SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO. 1 TO 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, 1997
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 0-19960
DATAWATCH CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 02-0405716
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification no.)
234 Ballardvale St., Wilmington, Massachusetts 01887
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (978) 988-9700
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value per share
(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:
$20,743,977 (computed by reference to the last sales price of such
common stock on December 19, 1997 as reported in the National Association
of Security Dealers consolidated trading index).
Number of shares of common stock outstanding at December 19, 1997 : 9,111,227
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, 1997. Portions of such Proxy Statement are incorporated
by reference in Part III of this report.
This Amendment No. 1 on Form 10-K/A to the registrant's Annual Report on
Form 10-K for the fiscal year ended September 30, 1997 (the "Report") is being
filed to correct the filing of those documents and exhibits identified in Items
14(a) and 14(c) of the Report which were inadvertently formatted as
"correspondence" on the Securities and Exchange Commission's Electronic Data
Gathering, Analysis and Retrieval System when the Report was filed with the
Securities and Exchange Commission on December 29, 1997.
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, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
September 30, 1997, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended September 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedule
Schedule VIII Valuation and Qualifying Accounts
All other schedules are omitted as the required information is
not applicable or is included in the financial statements or
related notes.
The Independent Auditors' Report included with the Consolidated
Financial Statements under Item 14(a)1 above contains the
Independent Auditors' Report on the Consolidated Financial
Statement Schedule.
3. Exhibits
The exhibits listed in the Exhibit Index immediately preceding
the Exhibits are filed as a part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
No current report on Form 8-K was filed during the quarterly
period ended September 30, 1997.
(c) EXHIBIT INDEX
(6) 2.1 Asset Purchase Agreement, dated October 9, 1997, among
DATAWATCH CORPORATION, Pole Position Software GmbH and Dr
Solomon's Software, Inc. (Exhibit 2.1)
(6) 2.2 Escrow Agreement, dated October 9, 1997, among DATAWATCH
CORPORATION, Dr Solomon's Software, Inc. and State Street
Bank and Trust Company. (Exhibit 2.2)
(1) 3.1 Restated Certificate of Incorporation of the Registrant
(Exhibit 3.2)
(1) 3.2 By-Laws, as amended, of the Registrant (Exhibit 3.3)
(1) 4.1 Specimen certificate representing the Common Stock
(Exhibit 4.4)
(1)10.1 Lease by and between the Registrant and CBOB Fund Corp.,
as Trustee of Ballardvale Building D Nominee Trust, dated
February 17, 1992 (Exhibit 10.2)
(1)10.2 1987 Stock Plan (Exhibit 10.7)
(1)10.3 Form of Incentive Stock Option Agreement of the
Registrant (Exhibit 10.8)
(1)10.4 Form of Nonqualified Stock Option Agreement of the
Registrant (Exhibit 10.9)
(1)10.5 Software Development and Marketing Agreement by and
between PERSONICS CORPORATION and Raymond Huger, dated January
19, 1989 (Exhibit 10.12)
(2)10.6 Asset Purchase Agreement by and between the Registrant
and Secure Systems Group, dated as of May 14, 1993 (Exhibit
2.1)
(2)10.7 Promissory Note of Secure Systems Group to the Registrant
in the original principal amount of $968,782, dated May 14,
1993 (Exhibit 10.1)
(2)10.8 Promissory Note of Secure Systems Group to the Registrant
in the original principal amount of $1,821,018, dated May 14,
1993 (Exhibit 10.2)
(2)10.9 Security Agreement dated as of May 14, 1993 between
Secure Systems Group as debtor and the Registrant as secured
party (Exhibit 10.3)
(2)10.10 Sublease dated as of May 14, 1993 between the
Registrant as sublandlord and Secure Systems Group as
subtenant (Exhibit 10.4)
(3)10.11 Marketing Agreement dated May 1, 1994 between
WorkGroup Systems Ltd. and DATAWATCH CORPORATION (Exhibit
10.1)
(4)10.12 Commercial Security Agreement between DATAWATCH
CORPORATION and Silicon Valley Bank doing business as Silicon
Valley East dated November 1, 1994 (Exhibit 10.23)
(4)10.13 Commercial Security Agreement between PERSONICS CORPORATION
and Silicon Valley Bank doing business as Silicon Valley East
dated November 1, 1994 (Exhibit 10.24)
(5)10.14 Executive Agreement between the Company and Andrew
W. Mathews dated April 11, 1996 (Exhibit 10.1)
(5)10.15 Executive Agreement between the Company and Marco D.
Peterson dated April 11, 1996 (Exhibit 10.2)
(5)10.16 Executive Agreement between the Company and Bruce R.
Gardner dated April 11, 1996 (Exhibit 10.3)
(5)10.17 Executive Agreement between the Company and Thomas
R. Foley dated April 11, 1996 (Exhibit 10.4)
(7)10.18 Loan Modification Agreement dated October 31, 1996 between
DATAWATCH CORPORATION, Personics Corporation and Silicon
Valley Bank (Exhibit 10.29)
(7)10.19 1996 Non-Employee Director Stock Option Plan, as amended on
December 10, 1996 (Exhibit 10.30)
(7)10.20 1996 International Employee Non-Qualified Stock Option
Plan (Exhibit 10.31)
(8)10.21 Amended and Restated Letter Agreement, dated February 12,
1997, by and between DATAWATCH CORPORATION, Personics
Corporation and Silicon Valley Bank (Exhibit 10.1)
(8)10.22 Promissory Note, dated February 12, 1997, by and between
DATAWATCH CORPORATION, Personics Corporation and Silicon
Valley Bank (Exhibit 10.21).
10.23 Loan Modification Agreement, dated October 30, 1997, by and
between DATAWATCH CORPORATION, Personics Corporation and
Silicon Valley Bank (filed herewith)
(9)10.24 1996 Stock Plan (Appendix A)
11.1 Statement re: computation of per share earnings (filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedule (filed herewith)
- ------------------------------
(1) Previously filed as exhibits to Registration Statement 33-46290 on
Form S-1 and incorporated herein by reference (the number given in
parenthesis indicates the corresponding exhibit in such Form S-1).
(2) Previously filed as exhibits to Registrant's Current Report on
Form 8-K dated May 14, 1993, filed May 28, 1993 and incorporated
herein by reference (the number given in parenthesis indicates the
corresponding exhibit in such Form 8-K).
(3) Previously filed as an exhibit to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994 and incorporated
herein by reference (the number given in parenthesis indicates the
corresponding exhibit in such Form 10-Q).
(4) Previously filed as an exhibit to Registrant's Annual Report on
Form 10-K for the Fiscal Year ended September 30, 1994 and
incorporated herein by reference (the number given in parenthesis
indicates the corresponding exhibit in such Form 10-K).
(5) 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).
(6) Previously filed as exhibits to Registrant's Current Report on
Form 8-K dated October 9, 1997 and incorporated herein by reference
(the number given in parenthesis indicates the corresponding exhibit in
such Form 8-K).
(7) Previously filed as an exhibit to Registrant's Annual Report on
Form 10-K for the Fiscal Year ended September 30, 1996 and incorporated
herein by reference (the number given in parenthesis indicates the
corresponding exhibit in such for 10-K).
(8) Previously filed as exhibits 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).
(9) Previously filed as appendix A to the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders held on March 19, 1997
and incorporated herein by reference (the number given in parenthesis
indicates the corresponding appendix in such definitive Proxy
Statement).
(d) Financial Statement Schedules
The Company hereby files as financial statement schedules to this
Form 10-K the Consolidated Financial Statement Schedules listed in Item
14(a)2 above which are attached hereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
Amendment No. 1 to the Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, this 5th day of
January, 1998.
DATAWATCH CORPORATION
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 January 5, 1998
- --------------------- Officer and Director
Bruce R. Gardner (Principal Executive Officer)
/s/ Betsy J. Hartwell Vice President Finance, January 5, 1998
- --------------------- Chief Financial Officer
Betsy J. Hartwell and Treasurer
(Principal Financial
and Accounting Officer)
/s/ Jerome Jacobson Director January 5, 1998
- --------------------
Jerome Jacobson
/s/ David Riddiford Director January 5, 1998
- --------------------
David Riddiford
Datawatch Corporation and Subsidiaries
Consolidated Balance Sheets as of
September 30, 1997 and 1996 and Consolidated
Statements of Operations, Changes in
Shareholders' Equity, and Cash Flows for the
Years Ended September 30, 1997, 1996 and 1995
and Independent Auditors' Report
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND 1996
AND FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1997:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Changes in Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-18
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Datawatch Corporation
Wilmington, Massachusetts
We have audited the accompanying consolidated balance sheets of Datawatch
Corporation and subsidiaries as of September 30, 1997 and 1996, 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,
1997. Our audits also included the consolidated financial statement schedule
listed in Item 14(a)2. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Datawatch Corporation and
subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, such consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ Deloitte & Touche LLP
November 21, 1997
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
- -----------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and equivalents $ 1,586,875 $ 1,696,349
Short-term investments - 792,665
Accounts receivable, less allowance
for doubtful accounts of $228,000 in
1997 and $73,000 in 1996 7,810,169 7,767,748
Inventories 876,767 480,758
Prepaid advertising and other expenses 2,000,717 1,264,798
----------- -----------
Total current assets 12,274,528 12,002,318
----------- -----------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 3,748,022 3,174,964
Manufacturing and engineering equipment 450,063 359,795
----------- -----------
4,198,085 3,534,759
Less accumulated depreciation
and amortization (2,304,705) (1,737,733)
----------- -----------
Net property and equipment 1,893,380 1,797,026
----------- -----------
OTHER ASSETS 551,639 400,062
----------- -----------
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED COMPANIES - Less accumulated
amortization of $2,424,263 in 1997 and
$1,877,461 in 1996 1,427,098 1,041,165
----------- -----------
$16,146,645 $15,240,571
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,834,038 $2,914,952
Accrued expenses 1,340,995 1,063,129
Deferred revenue 2,143,203 1,946,473
Borrowings under credit lines 3,338 636,806
Current portion of long-term obligations 501,133 230,501
----------- ----------
Total current liabilities 7,822,707 6,791,861
----------- ----------
LONG-TERM OBLIGATIONS 1,399,089 209,824
----------- ----------
COMMITMENTS (NOTE 6)
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 - authorized,
20,000,000 shares; issued, 9,116,113 and
8,965,988 shares; outstanding,
9,084,061 and 8,965,988 shares in 1997 and
1996, respectively 91,160 89,659
Additional paid-in capital 19,737,963 18,665,402
Accumulated deficit (12,533,550) (10,538,117)
Cumulative translation adjustment (230,336) 21,942
----------- -----------
7,065,237 8,238,886
Less - treasury stock, at cost
- 32,052 shares (140,388) -
----------- ----------
Total shareholders' equity 6,924,849 8,238,886
----------- ----------
$16,146,645 $15,240,571
=========== ===========
See notes to consolidated financial statements.
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- -------------------------------------------------------------------------
1997 1996 1995
NET SALES:
IBM PC-based products $25,995,197 $24,216,794 $18,839,265
Macintosh-based products 6,052,298 5,805,328 4,520,716
----------- ---------- ----------
Net sales 32,047,495 30,022,122 23,359,981
COSTS AND EXPENSES:
Cost of sales 5,899,849 4,516,456 3,808,995
Engineering and product
development 2,804,434 2,338,724 2,219,930
Selling, general and
administrative 25,225,177 22,039,420 17,650,010
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (1,881,965) 1,127,522 (318,954)
INTEREST EXPENSE (167,871) (96,184) (75,449)
OTHER INCOME - Primarily interest 54,503 49,162 67,688
FOREIGN CURRENCY TRANSACTION
GAINS (LOSSES) (100) 11,860 23,292
BENEFIT (PROVISION) FOR INCOME
TAXES - 33,000 (28,000)
---------- --------- ----------
NET INCOME (LOSS) $(1,995,433) $ 1,125,360 $ (331,423)
========== ========== ===========
NET INCOME (LOSS) PER SHARE $ (.22) $ .13 $ (.04)
========== ========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 9,060,612 8,943,862 8,204,502
========== ========== ==========
See notes to consolidated financial statements.
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- ----------------------------------------------------------------------------------------------------------------------
Common Additional Treasury Cumulative
Stock Paid-in Stock Accumulated Translation Total
Shares Amount Capital Shares Amount Deficit Adjustments
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 1994 7,378,756 $73,787 $16,478,411 - $ - $(11,332,054) $46,444 $5,266,588
Common stock options exercised 97,039 970 71,123 - - - - 72,093
Warrants exercised, net of
offering costs 1,153,340 11,534 1,064,826 - - - - 1,076,360
Translation adjustment - - - - - - (21,448) (21,448)
Net loss - - - - - (331,423) - (331,423)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1995 8,629,135 86,291 17,614,360 - - (11,663,477) 24,996 6,062,170
Common stock options exercised 217,411 2,174 203,264 - - - - 205,438
Warrants exercised, net of
offering costs 119,442 1,194 847,778 - - - - 848,972
Translation adjustment - - - - - - (3,054) (3,054)
Net income - - - - - 1,125,360 - 1,125,360
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996 8,965,988 89,659 18,665,402 - - (10,538,117) 21,942 8,238,886
Common stock issued pursuant
to acquisition of Guildsoft 125,000 1,250 905,000 - - - - 906,250
Common stock options
exercised 25,125 251 27,173 - - - - 27,424
Escrowed share returned to
treasury - - 140,388 (32,052) (140,388) - - -
Translation adjustment - - - - - - (252,278) (252,278)
Net loss - - - - - (1,995,433) - (1,995,433)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 9,116,113 $91,160 $19,737,963 (32,052) $(140,388) $(12,533,550) $(230,336) $6,924,849
======================================================================================================================
See notes to consolidated financial statements,
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,995,433) $ 1,125,360 $ (331,423)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Adjustment to change fiscal
year of WorkGroup - - 158,921
Depreciation and amortization 1,522,877 1,223,162 975,254
Changes in current assets and
liabilities, net of acquisitions:
Inventories (175,144) (218,230) (20,900)
Prepaid advertising and
other expenses (672,054) 243,381 (641,303)
Accounts receivable 353,381 (2,537,062) (1,819,261)
Accounts payable and accrued
expenses 132,358 (567,112) 914,894
Deferred revenue 196,730 631,818 581,524
--------- ---------- ---------
Net cash used in operating
activities (637,285) (98,683) (182,294)
--------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and fixtures (647,888) (564,129) (381,298)
Proceeds from sale of equipment - net 91,233 - -
Proceeds from sale of short-term
investments 2,069,065 2,312,478 676,733
Purchase of short-term investments (1,276,400) (2,219,484) (1,562,392)
Acquisition of Guildsoft Holdings, Ltd.,
net of working capital acquired 19,833 - -
Other assets (314,608) 25,571 (393,006)
--------- --------- ---------
Net cash used in investing
activities (58,765) (445,564) (1,659,963)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of
common stock 27,424 1,054,410 1,148,453
Principal payments on long-term
obligations (307,380) (245,575) (136,833)
Principal (payments) borrowings under
credit lines - net (633,468) 554,959 81,847
Proceeds from bank term loan 1,500,000 - -
--------- --------- ----------
Net cash provided by financing
activities 586,576 1,363,794 1,093,467
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH
AND EQUIVALENTS (109,474) 819,547 (748,790)
CASH AND EQUIVALENTS, BEGINNING
OF YEAR 1,696,349 876,802 1,625,592
--------- --------- ----------
CASH AND EQUIVALENTS, END OF YEAR $1,586,875 $1,696,349 $ 876,802
========= ========= ==========
SUPPLEMENTAL INFORMATION:
Interest paid $ 159,954 $ 96,184 $ 75,449
========= ========= ==========
Income taxes paid $ 167,490 $ 78,922 $ -
========= ========= ==========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital
lease agreements $ 267,277 $ 320,684 $ 259,713
========= ========= =========
Escrowed shares returned to treasury $ 140,388 $ - $ -
========= ========= =========
See notes to consolidated financial statements.
DATAWATCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Nature of Business - Datawatch Corporation and its wholly owned
subsidiaries, Personics Corporation ("Personics"), Pole Position
Software GmbH ("Pole Position") WorkGroup Systems Limited
("WorkGroup") and Guildsoft Holdings Limited ("Guildsoft")
(collectively, the "Company") develop, market and distribute
personal computer software products. The Company also provides
a wide range of consulting services surrounding the
implementation and support of its software products.
Principles of Consolidation - The financial statements are
consolidated to include the accounts of Datawatch Corporation
and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation. The term "Datawatch," as used herein, refers to
Datawatch Corporation and its wholly owned subsidiaries prior to
the pooling-of-interests of WorkGroup. WorkGroup's fiscal
year end had historically ended on December 31, while
Datawatch's fiscal year had ended on September 30. Effective
January 1, 1995, WorkGroup changed its fiscal year end from
December 31 to September 30.
Revenue Recognition - Software - Revenue from sales of software
products are recognized at the time of shipment when no
significant obligations remain and collectibility is probable.
The Company's software products are sold under warranty against
certain defects in material and workmanship for a period of 30
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. During each of the three years in the period ended
September 30, 1997, returns under these warranty and guarantee
arrangements were not material.
Revenue Recognition - Services and Other - Revenue from the
sale of annual subscription agreements to provide upgrades for
minor product improvements and new virus protection are deferred
at the time of sale. Revenue from the sale of separate
consulting agreements to provide field service support are also
deferred at the time of sale. The Company recognizes its
revenue on these agreements ratably over a twelve-month period.
Revenue from consulting services performed in connection with
the sale of bundled products and services (principally at the
Company's WorkGroup subsidiary) are recognized at the time of
the shipment of software if the consulting services are expected
to be provided within a short period of time after the shipment
of the related product (i.e., within a few weeks) and the cost
of such services are estimable. If consulting services are not
expected to be provided within a short period of time after the
shipment of the related product, such revenue are deferred and
recognized as revenue as the services are provided.
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Cash and Equivalents - Cash and equivalents includes cash on
hand, cash deposited with banks and highly liquid debt
securities with remaining maturities of 90 days or less when
purchased.
Short-Term Investments - Short-term investments consist of
United States Treasury Bills with relatively short-term
maturities for which the carrying value approximates market.
Other Assets - 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 capitalized when
related to a product which has achieved technological
feasibility or that has an alternative future use. For the
years ended September 30, 1997, 1996 and 1995, the Company did
not capitalize any internal software development costs. During
fiscal 1997, the Company purchased and capitalized software
amounting to $315,000. For the years ended September 30, 1996
and 1995, the Company did not capitalize any purchased software.
Software development costs incurred prior to achieving
technological feasibility as well as certain licensing costs 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 based on the straight-line method over the estimated
life, generally twelve to thirty-six months for purchased
software. Amortization was approximately $22,000 in 1997 and
$60,000 in both 1996 and 1995.
Advertising and Promotional Materials - Advertising costs are
expensed as incurred and amounted to approximately $721,000,
$917,000, and $640,000 in 1997, 1996 and 1995, 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 3 to 4 months
from the date of the mailing). Direct mail expense was
approximately $3,152,000, $3,970,000 and $4,000,000 in 1997,
1996 and 1995, respectively. At September 30, 1997 and 1996,
deferred direct mail/direct response costs were approximately
$1,291,000 and $863,000, respectively.
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
14% of net sales in 1997, 13% of net sales in 1996, and 10% of
net sales in 1995. This same customer accounted for 26% and 23% of
outstanding trade receivables as of September 30, 1997 and 1996,
respectively. No base of customers in one geographic area
constitutes a significant portion of sales. The Company
performs ongoing credit evaluations of its customers and
generally does not require collateral. Allowances are provided
for anticipated doubtful accounts and sales returns.
Inventories - Inventories consist of software components -
primarily software manuals, diskettes and retail packaging
materials. Inventories are valued at the lower of cost or
market. Cost is determined using the first-in, first-out
method.
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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 term. Depreciation and
amortization are provided using the straight-line method over
the estimated useful lives of the related assets and over the
terms, if shorter, of the related leases. Useful lives and
lease terms range from 3 to 7 years. The cost and the related
accumulated amortization of equipment leased under capital lease
agreements was approximately $1,043,000 and $577,000 at
September 30, 1997, respectively, and $958,000 and $448,000 at
September 30, 1996, respectively. Amortization expense was
$296,000, $224,000 and $142,000 for the years ended September
30, 1997, 1996 and 1995, respectively.
Income Taxes - The Company accounts for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes."
This statement requires an asset and liability approach to
accounting for income taxes based upon the future expected
values of the related assets and liabilities. Deferred income
taxes are provided for items which are recognized in different
years for tax and financial reporting purposes.
Excess of Cost Over Net Assets of Acquired Companies - The
excess of cost over net assets of acquired companies is being
amortized on a straight-line basis over seven years. In
addition, the net carrying amount of the excess of cost over net
assets of acquired companies is reduced if it is probable that
the estimated undiscounted operating income (defined as
operating cash flow less depreciation and amortization) from
related operations will be less than the carrying amount of the
excess of cost over net assets of acquired companies.
The Company also evaluates other long-lived assets using the
same methodology in accordance with SFAS No. 121.
Accounting Estimates - The preparation of the Company's
consolidated financial statements in conformity with generally
accepted accounting principles necessarily requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments - The carrying amounts of
cash and equivalents, short-term investments, accounts
receivable, accounts payable, accrued expenses and deferred
revenue approximate fair value because of their short-term
nature. The carrying amount of the Company's current and long-
term obligations approximate fair value.
Net Income Per Common Share - Net income per common share is
computed upon the weighted average number of common and common
equivalent shares outstanding during each period presented.
Common stock equivalents consist of dilutive stock options and
common stock warrants.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per
Share", which will become effective during the first quarter of
fiscal 1998. SFAS No. 128 replaces the presentation of primary
earnings per share with basic earnings per share, which excludes
dilution, and requires the dual presentation of basic and
diluted earnings per share. Had the Company used SFAS No. 128,
the Company's basic earnings per share and diluted earnings per
share would have been the same as the earnings per share
presented in the consolidated statements of operations for
fiscal 1997, 1996 and 1995.
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Foreign Currency Translations and Transactions - The financial
statements of foreign subsidiaries are translated into U.S.
dollars in accordance with SFAS No. 52. The related translation
adjustments are reported as a separate component of
shareholders' equity. Gains and losses resulting from
transactions and related accounts that are denominated in
currencies other than the U.S. dollar are included in the net
operating results of the Company in accordance with SFAS No. 52.
Reclassifications - Certain prior year amounts have been
reclassified to conform with the current financial statement
presentation.
Stock-Based Compensation - During 1997, the Company adopted the
disclosure provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation." SFAS No. 123 encourages, but does not
require, the recognition of compensation expense for the fair
value of stock options and other equity instruments issued to
employees and nonemployee directors. The Company continues to
account for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion
("APB") No. 25. The difference between accounting for stock-
based compensation under APB No. 25 and SFAS No. 123 is
disclosed in Note 9.
New Accounting Pronouncements - In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income," and SFAS
No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 131 establishes
standards for the way that public business enterprises report
information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial
reports. It also establishes standards for related disclosures
about products and services, geographic areas and major
customers. Both standards will be adopted by the Company during
the first quarter of fiscal 1999 and are not expected to have a
material effect on its consolidated financial position, results
of operations or financial statement disclosures.
2. POOLING-OF-INTERESTS
On March 12, 1996, the Company acquired all of the outstanding
shares of capital stock of WorkGroup in exchange for an
aggregate of 1,437,000 shares of the Company's common stock,
with 143,698 of such issued shares held in escrow for contingent
liabilities. The acquisition has been accounted for as a
pooling-of-interests. Costs related to the pooling-of-interests
of $450,000 were expensed during fiscal 1996. On November 21,
1996, the Company recovered 32,052 shares of the 143,698
escrowed shares in connection with the settlement of certain
WorkGroup contingent liabilities. These liabilities had been
previously recorded in the 1996 financial statements.
As of September 30, 1995, the Company acquired Pole Position, a
German software developer, in exchange for 300,000 shares of the
Company's common stock. The acquisition has been accounted for
as a pooling-of-interests. Costs related to the pooling-of-
interests of $70,208 were expensed during fiscal 1995.
3. PURCHASE ACQUISITION
On November 7, 1996, the Company acquired all of the outstanding
capital stock of Guildsoft Holdings Limited ("Guildsoft"), a
U.K.-based software distributor, in exchange for an aggregate of
125,000 shares of the Company's common stock, with 12,500 of
such issued shares held in escrow for contingent liabilities.
The acquisition has been accounted for as a purchase.
Accordingly, all operating activity of Guildsoft from November
7, 1996 through September 30, 1997 has been included in the
Company's fiscal 1997 consolidated statement of operations. On
an unaudited pro forma basis, if the acquisition had taken place
on October 1, 1995, net sales for fiscal 1996 would have been
approximately $31,900,000 and net income for fiscal 1996 would not
have been materially different from the amount previously reported.
The total purchase price of $906,250 was allocated to the assets
acquired based upon their respective fair values as follows:
Accounts receivable $ 395,802
Inventories 220,865
Prepaid and other assets 63,865
Property and equipment 84,669
Goodwill 933,532
Accounts payable (682,931)
Accrued expenses (129,385)
Cash and equivalents 19,833
---------
$ 906,250
=========
4. INVENTORIES
Inventories consisted of the following at September 30:
1997 1996
Raw materials $ 338,560 $ 218,615
Work in process 1,825 2,458
Finished goods 536,382 259,685
-------- --------
Total $ 876,767 $ 480,758
======== ========
5. ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
1997 1996
Accrued salaries and benefits $ 567,745 $ 222,921
Accrued royalties and commissions 406,536 491,960
Accrued legal and accounting 19,802 142,758
Accrued rent and property taxes 54,364 80,487
Other 292,548 125,003
--------- ---------
Total $1,340,995 $1,063,129
========= =========
6. COMMITMENTS
Leases - The Company leases various facilities in the U.S. and
overseas under noncancelable operating leases which expire
through 2017. The lease agreements provide for the payment of
minimum annual rentals and a pro-rata share of real estate taxes
and maintenance expenses. The Company has an option to renew
the lease for its U.S. facilities for an additional five years
commencing in 1999. Rental expense for all operating leases was
approximately $803,000, $851,000 and $714,000 for the years
ended September 30, 1997, 1996 and 1995, respectively.
As of September 30, 1997, minimum rental commitments under
noncancelable operating leases are as follows:
Year Ending
September 30
1998 $ 623,625
1999 382,770
2000 107,479
2001 77,115
2002 77,115
Thereafter 1,135,382
----------
Total minimum lease payments $2,403,486
==========
Royalties - The Company is also committed to pay royalties
relating to the sales of software products. Royalty expense was
approximately $1,867,000, $1,533,000 and $1,395,000 for the
years ended September 30, 1997, 1996 and 1995, respectively.
7. FINANCING ARRANGEMENTS
Line of Credit - The Company maintains a line of credit which
will expire on January 30, 1998. The line of credit provides
for maximum borrowings up to the lesser of $1,500,000 or 50%-75%
of defined eligible accounts receivable. Borrowings under the
line are collateralized by substantially all assets of the
Company. Outstanding borrowings bear interest at the bank's
prime rate plus 1.0%. As of September 30, 1997 and 1996, there
were no outstanding borrowings under the line of credit.
Term Loan - On February 12, 1997, the Company obtained an
equipment line of credit with a bank. The line of credit
provides for maximum borrowings up to $1,500,000. Borrowings
under the line are collateralized by substantially all assets of
the Company. The borrowings bear interest at the bank's prime
rate plus 1.5% (10% at September 30, 1997). Payments of
interest only are required from March 12, 1997 through February
12, 1998, at which time the equipment line will convert to a
term loan payable in thirty-six even monthly payments of
principal plus interest, beginning March 12, 1998 with final
payment due February 12, 2001. The agreement requires
compliance with certain financial and other covenants which
specify, among other things, dividend restrictions, a minimum
tangible capital base, and minimum leverage and liquidity
levels. The Company was in violation (and subsequently obtained
a waiver) of one of these covenants at September 30, 1997. As
of September 30, 1997, $1,500,000 of borrowings were outstanding
under the equipment line of credit.
Demand Note - At September 30, 1997, Pole Position had a demand
note payable to a bank. The interest rate applicable to this
note is a variable rate based upon the General Interest Rate of
Germany (10% at September 30, 1997). Subsequent to year end
this note was repaid in full.
Capital Lease Obligations - The Company leases certain office
and computer equipment under capital leases with lease terms
ranging from 1 to 3 years.
Future principal maturities of the Company's debt obligations at
September 30,1997 are as follows:
Capital Demand Term
Leases Note Loan Total
1998 $ 215,927 $ 26,712 $ 258,494 $ 501,133
1999 121,476 - 500,000 621,476
2000 36,107 - 500,000 536,107
2001 and thereafter - - 241,506 241,506
--------- -------- --------- ---------
Total debt obligation $ 373,510 $ 26,712 $1,500,000 $1,900,222
========= ========= ========= =========
8. INCOME TAXES
At September 30, 1997, the Company has available approximately
$4,600,000 and $7,365,000 of regular tax loss carryforwards for
federal and state purposes, respectively, which commence expiring
in 2007. An alternative minimum tax credit of $144,000 is
available for offset against future regular federal taxes.
Research and development credits of $205,000 expire in 2005.
In addition, tax loss carryforwards in certain foreign
jurisdictions total approximately $2,000,000.
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes and operating loss carryforwards
and credits. The tax effects of significant items comprising
the Company's net deferred tax position as of September 30 were
as follows:
1997 1996
Deferred tax liabilities:
Depreciation and amortization $ (91,675) $ (28,174)
Other - (20,041)
--------- ---------
(91,675) (48,215)
Deferred tax assets:
Inventory related items 196,870 69,947
Accounts and notes receivable reserves 269,043 184,063
Net operating loss carryforwards 3,166,171 2,430,356
Research and development credits 204,711 195,817
Alternative minimum tax credits 143,711 119,000
--------- ---------
3,888,831 2,950,968
Valuation allowance (3,888,831) (2,950,968)
--------- ---------
Deferred taxes, net $ - $ -
========== ===========
The Company has experienced significant losses either
domestically or internationally over the past several years.
Accordingly, management does not believe the tax assets satisfy
the realization criteria set forth in SFAS No. 109 and has thus
recorded a valuation allowance for the entire net tax asset.
The valuation allowance increased by approximately $938,000 in
1997 because of significant unrecognized foreign net operating
losses.
As described in Note 12, in October 1997 the Company sold two
of its software product lines. Net operating losses previously
reserved totaling approximately $3,000,000 will be recognized in
connection with this transaction.
The following table reconciles the Company's effective tax rate
to the federal statutory rate of 34% for the years ended
September 30, 1997, 1996 and 1995:
1997 1996 1995
Taxes (benefit) at federal statutory rate $ (678,000) $ 372,000 $(103,000)
Utilization of net operating loss carryforwards (371,000) (507,000) (287,000)
Net operating loss carryforwards not recognized 1,049,000 133,000 365,000
Other - (31,000) 53,000
--------- --------- --------
Provision (benefit) for income taxes $ - $ (33,000) $ 28,000
========= ========= ========
9. 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 provides for the issuance
of nonqualified or incentive stock options to employees, officers,
consultants, and directors to purchase an aggregate of 790,791
shares of common stock. As of February 25, 1997, the Company
may no longer issue stock options under the 1987 Stock Option
Plan pursuant to terms of the plan.
On June 1, 1996, the Company established the 1996 Non-employee
Director Stock Option Plan, (the "1996 Director Plan") which was
amended December 10, 1996. The 1996 Director Plan, as amended,
provides for an initial grant of 12,000 options to each
non-employee director elected as a member of the Board of
Directors and for the subsequent automatic annual grant of 4,000
options (at the then current fair market value) to each member
so long as that member remains on the Board of Directors.
Options granted pursuant to this plan vest 8.33% during each
three-month period subsequent to date of grant, so as to be
fully vested three years from date of grant. Options may be
granted under this plan through June 1, 2006.
On October 4, 1996, the Company established the 1996
International Employee Non-Qualified Stock Option Plan (the
"1996 International Plan"). Pursuant to this plan, nonqualified
options may be granted to any employee or consultant of any of
the Company's foreign subsidiaries through October 4, 2006.
On December 10, 1996, the Company established the Datawatch
Corporation 1996 Stock Plan (the "1996 Stock Plan") which
provides for the granting of both incentive stock options and
nonqualified options, the award of Company common stock, and
opportunities to make direct purchases of Company common stock
(collectively, "Stock Rights"), as determined by a committee
appointed by the Board of Directors. Options pursuant to this
plan may be granted through December 10, 2006, and shall vest as
specified by the Committee.
Selected information regarding the above stock option plans as
of and for the year ended September 30, 1997 is as follows:
Authorized Available for
for Grant Future Grant
1987 Stock Option Plan 790,791 -
1996 Director Plan 72,000 36,000
1996 International Plan 200,000 13,000
1996 Stock Plan 1,000,000 645,000
---------- ----------
2,062,791 694,000
========== ==========
9. SHAREHOLDERS' EQUITY (CONTINUED)
The following table is a summary of activity for all of the
Company's stock option plans:
Shares Under Weighted Average
Option Exercise Price
Per Share
Outstanding, October 1, 1994 449,490 $ 0.95
Granted 9,000 2.90
Canceled (41,832) 1.56
Exercised (97,039) 0.74
-------- -------
Outstanding, September 30, 1995 319,619 0.99
Granted 181,000 5.01
Canceled (7,667) 4.46
Exercised (217,411) 0.95
-------- -------
Outstanding, September 30, 1996 275,541 3.56
Granted 719,820 1.98
Canceled (198,527) 4.53
Exercised (25,125) 1.09
-------- -----
Outstanding, September 30, 1997 771,709 $ 1.92
======== =====
9. SHAREHOLDERS' EQUITY (CONTINUED)
The following table sets forth information regarding options
outstanding at September 30, 1997:
Options Outstanding Options Exercised
- ---------------------------------------------------- --------------------
Weighted Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
$ 1.00 74,875 2 $ 1.00 74,875 $ 1.00
1.69 352,167 8 1.69 46,661 1.69
1.75 285,000 10 1.75 23,335 1.75
1.88 8,000 5 1.88 - 1.88
1.94 3,000 5 1.94 - 1.94
2.47 667 2 2.47 333 2.47
4.31 12,000 9 4.31 - 4.31
4.87 12,000 4 4.87 5,000 4.87
7.06 12,000 9 7.06 4,000 7.06
7.75 12,000 9 7.75 4,000 7.75
-------- ---- ------ ------- ----
771,709 8 $ 1.92 158,204 $ 1.76
======== ==== ====== ======= ====
As described in Note 1, the Company uses the intrinsic value method
in accordance with APB No. 25 to measure compensation expense
associated with grants of stock options to employees. Had the
Company used the fair value method to measure compensation, the
Company's net income (loss) and net income (loss) per share for the
years ended September 30, 1997 and 1996 would have been
$(2,263,219) or $(.25) per share in 1997 and $1,062,506 or $.12 per
share in 1996.
The fair value of each stock option is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions in 1997 and 1996: an
expected life of 5 years, expected weighted-average volatility of
87.2% in 1997 and 52.1% in 1996, a dividend yield of 0%, and a
weighted-average risk-free interest rate of 6.7% in 1997 and 6.1%
in 1996. The weighted-average fair value of options granted in
1997 and 1996 was $1.26 and $3.41, respectively.
The option pricing model was designed to value readily tradeable
stock options with relatively short lives. The options granted to
employees are not tradeable and have contractual lives of five to
ten years. However, management believes that the assumptions used
and the model applied to value the awards yields a reasonable
estimate of the fair value of the grants made under the
circumstances.
Preferred Stock - The Company is authorized to issue 1,000,000
shares of preferred stock with a par value of $.01 per share.
There were no shares of preferred stock outstanding at September
30, 1997 and 1996.
10.RETIREMENT SAVINGS PLAN
The Company has a 401(k) retirement savings plan covering
substantially all of the Company's full-time domestic employees.
Under the provisions of the plan, employees may contribute a
portion of their compensation within certain limitations. The
Company, at the discretion of the Board of Directors, may make
contributions on behalf of its employees under this plan. Such
contributions, if any, become fully vested after five years of
continuous service. The Company has not made any contributions
during 1997, 1996 or 1995.
11.SEGMENT INFORMATION
Summarized information about the Company's operations by geographic
area is as follows:
Europe
(Principally
U.K. and
Domestic Germany) Eliminations Total
Year Ended September 30, 1997
Net sales $20,502,363 $12,398,815 $ (853,683) $32,047,495
Income (loss) from
operations 986,866 (2,800,009) (68,822) (1,881,965)
Identifiable assets 16,782,249 5,089,501 (5,725,105) 16,146,645
Year Ended September 30, 1996
Net sales $19,980,505 $10,418,080 $ (376,463) $30,022,122
Income (loss) from
operations 1,802,456 (666,201) (8,733) 1,127,522
Identifiable assets 12,329,945 4,658,682 (1,748,056) 15,240,571
Year Ended September 30, 1995
Net sales $16,425,189 $ 7,242,738 $ (307,946) $23,359,981
Income (loss) from
operations 945,860 (1,190,528) (74,286) (318,954)
Identifiable assets 9,918,844 2,551,838 (112,550) 12,358,132
Export sales aggregated approximately $3,484,000, $4,015,000 and
$3,496,000 in 1997, 1996 and 1995, respectively.
12.SUBSEQUENT EVENT
On October 9, 1997, the Company sold two of its software product
lines for $16,750,000 in cash, resulting in a gain, net of tax, of
approximately $11,865,000. The assets sold consist primarily of
inventory, property and equipment, trademarks, and the
technological rights related to these product lines.
On an unaudited pro forma basis, if the sale of these product lines
had taken place on October 1, 1996, net sales, net loss, and net
loss per share for fiscal 1997 would have been approximately
$25,915,000, $1,659,000, and $0.18, respectively.
* * * * * *
Schedule VIII
DATAWATCH CORPORATION & SUBSIDIARIES
VALUATION AND QUALIFIED ACCOUNTS
- ------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------
Description Balance at Additions Deductions Balance at
Beginning Charged To from End of
Period ----------------------- Reserves Period
Costs & Expenses(a) Other
- -----------------------------------------------------------------------------
<S)
Year Ended September 30, 1997
- -----------------------------
Allowance-doubtful
accounts and
sales returns $73,145 $177,334 $54,138 (d),(e) ($76,704)(b) $227,913
-----------------------------------------------------------
TOTAL $73,145 $177,334 $54,138 ($76,704) $227,913
===========================================================
Year Ended September 30, 1996
- -----------------------------
Allowance-doubtful
accounts and
sales returns $83,064 $42,349 ($52,268)(b)(c) $73,145
-----------------------------------------------------------
TOTAL $83,064 $42,349 ($52,268) $73,145
===========================================================
Year Ended September 30, 1995
- -----------------------------
Allowance-doubtful
accounts and
sales returns $68,590 $74,550 ($60,076)(b)(c) $83,064
-----------------------------------------------------------
TOTAL $68,590 $74,550 ($60,076) $83,064
===========================================================
(a) Current year provision
(b) Doubtful accounts written off
(c) Product returns
(d) Allowance acquired through purchase of Guildsoft Holdings Ltd.
(e) Bad debt recoveries
EXHIBIT 10.23
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of October 30, 1997,
by and between Datawatch Corporation and Personics Corporation (jointly and
severally, the "Borrower" and sometimes referred to as "Company") whose
address is 234 Ballardvale Street, Wilmington, MA 01887 and Silicon Valley
Bank, a California-chartered bank ("Lender"), with its principal place of
business at 3003 Tasman Drive, Santa Clara, CA 95054 and with a loan
production office located at Wellesley Office Park, 40 William Street,
Suite 350, Wellesley, MA 02181, doing business under the name "Silicon
Valley East".
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which
may be owing by Borrower to Lender, Borrower is indebted to Lender pursuant
to, among other documents, a Promissory Note, dated November 1, 1994, in
the original principal amount of One Million Five hundred Thousand and
00/100 Dollars ($1,500,000.00), as may have been modified from time to time
(the "Note"). The Note, together with other promissory notes from Borrower
to Lender, is governed by the terms of a Letter Agreement, dated November 1,
1994, between Borrower and Lender, as such agreement may be amended from
time to time (the "Loan Agreement"). Defined terms used but not otherwise
defined herein shall have the same meaning as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness".
2. DESCRIPTION OF COLLATERAL: Repayment of the Indebtedness is secured
by two (2) Commercial Security Agreements, each dated November 1,
1994 (each, the "Security Agreement"), and two (2) Collateral
Assignment, Patent Mortgage and Security Agreements, each dated November
1, 1994 (each, the "Patent Agreement").
Hereinafter, the above-described security documents, together with all
other documents securing payment of the Indebtedness shall be referred to as
the "Security Documents". Hereinafter, the Security Documents, together with
all other documents evidencing or securing the Indebtedness shall be referred
to as the "Existing Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS:
A. Modification(s) to Note.
1. Payable in one payment of all outstanding principal plus all
accrued unpaid interest on January 30, 1998. In addition,
Borrower will pay two monthly payments of all accrued unpaid
interest due as of each payment date on November 30, 1997 and
December 30, 1997.
B. Waiver of Covenant Default.
1. Lender hereby waives Borrower's existing default under the Loan
Agreement by virtue of Borrower's failure to comply with the
Tangible Net Worth and Total Liabilities to Tangible Net Worth
covenants as of the months ended June 30, 1997, July 31, 1997,
August 31, 1997 and September 30, 1997. Lender's waiver of
Borrower's compliance of these covenants shall apply only to the
foregoing periods. Accordingly, for the month ending October
31, 1997, Borrower shall be in compliance with these covenants.
Lender's agreement to waive the above-described default (1) in
any way shall be deemed an agreement by the Lender to
waive Borrower's compliance with the above-described covenants
as of all other dates and (2) shall not limit or impair the
Lender's right to demand strict performance of these covenants
as of all other dates and (3) shall not limit or impair the
Lender's right to demand strict performance of all other
covenants as of any date.
4. PAYMENT OF LOAN FEE. Borrower shall pay Lender a fee in the amount of
Five Hundred and 00/100 Dollars ($500.00) plus all out-of-pocket expenses
(the "Loan Fee").
5. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
6. NO DEFENSES OF BORROWER. Borrower agrees that, as of this date, it
has no defenses against the obligations to pay any amounts under the
Indebtedness.
7. CONTINUING VALIDITY. Borrower understands and agrees that in modifying
the existing Indebtedness, Lender is relying upon Borrower's representations,
warranties, and agreements, as set forth in the Existing Loan Documents.
Except as expressly modified pursuant to this Loan Modification Agreement,
the terms of the Existing Loan Documents remain unchanged and in full force
and effect. Lender's agreement to modifications to the existing
Indebtedness pursuant to this Loan Modification Agreement in no way
shall obligate Lender to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction of
the Indebtedness. It is the intention of Lender and Borrower to retain as
liable parties all makers and endorsers of Existing Loan Documents, unless the
party is expressly released by Lender in writing. No maker, endorser, or
guarantor will be released by virtue of this Loan Modification Agreement.
The terms of this Paragraph apply not only to this Loan Modification
Agreement, but also to all subsequent loan modification agreements.
8. JURISDICTION/VENUE. Borrower accepts for itself and in connection with
its properties, unconditionally, the non-exclusive jurisdiction of any state
or federal court of competent jurisdiction in the Commonwealth of Massachusetts
in any action, suit, or proceeding of any kind against it which arises out of
or by reason of this Loan Modification Agreement; provided, however, that if
for any reason Lender cannot avail itself of the courts of the Commonwealth of
Massachusetts, then venue shall lie in Santa Clara County, California.
9. COUNTERSIGNATURE. This Loan Modification Agreement shall become effective
only when it shall have been executed by Borrower and Lender (provided,
however, in no event shall this Loan Modification Agreement become effective
until signed by an officer of Lender in California).
10. CONDITIONS. The effectiveness of this Loan Modification Agreement
is conditioned upon payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER:
DATAWATCH CORPORATION
By: /s/ Betsy J. Hartwell
Name: Betsy J. Hartwell
Title: V.P. Finance/CFO
PERSONICS CORPORATION
By: /s/ Betsy J. Hartwell
Name: Betsy J. Hartwell
Title: Treasurer
LENDOR:
SILICON VALLEY BANK, doing business as
SILICON VALLEY EAST
By: /s/ J.C. Maynard
Name: J.C. Maynard
Title: S.V.P.
SILICON VALLEY BANK
By: /s/ Michael E. Jordan
Name: Michael E. Jordan
Title: Loan Docs Officer
(Signed at Santa Clara County, CA)
Exhibit 11.1
DATAWATCH CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON SHARE
Computation of weighted average number of shares outstanding used in
determining income (loss) per share was as follows:
1997 1996 1995
COMMON STOCK AND COMMON STOCK EQUIVALENTS:
Weighted shares outstanding of common stock 9,089,415 8,705,172 8,204,502
Shares held in treasury (28,803)
Common stock equivalent shares resulting
from assumed exercise of stock options (a) 238,690 (a)
---------- --------- ---------
Weighted average of common and common
equivalent shares-primary 9,060,612 8,943,862 8,204,502
Assumed exercise of stock options based on
higher of average or closing market price (a) 4,340 (a)
--------- --------- --------
Weighted average of common and common
equivalent shares-fully diluted 9,060,612 8,949,202 8,204,502
========= ========= =========
NET INCOME (LOSS) $(1,995,433) $1,125,360 $ (331,423)
========== ========= =========
NET INCOME (LOSS) PER COMMON SHARE:
Primary $ (.22) $ .13 $ (.04)
========== ========= =========
Fully-diluted $ (.22) $ .13 $ (.04)
========== ========= =========
(a) Common stock equivalent shares were excluded from the calculation for
the years ended September 30, 1997 and 1995 due to the antidulitive
effect the inclusion of such would have had on loss per share.
EXHIBIT 21.1
Subsidiaries of the Registrant
Subsidiary Place of Incorporation D/B/A Name
Personics Corporation Delaware, USA Personics Corporation
DATAWATCH GmbH Germany DATAWATCH GmbH
Pole Position Software GmbH* Germany Pole Position Software GmbH
WorkGroup Systems Limited England and Wales WorkGroup Systems Limited
WorkGroup Systems GmbH** Germany WorkGroup Systems GmbH
WorkGroup Systems SARL** France WorkGroup Systems SARL
WorkGroup Systems Pty Ltd.** Australia WorkGroup Systems Pty Ltd.
Guildsoft Holdings Limited England and Wales Guildsoft Holdings Limited
Guildsoft Limited *** England and Wales Guildsoft Limited
* All of the shares of capital stock of Pole Position Software GmbH are owned
by DATAWATCH GmbH.
** All of the shares of capital stock of WorkGroup Systems GmbH, WorkGroup
Systems SARL, and WorkGroup Systems Pty Ltd. are owned by WorkGroup Systems
Limited
*** All of the shares of capital stock of Guildsoft Limited are owned by
Guildsoft Holdings Limited.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-39627 and No. 33-65786 of Datawatch Corporation on Form S-8 of our
report dated November 21, 1997 appearing in the Annual Report on Form 10-K
of Datawatch Corporation for the year ended September 30, 1997.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
December 29, 1997
EXHIBIT 27
Financial Data Schedule
[ARTICLE] 5
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] SEP-30-1997
[PERIOD-END] SEP-30-1997
[CASH] 1,586,875
[SECURITIES] 0
[RECEIVABLES] 7,810,169
[ALLOWANCES] (228,000)
[INVENTORY] 876,767
[CURRENT-ASSETS] 12,274,528
[PP&E] 4,198,085
[DEPRECIATION] 2,304,705
[TOTAL-ASSETS] 16,146,645
[CURRENT-LIABILITIES] 7,822,707
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 91,160
[OTHER-SE] 6,833,689
[TOTAL-LIABILITY-AND-EQUITY] 16,146,645
[SALES] 32,047,495
[TOTAL-REVENUES] 32,047,495
[CGS] 5,899,849
[TOTAL-COSTS] 33,929,460
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 167,871
[INCOME-PRETAX] (1,995,433)
[INCOME-TAX] 0
[INCOME-CONTINUING] (1,995,433)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (1,995,433)
[EPS-PRIMARY] (.22)
[EPS-DILUTED] (.22)