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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, 2003 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
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(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. [_]
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: $11,471,900
(based on the closing price of the registrant's Common Stock of $5.75 per share
on December 12, 2003 as reported by the NASDAQ SmallCap Market).
Number of shares of common stock outstanding at December 12, 2003: 2,615,711
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, 2003.
Portions of such Proxy Statement are incorporated by reference in Part III of
this report.
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PART I
ITEM 1. BUSINESS
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.
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.
DATAWATCH|ES - Datawatch|ES, formerly known as 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. Datawatch|ES allows organizations
to quickly and easily deliver business intelligence and decision support,
derived from existing reporting systems and other database sources, with no new
programming or report writing. Datawatch|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.
VISUAL|SERVICE MANAGEMENT - Visual|Service Management ("Visual|SM"), formerly
known as Q|Service Management or 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. Visual|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 or VHD ("Visual|HD" ), 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|HD is an enterprise-wide
support solution that supports an organization's existing IT infrastructure.
Visual|HD 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 typically priced from $300
to $535 per user, depending upon the number of users. A single user license for
Monarch Professional Edition is priced at $765. Multi-user
2
licenses for Monarch Professional Edition are typically priced from $415 to $665
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 $499 and VorteXML Server is typically priced at $7,999 per
server.
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 Datawatch|ES system is priced at approximately $50,000. Typical
configurations are priced in the range of $65,000 to $500,000. An entry-level
Visual|SM system is priced at approximately $20,000. Typical configurations sell
in the range of $35,000 to $250,000. An entry-level Visual|HD system sells for
less than $10,000. Typical configurations are priced in the range of $10,000 to
$60,000. 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 or 60 day money-back guarantee on certain of its products sold
directly to end-users. Under the guarantee, customers may return purchased
products within the 30 day or 60 day period 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 2003, one distributor, Ingram Micro Inc., represented
approximately 19% of the Company's total revenue. No other customer accounted
for more than 10% of the Company's total revenue in fiscal 2003. 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 38%,
41% and 45% of the Company's total revenue for fiscal 2003, 2002 and 2001,
respectively. See Note 13 to the Consolidated Financial Statements which appear
elsewhere herein.
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 to ensure that its products meet the current
and future demands of its markets as well as to take advantage of evolving
technology trends.
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 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
3
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, Monarch Data Pump 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, Monarch Data Pump and VorteXML with a stated term
expiring in the year 2009. Monarch and Monarch Data Pump are trademarks of
Datawatch Corporation and VorteXML is a registered trademark 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
- -Datawatch|ES, Visual|SM, and Visual|HD products. Datawatch|ES, Visual|SM, and
Visual|HD are trademarks of Datawatch Corporation. Visual Help Desk is a
registered trademark of Auxilor, Inc., a wholly-owned subsidiary of Datawatch
Corporation.
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 Datawatch|ES,
Visual|SM, and Visual|HD 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 compact and
floppy disks, and the printing of user manuals, packaging and other related
materials. High volume compact disk duplication is performed by non-affiliated
subcontractors, while low volume compact disk duplication is performed in-house.
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. 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 12, 2003, Datawatch had 88 full-time and 8 contract,
temporary or part-time employees, including 41 engaged in marketing, sales, and
customer service; 21 engaged in product consulting, training and technical
support; 9 engaged in product
4
management, development and quality assurance; 22 providing general,
administrative, accounting, and IT functions; and 3 engaged in software
production and warehousing.
ITEM 2. PROPERTIES
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 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 12, 2003 are as follows:
Robert W. Hagger 55 President, Chief Executive Officer and Director
John H. Kitchen, III 48 Senior Vice President of Desktop & Server
Solutions and Secretary
Alan R. MacDougall 55 Senior Vice President of Finance, Chief
Financial Officer, Treasurer and Assistant
Secretary
H. Calvin G. MacKay 59 Senior Vice President for Enterprise Software
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.
ALAN R. MACDOUGALL, Senior Vice President of Finance, Chief Financial
Officer, Treasurer and Assistant Secretary. Mr. MacDougall assumed the position
of Senior Vice President of Finance on October 22, 2003. Prior thereto, and
since December 16, 2000, Mr. MacDougall held the position of Vice President of
Finance. Mr. MacDougall assumed the positions of 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.
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 Renoir and
Rembrandt Consulting Ltd., a management consulting firm, and as the Chief
Executive Officer of the firm's South East Asia 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, 2003 High Low
4th Quarter 8.740 2.750
3rd Quarter 3.000 2.480
2nd Quarter 3.250 2.720
1st Quarter 3.640 2.870
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
There are approximately 143 shareholders of record as of December 12, 2003.
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
12, 2003 was at $5.75.
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, 2003 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. Additional
amounts of $153,000 and $217,000, respectively, were paid during fiscal 2003 and
fiscal 2002, respectively, leaving a balance of $16,000 accrued as of September
30, 2003, of which the long term portion is $3,000. The total balance 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 four terminated employees. These charges were fully paid
during fiscal 2002. During the first quarter of fiscal 2003, the Company
approved and completed a restructuring undertaken to reduce costs related to its
international operations. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," the Company recorded a restructuring charge of
approximately $181,000 for severance benefits for five terminated employees and
costs resulting from the cancellation of leases and the disposal of fixed assets
related to a relocation to smaller facilities. The charges for this
restructuring were fully paid in February 2003.
6
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 adopted
EITF 01-9 in fiscal 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.
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, 2003
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, 2003 2002 2001 2000 1999
----------------------------------------------------------------------------------
Revenue $ 17,712,206 $ 19,440,743 $ 18,321,251 $ 22,368,637 $ 23,552,764
Costs and Expenses 16,886,018 18,499,009 23,638,923 23,329,304 27,723,971
------------ ------------ ------------ ------------ ------------
Income (Loss) from Operations 826,188 941,734 (5,317,672) (960,667) (4,171,207)
Income (Loss) from
Continuing Operations 846,545 846,379 (5,385,051) (1,002,097) (3,716,637)
Discontinued Operations
Income (Loss) from Guildsoft
operations, net -- -- (143,856) 12,468 (130,544)
Gain on sale of Guildsoft -- 17,096 413,013 -- --
------------ ------------ ------------ ------------ ------------
Income (Loss) from
Discontinued Operations -- 17,096 269,157 12,468 (130,544)
Net Income (Loss) $ 846,545 $ 863,475 $ (5,115,894) $ (989,629) $ (3,847,181)
============ ============ ============ ============ ============
Net Income (Loss) from Continuing Operations
per Common Share:
Basic $ 0.33 $ 0.33 $ (2.24) $ (0.49) $ (1.83)
Diluted $ 0.31 $ 0.31 $ (2.24) $ (0.49) $ (1.83)
Net Income (Loss) per Common Share:
Basic $ 0.33 $ 0.34 $ (2.13) $ (0.48) $ (1.89)
Diluted $ 0.31 $ 0.32 $ (2.13) $ (0.48) $ (1.89)
Balance Sheet Data
September 30, 2003 2002 2001 2000 1999
----------------------------------------------------------------------------------
Total Assets $ 10,503,942 $ 9,454,466 $ 9,423,894 $ 13,572,817 $ 14,780,755
Working Capital 3,407,639 2,022,702 596,136 4,339,237 4,838,234
Long-Term Obligations 3,115 12,795 126,121 -- 354
Shareholders' Equity 5,138,115 4,060,212 2,985,289 6,866,891 7,817,707
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 desktop 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; Datawatch|ES,
formerly known as Monarch|ES, a web-enabled business information portal,
providing complete report management, business intelligence and content
management, and the ability to analyze data within reports derived from existing
reporting systems with no new programming or report writing; Visual|Service
Management , formerly known as Q|Service Management or 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 or VHD, a web-based help desk and call center
solution operating on the IBM Lotus Domino platform, acquired during fiscal 2003
in the Auxilor, Inc. transaction described below; and 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.
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 included an
earn-out clause, which provided for a cash payout equal to 10% of the sales of
Auxilor products in fiscal 2003. The activities of Auxilor from October 1, 2002
to October 16, 2002 are not consolidated into the Company's consolidated
financial statements and are not significant.
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 15. Certain of
those policies are comparatively more important to our financial results and
condition than others. The policies that the Company believes are most important
for a reader's understanding of the financial information are described below.
Revenue Recognition, Allowance for Bad Debts and Returns Reserve
The Company has two types of software product offerings: Enterprise
Software and Desktop and Server Software. The Company sells its Desktop and
Server Software products directly to end-users and through distributors and
resellers. Enterprise Software products are generally sold directly to
end-users. Sales to distributors and resellers accounted for approximately 29%,
27% and 20%, respectively, of total sales for the fiscal years ended September
30, 2003, 2002 and 2001. Revenue from the sale of all software products is
generally recognized at the time of shipment, provided 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. Both types of the Company's
software product offerings are "off-the-shelf" as such term is defined by
Statement of Position No. 97-2, "Software Revenue Recognition." Our products are
relatively straightforward and the software can be installed and used by
customers on their own with little or no customization required. Multi-user
licenses marketed by the Company are sold as a right to use the number of
licenses and license fee revenue is recognized upon delivery of all software
required to satisfy the number of licenses sold. Upon delivery, the licensing
fee is payable without further delivery obligations of the Company.
Desktop and Server Software products are generally not sold in multiple
element arrangements. Accordingly, the price paid by the customer is considered
the vendor specific objective evidence ("VSOE") of fair value for those
products.
8
Enterprise Software sales are generally multiple element arrangements which
include software license deliverables, professional services and post-contract
customer support. In such multiple element arrangements, the Company applies the
residual method in determining revenue to be allocated to a software license. In
applying the residual method, the Company deducts from the sale proceeds the
VSOE of fair value of the services and post-contract customer support in
determining the residual fair value of the software license. The VSOE of fair
value of the services and post-contract customer support is based on the amounts
charged for these elements when sold separately. Professional services include
implementation, integration, training and consulting services with revenue
recognized as the services are performed. These services are generally delivered
on a time and materials basis, are billed on a current basis as the work is
performed, and do not involve modification or customization of the software or
any other unusual acceptance clauses or terms. Post-contract customer support is
typically provided under a maintenance agreement which provides technical
support and rights to unspecified software maintenance updates and bug fixes on
a when-and-if available basis. Revenue from post-contract customer support
services is deferred and recognized ratably over the contract period (generally
one year). Such deferred amounts are recorded as part of deferred revenue in the
Company's Consolidated Balance Sheets included elsewhere herein.
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. Additionally, the Company provides its distributors with
stock-balancing rights and applies the guidance found in SFAS No. 48, "Revenue
Recognition when Right of Return Exists." Revenue from the sale of software
products to distributors and resellers is recognized at the time of shipment
providing all other criteria for revenue recognition as stated above are met and
(i) the distributor or reseller is unconditionally obligated to pay for the
products, including no contingency as to product resale, (ii) the distributor or
reseller has independent economic substance apart from the Company, (iii) the
Company is not obligated for future performance to bring about product resale,
and (iv) the amount of future returns can be reasonably estimated. The Company's
experience and history with its distributors and resellers allows for reasonable
estimates of future returns. Among other things, estimates of potential future
returns are made based on the inventory levels at the various distributors and
resellers, which the Company monitors frequently. Once the estimates of
potential future returns from all sources are made, the Company determines if it
has adequate returns reserves to cover anticipated returns and the returns
reserve is adjusted as required. Adjustments are recorded as increases or
decreases in revenue in the period of adjustment. Actual returns have
historically been within the range estimated and amounts provided by the
Company. For the fiscal years ended September 30, 2003, 2002 and 2001 changes to
and ending balances of the returns reserve were approximately as follows:
2003 2002 2001
---- ---- ----
Amounts Accrued for the Returns Reserve $379,000 $255,000 $300,000
Returns Applied Against the Returns Reserve $451,000 $215,000 $429,000
Ending Returns Reserve Balance at September 30 $213,000 $285,000 $245,000
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. For the fiscal years ended
September 30, 2003, 2002 and 2001, changes to and ending balances of the
allowance for doubtful accounts were approximately as follows:
2003 2002 2001
---- ---- ----
Additions to the Allowance for Doubtful Accounts $120,000 $ 48,000 $280,000
Amounts Applied Against the Allowance for Doubtful Accounts $150,000 $105,000 $167,000
Allowance for Doubtful Accounts Balance at September 30 $230,000 $260,000 $317,000
9
Capitalized Software Development Costs
The Company capitalizes certain software development costs as well as
purchased software upon achieving technological feasibility of the related
products. 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 fiscal years ended September
30, 2003, 2002 and 2001 amounts related to capitalized software development
costs and purchased software were approximately as follows:
2003 2002 2001
---- ---- ----
Capitalized Software Development Costs $109,000 -- $496,000
Capitalized Purchased Software $124,000 $272,000 $307,000
Amortization of Capitalized Software
Development Costs and Purchased Software $498,000 $394,000 $358,000
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 Loss." Accumulated other comprehensive loss reported in the
consolidated balance sheets consists only of foreign currency translation
adjustments. At the fiscal years ended September 30, 2003 and 2002, the
accumulated foreign currency translation loss totaled approximately $403,000 and
$516,000, respectively. The Company does not currently engage in foreign
currency hedging activities.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2003 AS COMPARED TO
FISCAL YEAR ENDED SEPTEMBER 30, 2002
Revenue from continuing operations for the fiscal year ended September 30,
2003 was $17,712,000 which represents a decrease of $1,729,000 or approximately
9% from revenue of $19,441,000 for the fiscal year ended September 30, 2002. For
fiscal 2003 Monarch, Visual|SM and Visual|HD, and Datawatch|ES sales accounted
for 59%, 29% and 12% of total revenue, respectively, as compared to 59%, 26% and
15%, respectively, for fiscal 2002.
Software license revenue for the fiscal year ended September 30, 2003 was
$12,210,000 or approximately 69% of total revenue, as compared to $13,814,000 or
approximately 71% of total revenue for the fiscal year ended September 30, 2002.
This represents a decrease of $1,604,000 or approximately 12% from fiscal 2002
to fiscal 2003. In fiscal 2003, Datawatch|ES license revenue decreased by
$911,000 and Monarch license revenue (including Monarch Data Pump, VorteXML and
Redwing) decreased by $909,000 when compared to fiscal 2002. These decreases
were partially offset by an increase in Visual|SM and Visual|HD license revenue
of $216,000 (Visual|HD license revenue increased by $232,000 and Visual|SM
license revenue decreased by $16,000). The Company attributes the decreases in
software license revenue to concerns regarding the possible effects of war and
terrorism on an uncertain worldwide economy and the resulting reduction in
corporate spending on software solutions.
Maintenance and services revenue for the fiscal year ended September 30,
2003 was $5,502,000 or approximately 31% of total revenue, as compared to
$5,627,000 or approximately 29% of total revenue for the fiscal year ended
September 30, 2002. This represents a decrease of $125,000 or approximately 2%
from fiscal 2002 to fiscal 2003. This decrease is primarily attributable to a
net decrease for Visual|SM maintenance and services revenue of $386,000 and a
net decrease in Monarch maintenance and services revenue of $101,000. This was
partially offset by Visual|HD and Datawatch|ES maintenance and services revenue
increases of $219,000 and $143,000, respectively. The decrease in Visual|SM
maintenance and services revenue is the result of reduced revenue from the
Company's Visual|SM professional services (decrease of $570,000 for fiscal
2003), partially offset by increased Visual|SM maintenance revenue (increase of
10
$184,000 for fiscal 2003). The increase in Datawatch|ES maintenance and services
revenue is the result of increased revenue from Datawatch|ES maintenance
(increase of $228,000 for fiscal 2003) partially offset by reduced revenue from
Datawatch|ES professional services (decrease of $85,000 for fiscal 2003). The
Company believes the lower professional services revenues are the result of a
reduced demand for such services due to a weakened worldwide economy. The
Company attributes the increased maintenance revenues to increasing customer
loyalty for its products, resulting in a higher percentage of maintenance
contract renewals.
Cost of software licenses for the fiscal year ended September 30, 2003 was
$2,563,000 or approximately 21% of software license revenues, as compared to
$2,795,000 or approximately 20% of software license revenues for the fiscal year
ended September 30, 2002. This decrease of $232,000 is primarily attributable to
decreased software license sales during fiscal 2003 as compared to fiscal 2002,
especially those for Datawatch|ES which has a substantially higher cost of
royalties than the Company's other products.
Cost of maintenance and services for the fiscal year ended September 30,
2003 was $2,369,000 or approximately 43% of maintenance and service revenues, as
compared to $2,679,000 or approximately 48% of maintenance and service revenues,
for the fiscal year ended September 30, 2002. This decrease of $310,000 is
primarily attributable to reductions in services headcount and related expenses.
Sales and marketing expenses were $6,129,000 for the fiscal year ended
September 30, 2003, which represents a decrease of $768,000, or approximately
11%, from $6,897,000 for the fiscal year ended September 30, 2002. This decrease
is primarily attributable to decreases in marketing expenses for direct mail,
lead generation and advertising, partially offset by an increase in show
expense. The decreases in direct mail expense, lead generation and advertising
totaled $395,000, $250,000, and $152,000, respectively, while the increase in
show expense totaled $28,000.
Engineering and product development expenses were $1,507,000 for the
fiscal year ended September 30, 2003, which represents an increase of $231,000
or approximately 18% from $1,276,000 for the fiscal year ended September 30,
2002. This increase is attributable to engineering and development expenses of
$167,000 related to the Visual|HD product acquired in the Auxilor purchase
during fiscal 2003 and increased severance charges for product development
personnel totaling $90,000. During fiscal 2003, the Company capitalized $233,000
in purchased software and software development costs. This compares to $272,000
capitalized during fiscal 2002. This decrease in capitalized costs is due to
reduced capitalized costs associated with a development project for a new
version of Visual|SM which was completed during the Company's fiscal 2003 second
quarter.
General and administrative expenses were $4,137,000 for the fiscal year
ended September 30, 2003, which represents a decrease of $627,000 or
approximately 13% from $4,764,000 for the fiscal year ended September 30, 2002.
This decrease is attributable to reductions in international general and
administrative expenses.
As a result of the foregoing, the income from continuing operations for the
year ended September 30, 2003 was $847,000, which compares to income from
continuing operations of $846,000 for the year ended September 30, 2002. The
Company recorded a provision for income taxes of $5,500 in fiscal 2003 primarily
due to an estimated federal tax liability for alternative minimum tax due, while
in fiscal 2002, no benefit or provision for income taxes was recorded. No
further tax benefits or provisions were recorded in either fiscal 2003 or fiscal
2002 due to the Company's current estimate that it will not be in a significant
taxable position in any jurisdiction owing primarily to the availability of loss
carryforwards for which valuation allowances had previously been provided. At
September 30, 2003, the Company had federal tax loss carryforwards available to
offset future taxable income of approximately $7 million (plus approximately $8
million in state tax loss carryforwards and $5 million in tax loss carryforwards
in foreign jurisdictions); 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.
In September 2001, Datawatch sold the operations of Guildsoft Limited, a
United Kingdom distribution subsidiary, to a third party. In December 2001 there
was a purchase price settlement between Datawatch and the purchaser of Guildsoft
Limited, resulting in an additional gain of $17,000 which is shown as a gain on
the sale of Guildsoft as part of discontinued operations on the Consolidated
Statement of Operations for fiscal 2002 included elsewhere herein.
Net income for the year ended September 30, 2003 was $847,000, which
compares to net income of $863,000 for the year ended September 30, 2002.
11
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, Visual|SM, and Datawatch|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 license sales (including Monarch 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 Datawatch|ES and
Visual|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 Datawatch|ES and Visual|SM sales to a reduction in corporate
spending on high-ticket software solutions due to an uncertain 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 Datawatch|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
Visual|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 Visual|SM product and a new major version of Datawatch|ES
developed and released during fiscal 2001.
12
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 income 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.
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 SFAS No. 144 (See Notes 1 and 3 to 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 from 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.
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
2008. 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 $766,000, $810,000 and $906,000 for the
years ended September 30, 2003, 2002 and 2001, respectively.
As of September 30, 2003, minimum rental commitments under noncancelable
operating leases are as follows:
Year Ending September 30,
2004 $ 599,666
2005 415,835
2006 141,320
2007 21,105
2008 8,793
Thereafter --
----------
Total minimum lease payments $1,186,719
==========
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 $1,584,000,
$1,802,000 and $1,925,000 for the years ended September 30, 2003, 2002 and 2001,
respectively. The Company is not obligated to pay any minimum royalty amounts.
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.
Accordingly, the
13
Company expensed earn-out payments of approximately $45,000
during fiscal 2003. The Company is not obligated to make earn-out payments on
the sales of Auxilor products beyond September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net income of $847,000 for the year ended September 30,
2003 as compared to net income of $863,000 and a net loss of $5,116,000 in
fiscal 2002 and 2001, respectively. Working capital increased by $1,385,000
during fiscal 2003. During fiscal 2003, approximately $1,747,000 of cash was
provided by the Company's operations as compared to approximately $3,072,000 of
cash provided by operations during fiscal 2002. During the three month periods
ended September 30, 2001, June 30, 2002 and December 31, 2002, management took a
series of steps to reduce operating expenses and to restructure operations. See
Note 4 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.
Net cash provided by operating activities for fiscal 2003 of $1,747,000 is
primarily the result of profitable operations and an increase in deferred
revenue which is due to increased maintenance renewals and product orders which
can be invoiced but not recognized as revenue under the Company's revenue
recognition policies, and a decrease in accounts receivable, partially offset by
cash payments required to reduce the assumed liabilities resulting from the
purchase of Auxilor, Inc. and decreases in accounts payable and accrued
expenses. As discussed in Note 2 to the Consolidated Financial Statements
included elsewhere herein, the Company assumed liabilities totaling
approximately $324,000 as a result of the acquisition of Auxilor. From the date
of acquisition of Auxilor to September 30, 2003, approximately $262,000 was used
to reduce these assumed liabilities. The decrease in accounts receivable is
primarily due to the decreased sales for the quarter ended September 30, 2003
compared to the quarter ended September 30, 2002. The decrease in accounts
payable during fiscal 2003 was primarily the result of reduced expense levels
due to the restructuring which took place during the quarter ended December 31,
2002. The decrease in accrued expenses which took place during the same period
was primarily the result of reductions in accrued restructuring costs and
accrued royalties due to outside developers.
Net cash used in investing activities during fiscal 2003 of $330,000 is
primarily the result of the acquisition of Auxilor, the purchase of fixed assets
(primarily computer equipment and software) and the investment in acquired
software and capitalized development, partially offset by a decrease in other
assets (primarily rent deposits).
On October 29, 2003, the Company's bank line of credit, which provided for
maximum borrowings of the lesser of $1,500,000 or 70% of defined eligible
receivables and was collateralized by substantially all the assets of the
Company, expired. The Company was offered the option to renew its bank line of
credit but decided, based on its positive cash flow during the past two fiscal
years and the current level of its cash holdings, that it was in the Company's
best interest to forego the expense required to continue the line of credit and,
therefore, did not renew the line of credit. The Company had no outstanding
borrowings under its bank line of credit, with approximately $601,000 in
borrowings available under the line, as of September 30, 2003.
Management believes based on its current cash position and by continuing to
control operating expenses and capital expenditures, the Company will have
sufficient liquidity through at least September 30, 2004 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 2002, the Financial Accounting Standards Board ("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
adopted SFAS No. 146 on October 1, 2002. Accordingly, the Company recorded
$181,459 in restructuring and centralization costs for severance benefits for
five terminated employees and costs resulting from the cancellation of leases
and the disposal of fixed assets related to a relocation to smaller facilities
during the first quarter of fiscal 2003. (See Note 4 to the Consolidated
Financial Statements elsewhere herein.)
In May 2003, the FASB issued SFAS 150, "Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," which
establishes standards for how an issuer of financial instruments classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) if, at
inception, the monetary value of the obligation is based solely or predominantly
on a fixed monetary amount known at inception, has variations in something other
than the fair value of the issuer's equity shares or has variations inversely
related to changes in the fair value of the issuer's equity shares.
14
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company adopted SFAS No. 150
on July 1, 2003. Adoption did not have a significant impact on the Company's
consolidated financial statements.
In November 2002, the FASB issued Financial Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
certain guarantees to be recorded at fair value and requires a guarantor to make
significant new disclosures, even when the likelihood of making any payments
under the guarantee is remote. Generally, FIN 45 applies to certain types of
financial guarantees that contingently require the guarantor to make payments to
the guaranteed party based on changes in an underlying that is related to an
asset, liability, or an equity security of the guaranteed party; performance
guarantees involving contracts which require the guarantor to make payments to
the guaranteed party based on another entity's failure to perform under an
obligating agreement; indemnification agreements that contingently require the
guarantor to make payments to an indemnified party based on changes in an
underlying that is related to an asset, liability, or an equity security of the
indemnified party; or indirect guarantees of the indebtedness of others.
Adoption of FIN 45 did not have a significant impact on the Company's financial
position or results of operations. The Company's disclosures required under FIN
45 follow below:
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. If necessary, the Company would provide for the estimated cost of
warranties based on specific warranty claims and claim history. However, the
Company has never incurred significant expense under it's product or service
warranties. As a result, the Company believes the estimated fair value of these
warranty agreements is minimal. Accordingly, there are no liabilities recorded
for warranty claims as of September 30, 2003.
The Company is required by the lease related to its Lowell, Massachusetts
facility to provide a letter of credit in the amount of $143,299 as a security
deposit to guarantee payment to the landlord of amounts due under the lease.
Cash on deposit providing security in the amount of this letter of credit is
recorded as part of restricted cash in the Company's consolidated balance sheets
as of September 30, 2003 and September 30, 2002 found elsewhere in this filing.
No amount has ever been drawn against the letter of credit by the landlord to
guarantee payment and no such action is anticipated in the future. As it is
anticipated that this and any other lease arrangement will continue to be paid
in a timely manner, no contingent liability has been recorded by the Company for
such leases as of September 30, 2003. See the section titled OFF BALANCE SHEET
ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
which is found elsewhere in this filing for disclosure of minimum rental
commitments under noncancelable operating leases.
As a requirement of the Company's bank line of credit arrangement which
expired on October 29, 2003, its United Kingdom subsidiaries, Datawatch
International Limited and Datawatch Europe Limited, have entered into unlimited
guarantees that pledge their assets as collateral against any default by the
Company in the repayment of amounts borrowed under the line of credit. Any
amounts borrowed under the line of credit would have been recorded as a
liability by the Company. No such amounts were borrowed as of September 30,
2003. (See Note 9 to the Consolidated Financial Statements elsewhere herein.)
As a result of the sale of the Company's former subsidiary Guildsoft
Limited in September 2001, the Company made certain warranties to the purchaser
regarding, among other things, the financial condition and accuracy of the
records of Guildsoft at the time of the sale and against future claims against
Guildsoft related to periods prior to the purchase and sale. As a guarantee of
payment for any such claims or inaccuracies, the equivalent of approximately
$160,000 was placed in escrow in a joint account controlled by both the
Company's and purchaser's United Kingdom attorneys. Under the terms of the
purchase and sale agreement, 50% of the escrow amount was to be released to the
Company on the one year anniversary of the sale and 50% released on the third
anniversary of the sale, if there were no warranty claims made by the purchaser.
To date, no warranty claims have been made by the purchaser and 50% of the funds
were released to Datawatch in September 2002. The balance, or the equivalent of
approximately $83,000, will remain in escrow until September 2004 under the
terms of the purchase and sale agreement and is recorded as part of restricted
cash in the Company's consolidated balance sheets as of September 30, 2003 and
September 30, 2002 found elsewhere in this filing. As there have been no claims
to date against the warranties and the Company believes the fair value of any
such claims to be minimal and insignificant, no contingent liability has been
recorded by the Company for these warranties as of September 30, 2003.
The Company enters into standard indemnification agreements in our ordinary
course of business. Pursuant to these agreements, the Company agrees to
indemnify, hold harmless, and reimburse the indemnified party for losses
suffered or incurred by the indemnified party, generally our customers, in
connection with any patent, copyright or other intellectual property
infringement claim by any third party with respect to our products. The term of
these indemnification agreements is generally perpetual. The maximum potential
amount of future payments the Company could be required to make under these
indemnification agreements is unlimited. The Company has never incurred costs to
defend lawsuits or settle claims related to
15
these indemnification agreements. As a result, the Company believes the
estimated fair value of these agreements is minimal. Accordingly, the Company
has no liabilities recorded for these agreements as of September 30, 2003.
Certain of our agreements also provide for the performance of services at
customer sites. These agreements may contain indemnification clauses, whereby
the Company will indemnify the customer from any and all damages, losses,
judgments, costs and expenses for acts of our employees or subcontractors
resulting in bodily injury or property damage. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company has general and
umbrella insurance policies that would enable us to recover a portion of any
amounts paid. The Company has never incurred costs to defend lawsuits or settle
claims related to these indemnification agreements. As a result, the Company
believes the estimated fair value of these agreements is minimal. Accordingly,
the Company has no liabilities recorded for these agreements as of September 30,
2003.
As permitted under Delaware law, the Company has agreements with its
directors whereby the Company will indemnify them for certain events or
occurrences while the director is, or was, serving at our request in such
capacity. The term of the director indemnification period is for the later of
ten years after the date that the director ceases to serve in such capacity or
the final termination of proceedings against the director as outlined in the
indemnification agreement. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
unlimited; however, our director and officer insurance policy limits our
exposure and enables us to recover a portion of any future amounts paid. As a
result of our insurance policy coverage, the Company believes the estimated fair
value of these indemnification agreements is minimal. All of these
indemnification agreements were grandfathered under the provisions of FIN No. 45
as they were in effect prior to December 31, 2002. Accordingly, the Company has
no liabilities recorded for these agreements as of September 30, 2003.
In January 2003, the FASB issued Financial Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities," with the objective of
improving financial reporting by companies involved with variable interest
entities. The Company is not involved with any variable interest entities as
defined within this interpretation. Accordingly, no additional disclosures are
required under FIN 46 for the fiscal year ended September 30, 2003.
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
16
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, as well as the worldwide reaction to SARS,
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. 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 2003, Monarch, Visual|SM and Visual|HD, and Datawatch|ES
accounted for approximately 59%, 29% and 12%, respectively, of the Company's
total revenue. The Company is wholly dependent on the Monarch, Visual|SM,
Visual|HD and Datawatch|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 fiscal 2003, 2002 and 2001, international sales, including export sales
from domestic operations, accounted for approximately 39%, 42% and 47%,
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
17
adversely affect the life cycles of the Company's products, which in turn could
have a material adverse effect on the Company's business.
Software products may contain undetected errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by the Company and by current and potential end-users, errors
will not be found in new products after commencement of commercial shipments,
resulting in loss of or delay in market acceptance. Any failure by the Company
to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business.
Rapid Technological Change
The markets in which the Company competes have undergone, and can be
expected to continue to undergo, rapid and significant technological change. The
ability of the Company to grow will depend on its ability to successfully update
and improve its existing products and market and license new products to meet
the changing demands of the marketplace and that can compete successfully with
the existing and new products of the Company's competitors. There can be no
assurance that the Company will be able to successfully anticipate and satisfy
the changing demands of the personal computer software marketplace, that the
Company will be able to continue to enhance its product offerings, or that
technological changes in hardware platforms or software operating systems, or
the introduction of a new product by a competitor, will not render the Company's
products obsolete.
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.
Dependence on the Ability to Hire and Retain Skilled Personnel
Qualified personnel are in great demand throughout the software industry.
Our success depends, in large part, upon our ability to attract, train, motivate
and retain highly skilled employees, particularly, technical personnel such and
product development and professional services personnel, sales and marketing
personnel and other senior personnel. Our failure to attract and retain the
highly trained technical personnel that are integral to our product development,
professional services and direct sales teams may limit the rate at which the
Company can generate sales and develop new products or product enhancements. A
change in key management could result in transition and attrition in the
affected department. This could have a material adverse effect on our business,
operating results and financial condition.
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
18
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 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, 2003, 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 exposure is currency exchange rate risk.
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
19
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.
20
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,
2003. 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, 2003 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, 2003 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, 2003 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 13(a)-15(e) 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.
It should be noted that any system of controls is designed to provide
reasonable, but not absolute, assurances that the system will achieve
its stated goals under all reasonably foreseeable circumstances. Our
Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls are effective at a level that provides
such reasonable assurances.
(b) Changes in internal controls
There were no 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.
21
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, 2003 and 2002
Consolidated Statements of Operations for the Years Ended September
30, 2003, 2002 and 2001.
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years Ended September
30, 2003, 2002 and 2001.
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
All schedules are omitted as the required information is not
applicable or is included in the financial statements or related
notes.
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)
(12) 10.5 Distribution Agreement, dated December 10, 1992, by and between
Datawatch Corporation and Ingram Micro Inc. (Exhibit 10.2)
(4) 10.6 Commercial Security Agreement between Datawatch Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (Exhibit 10.6)
(4) 10.7 Commercial Security Agreement between Personics Corporation and
Silicon Valley Bank doing business as Silicon Valley East, dated
November 1, 1994 (Exhibit 10.7)
(2) 10.8* 1996 Non-Employee Director Stock Option Plan, as amended on
December 10, 1996 (Exhibit 10.30)
(2) 10.9* 1996 International Employee Non-Qualified Stock Option Plan
(Exhibit 10.31)
(3) 10.10 Promissory Note, dated February 12, 1997, by and between Datawatch
Corporation, Personics Corporation and Silicon Valley Bank
(Exhibit 10.2).
(12) 10.11* 1996 Stock Plan as amended as of March 7, 2003 (Exhibit 10.1)
(4) 10.12 Lease, dated August 31, 2000, by and between Fortune Wakefield,
LLC and Datawatch Corporation (Exhibit 10.27)
(5) 10.13 Indemnification Agreement between Datawatch Corporation and James
Wood, dated January 12, 2001 (Exhibit 10.1)
(5) 10.14 Indemnification Agreement between Datawatch Corporation and Richard
de J. Osborne, dated January 12,2001 (Exhibit 10.2)
(6) 10.15 Registration Rights Agreement between Silicon Valley Bank and
Datawatch Corporation, dated January 17, 2001 (Exhibit 10.1)
(8) 10.16 Amendment No. 1 to Registration Rights Agreement, dated October 30,
2001, by and between Silicon Valley Bank and Datawatch Corporation
(Exhibit 10.15)
22
(6) 10.17 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) 10.18 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) 10.19 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) 10.20 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) 10.21 Supplemental Deed of Guarantee, dated January 17, 2001, by and
between Datawatch International Limited and Silicon Valley Bank
(Exhibit 10.6)
(6) 10.22 Supplemental Deed of Guarantee, dated January 17, 2001, by and
between Datawatch Europe Limited and Silicon Valley Bank (Exhibit
10.7)
(6) 10.23 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) 10.24 Form of Indemnification Agreement between Datawatch Corporation and
each of its Non-Employee Directors (Exhibit 10.1)
(7) 10.25* Advisory Agreement, dated April 5, 2001, by and between Datawatch
Corporation and Richard de J. Osborne (Exhibit 10.2)
(8) 10.26* Executive Agreement, dated July 9, 2001, between the Company and
Robert W. Hagger (Exhibit 10.24)
(8) 10.27* Management Transition Agreement, dated July 6, 2001, between the
Company and Bruce R. Gardner (Exhibit 10.25)
(8) 10.28 Amended and Restated Loan and Security Agreement, dated October 30,
2001, between Datawatch Corporation and Silicon Valley Bank
(Exhibit 10.26)
(8) 10.29 Intellectual Property Security Agreement, dated October 30, 2001 by
and between Datawatch Corporation and Silicon Valley Bank (Exhibit
10.27)
(8) 10.30 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) 10.31 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) 10.32 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) 10.33* Executive Agreement, dated December 1, 2001, by and between
Datawatch Corporation and Calvin MacKay (Exhibit 10.1)
(9) 10.34* Severance Agreement and Release, dated January 31, 2002, by and
between Datawatch Corporation and Linda Lammi (Exhibit 10.2)
(10) 10.35* Executive Agreement, dated April 25, 2002, by and between Datawatch
Corporation and Alan R. MacDougall (Exhibit 10.1)
(10) 10.36* Executive Agreement, dated April 25, 2002, by and between Datawatch
Corporation and John Kitchen (Exhibit 10.2)
(10) 10.37* Professional Services Agreement, dated May 16, 2002, by and between
Vested Development Inc. and Datawatch Corporation (Exhibit 10.3)
(11) 10.38 Loan Modification Agreement, dated November 15, 2002, by and
between Datawatch Corporation and Silicon Valley Bank, doing
business as Silicon Valley East (Exhibit 10.37)
21.1 Subsidiaries of the Registrant (filed herewith)
23.1 Independent Auditor's Consent (filed herewith)
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (filed herewith)
23
32.2 Certification of the Chief Financial Officer 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.
(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).
(11) Previously filed as an exhibit to Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 2002 and incorporated herein by
reference (the number given in parenthesis indicates the corresponding
exhibit in such Form 10-K).
(12) Previously filed as an exhibit to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2003 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, 2003.
(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.
24
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, 2003 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 December 24, 2003
- ------------------------- Officer and Director
Robert W. Hagger (Principal Executive Officer)
/s/ Alan R. MacDougall Senior Vice President of Finance, December 24, 2003
- ------------------------- Chief Financial Officer, Treasurer
Alan R. MacDougall and Assistant Secretary (Principal
Financial and Accounting Officer)
/s/ Richard de J. Osborne Chairman of the Board December 24, 2003
- -------------------------
Richard de J. Osborne
/s/ Kevin Morano Director December 24, 2003
- -------------------------
Kevin Morano
/s/ Terry W. Potter Director December 24, 2003
- -------------------------
Terry W. Potter
/s/ David T. Riddiford Director December 24, 2003
- -------------------------
David T. Riddiford
/s/ James Wood Director December 24, 2003
- -------------------------
James Wood
25
DATAWATCH CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2003 and 2002
and for Each of the Three Years in the Period
Ended September 30, 2003
Independent Auditors' Report
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
================================================================================
PAGE
INDEPENDENT AUDITORS' REPORT ............................................. 1
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2003
AND 2002 AND FOR EACH OF THE THREE YEARS IN THE PERIOD
ENDED SEPTEMBER 30, 2003:
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 of
Datawatch Corporation
Lowell, Massachusetts
We have audited the accompanying consolidated balance sheets of Datawatch
Corporation and subsidiaries as of September 30, 2003 and 2002 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended September 30, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2003, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
December 23, 2003
1
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2002
======================================================================================
ASSETS 2003 2002
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