UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-19960
Datawatch Corporation
(Exact name of registrant as specified in its charter)
Delaware 02-0405716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Ballardvale Street, Wilmington Massachusetts 01887
(Address of principal executive offices) (Zip Code)
(978) 988-9700
(Registrant's telephone number, including area code)
None
(Former name, former address, former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at May 6, 1998
Common stock, $.01 par value 9,148,312
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page #
a) Consolidated Condensed Balance Sheets: 3
March 31, 1998 and September 30, 1997
b) Consolidated Condensed Statements of Operations: 4
Three Months Ended March 31, 1998 and 1997
Six Months Ended March 31, 1998 and 1997
c) Consolidated Condensed Statements of Cash Flows: 5
Six Months Ended March 31, 1998 and 1997
d) Notes to Unaudited Consolidated Condensed Financial 6
Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Default upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES
* No information provided due to inapplicability of item.
<TABLE>
PART I.
Item 1. Financial Statements
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31 September 30,
1998 1997
ASSETS (Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 4,427,649 $ 1,586,875
Short-term investments 4,946,058
Accounts receivable, net 6,950,196 7,810,169
Inventories 587,768 876,767
Prepaid advertising and other
expenses 1,396,291 2,000,717
Total current assets 18,307,962 12,274,528
PROPERTY AND EQUIPMENT:
Property and equipment 4,057,375 4,198,085
Less accumulated depreciation
and amortization (2,204,714) (2,304,705)
Net property and equipment 1,852,661 1,893,380
OTHER ASSETS 238,563 551,639
EXCESS OF COSTS OVER NET ASSETS
OF ACQUIRED COMPANIES 933,274 1,427,098
TOTAL ASSETS $21,332,460 $16,146,645
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,766,430 $ 3,834,038
Accrued expenses 1,981,641 1,340,995
Deferred revenue 1,147,515 2,143,203
Borrowings under credit lines 3,338
Current portion of long-term
debt 195,905 501,133
Total current liabilities 6,091,491 7,822,707
LONG-TERM DEBT 88,990 1,399,089
TOTAL LIABILITIES 6,180,481 9,221,796
SHAREHOLDERS' EQUITY:
Common stock 91,777 91,160
Additional paid-in capital 19,821,412 19,737,963
Accumulated deficit (4,351,880) (12,533,550)
Cumulative translation
adjustment (268,942) (230,336)
15,292,367 7,065,237
Less treasury stock - at cost (140,388) (140,388)
Total shareholders' equity 15,151,979 6,924,849
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $21,332,460 $16,146,645
See notes to unaudited consolidated condensed financial statements.
</TABLE>
<TABLE>
Item 1. Financial Statements (continued)
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
IBM PC based products $6,376,747 $6,807,048 $12,582,832 $13,640,495
Macintosh based products 1,389,852 172,254 2,775,877
NET SALES $6,376,747 $8,196,900 $12,755,086 $16,416,372
COSTS AND EXPENSES:
Cost of sales 1,263,670 1,455,046 2,723,674 2,915,079
Engineering & product
development 499,389 655,319 918,526 1,314,736
Selling, general and
administrative 5,629,888 5,950,348 12,018,216 11,660,924
Restructuring costs 2,364,246
INCOME (LOSS) FROM
OPERATIONS (1,016,200) 136,187 (5,269,576) 525,633
INTEREST EXPENSE (13,866) (20,784) (32,336) (50,879)
OTHER INCOME,
primarily interest 144,288 12,567 287,531 28,596
GAIN ON SALE OF PRODUCT
LINE 15,431,253
FOREIGN CURRENCY
TRANSACTION GAIN(LOSS) (5,986) (34,180) (10,202) 12,878
PROVISION FOR INCOME TAX (8,013) (2,225,000) (8,013)
NET INCOME (LOSS) $ (891,764) $ 85,777 $8,181,670 $ 508,215
NET INCOME (LOSS) PER
COMMON SHARE-Basic $ (.10) $ .01 $ .90 $ .06
COMMON SHARE-Diluted $ (.10) $ .01 $ .87 $ .06
WEIGHTED AVERAGE SHARES
OUTSTANDING - Basic 9,140,718 9,068,269 9,118,762 9,045,595
ADJUSTMENT FOR COMMON
STOCK EQUIVALENTS 81,704 241,459 105,526
WEIGHTED AVERAGE SHARES
OUTSTANDING - Diluted 9,140,718 9,149,973 9,360,221 9,151,121
See notes to unaudited consolidated condensed financial statements.
</TABLE>
<TABLE>
Item 1. Financial Statements (continued)
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 8,181,670 $ 508,215
Adjustment to reconcile net income to net
cash:
Gain on sale of product line (15,431,253)
Depreciation and amortization 601,488 681,612
Interest accrued on short-term investments (66,577) (5,129)
Changes in current assets and liabilities:
Inventories 199,785 (82,456)
Prepaid advertising and other expenses 356,635 (1,168,827)
Accounts receivable 488,164 (686,593)
Accounts payable and accrued expenses (1,330,577) (590,388)
Deferred revenue (157,061) 470,917
Net cash used in operating activities (7,157,726) (872,649)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and fixtures (466,042) (386,067)
Proceeds from maturity of short-term 1,086,491
investments
Purchase of short-term investments (4,879,481) (931,580)
Proceeds from sale of product lines to Dr
Solomon's Software, Inc. 16,750,000
Acquisition of Guildsoft Holdings Ltd., net of
working capital acquired 71,039
Other assets 122,611 64,800
Net cash provided by (used in)investing 11,527,088 (95,317)
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 84,066 9,333
Proceeds from bank term loan 1,500,000
Principal payments on long-term obligations (109,316) (122,641)
Principal payments on bank term-loan (1,500,000)
Borrowings under credit lines, net (3,338) (636,806)
Net cash provided by (used in) financing (1,528,588) 749,886
activities
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2,840,774 (218,080)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,586,875 1,696,349
CASH AND EQUIVALENTS, END OF PERIOD $4,427,649 $1,478,269
See notes to unaudited consolidated condensed financial statements.
</TABLE>
Item 1. Financial Statements (continued)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation: The consolidated condensed balance sheet as of March
31, 1998 and the consolidated condensed statements of operations for the three
months and six months ended March 31, 1998 and 1997, and the consolidated
condensed statements of cash flows for the six months ended March 31, 1998 and
1997 are unaudited. In the opinion of management these statements include all
adjustments necessary for the fair presentation of the financial data for such
periods. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the Company's audited condensed
financial statements for the year ended September 30, 1997 which appear in the
Company's Annual Report on Form 10-K.
2. Inventories: The Company accounts for its inventories using a standard cost
methodology. Inventories were comprised of the following:
March 31, September 30,
1998 1997
Raw materials $ 250,897 $ 338,560
Work in process 631 1,825
Finished goods 336,240 536,382
TOTAL $ 587,768 $ 876,767
3. Divestitures: On October 9, 1997, the Company sold two of its software
product lines for $16,750,000 in cash, resulting in an after tax gain of
approximately $13,200,000. The assets sold consisted primarily of inventory,
property and equipment, trademarks, and the technological rights related to
these product lines. This divesture gave rise to the utilization of net
operating loss carryforwards that had not previously been recognized.
4. Long-term Debt: During the six months ended March 31, 1998 the Company paid
down its outstanding $1,500,000 term loan with proceeds from the sale of two of
its product lines.
5. Restructuring: Subsequent to the sale of its Macintosh software product
lines, the Company undertook a corporate wide restructuring effort so as to
centralize both its administrative infrastructure and its development efforts
for its remaining products. The total amount charged to operations was
approximately $2,364,000. The restructuring plan included charges for salaries
and wages and the related severance benefits for terminated personnel. The
restructuring plan also included payments totaling $433,000 made to outside
developers associated with the centralization of the Company's development
efforts.
6. Earnings per Share: In the first quarter of fiscal 1998, the Company
adopted Statement of Financial Accounting Standard No. 128 "Earnings per Share."
All prior period figures have been restated to reflect the adoption of the
Standard.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
DATAWATCH CORPORATION (the "Company" or "Datawatch") is a provider of
knowledge-based software solutions for the business enterprise.
DATAWATCH's principal products are: Monarch(TM), a report mining
solution that leverages legacy reports and reporting systems to provide
business intelligence on the Windows desktop; Monarch/ES(TM),
a client/server product with an integrated report warehouse subsystem;
Redwing(TM), a plug-in for Abode(R) Acrobat(R) that accurately extracts
text and tables from PDF files; Q-Support(TM) (in the United States)
and Quetzal(TM) (internationally), an integrated help desk and asset
management solution for multi-user, networked support centers.
On October 9, 1997, the Company sold its Virex(R) and netOctopus(TM)
product lines to Dr Solomon's Software, Inc. ("Dr Solomon's Software") for
$16,750,000 in cash, resulting in an after tax gain of approximately
$13,200,000.
From time to time, information provided by the Company, statements made by its
employees or information in its filings with the Securities and Exchange
Commission (including statements in this Form 10-Q) may contain statements which
are not historical facts (so called "forward-looking statements"), and are made
pursuant to the safe harbor provision of the Private Securities Litigation
Reform Act of 1995 and releases of the Securities and Exchange Commission. In
that regard, the discussion in this Item 2 contains forward-looking statements
which involve certain risks and uncertainties, including statements related to
liquidity and capital resources. The Company's operating results may continue
to vary significantly from quarter to quarter or year to year depending on a
number of factors, including technological changes, competition and general
market trends, and other factors such as the Company's dependence on continued
sales of its Monarch and Q-Support/Quetzal product lines both domestically and
internationally, the Company's dependence on the continued introduction of new
products, the Company's dependence on indirect distribution channels for the
sale of its products, the Company's dependence on the continued protection of
its proprietary technology, and the Company's reliance on licensing agreements
relating to third party technology incorporated into the Company's products.
These factors are more fully described in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997. The Company's current
planned expense levels are based in part upon expectations as to
future revenue. Consequently, operating results may vary significantly
from quarter to quarter or year to year, based on timing of revenue.
Revenue or net income in any period will not necessarily be indicative of
results of subsequent periods and there can be no assurance that the
Company will maintain profitability or that revenue growth can be sustained
in the future.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997.
Net sales for the three months ended March 31, 1998 were $6,377,000, which
represents a decrease of $1,820,000 from net sales of $8,197,000 for the three
months ended March 31, 1997. If sales of the Company's Macintosh based products,
which were sold on October 9, 1997 to Dr Solomon's Software, are excluded from
the earlier period, net sales for the three months ended March 31, 1998
represent a decrease of $430,000 from net sales of $6,807,000 for the three
months ended March 31, 1997. This decrease in net sales results from a decrease
in international sales of the Company's Quetzal product. Monarch accounted for
approximately 50% of net sales, while Q-Support/Quetzal accounted for
approximately 38%.
Cost of sales for the three months ended March 31, 1998 was $1,264,000 or
approximately 20% of net sales. Cost of sales for the three months ended March
31, 1997 was $1,455,000 or approximately 18% of net sales. Excluding the
Company's Macintosh based products, cost of sales would have been 20% of net
sales for the three months ended March 31, 1998 which compares to 19% for the
three months ended March 31, 1997. This increase in cost of sales, as a
percentage of net sales, is principally due to product sales through Guildsoft
Limited, an indirect wholly owned subsidiary of the Company based in England
("Guildsoft"), which bear lower gross margins than the Company's other products.
Guildsoft sales represented 11% of net sales for the three months ended March
31, 1998 and, excluding the Company's Macintosh based products, 7% of net sales
for the comparable period in the prior year. Guildsoft's higher percentage of
total net sales is principally due to the decrease in international sales of the
Company's Quetzal product combined with an increase in Guildsoft's sales which
results in an increase to cost of sales when expressed as a percentage of net
sales.
Engineering and product development expenses were $499,000 for the three months
ended March 31, 1998, a decrease of $156,000 or approximately 24% from $655,000
for the three months ended March 31, 1997. This decrease is primarily
attributable to reductions in personnel and expenses associated with development
of the Virex and netOctopus product lines sold to Dr Solomon's Software in
October 1997, as well as expense reductions resulting from the Company's
restructuring subsequent to the sale of those product lines.
Selling, general and administrative expenses were $5,630,000 for the three
months ended March 31, 1998, a decrease of $320,000 or approximately 5% from
$5,950,000 for the three months ended March 31, 1997. This decrease is primarily
attributable to reductions of promotional expenses and administrative costs
resulting from the Company's restructuring during the first quarter of fiscal
1998.
As a result of the foregoing, the loss from operations for the three months
ended March 31, 1998 was $1,016,000 which compares to income from operations of
$136,000 for the three months ended March 31, 1997. The net loss for the three
months ended March 31, 1998 was $892,000 which compares to net income of $86,000
for the three months ended March 31, 1997.
Six Months Ended March 31, 1998 and 1997.
Net sales for the six months ended March 31, 1998 were $12,755,000, which
represents a decrease of $3,661,000 from net sales of $16,416,000 for the six
months ended March 31, 1997. Excluding sales of the Company's Macintosh based
products, which were sold on October 9, 1997 to Dr Solomon's Software, net sales
for the six months ended March 31, 1998 were $12,583,000 which represents a
decrease of $1,057,000 from net sales of $13,640,000 for the six months ended
March 31, 1997. This decrease in net sales results from a decrease in
international sales of the Company's Quetzal product and a decrease in domestic
sales of the Company's Monarch product line. Excluding sales of the Company's
Macintosh based products for the six months ended March 31, 1998, Monarch
accounted for approximately 48% of net sales, Q-Support/Quetzal accounted
for approximately 39%.
Cost of sales for the six months ended March 31, 1998 was $2,724,000 or
approximately 21% of net sales. Cost of sales for the six months ended March 31,
1997 was $2,915,000 or approximately 18% of net sales. Excluding the Company's
Macintosh based products, cost of sales would have been 22% of net sales for the
six months ended March 31, 1998, which compares to 19% for the same period in
the prior year. This increase in cost of sales, as a percentage of net sales,
is principally due to product sales through Guildsoft, which bear lower gross
margins than the Company's other products. Guildsoft sales represented 12% of
net sales for the six months ended March 31, 1998 and 7% of net sales for the
comparable period in the prior year. Guildsoft's higher percentage of total net
sales is principally due to the decrease in international sales of the Company's
Quetzal product combined with an increase in Guildsoft's sales, which results in
an increase to cost of sales when expressed as a percentage of net sales.
Engineering and product development expenses were $919,000 for the six months
ended March 31, 1998, a decrease of $396,000 or approximately 30% from
$1,315,000 for the six months ended March 31, 1997. This decrease is primarily
attributable to reductions in personnel and expenses associated with development
of the Virex and netOctopus product lines sold to Dr Solomon's Software in
October 1997, as well as expense reductions resulting from the Company's
restructuring subsequent to the sale of those product lines.
Selling, general and administrative expenses were $12,018,000 for the six months
ended March 31, 1998, an increase of $357,000 or approximately 3% from
$11,661,000 for six months ended March 31, 1997. Included in the expenses for
the six months ended March 31, 1998 were approximately $196,000 of one-time
expenses associated with leased spaced no longer required as a result of the
Company's restructuring subsequent to the sale of its Macintosh product lines.
Excluding these expenses, the increase would have been $161,000 or approximately
1%, from the same period in the prior year.
During the six months ended March 31, 1998, the Company sold its Macintosh
software product lines to Dr Solomon's Software for $16,750,000. The Company
realized an after tax gain on the sale of approximately $13,200,000. After the
sale of these product lines the Company initiated a corporate-wide restructuring
effort so as to allow the Company to centralize both its administrative
infrastructure and the development efforts of its remaining products. The total
amount charged to operations was approximately $2,364,000. The restructuring
plan included charges for salaries and wages and the related severance benefits
for terminated personnel. These charges, totaling $1,884,000, have been paid.
The restructuring plan also included payments totaling $433,000 made to outside
developers associated with the centralization of the Company's development
efforts. The restructuring is expected to lower annual operating expenses and
cash outflows by approximately $2,300,000 annually.
As a result of the foregoing, the loss from operations for the six months ended
March 31, 1998 was $5,270,000 which compares to income from operations of
$526,000 for the six months ended March 31, 1997. As a result of the foregoing,
and due to the $15,431,000 pre-tax gain on the sale of the Macintosh software
product lines, net income for the six months ended March 31, 1998 was $8,182,000
which compares to net income of $508,000 for the six months ended March 31,
1997. The gain recognized on the Dr Solomon's Software transaction allowed the
Company to utilize net operating losses that had previously been reserved.
LIQUIDITY AND CAPITAL RESOURCES
In October 1997, the Company received $16,750,000 in cash from Dr
Solomon's Software in connection with the sale of its Virex and netOctopus
product lines, resulting in an after tax profit of approximately $13,200,000.
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, 1998 by funds currently available from the above mentioned sale.
The Company also has its unused $1,500,000 bank line of credit. Working capital
increased by approximately $7,765,000 during the six months ended March 31, 1998
primarily as a result of the above mentioned divestiture offset by outflows for
costs associated with the subsequent restructuring of the Company.
Management believes that the Company's current operations have not been
materially impacted by the effects of inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per
Share" which became effective during the first quarter of fiscal 1998. SFAS No.
128 replaces the presentation of primary earnings per share with basic earnings
per share, which excludes dilution, and requires the dual presentation of basic
and diluted earnings per share. All per share amounts have been restated to
conform with the Standard.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," both of which will be effective for the Company in fiscal 1999.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No. 131 establishes
standards for the way that public business enterprises report selected
information about operating segments in annual and interim financial reports.
SFAS 131 also established standards for related disclosures about products and
services, geographic areas, and major customers. The implementation of SFAS 130
and 131 are not expected to have a material effect on the Company's financial
statements.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue
Recognition." SOP 97-2 provides guidance on when revenue should be recognized
and in what amounts for licensing, selling, leasing, or otherwise marketing
computer software. SOP 97-2 will be adopted by the Company during the first
quarter of fiscal 1999 and is not expected to have a material effect on the
Company's consolidated financial position, results of operations or financial
statement disclosures. In March 1998, the AICPA released SOP 98-1 "Accounting
for Costs of Computer Software Developed or Obtained for Internal Use" which
requires certain expenditures made for internal use software to be capitalized.
The Company is currently studying the impact of SOP 98-1.
PART II.
Item 4. Submission of Matters to a Vote of Security Holders
A. The annual meeting of stockholders of DATAWATCH CORPORATION was held on
March 16, 1998.
B. No information provided due to inapplicability of item.
C. A vote was proposed to elect a Board of Directors to serve for the ensuing
year or until their respective successors are duly elected and qualified.
The ballot results are as follows:
Voted Voted Broker
For Against Abstained Non-Votes
Bruce R. Gardner 8,585,618 102,015
Jerome Jacobson 8,609,393 78,240
David T. Riddiford 8,609,393 78,240
D. No information provided due to inapplicability of item.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
10.1 Loan Modification Agreement dated January 30, 1998, by and between
Datawatch Corporation, Personics Corporation and Silicon Valley Bank.
27 Financial Data Schedule (filed with SEC Edgar version only).
B. Reports on Form 8-K
No Current Report on Form 8-K was filed during the quarterly period ended March
31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 14, 1998.
DATAWATCH CORPORATION
/s/ Betsy J. Hartwell
Betsy J. Hartwell
Vice President of Finance and Chief
Financial Officer
(Principal Financial officer)
Exhibit 10.1
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of January 30, 1998, 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 other promissory notes from Borrower to Lender, is governed
by the terms of an Amended and Restated Letter Agreement, dated February 12,
1997, 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: Repayment 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 Agreement").
Hereinafter, the above-described security documents together with all other
documents securing payment 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 January 29, 1999. In addition,
Borrower will pay monthly payments of all accrued unpaid
interest due as of each payment date beginning February
28, 1998 and all subsequent interest payments will be due
on the 29th 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, will be at a rate equal to
three quarters of one (0.75) percentage point over Lender's
current Index (as defined therein).
B. Modification(s) to Loan Agreement.
1. The paragraph beginning with "Funds are advanced under
the Working Capital Line according to a borrowing base
formula" is hereby amended in its entirety to read as follows:
Funds are advanced under the Working Capital Line according to a
borrowing base formula, as determined by Lender on a monthly
basis, defined as follows: The lesser of $1,500,000.00 or the
sum of (a) eighty percent (80%) of eligible billed, domestic non-
distributor accounts receivable under 90 days from invoice date,
plus (b) eighty percent (80%) of eligible foreign accounts
receivable (as approved by Lender), plus (c) fifty percent (50%)
of Lender pre-approved distributor accounts receivable under 60
days from invoice date, minus (d) the aggregate commitments
between Borrower and Lender in which Borrower has guaranteed the
obligations of a third party to Lender (each guaranty shall not
be greater than $500,000.00) ("(a)" through "(d)" are
collectively defined as "Eligible Receivables"). The maximum
benefit to be derived from the foreign accounts receivable cannot
exceed fifty percent (50%) of the total borrowing availability
and the maximum benefit to be derived from the distributor
accounts receivable cannot exceed forty percent (40%) of the
total borrowing availability. Eligible accounts receivable shall
include, but not be limited to, those accounts outstanding less
than 90 days from the date of invoice, excluding, non-approved
foreign, government, contra, and intercompany accounts; and
exclude accounts wherein 50% or more of the account is
outstanding more than 90 days from date of invoice. Any account
which alone exceeds 25% of total accounts will be ineligible to
the extent said account exceeds 25% of total accounts. Also
exclude any credit balances which are aged past 90 days. Also
ineligible are any accounts which Lender in its sole judgment
excludes for valid credit reasons.
2. Items "(a)", "(b)" and "(c)" under the Section entitled
"Affirmative Covenants" are hereby amended in their entirety to
read as follows:
a. To provide the Lender with duplicate unaudited monthly
financial statements, together with a Compliance
Certificate, prepared in accordance with generally
accepted accounting principles (at such times as an
outstanding balance exists under the Working Capital
Line) and duplicate audited annual (consolidated and
consolidating) financial statements certified by public
accountants with an unqualified opinion, to be received
35 and 120 days, respectively after the close of the
period. Furthermore, at such times as an outstanding
balance does not exist under the Working Capital Line, to
provide the Lender within 45 days of Borrower's quarter end,
copies of all statements, reports and notices made
available to Borrower's security holders or to any
holders of Subordinated Debt and all reports on Form 10-Q
filed with the Securities and Exchange Commission.
b. At such times as an outstanding balance exists under the
Working Capital Line, Borrower shall provide the Lender
with a Borrowing Base Certificate, together with an aged
list of accounts receivable, to be received within 15 days
after the close of each month. Prior to the aggregate
advances under the Working Capital Line exceeding twenty
five percent (25%) of the Eligible Receivables, an
initial accounts receivable audit, with results
satisfactory to Lender, shall be performed by Lender's
agent. Annual accounts receivable audits shall be
performed by Lender's agent, thereafter. Borrower's
deposit account will be debited for audit expenses and
notifications will be mailed to Borrower.
c. Comply with the following Financial Covenants:
Tangible Capital Base - (Tested Monthly) Maintain a minimum
Tangible Capital Base (TCB) of $12,500,000.00. 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).
Quick Ratio - (Tested Monthly) Maintain a minimum Quick
Ratio of 1.75 to 1.00. Quick Ratio is defined as cash and
receivables divided by current liabilities net of deferred
revenues.
4. PAYMENT OF LOAN FEE. Borrower shall pay lender a fee in the amount of Two
Thousand Five Hundred and 00/100 Dollars ($2,500.00) 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.
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
By: /s/ Bruce R. Gardner
Name: Bruce R. Gardner
Title: President and CEO
PERSONICS CORPORATION
By: /s/ Bruce R. Gardner
Name: Bruce R. Gardner
Title: Treasurer
LENDER:
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: /s/ James C. Maynard
Name: James C. Maynard
Title: Senior Vice President
SILICON VALLEY BANK
By: /s/ Michael E. Jordan
Name: Michael E. Jordan
Title: Loan Docs Officer
(Signed at Santa Clara County, CA)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1998
<CASH> 4,427,649
<SECURITIES> 4,946,058
<RECEIVABLES> 6,950,196
<ALLOWANCES> 0
<INVENTORY> 587,768
<CURRENT-ASSETS> 18,307,962
<PP&E> 4,057,375
<DEPRECIATION> 2,204,714
<TOTAL-ASSETS> 21,332,460
<CURRENT-LIABILITIES> 6,091,491
<BONDS> 0
0
0
<COMMON> 91,777
<OTHER-SE> 15,060,202
<TOTAL-LIABILITY-AND-EQUITY> 21,332,460
<SALES> 12,755,086
<TOTAL-REVENUES> 12,755,086
<CGS> 2,723,674
<TOTAL-COSTS> 15,660,416
<OTHER-EXPENSES> 2,364,246
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,336
<INCOME-PRETAX> 5,956,670
<INCOME-TAX> 2,225,000
<INCOME-CONTINUING> 8,181,670
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,181,670
<EPS-PRIMARY> .90
<EPS-DILUTED> .87
</TABLE>
