UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-19960
Datawatch Corporation
(Exact name of registrant as specified in its charter)
Delaware 02-0405716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Ballardvale Street, Wilmington Massachusetts 01887
(Address of principal executive offices) (Zip Code)
(978) 988-9700
(Registrant's telephone number, including area code)
None
(Former name, former address, former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at May 7, 1999
Common stock, $.01 par value 9,150,821
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page #
a) Consolidated Condensed Balance Sheets: 3
March 31, 1999 and September 30, 1998
b) Consolidated Condensed Statements of Operations: 4
Three Months Ended March 31, 1999 and 1998
Six Months Ended March 31, 1999 and 1998
c) Consolidated Condensed Statements of Cash Flows: 5
Six Months Ended March 31, 1999 and 1998
d) Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities *
Item 3. Default upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
* No information provided due to inapplicability of item.
PART I.
Item 1. Financial Statements
--------------------
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1999 September 30, 1998
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,130,802 $ 3,575,256
Short-term investments 2,083,649 3,395,410
Accounts receivable, net 6,915,055 6,401,965
Inventories 424,249 511,669
Prepaid expenses 951,437 1,270,671
--------------- ---------------
Total current assets 12,505,192 15,154,971
--------------- ---------------
PROPERTY AND EQUIPMENT:
Property and equipment 4,147,429 4,280,100
Less accumulated depreciation
and amortization (2,539,086) (2,453,240)
--------------- ---------------
Net property and equipment 1,608,343 1,826,860
--------------- ---------------
OTHER ASSETS 848,944 625,293
--------------- ---------------
EXCESS OF COSTS OVER NET ASSETS
OF ACQUIRED COMPANIES 611,250 725,091
--------------- ---------------
TOTAL ASSETS $ $ 15,573,729 $ 18,332,215
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,761,728 $ 3,791,323
Accrued expenses 853,611 1,301,599
Borrowings under credit lines 960,177 250,000
Deferred revenue 1,305,320 1,161,556
Current portion of long-term
debt 79,881 147,065
--------------- ---------------
Total current liabilities 6,960,717 6,651,543
--------------- ---------------
LONG-TERM DEBT 12,775 44,190
--------------- ---------------
TOTAL LIABILITIES $ 6,973,492 $ 6,695,733
=============== ===============
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY:
Common stock $ 91,828 $ 91,803
Additional paid-in capital 19,826,387 19,823,887
Accumulated deficit (10,794,987) (7,829,554)
Accumulated other comprehensive
loss (382,603) (309,266)
--------------- ---------------
8,740,625 11,776,870
--------------- ---------------
Less treasury stock - at cost (140,388) (140,388)
--------------- ---------------
Total shareholders' equity 8,600,237 11,636,482
--------------- ---------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ $ 15,573,729 $ 18,332,215
=============== ===============
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
--------------- --------------- --------------- --------------
<C> <C> <C> <C>
IBM-PC based products $ 7,160,763 $ 6,376,747 $ 13,684,188 $ 12,582,832
Macintosh-based products 172,254
--------------- ---------------- --------------- --------------
NET SALES 7,160,763 6,376,747 13,684,188 12,755,086
--------------- ---------------- --------------- --------------
COSTS AND EXPENSES:
Cost of sales 1,768,385 1,263,670 3,222,905 2,723,674
Engineering and product
development 737,438 499,389 1,376,073 918,526
Selling, general and
administrative 5,900,816 5,629,888 11,898,953 12,018,216
Restructuring and
centralization costs 199,637 2,364,246
--------------- ---------------- --------------- --------------
LOSS FROM OPERATIONS (1,245,876) (1,016,200) (3,013,380) (5,269,576)
INTEREST EXPENSE (33,775) (13,866) (64,621) (32,336)
OTHER INCOME, primarily
interest 42,509 144,288 113,391 287,531
GAIN (LOSS) ON DISPOSITION
OF FIXED ASSETS 5,636 (2,130)
GAIN ON SALE OF PRODUCT
LINE 15,431,253
FOREIGN CURRENCY
TRANSACTION GAIN(LOSS) (3,295) (5,986) 1,307 (10,202)
--------------- ---------------- -------------- --------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAX (1,234,801) (891,764) (2,965,433) 10,406,670
PROVISION FOR INCOME TAX 2,225,000
--------------- ---------------- -------------- --------------
NET INCOME (LOSS) $ (1,234,801) $ (891,764) $ (2,965,433) $ 8,181,670
================ =============== ============== ==============
NET INCOME (LOSS) PER
COMMON SHARE-Basic $ (.13) $ (.10) $ (.32) $ .90
COMMON SHARE-Diluted $ (.13) $ (.10) $ (.32) $ .87
WEIGHTED AVERAGE SHARES
OUTSTANDING - Basic 9,148,457 9,140,718 9,148,384 9,118,762
ADJUSTMENT FOR DILUTIVE
POTENTIAL COMMON STOCK 241,459
---------------- --------------- -------------- --------------
WEIGHTED AVERAGE SHARES
OUTSTANDING - Diluted 9,148,457 9,140,718 9,148,384 9,360,221
================ =============== ============== ==============
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended March 31,
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,965,433) $ 8,181,670
Adjustment to reconcile net income to net cash:
Gain on sale of product line (15,431,253)
(Gain) loss on disposition of fixed assets 2,130
Depreciation and amortization 622,422 601,488
Interest accrued on short-term investments (81,702) (66,577)
Changes in current assets and liabilities:
Inventories 87,420 199,785
Prepaid expenses 319,234 356,635
Accounts receivable (513,090) 488,164
Accounts payable and accrued expenses (550,920) (1,333,915)
Deferred revenue 143,764 (157,061)
--------------- ---------------
Net cash used in operating activities (2,936,175) (7,161,064)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and fixtures (178,634) (466,042)
Proceeds from maturity of short-term investments 4,905,000
Purchase of short-term investments (3,511,537) (4,879,481)
Proceeds from sale of product line to Dr Solomon's
Software, Inc. 16,750,000
Proceeds from disposition of fixed assets 5,641
Purchased software development (242,586)
Other assets (100,266) 122,611
--------------- ---------------
Net cash provided by investing activities 877,618 11,527,088
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,525 84,066
Principal payments on long-term obligations (98,599) (109,316)
Principal payments on bank term-loan (1,500,000)
Borrowings under credit line, net 710,177
--------------- ---------------
Net cash provided by (used in) financing activities 614,103 (1,525,250)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (1,444,454) 2,840,774
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,575,256 1,586,875
--------------- ---------------
CASH AND EQUIVALENTS, END OF PERIOD $ 2,130,802 $ 4,427,649
=============== ===============
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements include the accounts of Datawatch Corporation (the
"Company") and its wholly owned subsidiaries and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements and should be read in conjunction with the
audited consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 1998.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments necessary
for fair presentation of the results of the interim periods presented. The
operating results for the interim periods presented are not necessarily
indicative of the results expected for the full year.
2. Recent Accounting Pronouncements: 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 adoption of SOP No. 97-2 did not have a material effect on the Company's
operating results for either the three or six months ended March 31, 1999.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
About Segments of an Enterprise and Related Information." 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. 131 will be adopted by the Company in its annual
consolidated financial statements for fiscal 1999. Such standard is
"disclosure standards" and will not impact the Company's consolidated results
of operations.
In March 1998, the AICPA released SOP 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use," which requires
certain expenditures made for internal use software to be capitalized. The
Company is currently studying the impact of SOP 98-1, 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.
3. Inventories: The Company accounts for its inventories using a standard
cost methodology. Inventories were comprised of the following:
March 31, 1999 September 30, 1998
------------------ ------------------
Materials $ 278,507 $ 303,426
Finished goods 145,742 208,243
------------------ ------------------
TOTAL $ 424,249 $ 511,669
================== ==================
4. Restructuring and Centralization Costs: During the fourth quarter of
fiscal 1998, the Company approved and completed a restructuring plan to further
centralize its administrative infrastructure and its development efforts.
These charges, totaling approximately $315,000 have been paid. There were no
changes in these estimates in the six months ended March 31, 1999.
During the first quarter of fiscal 1999, the Company approved and completed a
restructuring plan to centralize in the United States the quality assurance
efforts for its Quetzal/SC product. The restructuring plan consisted of
charges for severance benefits and related costs for 10 terminated employees.
These charges, totaling approximately $200,000, have been paid.
5. Litigation: 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.
6. Comprehensive Income: Effective October 1, 1998, the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income." The following is
presented in accordance with this statement:
Six Months Ended March 31,
1999 1998
--------------- ---------------
Net income (loss) $ (2,965,433) $ 8,181,670
Other comprehensive income, net of tax:
Foreign currency translation adjustments (73,337) (38,606)
--------------- ---------------
Comprehensive income (loss) $ (3,038,770) $ 8,143,064
=============== ===============
Accumulated other comprehensive loss reported in the condensed consolidated
balance sheets consists only of foreign currency translation adjustments.
7. Financing Arrangement: On March 16, 1999 the Company amended its line of
credit with a bank. As amended, the line of credit, expires on January 30,
2000 and 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 1% (8.5% at March 31,
1999). As of March 31, 1999, the Company had approximately $960,000 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
GENERAL
DATAWATCH CORPORATION (the "Company" or "Datawatch") is a provider of
knowledge-based software solutions for the business enterprise.
DATAWATCH's principal products are: Monarch?, 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 store and
deliver reports electronically via their local area network; Monarch/ES Web?,
a Monarch/ES extension introduced in October 1998 that supports browser-based
report retrieval via the World Wide Web; Monarch/ES Report Publisher?, a
Monarch/ES extension also introduced in October 1998 that supports automated
delivery of reports via MAPI-compliant email; Redwing? a plug-in for Aboder
Acrobatr 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
Quetzal/SC? an integrated help desk and asset management solution for
multi-user networked support centers.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998.
- ------------------------------------------
Net sales for the three months ended March 31, 1999 were $7,161,000 which
represents an increase of $784,000, or approximately 12% from net sales of
$6,377,000 for the three months ended March 31, 1998. This increase in net
sales results from an increase of the Company's Monarch/ES product sales and
approximately $420,000 of non-recurring revenue resulting from the
reimbursement by Adobe Systems Incorporated ("Adobe") of engineering expenses
paid to a third-party developer for the customization of the Company's Redwing
product. Such an arrangement is unusual in that customization work is usually
undertaken and billed by a third-party. For the three months ended March 31,
1999, the Monarch suite of products accounted for approximately 56% of net
sales, the Quetzal/SC product accounted for approximately 33% of net sales, and
the third-party product lines accounted for approximately 11% of net sales.
Cost of sales for the three months ended March 31, 1999 was $1,768,000 or
approximately 25% of net sales. Cost of sales for the three months ended March
31, 1998 was $1,264,000 or approximately 20% of net sales. Included in the cost
of sales for the three months ended March 31, 1999 were non-recurring
engineering expenses of approximately $420,000 paid to a third-party developer
on behalf of Adobe which has licensed certain technology from the Company's
Redwing product. Excluding these expenses from cost of sales and excluding the
reimbursement from Adobe from net sales, cost of sales for the three months
ended March 31, 1999 would have been $1,348,000 or 20%, which is comparable to
cost of sales for the same period of fiscal 1998.
Engineering and product development expenses were $737,000 for the three
months ended March 31, 1999, an increase of $238,000 or approximately 48% from
$499,000 for the three months ended March 31, 1998. This increase is primarily
attributable to expenditures for development efforts undertaken by developers
under contract to the Company and internal quality assurance personnel for the
Company's Quetzal/SC and Monarch/ES products.
Selling, general and administrative expenses were $5,901,000 for the three
months ended March 31, 1999, an increase of $271,000 or approximately 5% from
$5,630,000 for the three months ended March 31, 1998. Included in expenses for
the three months ended March 31, 1999 were non-recurring legal expenses of
approximately $550,000 associated with the litigation with Palms Technology,
which has been settled. Excluding these costs, selling, general and
administrative expenses would have been $5,351,000 for the three months ended
March 31, 1999, a decrease of $279,000 or approximately 5% from the prior year.
This decrease is primarily due to the reduction of personnel in the Company's
foreign subsidiaries pursuant to a restructuring during the fourth quarter of
fiscal 1998, as well as a decrease in promotional activities associated with
the Company's Monarch product line.
As a result of the foregoing, the loss from operations for the three
months ended March 31, 1999 was $1,246,000 which compares to a loss from
operations of $1,016,000 for the three months ended March 31, 1998. The net
loss for the three months ended March 31, 1999 was $1,235,000, which compares
to a net loss of $892,000 for the three months ended March 31, 1998.
Six Months Ended March 31, 1999 and 1998.
- ----------------------------------------
Net sales for the six months ended March 31, 1999 were $13,684,000, which
represents an increase of $929,000 or approximately 7% from net sales of
$12,755,000 for the six months ended March 31, 1998. This increase in net
sales results from an increase of the Company's Monarch/ES product sales and
approximately $420,000 of non-recurring revenue resulting from the
reimbursement by Adobe of engineering expenses paid to a third-party developer
for customization of the Company's Redwing product. Such an arrangement is
unusual in that customization work is usually undertaken and billed by a
third-party. For the six months ended March 31, 1999, the Monarch suite of
products accounted for approximately 52% of net sales, Quetzal/SC accounted for
approximately 35% and third-party product lines accounted for approximately 13%
of net sales.
Cost of sales for the six months ended March 31, 1999 was $3,223,000 or
approximately 24% of net sales. Cost of sales for the six months ended March
31, 1998 was $2,724,000 or approximately 21% of net sales. Included in the cost
of sales for the six months ended March 31, 1999 were non-recurring engineering
expenses of approximately $420,000 paid to a third-party developer on behalf of
Adobe which has licensed certain technology from the Company's Redwing product.
Excluding these expenses from cost of sales and excluding the reimbursement
from Adobe from net sales, cost of sales for the six months ended March 31,
1999 would have been $2,803,000 or 21%, which is comparable to cost of sales
for the same period of fiscal 1998.
Engineering and product development expenses were $1,376,000 for the six
months ended March 31, 1999, an increase of $457,000 or approximately 50% from
$919,000 for the six months ended March 31, 1998. This increase is primarily
attributable to expenditures for development efforts undertaken by developers
under contract to the Company and internal quality assurance personnel for the
Company's Quetzal/SC and Monarch/ES products.
Selling, general and administrative expenses were $11,899,000 for the six
months ended March 31, 1999, a decrease of $119,000 or approximately 1% from
$12,018,000 for six months ended March 31, 1998. Included in the expenses for
the six months ended March 31, 1999 were approximately $631,000 of
non-recurring legal expenses associated with the litigation with Palms
Technology, which has been settled. Excluding these costs, selling, general
and administrative expenses would have been $11,268,000 for the six months
ended March 31, 1999, a decrease of $750,000 or approximately 6% from the same
period of fiscal year 1998. This decrease is primarily due to the reduction of
personnel in the Company's foreign subsidiaries pursuant to a restructuring
during the fourth quarter of fiscal 1998, as well as a decrease in promotional
activities associated with the Company's Monarch product line.
During the six months ended March 31, 1999, the Company approved and
completed a restructuring plan to centralize in the United States the quality
assurance efforts for its Quetzal/SC product. The restructuring plan consisted
of charges for severance benefits and related costs for 10 terminated
employees. These charges, totaling approximately $200,000, have been paid.
The Company has not recorded any provision for income taxes in the six
months ended March 31, 1999. This reflects the Company's current estimate that
it will not be in a taxable position at the end of the current year in any
jurisdiction owing either to the presence of net operating loss carryforwards
(that are still reserved for) or anticipated loss for the fiscal year based on
the results of the first two quarters. Such estimates are reviewed by
management and are subject to change. The Company did record a provision for
income taxes in the six months ended March 31, 1998 owing to management's
estimate, at that time, of taxable income for the year.
As a result of the foregoing, the loss from operations for the six months
ended March 31, 1999 was $3,013,000 which compares to a loss from operations of
$5,270,000 for the six months ended March 31, 1998. The net loss for the six
months ended March 31, 1999 was $2,965,000, which compares to net income of
$8,182,000 for the six months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
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, funds generated from
operations and available borrowings. On March 16, 1999 the Company amended its
line of credit with a bank. The line of credit, as amended, expires on January
20, 2000 and 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 1% (8.5% at March 31,
1999). As of March 31, 1999, the Company had approximately $960,000 of
outstanding borrowings under the line of credit.
Working capital decreased by approximately $2,959,000 during the six months
ended March 31, 1999 primarily as a result of unprofitable operations, cash
flow requirements of the Company's international subsidiaries, and legal
expenses associated with the litigation with Palm Technology which has been
settled.
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. 131, "Disclosures About Segments of
an Enterprise and Related Information." 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. 131 will be
adopted by the Company in its annual consolidated financial statements for
fiscal 1999. Such standard is a "disclosure standard" and will not impact the
Company's consolidated results of operations.
In March 1998, the AICPA released SOP 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use," which requires
certain expenditures made for internal use software to be capitalized. The
Company is currently studying the impact of SOP 98-1, 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 implementation of the
Company's Year 2000 compliance program continues with corrective action taken
as Year 2000 issues are identified. The purpose of the compliance program is
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
administering the Company's Year 2000 compliance program.
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. Although the Company anticipates that the accounting systems at some of
its other subsidiaries will be replaced by the end of 1999, 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 also believes
that all major internal use hardware, including network servers and telephone
systems, have been upgraded or replaced so that they are now Year 2000
compliant. A complete review of all desktop and laptop computers is in
progress, with corrective action taken as Year 2000 compliance issues are
identified. The Company now anticipates completing its review of all internal
software and hardware by June 30, 1999. The cost to bring internal operations
into compliance is estimated to be approximately $100,000.
The Company has begun 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 to use only vendors who are determined to be
Year 2000 compliant 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. With respect to certain of
those products, the Company has relied on testing and representations by its
third-party developers. Based on its internal testing and the testing done by
its third-party developers to date, 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. 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 and the Company makes
available to these customers older 16-bit versions of its software, which in
ome cases are not Year 2000 compliant. The Company believes it does not have
material financial exposure to customers with respect to older versions of its
products.
The Company estimates the total cost for testing its products for Year
2000 compliance to be approximately $100,000, including $28,000 already
expended, and estimates the cost associated with vendor compliance and customer
communication to be approximately $50,000.
As the Year 2000 compliance assessment and/or testing of a product is
completed, the Company makes this information available to its customers via
the Company's web site. Information is also communicated to registered
customers in newsletters and other special mailings.
Risks Associated with Year 2000 Issue
The Company believes its Year 2000 compliance program 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 Year 2000 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 will be to allow the Company to recognize system
failures, if any, and identify resources needed and available to restore
operations in a timely manner.
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-Q that are not historical facts (including, but not limited to
statements contained in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of Part I of this Report on Form
10-Q 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-Q,
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 contained
herein 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
For the six months ended March 31, 1999, the Monarch suite of products and
the Quetzal/SC product accounted for approximately 52% and 35%, respectively,
of the Company's net sales. With the disposal of the Macintosh-based product
line, the Company is wholly dependent on Monarch and Quetzal/SC. 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
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-Q, 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.
Indirect Distribution Channels
The Company sells its products 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. 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 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments.
At March 31, 1999 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 a working
capital line of credit pursuant to which the Company is permitted to borrow up
to a maximum of $1,500,000. The line of credit, which currently bears an
interest rate of prime plus 1.% (8.5% at March 31, 1999), is subject to annual
renewal and expires on January 30, 2000. 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
period ended March 31, 1999. As of March 31, 1999, the Company had
approximately $960,000 of outstanding borrowings under the line of credit.
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 the period ended March 31, 1999. Currently the Company does not engage in
foreign currency hedging activities.
PART II.
Item 1. Legal Proceedings
-----------------
The litigation between the Company and Palms Technology described in Item
1 of Part II of the Company's Quarterly Report on Form 10-Q for the Quarterly
Period ended December 31, 1998 has been settled. The Company does not believe
that the settlement will have a material adverse effect on its consolidated
financial condition, results of operations or cash flows. However, the Company
incurred substantial legal expenses in connection with the litigation and its
settlement. See "Results of Operations" under Item 2 of Part I of this
Quarterly Report on Form 10-Q.
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
---------------------------------------------------
A. The annual meeting of stockholders of DATAWATCH CORPORATION was held on
March 23, 1999.
B. No information provided due to inapplicability of item.
C. A vote was proposed to elect a Board of Directors to serve for the
ensuing year or until their respective successors are duly elected and
qualified.
The ballot results are as follows:
Voted Voted Broker
For Against Abstained Non-Votes
---------- ---------- ---------- ----------
Bruce R. Gardner 8,304,978 184,832
Jerome Jacobson 8,305,178 184,632
Don M. Lyle 8,305,178 184,632
Terry W. Potter 8,304,978 184,832
David T. Riddiford 8,305,178 184,632
D. No information provided due to inapplicability of item.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
10.1 Amended and Restated Loan and Security Agreement dated March 16, 1999,
by and between Datawatch Corporation, Personics Corporation and Silicon
Valley Bank.
27 Financial Data Schedule (filed with SEC Edgar version only).
B. Reports on Form 8-K
No Current Report on Form 8-K was filed during the quarterly period ended
March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on May 15, 1999.
DATAWATCH CORPORATION
/s/ Betsy J. Hartwell
---------------------
Betsy J. Hartwell
Vice President of Finance and Chief Financial
Officer (Principal Financial Officer)
5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,130,802
<SECURITIES> 2,083,649
<RECEIVABLES> 6,915,055
<ALLOWANCES> 0
<INVENTORY> 424,249
<CURRENT-ASSETS> 12,505,192
<PP&E> 4,147,429
<DEPRECIATION> 2,539,086
<TOTAL-ASSETS> 15,573,729
<CURRENT-LIABILITIES> 6,960,717
<BONDS> 0
0
0
<COMMON> 91,828
<OTHER-SE> 8,505,409
<TOTAL-LIABILITY-AND-EQUITY> 15,573,729
<SALES> 13,684,188
<TOTAL-REVENUES> 13,684,188
<CGS> 3,222,905
<TOTAL-COSTS> 13,275,026
<OTHER-EXPENSES> 199,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,621
<INCOME-PRETAX> (2,965,433)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,965,433)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,965,433)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
EXHIBIT 10.1
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
DATAWATCH CORPORATION
AND PERSONICS CORPORATION
TABLE OF CONTENTS
Page
1 ACCOUNTING AND OTHER TERMS 4
2 LOAN AND TERMS OF PAYMENT 4
2.1 Advances. 4
2.2 Overadvances. 5
2.3 Interest Rate, Payments. 5
2.4 Fees. 5
3 CONDITIONS OF LOANS 5
3.1 Conditions Precedent to Initial Advance. 5
3.2 Conditions Precedent to all Advances. 5
4 CREATION OF SECURITY INTEREST 6
4.1 Grant of Security Interest. 6
5 REPRESENTATIONS AND WARRANTIES 6
5.1 Due Organization and Authorization. 6
5.2 Collateral. 6
5.3 Litigation. 7
5.4 No Material Adverse Change in Financial Statements. 7
5.5 Solvency. 7
5.6 Regulatory Compliance. 7
5.7 Subsidiaries. 7
5.8 Full Disclosure. 7
6 AFFIRMATIVE COVENANTS 8
6.1 Government Compliance. 8
6.2 Financial Statements, Reports, Certificates. 8
6.3 Inventory; Returns. 9
6.4 Taxes. 9
6.5 Insurance. 9
6.6 Primary Accounts. 9
6.7 Financial Covenants. 9
6.8 Registration of Intellectual Property Rights. 9
6.9 Further Assurances. 10
7 NEGATIVE COVENANTS 10
7.1 Dispositions. 10
7.2 Changes in Business, Ownership, Management or Business Locations. 10
7.3 Mergers or Acquisitions. 10
7.4 Indebtedness. 10
7.5 Encumbrance. 10
7.6 Distributions; Investments. 11
7.7 Transactions with Affiliates. 11
7.8 Subordinated Debt. 11
7.9 Compliance. 11
8 EVENTS OF DEFAULT 11
8.1 Payment Default. 11
8.2 Covenant Default. 11
8.3 Material Adverse Change. 12
8.4 Attachment. 12
8.5 Insolvency. 12
8.6 Other Agreements. 12
8.7 Judgments. 12
8.8 Misrepresentations. 12
9 BANK'S RIGHTS AND REMEDIES 12
9.1 Rights and Remedies. 12
9.2 Power of Attorney. 13
9.3 Accounts Collection. 14
9.4 Bank Expenses. 14
9.5 Bank's Liability for Collateral. 14
9.6 Remedies Cumulative. 14
9.7 Demand Waiver. 14
10 NOTICES AND WAIVERS 14
10.1 Notices. 14
10.2 Subrogation and Similar Rights. 15
10.3 Waivers of Notice. 15
10.4 Subrogation Defenses. 16
10.5 Right to Settle, Release. 16
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER 16
12 GENERAL PROVISIONS 17
12.1 Successors and Assigns. 17
12.2 Indemnification. 17
12.3 Time of Essence. 17
12.4 Severability of Provision. 17
12.5 Amendments in Writing, Integration. 17
12.6 Counterparts. 17
12.7 Survival. 17
12.8 Confidentiality. 18
12.9 Effect of Amendment and Restatement. 18
12.10 Countersignature. 18
12.11 Attorneys' Fees, Costs and Expenses. 18
13 DEFINITIONS 18
13.1 Definitions. 18
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated March 16, 1999,
between SILICON VALLEY BANK ("Bank"), a California-chartered bank with its
principal place of business at 3003 Tasman Drive, Santa Clara, California 95054
with a loan production office located at 40 William St., Ste. 350, Wellesley,
Massachusetts 02481 doing business as "Silicon Valley East" and DATAWATCH
CORPORATION and PERSONICS CORPORATION ("Borrower").
RECITALS
A. Bank and Borrower are parties to that certain Promissory Note, dated
November 1, 1994; 2 Commercial Security Agreements, each dated November 1,
1994; and an Amended and Restated Letter Agreement, dated February 12, 1997,
each as amended (collectively, the "Original Agreement").
B. Borrower's Obligations continue to be secured by, among other things, that
certain Collateral Assignment, Patent Mortgage and Security Agreement, dated
November 1, 1994, by and between Datawatch Corporation and Borrower.
B. Borrower and Bank desire in this Agreement to set forth their agreement with
respect to a working capital loan and to amend and restate in its entirety
without novation the Original Agreement in accordance with the provisions
herein.
AGREEMENT
The parties agree as follows:
1 ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed following
GAAP. Calculations and determinations must be made following GAAP. The term
"financial statements" includes the notes and schedules. The terms "including"
and "includes" always mean "including (or includes) without limitation," in
this or any Loan Document. This Agreement shall be construed to impart upon
Bank a duty to act reasonably at all times.
2 LOAN AND TERMS OF PAYMENT
2.1 Advances.
Borrower jointly and severally promises to pay Bank the unpaid principal amount
of all Advances and interest on the unpaid principal amount of the Advances.
2.1.1 Revolving Advances.
a) Bank will make Advances not exceeding the lesser of (A) the Committed
Revolving Line or (B) the Borrowing Base. Amounts borrowed under this Section
may be repaid and reborrowed during the term of this Agreement.
b) To obtain an Advance, Borrower must notify Bank by facsimile or telephone by
3:00 p.m. Eastern time on the Business Day the Advance is to be made. Borrower
must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit B. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based
on instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have
become due. Bank may rely on any telephone notice given by a person whom Bank
believes is a Responsible Officer or designee. Borrower will indemnify Bank for
any loss Bank suffers due to reliance.
c) The Committed Revolving Line terminates on the Revolving Maturity Date, when
all Advances and other amounts due under this Agreement are immediately
payable.
2.2 Overadvances.
If Borrower's Obligations under Section 2.1.1 exceed the lesser of either (i)
the Committed Revolving Line or (ii) the Borrowing Base, Borrower must
immediately pay Bank the excess.
2.3 Interest Rate, Payments.
a) Interest Rate. Advances accrue interest on the outstanding principal
balance at a per annum rate of 1 percentage point above the Prime Rate. After
an Event of Default, Obligations accrue interest at 5 percent above the rate
effective immediately before the Event of Default. The interest rate increases
or decreases when the Prime Rate changes. Interest is computed on a 360 day
year for the actual number of days elapsed.
b) Payments. Interest due on the Committed Revolving Line is payable on the
last day of each month. Bank may debit any of Borrower's deposit accounts
including Account Number 0700763970 bjh_ for principal and
interest payments or any amounts Borrower owes Bank. Bank will notify Borrower
when it debits Borrower's accounts. These debits are not a set-off. Payments
received after 12:00 noon Eastern time are considered received at the opening
of business on the next Business Day. When a payment is due on a day that is
not a Business Day, the payment is due the next Business Day and additional
fees or interest accrue.
2.4 Fees.
Borrower will pay:
a) Facility Fee. A fully earned, non-refundable Facility Fee of $2,500 due on
the Closing Date; and
b) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees and
expenses) incurred through and after the date of this Agreement, are payable
when due.
3 CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance.
Bank's obligation to make the initial Advance is subject to the condition
precedent that it receive the agreements, documents and fees it requires, and
all outstanding Obligations under the Original Agreement are paid in their
entirety.
3.2 Conditions Precedent to all Advances.
Bank's obligation to make each Advance, including the initial Advance, is
subject to the following:
a) timely receipt of any Payment/Advance Form; and
b) the representations and warranties in Section 5 must be materially true on
the date of the Payment/Advance Form and on the effective date of each Advance
and no Event of Default may have occurred and be continuing, or result from the
Advance. Each Advance is Borrower's representation and warranty on that date
that the representations and warranties of Section 5 remain true.
4 CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest.
Borrower continues to grant Bank a continuing security interest in all
presently existing and later acquired Collateral to secure all Obligations and
performance of each of Borrower's duties under the Loan Documents. Except for
Permitted Liens, any security interest will be a first priority security
interest in the Collateral. Bank may place a "hold" on any deposit account
pledged as Collateral. If this Agreement is terminated, Bank's lien and
security interest in the Collateral will continue until Borrower fully
satisfies its Obligations.
5 REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Authorization.
Borrower and each Subsidiary is duly existing and in good standing in its state
of formation and qualified and licensed to do business in, and in good standing
in, any state in which the conduct of its business or its ownership of property
requires that it be qualified.
The execution, delivery and performance of the Loan Documents have been duly
authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower
is bound. Borrower is not in default under any agreement to which or by which
it is bound in which the default could cause a Material Adverse Change.
5.2 Collateral.
Borrower has good title to the Collateral, free of Liens except Permitted
Liens. The Accounts are bona fide, existing obligations, and the service or
property has been performed or delivered to the account debtor or its agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has no notice of any actual or imminent Insolvency Proceeding of any
account debtor whose accounts are an Eligible Account in any Borrowing Base
Certificate. All Inventory is in all material respects of good and marketable
quality, free from material defects. Borrower is the sole owner of the
Intellectual Property, except for non-exclusive licenses granted to its
customers in the ordinary course of business. Each Patent is valid and
enforceable and no part of the Intellectual Property has been judged invalid or
unenforceable, in whole or in part, and no claim has been made that any part of
the Intellectual Property violates the rights of any third party.
5.3 Litigation.
Except as shown in the Schedule, there are no actions or proceedings pending
or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could cause a Material Adverse Change.
5.4 No Material Adverse Change in Financial Statements.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 Solvency.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as
they mature.
5.6 Regulatory Compliance.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower
has complied with the Federal Fair Labor Standards Act. Borrower has not
violated any laws, ordinances or rules, the violation of which could cause a
Material Adverse Change. None of Borrower's or any Subsidiary's properties or
assets has been used by Borrower or any Subsidiary or, to the best of
Borrower's knowledge, by previous Persons, in disposing, producing, storing,
treating, or transporting any hazardous substance other than legally. Borrower
and each Subsidiary has timely filed all required tax returns and paid, or made
adequate provision to pay, all taxes, except those being contested in good
faith with adequate reserves under GAAP. Borrower and each Subsidiary has
obtained all consents, approvals and authorizations of, made all declarations
or filings with, and given all notices to, all government authorities that are
necessary to continue its business as currently conducted.
5.7 Subsidiaries.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
5.8 Full Disclosure.
No representation, warranty or other statement of Borrower in any certificate
or written statement given to Bank contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained in the certificates or statements not misleading.
6 AFFIRMATIVE COVENANTS
Borrower will do all of the following:
6.1 Government Compliance.
Borrower will maintain its and all Subsidiaries' legal existence and good
standing in its jurisdiction of formation and maintain qualification in each
jurisdiction in which the failure to so qualify could have a material adverse
effect on Borrower's business or operations. Borrower will comply, and have
each Subsidiary comply, with all laws, ordinances and regulations to which it
is subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
6.2 Financial Statements, Reports, Certificates.
a) Borrower will deliver to Bank: (i) at such times as outstanding Advances
exist, as soon as available, but no later than 35 days after the last day of
each month, a company prepared consolidated balance sheet and income statement
covering Borrower's consolidated operations during the period, in a form and
certified by a Responsible Officer acceptable to Bank; (ii) as soon as
available, but no later than 120 days after the last day of Borrower's fiscal
year, audited consolidated financial statements prepared under GAAP,
consistently applied, together with an unqualified opinion on the financial
statements from an independent certified public accounting firm acceptable to
Bank; (iii) at such times as no outstanding Advances exist, within 5 days of
filing, copies of all statements, reports and notices made available to
Borrower's security holders or to any holders of Subordinated Debt and all
reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission; (iv) a prompt report of any legal actions pending or threatened
against Borrower or any Subsidiary that could result in damages or costs to
Borrower or any Subsidiary of $100,000 or more; (v) budgets, sales projections,
operating plans or other financial information Bank requests; and (vi) prompt
notice of any material change in the composition of the Intellectual Property,
including any subsequent ownership right of Borrower in or to any Copyright,
Patent or Trademark not shown in any intellectual property security agreement
between Borrower and Bank or knowledge of an event that materially adversely
affects the value of the Intellectual Property.
b) At such times as outstanding Advances exist and prior to the initial
Advance, within 25 days after the last day of each month, Borrower will deliver
to Bank a Borrowing Base Certificate signed by a Responsible Officer in the
form of Exhibit C, with aged listings of accounts payable.
c) Borrower will deliver to Bank with the monthly financial statements and with
the quarterly 10-Q report a Compliance Certificate signed by a Responsible
Officer in the form of Exhibit D.
d) Bank has the right to audit Borrower's Collateral at Borrower's expense at
such times as outstanding Advances exist, but the audits will be conducted no
more often than annually (or every 6 months if the aggregate outstanding
Advances exceed 25% of the Committed Revolving Line) unless an Event of Default
has occurred and is continuing.
6.3 Inventory; Returns.
Borrower will keep all Inventory in good and marketable condition, free from
material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution
of this Agreement. Borrower must promptly notify Bank of all returns,
recoveries, disputes and claims, that involve more than $50,000.
6.4 Taxes.
Borrower will make, and cause each Subsidiary to make, timely payment of all
material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.
6.5 Insurance.
Borrower will keep its business and the Collateral insured for risks and in
amounts, as Bank requests. Insurance policies will be in a form, with
companies, and in amounts that are satisfactory to Bank. All property policies
will have a lender's loss payable endorsement showing Bank as an additional
loss payee and all liability policies will show the Bank as an additional
insured and provide that the insurer must give Bank at least 20 days notice
before canceling its policy. At Bank's request, Borrower will deliver
certified copies of policies and evidence of all premium payments. Proceeds
payable under any policy will, at Bank's option, be payable to Bank on account
of the Obligations.
6.6 Primary Accounts.
Borrower will maintain its primary depository and operating accounts with Bank.
6.7 Financial Covenants.
(a) Borrower will maintain as of the last day of the months ending January 31,
February 28, April 30, May 31, July 31, August 31, October 31 and November 30:
(i) Quick Ratio (Adjusted). A ratio of Quick Assets to Current Liabilities
minus Deferred Maintenance Revenue of at least 1.50 to 1.00.
(ii) Tangible Net Worth. A Tangible Net Worth of at least $6,000,000.
(b) Borrower will maintain as of the last day of each fiscal quarter:
(i) Quick Ratio (Adjusted). A ratio of Quick Assets to Current Liabilities
minus Deferred Maintenance Revenue of at least 1.75 to 1.00.
(ii) Tangible Net Worth. A Tangible Net Worth of at least $7,000,000.
6.8 Registration of Intellectual Property Rights.
Borrower will register with the United States Patent and Trademark Office or
the United States Copyright Office Intellectual Property rights on Exhibits A,
B, C, and D to the Intellectual Property Security Agreement within 30 days of
the date of this Agreement, and additional Intellectual Property rights
developed or acquired including revisions or additions with any product before
the sale or licensing of the product to any third party.
Borrower will (i) protect, defend and maintain the validity and enforceability
of the Intellectual Property and promptly advise Bank in writing of material
infringements and (ii) not allow any Intellectual Property to be abandoned,
forfeited or dedicated to the public without Bank's written consent.
6.9 Further Assurances.
Borrower will execute any further instruments and take further action as Bank
requests to perfect or continue Bank's security interest in the Collateral or
to effect the purposes of this Agreement.
7 NEGATIVE COVENANTS
Borrower will not do any of the following:
7.1 Dispositions.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business; (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business; or (iii) of worn-out or obsolete Equipment.
7.2 Changes in Business, Ownership, Management or Business Locations.
Engage in or permit any of its Subsidiaries to engage in in any business other
than the businesses currently engaged in by Borrower or have a material change
in its ownership of greater than 25%. Borrower will not, without at least 30
days prior written notice, relocate its chief executive office or add any new
offices or business locations.
7.3 Mergers or Acquisitions.
Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, except where (i) no Event of Default has occurred
and is continuing or would result from such action during the term of this
Agreement or result in a decrease of more than 25% of Tangible Net Worth; or
(ii) the merger or consolidation is (a) a Subsidiary into another Subsidiary or
(b) a Subsidiary into Borrower.
7.4 Indebtedness.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
7.5 Encumbrance.
Create, incur, or allow any Lien on any of its property, or assign or convey
any right to receive income, including the sale of any Accounts, or permit any
of its Subsidiaries to do so, except for Permitted Liens, or permit any
Collateral not to be subject to the first priority security interest granted
here.
7.6 Distributions; Investments.
Directly or indirectly acquire or own any Person, or make any Investment in any
Person, other than Permitted Investments, or permit any of its Subsidiaries to
do so. Pay any dividends or make any distribution or payment or redeem, retire
or purchase any capital stock.
7.7 Transactions with Affiliates.
Directly or indirectly enter or permit any material transaction with any
Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an
arm's length transaction with a non-affiliated Person.
7.8 Subordinated Debt.
Make or permit any payment on any Subordinated Debt, except under the terms of
the Subordinated Debt, or amend any provision in any document relating to the
Subordinated Debt without Bank's prior written consent.
7.9 Compliance.
Become an "investment company" or a company controlled by an "investment
company", under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Advance for that purpose; fail to meet the minimum funding
requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as
defined in ERISA, to occur; fail to comply with the Federal Fair Labor
Standards Act or violate any other law or regulation, if the violation could
have a material adverse effect on Borrower's business or operations or cause a
Material Adverse Change, or permit any of its Subsidiaries to do so.
8 EVENTS OF DEFAULT
Any one of the following is an Event of Default:
8.1 Payment Default.
If Borrower fails to pay any of the Obligations when due;
8.2 Covenant Default.
If Borrower does not perform any obligation in Section 6 or violates any
covenant in Section 7 or does not perform or observe any other material term,
condition or covenant in this Agreement, any Loan Documents, or in any
agreement between Borrower and Bank and as to any default under a term,
condition or covenant that can be cured, has not cured the default within 10
days after it occurs, or if the default cannot be cured within 10 days or
cannot be cured after Borrower's attempts within 10 day period, and the default
may be cured within a reasonable time, then Borrower has an additional period
(of not more than 30 days) to attempt to cure the default. During the
additional time, the failure to cure the default is not an Event of Default
(but no Advances will be made during the cure period);
8.3 Material Adverse Change.
(i) If there occurs a material impairment in the perfection or priority of the
Bank's security interest in the Collateral or in the value of such Collateral
which is not covered by adequate insurance or (ii) if the Bank determines,
based upon information available to it and in its reasonable judgment, that
there is a reasonable likelihood that Borrower will fail to comply with one or
more of the financial covenants in Section 6 during the next succeeding
financial reporting period.
8.4 Attachment.
If any material portion of Borrower's assets is attached, seized, levied on, or
comes into possession of a trustee or receiver and the attachment, seizure or
levy is not removed in 10 days, or if Borrower is enjoined, restrained, or
prevented by court order from conducting a material part of its business or if
a judgment or other claim becomes a Lien on a material portion of Borrower's
assets, or if a notice of lien, levy, or assessment is filed against any of
Borrower's assets by any government agency and not paid within 10 days after
Borrower receives notice. These are not Events of Default if stayed or if a
bond is posted pending contest by Borrower (but no Advances will be made during
the cure period);
8.5 Insolvency.
If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or
an Insolvency Proceeding is begun against Borrower and not dismissed or stayed
within 30 days (but no Advances will be made before any Insolvency Proceeding
is dismissed);
8.6 Other Agreements.
If there is a default in any agreement between Borrower and a third party that
gives the third party the right to accelerate any Indebtedness exceeding
$100,000 or that could cause a Material Adverse Change;
8.7 Judgments.
If a money judgment(s) in the aggregate of at least $50,000 is rendered against
Borrower and is unsatisfied and unstayed for 10 days (but no Advances will be
made before the judgment is stayed or satisfied); or
8.8 Misrepresentations.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
9 BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies.
When an Event of Default occurs and continues Bank may, without notice or
demand, do any or all of the following:
a) Declare all Obligations immediately due and payable (but if an Event of
Default described in Section 8.5 occurs all Obligations are immediately due and
payable without any action by Bank);
b) Stop advancing money or extending credit for Borrower's benefit under this
Agreement or under any other agreement between Borrower and Bank;
c) Settle or adjust disputes and claims directly with account debtors for
amounts, on terms and in any order that Bank considers advisable;
d) Make any payments and do any acts it considers necessary or reasonable to
protect its security interest in the Collateral. Borrower will assemble the
Collateral if Bank requires and make it available as Bank designates. Bank may
enter premises where the Collateral is located, take and maintain possession of
any part of the Collateral, and pay, purchase, contest, or compromise any Lien
which appears to be prior or superior to its security interest and pay all
expenses incurred. Borrower grants Bank a license to enter and occupy any of
its premises, without charge, to exercise any of Bank's rights or remedies;
e) Apply to the Obligations any (i) balances and deposits of Borrower it holds,
or (ii) any amount held by Bank owing to or for the credit or the account of
Borrower;
f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale,
advertise for sale, and sell the Collateral. Bank is granted a non-exclusive,
royalty-free license or other right to use, without charge, Borrower's labels,
Patents, Copyrights, Mask Works, rights of use of any name, trade secrets,
trade names, Trademarks, service marks, and advertising matter, or any similar
property as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank's
exercise of its rights under this Section, Borrower's rights under all licenses
and all franchise agreements inure to Bank's benefit; and
Dispose of the Collateral according to the Code.
9.2 Power of Attorney.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's
name on any checks or other forms of payment or security; (ii) sign Borrower's
name on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts
directly with account debtors, for amounts and on terms Bank determines
reasonable; and (v) transfer the Collateral into the name of Bank or a third
party as the Code permits. Bank may exercise the power of attorney to sign
Borrower's name on any documents necessary to perfect or continue the
perfection of any security interest regardless of whether an Event of Default
has occurred. Bank's appointment as Borrower's attorney in fact, and all of
Bank's rights and powers, coupled with an interest, are irrevocable until all
Obligations have been fully repaid and performed and Bank's obligation to
provide Advances terminates.
9.3 Accounts Collection.
When an Event of Default occurs and continues, Bank may notify any Person owing
Borrower money of Bank's security interest in the funds and verify the amount
of the Account. Borrower must collect all payments in trust for Bank and, if
requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses.
If Borrower fails to pay any amount or furnish any required proof of payment to
third persons Bank may make all or part of the payment or obtain insurance
policies required in Section 6.5, and take any action under the policies Bank
deems prudent. Any amounts paid by Bank are Bank Expenses and immediately due
and payable, bearing interest at the then applicable rate and secured by the
Collateral. No payments by Bank are deemed an agreement to make similar
payments in the future or Bank's waiver of any Event of Default.
9.5 Bank's Liability for Collateral.
If Bank complies with reasonable banking practices it is not liable for: (a)
the safekeeping of the Collateral; (b) any loss or damage to the Collateral;
(c) any diminution in the value of the Collateral; or (d) any act or default
of any carrier, warehouseman, bailee, or other person. Borrower bears all
risk of loss, damage or destruction of the Collateral.
9.6 Remedies Cumulative.
Bank's rights and remedies under this Agreement, the Loan Documents, and all
other agreements are cumulative. Bank has all rights and remedies provided
under the Code, by law, or in equity. Bank's exercise of one right or remedy
is not an election, and Bank's waiver of any Event of Default is not a
continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No
waiver is effective unless signed by Bank and then is only effective for the
specific instance and purpose for which it was given.
9.7 Demand Waiver.
Borrower waives demand, notice of default or dishonor, notice of payment and
nonpayment, notice of any default, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees held by Bank on which Borrower is liable.
10 NOTICES AND WAIVERS
10.1 Notices.
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements
and other informational documents which may be sent by first-class mail,
postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower Datawatch Corporation
234 Ballardvale Street
Wilmington, MA 01887
Attn: Betsy J. Hartwell
FAX: 978-988-0672
and to Personics Corporation
c/o Datawatch Corporation
234 Ballardvale Street
Wilmington, MA 01887
Attn: Betsy J. Hartwell
FAX: 978-988-0672
If to Bank Silicon Valley East
40 William St., Ste. 350
Wellesley , MA 02481
Attn: Jonathan Gray
FAX: _
10.2 Subrogation and Similar Rights.
Notwithstanding any other provision of this Agreement or any other Loan
Document, each Borrower irrevocably waives all rights that it may have at law
or in equity (including, without limitation, any law subrogating the Borrower
to the rights of Bank under the Loan Documents) to seek contribution,
indemnification, or any other form of reimbursement from any other Borrower,
or any other Person now or hereafter primarily or secondarily liable for any of
the Obligations, for any payment made by the Borrower with respect to the
Obligations in connection with the Loan Documents or otherwise and all rights
that it might have to benefit from, or to participate in, any security for the
Obligations as a result of any payment made by the Borrower with respect to the
Obligations in connection with the Loan Documents or otherwise. Any agreement
providing for indemnification, reimbursement or any other arrangement
prohibited under this Section 10.2 shall be null and void. If any payment is
made to a Borrower in contravention of this Section 10.2, such Borrower shall
hold such payment in trust for Bank and such payment shall be promptly
delivered to Bank for application to the Obligations, whether matured or
unmatured.
10.3 Waivers of Notice.
Each Borrower waives notice of acceptance hereof; notice of the existence,
creation or acquisition of any of the Obligations; notice of an Event of
Default; notice of the amount of the Obligations outstanding at any time;
notice of intent to accelerate; notice of acceleration; notice of any adverse
change in the financial condition of any other Borrower or of any other fact
that might increase the Borrower's risk; presentment for payment; demand;
protest and notice thereof as to any instrument; default; and all other notices
and demands to which the Borrower would otherwise be entitled. Each Borrower
waives any defense arising from any defense of any other Borrower, or by reason
of the cessation from any cause whatsoever of the liability of any other
Borrower. Bank's failure at any time to require strict performance by any
Borrower of any provision of the Loan Documents shall not waive, alter or
diminish any right of Bank thereafter to demand strict compliance and
performance therewith. Nothing contained herein shall prevent Bank from
foreclosing on the Lien of any deed of trust, mortgage or other security
instrument, or exercising any rights available thereunder, and the exercise of
any such rights shall not constitute a legal or equitable discharge of any
Borrower. Each Borrower also waives any defense arising from any act or
omission of Bank that changes the scope of the Borrower's risks hereunder. Each
Borrower hereby waives any right to assert against Bank any defense (legal or
equitable), setoff, counterclaim, or claims that such Borrower individually may
now or hereafter have against another Borrower or any other Person liable to
Borrower with respect to the Obligations in any manner or whatsoever.
10.4 Subrogation Defenses.
Each Borrower waives the benefits, if any, of any statutory or common law rule
that may permit a borrower to assert any defenses of a surety or guarantor, or
that may give a borrower the right to require a senior creditor to marshal
assets, and Borrower agrees that it shall not assert any such defenses or
rights.
10.5 Right to Settle, Release.
The liability of Borrowers hereunder shall not be diminished by (i) any
agreement, understanding or representation that any of the Obligations is or
was to be guaranteed by another Person or secured by other property, or (ii)
any release or unenforceability, whether partial or total, or rights, if any,
which Borrower may now or hereafter have against any other Person, including
another Borrower, or property with respect to any of the Obligations.
Without notice to any Borrower and without affecting the liability of any
Borrower hereunder, Bank may (i) compromise, settle, renew, extend the time for
payment, change the manner or terms of payment, discharge the performance of,
decline to enforce, or release all or any of the Obligations with respect to a
Borrower, (ii) grant other indulgences to a Borrower in respect of the
Obligations, (iii) modify in any manner any documents, relating to the
Obligations with respect to a Borrower, (iv) release, surrender or exchange
any deposits or other property securing the Obligations, whether pledged by a
Borrower or any other Person, or (v) compromise, settle renew, or extend the
time for payment, discharge the performance of, decline to enforce, or release
all or any obligations of any guarantor, endorser or other Person who is now
or may hereafter be liable with respect to any of the Obligations.
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE COMMONWEALTH OF MASSACHUSETTS WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAW. EACH OF BORROWER AND BANK HEREBY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN THE COMMONWEALTH OF
MASSACHUSETTS, BUT IF FOR ANY REASON THE BANK IS DENIED ACCESS TO SUCH COURTS,
THEN THE VENUE WILL BE IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF
SANTA CLARA, STATE OF CALIFORNIA.
BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH
PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12 GENERAL PROVISIONS
12.1 Successors and Assigns.
This Agreement binds and is for the benefit of the successors and permitted
assigns of each party. Borrower may not assign this Agreement or any rights
under it without Bank's prior written consent which may be granted or withheld
in Bank's discretion. Bank has the right, without the consent of or notice to
Borrower, to sell, transfer, negotiate, or grant participation in all or any
part of, or any interest in, Bank's obligations, rights and benefits under this
Agreement.
12.2 Indemnification.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 Severability of Provision.
Each provision of this Agreement is severable from every other provision in
determining the enforceability of any provision.
12.5 Amendments in Writing, Integration.
All amendments to this Agreement must be in writing and signed by Borrower and
Bank. This Agreement represents the entire agreement about this subject
matter, and supersedes prior negotiations or agreements. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties about the subject matter of this Agreement merge into this Agreement
and the Loan Documents.
12.6 Counterparts.
This Agreement may be executed in any number of counterparts and by different
parties on separate counterparts, each of which, when executed and delivered,
are an original, and all taken together, constitute one Agreement.
12.7 Survival.
All covenants, representations and warranties made in this Agreement continue
in full force while any Obligations remain outstanding. The obligations of
Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
12.8 Confidentiality.
In handling any confidential information, Bank will exercise the same degree of
care that it exercises for its own proprietary information, but disclosure of
information may be made (i) to Bank's subsidiaries or affiliates in connection
with their business with Borrower, (ii) to prospective transferees or
purchasers of any interest in the Loans, (iii) as required by law, regulation,
subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information
that either: (a) is in the public domain or in Bank's possession when disclosed
to Bank, or becomes part of the public domain after disclosure to Bank; or (b)
is disclosed to Bank by a third party, if Bank does not know that the third
party is prohibited from disclosing the information.
12.9 Effect of Amendment and Restatement.
This Agreement is intended to and does completely amend and restate, without
novation, the Original Agreement. All advances or loans outstanding under the
Original Agreement are and shall continue to be outstanding under this
Agreement. All security interests granted under the Original Agreement are
hereby confirmed and ratified and shall continue to secure all Obligations
under this Agreement.
12.10 Countersignature.
This Agreement shall become effective only when it shall have been executed by
Borrower and Bank (provided, however, in no event shall this Agreement become
effective until signed by an officer of Bank in California).
12.11 Attorneys' Fees, Costs and Expenses.
In any action or proceeding between Borrower and Bank arising out of the Loan
Documents, the prevailing party will be entitled to recover its reasonable
attorneys' fees and other costs and expenses incurred, in addition to any other
relief to which it may be entitled.
13 DEFINITIONS
13.1 Definitions.
In this Agreement:
"Accounts" are all existing and later arising accounts, contract rights, and
other obligations owed Borrower in connection with its sale or lease of goods
(including licensing software and other technology) or provision of services,
all credit insurance, guaranties, other security and all merchandise returned
or reclaimed by Borrower and Borrower's Books relating to any of the foregoing.
"Advance" or "Advances" is a loan advance (or advances) under the Committed
Revolving Line.
"Affiliate" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"Bank Expenses" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"Borrower's Books" are all Borrower's books and records including ledgers,
records regarding Borrower's assets or liabilities, the Collateral, business
operations or financial condition and all computer programs or discs or any
equipment containing the information.
"Borrowing Base" is (a) 80% of Eligible Accounts in which the Account debtor is
a non-distributor, plus (b) 50% of Eligible Accounts (not to exceed 40% of the
aggregate Borrowing Base) in which the Account debtor (i) is a distributor and
(ii) is approved in writing by Bank on a case by case basis, plus (c) 60% of
Eligible Foreign Accounts (not to exceed $400,000) each as determined by Bank
from Borrower's most recent Borrowing Base Certificate.
"Business Day" is any day that is not a Saturday, Sunday or a day on which the
Bank is closed.
"Closing Date" is the date of this Agreement.
"Code" is the Massachusetts Uniform Commercial Code.
"Collateral" is the property described on Exhibit A.
"Committed Revolving Line" is an Advance of up to $1,500,000.
"Contingent Obligation" is, for any Person, any direct or indirect liability,
contingent or not, of that Person for (i) any indebtedness, lease, dividend,
letter of credit or other obligation of another such as an obligation directly
or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse
by that Person, or for which that Person is directly or indirectly liable; (ii)
any obligations for undrawn letters of credit for the account of that Person;
and (iii) all obligations from any interest rate, currency or commodity swap
agreement, interest rate cap or collar agreement, or other agreement or
arrangement designated to protect a Person against fluctuation in interest
rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined
by the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"Copyrights" are all copyright rights, applications or registrations and like
protections in each work or authorship or derivative work, whether published
or not (whether or not it is a trade secret) now or later existing, created,
acquired or held.
"Current Liabilities" are the aggregate amount of Borrower's Total Liabilities
which mature within one (1) year.
"Deferred Maintenance Revenue" is all amounts received in advance of
performance under maintenance contract and not yet recognized as revenue.
"Eligible Accounts" are Accounts in the ordinary course of Borrower's business
that meet all Borrower's representations and warranties in Section 5; but Bank
may change eligibility standards by giving Borrower notice. Unless Bank agrees
otherwise in writing, Eligible Accounts will not include:
(a) Accounts that the account debtor has not paid within 90 days (or 60 days if
account debtor is a distributor) of invoice date;
(b) Accounts for an account debtor, 50% or more of whose Accounts have not been
paid within 90 days of invoice date;
(c) Credit balances over 90 days from invoice date;
(d) Accounts for an account debtor, including Affiliates, whose total
obligations to Borrower exceed 25% of all Accounts, for the amounts that
exceed that percentage, unless the Bank approves in writing;
(e) Accounts for which the account debtor does not have its principal place of
business in the United States except for Eligible Foreign Accounts;
(f) Accounts for which the account debtor is a federal, state or local
government entity or any department, agency, or instrumentality;
(g) Accounts for which Borrower owes the account debtor, but only up to the
amount owed (sometimes called "contra" accounts, accounts payable, customer
deposits or credit accounts);
(h) Accounts for demonstration or promotional equipment, or in which goods are
consigned, sales guaranteed, sale or return, sale on approval, bill and hold,
or other terms if account debtor's payment may be conditional;
(i) Accounts for which the account debtor is Borrower's Affiliate, officer,
employee, or agent;
(j) Accounts in which the account debtor disputes liability or makes any claim
and Bank believes there may be a basis for dispute (but only up to the disputed
or claimed amount), or if the Account Debtor is subject to an Insolvency
Proceeding, or becomes insolvent, or goes out of business;
(k) Accounts for which Bank reasonably determines collection to be doubtful.
"Eligible Foreign Accounts" are Eligible Accounts for which the account debtor
has its principal place of business in the United Kingdom, Australia or Germany.
"Equipment" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
"GAAP" is generally accepted accounting principles.
"Indebtedness" is (a) indebtedness for borrowed money or the deferred price of
property or services, such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"Insolvency Proceeding" are proceedings by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"Intellectual Property" is:
(a) Copyrights, Trademarks, Patents, and Mask Works including amendments,
renewals, extensions, and all licenses or other rights to use and all license
fees and royalties from the use;
(b) Any trade secrets and any intellectual property rights in computer software
and computer software products now or later existing, created, acquired or
held;
(c) All design rights which may be available to Borrower now or later created,
acquired or held;
(d) Any claims for damages (past, present or future) for infringement of any of
the rights above, with the right, but not the obligation, to sue and collect
damages for use or infringement of the intellectual property rights above;
All proceeds and products of the foregoing, including all insurance, indemnity
or warranty payments.
"Inventory" is present and future inventory in which Borrower has any interest,
including merchandise, raw materials, parts, supplies, packing and shipping
materials, work in process and finished products intended for sale or lease or
to be furnished under a contract of service, of every kind and description now
or later owned by or in the custody or possession, actual or constructive, of
Borrower, including inventory temporarily out of its custody or possession or
in transit and including returns on any accounts or other proceeds (including
insurance proceeds) from the sale or disposition of any of the foregoing and
any documents of title.
"Investment" is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
"Lien" is a mortgage, lien, deed of trust, charge, pledge, security interest or
other encumbrance.
"Loan Documents" are, collectively, this Agreement, any note, or notes or
guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"Mask Works" are all mask works or similar rights available for the protection
of semiconductor chips, now owned or later acquired.
"Material Adverse Change" is defined in Section 8.3.
"Obligations" are debts, principal, interest, Bank Expenses and other amounts
Borrower owes Bank now or later, including letters of credit and Exchange
Contracts and including interest accruing after Insolvency Proceedings begin
and debts, liabilities, or obligations of Borrower assigned to Bank.
"Original Agreement" has the meaning set forth in recital paragraph A.
"Patents" are patents, patent applications and like protections, including
improvements, divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same.
"Permitted Indebtedness" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other Loan
Document;
(b) Indebtedness existing on the Closing Date and shown on the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens.
"Permitted Investments" are:
(a) Investments shown on the Schedule and existing on the Closing Date; and
(b) (i) marketable direct obligations issued or unconditionally guaranteed by
the United States or its agency or any State maturing within 1 year from its
acquisition, (ii) commercial paper maturing no more than 1 year after its
creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates
of deposit issued maturing no more than 1 year after issue.
"Permitted Liens" are:
(a) Liens existing on the Closing Date and shown on the Schedule or arising
under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or levies,
either not delinquent or being contested in good faith and for which Borrower
maintains adequate reserves on its Books, if they have no priority over any of
Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower or its
Subsidiaries incurred for financing the acquisition of the Equipment, or (ii)
existing on equipment when acquired, if the Lien is confined to the property
and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the ordinary
course of Borrower's business and any interest or title of a lessor, licensor
or under any lease or license, if the leases, subleases, licenses and
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the indebtedness
secured by Liens described in (a) through (c), but any extension, renewal or
replacement Lien must be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness may not increase.
"Person" is any individual, sole proprietorship, partnership, limited liability
company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or government
agency.
"Prime Rate" is Bank's most recently announced "prime rate," even if it is not
Bank's lowest rate.
"Quick Assets" is, on any date, the Borrower's consolidated, unrestricted cash,
cash equivalents, net billed accounts receivable and investments with
maturities of fewer than 12 months determined according to GAAP.
"Responsible Officer" is each of the Chief Executive Officer, the President,
the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" is January 30, 2000.
"Schedule" is any attached schedule of exceptions.
"Subordinated Debt" is debt incurred by Borrower subordinated to Borrower's
debt to Bank (and identified as subordinated by Borrower and Bank).
"Subsidiary" is for any Person, or any other business entity of which more than
50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Person or one or more Affiliates of the Person.
"Tangible Net Worth" is, on any date, the consolidated total assets of Borrower
and its Subsidiaries minus, (i) any amounts attributable to (a) goodwill, (b)
intangible items such as unamortized debt discount and expense, Patents, trade
and service marks and names, Copyrights and research and development expenses
except prepaid expenses, and (c) reserves not already deducted from assets, and
(ii) Total Liabilities.
"Total Liabilities" is on any day, obligations that should, under GAAP, be
classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
"Trademarks" are trademark and servicemark rights, registered or not,
applications to register and registrations and like protections, and the
entire goodwill of the business of Assignor connected with the trademarks.
BORROWER:
Datawatch Corporation
By: /s/ Betsy J. Hartwell
Title: VP Finance and CFO __
Personics Corporation
By: /s/ Betsy J. Hartwell
Title: Assist Treasurer __
BANK:
SILICON VALLEY BANK, doing business as SILICON VALLEY EAST
By: /s/ Jonathon Gray __
Title: SVP
SILICON VALLEY BANK
By: /s/ Amy Young __
Title: V.P.
executed in Santa Clara County, California
<PAGE>
EXHIBIT A
The Collateral consists of all of Borrower's right, title and interest in and
to the following:
All goods and equipment now owned or hereafter acquired, including, without
limitation, all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
All inventory, now owned or hereafter acquired, including, without limitation,
all merchandise, raw materials, parts, supplies, packing and shipping
materials, work in process and finished products including such inventory as
is temporarily out of Borrower's custody or possession or in transit and
including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
All contract rights and general intangibles now owned or hereafter acquired,
including, without limitation, goodwill, trademarks, servicemarks, trade
styles, trade names, patents, patent applications, leases, license agreements,
franchise agreements, blueprints, drawings, purchase orders, customer lists,
route lists, infringements, claims, computer programs, computer discs, computer
tapes, literature, reports, catalogs, design rights, income tax refunds,
payments of insurance and rights to payment of any kind;
All now existing and hereafter arising accounts, contract rights, royalties,
license rights and all other forms of obligations owing to Borrower arising out
of the sale or lease of goods, the licensing of technology or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower;
All documents, cash, deposit accounts, securities, securities entitlements,
securities accounts, investment property, financial assets, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
All copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; all trade secret
rights, including all rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now owned
or hereafter acquired; all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired; all claims
for damages by way of any past, present and future infringement of any of the
foregoing; and
All Borrower's Books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions and
accessions to and proceeds thereof.
