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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
COMMISSION FILE NUMBER: 000-19960
DATAWATCH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 02-0405716
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
175 CABOT STREET
SUITE 503
LOWELL, MASSACHUSETTS 01854
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
TELEPHONE NUMBER: (978) 441-2200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK $0.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [_] No [X]
Aggregate market value of voting stock held by non-affiliates: $6,200,395
(computed by reference to the last sales price of such common stock on December
19, 2002 as reported in the National Association of Security Dealers
consolidated trading index).
Number of shares of common stock outstanding at December 19, 2002:
2,595,246
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, 2002.
Portions of such Proxy Statement are incorporated by reference in Part III of
this report.
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PART I
ITEM 1. BUSINESS
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GENERAL
Datawatch Corporation (the "Company" or "Datawatch"), founded in 1985, is
a provider of enterprise reporting, business intelligence, report mining, data
transformation and service center software products that help organizations
increase productivity, reduce costs and gain competitive advantages. Datawatch
products are used in more than 20,000 companies, institutions and government
agencies worldwide.
The Company is a Delaware corporation, with executive offices located at
175 Cabot Street, Lowell, Massachusetts 01854 and the Company's telephone number
is (978) 441-2200.
PRODUCTS
MONARCH - Datawatch is best known for its popular desktop report mining and
business intelligence application called Monarch. More than 400,000 copies of
Monarch have been sold, with localized versions in English, French, German and
Spanish. Monarch transforms structured text files (reports, statements, etc.)
into a live database that users can sort, filter, summarize, graph and export to
other applications such as Microsoft Corporation's Excel or Access. Monarch
Professional Edition lets users extract and work with data in HTML files,
databases, spreadsheets and ODBC sources as well as reports. The Company's
Redwing product lets users extract text and tables from Adobe PDF documents.
MONARCH DATA PUMP - Monarch Data Pump is a unique data replication and migration
tool that offers a shortcut for populating and refreshing data marts and data
warehouses, for migrating legacy data into new applications and for providing
automated delivery of existing reports in a variety of formats, including Excel,
via email.
MONARCH|ES - Monarch|ES is Datawatch's web-enabled business information portal,
providing complete report management, business intelligence and content
management, and the ability to analyze data within reports, all using just a web
browser. Monarch|ES allows organizations to quickly and easily deliver business
intelligence and decision support, derived from existing reporting systems, with
no new programming or report writing. Monarch|ES automatically archives report
data and binary documents in an enterprise report and document warehouse and
provides users a unified point of entry to view, analyze and share information
over the Internet.
Q|SERVICE MANAGEMENT - Q|Service Management ("Q|SM") is a fully internet-enabled
IT support solution that can scale from a basic help desk system to a full
service center solution that incorporates workflow and network management
capabilities and provides web access to multiple databases while enabling
customers to interact via a standard browser. Q|SM, a market leader in Europe,
also provides advanced service level management capabilities, integrated change
management features, business process automation tools and one of the industry's
easiest to learn and use interfaces.
VISUAL HELP DESK - Visual Help Desk, developed and marketed by Datawatch's
Auxilor subsidiary, leverages the IBM Lotus Domino platform to provide a 100%
web-based help desk and call center solution. Cost effective and easy to deploy,
Visual Help Desk is an enterprise-wide support solution that supports an
organization's existing IT infrastructure. Visual Help Desk has the additional
ability to utilize XML-based Web Services as well as the ability to integrate
directly with IBM enterprise applications.
VORTEXML - VorteXML software quickly and easily converts any structured text
output generated from any system into valid XML for web services and more using
any DTD or XDR schema without programming. VorteXML dramatically speeds up and
reduces the cost of enabling current applications for web services, implementing
enterprise XML systems, putting legacy output on the web (including bill
presentment), and more. The VorteXML solution suite is comprised of two powerful
software products that work together: VORTEXML DESIGNER, a desktop tool that
provides users a visual interface that allows users to extract, transform and
map data from existing text documents into XML without programming; and VORTEXML
SERVER, a scalable, high-volume server that automates the extraction and
conversion of text documents into XML.
PRICING
The Company's desktop products are sold under single and multi-user
licenses. A single user license for Monarch Standard Edition is priced at $635.
Multi-user licenses for Monarch Standard Edition are priced at $250 to $399 per
user, depending upon the number of users. A single user license for Monarch
Professional Edition is priced at $765. Multi-user licenses for
2
Monarch Professional Edition are priced at $375 to $529 per user, depending upon
the number of users. A single user license for Monarch Data Pump Personal
Edition is priced at $2,495 and Monarch Data Pump Server is typically priced at
$7,500 per server. A single user license for VorteXML Designer is priced at $599
and VorteXML Server is typically priced at $7,999 per server. A single user
license for Redwing is priced at $579. A five-user license is priced at $2,199.
The Company's report enterprise and service center products are sold under
server-based licenses in addition to named-user and concurrent-user licenses. An
entry-level Monarch|ES system is priced at approximately $50,000. Typical
configurations are priced in the range of $65,000 to $250,000. An entry-level
Q|SM system is priced at approximately $35,000. Typical configurations sell in
the range of $35,000 to $250,000. An entry-level Visual Help Desk system is less
than $10,000. Typical configurations are priced in the range of $10,000 to
$40,000. Maintenance agreements, training and implementation services are sold
separately.
MARKETING AND DISTRIBUTION
Datawatch markets its products through a variety of channels in order to
gain broad market exposure and to satisfy the needs of its customers. Datawatch
believes that some customers prefer to purchase products through
service-oriented resellers, while others buy on the basis of price, purchase
convenience, and/or immediate delivery.
The Company is engaged in active direct sales of its products to
end-users, including repeat and add-on sales to existing customers and sales to
new customers. Datawatch utilizes direct mail, the Internet, telemarketing and
direct personal selling to generate its sales.
Datawatch uses a variety of marketing programs to create demand for its
products. These programs include advertising, cooperative advertising with
reseller partners, direct mail, exhibitor participation in industry shows,
executive participation in press briefings, Internet-based marketing and
on-going communication with the trade press.
The Company offers certain of its resellers the ability to return obsolete
versions of its products and slow-moving products for credit. 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
30 to 90 days from the date of purchase depending on the product. Datawatch also
offers a 30 day money-back guarantee on certain of its products sold directly to
end-users. Under the guarantee, customers may return purchased products within
the 30 days for a full refund if they are not completely satisfied. To date, the
Company has not experienced any significant product returns under its money-back
guarantee.
During fiscal 2002, one distributor represented approximately 18% of the
Company's total revenue. No other customer accounted for more than 10% of the
Company's total revenue in fiscal 2002. Datawatch's revenues from outside of the
U.S. are primarily the result of sales through the direct sales force of its
wholly owned subsidiary, Datawatch International Limited and its subsidiaries
("Datawatch International") and through international resellers. Such
international sales represented approximately 42%, 47% and 43% of the Company's
total revenue for fiscal 2002, 2001 and 2000, respectively. See Note 12 to
Consolidated Financial Statements which appear elsewhere in this Annual Report
on Form 10-K.
RESEARCH AND DEVELOPMENT
The Company believes that timely development of new products and
enhancements to its existing products is essential to maintain strong positions
in its markets. Datawatch intends to continue to invest sizeable effort in
research and product development, particularly in the area of computing
technology trends and the Internet. The Company's product development efforts
are primarily focused on the Monarch|ES, Q|Service Management ("Q|SM"), and
Visual Help Desk products and their related core technologies. Additional
efforts are devoted to the expansion of the feature set of the Monarch product
and enhancing the functionality of its XML tool, VorteXML, which automates the
process of generating XML output from reports or structured text input.
Datawatch's product development efforts are conducted through in-house
software development engineers and by external developers. External developers
are compensated either through royalty or commission payments based on product
sales levels achieved or under contracts based on services provided. Datawatch
has established long-term relationships with several development engineering
firms, providing flexibility, stability and reliability in its development
process.
Datawatch's product managers work closely with developers, whether
independent or in-house, to define product specifications. The initial concept
for a product originates from this cooperative effort. The developer is
generally responsible
3
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 a contractual agreement with the independent developer of
Monarch and VorteXML which requires that source code be placed into escrow. The
principal developer for these products is also bound by contractual commitments
which require the developer's continuing involvement in product maintenance and
enhancement. The Company has been granted exclusive worldwide rights to Monarch
and VorteXML with a stated term expiring in the year 2009. Monarch and VorteXML
are trademarks of Datawatch Corporation.
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
the Monarch Data Pump (Personal and Server Editions), Monarch|ES, Q|SM, and
Visual Help Desk products.
BACKLOG
The Company's software products are generally shipped within three
business days of receipt of an order. Accordingly, the Company does not believe
that backlog for its products is a meaningful indicator of future business. The
Company does maintain a backlog of services related to its Monarch|ES, Q|SM, and
Visual Help Desk business. While this services backlog will provide future
revenue to the Company, the Company believes that it is not 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 BMC Software, Actuate Corporation, Quest
Software Inc. and others that have substantially greater financial, marketing
and technological resources than the Company. Competition in the industry is
likely to intensify as current competitors expand their product lines and as new
competitors enter the market.
PRODUCT PROTECTION
Although Datawatch does not generally own patents on its software
technologies, it relies on a combination of trade secret, copyright and
trademark laws, nondisclosure and other contractual agreements and technical
measures to protect its rights in its products. Despite these precautions,
unauthorized parties may attempt to copy aspects of Datawatch's products or to
obtain and use information that Datawatch regards as proprietary. Patent
protection is not considered crucial to Datawatch's success. Datawatch believes
that, because of the rapid pace of technological change in the software
industry, the legal protections for its products are less significant than the
knowledge, ability and experience of its employees and developers, the frequency
of product enhancements and the timeliness and quality of its support services.
Datawatch believes that none of its products, trademarks and other proprietary
rights infringe on the proprietary rights of third parties, but there can be no
assurance that third parties will not assert infringement claims against it or
its developers in the future.
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 December 20, 2002, Datawatch had 91 full-time and 8 contract or
temporary employees, including 33 engaged in marketing, sales, and customer
service; 28 engaged in product consulting, training and technical support; 12
engaged in product management, development and quality assurance; 23 providing
general, administrative, accounting, and IT functions; and 3 engaged in software
production and warehousing.
4
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 20,492 square feet of leased
office space in Lowell, Massachusetts. The lease expires in January 2006. In
addition, the Company's Auxilor subsidiary leases 1,816 square feet of office
space in Torrance, California with a lease expiration in September 2004. The
Company maintains small offices in the United Kingdom, Germany, France and
Australia.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not a party to any litigation that management believes will
have a material adverse effect on the Company's consolidated financial
condition, results of operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of the Registrant's security holders
during the last quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and titles of the executive officers of the Company as of
December 19, 2002 are as follows:
Robert W. Hagger 54 President, Chief Executive Officer and Director
John H. Kitchen, III 47 Senior Vice President of Desktop & Server
Solutions and Secretary
H. Calvin G. MacKay 58 Senior Vice President for Enterprise Software
Alan R. MacDougall 54 Vice President of Finance, Chief Financial
Officer, Treasurer and Assistant Secretary
Officers are elected by, and serve at the discretion of, the Board of Directors.
ROBERT W. HAGGER, President, Chief Executive Officer and Director. Mr.
Hagger assumed the positions of President, Chief Executive Officer and Director
on July 9, 2001. Prior thereto, and since November 1, 1997, Mr. Hagger was
Senior Vice President of International Operations of the Company. Prior to that
and since March 1997, Mr. Hagger was Managing Director of the Company's
wholly-owned subsidiary Datawatch International Limited. Prior to joining
Datawatch, from 1993 to March 1997, Mr. Hagger was founder and Managing Director
of Insight Strategy Management Ltd. Prior to that he was Managing Director of
Byrne Fleming Ltd.
JOHN H. KITCHEN, III, Senior Vice President of Desktop & Server Solutions
and Secretary. Mr. Kitchen assumed the position of Senior Vice President of
Desktop & Server Solutions on July 9, 2001. Prior thereto, and since July 2000,
Mr. Kitchen was the Company's Vice President of Marketing. Prior to July 2000,
and since March 1998, Mr. Kitchen was the Company's Director of Marketing. Prior
to that, Mr. Kitchen was a marketing consultant to the Company.
H. CALVIN G. MACKAY, Senior Vice President for Enterprise Software. Mr.
MacKay assumed the position of Senior Vice President for Enterprise Software on
July 9, 2001 and was elected an executive officer of the Company on December 1,
2001. Prior thereto, and since January 2001, Mr. MacKay was a marketing and
sales consultant to the Company's wholly-owned subsidiary, Datawatch
International Limited. Prior to January 2001, and since December 1998, Mr.
MacKay acted as an advisor and consultant to several technology companies. From
June 1996 to October 1998, Mr. MacKay served as Principal of Renior and
Rembrandt Consulting Ltd., a management consulting firm, and as the Chief
Executive Officer of the firm's South East Asia operations.
ALAN R. MACDOUGALL, Vice President of Finance, Chief Financial Officer,
Treasurer and Assistant Secretary. Mr. MacDougall assumed the positions of Vice
President of Finance, Chief Financial Officer Treasurer and Assistant Secretary
on December 16, 2000. Prior thereto, and since October 1997, Mr. MacDougall was
the Company's Corporate Controller. Prior to October 1997, and since June 1994,
Mr. MacDougall was the Company's Director of Operations.
5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
- ---------------------------------------------------------------------------
MATTERS
- -------
The Registrant's common stock is listed and traded on the Nasdaq SmallCap
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, 2002 High Low
---------------------------------
4th Quarter 4.000 2.050
3rd Quarter 4.190 2.040
2nd Quarter 2.900 1.180
1st Quarter 2.500 1.050
For the Year Ended Common Stock
September 30, 2001 High Low
---------------------------------
4th Quarter 2.610 1.000
3rd Quarter 3.915 1.620
2nd Quarter 6.751 1.688
1st Quarter 7.032 1.266
There are approximately 156 shareholders of record as of December 19,
2002. The Company believes that the number of beneficial holders of common stock
exceeds 2,000. The last reported sale of the Company's common stock on December
19, 2002 was at $3.14.
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.
The information set forth under the caption "Equity Compensation Plans"
appearing in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders for the fiscal year ended September 30, 2002 is incorporated herein
by reference.
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
In fiscal 2001, the Company sold its wholly owned subsidiary, Guildsoft
Limited ("Guildsoft"). Guildsoft was a component of the Company with clearly
distinguishable operations and cash flows. Guildsoft's activities are now
entirely eliminated from ongoing operations and the Company has no continuing
involvement with Guildsoft's operations. As a result, the Company has presented
Guildsoft as a discontinued operation in all periods presented herein.
During the fourth quarter of fiscal 2001, the Company approved and
completed a corporate-wide restructuring plan in an effort to reduce costs and
centralize administrative operations. The restructuring plan resulted in charges
of approximately $763,000 for severance benefits and related costs for 42
terminated employees. Of these charges, $377,000 was paid during fiscal 2001
with the balance of $386,000 accrued as of September 30, 2001. During fiscal
2002 an additional $217,000 was paid leaving a balance of $169,000 accrued as of
September 30, 2002, which is expected to be fully paid by January 2005. During
the second quarter of fiscal 2002, the Company approved and completed an
additional restructuring undertaken to further improve efficiencies and reduce
costs, which resulted in an additional restructuring charge of approximately
$88,000 for severance benefits and related costs for 4 terminated employees.
These charges were fully paid during fiscal 2002.
In November 2001, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board released EITF Issue 01-9, "Accounting for
Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products." EITF 01-9 requires that certain amounts paid by a vendor for
advertising and marketing to a customer be recorded as a reduction of revenue,
when certain conditions are met. The Company previously accounted for payments
of this type to certain distributors as marketing expenses. The Company has
adopted EITF 01-9 in 2002, and, as required, reclassified these payments as a
reduction of revenue in all periods presented herein. The amounts reclassified
from marketing expenses to a reduction in revenue in 2002, 2001, and 2000
approximated $77,000, $81,000 and $105,000, respectively.
6
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, 2002
are derived from the Consolidated Financial Statements of the Company. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes which appears elsewhere in this
Annual Report on Form 10-K.
Statements of Operations Data
Years Ended September 30, 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Revenue
PC-based Products $ 19,440,743 $ 18,321,251 $ 22,368,637 $ 23,552,764 $ 22,299,352
Macintosh-based Products -- -- -- -- 172,254
------------ ------------ ------------ ------------ ------------
Total Revenue 19,440,743 18,321,251 22,368,637 23,552,764 22,471,606
Costs and Expenses 18,499,009 23,638,923 23,329,304 27,723,971 32,782,443
------------ ------------ ------------ ------------ ------------
Income (Loss) from Operations 941,734 (5,317,672) (960,667) (4,171,207) (10,310,837)
Gain on Sale of Product Line -- -- -- -- 15,431,253
------------ ------------ ------------ ------------ ------------
Income (Loss) from
Continuing Operations 846,379 (5,385,051) (1,002,097) (3,716,637) 4,882,807
Discontinued Operations
Income (Loss) from Guildsoft
operations, net -- (143,856) 12,468 (130,544) (178,811)
Gain on sale of Guildsoft 17,096 413,013 -- -- --
------------ ------------ ------------ ------------ ------------
Income (Loss) from
Discontinued Operations 17,096 269,157 12,468 (130,544) (178,811)
Net Income (Loss) $ 863,475 $ (5,115,894) $ (989,629) $ (3,847,181) $ 4,703,996
============ ============ ============ ============ ============
Income (Loss) from Continuing
Operations per Common Share:
Basic $ 0.33 $ (2.24) $ (0.49) $ (1.83) $ 2.42
Diluted $ 0.31 $ (2.24) $ (0.49) $ (1.83) $ 2.36
Net Income (Loss) per Common Share:
Basic $ 0.34 $ (2.13) $ (0.48) $ (1.89) $ 2.33
Diluted $ 0.32 $ (2.13) $ (0.48) $ (1.89) $ 2.27
Balance Sheet Data
September 30, 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Total Assets $ 9,454,466 $ 9,423,894 $ 13,572,817 $ 14,780,755 $ 18,332,215
Working Capital 2,022,702 596,136 4,339,237 4,838,234 8,503,428
Long-Term Obligations 12,795 126,121 -- 354 44,190
Shareholders' Equity 4,060,212 2,985,289 6,866,891 7,817,707 11,636,482
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The following discussion and analysis is qualified by reference to, and
should be read in conjunction with, the Consolidated Financial Statements of
Datawatch and its subsidiaries which appear elsewhere in this Annual Report on
Form 10-K.
GENERAL
Datawatch is engaged in the design, development, manufacture, marketing,
and support of business computer software primarily for the Windows-based
market. Its products address the enterprise reporting, business intelligence,
data replication and help desk markets.
Datawatch's principal products are: Monarch, a report mining and business
intelligence application that lets users extract and manipulate data from ASCII
report files or HTML files produced on any mainframe, midrange, client/server or
PC system; Monarch Data Pump, a data replication and migration tool that offers
a shortcut for populating and refreshing data marts and data warehouses, for
migrating legacy data into new applications and for providing automated delivery
of reports in a variety of formats via email; Monarch|ES, a web-enabled business
information portal, allows an organization to quickly deliver business
intelligence and decision support derived from existing reporting systems with
no new programming or report writing; Q|Service Management ("Q|SM"), a fully
internet-enabled IT support solution that incorporates workflow and network
management capabilities and provides web access to multiple databases via a
standard browser; Visual Help Desk, a web-based help desk and call center
solution operating on the IBM Lotus Domino platform, acquired in the Auxilor,
Inc. transaction described below; VorteXML, a data transformation product for
the emerging XML market that easily and quickly converts structured text output
from any system into valid XML for web services and more using any DTD or XDR
schema without programming; and Redwing , a plug-in for Adobe Acrobat that lets
users extract text and tables from Adobe PDF documents.
On October 16, 2002, Datawatch acquired 100% of the shares of Auxilor,
Inc., in exchange for $127,000 in cash and 14,764 shares of Datawatch common
stock valued at approximately $50,000. The purchase agreement also includes an
earn-out clause, which provides for a cash payout equal to 10% of the sales of
Auxilor products in fiscal 2003. Due to the timing of the acquisition, Visual
Help Desk, as an Auxilor product, is not included in the results of operations
and financial data for the fiscal year ended September 30, 2002.
CRITICAL ACCOUNTING POLICIES
In the preparation of financial statements and other financial data, management
applies certain accounting policies to transactions that, depending on choices
made by management, can result in various outcomes. In order for a reader to
understand the following information regarding the financial performance and
condition of the Company, an understanding of those accounting policies is
important. The Company's accounting policies are set forth in the Notes to our
Consolidated Financial Statements, which are included in Item 14. Certain of
those policies are comparatively more important to our financial results and
condition than others. The policies that we believe are most important for a
reader's understanding of the financial information are described below.
Revenue Recognition, Allowance for Bad Debts and Returns Reserve
Datawatch generally recognizes revenue from the sale of software products
at the time of shipment, providing there are no uncertainties surrounding
product acceptance, the fee is fixed and determinable, collection is considered
probable, persuasive evidence of the arrangement exists and there are no
significant obligations remaining. For enterprise solutions products, the
Company applies the residual method in determining revenue from license sales.
Revenue from implementation, integration, training and consulting services is
recognized as the services are performed. Revenue from post-contract customer
support services is deferred and recognized ratably over the contract period
(generally one year). Post-contract customer support includes technical support
and rights to unspecified software upgrades and enhancements on a when-and-if
available basis.
The Company's software products are sold under warranty against certain
defects in material and workmanship for a period of 30 to 90 days from the date
of purchase. Certain software products, including desktop versions of Monarch,
Monarch Data Pump, VorteXML and Redwing 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 distributors the ability to return
obsolete versions of its products and slow-moving products for refund or credit.
Reserves are provided for potential returns under these arrangements based upon
historical experience and anticipated exposures. Returns reserves are primarily
calculated by accruing a fixed amount each period, assessing the level of the
reserve at the end of the period against anticipated returns and adjusting the
reserve as needed. During the year ended September 30, 2002, $255,000 was
accrued for the returns reserve and approximately $215,000 in returns were
applied against the reserve. This compares to $300,000 accrued for the returns
reserve and
8
approximately $429,000 in returns applied against the returns reserve for the
year ended September 30, 2001. At September 30, 2002, the returns reserve was
approximately $285,000, with 70% related to specific accounts, as compared to
approximately $246,000, with 62% related to specific accounts, at September 30,
2001.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of customers to make required payments. The Company
analyzes accounts receivable and the composition of the accounts receivable
aging, historical bad debts, customer creditworthiness, current economic trends,
foreign currency exchange rate fluctuations, and changes in customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. Based
upon the analysis and estimates of the uncollectibility of its accounts
receivable, the Company records an increase in the allowance for doubtful
accounts when the prospect of collecting a specific account receivable becomes
doubtful. Actual results could differ from the allowances for doubtful accounts
recorded, and this difference may have a material effect on our financial
position and results of operations. The Company recorded provisions for doubtful
accounts of $48,000, $266,000 and $147,000 for the years ended September 30,
2002, 2001 and 2000, respectively, which have been included in our statements of
operations. As of September 30, 2002 and 2001, we recorded allowances for bad
debts of $259,000 and $317,000, respectively.
Capitalized Software Development Costs
The Company capitalizes certain software development costs as well as
purchased software upon achieving technological feasibility of the related
products. For the years ended September 30, 2002, 2001, and 2000, the Company
capitalized software development costs and purchased software totaling $272,000,
$803,000 and $197,000, respectively. For the years ended September 30, 2002,
2001, and 2000 the Company capitalized $0, $496,000 and $0 of software
development costs, respectively. For the years ended September 30, 2002, 2001
and 2000, the Company purchased and capitalized software amounting to
approximately $272,000, $307,000, and $197,000, respectively. Software
development costs incurred and software purchased prior to achieving
technological feasibility are charged to research and development expense as
incurred. Commencing upon initial product release, capitalized costs are
amortized to cost of software licenses 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 the years ended September 30,
2002, 2001 and 2000, amortization of these costs was approximately $394,000,
$358,000 and $337,000, respectively.
Foreign Currency Translations
Assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at rates in effect at each balance sheet date. Revenues, expenses and
cash flows are translated into U.S. dollars at average rates prevailing when
transactions occur. The related translation adjustments are reported as a
separate component of shareholders' equity under the heading "Accumulated Other
Comprehensive Income (Loss)." Accumulated other comprehensive loss reported in
the consolidated balance sheets consists only of foreign currency translation
adjustments. At September 30, 2002 and September 30, 2001, the accumulated
foreign currency translation loss totaled approximately $516,000 and $613,000,
respectively. The Company does not currently engage in foreign currency hedging
activities.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2002 AS COMPARED TO
---------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 2001
------------------------------------
Revenue from continuing operations for the fiscal year ended September 30,
2002 was $19,441,000 which represents an increase of $1,120,000 or approximately
6% from revenue of $18,321,000 for the fiscal year ended September 30, 2001. For
fiscal 2002 Monarch, Q|SM, and Monarch|ES sales accounted for 59%, 26% and 15%
of total revenue, respectively, as compared to 54%, 30% and 16%, respectively,
for fiscal 2001.
Software license revenue for the fiscal year ended September 30, 2002 was
$13,814,000 or approximately 71% of total revenue, as compared to $12,754,000 or
approximately 70% of total revenue for the fiscal year ended September 30, 2001.
This represents an increase of $1,060,000 or approximately 8% from fiscal 2001
to fiscal 2002. In fiscal 2002, Monarch family license sales (including Data
Pump, VorteXML and Redwing) increased by $1,545,000 or 17% when compared to
fiscal 2001, which accounts for an increase of approximately 12% in total
software license revenue. Monarch software license sales to the Company's two
largest distributors increased by 56% in fiscal 2002, as compared to fiscal
2001, which accounts for the increase in Monarch license revenue. The increase
in Monarch license sales was partially offset by decreases in Monarch|ES and
Q|SM license sales of $361,000 and $123,000, or approximately 19% and 8%,
respectively, when compared to fiscal 2001, which account for a decrease in
total software license revenue of approximately 4%. The Company attributes the
decreases in Monarch|ES and Q|SM sales to a reduction in corporate spending on
high-ticket software solutions due to an uncertain
9
worldwide economy and continuing reactions to the events of September 11, 2001
and ongoing concerns regarding the possible effects of war and terrorism.
Maintenance and services revenue for the fiscal year ended September 30,
2002 was $5,627,000 or approximately 29% of total revenue, as compared to
$5,567,000 or approximately 30% of total revenue for the fiscal year ended
September 30, 2001. This represents an increase of $60,000 or approximately 1%
from fiscal 2001 to fiscal 2002. This increase is primarily attributable to an
increase in Monarch|ES maintenance and services sales of $186,000 or
approximately 18%, which accounts for an increase of approximately 3% in total
maintenance and services revenue. This was partially offset by a decreases in
Q|SM and Monarch maintenance and services sales of $108,000 and $19,000 or
approximately 3% and 2%, respectively, which account for a decrease of 2% in
total maintenance and services revenue.
Cost of software licenses for the fiscal year ended September 30, 2002 was
$2,795,000 or approximately 20% of software license revenues, as compared to
$3,062,000 or approximately 24% of software license revenues for the fiscal year
ended September 30, 2001. This decrease of $267,000 is primarily attributable to
a fiscal 2001 charge of $265,000 in additional royalties expense which resulted
from refinement of the Company's estimated royalty obligations.
Cost of maintenance and services for the fiscal year ended September 30,
2002 was $2,679,000 or approximately 48% of maintenance and service revenues, as
compared to $3,565,000 or approximately 64% of maintenance and service revenues,
for the fiscal year ended September 30, 2001. This decrease of $886,000 is
primarily attributable to the reductions in services headcount and related
expenses resulting from the restructuring plans implemented in the fourth
quarter of fiscal 2001 and the second quarter of fiscal 2002, and a reduction in
the expenses for third-party consultants hired to supplement the employee
workforce in the performance of revenue generating consulting services during
periods of excess demand. The realized cost savings from the reduction in
headcount and related expenses was $676,000, or 76% of the decrease, and
$167,000, or 19% of the decrease, was from the reduction in the expenses for
third-party consultants.
Sales and marketing expenses were $6,897,000 for the fiscal year ended
September 30, 2002, which represents a decrease of $1,578,000, or approximately
19%, from $8,475,000 for the fiscal year ended September 30, 2001. This decrease
is attributable to reduced marketing expenses for direct mail campaigns and
trade shows, and reductions in headcount and related expenses resulting from the
restructuring plan implemented in the fourth quarter of fiscal 2001, partially
offset by an increase in other sales and marketing expenses. The realized cost
savings from reduced expenses for direct mail campaigns and tradeshows was
$1,056,000. Savings of $585,000 were realized from the reduction in marketing
and sales headcount and related expenses.
Engineering and product development expenses were $1,276,000 for the
fiscal year ended September 30, 2002, which represents a decrease of $726,000 or
approximately 36% from $2,002,000 for the fiscal year ended September 30, 2001.
This decrease is primarily attributable to reduced expenses for maintenance of
the older versions of the Company's help desk and asset management products by
external developers and reduced headcount and related expenses resulting from
the restructurings which took place in the fourth quarter of fiscal 2001 and the
second quarter of fiscal 2002. The realized cost savings from the reduction in
expenses for the maintenance of the help desk and asset management products was
$390,000, or 54% of the decrease, and $297,000, or 41% of the decrease, was from
the reduction in headcount and related expenses. During fiscal 2002, the Company
capitalized $272,000 in purchased software and software development costs. This
compares to $803,000 capitalized in fiscal 2001. The higher amount in
capitalized costs in fiscal 2001,as compared to fiscal 2002, is due to the
development of the Q|SM product and a new major version of Monarch|ES developed
and released during fiscal 2001.
General and administrative expenses were $4,764,000 for the fiscal year
ended September 30, 2002, which represents a decrease of $1,008,000 or
approximately 17% from $5,772,000 for the fiscal year ended September 30, 2001.
This decrease is primarily attributable to the reductions in headcount and
related expenses resulting from the restructuring plans implemented during the
fourth quarter of fiscal 2001, savings in professional services expenses
provided by non-related companies, and reduced bad debt expense. The realized
cost savings from savings in professional services expense was $404,000, or 40%
of the decrease, while $332,000, or 33% of the decrease, was from the reduction
in headcount and related expenses, and $82,000, or 8% of the decrease, was due
to reduced bad debt expense.
As a result of the foregoing, the gain from continuing operations for the
year ended September 30, 2002 was $846,000, which compares to a loss from
continuing operations of $5,385,000 for the year ended September 30, 2001. The
Company recorded a benefit for income taxes of $25,000 in fiscal 2001 due to tax
refunds received in the year. In fiscal 2002, no benefit or provision for income
taxes was recorded due to the availability of loss carryforwards for which
valuation allowances had previously been provided. At September 30, 2002, the
Company had federal tax loss carryforwards available to offset future taxable
income of approximately $7 million; a full valuation reserve has been
established against these assets as uncertainty continues to exist regarding the
Company's ability to generate sufficient future taxable income for the
utilization of these losses.
10
In September 2001, Datawatch sold the operations of Guildsoft Limited, a
United Kingdom distribution subsidiary, to a third party. The sale resulted in
gross proceeds of approximately $1,179,000 and a gain of approximately $413,000.
The operations of Guildsoft Limited have been reflected as a discontinued
operation in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144 (See Notes 1 and 2 of the Consolidated Financial Statements
included elsewhere herein). Income from discontinued operations for the year
ended September 30, 2002 was $17,000 which compares to income from discontinued
operations of $269,000 for the year ended September 30, 2001. Income for
discontinued operations in 2002 was the result of the finalization of the sales
price for Guildsoft with the buyer and additional proceeds received by the
Company.
Net income for the year ended September 30, 2002 was $863,000, which
compares to a net loss of $5,116,000 for the year ended September 30, 2001.
FISCAL YEAR ENDED SEPTEMBER 30, 2001 AS COMPARED TO
---------------------------------------------------
FISCAL YEAR ENDED SEPTEMBER 30, 2000
------------------------------------
Revenue from continuing operations for the fiscal year ended September 30,
2001 were $18,321,000 which represents a decrease of $4,048,000 or approximately
18%, from revenue of $22,369,000 for the fiscal year ended September 30, 2000.
For fiscal 2001 Monarch, Q|SM and Monarch|ES sales accounted for 54%, 30% and
16% of total revenue, respectively, as compared to 55%, 30%, and 15%,
respectively, for fiscal 2000.
Software license revenue for the fiscal year ended September 30, 2001 was
$12,754,000 or approximately 70% of total revenue, as compared to $16,849,000 or
approximately 75% of total revenue for the fiscal year ended September 30, 2000.
This represents a decrease of $4,095,000 or approximately 24% from fiscal 2000
to fiscal 2001. In fiscal 2001, Monarch family license sales (including Data
Pump, VorteXML and Redwing) decreased by $2,562,000 or 22% when compared to
fiscal 2000, which accounts for an decrease of approximately 15% in total
software license revenue. Monarch family software license sales to the Company's
largest distributor decreased by approximately 40% during the fiscal year ended
September 30, 2001, even though sales of the product by this distributor
increased by approximately 4% during this period. Decreasing sales to this
distributor accounted for a decrease of approximately 14% in Monarch family
software license revenues and a decrease in total software license revenues of
approximately 10%. Also, revenues for the fiscal year ended September 30, 2000
include a one-time sale of paid-up Monarch OEM licenses totaling $520,000. This
accounts for a decrease in Monarch family software license revenues of
approximately 4% and a decrease in total software license revenues of
approximately 3%. The Company attributes the balance of the decrease in Monarch
family product revenue to a reduction in corporate spending due to a weaker
worldwide economy in fiscal 2001 as compared to fiscal 2000. Q|SM and Monarch|ES
software license revenues decreased by $891,000 and $643,000, or approximately
36% and 25%, respectively, from fiscal 2000 to fiscal 2001. The Company
attributes the decreases in Q|SM and Monarch|ES license revenues to a reduction
in corporate spending due to a weaker worldwide economy in fiscal 2001 as
compared to fiscal 2000.
Maintenance and services revenue for the fiscal year ended September 30,
2001 was $5,567,000 or approximately 30% of total revenue, as compared to
$5,519,000 or approximately 25% of total revenue for the fiscal year ended
September 30, 2000. This represents an increase of $48,000 or approximately 1%
from fiscal 2000 to fiscal 2001. This increase is primarily attributable to
increases in Monarch|ES and Monarch maintenance and services sales of $389,000
and $171,000 or approximately 58% and 29%, respectively, which account for an
increase of approximately 10% in total maintenance and services revenue. This
was offset by a decrease in Q|SM maintenance and services sales of $511,000, or
approximately 12%, which accounts for a decrease of 9% in total maintenance and
services revenue. The Company attributes the decrease in Q|SM maintenance and
services revenues to a reduction in corporate spending due to a weaker worldwide
economy in fiscal 2001 as compared to fiscal 2000.
Cost of software licenses for the fiscal year ended September 30, 2001 was
$3,062,000 or approximately 24% of software license revenue as compared to
$3,171,000, or approximately 19% of software license revenue, for the fiscal
year ended September 30, 2000. During the fourth quarter of fiscal 2001 the
Company recorded an amount of $265,000 in additional royalties expense resulting
from refinement of the Company's estimated royalty obligations. Additionally,
there was an increase of $187,000 in the cost of software licenses for
Monarch|ES, resulting primarily from increased royalties and amortization of
capitalized development and purchased software costs in fiscal 2001 as compared
to fiscal 2000. Together the increases in Monarch royalty expense and Monarch|ES
cost of software licenses account for a 4% increase in the cost of software
licenses as a percentage of software license revenue.
Cost of maintenance and services for the fiscal year ended September 30,
2001 was $3,565,000 or approximately 64% of maintenance and service revenue, as
compared to $3,984,000, or approximately 72% of maintenance and service revenue,
for
11
the fiscal year ended September 30, 2000. This decrease of $419,000 is
attributable to decreased headcount and related expenses for consulting and
technical support personnel in fiscal 2001 compared to fiscal 2000.
Sales and marketing expenses were $8,475,000 for the fiscal year ended
September 30, 2001, which represents an increase of $319,000 or approximately 4%
from $8,156,000 for the fiscal year ended September 30, 2000. This increase is
attributable to increased direct mail expenses of $342,000 related to the
marketing of Monarch, partially offset by a small decrease in other marketing
expenses.
Engineering and product development expenses were $2,002,000 for the
fiscal year ended September 30, 2001, which represents an increase of $165,000
or approximately 9% from $1,837,000 for the fiscal year ended September 30,
2000. During fiscal 2001, the company capitalized $803,000 in purchased software
and software development costs. This compares to $197,000 capitalized in fiscal
2000. Both the increase in engineering and product development expenses and the
increase in capitalized costs are the result of the development of the Q|SM
product and a new major version of Monarch|ES.
General and administrative expenses were $5,772,000 for the fiscal year
ended September 30, 2001, which represents a decrease of $409,000 or
approximately 7% from $6,181,000 for the fiscal year ended September 30, 2000.
This decrease is attributable to a decrease in international general and
administrative expenses of $482,000, or approximately 19%. This was partially
offset by a 2% increase in domestic general and administrative expenses.
As a result of the foregoing the Company recorded a loss from continuing
operations for the fiscal year ended September 30, 2001 of $5,385,000, which
compares to a loss from continuing operations of $1,002,000 for the fiscal year
ended September 30, 2000. The Company recorded a benefit for income taxes of
$25,000 in fiscal 2001 due to tax refunds received in the year. In fiscal 2000,
no benefit for income taxes was recorded owing to the Company's conclusion that
the realization of its net operating loss carryforwards was unlikely to occur.
In September 2001, Datawatch sold the operations of Guildsoft Limited, a
United Kingdom distribution subsidiary, to a third party. The sale resulted in
gross proceeds of approximately $1,179,000 and a gain of approximately $413,000.
The operations of Guildsoft Limited have been reflected as a discontinued
operation in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144 (See Notes 1 and 2 of the Consolidated Financial Statements
included elsewhere herein). Income from discontinued operations for the year
ended September 30, 2001 was $269,000 which compares to income from discontinued
operations of $12,000 for the year ended September 30, 2000.
Net loss for fiscal 2001 was $5,116,000, which compares to a net loss of
$990,000 for fiscal 2000.
OFF BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT
LIABILITIES AND COMMITMENTS
The Company leases various facilities, equipment and automobiles in the
U.S. and overseas under noncancelable operating leases which expire through
2006. 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 $810,000, $906,000 and $912,000 for the
years ended September 30, 2002, 2001 and 2000, respectively.
As of September 30, 2002, minimum rental commitments under noncancelable
operating leases are as follows:
Year Ending September 30,
2003 $ 643,955
2004 419,989
2005 364,110
2006 119,784
Thereafter --
----------
Total minimum lease payments $1,547,838
==========
The Company is also committed to pay royalties ranging from 7% to 50% on
revenue generated by the sale of certain licensed software products. Royalty
expense included in cost of software licenses was approximately $1,802,000,
$1,925,000 and $1,894,000 for the years ended September 30, 2002, 2001 and 2000,
respectively. The Company is not obligated to pay any minimum royalty amounts.
12
On October 16, 2002, the Company acquired 100% of the shares of Auxilor,
Inc. The purchase agreement includes an earn-out clause, which provides for a
cash payout equal to 10% of the sales of Auxilor products in fiscal 2003. In
addition, Auxilor has the following rental commitments under noncancelable
operating leases:
Year Ending September 30,
2003 $ 53,974
2004 53,611
2005 4,184
Thereafter --
--------
Total minimum lease payments $111,769
========
LIQUIDITY AND CAPITAL RESOURCES
The Company had net income of $863,000 for the year ended September 30,
2002 as compared to the significant net losses in each of the prior two years.
In addition, during fiscal 2002 approximately $3,072,000 of cash was provided by
the Company's operations as compared to approximately $388,000 and $156,000 of
cash used in operations during fiscal 2001 and 2000, respectively. During the
fourth quarter of the fiscal year ended September 30, 2001 and the second
quarter of the fiscal year ended September 30, 2002, management took a series of
steps to reduce operating expenses and to restructure operations in response to
the net losses. See Note 3 to the Consolidated Financial Statements included
elsewhere herein for a further discussion of the reductions in the workforce as
well as other restructuring actions taken to reduce operating expenses.
As of September 30, 2002 and 2001 the Company had two line-of-credit
agreements, one domestic and the other international, with a single bank (the
"credit lines"). At September 30, 2002 the Company had no borrowings outstanding
against the credit lines. At September 30, 2001 the company had outstanding
borrowings against the credit lines of $635,000. Borrowings under the credit
lines bore interest at the bank's prime rate plus 2% (6.75%) at September 30,
2002 and prime plus 1% (7%) at September 30, 2001, and were collateralized by
substantially all assets of the Company. The credit lines contain customary
covenants which require, among other items, the Company maintain a minimum level
of consolidated tangible net worth. As of September 30, 2002, the Company had no
borrowings outstanding and approximately $507,000 in available borrowing under
the lines.
On November 15, 2002, the Company renewed the domestic bank line-of-credit
for a period to expire on October 29, 2003 under similar terms and conditions
except that the credit line will bear interest at the bank's prime rate plus
3/4%. The Company has no plans to renew or extend its international credit line
which expired October 1, 2002. The renewed domestic credit line provides for
maximum borrowings of the lesser of $1,500,000 or 70% of defined eligible
receivables.
Management believes that by continuing to control operating expenses and
capital expenditures and with the borrowings available under its line of credit,
the Company will have sufficient liquidity through at least September 30, 2003
to fund its cash requirements.
Management believes that the Company's current operations have not been
materially impacted by the effects of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." These pronouncements provide guidance on how to account for
the acquisition of businesses and intangible assets, including goodwill, which
arise from such activities. The Company adopted SFAS No. 141 in 2001 and No. 142
in 2002. Adoption of these pronouncements did not have a significant effect on
the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company adopted this standard
in 2001. Adoption did not have a material effect on income from continuing
operations or on the Company's financial position. In accordance with SFAS No.
144, the disposition of Guildsoft has been treated as a discontinued operation
and all periods presented have been restated to reflect that treatment.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements SFAS Nos. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections." SFAS No. 145 will impact how companies account for
sale-leaseback transactions and how gains or losses on debt extinguishments are
presented in financial statements. The Company will adopt
13
SFAS No. 145 in 2003. The Company does not expect that adoption will have a
significant impact on results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit and Disposal Activities." SFAS No. 146 will impact how
companies account for costs incurred with exit activities, such as employee
severance and facility closure costs. The Company will adopt SFAS No. 146 in
2003. The Company is currently evaluating the effect of adoption.
In November 2001, the Emerging Issues Task Force ("EITF") of the FASB
released EITF Issue 01-9, "Accounting for Consideration Given by a Vendor to a
Customer or a Reseller of the Vendor's Products." EITF 01-9 requires that
certain amounts paid by a vendor for advertising and marketing to a customer be
recorded as a reduction of revenue, when certain conditions are met. The Company
previously accounted for payments of this type to certain distributors as
marketing expenses. The Company has adopted EITF 01-9 in 2002, and, as required,
reclassified these payments as a reduction of revenue in all periods presented
in the accompanying consolidated statements of operations. The amounts
reclassified from marketing expenses to a reduction in revenue in 2002, 2001,
and 2000 approximated $77,000, $81,000 and $105,000, respectively.
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 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations" of Part I of this Annual
Report on Form 10-K 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 cautions readers
not to place undue reliance on any such forward looking-statements, which speak
only as of the date they are made. The Company disclaims any obligation, except
as specifically required by law and the rules of the Securities and Exchange
Commission, to publicly update or revise any such statements to reflect any
change in the Company's expectations or in events, conditions or circumstances
on which any such statements may be based, or that may affect the likelihood
that actual results will differ from those set forth in the forward-looking
statements. 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 contained herein and related notes thereto. Such
factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
Fluctuations in Quarterly Operating Results
The Company's future operating results could vary substantially from
quarter to quarter because of uncertainties and/or risks associated with such
things as technological change, competition, and 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.
Weakening of World Wide Economic Conditions and the Computer Software Market May
Result in Lower Revenue Growth Rates or Decreased Revenues
The revenue growth and profitability of the Company's business depends on
the overall demand for computer software and services, particularly in the
markets in which it competes. Because the Company's sales are primarily to major
corporate customers, its business also depends on general economic and business
conditions. A softening of demand for computer software and services, caused by
a weakening of the economy in the United States or abroad, may result in lower
revenue growth rates, decreased revenues or reduced profitability. In addition,
recent terrorist attacks against the United States, and the United States
military response to these attacks, have added to economic and political
uncertainty which may adversely affect worldwide demand for computer software
and services and result in significant fluctuations in the value of foreign
currencies.
14
In a weakened economy, the Company cannot be assured that it will be able to
effectively promote future growth in its software and services revenues or
maintain profitability.
Dependence on Principal Products
In fiscal 2002, Monarch, Q|Service Management, and Monarch|ES accounted
for approximately 59%, 26% and 15%, respectively, of the Company's total
revenue. The Company is wholly dependent on the Monarch, Q|Service Management,
and Monarch|ES products. As a result, any factor adversely affecting sales of
any of these products could have a material adverse effect on the Company. The
Company's future financial performance 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 2002, 2001 and 2000, international sales accounted for approximately
42%, 47% and 43%, respectively, of the Company's total revenue. The Company
anticipates that international sales will continue to account for a significant
percentage of its total revenue. A significant portion of the Company's total
revenue 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,
possible effects of war and acts of terrorism, 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
As evidenced by its October 2002 acquisition of Auxilor, Inc., the Company
continues 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
15
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.
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 BMC Software, Actuate
Corporation, Quest Software Inc., and others, have substantially greater
financial, marketing and technological resources than the Company. No assurance
can be given that the Company will have the resources required to compete
successfully in the future.
Dependence on Proprietary Software Technology
The Company's success is dependent upon proprietary software technology.
Although the Company does not own any patents on any such technology, it does
hold exclusive licenses to such technology and relies principally on a
combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its rights to
such proprietary technology. Despite such precautions, there can be no assurance
that such steps will be adequate to deter misappropriation of such technology.
Reliance on Software License Agreements
Substantially all of the Company's products incorporate third-party
proprietary technology which is generally licensed to the Company on an
exclusive, worldwide basis. Failure by such third-parties to continue to develop
technology for the Company and license such technology to the Company could have
a material adverse effect on the Company's business and results of operations.
Indirect Distribution Channels
The Company sells a significant portion of its products through resellers,
none of which are under the direct control of the Company. The loss of major
resellers of the Company's products, or a significant decline in their sales,
could have a material adverse effect on the Company's operating results. There
can be no assurance that the Company will be able to attract or retain
additional qualified resellers or that any such resellers will be able to
effectively sell the Company's products. The Company seeks to select and retain
resellers on the basis of their business credentials and their ability to add
value through expertise in specific vertical markets or application programming
expertise. In addition, the Company relies on resellers to provide post-sales
service and support, and any deficiencies in such service and support could
adversely affect the Company's business.
Volatility of Stock Price
As is frequently the case with the stocks of high technology companies,
the market price of the Company's common stock has been, and may continue to be,
volatile. Factors such as quarterly fluctuations in results of operations,
increased competition, the introduction of new products by the Company or its
competitors, expenses or other difficulties associated with assimilating
companies acquired by the Company, changes in the mix of sales channels, the
timing of significant customer orders, and macroeconomic conditions generally,
may have a significant impact on the market price of the stock of the Company.
Any shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant adverse effect on the market
price of the Company's common stock in any given period. In addition, the stock
market has from time to time experienced extreme price and volume fluctuations,
which have particularly affected the market price for many high technology
companies and which, on occasion, have appeared to be unrelated to the operating
performance of such companies.
Transfer of Common Stock Listing
On March 30, 2001 the Company announced that it had received a notice from
The Nasdaq Stock Market, Inc. that the Company's Common Stock failed to comply
with the $1.00 minimum bid price requirement for continued listing on The Nasdaq
National Market as set forth in marketplace Rule 4450(a)(5), and that the
Company's Common Stock was, therefore, subject to delisting from The Nasdaq
National Market. Management presented the Company's plan to regain compliance
with the minimum bid price requirement to the Nasdaq Listing Qualifications
Panel and, on May 30, 2001, the Listing Qualifications Panel's notified the
Company that it had determined to continue listing the Company's common stock on
the Nasdaq National Market, provided that on or before July 31, 2001, the
Company's Common Stock evidenced a closing bid price of at least $1.00
16
per share and, immediately thereafter, a closing bid price of at least $1.00 for
a minimum of ten consecutive trading days and that the Company remained in
compliance with all other requirements for continued listing on The Nasdaq
National Market. Effective as of the close of business on July 23, 2001 the
Company effected a 1-for-4.5 reverse stock split which resulted in compliance
with the $1.00 per share minimum bid price requirement for the Company's common
stock.
In January 2002, the Company received a notice from the Nasdaq Stock
Market, Inc. that it was not in compliance with the $4 million net tangible
asset requirement for continued listing on The Nasdaq National Market and, in
response, the Company applied for listing of its Common Stock on The Nasdaq
SmallCap Market. In early February 2002, the Company was notified that its
application for listing on The Nasdaq SmallCap Market had been approved. The
listing of the Company's Common Stock was transferred to The Nasdaq SmallCap
Market at the opening of business on February 7, 2002.
There can be no assurance that the Company will remain in compliance with
the requirements for continued listing on The Nasdaq SmallCap Market. In
addition, the transfer of the Company's Common Stock listing to The Nasdaq
SmallCap Market may impair the ability of stockholders to buy and sell shares of
the Company's Common Stock and could adversely affect the market price of, and
the efficiency of the trading market for, the shares of Common Stock. Further,
the transfer of the Common Stock from The Nasdaq National Market could
significantly impair the Company's ability to raise capital in the public
markets should it desire to do so in the future.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ---------------------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments
At September 30, 2002, the Company did not participate in any derivative
financial instruments, or other financial and commodity instruments. The Company
holds no investment securities that possess significant market risk.
Primary Market Risk Exposures
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company utilizes U.S.
dollar denominated borrowings to fund its operational needs through its working
capital line of credit agreement. The line, which currently bears an interest
rate of prime plus 3/4% (prime plus 2% or 6.75% at September 30, 2002), is
subject to annual renewal. Had the interest rate under the lines of credit been
10% greater or lesser than actual rates, the impact would not have been material
in the Company's consolidated financial statements for the period ended
September 30, 2002. As of September 30, 2002, the Company had no outstanding
borrowings under the working capital line.
The Company's exposure to currency exchange rate fluctuations has been and
is expected to continue to be modest due to the fact that the operations of its
international subsidiaries are almost exclusively conducted in their respective
local currencies, and dollar advances to the Company's international
subsidiaries, if any, are usually considered to be of a long-term investment
nature. Therefore, the majority of currency movements are reflected in the
Company's other comprehensive income. There are, however, certain situations
where the Company will invoice customers in currencies other than its own. Such
gains or losses, whether realized or unrealized, are reflected in income. These
have not been material in the past nor does management believe that they will be
material in the future. Currently the Company does not engage in foreign
currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The information required by this item is set forth in Item 15(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.
17
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,
2002. 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 captions "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, 2002 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" and "Equity Compensation Plans" appearing in the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders for the fiscal
year ended September 30, 2002 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, 2002 is incorporated herein
by reference.
ITEM 14. CONTROLS AND PROCEDURES
- ---------------------------------
(a) Evaluation of disclosure controls and procedures
As of a date (the "Evaluation Date") within ninety days prior to
the filing date of this Annual Report on Form 10-K, the Company, under
the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rules 13a-15 and
15d-15 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are
effective in ensuring that material information relating to the Company
(including its consolidated subsidiaries) required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms,
including ensuring that such material information is accumulated and
communicated to the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
(b) Changes in internal controls
There were no significant changes in the Company's internal
controls or, to the knowledge of the Company, in other factors that could
significantly affect the Company's internal controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
18
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
The following documents are filed as part of this report:
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets as of September 30, 2002 and 2001
Consolidated Statements of Operations for the Years Ended September
30, 2002, 2001 and 2000.
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended September 30, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows for the Years Ended September
30, 2002, 2001 and 2000.
Notes to Consolidated Financial Statements
2. 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 15(a)1 above contains the Independent
Auditors' Report on the Consolidated Financial Statement Schedule.
3. LIST OF EXHIBITS
EX. NO. DESCRIPTION
- --------------------------------------------------------------------------------
(1) 3.1 Restated Certificate of Incorporation of the Registrant (Exhibit
3.2)
(8) 3.2 Certificate of Amendment of Restated Certificate of Incorporation
of the Registrant (Exhibit 3.2)
(1) 3.3 By-Laws, as amended, of the Registrant (Exhibit 3.3)
(1) 4.1 Specimen certificate representing the Common Stock (Exhibit 4.4)
(6) 4.2 Warrant to Purchase Stock issued to Silicon Valley Bank, dated
January 17, 2001 (Exhibit 4.1)
(8) 4.3 Warrant to Purchase Stock issued to Silicon Valley Bank, dated
October 30, 2001 (Exhibit 4.3)
(1) 10.1* 1987 Stock Plan (Exhibit 10.7)
(1) 10.2* Form of Incentive Stock Option Agreement of the Registrant
(Exhibit 10.8)
(1) 10.3* Form of Nonqualified Stock Option Agreement of the Registrant
(Exhibit 10.9)
(1) 10.4 Software Development and Marketing Agreement by and between
Personics Corporation and Raymond Huger, dated January 19, 1989
(Exhibit 10.12)
(4) 10.5 Commercial Security Agreement between Datawatch Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (Exhibit 10.6)
(4) 10.6 Commercial Security Agreement between Personics Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (Exhibit 10.7)
(2) 10.7* 1996 Non-Employee Director Stock Option Plan, as amended on
December 10, 1996 (Exhibit 10.30)
(2) 10.8* 1996 International Employee Non-Qualified Stock Option Plan
(Exhibit 10.31)
(3) 10.9 Promissory Note, dated February 12, 1997, by and between Datawatch
Corporation, Personics Corporation and Silicon Valley Bank
(Exhibit 10.2).
(9) 10.10* 1996 Stock Plan as amended as of March 16, 2001 (Exhibit 10.3)
(4) 10.11 Lease, dated August 31, 2000, by and between Fortune Wakefield,
LLC and Datawatch Corporation (Exhibit 10.27)
(5) 10.12 Indemnification Agreement between Datawatch Corporation and James
Wood, dated January 12, 2001 (Exhibit 10.1)
(5) 10.13 Indemnification Agreement between Datawatch Corporation and
Richard de J. Osborne, dated January 12, 2001 (Exhibit 10.2)
(6) 10.14 Registration Rights Agreement between Silicon Valley Bank and
Datawatch Corporation, dated January 17, 2001 (Exhibit 10.1)
(8) 10.15 Amendment No. 1 to Registration Rights Agreement, dated October
30, 2001, by and between Silicon Valley Bank and Datawatch
Corporation (Exhibit 10.15)
19
(6) 10.16 Export-Import Bank of the United States Working Capital Guarantee
Program Borrower Agreement, dated January 17, 2001, by and among
Datawatch Corporation, Datawatch International Limited, Datawatch
Europe Limited, Guildsoft Limited and Silicon Valley Bank in favor
of Export-Import Bank of the United States (Exhibit 10.2)
(6) 10.17 Second Loan Modification Agreement, dated January 17, 2001, by and
between Datawatch Corporation and Silicon Valley Bank, doing
business as Silicon Valley East. (Exhibit 10.3)
(6) 10.18 First Loan Modification Agreement (EXIM Line), dated January 17,
2001, by and among Datawatch Corporation, Datawatch International
Limited, Datawatch Europe Limited, Guildsoft Limited and Silicon
Valley Bank, doing business as Silicon Valley East, in favor of
Export-Import Bank of the United States (Exhibit 10.4)
(6) 10.19 Revolving Promissory Note (Export-Import Line), dated January 17,
2001, by and among Datawatch Corporation, Datawatch International
Limited, Datawatch Europe Limited, Guildsoft Limited and Silicon
Valley Bank (Exhibit 10.5)
(6) 10.20 Supplemental Deed of Guarantee, dated January 17, 2001, by and
between Datawatch International Limited and Silicon Valley Bank
(Exhibit 10.6)
(6) 10.21 Supplemental Deed of Guarantee, dated January 17, 2001, by and
between Datawatch Europe Limited and Silicon Valley Bank (Exhibit
10.7)
(6) 10.22 Assignment and Consulting Agreement, effective June 30, 2000, by
and between Datawatch Corporation and Russell Ryan, also doing
business as Edge IT (Exhibit 10.9)
(7) 10.23 Form of Indemnification Agreement between Datawatch Corporation
and each of its Non-Employee Directors (Exhibit 10.1)
(7) 10.24* Advisory Agreement, dated April 5, 2001, by and between Datawatch
Corporation and Richard de J. Osborne (Exhibit 10.2)
(8) 10.25* Executive Agreement, dated July 9, 2001, between the Company and
Robert W. Hagger (Exhibit 10.24)
(8) 10.26* Management Transition Agreement, dated July 6, 2001, between the
Company and Bruce R. Gardner (Exhibit 10.25)
(8) 10.27 Amended and Restated Loan and Security Agreement, dated October
30, 2001, between Datawatch Corporation and Silicon Valley Bank
(Exhibit 10.26)
(8) 10.28 Intellectual Property Security Agreement, dated October 30, 2001
by and between Datawatch Corporation and Silicon Valley Bank
(Exhibit 10.27)
(8) 10.29 Amended and Restated Export-Import Bank Loan and Security
Agreement, dated December 19, 2001, by and among Datawatch
Corporation, Datawatch International Limited, Datawatch Europe
Limited and Silicon Valley Bank (Exhibit 10.28)
(8) 10.30 Revolving Promissory Note, dated December 19, 2001, by and between
Datawatch Corporation, Datawatch International Limited, Datawatch
Europe Limited and Silicon Valley Bank (Exhibit 10.29)
(8) 10.31 Export-Import Bank of the United States Working Capital Guarantee
Program Borrower Agreement, dated December 19, 2001, by and among
Datawatch Corporation, Datawatch International Limited, Datawatch
Europe Limited and Silicon Valley Bank in favor of Export-Import
Bank of the United States (Exhibit 10.30)
(9) 10.32* Executive Agreement, dated December 1, 2001, by and between
Datawatch Corporation and Calvin MacKay (Exhibit 10.1)
(9) 10.33* Severance Agreement and Release, dated January 31, 2002, by and
between Datawatch Corporation and Linda Lammi (Exhibit 10.2)
(10) 10.34* Executive Agreement, dated April 25, 2002, by and between
Datawatch Corporation and Alan R. MacDougall (Exhibit 10.1)
(10) 10.35* Executive Agreement, dated April 25, 2002, by and between
Datawatch Corporation and John Kitchen (Exhibit 10.2)
(10) 10.36* Professional Services Agreement, dated May 16, 2002, by and
between Vested Development Inc. and Datawatch Corporation
(Exhibit 10.3)
10.37 Loan Modification Agreement, dated November 15, 2002, by and
between Datawatch Corporation and Silicon Valley Bank, doing
business as Silicon Valley East (filed herewith)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Independent Auditor's Consent (filed herewith)
99.1 CEO Certification Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
99.2 CFO Certification Pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (filed
herewith)
- --------------------------------------------------------------------------------
* Indicates a management contract or compensatory plan or contract.
20
(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 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).
(3) 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).
(4) Previously filed as an exhibit to Registrant's Annual Report on Form
10-K for the fiscal year ended September 30, 2000 and incorporated
herein by reference (the number given in parenthesis indicates the
corresponding exhibit in such Form 10-K).
(5) Previously filed as an exhibit to Registrant's Current Report on Form
8-K dated February 2, 2001 and incorporated herein by reference (the
number in parenthesis indicates the corresponding exhibit in such Form
8-K).
(6) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 2000 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q).
(7) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2001 and incorporated herein by
reference (the number given 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, 2001 and incorporated
herein by reference (the number given in parenthesis indicates the
corresponding exhibit in such Form 10-K).
(9) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q).
(10) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002 and incorporated herein by
reference (the number given 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, 2002.
(C) EXHIBITS
The Company hereby files as exhibits to this Annual Report on Form 10-K
those exhibits listed in Item 15(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 15(a)2 above which are attached hereto.
21
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 24, 2002 By: /s/ Robert W. Hagger
---------------------------
Robert W. Hagger
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/ Robert W. Hagger President, Chief Executive Officer and Director December 24, 2002
- ------------------------- (Principal Executive Officer)
Robert W. Hagger
/s/ Alan R. MacDougall Vice President of Finance, Chief Financial December 24, 2002
- ------------------------- Officer, Treasurer and Assistant Secretary
Alan R. MacDougall (Principal Financial and Accounting Officer)
/s/ Richard de J. Osborne Chairman of the Board December 24, 2002
- -------------------------
Richard de J. Osborne
/s/ Jerome Jacobson Director December 24, 2002
- -------------------------
Jerome Jacobson
/s/ Kevin Morano Director December 24, 2002
- -------------------------
Kevin Morano
/s/ Terry W. Potter Director December 24, 2002
- -------------------------
Terry W. Potter
/s/ David T. Riddiford Director December 24, 2002
- -------------------------
David T. Riddiford
/s/ James Wood Director December 24, 2002
- -------------------------
James Wood
22
CERTIFICATIONS
I, Robert W. Hagger, certify that:
1. I have reviewed this annual report on Form 10-K of Datawatch Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 24, 2002 /s/ Robert W. Hagger
---------------------
Robert W. Hagger
President, Chief Executive Officer and Director
23
CERTIFICATIONS
I, Alan R. MacDougall, certify that:
1. I have reviewed this annual report on Form 10-K of Datawatch Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: December 24, 2002 /s/ Alan R. MacDougall
------------------------------------
Alan R. MacDougall
Vice President Finance, Chief Financial
Officer, Treasurer and Assistant Secretary
24
DATAWATCH CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2002 and 2001
and for Each of the Three Years in the Period
Ended September 30, 2002
Independent Auditors' Report
DATAWATCH CORPORATION AND SUBSIDIARies
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2002 and 2001
AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 2002:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Datawatch Corporation
Lowell, Massachusetts
We have audited the accompanying consolidated balance sheets of Datawatch
Corporation (the "Company") and subsidiaries as of September 30, 2002 and 2001,
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, 2002. Our audits also included the financial statement schedule listed in
the Index at Item 14(a)2. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Datawatch Corporation and
subsidiaries as of September 30, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2002, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
November 15, 2002
1
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND 2001
- -----------------------------------------------------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS:
Cash and equivalents $ 3,605,044 $ 1,568,691
Accounts receivable, less allowances for doubtful accounts
and sales returns of approximately $545,000 in 2002
and $562,000 in 2001 3,057,356 4,255,809
Inventories 170,735 230,878
Prepaid expenses and other 571,026 853,332
------------ ------------
Total current assets 7,404,161 6,908,710
------------ ------------
PROPERTY AND EQUIPMENT:
Office furniture and equipment 3,153,385 3,180,156
Manufacturing and engineering equipment 175,332 336,609
------------ ------------
3,328,717 3,516,765
Less accumulated depreciation and amortization (2,596,107) (2,491,996)
------------ ------------
Net property and equipment 732,610 1,024,769
------------ ------------
OTHER ASSETS:
Capitalized software development costs, net 962,312 1,085,039
Other 355,383 405,466
------------ ------------
Total other assets 1,317,695 1,490,505
------------ ------------
TOTAL $ 9,454,466 $ 9,423,984
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
CURRENT LIABILITIES:
Accounts payable $ 1,156,966 $ 1,556,286
Accrued expenses 1,996,554 1,965,911
Deferred revenue 2,227,939 2,155,377
Borrowings under credit lines -- 635,000
------------ ------------
Total current liabilities 5,381,459 6,312,574
------------ ------------
ACCRUED SEVERANCE, less current portion 12,795 126,121
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 1, 3, 6, 7 and 8)
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01- authorized,
1,000,000 shares; none issued -- --
Common stock, par value $.01- authorized,
20,000,000 shares; issued, 2,587,605 shares and
2,547,795 shares in 2002 and 2001, respectively;
outstanding, 2,580,482 shares and 2,540,672
shares in 2002 and 2001, respectively 25,876 25,478
Additional paid-in capital 21,609,555 21,495,497
Accumulated deficit (16,918,783) (17,782,258)
Accumulated other comprehensive loss (516,048) (613,040)
------------ ------------
4,200,600 3,125,677
Less treasury stock, at cost - 7,123 shares (140,388) (140,388)
------------ ------------
Total shareholders' equity 4,060,212 2,985,289
------------ ------------
TOTAL $ 9,454,466 $ 9,423,984
============ ============
See notes to consolidated financial statements.
2
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
- -------------------------------------------------------------------------------------------------------
2002 2001 2000
REVENUE
Software licenses $ 13,814,192 $ 12,753,848 $ 16,849,496
Maintenance and services 5,626,551 5,567,403 5,519,141
------------ ------------ ------------
TOTAL REVENUE 19,440,743 18,321,251 22,368,637
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of software licenses 2,795,110 3,062,075 3,171,415
Cost of maintenance and services 2,679,379 3,564,770 3,984,115
Sales and marketing 6,897,176 8,474,622 8,155,770
Engineering and product development 1,275,997 2,002,039 1,837,289
General and administrative 4,763,696 5,772,096 6,180,715
Restructuring and centralization costs 87,651 763,321 --
------------ ------------ ------------
Total costs and expenses 18,499,009 23,638,923 23,329,304
------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 941,734 (5,317,672) (960,667)
INTEREST EXPENSE (120,953) (135,505) (153,071)
INTEREST INCOME AND OTHER 22,761 43,515 123,298
FOREIGN CURRENCY TRANSACTION
GAINS (LOSSES) 2,837 (389) (11,657)
BENEFIT FOR INCOME TAXES -- 25,000 --
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 846,379 (5,385,051) (1,002,097)
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Income (loss) from Guildsoft operations -- (143,856) 12,468
Gain on sale of Guildsoft 17,096 413,013 --
------------ ------------ ------------
INCOME FROM DISCONTINUED OPERATIONS 17,096 269,157 12,468
------------ ------------ ------------
NET INCOME (LOSS) $ 863,475 $ (5,115,894) $ (989,629)
============ ============ ============
INCOME (LOSS) PER SHARE - Basic:
Continuing operations $ 0.33 $ (2.24) $ (0.49)
Discontinued operations 0.01 0.11 0.01
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE - Basic $ 0.34 $ (2.13) $ (0.48)
============ ============ ============
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING - Basic 2,563,835 2,399,132 2,059,603
============ ============ ============
INCOME (LOSS) PER SHARE - Diluted:
Continuing operations $ 0.31 $ (2.24) $ (0.49)
Discontinued operations 0.01 0.11 0.01
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE - Diluted $ 0.32 $ (2.13) $ (0.48)
============ ============ ============
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING - Diluted 2,696,708 2,399,132 2,059,603
============ ============ ============
See notes to consolidated financial statements.
3
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
- ---------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
BALANCE, OCTOBER 1, 1999 2,049,258 $ 20,493 $ 19,936,014 $(11,676,735)
Stock options exercised 41,624 416 303,114 --
Comprehensive loss:
Translation adjustments -- -- -- --
Net loss -- -- -- (989,629)
------------ ------------ ------------ ------------
Total comprehensive loss
BALANCE, SEPTEMBER 30, 2000 2,090,882 20,909 20,239,128 (12,666,364)
Sale of common stock, net of $79,148
of related costs 416,667 4,167 1,079,185 --
Issuance of common stock for services 39,912 399 100,011 --
Stock options exercised 334 3 840 --
Issuance of warrant -- -- 76,333 --
Comprehensive loss:
Translation adjustments -- -- -- --
Net loss -- -- -- (5,115,894)
------------ ------------ ------------ ------------
Total comprehensive loss
BALANCE, SEPTEMBER 30, 2001 2,547,795 25,478 21,495,497 (17,782,258)
Issuance of common stock for services 15,312 153 37,347 --
Issuance of warrant -- -- 76,956 --
Warrants exercised 24,498 245 (245) --
Comprehensive income:
Translation adjustments -- -- -- --
Net income -- -- -- 863,475
------------ ------------ ------------ ------------
Total comprehensive income
BALANCE, SEPTEMBER 30, 2002 2,587,605 $ 25,876 $ 21,609,555 $(16,918,783)
============ ============ ============ ============
Accumulated
Other
Comprehensive Comprehensive Treasury Stock
Loss Income (Loss) Shares Amount Total
BALANCE, OCTOBER 1, 1999 $ (321,677) (7,123) $ (140,388) $ 7,817,707
Stock options exercised -- -- -- 303,530
Comprehensive loss:
Translation adjustments (264,717) $ (264,717) -- -- (264,717)
Net loss -- (989,629) -- -- (989,629)
------------ ------------ ------------ ------------ ------------
Total comprehensive loss $ (1,254,346)
============
BALANCE, SEPTEMBER 30, 2000 (586,394) (7,123) (140,388) 6,866,891
Sale of common stock, net of $79,148
of related costs -- -- -- 1,083,352
Issuance of common stock for services -- -- -- 100,410
Stock options exercised -- -- -- 843
Issuance of warrant -- -- -- 76,333
Comprehensive loss:
Translation adjustments (26,646) $ (26,646) -- -- (26,646)
Net loss -- (5,115,894) -- -- (5,115,894)
------------ ------------ ------------ ------------ ------------
Total comprehensive loss $ (5,142,540)
============
BALANCE, SEPTEMBER 30, 2001 (613,040) (7,123) (140,388) 2,985,289
Issuance of common stock for services -- -- -- 37,500
Issuance of warrant -- -- -- 76,956
Warrants exercised -- -- -- --
Comprehensive income:
Translation adjustments 96,992 $ 96,992 -- -- 96,992
Net income -- 863,475 -- -- 863,475
------------ ------------ ------------ ------------ ------------
Total comprehensive income $ 960,467
============
BALANCE, SEPTEMBER 30, 2002 $ (516,048) (7,123) $ (140,388) $ 4,060,212
============ ============ ============ ============
See notes to consolidated financial statements.
4
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
- ----------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 863,475 $(5,115,894) $ (989,629)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 929,603 1,022,343 1,108,231
Amortization of interest on short-term investments -- -- (4,290)
Gain on sale of Guildsoft (17,096) (413,013) --
Loss on disposition of equipment 22,293 10,412 33,290
Stock-based compensation 37,500 114,479 --
Changes in current assets and liabilities, net of disposal of Guildsoft:
Accounts receivable 1,336,731 3,250,903 (567,806)
Inventories 64,120 100,039 (3,341)
Prepaid expenses and other 303,993 112,119 (277,873)
Accounts payable and accrued expenses (452,550) 466,108 (78,928)
Deferred revenue (15,759) 64,159 623,988
----------- ----------- -----------
Cash provided by (used in) operating activities 3,072,310 (388,345) (156,358)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and fixtures (167,344) (515,270) (419,544)
Proceeds from sale of equipment 569 26,739 20,603
Proceeds from sale of short-term investments -- 348,121 2,950,549
Purchase of short-term investments -- -- (1,814,682)
Net proceeds from sale of Guildsoft 20,509 665,137 --
Long term notes receivable (31,156) -- --
Capitalized software development costs (271,943) (763,370) (197,057)
Other assets 16,686 (101,431) (13,112)
----------- ----------- -----------
Cash (used in) provided by investing activities (432,679) (340,074) 526,757
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of related costs -- 1,083,352 --
Net proceeds from exercise of stock options -- 843 303,530
Principal payments on long-term obligations (113,326) (317) (39,603)
(Payments) borrowings under credit lines - net (635,000) (325,000) (353,705)
Restricted cash 76,063 (147,435) (143,299)
----------- ----------- -----------
Cash (used in) provided by financing activities (672,263) 611,443 (233,077)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS 68,985 (10,165) (125,975)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2,036,353 (127,141) 11,347
CASH AND EQUIVALENTS, BEGINNING OF YEAR 1,568,691 1,695,832 1,684,485
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 3,605,044 $ 1,568,691 $ 1,695,832
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 21,732 $ 135,131 $ 145,355
=========== =========== ===========
Income taxes paid (refunds received) $ -- $ (25,000) $ (231,000)
=========== =========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES -
Issuance of 15,312 and 39,912 shares of common stock for services and software
in 2002 and 2001, respectively $ 37,500 $ 100,410
=========== ===========
Issuance of warrants $ 76,956 $ 76,333
=========== ===========
See notes to consolidated financial statements.
5
DATAWATCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
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, including implementation and
support of its software products.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
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. In 2001, the Company disposed of its
wholly owned subsidiary, Guildsoft Limited ("Guildsoft"). Guildsoft was a
component of the Company with clearly distinguishable operations and cash
flows. Guildsoft's activities are now entirely eliminated from ongoing
operations and the Company has no continuing involvement with Guildsoft's
operations. As a result, the Company has presented Guildsoft as a
discontinued operation in all periods presented herein. (See Note 2).
ACCOUNTING ESTIMATES - The preparation of the Company's consolidated
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
REVENUE RECOGNITION - Revenue from the sale of software products is
generally recognized at the time of shipment, providing there are no
uncertainties surrounding product acceptance, the fee is fixed and
determinable, collection is considered probable, persuasive evidence of
the arrangement exists and there are no significant obligations remaining.
For enterprise solutions products, the Company applies the residual method
in determining revenue from license sales.
Revenue from implementation, integration, training and consulting services
is recognized as the services are performed. Revenue from post-contract
customer support services is deferred and recognized ratably over the
contract period (generally one year). Post-contract customer support
includes technical support and rights to unspecified software upgrades and
enhancements on a when-and-if available basis.
RETURNS RESERVES - 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. Certain software products, including
desktop versions of Monarch, Monarch Data Pump, VorteXML and Redwing 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 distributors the ability to return obsolete versions of its products
and slow-moving products for refund or credit. Reserves are provided for
potential returns under these arrangements based upon historical
experience and anticipated exposures.
Returns reserves are primarily calculated by accruing a fixed amount each
period, assessing the level of the reserve at the end of the period
against anticipated returns and adjusting the reserve as needed. During
the year ended September 30, 2002, $255,000 was accrued for the returns
reserve and approximately $215,000 in returns were applied against the
reserve. This compares to $300,000 accrued
6
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RETURNS RESERVES (CONTINUED) - for the returns reserve and approximately
$429,000 in returns applied against the returns reserve for the year ended
September 30, 2001. At September 30, 2002, the returns reserve was
approximately $285,000, with 70% related to specific accounts, as compared
to approximately $246,000, with 62% related to specific accounts, at
September 30, 2001.
BAD DEBTS - The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make
required payments. The Company analyzes accounts receivable and the
composition of the accounts receivable aging, historical bad debts,
customer creditworthiness, current economic trends, foreign currency
exchange rate fluctuations, and changes in customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. Based upon
the analysis and estimates of the uncollectibility of its accounts
receivable, the Company records an increase in the allowance for doubtful
accounts when the prospect of collecting a specific account receivable
becomes doubtful. Actual results could differ from the allowances for
doubtful accounts recorded, and this difference may have a material effect
on our financial position and results of operations. The Company recorded
provisions for doubtful accounts of $48,000, $266,000 and $147,000 for the
years ended September 30, 2002, 2001 and 2000, respectively, which have
been included in the accompanying statements of operations.
CASH AND EQUIVALENTS - Cash and equivalents include cash on hand, cash
deposited with banks, and highly liquid securities with maturities of 90
days or less.
RESTRICTED CASH - Cash restricted for designated purposes amounted to
$222,000 and $291,000 at September 30, 2002 and 2001, respectively, and is
included with other long-term assets in the accompanying consolidated
balance sheets.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS - The Company capitalizes certain
software development costs as well as purchased software upon achieving
technological feasibility of the related products. For the years ended
September 30, 2002 and 2001 the Company capitalized $0 and $496,000 of
software development costs, respectively. For the years ended September
30, 2002, 2001 and 2000, the Company purchased and capitalized software
amounting to approximately $272,000, $307,000, and $197,000, respectively.
Software development costs incurred and software purchased prior to
achieving technological feasibility are charged to research and
development expense as incurred. Commencing upon initial product release,
capitalized costs are amortized to cost of software licenses 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 the years ended September 30, 2002, 2001 and 2000,
amortization of these costs was approximately $394,000, $358,000 and
$337,000, respectively.
ADVERTISING AND PROMOTIONAL MATERIALS - Advertising costs are expensed as
incurred and amounted to approximately $571,000, $450,000 and $517,000 in
2002, 2001 and 2000, 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 $565,000, $1,155,000 and $846,000 in 2002, 2001 and 2000,
respectively. At September 30, 2002 and 2001, deferred direct mail/direct
response costs were approximately $30,000 and $52,000, respectively, and
are included under the caption "prepaid expenses and other" in the
accompanying consolidated balance sheets.
7
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 18%, 13% and 18% of total revenue in
2002, 2001 and 2000, respectively. This same customer accounted for 23%
and 21% of outstanding trade receivables as of September 30, 2002 and
2001, respectively. Other than this customer, no base of customers in one
geographic area constitutes a significant portion of revenue. The Company
performs ongoing credit evaluations of its customers and generally does
not require collateral. Allowances are provided for anticipated doubtful
accounts and sales returns.
INVENTORIES - Inventories consist of software components - primarily
software manuals, diskettes and retail packaging materials. Inventories
are valued at the lower of cost (first-in, first-out) method or market.
PROPERTY AND EQUIPMENT - Purchased equipment and fixtures are recorded at
cost. Leased equipment accounted for as capital leases is recorded at the
present value of the minimum lease payments required during the lease
terms. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the related assets or over the
terms, if shorter, of the related leases. Useful lives and lease terms
range from three to seven years. Equipment leased under capital lease
agreements with a cost of approximately $666,000 was fully amortized at
September 30, 2001, and no capital leases were added in 2002. Amortization
expense was approximately $0, $4,000 and $48,000 for the years ended
September 30, 2002, 2001 and 2000, respectively.
INCOME TAXES - Deferred income taxes are provided for 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.
Valuation allowances are recorded to reduce the net deferred tax assets to
amounts the Company believes are more likely than not to be realized.
LONG-LIVED ASSETS - The Company, using its best estimates based on
reasonable and supportable assumptions and projections, reviews for
impairment long-lived assets and certain identifiable intangibles to be
held and used whenever events or changes in circumstances indicate that
the carrying amount of its assets might not be recoverable. The Company
has completed these reviews in each period presented and has concluded no
adjustments to carrying value are required.
FAIR VALUE DISCLOSURE - The carrying amounts of cash and equivalents,
accounts receivable, accounts payable, accrued expenses and deferred
revenue approximate fair value because of their short-term nature. The
carrying amounts of current and long-term obligations approximate fair
value.
EARNINGS (LOSS) PER SHARE - Basic earnings (loss) per share reflect the
weighted-average number of common shares outstanding during each period.
Diluted earnings (loss) per share reflect the impact, when dilutive, of
the potential exercise of options using the treasury stock method. The
Company's stock options were antidilutive in 2001 and 2000. Options to
purchase approximately 17,000 and 61,000 shares in 2001 and 2000,
respectively, were therefore excluded from the treasury stock calculation
for those years.
FOREIGN CURRENCY TRANSLATIONS AND TRANSACTIONS - Assets and liabilities of
foreign subsidiaries are translated into U.S. dollars at rates in effect
at each balance sheet date. Revenues, expenses and cash flows are
translated into U.S. dollars at average rates prevailing when transactions
occur. 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
that are denominated in currencies other than the U.S. dollar are included
in the operating results of the Company.
8
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
STOCK-BASED COMPENSATION - The Company accounts for stock option awards to
employees, officers, and non-employee directors using the intrinsic value
method. Awards to non-employees are accounted for using the fair value
method. The difference between accounting for stock-based compensation
under the intrinsic value method and the fair value method is disclosed in
Note 10.
OTHER COMPREHENSIVE INCOME (LOSS) - Currently, the only items presented in
the Company's consolidated financial statements that are considered other
comprehensive income (loss) are cumulative foreign currency translation
adjustments, which are recorded as a component of accumulated other
comprehensive income (loss) in the accompanying consolidated statements of
shareholders' equity. Accumulated other comprehensive loss reported in the
accompanying consolidated balance sheets consists only of foreign currency
translation adjustments. Foreign currency translation gains (losses)
arising during 2002, 2001 and 2000 were approximately $97,000, ($27,000)
and ($265,000), respectively.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform to the current year presentation.
ACCOUNTING CHANGES - In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." These pronouncements provide
guidance on how to account for the acquisition of businesses and
intangible assets, including goodwill, which arise from such activities.
The Company adopted SFAS No. 141 in 2001 and No. 142 in 2002. Adoption of
these pronouncements did not have a significant effect on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company adopted this
standard in 2001. Adoption did not have a material effect on income from
continuing operations or on the Company's financial position. In
accordance with SFAS No. 144, the disposition of Guildsoft has been
treated as a discontinued operation and all periods presented have been
restated to reflect that treatment.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements SFAS Nos. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections." SFAS No. 145 will impact how companies account for
sale-leaseback transactions and how gains or losses on debt
extinguishments are presented in financial statements. The Company will
adopt SFAS No. 145 in 2003. The Company does not expect that adoption will
have a significant impact on results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit and Disposal Activities." SFAS No. 146 will impact
how companies account for costs incurred with exit activities, such as
employee severance and facility closure costs. The Company will adopt SFAS
No. 146 in 2003. The Company is currently evaluating the effect of
adoption.
In November 2001, the Emerging Issues Task Force ("EITF") of the FASB
released EITF Issue 01-9, "Accounting for Consideration Given by a Vendor
to a Customer or a Reseller of the Vendor's Products." EITF 01-9 requires
that certain amounts paid by a vendor for advertising and marketing to a
customer be recorded as a reduction of revenue, when certain conditions
are met. The Company previously accounted for payments of this type to
certain distributors as marketing expenses. The Company has adopted EITF
01-9 in 2002, and, as required, reclassified these payments as a reduction
of revenue in all periods presented in the accompanying consolidated
statements of operations. The amounts reclassified from marketing expenses
to a reduction in revenue in 2002, 2001, and 2000 approximated $77,000,
$81,000 and $105,000, respectively.
9
2. DISCONTINUED OPERATION
On September 20, 2001, the Company sold the operations of Guildsoft, a
United Kingdom distribution subsidiary, to a third party, as part of a
restructuring plan (Note 3). The sale resulted in gross proceeds of
$1,179,000 and a gain of approximately $413,000 in the year ended
September 30, 2001. Additional proceeds of approximately $17,000 were
received in 2002 as final settlement of the purchase price. Guildsoft
represented a separate component of the Company's operations, and its cash
flows and activities have been entirely eliminated from those of the
Company.
The following is a summary of the carrying amounts of the major classes of
assets and liabilities included as part of the sale:
Cash and equivalents $ 511,056
Accounts receivable and other current assets 226,350
Property and equipment 84,311
Goodwill 288,973
----------
1,110,690
Liabilities 548,112
----------
Net assets sold $ 562,578
==========
The following is a summary of financial information pertaining to
Guildsoft:
2002 2001 2000
Total revenue -- $ 3,137,858 $ 4,405,574
Income (loss) before taxes -- (143,856) 12,468
3. RESTRUCTURING AND CENTRALIZATION COSTS
During the fourth quarter of fiscal 2001, the Company approved and
completed a corporate-wide restructuring plan in an effort to reduce costs
and centralize administrative operations. The restructuring plan resulted
in charges of approximately $763,000 for severance benefits and related
costs for 42 terminated employees. Of these charges, $377,000 was paid
during fiscal 2001 with the balance of $386,000 accrued as of September
30, 2001. During fiscal 2002 an additional $217,000 was paid leaving a
balance of $169,000 accrued as of September 30, 2002, which is expected to
be fully paid by January 2005.
During the second quarter of fiscal 2002, the Company approved and
completed an additional restructuring undertaken to further improve
efficiencies and reduce costs, which resulted in restructuring charges of
approximately $88,000 for severance benefits and related costs for 4
terminated employees. These charges were fully paid during fiscal 2002.
10
4. INVENTORIES
Inventories consisted of the following at September 30:
2002 2001
Materials $105,814 $222,976
Finished goods 64,921 7,902
-------- --------
Total $170,735 $230,878
======== ========
5. ACCRUED EXPENSES
Accrued expenses consisted of the following at September 30:
2002 2001
Accrued salaries and benefits $ 121,773 $ 130,756
Accrued royalties and commissions 890,235 837,562
Accrued professional fees 240,623 317,713
Accrued severance, current portion 156,572 259,538
Other 587,351 420,342
---------- ----------
Total $1,996,554 $1,965,911
========== ==========
6. COMMITMENTS
LEASES - The Company leases various facilities, equipment and automobiles
in the U.S. and overseas under noncancelable operating leases which expire
through 2006. 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 $810,000,
$906,000 and $912,000 for the years ended September 30, 2002, 2001 and
2000, respectively.
As of September 30, 2002, minimum rental commitments under noncancelable
operating leases are as follows:
Year Ending September 30
2003 $ 643,955
2004 419,989
2005 364,110
2006 119,784
Thereafter --
----------
Total minimum lease payments $1,547,838
==========
ROYALTIES - The Company is also committed to pay royalties ranging from 7%
to 50% on revenue generated by the sale of certain licensed software
products. Royalty expense included in cost of software licenses was
approximately $1,802,000, $1,925,000 and $1,894,000 for the years ended
September 30, 2002, 2001 and 2000, respectively. The Company is not
obligated to pay any minimum royalty amounts.
11
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
LINES OF CREDIT - As of September 30, 2002 and 2001 the Company had two
line-of-credit agreements, one domestic and the other international, with
a single bank (the "credit lines"). At September 30, 2002 the Company had
no borrowings outstanding against the credit lines. At September 30, 2001,
the company had outstanding borrowings against the credit lines of
$635,000. Borrowings under the credit lines bore interest at the bank's
prime rate plus 2% (6.75%) at September 30, 2002 and prime plus 1% (7%) at
September 30, 2001, and were collateralized by substantially all assets of
the Company. The credit lines contain customary covenants which require,
among other items, the Company maintain a minimum level of consolidated
tangible net worth. As of September 30, 2002, the Company had no
borrowings outstanding and approximately $507,000 in available borrowing
under the lines.
On November 15, 2002, the Company renewed the domestic bank line-of-credit
for a period to expire on October 29, 2003 under similar terms and
conditions except that the credit line will bear interest at the bank's
prime rate plus 3/4%. The Company has no plans to renew or extend its
international credit line which expired on October 1, 2002. The renewed
domestic credit line provides for maximum borrowings of the lesser of
$1,500,000 or 70% of defined eligible receivables.
LETTER OF CREDIT - The Company has an irrevocable standby letter of credit
with a bank securing performance of a five-year property lease. The
Company has reserved a cash term deposit in the amount of approximately
$143,000 to secure the letter of credit. This restricted cash balance is
included in other long-term assets.
9. INCOME TAXES
Income (loss) before provision for (benefit from) income taxes consists of
the following for the years ended September 30:
2002 2001 2000
Domestic $ 1,454,280 $(3,016,908) $ 888,776
Foreign (607,901) (2,393,143) (1,890,873)
----------- ----------- -----------
Total $ 846,379 $(5,410,051) $(1,002,097)
=========== =========== ===========
12
9. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes consisted of the following for
the years ended September 30:
2002 2001 2000
Current:
Federal $ -- $ (25,000) $ --
State -- -- --
Foreign -- -- --
--------- --------- ---------
-- (25,000) --
--------- --------- ---------
Deferred:
Federal 445,000 (567,000) (547,000)
State 76,000 (100,000) (97,000)
Foreign (322,000) (165,000) 96,000
Change in valuation allowance (199,000) 832,000 548,000
--------- --------- ---------
-- -- --
--------- --------- ---------
Total $ -- $ (25,000) $ --
========= ========= =========
At September 30, 2002, the Company had federal tax loss carryforwards of
approximately $7 million, expiring in 2020 and had approximately $8
million in state tax loss carryforwards, which commence expiration in
2008. An alternative minimum tax credit of approximately $132,000 is
available to offset future regular federal taxes. Research and development
credits of approximately $447,000 expire beginning in 2013. In addition,
tax loss carryforwards in certain foreign jurisdictions total
approximately $4 million.
The tax effects of significant items comprising the Company's net deferred
tax position as of September 30 were approximately as follows:
2002 2001
Deferred tax liabilities:
Depreciation and amortization $ (30,000) $ (107,000)
Other (68,000) --
Prepaid expenses (130,000) (108,000)
----------- -----------
(228,000) (215,000)
----------- -----------
Deferred tax assets:
Net operating loss carryforwards 4,191,000 4,303,000
Research and development credits 447,000 442,000
Accounts and notes receivable reserves 370,000 222,000
Accrued severence 58,000 154,000
Alternative minimum tax credits 132,000 132,000
Other -- 131,000
----------- -----------
5,198,000 5,384,000
----------- -----------
Total 4,970,000 5,169,000
Valuation allowance (4,970,000) (5,169,000)
----------- -----------
Deferred taxes, net $ -- $ --
=========== ===========
13
9. INCOME TAXES (CONTINUED)
The Company had profitable domestic operations but continued to have
operating losses from international operations for the year ended
September 30, 2002. This followed significant losses from operations, both
domestically and internationally, over several prior years. Accordingly,
management does not believe the tax assets are more likely than not to be
realized and a full valuation allowance has been provided. The valuation
allowance (decreased) increased by approximately ($199,000) in 2002 and
$832,000 in 2001 primarily because the Company maintains a full valuation
allowance against the tax assets and such assets (decreased) increased
primarily as a result of utilization of or increases in net operating loss
carryforwards in each respective year. In 2001, the increase was partially
offset by a write-off of deferred tax assets related to Guildsoft
operations (Note 2) and partial expiration of state operating loss
carryforwards. In 2002, although the domestic net operating loss
carryforwards decreased as a result of income recorded domestically,
international losses increased, resulting in an overall increase in the
related asset.
The following table reconciles the Company's effective tax rate to the
federal statutory rate of 34% for the years ended September 30, 2002, 2001
and 2000:
2002 2001 2000
Provision (benefit) at federal statutory rate $ 288,000 $(1,630,000) $ (336,000)
Provision of valuation allowance against currently
generated net operating loss carryforwards 42,000 1,598,000 398,000
Utilization of net operating losses carried forward (321,000) -- --
Other (9,000) 7,000 (62,000)
----------- ----------- -----------
Provision (benefit) for income taxes $ -- $ (25,000) $ --
=========== =========== ===========
10. SHAREHOLDERS' EQUITY
STOCK OPTION PLANS - The Company's two 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.
On October 4, 1996, the Company established the 1996 International
Employee Non-Qualified Stock Option Plan (the "1996 International Plan").
Pursuant to this plan, nonqualified options may be granted to any employee
or consultant of any of the Company's foreign subsidiaries through October
4, 2006.
On December 10, 1996, the Company established the Datawatch Corporation
1996 Stock Plan (the "1996 Stock Plan") which provides for the granting of
both incentive stock options and nonqualified options, the award of
Company common stock, and opportunities to make direct purchases of
Company common stock (collectively, "Stock Rights"), as determined by a
committee appointed by the Board of Directors. Options pursuant to this
plan may be granted through December 10, 2006 and shall vest as specified
by the Committee.
14
10. SHAREHOLDERS' EQUITY (CONTINUED)
Selected information regarding the above stock option plans as of and for
the year ended September 30, 2002 is as follows:
Shares
Authorized Available for
for Grant Future Grant
1996 International Plan 44,444 4,347
1996 Stock Plan 494,400 62,269
------- -------
538,844 66,616
======= =======
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, 1999 270,035 $ 8.01
Granted 47,738 12.78
Canceled (35,817) 8.28
Exercised (41,592) 7.29
Outstanding, September, 30, 2000 240,364 9.05
Granted 73,567 2.60
Canceled (63,592) 8.68
Exercised (334) 2.52
Outstanding, September 30, 2001 250,005 7.25
Granted 201,441 1.80
Canceled (49,199) 6.92
Exercised -- 0.00
Outstanding, September 30, 2002 402,247 $ 4.56
========
Exercisable, September 30, 2002 190,739 $ 7.09
========
Exercisable, September 30, 2001 159,502 $ 8.76
========
Exercisable, September 30, 2000 129,885 $ 9.32
========
15
10. SHAREHOLDERS' EQUITY (CONTINUED)
The following table sets forth information regarding options outstanding
at September 30, 2002:
Options Outstanding Options Exercisable
---------------------------------------------------------------------- -----------------------
Weighted-Average Weighted- Weighted-
Remaining Average Average
Exercise Number of Contractual Exercise Exercise
Prices Shares Life (Years) Price Shares Price
$ 1.10-1.48 152,863 10 $ 1.45 31,567 $ 1.43
1.80-2.53 21,989 9 2.25 8,442 2.32
2.63-3.52 91,460 9 2.80 21,631 2.87
5.20-7.17 53,366 7 5.57 51,816 5.54
7.61-10.97 41,412 6 9.28 39,438 9.22
11.52-15.19 34,045 6 13.16 30,733 12.94
19.41-21.92 4,445 4 20.91 4,445 20.91
31.78 2,667 4 31.78 2,667 31.78
------- --- ------ ------- ------
402,247 9 $ 4.56 190,739 $ 7.09
======= === ====== ======= ======
PRO FORMA DISCLOSURE - As described in Note 1, the Company uses the
intrinsic method of valuing its stock options 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,
pro forma net income (loss) and pro forma net income (loss) per share
would have been as follows:
Years Ended September 30,
------------------------------------------------
2002 2001 2000
Pro forma net income (loss) $ 586,337 $ (5,596,153) $ (1,171,846)
Pro forma net income (loss) per share -
Basic 0.23 (2.33) (0.57)
Diluted 0.22 (2.33) (0.57)
The fair values used to compute pro forma net income (loss) and pro forma
net income (loss) per share were estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions:
Years Ended September 30,
-----------------------------
2002 2001 2000
Risk-free interest rate 4.3 % 4.8 % 6.2 %
Expected life of option grants (years) 3.0 3.0 3.0
Expected volatility of underlying stock 112.9 % 134.3 % 116.3 %
Expected dividend payment rate 0.0 % 0.0 % 0.0 %
Expected forfeiture rate 0.0 % 0.0 % 0.0 %
The weighted-average fair value of stock options granted was $1.23, $1.49
and $2.61 for the years ended September 30, 2002, 2001 and 2000,
respectively.
16
10. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION - In November 2001, the Company issued 15,312
shares of common stock with and aggregate fair value of $37,500 to a
director for services. The fair value of the stock issued to the director
was expensed as the services were provided.
In fiscal 2001, the Company issued 39,912 shares of common stock with an
aggregate fair value of $100,410 to a director for services and a
third-party for the purchase of software. The fair value of the stock
issued the director ($60,410) was expensed as the services were provided.
The fair value of the stock issued the third-party ($40,000) was
capitalized as purchased software (see Note 1).
On January 17, 2001, the Company renewed its two line-of-credit agreements
with a bank (see Note 8), in connection therewith, the Company issued the
bank a warrant to purchase 15,556 shares of the Company's common at an
exercise price of $2.25 per share. The fair market value of the warrant
(determined using the Black-Scholes pricing model and the following
assumptions: 116% volatility, 10 year estimated life and 6.2% risk-free
interest rate) was determined to be $76,333, which has been recorded as an
increase in additional paid-in capital and was amortized to interest
expense over the one year renewal period.
On October 30, 2001, the Company again renewed its two line-of-credit
agreements with the bank (see Note 8). In connection therewith, the
Company issued the bank a warrant to purchase 49,669 shares of the
Company's common at an exercise price of $1.51 per share. The fair market
value of the warrant (determined using the Black-Scholes pricing model and
the following assumptions: 134.3% volatility, 7 year estimated life and
4.8% risk-free interest rate) was determined to be $76,956 which has been
recorded as an increase in additional paid-in capital and is being
amortized to interest expense over the one year renewal period.
On May 3, 2002 the Company issued 24,498 shares of its common stock to the
bank pursuant to the cashless exercise of the bank's warrants as allowed
by the underlying agreements. There are no warrants outstanding at
September 30, 2002.
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
2002, 2001 or 2000.
12. SEGMENT INFORMATION
The Company has determined that it has only one reportable segment meeting
the criteria established under SFAS No. 131. The Company's chief operating
decision maker, as defined (determined to be the Chief Executive Officer
and the Board of Directors), does not manage any part of the Company
separately, and the allocation of resources and assessment of performance
is based solely on the Company's consolidated operations and operating
results.
17
12. SEGMENT INFORMATION (CONTINUED)
The following table presents information about the Company's revenue by
product lines:
Years Ended September 30,
2002 2001 2000
Monarch 59 % 54 % 55 %
Q|Service Management 26 30 30
Monarch|ES 15 16 15
--- --- ---
100 % 100 % 100 %
=== === ===
The Company's conducts operations in the U.S. and internationally
(principally in the United Kingdom). The following table presents
information about the Company's continuing geographic operations:
International
(Principally
Domestic U.K.) Eliminations Total
Year Ended September 30, 2002
Total revenue $12,659,607 $ 7,904,520 $(1,123,384) $19,440,743
Long-lived assets 1,571,978 436,171 2,008,149
Year Ended September 30, 2001
Total revenue $11,141,382 $ 8,153,778 $ (973,909) $18,321,251
Long-lived assets 1,943,505 559,769 2,503,274
Year Ended September 30, 2000
Total revenue $14,251,299 $ 9,332,206 $(1,214,868) $22,368,637
Long-lived assets 1,615,423 808,849 2,424,272
Export revenue aggregated approximately $4,277,000, $4,367,000 and
$5,137,000 in 2002, 2001 and 2000, respectively.
13. SUBSEQUENT EVENT
On October 16, 2002, Datawatch acquired 100% of the shares of Auxilor,
Inc., in exchange for $127,000 in cash and 14,764 shares of Datawatch
common stock valued at approximately $50,000. The purchase agreement also
includes an earn-out clause, which provides for a cash payout equal to 10%
of the sales of Auxilor products in fiscal 2003. The acquisition will be
accounted for using the purchase method of accounting and the Company is
currently in the process of allocating the purchase price.
18
14. QUARTERLY RESULTS (UNAUDITED)
SUPPLEMENTARY INFORMATION - Quarterly Results (Unaudited):
First Second Third Fourth
Year Ended September 30, 2002:
Software license revenue $ 3,266,349 $ 3,396,038 $ 3,684,256 $ 3,467,549
Maintenance and service revenue 1,334,394 1,415,843 1,459,961 1,416,353
Cost of software licenses 732,236 711,770 687,207 663,897
Cost of maintenance and services 670,002 746,016 686,925 576,436
Expenses 3,089,894 3,117,204 3,475,379 3,437,398
Income from continuing operations,
before tax 108,611 236,891 294,706 206,171
Income from continuing operations 108,611 236,891 294,706 206,171
Income from discontinued
operations 17,096 0 0 0
Net income 125,707 236,891 294,706 206,171
Income per share - basic and diluted:
Continuing operations $ 0.04 $ 0.09 $ 0.11 $ 0.08
Discontinued operations $ 0.01 $ 0.00 $ 0.00 $ 0.00
Net income per share -
basic and diluted $ 0.05 $ 0.09 $ 0.11 $ 0.08
Year Ended September 30, 2001:
Software license revenue $ 3,596,682 $ 3,212,791 $ 2,866,084 $ 3,078,291
Maintenance and service revenue 1,442,268 1,361,864 1,395,269 1,368,002
Cost of software licenses 669,184 708,555 714,971 969,365
Cost of maintenance and services 935,251 881,958 896,732 850,829
Expenses 3,874,535 4,173,385 4,107,993 4,948,544
Loss from continuing operations,
before tax (440,020) (1,189,243) (1,458,343) (2,322,445)
Loss from continuing operations (440,020) (1,189,243) (1,458,343) (2,297,445)
Income (loss) from discontinued
operations (33,677) (26,507) (43,490) 372,831
Net loss (473,697) (1,215,750) (1,501,833) (1,924,614)
Income (loss) per share - basic and diluted:
Continuing operations $ (0.21) $ (0.49) $ (0.58) $ (0.91)
Discontinued operations $ (0.02) $ (0.01) $ (0.02) $ 0.15
Net loss per share -
basic and diluted $ (0.23) $ (0.50) $ (0.60) $ (0.76)
In the fourth quarter of 2001, the Company recorded an additional amount
of $265,000 in royalties expense resulting from refinement of the
Company's estimated obligations.
As discussed in Note 1, in 2002, the Company reclassified payments to
certain distributors from marketing expense to a reduction of revenue.
These payments have been reclassified from selling and marketing expenses
in all periods presented.
* * * * * *
19
SCHEDULE VIII
DATAWATCH CORPORATION & SUBSIDIARIES
VALUATION AND QUALIFIED ACCOUNTS
- ----------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------
Balance at Additions Charged to Deductions Balance at
Description Beginning of Period Expenses (a) Other from Reserves End of Period
- ----------------------------------------------------------------------------------------------------
Year Ended September 30, 2002
- -----------------------------
Allowance-doubtful
accounts and
sales returns $562,068 $302,864 $ -- (d) ($320,408)(b)(c) $544,524
------------------------------------------------------------------------------
TOTAL $562,068 $302,864 $ -- ($320,408) $544,524
==============================================================================
Year Ended September 30, 2001
- -----------------------------
Allowance-doubtful
accounts and
sales returns $588,439 $554,832 $15,388(d) ($596,591)(b)(c) $562,068
------------------------------------------------------------------------------
TOTAL $588,439 $554,832 $15,388 ($596,591) $562,068
==============================================================================
Year Ended September 30, 2000
- -----------------------------
Allowance-doubtful
accounts and
sales returns $467,039 $397,700 $ 350(d) ($276,650)(b)(c) $588,439
------------------------------------------------------------------------------
TOTAL $467,039 $397,700 $ 350 ($276,650) $588,439
==============================================================================
(a) Current year provision
(b) Doubtful accounts written off
(c) Product returns
(d) Bad debt recoveries