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, 1998
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: (978) 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: $11,866,275
(computed by reference to the last sales price of such common stock on December
15, 1998 as reported in the National Association of Security Dealers
consolidated trading index).
Number of shares of common stock outstanding at December 15, 1998: 9,148,312
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, 1998.
Portions of such Proxy Statement are incorporated by reference in Part III of
this report.
<PAGE>
PART I
Item 1. BUSINESS
GENERAL
DATAWATCH CORPORATION (the "Company" or "Datawatch") is a provider of
Enterprise Reporting, Report Mining and Service Center software products that
help organizations increase productivity, reduce costs and gain competitive
advantages. DATAWATCH products are used in more than 20,000 companies,
institutions and government agencies worldwide.
The Company was founded in 1985 to design, manufacture and market computer
workstations and peripherals that conform to the U.S. government's TEMPEST
security standard. With the end of the Cold War and subsequent decline in demand
for defense-oriented products, the Company exited the TEMPEST market in 1993 and
focused its attention on commercial software. Through a series of acquisitions,
the Company assembled a diverse portfolio of popular software applications,
including Monarch(TM), netOctopus(TM), VIREX(R) and Q-Support(TM)/Quetzal(TM).
In October 1997, DATAWATCH divested its Apple Macintosh software (VIREX and
netOctopus) in order to concentrate on the Windows/Intel platform.
The Company is a Delaware corporation, with executive offices located at
234 Ballardvale Street, Wilmington, Massachusetts 01887 and the Company's
telephone number is (978) 988-9700.
PRODUCTS
DATAWATCH is best known for its popular report mining application called
Monarch. More than 200,000 copies of Monarch have been sold, with localized
versions in English, French, German and Japanese. Monarch lets users extract and
manipulate data from ASCII report files produced on any mainframe, midrange,
client/server or PC system. The Company's Redwing(TM) product, introduced in
1997, lets users extract text and tables from Adobe PDF documents.
DATAWATCH recently completed a series of strategic product initiatives
that position the Company as a leader in the emerging market for enterprise
reporting software. Monarch/ES(TM), introduced in March 1998, is a configurable
enterprise reporting solution that lets organizations deliver reports
electronically via their local area network. Reports are stored in a secure
repository and brought to life on screen to support queries and analyses.
Monarch/ES Web, introduced in October 1998, extends the system to support
browser-based report retrieval via the Worldwide Web. Monarch/ES Report
Publisher, also introduced in October 1998, supports automated delivery of
reports via MAPI-compliant email.
In August 1998, DATAWATCH entered the market for data replication and
migration tools with the introduction of Monarch Data Pump. This product offers
a shortcut for populating and refreshing data marts and data warehouses, and for
migrating legacy data into new applications.
DATAWATCH also participates in the market for service center software. The
Company's Quetzal/Q-Support help desk and asset management software is a market
leader in Europe, with the largest installed base among products that compete in
the internal help desk market. Customers include the British Broadcasting
Corporation, Her Majesty's Customs and Excise Service and Toronto Dominion Bank.
Quetzal/Q-Support is recognized for its advanced service level management
capabilities, integrated change management features, business process automation
tools and unique user-interface that promotes ease-of-use and ease-of-learning.
Quetzal/SC, introduced in December 1998, is a major new release of the
Company's Quetzal/Q-Support software. Quetzal/SC's advanced architecture gives
it strong performance and scalability. The product was designed to handle up to
50,000 calls per hour, and can be scaled to support as few as two users running
on an xBASE file server, hundreds of users running on an NT server, or thousands
of users running on powerful Unix servers. Quetzal/SC integrates with popular
network management tools such as CA-Unicenter, Tivoli Management Edition and BMC
Patrol, and employs Monarch to provide extensive data analysis and reporting
capabilities.
PRICING
The Company's desktop products are sold under single and multi-user
licenses. A single user license for Monarch is priced at $499. Multi-user
licenses are priced at $150 to $250 per user, depending upon the number of
users. A single user license for Redwing is priced at $695. A five user license
is priced at $1,995.
The Company's enterprise products are sold under named-user and
concurrent-user licenses. An entry-level Monarch/ES system is priced at
approximately $20,000. Typical configurations are priced in the range of $40,000
to $250,000. Monarch Data Pump is priced at approximately $20,000 per server. An
entry-level Quetzal/Q-Support systems is priced at approximately $8,000. Typical
configurations sell in the range of $15,000 to $125,000. Maintenance agreements
and implementation services are sold separately.
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 customers. DATAWATCH
believes 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-users, 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.
DATAWATCH uses a variety of marketing programs 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.
The Company offers its resellers the ability to return obsolete versions
of its products and slow-moving products for credit which can be used 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.
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.
During fiscal 1998, one distributor represented approximately 12% of
DATAWATCH's net sales. No other customer accounted for more than 10% of
DATAWATCH's net sales in 1998. DATAWATCH sells its products outside of the U.S.
directly through the sales force of its wholly owned subsidiary, Datawatch
International Limited (formerly WorkGroup Systems Limited)("Datawatch
International") and through international resellers. Such international sales
represented approximately 56%, 47% and 47% of DATAWATCH'S net sales for fiscal
1998, 1997 and 1996, respectively. See Note 14 to Consolidated Financial
Statements which appear elsewhere in this Report on Form 10-K.
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
either through royalty payments based on product sales levels achieved or under
contracts based on services provided.
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 has contractual agreements with the independent developers of
Monarch and Monarch/ES which require that source codes be placed into escrow.
The principal developers for the products are also bound by contractual
commitments which require their continuing involvement in product maintenance
and enhancement. Under the agreements, the Company has been granted
manufacturing, marketing and sales rights under license agreements which provide
for royalty payments based on net sales. The Company has also been granted
exclusive worldwide rights to Monarch with a stated term expiring in the year
2009, and to Monarch/ES with a stated term expiring in the year 2001. The
Monarch/ES license automatically renews for successive annual periods unless
terminated for cause by either party prior to the regular termination date.
BACKLOG
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.
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, Network Associates, Remedy, Actuate,
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 an allegation of
misappropriation of trade secrets has been made against the Company by a former
independent developer. (See Item 3 of this Report on Form 10-K), and 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 a commercially reasonable cost.
EMPLOYEES
As of September 30, 1998, DATAWATCH had 216 full-time employees, including
79 engaged in marketing, sales, and customer service; 27 engaged in product
consulting, 30 engaged in product management, development and quality assurance,
29 in technical support, 42 providing general, administrative, accounting, and
IT functions and 9 in software production and warehousing.
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 April 1999, with an
option to renew for an additional five years. The Company uses approximately 65%
of this facility and the remaining 35% is sublet to Secure Systems Group. The
Company also maintains small offices in California, Georgia, and Illinois.
The Company also leases approximately 6,200 square feet in Potters Bar,
Hertfordshire, England, which expires in January 2005, approximately 16,000
square feet in Plymouth, Devon, England, which expires in December 2017, and
maintains small offices in Germany, France and Australia.
The Company is currently reevaluating its facilities needs.
Item 3. LEGAL PROCEEDINGS
On November 12, 1998, the Company brought a lawsuit in Superior Court of
Massachusetts for Middlesex County, against Palms Technology U.S., Inc. and its
Chairman, Jesse E. Torres, III (collectively, "Palms"), alleging, among other
things, misrepresentation, unfair or deceptive trade practices, and breach of
contract, including breach of a Development Agreement dated as of December 19,
1997, for Palms' failure to complete and deliver certain software it was hired
to develop. Also, on November 12, 1998, Palms brought a lawsuit in the same
court against the Company and two of its officers (the "Palms lawsuit"),
claiming that the Company misappropriated Palms' trade secrets and breached
contracts between the parties. On November 16, 1998, the Company was granted a
Temporary Restraining Order preventing Palms and Torres from dissipating certain
assets to avoid judgment, and from damaging certain software and source code.
Management believes that the Palms lawsuit has no merit, and Datawatch intends
to vigorously defend itself against Palms' allegations. Datawatch intends to
pursue its claims against Palms aggressively. However, the ultimate outcome of
these matters cannot yet be determined. No provision for any liability regarding
these lawsuits has been recognized in the Consolidated Financial Statements
included in Item 8.
From time to time the Company is also involved in litigation matters which
arise in the ordinary course of business, including one current action brought
by a former employee. The Company does not believe that the ultimate resolution
of this matter will have a material adverse effect on its consolidated financial
condition, results of operations, or cash flows.
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:
Bruce R. Gardner 55 President, Chief Executive Officer and Director
Marco D. Peterson 43 Senior Vice President of North American Operations
Robert Hagger 50 Senior Vice President of International Operations,
Managing Director of Datawatch International Limited
Betsy J. Hartwell 51 Vice President of Finance, Chief Financial Officer
and Treasurer
Scott Crenshaw 33 Vice President of Product Development
John Loring 48 Vice President of Information Technology
Officers are elected by, and serve at the discretion of, the Board of Directors.
BRUCE R. GARDNER, President, Chief Executive Officer and Director. Mr.
Gardner, a founder and director of DATAWATCH, was theChief Financial Officer
and Treasurer since the Company was founded in 1985 until November 1, 1997.
Mr. Gardner was a Senior Vice President until June 1993 when he became Executive
Vice President. Mr. Gardner assumed his current position on November 1, 1997.
MARCO D. PETERSON, Senior Vice President of North American Operations.
Mr.Peterson was the founder of Personics Corporation 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
until he became Senior Vice President on November 1, 1997.
ROBERT HAGGER, Senior Vice President of International Operations,
Managing Director of Datawatch International. Mr. Hagger joined DATAWATCH as
Managing Director of Datawatch International on March 4, 1997 and assumed the
title of Senior Vice President of International Operations on November 1, 1997.
Mr. Hagger, since 1993, was founder and Managing Director of Insight Strategy
Management Ltd. Prior to that he was Managing Director of Byrne Fleming Ltd.
BETSY J. HARTWELL, Vice President of Finance, Chief Financial Officer and
Treasurer. Ms. Hartwell assumed the positions of Vice President of Finance,
Chief Financial Officer and Treasurer on November 1, 1997. Prior to that and
since July, 1990, Ms. Hartwell was DATAWATCH's Corporate Controller.
SCOTT CRENSHAW, Vice President of Product Development. Mr. Crenshaw
assumed the position of Vice President of Product Development on November 1,
1997. Prior to that and since joining DATAWATCH in 1992, Mr. Crenshaw has held
various management positions, most recently as Director of Business Development
and International Marketing and prior to that as Business Segment Manager and
Director of Product Development.
JOHN LORING, Vice President of Information Technology. Mr. Loring assumed
the position of Vice President of Information Technology on November 1, 1997.
Prior thereto and since November, 1993, Mr. Loring was the Company's Director of
Business Development/Information Systems. Prior to that, Mr. Loring was
DATAWATCH's Manager of Systems Engineering.
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, 1998 High Low
4th Quarter 2 1/16 1 1/16
3rd Quarter 2 7/8 1 7/8
2nd Quarter 3 1/2 1 13/16
1st Quarter 4 1/16 1 15/16
For the Year Ended Common Stock
September 30, 1997 High Low
4th Quarter 2 7/8 1 7/16
3rd Quarter 4 5/16 1 5/8
2nd Quarter 6 5/8 3 5/8
1st Quarter 8 3/4 5
There are approximately 206 shareholders of record as of December 15,
1998. The Company believes that the number of beneficial holders of common stock
exceeds 2,000.
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.
<PAGE>
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, 1998
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>
Statements of Operations Data
Years Ended September 30, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------
Sales
PC-based Products $25,123,468 $25,995,197 $24,216,794 $18,839,265 $13,027,232
Macintosh-based Products 172,254 6,052,298 5,805,328 4,520,716 3,854,910
--------------------------------------------------------------
Net Sales 25,295,722 32,047,495 30,022,122 23,359,981 16,882,142
Costs and Expenses 35,800,154 33,929,460 28,894,600 23,678,935 19,956,576
Income (Loss) from
Operations (10,504,432) (1,881,965) 1,127,522 (318,954) (3,074,434)
Gain on Sale
of Product Line 15,431,253
Net Income (Loss) $4,703,996 ($1,995,433) $1,125,360 ($331,423) ($3,042,767)
Net Income (Loss)
per Common Share - Basic $.52 ($.22) $0.13 ($0.04) ($0.41)
Net Income (Loss)
per Common Share - Diluted $.51 ($.22) $0.13 ($0.04) ($0.41)
Balance Sheet Data
September 30, 1998 1997 1996 1995 1994
-------------------------------------------------------------
Total Assets $18,332,215 $16,146,645 $15,240,571 $12,358,132 $9,646,324
Working Capital 8,503,428 4,451,821 5,210,457 2,631,759 1,547,706
Long-Term Obligations 44,190 1,399,089 209,824 163,868 137,324
Shareholders' Equity $11,636,482 $6,924,849 $8,238,886 $ 6,062,170 $5,266,588
</TABLE>
<PAGE>
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 which appear elsewhere in this Report on FORM
10-K.
GENERAL
DATAWATCH CORPORATION (the "Company" or "DATAWATCH"), is engaged in the
design, development, manufacture, marketing, consulting services and support of
business computer software. Its products specifically address the enterprise
reporting, business intelligence, and help desk markets. Until October 1997, the
Company developed, sold, and supported both PC and Macintosh-based products.
On October 9, 1997, the Company sold its Macintosh-based product line to
Dr Solomon's Software, Inc. ("Dr Solomon's") for $16,750,000 in cash. This
resulted in a pre-tax gain of approximately $15,431,000. Note 2 to Consolidated
Financial Statements of DATAWATCH and its subsidiaries contains a more detailed
discussion of this transaction.
DATAWATCH's principal products are: Monarch, a report mining application
that lets users extract and manipulate data from ASCII report files produced on
any mainframe, midrange, client/server or PC system; Monarch/ES, a configurable
enterprise reporting solution that lets organizations deliver reports
electronically via their local area network; Monarch/ES Web, a Monarch/ES
extension that supports browser-based report retrieval via the Worldwide Web;
Monarch/ES Report Publisher, a Monarch/ES extension that supports automatic
delivery of reports via MAPI-compliant email; Redwing, a plug-in for Adobe
Acrobat that lets users extract text and tables from Adobe PDF documents;
Monarch Data Pump, a data replication and migration tool that offers a shortcut
for populating and refreshing data marts and data warehouses, and for migrating
legacy data into new applications; Q-Support (in the United States) and Quetzal
(internationally), an integrated help desk and asset management solution for
multi-user, networked support centers; and Quetzal/SC, a major new release of
the Company's Quetzal/Q-Support software, introduced in December 1998.
RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 1998 as Compared to
Fiscal Year Ended September 30, 1997
Net sales for the fiscal year ended September 30, 1998 were $25,296,000
which represents a decrease of $6,752,000 or 21% from the net sales of
$32,047,000 for the fiscal year ended September 30, 1997. Sales have been
segregated on the statements of operations so as to highlight the product line
which remains after the disposition of the Macintosh-based product line (sold to
Dr Solomon's Software on October 9, 1997). Excluding sales of the Company's
Macintosh-based products, net sales for fiscal 1998 were $25,123,000 which
represents a decrease of $872,000 or 3% from net sales of $25,995,000 for fiscal
1997. The decline in sales is principally attributable to lower sales of
Q-Support/Quetzal as customers awaited the introduction of the next generation
product, Quetzal/SC, subsequently released in December 1998. In fiscal 1998,
Monarch accounted for approximately 51% of net sales; Q-Support/Quetzal
accounted for approximately 37% of net sales; and Guildsoft accounted for
approximately 11% of net sales. For the fiscal year ended September 30, 1998,
the Company's PC-based products accounted for approximately 99% of net sales
while the Company's Macintosh-based products accounted for approximately 1%.
The Company's cost of sales for the fiscal year ended September 30, 1998
were $5,213,000 or approximately 21% of net sales. Cost of sales for the fiscal
year ended September 30, 1997 were $5,900,000 or approximately 18% of net sales.
Excluding the sales and costs of sales related to the Company's Macintosh-based
products, costs of sales for fiscal 1997 would have been approximately 20%.
Without the influence of the Company's Macintosh-based products (sold to Dr.
Solomon's in October, 1997) margins remained relatively comparable.
Engineering and product development expenses include those expenditures
attributable to both internal development efforts and efforts undertaken by
third-party developers. Fiscal 1998 external development expense included costs
incurred for parallel development efforts undertaken for the next generation
Q-Support/Quetzal product. Expenditures of approximately $1,080,000 were
directly related to the terminated Palms Technology development project. In
addition, external costs of approximately $543,000 attributable to maintenance
of Q-Support/Quetzal, the next generation help desk product, Quetzal/SC,
released in December 1998, and certain enterprise solutions products were also
recorded. Internal engineering and product development expenses were $1,760,000
for the fiscal year ended September 30, 1998, a decrease of $1,044,000 or 37%
from $2,804,000 for the fiscal year ended September 30, 1997. This decrease was
due to both the discontinuance of certain internal development efforts and the
non-recurrence of development costs incurred in fiscal 1997 relating to the
Macintosh based- product line (sold to Dr Solomon's in October, 1997).
Selling, general and administrative expenses were $24,525,000 for the
fiscal year ended September 30, 1998, a decrease of $700,000 or approximately 3%
from $25,225,000 for the fiscal year ended September 30, 1997. Included in the
costs for fiscal 1998 were approximately $196,000 of one-time expenses primarily
associated with leased space no longer required as a result of the Company's
restructuring subsequent to the sale of its Macintosh-based product line in the
first quarter of 1998, and $91,000 of administrative and consulting costs
associated with the Company's second restructuring during the fourth quarter of
fiscal 1998. Included in the expenses for the fiscal year ended September 30,
1997 were $608,000 of one-time expenses principally associated with
organizational changes within the Company's European subsidiaries. Excluding
these expenses, the decrease would have been $379,000 or 2% which is principally
attributable to selling expenses associated with the Company's Macintosh-based
product line.
In October 1997, the Company sold its Macintosh-based product line to Dr
Solomon's Software for $16,750,000 in cash. The Company realized a pre-tax gain
on the sale of approximately $15,431,000. After the sale of this product line
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 for
the quarter ended December 31, 1997 was approximately $2,364,000. The plan
included charges for salaries and wages and the related severance benefits for
terminated personnel. These charges totaling approximately $1,884,000, were
either paid ($1,549,000) or accrued ($335,000) in the first fiscal quarter. The
plan also included special payments made to outside developers associated with
the centralization of the Company's development efforts. These charges, totaling
$433,000, were either paid ($339,000) or accrued ($94,000) in the first quarter.
Those benefits or payments accrued were paid in the second quarter of 1998.
During the fourth quarter of fiscal 1998 the Company approved and
completed a second restructuring plan to further centralize the Company's
administrative infrastructure and its development efforts. The restructuring
plan consisted of charges for severance benefits and costs for terminated
employees. These charges totaling approximately $315,000 were either paid
($134,000) or accrued ($181,000) as of September 30, 1998. The Company
anticipates those benefits and payments accrued will be paid during the first
and second quarters of fiscal 1999.
As a result of the foregoing, the net loss from operations for the fiscal
year ended September 30, 1998 was $10,504,000, which compares to the net loss
from operations of $1,882,000 for the fiscal year ended September 30, 1997. Net
income for the fiscal year ended September 30, 1998 was $4,704,000, which
compares to the net loss of $1,995,000 for the prior fiscal year. The Company
has recorded a tax provision in the amount of $600,000 for the fiscal year ended
September 30, 1998. The Company recorded a de minimis tax provision during
fiscal year ended September 30, 1997 because of its ability to utilize domestic
net operating loss carryforwards (NOL) and foreign losses. The Company's 1998
effective tax rate of 11% is primarily the result of utilizing domestic NOL and
certain credit carryforwards. Such carryforwards have been exhausted in the US
although the foreign operations still maintain substantial amounts in
carryforwards (all currently reserved for).
Fiscal Year Ended September 30, 1997 as Compared to
Fiscal Year Ended September 30, 1996
Net sales for the fiscal year ended September 30, 1997 were $32,047,000
which represents an increase of $2,025,000 or 7% from the net sales of
$30,022,000 for the fiscal year ended September 30, 1996. Sales have been
segregated on the statements of operations so as to highlight the product lines
which remain after the disposal of the Macintosh-based product line. In fiscal
1997 Monarch, which amounted to approximately 40% of sales, increased by 5%;
Q-Support/Quetzal, which amounted to approximately 34% of sales, decreased by
6%; Virex, which amounted to approximately 15% of sales and netOctopus, which
amounted to approximately 4% of sales, did not change as a percentage of sales
from fiscal year ended September 30, 1996. Guildsoft, acquired in November 1996,
had net sales for fiscal 1997 which amounted to $1,876,000 or 6% of total net
sales. For the fiscal year ended September 30, 1997, the Company's PC-based
products accounted for approximately 81% of sales while the Company's
Macintosh-based products accounted for approximately 19%.
The Company's cost of sales for the fiscal year ended September 30, 1997
were $5,900,000 or approximately 18% of net sales. Cost of sales for the fiscal
year ended September 30, 1996 were $4,516,000 or approximately 15% of net sales.
The increase in cost of sales, as a percentage of net sales, results from the
inclusion of Guildsoft's product sales which bear lower gross margins than the
Company's other products. Cost of sales, as a percentage of net sales for the
fiscal year ended September 30, 1997, excluding Guildsoft, would have been 16%,
which is relatively consistent with the prior period.
Engineering and product development expenses were $2,804,000 for the
fiscal year ended September 30, 1997, an increase of $465,000 or approximately
20% from $2,339,000 for the fiscal year ended September 30, 1996. This increase
(net of approximately $80,000 of expenses associated with organizational
changes) is primarily attributable to the increase in personnel costs and
expenses necessary for continued development of the Q-Support/Quetzal product
and quality assurance for the Monarch product. Product development costs related
to the Virex and netOctopus products were approximately $1,296,000 in 1997 and
$1,104,000 in 1996.
Selling, general and administrative expenses were $25,225,000 for fiscal
year ended September 30, 1997, an increase of $3,186,000 or approximately 14%
from $22,039,000 for the fiscal year ended September 30, 1996. Included in the
expenses were $608,000 of one-time expenses principally associated with
organizational changes within Datawatch International during the third fiscal
quarter. Included in the expenses for the fiscal year ended September 30, 1996
were $450,000 of expenses associated with the acquisition of Datawatch
International in March, 1996. Excluding these expenses, selling, general and
administrative expenses were $24,617,000 for the 1997 fiscal year and were
$21,589,000 for the 1996 fiscal year resulting in an increase of $3,028,000 or
approximately 14%. This increase is primarily attributable to increases in
personnel within the sales and marketing organizations, principally for
Q-Support/Quetzal and Monarch, and the inclusion of Guildsoft operating expenses
amounting to approximately $912,000 for the period or approximately 30% of the
increase.
As a result of the foregoing, the net loss from operations for the fiscal
year ended September 30, 1997 was $1,995,000, which compares to the net income
of $1,125,000 for the fiscal year ended September 30, 1996. The Company recorded
a de minimis tax provision, both domestically and internationally, during the
periods because of its ability to utilize NOL carryforwards during fiscal 1996
and because of its ability to utilize domestic NOL carryforwards and foreign
losses during fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
In October 1997, the Company received $16,750,000 in cash from Dr
Solomon's Software for its Virex and netOctopus product lines, resulting in a
pre-tax gain of approximately $15,431,000. This sale provided working capital in
the current year to accomplish internal restructuring plans and fund on-going
operations.
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, 1999 by funds currently available from the above mentioned sale
and funds generated from operations. The Company also has a $1,500,000 line of
credit pursuant to a letter agreement with a bank. Currently, advances from the
line of credit amount to $1,150,000. Beginning as of September 30, 1998, the
Company was not in compliance with one of the financial covenants contained in
the letter agreement with the bank. The bank has effectively waived through
maturity (January 29, 1999) a default under the line of credit as a result of
the Company's non-compliance with this financial covenant, but has restricted
the Company from further advances above the $1,150,000 currently outstanding.
The Company is currently negotiating the renewal of the line of credit which
expires in January 1999.
Working capital increased by approximately $4,052,000 during fiscal
1998 primarily as a result of the above mentioned divestiture offset by outflows
for operating activities, costs associated with the restructurings of the
Company, and discontinued development efforts.
Management believes that the Company's current operations are not
materially impacted by the effects of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
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." SFAS No. 130 establishes standards for reporting and
displaying 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
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 130
will be adopted by the Company during the first quarter of fiscal 1999. SFAS No.
131 will be adopted by the Company in its annual consolidated financial
statements for fiscal 1999. Such standards are "disclosure standards" and will
not impact the Company's consolidated results of operations.
In March of 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, which is required to be
adopted by the Company in October 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. The new standard requires that all companies record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. Management is currently assessing whether there will be
any impact of SFAS No. 133 on the Company's consolidated financial statements
upon adoption, which is required in October 1999.
YEAR 2000 READINESS DISCLOSURE STATEMENT
General
The Company is aware of the global concerns related to what is known as
the Year 2000 issue and the potential for the associated system failures and
business interruptions that may result. The Year 2000 issue concerns three main
areas: the ambiguity that may result from processing and storing data using
2-digit year formats; the recognition that the year 2000 is a leap year; and the
use of dates (most commonly 9/9/99) for special programming functions. Any of
these problems could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities for both the
Company and its customers who rely on its products.
Year 2000 Compliance Program
The Company has been aware of the Year 2000 issue for several years and
has been actively engaged in correcting Year 2000 deficiencies as they are
recognized, but has not yet completed reviewing, correcting and testing all
facets of the Year 2000 compliance issues facing it. The Company is currently in
the process of developing a Year 2000 compliance program, the purpose of which
will be: to identify important internal systems that are not yet Year 2000
compliant; to initiate replacement or remedial action to assure that key systems
and products will continue to operate in the Year 2000 and to test the replaced
or remediated systems and products; to identify and contact key suppliers,
vendors, customers and business partners to evaluate their ability to maintain
normal operations in the Year 2000; and to develop appropriate contingency plans
for dealing with foreseeable Year 2000 complications. The Company has appointed
a Year 2000 Readiness Coordinator who is responsible for developing and
administering the Company's Year 2000 compliance program. The Company expects to
complete its Year 2000 compliance plan by the end of January 1999 and
substantially implement the plan by the end of 1999.
Internal Systems
Based on the preliminary results of the Company's assessment of its
internal use hardware and software, including telephone systems and other
facilities equipment, the Company has determined that it may be necessary to
modify or replace some of its internal use software and hardware. During 1998, a
project was initiated at the corporate offices in Wilmington, Massachusetts and
at the Company's largest subsidiary, Datawatch International, in Potters Bar,
England to upgrade the Company's accounting software to a Year 2000 compliant
version. These simultaneous projects were completed in September 1998. The
Company anticipates that the accounting systems at some of its other
subsidiaries will be replaced by the end of 1999, however, the accounting
systems at these locations are significantly less critical than at the locations
already upgraded. The Company currently believes that all other "mission
critical" software is Year 2000 compliant. The Company anticipates completing a
full review of all internal software and hardware by April 30, 1999. The cost to
bring internal operations into compliance is estimated to be approximately
$100,000.
In early 1999, the Company will begin contacting vendors concerning the
status of their Year 2000 readiness. All supplies used to market, sell or
produce the Company's products are readily available from many different
suppliers; Therefore, the Company intends that only vendors who are determined
to be Year 2000 compliant will be used for supplies after September 30, 1999.
Software Products
The Company has designed, tested and continues to test the most current
versions of its products for Year 2000 issues. The Company believes that the
latest versions of its products are substantially Year 2000 compliant and are
not likely to pose a significant Year 2000 liability issue for the Company or
any significant operational problems for its customers. The Company continues to
test the current versions of its products for Year 2000 compliance, and in the
event problems are discovered, the Company intends to issue product updates to
correct such anomalies. The Company has requested and is waiting to receive Year
2000 compliance statements from vendors of certain widely-accepted database and
middleware tools which are used in the development of its products; in the event
such tools are not compliant, the Company believes achieving compliance will
require upgrades to newer versions of such tools.
The Company also has performed and continues to perform limited Year 2000
compliance assessments of certain older versions of its products, and where
problems are discovered, will determine the practicality of modifying older
versions. Certain of the Company's customers use older 16-bit operating systems
which are believed not to be Year 2000 compliant; the Company makes available to
these customers older 16-bit versions of its software, which in some cases are
not Year 2000 compliant. The Company believes it does not have material
financial exposure to customers with respect to older version of its products.
The Company estimates testing costs for its products to be approximately
$100,000 and an additional $50,000 for vendor compliance and customer
communication.
As the Year 2000 compliance assessment and/or testing of a product is
complete, the Company will make available information to its customers via the
Company's web site. This information may also be communicated to registered
customers in news letters or other special mailings.
Risks Associated with Year 2000 Issue
The Company believes it will have an effective Year 2000 compliance
program in place prior to the end of 1999 which will allow it to identify and
correct any Year 2000 compliance deficiencies. This assessment is subject to
revision based on the results of the Company's on-going Year 2000 compliance
efforts. If unforeseen compliance efforts are required or if present compliance
efforts are not completed on time, or if the cost of any required updating,
modification or replacement of the Company's systems or equipment exceeds the
Company's estimates, the Year 2000 issue could result in material costs and have
a material adverse effect on the Company. However, the Company believes that the
risk is minimal.
The Company utilizes third-party vendors for product development and
testing. Should these vendors not be compliant in a timely manner, product
releases scheduled to take place after December 31, 1999 could be delayed. The
Company also utilizes third-party vendors for processing data and payments, e.g.
payroll services, 401(k) plan administration, check processing, medical benefits
processing, etc. Should these vendors not be compliant in a timely manner, the
Company may be required to process transactions manually or delay processing
until such time as the vendors are Year 2000 compliant. The Company has
warranted, to certain customers, that certain of its products are or will be
Year 2000 compliant. Non-compliance with these warranties may result in legal
action for breach of warranty.
Various statements in this discussion of Year 2000 are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 as discussed below under "Risk Factors". These statements include
statements of the Company's expectations, statements with regard to schedules
and expected completion dates and statements regarding expected Year 2000
compliance. These forward-looking statements are subject to various risk factors
which may materially affect the Company's efforts to achieve Year 2000
compliance. These risk factors include: the inability of the Company to complete
in a timely manner the plans and modifications that it has identified; any
inaccuracy in the assessment of the cost and financial exposure of the Company
with respect to current and older versions of the Company's products; the
failure of software vendors to deliver the upgrades and repairs to which they
have committed; the wide variety of information technology systems and
components, both hardware and software, that must be evaluated; and the large
number vendors and customers with which the Company interacts. The Company's
assessments of the effects of Year 2000 on the Company are based, in part, upon
information received from third parties and the Company's reasonable reliance on
that information. Therefore, the risk that inaccurate information is supplied by
third parties upon which the Company reasonably relies must be considered as a
risk factor that might affect the Company's Year 2000 efforts. The Company is
attempting to reduce the risks by utilizing an organized approach, extensive
testing, and allowance of ample contingency time to address issues identified by
tests.
Contingency Plans
The Company has not established a specific contingency plan at this time.
The Company is in the process of developing a general corporate contingency plan
which it anticipates will be in place prior to December 31, 1999. The purpose of
this plan is to allow the Company to recognize system failures, if any, and
identify resources needed and available to restore operations in a timely
manner. If the need for an additional Year 2000 specific contingency plan is
recognized, such plan will be developed.
RISK FACTORS
The Company does not provide forecasts of its future financial
performance. However, from 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) may 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 1998, Monarch and Q-Support/Quetzal accounted for approximately
51% and 37%, respectively, of the Company's net sales. With the disposal of the
Virex and netOctopus products, the Company is wholly dependent on Monarch and
Q-Support/Quetzal. As a result, any factor adversely affecting sales of either
of these products could have a material adverse effect on the Company. The
Company's future financial performance 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 business, financial condition or results of operations.
International Sales
In 1998, 1997 and 1996, international sales accounted for approximately
56%, 47% and 47%, respectively, of the Company's net sales. The Company
anticipates that international sales will continue to account for a significant
percentage of its net sales. 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
Although the Company has no current acquisition plans, it has addressed
and may continue to address the need to develop new products, in part, through
the acquisition of other companies. Acquisitions 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.
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 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 offerings, 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.
Year 2000 Issue
Although the Company does not expect that the Year 2000 issue will have
a material effect on the Company's results of operations or financial condition,
the Company is potentially exposed to Year 2000 issues with respect to internal
software and external product offerings. If the Company's internal systems or
its products fail to operate properly as a result of Year 2000, the Company's
results of operations and financial condition could be materially and adversely
impacted. The Company continues to evaluate the Year 2000 issue. See "Year 2000
Readiness Disclosure Statement." particularly the subsection headed "Risks
Associated with Year 2000 Issue" which appears immediately before this "Risk
Factors" section of this Report on Form 10-K, for a discussion of the Company's
Year 2000 readiness and the risks associated with the Year 2000 issue.
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, Network Associates,
Inc., Remedy, and Actuate) 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.
Litigation
The Company is currently engaged in litigation with a former
independent software developer. See Item 3, Legal Proceedings, of this Report on
Form 10-K. Although the Company believes that the developer's claims have no
merit, an unexpected adverse result in this litigation could have a material
adverse effect on the Company's results of operations or financial condition. In
addition, the legal costs for this litigation may be substantial.
Indirect Distribution Channels
During 1998, 1997 and 1996, the Company derived approximately 22%, 20% and
17%, respectively, of its net sales through resellers, none of which are under
the direct 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 12%, 14%, and 13% of the Company's 1998, 1997 and
1996 net sales, respectively, no reseller or other customer accounted for more
than 10% of the Company's revenues in 1998, 1997 or 1996. 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 macroeconomic 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 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
At September 30, 1998, the Company did not participate in any derivative
financial instruments, or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. The Company holds no
investment securities which would require disclosure of market risk.
Primary Market Risk Exposures.
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company utilizes U.S.
dollar denominated borrowings to fund its operational needs through its
$1,500,000 working capital line. The line, which currently bears an interest
rate of prime plus .75% (9.25% at September 30, 1998), is subject to annual
renewal. Had the interest rates under the line of credit been 10% greater or
lesser than actual rates, the impact would not have been material in the
Company's consolidated financial statements for the year ended September 30,
1998. As of September 30, 1998, the Company had $250,000 outstanding on its
working capital line.
The Company's exposure to currency exchange rate fluctuations has been
and is expected to continue to be modest due to the fact that the operations of
its international subsidiaries are almost exclusively conducted in their
respective local currencies. International subsidiary operating results are
translated into U.S. dollars and consolidated for reporting purposes. The impact
of currency exchange rate movements on intercompany transactions was immaterial
for fiscal 1998. Currently the Company does not engage in foreign currency
hedging activities.
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 Schedule" as a part of this Report on Form 10-K.
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,
1998. 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, 1998 is incorporated herein by reference.
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, 1998 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, 1998 is incorporated herein
by reference.
<PAGE>
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, 1998 and
1997 Consolidated Statements of Operations for the Years Ended
September 30, 1998, 1997 and 1996. Consolidated Statements of Changes
in Shareholders' Equity for the Years Ended September 30, 1998, 1997
and 1996. Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998, 1997 and 1996. 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. List of Exhibits
Ex.No Description
(5) 2.1 Asset Purchase Agreement, dated October 9, 1997, among DATAWATCH
CORPORATION, Pole Position Software GmbH and Dr Solomon's Software,
Inc. (Exhibit 2.1)
(5) 2.2 Escrow Agreement, dated October 9, 1997, among DATAWATCH CORPORATION,
Dr Solomon's Software, Inc. and State Street Bank and Trust Company.
(Exhibit 2.2)
(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 Specimen certificate representing the Common Stock (Exhibit 4.4)
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)
Software Development and Marketing Agreement by and between PERSONICS
CORPORATION and Raymond Huger, dated January 19, 1989 (Exhibit 10.12)
(2)10.6 Marketing Agreement dated May 1, 1994 between WorkGroup Systems Ltd.
and DATAWATCH CORPORATION (Exhibit 10.1)
(3)10.7 Commercial Security Agreement between DATAWATCH CORPORATION and Silicon
Valley Bank doing business as Silicon Valley East dated November 1,
1994 (Exhibit 10.23)
(3)10.8 Commercial Security Agreement between PERSONICS CORPORATION and Silicon
Valley Bank doing business as Silicon Valley East dated November 1,
1994 (Exhibit 10.24)
(4)10.9* Executive Agreement between the Company and Marco D. Peterson dated
April 11, 1996 (Exhibit 10.2)
(4)10.10*Executive Agreement between the Company and Bruce R. Gardner dated
April 11, 1996 (Exhibit 10.3)
(6)10.11 Loan Modification Agreement dated October 31, 1996 between DATAWATCH
CORPORATION, Personics Corporation and Silicon Valley Bank
(Exhibit 10.29)
(6)10.12*1996 Non-Employee Director Stock Option Plan, as amended on
December 10, 1996 (Exhibit 10.30)
(6)10.13*1996 International Employee Non-Qualified Stock Option Plan
(Exhibit 10.31)
(7)10.14 Amended and Restated Letter Agreement, dated February 12, 1997, by and
between DATAWATCH CORPORATION, Personics Corporation and Silicon Valley
Bank (Exhibit 10.1)
(7)10.15 Promissory Note, dated February 12, 1997, by and between DATAWATCH
CORPORATION, Personics Corporation and Silicon Valley Bank
(Exhibit 10.2).
(8)10.16 Loan Modification Agreement, dated October 30, 1997, by and between
DATAWATCH CORPORATION, Personics Corporation and Silicon Valley Bank
(Exhibit 10.23)
(9)10.17*1996 Stock Plan (Appendix A)
(10)10.18 Loan Modification Agreement, dated January 30, 1998, by and between
DATAWATCHCORPORATION, Personics Corporation and Silicon Valley Bank
(Exhibit 10.1)
10.19 Loan Modification Agreement, dated December 18,1998, by and between
DATAWATCH CORPORATION, Personics Corporation and Silicon Valley Bank
(filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedule (filed herewith)
- - -------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan or contract.
(1) Previously filed as an exhibit 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 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).
(3) 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).
(4) 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).
(5) Previously filed as an exhibit to Registrant's Current Report on Form 8-K
dated October 9, 1997 and incorporated herein by reference (the number
given in parenthesis indicates the corresponding exhibit in such Form 8-K).
(6) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the Fiscal Year ended September 30, 1996 and Incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such for 10-K).
(7) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit in
such Form 10-Q).
(8) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the Fiscal Year ended September 30, 1997 and Incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such for 10-K).
(9) Previously filed as Appendix A to the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders held on March 19, 1997 and
incorporated herein by reference (the number given in parenthesis indicates
the corresponding Appendix in such definitive Proxy Statement).
(10) Previously filed as an exhibit to Registrant's Quarterly Report on form
10-Q for the quarter ended March 31, 1998 and incorporated herein by
reference (the number in parenthesis
indicates the corresponding exhibit in such Form 10-Q.
(b) Reports on Form 8-K
No current report on Form 8-K was filed during the quarterly period ended
September 30, 1998.
(c) Exhibits
The Company hereby files as exhibits to this Annual Report on Form
10-K those exhibits listed in Item 14(a)3 above.
(d) Financial Statement Schedules
The Company hereby files as financial statement schedules to this Annual
Report on Form 10-K the Consolidated Financial Statement Schedules listed
in Item 14(a)2 above which are attached hereto.
<PAGE>
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 29, 1998 By: /s/ Bruce R. Gardner
Bruce R. Gardner
President, Chief Executive Officer
and Director
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.
Signature Title Date
/s/ Bruce R. Gardner President, Chief Executive December 29, 1998
Bruce R. Gardner Officer and Director
(Principal Executive Officer)
/s/ Betsy J. Hartwell Vice President Finance, December 29, 1998
Betsy J. Hartwell Chief Financial Officer
and Treasurer
(Principal Financial
and Accounting Officer)
/s/ Jerome Jacobson Director December 29, 1998
Jerome Jacobson
/s/ David T. Riddiford Director December 29, 1998
- - -------------------------
David T. Riddiford
/s/ Terry W. Potter Director December 29, 1998
- - -------------------------
Terry W. Potter
/s/ Don M. Lyle Director December 29, 1998
- - ----------------------
Don M. Lyle
<PAGE>
- - -------------------------------------------------------------------------------
Datawatch Corporation and Subsidiaries
Consolidated Balance Sheets as of September 30, 1998 and 1997 and
Consolidated Statements of Operations, Changes in Shareholders' Equity, and
Cash Flows for the Years Ended September 30, 1998, 1997 and 1996 and
Independent Auditors' Report
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- - --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998 AND 1997 AND FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998:
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 6-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Datawatch Corporation
Wilmington, Massachusetts
We have audited the accompanying consolidated balance sheets of Datawatch
Corporation (the "Company") and subsidiaries as of September 30, 1998 and 1997,
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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, 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.
/s/ Deloitte & Touche LLP
November 24, 1998
<TABLE>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
- - ------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 3,575,256 $ 1,586,875
Short-term investments 3,395,410 -
Accounts receivable, less allowance for doubtful
accounts of $353,000 in 1998
and $228,000 in 1997 6,401,965 7,810,169
Inventories 511,669 876,767
Prepaid advertising and other expenses 1,270,671 2,000,717
Total current assets 15,154,971 12,274,528
PROPERTY AND EQUIPMENT:
Office furniture and equipment 4,120,118 3,748,022
Manufacturing and engineering equipment 159,982 450,063
4,280,100 4,198,085
Less accumulated depreciation
and amortization (2,453,240) (2,304,705)
Net property and equipment 1,826,860 1,893,380
OTHER ASSETS 625,293 551,639
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED COMPANIES - Less accumulated
amortization of $2,189,512 in 1998 and
$2,424,263 in 1997 725,091 1,427,098
$18,332,215 $16,146,645
- - ------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
CURRENT LIABILITIES:
Accounts payable $ 3,791,323 $ 3,837,376
Accrued expenses 1,301,599 1,340,995
Deferred revenue 1,161,556 2,143,203
Borrowings under credit lines 250,000 -
Current portion of long-term obligations 147,065 501,133
Total current liabilities 6,651,543 7,822,707
LONG-TERM OBLIGATIONS 44,190 1,399,089
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01- authorized,
1,000,000 shares; no shares issued - -
Common stock, par value $.01- authorized,
20,000,000 shares; issued, 9,180,364 and 9,116,113 shares in 1998 and 1997,
respectively; outstanding, 9,148,312 and 9,084,061 shares in
1998 and 1997, respectively 91,803 91,160
Additional paid-in capital 19,823,887 19,737,963
Accumulated deficit (7,829,554) (12,533,550)
Cumulative translation adjustment (309,266) (230,336)
11,776,870 7,065,237
Less treasury stock, at cost - 32,052 shares (140,388) (140,388)
Total shareholders' equity 11,636,482 6,924,849
$ 18,332,215 $16,146,645
</TABLE>
See notes to consolidated financial statements.
<TABLE>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- - ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
NET SALES:
PC-based products $ 25,123,468 $ 25,995,197 $ 24,216,794
Macintosh-based products 172,254 6,052,298 5,805,328
Net sales 25,295,722 32,047,495 30,022,122
COSTS AND EXPENSES:
Cost of sales 5,212,595 5,899,849 4,516,456
Engineering and product development 3,383,260 2,804,434 2,338,724
Selling, general and administrative 24,524,839 25,225,177 22,039,420
Restructuring and centralization costs 2,679,460 - -
INCOME (LOSS) FROM OPERATIONS (10,504,432) (1,881,965) 1,127,522
INTEREST EXPENSE (62,306) (167,871) (96,184)
INTEREST INCOME AND OTHER 470,367 54,503 49,162
GAIN ON SALE OF PRODUCT LINE 15,431,253 - -
FOREIGN CURRENCY TRANSACTION
GAINS (LOSSES) (30,886) (100) 11,860
(PROVISION) BENEFIT FOR INCOME TAXES (600,000) - 33,000
NET INCOME (LOSS) $ 4,703,996 $ (1,995,433) $ 1,125,360
NET INCOME (LOSS) PER SHARE - Basic $ 0.52 $ (0.22) $ 0.13
NET INCOME (LOSS) PER SHARE - Diluted $ 0.51 $ (0.22) $ 0.13
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING - Basic 9,133,385 9,060,612 8,705,172
ADJUSTMENT FOR POTENTIAL COMMON
STOCK 176,868 - 243,040
WEIGHTED-AVERAGE NUMBER
OF SHARES OUTSTANDING - Diluted 9,310,253 9,060,612 8,948,212
</TABLE>
See notes to consolidated financial statements.
<TABLE>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Additional Cumulative
Common Stock Paid-in Treasury Stock Accumulated Translation
Shares Amount Capital Shares Amount Deficit Adjustments Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1995 8,629,135 $86,291 $17,614,360 - $ - $(11,663,477) $ 24,996 $ 6,062,170
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
Stock issued pursuant to
acquisition of Guildsoft 125,000 1,250 905,000 - - - - 906,250
Stock options exercised 25,125 251 27,173 - - - - 27,424
Escrowed shares
returned to treasury - - 140,388 (32,052) (140,388) - - -
Translation adjustment - - - - - - (252,278) (252,278)
Net loss - - - - - (1,995,433) - (1,995,433)
BALANCE, SEPTEMBER 30, 1997 9,116,113 91,160 19,737,963 (32,052) (140,388) (12,533,550) (230,336) 6,924,849
Stock options exercised 64,251 643 85,924 - - - - 86,567
Translation adjustment - - - - - - (78,930) (78,930)
Net income - - - - - 4,703,996 - 4,703,996
BALANCE, SEPTEMBER 30, 1998 9,180,364 $91,803 $19,823,887 (32,052) $ (140,388) $ (7,829,554) $(309,266) $11,636,482
</TABLE>
See notes to consolidated financial statements.
<TABLE>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,703,996 $ (1,995,433) $ 1,125,360
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,300,813 1,522,877 1,223,162
Amortization of interest on short-term investments (176,034) - -
Gain on sale of product lines (15,431,253) - -
Gain on disposition of equipment (8,537) - -
Changes in current assets and liabilities, net of acquisitions:
Accounts receivable 1,036,395 353,381 (2,537,062)
Inventories 275,884 (175,144) (218,230)
Prepaid advertising and other expenses 482,255 (672,054) 243,381
Accounts payable and accrued expenses (1,030,528) 132,358 (567,112)
Deferred revenue (143,020) 196,730 631,818
Net cash used in operating activities (8,990,029) (637,285) (98,683)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and fixtures (818,143) (647,888) (564,129)
Proceeds from sale of equipment - net 18,862 91,233 -
Proceeds from sale of short-term investments 6,245,000 2,069,065 2,312,478
Purchase of short-term investments (9,464,376) (1,276,400) (2,219,484)
Proceeds from sale of product lines 16,750,000
Acquisition of Guildsoft Holdings, Ltd., net of working capital acquired - 19,833 -
Other assets (346,731) (314,608) 25,571
Net cash provided by (used in) investing activities 12,384,612 (58,765) (445,564)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 86,567 27,424 1,054,410
Principal payments on long-term obligations (242,769) (307,380) (245,575)
(Payments) borrowings under credit lines - net 250,000 (633,468) 554,959
Proceeds from bank term loan - 1,500,000 -
Payments of bank term loan (1,500,000) - -
Net cash (used in) provided by financing activities (1,406,202) 586,576 1,363,794
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,988,381 (109,474) 819,547
CASH AND EQUIVALENTS, BEGINNING OF YEAR 1,586,875 1,696,349 876,803
CASH AND EQUIVALENTS, END OF YEAR $ 3,575,256 $ 1,586,875 $ 1,696,350
SUPPLEMENTAL INFORMATION:
Interest paid $ 62,306 $ 159,954 $ 96,184
Income taxes paid $ 1,175,000 $ 167,490 $ 78,922
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital lease agreements $ 77,311 $ 267,277 $ 320,684
Escrowed shares returned to treasury $ - $ 140,388 $ -
</TABLE>
See notes to consolidated financial statements.
DATAWATCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
- - --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Datawatch Corporation (the "Company") develops,
markets and distributes commercial 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 consolidated financial statements
include the accounts of Datawatch Corporation and its wholly owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
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
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition - Revenue from sales of software products is
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 thirty to sixty days from the date of purchase. Software
products sold directly to end users include a guarantee under which such
customers may return products within thirty to sixty days for a full
refund. The Company offers its resellers the ability to return obsolete
versions of its products and slow-moving products for credit which can be
used against purchases of other Company products on a dollar-for-dollar
basis. During each of the three years in the period ended September 30,
1998, returns under these warranty and guarantee arrangements were not
material.
Revenue from the sale of separate consulting agreements to provide field
service support is deferred at the time of sale. The Company recognizes
its revenue on these agreements ratably over their twelve-month
contractual periods. Revenue from the sale of annual subscription
agreements to provide upgrades for minor product improvements and new
virus protection (with respect to the Company's Macintosh software product
lines, see Note 2) was deferred at the time of sale and recognized ratably
over their twelve-month contractual periods.
Revenue from consulting services performed in connection with the sale of
bundled products and services is 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), the cost of the services and the Company's
obligations are not significant, and the cost of such services are
estimable. If consulting services do not meet these criteria, such revenue
is deferred and recognized as revenue as the services are provided.
<PAGE>
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Revenue Recognition (Continued) - The American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position ("SOP")
No. 97-2, "Software Revenue Recognition," and interpretive guidance in
SOP Nos. 98-4 and 98-9 which supersede SOP No. 91-1. The Company has
adopted SOP No. 97-2 and the successor SOPs effective October 1, 1998.
SOP No. 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The Company's management believes
that the adoption of SOP No. 97-2 will not have a material effect on the
Company's annual consolidated revenues and operating results.
Cash and Equivalents - Cash and equivalents includes cash on hand, cash
deposited with banks and highly liquid debt securities with remaining
maturities of ninety days or less when purchased.
Short-Term Investments - Short-term investments consist of United States
Treasury Bills and commercial paper with relatively short-term maturities
(less than one year from the date of purchase) for which the carrying
value approximates market value.
Other Assets - Pursuant to Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," issued by the Financial Accounting
Standards Board ("FASB"), the Company is required to capitalize certain
software development and production costs once technological feasibility
has been achieved. The cost of purchased software is also required to be
capitalized when related to a product which has achieved technological
feasibility or that has an alternative future use. For the years ended
September 30, 1998, 1997 and 1996, the Company did not capitalize any
internal software development costs. For the years ended September 30,
1998, 1997 and 1996, the Company purchased and capitalized software
amounting to $487,000, $315,000 and $0, respectively. Software development
costs incurred prior to achieving technological feasibility are charged to
research and development expense as incurred.
Capitalized software development and purchased software costs are reported
at the lower of unamortized cost or net realizable value. Commencing upon
initial product release, these costs are amortized using the straight-line
method over the estimated life, generally twelve to thirty-six months for
purchased software. For the years ended September 30, 1998, 1997 and 1996,
amortization was approximately $125,000, $22,000 and $60,000,
respectively.
Advertising and Promotional Materials - Advertising costs are expensed as
incurred and amounted to approximately $339,000, $721,000 and $917,000 in
1998, 1997 and 1996, respectively. 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 three to
four months from the date of the mailing). Direct mail expense was
approximately $2,979,000, $3,152,000 and $3,970,000 in 1998, 1997 and
1996, respectively. At September 30, 1998 and 1997, deferred direct
mail/direct response costs were approximately $725,000 and $1,291,000,
respectively.
<PAGE>
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 12%, 14% and 13% of net sales in 1998,
1997 and 1996, respectively. This same customer accounted for 16% and 26%
of outstanding trade receivables as of September 30, 1998 and 1997,
respectively. Other than this customer, 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 (first-in, first-out) method or market.
Property and Equipment - Purchased equipment and fixtures are recorded at
cost. Leased equipment accounted for as capital leases is recorded at the
present value of the minimum lease payments required during the lease
terms. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the related assets or over the
terms, if shorter, of the related leases. Useful lives and lease terms
range from three to seven years. The cost and the related accumulated
amortization of equipment leased under capital lease agreements were
approximately $914,000 and $690,000 at September 30, 1998, respectively,
and $1,043,000 and $577,000 at September 30, 1997, respectively.
Amortization expense was $232,000, $296,000 and $224,000 for the years
ended September 30, 1998, 1997 and 1996, respectively.
Income Taxes - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." This statement requires an
asset and liability approach to accounting for income taxes based upon the
future expected values of the related assets and liabilities. Deferred
income taxes are provided for items which are recognized in different
years for tax and financial reporting purposes.
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 cash flow before
depreciation and amortization from related operations will be less than
the carrying amount of the excess of cost over net assets of acquired
companies.
The Company also evaluates other long-lived assets using the same
methodology in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
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 amounts of the Company's
current and long-term obligations approximate fair value.
<PAGE>
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Earnings (Loss) Per Share - In the first quarter of 1998, the Company
adopted the provisions of SFAS No. 128, "Earnings per Share." The Company
therefore changed the method used to compute earnings per share and
restated all prior periods in accordance with SFAS No. 128. Basic earnings
(loss) per share reflect the weighed-average number of common shares
outstanding during each period. Diluted earnings (loss) per share reflect
the impact of potential common shares from options and warrants, using the
treasury-stock method. The Company's only dilutive potential common stock
in 1998 and 1996 are stock options. The Company's stock options are
antidilutive in 1997 due to the recorded net loss. Approximately 164,000
potential common shares would have been included in the calculation in
1997 had they not been antidilutive.
Foreign Currency Translations and Transactions - 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. 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.
Reclassifications - Certain prior year amounts have been reclassified to
conform with the current financial statement presentation.
Stock-Based Compensation - The Company accounts for stock-based
compensation using the intrinsic- value method in accordance with APB
Opinion No. 25. The difference between accounting for stock-based
compensation under APB Opinion No. 25 and SFAS No. 123 is disclosed in
Note 12.
Recent Accounting Pronouncements - 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." SFAS No. 130
establishes standards for reporting and displaying 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 information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. SFAS No. 130 will be adopted by the Company during the first
quarter of fiscal 1999. SFAS No. 131 will be adopted by the Company in its
annual consolidated financial statements for fiscal 1999. Such standards
are "disclosure standards" and will not impact the Company's consolidated
results of operations.
In March of 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, which is required to
be adopted by the Company in October 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning
after June 15, 1999. The new standard requires that all companies record
derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. Management is currently
assessing whether there will be any impact of SFAS No. 133 on the
Company's consolidated financial statements upon adoption, which is
required in October 1999.
2. DIVESTITURE
On October 9, 1997, the Company sold its Macintosh software product lines
for $16,750,000 in cash, resulting in a pretax gain of approximately
$15,431,000. The assets sold consisted primarily of inventory, property
and equipment, trademarks and the technological rights related to these
product lines. In connection with the sale, the Company wrote off certain
assets and liabilities related to the product lines sold, including
approximately $286,000 representing the unamortized balance of goodwill
initially recorded in a prior acquisition of a business.
3. RESTRUCTURING AND CENTRALIZATION COSTS
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 plan was approved and completed in
the first quarter of 1998. The total amount charged to first quarter
operations was approximately $2,364,000. The plan included charges for
salaries and wages and the related severance benefits for twenty-five
terminated employees. These charges, totaling $1,884,000, were either paid
($1,549,000) or accrued ($335,000) in the first quarter. The plan also
included special one-time payments made to outside developers associated
with the centralization of the Company's development efforts. These
charges, totaling $433,000, were either paid ($339,000) or accrued
($94,000) in the first quarter. Those benefits or payments accrued were
paid in the second quarter of 1998.
In August 1998, management approved, and in September 1998, management
completed, a second restructuring plan to further centralize the Company's
administrative infrastructure and its development efforts. The
restructuring plan consisted of charges for severance benefits and related
costs for thirteen terminated employees. These charges, totaling
approximately $315,000, were either paid ($134,000) or accrued ($181,000)
as of September 30, 1998.
4. POOLING OF INTERESTS
On March 12, 1996, the Company acquired all of the outstanding shares of
capital stock of Datawatch International Limited (formerly Workgroup
Systems Limited) ("Datawatch International") 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
was accounted for as a pooling of interests, and accordingly, the
Company's consolidated financial statements for the periods prior to the
merger were restated to include the accounts of Datawatch International.
Costs related to the pooling of interests of $450,000 were expensed during
1996. On November 21, 1996, the Company recovered 32,052 shares of the
143,698 escrowed shares in connection with the settlement of certain
Datawatch International contingent liabilities. These liabilities had been
previously recorded in the 1996 financial statements.
5. PURCHASE ACQUISITION
On November 7, 1996, the Company acquired all of the outstanding capital
stock of Datawatch Europe Limited (formerly Guildsoft Holdings Limited)
("Datawatch Europe") 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 was accounted for as a
purchase. Accordingly, all operating activity of Datawatch Europe from
November 7, 1996 has been included in the Company's consolidated
statements of operations. On an unaudited pro forma basis, if the
acquisition had taken place on October 1, 1995, net sales for 1996 would
have been approximately $31,900,000 and net income for 1996 would not have
been materially different from the amount previously reported.
5. PURCHASE ACQUISITION (CONTINUED)
The total purchase price of $1,719,000 (including liabilities assumed of
$812,000) was allocated to the assets acquired based upon their respective
fair values. The excess of cost over net assets acquired totaled
approximately $934,000.
6. INVENTORIES
<TABLE>
Inventories consisted of the following at September 30:
1998 1997
<S> <C> <C>
Materials $ 303,426 $ 340,385
Finished goods 208,243 536,382
Total $ 511,669 $ 876,767
</TABLE>
7. ACCRUED EXPENSES
<TABLE>
Accrued expenses consisted of the following at September 30:
1998 1997
<S> <C> <C>
Accrued salaries and benefits $ 155,694 $ 567,745
Accrued royalties and commissions 491,300 406,536
Accrued professional fees 136,716 19,802
Accrued rent and property taxes 33,993 54,364
Accrued restructuring costs (Note 3) 181,344 -
Other 302,552 292,548
Total $ 1,301,599 $ 1,340,995
</TABLE>
8. COMMITMENTS
Leases - The Company leases various facilities in the U.S. and overseas
under noncancelable operating leases which expire through 2017. 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 its U.S. facilities for an additional
five years commencing in 1999. Rental expense for all operating leases was
approximately $631,000, $803,000 and $851,000 for the years ended
September 30, 1998, 1997 and 1996, respectively.
<PAGE>
8. COMMITMENTS (CONTINUED)
<TABLE>
As of September 30, 1998, minimum rental commitments under noncancelable
operating leases are as follows:
Year Ending
September 30
<S> <C>
1999 $ 720,318
2000 329,967
2001 195,719
2002 180,736
2003 180,736
Thereafter 1,284,144
Total minimum lease payments $ 2,891,620
</TABLE>
Royalties - The Company is also committed to pay royalties relating to the
sales of certain software products. Royalty expense included in cost of
sales was approximately $1,380,000, $1,867,000 and $1,533,000 for the
years ended September 30, 1998, 1997 and 1996, respectively.
Software Development Agreement - In August 1998, the Company entered into
a software development agreement whereby, upon completion of the
development and acceptance by the Company, the Company will issue to the
developer a number of shares of its common stock as would be determined by
dividing $160,000 by the average of the closing price of its stock during
the period from the date of the agreement through the date of acceptance
of the software.
9. LITIGATION
The Company has been named as a defendant in litigation arising from its
normal business activities. The Company is not a party to any litigation
that management believes will have a material adverse effect on the
Company's consolidated financial statements or its business.
10. FINANCING ARRANGEMENTS
Line of Credit - The Company maintains a line of credit which will expire
on January 29, 1999. The line of credit provides for maximum borrowings up
to the lesser of $1,500,000 or 50%-80% of defined eligible accounts
receivable. Borrowings under the line are collateralized by substantially
all assets of the Company. Outstanding borrowings bear interest at the
bank's prime rate plus .75% (9.25% at September 30, 1998). As of September
30, 1998 and 1997, there were $250,000 and $0, respectively, of
outstanding borrowings under the line of credit. The line of credit
contains customary covenants which require, among other items, a minimum
level of consolidated tangible net worth and the maintenance of a minimum
liquidity ratio, as defined. As of September 30, 1998, the Company was in
default on its covenant to maintain the minimum level of consolidated net
worth. The bank subsequently waived this default through the line's
maturity date and limited borrowings to $1,150,000.
<PAGE>
10. FINANCING ARRANGEMENTS (CONTINUED)
Term Loan - On February 12, 1997, the Company obtained an equipment line
of credit with a bank. The line of credit provides for maximum borrowings
up to $1,500,000. Payments of interest only were required from March 12,
1997 through February 12, 1998, at which time the equipment line was to
convert to a term loan payable. The Company fully repaid the loan on
October 16, 1997.
Capital Lease Obligations - The Company leases certain office and computer
equipment under capital leases with lease terms ranging from one to three
years.
Future minimum lease payments under the noncancelable capital lease
obligation at September 30,1998 follows:
1999 $ 170,211
2000 50,583
2001 and thereafter 422
Total minimum lease payments 221,216
Amounts representing interest (29,961)
Present value of minimum lease commitments 191,255
Current portion (147,065)
Long-term portion $ 44,190
<PAGE>
11. INCOME TAXES
The provision (benefit) for income taxes consisted of the following for
the years ended September 30:
1998 1997 1996
Current:
Federal $ 580,000 $ - $(28,000)
State 10,000 - (5,000)
Foreign 10,000 - -
600,000 - (33,000)
Deferred:
Federal 1,663,000 (797,000) 647,700
State 688,000 (141,000) 114,300
Foreign (1,621,000) - -
Change in valuation allowance (730,000) 938,000 (762,000)
- -
Total $ 600,000 $ - $(33,000)
At September 30, 1998, the Company has fully utilized the federal tax loss
carryforwards and has approximately $358,000 in state tax loss
carryforwards, which commence expiring in 2007. An alternative minimum tax
credit of $132,000 is available for offset against future regular federal
taxes. Research and development credits of $75,000 expire in 2013. In
addition, tax loss carryforwards in certain foreign jurisdictions total
approximately $6,322,000.
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.
<PAGE>
11. INCOME TAXES (CONTINUED)
The tax effects of significant items comprising the Company's net deferred
tax position as of September 30 were as follows:
1998 1997
Deferred tax liabilities:
Depreciation and amortization $ (60,000) $ (92,000)
Prepaid expenses (309,000) -
(369,000) (92,000)
Deferred tax assets:
Goodwill 362,000 -
Inventory-related items 100,000 197,000
Accounts and notes receivable reserves 239,000 269,000
Net operating loss carryforwards 2,563,000 3,166,000
Research and development credits 75,000 205,000
Alternative minimum tax credits 132,000 144,000
Other 57,000 -
3,528,000 3,981,000
Total 3,159,000 3,889,000
Valuation allowance (3,159,000) (3,889,000)
Deferred taxes, net $ - $ -
The Company has experienced significant losses from operations either
domestically or internationally over the past several years. Accordingly,
management does not believe the tax assets satisfy the realization
criteria set forth in SFAS No. 109 and has thus recorded a valuation
allowance for the entire net tax asset. The valuation allowance decreased
by approximately $730,000 in 1998, primarily because of the utilization of
net operating loss carryforwards.
<TABLE>
The following table reconciles the Company's effective tax rate to the
federal statutory rate of 34% for the years ended September 30, 1998, 1997
and 1996:
1998 1997 1996
<S> <C> <C> <C>
Taxes (benefit) at federal statutory rate $ 1,803,000 $ (678,000) $ 372,000
Reversal of valuation allowances against
net operating loss carryforwards (2,066,000) (371,000) (507,000)
Provision of valuation allowance against currently
generated net operating loss carryforwards 962,000 1,049,000 133,000
Benefit of research credits (280,000) - -
Nondeductible goodwill 96,000 - -
Other 85,000 - (31,000)
Provision (benefit) for income taxes $ 600,000 $ - $ (33,000)
</TABLE>
<PAGE>
12. SHAREHOLDERS' EQUITY
Stock Option Plans - The Company's four stock option plans described below
provide for granting of options and other stock rights to purchase common
stock of the Company to employees, officers, consultants and directors who
are not otherwise employees. The options granted are exercisable as
specified at the date of grant and generally expire five to ten years from
the date of grant. Generally, options and other stock rights are granted
at exercise prices not less than fair market value at the date of the
grant.
The Company's 1987 Stock Option Plan provided for the issuance of
nonqualified or incentive stock options to employees, officers,
consultants, and directors. As of February 25, 1997, the Company may no
longer issue stock options under the 1987 Stock Option Plan pursuant to
terms of the plan.
On June 1, 1996, the Company established the 1996 Non-employee Director
Stock Option Plan (the "1996 Director Plan") which was amended December
10, 1996. The 1996 Director Plan, as amended, provides for an initial
grant of 12,000 options to each non-employee director elected as a member
of the Board of Directors and for the subsequent automatic annual grant of
4,000 options (at the then current fair market value) to each member so
long as that member remains on the Board of Directors. Options granted
pursuant to this plan vest 8.33% during each three-month period subsequent
to date of grant, so as to be fully vested three years from date of grant.
Options may be granted under this plan through June 1, 2006.
On October 4, 1996, the Company established the 1996 International
Employee Non-Qualified Stock Option Plan (the "1996 International Plan").
Pursuant to this plan, nonqualified options may be granted to any employee
or consultant of any of the Company's foreign subsidiaries through October
4, 2006.
On December 10, 1996, the Company established the Datawatch Corporation
1996 Stock Plan (the "1996 Stock Plan") which provides for the granting of
both incentive stock options and nonqualified options, the award of
Company common stock, and opportunities to make direct purchases of
Company common stock (collectively, "Stock Rights"), as determined by a
committee appointed by the Board of Directors. Options pursuant to this
plan may be granted through December 10, 2006, and shall vest as specified
by the Committee.
Selected information regarding the above stock option plans as of and for
the year ended September 30, 1998 is as follows:
Authorized Available for
for Grant Future Grant
1987 Stock Option Plan 790,791 -
1996 Director Plan 72,000 20,000
1996 International Plan 200,000 13,000
1996 Stock Plan 1,000,000 423,298
2,062,791 456,298
<PAGE>
12. SHAREHOLDERS' EQUITY (CONTINUED)
Stock Option Plans (Continued) - The following table is a summary of
activity for all of the Company's stock option plans:
Weighted-
Average
Options Exercise
Outstanding Price
Outstanding, October 1, 1995 319,619 $ 0.99
Granted 181,000 5.01
Canceled (7,667) 4.46
Exercised (217,411) 0.95
Outstanding, September 30, 1996 275,541 3.56
Granted 719,820 1.98
Canceled (198,527) 4.53
Exercised (25,125) 1.09
Outstanding, September 30, 1997 771,709 1.92
Granted 388,200 2.30
Canceled (181,499) 2.19
Exercised (64,251) 1.35
Outstanding, September 30, 1998 914,159 $ 2.06
Exercisable, September 30, 1998 272,360 $ 2.05
Exercisable, September 30, 1997 158,204 $ 1.76
<PAGE>
12. SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
Stock Option Plans (Continued) - The following table sets forth
information regarding options outstanding at September 30, 1998:
Options Outstanding Options Exercisable
- - -------------------------------------------------------------------- -------------------------------
Weighted-Average Weighted- Weighted-
Remaining Average Average
Exercise Number of Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
<S> <C> <C> <C> <C> <C>
$ 1.00 40,791 1 $ 1.00 40,791 $ 1.00
1.59-2.28 598,701 8 1.75 164,801 1.72
2.38-2.56 242,667 10 2.54 45,760 2.54
4.31-4.87 20,000 5 4.65 13,008 4.70
7.06 12,000 8 7.06 8,000 7.06
914,159 8 $ 2.06 272,360 $ 2.05
</TABLE>
<TABLE>
Pro Forma Disclosure - As described in Note 1, the Company uses the
intrinsic method of valuing its stock options in accordance with ABP No.
25 to measure compensation expense associated with grants of stock options
to employees and directors. Had the Company recognized compensation for
its stock options and purchase plans based on the fair value for awards
under those plans after October 1, 1995, in accordance with SFAS No. 123,
"Accounting for Stock Based Compensation," pro forma net income (loss) and
pro forma net income (loss) per share would have been as follows:
- - ------------------------------------------------------------------------------------------------------
Years Ended September 30,
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C>
- - ------------------------------------------------------------------------------------------------------
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ 4,410,742 $ (2,263,219) $ 1,062,506
- - ------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------
Pro forma net income (loss)
- - ------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------
per share:
- - ------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------
Basic $ 0.48 $ (0.25) $ 0.12
- - ------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------
Diluted 0.47 (0.25) 0.12
- - ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
12. SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
Pro Forma Disclosure (Continued) - The fair values used to compute pro
forma net income (loss) and net income (loss) per share were estimated on
the grant date using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
- - -----------------------------------------------------------------------------------------------------------------------
Years Ended September 30,
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 5.8 % 6.7 % 6.1 %
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
Expected life of option grants (years) 5.0 5.0 5.0
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
Expected volatility of underlying stock 92.8 % 87.2 % 52.1 %
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
Expected dividend payment rate 0.0 % 0.0 % 0.0 %
- - -----------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------
Expected forfeiture rate 0.0 % 0.0 % 0.0 %
- - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted-average fair value of stock options granted, was $1.71, $1.26
and $3.41 during the years ended September 30, 1998, 1997 and 1996,
respectively.
The option pricing model was designed to value readily tradeable stock
options with relatively short lives. The options granted to employees are
not tradeable and have contractual lives of five to ten years. However,
management believes that the assumptions used and the model applied to
value the awards yields a reasonable estimate of the fair value of the
grants made under the circumstances.
13. 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
1998, 1997 or 1996.
<PAGE>
14. SEGMENT INFORMATION
<TABLE>
Summarized information, determined under the provisions of SFAS No. 14,
about the Company's operations by geographic area is as follows:
Europe
(Principally
Domestic U.K.) Eliminations Total
<S> <C> <C> <C> <C>
Year Ended September 30, 1998
Net sales $11,635,959 $14,058,471 $ (398,708) $25,295,722
Income (loss) from operations (7,038,903) (3,346,808) (118,721) (10,504,432)
Identifiable assets 21,672,565 6,549,965 (9,890,315) 18,332,215
Year Ended September 30, 1997
Net sales $20,502,363 $12,398,815 $ (853,683) $ 32,047,495
Income (loss) from operations 986,866 (2,800,009) (68,822) (1,881,965)
Identifiable assets 16,782,249 5,089,501 (5,725,105) 16,146,645
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
Export sales aggregated approximately $3,132,000, $3,484,000 and $4,105,000 in
1998, 1997 and 1996, respectively.
</TABLE>
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 ----------------------- Reserves Period
Costs & Expenses(a) Other
- - -----------------------------------------------------------------------------
Year Ended September 30, 1998
- - -----------------------------
Allowance-doubtful
accounts and
sales returns $227,913 $322,128 $74,540 (e) ($272,064)(b)(c) $352,517
-----------------------------------------------------------
TOTAL $227,913 $322,128 $74,540 ($272,064) $352,517
===========================================================
Year Ended September 30, 1997
- - -----------------------------
Allowance-doubtful
accounts and
sales returns $73,145 $177,334 $54,138 (d)(e) ($76,704)(b) $227,913
-----------------------------------------------------------
TOTAL $73,145 $177,334 $54,138 ($76,704) $227,913
===========================================================
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 ($52,268) $73,145
===========================================================
(a) Current year provision
(b) Doubtful accounts written off
(c) Product returns
(d) Allowance acquired through purchase of Datawatch Europe Ltd.
(e) Bad debt recoveries
EXHIBIT INDEX
(5) 2.1 Asset Purchase Agreement, dated October 9, 1997, among DATAWATCH
CORPORATION, Pole Position Software GmbH and Dr Solomon's Software,
Inc. (Exhibit 2.1)
(5) 2.2 Escrow Agreement, dated October 9, 1997, among DATAWATCH CORPORATION,
Dr Solomon's Software, Inc. and State Street Bank and Trust Company.
(Exhibit 2.2)
(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 Specimen certificate representing the Common Stock (Exhibit 4.4)
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)
Software Development and Marketing Agreement by and between PERSONICS
CORPORATION and Raymond Huger, dated January 19, 1989 (Exhibit 10.12)
(2)10.6 Marketing Agreement dated May 1, 1994 between WorkGroup Systems Ltd.
and DATAWATCH CORPORATION (Exhibit 10.1)
(3)10.7 Commercial Security Agreement between DATAWATCH CORPORATION and Silicon
Valley Bank doing business as Silicon Valley East dated November 1,
1994 (Exhibit 10.23)
(3)10.8 Commercial Security Agreement between PERSONICS CORPORATION and Silicon
Valley Bank doing business as Silicon Valley East dated November 1,
1994 (Exhibit 10.24)
(4)10.9* Executive Agreement between the Company and Marco D. Peterson dated
April 11, 1996 (Exhibit 10.2)
(4)10.10*Executive Agreement between the Company and Bruce R. Gardner dated
April 11, 1996 (Exhibit 10.3)
(6)10.11 Loan Modification Agreement dated October 31, 1996 between DATAWATCH
CORPORATION, Personics Corporation and Silicon Valley Bank
(Exhibit 10.29)
(6)10.12*1996 Non-Employee Director Stock Option Plan, as amended on
December 10, 1996 (Exhibit 10.30)
(6)10.13*1996 International Employee Non-Qualified Stock Option Plan
(Exhibit 10.31)
(7)10.14 Amended and Restated Letter Agreement, dated February 12, 1997, by and
between DATAWATCH CORPORATION, Personics Corporation and Silicon Valley
Bank (Exhibit 10.1)
(7)10.15 Promissory Note, dated February 12, 1997, by and between DATAWATCH
CORPORATION, Personics Corporation and Silicon Valley Bank
(Exhibit 10.2).
(8)10.16 Loan Modification Agreement, dated October 30, 1997, by and between
DATAWATCH CORPORATION, Personics Corporation and Silicon Valley Bank
(Exhibit 10.23)
(9)10.17*1996 Stock Plan (Appendix A)
(10)10.18 Loan Modification Agreement, dated January 30, 1998, by and between
DATAWATCHCORPORATION, Personics Corporation and Silicon Valley Bank
(Exhibit 10.1)
10.19 Loan Modification Agreement, dated December 18,1998, by and between
DATAWATCH CORPORATION, Personics Corporation and Silicon Valley Bank
(filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedule (filed herewith)
- - --------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan or contract.
(1) Previously filed as an exhibit 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 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).
(3) 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).
(4) 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).
(5) Previously filed as an exhibit to Registrant's Current Report on Form 8-K
dated October 9, 1997 and incorporated herein by reference (the number
given in parenthesis indicates the corresponding exhibit in such Form 8-K).
(6) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the Fiscal Year ended September 30, 1996 and Incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such for 10-K).
(7) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit in
such Form 10-Q).
(8) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the Fiscal Year ended September 30, 1997 and Incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such for 10-K).
(9) Previously filed as Appendix A to the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders held on March 19, 1997 and
incorporated herein by reference (the number given in parenthesis indicates
the corresponding Appendix in such definitive Proxy Statement).
(10) Previously filed as an exhibit to Registrant's Quarterly Report on form
10-Q for the quarter ended March 31, 1998 and incorporated herein by
reference (the number in parenthesis
indicates the corresponding exhibit in such Form 10-Q.
EXHIBIT 10.19
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of December 18,
1998, by and between Datawatch Corporation and Personics Corporation (jointly
and severally, the "Borrower" and sometimes referred to as "Company") and
Silicon Valley Bank, a California-chartered bank ("Lender"), 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. The paragraph entitled "Line of Credit" is hereby
deleted. Borrower shall not be allowed further
advances under the Note.
B. Modification(s) to Loan Agreement.
1. The "Tangible Capital Base" financial covenant
requirement, as described in the "Affirmative
Covenants" Section, is hereby deleted.
C. Waiver of Financial Covenant Default.
1. Lender hereby waives Borrower's existing default
under the Loan Agreement by virtue of Borrower's
failure to comply with the Tangible Capital Base as
of months ended September 30, 1998, October 31, 1998
and November 30, 1998. Lender's waiver of Borrower's
compliance of this covenant shall apply only to the
foregoing periods.
Lender's agreement to waive the above-described
default (1) in no way shall be deemed an agreement by
the Lender to waive Borrower's compliance with the
above-described covenant as of all other dates and
(2) shall not limit or impair the Lender's right to
demand strict performance of this covenant as of all
other dates and (3) shall not limit or impair the
Lender's right to demand strict performance of all
other covenants as of any date.
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 agreement, as set forth in the Existing Loan Documents. Except
as expressly modified pursuant to this Loan Modification Agreement, the terms of
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 (provide, 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.
<PAGE>
This Loan Modification Agreement is executed as of
the date first written above.
BORROWER:
DATAWATCH CORPORATION
By: /s/ Betsy J. Hartwell
Name: Betsy J. Hartwell
Title: CFO / VP Finance
PERSONICS CORPORATION
By: /s/ Betsy J. Hartwell
Name: Betsy J. Hartwell
Title: Assist. Treasurer
LENDER:
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: /s/ J. C. Maynard
Name: J. C. Maynard
Title: SVP
SILICON VALLEY BANK
By: /s/ Amy Young
Name: Amy Young
Title: VP
(Signed at Santa Clara County, CA)
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Subsidiary Place of Incorporation D/B/A Name
Personics Corporation Delaware, USA Personics Corporation
WorkGroup GmbH Germany WorkGroup GmbH
Pole Position Software GmbH* Germany Pole Position Software GmbH
Datawatch International Ltd England & Wales Datawatch International Ltd
Datawatch GmbH** Germany Datawatch GmbH
Datawatch France SARL** France Datawatch France SARL
Datawatch Pty Ltd.** Australia Datawatch Pty Ltd.
Datawatch Europe Limited** England & Wales Datawatch Europe Limited
Guildsoft Limited *** England & Wales Guildsoft Limited
* All of the shares of capital stock of Pole Position Software GmbH are owned
by WorkGroup GmbH.
** All of the shares of capital stock of WorkGroup Systems GmbH, WorkGroup
Systems France SARL, Datawatch Pty Ltd. and Datawatch Europe Limited are
owned by Datawatch International Limited.
*** All of the shares of capital stock of Guildsoft Limited are owned by
Datawatch Europe Limited.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-39627 and No. 33-65786 of Datawatch Corporation on Forms S-8 of our report
dated November 24, 1998 appearing in this Annual Report on Form 10-K of
Datawatch Corporation for the year ended September 30, 1998.
/s/Deloitte & Touche LLP
Boston, Massachusetts
December 28, 1998
<PAGE>
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<NAME> DATAWATCH CORPORATION
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