UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
-------------------
Commission file number 0-19960
--------
DATAWATCH CORPORATION
---------------------
(Exact name of registrant as specified in its charter)
Delaware 02-0405716
-------- ----------
(State of other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification number)
234 Ballardvale St., Wilmington, Massachusetts 01887
- ---------------------------------------------- -----
(Address of principal executive office)
(Zip Code)
Registrant's telephone number, including area code: (508) 988-9700
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Title of Class: Common Stock $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X]
Aggregate market value of voting stock held by non-affiliates: $49,129,167
(computed by reference to the last sales price of such common stock on December
20, 1996 as reported in the National Association of Security Dealers
consolidated trading index).
Number of shares of common stock outstanding at December 20, 1996 : 9,100,113
1
Documents Incorporated By Reference
Registrant intends to file a definitive Proxy Statement pursuant to Regulation
14A within 120 days of the end of the fiscal year ended September 30, 1996.
Portions of such Proxy Statement are incorporated by reference in Part III of
this report.
2
PART I
ITEM 1. BUSINESS
- -----------------
GENERAL
From its founding in 1985 until December 1991, DATAWATCH Corporation
("DATAWATCH" or the "Company") was engaged solely in the design, manufacture,
test and marketing of IBM-compatible computer workstations and peripherals which
conformed to the U.S. government's TEMPEST security standard for processing
classified information. However, with the ending of the Cold War, the break-up
of the U.S.S.R. and the consequent uncertainties in the future market for
TEMPEST products, during 1991 management developed a strategy to expand via
acquisition into the business of PC software, thereby utilizing its computer
expertise and lessening its reliance on the TEMPEST hardware market.
Consistent with this strategy, and further prompted by a subsequent
precipitous decline in the TEMPEST market, the Company completely transitioned
its business from computer hardware to computer software via the following
transactions:
* December 1991 - Acquisition of Personics Corporation.
* October 1992 - Acquisition of the Utilities Product Group of Microcom.
* May 1993 - Sale of the TEMPEST hardware division to Secure Systems Group.
* May 1994 - Agreement as exclusive North American publisher and marketer of
the Q-Support( line of software owned by UK-based WorkGroup Systems Limited
("WorkGroup").
* April 1995 - Agreement as exclusive U.S. publisher and marketer of
netOctopus TM, a network management software product owned by Pole Position
Software GmbH ("Pole Position").
* October 1995 - Acquisition of Pole Position.
* March 1996 - Acquisition of WorkGroup.
* July 1996 - Agreement as exclusive U.S. publisher and marketer of VET(TM), a
PC based anti-virus software owned by Cybec Pty Ltd.
DATAWATCH's principal products are: Monarch(TM), which provides data
access, translation and reporting capabilities to users of networked PC's;
Virex(R) and VET(TM) for the PC, which detect, repair and monitor for virus
infections for both the Apple Macintosh and IBM compatible PC's, respectively;
Quetzal (internationally) or Q-Support(TM) for Windows (in the United States), a
complete help desk and asset management system; and netOctopus(TM), a network
management and administration system.
3
The Company's executive offices are located at 234 Ballardvale Street,
Wilmington, Massachusetts 01887 and the Company's telephone number is (508)
988-9700.
4
PRINCIPAL PRODUCTS
Monarch
- -------
Introduced in 1991, Monarch is one of DATAWATCH's principal products
and represented approximately 41% of the Company's net sales in fiscal 1996, 46%
of net sales for fiscal 1995 and 38% for fiscal 1994. Monarch is a PC compatible
business intelligence software tool which allows users to access, manipulate and
translate data held in report files. Monarch is a multi-function data access
tool that uses computer-generated legacy reports as a source for data. Monarch
accepts a report file as input, extracts the data, and delivers the data to
users in a variety of formats. Monarch is marketed as "an electronic alternative
to hard copy printouts."
Corporate and government MIS departments have invested substantial
resources in designing reports and delivering them into the hands of managers
and their staffs. With Monarch, users can gain instant access to the reports
used in their workplace. When the chosen report appears on screen, Monarch
offers the user a variety of tools for rapid lookup and navigation. Users can
view a full report, or apply filters to view only information that is relevant
to their needs. With Monarch, users can create custom reports and summaries,
produce local hard copy, create graphs and export data to popular PC
applications such as Lotus 1-2-3 or Excel. With the September 1996 introduction
of Monarch Version 3.0 users are now able to create a Portable Report Format
(PRF) which enables electronic distribution of reports via the intranet thus
reducing hardcopy print and delivery costs.
The use of existing reports as the source for data in Monarch has
several important advantages:
* Data is instantly available. Every computer-generated report used in
the customer's organization represents a ready-made, pre-processed
database that Monarch can exploit.
* Compatibility is achieved across computing environments. Because the
computer industry has adopted a standard convention for sending
characters to printers, Monarch can read report files generated in
nearly all computing environments, including IBM, DEC, Unisys, ICL,
NCR, Wang, Hewlett Packard, and many others.
* Users are immediately productive. Because users are already familiar
with computer-generated reports, they are quickly able to use
Monarch. A report is perceived by most users as a physical, tangible
object with information arranged for human consumption.
* Data security is maintained. Since Monarch reads computer reports,
not the computer database, the computer's data stays secure and
out-of-reach.
5
* Costs are reduced. Since Monarch takes the report off of the desktop
and puts it in the PC, the cost of report generation and
distribution are significantly lowered.
Virex
- -----
Virex was introduced in 1988 as the first commercial anti-virus
software product for the Macintosh. Virex has an installed base of more than
800,000 users and represented approximately 15% of the Company's net sales in
fiscal 1996, 17% of net sales for fiscal 1995 and 20% of net sales for fiscal
1994. Virex detects and repairs known Macintosh viruses and then, through the
Virex INIT, a memory resident companion program, continuously monitors the
system to prevent future infection by viruses.
Virex is a leader in Macintosh virus protection, delivering complete
protection from both known and unknown viruses faster than any other product,
with its patented SpeedScan(TM) technology. Scan-At-Download - a Virex exclusive
- - automatically protects you from viruses in files downloaded from on-line
services, the Internet or any other network. Other powerful features include
scheduled scanning, extensive network protection, instant updating, native Power
Macintosh support and compressed file scanning, supporting Stuffit(TM),
CompactPro(TM), Disk Doubler, and more.
Virex is the only Macintosh anti-virus product that automatically
detects and repairs ALL infected documents as they are opened by Microsoft Word
or Excel, preventing wide-spread infection or data loss.
VET
- ---
VET(TM) is a virus protection tool for business, government, education
and consumer users introduced in the U.S. by the Company in September of 1996.
VET delivers fast and thorough virus protection against viruses, trojan horses
and Macro viruses for DOS, Windows, Windows 95, Windows NT and Novell Netware.
With VET, files are scanned automatically so no manual checking is required. It
provides maximum protection against viruses downloaded from the Internet, in
e-mail attachments or copied from a diskette or network server.
Comprehensive on-screen help and detailed virus information is always
available at the click of a mouse. VET is certified by the National Security
Computer Association, Novell accredited, non-intrusive, fully compatible and
easy to use.
Help Desk Products
- ------------------
Q-Support (U.S.)/Quetzal (Internationally)
Q-Support, marketed internationally under the name Quetzal, is a
Windows-based, comprehensive help desk automation and asset management software
package. Q-Support/Quetzal ("Q-Support") is one of DATAWATCH's principal
products and represented approximately 39% of the Company's net sales in fiscal
1996, 33% for fiscal 1995 and 32% for
6
fiscal 1994. The program provides IS support centers with a wide-range set of PC
software tools for use in a multi-user, networked environment.
Featuring an easy-to-use graphical user interface, Q-Support logs,
routes and tracks calls from initiation through resolution. With Q-Support you
have inventory control, the ability to monitor performance levels, access to
third-party knowledge providers, e-mail and extensive management reporting
options. Flexibility is built in-system administrators can customize the program
to suit organizational needs.
Q-Support automates four key functions for the corporate
support center:
* Asset Management - addresses the increasing needs by corporations
for microcomputer asset management by providing an accurate record
of every item of equipment or service, tracing of equipment movement
and change, and full maintenance and warranty information.
* Help Call Management - automates the receiving and resolving of
problem calls from the end-user by providing a fast logging process,
allocation to groups or individuals, and monitoring screens to track
progress, priority and status.
* Support Facilities - provides the database of resources and
reference sources that are required to find the solution to end-user
problems.
* Management Analysis - satisfies the Information Center manager's
need to provide accurate management reports on the status of either
the inventory of equipment or the amount of support activity taking
place.
Consulting services from experienced DATAWATCH professionals
complements the Q-Support package by providing valuable assistance for all
phases of implementation. Q-Support offers all the tools you need to satisfy
end-users, lower support costs and optimize asset utilization.
netOctopus
- ----------
netOctopus(TM) from DATAWATCH is a comprehensive systems and network
administration solution that allows administrators to manage an entire network
of Macintosh and IBM-compatible PC's from the convenience of their own desktop.
netOctopus can obtain complete hardware and software inventory detailing the
configuration of each computer on a network in real-time. Any number of
workstations can be queried simultaneously without interrupting the work flow of
the computer users.
Administrators can install and upgrade software of any computer,
troubleshoot, correct and prevent system problems, and monitor software usage
all from their desktop. For file distribution, use File Scripter to effortlessly
create scripts
7
that accomplish lengthy installations of large and complex software programs
like Microsoft Office. Additional features include advanced and flexible
administrator security, remote virus scanning, and data storage for easy
integration into other programs. netOctopus is fully customized and expandable.
All netOctopus features can be configured to operate automatically. netOctopus
operates over LAN, WAN, and dial-up links for easy administration of remote
sites.
PRICING
The Company's products are sold as individual units or under LAN or
site licenses for multiple users. Monarch licenses list for $499 for an
individual unit with LAN licenses listing for a minimum of $2,000. Virex
licenses list for $99.95 per individual copy and a minimum LAN price of $1,750.
VET licenses list for $59.95 per individual copy and a minimum LAN price of
$1,250. A minimum three user license for Q-Support is $6,900. The per seat list
price for netOctopus is $69.
MARKETING AND DISTRIBUTION
DATAWATCH markets its products through a variety of channels in order
to gain broad market exposure and to satisfy the needs of its end-user
customers, no matter what their buying behavior. DATAWATCH has observed that
some customers prefer to purchase products through service-oriented resellers,
while others buy on the basis of price, purchase convenience, and/or immediate
delivery.
The Company is engaged in active direct sales of its products to
end-user customers, including repeat and add-on sales to existing customers and
sales to new customers. DATAWATCH utilizes direct mail, telemarketing and direct
personal selling to generate its sales.
During fiscal 1996, one distributor represented approximately 13% of
DATAWATCH's net sales. No other customer accounted for more than 10% of
DATAWATCH's net sales in 1996. DATAWATCH sells its products outside of the U.S.
directly through WorkGroup's sales force and through international resellers.
Such international sales represented approximately 47%, 45% and 49% of
DATAWATCH'S net sales for fiscal 1996, 1995 and 1994, respectively. See Note 11
to Consolidated Financial Statements which appears elsewhere in this Report on
Form 10-K.
The Company offers its resellers the ability to return obsolete
versions of its products and slow-moving products for credit against purchases
of other DATAWATCH products on a dollar-for-dollar basis. Defective products may
also be returned for credit or exchange. Based on its historical experience, the
Company believes that its exposure to such returns is minimal; however, as
significant new product introductions occur, the Company has periodically
exchanged re-seller inventories of older versions of the Company's products with
these new versions of its products.
8
A variety of marketing programs are used by DATAWATCH to create demand
for its products. These programs include advertising, cooperative advertising
with reseller partners, direct mail, exhibitor participation in industry shows,
executive participation in press briefings and on-going communication with the
trade press.
DATAWATCH warrants the physical disk media and printed documentation
for its products to be free of defects in material and workmanship for a period
of 90 days from the date of purchase. DATAWATCH also offers a 30-60 day
money-back guarantee on certain of its products sold directly to end-users.
Under the guarantee, customers may return purchased products within the 60 days
for a full refund if they are not completely satisfied. To date, the Company has
not experienced any significant product returns under its money-back guarantee.
RESEARCH AND DEVELOPMENT
The Company's product strategy necessitates the timely development of
new products. DATAWATCH's product development efforts are conducted through
in-house software development engineers or by external developers, who are
compensated through royalty payments based on product sales levels achieved.
DATAWATCH's product managers work closely with developers, whether
independent or in-house, to define product specifications. The initial concept
for a product originates from this cooperative effort. The developer is
generally responsible for coding the development project. The product managers
and their staff work in parallel with the developers to produce printed
documentation, on-line help files, tutorials and installation software. In some
cases, DATAWATCH may choose to subcontract a portion of this work on a project
basis to third-party suppliers under contracts. DATAWATCH personnel also perform
extensive quality assurance testing for all products and coordinate external
beta test programs.
DATAWATCH's Q-Support, Virex and netOctopus products are developed,
enhanced and maintained by its software development engineers. Monarch is
developed, maintained and enhanced by a contractual arrangement with an external
developer. The tradenames associated with each product, as well as copyrights
for printed documentation, are held by DATAWATCH or its subsidiaries.
DATAWATCH has a contractual agreement with the independent developer of
Monarch which requires that source code be placed into escrow. The principal
developer for that product is also bound by contractual commitments which
require its continuing involvement in product maintenance and enhancement. Under
the agreement, the Company has been granted manufacturing, marketing and sales
rights under license agreements which provide for royalty payments based on net
revenues and exclusive worldwide rights with a stated term expiring in the year
2009.
BACKLOG
9
The Company's software products are generally shipped within seven days
of receipt of an order. Accordingly, the Company does not believe that backlog
for its products is a meaningful indicator of future business.
10
COMPETITION
The software industry is highly competitive and is characterized by
rapidly changing technology and evolving industry standards. DATAWATCH competes
with a number of companies including IBM, Microsoft, Symantec Corp., McAfee
Associates, Inc., Remedy, Astea, Applix and others which have substantially
greater research and development, marketing and financial resources than
DATAWATCH. Competition in the industry is likely to intensify as current
competitors expand their product lines and as new competitors enter the market.
PRODUCT PROTECTION
Although DATAWATCH does not generally own patents on its software
technologies, it relies on a combination of trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures to protect its rights in its products. Despite these precautions,
unauthorized parties may attempt to copy aspects of DATAWATCH's products or to
obtain and use information that DATAWATCH regards as proprietary. Patent
protection is not considered crucial to DATAWATCH's success. DATAWATCH believes
that, because of the rapid pace of technological change in the software
industry, the legal protections for its products are less significant than the
knowledge, ability and experience of its employees and developers, the frequency
of product enhancements and the timeliness and quality of its support services.
DATAWATCH believes that none of its products, trademarks and other proprietary
rights infringe on the proprietary rights of third parties, but there can be no
assurance that third parties will not assert infringement claims against it or
its developers in the future.
PRODUCTION
Production of DATAWATCH's products involves the duplication of master
disks and the printing of user manuals, packaging and other related materials.
Disk duplication is performed in-house with high-capacity disk duplication
equipment, and is occasionally supplemented with duplication services performed
by non-affiliated subcontractors. Printing work is also performed by
non-affiliated subcontractors. To date, DATAWATCH has not experienced any
material difficulties or delays in production of its software and related
documentation and believes that, if necessary, alternative production sources
could be secured at commercially reasonable cost.
EMPLOYEES
As of September 30, 1996, DATAWATCH had 211 full-time employees,
including 4 executive officers, 68 engaged in marketing and sales, 44 engaged in
product management, development and quality assurance, 55 engaged in providing
administrative, accounting and production functions and 40 in technical support
services.
11
The Company believes that its future success may depend on its ability
to continue to attract and retain highly-skilled technical, marketing and
management personnel, who are in great demand. The Company currently has written
agreements with each of its employees prohibiting disclosure of confidential
information to anyone outside of the Company, both during and subsequent to
employment. These agreements also require disclosure to the Company of ideas,
discoveries or inventions relating to or resulting from the employee's work for
the Company, and assignment to the Company of all proprietary rights to such
matters.
ITEM 2. PROPERTIES
- -------------------
The Company is currently headquartered in a 51,650 square foot leased
facility in Wilmington, Massachusetts. The lease expires in May 1999, with an
option to renew for an additional five years. The Company uses approximately 60%
of this facility and the other 40% is subleased to Secure Systems Group.
The Company also leases approximately 6,200 square feet in Potter Bar,
Hertsfordshire, England, which expires in January 2005, approximately 3,500
square feet in Raleigh, North Carolina, which expires in January 1998, and
maintains small offices in Germany, France and Australia.
The Company believes its facilities are suitable for its current needs.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
At the current time, the Registrant does not have any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of the Registrant's security
holders during the last quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and titles of the executive officers of the Company are
as follows:
Thomas R. Foley 56 President, Chief Executive Officer and Director
Bruce R. Gardner 53 Executive Vice President, Chief Financial
Officer, Treasurer and Director
Andrew W. Mathews 54 Vice President of Sales
Marco D. Peterson 41 Vice President of Marketing and Product
Development
Officers are elected by, and serve at the discretion of, the Board of Directors.
12
THOMAS R. FOLEY, President, Chief Executive Officer and Director. Mr.
Foley, a founder and director of DATAWATCH, has been its President and Chief
Executive Officer since the Company was founded in 1985.
BRUCE R. GARDNER, Executive Vice President, Chief Financial Officer,
Treasurer and Director. Mr. Gardner, a founder and director of DATAWATCH, has
been the Chief Financial Officer and Treasurer since the Company was founded in
1985. Mr. Gardner was a Senior Vice President until June 1993 when he became
Executive Vice President.
ANDREW W. MATHEWS, Vice President of Sales. Mr. Mathews has been a Vice
President since March 1986 serving in various capacities in the areas of
marketing, sales and as a division general manager.
MARCO D. PETERSON, Vice President of Marketing and Product Development.
Mr. Peterson was the founder of PERSONICS and has been its President since its
founding in 1984. Mr. Peterson took on the additional role of Vice President of
Marketing and Product Development of the Company in October 1994.
13
Part II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
- --------------------------------------------------------------------------------
MATTERS
- -------
The Registrant's common stock is listed and traded on the Nasdaq National Market
under the symbol DWCH. The range of high and low prices during each fiscal
quarter for the last two fiscal years is set forth below:
For the Year Ended Common Stock
September 30, 1996 High Low
------------------ ---------------------------------
4th Quarter 11 5/8 6 3/8
3rd Quarter 11 5/8 4 3/4
2nd Quarter 5 1/4 3 3/8
1st Quarter 5 7/8 3 3/4
For the Year Ended
September 30, 1995
------------------
4th Quarter 6 3 1/8
3rd Quarter 4 3/16 1 3/4
2nd Quarter 2 11/16 1 1/4
1st Quarter 1 11/16 1
There are approximately 195 shareholders of record as of December 10, 1996.
The Registrant's common stock purchase warrants previously outstanding expired
in accordance with their terms on May 28, 1996.
The Company has not paid any cash dividends and it is anticipated that none
will be declared in the foreseeable future. The Company intends to retain future
earnings, if any, to provide funds for the operation, development and expansion
of its business.
14
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The following table sets forth selected consolidated financial data of the
Company for the periods indicated. The selected consolidated financial data for
and as of the end of the years in the five year period ended September 30, 1996
are derived from the Consolidated Financial Statements of the Company. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes appearing elsewhere in this
report.
<TABLE>
<CAPTION>
Statements of Operations Data
Years Ended September 30, 1996 1995 1994 1993 1992
-------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net Sales $30,022,122 $23,359,981 $16,882,142 $13,941,902 $7,888,053
Costs and Expenses 28,894,600 23,678,935 19,956,576 17,883,679 8,135,003
Income (Loss) Continuing Operations 1,127,522 (318,954) (3,074,434) (3,941,777) (246,216)
Income (Loss) from Discontinued - - - (741,145) 463,216
Operation
Loss on Disposal of Discontinued - - - (1,478,082)
Operation
Net Income (Loss) $1,125,360 ($331,423) ($3,042,767) ($6,125,104) $320,783
Income (Loss) from Continuing
Operations per Common Share $0.13 ($0.04) ($0.41) ($0.54) ($0.04)
Income (Loss) from Discontinued
Operation 0.00 0.00 0.00 (0.10) 0.08
Loss on Disposal of Discontinued
Operation 0.00 0.00 0.00 (0.20) 0.00
Net Income (Loss) per Common
Share $0.13 ($0.04) ($0.41) ($0.84) $0.05
Balance Sheet Data September 30, 1996 1995 1994 1993 1992
--------------- -------------- --------------- --------------- ---------------
Total Assets $15,240,571 $12,358,132 $9,646,324 $12,108,270 $16,217.070
Working Capital 5,210,457 2,631,759 1,547,706 3,920,512 9,084,750
Long-Term Obligations 209,824 163,868 137,324 152,484 67,085
Shareholders' Equity $8,238,886 $6,062,170 $5,266,588 $8,086,154 $13,019,301
</TABLE>
Data for all years has been retroactively adjusted to reflect the
acquisition of WorkGroup which was accounted for as a pooling of interests.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The following discussion and analysis is qualified by reference to, and
should be read in conjunction with, the consolidated financial statements of
DATAWATCH and its subsidiaries.
GENERAL
15
DATAWATCH CORPORATION (the "Company" or "DATAWATCH"), is engaged in the
design, development, manufacture, marketing, consulting services and support of
personal computer software.
On March 12, 1996, the Company acquired all of the outstanding capital
stock of WorkGroup Systems Limited ("WorkGroup"), a United Kingdom based
provider of help-desk and asset management software, in exchange for 1,437,000
shares of the Company's common stock. This acquisition has been accounted for as
a pooling of interests. As a result, DATAWATCH's operating results for the
fiscal years ended September 30, 1996, 1995 and 1994, as discussed herein have
been adjusted to include WorkGroup's operating results.
On November 7, 1996 the Company acquired all the outstanding shares of
capital stock of Guildsoft Limited ("Guildsoft"), located in Plymouth, England,
which provides software companies with multi-lingual telesales, support and
fulfillment services throughout Europe, in exchange for 125,000 shares of
DATAWATCH common stock. This acquisition will be accounted for as a purchase.
DATAWATCH's principal products are: Monarch(TM), which provides data
access, translation, and reporting capability to users of networked PCs;
VIREX(R) and VET( for the PC, which detect, repair and monitor for virus
infections for Apple Macintosh and IBM compatible PCs, respectively;
Q-Support(TM) for Windows (in the United States), or Quetzal(TM)
(internationally) or a complete help desk and asset management system; and
netOctopus(TM), a network management and administration system.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1996 AS COMPARED TO
---------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1995
------------------------------------
Net sales for the fiscal year ended September 30, 1996 were $30,022,000
which represents an increase of $6,662,000 or 29% from the net sales of
$23,360,000 for the fiscal year ended September 30, 1995. This increase results
from growth in sales of all of DATAWATCH's products. Monarch, which amounted to
approximately 41% of sales, increased by 14%; Q-Support, which amounted to
approximately 39% of sales, increased by 51%; Virex, which amounted to
approximately 15% of sales, increased by 14%; and netOctopus, which amounted to
approximately 4% of sales, increased by 143%. For the fiscal year ended
September 30, 1996, the Company's products for the IBM compatible PC accounted
for approximately 80% of sales while the Company's products for the Apple PC
accounted for approximately 20%. Revenues were reduced by approximately $400,000
for the fourth quarter, and consequently for the year, as a result of
consultancy revenue deferrals. See Note 1 (Revenue Recognition - Services and
Other) to Notes to Consolidated Financial Statements which appear elsewhere in
this Report on Form 10-K.
The Company's cost of sales for the fiscal year ended September 30, 1996 were
$4,516,000 or approximately 15% of net sales. Cost of sales for the fiscal year
ended September 30, 1995 were $3,809,000 or approximately 16% of net sales.
These costs remained reasonably constant as a percentage of net sales for the
two periods.
Engineering and product development expenses were $2,339,000 for the fiscal
year ended September 30, 1996, which increased by $119,000 or approximately 5%
from $2,220,000 for the fiscal year ended September 30, 1995. This increase is
primarily attributable to the increase in personnel costs associated with the
development and quality assurance for its products.
Selling, general and administrative expenses were $22,039,000 for fiscal
year ended September 30, 1996. Included in these expenses were non-
16
recurring expenses associated with the acquisition of WorkGroup amounting to
$450,000. Excluding these non-recurring expenses, selling, general and
administrative expenses were $21,589,000 for the 1996 fiscal year resulting in
an increase of $3,939,000 or approximately 22% from $17,650,000 for the fiscal
year ended September 30, 1996. This increase is primarily attributable to
increases in personnel within the sales and marketing organizations and in
promotional expenses principally for Q-Support and Monarch.
As a result of the foregoing, the net income for the fiscal year ended
September 30, 1996 was $1,125,000, an increase of $1,457,000 when compared to
the net loss of $331,000 for the fiscal year ended September 30, 1995. The
Company recorded only de minimis tax provisions, both domestically and
internationally, during the period because of its ability to utilize net
operating loss carryforwards.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 AS COMPARED TO
---------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1994
------------------------------------
Net sales for the fiscal year ended September 30, 1995 were $23,360,000
which represents an increase of $6,478,000 or 38% from the net sales of
$16,882,000 for the fiscal year ended September 30, 1994. This increase results
from sales growth in all of DATAWATCH's products. Monarch, which amounted to
approximately 46% of sales, increased by 66%; Q-Support, which amounted to
approximately 33% of sales, increased by 41%; Virex, which amounted to
approximately 17% of sales, increased by 16%; and netOctopus, which amounted to
approximately 2% of sales, increased by 26%. For the fiscal year ended September
30, 1995, the Company's products for the IBM compatible PC accounted for
approximately 80% of sales while the Company's products for the Apple PC
accounted for approximately 20%.
The Company's cost of sales for the fiscal year ended September 30, 1995
were $3,809,000 or approximately 16% of net sales. Cost of sales for the fiscal
year ended September 30, 1994 were $3,253,000 or approximately 19% of net sales.
The decrease in cost of sales, as a percentage of net sales, is principally
attributable to the higher volume of sales allowing for increased absorption of
manufacturing overheads.
Engineering and product development expenses were $2,220,000 for the fiscal
year ended September 30, 1995 and $2,125,000 for the fiscal year ended September
30, 1994. Fiscal 1995 engineering and product development expenses increased by
approximately $95,000 or 4%. This increase is primarily attributable to the
increase in personnel costs associated with the development and quality
assurance for its products.
Selling, general and administrative expenses were $17,650,000 for fiscal
year ended September 30, 1995. These expenses increased by $3,071,000 or 21%
over the $14,579,000 of selling, general and administrative expenses for the
fiscal year ended September 30, 1994. Included in the 1994 expenses were certain
non-recurring asset write-offs, relocation costs associated with the
consolidation of certain of the Company's operations into its headquarters and
non-recurring product marketing expenses, in the aggregate amounting to
approximately $1,420,000. Excluding these non-recurring expenses, the selling,
general and administrative expenses for the fiscal year ended September 30, 1995
increased by $4,491,000 or 34%. This increase can be attributed primarily to
increased promotional costs, principally for Monarch, and to product
introduction and selling expenses associated with DATAWATCH's newer products,
Q-Support and netOctopus.
As a result of the foregoing, the net loss for the fiscal year ended
September 30, 1995 was $331,000 compared to the net loss of $3,043,000 for the
fiscal year ended September 30, 1994.
LIQUIDITY AND CAPITAL RESOURCES
17
The Company's management believes that its currently anticipated capital needs
for future operations of the Company will be satisfied through at least
September 30, 1997 by funds currently available and its unused $1,500,000 bank
line of credit. WorkGroup has an overdraft facility in place which allows it to
draw up to approximately $640,000. The facility was fully utilized as of
September 30, 1996. Working capital increased by approximately $2,579,000 during
fiscal 1996 primarily as a result of profitable operations and cash flow
generated by exercise of the Company's outstanding common stock purchase
warrants. The Company used its common stock as consideration for its recent
acquisitions and, therefore, completion of these acquisitions did not adversely
impact working capital.
Management believes that the Company's current operations are not materially
impacted by the effects of inflation.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of its future financial
performance. However, time to time, information provided by the Company or
statements made by its employees may contain "forward looking" information that
involves risks and uncertainties. In particular, statements contained in this
Form 10-K that are not historical facts (including, but not limited to
statements contained in "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations" relating to liquidity and capital
resources) constitute forward looking statements and are made under the safe
harbor provisions of The Private Securities Litigation Reform Act of 1995. The
Company's' actual results of operations and financial condition have varied and
may in the future vary significantly from those stated in any forward looking
statements. Factors that may cause such differences include, without limitation,
the risks, uncertainties and other information discussed below and within this
Form 10-K, as well as the accuracy of the Company's internal estimates of
revenue and operating expense levels. The following discussion of the Company's
risk factors should be read in conjunction with the financial statements and
related notes thereto. Such factors, among others, may have a material adverse
effect upon the Company's business, results of operations and financial
condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future operating results could vary substantially from
quarter to quarter because of uncertainties and/or risks associated with such
things as technological change, competition, delays in the introduction of
products or product enhancements and general market trends. Historically, the
Company has operated with little backlog of orders because its software products
are generally shipped as orders are received. As a result, net sales in any
quarter are substantially dependent on orders booked and shipped in that
quarter. Because the Company's staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the Company's costs are
fixed in the short-term, small variations in the timing of revenues can cause
significant variations in operating results from quarter to quarter. Because of
these factors, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. There can be no assurance that the
Company will not experience such variations in operating results in the future
or that such variations will not have a material adverse effect on the Company's
business, financial condition or results of operation.
DEPENDENCE ON PRINCIPAL PRODUCTS
In Fiscal 1996, Monarch, Q-Support, Virex and netOctopus accounted for
approximately 41% and 39%, 15% and 4%, respectively, of the Company's net sales.
As a result, any factor adversely affecting sales of any of these products could
have a material adverse effect on the Company. The Company's future financial
performance
18
will depend in part on the successful introduction of its new and enhanced
versions of these products and development of new versions of these and other
products and subsequent acceptance of such new and enhanced products. In
addition, competitive pressures or other factors may result in significant price
erosion that could have a material adverse effect on the Company's results of
operations.
INTERNATIONAL SALES
In 1996, 1995 and 1994, international sales accounted for approximately
47%,45% and 49%, respectively, of the Company's net sales. The Company
anticipates that international sales will continue to account for a significant
percentage of its revenues. A significant portion of the Company's net sales
will therefore be subject to risks associated with international sales,
including unexpected changes in legal and regulatory requirements, changes in
tariffs, exchange rates and other barriers, political and economic instability,
difficulties in account receivable collection, difficulties in managing
distributors or representatives, difficulties in staffing and managing
international operations, difficulties in protecting the Company's intellectual
property overseas, seasonality of sales and potentially adverse tax
consequences.
ACQUISITION STRATEGY
The Company has addressed the need to develop new products, in part,
through the acquisition of other companies. Acquisitions such as WorkGroup, Pole
Position and Guildsoft involve numerous risks including difficulties in the
assimilation of the operations, technologies and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited direct prior
experience and where competitors in such markets have stronger market positions,
and the potential loss of key employees of the acquired company. Achieving and
maintaining the anticipated benefits of an acquisition will depend in part upon
whether the integration of the companies' business is accomplished in an
efficient and effective manner, and there can be no assurance that this will
occur. The successful combination of companies in the high technology industry
may be more difficult to accomplish than in other industries. The combination of
such companies will require, among other things, coordination of their sales and
marketing and research and development efforts. The difficulties of such
integration may be increased by the necessity of coordinating geographically
separated organizations. The coordination of certain operations following an
acquisition will require the dedication of management resources that may
temporarily distract attention from the day-to-day business of the Company. The
inability of management to successfully coordinate and integrate on an ongoing
basis the operations of WorkGroup, Pole Position or Guildsoft or any other
company which it may subsequently acquire could have a material adverse effect
on the business and results of operations of the Company.
DEPENDENCE ON NEW INTRODUCTIONS; NEW PRODUCT DELAYS
Growth in the Company's business depends in substantial part on the
continuing introduction of new products. The length of product life cycles
depends in part on end-user demand for new or additional functionality in the
Company's products. If the Company fails to accurately anticipate the demand
for, or encounters any significant delays in developing or introducing, new
products or additional functionality on its products, there could be a material
adverse effect on the Company's business. Product life cycles can also be
affected by the introduction by suppliers of operating systems of comparable
functionality within their products. The failure of the Company to anticipate
the introduction of additional functionality in products developed by such
suppliers could have a material adverse effect on the Company's business. In
addition, the Company's competitors may introduce products with more features
and lower prices than the Company's products. Such increase in competition could
adversely affect the
19
life cycles of the Company's products, which in turn could have a material
adverse effect on the Company's business.
Software products may contain undetected errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by the Company and by current and potential end-users, errors
will not be found in new products after commencement of commercial shipments,
resulting in loss of or delay in market acceptance. Any failure by the Company
to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business.
RAPID TECHNOLOGICAL CHANGE
The markets in which the Company competes have undergone, and can be
expected to continue to undergo, rapid and significant technological change. The
ability of the Company to grow will depend on its ability to successfully update
and improve its existing products and market and license new products to meet
the changing demands of the marketplace and that can compete successfully with
the existing and new products of the Company's competitors. There can be no
assurance that the Company will be able to successfully anticipate and satisfy
the changing demands of the personal computer software marketplace, that the
Company will be able to continue to enhance its product offering, or that
technological changes in hardware platforms or software operating systems, or
the introduction of a new product by a competitor, will not render the Company's
products obsolete.
COMPETITION IN THE PC SOFTWARE INDUSTRY
The software market for personal computers is highly competitive and
characterized by continual change and improvement in technology. Several of the
Company's existing and potential competitors (including IBM Corporation,
Microsoft, McAfee Associates, Inc., Remedy, Astea, Applix, Symantec Corp. and
Ziff-Davis, Inc.) have substantially greater financial, marketing and
technological resources than the Company. No assurance can be given that the
Company will have the resources required to compete successfully in the future.
DEPENDENCE ON PROPRIETARY SOFTWARE TECHNOLOGY
The Company's success is dependent upon proprietary software
technology. Although the Company does not own any patents on any such
technology, it does hold exclusive licenses to such technology and relies
principally on a combination of trade secret, copyright and trademark laws,
nondisclosure and other contractual agreements and technical measures to protect
its rights to such proprietary technology. Despite such precautions, there can
be no assurance that such steps will be adequate to deter misappropriation of
such technology.
RELIANCE ON SOFTWARE LICENSE AGREEMENTS
Substantially all of the Company's products incorporate third party
proprietary technology which is generally licensed to the Company on an
exclusive, worldwide basis. Failure by such third parties to continue to develop
technology for the Company and license such technology to the Company could have
a material adverse effect on the Company's business and results of operations.
INDIRECT DISTRIBUTION CHANNELS
During 1996, 1995 and 1994, the Company derived approximately 17%, 19% and
19%, respectivley, of its net sales through resellers, none of which are under
the direct
20
control of the Company. The loss of major resellers of the Company's products,
or a significant decline in their sales, could have a material adverse effect on
the Company's operating results. Other than Ingram Micro Inc., which accounted
for approximately 13%, 10%, and 10% of the Company's 1996, 1995 and 1994 net
sales, respectively, no reseller or other customer accounted for more than 10%
of the Company's revenues in 1996, 1995 and 1994. There can be no assurance that
the Company will be able to attract or retain additional qualified resellers or
that any such resellers will be able to effectively sell the Company's products.
The Company seeks to select and retain resellers on the basis of their business
credentials and their ability to add value through expertise in specific
vertical markets or application programming expertise. In addition, the Company
relies on resellers to provide post-sales service and support, and any
deficiencies in such service and support could adversely affect the Company's
business.
VOLATILITY OF STOCK PRICE
- -------------------------
As is frequently the case with the stocks of high technology companies, the
market price of the Company's common stock has been, and may continue to be,
volatile. Factors such as quarterly fluctuations in results of operations,
increased competition, the introduction of new products by the Company or its
competitors, expenses or other difficulties associated with assimilating
companies acquired by the Company, changes in the mix of sales channels, the
timing of significant customer orders, and macroeconomics conditions generally,
may have a significant impact on the market price of the stock of the Company.
Any shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant adverse effect on the market
price of the Company's Common Stock in any given period. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations,
which have particularly affected the market price for many high technology
companies and which, on occasion, have appeared to be unrelated to the operating
performance of such companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The information required by this item is set forth in Item 14(a) under
the captions "Consolidated Financial Statements" and "Consolidated Financial
Statement Schedules" as a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information with respect to Directors may be found under the caption
"Election of Directors" appearing in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders for the fiscal year ended September 30,
1996. Such information is incorporated herein by reference. Information with
respect to the Company's executive officers may be found under the caption
"Executive Officers of the Registrant" appearing in Part I of this Annual Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information set forth under the caption "Compensation and Other
Information Concerning Directors and Officers" appearing in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal
year ended September 30, 1996 is incorporated herein by reference.
21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information set forth under the caption "Principal Holders of
Voting Securities" appearing in the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders for the fiscal year ended September 30, 1996 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
The information set forth under the caption "Certain Transactions"
appearing in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders for the fiscal year ended September 30, 1996 is incorporated herein
by reference.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
The following documents are filed as part of this report:
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 1996 and 1995
Consolidated Statements of Operations for the Years Ended September 30,
1996, 1995 and 1994.
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1996, 1995 and 1994.
Notes to Consolidated Financial Statements
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule VIII Valuation and Qualifying Accounts
All other schedules are omitted as the required information is not
applicable or is included in the financial statements or related notes.
The Independent Auditors' Report included with the Consolidated
Financial Statements under Item 14(a)1 above contains the Independent
Auditors' Report on the Consolidated Financial Statement Schedule.
3. EXHIBITS
The exhibits listed in the Exhibit Index immediately preceding the
Exhibits are filed as a part of this Annual Report on Form 10-K.
(b) REPORTS ON FORM 8-K
No current report on Form 8-K was filed during the quarterly period
ended September 30, 1996.
23
<TABLE>
<CAPTION>
(C) EXHIBIT INDEX
<S> <C>
(1) 3.1 Restated Certificate of Incorporation of the Registrant (Exhibit 3.2)
(1) 3.2 By-Laws, as amended, of the Registrant (Exhibit 3.3)
(1) 4.1 Form of Warrant Agreement by and between the Registrant and Warrant Agent
(Exhibit 4.1)
(1) 4.2 Specimen certificate representing the Common Stock Purchase Warrants
(Exhibit 4.2)
(1) 4.3 Form of Representative's Warrant (Exhibit 4.3)
(1) 4.4 Specimen certificate representing the Common Stock (Exhibit 4.4)
(1) 10.1 Lease by and between the Registrant and CBOB Fund Corp., as Trustee of
Ballardvale Building D Nominee Trust, dated February 17, 1992 (Exhibit 10.2)
(1) 10.2 1987 Stock Plan (Exhibit 10.7)
(1) 10.3 Form of Incentive Stock Option Agreement of the Registrant (Exhibit 10.8)
(1) 10.4 Form of Nonqualified Stock Option Agreement of the Registrant (Exhibit 10.9)
(2) 10.5 Software Development and License Agreement by and between Walter J. Biess
and HJC Software, Inc., dated as of May 25, 1989, as amended (Exhibit 10.2)
(2) 10.6 License Agreement by and between Ross Greenberg and Microcom, Inc., dated as
of September 30, 1992 (Exhibit 10.3)
(2) 10.7 Asset Purchase Agreement by and among Microcom, Inc. and Microcom Systems
and the Registrant, dated as of September 30, 1992 (Exhibit 2.1)
(2) 10.8 Letter Agreement by and between the Registrant and Microcom, Inc., dated as
of September 30, 1992 (Exhibit 10.4)
(2) 10.9 Amended and Restated Registration Rights Agreement, dated as of
September 30, 1992 by and among the Registrant and the parties listed therein
(Exhibit 10.5)
(1) 10.10 Software Development and Marketing Agreement by and between PERSONICS CORPORATION
and Raymond Huger, dated January 19, 1989 (Exhibit 10.12)
(1) 10.11 License Agreement by and between International Business Machines
Corporation and PERSONICS CORPORATION, dated December 31, 1991 (Exhibit 10.16)
(1) 10.12 Software Distribution Agreement by and between PERSONICS CORPORATION and Librex
Computer Systems, Inc., dated March 12, 1991 (Exhibit 10.17)
(1) 10.13 Software License Agreement by an between M&H Consulting, dated June 1, 1987
(Exhibit 10.13)
(4) 10.14 Software Distribution Agreement by and between PERSONICS CORPORATION and
Toshiba America Information Systems, Inc., dated March 19, 1993, as amended
(Exhibit 10.19)
(3) 10.15 Asset Purchase Agreement by and between the Registrant and Secure Systems
Group, dated as of May 14, 1993 (Exhibit 2.1)
(3) 10.16 Promissory Note of Secure Systems Group to the Registrant in the original
principal amount of $968,782, dated May 14, 1993 (Exhibit 10.1)
(3) 10.17 Promissory Note of Secure Systems Group to the Registrant in the original
principal amount of $1,821,018, dated May 14, 1993 (Exhibit 10.2)
(3) 10.18 Security Agreement dated as of May 14, 1993 between Secure Systems Group
as debtor and the Registrant as secured party (Exhibit 10.3)
(3) 10.19 Sublease dated as of May 14, 1993 between the Registrant as sublandlord
and Secure Systems Group as subtenant (Exhibit 10.4)
(5) 10.20 Marketing Agreement dated May 1, 1994 between WorkGroup Systems Ltd. and
DATAWATCH CORPORATION (Exhibit 10.1)
(6) 10.21 Letter Agreement dated November 1, 1994 by and among Silicon Valley Bank,
Silicon Valley Bank doing business under the name Silicon Valley East,
DATAWATCH CORPORATION and PERSONICS CORPORATION (Exhibit 10.22)
(6) 10.22 Commercial Security Agreement between DATAWATCH CORPORATION and Silicon Valley
Bank doing business as Silicon Valley East dated November 1, 1994 (Exhibit 10.23)
24
(6) 10.23 Commercial Security Agreement between PERSONICS CORPORATION and Silicon Valley
Bank doing business as Silicon Valley East dated November 1, 1994 (Exhibit 10.24)
(7) 10.24 Loan Modification Agreement dated November 1, 1995 between DATAWATCH Corporation,
Personics Corporation and Silicon Valley Bank (Exhibit 10.24)
(8) 10.25 Executive Agreement between the Company and Andrew W. Mathews dated April
11, 1996 (Exhibit 10.1)
(8) 10.26 Executive Agreement between the Company and Marco D. Peterson dated April 11, 1996
(Exhibit 10.2)
(8) 10.27 Executive Agreement between the Company and Bruce R. Gardner dated April 11, 1996
(Exhibit 10.3)
(8) 10.28 Executive Agreement between the Company and Thomas R. Foley dated April 11, 1996
(Exhibit 10.4)
10.29 Loan Modification Agreement dated October 31, 1996 between Datawatch Corporation,
Personics Corporation and Silicon Valley Bank (filed herewith).
10.30 1996 Non-Employee Director Stock Option Plan, as amended on December 10, 1996
(filed herewith).
10.31 1996 International Employee Non-Qualified Stock Option Plan (filed herewith).
11.1 Statement re: computation of per share earnings (filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedule (filed with EDGAR Submission only)
</TABLE>
- ------------------------------
(1) Previously filed as exhibits to Registration Statement 33-46290 on Form
S-1 and incorporated herein by reference (the number given in
parenthesis indicates the corresponding exhibit in such Form S-1).
(2) Previously filed as exhibits to Registrant's Current Report on Form 8-K
dated September 30, 1992, filed October 14, 1992 and incorporated
herein by reference (the number given in parenthesis indicates the
corresponding exhibit in such Form 8-K).
(3) Previously filed as exhibits to Registrant's Current Report on Form 8-K
dated May 14, 1993, filed May 28, 1993 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 8-K).
(4) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the Fiscal Year ended September 30, 1993 and incorporated
herein by reference (the number given in parenthesis indicates the
corresponding exhibit in such Form 10-K).
(5) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q).
(6) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the Fiscal Year ended September 30, 1994 and incorporated
herein by reference (the number given in parenthesis indicates the
corresponding exhibit in such Form 10-K).
(7) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the Fiscal Year ended September 30, 1995 and incorporated
herein by reference (the number given in parenthesis indicates the
corresponding exhibit in such Form 10-K).
(8) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q).
25
(D) FINANCIAL STATEMENT SCHEDULES
The Company hereby files as financial statement schedules to this Form
10-K the Consolidated Financial Statement Schedules listed in Item 14(a)2 above
which are attached hereto.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATAWATCH CORPORATION
Date: December 26, 1996 By: /s/Thomas R. Foley
-------------------- ----------------------------------
Thomas R. Foley
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Thomas R. Foley President, Chief Executive December 26, 1996
- ------------------------------------
Thomas R. Foley Officer and Director
/s/Bruce R. Gardner Executive Vice President December 26, 1996
- ------------------------------------
Bruce R. Gardner and Treasurer, and Director
(Principal Financial
and Accounting Officer)
/s/John A. Blaeser Director December 26, 1996
- ------------------------------------
John A. Blaeser
/s/Jerome Jacobson Director December 26, 1996
- ------------------------------------
Jerome Jacobson
/s/David Riddiford Director December 26, 1996
- ------------------------------------
David Riddiford
</TABLE>
27
- --------------------------------------------------------------------------------
DATAWATCH CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets as of September 30, 1996 and 1995 and Consolidated
Statements of Operations, Changes in Shareholders' Equity, and Cash Flows for
the Years Ended September 30, 1996, 1995 and 1994 and Independent Auditors'
Report
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1996
AND 1995 AND FOR THE THREE YEARS IN THE PERIOD ENDED
SEPTEMBER 30, 1996:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Changes in Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-15
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Datawatch Corporation
Wilmington, Massachusetts
We have audited the accompanying consolidated balance sheets of Datawatch
Corporation and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the three years in the period ended September 30, 1996. Our
audits also included the consolidated financial statement schedule listed in
Item 14(a)2. These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Datawatch Corporation and
subsidiaries as of September 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As described in Note 2 to the consolidated financial statements, the
consolidated financial statements have been restated to give retroactive effect
to the March 12, 1996 merger of Datawatch Corporation and WorkGroup Systems
Limited, which has been accounted for as a pooling-of-interests.
/s/ Deloitte & Touche LLP
November 25, 1996
-1-
<TABLE>
<CAPTION>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
- ------------------------------------------------------------------------------------
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 1,696,349 $ 876,802
Short-term investments 792,665 885,659
Accounts receivable, less allowance for doubtful
accounts and sales returns of $73,000 in 1996
and $83,000 in 1995 7,767,748 5,230,685
Inventories 480,758 262,528
Prepaid advertising and other expenses 1,264,798 1,508,179
--------- ---------
Total current assets 12,002,318 8,763,853
--------- ---------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 3,174,964 2,490,719
Manufacturing and engineering equipment 359,795 246,247
--------- ---------
3,534,759 2,736,966
Less accumulated depreciation
and amortization (1,737,733) (1,197,419)
--------- ---------
Net property and equipment 1,797,026 1,539,547
--------- ---------
OTHER ASSETS 400,062 596,990
--------- ---------
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED COMPANIES - Less accumulated
amortization of $1,877,461 in 1996 and
$1,452,990 in 1995 1,041,165 1,457,742
--------- ---------
$ 15,240,571 $ 12,358,132
============== ==============
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 2,914,952 $ 2,718,825
Accrued expenses 1,063,129 1,815,419
Deferred revenue 1,946,473 1,314,655
Borrowings under credit lines 636,806 81,847
Current portion of long-term obligations 230,501 201,348
--------- ---------
Total current liabilities 6,791,861 6,132,094
--------- ---------
LONG-TERM OBLIGATIONS 209,824 163,868
--------- ---------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock, par value $.01; authorized,
20,000,000 shares; issued and
outstanding, 8,965,988 shares in 1996
and 8,629,135 shares in 1995 89,659 86,291
Additional paid-in capital 18,665,402 17,614,360
Accumulated deficit (10,538,117) (11,663,477)
Cumulative translation adjustment 21,942 24,996
--------- ---------
Total shareholders' equity 8,238,886 6,062,170
--------- ---------
$ 15,240,571 $ 12,358,132
============== ==============
</TABLE>
See notes to consolidated financial statements.
-2-
<TABLE>
<CAPTION>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
NET SALES $ 30,022,122 $ 23,359,981 $ 16,882,142
COSTS AND EXPENSES:
Cost of sales 4,516,456 3,808,995 3,253,036
Engineering and product development 2,338,724 2,219,930 2,124,655
Selling, general and administrative 22,039,420 17,650,010 14,578,885
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 1,127,522 (318,954) (3,074,434)
INTEREST EXPENSE (96,184) (75,449) (19,914)
OTHER INCOME - Primarily interest 49,162 67,688 65,178
FOREIGN CURRENCY TRANSACTION GAINS 11,860 23,292 17,403
BENEFIT (PROVISION ) FOR INCOME TAXES 33,000 (28,000) (31,000)
------------- ------------- -------------
NET INCOME (LOSS) $ 1,125,360 $ (331,423) $ (3,042,767)
============== ============== =============
NET INCOME (LOSS) PER SHARE $ 0.13 $ (0.04) $ (0.41)
============== ============== =============
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 8,943,862 8,204,502 7,372,946
============== ============== =============
See notes to consolidated financial statements.
</TABLE>
-3-
<TABLE>
<CAPTION>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Cumulative
Common Stock Paid-in Accumulated Translation
Shares Amount Capital Deficit Adjustments Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1993, As previously reported 5,919,670 $ 59,197 $16,316,478 $ (8,652,605) $ (3,050) $ 7,720,020
Adjustment for pooling-of-interest of WorkGroup 1,437,000 14,370 147,348 204,397 19 366,134
--------- ---------- ----------- ------------ -------- -----------
BALANCE, OCTOBER 1, 1993, As restated 7,356,670 73,567 16,463,826 (8,448,208) (3,031) 8,086,154
Common stock options exercised 22,086 220 14,585 14,805
Translation adjustment 49,475 49,475
Adjustment to change fiscal year of WorkGroup 158,921 158,921
Net loss (3,042,767) (3,042,767)
--------- ---------- ----------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1994 7,378,756 73,787 16,478,411 (11,332,054) 46,444 5,266,588
Common stock options exercised 97,039 970 71,123 72,093
Warrants exercised, net of offering costs 1,153,340 11,534 1,064,826 1,076,360
Translation adjustment (21,448) (21,448)
Net loss (331,423) (331,423)
--------- ---------- ----------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1995 8,629,135 86,291 17,614,360 (11,663,477) 24,996 6,062,170
Common stock options exercised 217,411 2,174 203,264 205,438
Warrants exercised, net of offering costs 119,442 1,194 847,778 848,972
Translation adjustment (3,054) (3,054)
Net income 1,125,360 1,125,360
--------- ---------- ----------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1996 8,965,988 $ 89,659 $18,665,402 $(10,538,117) $21,942 $ 8,238,886
========= ========== =========== ============ ======= ===========
See notes to consolidated financial statements.
</TABLE>
-4-
<TABLE>
<CAPTION>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 1,125,360 $ (331,423)$ (3,042,767)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Adjustment to change fiscal year of WorkGroup 158,921
Depreciation and amortization 1,223,162 975,254 936,817
Write-off of assets under contractual obligation 1,104,961
Changes in current assets and liabilities:
Inventories (218,230) (20,900) 101,409
Prepaid advertising and other expenses 243,381 (641,303) 364,189
Accounts receivable (2,537,062) (1,819,261) (746,605)
Accounts payable and accrued expenses (567,112) 914,894 869,708
Deferred revenue 631,818 581,524 (244,071)
-------------- ------------- ------------
Net cash used in operating activities (98,683) (182,294) (656,359)
-------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and fixtures - net (564,129) (381,298) (247,063)
Payment received on asset held under contractual obligation 123,131
Proceeds from sale of short-term investments 2,312,478 676,733 3,977,694
Purchase of short-term investments (2,219,484) (1,562,392) (1,984,033)
Other assets 25,571 (393,006) (193,442)
-------------- ------------- ------------
Net cash (used in) provided by investing activities (445,564) (1,659,963) 1,676,287
-------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,054,410 1,148,453 14,805
Principal payments on long-term obligations (245,575) (136,833) (332,418)
Borrowings under credit lines - net 554,959 81,847
Proceeds from equipment financing agreement 64,636
-------------- ------------- ------------
Net cash provided by (used in) financing activities 1,363,794 1,093,467 (252,977)
-------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 819,547 (748,790) 766,951
CASH AND EQUIVALENTS, BEGINNING OF YEAR 876,802 1,625,592 858,641
-------------- ------------- ------------
CASH AND EQUIVALENTS, END OF YEAR $ 1,696,349 $ 876,802 $ 1,625,592
-------------- ------------- ------------
SUPPLEMENTAL INFORMATION:
Interest paid $ 96,184 $ 75,449 $ 19,914
-------------- ------------- ------------
Income taxes paid $ 78,922 $ 0 $ 0
-------------- ------------- ------------
NONCASH INVESTING AND FINANCING ACTIVITIES - Equipment
acquired under capital lease agreements $ 320,684 $ 259,713 $ 168,202
-------------- ------------- ------------
See notes to consolidated financial statements.
</TABLE>
-5-
DATAWATCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Datawatch Corporation and its wholly owned
subsidiaries, Personics Corporation ("Personics"), Pole Position Software
GmbH ("Pole Position") and WorkGroup Systems Limited ("WorkGroup")
(collectively, the "Company") develop, market and distribute personal
computer software products. The Company also provides a wide range of
consulting services surrounding the implementation and support of its
software products.
PRINCIPLES OF CONSOLIDATION - The financial statements are consolidated to
include the accounts of Datawatch Corporation and its wholly owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation. The accompanying consolidated financial
statements have been restated to give retroactive effect to the
pooling-of-interests of WorkGroup on March 12, 1996 (see Note 2). The term
"Datawatch," as used herein, refers to Datawatch Corporation and its
wholly owned subsidiaries prior to the pooling-of-interests of WorkGroup.
WorkGroup's fiscal year end had historically ended on December 31, while
Datawatch's fiscal year had ended on September 30. Effective January 1,
1995, WorkGroup changed its fiscal year end from December 31 to September
30. Accordingly, the accompanying consolidated financial statements for
the fiscal year ended September 30, 1994 combine information for
Datawatch's fiscal year ended September 30, 1994 with WorkGroup's fiscal
year ended December 31, 1994.
Due to the different fiscal year ends of the combined companies, the
results of WorkGroup for the three months ended December 31, 1994, have
been included in the consolidated statements of operations for both years
ended September 30, 1995 and 1994. WorkGroup's net sales for the three
months ended December 31, 1994 were approximately $1,471,000. WorkGroup's
net loss for the three months ended December 31, 1994 was approximately
$159,000 and has been included as an adjustment in the consolidated
statement of changes in shareholders' equity.
REVENUE RECOGNITION - Software - Revenues from sales of software products
are recognized at the time of shipment when no significant obligations
remain and collectibility is probable. The Company's software products are
sold under warranty against certain defects in material and workmanship
for a period of 30-60 days from the date of purchase. Software products
sold directly to end-users include a guarantee under which such customers
may return products within 60 days for a full refund. During each of the
three years in the period ended September 30, 1996, returns under these
warranty and guarantee arrangements were not material.
REVENUE RECOGNITION - Services and Other - Revenues from the sale of
annual subscription agreements to provide upgrades for minor product
improvements and new virus protection are deferred at the time of sale.
Revenues from the sale of separate consulting agreements to provide field
service support are also deferred at the time of sale. The Company
recognizes its revenue on these agreements ratably over a twelve-month
period.
-6-
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION - Services and Other (Continued) - Revenues from
consulting services performed in connection with the sale of bundled
products and services (principally at the Company's WorkGroup subsidiary)
are recognized at the time of the shipment of software if the consulting
services are expected to be provided within a short period of time after
the shipment of the related product (i.e., within a few weeks) and the
cost of such services are estimable. If consulting services are not
expected to be provided within a short period of time after the shipment
of the related product, such revenues are deferred and recognized as
revenue as the services are provided. Prior to July 1996, substantially
all of the Company's bundled consulting services were expected to be, and
were, provided within a short period of time after the shipment of the
related product. For shipments made in and subsequent to July 1996, the
Company has determined that, due to changes in the volume of the Company's
sales, as well as the increased complexity in the Company's products,
bundled consulting services may not be provided within a short period of
time after the shipment of the related product and, accordingly, revenues
from such consulting services are being deferred and recognized as revenue
as the services are provided.
CASH AND EQUIVALENTS - Cash and equivalents includes cash on hand, cash
deposited with banks and highly liquid debt securities with remaining
maturities of 90 days or less when purchased.
SHORT-TERM INVESTMENTS - Short-term investments consist of United States
Treasury Bills with relatively short-term maturities for which the
carrying value approximates market.
OTHER ASSETS - At September 30, 1996 and 1995, other assets included
approximately $21,000 and $81,000, respectively, of unamortized
capitalized software products resulting from acquisitions. Amortization is
provided over estimated lives of 1 to 5 years on a straight-line basis.
Amortization was approximately $60,000 in 1996 and 1995 and $177,000 in
1994.
Copyright-related costs accounted for the majority of the remaining
balance. These costs are being amortized on a basis consistent with the
capitalized software products mentioned above.
ADVERTISING AND PROMOTIONAL MATERIALS - Advertising costs are expensed as
incurred and amounted to approximately $917,000 in 1996 and $640,000 in
1995 and $1,170,000 in 1994. Direct mail/direct response costs are
expensed as the associated revenue is recognized. The amortization period
is based on historical results of previous mailers (generally 3 to 4
months from the date of the mailing). Direct mail expense was
approximately $3,970,000 in 1996, $4,000,000 in 1995 and $2,680,000 in
1994.
CONCENTRATION OF CREDIT RISKS AND MAJOR CUSTOMERS - The Company sells its
products and services to U.S. and non-U.S. dealers and other software
distributors, as well as to end-users under normal credit terms. One
customer individually accounted for 13% of net sales in 1996 and 10% of
net sales in both 1995 and 1994. No base of customers in one geographic
area constitutes a significant portion of sales. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. Allowances are provided for anticipated doubtful accounts and
sales returns.
INVENTORIES - Inventories consist of software components - primarily
software manuals, diskettes and retail packaging materials. Inventories
are valued at the lower of cost or market. Cost is determined using the
first-in, first-out method.
-7-
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT - Purchased equipment and fixtures are recorded at
cost. Leased equipment is recorded at the present value of the minimum
lease payments required during the lease term. Depreciation and
amortization are provided using the straight-line method over the
estimated useful lives of the related assets and over the terms, if
shorter, of the related leases. Useful lives and lease terms range from 3
to 7 years.
INCOME TAXES - The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective
October 1, 1993. There was no cumulative effect adjustment for the
adoption of the new statement and prior financial statements have not been
restated. Prior to this time, the Company accounted for taxes under
Accounting Principles Board ("APB") No. 11.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANIES - The excess of cost
over net assets of acquired companies is being amortized on a
straight-line basis over seven years. In addition, the net carrying amount
of the excess of cost over net assets of acquired companies is reduced if
it is probable that the estimated undiscounted operating income (defined
as operating cash flow less depreciation and amortization) from related
operations will be less than the carrying amount of the excess of cost
over net assets of acquired companies.
ACCOUNTING ESTIMATES - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
equivalents, short-term investments, accounts receivable, accounts
payable, accrued expenses and deferred revenue approximate fair value
because of their short-term nature. The carrying amount of the Company's
current and long-term obligations approximate fair value.
POOLING-OF-INTERESTS - All share and per share data have been
retroactively adjusted to reflect the pooling-of-interests of WorkGroup.
NET INCOME PER COMMON SHARE - Net income per common share is computed upon
the weighted average number of common and common equivalent shares
outstanding during each period presented after retroactive adjustment for
the pooling-of-interests. Common stock equivalents consist of dilutive
stock options and common stock warrants.
FOREIGN CURRENCY TRANSACTIONS - Gains and losses resulting from
transactions and related accounts that are denominated in currencies other
than the U.S. dollar are included in the net operating results of the
Company in accordance with SFAS No. 52.
FOREIGN CURRENCY TRANSLATIONS - The financial statements of foreign
subsidiaries are translated into U.S. dollars in accordance with SFAS No.
52. The related translation adjustments are reported as a separate
component of shareholders' equity.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the current financial statement presentation.
-8-
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR LONG-LIVED ASSETS - The Financial Accounting Standards
Board ("FASB") has issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related
to those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The Company adopted this
standard in fiscal 1996. The adoption did not have a material effect on
the Company's consolidated financial position or results of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION - In October 1995, the FASB issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which is
effective for the Company's fiscal year 1997. This standard requires
expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation costs to be
measured based on the fair value of stock options awarded. The Company has
evaluated this standard and, as permitted under SFAS No. 123, has decided
that it will not adopt the fair value method and will continue to use APB
No. 25 for the measurement and recognition of employee stock-based
transactions. As a result, compliance with this standard during fiscal
1997 will have no impact on the Company's 1997 consolidated financial
statements other than the required additional disclosure of the pro forma
effect of SFAS No. 123 on net income and earnings per share.
2. POOLING-OF-INTERESTS
On March 12, 1996, the Company acquired all of the outstanding shares of
capital stock of WorkGroup in exchange for an aggregate of 1,437,000
shares of the Company's common stock, with 143,698 of such issued shares
held in escrow for contingent liabilities. The acquisition has been
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements have been restated to include the accounts and
operations of WorkGroup for all periods presented. Costs related to the
pooling-of-interests of $450,000 were expensed during fiscal 1996.
Net sales and net income (loss) of the separate companies for the years
ended September 30 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Net sales:
<S> <C> <C> <C>
Datawatch $ 20,008,921 $ 16,633,288 $ 11,521,444
WorkGroup 10,389,664 7,034,639 5,412,058
Eliminations (376,463) (307,946) (51,360)
-------------- ------------- -------------
Combined $ 30,022,122 $ 23,359,981 $ 16,882,142
============== ============= =============
Net income (loss):
Datawatch $ 1,461,556 $ 818,345 $ (3,285,562)
WorkGroup (327,463) (1,075,482) 277,967
Eliminations (8,733) (74,286) (35,172)
-------------- ------------- -------------
Combined $ 1,125,360 $ (331,423) $ (3,042,767)
============== ============= =============
</TABLE>
-9-
2. POOLING-OF-INTERESTS (CONTINUED)
On November 21, 1996, the Company redeemed 32,052 shares of the 143,698
escrowed shares in connection with the settlement of certain WorkGroup
contingent liabilities.
As of September 30, 1995, the Company acquired Pole Position, a German
software developer, in exchange for 300,000 shares of the Company's common
stock. The acquisition has been accounted for as a pooling-of-interests.
Costs related to the pooling-of-interests of $70,208 were expensed during
fiscal 1995.
3. INVENTORIES
Inventories consisted of the following at September 30:
1996 1995
Raw materials $ 218,615 $ 198,917
Work in process 2,458 2,974
Finished goods 259,685 60,637
------- ------
Total $ 480,758 $ 262,528
========== ==========
4. ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
1996 1995
---- ----
Accrued salaries and benefits $ 222,921 $ 600,707
Accrued royalties and commissions 491,960 489,778
Accrued legal and accounting 142,758 200,145
Accrued rent and property taxes 80,487 124,373
Other 125,003 400,416
------- -------
Total $ 1,063,129 $ 1,815,419
============= =============
5. COMMITMENTS AND OBLIGATIONS
Leases - The Company leases various facilities under noncancelable
operating leases which expire through 2000. The lease agreements provide
for the payment of minimum annual rentals and a pro-rata share of real
estate taxes and maintenance expenses. The Company has an option to renew
the lease for certain facilities for an additional five years commencing
in 2000. Rental expense for all operating leases was approximately
$851,000, $714,000 and $650,000 for the years ended September 30, 1996,
1995 and 1994, respectively.
-10-
5. COMMITMENTS AND OBLIGATIONS (CONTINUED)
As of September 30, 1996, minimum rental commitments under capital and
noncancelable operating leases are as follows:
YEAR ENDING CAPITAL OPERATING
SEPTEMBER 30 LEASES LEASES
1997 $ 263,950 $ 913,379
1998 174,496 812,949
1999 69,692 609,443
2000 449,155
---------- ------------
Total minimum lease payments 508,138 $ 2,784,926
============
Less amount representing interest 67,813
----------
Present value of minimum lease payments 440,325
Less current portion 230,501
----------
Long-term obligations $ 209,824
==========
The cost and the related accumulated amortization of equipment leased
under capital lease agreements was approximately $958,000 and $448,000 at
September 30, 1996, respectively, and $640,000 and $225,000 at September
30, 1995, respectively. Amortization expense was $224,000, $142,000 and
$104,000 for the years ended September 30, 1996, 1995 and 1994,
respectively.
ROYALTIES - The Company is also committed to pay royalties relating to the
sales of software products. Royalty expense was approximately $1,900,000,
$1,630,000 and $1,300,000 for the years ended September 30, 1996, 1995 and
1994, respectively.
6. LINE OF CREDIT
The Company's line of credit with a bank expired on October 31, 1996 and
was extended to October 30, 1997. The extended line of credit was modified
to provide for maximum borrowings up to the lesser of $1,500,000 or
50%-75% of defined eligible accounts receivable. Borrowings under the line
are collateralized by substantially all assets of the Company. Outstanding
borrowings will bear interest at the bank's prime rate plus 1.0%. The
agreement requires compliance with certain financial and other covenants
which specify, among other things, dividend restrictions, certain
quarterly profitability levels, a minimum tangible capital base (as
defined), and minimum leverage and liquidity levels. As of September 30,
1996, there were no outstanding borrowings under the line of credit.
The Company has an additional line of credit facility with a U.K. bank
which provides for borrowings up to approximately $640,000. Outstanding
borrowings are payable on demand and bear interest at the prime rate plus
3.0% on borrowings up to $160,000 and at prime plus 6% on any excess
borrowings. The agreement requires compliance with certain financial and
other covenants. Amounts due to the bank under this facility are
approximately $637,000 and $82,000 at September 30, 1996 and 1995,
respectively.
-11-
7. INCOME TAXES
INCOME TAXES - At September 30, 1996, the Company had available
approximately $6,000,000 of regular tax loss carryforwards for federal and
state purposes (approximately $2,000,000 of which may be subject to
limitations under certain federal and state income tax regulations) which
commence expiring in 2007. An alternative minimum tax credit of $119,000
at September 30, 1996 is available for offset against future regular
federal taxes. Research and development credits of $196,000 at September
30, 1996 expire in 2005.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and
operating loss carryforwards and credits. The tax effects of significant
items comprising the Company's net deferred tax liability as of September
30 were as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $ 28,174 $ 112,946
Other 20,041 7,987
---------- ----------
48,215 120,933
Deferred tax assets:
Inventory reserves 69,947 71,856
Accounts and notes receivable reserves 184,063 112,421
Net operating loss carryforwards 2,430,356 3,364,401
Research and development credits 195,817 195,817
Alternative minimum tax credits 119,000 89,000
---------- ----------
2,950,968 3,712,562
Valuation allowance (2,950,968) (3,712,562)
---------- ----------
Deferred taxes, net $ 0 $ 0
=============== ==============
</TABLE>
The Company has experienced significant losses prior to fiscal year 1996.
Accordingly, management believes the tax benefits do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a
valuation allowance for the entire net tax asset. The valuation allowance
decreased by approximately $762,000 and $185,000 in 1996 and 1995,
respectively.
The following reconciles the Company's effective tax rate to the federal
statutory rate of 34% for the years ended September 30, 1996, 1995 and
1994:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Taxes (benefit) at federal statutory rate $ 372,000 $ (103,000) $ (1,024,000)
Utilization of net operating loss carryforwards (507,000) (287,000) (105,000)
Net operating loss carryforwards not recognized 133,000 365,000 1,117,000
Other (61,000) 28,000 43,000
Alternative minimum tax 30,000 25,000
------ ------ ---------
Provision (benefit) for income taxes $ (33,000) $ 28,000 $ 31,000
========== ========== ============
</TABLE>
-12-
8. SHAREHOLDERS' EQUITY
STOCK OPTIONS - Under the Company's 1987 Stock Plan (the "Plan"),
nonqualified and incentive stock options to purchase up to a maximum of
790,791 shares of common stock may be granted to certain employees,
officers, consultants and directors, at exercise prices not less than fair
market value at the date of the grant. Options become exercisable as
specified at the date of grant and generally expire ten years from the
date of grant.
The Company has also adopted the 1996 Non-Employee Director Stock Option
Plan that provides for the award of up to 72,000 shares.
The following table summarizes option activity:
Exercise
Price
Shares Per Share
Outstanding, October 1, 1993 467,826 $0.44 - 4.00
Granted 300,250 1.00 - 1.50
Canceled (296,500) 0.73 - 4.00
Exercised (22,086) 0.44 - 0.73
----------
Outstanding, September 30, 1994 449,490 0.73 - 2.75
Granted 9,000 2.47 - 3.44
Canceled (41,832) 1.00 - 2.75
Exercised (97,039) 0.73 - 1.00
----------
Outstanding, September 30, 1995 319,619 0.73 - 3.44
Granted 181,000 4.63 - 10.13
Canceled (7,667) 3.44 - 5.00
Exercised (217,411) 0.73 - 3.44
----------
Outstanding, September 30, 1996 275,541 1.00 - 10.13
==========
Exercisable, September 30, 1996 13,626
==========
The Company has reserved 292,201 shares of common stock for issuance upon
exercise of stock options and stock purchase warrants (see Note 9).
PREFERRED STOCK - The Company is authorized to issue 1,000,000 shares of
preferred stock with a par value of $.01 per share. No shares of preferred
stock were outstanding at September 30, 1996 and 1995.
-13-
9. STOCK PURCHASE WARRANTS
In connection with its initial public offering in 1992, the Company issued
warrants to purchase shares of common stock (the "Warrants"), expiring May
28, 1996, subject to earlier redemption by the Company, at an exercise
price of $7.50 per share.
In June 1994, the Company's Board of Directors (the "Board") approved a
proposal to reduce the exercise price of each Warrant exercised during the
period from October 3, 1994 to December 12, 1994. On December 12, 1994,
the Board extended the period to February 10, 1995. Pursuant to this
offer, 1,066,540 Warrants had been exercised as of September 30, 1995,
providing a net aggregate of $1,076,360 cash consideration. During 1996,
119,442 Warrants were exercised, providing a net aggregate of $848,972
cash consideration, and 64,019 Warrants expired. As of September 30, 1996,
all Warrants have either been exercised or have expired.
10. RETIREMENT SAVINGS PLAN
The Company has a 401(k) retirement savings plan covering substantially
all of the Company's full-time domestic employees. Under the provisions of
the plan, employees may contribute a portion of their compensation within
certain limitations. The Company, at the discretion of the Board of
Directors, may make contributions on behalf of its employees under this
plan. Such contributions, if any, become fully vested after five years of
continuous service. The Company has not made any contributions during
1996, 1995 or 1994.
11. SEGMENT INFORMATION
Summarized information about the Company's operations by geographic area
is as follows:
<TABLE>
<CAPTION>
United
Domestic Kingdom Eliminations Total
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1996
Net sales $ 19,980,505 $ 10,418,080 $ (376,463) $ 30,022,122
Income (loss) from operations 1,802,456 (666,201) (8,733) 1,127,522
Identifiable assets 12,329,945 4,658,682 (1,748,056) 15,240,571
YEAR ENDED SEPTEMBER 30, 1995
Net sales 16,425,189 7,242,738 (307,946) 23,359,981
Income (loss) from operations 945,860 (1,190,528) (74,286) (318,954)
Identifiable assets 9,918,844 2,551,838 (112,550) 12,358,132
YEAR ENDED SEPTEMBER 30, 1994
Net sales 11,124,226 5,809,276 (51,360) 16,882,142
Income (loss) from operations (3,292,851) 253,589 (35,172) (3,074,434)
Identifiable assets 7,354,952 2,317,965 (26,593) 9,646,324
</TABLE>
WorkGroup's revenue and loss from operations for the three months ended
December 31, 1994 of $1,471,000 and ($159,000), respectively, have been
included in the United Kingdom amounts above for both years ended
September 30, 1995 and 1994 (see Note 1).
Export sales aggregated approximately $4,105,000, $3,496,000 and
$2,433,000 in 1996, 1995 and 1994, respectively.
-14-
12. SUBSEQUENT EVENT
On November 7, 1996, the Company acquired all of the outstanding capital
stock of Guildsoft Holdings Limited ("Guildsoft"), a U.K.-based software
distributor, in exchange for an aggregate of 125,000 shares of the
Company's common stock, with 12,500 of such issued shares held in escrow
for contingent liabilities. The acquisition will be accounted for as an
asset purchase. On an unaudited pro forma basis, if the acquisition had
taken place on October 1, 1995, net sales for fiscal 1996 would have been
approximately $31,900,000 and net income for fiscal 1996 would not have
been materially different from the amount previously reported.
* * * * * *
-15-
<TABLE>
<CAPTION>
Schedule VIII
DATAWATCH CORPORATION & SUBSIDIARIES
VALUATION AND QUALIFIED ACCOUNTS
- -----------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------------------------
Description Balance at Additions Deductions Balance at
Beginning Charged To from End of Period
Period Costs & Reserves
Expenses(a) Other
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended September 30, 1996
- -----------------------------
Allowance-doubtful accounts
and sales returns $83,064 $42,349 ($52,268)(b)(c) $73,145
------------------------------------------------------------------------------
TOTAL $83,064 $42,349 $0 ($52,268) $73,145
==============================================================================
Year Ended September 30, 1995
- -----------------------------
Allowance-doubtful accounts
and sales returns $68,590 $74,550 ($60,076)(b)(c) $83,064
------------------------------------------------------------------------------
TOTAL $68,590 $74,550 $0 ($60,076) $83,064
==============================================================================
Year ended September 30, 1994
- -----------------------------
Allowance-doubtful accounts
and sales return $198,649 $92,562 ($222,621)(b)(c) $68,590
Allowance-assets held
under contractual
obligation 1,401,840 1,208,395 (2,610,235)(b)
---------------------------------------------------------------------------------
TOTAL $1,600,489 $1,300,957 $0 ($2,832,856) $68,590
=================================================================================
(a) Current year provision
(b) Doubtful accounts written off
(c) Product returns
</TABLE>
EXHIBIT 10.29
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of October 31, 1996,
by and between DATAWATCH Corporation and Personics Corporation (jointly and
severally, the "Borrower" and sometimes referred to as "Company") whose address
is 234 Ballardvale Street, Wilmington, MA 01887 and Silicon Valley Bank, a
California-chartered bank ("Lender"), with its principal place of business at
3003 Tasman Drive, Santa Clara, CA 95054 and with a loan production office
located at Wellesley Office Park, 40 William Street, Suite 350, Wellesley, MA
02181, doing business under the name "Silicon Valley East".
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Lender, Borrower is indebted to Lender pursuant to, among
other documents, a Promissory Note, dated November 1, 1994 in the original
principal amount of One Million Five Hundred Thousand and 00/100 Dollars
($1,500,000.00), as may have been modified from time to time (the "Note"). The
Note, together with the promissory notes from Borrower to Lender, is governed by
the terms of a Letter Agreement, dated November 1, 1994, between Borrower and
Lender, as such agreement may be amended from time to time (the "Loan
Agreement"). Defined terms used but not otherwise defined herein shall have the
same meaning as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness".
2. DESCRIPTION OF COLLATERAL: Repayments of the Indebtedness is secured by two
(2) Commercial Security Agreements, each dated November 1, 1994 (each, the
"Security Agreement"), and two (2) Collateral Assignment, Patent Mortgage and
Security Agreements, each dated November 1, 1994 (each, the "Patent
Agreements").
Hereinafter, the above-described security documents, together with all other
documents securing payments of the Indebtedness shall be referred to as the
"Security Documents". Hereinafter, the Security Documents, together with all
other documents evidencing or securing the Indebtedness shall be referred to as
the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS:
A. Modification(s) to Note:
1. Payable in one payment of all outstanding principal plus all
accrued unpaid interest on October 30, 1997. In addition, Borrower
will pay regular monthly payments of all accrued unpaid interest
due as of each payment date beginning November 30,
1
1996, and all subsequent interest payments are due on the same day
of each month thereafter.
2. The interest rate to be applied to the unpaid principal balance
of the Note, effective as of this date, is hereby decreased to one
(1.00) percentage point over Lender's current Index (as defined
therein).
B. Modification(s) to Loan Agreement:
1. The paragraph describing the maximum available borrowings is
hereby modified to increase the percentage of all the Company's
eligible non-distributor domestic trade accounts within 90 days
from invoice, from 70% to 75%.
2. The paragraph entitled "Minimum Equity" is hereby amended in
its entirety, to read as follows:
(Tested Monthly) Have a minimum Tangible Capital Base (TCB) of
$4,500,000.00 through quarter ending December 31, 1996, increasing
to $5,500,000.00 through quarter ending March 31, 1997, increasing
to $6,500,000.00 through quarter ending June 30, 1997 and
increasing to $7,500,000.00 through quarter ending September 30,
1997 and thereafter. TCB is defined as Stockholder's Equity plus
Subordinated Debt (debt which is formally subordinated to the
Bank) less intangibles (including but not limited to Goodwill,
Capitalized Software and Excess Purchase Costs).
3. The paragraph entitled "Leverage" is amended to include the
months ending January and February under the covenant ratio
requirement of 1.50 to 1.00.
4. The following paragraphs are hereby incorporated into the Loan
Agreement:
SUBROGATION AND SIMILAR RIGHTS: Notwithstanding any other
provisions of this Agreement or any other Existing Loan Document,
each Borrower irrevocably waives all rights that it may have at
law or in equity (including, without limitation, any law
subrogating the Borrower to the rights of Borrower under the
Existing Loan Documents) to seek contribution, indemnification, or
any other form of reimbursement from any other Borrower, or any
other person now or hereafter primarily or secondarily liable for
any Indebtedness of Borrower, for any payment made by the Borrower
with respect to the Indebtedness in connection with this Agreement
or the Existing Loan Documents or otherwise and
2
all rights that it might have to benefit from, or to participate
in, any security for the Indebtedness as a result of any payment
made by the Borrower with respect to the Indebtedness in
connection with the Existing Loan Documents or otherwise. Any
agreement providing for indemnification, reimbursement or any
other arrangement prohibited under this Agreement shall be null
and void. If any payment is made to a Borrower in contravention of
this Section, such Borrower shall hold such payment in trust for
Lender and such payment shall be promptly delivered to Lender for
application to the Indebtedness, whether matured or unmatured.
SUBROGATION DEFENSES: Each Borrower hereby waives any defense
based on impairment or destruction of its subrogation or other
rights against any other Borrower and waives all benefits which
might otherwise be available to it under Commonwealth of
Massachusetts law now in effect and hereafter amended, and under
any other similar laws now and hereafter in effect.
4. PAYMENT OF LOAN FEE: Borrower shall pay Lender a fee in the amount of Three
Thousand and 00/100 Dollars ($3,000.00) plus all out-of-pocket expenses (the
"Loan Fee").
5. CONSISTENT CHANGES: The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
6. NO DEFENSES OF BORROWER: Borrower agrees that, as of this date, it has no
defenses against the obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY: Borrower understands and agrees that in modifying the
existing Indebtedness, Lender is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents. Except
as expressly modified pursuant to this Loan Modification Agreement, the terms of
the Existing Loan Documents remain unchanged and in full force and effect.
Lender's agreement to modifications to the existing Indebtedness pursuant to
this Loan Modification Agreement in no way shall obligate Lender to make any
future modifications to the Indebtedness. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of the Indebtedness. It is the
intention of Lender and Borrower to retain as liable parties all makers and
endorsers of Existing Loan Documents, unless the party is expressly released by
Lender in writing. No maker, endorser, or guarantor will be released by virtue
of this Loan Modification Agreement. The terms of this Paragraph apply not only
to this Loan Modification Agreement, but also to all subsequent loan
modification agreements.
3
8. JURISDICTION/VENUE: Borrower accepts for itself and in connection with its
properties, unconditionally, the non-exclusive jurisdiction of any state or
federal court of competent jurisdiction in the Commonwealth of Massachusetts in
any action, suit, or proceeding of any kind against it which arises out of or by
reason of this Loan Modification Agreement; provided, however, that if for any
reason Lender cannot avail itself of the courts of the Commonwealth of
Massachusetts, then venue shall lie in Santa Clara County, California.
9. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective
only when it shall have been executed by Borrower and Lender (provided, however,
in no event shall this Loan Modification Agreement become effective until signed
by an officer of Lender in California).
10. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first written above.
BORROWER:
DATAWATCH CORPORATION and
PERSONICS CORPORATION
By: /s/Bruce R. Gardner
------------------------------------
Name: Bruce R. Gardner
----------------------------------
Title: Executive Vice President
---------------------------------
LENDER: SILICON VALLEY BANK
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: /s/James C. Maynard By: /s/ Christine Ware
------------------------------------ ---------------------------------
Name: James C. Maynard Name: Christine Ware
---------------------------------- -------------------------------
Title: Vice President Title: Vice President
---------------------------------- ------------------------------
(Signed at Santa Clara County, CA)
4
EXHIBIT 10.30
-------------
(As Amended on December 10, 1996)
DATAWATCH CORPORATION
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose. This Non-Qualified Stock Option Plan, to be known as the 1996
Non-Employee Director Stock Option Plan (hereinafter, this "Plan"), is intended
to promote the interests of DATAWATCH Corporation (hereinafter, the "Company")
by providing an inducement to obtain and retain the services of qualified
persons who are not employees or officers of the Company to serve as members of
its Board of Directors (the "Board").
2. Available Shares. The total number of shares of Common Stock, par value
$.01 per share, of the Company (the "Common Stock") for which options may be
granted under this Plan shall not exceed 72,000 shares, subject to adjustment in
accordance with paragraph 11 of this Plan; provided, however, that
notwithstanding anything to the contrary set forth herein, options to purchase
more than an aggregate of 24,000 shares of Common Stock shall not be granted
under this Plan unless and until this Plan has been approved by a majority of
the stockholders of the Company no later than June 1, 1997. Shares subject to
this Plan are authorized but unissued shares or shares that were once issued and
subsequently reacquired by the Company. If any options granted under this Plan
are surrendered before exercise or lapse without exercise, in whole or in part,
the shares reserved therefor shall continue to be available under this Plan.
3. Administration. This Plan shall be administered by the Board or by a
committee appointed by the Board (the "Committee"). In the event the Board fails
to appoint or refrains from appointing a Committee, the Board shall have all
power and authority to administer this Plan. In such event, the word "Committee"
wherever used herein shall be deemed to mean the Board. The Committee shall,
subject to the provisions of the Plan, have the power to construe this Plan, to
determine all questions hereunder, and to adopt and amend such rules and
regulations for the administration of this Plan as it may deem desirable. No
member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to this Plan or any option granted
under it.
4. Eligibility and Limitations. Options to purchase shares of Common Stock
may be granted under this Plan only to members of the Board who are not
employees or officers of the Company and who may hold
1
and beneficially own such options, and the shares of Common Stock issuable upon
exercise thereof, individually, in their own names.
5. Automatic Grant of Options. Subject to the availability of shares under
this Plan, (a) each person who is or becomes a member of the Board and who
satisfies the requirements of paragraph 4 of this Plan (a "Non-Employee
Director") shall be automatically granted on the later of (i) June 1, 1996, (ii)
the date such person is first elected to the Board or (iii) the date such person
first meets the requirements of paragraph 4 of this Plan (such later date being
referred to herein as the "Initial Grant Date"), without further action by the
Board, an option to purchase 12,000 shares of the Common Stock, and (b) each
person receiving or eligible to receive an option pursuant to clause (a) hereof
who is a Non-Employee Director on the date of the Company's Annual Meeting of
Stockholders (the "Annual Grant Date") in each successive year after such
person's Initial Grant Date during the term of this Plan shall be automatically
granted on each such Annual Grant Date an option to purchase 4,000 shares of the
Common Stock. The number of shares covered by options granted under this
paragraph 5 shall be subject to adjustment in accordance with the provisions of
paragraph 11 of this Plan.
6. Option Price. The purchase price of the stock covered by an option
granted pursuant to this Plan shall be 100% of the fair market value of such
shares on the day the option is granted. The option price will be subject to
adjustment in accordance with the provisions of paragraph 11 of this Plan. For
purposes of this Plan, if, at the time an option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes discussed
in this sentence are available prior to the date such option is granted and
shall mean (i) the average (on that date) of the high and low prices of the
Common Stock on the principal national securities exchange on which the Common
Stock is traded, if the Common Stock is then traded on a national securities
exchange; or (ii) the last reported sale price (on that date) of the Common
Stock on the Nasdaq National Market, if the Common Stock is not then traded on a
national securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the Nasdaq
National Market. However, if the Common Stock is not publicly traded at the time
an option is granted under the Plan, "fair market value" shall be deemed to be
the fair value of the Common Stock as determined by the Committee after taking
into consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.
2
7. Period of Option. Unless sooner terminated in accordance with the
provisions of paragraph 9 of this Plan, an option granted hereunder shall expire
on the date which is ten (10) years after the date of grant of the option.
8. (a) Vesting of Shares and Non-Transferability of Options. Options
granted under this Plan shall not be exercisable until they become vested.
Options granted under this Plan shall vest in the optionee and thus become
exercisable, in accordance with the following schedule, provided that the
optionee has continuously served as a member of the Board through such vesting
date:
Percentage of Option
Shares for which
Option will be Exercisable Date of Vesting
- -------------------------- ---------------
0% Less than three months from
the date of grant
an additional 8.33% Three months from the date of
grant and at the end of each
three month period thereafter
until three years from the
date of grant
100% Three years from the date of
grant
The number of shares as to which options may be exercised shall be
cumulative, so that once the option shall become exercisable as to any shares it
shall continue to be exercisable as to said shares, until expiration or
termination of the option as provided in this Plan. Notwithstanding the
foregoing, each option granted under this Plan that is outstanding but unvested
shall become exercisable in full 10 days prior to the date of any Change in
Control of the Company, as set forth below. For purposes of this Plan, a "Change
in Control" means the occurrence of any of the following events:
(A) The Company is merged or consolidated or reorganized into or
with another corporation or other legal person, and as a result of such
merger, consolidation or reorganization less than a majority of the
combined voting power of the then-outstanding securities of such
surviving, resulting or reorganized corporation or person immediately
after such transaction is held in the aggregate by the holders of the
then-outstanding securities
3
entitled to vote generally in the election of directors of the Company
("Voting Stock") immediately prior to such transaction;
(B) The Company sells or otherwise transfers all or substantially
all of its assets to any other corporation or other legal person, and as a
result of such sale or transfer less than a majority of the combined
voting power of the then-outstanding securities of such corporation or
person immediately after such sale or transfer is held in the aggregate by
the holders of Voting Stock of the Company immediately prior to such sale
or transfer;
(C) There is a report filed on Schedule 13D or Schedule 14D-1 (or
any successor schedule, form or report), each as promulgated pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
disclosing that any "person" (as such term is used in Section 13(d)(3) or
Section 14(d)(2) of the Exchange Act) has become the "beneficial owner"
(as such term is used in Rule 13d-3 under the Exchange Act) of securities
representing 35% or more of the Voting Stock of the Company;
(D) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act disclosing
in response to Form 8-K or Schedule 14A (or any successor schedule, form
or report or item therein) that a change in control of the Company has
occurred; or
(E) If during any period of two consecutive years, individuals who
at the beginning of any such period constitute the Board cease for any
reason to constitute at least a majority thereof, unless the election, or
the nomination for election by the Company's stockholders, of each
director of the Company first elected during such period was approved by a
vote of at least a majority of the directors then still in office who were
directors of the Company at the beginning of any such period;
provided, however, that a "Change in Control" shall not be deemed to have
occurred for purposes of this Plan solely because (x) the Company, (y) an entity
in which the Company directly or indirectly beneficially owns 50% or more of the
voting securities, or (z) any Company-sponsored employee stock ownership plan or
any other employee benefit plan of the Company, either files or becomes
obligated to file a report or a proxy statement under or in response to Schedule
13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form
or report) under the Exchange Act, disclosing beneficial ownership by it of
shares of Voting Stock or because the Company reports that a change in control
of the Company has occurred by reason of such beneficial ownership.
(b) Non-transferability. Any option granted pursuant to this Plan
shall not be assignable or transferable other than by will or the
4
laws of descent and distribution or pursuant to a domestic relations order and
shall be exercisable during the optionee's lifetime only by him or her.
9. Termination of Option Rights.
(a) In the event an optionee ceases to be a member of the Board
for any reason other than death or permanent disability, any then unexercised
portion of options granted to such optionee shall, to the extent not then
vested, immediately terminate and become void; any portion of an option which is
then vested but has not been exercised at the time the optionee so ceases to be
a member of the Board may be exercised, to the extent it is then vested, by the
optionee within 90 days of the date the optionee ceased to be a member of the
Board; and all options shall terminate after such 90 days have expired.
(b) In the event that an optionee ceases to be a member of the
Board by reason of his or her death or permanent disability, any option granted
to such optionee shall be immediately and automatically accelerated and become
fully vested and all unexercised options shall be exercisable by the optionee
(or by the optionee's personal representative, heir or legatee, in the event of
death) until the scheduled expiration date of the option.
10. Exercise of Option. Subject to the terms and conditions of this Plan
and the option agreements, an option granted hereunder shall, to the extent then
exercisable, be exercisable in whole or in part by giving written notice to the
Company by mail or in person addressed to DATAWATCH Corporation, 234 Ballardvale
Street, Wilmington, Massachusetts 01887, at its principal executive offices,
stating the number of shares with respect to which the option is being
exercised, accompanied by payment in full for such shares. Payment may be (a) in
United States dollars in cash or by check, (b) in whole or in part in shares of
the Common Stock of the Company already owned by the person or persons
exercising the option or shares subject to the option being exercised (subject
to such restrictions and guidelines as the Board may adopt from time to time),
valued at fair market value determined in accordance with the provisions of
paragraph 6 or (c) consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise. There shall be no
such exercise at any one time as to fewer than one hundred (100) shares or all
of the remaining shares then purchasable by the person or persons exercising the
option, if fewer than one hundred (100) shares. The Company's transfer agent
shall, on behalf of the Company, prepare a certificate or certificates
representing such shares acquired pursuant to exercise of the option, shall
register the optionee as the
5
owner of such shares on the books of the Company and shall cause the fully
executed certificate(s) representing such shares to be delivered to the optionee
as soon as practicable after payment of the option price in full. The holder of
an option shall not have any rights of a stockholder with respect to the shares
covered by the option, except to the extent that one or more certificates for
such shares shall be delivered to him or her upon the due exercise of the
option.
11. Adjustments Upon Changes in Capitalization and Other Events. Upon the
occurrence of any of the following events, an optionee's rights with respect to
options granted to him or her hereunder shall be adjusted as hereinafter
provided:
(a) Stock Dividends and Stock Splits. If the shares of Common
Stock shall be subdivided or combined into a greater or smaller number of
shares or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.
(b) Issuances of Securities. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the
Company.
(c) Adjustments. Upon the happening of any of the foregoing
events, the class and aggregate number of shares set forth in paragraphs 2
and 5 of this Plan that are subject to options which previously have been
or subsequently may be granted under this Plan shall also be appropriately
adjusted to reflect such events. The Board shall determine the specific
adjustments to be made under this paragraph 11 and its determination shall
be conclusive.
12. Restrictions on Issuance of Shares. Notwithstanding the provisions of
paragraphs 5 and 10 of this Plan, the Company shall have no obligation to
deliver any certificate or certificates upon exercise of an option until one of
the following conditions shall be satisfied:
(i) The issuance of shares with respect to which the option has been
exercised is at the time of the issue of such shares effectively
registered under applicable Federal and state securities laws as now in
force or hereafter amended; or
6
(ii) Counsel for the Company shall have given an opinion that the
issuance of such shares is exempt from registration under Federal and
state securities laws as now in force or hereafter amended; and the
Company has complied with all applicable laws and regulations with respect
thereto, including without limitation all regulations required by any
stock exchange upon which the Company's outstanding Common Stock is then
listed.
13. Legend on Certificates. The certificates representing shares issued
pursuant to the exercise of an option granted hereunder shall carry such
appropriate legend, and such written instructions shall be given to the
Company's transfer agent, as may be deemed necessary or advisable by counsel to
the Company in order to comply with the requirements of the Securities Act of
1933 or any state securities laws.
14. Representation of Optionee. If requested by the Company, the optionee
shall deliver to the Company written representations and warranties upon
exercise of the option that are necessary to show compliance with Federal and
state securities laws, including representations and warranties to the effect
that a purchase of shares under the option is made for investment and not with a
view to their distribution (as that term is used in the Securities Act of 1933).
15. Option Agreement. Each option granted under the provisions of this
Plan shall be evidenced by an option agreement, which agreement shall be duly
executed and delivered on behalf of the Company and by the optionee to whom such
option is granted. The option agreement shall contain such terms, provisions and
conditions not inconsistent with this Plan as may be determined by the officer
executing it.
16. Termination and Amendment of Plan. Options may no longer be granted
under this Plan after June 1, 2006, and this Plan shall terminate when all
options granted or to be granted hereunder are no longer outstanding. The Board
may at any time terminate this Plan or make such modification or amendment
thereof as it deems advisable; provided, however, that the Board may not,
without approval of the stockholders, (a) increase the maximum number of shares
for which options may be granted under this Plan (except by adjustment pursuant
to Section 11), (b) materially modify the requirements as to eligibility to
participate in this Plan, (c) materially increase benefits accruing to option
holders under this Plan or (d) amend this Plan in any manner which would cause
Rule 16b-3 under the Exchange Act (or any successor or amended provision
thereof) to become inapplicable to this Plan; and provided further that the
provisions of this Plan specified in Rule 16b-3(c)(2)(ii)(A) (or any successor
or amended provision thereof) under the Exchange Act (including without
limitation, provisions as to eligibility, amount, price and timing of awards)
may not be amended more than once every six months, other than
7
to comport with changes in the Internal Revenue Code, the Employee Retirement
Income Security Act, or the rules thereunder. Termination or any modification or
amendment of this Plan shall not, without consent of a participant, affect his
or her rights under an option previously granted to him or her.
17. Withholding of Income Taxes. Upon the exercise of an option, the
Company, in accordance with Section 3402(a) of the Internal Revenue Code, may
require the optionee to pay withholding taxes in respect of amounts considered
to be compensation includible in the optionee's gross income.
18. Governing Law. The validity and construction of this Plan and the
instruments evidencing options shall be governed by the laws of the State of
Delaware, without giving effect to the principles of conflicts of law thereof.
8
EXHIBIT 10.31
DATAWATCH CORPORATION
1996 INTERNATIONAL EMPLOYEE NON-QUALIFIED STOCK OPTION PLAN
-----------------------------------------------------------
1. PURPOSE. This 1996 International Employee Non-Qualified Stock Option
Plan (the "Plan") is intended to provide incentives to employees and consultants
of Participating Subsidiaries (as defined in paragraph 3) of DATAWATCH
Corporation (the "Company") by providing them with opportunities to purchase
stock in the Company pursuant to options ("Non-Qualified Options" or "Options")
granted hereunder which do not qualify as "incentive stock options" ("ISOs")
under Section 422(b) of the United States Internal Revenue Code (the "Code").
2. ADMINISTRATION OF THE PLAN.
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be
administered by the Board of Directors of the Company (the "Board") or by
a committee appointed by the Board (the "Committee"). Hereinafter, all
references in this Plan to the "Committee" shall mean the Board if no
Committee has been appointed. Subject to ratification of the grant or
authorization of each Option by the Board (if so required by applicable
law), and subject to the terms of the Plan, the Committee shall have the
authority to (i) determine to whom, from among the class of individuals
and entities eligible under paragraph 3 to receive Options, Options may be
granted; (ii) determine the time or times at which Options shall be
granted; (iii) determine the option price of shares subject to each
Option, which price shall not be less than the minimum price specified in
paragraph 6; (iv) determine (subject to paragraph 7) the time or times
when each Option shall become exercisable and the duration of the exercise
period; (v) determine whether restrictions such as repurchase options are
to be imposed on shares subject to Options and the nature of such
restrictions, if any; and (vi) interpret the Plan and prescribe and
rescind rules and regulations relating to it. The Committee shall take
whatever actions it deems necessary, under Section 422 of the Code and the
regulations promulgated thereunder, to ensure that no Option issued
hereunder is treated as an ISO. The interpretation and construction by the
Committee of any provisions of the Plan or of any Option granted under it
shall be final unless otherwise determined by the Board. The Committee may
from time to time adopt such rules and regulations for carrying out the
Plan as it may deem advisable. No member of the Board or the Committee
shall be liable for any action or determination made in good faith with
respect to the Plan or any Option granted under it.
1
B. COMMITTEE ACTIONS. The Committee may select one of its members
as its chairman, and shall hold meetings at such time and places as it may
determine. A majority of the Committee shall constitute a quorum and acts
by a majority of the members of the Committee, or acts reduced to or
approved in writing by a majority of the members of the Committee (if
consistent with applicable law), shall constitute the valid acts of the
Committee. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill
vacancies however caused, or remove all members of the Committee and
thereafter directly administer the Plan.
3. ELIGIBLE EMPLOYEES AND OTHERS. Non-Qualified Options may be granted
under the Plan to any employee or consultant of any Participating Subsidiary of
the Company. The Committee may take into consideration a recipient's individual
circumstances in determining whether to grant an Option. The granting of any
Option to any individual or entity shall neither entitle such grantee to, nor
disqualify such grantee from, participation in any other grant of Options. For
purposes of the Plan, the term "Participating Subsidiary" shall mean any present
or future subsidiary of the Company, as that term is defined in Section 424(f)
of the Code, incorporated outside of the United States.
4. STOCK. The stock subject to Options shall be authorized but unissued
shares of Common Stock of the Company, par value $.01 per share (the "Common
Stock"), or shares of Common Stock reacquired by the Company in any manner. The
aggregate number of shares which may be issued pursuant to the Plan is 200,000,
subject to adjustment as provided in paragraph 13. If any Option granted under
the Plan shall expire or terminate for any reason without having been exercised
in full or shall cease for any reason to be exercisable in whole or in part or
shall be repurchased by the Company, the shares of Common Stock subject to such
Option shall again be available for grants of Options under the Plan.
5. GRANTING OF OPTIONS. Options may be granted under the Plan at any time
on or after October 4, 1996 and prior to October 4, 2006. The date of grant of
an Option under the Plan will be the date specified by the Committee at the time
it grants the Option; provided, however, that such date shall not be prior to
the date on which the Committee acts to approve the grant.
6. MINIMUM OPTION PRICE.
The exercise price per share specified in the agreement relating to each
Non-Qualified Option granted under the Plan (the "Agreement"), may be less than
the fair market value of the Common Stock of the Company
2
on the date of grant, but shall in no event be less than the minimum legal
consideration required therefor under the laws of the State of Delaware or the
laws of any jurisdiction in which the Company or its successors in interest may
be organized.
7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10 or as specified in the Agreement relating to such Option,
each Option shall expire on the date specified by the Committee, but not more
than ten years from the date of grant.
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through
12, each Option granted under the Plan shall be exercisable as follows:
A. VESTING. The Option shall either be fully exercisable on the
date of grant or shall become exercisable thereafter in such installments
as the Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable it shall remain exercisable until expiration or termination of
the Option, unless otherwise specified by the Committee.
C. PARTIAL EXERCISE. Each Option or installment may be exercised
at any time or from time to time, in whole or in part, for up to the total
number of shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. The Committee shall have the right to
accelerate the date that any installment of any Option becomes
exercisable.
9. TERMINATION OF BUSINESS RELATIONSHIP. Each Option may provide that it
shall terminate before its stated expiration date, upon terms specified by the
Committee, if the optionee ceases to be an employee or consultant of all
Participating Subsidiaries of the Company or of the Company (such relationship
hereinafter referred to as a "Business Relationship with the Company"). Nothing
in the Plan or any Option granted hereunder shall be deemed to give any optionee
the right to continue his or her Business Relationship with the Company for any
period of time.
10. DEATH; DISABILITY.
A. DEATH. Unless otherwise specified by the Committee, if an
optionee's Business Relationship with the Company terminates by reason of
death, his or her Option may be exercised, to the extent of the number of
shares with respect to which such optionee could
3
have exercised it on the date of such optionee's death, by such optionee's
estate, personal representative or beneficiary who has acquired the Option
by will or by the laws of descent and distribution, at any time prior to
the earlier of the specified expiration date of the Option or 180 days
from the date of death.
B. DISABILITY. Unless otherwise specified by the Committee, if an
optionee's Business Relationship with the Company terminates by reason of
such optionee's disability, such optionee shall have the right to exercise
his or her Option, to the extent of the number of shares with respect to
which such optionee could otherwise have exercised it on the date his or
her Business Relationship with the Company terminated, at any time prior
to the earlier of the specified expiration date of the Option or 180 days
from the date of the termination of the optionee's Business Relationship
with the Company. For the purposes of the Plan, the term "disability"
shall mean "permanent and total disability" as defined in Section 22(e)(3)
of the Code or any successor statute.
11. ASSIGNABILITY. No Option shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution, and during
the lifetime of the optionee each Option shall be exercisable only by the
optionee.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any Option
shall be subject to the restrictions set forth herein or, consistent with
paragraph 7, to such other or additional termination and cancellation provisions
as the Committee may determine. The Committee may from time to time confer
authority and responsibility on one or more of its own members and/or one or
more officers of the Company to execute and deliver such instruments. The proper
officers of the Company are authorized and directed to take any and all action
necessary or advisable from time to time to carry out the terms of such
instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller
4
number of shares or if the Company shall issue any shares of Common Stock
as a stock dividend on its outstanding Common Stock, the number of shares
of Common Stock deliverable upon the exercise of Options shall be
appropriately increased or decreased proportionately, and appropriate
adjustments shall be made in the purchase price per share to reflect such
subdivision, combination or stock dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
with or acquired by another entity in a merger or other reorganization in
which the holders of the outstanding voting stock of the Company
immediately preceding the consummation of such event, shall, immediately
following such event, hold, as a group, less than a majority of the voting
securities of the surviving or successor entity, or in the event of a sale
of all or substantially all of the Company's assets or otherwise (each, an
"Acquisition"), the Committee or the board of directors of any entity
assuming the obligations of the Company hereunder (the "Successor Board"),
shall, as to outstanding Options, either (i) make appropriate provision
for the continuation of such Options by substituting on an equitable basis
for the shares then subject to such Options either (a) the consideration
payable with respect to the outstanding shares of Common Stock in
connection with the Acquisition, (b) shares of stock of the surviving or
successor corporation or (c) such other securities as the Successor Board
deems appropriate, the fair market value of which shall not materially
exceed the fair market value of the shares of Common Stock subject to such
Options immediately preceding the Acquisition; or (ii) upon written notice
to the optionees, provide that all Options must be exercised, to the
extent then exercisable or to be exercisable as a result of the
Acquisition, within a specified number of days of the date of such notice,
at the end of which period the Options shall terminate; or (iii) terminate
all Options in exchange for a cash payment equal to the excess of the fair
market value of the shares subject to such Options (to the extent then
exercisable or to be exercisable as a result of the Acquisition) over the
exercise price thereof.
C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a
transaction described in subparagraph B above) pursuant to which
securities of the Company or of another corporation are issued with
respect to the outstanding shares of Common Stock, an optionee upon
exercising an Option shall be entitled to receive for the purchase price
paid upon such exercise the securities such optionee would have received
if such optionee had exercised his or her Option prior to such
recapitalization or reorganization.
5
D. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at such
other time and subject to such other conditions as shall be determined by
the Committee.
E. ISSUANCES OF SECURITIES. Except as expressly provided herein,
no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the
Company.
F. FRACTIONAL SHARES. No fractional shares shall be issued under
the Plan and the optionee shall receive from the Company cash in lieu of
such fractional shares.
G. ADJUSTMENTS. Upon the happening of any of the events described
in subparagraphs A, B or C above, the class and aggregate number of shares
set forth in paragraph 4 hereof that are subject to Options which
previously have been or subsequently may be granted under the Plan shall
also be appropriately adjusted to reflect the events described in such
subparagraphs. The Committee or the Successor Board shall determine the
specific adjustments to be made under this paragraph 13 and, subject to
paragraph 2, its determination shall be conclusive.
14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment
thereof) shall be exercised by giving written notice to the Company at its
principal office address, or to such transfer agent as the Company shall
designate. Such notice shall identify the Option being exercised and specify the
number of shares as to which such Option is being exercised, accompanied by full
payment of the purchase price therefor either (a) in United States dollars in
cash or by check, (b) at the discretion of the Committee, through delivery of
shares of Common Stock having a fair market value equal as of the date of the
exercise to the cash exercise price of the Option, (c) at the discretion of the
Committee, by delivery of the optionee's personal recourse note bearing interest
payable not less than annually at no less than 100% of the lowest applicable
Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion
of the Committee and consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the Option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise, or (e) at the
discretion of the Committee, by any combination of (a), (b), (c) and (d) above.
The holder of an Option
6
shall not have the rights of a shareholder with respect to the shares covered by
such Option until the date of issuance of a stock certificate to such holder for
such shares. Except as expressly provided above in paragraph 13 with respect to
changes in capitalization and stock dividends, no adjustment shall be made for
dividends or similar rights for which the record date is before the date such
stock certificate is issued.
15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on
October 4, 1996. The Plan shall expire at the end of the day on October 4, 2006
(except as to Options outstanding on that date). The Board may terminate or
amend the Plan in any respect at any time. In no event may action of the Board
alter or impair the rights of an optionee, without his or her consent, under any
Option previously granted to such optionee.
16. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted under the Plan shall be used for
general corporate purposes.
17. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the grant or exercise of
an Option, the vesting or transfer of an Option pursuant to an arm's-length
transaction, the vesting or transfer of restricted stock or securities acquired
upon the exercise of an Option hereunder, or the making of a distribution or
other payment with respect to such stock or securities, the Company or a
Participating Subsidiary may withhold taxes in respect of amounts that
constitute compensation includible in gross income. The Committee in its
discretion may condition (i) the grant or exercise of an Option, (ii) the
transfer of an Option or (iii) the vesting or transferability of restricted
stock or securities acquired by exercising a Option, on the optionee's making
satisfactory arrangement for such withholding. Such arrangement may include
payment by the optionee in cash or by check of the amount of the withholding
taxes or, at the discretion of the Committee, by the optionee's delivery of
previously held shares of Common Stock or the withholding from the shares of
Common Stock otherwise deliverable upon exercise of a Option shares having an
aggregate fair market value equal to the amount of such withholding taxes.
18. DETERMINATION OF FAIR MARKET VALUE OF COMMON STOCK. Whenever, under
the terms of any option agreement or in administering the Plan, it is necessary
or desirable to determine the fair market value of the Company's Common Stock,
the Committee shall make such determination in accordance with this Section.
"Fair Market Value" shall be determined as of the last business day for which
the prices or quotes discussed in this sentence are available prior to the date
such Option is granted and shall mean (i) the average (on that date) of the high
and low prices of the Common Stock on the principal national securities exchange
on which the Common Stock is traded, if the Common Stock is then traded on a
national securities exchange; or (ii) the last reported sale price (on that
date) of the Common Stock on the Nasdaq National Market, if the Common Stock is
not
7
then traded on a national securities exchange; or (iii) the closing bid price
(or average of bid prices) last quoted (on that date) by an established
quotation service for over-the-counter securities, if the Common Stock is not
reported on the Nasdaq National Market. However, if the Common Stock is not
publicly traded at the time an Option is granted under the Plan, "fair market
value" shall be deemed to be the fair value of the Common Stock as determined by
the Committee after taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale and offer prices of the
Common Stock in private transactions negotiated at arm's length.
19. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.
Government regulations may impose reporting or other obligations on the
Company or a Participating Subsidiary with respect to the Plan. For example, the
Company or a Participating Subsidiary may be required to file tax information
returns with appropriate taxing authorities reporting the income received by
optionees in connection with the Plan.
20. GOVERNING LAW. The validity and construction of the Plan and the
instruments evidencing Options shall be governed by the laws of the Commonwealth
of Massachusetts, or the laws of any jurisdiction in which the Company or its
successors in interest may be organized.
8
EXHIBIT 11.1
DATAWATCH CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
Computation of weighted average number of shares outstanding used in determining
income (loss) per share was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK AND COMMON STOCK EQUIVALENTS:
Weighted average shares outstanding
of common stock........................................ 8,705,172 8,204,502 7,372,946
Common stock equivalent shares resulting
from assumed conversion of warrants
and assumed exercise of stock options.................. 238,690 (a) (a)
------------- ------------ -----------
Weighted average of common and common
equivalent shares-primary.............................. 8,943,862 8,204,502 7,372,946
Assumed conversion of warrants and exercise
of stock options based on higher of
average or closing market price......................... 4,340 (a) (a)
------------- ------------- -------------
Weighted average of common and common
equivalent shares-fully diluted......................... 8,948,202 8,204,502 7,372,946
============= ============= ==============
NET INCOME (LOSS)......................................... $1,125,360 $(331,423) $(3,042,767)
============= ============= ==============
NET INCOME (LOSS) PER COMMON SHARE:
Primary................................................ $ .13 $ (.04) $ (.41)
============= ============= ==============
Fully-diluted.......................................... $ .13 $ (.04) $ (.41)
============= ============= ==============
</TABLE>
(a) Common stock equivalent shares were excluded from the calculation for the
years ended September 30, 1995 and 1994 due to the antidulitive effect the
inclusion of such would have had on loss per share.
EXHIBIT 21.1
<TABLE>
<CAPTION>
Subsidiaries of the Registrant
Subsidiary Place of Incorporation D/B/A Name
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Personics Corporation Delaware, USA Personics Corporation
DATAWATCH GmbH Germany DATAWATCH GmbH
Pole Position Software GmbH* Germany Pole Position Software GmbH
WorkGroup Systems Limited England and Wales WorkGroup Systems Limited
WorkGroup Systems GmbH** Germany WorkGroup Systems GmbH
WorkGroup Systems SARL** France WorkGroup Systems SARL
WorkGroup Systems Pty Ltd.** Australia WorkGroup Systems Pty Ltd.
Guildsoft Holdings Limited England and Wales Guildsoft Holdings Limited
Guildsoft Limited *** England and Wales Guildsoft Limited
* All of the shares of capital stock of Pole Position Software GmbH are owned by DATAWATCH GmbH.
** All of the shares of capital stock of WorkGroup Systems GmbH, WorkGroup Systems SARL, and WorkGroup Systems
Pty Ltd. are owned by WorkGroup Systems Limited
*** All of the shares of capital stock of Guildsoft Limited are owned by Guildsoft Holdings Limited.
</TABLE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-65786 of Datawatch Corporation on Form S-8 of our report dated November 25,
1996 (which expresses an unqualified opinion and includes an explanatory
paragraph relating to the merger of Datawatch Corporation and WorkGroup Systems
Limited, which has been accounted for as a pooling-of-interests), appearing in
the Annual Report on Form 10-K of Datawatch Corporation for the year ended
September 30, 1996.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,696,349
<SECURITIES> 792,665
<RECEIVABLES> 7,767,748
<ALLOWANCES> (73,145)
<INVENTORY> 480,758
<CURRENT-ASSETS> 12,002,318
<PP&E> 3,534,759
<DEPRECIATION> (1,737,733)
<TOTAL-ASSETS> 15,240,571
<CURRENT-LIABILITIES> 6,791,861
<BONDS> 0
0
0
<COMMON> 89,659
<OTHER-SE> 8,149,227
<TOTAL-LIABILITY-AND-EQUITY> 15,240,571
<SALES> 30,022,122
<TOTAL-REVENUES> 30,022,122
<CGS> 4,516,456
<TOTAL-COSTS> 28,894,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96,184
<INCOME-PRETAX> 1,092,360
<INCOME-TAX> (33,000)
<INCOME-CONTINUING> 1,125,360
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,125,360
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
