-----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, QAThLhwLS/UF7hKNVu7FsXy6VyN9+YDEnwB7lMSTEFauUw6KNYNNkjw3LtgcH5AA KkmcvI75T40PioQ5XaxFzw== 0000927016-96-001757.txt : 19961118 0000927016-96-001757.hdr.sgml : 19961118 ACCESSION NUMBER: 0000927016-96-001757 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NONE 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21860 FILM NUMBER: 96665335 BUSINESS ADDRESS: STREET 1: 222 THIRD ST CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6176210820 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 1996 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 No.) incorporation or organization) 222 Third Street 02142 Suite 3300 (Zip Code) Cambridge, MA (Address of principal executive offices) 617-621-0820 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- --------- Number of shares outstanding of the issuer's classes of common stock as of October 31, 1996: Class Number of Shares Outstanding -------------------------------------- ---------------------------- Common Stock, par value $.01 per share 6,525,065 Total number of pages 17 DATAWARE TECHNOLOGIES, INC. INDEX PAGE NUMBER ------------ PART I. FINANCIAL INFORMATION Item 1. Consolidated Condensed Financial Statements Consolidated Condensed Balance Sheets as of September 30, 1996 and December 31, 1995 3 Consolidated Condensed Statements of Operations for the Three and Nine Months Ended September 30, 1996 and 1995 4 Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURE 14 EXHIBIT INDEX 15 Part I. FINANCIAL INFORMATION Item 1. Consolidated Condensed Financial Statements Dataware Technologies, Inc. Consolidated Condensed Balance Sheets (In thousands, except share data)
September 30, December 31, 1996 1995 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 3,204 $ 7,734 Accounts receivable, less allowance for doubtful accounts of $860 and $610 8,986 10,063 Prepaid expenses and other current assets 3,230 2,734 Deferred taxes 336 336 ------------- ------------- Total current assets 15,756 20,867 Property and equipment, net 7,587 5,543 Computer software costs, net 2,112 3,002 Marketable securities 2,034 8,908 Deferred taxes 4,151 284 Intangible assets 2,370 3,362 ------------- ------------- Total assets $ 34,010 $ 41,966 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of notes, software license payable and capital leases $ 107 $ 189 Demand note payable to related party --- 50 Accounts payable 2,785 1,963 Accrued expenses 1,982 1,396 Accrued litigation and non-recurring charges 4,394 --- Accrued compensation 1,957 1,690 Income taxes payable 1,875 1,928 Deferred revenue 2,399 2,530 ------------- ------------- Total current liabilities 15,499 9,746 Notes, software license payable and capital leases --- 4 Stockholders' equity: Preferred stock, $.01 par value, 8,000,000 shares authorized, none issued --- --- Common stock, $.01 par value: 14,000,000 shares authorized; 6,500,942 and 6,239,123 shares issued and outstanding at September 30, 1996 and December 31, 1995, respectively 65 62 Additional paid-in capital 38,118 36,782 Accumulated deficit (19,400) (4,445) Cumulative translation adjustment (269) (209) Unrealized gain (loss) on marketable securities (3) 26 ------------- ------------- Total stockholders' equity 18,511 32,216 ------------- ------------- Total liabilities and stockholders' equity $ 34,010 $ 41,966 ============= ============= The accompanying notes are an integral part of the consolidated condensed financial statements
Dataware Technologies, Inc. Consolidated Condensed Statements of Operations (In thousands except per share data)
Three months ended Nine months ended September 30, September 30, 1996 1995 1996 1995 --------- --------- ---------- --------- Revenues: Software license fees $ 4,905 $ 5,415 $ 11,408 $ 14,620 Services 5,115 5,187 15,417 15,971 --------- --------- ---------- --------- Total revenues 10,020 10,602 26,825 30,591 Cost of revenues: Software license fees 896 872 2,576 2,209 Write down of intangible assets ---- ---- 1,926 ---- Services 3,400 2,938 9,776 8,821 --------- --------- ---------- --------- Total cost of revenues 4,296 3,810 14,278 11,030 --------- --------- ---------- --------- Gross margin 5,724 6,792 12,547 19,561 Operating expenses: Sales and marketing 4,752 3,342 12,752 9,859 Product development 2,181 1,155 5,953 3,620 General and administrative 1,736 1,343 5,172 3,936 Write down of goodwill and other non-recurring charges ---- ---- 1,889 ---- Acquired research and development 668 ---- 1,861 ---- --------- --------- ---------- --------- Total operating expenses 9,337 5,840 27,627 17,415 --------- --------- ---------- --------- Income (loss) from operations (3,613) 952 (15,080) 2,146 Interest income, net 64 158 360 425 Settlement of litigation ---- ---- (4,073) ---- Other income (expenses), net 2 11 (29) 65 --------- --------- ---------- --------- Income (loss) before income taxes (3,547) 1,121 (18,822) 2,636 Provision (benefit) for income taxes (864) 336 (3,867) 791 --------- --------- ---------- --------- Net income (loss) $ (2,683) $ 785 $ (14,955) $ 1,845 ========= ========= ========== ========= Net income (loss) per common share $ (0.41) $ 0.12 $ (2.35) $ 0.28 ========= ========= ========== ========= Weighted average number of common and common equivalent shares 6,466 6,635 6,358 6,605 ========= ========= ========== =========
The accompanying notes are an integral part of the consolidated condensed financial statements Dataware Technologies, Inc. Consolidated Condensed Statements of Cash Flows (In thousands) Nine months ended September 30, 1996 1995 --------- ---------- Cash flows provided by (used in) operating activities: Net income (loss) $ (14,955) $ 1,845 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,785 2,480 Loss (gain) on foreign currency transactions 51 (62) Deferred taxes (3,867) --- Non-cash portion of write-down of intangible assets 3,180 --- Charge for acquired research and development 1,861 --- Other adjustments 195 --- Changes in operating assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable 1,691 (1,686) Prepaid expenses and other current assets (960) (101) Accounts payable 677 (351) Accrued expenses and compensation 528 129 Accrued litigation and non-recurring charges 4,394 --- Income taxes payable (53) 795 Deferred revenue (435) 296 --------- ---------- Net cash provided by (used in) operating activities (4,908) 3,345 --------- ---------- Cash flows provided by (used in) investing activities: Purchase of marketable securities (9,874) --- Proceeds from sales and maturities of marketable securities 16,719 1,213 Additions to property and equipment (3,507) (2,178) Acquisition of businesses, net of cash acquired (1,553) --- Additions to capitalized software costs (1,496) (1,084) --------- ---------- Net cash provided by (used in) investing activities 289 (2,049) --------- ---------- Cash flows provided by financing activities: Proceeds from issuance of common stock and exercise of stock options 382 1,200 Principal payments on notes, software license payable and capital leases (236) (290) --------- ---------- Net cash provided by financing activities 146 910 --------- ---------- Effect of exchange rate changes on cash (57) (13) --------- ---------- Net change in cash and cash equivalents (4,530) 2,193 Cash and cash equivalents at beginning of period 7,734 4,642 --------- ---------- Cash and cash equivalents at end of period $ 3,204 $ 6,835 --------- ---------- Supplemental disclosure of non-cash financing transactions: Stock and stock warrants issued in connection with acquisitions $ 761 $ --- ========= ========== Note payable assumed in connection with acquisition of business $ 101 $ --- ========= ==========
The accompanying notes are an integral part of the consolidated condensed financial statements DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS A. Basis of Presentation These consolidated financial statements should be read in conjunction with portions of the Company's Annual Report incorporated by reference in Form 10-K for the fiscal year ended December 31, 1995 and the financial statements and footnotes included therein. In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of normal recurring accruals and non-recurring charges, necessary to present fairly the consolidated financial position, results of operations and cash flows of Dataware Technologies, Inc. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission rules and regulations. The Company's results for the three and nine month periods ended September 30, 1995 have been restated to include the operations of Ledge Multimedia, Inc., which was acquired on December 30, 1995 in a pooling transaction. Additionally, certain reclassifications have been made to the prior years' financial statements to conform to the current presentation. B. Computer Software Costs During the nine month period ended September 30, 1996, the Company capitalized approximately $1,492,000 of internally developed software costs and capitalized $1,084,000 during the same period in 1995. For the three month period ended September 30, 1996, the Company capitalized approximately $551,000 of these costs as compared to $353,000 during the same period in 1995. These costs, net of accumulated amortization, amounted to $1,887,000 at September 30, 1996. Amortization expense related to internally developed software was $667,000 and $608,000 for the nine month periods ended September 30, 1996 and 1995, respectively. For the three month periods ended September 30, 1996 and 1995, amortization expense related to internally developed software was $212,000 and $308,000, respectively. The Company also recorded a $1,180,000 one-time charge during the nine month period ended September 30, 1996 for the write-down of less productive internally developed software assets to their net realizable value. During the nine month period ended September 30, 1996, the Company capitalized approximately $175,000 of purchased software costs related to the acquisition of Status/IQ Ltd. The cost of capitalized software purchased, net of accumulated amortization, amounted to $225,000 at September 30, 1996. Amortization expense for computer software purchased was $308,000 and $194,000 for the nine months ended September 30, 1996 and 1995, respectively. For the three month periods ended September 30, 1996 and 1995, amortization expense related to computer software purchased was $207,000 and $72,000, respectively. During the nine months ended September 30, 1996 the Company recorded a one-time charge for the write-down of less productive purchased software assets to their net realizable value in the amount of $405,000. C. Accounting for Goodwill The company periodically reviews and evaluates the recoverability of goodwill whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. The Company's assessment of impairment considers the expected future operating income of the acquired entity. During the nine month period ended September 30, 1996, the Company recorded a $905,000 one-time charge for the write-down of goodwill to fair value primarily related to the acquisition of PCD-Consult AB in Skovde, Sweden. There were no write- downs of goodwill during the three month period ended September 30, 1996. D. Acquisitions On March 29, 1996 the Company completed the acquisition of all of the outstanding shares of Status/IQ Ltd. ("Status"), located in the United Kingdom, in exchange for approximately $1,394,000 (including acquisition expenses), consisting of cash, common stock of the Company, and warrants to purchase additional common stock of the Company. The acquisition has been accounted for as a purchase and, accordingly, the assets, liabilities and results of operations are included in the financial statements from the acquisition date. Because Status was acquired on the last business day of the quarter, the results of operations in the first quarter were not affected by the acquisition other than a one-time charge of $1,193,000 for purchased research and development. In addition, $175,000 of the purchase price has been allocated to computer software costs and is being amortized over a one year period. On May 15, 1996 the Company completed the acquisition of substantially all of the assets and assumed the liabilities of S Cube srl of Milan ("S Cube") for approximately $425,000 including acquisition-related expenses. The acquisition has been accounted for as a purchase and, accordingly, the assets, liabilities and results of operations have been included in the financial statements from the acquisition date. The purchase price has been allocated to the assets and liabilities of S Cube based on their estimated respective fair values. The excess purchase price over the fair value of net assets acquired, totaling $191,000, is included in intangible assets and is being amortized over a five year period. On July 31, 1996 the Company acquired Ntergaid, Inc. of Milford, CT through the merger of a wholly-owned subsidiary with Ntergaid for a cost of approximately $685,000 (including acquisition-related expenses), consisting of cash and common stock of the Company. The acquisition is being accounted for as a purchase and, accordingly, the assets, liabilities and results of operations have been included in the financial statements from the acquisition date. The excess purchase price over the fair value of net assets acquired, totaling $668,000, is included in the third quarter results of operations as acquired research and development. E. Income Taxes The Company recorded a tax benefit of $864,000 for the third quarter of 1996 as compared to a $336,000 tax provision for the same period a year ago. For the nine month period ended September 30, 1996, the Company recorded a tax benefit of $3,867,000. The effective tax rate for the three and nine month periods ended September 30, 1996 was 24% and 20%, respectively. The Company has not recorded a benefit for the litigation settlement costs incurred in 1996. Management continues to evaluate the realizability of its $4.5 million deferred tax asset and believes that it is more likely than not, based on the weight of available evidence, that these deferred tax assets will be realizable. However, there can be no assurances that a reduction of this deferred tax asset will not be required in the near term pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Dataware Technologies, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS: - ---------------------- The Company's results for the three month and nine month periods ended September 30, 1995 have been restated to include the operations of Ledge Multimedia, Inc., which was acquired on December 30, 1995 in a pooling transaction. Additionally, the former systems integration category has been combined with the services category in the revenues and cost of revenues sections in the statements of operations for all periods shown. On July 31, 1996 the Company acquired Ntergaid, Inc. of Milford, CT through the merger of a wholly-owned subsidiary with Ntergaid for a cost of approximately $685,000 (including acquisition-related expenses), consisting of cash and common stock of the Company. The acquisition is being accounted for as a purchase and, accordingly, the assets, liabilities and results of operations have been included in the financial statements from the acquisition date. The excess purchase price over the fair value of net assets acquired, totaling $668,000, is included in the third quarter results of operations as acquired research and development. Revenues The Company's total revenues decreased 5% from $10.6 million in the third quarter of 1995 to $10.0 million in the third quarter of 1996. The Company's total revenues decreased 12% from $30.6 million in the first nine months of 1995 to $26.8 million in the first nine months of 1996. Software license fees decreased 9% from $5.4 million for the three months ended September 30, 1995 to $4.9 million for the three months ended September 30, 1996. Services revenues decreased 1% from $5.2 million during the same period in 1995 to $5.1 million in 1996. For the first nine months of 1996, software license fees decreased 22% from $14.6 million to $11.4 million, and services revenues decreased 3% from $16.0 million to $15.4 million. These decreases in software license revenues during the third quarter as well as the first nine months of 1996 reflect customer delays, as our customers reviewed the impact of the internet on their businesses, as well as increased competition in the industry. Software revenues decreased to 49% of total revenues in the third quarter of 1996, down from 51% in the third quarter of 1995, and services revenues increased to 51% of total revenues in the third quarter of 1996, up from 49% in the third quarter of 1995. For the first nine months of 1996, software license fees decreased to 43% of total revenues from 48% in the first nine months of 1995 and services revenues increased to 57% of total revenues from 52% in the first nine months of 1995. Consistent with past experience, a higher percentage of the Company's revenues are expected to be realized in the third month of each fiscal quarter and tend to be concentrated in the latter half of that month. The Company's orders early in a quarter will not generally be large enough to assure that it will meet its revenue targets for any particular quarter. Accordingly, the Company's quarterly results will be difficult to predict until the end of the quarter, and a shortfall in shipments or contract orders at the end of any particular quarter may have a material adverse impact on the results for that quarter. Cost of Revenues Cost of revenues increased 13% from $3.8 million in the third quarter of 1995 to $4.3 million during the same period in 1996. Cost of revenues increased 29% from $11.0 million for the nine month period ended September 30, 1995 to $14.3 million during the nine month period ended September 30, 1996. As a percent of revenues, total cost of revenues increased from 36% of total revenues for the three months ended September 30, 1995 to 43% for the three months ended September 30, 1996 and from 36% to 53% for the first nine months of 1995 compared to the same period in 1996. This increase is largely due to a $1.9 million one-time charge that was recorded in the second quarter of 1996 for the write-down of less productive software assets to their net realizable value. A continuing shift in product mix from software license fees to higher cost services business, as well as increased fixed costs, also contributed to the increase. The cost of software licenses as a percentage of software license fees increased from 16% during the third quarter of 1995 to 18% during the same period in 1996, and from 15% for the first nine months of 1995 to 23% for the first nine months of 1996. This increase was due to the decrease in sales volume while fixed costs, primarily amortization of capitalized software, increased quarter over quarter and year over year. The cost of services as a percentage of service revenues increased from 57% for the third quarter of 1995 to 66% during the third quarter of 1996 and from 55% for the first nine months of 1995 to 63% for the first nine months of 1996. This increase primarily reflects higher direct and indirect expenses for services projects. Gross Margin Total gross margin was $6.8 million or 64% of total revenues for the third quarter of 1995 and $5.7 million or 57% of total revenues for the third quarter of 1996. For the nine month period ended September 30, 1995, total gross margin amounted to $19.6 million as compared with $12.5 million for the same period in 1996, representing 64% and 47% of total revenues, respectively. In addition to the one-time charge mentioned previously, changes in total gross margin from period to period have resulted from lower total revenue volume, higher costs within each revenue category, and a shift in product mix from higher margin software products to relatively lower margin services. Although management anticipates that gross margin as a percentage of revenues will improve in the long run as the Company's revenue base grows and if the Company successfully shifts product mix toward higher margin software, 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. These factors, which are discussed in detail in Exhibit 99 hereto, incorporated by reference, include: the existence of strong competition for the Company's products and services, including the introduction of new products from competitors, the timing of which cannot be foreseen by the Company; the inherent risks of new product introductions, including uncertainty of customer acceptance; and the Company's reliance on third parties for supply of certain product components. Sales and Marketing Expenses Sales and marketing expenses increased 42% from $3.3 million during the third quarter of 1995 to $4.8 million during the same period in 1996. During the nine month period ended September 30, 1996, sales and marketing expenses increased 29% from $9.9 million during this period a year ago to $12.8 million. Sales and marketing expenses increased as a percentage of revenues from 32% in the third quarter of 1995 to 47% in that same period in 1996 and from 32% for the nine months ended September 30, 1995 to 48% for the nine months ended September 30, 1996. The increase in sales and marketing expenses reflects the Company's continuing investment in strengthening the Company's sales and marketing capabilities as well as the incremental expense associated with recent acquisitions. Product Development Expenses Product development expenses, which excludes capitalized software costs, increased 89% from $1.2 million in the third quarter of 1995 to $2.2 million in the third quarter of 1996, and increased 64% from $3.6 million during the first nine months of 1995 to $6.0 million during the same period in 1996. The Company capitalized software development costs in the amount of $353,000 in the third quarter of 1995 as compared to $551,000 in the third quarter of 1996. During the first nine months of 1995, the Company capitalized $1,084,000 in software development expenses as compared with $1,492,000 during the same period in 1996. Product development expenses as a percentage of total revenues increased from 11% in the third quarter of 1995 to 22% in that same period in 1996 and from 12% for the nine months ended September 30, 1995 to 22% for the nine months ended September 30, 1996. The increase in product development expenses in real dollars as well as in relation to total revenues reflects the Company's continuing investment in previously announced projects, compounded by the decline in revenue during 1996. General and Administrative Expenses General and administrative expenses increased 29% from $1.3 million in the third quarter of 1995 to $1.7 million in the third quarter of 1996, and increased 31% from $3.9 million during the first nine months of 1995 to $5.2 million during the first nine months of 1996. This increase was primarily due to the build-up of the Company's financial and administrative infrastructure during the second half of 1995. General and administrative expenses as a percent of total revenues increased from 13% in the third quarter of 1995 to 17% in that same period in 1996 and from 13% for the nine months ended September 30, 1995 to 19% for the nine months ended September 30, 1996, due to increased fixed costs while revenues declined during 1996. Write-Down of Goodwill and Other Non-Recurring Charges The company periodically reviews and evaluates the recoverability of goodwill whenever events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. The Company's assessment of impairment considers the expected future operating income of the acquired entity. During the nine month period ended September 30, 1996 the Company recorded a one-time charge, which was included in cost of revenues in the consolidated statements of operations, in the amount of $1,926,000 for the write-down, to their net realizable value, of less productive software assets, prepaid royalties and inventory. In addition, the Company recorded write-downs of goodwill, facilities consolidations, and smaller amounts for severance and miscellaneous items amounting to $1,889,000 which was included in operating expenses in the consolidated statements of operations. Charge for Acquired Research and Development In conjunction with the acquisitions of Status/IQ Ltd. in March 1996 and Ntergaid, Inc. in July 1996, the Company acquired certain technologies under development that the Company hopes will prove valuable to the future growth of the Company. Such technology, valued at approximately $1.2 million for Status/IQ and $668,000 for Ntergaid, was charged to operations during the first and third quarters of 1996, respectively, as acquired research and development. Settlement of Litigation Pursuant to the settlement with the plaintiffs of a securities class-action lawsuit pending against the Company and certain of its current and former directors and officers since November 1994, the Company will distribute approximately $1.7 million in cash and 250,000 shares of its common stock in exchange for a full release of all claims against the Company and its current and former directors and officers. The Company's insurance carrier will contribute $1.0 million in cash towards the settlement and associated legal fees. The Company reported an expense of $4,073,000 in the consolidated statements of operations for the second quarter of 1996 related to the then proposed settlement. The final cost of the settlement will be based on the closing price of the Company's common stock on November 25, 1996. Provision for Income Taxes The Company recorded a tax benefit of $864,000 for the third quarter of 1996 as compared to a $336,000 tax provision for the same period a year ago. For the nine month period ended September 30, 1996, the Company recorded a tax benefit of $3,867,000. The effective tax rate was 24% for the third quarter of 1996, and 20% for the nine month period ended September 30, 1996. The Company did not record a tax benefit for the litigation settlement costs incurred in 1996. Management continues to evaluate the realizability of its $4.5 million deferred tax asset and believes that it is more likely than not, based on the weight of available evidence, that these deferred tax assets will be realizable. However, there can be no assurances that a reduction of this deferred tax asset will not be required in the near term pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". LIQUIDITY AND CAPITAL RESOURCES: - -------------------------------- As of September 30, 1996, the Company had cash, cash equivalents, and marketable securities of approximately $5.2 million. Operating activities used $4.9 million of the Company's cash during the first nine months of 1996, primarily due to operating losses. Days sales outstanding decreased from 79 days at June 30, 1996 to 75 days at September 30, 1996. The Company's investing activities provided cash of $289,000 during the first nine months of 1996. The cash inflow from the net sales and maturities of marketable securities amounting to $6.8 million was partially offset by additions to property and equipment of $3.5 million, $1.6 million to fund the acquisitions of Status/IQ Ltd., S Cube and Ntergaid and capitalization of $1.5 million in software costs. The Company's financing activities provided cash of $146,000 during the first nine months of 1996. Cash of $382,000 from proceeds received from the issuance of stock and exercise of stock options partially offset the paydown of $236,000 in debt. The Company currently has higher than usual cash requirements due to the settlement of litigation and certain product development investments. While the Company believes that its cash, cash equivalents, and marketable securities, together with anticipated cash from operations and available credit lines, would be sufficient to meet its liquidity needs for the foreseeable future, the Company is considering various options for raising additional capital, including the possibility of the sale of equity securities. Working capital and other capital requirements may change because of unanticipated changes in business conditions or delays in market acceptance of new products, in addition to such other considerations as expansion of operations or research and development activities, competitive and technological developments, costs associated with litigation, and possible future acquisitions of businesses and/or product rights. DATAWARE TECHNOLOGIES, INC. PART II. OTHER INFORMATION Item 1. Legal Proceedings - -------------------------- On October 24, 1996 the United States District Court for Massachusetts approved the settlement of the securities class-action lawsuit filed in November 1994, the terms of which were described in the Company's Report on Form 10-Q for the quarter ending June 30, 1996. See "Settlement of Litigation" on page 10 above. Item 6. Exhibits and Reports Filed on Form 8-K. - ----------------------------------------------- (a) Exhibits. See exhibit list on page 14. (b) Reports on Form 8-K. On July 18, 1996 the Company filed a report on Form 8-K reporting the adoption of a Shareholder Rights Plan and a distribution to all shareholders of one share purchase right for each share of Common Stock held. DATAWARE TECHNOLOGIES, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATAWARE TECHNOLOGIES, INC. (Registrant) Date: November 14, 1996 By: Daniel M. Clarke ----------------------------------------- Daniel M. Clarke Chief Financial Officer (Principal Financial and Principal Accounting Officer) Exhibit Index 27.1 Financial Data Schedule. 99 Important Factors Regarding Future Results EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 3,204 2,034 9,846 860 147 3,083 13,474 5,887 34,010 15,499 0 0 0 38,183 (19,672) 34,010 26,825 26,825 14,278 14,278 31,700 0 12 (18,822) (3,867) (14,955) 0 0 0 (14,955) (2.35) (2.35)
EX-99 3 IMPORTANT FACTORS REGARDING FUTURE RESULTS Exhibit 99 Important Factors Regarding Future Results Information provided by the Company or its spokespersons from time to time may contain forward-looking statements concerning projected financial performance, product development and commercialization or other aspects of future operations. Such statements will be based on the assumptions and expectations of the Company's management at the time such statements are made. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. Various factors, including but not limited to the following, have affected the Company's results in the past and may cause its future results to differ materially from those projected in the forward-looking statements. Rapid Technological and Market Changes The market for the Company's products and services is characterized by rapidly changing technology. Currently, the Company's products and services are primarily based on CD ROM technology and on-line information management and distribution technology, the core elements of which were developed prior to or during the early 1990s. Furthermore, the market for the Company's products is changing, especially in the United States, with potential customers placing an increasing emphasis on price. With the recent popularity of the Internet and the growth in the market for lower-priced software not requiring a high level of customer service, the environment for information management and distribution products and services is changing rapidly. The Company's ability to realize its expectations will depend on its success at enhancing its current offerings, developing new products and services that keep pace with developments in technology and meet evolving customer requirements, and delivering those products through appropriate distribution channels. This will require, among other things, correctly anticipating customer needs, hiring and retaining personnel with the necessary skills and creativity, providing adequate funding for the development efforts, and managing distribution channels effectively. Failure by the Company to anticipate or respond adequately to technological developments and customer requirements, significant delays in the development, production, testing, marketing or availability of new or enhanced products or services, or the failure of customers to accept such products or services could adversely affect the Company's competitive position and operating results. Competition The market areas where the Company competes are intensely competitive and rapidly changing. The Company currently encounters competition from direct competitors that offer CD-ROM software and/or services, text management software, and software and services for on-line/internet applications. The Company also competes with larger organizations, including software publishers, publishing houses and systems integrators. The Company expects that competition from these sources will increase. Furthermore, it is likely that new competitors will enter the markets as they continue to grow. Many of the Company's existing and potential competitors have longer operating histories and significantly greater financial, technical, sales, marketing and other resources than the Company. Furthermore, as the markets grow, a number of companies with significantly greater resources than the Company could attempt to increase their presence in the Company's market areas by acquiring or forming strategic alliances with competitors of the Company or by introducing products or services specifically designed for these markets. The principal competitive factors affecting the market for the Company's products and services include vendor and product reputation, breadth of product and services offering, direct and indirect sales presence, product performance, functionality, price, ease of use, architecture, platform coverage, quality of support and international language support. Based on these factors, the Company believes that it has competed effectively to date. The Company expects competition to increase and such increased competition could result in price reductions and loss of market share for the Company. The Company must continue to introduce enhancements to its existing products and services and new products and services in a timely manner in order to remain competitive. In particular, as the market for managing and distributing information grows, both new entrants and existing customers are becoming increasingly price sensitive. Certain of the Company's competitors are already addressing this situation with lower priced, less sophisticated products. The Company is responding by: (i) adding lower-price products that do not include the level of features and custom service that have characterized traditional offerings, (ii) developing appropriate distribution channels, (iii) stressing functionality differences and (iv) stressing the quality and extent of support. However, even if the Company introduces such products and services in this manner, it may not be able to compete effectively because of the significantly larger resources available to many of its competitors. There can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's business, operating results and financial condition. Fluctuations in Operating Results The Company has experienced and may in the future experience significant period- to-period fluctuations in operating results. The Company's software license fee revenues in any quarter are substantially dependent on the timing of product shipments and receipt of license reports (with respect to which sales are often difficult to forecast), the Company's ability to close significant sales in that quarter, external market conditions and competition. The Company's sales cycle varies substantially from customer to customer and, like many other high technology companies, a disproportionately large percentage of quarterly sales occur in the closing weeks of each quarter. The Company's orders early in a quarter will not generally be large enough to assure that it will meet its revenue targets for any particular quarter. Accordingly, the Company's quarterly results will be difficult to predict until the end of the quarter. Any forward- looking statements about operating results made by members of management will be based on historically reasonable assumptions about the likelihood of closing sales then in the pipeline. The failure to consummate any of those sales may have a disproportionately negative impact on operating results, given the Company's relatively fixed costs, and may thus prevent management's projections from being realized. Other factors that affect the Company's operating results and that management takes into account include worldwide and regional economic trends, increases in the cost of software licenses, changes in the revenue mix between software license fees and service revenues, and other changes in the cost of revenues within each category. Changes in the factors underlying management's assumption may result in a material variation between actual results and those forecast in any forward-looking statements made during a particular period. Dependence on Certain Classes of Customer Although the Company's customer base is broad and diverse, the Company's revenues depend in part on maintaining its relationships with certain classes of customer, particularly including government agencies in the United States, Canada, Germany, and the United Kingdom, corporate and commercial publishers, and (for certain online products) law firms. Factors generally affecting any of these customer groups may have a substantial adverse effect on the Company's earnings. For example, political pressures may cause governmental customers to reduce spending on the Company's products and services. A reduction in the amount of orders received from any such customer class would have a material adverse effect on the Company's earnings and may cause actual results to differ from those projected in management's forward-looking statements. Dependence on Licensed Proprietary Technology Certain proprietary technology is incorporated into the Company's products under license agreements with third parties who may be competitors. Management's forward-looking statements are necessarily based on assumptions about the costs associated with the Company's use of such technology, but such costs are subject to change from time to time for reasons not under the Company's control. Changes in such costs or in the availability of such licenses could have a material effect on the Company's operating results, and may cause actual results to differ from those projected in management's forward-looking statements. Dependence on Key Personnel The Company's success depends on its ability to attract and retain highly skilled technical, management, sales and marketing personnel. Competition for such personnel in the computer software and services industry is intense. Management's projections necessarily assume that the Company will continue to attract and retain such personnel, so the failure to do so could have a material adverse effect on the Company's ability to develop and market competitive products and, thus its ability to achieve projected operating results. Management of Growth Through Acquisitions The Company's product range and customer base have grown rapidly in the recent past due in part to acquisitions. The Company may acquire additional businesses or assets in the future. Any forecasts of the probability of success of an acquisition are dependent upon the Company's ability to integrate the acquired business or assets successfully. Failure to do so, or a material increase in the cost of integration, could cause actual results to differ from those projected in management's forward-looking statements. -----END PRIVACY-ENHANCED MESSAGE-----