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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, 1999
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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
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
900 Chelmsford Street, Tower 3, 5th Floor, Massachusetts 01851
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (978) 441-2200
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
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: $23,801,172
(computed by reference to the last sales price of such common stock on December
15, 1999 as reported in the National Association of Security Dealers
consolidated trading index).
Number of shares of common stock outstanding at December 15, 1999: 9,189,113
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, 1999.
Portions of such Proxy Statement are incorporated by reference in Part III of
this report.
PART I
ITEM 1. BUSINESS
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GENERAL
DATAWATCH CORPORATION (the "Company" or "Datawatch") is a provider of
Enterprise Reporting, Report Mining and Service Center software products that
help organizations increase productivity, reduce costs and gain competitive
advantages. Datawatch products are used in more than 20,000 companies,
institutions and government agencies worldwide.
The Company was founded in 1985 to design, manufacture and market computer
workstations and peripherals that conform to the U.S. government's TEMPEST
security standard. With the end of the Cold War and subsequent decline in demand
for defense-oriented products, the Company exited the TEMPEST market in 1993 and
focused its attention on commercial software. Through a series of acquisitions,
the Company assembled a diverse portfolio of popular software applications,
including Monarch(TM), netOctopus(TM), VIREX(R) and Quetzal(TM)/Q-Support(TM).
In October, 1997, Datawatch divested its Apple Macintosh software products
(VIREX and netOctopus) in order to concentrate on the Windows/Intel platform.
The Company is a Delaware corporation, with executive offices located at
900 Chelmsford Street, Lowell, Massachusetts 01851 and the Company's telephone
number is (978) 441-2200.
PRODUCTS
Datawatch is best known for its popular report mining application called
Monarch(TM). More than 300,000 copies of Monarch have been sold, with localized
versions in English, French, German and Japanese. Monarch lets users extract and
manipulate data from ASCII report files produced on any mainframe, midrange,
client/server or PC system. The Company's Redwing(TM) product lets users extract
text and tables from Adobe PDF documents.
Datawatch also participates in the emerging market for enterprise
reporting software. Monarch|ES(TM) is a configurable enterprise reporting
solution that lets organizations deliver reports electronically via their
network. Reports are stored in a secure repository and brought to life on screen
to support queries and analyses.
Monarch|ES Web extends the system to support browser-based report
retrieval via the Worldwide Web. Monarch|ES Report Publisher supports automated
delivery of reports via MAPI-compliant email.
The Company's Monarch Data Pump product is a unique data replication and
migration tool that offers a shortcut for populating and refreshing data marts
and data warehouses, and for migrating legacy data into new applications.
Datawatch also participates in the market for service center software. The
Company's Quetzal/Q-Support help desk and asset management software is a market
leader in Europe, with the largest installed base among products that compete in
the internal help desk market. Quetzal/Q-Support is recognized for its advanced
service level management capabilities, integrated change management features,
business process automation tools and unique user-interface that promotes
ease-of-use and ease-of-learning.
Quetzal|SC(TM), introduced in December, 1998, is a major new release of
the Company's Quetzal/Q-Support software. Quetzal|SC's advanced architecture
gives it strong performance and scalability. The product was designed to handle
up to 50,000 calls per hour, and can be scaled to support as few as two users
running on an xBASE file server, hundreds of users running on an NT server, or
thousands of users running on powerful Unix servers. Quetzal|SC integrates with
popular network management tools such as CA-Unicenter, Tivoli
Management Edition and BMC Patrol, and employs Monarch to provide extensive data
analysis and reporting capabilities.
PRICING
The Company's desktop products are sold under single and multi-user
licenses. A single user license for Monarch is priced at $499. Multi-user
licenses are priced at $150 to $250 per user, depending upon the number of
users. A single user license for Monarch Data Pump Personal Edition is priced at
$1,495. A single user license for Redwing is priced at $499. A five-user license
is priced at $1,995.
The Company's report enterprise and service center products are sold under
named-user and concurrent-user licenses. An entry-level Monarch|ES system is
priced at approximately $18,000. Typical configurations are priced in the range
of $40,000 to $250,000. Server editions of Monarch Data Pump are typically
priced at approximately $20,000 per server. An entry-level Quetzal/Q-Support
system is priced at approximately $10,000. Typical configurations sell in the
range of $15,000 to $125,000. Maintenance agreements, training and
implementation services are sold separately.
MARKETING AND DISTRIBUTION
Datawatch markets its products through a variety of channels in order to
gain broad market exposure and to satisfy the needs of its customers. Datawatch
believes that some customers prefer to purchase products through
service-oriented resellers, while others buy on the basis of price, purchase
convenience, and/or immediate delivery.
The Company is engaged in active direct sales of its products to
end-users, including repeat and add-on sales to existing customers and sales to
new customers. Datawatch utilizes direct mail, telemarketing and direct personal
selling to generate its sales.
Datawatch uses a variety of marketing programs to create demand for its
products. These programs include advertising, cooperative advertising with
reseller partners, direct mail, exhibitor participation in industry shows,
executive participation in press briefings and on-going communication with the
trade press.
The Company offers its resellers the ability to return obsolete versions
of its products and slow-moving products for credit which can be used against
purchases of other Datawatch products on a dollar-for-dollar basis. Defective
products may also be returned for credit or exchange. Based on its historical
experience relative to products sold to these distributors, the Company believes
that its exposure to such returns is minimal. It has provided a provision for
such estimated returns in the financial statements.
Datawatch warrants the physical disk media and printed documentation for
its products to be free of defects in material and workmanship for a period of
90 days from the date of purchase. Datawatch also offers a 30-60 day money-back
guarantee on certain of its products sold directly to end-users. Under the
guarantee, customers may return purchased products within the 60 days for a full
refund if they are not completely satisfied. To date, the Company has not
experienced any significant product returns under its money-back guarantee.
During fiscal 1999, one distributor represented approximately 15% of the
Company's net sales. No other customer accounted for more than 10% of the
Company's net sales in fiscal 1999. Datawatch sells its products outside of the
U.S. directly through the sales force of its wholly owned subsidiary, Datawatch
International Limited ("Datawatch International") and through international
resellers. Such international sales represented approximately 55%, 56% and 47%
of the Company's net sales for fiscal 1999, 1998 and 1997,
respectively. See Note 12 to Consolidated Financial Statements which appear
elsewhere in this Report on Form 10-K.
RESEARCH AND DEVELOPMENT
The Company believes that timely development of new products and
enhancements to its existing products is essential to maintain a strong position
in its market. Datawatch intends to continue to invest sizeable effort in
research and product development, particularly in the area of computing
technology trends and the Internet. The Company's product development efforts
are focused on the Monarch|ES suite of Enterprise Reporting products and the
expansion of the feature set of the Monarch shrink-wrap and Quetzal|SC Service
Center products and their related core technologies.
Datawatch's product development efforts are conducted through in-house
software development engineers or by external developers, who are compensated
either through royalty payments based on product sales levels achieved or under
contracts based on services provided. Datawatch has established long-term
relationships with several development engineering firms, providing stability
and reliability in its development process.
Datawatch's product managers work closely with developers, whether
independent or in-house, to define product specifications. The initial concept
for a product originates from this cooperative effort. The developer is
generally responsible for coding the development project. Datawatch's product
managers maintain close technical control over the products, giving the Company
the freedom to designate which modifications and enhancements are most important
and when they should be implemented. The product managers and their staff work
in parallel with the developers to produce printed documentation, on-line help
files, tutorials and installation software. In some cases, Datawatch may choose
to subcontract a portion of this work on a project basis to third-party
suppliers under contracts. Datawatch personnel also perform extensive quality
assurance testing for all products and coordinate external beta test programs.
Datawatch has contractual agreements with the independent developers of
Monarch and Monarch|ES which require that source codes be placed into escrow.
The principal developers for the products are also bound by contractual
commitments which require their continuing involvement in product maintenance
and enhancement. Under the agreements, the Company has been granted
manufacturing, marketing and sales rights under license agreements which provide
for royalty payments based on net sales. The Company has also been granted
exclusive worldwide rights to Monarch with a stated term expiring in the year
2009, and to Monarch|ES with a stated term expiring in the year 2001. The
Monarch|ES license automatically renews for successive annual periods unless
terminated for cause by either party prior to the regular termination date.
Other Datawatch products have been developed through in-house software
development or by independent software engineers hired under contract. Datawatch
maintains source code and full product control for these products, which include
Monarch Data Pump (Personal and Server Editions), Monarch Report Publisher,
Monarch ES|Web, Quetzal|SC and Quetzal/Q-Support.
BACKLOG
The Company's software products are generally shipped within seven days of
receipt of an order. Accordingly, the Company does not believe that backlog for
its products is a meaningful indicator of future business.
COMPETITION
The software industry is highly competitive and is characterized by
rapidly changing technology and evolving industry standards. Datawatch competes
with a number of companies including IBM, Remedy, Actuate, and others which have
substantially greater research and development, marketing and financial
resources than Datawatch. Competition in the industry is likely to intensify as
current competitors expand their product lines and as new competitors enter the
market.
PRODUCT PROTECTION
Although Datawatch does not generally own patents on its software
technologies, it relies on a combination of trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures to protect its rights in its products. Despite these precautions,
unauthorized parties may attempt to copy aspects of Datawatch's products or to
obtain and use information that Datawatch regards as proprietary. Patent
protection is not considered crucial to Datawatch's success. Datawatch believes
that, because of the rapid pace of technological change in the software
industry, the legal protections for its products are less significant than the
knowledge, ability and experience of its employees and developers, the frequency
of product enhancements and the timeliness and quality of its support services.
Datawatch believes that none of its products, trademarks and other proprietary
rights infringe on the proprietary rights of third parties, but 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 floppy and
compact disks, and the printing of user manuals, packaging and other related
materials. Floppy disk duplication is performed in-house with high-capacity disk
duplication equipment, and is occasionally supplemented with duplication
services performed by non-affiliated subcontractors. High volume compact disk
duplication is performed by non-affiliated subcontractors, while low volume
compact disk duplication is performed in-house. Printing work is also performed
by non-affiliated subcontractors. To date, Datawatch has not experienced any
material difficulties or delays in production of its software and related
documentation and believes that, if necessary, alternative production sources
could be secured at a commercially reasonable cost.
EMPLOYEES
As of September 30, 1999, Datawatch had 162 full-time employees, including
58 engaged in marketing, sales, and customer service; 24 engaged in product
consulting, 11 engaged in product management, development and quality assurance,
27 in technical support, 33 providing general, administrative, accounting, and
IT functions and 9 in software production and warehousing.
The Company believes that its future success may depend on its ability to
continue to attract and retain highly-skilled technical, marketing and
management personnel, who are in great demand. The Company currently has written
agreements with each of its employees prohibiting disclosure of confidential
information to anyone outside of the Company, both during and subsequent to
employment. These agreements also require disclosure to the Company of ideas,
discoveries or inventions relating to or resulting from the employee's work for
the Company, and assignment to the Company of all proprietary rights to such
matters.
ITEM 2. PROPERTIES
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The Company is currently headquartered in a 21,000 square foot sub-leased
facility in Lowell, Massachusetts. The lease expires in January 2001. The
Company also maintains small offices in California, Illinois, Georgia, and New
Jersey.
The Company also leases approximately 6,000 square feet in Kings Langley,
Hertfordshire, England, which expires in January 2009, approximately 16,000
square feet in Plymouth, Devon, England, which expires in December 2017, and
maintains small offices in Germany, France and Australia.
ITEM 3. LEGAL PROCEEDINGS
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The Company is not a party to any litigation that management believes will
have a material adverse effect on the Company's consolidated financial
condition, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of the Registrant's security holders
during the last quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and titles of the executive officers of the Company are as
follows:
Bruce R. Gardner 56 President, Chief Executive Officer and Director
Marco D. Peterson 44 Senior Vice President of North American Operations
Robert Hagger 51 Senior Vice President of International Operations,
Managing Director of Datawatch International Limited
Betsy J. Hartwell 52 Vice President of Finance, Chief Financial Officer
and Treasurer
John Loring 49 Vice President of Information Technology
Officers are elected by, and serve at the discretion of, the Board of Directors.
BRUCE R. GARDNER, President, Chief Executive Officer and Director. Mr.
Gardner, a founder and director of Datawatch, was the Chief Financial Officer
and Treasurer since the Company was founded in 1985 until November 1, 1997. Mr.
Gardner was a Senior Vice President until June, 1993 when he became Executive
Vice President. Mr. Gardner assumed his current position on November 1, 1997.
MARCO D. PETERSON, Senior Vice President of North American Operations. Mr.
Peterson was the founder of Personics Corporation and has been its President
since its founding in 1984. Mr. Peterson took on the additional role of Vice
President of Marketing and Product Development of the Company in October, 1994
until he became Senior Vice President on November 1, 1997.
ROBERT HAGGER, Senior Vice President of International Operations, Managing
Director of Datawatch International. Mr. Hagger joined Datawatch as Managing
Director of Datawatch International on March 4, 1997 and assumed the title of
Senior Vice President of International Operations on November 1, 1997. Mr.
Hagger, since 1993, was founder and Managing Director of Insight Strategy
Management Ltd. Prior to that he was Managing Director of Byrne Fleming Ltd.
BETSY J. HARTWELL, Vice President of Finance, Chief Financial Officer and
Treasurer. Ms. Hartwell assumed the positions of Vice President of Finance,
Chief Financial Officer and Treasurer on November 1, 1997. Prior to that, and
since July, 1990, Ms. Hartwell was Datawatch's Corporate Controller.
JOHN LORING, Vice President of Information Technology. Mr. Loring assumed
the position of Vice President of Information Technology on November 1, 1997.
Prior thereto and since November, 1993, Mr. Loring was the Company's Director of
Business Development/Information Systems. Prior to that, Mr. Loring was
Datawatch's Manager of Systems Engineering.
Part II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
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MATTERS
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The Registrant's common stock is listed and traded on the Nasdaq National
Market under the symbol DWCH. The range of high and low prices during each
fiscal quarter for the last two fiscal years is set forth below:
For the Year Ended Common Stock
September 30, 1999 High Low
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4th Quarter 1 9/16 1/2
3rd Quarter 1 9/16 1 1/8
2nd Quarter 1 11/16 1 1/8
1st Quarter 1 5/8 1 1/8
For the Year Ended Common Stock
September 30, 1998 High Low
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4th Quarter 2 1/16 1 1/16
3rd Quarter 2 7/8 1 7/8
2nd Quarter 3 1/2 1 13/16
1st Quarter 4 1/16 1 15/16
There are approximately 197 shareholders of record as of December 15,
1999. The Company believes that the number of beneficial holders of common stock
exceeds 2,000.
The Company has not paid any cash dividends and it is anticipated that
none will be declared in the foreseeable future. The Company intends to retain
future earnings, if any, to provide funds for the operation, development and
expansion of its business.
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, 1999
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
Annual Report on Form 10-K.
Statements of Operations Data
Years Ended September 30, 1999 1998 1997 1996 1995
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Net Sales
PC-based Products $27,171,401 $25,123,468 $25,995,197 $24,216,794 $18,839,265
Macintosh-based Products 172,254 6,052,298 5,805,328 4,520,716
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Net Sales 27,171,401 25,295,722 32,047,495 30,022,122 23,359,981
Costs and Expenses 31,480,281 35,800,154 33,929,460 28,894,600 23,678,935
Income (Loss) from
Operations (4,308,880) (10,504,432) (1,881,965) 1,127,522 (318,954)
Gain on Sale
of Product Line 15,431,253
Net Income (Loss) $(3,847,181) $4,703,996 ($1,995,433) $1,125,360 ($331,423)
Net Income (Loss)
per Common Share - Basic $(.42) $.52 ($0.22) $0.13 ($0.04)
Net Income (Loss)
per Common Share - Diluted $(.42) $.51 ($0.22) $0.13 ($0.04)
Balance Sheet Data
September 30, 1999 1998 1997 1996 1995
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Total Assets $14,780,755 $18,332,215 $16,146,645 $15,240,571 $12,358,132
Working Capital 4,838,234 8,503,428 4,451,821 5,210,457 2,631,759
Long-Term Obligations 354 44,190 1,399,089 209,824 163,868
Shareholders' Equity $ 7,817,707 $11,636,482 $6,924,849 $ 8,238,886 $ 6,062,170
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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The following discussion and analysis is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements of
Datawatch and its subsidiaries which appear elsewhere in this Annual Report on
Form 10-K.
GENERAL
Datawatch Corporation (the "Company" or "Datawatch"), is engaged in the
design, development, manufacture, marketing, and support of business computer
software. Its products address the enterprise reporting, business intelligence,
data replication and help desk markets.
Over the last two years, the Company has focused primarily on PC-based
software. Prior to October, 1997 the Company also marketed MacIntosh-based
products. The sale of this product line is discussed in Note 2 to Consolidated
Financial Statements which appear elsewhere in this Annual Report on Form 10-K.
Datawatch's principal products are: Monarch, a report mining application
that lets users extract and manipulate data from ASCII report files produced on
any mainframe, midrange, client/server or PC system; Redwing, a plug-in for
Adobe Acrobat that lets users extract text and tables from Adobe PDF documents;
Monarch|ES, a configurable enterprise reporting solution that lets organizations
deliver reports electronically via their network; Monarch|ES Web, an extension
to Monarch|ES that supports browser-based report retrieval via the Worldwide
Web; Monarch|ES Report Publisher, an extension to Monarch|ES that supports
automated delivery of reports via MAPI-compliant email; Monarch Data Pump, a
data replication and migration tool that offers a shortcut for populating and
refreshing data marts and data warehouses and for migrating legacy data into new
applications; Quetzal (internationally) and Q-Support (in the United States
("U.S.")), an integrated help desk and asset management solution for multi-user,
networked support centers; and Quetzal|SC, a major new release of the Company's
Quetzal/Q-Support software, introduced in December, 1998.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1999 AS COMPARED TO
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FISCAL YEAR ENDED SEPTEMBER 30, 1998
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Net sales for the fiscal year ended September 30, 1999 were $27,171,000
which represents an increase of $1,875,000 or approximately 7% from the net
sales of $25,296,000 for the fiscal year ended September 30, 1998. The increase
in sales results from an increase of the Company's Monarch|ES product sales and
non-recurring revenue resulting from a one-time license of a customized version
of the Company's Redwing product. In fiscal 1999 and 1998 respectively, Monarch
products accounted for approximately 53% and 51% of net sales; Quetzal/Q-Support
products accounted for approximated 33% and 37% of net sales; and third-party
products accounted for 14% and 11%. In fiscal 1999 there were no sales of
Macintosh-based products; these products had accounted for 1% of net sales in
fiscal 1998, owing to the disposition of the product line in early fiscal 1998.
Cost of sales for the fiscal year ended September 30, 1999 were $6,148,000
or approximately 23% of net sales. Cost of sales for the fiscal year ended
September 30, 1998 were $5,213,000 or approximately 21% of net sales. Included
in the cost of sales for fiscal 1999 were $420,000 of non-recurring engineering
costs paid to a third-party developer for a one-time customization of the the
Company's Redwing product. Excluding these expenses from the cost of sales, cost
of sales for fiscal 1999 would have been $5,728,000 or 21% of net sales, which
is comparable to cost of sales for fiscal 1998.
Engineering and product development expenses include those expenditures
attributable to both internal development efforts and efforts undertaken by
third-party developers. Engineering and product development expenses were
$2,386,000 for the fiscal year ended September 30, 1999, a decrease of $997,000
or 29% from $3,383,000 for the fiscal year ended September 30, 1998. This
decrease was due to the discontinuance in October, 1998 of parallel external
development efforts undertaken for Quetzal|SC during fiscal 1998.
Selling, general and administrative expenses were $22,297,000 for the
fiscal year ended September 30, 1999, a decrease of $2,228,000 or approximately
9% from $24,525,000 for the fiscal year ended September 30, 1998. Included in
the expenses for fiscal 1999 were approximately $571,000 of non-recurring legal
expenses associated with the Palms Technology litigation, which has been
settled. Included in the expenses for fiscal 1998 were approximately $196,000 of
one-time expenses associated with leased space no longer required as a result of
the Company's restructuring subsequent to the sale of its Macintosh-based
product line to Dr Solomon's, and $91,000 of administrative and consulting costs
associated with the Company's second restructuring during fiscal 1998. Excluding
these specifically identified costs, selling, general and administrative
expenses would have been $21,726,000 for fiscal 1999, a decrease of $2,512,000
or approximately 10% from $24,238,000 for fiscal 1998. This decrease is
primarily due to the reduction of personnel in the Company's worldwide
operations pursuant to a restructuring during the fourth quarter of fiscal 1998
and the third quarter of fiscal 1999, as well as a decrease in promotional
activities associated with the Company's Monarch product.
During the first quarter of fiscal 1999, the Company approved and
completed a restructuring plan to centralize in the United States the quality
assurance efforts for its Quetzal|SC product. The restructuring plan consisted
of charges for severance benefits and related costs for 10 terminated employees.
These charges, totaling approximately $200,000, have been paid. There was no
change to the initial estimate in subsequent quarters.
During the third quarter of fiscal 1999, the Company approved and
completed a plan to further reduce costs and focus resources on key areas of the
business. The restructuring plan consisted of charges for severance benefits and
related costs for 21 terminated employees. These charges, totaling approximately
$449,000, have been paid. There was no change to the initial estimate in
subsequent quarters.
As a result of the foregoing, the net loss from operations for the fiscal
year ended September 30, 1999 was $4,309,000, which compares to the net loss
from operations of $10,504,000 for the fiscal year ended September 30, 1998.
Elements of other income and expense changed substantially from year to year. In
1998, the Company recognized a $15,431,000 pre-tax gain on the sale of its
Macintosh-based product line. Because such sale generated significant cash
balances - balances that have been used for working capital purposes during
fiscal 1998 and 1999 - interest income for fiscal 1998 was approximately
$470,000 compared to approximately $180,000 for fiscal 1999. The interest
expense recorded by the Company also increased in fiscal 1999 relative to fiscal
1998 owing to the continued use of working capital balances. The Company
recorded a tax benefit in fiscal 1999 of approximately $412,000. This benefit
was attributable to the Company's utilization of tax loss carrybacks that arose
as a result of taxes paid in fiscal 1998. The tax provision in fiscal 1998 of
$600,000 reflected the utilization, in the U.S., of all of the Company's
previous net operating loss carryforwards and the actual incurrence of a tax
liability. The Company still maintains significant foreign net operating loss
carryforwards. The net loss for fiscal 1999 was $3,847,000, which compares to
net income of $4,704,000 for fiscal 1998.
FISCAL YEAR ENDED SEPTEMBER 30, 1998 AS COMPARED TO
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FISCAL YEAR ENDED SEPTEMBER 30, 1997
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Net sales for the fiscal year ended September 30, 1998 were $25,296,000
which represents a decrease of $6,752,000 or 21% from the net sales of
$32,047,000 for the fiscal year ended September 30, 1997. Sales have been
segregated on the statements of operations so as to highlight the product lines
which remains after the disposition of the Macintosh-based product line (sold to
Dr Solomon's on October 9, 1997). Excluding sales of the Company's
Macintosh-based products, net sales for fiscal 1998 were $25,123,000 which
represents a decrease of $872,000 or 3% from net sales of $25,995,000 for fiscal
1997. The decline in sales is principally attributable to lower sales of
Quetzal/Q-Support products as customers awaited the introduction of the next
generation product, Quetzal|SC, subsequently released in December 1998. In
fiscal 1998, Monarch products accounted for approximately 51% of net sales;
Quetzal/Q-Support products accounted for approximately 37% of net sales; and
third-party products accounted for approximately 11% of net sales. For the
fiscal 1998, the Company's PC-based products accounted for approximately 99% of
net sales while the Company's Macintosh-based products accounted for
approximately 1%.
The Company's cost of sales for the fiscal year ended September 30, 1998
were $5,213,000 or approximately 21% of net sales. Cost of sales for the fiscal
year ended September 30, 1997 were $5,900,000 or approximately 18% of net sales.
Excluding the sales and costs of sales related to the Company's Macintosh-based
products, costs of sales for fiscal 1997 would have been approximately 20%.
Without the influence of the Company's Macintosh-based products (sold to Dr.
Solomon's in October, 1997) margins remained relatively comparable.
Engineering and product development expenses include those expenditures
attributable to both internal development efforts and efforts undertaken by
third-party developers. Fiscal 1998 external development expense included costs
incurred for parallel development efforts undertaken for the next generation
Quetzal/Q-Support product. Expenditures of approximately $1,080,000 were
directly related to the terminated Palms Technology development project. In
addition, external costs of approximately $543,000 attributable to maintenance
of Quetzal/Q-Support, the next generation help desk product, Quetzal|SC,
released in December 1998, and certain enterprise solutions products were also
recorded. Internal engineering and product development expenses were $1,760,000
for the fiscal year ended September 30, 1998, a decrease of $1,044,000 or 37%
from $2,804,000 for the fiscal year ended September 30, 1997. This decrease was
due to both the discontinuance of certain internal development efforts and the
non-recurrence of development costs incurred in fiscal 1997 relating to the
Macintosh-based-product line (sold to Dr Solomon's in October, 1997).
Selling, general and administrative expenses were $24,525,000 for the
fiscal year ended September 30, 1998, a decrease of $700,000 or approximately 3%
from $25,225,000 for the fiscal year ended September 30, 1997. Included in the
expenses for fiscal 1998 were approximately $196,000 of one-time expenses
primarily associated with leased space no longer required as a result of the
Company's restructuring subsequent to the sale of its Macintosh-based product
line in the first quarter of 1998, and $91,000 of administrative and consulting
costs associated with the Company's second restructuring during the fourth
quarter of fiscal 1998. Included in the expenses for 1997 were $608,000 of
one-time expenses principally associated with organizational changes within the
Company's European subsidiaries. Excluding these expenses, the decrease would
have been $379,000 or 2% which is principally attributable to selling expenses
associated with the Company's Macintosh-based product line.
In October, 1997, the Company sold its Macintosh-based product line to Dr
Solomon's Software for $16,750,000 in cash. The Company realized a pre-tax gain
on the sale of approximately $15,431,000. After the sale of this product line
the Company initiated a corporate-wide restructuring effort so as to allow the
Company to centralize both its administrative infrastructure and the development
efforts of its remaining products. The total amount charged to operations for
the quarter ended December 31, 1997 was approximately $2,364,000. The plan
included charges for salaries and wages and the related
severance benefits for 25 terminated employees. These charges totaling
approximately $1,884,000, have paid. The plan also included special payments
made to outside developers associated with the centralization of the Company's
development efforts. These charges, totaling $433,000, have been paid. There was
no change to the initial estimate in subsequent quarters.
During the fourth quarter of fiscal 1998 the Company approved and
completed a second restructuring plan to further centralize the Company's
administrative infrastructure and its development efforts. The restructuring
plan consisted of charges for severance benefits and costs for 14 terminated
employees. These charges, totaling approximately $315,000, have been paid. There
was no change to the initial estimate in subsequent quarters.
As a result of the foregoing, the net loss from operations for the fiscal
year ended September 30, 1998 was $10,504,000, which compares to the net loss
from operations of $1,882,000 for the fiscal year ended September 30, 1997. The
Company recorded a tax provision in the amount of $600,000 for the fiscal year
ended September 30, 1998. The Company recorded a de minimis tax provision during
fiscal year ended September 30, 1997 because of its ability to utilize domestic
net operating loss carryforwards and foreign losses. The Company's 1998
effective tax rate of 11% was primarily the result of utilizing domestic net
operating loss carryforwards and certain credit carryforwards. Such
carryforwards were exhausted in the U.S. although the foreign operations still
maintained substantial amounts in carryforwards. Net income for fiscal 1998 was
$4,704,000, which compares to the net loss of $1,995,000 for fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by approximately $3,665,000 during fiscal 1999
primarily as a result of the above mentioned unprofitable operations,
non-recurring expenses requiring cash outlays and cash requirements of the
Company's international subsidiaries. Management believes that the significant
cash outflows experienced will not be repeated in fiscal 2000.
Accordingly, Company's management believes that its currently anticipated
capital needs for future operations will be satisfied through at least September
30, 2000 by funds generated from operations and by availability under the
Company's lines of credit which total $3,500,000. As of September 30, 1999,
advances from the lines of credit amount to $1,314,000. These lines were
committed to on December 27, 1999 and will provide for working capital
borrowings through December 27, 2000.
Management believes that the Company's current operations are not
materially impacted by the effects of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which, as amended, is effective for fiscal
years beginning after June 15, 2000. The new standard requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. Management is currently assessing
whether there will be any impact of SFAS No. 133 on the Company's consolidated
financial statements upon adoption, which is required in October, 2000.
YEAR 2000 READINESS DISCLOSURE STATEMENT
General
The Company is aware of the global concerns related to what is known as
the Year 2000 issue and the potential for the associated system failures and
business interruptions that may result. The Year 2000 issue concerns three main
areas: the ambiguity that may result from processing and storing data using
2-digit year formats; the recognition that the year 2000 is a leap year; and the
use of dates (most commonly 9/9/99) for special programming functions. Any of
these problems could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities for both the
Company and its customers who rely on its products.
Year 2000 Compliance Program
The Company has been aware of the Year 2000 issue for several years and
has been actively engaged in correcting Year 2000 deficiencies as they are
recognized. In late 1998, the Company appointed a Year 2000 Readiness
Coordinator responsible for developing and administering the Company's Year 2000
compliance program. The purpose of the compliance program is to identify
important internal systems that are not yet Year 2000 compliant; to initiate
replacement or remedial action to assure that key systems and products will
continue to operate in the Year 2000 and to test the replaced or remediated
systems and products; to identify and contact key suppliers, vendors, customers
and business partners to evaluate their ability to maintain normal operations in
the Year 2000; and to develop appropriate contingency plans for dealing with
foreseeable Year 2000 complications.
Internal Systems
The assessment of the Company's internal use hardware and software began
in 1997 and the preliminary results of this assessment, including the review of
telephone systems and other facilities equipment, determined that it was
necessary to modify or replace some of its internal use software and hardware.
During 1998, a project was initiated at the corporate offices in Massachusetts
and at the Company's largest subsidiary, Datawatch International, in Potters
Bar, England to upgrade the Company's accounting software to a Year 2000
compliant version. These simultaneous projects were completed in September 1998.
The accounting systems at some of its other subsidiaries have also been
upgraded, but the accounting systems at these locations are significantly less
critical to the continued operation of the Company. The Company currently
believes that all other "mission critical" software is Year 2000 compliant. The
Company also believes that all major internal use hardware, including network
servers and telephone systems, has been upgraded or replaced so that it is now
Year 2000 compliant. A complete assessment of all desktop and laptop computers,
with all major Year 2000 issues corrected as identified, is now complete. This
assessment included the rollover of December 31, 1999 to January 1, 2000 and the
computer's ability to accept the date February 29, 2000. The Company feels
certain that all Year 2000 issues related to internal use software and hardware
have been identified and corrective action will be complete by December 31,
1999. With the assessment of internal use hardware and software now complete,
the estimated cost to bring internal operations into compliance has been reduced
to $50,000.
The Company has contacted mission critical vendors concerning the status
of their Year 2000 readiness and has received statements back from all such
vendors that they are Year 2000 compliant. The Company does not anticipate any
delays in obtaining goods and services from any mission critical vendors due to
Year 2000 related issues. All supplies used to market, sell or produce the
Company's products are readily available from many different suppliers. Should
any vendor have Year 2000 compliance issues that result in a disruption in its
ability to deliver products or services, alternative suppliers can and will be
utilized immediately.
Software Products
The Company has designed, tested and continues to test the most current
versions of its products for Year 2000 issues. With respect to certain of those
products, the Company has relied on testing and representations by its
third-party developers. Based on its internal testing and the testing done by
its third-party developers to date, the Company believes that the latest
versions of its products are substantially Year 2000 compliant and are not
likely to pose a significant Year 2000 liability issue for the Company or any
significant operational problems for its customers. In the event problems are
discovered, the Company intends to issue product updates to correct such
anomalies. The Company has received Year 2000 compliance statements from vendors
of certain widely-accepted database and middleware tools which are used in the
development of its products and there are no known Year 2000 compliance issues
with such tools. In the event that Year 2000 compliance issues are found with
such tools in the future, the Company believes achieving compliance will require
upgrades to newer versions of such tools.
The Company also has performed and continues to perform limited Year 2000
compliance assessments of certain older versions of its products, and where
problems are discovered, will determine the practicality of modifying older
versions. Where such modifications are deemed impractical, the Company will
discontinue the sale of such older versions. Certain of the Company's customers
use older 16-bit operating systems which are believed not to be Year 2000
compliant and, until recently, the Company made available to these customers
older 16-bit versions of its software, which in some cases are not Year 2000
compliant. The Company believes it does not have material financial exposure to
customers with respect to older versions of its products.
As the Year 2000 compliance assessment and/or testing of a product is
completed, the Company makes this information available to its customers via the
Company's web site. Information is also communicated to registered customers in
newsletters and other special mailings. The Company estimates the total cost for
testing its products for Year 2000 compliance will not exceed $50,000, including
$28,000 already expended, and estimates the total cost associated with customer
communication to be approximately $20,000.
Contingency Plans
The Company has developed Year 2000 contingency plans to provide limited
support for customers utilizing its software products for the period December
31, 1999 through January 2, 2000. This contingency plan provides for technical
support and assistance during this holiday period for major customers utilizing
the Company's products in mission critical applications. In some cases customers
may be invoiced for this support.
The Company is also in the process of developing a general corporate
contingency plan which it anticipates will be in place prior to December 31,
1999. The purpose of this plan will be to allow the Company to recognize
internal system failures, if any, and identify resources needed and available to
restore operations in a timely manner.
Risks Associated with Year 2000 Issue
The Company believes its Year 2000 compliance program has allowed it to
identify and correct any material Year 2000 compliance deficiencies. This
assessment is subject to revision based on the results of the Company's on-going
Year 2000 compliance efforts. If unforeseen compliance efforts are required or
if present compliance efforts are not completed on time, or if the cost of any
required updating, modification or replacement of the Company's systems or
equipment exceeds the Company's estimates, the Year 2000 issue could result in
material costs and have a material adverse effect on the Company. However, the
Company believes that the risk is minimal.
The Company utilizes third-party vendors for product development and
testing. Should these vendors not be compliant in a timely manner, product
releases scheduled to take place after December 31, 1999 could be delayed. The
Company also utilizes third-party vendors for processing data and payments, e.g.
payroll services, 401(k) plan administration, check processing, medical benefits
processing, etc. These vendors have been contacted and have stated that they are
compliant. If it is later shown that they are not Year 2000 compliant, the
Company may be required to process transactions manually or delay processing
until such time as the vendors are Year 2000 compliant. The Company has
warranted, to certain customers, that certain of its products are or will be
Year 2000 compliant. Non-compliance with these warranties may result in legal
action for breach of warranty.
RISK FACTORS
The Company does not provide forecasts of its future financial
performance. However, from time to time, information provided by the Company or
statements made by its employees may contain "forward looking" information that
involves risks and uncertainties. In particular, statements contained in this
Annual Report on Form 10-K that are not historical facts (including, but not
limited to statements contained in "Item 7: Management's Discussion and Analysis
of Financial Condition and Results of Operations" relating to liquidity and
capital resources) may constitute forward looking statements and are made under
the safe harbor provisions of The Private Securities Litigation Reform Act of
1995. The Company's actual results of operations and financial condition have
varied and may in the future vary significantly from those stated in any forward
looking statements. Factors that may cause such differences include, without
limitation, the risks, uncertainties and other information discussed below and
within this Annual Report on Form 10-K, as well as the accuracy of the Company's
internal estimates of revenue and operating expense levels. The following
discussion of the Company's risk factors should be read in conjunction with the
financial statements and related notes thereto. Such factors, among others, may
have a material adverse effect upon the Company's business, results of
operations and financial condition.
Fluctuations in Quarterly Operating Results
The Company's future operating results could vary substantially from
quarter to quarter because of uncertainties and/or risks associated with such
things as technological change, competition, delays in the introduction of
products or product enhancements and general market trends. Historically, the
Company has operated with little backlog of orders because its software products
are generally shipped as orders are received. As a result, net sales in any
quarter are substantially dependent on orders booked and shipped in that
quarter. Because the Company's staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the Company's costs are
fixed in the short-term, small variations in the timing of revenues can cause
significant variations in operating results from quarter to quarter. Because of
these factors, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. There can be no assurance that the
Company will not experience such variations in operating results in the future
or that such variations will not have a material adverse effect on the Company's
business, financial condition or results of operation.
Dependence on Principal Products
In fiscal 1999, Monarch and Quetzal/Q-Support accounted for approximately
53% and 33%, respectively, of the Company's net sales. With the disposal of the
Virex and netOctopus products, the Company is wholly dependent on Monarch and
Quetzal/Q-Support. As a result, any factor adversely affecting sales of either
of these products could have a material adverse effect on the Company. The
Company's future financial performance will depend in part on the successful
introduction of its new and enhanced versions of these products and development
of new versions of these and other products and subsequent
acceptance of such new and enhanced products. In addition, competitive pressures
or other factors may result in significant price erosion that could have a
material adverse effect on the Company's business, financial condition or
results of operations.
International Sales
In 1999, 1998 and 1997, international sales accounted for approximately
55%, 56% and 47%, respectively, of the Company's net sales. The Company
anticipates that international sales will continue to account for a significant
percentage of its net sales. A significant portion of the Company's net sales
will therefore be subject to risks associated with international sales,
including unexpected changes in legal and regulatory requirements, changes in
tariffs, exchange rates and other barriers, political and economic instability,
difficulties in account receivable collection, difficulties in managing
distributors or representatives, difficulties in staffing and managing
international operations, difficulties in protecting the Company's intellectual
property overseas, seasonality of sales and potentially adverse tax
consequences.
Acquisition Strategy
Although the Company has no current acquisition plans, it has addressed
and may continue to address the need to develop new products, in part, through
the acquisition of other companies. Acquisitions involve numerous risks
including difficulties in the assimilation of the operations, technologies and
products of the acquired companies, the diversion of management's attention from
other business concerns, risks of entering markets in which the Company has no
or limited direct prior experience and where competitors in such markets have
stronger market positions, and the potential loss of key employees of the
acquired company. Achieving and maintaining the anticipated benefits of an
acquisition will depend in part upon whether the integration of the companies'
business is accomplished in an efficient and effective manner, and there can be
no assurance that this will occur. The successful combination of companies in
the high technology industry may be more difficult to accomplish than in other
industries.
Dependence on New Introductions; New Product Delays
Growth in the Company's business depends in substantial part on the
continuing introduction of new products. The length of product life cycles
depends in part on end-user demand for new or additional functionality in the
Company's products. If the Company fails to accurately anticipate the demand
for, or encounters any significant delays in developing or introducing, new
products or additional functionality on its products, there could be a material
adverse effect on the Company's business. Product life cycles can also be
affected by the introduction by suppliers of operating systems of comparable
functionality within their products. The failure of the Company to anticipate
the introduction of additional functionality in products developed by such
suppliers could have a material adverse effect on the Company's business. In
addition, the Company's competitors may introduce products with more features
and lower prices than the Company's products. Such increase in competition could
adversely affect the life cycles of the Company's products, which in turn could
have a material adverse effect on the Company's business.
Software products may contain undetected errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by the Company and by current and potential end-users, errors
will not be found in new products after commencement of commercial shipments,
resulting in loss of or delay in market acceptance. Any failure by the Company
to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business.
Rapid Technological Change
The markets in which the Company competes have undergone, and can be
expected to continue to undergo, rapid and significant technological change. The
ability of the Company to grow will depend on its ability to successfully update
and improve its existing products and market and license new products to meet
the changing demands of the marketplace and that can compete successfully with
the existing and new products of the Company's competitors. There can be no
assurance that the Company will be able to successfully anticipate and satisfy
the changing demands of the personal computer software marketplace, that the
Company will be able to continue to enhance its product offerings, or that
technological changes in hardware platforms or software operating systems, or
the introduction of a new product by a competitor, will not render the Company's
products obsolete.
Year 2000 Issue
Although the Company does not expect that the Year 2000 issue will have a
material effect on the Company's results of operations or financial condition,
the Company is potentially exposed to Year 2000 issues with respect to internal
software and external product offerings. If the Company's internal systems or
its products fail to operate properly as a result of Year 2000, the Company's
results of operations and financial condition could be materially and adversely
impacted. The Company continues to evaluate the Year 2000 issue. See "Year 2000
Readiness Disclosure Statement" particularly the subsection headed "Risks
Associated with Year 2000 Issue" which appears immediately before this "Risk
Factors" section of this Annual Report on Form 10-K, for a discussion of the
Company's Year 2000 readiness and the risks associated with the Year 2000 issue.
Competition in the PC Software Industry
The software market for personal computers is highly competitive and
characterized by continual change and improvement in technology. Several of the
Company's existing and potential competitors (including IBM, Remedy, and
Actuate) have substantially greater financial, marketing and technological
resources than the Company. No assurance can be given that the Company will have
the resources required to compete successfully in the future.
Dependence on Proprietary Software Technology
The Company's success is dependent upon proprietary software technology.
Although the Company does not own any patents on any such technology, it does
hold exclusive licenses to such technology and relies principally on a
combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its rights to
such proprietary technology. Despite such precautions, there can be no assurance
that such steps will be adequate to deter misappropriation of such technology.
Reliance on Software License Agreements
Substantially all of the Company's products incorporate third-party
proprietary technology which is generally licensed to the Company on an
exclusive, worldwide basis. Failure by such third-parties to continue to develop
technology for the Company and license such technology to the Company could have
a material adverse effect on the Company's business and results of operations.
Indirect Distribution Channels
During fiscal 1999, 1998 and 1997, the Company derived approximately 26%,
22% and 20%, respectively, of its net sales through resellers, none of which are
under the direct control of the Company. The loss of major resellers of the
Company's products, or a significant decline in their sales, could have a
material adverse effect on the Company's operating results. Other than Ingram
Micro Inc., which accounted for approximately 15%, 12%, and 14% of the Company's
fiscal 1999, 1998 and 1997 net sales, respectively, no reseller or other
customer accounted for more than 10% of the Company's revenues in fiscal 1999,
1998 or 1997. There can be no assurance that the Company will be able to attract
or retain additional qualified resellers or that any such resellers will be able
to effectively sell the Company's products. The Company seeks to select and
retain resellers on the basis of their business credentials and their ability to
add value through expertise in specific vertical markets or application
programming expertise. In addition, the Company relies on resellers to provide
post-sales service and support, and any deficiencies in such service and support
could adversely affect the Company's business.
Volatility of Stock Price
As is frequently the case with the stocks of high technology companies,
the market price of the Company's common stock has been, and may continue to be,
volatile. Factors such as quarterly fluctuations in results of operations,
increased competition, the introduction of new products by the Company or its
competitors, expenses or other difficulties associated with assimilating
companies acquired by the Company, changes in the mix of sales channels, the
timing of significant customer orders, and macroeconomic conditions generally,
may have a significant impact on the market price of the stock of the Company.
Any shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant adverse effect on the market
price of the Company's common stock in any given period. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations,
which have particularly affected the market price for many high technology
companies and which, on occasion, have appeared to be unrelated to the operating
performance of such companies.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
At September 30, 1999, the Company did not participate in any derivative
financial instruments, or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. The Company holds no
investment securities that would require disclosure of market risk.
Primary Market Risk Exposures.
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company utilized U.S.
dollar denominated borrowings to fund its operational needs through its
$1,500,000 working capital line. The line that was operative in fiscal 1999,
which bore an interest rate of prime plus 1% (9.25% at September 30, 1999), is
subject to annual renewal. Had the interest rates under the line of credit been
10% greater or lesser than actual rates, the impact would not have been material
in the Company's consolidated financial statements for the year ended September
30, 1999. As of September 30, 1999, the Company had $1,314,000 outstanding on
its working capital line. On December 27, 1999, the Company renegotiated its
line of credit and increased availability under this line, and an additional
line, to $3,500,000.
The Company's exposure to currency exchange rate fluctuations has been and
is expected to continue to be modest due to the fact that the operations of its
international subsidiaries are almost exclusively conducted in their respective
local currencies.
International subsidiary operating results are translated into U.S. dollars and
consolidated for reporting purposes. Currently the Company does not engage in
foreign currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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The information required by this item is set forth in Item 14(a) under the
captions "Consolidated Financial Statements" and "Consolidated Financial
Statement Schedule" as a part of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information with respect to Directors may be found under the caption
"Election of Directors" appearing in the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders for the fiscal year ended September 30,
1999. 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, 1999 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information set forth under the caption "Principal Holders of Voting
Securities" appearing in the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders for the fiscal year ended September 30, 1999 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, 1999 is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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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, 1999 and 1998
Consolidated Statements of Operations for the Years Ended September
30, 1999, 1998 and 1997.
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended September 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years Ended September
30, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule VIII Valuation and Qualifying Accounts
All other schedules are omitted as the required information is not
applicable or is included in the financial statements or related
notes.
The Independent Auditors' Report included with the Consolidated
Financial Statements under Item 14(a)1 above contains the Independent
Auditors' Report on the Consolidated Financial Statement Schedule.
3. LIST OF EXHIBITS
EX.NO DESCRIPTION
- --------------------------------------------------------------------------------
(5) 2.1 Asset Purchase Agreement, dated October 9, 1997, among Datawatch
Corporation, Pole Position Software GmbH and Dr Solomon's
Software, Inc. (Exhibit 2.1)
(5) 2.2 Escrow Agreement, dated October 9, 1997, among Datawatch
Corporation, Dr Solomon's Software, Inc. and State Street Bank and
Trust Company. (Exhibit 2.2)
(1) 3.1 Restated Certificate of Incorporation of the Registrant (Exhibit
3.2)
(1) 3.2 By-Laws, as amended, of the Registrant (Exhibit 3.3)
(1) 4.1 Specimen certificate representing the Common Stock (Exhibit 4.4)
10.1 Sub-Lease, dated April 30, 1999, by and between Datawatch
Corporation and Eastman Kodak Company (filed herewith)
(1) 10.2* 1987 Stock Plan (Exhibit 10.7)
(1) 10.3* Form of Incentive Stock Option Agreement of the Registrant
(Exhibit 10.8)
(1) 10.4* Form of Nonqualified Stock Option Agreement of the Registrant
(Exhibit 10.9)
(1) 10.6 Software Development and Marketing Agreement by and between
Personics Corporation and Raymond Huger, dated January 19, 1989
(Exhibit 10.12)
(2) 10.6 Marketing Agreement, dated May 1, 1994, between WorkGroup Systems
Ltd. and Datawatch Corporation (Exhibit 10.1)
(3) 10.7 Commercial Security Agreement between Datawatch Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (Exhibit 10.23)
(3) 10.8 Commercial Security Agreement between Personics Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (Exhibit 10.24)
(4) 10.9* Executive Agreement between the Company and Marco D. Peterson,
dated April 11, 1996 (Exhibit 10.2)
10.10* Amendment No. 1 to Executive Agreement dated April 11, 1996
between the Registrant and Marco D. Peterson, dated July 15, 1999,
(filed herewith)
(4) 10.11* Executive Agreement between the Company and Bruce R. Gardner,
dated April 11, 1996 (Exhibit 10.3)
(6) 10.12 Loan Modification Agreement dated, October 31, 1996, between
Datawatch Corporation, Personics Corporation and Silicon Valley
Bank (Exhibit 10.29)
(6) 10.13* 1996 Non-Employee Director Stock Option Plan, as amended on
December 10, 1996 (Exhibit 10.30)
(6) 10.14* 1996 International Employee Non-Qualified Stock Option Plan
(Exhibit 10.31)
(7) 10.15 Amended and Restated Letter Agreement, dated February 12, 1997, by
and between Datawatch Corporation, Personics Corporation and
Silicon Valley Bank (Exhibit 10.1)
(7) 10.16 Promissory Note, dated February 12, 1997, by and between Datawatch
Corporation, Personics Corporation and Silicon Valley Bank
(Exhibit 10.2).
(8) 10.17 Loan Modification Agreement, dated October 30, 1997, by and
between Datawatch Corporation, Personics Corporation and Silicon
Valley Bank (Exhibit 10.23)
(9) 10.18* 1996 Stock Plan (Appendix A)
(10) 10.19 Loan Modification Agreement, dated January 30, 1998, by and
between Datawatch Corporation, Personics Corporation and Silicon
Valley Bank (Exhibit 10.1)
(11) 10.20 Loan Modification Agreement, dated December 18, 1998, by and
between Datawatch Corporation, Personics Corporation and Silicon
Valley Bank (Exhibit 10.19)
(12) 10.21 Loan Modification Agreement, dated March 16, 1999, by and between
Datawatch Corporation, Personics Corporation and Silicon Valley
Bank (Exhibit 10.1)
10.22 Loan Modification Agreement, dated December 27, 1999, by and
between Datawatch Corporation and Silicon Valley Bank (filed
herewith)
10.23 Intellectual Property Security Agreement, dated December 27, 1999
by and between Datawatch Corporation and Silicon Valley Bank
(filed herewith)
10.24 Export-Import Bank Loan and Security Agreement, dated December 27,
1999, by and among Datawatch Corporation, Datawatch International
Limited, Datawatch Europe Limited, Guildsoft Limited and Silicon
Valley Bank in favor of Export-Import Bank of the United States
(filed herewith)
10.25* Contract of Employment, dated February 24, 1997, by and between
WorkGroup Systems Limited and Robert Hagger (filed herewith)
10.26* Amendment to Contract of Employment dated February 24, 1997, by
and between WorkGroup Systems Limited and Robert Hagger, dated
July 15, 1999 (filed herewith)
10.27 Mortgage Debenture, dated December 27, 1999, by and between
Datawatch Europe Limited and Silicon Valley Bank (filed herewith)
10.28 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch Europe Limited and Silicon Valley Bank (filed herewith)
10.29 Mortgage Debenture, dated December 27, 1999, by and between
Datawatch International Limited and Silicon Valley Bank (filed
herewith)
10.30 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch International Limited and Silicon Valley Bank (filed
herewith)
10.31 Mortgage Debenture, dated December 27, 1999, by and between
Guildsoft Limited and Silicon Valley Bank (filed herewith)
10.32 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch Guildsoft Limited and Silicon Valley Bank (filed
herewith)
10.33 Export-Import Bank of the United States Working Capital Guarantee
Program Borrower Agreement, dated December 27, 1999, by and among
Datawatch Corporation, Datawatch International Limited, Datawatch
Europe Limited, Guildsoft Limited and Silicon Valley Bank in favor
of Export-Import Bank of the United States (filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedule (filed herewith)
- --------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan or contract.
(1) Previously filed as an exhibit to Registration Statement 33-46290 on Form
S-1 and incorporated herein by reference (the number given in parenthesis
indicates the corresponding exhibit in such Form S-1).
(2) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q).
(3) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
(4) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q).
(5) Previously filed as an exhibit to Registrant's Current Report on Form 8-K
dated October 9, 1997 and incorporated herein by reference (the number
given in parenthesis indicates the corresponding exhibit in such Form
8-K).
(6) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
(7) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit
in such Form 10-Q).
(8) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
(9) Previously filed as Appendix A to the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders held on March 19, 1997 and
incorporated herein by reference (the number given in parenthesis
indicates the corresponding Appendix in such definitive Proxy Statement).
(10) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit
in such Form 10-Q).
(11) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
(12) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit
in such Form 10-Q).
(B) REPORTS ON FORM 8-K
No current report on Form 8-K was filed during the quarterly period ended
September 30, 1999.
(C) EXHIBITS
The Company hereby files as exhibits to this Annual Report on Form 10-K
those exhibits listed in Item 14(a)3 above.
(D) FINANCIAL STATEMENT SCHEDULES
The Company hereby files as financial statement schedules to this Annual
Report on Form 10-K the Consolidated Financial Statement Schedules listed
in Item 14(a)2 above which are attached hereto.
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 28, 1999 By: /s/ Bruce R. Gardner
-----------------------
Bruce R. Gardner
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Bruce R. Gardner President, Chief Executive December 28, 1999
- ----------------------- Officer and Director
Bruce R. Gardner (Principal Executive Officer)
/s/ Betsy J. Hartwell Vice President Finance, December 28, 1999
- ----------------------- Chief Financial Officer
Betsy J. Hartwell and Treasurer
(Principal Financial
and Accounting Officer)
/s/ Jerome Jacobson Director December 28, 1999
- -----------------------
Jerome Jacobson
/s/ David T. Riddiford Director December 28, 1999
- -----------------------
David T. Riddiford
/s/ Terry W. Potter Director December 28, 1999
- -----------------------
Terry W. Potter
/s/ Don M. Lyle Director December 28, 1999
- -----------------------
Don M. Lyle
================================================================================
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 1999 AND 1998 AND CONSOLIDATED STATEMENTS OF OPERATIONS,
CHANGES IN SHAREHOLDERS' EQUITY, AND CASH FLOWS FOR THE YEARS ENDED
SEPTEMBER 30, 1999, 1998 AND 1997 AND INDEPENDENT AUDITORS' REPORT
================================================================================
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
----
INDEPENDENT AUDITORS' REPORT ............................................ 1
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999 AND 1998
AND FOR THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1998:
Consolidated Balance Sheets .......................................... 2
Consolidated Statements of Operations ................................ 3
Consolidated Statements of Changes in Shareholders' Equity ........... 4
Consolidated Statements of Cash Flows ................................ 5
Notes to Consolidated Financial Statements ........................... 6-18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Datawatch Corporation
Wilmington, Massachusetts
We have audited the accompanying consolidated balance sheets of Datawatch
Corporation (the "Company") and subsidiaries as of September 30, 1999 and 1998,
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, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999, in conformity with generally accepted accounting principles.
Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ Deloitte & Touche LLP
- -------------------------
Boston, Massachusetts
November 19, 1999 (December 27, 1999 as to Note 8)
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
- -------------------------------------------------------------------------------
ASSETS 1999 1998
------------ ------------
CURRENT ASSETS:
Cash and equivalents $ 1,684,485 $ 3,575,256
Short-term investments 1,479,698 3,395,410
Accounts receivable, less allowance for
doubtful accounts and sales returns of
approximately $467,000 in 1999 and
$353,000 in 1998 7,282,452 5,568,754
Income tax recoverable 230,922 833,211
Inventories 409,753 511,669
Prepaid advertising and other expenses 713,618 1,270,671
------------ ------------
Total current assets 11,800,928 15,154,971
------------ ------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 4,096,358 4,120,118
Manufacturing and engineering equipment 202,187 159,982
------------ ------------
4,298,545 4,280,100
Less accumulated depreciation
and amortization (2,805,418) (2,453,240)
------------ ------------
Net property and equipment 1,493,127 1,826,860
------------ ------------
OTHER ASSETS 942,128 625,293
------------ ------------
EXCESS OF COST OVER NET ASSETS OF
ACQUIRED COMPANIES - Less accumulated
amortization of approximately $2,370,000
in 1999 and $2,190,000 in 1998 544,572 725,091
------------ ------------
TOTAL $ 14,780,755 $ 18,332,215
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 2,851,120 $ 3,791,323
Accrued expenses 1,136,365 1,301,599
Deferred revenue 1,619,715 1,161,556
Borrowings under credit lines 1,313,705 250,000
Current portion of long-term obligations 41,789 147,065
------------ ------------
Total current liabilities 6,962,694 6,651,543
------------ ------------
LONG-TERM OBLIGATIONS 354 44,190
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 6,7 and 8)
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01- authorized,
1,000,000 shares; no shares issued -- --
Common stock, par value $.01- authorized,
20,000,000 shares; issued, 9,221,165 shares and
9,180,364 shares in 1999 and 1998, respectively;
outstanding, 9,189,113 shares and 9,148,312
shares in 1999 and 1998, respectively 92,211 91,803
Additional paid-in capital 19,864,296 19,823,887
Accumulated deficit (11,676,735) (7,829,554)
Accumulated other comprehensive loss (321,677) (309,266)
------------ ------------
7,958,095 11,776,870
Less treasury stock, at cost - 32,052 shares (140,388) (140,388)
------------ ------------
Total shareholders' equity 7,817,707 11,636,482
------------ ------------
TOTAL $ 14,780,755 $ 18,332,215
============ ============
-2-
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
NET SALES:
PC-based products $ 27,171,401 $ 25,123,468 $ 25,995,197
Macintosh-based products -- 172,254 6,052,298
------------ ------------ ------------
Net sales 27,171,401 25,295,722 32,047,495
COSTS AND EXPENSES:
Cost of sales 6,147,938 5,212,595 5,899,849
Engineering and product development 2,386,256 3,383,260 2,804,434
Selling, general and administrative 22,297,320 24,524,839 25,225,177
Restructuring and centralization costs 648,767 2,679,460 --
------------ ------------ ------------
Total costs and expenses 31,480,281 35,800,154 33,929,460
------------ ------------ ------------
LOSS FROM OPERATIONS (4,308,880) (10,504,432) (1,881,965)
INTEREST EXPENSE (135,562) (62,306) (167,871)
INTEREST INCOME AND OTHER 179,846 470,367 54,503
GAIN ON SALE OF PRODUCT LINE -- 15,431,253 --
FOREIGN CURRENCY TRANSACTION
GAINS (LOSSES) 5,785 (30,886) (100)
BENEFIT (PROVISION) FOR INCOME TAXES 411,630 (600,000) --
------------ ------------ ------------
NET (LOSS) INCOME (3,847,181) $ 4,703,996 $ (1,995,433)
============ ============ ============
NET (LOSS) INCOME PER SHARE - Basic $ (0.42) $ 0.52 $ (0.22)
============ ============ ============
NET (LOSS) INCOME PER SHARE - Diluted $ (0.42) $ 0.51 $ (0.22)
============ ============ ============
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING - Basic 9,160,831 9,133,385 9,060,612
ADJUSTMENT FOR POTENTIAL COMMON
STOCK -- 176,868 --
------------ ------------ ------------
WEIGHTED-AVERAGE NUMBER
OF SHARES OUTSTANDING - Diluted 9,160,831 9,310,253 9,060,612
============ ============ ============
See notes to consolidated financial statements.
-3-
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- -----------------------------------------------------------------------------------------------------------------
ADDITIONAL
COMMON STOCK PAID-IN TREASURY STOCK
SHARES AMOUNT CAPITAL SHARES AMOUNT
------------ ------------ ------------ ------------ ------------
BALANCE, OCTOBER 1, 1996 8,965,988 $ 89,659 $ 18,665,402 -- $ --
Stock issued pursuant to
acquisition of Guildsoft 125,000 1,250 905,000 -- --
Stock options exercised 25,125 251 27,173 -- --
Escrowed shares returned to treasury -- -- 140,388 (32,052) (140,388)
Comprehensive loss:
Translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
Total comprehensive loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1997 9,116,113 91,160 19,737,963 (32,052) (140,388)
Stock options exercised 64,251 643 85,924 -- --
Comprehensive income:
Translation adjustment -- -- -- -- --
Net income -- -- -- -- --
Total comprehensive income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 9,180,364 91,803 19,823,887 (32,052) (140,388)
Stock options exercised 40,801 408 40,409 -- --
Comprehensive loss:
Translation adjustment -- -- -- -- --
Net income -- -- -- -- --
Total comprehensive loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1999 9,221,165 $ 92,211 $ 19,864,296 (32,052) $ (140,388)
============ ============ ============ ============ ============
- --------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER COMPREHENSIVE
ACCUMULATED COMPREHENSIVE INCOME
DEFICIT INCOME (LOSS) (LOSS) TOTAL
------------ ------------ ------------ ------------
BALANCE, OCTOBER 1, 1996 $(10,538,117) $ 21,942 $ 8,238,886
Stock issued pursuant to
acquisition of Guildsoft -- -- 906,250
Stock options exercised -- -- 27,424
Escrowed shares returned to treasury -- -- --
Comprehensive income:
Translation adjustment -- (252,278) $ (252,278) (252,278)
Net loss (1,995,433) -- (1,995,433) (1,995,433)
------------
Total comprehensive loss -- -- $ (2,247,711)
------------ ------------ ============ ------------
BALANCE, SEPTEMBER 30, 1997 (12,533,550) (230,336) 6,924,849
Stock options exercised -- -- 86,567
Comprehensive income:
Translation adjustment -- (78,930) $ (78,930) (78,930)
Net income 4,703,996 -- 4,703,996 4,703,996
------------
Total comprehensive income -- -- $ 4,625,066
------------ ------------ ============ ------------
BALANCE, SEPTEMBER 30, 1998 (7,829,554) (309,266) 11,636,482
Stock options exercised -- -- 40,817
Comprehensive income:
Translation adjustment -- (12,411) $ (12,411) (12,411)
Net income (3,847,181) -- (3,847,181) (3,847,181)
------------
Total comprehensive loss -- -- $ (3,859,592)
------------ ------------ ============ ------------
BALANCE, SEPTEMBER 30, 1999 $(11,676,735) $ (321,677) $ 7,817,707
============ ============ ============
See notes to consolidated financial statements.
-4-
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,847,181) $ 4,703,996 $ (1,995,433)
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization 1,151,719 1,300,813 1,522,877
Amortization of interest on short-term investments (121,003) (176,034) --
Gain on sale of product lines -- (15,431,253) --
Gain (loss) on disposition of equipment 2,825 (8,537) --
Changes in current assets and liabilities, net of acquisitions:
Accounts receivable (1,535,541) 1,036,395 353,381
Inventories 96,117 275,884 (175,144)
Prepaid advertising and other expenses 918,675 482,255 (672,054)
Accounts payable and accrued expenses (1,026,772) (1,030,528) 132,358
Deferred revenue 496,608 (143,020) 196,730
------------ ------------ ------------
Net cash used in operating activities (3,864,553) (8,990,029) (637,285)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and fixtures (410,920) (818,143) (647,888)
Proceeds from sale of equipment - net 14,885 18,862 91,233
Proceeds from sale of short-term investments 7,979,405 6,245,000 2,069,065
Purchase of short-term investments (5,942,690) (9,464,376) (1,276,400)
Proceeds from sale of product lines -- 16,750,000
Acquisition of Guildsoft Holdings, Ltd., net of working capital acquired -- -- 19,833
Other assets (585,487) (346,731) (314,608)
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,055,193 12,384,612 (58,765)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 40,817 86,567 27,424
Principal payments on long-term obligations (145,460) (242,769) (307,380)
Borrowings (payments) under credit lines - net 1,063,705 250,000 (633,468)
Proceeds from bank term loan -- -- 1,500,000
Payments of bank term loan -- (1,500,000) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 959,062 (1,406,202) 586,576
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (40,473) -- --
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (1,890,771) 1,988,381 (109,474)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 3,575,256 1,586,875 1,696,349
------------ ------------ ------------
CASH AND EQUIVALENTS, END OF YEAR $ 1,684,485 $ 3,575,256 $ 1,586,875
============ ============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 135,562 $ 62,306 $ 159,954
============ ============ ============
Income taxes paid $ -- $ 1,175,000 $ 167,490
============ ============ ============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital lease agreements $ -- $ 77,311 $ 267,277
============ ============ ============
Escrowed shares returned to treasury $ -- $ -- $ 140,388
============ ============ ============
See notes to consolidated financial statements.
-5-
DATAWATCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Datawatch Corporation (the "Company") develops,
markets and distributes commercial software products. The Company also
provides a wide range of consulting services surrounding the
implementation and support of its software products.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Datawatch Corporation and its wholly owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
ACCOUNTING ESTIMATES - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
REVENUE RECOGNITION - Revenue from sales of software products is
recognized at the time of shipment when no significant obligations remain
and collectibility is probable. The Company's software products are sold
under warranty against certain defects in material and workmanship for a
period of 30 to 60 days from the date of purchase. Software products sold
directly to end users include a guarantee under which such customers may
return products within 30 to 60 days for a full refund. The Company offers
its resellers the ability to return obsolete versions of its products and
slow-moving products for credit which can be used against purchases of
other Company products on a dollar-for-dollar basis. During each of the
three years in the period ended September 30, 1999, returns under these
warranty and guarantee arrangements were not material.
Revenue from the sale of separate consulting agreements to provide field
service support is deferred at the time of sale. The Company recognizes
its revenue on these agreements ratably over their 12-month contractual
periods. Revenue from the sale of annual subscription agreements to
provide upgrades for minor product improvements is deferred at the time of
sale and recognized ratably over their 12-month contractual periods.
Revenue from consulting services is recognized as revenue as the services
are provided.
-6-
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CASH AND EQUIVALENTS - Cash and equivalents include cash on hand, cash
deposited with banks, and highly liquid debt securities with remaining
maturities of 90 days or less when purchased.
SHORT-TERM INVESTMENTS - Short-term investments consist of United States
Treasury Bills and commercial paper with relatively short-term maturities
(less than one year from the date of purchase) for which the carrying
value approximates market value.
OTHER ASSETS - Pursuant to Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," issued by the Financial Accounting
Standards Board ("FASB"), the Company is required to capitalize certain
software development and production costs once technological feasibility
has been achieved. The cost of purchased software is also required to be
capitalized when related to a product which has achieved technological
feasibility or that has an alternative future use. For the years ended
September 30, 1999, 1998 and 1997, the Company did not capitalize any
internal software development costs. For the years ended September 30,
1999, 1998 and 1997, the Company purchased and capitalized software
amounting to approximately $468,000, $487,000 and $315,000, respectively.
Software development costs incurred prior to achieving technological
feasibility are charged to research and development expense as incurred.
Capitalized software development and purchased software costs are reported
at the lower of unamortized cost or net realizable value. Commencing upon
initial product release, these costs are amortized using the straight-line
method over the estimated life (which approximates the ratio that current
gross revenues for a product bear to the total of current and anticipated
future gross revenues for that product), generally 12 to 36 months for
purchased software. For the years ended September 30, 1999, 1998 and 1997,
amortization was approximately $267,000, $125,000 and $22,000,
respectively.
ADVERTISING AND PROMOTIONAL MATERIALS - Advertising costs are expensed as
incurred and amounted to approximately $475,000, $339,000 and $721,000 in
1999, 1998 and 1997, respectively. Direct mail/direct response costs are
expensed as the associated revenue is recognized. The amortization period
is based on historical results of previous mailers (generally three to six
months from the date of the mailing). Direct mail expense was
approximately $1,682,000, $2,979,000 and $3,152,000 in 1999, 1998 and
1997, respectively. At September 30, 1999 and 1998, deferred direct
mail/direct response costs were approximately $117,000 and $725,000,
respectively.
CONCENTRATION OF CREDIT RISKS AND MAJOR CUSTOMERS - The Company sells its
products and services to U.S. and non-U.S. dealers and other software
distributors, as well as to end users under normal credit terms. One
customer individually accounted for 15%, 12%, and 14% of net sales in
1999, 1998 and 1997, respectively. This same customer accounted for 24%
and 16% of outstanding trade receivables as of September 30, 1999 and
1998, respectively. Other than this customer, no base of customers in one
geographic area constitutes a significant portion of sales. The Company
performs ongoing credit evaluations of its customers and generally does
not require collateral. Allowances are provided for anticipated doubtful
accounts and sales returns.
INVENTORIES - Inventories consist of software components - primarily
software manuals, diskettes and retail packaging materials. Inventories
are valued at the lower of cost (first-in, first-out) method or market.
-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 accounted for as capital leases is recorded at the
present value of the minimum lease payments required during the lease
terms. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the related assets or over the
terms, if shorter, of the related leases. Useful lives and lease terms
range from three to seven years. The cost and the related accumulated
amortization of equipment leased under capital lease agreements were
approximately $804,000 and $746,000 at September 30, 1999, respectively,
and approximately $914,000 and $690,000 at September 30, 1998,
respectively. Amortization expense was approximately $149,000, $232,000
and $296,000 for the years ended September 30, 1999, 1998 and 1997,
respectively.
INCOME TAXES - The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." This statement requires an
asset and liability approach to accounting for income taxes based upon the
future expected values of the related assets and liabilities. Deferred
income taxes are provided for items which are recognized in different
years for tax and financial reporting purposes.
EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANIES - The excess of cost
over net assets of acquired companies is being amortized on a
straight-line basis over seven years. In addition, the net carrying amount
of the excess of cost over net assets of acquired companies is reduced if
it is probable that the estimated undiscounted operating cash flow before
depreciation and amortization from related operations will be less than
the carrying amount of the excess of cost over net assets of acquired
companies.
The Company also evaluates other long-lived assets using the same
methodology in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
equivalents, short-term investments, accounts receivable, accounts
payable, accrued expenses and deferred revenue approximate fair value
because of their short-term nature. The carrying amounts of the Company's
current and long-term obligations approximate fair value.
EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share reflect the
weighed-average number of common shares outstanding during each period.
Diluted earnings (loss) per share reflect the impact, when dilutive, of
the exercise of options using the treasury stock method. The Company's
stock options were antidilutive in 1999 and 1997. Options to purchase
approximately 43,000 shares and 164,000 shares in 1999 and 1997,
respectively, were therefore excluded from the treasury stock calculation.
FOREIGN CURRENCY TRANSLATIONS AND TRANSACTIONS - The financial statements
of foreign subsidiaries are translated into U.S. dollars in accordance
with SFAS No. 52, "Foreign Currency Translation". The related translation
adjustments are reported as a separate component of shareholders' equity
under the heading "Accumulated Other Comprehensive Income (Loss)." Gains
and losses resulting from transactions and related accounts that are
denominated in currencies other than the U.S. dollar are included in the
net operating results of the Company in accordance with SFAS No. 52.
-8-
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
STOCK-BASED COMPENSATION - The Company accounts for stock-based
compensation using the intrinsic value method in accordance with
Accounting Principles Board ("APB") Opinion No. 25. The difference between
accounting for stock-based compensation under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and SFAS No. 123, "Accounting
for Stock-Based Compensation", is disclosed in Note 10.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) - Accumulated other
comprehensive income (loss) reported in the consolidated balance sheets
consists only of foreign currency translation adjustments.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities,"
which, as amended, is effective after June 15, 2000. The new standard
requires that all companies record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting
from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. Management is currently assessing whether there will be any
impact of SFAS No. 133 on the Company's consolidated financial statements
upon adoption, which is required in October 2000.
In March 1998, the AICPA released Statement of Position ("SOP") 98-1,
"Accounting for Costs of Computer Software Developed or Obtained for
Internal Use," which requires certain expenditures made for internal use
software to be capitalized. The Company adopted the provisions of SOP 98-1
in October 1999. The adoption of these provisions did not have a material
impact on the Company's consolidated results of operations.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the current consolidated financial statement presentation.
2. DIVESTITURE
On October 9, 1997, the Company sold its Macintosh-based product line for
approximately $16,750,000 in cash, resulting in a pretax gain of
approximately $15,431,000. The assets sold consisted primarily of
inventory, property and equipment, trademarks, and the technological
rights related to the product line. In connection with the sale, the
Company wrote off certain assets and liabilities related to the product
line sold, including approximately $286,000 representing the unamortized
balance of goodwill initially recorded in a prior acquisition of a
business.
3. RESTRUCTURING AND CENTRALIZATION COSTS
Subsequent to the sale of its Macintosh-based product line, the Company
undertook a corporate-wide restructuring effort so as to centralize both
its administrative infrastructure and its development efforts for its
remaining products. The plan was approved and completed in the first
quarter of fiscal 1998. The total amount charged to first quarter
operations was approximately $2,364,000. The plan included charges for
salaries and wages and the related severance benefits for 25 terminated
employees. These charges, totaling approximately $1,884,000, have been
paid. The plan also included special one-time payments made to outside
developers associated with the centralization of the Company's development
efforts. These charges, totaling approximately $433,000, have been paid.
There was no change to the initial estimate in subsequent quarters.
During the fourth quarter of fiscal 1998, the Company approved and
completed a restructuring plan to further centralize its administrative
infrastructure and its development efforts. The restructuring plan
resulted in charges for severance benefits and related costs for 14
terminated employees. These charges, totaling approximately $315,000, have
been paid. There was no change to the initial estimate in subsequent
quarters.
-9-
3. RESTRUCTURING AND CENTRALIZATION COSTS (CONTINUED)
During the first quarter of fiscal 1999, the Company approved and
completed a restructuring plan to centralize in the United States the
quality assurance efforts for its Quetzal/SC product. The restructuring
plan resulted in charges for severance benefits and related costs for 10
terminated employees. These charges, totaling approximately $200,000, have
been paid. There was no change in the initial estimate in subsequent
quarters.
During the third quarter of fiscal 1999, the Company approved and
completed a plan to further reduce costs and focus resources on key areas
of the business. The restructuring plan resulted in charges for severance
benefits and related costs for 21 terminated employees. These charges,
totaling approximately $449,000, have been paid. There was no change in
the initial estimate in subsequent quarters.
4. INVENTORIES
Inventories consisted of the following at September 30:
1999 1998
---------- ----------
Materials ........................ $ 233,830 $ 303,426
Finished goods ................... 175,923 208,243
---------- ----------
Total ............................ $ 409,753 $ 511,669
========== ==========
5. ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
1999 1998
---------- ----------
Accrued salaries and benefits ..... $ 247,840 $ 155,694
Accrued royalties and commissions . 557,518 491,300
Accrued professional fees ......... 104,917 136,716
Accrued restructuring costs (Note 3) -- 181,344
Other ............................. 226,090 336,545
---------- ----------
Total ............................. $1,136,365 $1,301,599
========== ==========
6. COMMITMENTS
LEASES - The Company leases various facilities, equipment and automobiles
in the U.S. and overseas under noncancelable operating leases which expire
through 2017. The lease agreements generally provide for the payment of
minimum annual rentals, pro-rata share of taxes, and maintenance expenses.
Rental expense for all operating leases was approximately $1,023,000,
$1,006,000 and $803,000 for the years ended September 30, 1999, 1998 and
1997, respectively.
-10-
6. COMMITMENTS (CONTINUED)
As of September 30, 1999, minimum rental commitments under noncancelable
operating leases are as follows:
YEAR ENDING SEPTEMBER 30
2000 ............................. $ 902,701
2001 ............................. 413,456
2002 ............................. 201,500
2003 ............................. 184,642
2004 ............................. 83,960
Thereafter ....................... 993,531
----------
Total minimum lease payments ..... $2,779,790
==========
ROYALTIES - The Company is also committed to pay royalties relating to the
sales of certain software products. Royalty expense included in cost of
sales was approximately $1,637,000, $1,380,000 and $1,867,000 for the
years ended September 30, 1999, 1998 and 1997, respectively.
7. LITIGATION
The Company is not a party to any litigation that management believes will
have a material adverse effect on the Company's consolidated financial
statements or its business.
8. FINANCING ARRANGEMENTS
LINE OF CREDIT - On December 27, 1999 the Company finalized two
line-of-credit agreements which will provide for working capital
borrowings through December 27, 2000. The lines provide for maximum
borrowings up to the lesser of $3,500,000 or 50% to 90% of defined
eligible accounts receivable. Borrowings under the lines are
collateralized by substantially all assets of the Company and a maximum of
$2,000,000 is guaranteed by the Export-Import Bank of the United States.
Outstanding borrowings bear interest at the bank's prime rate plus 1%
(9.25% at September 30, 1999). The lines of credit contain customary
covenants which require, among other items, a minimum level of
consolidated tangible net worth and the maintenance of a minimum liquidity
ratio, as defined.
As of September 30, 1999 and 1998, there were approximately $1,314,000 and
$250,000, respectively, of outstanding borrowings under a previously
negotiated line. As of September 30, 1999, the Company was in default on
its covenant to maintain the minimum level of consolidated net worth under
covenants. The bank subsequently waived this default.
TERM LOAN - On February 12, 1997, the Company obtained an equipment line
of credit with a bank. The line of credit provided for maximum borrowings
up to $1,500,000. Payments of interest only were required from March 12,
1997 through February 12, 1998, at which time the equipment line was to
convert to a term loan payable. The Company fully repaid the loan on
October 16, 1997.
CAPITAL LEASE OBLIGATIONS - The Company leases certain office and computer
equipment under capital leases.
-11-
8. FINANCING ARRANGEMENTS (CONTINUED)
Future minimum lease payments under the noncancelable capital lease
obligation at September 30, 1999 are as follows:
2000 $ 42,459
2001 and thereafter 356
--------
Total minimum lease payments 42,815
Amounts representing interest (672)
--------
Present value of minimum lease commitments 42,143
Current portion (41,789)
--------
Long-term portion $ 354
========
9. INCOME TAXES
The (benefit) provision for income taxes consisted of the following for
the years ended September 30:
1999 1998 1997
---------- ---------- ----------
Current:
Federal $ (412,000) $ 580,000 $ --
State -- 10,000 --
Foreign -- 10,000 --
---------- ---------- ----------
(412,000) 600,000 --
---------- ---------- ----------
Deferred:
Federal 525,000 1,663,000 (797,000)
State 387,000 688,000 (141,000)
Foreign 22,000 (1,621,000) --
Change in valuation allowance (934,000) (730,000) 938,000
---------- ---------- ----------
-- -- --
---------- ---------- ----------
Total $ (412,000) $ 600,000 $ --
========== ========== ==========
At September 30, 1999, the Company had federal tax loss carryforwards of
approximately $1,284,000 expiring in 2019 and had approximately $3,572,000
in state tax loss carryforwards, which commence expiring in 2007. An
alternative minimum tax credit of approximately $132,000 is available for
offset against future regular federal taxes. Research and development
credits of approximately $289,000 expire beginning in 2013. In addition,
tax loss carryforwards in certain foreign jurisdictions total
approximately $6,439,000.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and
operating loss carryforwards and credits.
-12-
9. INCOME TAXES (CONTINUED)
The tax effects of significant items comprising the Company's net deferred
tax position as of September 30 were as follows:
1999 1998
---------- ----------
Deferred tax liabilities:
Depreciation and amortization $ (153,000) $ (60,000)
Prepaid expenses -- (309,000)
Accrued commissions (174,000) --
---------- ----------
(327,000) (369,000)
---------- ----------
Deferred tax assets:
Goodwill 337,000 362,000
Inventory-related items -- 100,000
Accounts and notes receivable reserves 180,000 239,000
Net operating loss carryforwards 3,351,000 2,563,000
Research and development credits 289,000 75,000
Alternative minimum tax credits 132,000 132,000
Other 130,000 57,000
---------- ----------
4,419,000 3,528,000
---------- ----------
Total 4,092,000 3,159,000
Valuation allowance (4,092,000) (3,159,000)
---------- ----------
Deferred taxes, net $ -- $ --
========== ==========
The Company has experienced significant losses from operations both
domestically and internationally over the past several years. Accordingly,
management does not believe the tax assets satisfy the realization
criteria set forth in SFAS No. 109 and has thus recorded a valuation
allowance for the entire net tax asset. The valuation allowance increased
by approximately $933,000 in 1999 primarily because of increased net
operating loss and credit carryforwards.
-13-
9. INCOME TAXES (CONTINUED)
The following table reconciles the Company's effective tax rate to the
federal statutory rate of 34% for the years ended September 30, 1999, 1998
and 1997:
1999 1998 1997
----------- ----------- -----------
(Benefit) taxes at federal statutory rate $(1,785,000) $ 1,803,000 $ (678,000)
Reversal of valuation allowances against
net operating loss carryforwards -- (2,066,000) (371,000)
Provision of valuation allowance against currently
generated net operating loss carryforwards 1,160,000 962,000 1,049,000
Benefit of research credits -- (280,000) --
Nondeductible goodwill -- 96,000 --
Other 213,000 85,000 --
----------- ----------- -----------
(Benefit) provision for income taxes $ (412,000) $ 600,000 $ --
=========== =========== ===========
10. SHAREHOLDERS' EQUITY
STOCK OPTION PLANS - The Company's four stock option plans described below
provide for granting of options and other stock rights to purchase common
stock of the Company to employees, officers, consultants, and directors
who are not otherwise employees. The options granted are exercisable as
specified at the date of grant and generally expire five to ten years from
the date of grant. Generally, options and other stock rights are granted
at exercise prices not less than fair market value at the date of the
grant.
The Company's 1987 Stock Option Plan provided for the issuance of
nonqualified or incentive stock options to employees, officers,
consultants, and directors. As of February 25, 1997, the Company may no
longer issue stock options under the 1987 Stock Option Plan pursuant to
terms of the plan.
On June 1, 1996, the Company established the 1996 Non-Employee Director
Stock Option Plan (the "1996 Director Plan") which was amended December
10, 1996. The 1996 Director Plan, as amended, provides for an initial
grant of 12,000 options to each nonemployee director elected as a member
of the Board of Directors and for the subsequent automatic annual grant of
4,000 options (at the then-current fair market value) to each member as
long as that member remains on the Board of Directors. Options granted
pursuant to this plan vest at 8.33% during each three-month period
subsequent to date of grant so as to be fully vested three years from date
of grant. Options may be granted under this plan through June 1, 2006.
On October 4, 1996, the Company established the 1996 International
Employee Non-Qualified Stock Option Plan (the "1996 International Plan").
Pursuant to this plan, nonqualified options may be granted to any employee
or consultant of any of the Company's foreign subsidiaries through October
4, 2006.
-14-
10. SHAREHOLDERS' EQUITY (CONTINUED)
On December 10, 1996, the Company established the Datawatch Corporation
1996 Stock Plan (the "1996 Stock Plan") which provides for the granting of
both incentive stock options and nonqualified options, the award of
Company common stock, and opportunities to make direct purchases of
Company common stock (collectively, "Stock Rights"), as determined by a
committee appointed by the Board of Directors. Options pursuant to this
plan may be granted through December 10, 2006 and shall vest as specified
by the Committee.
Selected information regarding the above stock option plans as of and for
the year ended September 30, 1999 is as follows:
AUTHORIZED AVAILABLE FOR
FOR GRANT FUTURE GRANT
------------ ------------
1987 Stock Option Plan 790,791 --
1996 Director Plan 72,000 4,000
1996 International Plan 200,000 17,000
1996 Stock Plan 1,000,000 80,515
------------ ------------
2,062,791 101,515
============ ============
The following table is a summary of activity for all of the Company's
stock option plans:
WEIGHTED-
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
------------ ------------
Outstanding, October 1, 1996 275,541 $ 3.56
Granted 719,820 1.98
Canceled (198,527) 4.53
Exercised (25,125) 1.09
------------
Outstanding, September 30, 1997 771,709 1.92
Granted 388,200 2.30
Canceled (181,499) 2.19
Exercised (64,251) 1.35
------------
Outstanding, September 30, 1998 914,159 2.06
Granted 518,300 1.21
Canceled (176,517) 1.82
Exercised (40,801) 1.00
------------
Outstanding, September 30, 1999 1,215,141 1.78
============ ============
Exercisable, September 30, 1999 446,210 2.21
============ ============
Exercisable, September 30, 1998 272,360 $ 2.05
============ ============
-15-
10. SHAREHOLDERS' EQUITY (CONTINUED)
The following table sets forth information regarding options outstanding
at September 30, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- -----------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
$ 0.75 3,000 10 $0.75 -- $ --
1.13-1.59 527,900 10 1.24 27,029 1.52
1.69-2.47 478,501 7 1.83 292,917 1.80
2.56 173,740 8 2.56 95,584 2.56
4.31-4.87 20,000 4 4.65 18,680 4.67
7.06 12,000 7 7.06 12,000 7.06
-------- -------- -------- -------- --------
1,215,141 8 $1.78 446,210 $2.21
======== ======== ======== ======== ========
PRO FORMA DISCLOSURE - As described in Note 1, the Company uses the
intrinsic method of valuing its stock options in accordance with APB No.
25 to measure compensation expense associated with grants of stock options
to employees and directors. Had the Company recognized compensation for
its stock options and purchase plans based on the fair value for awards
under those plans after October 1, 1995, in accordance with SFAS No. 123,
"Accounting for Stock Based Compensation," pro forma net income (loss) and
pro forma net income (loss) per share would have been as follows:
YEARS ENDED SEPTEMBER 30,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Pro forma net income (loss) .... $ (4,248,287) $ 4,410,742 $ (2,263,219)
Pro forma net income (loss)
per share:
Basic ...................... $ (0.46) $ 0.48 $ (0.25)
Diluted .................... (0.46) 0.47 (0.25)
-16-
10. SHAREHOLDERS' EQUITY (CONTINUED)
The fair values used to compute pro forma net income (loss) and net income
(loss) per share were estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
YEARS ENDED SEPTEMBER 30,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
Risk-free interest rate 5.5% 5.8% 6.7%
Expected life of option grants (years) 5.0 5.0 5.0
Expected volatility of underlying stock 75.8% 92.8% 87.2%
Expected dividend payment rate 0.0% 0.0% 0.0%
Expected forfeiture rate 0.0% 0.0% 0.0%
The weighted-average fair values of stock options granted were $0.79,
$1.71 and $1.26 during the years ended September 30, 1999, 1998 and 1997,
respectively.
The option pricing model was designed to value readily tradeable stock
options with relatively short lives. The options granted to employees are
not tradeable and have contractual lives of five to ten years. However,
management believes that the assumptions used and the model applied to
value the awards yield reasonable estimates of the fair values of the
grants made under the circumstances.
11. RETIREMENT SAVINGS PLAN
The Company has a 401(k) retirement savings plan covering substantially
all of the Company's full-time domestic employees. Under the provisions of
the plan, employees may contribute a portion of their compensation within
certain limitations. The Company, at the discretion of the Board of
Directors, may make contributions on behalf of its employees under this
plan. Such contributions, if any, become fully vested after five years of
continuous service. The Company has not made any contributions during
1999, 1998 or 1997.
12. SEGMENT INFORMATION
The following is presented in accordance with SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information." This statement
establishes new standards for defining and disclosing information about a
company's business segments and requires a company to define its segments
along its internal structure and reporting methodology. The Company has
determined that it has only one reportable segment meeting the criteria
established under SFAS No. 131. The Company's chief operating
decision maker, as defined, (determined to be the Chief Executive Officer)
does not manage any part of the Company separately, and the allocation of
resources and assessment of performance is based solely on the Company's
consolidated operations and operating results.
-17-
12. SEGMENT INFORMATION (CONTINUED)
The Company's operations are conducted in the U.S. and in Europe
(principally in the United Kingdom). The following table presents
information about the Company's geographic operations:
EUROPE
(PRINCIPALLY
DOMESTIC U.K.) ELIMINATIONS TOTAL
------------ ------------ ------------ ------------
YEAR ENDED SEPTEMBER 30, 1999
Net sales $ 12,923,636 $ 15,358,563 $ (1,110,798) $ 27,171,401
Long-lived assets 1,884,875 1,094,952 -- 2,979,827
YEAR ENDED SEPTEMBER 30, 1998
Net sales 11,635,959 14,058,471 (398,708) 25,295,722
Long-lived assets 1,731,766 1,445,478 -- 3,177,244
YEAR ENDED SEPTEMBER 30, 1997
Net sales 20,502,363 12,398,815 (853,683) 32,047,495
Long-lived assets 2,293,445 1,578,672 -- 3,872,117
Export sales aggregated approximately $5,862,000, $3,132,000 and
$3,484,000 in 1999, 1998 and 1997, respectively.
* * * * * *
Schedule VIII
DATAWATCH CORPORATION & SUBSIDIARIES
VALUATION AND QUALIFIED ACCOUNTS
- ----------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------
Description Balance at Additions Charged to Deductions from Balance at
Beginning of Period Expenses (a) Other Reserves End of Period
- ----------------------------------------------------------------------------------------------------
Year Ended September 30, 1999
- -----------------------------
Allowance-doubtful
accounts and
sales returns $352,517 $707,276 $114,589 (e) ($707,343)(b)(c) $476,039
---------------------------------------------------------------------------------
TOTAL $352,517 $707,276 $114,589 ($707,343) $476,039
=================================================================================
Year Ended September 30, 1998
- -----------------------------
Allowance-doubtful
accounts and
sales returns $227,913 $322,128 $74,540 (e) ($272,064)(b)(c) $352,517
---------------------------------------------------------------------------------
TOTAL $227,913 $322,128 $74,540 ($272,064) $352,517
=================================================================================
Year Ended September 30, 1997
- -----------------------------
Allowance-doubtful
accounts and
sales returns $73,145 $177,334 $54,138 (d)(e) ($76,704)(b) $227,913
---------------------------------------------------------------------------------
TOTAL $73,145 $177,334 $54,138 ($76,704) $227,913
=================================================================================
(a) Current year provision
(b) Doubtful accounts written off
(c) Product returns
(d) Allowance acquired through purchase of Datawatch Europe Ltd.
(e) Bad debt recoveries
EXHIBIT INDEX
(5) 2.1 Asset Purchase Agreement, dated October 9, 1997, among Datawatch
Corporation, Pole Position Software GmbH and Dr Solomon's
Software, Inc. (Exhibit 2.1)
(5) 2.2 Escrow Agreement, dated October 9, 1997, among Datawatch
Corporation, Dr Solomon's Software, Inc. and State Street Bank and
Trust Company. (Exhibit 2.2)
(1) 3.1 Restated Certificate of Incorporation of the Registrant (Exhibit
3.2)
(1) 3.2 By-Laws, as amended, of the Registrant (Exhibit 3.3)
(1) 4.1 Specimen certificate representing the Common Stock (Exhibit 4.4)
10.1 Sub-Lease, dated April 30, 1999, by and between Datawatch
Corporation and Eastman Kodak Company (filed herewith)
(1) 10.2* 1987 Stock Plan (Exhibit 10.7)
(1) 10.3* Form of Incentive Stock Option Agreement of the Registrant
(Exhibit 10.8)
(1) 10.4* Form of Nonqualified Stock Option Agreement of the Registrant
(Exhibit 10.9)
(1) 10.6 Software Development and Marketing Agreement by and between
Personics Corporation and Raymond Huger, dated January 19, 1989
(Exhibit 10.12)
(2) 10.6 Marketing Agreement, dated May 1, 1994, between WorkGroup Systems
Ltd. and Datawatch Corporation (Exhibit 10.1)
(3) 10.7 Commercial Security Agreement between Datawatch Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (Exhibit 10.23)
(3) 10.8 Commercial Security Agreement between Personics Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (Exhibit 10.24)
(4) 10.9* Executive Agreement between the Company and Marco D. Peterson,
dated April 11, 1996 (Exhibit 10.2)
10.10* Amendment No. 1 to Executive Agreement dated April 11, 1996
between the Registrant and Marco D. Peterson, dated July 15, 1999,
(filed herewith)
(4) 10.11* Executive Agreement between the Company and Bruce R. Gardner,
dated April 11, 1996 (Exhibit 10.3)
(6) 10.12 Loan Modification Agreement dated, October 31, 1996, between
Datawatch Corporation, Personics Corporation and Silicon Valley
Bank (Exhibit 10.29)
(6) 10.13* 1996 Non-Employee Director Stock Option Plan, as amended on
December 10, 1996 (Exhibit 10.30)
(6) 10.14* 1996 International Employee Non-Qualified Stock Option Plan
(Exhibit 10.31)
(7) 10.15 Amended and Restated Letter Agreement, dated February 12, 1997, by
and between Datawatch Corporation, Personics Corporation and
Silicon Valley Bank (Exhibit 10.1)
(7) 10.16 Promissory Note, dated February 12, 1997, by and between Datawatch
Corporation, Personics Corporation and Silicon Valley Bank
(Exhibit 10.2).
(8) 10.17 Loan Modification Agreement, dated October 30, 1997, by and
between Datawatch Corporation, Personics Corporation and Silicon
Valley Bank (Exhibit 10.23)
(9) 10.18* 1996 Stock Plan (Appendix A)
(10) 10.19 Loan Modification Agreement, dated January 30, 1998, by and
between Datawatch Corporation, Personics Corporation and Silicon
Valley Bank (Exhibit 10.1)
(11) 10.20 Loan Modification Agreement, dated December 18, 1998, by and
between Datawatch Corporation, Personics Corporation and Silicon
Valley Bank (Exhibit 10.19)
(12) 10.21 Loan Modification Agreement, dated March 16, 1999, by and between
Datawatch Corporation, Personics Corporation and Silicon Valley
Bank (Exhibit 10.1)
10.22 Loan Modification Agreement, dated December 27, 1999, by and
between Datawatch Corporation and Silicon Valley Bank (filed
herewith)
10.23 Intellectual Property Security Agreement, dated December 27, 1999
by and between Datawatch Corporation and Silicon Valley Bank
(filed herewith)
10.24 Export-Import Bank Loan and Security Agreement, dated December 27,
1999, by and among Datawatch Corporation, Datawatch International
Limited, Datawatch Europe Ltd, Guildsoft Limited and Silicon
Valley Bank in favor of Export-Import Bank of the United States
(filed herewith)
10.25* Contract of Employment, dated February 24, 1997, by and between
WorkGroup Systems Limited and Robert Hagger (filed herewith)
10.26* Amendment, dated July 15, 1999, to Contract of Employment by and
between WorkGroup Systems Limited and Robert Hagger (filed
herewith)
10.27 Mortgage Debenture, dated December 27, 1999, by and between
Datawatch Europe Ltd. and Silicon Valley Bank (filed herewith)
10.28 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch Europe Ltd. and Silicon Valley Bank (filed herewith)
10.29 Mortgage Debenture, dated December 27, 1999, by and between
Datawatch International Limited and Silicon Valley Bank (filed
herewith)
10.30 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch International Limited and Silicon Valley Bank (filed
herewith)
10.31 Mortgage Debenture, dated December 27, 1999, by and between
Guildsoft Limited and Silicon Valley Bank (filed herewith)
10.32 Deed of Guarantee, dated December 27, 1999, by and between
Datawatch Guildsoft Limited and Silicon Valley Bank (filed
herewith)
10.33 Export-Import Bank of the United States Working Capital Guarantee
Program Borrower Agreement, dated December 27, 1999, by and among
Datawatch Corporation, Datawatch International Limited, Datawatch
Europe Ltd, Guildsoft Limited and Silicon Valley Bank in favor of
Export-Import Bank of the United States (filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedule (filed herewith)
- --------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan or contract.
(1) Previously filed as an exhibit to Registration Statement 33-46290 on Form
S-1 and incorporated herein by reference (the number given in parenthesis
indicates the corresponding exhibit in such Form S-1).
(2) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q).
(3) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
(4) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q).
(5) Previously filed as an exhibit to Registrant's Current Report on Form 8-K
dated October 9, 1997 and incorporated herein by reference (the number
given in parenthesis indicates the corresponding exhibit in such Form
8-K).
(6) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
(7) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit
in such Form 10-Q).
(8) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1997 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
(9) Previously filed as Appendix A to the Company's definitive Proxy Statement
for the Annual Meeting of Shareholders held on March 19, 1997 and
incorporated herein by reference (the number given in parenthesis
indicates the corresponding Appendix in such definitive Proxy Statement).
(10) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit
in such Form 10-Q).
(11) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1998 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
(12) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 and incorporated herein by
reference (the number in parenthesis indicates the corresponding exhibit
in such Form 10-Q).