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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
COMMISSION FILE NUMBER: 000-19960
DATAWATCH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 02-0405716
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
175 CABOT STREET
SUITE 503
LOWELL, MASSACHUSETTS 01854
---------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 978-441-2200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.01 PAR VALUE
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(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates: $6,223,239
(computed by reference to the last sales price of such common stock on December
5, 2000 as reported in the National Association of Security Dealers consolidated
trading index).
Number of shares of common stock outstanding at December 5, 2000: 9,426,274
Documents Incorporated By Reference
Registrant intends to file a definitive Proxy Statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended September 30,
2000. Portions of such Proxy Statement are incorporated by reference in Part III
of this report.
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<PAGE>
PART I
ITEM 1. BUSINESS
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GENERAL
Datawatch Corporation (the "Company" or "Datawatch"), founded in 1985, is a
provider of enterprise reporting, report mining and service center software
products that help organizations increase productivity, reduce costs and gain
competitive advantages. Datawatch products are used in more than 20,000
companies, institutions and government agencies worldwide.
The Company is a Delaware corporation, with executive offices located at
175 Cabot Street, Lowell, Massachusetts 01854 and the Company's telephone number
is (978) 441-2200.
PRODUCTS
Monarch - Datawatch is best known for its popular report mining application
called Monarch. More than 350,000 copies of Monarch have been sold, with
localized versions in English, French and German. Monarch lets users extract and
manipulate data from ASCII report files produced on any mainframe, midrange,
client/server or PC system. The Company's Redwing product lets users extract
text and tables from Adobe PDF documents.
Monarch|ES - Datawatch also participates in the growing market for
enterprise reporting and business intelligence software. Monarch|ES allows
organizations to quickly and easily deliver business intelligence and decision
support derived from existing reporting systems with no new programming or
report writing. Monarch|ES automatically archives report data in an enterprise
report warehouse and provides users a unified point of entry to view, analyze
and share report information over the Internet, using a standard browser, with
no plug-ins or Java needed. Users can even import report data directly into an
Excel(TM) spreadsheet.
Monarch Data Pump - The Company's Monarch Data Pump product is a unique
data replication and migration tool that offers a shortcut for populating and
refreshing data marts and data warehouses, for migrating legacy data into new
applications and for providing automated delivery of existing reports in a
variety of formats, including Excel, via email.
Quetzal|SC - Datawatch also participates in the market for service center
software. The Company's Quetzal|SC help desk and asset management software is a
market leader in Europe, with the largest installed base among products that
compete in the internal help desk market. Quetzal|SC is recognized for its
advanced service level management capabilities, integrated change management
features, business process automation tools and unique user-interface that
promotes ease-of-use and ease-of-learning.
Q|Service Management - In early fiscal 2001, the Company will introduce
Q|Service Management ("Q|SM"), a major new release of the Company's service
management software. Q|SM(TM) is a fully Internet-enabled solution that can
scale from a basic help desk system to a full service center solution that
incorporates workflow and provides web access to multiple databases while
enabling customers to interact via a standard browser. Q|SM provides network
management capabilities and will also integrate with existing network management
systems and self help tools.
VorteXML - In early fiscal 2001, the Company will introduce VorteXML, a new
data transformation product for the emerging XML market. VorteXML's ability to
quickly and easily convert existing, structured ASCII text documents such as
reports, invoices, bills, and EDI streams into valid XML on a programming-free
basis solves one of the major problems of XML generation: the transformation of
legacy data into XML.
PRICING
The Company's desktop products are sold under single and multi-user
licenses. A single user license for Monarch Standard Edition is priced at $579.
Multi-user licenses for Monarch Standard Edition are priced at $200 to $480 per
user, depending
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upon the number of users. A single user license for Monarch Professional Edition
is priced at $699. Multi-user licenses for Monarch Professional Edition are
priced at $320 to $600 per user, depending upon the number of users. A single
user license for Monarch Data Pump Personal Edition is priced at $2,495. A
single user license for Redwing is priced at $579. A five-user license is priced
at $2,199.
The Company's report enterprise and service center products are sold under
server-based licenses in addition to named-user and concurrent-user licenses. An
entry-level Monarch|ES system is priced at approximately $50,000. Typical
configurations are priced in the range of $65,000 to $250,000. Server editions
of Monarch Data Pump are typically priced at approximately $19,995 per server.
An entry-level Quetzal|SC system is priced at approximately $12,000. Typical
configurations sell in the range of $15,000 to $125,000. Maintenance agreements,
training and implementation services are sold separately.
MARKETING AND DISTRIBUTION
Datawatch markets its products through a variety of channels in order to
gain broad market exposure and to satisfy the needs of its customers. Datawatch
believes that some customers prefer to purchase products through
service-oriented resellers, while others buy on the basis of price, purchase
convenience, and/or immediate delivery.
The Company is engaged in active direct sales of its products to end-users,
including repeat and add-on sales to existing customers and sales to new
customers. Datawatch utilizes direct mail, the Internet, telemarketing and
direct personal selling to generate its sales.
Datawatch uses a variety of marketing programs to create demand for its
products. These programs include advertising, cooperative advertising with
reseller partners, direct mail, exhibitor participation in industry shows,
executive participation in press briefings, Internet-based marketing and
on-going communication with the trade press.
The Company offers its resellers the ability to return obsolete versions of
its products and slow-moving products for credit which can be used against
purchases of other Datawatch products on a dollar-for-dollar basis. Based on its
historical experience relative to products sold to these distributors, the
Company believes that its exposure to such returns is minimal. It has provided a
provision for such estimated returns in the financial statements.
Datawatch warrants the physical disk media and printed documentation for
its products to be free of defects in material and workmanship for a period of
60 to 90 days from the date of purchase depending on the product. Datawatch also
offers a 30 day money-back guarantee on certain of its products sold directly to
end-users. Under the guarantee, customers may return purchased products within
the 30 days for a full refund if they are not completely satisfied. To date, the
Company has not experienced any significant product returns under its money-back
guarantee.
During fiscal 2000, one distributor represented approximately 16% of the
Company's net sales. No other customer accounted for more than 10% of the
Company's net sales in fiscal 2000. Datawatch sells its products outside of the
U.S. directly through the sales force of its wholly owned subsidiary, Datawatch
International Limited ("Datawatch International") and through international
resellers. Such international sales represented approximately 52%, 55% and 56%
of the Company's net sales for fiscal 2000, 1999 and 1998, respectively. See
Note 13 to Consolidated Financial Statements which appear elsewhere in this
Annual Report on Form 10-K.
RESEARCH AND DEVELOPMENT
The Company believes that timely development of new products and
enhancements to its existing products is essential to maintain strong positions
in its markets. Datawatch intends to continue to invest sizeable effort in
research and product development, particularly in the area of computing
technology trends and the Internet. The Company's product development efforts
are primarily focused on the Monarch|ES Enterprise Reporting products and
Q|Service Management ("Q|SM") products and their related core technologies.
Additional efforts are devoted to the expansion of the feature set of the
Monarch product and development of its new XML tool, VorteXML.
Datawatch's product development efforts are conducted through in-house
software development engineers or by external developers who are compensated
either through royalty
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payments based on product sales levels achieved or under contracts based on
services provided. Datawatch has established long-term relationships with
several development engineering firms, providing flexibility, stability and
reliability in its development process.
Datawatch's product managers work closely with developers, whether
independent or in-house, to define product specifications. The initial concept
for a product originates from this cooperative effort. The developer is
generally responsible for coding the development project. Datawatch's product
managers maintain close technical control over the products, giving the Company
the freedom to designate which modifications and enhancements are most important
and when they should be implemented. The product managers and their staff work
in parallel with the developers to produce printed documentation, on-line help
files, tutorials and installation software. In some cases, Datawatch may choose
to subcontract a portion of this work on a project basis to third-party
suppliers under contracts. Datawatch personnel also perform extensive quality
assurance testing for all products and coordinate external beta test programs.
Datawatch has contractual agreements with the independent developers of
Monarch, VorteXML and Monarch|ES which require that source code be placed into
escrow. The principal developers for the products are also bound by contractual
commitments which require their continuing involvement in product maintenance
and enhancement. The Company has also been granted exclusive worldwide rights to
Monarch and VorteXML with a stated term expiring in the year 2009, and to
Monarch|ES with a stated term expiring in the year 2001. The Monarch|ES license
automatically renews for successive annual periods unless terminated for cause
by either party prior to the regular termination date. Datawatch also has a
contractual agreement with the independent developer of Q|SM which requires his
continued involvement in product maintenance for a period of 5 years. The
developer has agreed to provide these services in exchange for a minimal royalty
based on net sales.
Other Datawatch products have been developed through in-house software
development or by independent software engineers hired under contract. Datawatch
maintains source code and full product control for these products, which include
Monarch Data Pump (Personal and Server Editions), Monarch ES|Report Portal, and
Q|Service Management products.
BACKLOG
The Company's software products are generally shipped within three business
days of receipt of an order. Accordingly, the Company does not believe that
backlog for its products is a meaningful indicator of future business.
COMPETITION
The software industry is highly competitive and is characterized by rapidly
changing technology and evolving industry standards. Datawatch competes with a
number of companies including IBM, Remedy, Actuate, Seagate and others which
have substantially greater financial, marketing and technological resources than
the Company. Competition in the industry is likely to intensify as current
competitors expand their product lines and as new competitors enter the market.
PRODUCT PROTECTION
Although Datawatch does not generally own patents on its software
technologies, it relies on a combination of trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures to protect its rights in its products. Despite these precautions,
unauthorized parties may attempt to copy aspects of Datawatch's products or to
obtain and use information that Datawatch regards as proprietary. Patent
protection is not considered crucial to Datawatch's success. Datawatch believes
that, because of the rapid pace of technological change in the software
industry, the legal protections for its products are less significant than the
knowledge, ability and experience of its employees and developers, the frequency
of product enhancements and the timeliness and quality of its support services.
Datawatch believes that none of its products, trademarks and other proprietary
rights infringe on the proprietary rights of third parties, but there can be no
assurance that third parties will not assert infringement claims against it or
its developers in the future.
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PRODUCTION
Production of Datawatch's products involves the duplication of floppy and
compact disks, and the printing of user manuals, packaging and other related
materials. Floppy disk duplication is performed in-house with high-capacity disk
duplication equipment, and is occasionally supplemented with duplication
services performed by non-affiliated subcontractors. High volume compact disk
duplication is performed by non-affiliated subcontractors, while low volume
compact disk duplication is performed in-house. Printing work is also performed
by non-affiliated subcontractors. To date, Datawatch has not experienced any
material difficulties or delays in production of its software and related
documentation and believes that, if necessary, alternative production sources
could be secured at a commercially reasonable cost.
EMPLOYEES
As of September 30, 2000, Datawatch had 175 full-time employees, including
60 engaged in marketing, sales, and customer service; 28 engaged in product
consulting, 16 engaged in product management, development and quality assurance,
17 engaged in technical support, 48 providing general, administrative,
accounting, and IT functions and 6 engaged in software production and
warehousing.
The Company believes that its future success may depend on its ability to
continue to attract and retain highly-skilled technical, marketing and
management personnel, who are in great demand. The Company currently has written
agreements with each of its employees prohibiting disclosure of confidential
information to anyone outside of the Company, both during and subsequent to
employment. These agreements also require disclosure to the Company of ideas,
discoveries or inventions relating to or resulting from the employee's work for
the Company, and assignment to the Company of all proprietary rights to such
matters.
ITEM 2. PROPERTIES
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The Company is currently headquartered in a 24,553 square foot leased
facility in Lowell, Massachusetts. The lease expires in January 2006. The
Company also maintains small offices in California, Connecticut, Illinois, and
Georgia.
The Company also leases approximately 6,000 square feet in Kings Langley,
Hertfordshire, England, which expires in January 2009, approximately 16,000
square feet in Plymouth, Devon, England, which expires in December 2017, and
maintains small offices in Germany, France and Australia.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
The Company is not a party to any litigation that management believes will
have a material adverse effect on the Company's consolidated financial
condition, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of the Registrant's security holders
during the last quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and titles of the executive officers of the Company as of
December 21, 2000 are as follows:
Bruce R. Gardner 57 President, Chief Executive Officer and Director
Robert Hagger 52 Senior Vice President of International Operations,
Managing Director of Datawatch International Limited
Alan R. MacDougall 52 Vice President of Finance, Chief Financial Officer
and Treasurer
John H. Kitchen, III 45 Vice President of Marketing
Linda E. Lammi 47 Vice Present of Development and Technical Services
Officers are elected by, and serve at the discretion of, the Board of Directors.
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BRUCE R. GARDNER, President, Chief Executive Officer and Director. Mr.
Gardner, a founder and director of Datawatch, was the Chief Financial Officer
and Treasurer since the Company was founded in 1985 until November 1, 1997. Mr.
Gardner was a Senior Vice President until June, 1993 when he became Executive
Vice President. Mr. Gardner assumed his current position on November 1, 1997.
ROBERT HAGGER, Senior Vice President of International Operations, Managing
Director of Datawatch International. Mr. Hagger joined Datawatch as Managing
Director of Datawatch International on March 4, 1997 and assumed the title of
Senior Vice President of International Operations on November 1, 1997. Mr.
Hagger, since 1993, was founder and Managing Director of Insight Strategy
Management Ltd. Prior to that he was Managing Director of Byrne Fleming Ltd.
ALAN R. MACDOUGALL, Vice President of Finance, Chief Financial Officer and
Treasurer. Mr. MacDougall assumed the positions of Vice President of Finance,
Chief Financial Officer and Treasurer on December 16, 2000. Prior thereto, and
since October, 1997, Mr. MacDougall was the Company's Corporate Controller.
Prior to 1997, and since June, 1994, Mr.MacDougall was the Company's Director of
Operations.
JOHN H. KITCHEN, III, Vice President of Marketing. Mr. Kitchen assumed the
position of Vice President of Marketing on July 1, 2000. Prior thereto, and
since March, 1998, Mr. Kitchen was the Company's Director of Marketing. Prior to
that, Mr. Kitchen was a marketing consultant to the Company.
LINDA E. LAMMI, Vice Present of Development and Technical Services. Ms.
Lammi assumed the position of Vice President of Development and Technical
Services on May 16, 1999. Prior thereto, and since March, 1995, Ms Lammi was the
Company's Director of Technical Services.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
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MATTERS
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The Registrant's common stock is listed and traded on the Nasdaq National
Market under the symbol DWCH. The range of high and low prices during each
fiscal quarter for the last two fiscal years is set forth below:
For the Year Ended Common Stock
September 30, 2000 High Low
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4th Quarter 2 3/8 1 3/32
3rd Quarter 3 3/4 1 1/8
2nd Quarter 7 7/16 1 7/8
1st Quarter 6 9/16 5/8
For the Year Ended Common Stock
September 30, 1999 High Low
-------------------------------------------------------
4th Quarter 1 9/16 1/2
3rd Quarter 1 9/16 1 1/8
2nd Quarter 1 11/16 1 1/8
1st Quarter 1 5/8 1 1/8
There are approximately 354 shareholders of record as of December 1, 2000.
The Company believes that the number of beneficial holders of common stock
exceeds 2,000.
The Company has not paid any cash dividends and it is anticipated that none
will be declared in the foreseeable future. The Company intends to retain future
earnings, if any, to provide funds for the operation, development and expansion
of its business.
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ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
The following table sets forth selected consolidated financial data of the
Company for the periods indicated. The selected consolidated financial data for
and as of the end of the years in the five-year period ended September 30, 2000
are derived from the Consolidated Financial Statements of the Company. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes which appears elsewhere in this
Annual Report on Form 10-K.
<TABLE><CAPTION>
Statements of Operations Data
Years Ended September 30, 2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Net Sales
PC-based Products $26,879,411 $27,171,401 $25,123,468 $25,995,197 $24,216,794
Macintosh-based Products -- -- 172,254 6,052,298 5,805,328
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Net Sales 26,879,411 27,171,401 25,295,722 32,047,495 30,022,122
Costs and Expenses 27,818,327 31,480,281 35,800,154 33,929,460 28,894,600
Income (Loss) from
Operations (938,916) (4,308,880) (10,504,432) (1,881,965) 1,127,522
Gain on Sale
of Product Line -- -- 15,431,253 -- --
Net Income (Loss) $ (989,629) $(3,847,181) $4,703,996 $(1,995,433) $1,125,360
Net Income (Loss)
per Common Share - Basic $ (.11) $ (.42) $ .52 $ (0.22) $ 0.13
Net Income (Loss)
per Common Share - Diluted $ (.11) $ (.42) $ .51 $ (0.22) $ 0.13
Balance Sheet Data
September 30, 2000 1999 1998 1997 1996
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Total Assets $13,572,817 $14,780,755 $18,332,215 $16,146,645 $15,240,571
Working Capital 4,339,237 4,838,234 8,503,428 4,451,821 5,210,457
Long-Term Obligations - 354 44,190 1,399,089 209,824
Shareholders' Equity $ 6,866,891 $ 7,817,707 $11,636,482 $ 6,924,849 $ 8,238,886
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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The following discussion and analysis is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements of
Datawatch and its subsidiaries which appear elsewhere in this Annual Report on
Form 10-K.
GENERAL
Datawatch Corporation (the "Company" or "Datawatch"), is engaged in the
design, development, manufacture, marketing, and support of business computer
software. Its products address the enterprise reporting, business intelligence,
data replication and help desk markets.
Over the last three years, the Company has focused primarily on
Windows-based software. Prior to October, 1997 the Company also marketed
Macintosh-based products. The sale of this product line is discussed in Note 2
to Consolidated Financial Statements which appear elsewhere in this Annual
Report on Form 10-K.
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; Redwing, a plug-in for
Adobe Acrobat that lets users extract text and tables from Adobe PDF documents;
Monarch|ES, a configurable enterprise reporting solution that allows an
organization to quickly deliver business intelligence and decision support
derived from existing reporting systems with no new programming or report
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writing; Monarch Data Pump, a data replication and migration tool that offers a
shortcut for populating and refreshing data marts and data warehouses, for
migrating legacy data into new applications and for providing automated delivery
of reports in a variety of formats via email; and Quetzal|SC, an integrated help
desk and asset management software with advanced service level management
capabilities, integrated change management features, business process automation
tools and unique user-interface that promotes ease-of-use and ease-of-learning.
In early fiscal 2001 the Company will introduce Q|SM, a major new release of the
Company's service management software, and VorteXML, a new data transformation
product for the emerging XML market.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2000 AS COMPARED TO
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FISCAL YEAR ENDED SEPTEMBER 30, 1999
------------------------------------
Net sales for the fiscal year ended September 30, 2000 were $26,879,000
which represents a decrease of $292,000 or approximately 1% from the net sales
of $27,171,000 for the fiscal year ended September 30, 1999. Net sales for
fiscal 1999 included a non-recurring licensing and development fee of $740,000
received from Adobe for integration of certain technology from the Company's
Redwing product into Adobe Acrobat. Exclusive of the fiscal 1999 Adobe sales,
net sales increased by $448,000 or approximately 2% in fiscal 2000. This
increase in sales results from an increase of the Company's Monarch, Monarch|ES
and third-party product sales. In fiscal 2000 and 1999 respectively, Monarch and
Monarch|ES products accounted for approximately 59% and 53% of net sales;
Quetzal|SC products accounted for approximately 25% and 33% of net sales; and
third-party products accounted for approximately 16% and 14%.
Cost of sales for the fiscal year ended September 30, 2000 were $6,364,000
or approximately 24% of net sales. Cost of sales for the fiscal year ended
September 30, 1999 were $6,148,000 or approximately 23% of net sales. Included
in the fiscal 1999 cost of sales were $420,000 of non-recurring costs paid to a
third-party developer for a one-time customization of the Company's Redwing
product. Excluding these costs, fiscal 1999 cost of sales, would have been
$5,728,000 or approximately 21% of net sales. This increase in cost of goods
sold as a percentage of net sales results from the increase in net sales of the
Company's third-party product lines, which produce lower margins.
Engineering and product development expenses were $1,837,000 for the fiscal
year ended September 30, 2000, which represents a decrease of $549,000 or
approximately 23% from $2,386,000 for the fiscal year ended September 30, 1999.
This decrease does not imply that the Company's development efforts are slowing
but is reflective of a reduction of expenditures for development efforts
undertaken by developers under contract to the Company and internal quality
assurance personnel for the Company's Monarch|ES and Questzal|SC products.
Selling, general and administrative expenses were $19,617,000 for the
fiscal year ended September 30, 2000, which represents a decrease of $2,680,000
or approximately 12% from $22,297,000 for the fiscal year ended September 30,
1999. Included in the expenses for fiscal 1999 were approximately $571,000 of
non-recurring legal expenses associated with litigation, which was settled in
fiscal 1999. Excluding these fees, fiscal 1999 selling, general and
administrative expenses would have been $21,726,000 and, accordingly, selling,
general and administrative expenses, decreased by $2,109,000 or approximately
10% in fiscal 2000. This decrease is primarily due to the reduction of personnel
in the Company's worldwide operations pursuant to a restructuring during the
fourth quarter of fiscal 1998 and the third quarter of fiscal 1999, as well as a
decrease in promotional activities associated with the Company's Monarch
product.
As a result of the foregoing the Company recorded a loss from operations
for the fiscal year ended September 30, 2000 of $939,000, which compares to a
loss from operations of $4,309,000 for the fiscal year ended September 30, 1999.
The Company has not recorded any benefit for income taxes in fiscal 2000 on the
net loss from operations as management believes it is unlikely that such benefit
would be realized. During fiscal 1999, the Company recorded an income tax
benefit of approximately $412,000 on the net loss from operations up to the
amount of recoverable tax refunds as that amount was likely to be realized.
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Net loss for fiscal 2000 was $990,000, which compares to a net loss of
$3,847,000 for the fiscal 1999.
FISCAL YEAR ENDED SEPTEMBER 30, 1999 AS COMPARED TO
---------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1998
------------------------------------
Net sales for the fiscal year ended September 30, 1999 were $27,171,000
which represents an increase of $1,875,000 or approximately 7% from the net
sales of $25,296,000 for the fiscal year ended September 30, 1998. The increase
in sales results from an increase of the Company's Monarch|ES product sales and
non-recurring revenue resulting from a one-time license of a customized version
of the Company's Redwing product. In fiscal 1999 and 1998 respectively, Monarch
and Monarch|ES products accounted for approximately 53% and 51% of net sales;
Quetzal|SC products accounted for approximately 33% and 37% of net sales; and
third-party products accounted for approximately 14% and 11%. In fiscal 1999
there were no sales of Macintosh-based products; these products had accounted
for approximately 1% of net sales in fiscal 1998, owing to the disposition of
the product line in early fiscal 1998.
Cost of sales for the fiscal year ended September 30, 1999 were $6,148,000
or approximately 23% of net sales. Cost of sales for the fiscal year ended
September 30, 1998 were $5,213,000 or approximately 21% of net sales. Included
in the cost of sales for fiscal 1999 were $420,000 of non-recurring engineering
costs paid to a third-party developer for a one-time customization of the
Company's Redwing product. Excluding these expenses from the cost of sales, cost
of sales for fiscal 1999 would have been $5,728,000 or approximately 21% of net
sales, which is comparable to cost of sales for fiscal 1998.
Engineering and product development expenses include those expenditures
attributable to both internal development efforts and efforts undertaken by
third-party developers. Engineering and product development expenses were
$2,386,000 for the fiscal year ended September 30, 1999, a decrease of $997,000
or approximately 29% from $3,383,000 for the fiscal year ended September 30,
1998. This decrease was due to the discontinuance in October, 1998 of parallel
external development efforts undertaken for Quetzal|SC during fiscal 1998.
Selling, general and administrative expenses were $22,297,000 for the
fiscal year ended September 30, 1999, a decrease of $2,228,000 or approximately
9% from $24,525,000 for the fiscal year ended September 30, 1998. Included in
the expenses for fiscal 1999 were approximately $571,000 of non-recurring legal
expenses associated with the Palms Technology litigation, which has been
settled. Included in the expenses for fiscal 1998 were approximately $196,000 of
one-time expenses associated with leased space no longer required as a result of
the Company's restructuring subsequent to the sale of its Macintosh-based
product line to Dr Solomon's, and $91,000 of administrative and consulting costs
associated with the Company's second restructuring during fiscal 1998. Excluding
these specifically identified costs, selling, general and administrative
expenses would have been $21,726,000 for fiscal 1999, a decrease of $2,512,000
or approximately 10% from $24,238,000 for fiscal 1998. This decrease is
primarily due to the reduction of personnel in the Company's worldwide
operations pursuant to a restructuring during the fourth quarter of fiscal 1998
and the third quarter of fiscal 1999, as well as a decrease in promotional
activities associated with the Company's Monarch product.
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. There was no change to
the initial estimate in subsequent quarters.
During the third quarter of fiscal 1999, the Company approved and completed
a plan to further reduce costs and focus resources on key areas of the business.
The restructuring plan consisted of charges for severance benefits and related
costs for 21 terminated employees. These charges, totaling approximately
$449,000, have been paid. There was no change to the initial estimate in
subsequent quarters.
As a result of the foregoing, the net loss from operations for the fiscal
year ended September 30, 1999 was $4,309,000, which compares to a net loss from
operations of $10,504,000 for the fiscal year ended September 30, 1998.
9
<PAGE>
Elements of other income and expense changed substantially from year to
year. In 1998, the Company recognized a $15,431,000 pre-tax gain on the sale of
its Macintosh-based product line. Because such sale generated significant cash
balances - balances that have been used for working capital purposes during
fiscal 1998 and 1999 - interest income for fiscal 1998 was approximately
$470,000 compared to approximately $180,000 for fiscal 1999. The interest
expense recorded by the Company also increased in fiscal 1999 relative to fiscal
1998 owing to the continued use of working capital balances.
The Company recorded a tax benefit in fiscal 1999 of approximately
$412,000. This benefit was attributable to the Company's utilization of tax loss
carrybacks that arose as a result of taxes paid in fiscal 1998. The tax
provision in fiscal 1998 of $600,000 reflected the utilization, in the U.S., of
all of the Company's previous net operating loss carryforwards and the actual
incurrence of a tax liability. The Company still maintains significant foreign
net operating loss carryforwards.
The net loss for fiscal 1999 was $3,847,000, which compares to net income
of $4,704,000 for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by approximately $499,000 during the fiscal year
ended September 30, 2000, primarily as a result of the loss recorded in fiscal
2000. Cash used in operating activities in fiscal 2000 was $156,000.
Management believes that its anticipated capital needs for future
operations will be satisfied through at least September 30, 2001 by funds
generated from operations and by availability under the Company's bank lines of
credit. On December 22, 2000, the bank approved and committed to the renewal of
these lines which will provide for working capital borrowings up to $3,500,000
through December 31, 2001. The Company and the bank are currently in the process
of completing the final renewal documents. As of September 30, 2000, advances
from working capital lines amounted to $960,000. The lines contain customary
covenants which require, among other items, a minimum level of consolidated
tangible net worth and the maintenance of a minimum liquidity ratio, as defined.
As of September 30, 2000, the Company was in default on its covenant to maintain
the minimum level of consolidated net worth. The bank subsequently waived the
default on this covenant.
Management believes that the Company's current operations are not
materially impacted by the effects of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which, as amended, is effective for fiscal
years beginning after June 15, 2000. 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. The Company adopted SFAS No. 133,
as required, on October 1, 2000. The adoption will not have a material impact on
the Company's consolidated financial statements.
The Securities and Exchange Commission has released Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
sets forth its views regarding how revenue should be recognized in financial
statements. The Company's revenue recognition practices are in conformity with
accounting standards generally accepted in the U.S., and the adoption of this
bulletin, as required, on October 1, 2000 will not have a material impact on the
Company's consolidated financial statements.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The Company believes its Year 2000 compliance program has allowed it to
identify and correct any material Year 2000 compliance deficiencies. It is
unlikely that the Company will be required to initiate additional Year 2000
compliance efforts other than those required in the normal operation of its
business. If unforeseen compliance efforts are required, the Year 2000 issue
could result in material costs and have a material adverse effect on the
Company. However, the Company believes that this risk is minimal. The
10
<PAGE>
Company has warranted, to certain customers, that certain of its products are
Year 2000 compliant. Non-compliance with these warranties may result in legal
action for breach of warranty. The Company believes that the risk of such legal
action is minimal.
Since January 1, 2000, a few of the Company's customers have reported Year
2000 compliance issues with the Company's products. All known product Year 2000
compliance issues are considered minor in nature and, to our knowledge, have not
adversely affected mission critical operations of any of the Company's
customers. All known product related Year 2000 compliance issues have been
corrected by free-of-charge product updates. The Company believes that no
material costs or material adverse effects will result from product related Year
2000 compliance issues.
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 Annual
Report on Form 10-K that are not historical facts (including, but not limited to
statements contained in "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations" relating to liquidity and capital
resources) may constitute forward looking statements and are made under the safe
harbor provisions of The Private Securities Litigation Reform Act of 1995. The
Company's actual results of operations and financial condition have varied and
may in the future vary significantly from those stated in any forward looking
statements. Factors that may cause such differences include, without limitation,
the risks, uncertainties and other information discussed below and within this
Annual Report on Form 10-K, as well as the accuracy of the Company's internal
estimates of revenue and operating expense levels. The following discussion of
the Company's risk factors should be read in conjunction with the financial
statements and related notes thereto. Such factors, among others, may have a
material adverse effect upon the Company's business, results of operations and
financial condition.
Fluctuations in Quarterly Operating Results
The Company's future operating results could vary substantially from
quarter to quarter because of uncertainties and/or risks associated with such
things as technological change, competition, delays in the introduction of
products or product enhancements and general market trends. Historically, the
Company has operated with little backlog of orders because its software products
are generally shipped as orders are received. As a result, net sales in any
quarter are substantially dependent on orders booked and shipped in that
quarter. Because the Company's staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the Company's costs are
fixed in the short-term, small variations in the timing of revenues can cause
significant variations in operating results from quarter to quarter. Because of
these factors, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. There can be no assurance that the
Company will not experience such variations in operating results in the future
or that such variations will not have a material adverse effect on the Company's
business, financial condition or results of operation.
Dependence on Principal Products
In fiscal 2000, Monarch and Monarch|ES products and Quetzal|SC products
accounted for approximately 59% and 25%, respectively, of the Company's net
sales. The Company is wholly dependent on Monarch, Monarch|ES and Quetzal|SC
products. 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.
11
<PAGE>
International Sales
In 2000, 1999 and 1998, international sales accounted for approximately
52%, 55% and 56%, respectively, of the Company's net sales. The Company
anticipates that international sales will continue to account for a significant
percentage of its net sales. A significant portion of the Company's net sales
will therefore be subject to risks associated with international sales,
including unexpected changes in legal and regulatory requirements, changes in
tariffs, exchange rates and other barriers, political and economic instability,
difficulties in account receivable collection, difficulties in managing
distributors or representatives, difficulties in staffing and managing
international operations, difficulties in protecting the Company's intellectual
property overseas, seasonality of sales and potentially adverse tax
consequences.
Acquisition Strategy
Although the Company has no current acquisition plans, it has addressed and
may continue to address the need to develop new products, in part, through the
acquisition of other companies. Acquisitions involve numerous risks including
difficulties in the assimilation of the operations, technologies and products of
the acquired companies, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience and where competitors in such markets have
stronger market positions, and the potential loss of key employees of the
acquired company. Achieving and maintaining the anticipated benefits of an
acquisition will depend in part upon whether the integration of the companies'
business is accomplished in an efficient and effective manner, and there can be
no assurance that this will occur. The successful combination of companies in
the high technology industry may be more difficult to accomplish than in other
industries.
Dependence on New Introductions; New Product Delays
Growth in the Company's business depends in substantial part on the
continuing introduction of new products. The length of product life cycles
depends in part on end-user demand for new or additional functionality in the
Company's products. If the Company fails to accurately anticipate the demand
for, or encounters any significant delays in developing or introducing, new
products or additional functionality on its products, there could be a material
adverse effect on the Company's business. Product life cycles can also be
affected by the introduction by suppliers of operating systems of comparable
functionality within their products. The failure of the Company to anticipate
the introduction of additional functionality in products developed by such
suppliers could have a material adverse effect on the Company's business. In
addition, the Company's competitors may introduce products with more features
and lower prices than the Company's products. Such increase in competition could
adversely affect the life cycles of the Company's products, which in turn could
have a material adverse effect on the Company's business.
Software products may contain undetected errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by the Company and by current and potential end-users, errors
will not be found in new products after commencement of commercial shipments,
resulting in loss of or delay in market acceptance. Any failure by the Company
to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business.
Rapid Technological Change
The markets in which the Company competes have undergone, and can be
expected to continue to undergo, rapid and significant technological change. The
ability of the Company to grow will depend on its ability to successfully update
and improve its existing products and market and license new products to meet
the changing demands of the marketplace and that can compete successfully with
the existing and new products of the Company's competitors. There can be no
assurance that the Company will be able to successfully anticipate and satisfy
the changing demands of the personal computer software marketplace, that the
Company will be able to continue to enhance its product offerings, or that
technological changes in hardware platforms or software operating systems, or
the introduction of a new product by a competitor, will not render the Company's
products obsolete.
12
<PAGE>
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" which appears immediately before this "Risk
Factors" section of this Annual Report on Form 10-K, for a discussion of the
Company's Year 2000 readiness and the risks associated with the Year 2000 issue.
Competition in the PC Software Industry
The software market for personal computers is highly competitive and
characterized by continual change and improvement in technology. Several of the
Company's existing and potential competitors including IBM, Remedy, Actuate and
Seagate have substantially greater financial, marketing and technological
resources than the Company. No assurance can be given that the Company will have
the resources required to compete successfully in the future.
Dependence on Proprietary Software Technology
The Company's success is dependent upon proprietary software technology.
Although the Company does not own any patents on any such technology, it does
hold exclusive licenses to such technology and relies principally on a
combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its rights to
such proprietary technology. Despite such precautions, there can be no assurance
that such steps will be adequate to deter misappropriation of such technology.
Reliance on Software License Agreements
Substantially all of the Company's products incorporate third-party
proprietary technology which is generally licensed to the Company on an
exclusive, worldwide basis. Failure by such third-parties to continue to develop
technology for the Company and license such technology to the Company could have
a material adverse effect on the Company's business and results of operations.
Indirect Distribution Channels
During fiscal 2000, 1999 and 1998, the Company derived approximately 29%,
26% and 22%, respectively, of its net sales through resellers, none of which are
under the direct control of the Company. The loss of major resellers of the
Company's products, or a significant decline in their sales, could have a
material adverse effect on the Company's operating results. Other than Ingram
Micro Inc., which accounted for approximately 16%, 15%, and 12% of the Company's
fiscal 2000, 1999 and 1998 net sales, respectively, no reseller or other
customer accounted for more than 10% of the Company's revenues in fiscal 2000,
1999 or 1998. 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
13
<PAGE>
analysts could have an immediate and significant adverse effect on the market
price of the Company's common stock in any given period. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations,
which have particularly affected the market price for many high technology
companies and which, on occasion, have appeared to be unrelated to the operating
performance of such companies.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
---------------------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
At September 30, 2000, 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 that would require disclosure of market risk.
Primary Market Risk Exposures.
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company utilizes U.S.
dollar denominated borrowings to fund its operational needs through its
$3,500,000 working capital line of credit agreements. The lines, which currently
bear an interest rate of prime plus 1% (10.5% at September 30, 2000), are
subject to annual renewal. Had the interest rates under the lines 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
September 30, 2000. As of September 30, 2000, the Company had approximately
$960,000 in outstanding borrowings under working capital lines.
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, and dollar advances to the Company's international
subsidiaries, if any, are usually considered to be of a long-term investment
nature. Therefore, the majority of currency movements are reflected in the
Company's other comprehensive income. There are, however, certain situations
where the Company will invoice customers in currencies other than its own. Such
gains or losses, whether realized or unrealized, are reflected in income. These
have not been material in the past nor does management believe that they will be
material in the future. Currently the Company does not engage in foreign
currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The information required by this item is set forth in Item 14(a) under the
captions "Consolidated Financial Statements" and "Consolidated Financial
Statement Schedule" as a part of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
Information with respect to Directors may be found under the caption
"Election of Directors" appearing in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders for the fiscal year ended September 30,
2000. Such information is incorporated herein by reference. Information with
respect to the Company's executive officers may be found under the caption
"Executive Officers of the Registrant" appearing in Part I of this Annual Report
on Form 10-K.
14
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
The information set forth under the caption "Compensation and Other
Information Concerning Directors and Officers" appearing in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal
year ended September 30, 2000 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
The information set forth under the caption "Principal Holders of Voting
Securities" appearing in the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders for the fiscal year ended September 30, 2000 is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
The information set forth under the caption "Certain Transactions"
appearing in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders for the fiscal year ended September 30, 2000 is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------
The following documents are filed as part of this report:
(a) 1. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 2000 and 1999
Consolidated Statements of Operations for the Years Ended September
30, 2000, 1999 and 1998.
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended September 30, 2000, 1999 and 19978
Consolidated Statements of Cash Flows for the Years Ended September
30, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
Schedule VIII Valuation and Qualifying Accounts
Allother schedules are omitted as the required information is not
applicable or is included in the financial statements or related
notes.
The Independent Auditors' Report included with the Consolidated
Financial Statements under Item 14(a)1 above contains the Independent
Auditors' Report on the Consolidated Financial Statement Schedule.
3. LIST OF EXHIBITS
EX. NO DESCRIPTION
------ -----------
(1) 3.1 Restated Certificate of Incorporation of the Registrant (Exhibit
3.2)
(1) 3.2 By-Laws, as amended, of the Registrant (Exhibit 3.3)
(1) 4.1 Specimen certificate representing the Common Stock (Exhibit 4.4)
(6) 10.1 Sub-Lease, dated April 30, 1999, by and between Datawatch
Corporation and Eastman Kodak Company (Exhibit 10.1)
(1) 10.2* 1987 Stock Plan (Exhibit 10.7)
(1) 10.3* Form of Incentive Stock Option Agreement of the Registrant
(Exhibit 10.8)
(1) 10.4* Form of Nonqualified Stock Option Agreement of the Registrant
(Exhibit 10.9)
(1) 10.5 Software Development and Marketing Agreement by and between
Personics Corporation and Raymond Huger, dated January 19, 1989
(Exhibit 10.12)
15
<PAGE>
10.6 Commercial Security Agreement between Datawatch Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (filed herewith)
10.7 Commercial Security Agreement between Personics Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (filed herewith)
(2) 10.8* Executive Agreement between the Company and Bruce R. Gardner,
dated April 11, 1996 (Exhibit 10.3)
(3) 10.9* 1996 Non-Employee Director Stock Option Plan, as amended on
December 10, 1996 (Exhibit 10.30)
(3) 10.10* 1996 International Employee Non-Qualified Stock Option Plan
(Exhibit 10.31)
(4) 10.11 Amended and Restated Letter Agreement, dated February 12, 1997,
by and between Datawatch Corporation, Personics Corporation and
Silicon Valley Bank (Exhibit 10.1)
(4) 10.12 Promissory Note, dated February 12, 1997, by and between
Datawatch Corporation, Personics Corporation and Silicon Valley
Bank (Exhibit 10.2).
10.13* 1996 Stock Plan as amended as of March 28, 2000 (filed herewith)
(5) 10.14 Loan Modification Agreement, dated March 16, 1999, by and between
Datawatch Corporation, Personics Corporation and Silicon Valley
Bank (Exhibit 10.1)
(6) 10.15 Loan Modification Agreement, dated December 27, 1999, by and
between Datawatch Corporation and Silicon Valley Bank (Exhibit
10.22)
(6) 10.16 Intellectual Property Security Agreement, dated December 27, 1999
by and between Datawatch Corporation and Silicon Valley Bank
(Exhibit 10.23)
(6) 10.17 Export-Import Bank Loan and Security Agreement, dated December
27, 1999, by and among Datawatch Corporation, Datawatch
International Limited, Datawatch Europe Limited, Guildsoft
Limited and Silicon Valley Bank in favor of Export-Import Bank of
the United States (Exhibit 10.24)
(6) 10.18* Contract of Employment, dated February 24, 1997, by and between
WorkGroup Systems Limited and Robert Hagger (Exhibit 10.25)
(6) 10.19* Amendment to Contract of Employment dated February 24, 1997, by
and between WorkGroup Systems Limited and Robert Hagger, dated
July 15, 1999 (Exhibit 10.26)
(6) 10.20 Mortgage Debenture, dated December 27, 1999, by and between
Datawatch Europe Limited and Silicon Valley Bank (Exhibit 10.27)
(6) 10.21 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch Europe Limited and Silicon Valley Bank (Exhibit 10.28)
(6) 10.22 Mortgage Debenture, dated December 27, 1999, by and between
Datawatch International Limited and Silicon Valley Bank (Exhibit
10.29)
(6) 10.23 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch International Limited and Silicon Valley Bank (Exhibit
10.30)
(6) 10.24 Mortgage Debenture, dated December 27, 1999, by and between
Guildsoft Limited and Silicon Valley Bank (Exhibit 10.31)
(6) 10.25 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch Guildsoft Limited and Silicon Valley Bank (Exhibit
10.32)
(6) 10.26 Export-Import Bank of the United States Working Capital Guarantee
Program Borrower Agreement, dated December 27, 1999, by and among
Datawatch Corporation, Datawatch International Limited, Datawatch
Europe Limited, Guildsoft Limited and Silicon Valley Bank in
favor of Export-Import Bank of the United States (Exhibit 10.33)
10.27 Lease, dated August 31, 2000, by and between Fortune
Wakefield,LLC and Datawatch Corporation (filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedule (filed herewith)
--------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan or contract.
(1) Previously filed as an exhibit to Registration Statement 33-46290 on Form
S-1 and incorporated herein by reference (the number given in parenthesis
indicates the corresponding exhibit in such Form S-1).
(2) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q).
(3) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
16
<PAGE>
(4) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit in
such Form 10-Q).
(5) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit in
such Form 10).
(6) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
(b) REPORTS ON FORM 8-K
No current report on Form 8-K was filed during the quarterly period ended
September 30, 2000.
(c) EXHIBITS
The Company hereby files as exhibits to this Annual Report on Form 10-K
those exhibits listed in Item 14(a)3 above.
(d) FINANCIAL STATEMENT SCHEDULES
The Company hereby files as financial statement schedules to this Annual
Report on Form 10-K the Consolidated Financial Statement Schedules listed
in Item 14(a)2 above which are attached hereto.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Datawatch Corporation
Date: December 29, 2000 By: /s/ Bruce R. Gardner
--------------------------
Bruce R. Gardner
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Bruce R. Gardner President, Chief Executive December 29, 2000
------------------------- Officer and Director
Bruce R. Gardner (Principal Executive Officer)
/s/ Alan MacDougall Vice President Finance, December 29, 2000
------------------------- Chief Financial Officer
Alan MacDougall and Treasurer (Principal
Financial and Accounting
Officer)
/s/ Jerome Jacobson Director December 29, 2000
-------------------------
Jerome Jacobson
/s/ David T. Riddiford Director December 29, 2000
-------------------------
David T. Riddiford
/s/ Terry W. Potter Director December 29, 2000
-------------------------
Terry W. Potter
18
<PAGE>
DATAWATCH CORPORATION AND
SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2000 and for the Three Years
Ended September 30, 2000
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
--------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2000 AND 1999
AND FOR THE THREE YEARS ENDED SEPTEMBER 30, 2000:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Datawatch Corporation
Lowell, Massachusetts
We have audited the accompanying consolidated balance sheets of Datawatch
Corporation (the "Company") and subsidiaries as of September 30, 2000 and 1999,
and the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the three years in the period ended September
30, 2000. Our audits also included the financial statement schedule listed in
the Index at Item 14(a)2. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Datawatch Corporation and
subsidiaries as of September 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2000, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/Deloitte & Touche LLP
Boston, Massachusetts
November 10, 2000 (December 22, 2000 as to Note 8)
-1-
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
<TABLE><CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------------------------
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 1,695,832 $ 1,684,485
Short-term investments 348,121 1,479,698
Accounts receivable, less allowance for doubtful accounts and
sales returns of approximately $588,000 in 2000 and
$467,000 in 1999 7,662,454 7,282,452
Income tax recoverable -- 230,922
Inventories 395,291 409,753
Prepaid advertising and other expenses 943,465 713,618
------------ ------------
Total current assets 11,045,163 11,800,928
------------ ------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 3,592,708 4,096,358
Manufacturing and engineering equipment 212,891 202,187
------------ ------------
3,805,599 4,298,545
Less accumulated depreciation and amortization (2,635,005) (2,805,418)
------------ ------------
Net property and equipment 1,170,594 1,493,127
------------ ------------
OTHER ASSETS 945,844 942,128
------------ ------------
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED COMPANIES - Less accumulated
amortization of approximately $2,503,000 in 2000 and
$2,370,000 in 1999 411,216 544,572
------------ ------------
$ 13,572,817 $ 14,780,755
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,064,501 $ 2,851,120
Accrued expenses 1,589,423 1,136,365
Deferred revenue 2,092,002 1,619,715
Borrowings under credit lines 960,000 1,313,705
Current portion of long-term obligations -- 42,143
------------ ------------
Total current liabilities 6,705,926 6,963,048
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 6, 7 and 8)
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01- authorized,
1,000,000 shares; no shares issued -- --
Common stock, par value $.01- authorized,
20,000,000 shares; issued, 9,408,326 shares and
9,221,165 shares in 2000 and 1999, respectively;
outstanding, 9,376,274 shares and 9,189,113
shares in 2000 and 1999, respectively 94,083 92,211
Additional paid-in capital 20,165,954 19,864,296
Accumulated deficit (12,666,364) (11,676,735)
Accumulated other comprehensive loss (586,394) (321,677)
------------ ------------
7,007,279 7,958,095
Less treasury stock, at cost - 32,052 shares (140,388) (140,388)
------------ ------------
Total shareholders' equity 6,866,891 7,817,707
------------ ------------
$ 13,572,817 $ 14,780,755
============ ============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
<TABLE><CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
---------------------------------------------------------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
NET SALES:
PC-based products $ 26,879,411 $ 27,171,401 $ 25,123,468
Macintosh-based products -- -- 172,254
------------ ------------ ------------
Net sales 26,879,411 27,171,401 25,295,722
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 6,363,695 6,147,938 5,212,595
Engineering and product development 1,837,289 2,386,256 3,383,260
Selling, general and administrative 19,617,343 22,297,320 24,524,839
Restructuring and centralization costs -- 648,767 2,679,460
------------ ------------ ------------
Total costs and expenses 27,818,327 31,480,281 35,800,154
------------ ------------ ------------
LOSS FROM OPERATIONS (938,916) (4,308,880) (10,504,432)
INTEREST EXPENSE (153,071) (135,562) (62,306)
INTEREST INCOME AND OTHER 114,901 179,846 470,367
GAIN ON SALE OF PRODUCT LINE -- -- 15,431,253
FOREIGN CURRENCY TRANSACTION
GAINS (LOSSES) (12,543) 5,785 (30,886)
BENEFIT (PROVISION) FOR INCOME TAXES -- 411,630 (600,000)
------------ ------------ ------------
NET (LOSS) INCOME $ (989,629) $ (3,847,181) $ 4,703,996
============ ============ ============
NET (LOSS) INCOME PER SHARE - Basic $ (0.11) $ (0.42) $ 0.52
============ ============ ============
NET (LOSS) INCOME PER SHARE - Diluted $ (0.11) $ (0.42) $ 0.51
============ ============ ============
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING - Basic 9,267,738 9,160,831 9,133,385
ADJUSTMENT FOR POTENTIAL COMMON
STOCK -- -- 176,868
------------ ------------ ------------
WEIGHTED-AVERAGE NUMBER
OF SHARES OUTSTANDING - Diluted 9,267,738 9,160,831 9,310,253
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
<TABLE><CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
-----------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
COMMON STOCK PAID-IN TREASURY STOCK
SHARES AMOUNT CAPITAL SHARES AMOUNT
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1997 9,116,113 $ 91,160 $ 19,737,963 (32,052) $ (140,388)
Stock options exercised 64,251 643 85,924 -- --
Comprehensive income:
Translation adjustment -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total comprehensive income
BALANCE, SEPTEMBER 30, 1998 9,180,364 91,803 19,823,887 (32,052) (140,388)
Stock options exercised 40,801 408 40,409 -- --
Comprehensive loss:
Translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total comprehensive loss
BALANCE, SEPTEMBER 30, 1999 9,221,165 92,211 19,864,296 (32,052) (140,388)
Stock options exercised 187,161 1,872 301,658 -- --
Comprehensive loss:
Translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total comprehensive loss
BALANCE, SEPTEMBER 30, 2000 9,408,326 $ 94,083 $ 20,165,954 (32,052) $ (140,388)
============ ============ ============ ============
ACCUMULATED
OTHER COMPREHENSIVE
ACCUMULATED COMPREHENSIVE INCOME
DEFICIT INCOME (LOSS) (LOSS) TOTAL
BALANCE, SEPTEMBER 30, 1997 $(12,533,550) $ (230,336) $ 6,924,849
Stock options exercised -- -- 86,567
Comprehensive income:
Translation adjustment -- (78,930) $ (78,930) (78,930)
Net income 4,703,996 -- 4,703,996 4,703,996
------------ ------------ ------------ ------------
Total comprehensive income $ 4,625,066
============
BALANCE, SEPTEMBER 30, 1998 (7,829,554) (309,266) 11,636,482
Stock options exercised -- -- 40,817
Comprehensive loss:
Translation adjustment -- (12,411) $ (12,411) (12,411)
Net loss (3,847,181) -- (3,847,181) (3,847,181)
------------ ------------ ------------ ------------
Total comprehensive loss $ (3,859,592)
============
BALANCE, SEPTEMBER 30, 1999 (11,676,735) (321,677) 7,817,707
Stock options exercised -- -- 303,530
Comprehensive loss:
Translation adjustment -- (264,717) $ (264,717) (264,717)
Net loss (989,629) -- (989,629) (989,629)
------------ ------------ ------------ ------------
Total comprehensive loss $ (1,254,346)
============
BALANCE, SEPTEMBER 30, 2000 $(12,666,364) $ (586,394) $ 6,866,891
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
<TABLE><CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (989,629) $ (3,847,181) $ 4,703,996
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 1,108,231 1,151,719 1,300,813
Amortization of interest on short-term investments (4,290) (121,003) (176,034)
Gain on sale of product lines -- -- (15,431,253)
Changes in current assets and liabilities, net of acquisitions:
Accounts receivable (567,806) (1,535,541) 1,036,395
Inventories (3,341) 96,117 275,884
Prepaid advertising and other expenses (277,873) 918,675 482,255
Accounts payable and accrued expenses (78,928) (1,026,772) (1,030,528)
Deferred revenue 623,988 496,608 (143,020)
Gain (loss) on disposition of equipment 33,290 2,825 (8,537)
------------ ------------ ------------
Net cash used in operating activities (156,358) (3,864,553) (8,990,029)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and fixtures (419,544) (410,920) (818,143)
Proceeds from sale of equipment-net 20,603 14,885 18,862
Proceeds from sale of short-term investments 2,950,549 7,979,405 6,245,000
Purchase of short-term investments (1,814,682) (5,942,690) (9,464,376)
Proceeds from sale of product lines -- -- 16,750,000
Capitalized software (197,057) (468,354) (486,925)
Other assets (13,112) (117,133) 140,194
------------ ------------ ------------
Net cash provided by investing activities 526,757 1,055,193 12,384,612
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 303,530 40,817 86,567
Principal payments on long-term obligations (39,603) (145,460) (242,769)
Borrowings (payments) under credit lines - net (353,705) 1,063,705 250,000
Payments of bank term loan -- -- (1,500,000)
Restricted cash (143,299) -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities (233,077) 959,062 (1,406,202)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (125,975) (40,473) --
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS 11,347 (1,890,771) 1,988,381
CASH AND EQUIVALENTS, BEGINNING OF YEAR 1,684,485 3,575,256 1,586,875
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF YEAR $ 1,695,832 $ 1,684,485 $ 3,575,256
============ ============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 145,355 $ 135,562 $ 62,306
============ ============ ============
Income taxes paid (refunds received) $ (231,000) $ -- $ 1,175,000
============ ============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES -
Equipment acquired under capital lease agreements $ -- $ -- $ 77,311
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Datawatch Corporation (the "Company") develops,
markets and distributes commercial software products. The Company also
provides a wide range of consulting services surrounding the
implementation and support of its software products.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Datawatch Corporation and its wholly owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
ACCOUNTING ESTIMATES - The preparation of the Company's consolidated
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
REVENUE RECOGNITION - Revenue from sales of software products is
recognized at the time of shipment when no significant obligations remain
and collectibility is probable. The Company's software products are sold
under warranty against certain defects in material and workmanship for a
period of 30 to 60 days from the date of purchase. Software products sold
directly to end users include a guarantee under which such customers may
return products within 30 to 60 days for a full refund. The Company offers
its resellers the ability to return obsolete versions of its products and
slow-moving products for credit which can be used against purchases of
other Company products on a dollar-for-dollar basis. Revenues are provided
for potential returns under these arrangements based upon historical
experience and anticipated exposures.
Revenue from the sale of separate consulting agreements to provide
field-service support is deferred at the time of sale. The Company
recognizes its revenue on these agreements ratably over their 12-month
contractual periods. Revenue from the sale of annual subscription
agreements to provide upgrades for minor product improvements is deferred
at the time of sale and recognized ratably over their 12-month contractual
periods.
Revenue from consulting services is recognized as revenue as the services
are provided.
CASH AND EQUIVALENTS - Cash and equivalents include cash on hand, cash
deposited with banks, and highly liquid debt securities with remaining
maturities of 90 days or less when purchased.
SHORT-TERM INVESTMENTS - Short-term investments consist of United States
Treasury Bills and commercial paper with relatively short-term maturities
(less than one year from the date of purchase) for which the carrying
value approximates market value.
-6-
<PAGE>
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
OTHER ASSETS - Pursuant to Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," issued by the Financial Accounting
Standards Board ("FASB"), the Company is required to capitalize certain
software development and production costs once technological feasibility
has been achieved. The cost of purchased software is also required to be
capitalized when related to a product which has achieved technological
feasibility or that has an alternative future use. For the years ended
September 30, 2000, 1999 and 1998, the Company did not capitalize any
internal software development costs. For the years ended September 30,
2000, 1999 and 1998, the Company purchased and capitalized software
amounting to approximately $197,000, $468,000 and $487,000, respectively.
Software development costs incurred prior to achieving technological
feasibility are charged to research and development expense as incurred.
Capitalized software development and purchased software costs are reported
at the lower of unamortized cost or net realizable value. Commencing upon
initial product release, these costs are amortized using the straight-line
method over the estimated life (which approximates the ratio that current
gross revenues for a product bear to the total of current and anticipated
future gross revenues for that product), generally 12 to 36 months for
purchased software. For the years ended September 30, 2000, 1999 and 1998,
amortization was approximately $337,000, $267,000 and $125,000,
respectively.
ADVERTISING AND PROMOTIONAL MATERIALS - Advertising costs are expensed as
incurred and amounted to approximately $517,000, $475,000 and $339,000 in
2000, 1999 and 1998, respectively. Direct mail/direct response costs are
expensed as the associated revenue is recognized. The amortization period
is based on historical results of previous mailers (generally three to six
months from the date of the mailing). Direct mail expense was
approximately $846,000, $1,682,000 and $2,979,000 in 2000, 1999 and 1998,
respectively. At September 30, 2000 and 1999, deferred direct mail/direct
response costs were approximately $186,000 and $117,000, respectively.
Such costs are included under the caption "prepaid advertising and other
expenses."
CONCENTRATION OF CREDIT RISKS AND MAJOR CUSTOMERS - The Company sells its
products and services to U.S. and non-U.S. dealers and other software
distributors, as well as to end users under normal credit terms. One
customer individually accounted for 16%, 15%, and 12% of net sales in
2000, 1999 and 1998, respectively. This same customer accounted for 34%
and 24% of outstanding trade receivables as of September 30, 2000 and
1999, respectively. Other than this customer, no base of customers in one
geographic area constitutes a significant portion of sales. The Company
performs ongoing credit evaluations of its customers and generally does
not require collateral. Allowances are provided for anticipated doubtful
accounts and sales returns.
INVENTORIES - Inventories consist of software components - primarily
software manuals, diskettes and retail packaging materials. Inventories
are valued at the lower of cost (first-in, first-out) method or market.
PROPERTY AND EQUIPMENT - Purchased equipment and fixtures are recorded at
cost. Leased equipment accounted for as capital leases is recorded at the
present value of the minimum lease payments required during the lease
terms. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the related assets or over the
terms, if shorter, of the related leases. Useful lives and lease terms
range from three to seven years. The cost and the related accumulated
amortization of equipment leased under capital lease agreements were
approximately $687,000 and $683,000 at September 30, 2000, respectively,
and approximately $804,000 and $746,000 at September 30, 1999,
respectively. Amortization expense was approximately $48,000, $149,000 and
$232,000 for the years ended September 30, 2000, 1999 and 1998,
respectively.
-7-
<PAGE>
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT (CONTINUED) - The Company adopted the provisions of
the AICPA Statement of Position ("SOP") 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use," on October 1,
2000. This statement requires certain expenditures made for internal use
software to be capitalized. For the year ending September 30, 2000, no
amounts were capitalized as there were no projects where the criteria for
capitalization was met.
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." This statement requires an
asset and liability approach to accounting for income taxes based upon the
future expected values of the related assets and liabilities. Deferred
income taxes are provided for items which are recognized in different
years for tax and financial reporting purposes.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANIES - The excess of cost
over net assets of acquired companies is being amortized on a
straight-line basis over seven years. In addition, the net carrying amount
of the excess of cost over net assets of acquired companies is reduced if
it is probable that the estimated undiscounted operating cash flow before
depreciation and amortization from related operations will be less than
the carrying amount of the excess of cost over net assets of acquired
companies.
The Company also evaluates other long-lived assets using the same
methodology in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
equivalents, short-term investments, accounts receivable, accounts
payable, accrued expenses and deferred revenue approximate fair value
because of their short-term nature. The carrying amounts of the Company's
current and long-term obligations approximate fair value.
EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share reflect the
weighed-average number of common shares outstanding during each period.
Diluted earnings (loss) per share reflect the impact, when dilutive, of
the exercise of options using the treasury stock method. The Company's
stock options were antidilutive in 2000 and 1999. Options to purchase
approximately 275,000 shares and 43,000 shares in 2000 and 1999,
respectively, were therefore excluded from the treasury stock calculation.
FOREIGN CURRENCY TRANSLATIONS AND TRANSACTIONS - The financial statements
of foreign subsidiaries are translated into U.S. dollars in accordance
with SFAS No. 52, "Foreign Currency Translation." The related translation
adjustments are reported as a separate component of shareholders' equity
under the heading "Accumulated Other Comprehensive Income (Loss)." Gains
and losses resulting from transactions and related accounts that are
denominated in currencies other than the U.S. dollar are included in the
net operating results of the Company.
STOCK-BASED COMPENSATION - The Company accounts for stock option awards to
employees and directors using the intrinsic value method in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations, including
Financial Accounting Standards Board Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions involving Stock Compensation." The
Company has not awarded stock options to nonemployees. The difference
between accounting for stock-based compensation under APB Opinion No. 25,
and SFAS No. 123, "Accounting for Stock-Based Compensation," is disclosed
in Note 10.
-8-
<PAGE>
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
OTHER COMPREHENSIVE INCOME (LOSS) - The Company complies with the
provisions of SFAS No. 130, "Reporting Comprehensive Income" which
provides standards for reporting items considered to be "comprehensive
income" and uses the term "other comprehensive income" to refer to
revenues, expenses, gains and losses that are included in comprehensive
income under accounting principles generally accepted in the United States
of America but excluded from net income. Currently the only items
presented in the Company's consolidated financial statements that are
considered other comprehensive income (loss) as defined in SFAS No. 130
are cumulative foreign currency translation adjustments, which are
recorded as a component in the accompanying consolidated statements of
stockholders' equity. Accumulated other comprehensive income (loss)
reported in the accompanying consolidated balance sheets consists only of
foreign currency translation adjustments.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
which, as amended, is effective for fiscal year beginning after June 15,
2000. 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. The Company adopted SFAS No. 133, as
required, on October 1, 2000. The adoption will not have a material impact
on the Company's consolidated financial statements.
The Securities and Exchange Commission has released Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," which
sets forth its views regarding how revenue should be recognized in
financial statements. The Company's revenue recognition practices are in
conformity with accounting standards generally accepted in the United
States of America, and the adoption of this bulletin, as required, on
October 1, 2000 will not have a material impact on the Company's
consolidated financial statements.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the current consolidated financial statement presentation.
2. DIVESTITURE
On October 9, 1997, the Company sold its Macintosh-based product line for
approximately $16,750,000 in cash, resulting in a pretax gain of
approximately $15,431,000. The assets sold consisted primarily of
inventory, property and equipment, trademarks, and the technological
rights related to the product line. In connection with the sale, the
Company wrote off certain assets and liabilities related to the product
line sold, including approximately $286,000 representing the unamortized
balance of goodwill initially recorded in a prior acquisition of a
business.
3. RESTRUCTURING AND CENTRALIZATION COSTS
Subsequent to the sale of its Macintosh-based product line, the Company
undertook a corporate-wide restructuring effort so as to centralize both
its administrative infrastructure and its development efforts for its
remaining products. The plan was approved and completed in the first
quarter of fiscal 1998. The total amount charged to first quarter
operations was approximately $2,364,000. The plan included charges for
salaries and wages and the related severance benefits for 25 terminated
employees. These charges, totaling approximately $1,884,000, have been
paid. The plan also included special one-time payments made to outside
developers associated with the centralization of the Company's development
efforts. These charges, totaling approximately $433,000, have been paid.
There was no change to the initial estimate in subsequent quarters.
-9-
<PAGE>
3. RESTRUCTURING AND CENTRALIZATION COSTS (CONTINUED)
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. The restructuring plan
resulted in charges for severance benefits and related costs for 14
terminated employees. These charges, totaling approximately $315,000, have
been paid. There was no change to the initial estimate in subsequent
quarters.
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 resulted in charges for severance benefits and related costs for 10
terminated employees. These charges, totaling approximately $200,000, have
been paid. There was no change in the initial estimate in subsequent
quarters.
During the third quarter of fiscal 1999, the Company approved and
completed a plan to further reduce costs and focus resources on key areas
of the business. The restructuring plan resulted in charges for severance
benefits and related costs for 21 terminated employees. These charges,
totaling approximately $449,000, have been paid. There was no change in
the initial estimate in subsequent quarters.
4. INVENTORIES
Inventories consisted of the following at September 30:
2000 1999
Materials $247,089 $233,830
Finished goods 148,202 175,923
-------- --------
Total $395,291 $409,753
======== ========
5. ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
2000 1999
Accrued salaries and benefits $ 170,837 $ 247,840
Accrued royalties and commissions 846,944 557,518
Accrued professional fees 212,060 104,917
Other 359,582 226,090
---------- ----------
Total $1,589,423 $1,136,365
========== ==========
-10-
<PAGE>
6. COMMITMENTS
LEASES - The Company leases various facilities, equipment and automobiles
in the U.S. and overseas under noncancelable operating leases which expire
through 2017. The lease agreements generally provide for the payment of
minimum annual rentals, pro-rata share of taxes, and maintenance expenses.
Rental expense for all operating leases was approximately $953,000,
$1,023,000 and $1,006,000 for the years ended September 30, 2000, 1999 and
1998, respectively.
As of September 30, 1999, minimum rental commitments under noncancelable
operating leases are as follows:
Year Ending September 30
2001 $ 832,156
2002 675,750
2003 469,386
2004 394,475
2005 386,026
Thereafter 996,050
----------
Total minimum lease payments $3,753,843
==========
ROYALTIES - The Company is also committed to pay royalties relating to the
sales of certain software products. Royalty expense included in cost of
sales was approximately $1,894,000, $1,637,000 and $1,380,000 for the
years ended September 30, 2000, 1999 and 1998, respectively.
7. 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.
8. FINANCING ARRANGEMENTS
LINE OF CREDIT - On December 22, 2000, the bank approved and committed to
the renewal of the Company's two line-of-credit agreements which will
provide for working capital borrowings through December 31, 2001. The
lines provide for maximum borrowings up to the lesser of $3,500,000 or for
anywhere from 50% to 90% of defined eligible accounts receivable.
Borrowings under the lines are collateralized by substantially all assets
of the Company and a maximum of $2,000,000 is guaranteed by the
Export-Import Bank of the United States. Outstanding borrowings bear
interest at the bank's prime rate plus 1% (10.5% at September 30, 2000).
The lines of credit contain customary covenants which require, among other
items, a minimum level of consolidated tangible net worth and the
maintenance of a minimum liquidity ratio, as defined.
As of September 30, 2000 and 1999, there were approximately $960,000 and
$1,314,000, respectively, of outstanding borrowings under then existing
line-of-credit agreements. As of September 30, 2000, the Company was in
default on its covenant to maintain the minimum level of consolidated net
worth under covenants. The bank subsequently waived this default and has
modified this covenant in the renewed line-of-credit agreements. As of
September 30, 2000, available borrowings under the agreements were
$1,187,000.
-11-
<PAGE>
8. FINANCING ARRANGEMENTS (CONTINUED)
LETTER OF CREDIT - The Company has an irrevocable standby letter of credit
with a bank securing performance of a five-year property lease. The
Company has reserved a term deposit in the amount of approximately
$143,000 to secure the letter of credit. This term deposit is included in
other long-term assets.
CAPITAL LEASE OBLIGATIONS - The Company leases certain office and computer
equipment under capital leases. The future minimum lease payments under
the noncancelable capital lease obligation at September 30, 2000 was $356.
The present value of this obligation was $317 and is included in accounts
payable at that date.
9. INCOME TAXES
The (benefit) provision for income taxes consisted of the following for
the years ended September 30:
<TABLE><CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Current:
Federal $ -- $ (412,000) $ 580,000
State -- -- 10,000
Foreign -- -- 10,000
----------- ----------- -----------
-- (412,000) 600,000
----------- ----------- -----------
Deferred:
Federal (547,000) 525,000 1,663,000
State (97,000) 387,000 688,000
Foreign 96,000 22,000 (1,621,000)
Change in valuation allowance 548,000 (934,000) (730,000)
----------- ----------- -----------
-- -- --
----------- ----------- -----------
Total $ -- $ (412,000) $ 600,000
=========== =========== ===========
</TABLE>
At September 30, 2000, the Company had federal tax loss carryforwards of
approximately $2,600,000 expiring in 2019 and had approximately $4,200,000
in state tax loss carryforwards, which commence expiring in 2004. An
alternative minimum tax credit of approximately $132,000 is available for
offset against future regular federal taxes. Research and development
credits of approximately $370,000 (federal) and $39,000 (state) expire
beginning in 2007. In addition, tax loss carryforwards in certain foreign
jurisdictions total approximately $3,600,000.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and
operating loss carryforwards and credits.
-12-
<PAGE>
9. INCOME TAXES (CONTINUED)
The tax effects of significant items comprising the Company's net deferred
tax position as of September 30 were as follows:
2000 1999
Deferred tax liabilities:
Depreciation and amortization $ (81,000) $ (153,000)
Prepaid expenses (69,000) (174,000)
----------- -----------
(150,000) (327,000)
----------- -----------
Deferred tax assets:
Goodwill 339,000 337,000
Deferred revenue 185,000 --
Accounts and notes receivable reserves 193,000 180,000
Net operating loss carryforwards 2,690,000 2,650,000
Research and development credits 404,000 289,000
Alternative minimum tax credits 155,000 132,000
Other 123,000 130,000
----------- -----------
4,089,000 3,718,000
----------- -----------
Total 3,939,000 3,391,000
Valuation allowance (3,939,000) (3,391,000)
----------- -----------
Deferred taxes, net $ -- $ --
=========== ===========
The Company has experienced significant losses from operations both
domestically and internationally over the past several years. Accordingly,
management does not believe the tax assets satisfy the realization
criteria set forth in SFAS No. 109 and has thus recorded a valuation
allowance for the entire net tax asset. The valuation allowance increased
by approximately $548,000 in 2000 because of the increase in the net
deferred tax asset during the year, primarily related to deferred revenue
and credit carryforwards.
-13-
<PAGE>
9. INCOME TAXES (CONTINUED)
The following table reconciles the Company's effective tax rate to the
federal statutory rate of 34% for the years ended September 30, 2000, 1999
and 1998:
<TABLE><CAPTION>
2000 1999 1998
<S> <C> <C> <C>
(Benefit) taxes at federal statutory rate $ (336,000) $(1,785,000) $ 1,803,000
Reversal of valuation allowances against
net operating loss carryforwards -- -- (2,066,000)
Provision of valuation allowance against currently
generated net operating loss carryforwards 398,000 1,160,000 962,000
Benefit of research credits -- -- (280,000)
Nondeductible goodwill -- -- 96,000
Other (62,000) 213,000 85,000
----------- ----------- -----------
(Benefit) provision for income taxes $ -- $ (412,000) $ 600,000
=========== =========== ===========
</TABLE>
10. SHAREHOLDERS' EQUITY
STOCK OPTION PLANS - The Company's four stock option plans described below
provide for granting of options and other stock rights to purchase common
stock of the Company to employees, officers, consultants, and directors
who are not otherwise employees. The options granted are exercisable as
specified at the date of grant and generally expire five to ten years from
the date of grant. Generally, options and other stock rights are granted
at exercise prices not less than fair market value at the date of the
grant.
The Company's 1987 Stock Option Plan provided for the issuance of
nonqualified or incentive stock options to employees, officers,
consultants, and directors. As of February 25, 1997, the Company may no
longer issue stock options under the 1987 Stock Option Plan pursuant to
terms of the plan.
The Company's 1996 Non-Employee Director Stock Option Plan (the "1996
Director Plan"), which was amended December 10, 1996, provided for an
initial grant of 12,000 options to each non-employee director elected as a
member of the Board of Directors and for the subsequent automatic annual
grant of 4,000 options (at the then-current fair market value) to each
member as long as that member remains on the Board of Directors. Options
granted pursuant to this plan vest at 8.33% during each three-month period
subsequent to date of grant so as to be fully vested three years from date
of grant. As of February 16, 2000, the Company may no longer issue stock
options under the 1996 Director Plan.
On October 4, 1996, the Company established the 1996 International
Employee Non-Qualified Stock Option Plan (the "1996 International Plan").
Pursuant to this plan, nonqualified options may be granted to any employee
or consultant of any of the Company's foreign subsidiaries through October
4, 2006.
On December 10, 1996, the Company established the Datawatch Corporation
1996 Stock Plan (the "1996 Stock Plan") which provides for the granting of
both incentive stock options and nonqualified options, the award of
Company common stock, and opportunities to make direct purchases of
Company common stock (collectively, "Stock Rights"), as determined by a
committee appointed by the Board of Directors. Options pursuant to this
plan may be granted through December 10, 2006 and shall vest as specified
by the Committee.
-14-
<PAGE>
10. SHAREHOLDERS' EQUITY (CONTINUED)
Selected information regarding the above stock option plans as of and for
the year ended September 30, 2000 is as follows:
SHARES
AUTHORIZED AVAILABLE FOR
FOR GRANT FUTURE GRANT
1987 Stock Option Plan 790,791 --
1996 Director Plan 72,000 --
1996 International Plan 200,000 20,749
1996 Stock Plan 1,250,000 236,431
--------- ---------
2,312,791 257,180
========= =========
The following table is a summary of activity for all of the Company's
stock option plans:
WEIGHTED-
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
Outstanding, September 30, 1997 771,709 $ 1.92
Granted 388,200 2.30
Canceled (181,499) 2.19
Exercised (64,251) 1.35
--------- --------
Outstanding, September 30, 1998 914,159 2.06
Granted 518,300 1.21
Canceled (176,517) 1.82
Exercised (40,801) 1.00
--------- --------
Outstanding, September, 30, 1999 1,215,141 1.78
Granted 214,500 2.84
Canceled (161,165) 1.84
Exercised (187,161) 1.62
--------- --------
Outstanding, September 30, 2000 1,081,315 2.01
========= ========
Exercisable, September 30, 2000 584,476 2.07
========= ========
Exercisable, September 30, 1999 446,210 $ 2.21
========= ========
Exercisable, September 30, 1998 272,360 $ 2.05
========= ========
-15-
<PAGE>
10. SHAREHOLDERS' EQUITY (CONTINUED)
The following table sets forth information regarding options outstanding
at September 30, 2000:
<TABLE><CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------ ----------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C>
$0.75 -$1.00 6,000 9 $ 0.88 -- $ --
1.13 - 1.69 578,689 8 1.38 272,644 1.43
1.75 - 2.56 356,126 7 4.50 273,666 2.27
3.38 - 4.87 128,500 9 3.57 26,166 4.33
7.06 12,000 6 7.06 12,000 7.06
--------- -- ------ ------- ------
1,081,315 8 $ 2.01 584,476 $ 2.07
========= == ====== ======= ======
</TABLE>
PRO FORMA DISCLOSURE - As described in Note 1, the Company uses the
intrinsic method of valuing its stock options in accordance with APB No.
25 to measure compensation expense associated with grants of stock options
to employees and directors. Had the Company recognized compensation for
its stock options and purchase plans based on the fair value for awards
under those plans after October 1, 1995, in accordance with SFAS No. 123,
"Accounting for Stock Based Compensation," pro forma net income (loss) and
pro forma net income (loss) per share would have been as follows:
<TABLE><CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------
2000 1999 1998
<S> <C> <C> <C>
Pro forma net income (loss) $ (1,171,846) $ (4,248,287) $ 4,410,742
Pro forma net income (loss) per share:
Basic $ (0.13) $ (0.46) $ 0.48
Diluted (0.13) (0.46) 0.47
</TABLE>
The fair values used to compute pro forma net income (loss) and net income
(loss) per share were estimated on the grant date using the Black-Scholes
option pricing model with the following weighted-average assumptions:
YEARS ENDED SEPTEMBER 30,
-----------------------------
2000 1999 1998
Risk-free interest rate 6.2 % 5.5 % 5.8 %
Expected life of option grants (years) 3.0 5.0 5.0
Expected volatility of underlying stock 116.3 % 75.8 % 92.8 %
Expected dividend payment rate 0.0 % 0.0 % 0.0 %
Expected forfeiture rate 0.0 % 0.0 % 0.0 %
-16-
<PAGE>
10. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted-average fair values of stock options granted were $.58, $.79
and $1.71 during the years ended September 30, 2000, 1999 and 1998,
respectively.
The option pricing model was designed to value readily tradeable stock
options with relatively short lives. The options granted to employees are
not tradeable and have contractual lives of five to ten years. However,
management believes that the assumptions used and the model applied to
value the awards yield reasonable estimates of the fair values of the
grants made under the circumstances.
11. RETIREMENT SAVINGS PLAN
The Company has a 401(k) retirement savings plan covering substantially
all of the Company's full-time domestic employees. Under the provisions of
the plan, employees may contribute a portion of their compensation within
certain limitations. The Company, at the discretion of the Board of
Directors, may make contributions on behalf of its employees under this
plan. Such contributions, if any, become fully vested after five years of
continuous service. The Company has not made any contributions during
2000, 1999 or 1998.
12. SEGMENT INFORMATION
The Company has determined that it has only one reportable segment meeting
the criteria established under SFAS No. 131. The Company's chief operating
decision maker, as defined, (determined to be the Chief Executive Officer
and the Board of Directors) does not manage any part of the Company
separately, and the allocation of resources and assessment of performance
is based solely on the Company's consolidated operations and operating
results.
The following table presents information about the Company's sales by
product lines:
YEARS ENDED SEPTEMBER 30,
2000 1999 1998
Monarch and Monarch|ES 59 % 53 % 51 %
Quetzal|SC 25 33 37
Third-party and other 16 14 12
--- --- ---
100 % 100 % 100 %
=== === ===
-17-
<PAGE>
12. SEGMENT INFORMATION (CONTINUED)
The Company's operations are conducted in the U.S. and in Europe
(principally in the United Kingdom). The following table presents
information about the Company's geographic operations:
<TABLE><CAPTION>
EUROPE
(PRINCIPALLY
DOMESTIC U.K.) ELIMINATIONS TOTAL
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 2000
Net sales $14,356,499 $14,200,936 $(1,678,024) $26,879,411
Long-lived assets 1,615,423 899,231 2,514,654
YEAR ENDED SEPTEMBER 30, 1999
Net sales 12,923,636 15,358,563 (1,110,798) 27,171,401
Long-lived assets 1,884,875 1,094,952 2,979,827
YEAR ENDED SEPTEMBER 30, 1998
Net sales 11,635,959 14,058,471 (398,708) 25,295,722
Long-lived assets 1,731,766 1,445,478 3,177,244
</TABLE>
Export sales aggregated approximately $5,137,000, $5,862,000 and
$3,132,000 in 2000, 1999 and 1998, respectively.
13. QUARTERLY RESULTS (UNAUDITED)
Supplementary Information - Quarterly Results (Unaudited):
<TABLE><CAPTION>
FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C>
Year Ended September 30, 1999:
Net sales $ 6,523,425 $ 7,160,763 $ 6,687,263 $ 6,799,950
Gross profit 5,068,905 5,392,378 5,141,446 5,420,734
Income (loss) before tax (1,730,632) (1,234,801) (864,357) (429,021)
Net loss (1,730,632) (1,234,801) (452,727) (429,021)
Loss per share $ (0.19) $ (0.13) ($ 0.05) $ (0.05)
Year Ended September 30, 2000:
Net sales 6,710,436 7,182,880 6,873,801 6,112,294
Gross profit 5,139,537 5,248,793 5,295,716 4,831,670
Income (loss) before tax (437,344) (87,814) 3,598 (468,069)
Net loss (437,344) (87,814) 3,598 (468,069)
Loss per share $ (0.05) $ (0.01) $ (0.00) $ (0.05)
</TABLE>
* * * * * *
-18-
<PAGE>
Schedule VIII
DATAWATCH CORPORATION & SUBSIDIARIES
VALUATION AND QUALIFIED ACCOUNTS
<TABLE><CAPTION>
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------------------------------------------------------------------------------------------------
Description Balance at Additions Charged to Deductions from Balance at
Beginning of Period Expenses (a) Other Reserves End of Period
----------------------------------------------------------------------------------------------------
Year Ended September 30, 2000
-----------------------------
Allowance-doubtful
accounts and
sales returns $467,039 $397,700 $ 350 (d) ($276,650)(b)(c) $588,439
---------------------------------------------------------------------------------
TOTAL $467,039 $397,700 $ 350 ($276,650) $588,439
=================================================================================
Year Ended September 30, 1999
-----------------------------
Allowance-doubtful
accounts and
sales returns $352,517 $707,276 $114,589 (d) ($707,343)(b)(c) $467,039
---------------------------------------------------------------------------------
TOTAL $352,517 $707,276 $114,589 ($707,343) $467,039
=================================================================================
Year Ended September 30, 1998
-----------------------------
Allowance-doubtful
accounts and
sales returns $227,913 $322,128 $ 74,540 (d) ($272,064)(b)(c) $352,517
---------------------------------------------------------------------------------
TOTAL $227,913 $322,128 $ 74,540 ($272,064) $352,517
=================================================================================
(a) Current year provision
(b) Doubtful accounts written off
(c) Product returns
(d) Bad debt recoveries
</TABLE>
<PAGE>
EX. NO EXHIBIT INDEX
------ -------------
(1) 3.1 Restated Certificate of Incorporation of the Registrant (Exhibit
3.2)
(1) 3.2 By-Laws, as amended, of the Registrant (Exhibit 3.3)
(1) 4.1 Specimen certificate representing the Common Stock (Exhibit 4.4)
(6) 10.1 Sub-Lease, dated April 30, 1999, by and between Datawatch
Corporation and Eastman Kodak Company (Exhibit 10.1)
(1) 10.2* 1987 Stock Plan (Exhibit 10.7)
(1) 10.3* Form of Incentive Stock Option Agreement of the Registrant
(Exhibit 10.8)
(1) 10.4* Form of Nonqualified Stock Option Agreement of the Registrant
(Exhibit 10.9)
(1) 10.5 Software Development and Marketing Agreement by and between
Personics Corporation and Raymond Huger, dated January 19, 1989
(Exhibit 10.12)
10.6 Commercial Security Agreement between Datawatch Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (filed herewith)
10.7 Commercial Security Agreement between Personics Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (filed herewith)
(2) 10.8* Executive Agreement between the Company and Bruce R. Gardner,
dated April 11, 1996 (Exhibit 10.3)
(3) 10.9* 1996 Non-Employee Director Stock Option Plan, as amended on
December 10, 1996 (Exhibit 10.30)
(3) 10.10* 1996 International Employee Non-Qualified Stock Option Plan
(Exhibit 10.31)
(4) 10.11 Amended and Restated Letter Agreement, dated February 12, 1997,
by and between Datawatch Corporation, Personics Corporation and
Silicon Valley Bank (Exhibit 10.1)
(4) 10.12 Promissory Note, dated February 12, 1997, by and between
Datawatch Corporation, Personics Corporation and Silicon Valley
Bank (Exhibit 10.2).
10.13* 1996 Stock Plan as amended as of March 28, 2000 (filed herewith)
(5) 10.14 Loan Modification Agreement, dated March 16, 1999, by and between
Datawatch Corporation, Personics Corporation and Silicon Valley
Bank (Exhibit 10.1)
(6) 10.15 Loan Modification Agreement, dated December 27, 1999, by and
between Datawatch Corporation and Silicon Valley Bank (Exhibit
10.22)
(6) 10.16 Intellectual Property Security Agreement, dated December 27, 1999
by and between Datawatch Corporation and Silicon Valley Bank
(Exhibit 10.23)
(6) 10.17 Export-Import Bank Loan and Security Agreement, dated December
27, 1999, by and among Datawatch Corporation, Datawatch
International Limited, Datawatch Europe Limited, Guildsoft
Limited and Silicon Valley Bank in favor of Export-Import Bank of
the United States (Exhibit 10.24)
(6) 10.18* Contract of Employment, dated February 24, 1997, by and between
WorkGroup Systems Limited and Robert Hagger (Exhibit 10.25)
(6) 10.19* Amendment to Contract of Employment dated February 24, 1997, by
and between WorkGroup Systems Limited and Robert Hagger, dated
July 15, 1999 (Exhibit 10.26)
(6) 10.20 Mortgage Debenture, dated December 27, 1999, by and between
Datawatch Europe Limited and Silicon Valley Bank (Exhibit 10.27)
(6) 10.21 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch Europe Limited and Silicon Valley Bank (Exhibit 10.28)
(6) 10.22 Mortgage Debenture, dated December 27, 1999, by and between
Datawatch International Limited and Silicon Valley Bank (Exhibit
10.29)
(6) 10.23 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch International Limited and Silicon Valley Bank (Exhibit
10.30)
(6) 10.24 Mortgage Debenture, dated December 27, 1999, by and between
Guildsoft Limited and Silicon Valley Bank (Exhibit 10.31)
(6) 10.25 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch Guildsoft Limited and Silicon Valley Bank (Exhibit
10.32)
(6) 10.26 Export-Import Bank of the United States Working Capital Guarantee
Program Borrower Agreement, dated December 27, 1999, by and among
Datawatch Corporation, Datawatch International Limited, Datawatch
Europe Limited, Guildsoft Limited and Silicon Valley Bank in
favor of Export-Import Bank of the United States (Exhibit 10.33)
10.27 Lease, dated August 31, 2000, by and between Fortune
Wakefield,LLC and Datawatch Corporation (filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedule (filed herewith)
--------------------------------------------------------------------------------
1
<PAGE>
* Indicates a management contract or compensatory plan or contract.
(1) Previously filed as an exhibit to Registration Statement 33-46290 on Form
S-1 and incorporated herein by reference (the number given in parenthesis
indicates the corresponding exhibit in such Form S-1).
(2) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q).
(3) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
(4) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit in
such Form 10-Q).
(5) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit in
such Form 10).
(6) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
2
