-----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, DrneyFC41fNp/kOQp3l2yxVjgNeOgzxLRwMqTLavJ91ns47k7qev2j5W9oY1s26N jgE/XiesS+YAvlFVSyHBdw== 0000927016-98-002838.txt : 19980803 0000927016-98-002838.hdr.sgml : 19980803 ACCESSION NUMBER: 0000927016-98-002838 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980731 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: SEC FILE NUMBER: 000-21860 FILM NUMBER: 98675306 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-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 1998 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) ONE CANAL PARK 02141 CAMBRIDGE, MA (Zip Code) (Address of principal executive offices) 617-621-0820 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- -------- Number of shares outstanding of the issuer's classes of common stock as of July 30, 1998: Class Number of Shares Outstanding -------------------------------------- ---------------------------- Common Stock, par value $.01 per share 9,391,810 DATAWARE TECHNOLOGIES, INC. INDEX
PAGE NUMBER ----------- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 3 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1997 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 14 Item 6. Exhibits and Reports Filed on Form 8-K 14 SIGNATURE 15 EXHIBIT INDEX 16
Part I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements DATAWARE TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
June 30, December 31, 1998 1997 ---------------- ---------------- ASSETS (unaudited) Current assets: Cash and cash equivalents $ 12,868 $ 13,231 Accounts receivable, less allowance for doubtful accounts of $1,184 and $750 at June 30, 1998 and December 31, 1997, respectively 3,159 6,678 Receivable related to sale of services business ---- 490 Prepaid expenses and other current assets 1,683 1,461 ---------------- ---------------- Total current assets 17,710 21,860 Property and equipment, net 3,557 4,198 Computer software costs, net 3,385 2,483 Investment in Northern Light, LLC 512 512 ---------------- ---------------- Total assets $ 25,164 $ 29,053 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,679 $ 2,677 Payable related to sale of services business ---- 2,466 Accrued acquisition-related costs 281 972 Accrued compensation 1,776 1,786 Other accrued expenses 1,826 1,306 Income taxes payable 790 830 Deferred revenue 2,156 2,550 ---------------- ---------------- Total current liabilities 8,508 12,587 Stockholders' equity: Common stock, $.01 par value: 14,000,000 shares authorized; 9,366,844 and 9,267,217 shares issued and outstanding at June 30, 1998 and December 31, 1997, respectively 94 93 Additional paid-in capital 47,093 46,800 Accumulated deficit (30,349) (30,221) Cumulative translation adjustment (182) (206) ---------------- ---------------- Total stockholders' equity 16,656 16,466 ---------------- ---------------- Total liabilities and stockholders' equity $ 25,164 $ 29,053 ================ ================
The accompanying notes are an integral part of the consolidated financial statements 3 DATAWARE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 ---------------- ---------------- ---------------- ---------------- Revenues: Software license fees $ 4,761 $ 5,125 $ 9,361 $ 9,216 Services 3,341 4,882 6,578 10,645 ---------------- ---------------- ---------------- ---------------- Total revenues 8,102 10,007 15,939 19,861 Cost of revenues: Software license fees 584 603 1,039 1,338 Services 1,792 2,897 3,730 5,920 ---------------- ---------------- ---------------- ---------------- Total cost of revenues 2,376 3,500 4,769 7,258 ---------------- ---------------- ---------------- ---------------- Gross profit 5,726 6,507 11,170 12,603 Operating expenses: Sales and marketing 2,808 4,455 5,480 8,921 Product development 1,557 1,384 3,079 3,636 General and administrative 1,263 1,361 2,487 2,737 Charge for purchased in-process research and development ---- ---- 450 ---- ---------------- ---------------- ---------------- ---------------- Total operating expenses 5,628 7,200 11,496 15,294 ---------------- ---------------- ---------------- ---------------- Income (loss) from operations 98 (693) (326) (2,691) Interest income 134 7 224 29 Interest expense ---- (96) ---- (131) Other income (expense), net (18) 10 (25) (201) ---------------- ---------------- ---------------- ---------------- Net income (loss) 214 (772) (127) (2,994) Dividends and accretion of preferred stock ---- 677 ---- 677 ---------------- ---------------- ---------------- ---------------- Net income (loss) to common stockholders $ 214 $ (1,449) $ (127) $ (3,671) ================ ================ ================ ================ Net income (loss) per common share - basic $ 0.02 $ (0.21) $ (0.01) $ (0.53) ================ ================ ================ ================ Net income (loss) per common share - diluted $ 0.02 $ (0.21) $ (0.01) $ (0.53) ================ ================ ================ ================ Weighted average number of common shares outstanding - basic 9,358 6,942 9,327 6,879 ================ ================ ================ ================ Weighted average number of common shares outstanding - diluted 9,782 6,942 9,327 6,879 ================ ================ ================ ================
The accompanying notes are an integral part of the consolidated financial statements 4 DATAWARE TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 1998 1997 ---------------- ---------------- Cash flows provided by (used in) operating activities: Net loss $ (127) $ (2,994) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,917 2,143 Provision for doubtful accounts 449 216 Loss (gain) on foreign currency transactions (29) 201 Charge for purchased in-process research and development 450 ---- Stock options issued to consultants 8 30 Changes in operating assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable 3,089 (1,033) Prepaid expenses and other current assets 272 (188) Accounts payable (1,004) (138) Accrued expenses and compensation (1,548) (2,148) Accrued acquisition-related costs (691) 972 Accrued litigation and non-recurring charges ---- (285) Income taxes payable (40) 29 Deferred revenue (398) 52 ---------------- ---------------- Net cash provided by (used in) operating activities 2,348 (3,143) ---------------- ---------------- Cash flows used in investing activities: Additions to property and equipment (633) (855) Acquisition of business, net of cash acquired (450) ---- Acquisition of third party software license (1,040) ---- Additions to capitalized software costs (946) (835) ---------------- ---------------- Net cash used in investing activities (3,069) (1,690) ---------------- ---------------- Cash flows provided by financing activities: Proceeds from issuance of common stock and exercise of stock options 286 103 Proceeds from issuance of preferred stock ---- 3,000 Dividends and issuance costs related to preferred stock ---- (255) Increase in short-term borrowings, net ---- 1,143 ---------------- ---------------- Net cash provided by financing activities 286 3,991 ---------------- ---------------- Effect of exchange rate changes on cash and cash equivalents 72 (54) ---------------- ---------------- Net change in cash and cash equivalents (363) (896) Cash and cash equivalents at beginning of period 13,231 2,368 ---------------- ---------------- Cash and cash equivalents at end of period $ 12,868 $ 1,472 ================ ================ Supplemental disclosure of non-cash financing transactions: Conversion of preferred stock into common stock $ ---- $ 853 ================ ================ Accretion of preferred stock $ ---- $ 650 ================ ================ Warrants issued in connection with issuance of preferred stock $ ---- $ 83 ================ ================ Investment in Northern Light LLC in exchange for assets $ ---- $ 512 ================ ================
The accompanying notes are an integral part of the consolidated financial statements 5 DATAWARE TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A. BASIS OF PRESENTATION These consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and the financial statements and footnotes included therein. In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly the consolidated financial position, results of operations and cash flows of Dataware Technologies, Inc. The year-end balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations. Certain reclassifications have been made to the prior year's financial statements to conform to the current presentation. B. ACQUISITIONS Green Book 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 has been 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. 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 flows approach. Specifically, the purchased technology underlying Gbook's electronic file compression and viewing software ("Viewer Technology") and its object oriented electronic authoring system ("Authoring Technology") 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 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. 6 IHS During the first quarter of 1998, the Company concluded its discussions with Information Handling Services Group, Inc. ("IHS") regarding the post- closing settlement of the purchase price for the sale of a portion of its data services business to IHS on September 30, 1997. The final settlement reached resulted in no gain or loss being recorded on the transaction. C. NET INCOME (LOSS) PER SHARE The Company computes basic and diluted earnings per share in accordance with Financial Accounting Standards 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 in the Consolidated Statements of Operations:
For the Three Months For the Six Months Ended June 30, Ended June 30, (In thousands, except per share data) 1998 1997 1998 1997 ---- ---- ---- ---- Basic and diluted EPS NUMERATOR: Net income (loss) $ 214 $(1,449) $ (127) $(3,671) ===================================================== DENOMINATOR: Common shares 9,358 6,942 9,327 6,879 outstanding-basic Dilutive options 352 ---- ---- ---- Dilutive warrants 72 ---- ---- ---- Common shares outstanding-diluted 9,782 6,942 9,327 6,879 ===================================================== Basic and Diluted EPS $ 0.02 $(0.21) $ (0.01) $(0.53) =====================================================
Options to purchase 1,483,104 and 280,396 shares of common stock outstanding with weighted average exercise prices of $6.59 and $6.12 as of the three month periods ended June 30, 1997 and 1998, respectively, and 1,414,814 and 351,645 shares of common stock outstanding with weighted average exercise prices of $6.81 and $5.60 as of the six month periods ended June 30, 1997 and 1998, respectively, were excluded from the calculation of diluted net income (loss) per share as the effect of their inclusion would have been anti-dilutive. Earnings per share data has been restated for the three and six month periods ending June 30, 1997, to reflect the adoption of SFAS 128. D. CHANGES IN ACCOUNTING PRINCIPLES Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." This Statement establishes new rules for the reporting and display of comprehensive income and its components; therefore, the adoption of this Statement had no impact on the Company's net income (loss) or stockholders' equity. The Company's comprehensive earnings were as follows:
For the Three Months For the Six Months Ended June 30, Ended June 30, (In thousands) 1998 1997 1998 1997 ---------------- --------------- --------------- --------------- Net income (loss) $214 $(1,449) $ (127) $(3,671) Foreign currency translation (10) (71) 23 (153) adjustment ---------------- --------------- --------------- --------------- Total comprehensive income (loss) $ 204 $(1,520) $ (104) $(3,824) ================ =============== =============== ===============
E. NEW PRONOUNCEMENT In June, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Early adoption is 7 encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after June 1998. The Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Under the new Statement, the accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. The Company believes that adoption of the Statement will not have a material effect on the financial statements. F. SUBSEQUENT EVENT-SETTLEMENT OF LITIGATION During the third quarter of 1998, the Company settled litigation with a licensee of one of its software products concerning the scope of the license and related matters. All costs related to this litigation, comprised only of legal expenses, were recorded by the Company in the first quarter of 1998. 8 DATAWARE TECHNOLOGIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements concerning the Company's anticipated performance, including future revenues, costs and profits, or about the development of the Company's products or markets, made throughout this Form 10-Q, may be deemed forward-looking statements. Such statements are based on the current assumptions of the Company's management, which are believed to be reasonable. However, they are subject to significant risks and uncertainties, including but not limited to the important factors described in the text below and in Exhibit 99.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (which is incorporated herein by reference), that could cause actual results to differ materially from those described in the forward-looking statements. IHS Transaction On September 30, 1997, Dataware 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. During the first quarter of 1998, the Company concluded its discussions with IHS regarding the post-closing settlement of the purchase price for the transaction described above. The final settlement reached resulted in no gain or loss being recorded on the transaction. 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. In addition, the Company entered into agreements with IHS under which it provides software and multimedia services for use by IHS in its publishing activities. Following this transaction, the Company is a leaner organization, having reduced headcount substantially. Expenses have been commensurately lower since the IHS transaction. Because the Company has been focused on its software and multimedia businesses, service revenues have also been substantially lower than they were before the IHS transaction. These transactions with IHS will necessarily continue to result in changes in the Company's manner and results of operations, not all of which can be anticipated at this time. Factors that cannot be predicted but that may significantly affect results include, but are not limited to, the extent to which IHS will be able to perform the same types of services as the Company was providing before the sale and the quality of such services, the ability of IHS to distribute the Company's software effectively, increased competition that may result from the access that IHS now has to the Company's customers and former employees, the extent of changes that the Company must make internally to adjust to its new configurations, and the quality of the ongoing relationships with IHS, which is currently the Company's biggest customer. Any of these factors could cause actual results to differ materially from those anticipated in any forward-looking statements in this Form 10-Q or in any other written or oral statements made by the Company or its officers. RESULTS OF OPERATIONS Revenues The Company's total revenues decreased 19% from $10.0 million in the second quarter of 1997 to $8.1 million in the second quarter of 1998. The Company's total revenues decreased 20% from $19.9 million in the first six months of 1997 to $15.9 million in the first six months of 1998. Quarter over quarter, software license fees decreased 7% from $5.1 million to $4.8 million and services revenues decreased 32% from $4.9 to $3.3 million. For the first six months of 1998, software license fees remained relatively flat at $9.4 million as compared to $9.2 million in the first six months of 1997, and services revenues decreased 38% from $10.6 million to $6.6 million. Software license fees include revenues from systems and tools, applications and custom software products. Software license revenue in the second quarter and the first half of 1998 included $2.1 and $4.7 million, respectively, in software revenues under agreements with IHS. 9 Service revenues are primarily derived from Ledge multimedia development, production services, software maintenance, custom software development and project management. The decrease in service revenue primarily reflects the Company's sale of a portion of the data services business to IHS in September 1997. Software revenues increased to 59% of total revenues in the second quarter of 1998, up from 51% in the second quarter of 1997, and services revenues decreased to 41% of total revenues in the second quarter of 1998, down from 49% in the second quarter of 1997. For the first six months of 1998, software license fees increased to 59% of total revenues, from 46% in the first six months of 1997, and services revenues decreased to 41% of total revenues from 54% in the first half of 1997. This shift toward software revenues from services revenues began as a result of marketing programs initiated by the Company in 1996 and was furthered by the sale of a portion of the Company's services business to IHS in the third quarter of 1997. Cost of Revenues Cost of revenues decreased 32% from $3.5 million in the second quarter of 1997 to $2.4 million during the same period in 1998. Cost of revenues decreased 34% from $7.3 million for the six month period ended June 30, 1997 to $4.8 million during the six month period ended June 30, 1998. As a percentage of revenues, total cost of revenues decreased from 35% of total revenues for the three months ended June 30, 1997 to 29% for the three months ended June 30, 1998, and from 37% to 30% for the first six months of 1997 compared to the same period in 1998. This decrease is primarily due to the shift in product mix to software license fees and away from the higher-cost services business. The cost of software licenses as a percentage of software license fees remained flat at 12% during the second quarter of 1998 and 1997, and decreased from 15% for the first six months of 1997 to 11% for the first six months of 1998. This decrease was due to the increase in software sales volume while fixed costs decreased from quarter to quarter and year to year, due to a lower portion of third-party software sales in the mix (and, thus, lower third-party license fee payments). The cost of services as a percentage of service revenues decreased from 59% for the second quarter of 1997 to 54% during the second quarter of 1998 and remained relatively flat during the first six months of 1997 and 1998 at 56% and 57%, respectively. The decrease quarter over quarter is caused by cost of services decreasing at a slightly higher rate than revenue volume. Gross Profit Total gross profit was $6.5 million or 65% of total revenues for the second quarter of 1997 and $5.7 million or 71% of total revenues for the second quarter of 1998. For the six month period ended June 30, 1997, total gross profit amounted to $12.6 million as compared with $11.2 million for the same period in 1998, representing 63% and 70% of total revenues, respectively. Quarter to quarter, software margins remained flat at 88% and service margins increased from 41% in 1997 to 46% in 1998. On a year to year basis, software margins increased from 85% to 89% and services margins decreased slightly from 44% to 43% in 1997 and 1998, respectively. Management anticipates that gross margins may continue to improve in the long run as the Company increases the percentage of software revenues in the product mix, and 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. These factors 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; the impact of higher levels of services that the Company provides to support its new software products; and the Company's reliance on third parties for supply of certain product components. Sales and Marketing Expenses Sales and marketing expenses decreased 37% from $4.5 million during the second quarter of 1997 to $2.8 million during the same period in 1998. During the six month period ended June 30, 1998, sales and marketing expenses decreased 39% to $5.5 million from $8.9 million during the same period a year ago. 10 Sales and marketing expenses decreased as a percentage of revenues from 45% to 35% on a quarter to quarter basis and from 45% to 34% year over year. The decrease in sales and marketing expenses was primarily caused by the 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 in the first half of 1998. Product Development Expenses Product development expenses, which excludes capitalized software costs, increased 13% from $1.4 million in the second quarter of 1997 to $1.6 million in the second quarter of 1998, and decreased 15% from $3.6 million during the first six months of 1997 to $3.1 million during the same period in 1998. The Company capitalized software development costs in the amount of $485,000 in the second quarter of 1998 as compared to $422,000 in the second quarter of 1997. During the first half of 1998, the Company capitalized $946,000 in internally developed software costs as compared with $835,000 during the same period in 1997. Product development expenses as a percentage of total revenues increased from 14% to 19% on a quarter to quarter basis and from 18% to 19% on a year to year basis. The decrease in product development expenses on a year to year basis is due primarily to expenses related to Northern Light Technology Corporation, a subsidiary whose assets were sold on April 7, 1997. These expenses amounted to approximately $735,000 in the quarter ended March 31, 1997, while there were no related expenses in the quarter ended June 30, 1997 or the six months ended June 30, 1998. General and Administrative Expenses General and administrative expenses decreased 7% from $1.4 million in the second quarter of 1997 to $1.3 million in the second quarter of 1998, and decreased 9% from $2.7 million during the first six months of 1997 to $2.5 million during the first six months of 1998. General and administrative expenses as a percent of total revenues increased from 14% in the second quarter of 1997 to 16% in that same period in 1998. The overall decrease in general and administrative expenses is primarily due to the IHS transaction. The increase in general and administrative expenses quarter to quarter as a percentage of total revenues is caused by lower total revenues while expenses decreased at a lower rate. 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. As a result, pro-forma financial information has not been presented. Although the Company acquired 100% of the stock of Gbook, its intention was not to carry on the operations of Gbook as a going concern. Rather, the Company's objective in the transaction was to acquire control over the technology underlying Gbook's electronic file compression and viewing software ("Viewer Technology") and its object oriented electronic authoring system ("Authoring Technology"). The Company's intention was to use the acquired Viewer Technology to sell services and software to existing and future clients for distributing relatively large, secure and searchable electronic publications that are, by nature of their small size, uniquely able to be distributed on a single floppy diskette or over the internet with commercially viable download times. The Company is in the process of incorporating the Authoring Technology into a product that allows customers to author publications in-house, rather than relying on the Company as a service provider. Because the technology acquired was incomplete and substantial additional development effort by the Company was required before the Viewing and Authoring Technology could be incorporated into future products and services, the Company recorded a charge of $450,000 for purchased in-process R&D in the first quarter of 1998. 11 The purchased technology was incomplete because 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, inasmuch as the Company did not plan to commercialize the technology in its existing form, had no other product, service or research and development project in which the technology could be utilized, and did not intend to market the technology as a stand-alone product without significant further development. Other Income (Expense), Net During the second quarter of 1998, the Company reported approximately $134,000 in net interest income as compared with approximately $89,000 in net interest expense in the second quarter of 1997. This compares with $224,000 of net interest income in the first half of 1998 as compared with net interest expense of $102,000 in the same period in 1997. For the three months ended June 30, 1998, the Company recorded $18,000 in net other expenses compared with $10,000 in net other income during the same period in 1997. For the first half of 1998, the Company recorded approximately $25,000 in net other expenses as opposed to $201,000 in net other expenses in the first half of 1997 (mostly foreign exchange losses on intercompany balances). During the third quarter of 1998, the Company settled litigation with a licensee of one of its software products concerning the scope of the license and related matters. All costs related to this litigation, comprised only of legal expenses, were recorded by the Company in the first quarter of 1998. Provision for Income Taxes The Company did not record a provision for income taxes for the quarters or the six month periods ended June 30, 1998 or 1997, because of the losses incurred in certain of those periods and the substantial net operating loss carryforward from prior periods. At June 30, 1998, the Company had a net operating loss carryforward of $16.7 million. Use of the Company's net operating loss carryforward is limited due to changes in ownership of the Company's stock. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1998, the Company had cash and cash equivalents of approximately $12.9 million and working capital of $9.2 million. Operating activities provided $2.3 million of the Company's cash during the first six months of 1998. Days sales outstanding decreased from 63 days at March 31, 1998, to 50 days at June 30, 1998. The significant decrease was primarily due to the second quarter collection of large amounts due from certain customers, as well as payments made under the distribution and licensing agreements with IHS in the quarter ended June 30, 1998. Although the Company is focusing on decreasing its days sales outstanding, it does not anticipate that such a significant decrease will be maintained going forward. The Company's investing activities used cash of $3.1 million during the first six months of 1998, consisting of $1.6 million for additions to capitalized software and property and equipment in addition to $450,000 for the acquisition of Gbook and $1.0 million for a third party license for software 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 $286,000 during the first six months of 1998, which consisted of proceeds from the issuance of common stock under the Company's Employee Stock Purchase Plan. On July 16, 1998, the Company announced that its board of directors had authorized a stock repurchase program under which up to one million shares of Dataware common stock may be repurchased. The Company expects to make repurchases from time to time in the open market or in private transactions, as market conditions warrant. The Company continues to implement and refine its revitalization programs which are intended to minimize future losses from continuing operations. These programs include cost reductions, higher employee productivity, repositioning of product lines and intensified asset management. The Company believes that its cash, cash equivalents, and marketable securities, together with anticipated cash from operations, will be sufficient to meet its liquidity needs for the foreseeable future. However, working 12 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 and possible future acquisitions of businesses and/or product rights. There can be no assurance that the Company may not experience liquidity problems because of adverse market conditions or other unfavorable events. 13 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ At the Annual Meeting of Stockholders on May 21, 1998, the Company's shareholders voted as follows: a) To reelect Kurt Mueller to the Board of Directors for a three-year term. Total Vote For 7,362,623 Total Vote Withheld 621,587 b) To reelect Stephen H. Beach to the Board of Directors for a three-year term. Total Vote For 7,362,677 Total Vote Withheld 621,533 c) To amend the Company's 1993 Equity Incentive Plan increasing the number of shares of Common Stock issuable thereunder. Total Vote For the Proposal 2,422,444 Total Vote Against the Proposal 1,386,915 Abstentions 34,634 Broker Non-votes 4,137,117 d) To amend the Company's 1993 Employee Stock Purchase Plan increasing the number of shares of Common Stock issuable thereunder. Total Vote For the Proposal 3,571,963 Total Vote Against the Proposal 234,631 Abstentions 37,399 Broker Non-votes 4,137,117 ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K (a) Exhibits. See exhibit list on page 16. (b) Reports on Form 8-K. None. 14 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: July 31, 1998 By: /s/ Michael Gonnerman --------------------------------------- Michael Gonnerman Vice President and Chief Financial Officer (Principal Financial and Principal Accounting Officer) 15 EXHIBIT INDEX 10.1 Consultant Agreement dated June 18, 1998 between the Company and Michael Gonnerman, Inc. 27.1 Financial Data Schedule. 99.1 Important Factors Regarding Future Results (Exhibit 99.1 to 1997 Form 10-K)*. * Incorporated by reference to the filing indicated in parentheses. EX-10.1 2 CONSULTANT AGREEMENT EXHIBIT 10.1 ------------ CONSULTANT AGREEMENT ---------- --------- THIS AGREEMENT is entered into as of June 18, 1998 (the "Effective Date"), by and between Dataware Technologies, Inc., a Delaware corporation with its offices at 222 Third Street, Suite 3300, Cambridge, Massachusetts 02142 (the "Company"), and Michael Gonnerman, Inc., a Massachusetts corporation with its offices at 65 Washington Drive, Sudbury, Massachusetts 01776 (the "Consultant"). WHEREAS, the Company wishes to engage Consultant and Consultant wishes to enter into a consultant relationship with the Company and to cause Michael Gonnerman ("Gonnerman"), Chief Executive Officer of Consultant, to perform certain functions and services for Company on behalf of Consultant; and WHEREAS, the parties desire to set forth the terms and conditions under which Consultant shall be engaged, and pursuant to which Consultant shall be compensated by the Company. NOW THEREFORE, in consideration of the foregoing recitals, the mutual promises and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Consultant agree as follows: ARTICLE 1 ENGAGEMENT TERM --------------- 1.1 Office. The Company hereby agrees to engage Consultant, and ------ Consultant hereby accepts such engagement and agrees to cause Gonnerman to serve the Company, as Vice President, Finance and Administration, and Chief Financial Officer of the Company during the Engagement Term (as hereinafter defined). Consultant's engagement shall, unless earlier terminated in accordance herewith, continue until December 31, 1999. Such engagement term, regardless of any earlier termination, is referred to herein as the "Engagement Term." 1.2 Responsibilities. Gonnerman shall be engaged as Vice President, ---------------- Finance and Administration, and Chief Financial Officer of the Company pursuant to and in accordance with the terms of this Agreement, subject to the direction and control of the President and the Board of Directors of the Company (the "Board of Directors") with such authority, duties and responsibilities as are commensurate with such position, provided that the Company may alter Gonnerman's position in the Company if warranted based on Gonnerman's performance. Gonnerman shall devote four (4) business days per week to his responsibilities to the Company. It is anticipated that Gonnerman shall devote his time to the Company in the proportions stated on Exhibit A hereto. 1.3 End of Engagement Term. At the end of the Engagement Term the Company ---------------------- may, without any obligation, (i) terminate Consultant's engagement with the Company or (ii) retain Consultant as a consultant of the Company. Consultant may elect to terminate its 1 relationship with the Company at that time. If the Consultant is retained by the Company following the end of the Engagement Term its relationship thereafter will continue from month to month until terminated in accordance herewith (and following the end of the Engagement Term that continued term shall be referred to as the "Engagement Term"). 1.4 Time Commitment. Subject to the commitment stated in Section 1.2, --------------- Gonnerman will serve the Company faithfully and to the best of his ability and will devote his time, attention and best efforts to the affairs of the Company during the Engagement Term; provided, however, that Gonnerman may engage in -------- ------- other business consulting activities and director and advisor positions at other companies, speaking and similar activities if and to the extent that such other activities do not inhibit or prohibit Gonnerman from devoting his time, attention and best efforts to the affairs of the Company as contemplated by Section 1.2 during the Engagement Term or conflict in any material way with the business of the Company. Schedule 1.4 attached hereto states all current business commitments Gonnerman currently has with other entities. 1.5 Indemnification. The Company shall, to the fullest extent permitted --------------- by the General Corporation Law of the State of Delaware, as amended from time to time and in accordance with the Company's Certificate of Incorporation, as amended from time to time, and By-laws, as amended from time to time, indemnify Gonnerman if Gonnerman is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was an officer of the Company, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom. ARTICLE 2 COMPENSATION AND BENEFITS ------------------------- 2.1 Payment; Bonus. During the Engagement Term, Consultant shall receive -------------- (i) a payment of eleven thousand dollars ($11,000) per month, payable on the same schedule as salary is paid by the Company to other senior executive officers, and (ii) a bonus of three thousand five hundred dollars ($3,500) per month, at 100% of the bonus plan, pro rata for the portion of time Consultant was engaged at the Company in the calendar year for which such bonus is being paid. The payment of this bonus will be subject to the achievement of the performance targets set forth by the Company and will be payable, to the extent earned by achievement of such performance targets, on the same schedule as bonuses are paid by the Company to other senior executive officers. 2.2 Stock Options. On June 18, 1998, the Board of Directors granted to ------------- Gonnerman a nonstatutory stock option to purchase fifty four thousand (54,000) shares of Common Stock, $0.01 par value, of the Company (the "Common Stock") under the Company's 1993 Equity Incentive Plan at a price equal to the fair market value of the Common Stock. Such options shall be exercisable as to three thousand (3,000) of the shares in monthly installments commencing on each monthly anniversary after June 30, 1998 and ending on the earlier of the end of the Engagement Term or the Date of Engagement Termination (as hereinafter defined), and contain such other terms and conditions consistent with the Company's form of stock option certificate, 2 except that, upon a Change of Control (as hereinafter defined), such options shall immediately vest in Gonnerman, and Gonnerman may exercise such options and purchase the balance of the outstanding shares thereunder. 2.3 Benefits; Other Compensation. Neither Consultant nor Gonnerman shall ---------------------------- be entitled during the Engagement Term to any benefits, including but not limited to, a car allowance or health insurance coverage. 2.4 Expenses. Consultant will be reimbursed for reasonable business -------- related expenses. Business travel expenses will be reimbursed in accordance with the Company travel policy. Mileage reimbursements for business related travel by private car will be at the latest Internal Revenue Service approved rate. 2.5 Non-Disclosure Agreement. Consultant and Gonnerman will execute the ------------------------ Company's standard Non-Disclosure Agreement which is attached hereto as Exhibit B. For the purposes of such Non-Disclosure Agreement, the term "employment" shall mean "Engagement Term," and the term "employee" shall mean "consultant." ARTICLE 3 TERMINATION OF ENGAGEMENT ------------------------- 3.1 Termination by Company. Prior to December 31, 1999, Consultant may be ---------------------- terminated from its engagement by the Company on the following grounds: (a) The Company may terminate Consultant with or without Cause. The Company shall have "Cause" for termination of Consultant's engagement if any of the following have occurred: (i) Consultant and/or Gonnerman shall have willfully failed and continued to fail substantially to perform the duties of its/his position, including the duties set forth in Section 1.2 hereof (other than any such failure resulting from incapacity due to physical or mental illness), for ten (10) days after a written demand for performance is delivered to Consultant on behalf of the Company; or (ii) Consultant and/or Gonnerman shall have engaged in (A) any material misappropriation of funds, properties or assets of the Company, (B) any damage or destruction of any property or assets of the Company, whether resulting from Consultant's or Gonnerman's willful actions or omissions or Consultant's or Gonnerman's gross negligence, or (C) any falsification of any books, records, documents or systems of the Company; or (iii) Consultant and/or Gonnerman shall (A) have been convicted of a crime involving moral turpitude or constituting a felony or entered a guilty or nolo contendere plea with respect thereto or (B) commit or knowingly allow to be committed any illegal action on any premises of, or involving any property or assets of, the Company; or 3 (iv) Consultant and/or Gonnerman shall have breached any provisions of this Agreement and such breach shall remain uncured by Consultant for ten (10) days after receipt of notice from the Company specifying such breach; provided that no such cure period shall be required for any such breach that cannot be cured. (b) The Company may terminate Consultant on account of a Disability. The term "Disability" shall mean the inability of Gonnerman to perform substantially his duties hereunder due to physical or mental disablement which continues for a period of ninety (90) consecutive days or for an aggregate of one hundred and eighty (180) days during any twelve (12) consecutive months during the Engagement Term, as reasonably determined by an independent qualified physician. 3.2 Termination by Consultant. Consultant may terminate its engagement as ------------------------- follows: (a) any material failure by the Company to comply with any of the provisions of Article 2 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by Consultant; (b) Consultant's engagement hereunder may be terminated by Consultant within three (3) months after the occurrence of any one of the following (each, a "Change of Control") but prior to the end of the Engagement Term: (i) the acquisition by any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934) of any amount of the Company's Common Stock so that it holds or controls fifty percent (50%) or more of the Company's Common Stock; (ii) a merger or consolidation after which fifty percent (50%) or more of the voting stock of the surviving corporation is held by persons who where not stockholders of the Company immediately prior to such merger or combination; or (iii) the election by the stockholders of the Company of twenty percent (20%) or more of the directors of the Company other than pursuant to nomination by the Company's management; or (c) Consultant's engagement may be terminated by Consultant without cause. 3.3 Date of Engagement Termination. "Date of Engagement Termination" shall ------------------------------ mean: (a) if Consultant's engagement is terminated as a result of a Disability, the thirtieth (30th) day after notice of termination is given (provided that Gonnerman shall not have returned to the performance of his duties during such thirty (30) day period); 4 (b) if Consultant's engagement is terminated by the Company for Cause, or by the Consultant after a Change of Control the date on which notice of such termination is given; or (c) if Consultant's engagement is terminated either by the Company without cause or by Consultant without cause, ninety days after the date on which notice of such termination is given or when the Company elects to pay the lump sum payment stated in Section 4.1. 3.4 Notice of Engagement Termination. Any termination of Consultant's -------------------------------- engagement hereunder (other than upon the death of Gonnerman) shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 5.2. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon and (ii) if the termination is by the Company for Cause or by Consultant, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Consultant's engagement under the provision so indicated. The failure by the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause shall not waive any right of the Company hereunder or preclude the Company from asserting such fact or circumstance in enforcing its rights hereunder. ARTICLE 4 COMPENSATION FOLLOWING TERMINATION ---------------------------------- 4.1 Without Cause. If Consultant's engagement is terminated by the Company ------------- without Cause and the Company elects to have the engagement terminate immediately, Consultant shall receive a lump sum payment equaling three months base payment. 4.2 Change of Control. If Consultant's engagement with the Company is ----------------- terminated after a Change of Control, Consultant shall receive a lump sum payment equaling three months base payment. 4.3 With Cause. Upon any other termination of Consultant's engagement, ---------- Consultant's payment and bonus specified in Article 2 shall cease on the Date of Engagement Termination; provided that the Company shall pay Consultant, within fifteen (15) days after the Date of Engagement Termination, all amounts then accrued under Article 2. If Consultant is terminated with Cause, any bonus accrued and not paid pursuant to Section 2.1 shall be forfeited by Consultant. ARTICLE 5 MISCELLANEOUS ------------- 5.1 Status. The Company and the Consultant agree that the Consultant will ------ be an independent contractor for all purposes, including but not limited to payroll and tax purposes. Accordingly, the Consultant shall have sole and exclusive responsibility for the payment of all federal, state and local income taxes and for all engagement and disability insurance, social 5 security and other similar taxes with respect to any compensation provided by the Company hereunder. 5.2 Notices. Any notice hereunder by either party to the other shall be ------- given in writing by personal delivery, telecopy or registered or certified mail, return receipt requested, addressed: (a) if to the Company, to the attention of President at the Company's executive offices or to such other address as the Company may designate in writing at any time or from time to time to Consultant, with a copy to Matthew C. Dallett, Palmer & Dodge LLP, One Beacon Street, Boston, Massachusetts 02108 (facsimile: (617) 227-4420); and (b) if to Consultant, to the most recent address on file with the Company. Notices shall be deemed given, if by personal delivery or if by telecopy, on the date of such delivery, or, if by registered or certified mail, on the date shown on the applicable return receipt. 5.3 Modification; Survival. This Agreement constitutes the entire ---------------------- understanding and agreement between the parties hereto with regard to the subject matter hereof, superseding all prior understandings and agreements, whether written or oral. This Agreement may not be amended or revised except by a writing signed by the parties hereto. 5.4 Assignment. This Agreement may not be assigned by Consultant. This ---------- Agreement shall be binding upon the Company's successors and assigns. 5.5 Headings. Headings herein have been inserted solely for convenience -------- of reference and in no way define, limit or describe the scope or substance of any provision of this Agreement. 5.6 Severability. The provisions of this Agreement are severable, and the ------------ invalidity of any provision shall not affect the validity of any other provision. In the event that any arbitrator or court of competent jurisdiction shall determine that any provision of this Agreement or the application thereof is unenforceable because of the duration or scope thereof, the parties hereto agree that said arbitrator or court in making such determination shall have the power to reduce the duration and scope of such provision to the extent necessary to make it enforceable, and that the Agreement in its reduced form shall be valid and enforceable to the full extent permitted by law. 5.7 Governing Law. This Agreement shall be governed by the laws of the ------------- Commonwealth of Massachusetts. 5.8 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 6 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a binding contract as of the date first written above. MICHAEL GONNERMAN, INC. /s/ Michael Gonnerman ---------------------------- Name: Michael Gonnerman Title: Chief Executive Officer DATAWARE TECHNOLOGIES, INC. /s/ Kurt Mueller ---------------------------- Name: Kurt Mueller Title: President Agreed with respect to Sections 1.2 and 1.4 Michael Gonnerman /s/ Michael Gonnerman ----------------------------- 7 SCHEDULE 1.4 Current Business Commitments of Gonnerman ----------------------------------------- Director, CEO and Treasurer of Michael Gonnerman, Inc. Director of: 1) Gold Wire Technology Corp. 2) Eprise Corporation 3) LSEnterprises Ltd. 4) Agranat Systems, Inc. Advisory Board Member of: 1) Netmarquee Online Services, Inc. 2) Cytel Software, Inc. Consultant to: 1) Global Telephone Corp. 2) Global Telemedix Inc. 3) Performance Motion Devices, Inc. 4) Dataware Technologies, Inc. Treasurer of: 1) Kappelerhof Trading USA, Inc. Agent for: 1) Iteco Inc. 2) Stockholders and noteholders of Sigma Design, Inc. 8 EXHIBIT A Approximate time investment at Company:
Current Future -------- ---------------------------- 20% 40% Deal structure and planning 5% 20% Investor relations/BOD 55% 20% Financial reporting 15% 15% Management team focus 5% 5% Supervise admin., h/r, misc. - ---- ---- 100% 100% TOTAL
9 EXHIBIT B Non-Disclosure Agreement 10 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 12,868 0 4,343 1,184 0 17,710 10,119 6,562 25,164 8,508 0 0 0 94 16,562 25,164 15,939 15,939 4,769 4,769 11,496 0 0 (127) 0 (127) 0 0 0 (127) ($0.01) ($0.01)
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