UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
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Commission file number 0-19960
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DATAWATCH CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 02-0405716
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(State of other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification number)
234 Ballardvale St., Wilmington, Massachusetts 01887
- ---------------------------------------------- -----
(Address of principal executive office)
(Zip Code)
Registrant's telephone number, including area code: (508) 988-9700
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Title of Class: Common Stock $.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X]
Aggregate market value of voting stock held by non-affiliates: $49,129,167
(computed by reference to the last sales price of such common stock on December
20, 1996 as reported in the National Association of Security Dealers
consolidated trading index).
Number of shares of common stock outstanding at December 20, 1996 : 9,100,113
1
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, 1996.
Portions of such Proxy Statement are incorporated by reference in Part III of
this report.
2
PART I
ITEM 1. BUSINESS
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GENERAL
From its founding in 1985 until December 1991, DATAWATCH Corporation
("DATAWATCH" or the "Company") was engaged solely in the design, manufacture,
test and marketing of IBM-compatible computer workstations and peripherals which
conformed to the U.S. government's TEMPEST security standard for processing
classified information. However, with the ending of the Cold War, the break-up
of the U.S.S.R. and the consequent uncertainties in the future market for
TEMPEST products, during 1991 management developed a strategy to expand via
acquisition into the business of PC software, thereby utilizing its computer
expertise and lessening its reliance on the TEMPEST hardware market.
Consistent with this strategy, and further prompted by a subsequent
precipitous decline in the TEMPEST market, the Company completely transitioned
its business from computer hardware to computer software via the following
transactions:
* December 1991 - Acquisition of Personics Corporation.
* October 1992 - Acquisition of the Utilities Product Group of Microcom.
* May 1993 - Sale of the TEMPEST hardware division to Secure Systems Group.
* May 1994 - Agreement as exclusive North American publisher and marketer of
the Q-Support( line of software owned by UK-based WorkGroup Systems Limited
("WorkGroup").
* April 1995 - Agreement as exclusive U.S. publisher and marketer of
netOctopus TM, a network management software product owned by Pole Position
Software GmbH ("Pole Position").
* October 1995 - Acquisition of Pole Position.
* March 1996 - Acquisition of WorkGroup.
* July 1996 - Agreement as exclusive U.S. publisher and marketer of VET(TM), a
PC based anti-virus software owned by Cybec Pty Ltd.
DATAWATCH's principal products are: Monarch(TM), which provides data
access, translation and reporting capabilities to users of networked PC's;
Virex(R) and VET(TM) for the PC, which detect, repair and monitor for virus
infections for both the Apple Macintosh and IBM compatible PC's, respectively;
Quetzal (internationally) or Q-Support(TM) for Windows (in the United States), a
complete help desk and asset management system; and netOctopus(TM), a network
management and administration system.
3
The Company's executive offices are located at 234 Ballardvale Street,
Wilmington, Massachusetts 01887 and the Company's telephone number is (508)
988-9700.
4
PRINCIPAL PRODUCTS
Monarch
- -------
Introduced in 1991, Monarch is one of DATAWATCH's principal products
and represented approximately 41% of the Company's net sales in fiscal 1996, 46%
of net sales for fiscal 1995 and 38% for fiscal 1994. Monarch is a PC compatible
business intelligence software tool which allows users to access, manipulate and
translate data held in report files. Monarch is a multi-function data access
tool that uses computer-generated legacy reports as a source for data. Monarch
accepts a report file as input, extracts the data, and delivers the data to
users in a variety of formats. Monarch is marketed as "an electronic alternative
to hard copy printouts."
Corporate and government MIS departments have invested substantial
resources in designing reports and delivering them into the hands of managers
and their staffs. With Monarch, users can gain instant access to the reports
used in their workplace. When the chosen report appears on screen, Monarch
offers the user a variety of tools for rapid lookup and navigation. Users can
view a full report, or apply filters to view only information that is relevant
to their needs. With Monarch, users can create custom reports and summaries,
produce local hard copy, create graphs and export data to popular PC
applications such as Lotus 1-2-3 or Excel. With the September 1996 introduction
of Monarch Version 3.0 users are now able to create a Portable Report Format
(PRF) which enables electronic distribution of reports via the intranet thus
reducing hardcopy print and delivery costs.
The use of existing reports as the source for data in Monarch has
several important advantages:
* Data is instantly available. Every computer-generated report used in
the customer's organization represents a ready-made, pre-processed
database that Monarch can exploit.
* Compatibility is achieved across computing environments. Because the
computer industry has adopted a standard convention for sending
characters to printers, Monarch can read report files generated in
nearly all computing environments, including IBM, DEC, Unisys, ICL,
NCR, Wang, Hewlett Packard, and many others.
* Users are immediately productive. Because users are already familiar
with computer-generated reports, they are quickly able to use
Monarch. A report is perceived by most users as a physical, tangible
object with information arranged for human consumption.
* Data security is maintained. Since Monarch reads computer reports,
not the computer database, the computer's data stays secure and
out-of-reach.
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* Costs are reduced. Since Monarch takes the report off of the desktop
and puts it in the PC, the cost of report generation and
distribution are significantly lowered.
Virex
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Virex was introduced in 1988 as the first commercial anti-virus
software product for the Macintosh. Virex has an installed base of more than
800,000 users and represented approximately 15% of the Company's net sales in
fiscal 1996, 17% of net sales for fiscal 1995 and 20% of net sales for fiscal
1994. Virex detects and repairs known Macintosh viruses and then, through the
Virex INIT, a memory resident companion program, continuously monitors the
system to prevent future infection by viruses.
Virex is a leader in Macintosh virus protection, delivering complete
protection from both known and unknown viruses faster than any other product,
with its patented SpeedScan(TM) technology. Scan-At-Download - a Virex exclusive
- - automatically protects you from viruses in files downloaded from on-line
services, the Internet or any other network. Other powerful features include
scheduled scanning, extensive network protection, instant updating, native Power
Macintosh support and compressed file scanning, supporting Stuffit(TM),
CompactPro(TM), Disk Doubler, and more.
Virex is the only Macintosh anti-virus product that automatically
detects and repairs ALL infected documents as they are opened by Microsoft Word
or Excel, preventing wide-spread infection or data loss.
VET
- ---
VET(TM) is a virus protection tool for business, government, education
and consumer users introduced in the U.S. by the Company in September of 1996.
VET delivers fast and thorough virus protection against viruses, trojan horses
and Macro viruses for DOS, Windows, Windows 95, Windows NT and Novell Netware.
With VET, files are scanned automatically so no manual checking is required. It
provides maximum protection against viruses downloaded from the Internet, in
e-mail attachments or copied from a diskette or network server.
Comprehensive on-screen help and detailed virus information is always
available at the click of a mouse. VET is certified by the National Security
Computer Association, Novell accredited, non-intrusive, fully compatible and
easy to use.
Help Desk Products
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Q-Support (U.S.)/Quetzal (Internationally)
Q-Support, marketed internationally under the name Quetzal, is a
Windows-based, comprehensive help desk automation and asset management software
package. Q-Support/Quetzal ("Q-Support") is one of DATAWATCH's principal
products and represented approximately 39% of the Company's net sales in fiscal
1996, 33% for fiscal 1995 and 32% for
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fiscal 1994. The program provides IS support centers with a wide-range set of PC
software tools for use in a multi-user, networked environment.
Featuring an easy-to-use graphical user interface, Q-Support logs,
routes and tracks calls from initiation through resolution. With Q-Support you
have inventory control, the ability to monitor performance levels, access to
third-party knowledge providers, e-mail and extensive management reporting
options. Flexibility is built in-system administrators can customize the program
to suit organizational needs.
Q-Support automates four key functions for the corporate
support center:
* Asset Management - addresses the increasing needs by corporations
for microcomputer asset management by providing an accurate record
of every item of equipment or service, tracing of equipment movement
and change, and full maintenance and warranty information.
* Help Call Management - automates the receiving and resolving of
problem calls from the end-user by providing a fast logging process,
allocation to groups or individuals, and monitoring screens to track
progress, priority and status.
* Support Facilities - provides the database of resources and
reference sources that are required to find the solution to end-user
problems.
* Management Analysis - satisfies the Information Center manager's
need to provide accurate management reports on the status of either
the inventory of equipment or the amount of support activity taking
place.
Consulting services from experienced DATAWATCH professionals
complements the Q-Support package by providing valuable assistance for all
phases of implementation. Q-Support offers all the tools you need to satisfy
end-users, lower support costs and optimize asset utilization.
netOctopus
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netOctopus(TM) from DATAWATCH is a comprehensive systems and network
administration solution that allows administrators to manage an entire network
of Macintosh and IBM-compatible PC's from the convenience of their own desktop.
netOctopus can obtain complete hardware and software inventory detailing the
configuration of each computer on a network in real-time. Any number of
workstations can be queried simultaneously without interrupting the work flow of
the computer users.
Administrators can install and upgrade software of any computer,
troubleshoot, correct and prevent system problems, and monitor software usage
all from their desktop. For file distribution, use File Scripter to effortlessly
create scripts
7
that accomplish lengthy installations of large and complex software programs
like Microsoft Office. Additional features include advanced and flexible
administrator security, remote virus scanning, and data storage for easy
integration into other programs. netOctopus is fully customized and expandable.
All netOctopus features can be configured to operate automatically. netOctopus
operates over LAN, WAN, and dial-up links for easy administration of remote
sites.
PRICING
The Company's products are sold as individual units or under LAN or
site licenses for multiple users. Monarch licenses list for $499 for an
individual unit with LAN licenses listing for a minimum of $2,000. Virex
licenses list for $99.95 per individual copy and a minimum LAN price of $1,750.
VET licenses list for $59.95 per individual copy and a minimum LAN price of
$1,250. A minimum three user license for Q-Support is $6,900. The per seat list
price for netOctopus is $69.
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 end-user
customers, no matter what their buying behavior. DATAWATCH has observed 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-user customers, including repeat and add-on sales to existing customers and
sales to new customers. DATAWATCH utilizes direct mail, telemarketing and direct
personal selling to generate its sales.
During fiscal 1996, one distributor represented approximately 13% of
DATAWATCH's net sales. No other customer accounted for more than 10% of
DATAWATCH's net sales in 1996. DATAWATCH sells its products outside of the U.S.
directly through WorkGroup's sales force and through international resellers.
Such international sales represented approximately 47%, 45% and 49% of
DATAWATCH'S net sales for fiscal 1996, 1995 and 1994, respectively. See Note 11
to Consolidated Financial Statements which appears elsewhere in this Report on
Form 10-K.
The Company offers its resellers the ability to return obsolete
versions of its products and slow-moving products for credit against purchases
of other DATAWATCH products on a dollar-for-dollar basis. Defective products may
also be returned for credit or exchange. Based on its historical experience, the
Company believes that its exposure to such returns is minimal; however, as
significant new product introductions occur, the Company has periodically
exchanged re-seller inventories of older versions of the Company's products with
these new versions of its products.
8
A variety of marketing programs are used by DATAWATCH to create demand
for its products. These programs include advertising, cooperative advertising
with reseller partners, direct mail, exhibitor participation in industry shows,
executive participation in press briefings and on-going communication with the
trade press.
DATAWATCH warrants the physical disk media and printed documentation
for its products to be free of defects in material and workmanship for a period
of 90 days from the date of purchase. DATAWATCH also offers a 30-60 day
money-back guarantee on certain of its products sold directly to end-users.
Under the guarantee, customers may return purchased products within the 60 days
for a full refund if they are not completely satisfied. To date, the Company has
not experienced any significant product returns under its money-back guarantee.
RESEARCH AND DEVELOPMENT
The Company's product strategy necessitates the timely development of
new products. DATAWATCH's product development efforts are conducted through
in-house software development engineers or by external developers, who are
compensated through royalty payments based on product sales levels achieved.
DATAWATCH's product managers work closely with developers, whether
independent or in-house, to define product specifications. The initial concept
for a product originates from this cooperative effort. The developer is
generally responsible for coding the development project. The product managers
and their staff work in parallel with the developers to produce printed
documentation, on-line help files, tutorials and installation software. In some
cases, DATAWATCH may choose to subcontract a portion of this work on a project
basis to third-party suppliers under contracts. DATAWATCH personnel also perform
extensive quality assurance testing for all products and coordinate external
beta test programs.
DATAWATCH's Q-Support, Virex and netOctopus products are developed,
enhanced and maintained by its software development engineers. Monarch is
developed, maintained and enhanced by a contractual arrangement with an external
developer. The tradenames associated with each product, as well as copyrights
for printed documentation, are held by DATAWATCH or its subsidiaries.
DATAWATCH has a contractual agreement with the independent developer of
Monarch which requires that source code be placed into escrow. The principal
developer for that product is also bound by contractual commitments which
require its continuing involvement in product maintenance and enhancement. Under
the agreement, the Company has been granted manufacturing, marketing and sales
rights under license agreements which provide for royalty payments based on net
revenues and exclusive worldwide rights with a stated term expiring in the year
2009.
BACKLOG
9
The Company's software products are generally shipped within seven days
of receipt of an order. Accordingly, the Company does not believe that backlog
for its products is a meaningful indicator of future business.
10
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, Microsoft, Symantec Corp., McAfee
Associates, Inc., Remedy, Astea, Applix and others which have substantially
greater research and development, marketing and financial resources than
DATAWATCH. Competition in the industry is likely to intensify as current
competitors expand their product lines and as new competitors enter the market.
PRODUCT PROTECTION
Although DATAWATCH does not generally own patents on its software
technologies, it relies on a combination of trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures to protect its rights in its products. Despite these precautions,
unauthorized parties may attempt to copy aspects of DATAWATCH's products or to
obtain and use information that DATAWATCH regards as proprietary. Patent
protection is not considered crucial to DATAWATCH's success. DATAWATCH believes
that, because of the rapid pace of technological change in the software
industry, the legal protections for its products are less significant than the
knowledge, ability and experience of its employees and developers, the frequency
of product enhancements and the timeliness and quality of its support services.
DATAWATCH believes that none of its products, trademarks and other proprietary
rights infringe on the proprietary rights of third parties, but there can be no
assurance that third parties will not assert infringement claims against it or
its developers in the future.
PRODUCTION
Production of DATAWATCH's products involves the duplication of master
disks and the printing of user manuals, packaging and other related materials.
Disk duplication is performed in-house with high-capacity disk duplication
equipment, and is occasionally supplemented with duplication services performed
by non-affiliated subcontractors. Printing work is also performed by
non-affiliated subcontractors. To date, DATAWATCH has not experienced any
material difficulties or delays in production of its software and related
documentation and believes that, if necessary, alternative production sources
could be secured at commercially reasonable cost.
EMPLOYEES
As of September 30, 1996, DATAWATCH had 211 full-time employees,
including 4 executive officers, 68 engaged in marketing and sales, 44 engaged in
product management, development and quality assurance, 55 engaged in providing
administrative, accounting and production functions and 40 in technical support
services.
11
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 51,650 square foot leased
facility in Wilmington, Massachusetts. The lease expires in May 1999, with an
option to renew for an additional five years. The Company uses approximately 60%
of this facility and the other 40% is subleased to Secure Systems Group.
The Company also leases approximately 6,200 square feet in Potter Bar,
Hertsfordshire, England, which expires in January 2005, approximately 3,500
square feet in Raleigh, North Carolina, which expires in January 1998, and
maintains small offices in Germany, France and Australia.
The Company believes its facilities are suitable for its current needs.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
At the current time, the Registrant does not have any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of the Registrant's security
holders during the last quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and titles of the executive officers of the Company are
as follows:
Thomas R. Foley 56 President, Chief Executive Officer and Director
Bruce R. Gardner 53 Executive Vice President, Chief Financial
Officer, Treasurer and Director
Andrew W. Mathews 54 Vice President of Sales
Marco D. Peterson 41 Vice President of Marketing and Product
Development
Officers are elected by, and serve at the discretion of, the Board of Directors.
12
THOMAS R. FOLEY, President, Chief Executive Officer and Director. Mr.
Foley, a founder and director of DATAWATCH, has been its President and Chief
Executive Officer since the Company was founded in 1985.
BRUCE R. GARDNER, Executive Vice President, Chief Financial Officer,
Treasurer and Director. Mr. Gardner, a founder and director of DATAWATCH, has
been the Chief Financial Officer and Treasurer since the Company was founded in
1985. Mr. Gardner was a Senior Vice President until June 1993 when he became
Executive Vice President.
ANDREW W. MATHEWS, Vice President of Sales. Mr. Mathews has been a Vice
President since March 1986 serving in various capacities in the areas of
marketing, sales and as a division general manager.
MARCO D. PETERSON, Vice President of Marketing and Product Development.
Mr. Peterson was the founder of PERSONICS and has been its President since its
founding in 1984. Mr. Peterson took on the additional role of Vice President of
Marketing and Product Development of the Company in October 1994.
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Part II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
- --------------------------------------------------------------------------------
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, 1996 High Low
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4th Quarter 11 5/8 6 3/8
3rd Quarter 11 5/8 4 3/4
2nd Quarter 5 1/4 3 3/8
1st Quarter 5 7/8 3 3/4
For the Year Ended
September 30, 1995
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4th Quarter 6 3 1/8
3rd Quarter 4 3/16 1 3/4
2nd Quarter 2 11/16 1 1/4
1st Quarter 1 11/16 1
There are approximately 195 shareholders of record as of December 10, 1996.
The Registrant's common stock purchase warrants previously outstanding expired
in accordance with their terms on May 28, 1996.
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
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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, 1996
are derived from the Consolidated Financial Statements of the Company. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes appearing elsewhere in this
report.
Statements of Operations Data
Years Ended September 30, 1996 1995 1994 1993 1992
-------------- --------------- --------------- --------------- ---------------
Net Sales $30,022,122 $23,359,981 $16,882,142 $13,941,902 $7,888,053
Costs and Expenses 28,894,600 23,678,935 19,956,576 17,883,679 8,135,003
Income (Loss) Continuing Operations 1,127,522 (318,954) (3,074,434) (3,941,777) (246,216)
Income (Loss) from Discontinued - - - (741,145) 463,216
Operation
Loss on Disposal of Discontinued - - - (1,478,082)
Operation
Net Income (Loss) $1,125,360 ($331,423) ($3,042,767) ($6,125,104) $320,783
Income (Loss) from Continuing
Operations per Common Share $0.13 ($0.04) ($0.41) ($0.54) ($0.04)
Income (Loss) from Discontinued
Operation 0.00 0.00 0.00 (0.10) 0.08
Loss on Disposal of Discontinued
Operation 0.00 0.00 0.00 (0.20) 0.00
Net Income (Loss) per Common
Share $0.13 ($0.04) ($0.41) ($0.84) $0.05
Balance Sheet Data September 30, 1996 1995 1994 1993 1992
--------------- -------------- --------------- --------------- ---------------
Total Assets $15,240,571 $12,358,132 $9,646,324 $12,108,270 $16,217.070
Working Capital 5,210,457 2,631,759 1,547,706 3,920,512 9,084,750
Long-Term Obligations 209,824 163,868 137,324 152,484 67,085
Shareholders' Equity $8,238,886 $6,062,170 $5,266,588 $8,086,154 $13,019,301
Data for all years has been retroactively adjusted to reflect the
acquisition of WorkGroup which was accounted for as a pooling of interests.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The following discussion and analysis is qualified by reference to, and
should be read in conjunction with, the consolidated financial statements of
DATAWATCH and its subsidiaries.
GENERAL
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DATAWATCH CORPORATION (the "Company" or "DATAWATCH"), is engaged in the
design, development, manufacture, marketing, consulting services and support of
personal computer software.
On March 12, 1996, the Company acquired all of the outstanding capital
stock of WorkGroup Systems Limited ("WorkGroup"), a United Kingdom based
provider of help-desk and asset management software, in exchange for 1,437,000
shares of the Company's common stock. This acquisition has been accounted for as
a pooling of interests. As a result, DATAWATCH's operating results for the
fiscal years ended September 30, 1996, 1995 and 1994, as discussed herein have
been adjusted to include WorkGroup's operating results.
On November 7, 1996 the Company acquired all the outstanding shares of
capital stock of Guildsoft Limited ("Guildsoft"), located in Plymouth, England,
which provides software companies with multi-lingual telesales, support and
fulfillment services throughout Europe, in exchange for 125,000 shares of
DATAWATCH common stock. This acquisition will be accounted for as a purchase.
DATAWATCH's principal products are: Monarch(TM), which provides data
access, translation, and reporting capability to users of networked PCs;
VIREX(R) and VET( for the PC, which detect, repair and monitor for virus
infections for Apple Macintosh and IBM compatible PCs, respectively;
Q-Support(TM) for Windows (in the United States), or Quetzal(TM)
(internationally) or a complete help desk and asset management system; and
netOctopus(TM), a network management and administration system.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1996 AS COMPARED TO
---------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1995
------------------------------------
Net sales for the fiscal year ended September 30, 1996 were $30,022,000
which represents an increase of $6,662,000 or 29% from the net sales of
$23,360,000 for the fiscal year ended September 30, 1995. This increase results
from growth in sales of all of DATAWATCH's products. Monarch, which amounted to
approximately 41% of sales, increased by 14%; Q-Support, which amounted to
approximately 39% of sales, increased by 51%; Virex, which amounted to
approximately 15% of sales, increased by 14%; and netOctopus, which amounted to
approximately 4% of sales, increased by 143%. For the fiscal year ended
September 30, 1996, the Company's products for the IBM compatible PC accounted
for approximately 80% of sales while the Company's products for the Apple PC
accounted for approximately 20%. Revenues were reduced by approximately $400,000
for the fourth quarter, and consequently for the year, as a result of
consultancy revenue deferrals. See Note 1 (Revenue Recognition - Services and
Other) to Notes to Consolidated Financial Statements which appear elsewhere in
this Report on Form 10-K.
The Company's cost of sales for the fiscal year ended September 30, 1996 were
$4,516,000 or approximately 15% of net sales. Cost of sales for the fiscal year
ended September 30, 1995 were $3,809,000 or approximately 16% of net sales.
These costs remained reasonably constant as a percentage of net sales for the
two periods.
Engineering and product development expenses were $2,339,000 for the fiscal
year ended September 30, 1996, which increased by $119,000 or approximately 5%
from $2,220,000 for the fiscal year ended September 30, 1995. This increase is
primarily attributable to the increase in personnel costs associated with the
development and quality assurance for its products.
Selling, general and administrative expenses were $22,039,000 for fiscal
year ended September 30, 1996. Included in these expenses were non-
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recurring expenses associated with the acquisition of WorkGroup amounting to
$450,000. Excluding these non-recurring expenses, selling, general and
administrative expenses were $21,589,000 for the 1996 fiscal year resulting in
an increase of $3,939,000 or approximately 22% from $17,650,000 for the fiscal
year ended September 30, 1996. This increase is primarily attributable to
increases in personnel within the sales and marketing organizations and in
promotional expenses principally for Q-Support and Monarch.
As a result of the foregoing, the net income for the fiscal year ended
September 30, 1996 was $1,125,000, an increase of $1,457,000 when compared to
the net loss of $331,000 for the fiscal year ended September 30, 1995. The
Company recorded only de minimis tax provisions, both domestically and
internationally, during the period because of its ability to utilize net
operating loss carryforwards.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 AS COMPARED TO
---------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 1994
------------------------------------
Net sales for the fiscal year ended September 30, 1995 were $23,360,000
which represents an increase of $6,478,000 or 38% from the net sales of
$16,882,000 for the fiscal year ended September 30, 1994. This increase results
from sales growth in all of DATAWATCH's products. Monarch, which amounted to
approximately 46% of sales, increased by 66%; Q-Support, which amounted to
approximately 33% of sales, increased by 41%; Virex, which amounted to
approximately 17% of sales, increased by 16%; and netOctopus, which amounted to
approximately 2% of sales, increased by 26%. For the fiscal year ended September
30, 1995, the Company's products for the IBM compatible PC accounted for
approximately 80% of sales while the Company's products for the Apple PC
accounted for approximately 20%.
The Company's cost of sales for the fiscal year ended September 30, 1995
were $3,809,000 or approximately 16% of net sales. Cost of sales for the fiscal
year ended September 30, 1994 were $3,253,000 or approximately 19% of net sales.
The decrease in cost of sales, as a percentage of net sales, is principally
attributable to the higher volume of sales allowing for increased absorption of
manufacturing overheads.
Engineering and product development expenses were $2,220,000 for the fiscal
year ended September 30, 1995 and $2,125,000 for the fiscal year ended September
30, 1994. Fiscal 1995 engineering and product development expenses increased by
approximately $95,000 or 4%. This increase is primarily attributable to the
increase in personnel costs associated with the development and quality
assurance for its products.
Selling, general and administrative expenses were $17,650,000 for fiscal
year ended September 30, 1995. These expenses increased by $3,071,000 or 21%
over the $14,579,000 of selling, general and administrative expenses for the
fiscal year ended September 30, 1994. Included in the 1994 expenses were certain
non-recurring asset write-offs, relocation costs associated with the
consolidation of certain of the Company's operations into its headquarters and
non-recurring product marketing expenses, in the aggregate amounting to
approximately $1,420,000. Excluding these non-recurring expenses, the selling,
general and administrative expenses for the fiscal year ended September 30, 1995
increased by $4,491,000 or 34%. This increase can be attributed primarily to
increased promotional costs, principally for Monarch, and to product
introduction and selling expenses associated with DATAWATCH's newer products,
Q-Support and netOctopus.
As a result of the foregoing, the net loss for the fiscal year ended
September 30, 1995 was $331,000 compared to the net loss of $3,043,000 for the
fiscal year ended September 30, 1994.
LIQUIDITY AND CAPITAL RESOURCES
17
The Company's management believes that its currently anticipated capital needs
for future operations of the Company will be satisfied through at least
September 30, 1997 by funds currently available and its unused $1,500,000 bank
line of credit. WorkGroup has an overdraft facility in place which allows it to
draw up to approximately $640,000. The facility was fully utilized as of
September 30, 1996. Working capital increased by approximately $2,579,000 during
fiscal 1996 primarily as a result of profitable operations and cash flow
generated by exercise of the Company's outstanding common stock purchase
warrants. The Company used its common stock as consideration for its recent
acquisitions and, therefore, completion of these acquisitions did not adversely
impact working capital.
Management believes that the Company's current operations are not materially
impacted by the effects of inflation.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company does not provide forecasts of its future financial
performance. However, time to time, information provided by the Company or
statements made by its employees may contain "forward looking" information that
involves risks and uncertainties. In particular, statements contained in this
Form 10-K that are not historical facts (including, but not limited to
statements contained in "Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations" relating to liquidity and capital
resources) constitute forward looking statements and are made under the safe
harbor provisions of The Private Securities Litigation Reform Act of 1995. The
Company's' actual results of operations and financial condition have varied and
may in the future vary significantly from those stated in any forward looking
statements. Factors that may cause such differences include, without limitation,
the risks, uncertainties and other information discussed below and within this
Form 10-K, as well as the accuracy of the Company's internal estimates of
revenue and operating expense levels. The following discussion of the Company's
risk factors should be read in conjunction with the financial statements and
related notes thereto. Such factors, among others, may have a material adverse
effect upon the Company's business, results of operations and financial
condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future operating results could vary substantially from
quarter to quarter because of uncertainties and/or risks associated with such
things as technological change, competition, delays in the introduction of
products or product enhancements and general market trends. Historically, the
Company has operated with little backlog of orders because its software products
are generally shipped as orders are received. As a result, net sales in any
quarter are substantially dependent on orders booked and shipped in that
quarter. Because the Company's staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the Company's costs are
fixed in the short-term, small variations in the timing of revenues can cause
significant variations in operating results from quarter to quarter. Because of
these factors, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. There can be no assurance that the
Company will not experience such variations in operating results in the future
or that such variations will not have a material adverse effect on the Company's
business, financial condition or results of operation.
DEPENDENCE ON PRINCIPAL PRODUCTS
In Fiscal 1996, Monarch, Q-Support, Virex and netOctopus accounted for
approximately 41% and 39%, 15% and 4%, respectively, of the Company's net sales.
As a result, any factor adversely affecting sales of any of these products could
have a material adverse effect on the Company. The Company's future financial
performance
18
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 results of
operations.
INTERNATIONAL SALES
In 1996, 1995 and 1994, international sales accounted for approximately
47%,45% and 49%, respectively, of the Company's net sales. The Company
anticipates that international sales will continue to account for a significant
percentage of its revenues. 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
The Company has addressed the need to develop new products, in part,
through the acquisition of other companies. Acquisitions such as WorkGroup, Pole
Position and Guildsoft 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. The combination of
such companies will require, among other things, coordination of their sales and
marketing and research and development efforts. The difficulties of such
integration may be increased by the necessity of coordinating geographically
separated organizations. The coordination of certain operations following an
acquisition will require the dedication of management resources that may
temporarily distract attention from the day-to-day business of the Company. The
inability of management to successfully coordinate and integrate on an ongoing
basis the operations of WorkGroup, Pole Position or Guildsoft or any other
company which it may subsequently acquire could have a material adverse effect
on the business and results of operations of the Company.
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
19
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 offering, 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.
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 Corporation,
Microsoft, McAfee Associates, Inc., Remedy, Astea, Applix, Symantec Corp. and
Ziff-Davis, Inc.) 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 1996, 1995 and 1994, the Company derived approximately 17%, 19% and
19%, respectivley, of its net sales through resellers, none of which are under
the direct
20
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 13%, 10%, and 10% of the Company's 1996, 1995 and 1994 net
sales, respectively, no reseller or other customer accounted for more than 10%
of the Company's revenues in 1996, 1995 and 1994. 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 macroeconomics conditions generally,
may have a significant impact on the market price of the stock of the Company.
Any shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant adverse effect on the market
price of the Company's Common Stock in any given period. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations,
which have particularly affected the market price for many high technology
companies and which, on occasion, have appeared to be unrelated to the operating
performance of such companies.
ITEM 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 Schedules" as a part of this report.
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,
1996. Such information is incorporated herein by reference. Information with
respect to the Company's executive officers may be found under the caption
"Executive Officers of the Registrant" appearing in Part I of this Annual Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information set forth under the caption "Compensation and Other
Information Concerning Directors and Officers" appearing in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal
year ended September 30, 1996 is incorporated herein by reference.
21
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, 1996 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, 1996 is incorporated herein
by reference.
22
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, 1996 and 1995
Consolidated Statements of Operations for the Years Ended September 30,
1996, 1995 and 1994.
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended September 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1996, 1995 and 1994.
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, 1996.
23
(C) 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 Form of Warrant Agreement by and between the Registrant and Warrant Agent
(Exhibit 4.1)
(1) 4.2 Specimen certificate representing the Common Stock Purchase Warrants
(Exhibit 4.2)
(1) 4.3 Form of Representative's Warrant (Exhibit 4.3)
(1) 4.4 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)
(2) 10.5 Software Development and License Agreement by and between Walter J. Biess
and HJC Software, Inc., dated as of May 25, 1989, as amended (Exhibit 10.2)
(2) 10.6 License Agreement by and between Ross Greenberg and Microcom, Inc., dated as
of September 30, 1992 (Exhibit 10.3)
(2) 10.7 Asset Purchase Agreement by and among Microcom, Inc. and Microcom Systems
and the Registrant, dated as of September 30, 1992 (Exhibit 2.1)
(2) 10.8 Letter Agreement by and between the Registrant and Microcom, Inc., dated as
of September 30, 1992 (Exhibit 10.4)
(2) 10.9 Amended and Restated Registration Rights Agreement, dated as of
September 30, 1992 by and among the Registrant and the parties listed therein
(Exhibit 10.5)
(1) 10.10 Software Development and Marketing Agreement by and between PERSONICS CORPORATION
and Raymond Huger, dated January 19, 1989 (Exhibit 10.12)
(1) 10.11 License Agreement by and between International Business Machines
Corporation and PERSONICS CORPORATION, dated December 31, 1991 (Exhibit 10.16)
(1) 10.12 Software Distribution Agreement by and between PERSONICS CORPORATION and Librex
Computer Systems, Inc., dated March 12, 1991 (Exhibit 10.17)
(1) 10.13 Software License Agreement by an between M&H Consulting, dated June 1, 1987
(Exhibit 10.13)
(4) 10.14 Software Distribution Agreement by and between PERSONICS CORPORATION and
Toshiba America Information Systems, Inc., dated March 19, 1993, as amended
(Exhibit 10.19)
(3) 10.15 Asset Purchase Agreement by and between the Registrant and Secure Systems
Group, dated as of May 14, 1993 (Exhibit 2.1)
(3) 10.16 Promissory Note of Secure Systems Group to the Registrant in the original
principal amount of $968,782, dated May 14, 1993 (Exhibit 10.1)
(3) 10.17 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)
(3) 10.18 Security Agreement dated as of May 14, 1993 between Secure Systems Group
as debtor and the Registrant as secured party (Exhibit 10.3)
(3) 10.19 Sublease dated as of May 14, 1993 between the Registrant as sublandlord
and Secure Systems Group as subtenant (Exhibit 10.4)
(5) 10.20 Marketing Agreement dated May 1, 1994 between WorkGroup Systems Ltd. and
DATAWATCH CORPORATION (Exhibit 10.1)
(6) 10.21 Letter Agreement dated November 1, 1994 by and among Silicon Valley Bank,
Silicon Valley Bank doing business under the name Silicon Valley East,
DATAWATCH CORPORATION and PERSONICS CORPORATION (Exhibit 10.22)
(6) 10.22 Commercial Security Agreement between DATAWATCH CORPORATION and Silicon Valley
Bank doing business as Silicon Valley East dated November 1, 1994 (Exhibit 10.23)
24
(6) 10.23 Commercial Security Agreement between PERSONICS CORPORATION and Silicon Valley
Bank doing business as Silicon Valley East dated November 1, 1994 (Exhibit 10.24)
(7) 10.24 Loan Modification Agreement dated November 1, 1995 between DATAWATCH Corporation,
Personics Corporation and Silicon Valley Bank (Exhibit 10.24)
(8) 10.25 Executive Agreement between the Company and Andrew W. Mathews dated April
11, 1996 (Exhibit 10.1)
(8) 10.26 Executive Agreement between the Company and Marco D. Peterson dated April 11, 1996
(Exhibit 10.2)
(8) 10.27 Executive Agreement between the Company and Bruce R. Gardner dated April 11, 1996
(Exhibit 10.3)
(8) 10.28 Executive Agreement between the Company and Thomas R. Foley dated April 11, 1996
(Exhibit 10.4)
10.29 Loan Modification Agreement dated October 31, 1996 between Datawatch Corporation,
Personics Corporation and Silicon Valley Bank (filed herewith).
10.30 1996 Non-Employee Director Stock Option Plan, as amended on December 10, 1996
(filed herewith).
10.31 1996 International Employee Non-Qualified Stock Option Plan (filed herewith).
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 with EDGAR Submission only)
- ------------------------------
(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 September 30, 1992, filed October 14, 1992 and incorporated
herein by reference (the number given in parenthesis indicates the
corresponding exhibit in such Form 8-K).
(3) 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).
(4) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the Fiscal Year ended September 30, 1993 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, 1994 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q).
(6) 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).
(7) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the Fiscal Year ended September 30, 1995 and incorporated
herein by reference (the number given in parenthesis indicates the
corresponding exhibit in such Form 10-K).
(8) 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).
25
(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.
26
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 26, 1996 By: /s/Thomas R. Foley
-------------------- ----------------------------------
Thomas R. Foley
President, Chief Executive Officer
and Director
(Principal Executive Officer)
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/Thomas R. Foley President, Chief Executive December 26, 1996
- ------------------------------------
Thomas R. Foley Officer and Director
/s/Bruce R. Gardner Executive Vice President December 26, 1996
- ------------------------------------
Bruce R. Gardner and Treasurer, and Director
(Principal Financial
and Accounting Officer)
/s/John A. Blaeser Director December 26, 1996
- ------------------------------------
John A. Blaeser
/s/Jerome Jacobson Director December 26, 1996
- ------------------------------------
Jerome Jacobson
/s/David Riddiford Director December 26, 1996
- ------------------------------------
David Riddiford
27
- --------------------------------------------------------------------------------
DATAWATCH CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets as of September 30, 1996 and 1995 and Consolidated
Statements of Operations, Changes in Shareholders' Equity, and Cash Flows for
the Years Ended September 30, 1996, 1995 and 1994 and Independent Auditors'
Report
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1996
AND 1995 AND FOR THE THREE YEARS IN THE PERIOD ENDED
SEPTEMBER 30, 1996:
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 6-15
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1996, 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.
As described in Note 2 to the consolidated financial statements, the
consolidated financial statements have been restated to give retroactive effect
to the March 12, 1996 merger of Datawatch Corporation and WorkGroup Systems
Limited, which has been accounted for as a pooling-of-interests.
/s/ Deloitte & Touche LLP
November 25, 1996
-1-
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
- ------------------------------------------------------------------------------------
ASSETS 1996 1995
CURRENT ASSETS:
Cash and equivalents $ 1,696,349 $ 876,802
Short-term investments 792,665 885,659
Accounts receivable, less allowance for doubtful
accounts and sales returns of $73,000 in 1996
and $83,000 in 1995 7,767,748 5,230,685
Inventories 480,758 262,528
Prepaid advertising and other expenses 1,264,798 1,508,179
--------- ---------
Total current assets 12,002,318 8,763,853
--------- ---------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 3,174,964 2,490,719
Manufacturing and engineering equipment 359,795 246,247
--------- ---------
3,534,759 2,736,966
Less accumulated depreciation
and amortization (1,737,733) (1,197,419)
--------- ---------
Net property and equipment 1,797,026 1,539,547
--------- ---------
OTHER ASSETS 400,062 596,990
--------- ---------
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED COMPANIES - Less accumulated
amortization of $1,877,461 in 1996 and
$1,452,990 in 1995 1,041,165 1,457,742
--------- ---------
$ 15,240,571 $ 12,358,132
============== ==============
- ---------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
CURRENT LIABILITIES:
Accounts payable $ 2,914,952 $ 2,718,825
Accrued expenses 1,063,129 1,815,419
Deferred revenue 1,946,473 1,314,655
Borrowings under credit lines 636,806 81,847
Current portion of long-term obligations 230,501 201,348
--------- ---------
Total current liabilities 6,791,861 6,132,094
--------- ---------
LONG-TERM OBLIGATIONS 209,824 163,868
--------- ---------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common stock, par value $.01; authorized,
20,000,000 shares; issued and
outstanding, 8,965,988 shares in 1996
and 8,629,135 shares in 1995 89,659 86,291
Additional paid-in capital 18,665,402 17,614,360
Accumulated deficit (10,538,117) (11,663,477)
Cumulative translation adjustment 21,942 24,996
--------- ---------
Total shareholders' equity 8,238,886 6,062,170
--------- ---------
$ 15,240,571 $ 12,358,132
============== ==============
See notes to consolidated financial statements.
-2-
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
NET SALES $ 30,022,122 $ 23,359,981 $ 16,882,142
COSTS AND EXPENSES:
Cost of sales 4,516,456 3,808,995 3,253,036
Engineering and product development 2,338,724 2,219,930 2,124,655
Selling, general and administrative 22,039,420 17,650,010 14,578,885
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS 1,127,522 (318,954) (3,074,434)
INTEREST EXPENSE (96,184) (75,449) (19,914)
OTHER INCOME - Primarily interest 49,162 67,688 65,178
FOREIGN CURRENCY TRANSACTION GAINS 11,860 23,292 17,403
BENEFIT (PROVISION ) FOR INCOME TAXES 33,000 (28,000) (31,000)
------------- ------------- -------------
NET INCOME (LOSS) $ 1,125,360 $ (331,423) $ (3,042,767)
============== ============== =============
NET INCOME (LOSS) PER SHARE $ 0.13 $ (0.04) $ (0.41)
============== ============== =============
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 8,943,862 8,204,502 7,372,946
============== ============== =============
See notes to consolidated financial statements.
-3-
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Cumulative
Common Stock Paid-in Accumulated Translation
Shares Amount Capital Deficit Adjustments Total
BALANCE, OCTOBER 1, 1993, As previously reported 5,919,670 $ 59,197 $16,316,478 $ (8,652,605) $ (3,050) $ 7,720,020
Adjustment for pooling-of-interest of WorkGroup 1,437,000 14,370 147,348 204,397 19 366,134
--------- ---------- ----------- ------------ -------- -----------
BALANCE, OCTOBER 1, 1993, As restated 7,356,670 73,567 16,463,826 (8,448,208) (3,031) 8,086,154
Common stock options exercised 22,086 220 14,585 14,805
Translation adjustment 49,475 49,475
Adjustment to change fiscal year of WorkGroup 158,921 158,921
Net loss (3,042,767) (3,042,767)
--------- ---------- ----------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 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
========= ========== =========== ============ ======= ===========
See notes to consolidated financial statements.
-4-
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,125,360 $ (331,423)$ (3,042,767)
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 1,223,162 975,254 936,817
Write-off of assets under contractual obligation 1,104,961
Changes in current assets and liabilities:
Inventories (218,230) (20,900) 101,409
Prepaid advertising and other expenses 243,381 (641,303) 364,189
Accounts receivable (2,537,062) (1,819,261) (746,605)
Accounts payable and accrued expenses (567,112) 914,894 869,708
Deferred revenue 631,818 581,524 (244,071)
-------------- ------------- ------------
Net cash used in operating activities (98,683) (182,294) (656,359)
-------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and fixtures - net (564,129) (381,298) (247,063)
Payment received on asset held under contractual obligation 123,131
Proceeds from sale of short-term investments 2,312,478 676,733 3,977,694
Purchase of short-term investments (2,219,484) (1,562,392) (1,984,033)
Other assets 25,571 (393,006) (193,442)
-------------- ------------- ------------
Net cash (used in) provided by investing activities (445,564) (1,659,963) 1,676,287
-------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,054,410 1,148,453 14,805
Principal payments on long-term obligations (245,575) (136,833) (332,418)
Borrowings under credit lines - net 554,959 81,847
Proceeds from equipment financing agreement 64,636
-------------- ------------- ------------
Net cash provided by (used in) financing activities 1,363,794 1,093,467 (252,977)
-------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 819,547 (748,790) 766,951
CASH AND EQUIVALENTS, BEGINNING OF YEAR 876,802 1,625,592 858,641
-------------- ------------- ------------
CASH AND EQUIVALENTS, END OF YEAR $ 1,696,349 $ 876,802 $ 1,625,592
-------------- ------------- ------------
SUPPLEMENTAL INFORMATION:
Interest paid $ 96,184 $ 75,449 $ 19,914
-------------- ------------- ------------
Income taxes paid $ 78,922 $ 0 $ 0
-------------- ------------- ------------
NONCASH INVESTING AND FINANCING ACTIVITIES - Equipment
acquired under capital lease agreements $ 320,684 $ 259,713 $ 168,202
-------------- ------------- ------------
See notes to consolidated financial statements.
-5-
DATAWATCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
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") and WorkGroup Systems Limited ("WorkGroup")
(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 accompanying consolidated financial
statements have been restated to give retroactive effect to the
pooling-of-interests of WorkGroup on March 12, 1996 (see Note 2). 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. Accordingly, the accompanying consolidated financial statements for
the fiscal year ended September 30, 1994 combine information for
Datawatch's fiscal year ended September 30, 1994 with WorkGroup's fiscal
year ended December 31, 1994.
Due to the different fiscal year ends of the combined companies, the
results of WorkGroup for the three months ended December 31, 1994, have
been included in the consolidated statements of operations for both years
ended September 30, 1995 and 1994. WorkGroup's net sales for the three
months ended December 31, 1994 were approximately $1,471,000. WorkGroup's
net loss for the three months ended December 31, 1994 was approximately
$159,000 and has been included as an adjustment in the consolidated
statement of changes in shareholders' equity.
REVENUE RECOGNITION - Software - Revenues 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 30-60 days from the date of purchase. Software products
sold directly to end-users include a guarantee under which such customers
may return products within 60 days for a full refund. During each of the
three years in the period ended September 30, 1996, returns under these
warranty and guarantee arrangements were not material.
REVENUE RECOGNITION - Services and Other - Revenues 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.
Revenues 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.
-6-
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION - Services and Other (Continued) - Revenues 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 revenues are deferred and recognized as
revenue as the services are provided. Prior to July 1996, substantially
all of the Company's bundled consulting services were expected to be, and
were, provided within a short period of time after the shipment of the
related product. For shipments made in and subsequent to July 1996, the
Company has determined that, due to changes in the volume of the Company's
sales, as well as the increased complexity in the Company's products,
bundled consulting services may not be provided within a short period of
time after the shipment of the related product and, accordingly, revenues
from such consulting services are being deferred and recognized as revenue
as the services are provided.
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 - At September 30, 1996 and 1995, other assets included
approximately $21,000 and $81,000, respectively, of unamortized
capitalized software products resulting from acquisitions. Amortization is
provided over estimated lives of 1 to 5 years on a straight-line basis.
Amortization was approximately $60,000 in 1996 and 1995 and $177,000 in
1994.
Copyright-related costs accounted for the majority of the remaining
balance. These costs are being amortized on a basis consistent with the
capitalized software products mentioned above.
ADVERTISING AND PROMOTIONAL MATERIALS - Advertising costs are expensed as
incurred and amounted to approximately $917,000 in 1996 and $640,000 in
1995 and $1,170,000 in 1994. 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 $3,970,000 in 1996, $4,000,000 in 1995 and $2,680,000 in
1994.
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 13% of net sales in 1996 and 10% of
net sales in both 1995 and 1994. 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.
-7-
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT - Purchased equipment and fixtures are recorded at
cost. Leased equipment 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.
INCOME TAXES - The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective
October 1, 1993. There was no cumulative effect adjustment for the
adoption of the new statement and prior financial statements have not been
restated. Prior to this time, the Company accounted for taxes under
Accounting Principles Board ("APB") No. 11.
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.
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.
POOLING-OF-INTERESTS - All share and per share data have been
retroactively adjusted to reflect the pooling-of-interests of WorkGroup.
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 after retroactive adjustment for
the pooling-of-interests. Common stock equivalents consist of dilutive
stock options and common stock warrants.
FOREIGN CURRENCY TRANSACTIONS - 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.
FOREIGN CURRENCY TRANSLATIONS - 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.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the current financial statement presentation.
-8-
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR LONG-LIVED ASSETS - The Financial Accounting Standards
Board ("FASB") has issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related
to those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The Company adopted this
standard in fiscal 1996. The adoption did not have a material effect on
the Company's consolidated financial position or results of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION - In October 1995, the FASB issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which is
effective for the Company's fiscal year 1997. This standard requires
expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation costs to be
measured based on the fair value of stock options awarded. The Company has
evaluated this standard and, as permitted under SFAS No. 123, has decided
that it will not adopt the fair value method and will continue to use APB
No. 25 for the measurement and recognition of employee stock-based
transactions. As a result, compliance with this standard during fiscal
1997 will have no impact on the Company's 1997 consolidated financial
statements other than the required additional disclosure of the pro forma
effect of SFAS No. 123 on net income and earnings per share.
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 and, accordingly, the consolidated
financial statements have been restated to include the accounts and
operations of WorkGroup for all periods presented. Costs related to the
pooling-of-interests of $450,000 were expensed during fiscal 1996.
Net sales and net income (loss) of the separate companies for the years
ended September 30 were as follows:
1996 1995 1994
Net sales:
Datawatch $ 20,008,921 $ 16,633,288 $ 11,521,444
WorkGroup 10,389,664 7,034,639 5,412,058
Eliminations (376,463) (307,946) (51,360)
-------------- ------------- -------------
Combined $ 30,022,122 $ 23,359,981 $ 16,882,142
============== ============= =============
Net income (loss):
Datawatch $ 1,461,556 $ 818,345 $ (3,285,562)
WorkGroup (327,463) (1,075,482) 277,967
Eliminations (8,733) (74,286) (35,172)
-------------- ------------- -------------
Combined $ 1,125,360 $ (331,423) $ (3,042,767)
============== ============= =============
-9-
2. POOLING-OF-INTERESTS (CONTINUED)
On November 21, 1996, the Company redeemed 32,052 shares of the 143,698
escrowed shares in connection with the settlement of certain WorkGroup
contingent liabilities.
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. INVENTORIES
Inventories consisted of the following at September 30:
1996 1995
Raw materials $ 218,615 $ 198,917
Work in process 2,458 2,974
Finished goods 259,685 60,637
------- ------
Total $ 480,758 $ 262,528
========== ==========
4. ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
1996 1995
---- ----
Accrued salaries and benefits $ 222,921 $ 600,707
Accrued royalties and commissions 491,960 489,778
Accrued legal and accounting 142,758 200,145
Accrued rent and property taxes 80,487 124,373
Other 125,003 400,416
------- -------
Total $ 1,063,129 $ 1,815,419
============= =============
5. COMMITMENTS AND OBLIGATIONS
Leases - The Company leases various facilities under noncancelable
operating leases which expire through 2000. 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 certain facilities for an additional five years commencing
in 2000. Rental expense for all operating leases was approximately
$851,000, $714,000 and $650,000 for the years ended September 30, 1996,
1995 and 1994, respectively.
-10-
5. COMMITMENTS AND OBLIGATIONS (CONTINUED)
As of September 30, 1996, minimum rental commitments under capital and
noncancelable operating leases are as follows:
YEAR ENDING CAPITAL OPERATING
SEPTEMBER 30 LEASES LEASES
1997 $ 263,950 $ 913,379
1998 174,496 812,949
1999 69,692 609,443
2000 449,155
---------- ------------
Total minimum lease payments 508,138 $ 2,784,926
============
Less amount representing interest 67,813
----------
Present value of minimum lease payments 440,325
Less current portion 230,501
----------
Long-term obligations $ 209,824
==========
The cost and the related accumulated amortization of equipment leased
under capital lease agreements was approximately $958,000 and $448,000 at
September 30, 1996, respectively, and $640,000 and $225,000 at September
30, 1995, respectively. Amortization expense was $224,000, $142,000 and
$104,000 for the years ended September 30, 1996, 1995 and 1994,
respectively.
ROYALTIES - The Company is also committed to pay royalties relating to the
sales of software products. Royalty expense was approximately $1,900,000,
$1,630,000 and $1,300,000 for the years ended September 30, 1996, 1995 and
1994, respectively.
6. LINE OF CREDIT
The Company's line of credit with a bank expired on October 31, 1996 and
was extended to October 30, 1997. The extended line of credit was modified
to provide 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 will bear interest at the bank's prime rate plus 1.0%. The
agreement requires compliance with certain financial and other covenants
which specify, among other things, dividend restrictions, certain
quarterly profitability levels, a minimum tangible capital base (as
defined), and minimum leverage and liquidity levels. As of September 30,
1996, there were no outstanding borrowings under the line of credit.
The Company has an additional line of credit facility with a U.K. bank
which provides for borrowings up to approximately $640,000. Outstanding
borrowings are payable on demand and bear interest at the prime rate plus
3.0% on borrowings up to $160,000 and at prime plus 6% on any excess
borrowings. The agreement requires compliance with certain financial and
other covenants. Amounts due to the bank under this facility are
approximately $637,000 and $82,000 at September 30, 1996 and 1995,
respectively.
-11-
7. INCOME TAXES
INCOME TAXES - At September 30, 1996, the Company had available
approximately $6,000,000 of regular tax loss carryforwards for federal and
state purposes (approximately $2,000,000 of which may be subject to
limitations under certain federal and state income tax regulations) which
commence expiring in 2007. An alternative minimum tax credit of $119,000
at September 30, 1996 is available for offset against future regular
federal taxes. Research and development credits of $196,000 at September
30, 1996 expire in 2005.
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 liability as of September
30 were as follows:
1996 1995
Deferred tax liabilities:
Depreciation and amortization $ 28,174 $ 112,946
Other 20,041 7,987
---------- ----------
48,215 120,933
Deferred tax assets:
Inventory reserves 69,947 71,856
Accounts and notes receivable reserves 184,063 112,421
Net operating loss carryforwards 2,430,356 3,364,401
Research and development credits 195,817 195,817
Alternative minimum tax credits 119,000 89,000
---------- ----------
2,950,968 3,712,562
Valuation allowance (2,950,968) (3,712,562)
---------- ----------
Deferred taxes, net $ 0 $ 0
=============== ==============
The Company has experienced significant losses prior to fiscal year 1996.
Accordingly, management believes the tax benefits do not satisfy the
realization criteria set forth in SFAS No. 109 and has recorded a
valuation allowance for the entire net tax asset. The valuation allowance
decreased by approximately $762,000 and $185,000 in 1996 and 1995,
respectively.
The following reconciles the Company's effective tax rate to the federal
statutory rate of 34% for the years ended September 30, 1996, 1995 and
1994:
1996 1995 1994
Taxes (benefit) at federal statutory rate $ 372,000 $ (103,000) $ (1,024,000)
Utilization of net operating loss carryforwards (507,000) (287,000) (105,000)
Net operating loss carryforwards not recognized 133,000 365,000 1,117,000
Other (61,000) 28,000 43,000
Alternative minimum tax 30,000 25,000
------ ------ ---------
Provision (benefit) for income taxes $ (33,000) $ 28,000 $ 31,000
========== ========== ============
-12-
8. SHAREHOLDERS' EQUITY
STOCK OPTIONS - Under the Company's 1987 Stock Plan (the "Plan"),
nonqualified and incentive stock options to purchase up to a maximum of
790,791 shares of common stock may be granted to certain employees,
officers, consultants and directors, at exercise prices not less than fair
market value at the date of the grant. Options become exercisable as
specified at the date of grant and generally expire ten years from the
date of grant.
The Company has also adopted the 1996 Non-Employee Director Stock Option
Plan that provides for the award of up to 72,000 shares.
The following table summarizes option activity:
Exercise
Price
Shares Per Share
Outstanding, October 1, 1993 467,826 $0.44 - 4.00
Granted 300,250 1.00 - 1.50
Canceled (296,500) 0.73 - 4.00
Exercised (22,086) 0.44 - 0.73
----------
Outstanding, September 30, 1994 449,490 0.73 - 2.75
Granted 9,000 2.47 - 3.44
Canceled (41,832) 1.00 - 2.75
Exercised (97,039) 0.73 - 1.00
----------
Outstanding, September 30, 1995 319,619 0.73 - 3.44
Granted 181,000 4.63 - 10.13
Canceled (7,667) 3.44 - 5.00
Exercised (217,411) 0.73 - 3.44
----------
Outstanding, September 30, 1996 275,541 1.00 - 10.13
==========
Exercisable, September 30, 1996 13,626
==========
The Company has reserved 292,201 shares of common stock for issuance upon
exercise of stock options and stock purchase warrants (see Note 9).
PREFERRED STOCK - The Company is authorized to issue 1,000,000 shares of
preferred stock with a par value of $.01 per share. No shares of preferred
stock were outstanding at September 30, 1996 and 1995.
-13-
9. STOCK PURCHASE WARRANTS
In connection with its initial public offering in 1992, the Company issued
warrants to purchase shares of common stock (the "Warrants"), expiring May
28, 1996, subject to earlier redemption by the Company, at an exercise
price of $7.50 per share.
In June 1994, the Company's Board of Directors (the "Board") approved a
proposal to reduce the exercise price of each Warrant exercised during the
period from October 3, 1994 to December 12, 1994. On December 12, 1994,
the Board extended the period to February 10, 1995. Pursuant to this
offer, 1,066,540 Warrants had been exercised as of September 30, 1995,
providing a net aggregate of $1,076,360 cash consideration. During 1996,
119,442 Warrants were exercised, providing a net aggregate of $848,972
cash consideration, and 64,019 Warrants expired. As of September 30, 1996,
all Warrants have either been exercised or have expired.
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
1996, 1995 or 1994.
11. SEGMENT INFORMATION
Summarized information about the Company's operations by geographic area
is as follows:
United
Domestic Kingdom Eliminations Total
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
YEAR ENDED SEPTEMBER 30, 1994
Net sales 11,124,226 5,809,276 (51,360) 16,882,142
Income (loss) from operations (3,292,851) 253,589 (35,172) (3,074,434)
Identifiable assets 7,354,952 2,317,965 (26,593) 9,646,324
WorkGroup's revenue and loss from operations for the three months ended
December 31, 1994 of $1,471,000 and ($159,000), respectively, have been
included in the United Kingdom amounts above for both years ended
September 30, 1995 and 1994 (see Note 1).
Export sales aggregated approximately $4,105,000, $3,496,000 and
$2,433,000 in 1996, 1995 and 1994, respectively.
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12. SUBSEQUENT EVENT
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 will be accounted for as an
asset purchase. 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.
* * * * * *
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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
Period Costs & Reserves
Expenses(a) Other
- -----------------------------------------------------------------------------------------------------------------------------------
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 $0 ($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 $0 ($60,076) $83,064
==============================================================================
Year ended September 30, 1994
- -----------------------------
Allowance-doubtful accounts
and sales return $198,649 $92,562 ($222,621)(b)(c) $68,590
Allowance-assets held
under contractual
obligation 1,401,840 1,208,395 (2,610,235)(b)
---------------------------------------------------------------------------------
TOTAL $1,600,489 $1,300,957 $0 ($2,832,856) $68,590
=================================================================================
(a) Current year provision
(b) Doubtful accounts written off
(c) Product returns