemed to have occurred solely because of the acquisition of securities of the Company by (1) one or more employee benefit plans or related trusts established for the benefit of the employees of the Company or any Affiliate of the Company; or (2) any Person when such acquisition (a) is effected primarily to prevent the Company from being declared insolvent and (b) is approved by the Board of Directors of the Company (the "Board"). (B) Any change in the membership of the Board such that individuals who are Incumbent Directors (as defined herein) cease for any reason to constitute at least a majority of the Board. The Incumbent Directors shall be (1) those members of the Board who were Directors as of April 15, 1996 and who have served continuously as Directors since such date, and (2) any other member of the Board who subsequently became a Director and whose election or nomination for election by the Company's stockholders at the beginning of his or her current tenure was approved by a vote of at least a majority of the Directors who were then Incumbent Directors, except that no individual shall be an Incumbent Director if such individual's initial assumption of office as a Director occurred as a result of an actual or threatened election contest with respect to the election or removal of Directors, or other actual or threatened solicitation of proxies or consents, by, or on behalf of, a Person other than the Board. (C) The consummation of a reorganization, merger, consolidation, sale or other disposition of all or substantially all of the assets of the Company, or 9 similar transaction (a "Business Combination"), unless all of the following conditions are met: (1) the individuals and entities who are the beneficial owners of the Company's Outstanding Voting Securities immediately before the consummation of the Business Combination would beneficially own, directly or indirectly, securities representing more than 50% of the outstanding combined voting power of the voting securities that would be outstanding and entitled to vote generally in the election of the governing body of the corporation or other entity resulting from such Business Combination (including, without limitation, a corporation or other entity that as a result of such transaction would own the Company or all or substantially all of the Company's assets, either directly or through one or more subsidiaries) (the "Resulting Entity"), and the securities of the Resulting Entity that would be owned by such beneficial owners of the Company's Outstanding Voting Securities would be owned by them in substantially the same proportions as they own the Company's Outstanding Voting Securities; (2) no Person (excluding any corporation or other entity resulting from such Business Combination, and excluding any employee benefit plan or related trust of the Company or of such corporation or other entity resulting from such Business Combination) would beneficially own, directly or indirectly, 30% or more of the combined voting power of the outstanding voting securities of the Resulting Entity except to the extent that such ownership existed before the Business Combination; and (3) at least a majority of the members of the board of directors of the Resulting Entity would be persons who were Incumbent Directors at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination. (D) Approval by the Company's stockholders of a liquidation or dissolution of the Company (unless the liquidation or dissolution is part of a Business Combination excepted from clause (C) above). (E) The close of business on the latest of the following dates: (1) the date that a tender or exchange offer by any Person (other than the Company, any Affiliate of the Company, or any employee benefit plan or related trust established for the benefit of the employees of the Company or any Affiliate of the Company) that, if consummated, would result in such Person becoming a "beneficial owner" (as defined in clause (A) above), directly or indirectly, of securities of the Company representing thirty percent 10 (30%) or more of the combined voting power of the Company's then outstanding voting securities, is first published or sent or given within the meaning of Rule 14d-2(a) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder; (2) the date upon which all regulatory approvals required for the acquisition of securities pursuant to the tender or exchange offer referred to in clause (1) have been obtained or waived; or (3) the date upon which any approval of the security holders of the Person publishing or sending or giving the tender or exchange offer referred to in clause (1) required for the acquisition of securities pursuant to such tender or exchange offer is obtained or waived." (i) Loans. The Committee may authorize the making of loans or cash payments to Participants in connection with any Award under the Plan, which loans may be secured by any security, including Common Stock, underlying or related to such Award (provided that such Loan shall not exceed the Fair Market Value of the security subject to such Award), and which may be forgiven upon such terms and conditions as the Committee may establish at the time of such loan or at any time thereafter. (j) Withholding Taxes. The Participant shall pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability. In the Committee's discretion, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value on the date of delivery. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant. (k) Foreign Nationals. Awards may be made to Participants who are foreign nationals or employed outside the United States on such terms and conditions different from those specified in the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or to comply with applicable laws. (l) Amendment of Award. The Committee may amend, modify or terminate any outstanding Award, including substituting therefor another Award of the same or a different type, changing the date of exercise or realization and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required: (i) if such action would terminate, or reduce the number of shares issuable under, an Option unless any time period relating to the exercise of such Option or the eliminated portion, as the case may be, is waived or accelerated before such termination or reduction (and in such case the Committee may provide for the Participant to receive cash or other property equal 11 to the net value that would have been received upon exercise of the terminated Option or the eliminated portion, as the case may be); and (ii) in any case not involving the termination of, or reduction of shares issuable under, an Option unless the Committee determines that the action, taking into account any related action, would not materially and adversely affect the Participant. Section 14. Miscellaneous ------------- (a) No Right To Employment. Except as provided in Section 12, no person shall have any claim or right to be granted an Award. The grant of an Award shall not be construed as giving a Participant the right to continued employment. The Company expressly reserves the right at any time to dismiss a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. (b) No Rights As Stockholder. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed under the Plan until he or she becomes the holder thereof. A Participant to whom Common Stock is awarded shall be considered the holder of the Stock at the time of the Award except as otherwise provided in the applicable Award. (c) Effective Date. The Plan became effective on the Effective Date. (d) Amendment of Plan. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, subject to any stockholder approval that the Board determines to be necessary or advisable. (e) Governing Law. The provisions of the Plan shall be governed by and interpreted in accordance with the laws of Delaware. 12 ____________________________________________ . Plan, including merger of 1988 Stock Option Plan, adopted by the Board of Directors and approved by the Stockholders on May 19, 1993. . Increase in shares issuable adopted by the Board of Directors April 15, 1994 and approved by the Stockholders May 25, 1994. . Amendments adopted by the Board of Directors April 15, 1996 and approved by the Stockholders May 23, 1996. . Amendments adopted by the Board of Directors December 9, 1996. . Increase in shares issuable adopted by the Board of Directors February 11, 1997 and approved by the Stockholders May 23, 1997. . Increase in shares issuable adopted by the Board of Directors April 14, 1998 and approved by the Stockholders May 21, 1998. . Amendment and restatement, including merger of 1993 Director Stock Option Plan, adopted by the Board of Directors April 13, 1999. . Amendments adopted by the Board of Directors February 8, 2000. 13 EX-10.5 5 AMENDMENT TO MUELLER SEVERANCE AGREEMENT Exhibit 10.5 Amendment dated February 10, 2000 to the Agreement between the Company and Kurt Mueller, dated December 31, 1998 Kurt Mueller Stuberstrasse 11A 80638 Munchen GERMANY Dear Mr. Mueller: You have resigned from the Board of Directors of Dataware Technologies, Inc. effective February 8, 2000. This letter confirms the amendments to the Agreement dated December 31, 1998 between Dataware Technologies, Inc. and yourself, Kurt Mueller, to which we have agreed in connection with your resignation. Except as amended hereby, the Agreement will continue in force. 1. We confirm that your outstanding stock options under Dataware's Equity Incentive Plan (the "Plan") will not terminate as a result of your resignation as a director but will remain exercisable until the respective expiration dates provided therein. Notwithstanding your resignation, subject to Section 3(d): (a) to the extent they are not already exercisable, all such options will continue to become exercisable on the dates set forth in the respective options; provided that no option will become exercisable as to any additional shares following your death; and (b) to the extent not already provided, vesting of such options will be accelerated, such that all such stock options shall become exercisable in full, upon a "change of control" of Dataware, as defined in the Plan. 2. Your outstanding stock options under the Plan are also hereby amended to provide that they, or any portion thereof, may be exercised on a "net exercise" basis in lieu of paying the exercise price in cash. You (or your transferee) must provide the Company with notice of such election, stating the portion of the option to be exercised, in which event the Company will issue the number of shares of common stock computed using the following formula: X = Y * (A-B) --------- A Where: X = the number of shares of common stock to be issued by Dataware; Y = the number of shares of common stock otherwise issuable upon exercise of this option or a portion thereof A = the fair market value (defined as the closing price per share on the last trading date prior to the date of exercise) of one share of the common stock at the date of exercise B = the exercise price per share of the option 3. Your outstanding stock options under the Plan are also hereby amended to provide that you may sell or transfer any or all of your then-vested options in one or more transactions to a single third party, subject to the following conditions: (a) in the opinion of counsel acceptable in form and substance to counsel to the Company, such sale or transfer is exempt from the registration requirements of the Securities Act of 1933 and any applicable state securities laws; (b) the buyer/transferee shall have no right to sell, transfer, assign or otherwise dispose of any of such options, by operation of law or otherwise, except by exercising them in accordance with their terms; (c) the buyer/transferee shall execute such documents as Dataware may require to (i) support the opinion referred to in subsection 3(a) above, (ii) evidence his or her understanding that the resale of the shares issued on exercise of the options will be restricted to the extent required by applicable securities laws; and (iii) evidence his or her agreement to be bound by the terms hereof and of the Equity Incentive Plan; and (d) Subsections 1(a) and (b) shall not apply to any options following their sale or transfer (so that no unvested options that have been transferred shall thereafter become exercisable). Any attempted sale or other transfer not complying with the foregoing shall be void. 4. Dataware is willing to agree to the foregoing in consideration of the following agreements by you: You agree that you shall cooperate fully with Dataware in the defense or prosecution of any claims or actions now pending or that may be brought in the future against or on behalf of Dataware that relate to events transpiring while you were employed by or a director of Dataware. Your cooperation shall include but not be limited to being available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf of Dataware. You also shall cooperate fully with Dataware in connection with any investigation or review by any governmental authority relating to events transpiring while you were employed or a director of by Dataware. The amount of time that you shall be required to be personally present in the United States for the foregoing activities on behalf of Dataware shall not exceed 24 days between now and March 1, 2002. Dataware will reimburse you for any reasonable out-of-pocket expenses you incur in connection with performing these obligations, in accordance with its normal reimbursement policy. Since this is a binding legal document, you should consider it carefully before signing. You should consult with an attorney if you wish to do so. If you wish to accept the above amendment as set out in this letter please sign the enclosed copy of this letter and return it to me. Sincerely, /s/ David Mahoney David Mahoney President and Chief Executive Officer 2 I have read the foregoing terms, fully understand them and freely accept them. /s/ Kurt Mueller 2/10/00 - ---------------------- ---------------------- Kurt Mueller Date 3 EX-10.6 6 SEVERANCE AGREEMENT BETWEEN REGISTRANT AND JEFFREY Exhibit 10.6 February 24, 2000 Mr. Jeffrey O. Nyweide Dataware Technologies, Inc. One Canal Park Cambridge, MA 02141 Dear Jeff: This letter will confirm the agreements that have been reached concerning the termination of your employment by Dataware Technologies, Inc.: 1. Your base salary will be adjusted to $200,000 per year effective January 1, 2000. 2. You will complete projects that you are currently working on or turn them over to others if that is more appropriate, you will complete the matters listed in the "projects to be completed list" provided to you by the CEO, Dave Mahoney, and you will undertake new, special, projects as requested by Mr. Mahoney. Dataware will pay invoices up to $10,000 from a career coaching/outplacement agency for services provided to you between now and May 15, 2001. Dataware will provide references for you upon request if and to the extent that the substance thereof is mutually agreed between you and Mr. Mahoney. Dataware will reimburse you in accordance with its normal policy for any approved business expenses for which you have submitted complete reimbursement requests by April 15, 2000. Dataware will continue to provide an office for you in Cambridge through March 15, 2000. Dataware also will cover the reasonable lease and telecommunications costs of an offsite office for you through May 15, 2000, but shall not have any obligation to reimburse you for any other expenses after the transition period, except those expenses incurred during service as a director of Dataware or as requested by Dataware. 3. Your employment by Dataware will continue until the earlier of (i) May 15, 2001, (ii) the termination of your employment by you or by Dataware for cause, or (iii) the date you begin employment with another company. However, you will be on a leave of absence after March 1, 2000. If your employment terminates before May 15, 2001, Dataware will pay you severance by continuing to pay you the base salary described in Section 1, payable in accordance with Dataware's normal compensation policies, until May 15, 2001. Your severance will not be reduced by the amount of any earnings you receive from other employment. It is your affirmative obligation to notify Dataware if you accept other employment. As used in this paragraph, "cause" means (i) your commission of a felony; (ii) your continued failure (other than any such failure resulting from your incapacity due to physical or mental illness) to perform your obligations to the Company (as described in this Agreement) after the Company has delivered written notice of such failure; (iii) your falsification of any records, documents or systems of the Company or any other conduct that is materially harmful to the Company or any of its customers or suppliers; or (iv) your violation of any material provision of any confidentiality, assignment of invention, noncompetition or similar agreement with the Company. 4. Dataware may request that you perform special services for it between March 1, 2000 and May 15, 2001. You have no obligation to provide any special services but, if you do, you will be compensated at the rate of $3000 per day for time actually worked. In addition, you agree that you Jeffrey O. Nyweide February 24, 2000 Page 2 of 4 will promptly upon request (and without compensation) respond to reasonable requests not requiring you to travel by providing any information you have that relates to the periods of your employment and/or your service as a director of Dataware. 5. You will not be eligible to receive stock options or other compensation payable to nonemployee directors for service on the Board of Directors during any period through May 31, 2001, that you are a director of Dataware. 6. You hereby resign as trustee of Dataware's 401(k) plan effective immediately. 7. You may continue to participate in the Dataware medical and dental benefits plan at your current levels at Dataware's expense until May 31, 2001. You will be eligible to continue on COBRA at your own expense for an additional 18 months beyond May 31, 2001 if you make a timely election to do so. Your Dataware life and disability insurance coverage will end on April 15, 2000. Dataware will reimburse you up to $5,500 of premiums paid by you between now and May 15, 2001 for life and disability insurance. 8. On April 15, 2000, Dataware will pay you the cash equivalent of the vacation that you have accrued through that date in accordance with its vacation policy. You may retain your current laptop computer (subject to your compliance with your nondisclosure agreement with Dataware). Dataware will provide you a company voice mailbox until December 31, 2000, and an email address until April 15, 2000. After April 15, 2000, you will not be entitled to receive any fringe or other employee benefits except as provided in this Agreement. 9. Your outstanding stock options under the Dataware Equity Incentive Plan (the "Plan"), including the options to purchase 40,000 shares granted on December 14, 1999, at an exercise price of $6.53, will continue to vest in accordance with their respective terms as long as you are still active with the company as a director. To the extent not already provided, vesting of such options will be accelerated such that all such stock options shall become exercisable in full upon a "change in control" of Dataware, as defined in the Plan, or upon your resignation as a director of Dataware. 10. Your outstanding stock options under the Plan are also hereby amended to provide that they, or any portion thereof, may be exercised on a "net exercise" basis, i.e., by delivering a portion of such options to Dataware for cancellation in lieu of paying the exercise price in cash. You must provide Dataware with notice of such election, stating the portion of the option to be exercised, in which event Dataware will issue the number of shares of common stock computed using the following formula: X = Y * (A-B) --------- A Where: X = the number of shares of common stock to be issued by Dataware; Y = the number of shares of common stock otherwise issuable upon exercise of this option or a portion thereof A = the fair market value (defined as the closing price per share on the last trading date prior to the date of exercise) of one share of the common stock at the date of exercise B = the exercise price per share of the option 11. In consideration of the foregoing, you shall execute non- competition, non-disclosure and assignment of inventions agreements in Dataware's standard form at the time of executing this Agreement, and you shall be bound by such agreements during your employment and thereafter, as provided in this Agreement. Your obligations under your non-competition agreement shall continue for one year Jeffrey O. Nyweide February 24, 2000 Page 3 of 4 after the later of the termination of your employment or your resignation from Dataware's Board of Directors, and your obligations under your non- disclosure and assignment of inventions agreements shall continue as provided therein. In addition, you agree that during and after your employment, you shall cooperate fully with Dataware in the defense or prosecution of any claims or actions now pending or that may be brought in the future against or on behalf of Dataware that relate to events transpiring while you were employed by or a director of Dataware. Your cooperation shall include but not be limited to being reasonably available to meet with counsel to prepare for discovery or trial and to act as a witness on behalf of Dataware. During and after your employment, you also shall cooperate fully with Dataware in connection with any investigation or review by any governmental authority relating to events transpiring while you were employed by Dataware. Dataware will reimburse you for any reasonable out-of-pocket expenses you incur in connection with performing these obligations, in accordance with its normal reimbursement policy . 12. Representations. You represent that: you understand the various claims that could have been asserted by you under the laws of Massachusetts, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the Retirement Income Security Act, the Fair Labor Standards Act, the National Labor Relations Act, the Equal Pay Act, or the Americans with Disabilities Act, and other such similar laws; that you have read this Agreement carefully and understand all of its provisions; that you understand you have the right to and are advised to consult an attorney concerning this Agreement and that to the extent, if any, that you desired, you availed yourself of this right; and that you have had at least twenty-one (21) days to consider whether to sign this Agreement. In addition, you have seven (7) days after signing this Agreement to revoke your acceptance of this Agreement. 13. In exchange for the payments and the other benefits outlined above, you hereby fully, forever, irrevocably and unconditionally release, remise and discharge Dataware from any and all manner of claims, charges, complaints, demands, actions, causes of action, suits, rights, debts, dues, sums of money, costs, losses, accounts, reckonings, covenants, contracts, promises, liabilities and expenses (including attorney's fees and costs), of every kind and nature whatsoever, whether known or unknown, either at law in equity, or mixed which you ever had, now have or may have by reason of any matter or thing which has happened, developed, or occurred before the signing of this agreement, including, but not in limitation of the foregoing general term, and claims, asserted or unasserted, arising from your employment with or separation from Dataware, and specifically including any claims you may have under any federal or state labor employment or discrimination laws, including but limited to, Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act of 1967, as amended, the Fair Labor Standards Act of 1938, as amended, the Americans with Disabilities Act of 1992, Chapter 151B of the Massachusetts General Laws, Sections 24A-24J of Chapter 149 of the Massachusetts General Laws, the Massachusetts Civil Rights Act, the Massachusetts Equal Rights Law, or at common law, but excluding (i) any ------------- claims under this agreement, (ii) any and all rights you have as a stockholder or holder of stock options of Dataware, (iii) your rights to indemnification by reason of your service as a director, officer, or agent of Dataware under its Restated Certificate of Incorporation and Bylaws or otherwise, or (iv) any and all other rights you have as a director of Dataware. Subject to the foregoing exclusions, it is expressly agreed and understood that this release is a general release. Furthermore, you agree that, in exchange for the payments and the other benefits outlined above, on and effective as of May 15, 2001, you shall release Dataware from all liability with respect to all periods ending on that date on the same terms as this paragraph 13, and you will execute an additional instrument of general release confirming such release. 14. This Agreement shall be governed by Massachusetts law. This Agreement contains the entire agreement between you and Dataware concerning payment of severance or other compensation following the termination of your employment and supersedes all prior agreements and Jeffrey O. Nyweide February 24, 2000 Page 4 of 4 understandings, written or oral, including without limitation the letter agreement dated October 28, 1988, which is hereby terminated. Please sign and return one copy of this Agreement to indicate your acceptance of and agreement with its terms, and retain the other copy for your records. This Agreement shall not become effective or enforceable until the seven-day period referred to in Paragraph 12 has expired. Sincerely, /s/ David Mahoney David Mahoney President and CEO I have read the foregoing terms, fully understand them and freely accept them. /s/ Jeffrey O. Nyweide 2/24/00 - --------------------------- -------------------------- Jeffrey O. Nyweide Date EX-10.9 7 EMPLOYMENT AGREEMENT Exhibit 10.9 [DATAWARE TECHNOLOGIES LETTERHEAD] November 15, 1999 Robert J. Farrell 123 Edgewood Avenue Smithtown, NY 11787 Dear Bob: I am very pleased to confirm our offer to you to join Dataware Technologies, Inc. as Executive Vice President of Worldwide Field Operations, Chief Operating Officer reporting to Dave Mahoney, the President and Chief Executive Officer. The terms of our offer of employment are summarized in the attached Proposed Employment Terms. In order to accept this position, please sign a copy of this letter and return it to me. Retain a copy for your records. We are looking forward to working with you at Dataware. Best Regards, DATAWARE TECHNOLOGIES, INC. /s/ Ann Smith Ann Smith Vice President Corporate Resources Offer Accepted: By /s/ Robert J. Farrell Date 11/19/99 --------------------- -------- Enclosure AS:jag Robert Farrell Employment Terms Position: Executive Vice President of Field Operations, Chief Operating - -------- Officer reporting to the Chief Executive Officer. Term: Your employment will commence on a date to be determined following - ---- your acceptance of the offer (the "Start Date"). Employment with Dataware can be terminated at any time at the option of either you or the Company. Base Salary: $250,000 per year, payable semi-monthly. - ------------ Bonus: $100,000 annual bonus opportunity (beginning with FY 2000) based - ----- on the achievement of Company revenue and earning performance targets. Fifty percent (50%) of the annual bonus opportunity, $50,000, is guaranteed subject to continued employment for the first 6 months of 2000. This bonus will be paid quarterly at the rate of at $12,500 per quarter for 4 quarters. Any remaining portion of the annual bonus opportunity will be earned based on the Company achieving its earnings and revenue targets and will be payable following the end of the year. Benefits: You will be entitled to medical, dental, disability, and life - -------- insurance, 15 days paid vacation, 5 paid personal days and 5 paid sick days (accruing in proportion to the time worked during a calendar year) and 10 paid holidays per calendar year and other benefits provided to our executive employees. In addition, you will be eligible for $750,000 of company paid term life insurance. Relocation: You will be reimbursed for reasonable expenses of relocating your - ---------- family and household to the Boston area. The company would prefer that your relocation be completed within 12 months of your date of employment. If your relocation is completed within your first 12 months of employment, you will be granted an additional 15,000 shares of ISO options. These options will be priced according to the provisions outlined in the equity section below. These options will vest immediately upon the completion of your relocation provided it occurs no later than 12 months from your date of employment. The Company will provide temporary living accommodations for you at no expense to you for a period not to exceed 12 months. Expenses: The Company will reimburse you for reasonable business related - -------- expenses, including travel in accordance with the Company travel policy. Since your permanent office will be at the Cambridge headquarters, weekly travel between your home and your office will be considered business travel and will be reimbursed. Mileage reimbursements for business-related travel by private car will be at the latest IRS approved rate. Equity: The Company will grant you a qualified (ISO) stock option for - ------ 150,000 shares, subject to approval by the Dataware Board of Directors. The exercise price will be the fair market value on the grant date, defined as the closing price on the day before the grant is issued. As part of this offer, options on the first 37,500 shares will vest on December 31, 1999. If you exercise these vested options, the Company will hold the certificate for the shares until you relocate your family and household to the Boston area. In the event that your employment is terminated within the first 12 months and you have not relocated to the Boston area by then, the shares will be forfeited to the Company in exchange for repayment of the exercise price. The remaining options will vest at the rate of 37,500 per year annually on December 31. Vesting will be accelerated upon a "Change in Control" of the Company, as defined in the Company's Equity Incentive Plan. . Should there be a "Change in Control" of the Company, as defined in the Company's Equity Incentive Plan, and you are not offered an equivalent position at or above your then current compensation, vesting will be accelerated. Severance: Should the Company terminate you without "Cause" or should there - --------- be a Change in Control of the Company and, as a result, your employment with the Company is terminated, the Company will continue your base salary plus earned pro-rata bonus for a period of six (6) months, plus one additional month for each full year of service with the Company. Total severance will be limited to twelve (12) months-base salary plus earned pro-rata bonus. Severance payments will be reduced by any amounts you receive from subsequent employment during the severance period. For this purpose, "Cause" means (i) your commission of a felony; (ii) your continued failure (other than any such failure resulting from your incapacity due to physical or mental illness) to perform your duties with the Company after the Company has delivered written notice of such failure; (iii) your falsification of any records, documents or systems of the Company or any other conduct that is materially harmful to the Company or any of its customers or suppliers; or (iv) your violation of any material provision of any confidentiality, assignment of invention, noncompetition or similar agreement with the Company. Other: You will need to sign non-disclosure and non-competition - ----- agreements satisfactory to the Company prior to your start date. You will also need to certify that you have no outstanding non- disclosure, non-compete or employment obligations that would interfere with your full-time employment by Dataware. Offer Accepted: By /s/ Robert J. Farrell Date 11/19/99 --------------------------- ----------------- Start Date: TBD -------- EX-21.1 8 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT Subsidiary Jurisdiction of Organization - ---------- ---------------------------- Dataware Technologies (UK) Ltd. England Dataware Technologies Pte Ltd Singapore Dataware Technologies A/S Denmark Creative Multimedia Corporation Oregon Green Book International Corporation Canada EX-23.1 9 CONSENT OF PRICEWATERHOUSECOOPERS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File nos. 333-27007 and 333-39633) and Form S-8 (File nos. 333-79711, 33-70498, 33-70500, 33-79824, 333-04487, 333-28545, 333-56691 and 333-56693) of Dataware Technologies, Inc. of our report dated February 8, 2000, relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers Boston, Massachusetts March 10, 2000 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 9,361 0 6,095 803 0 15,515 9,586 6,494 23,374 10,599 0 0 0 100 12,675 23,374 26,734 26,734 12,978 12,978 25,072 0 28 (5,083) (153) (4,930) 0 0 0 (4,930) (0.52) (0.52)
EX-99.1 11 IMPORTANT RISK FACTORS REGARDING FUTURE RESULTS Exhibit 99.1 DATAWARE TECHNOLOGIES, INC. Important Risk Factors Regarding Future Results Our SEC filings or other public announcements may contain "forward-looking statements." These are statements that relate to the future and include statements about our: . projected financial performance, including but not limited to revenues, expenses, and profits or losses; . market opportunities; . product development; . commercialization of new products; and . future operations. These statements can be identified by the use of words like "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. These statements are necessarily based on management's knowledge at the time they are made. Although we believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, you should not view them as guarantees of future performance. All statements like this are subject to known and unknown risks and uncertainties and other factors that could cause our actual results to differ materially from those contemplated by the statements. Important factors that could cause future results to differ materially from those projected in the forward-looking statements include those discussed below and others. We may have difficulty transitioning to an e-business solutions model, which could affect our ability to meet our long-term goals. During 1999, we began to transition our business and our corporate organization to an e-business solutions model. This model involves an extensive personnel reorganization, as well as new sales and marketing strategies. We have made substantial progress in our efforts to position the company in the e- business market by expanding our e-business solutions customer base and adding new executives experienced in this area to the management team. However, we may not be able to successfully implement the e-business solutions model. Some of the risks associated with our revised approach include: . we may not effectively complete the necessary personnel reorganization; . an excessive level of high-cost customized services may be required to provide solutions meeting individual customers' needs; . we may not be able to develop appropriate new distribution channels capable of delivering these offerings economically and on time; and . sales of our older product lines may decline more rapidly than they can be replaced by revenues from newer offerings. If we are unable to keep pace with rapid technological changes in the market for our products and services, we may miss market opportunities, which could reduce sales. The market for e-business solutions in general, and information management and distribution products and services in particular, continues to change rapidly. We must keep up with changing technology and customer demands, including technologies and features introduced by our competitors, or we will not be successful. As with any new product, our most innovative offerings may be subject to delays in development, "debugging," production, or customization, and will require periods of adjustment to ensure that they are meeting customer requirements. These may cause us to miss market opportunities and future sales. If we cannot raise any necessary capital, we may not be able to expand, or we may have to cut back, our operations. In recent years we have had significant operating losses. Our liquid assets and borrowings may be insufficient to provide for our growth for the near future or even for our operations at our current rate beyond the first half of 2000. Therefore, we have begun to consider various alternatives available to us to raise additional capital during the first half of 2000 to meet our working capital needs and to support a more aggressive expansion of our business. We are currently evaluating our options, and have made no decisions on the amount that we would raise, the type of securities that might be offered, or on any other terms of any possible financing. There is no assurance that we will be able to raise sufficient debt or equity capital on terms that we consider acceptable, if at all. In addition to or as an alternative to raising capital, we may be required to cut back operations to extend our resources. In general, factors such as the following may cause liquidity problems in the future: . unanticipated changes in business conditions or delays in market acceptance of new products; . expansion of operations or research and development activities; . development of new distribution channels; . competitive and technological developments; and . future acquisitions of businesses and/or product rights. We face intense competition. If we cannot develop new, improved or more cost effective products and solutions as quickly as our competitors, we will lose sales. The markets in which we do business are intensely competitive. Increased competition may result in price reductions, reduced gross margins, lost business, and loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition. Our competition varies by: . geography (North America, Europe, Asia); . type of customer (commercial, corporate, government agency); . market segment (financial services, high technology, etc); and . application category (from high-end, complete software and service solutions to pure software sales). Our competitors include traditional information retrieval competitors, as well as very significant companies in various areas of the e-business solutions market. It is likely that new competitors will enter these markets as they continue to grow. Furthermore, as the markets grow, a number of companies could attempt to increase their presence in our markets by acquiring or forming strategic alliances with our competitors or by introducing products or services specifically designed for these markets. Compared to us, many of our current and future competitors have longer operating histories and significantly greater financial, technical, sales, marketing and other resources. We are dependent on key personnel, whose loss could delay our product development initiatives or ability to market to customers. Our success depends on our ability to attract, motivate and retain highly skilled technical, management, sales and marketing personnel. Competition for personnel in the computer software and services industry is intense, and we are always at risk of losing key personnel to our competitors. We may not be able to attract and retain additional highly skilled employees, which could impair our ability to adequately manage and complete existing projects or develop and introduce competitive products. Our ability to provide competitive equity compensation to key employees plays a significant role in personnel retention. Stock options are a significant part of our compensation package, but we presently have no shares remaining for award under our stock compensation plans. We are asking our shareholders at the 2000 Annual Meeting to authorize an increase in the number of shares we may issue, as well as additional shares to grant to employees under our Equity Incentive Plan and Employee Stock Purchase Plan. If the stockholders do not approve these increases, we may not be successful in attracting and retaining qualified personnel. 2 Since a large portion of our revenues are generated outside the United States, changes in international markets could affect our overall sales. We generate a significant portion of our revenues from international sales. Currently, we have direct sales organizations in the United Kingdom, Denmark and Singapore and have distribution agreements covering other European countries, the Pacific Rim, and South America. Our performance could be adversely affected by changes in the world economies. As a result of doing business abroad, a significant percentage of our revenues and expenses are denominated in foreign currencies that fluctuate in value. Although we may enter into foreign exchange forward contracts and foreign exchange option contracts to offset a portion of the foreign exchange fluctuations, unanticipated events may have a material impact on our results. Risks of doing business abroad include: . unanticipated changes in regulatory requirements, tariffs and other barriers; . potential changes in tax and other laws; . greater difficulty in protecting intellectual property rights; . difficulties in managing foreign operations; and . general economic and political conditions. These or other factors may have a material adverse effect on our international sales, our ability to collect international receivables, or the value of our assets denominated in foreign currencies, any of which would hurt our operating results. Market factors that affect certain classes of customers may hurt our results. Our revenues depend on our maintaining relationships with certain classes of customers, including: . government agencies in the United States, Canada, Germany and the United Kingdom; . corporate and commercial publishers, and law firms (for certain on-line products); . financial printers and issuers of securities; and . financial services and health care organizations. Factors that affect any of these customer groups may have a substantial adverse effect on our earnings. For example, political pressures may cause governmental customers to reduce spending on our products and services. A reduction in the amount of orders received from any customer class could have a material adverse effect on our earnings and may cause actual results to vary materially from quarter to quarter. We may not be able to obtain or enforce protection for our intellectual property, which could limit our ability to prevent competitors from using our technology. Our success depends in large part on protecting our proprietary intellectual property rights. We rely primarily on a combination of copyright, trademark and trade secret laws, license agreements, employee and third party non-disclosure agreements and other methods to protect our software. We rely to a limited extent on patent protection for our software products. Various factors create risks in this area. For example, existing copyright laws--even in the United States--afford only limited protection, and it may be difficult to protect proprietary rights in certain international markets where the laws do not offer the same intellectual property protection as U.S. law. Third parties may claim we are infringing their rights. If these claims are made, they may result in costly litigation or require us to license intellectual property rights of others, which may not be possible on reasonable terms or at all. Any such claims, with or without merit, can be time consuming and expensive to defend, which can adversely affect our financial condition. We may have difficulty integrating acquisitions into our business, which could increase our costs and delay our ability to take advantage of the acquired assets. Over the last several years, we have expanded our product range and customer base through a number of selective acquisitions. We may acquire additional businesses or assets in the future. The success of an 3 acquisition is dependent upon our ability to integrate the acquired business or assets into our organization. For example, we may have difficulty integrating acquired technology into our products, or we may not be able to retain or motivate key employees of the acquired company. Our inability to integrate an acquired business, or an increase in the cost of integration, could materially and adversely affect our business, operating results and financial condition. In addition, acquisitions may result in the allocation of purchase price to in-process R&D. The SEC has raised concerns about the methodologies used and allocation of purchase price to in-process R&D and has required some companies to adjust or restate prior periods to reduce allocations to in-process R&D, thereby increasing intangible assets and future amortization expense. While we believe that our in-process R&D allocations are appropriate, if the SEC were to require us to change an allocation, this would result in a higher amortization expense, which would adversely impact our operating results. We rely on third-party distributors who may not sell enough of our products to make our business profitable. A significant portion of our products are sold through indirect distribution channels, such as value-added resellers. If we cannot develop and effectively manage these relationships, it could have a material adverse effect on our business. Year 2000 problems could cause interruption or failure of our internal computer systems and those of our suppliers, which may be expensive to fix. We have completed testing of our current, updated product offerings (including third party software incorporated in the products) and believe that they are all Year 2000 compliant. We have also reviewed the computer systems through which we provide certain services to customers and believe that they also are Year 2000 compliant. To date, no material problems related to the Year 2000 issue have surfaced. It is possible, however, that such problems exist but either have not yet manifested themselves or have not yet been detected. We cannot, of course, predict the nature or materiality of the impact on our operations or operating results of Year 2000 disruption by parties over whom we have no control. These Year 2000 problems may be expensive to fix and could have a material adverse effect on our operating results. Our operating results fluctuate from quarter to quarter, making future operating results difficult to predict. We have experienced, and may continue to experience, significant quarterly fluctuations in our operating results. Our revenue from software license fees are substantially dependent on factors including the following: . the timing of product shipments and receipt of license reports for sales that are often difficult to forecast; . our ability to close significant sales in any quarter; . external market conditions; and . competition. Changes in these factors may result in a material variation between forecasted quarterly results and actual results. Moreover, our shift in business emphasis to an e-business solutions model has resulted in increased product development costs and less predictable sales cycles for products and services. Also, a disproportionately large percentage of quarterly sales occur in the closing weeks of each quarter, making any prediction of quarterly results before the end of a quarter potentially unreliable. Given these variations, we cannot assure you that we will be consistently profitable during any particular period. A shortfall in revenues during any quarter could cause our earnings for that quarter to fall below expectations, which could adversely impact the market price of our stock. 4 -----END PRIVACY-ENHANCED MESSAGE-----