-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OhsgPWQNJDc/tm/tQ7VGQBnjazWXGbaNMJnwoZSOAwHPiE+1QapHBTPlDl0BqcO+ Xksuvap5gBGkvFnw5a11Pw== 0001072613-02-001310.txt : 20020814 0001072613-02-001310.hdr.sgml : 20020814 20020814090203 ACCESSION NUMBER: 0001072613-02-001310 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATAWATCH CORP CENTRAL INDEX KEY: 0000792130 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 020405716 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19960 FILM NUMBER: 02731761 BUSINESS ADDRESS: STREET 1: TOWER 3, 5TH FLOOR STREET 2: 900 CHELMSFORD STREET CITY: LOWELL STATE: MA ZIP: 01851-8100 BUSINESS PHONE: 978-441-2200 10-Q 1 form10q_11413.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________ COMMISSION FILE NUMBER: 000-19960 DATAWATCH CORPORATION ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 02-0405716 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 175 CABOT STREET SUITE 503 LOWELL, MASSACHUSETTS 01854 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 978-441-2200 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at August 9, 2002 ----- ----------------------------- Common Stock $0.01 par value 2,587,605 ================================================================================ DATAWATCH CORPORATION AND SUBSIDIARIES -------------------------------------- TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION - ------------------------------ Item 1. Unaudited Financial Statements Page # ------ a) Consolidated Condensed Balance Sheets: June 30, 2002 and September 30, 2001 3 b) Consolidated Condensed Statements of Operations: Three and Nine Months Ended June 30, 2002 and 2001 4 c) Consolidated Condensed Statements of Cash Flows: Nine Months Ended June 30, 2002 and 2001 5 d) Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 PART II. OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings * Item 2. Changes in Securities and Use of Proceeds 21 Item 3. Defaults upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders * Item 5. Other Information * Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22 * No information provided due to inapplicability of item. PART I. Item 1. Financial Statements -------------------- DATAWATCH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
JUNE 30, SEPTEMBER 30, 2002 2001 ------------ ------------ ASSETS CURRENT ASSETS: Cash and equivalents $ 2,497,058 $ 1,568,691 Accounts receivable, net 3,657,020 4,255,809 Inventories 180,307 230,878 Prepaid expenses 754,939 853,332 ------------ ------------ Total current assets 7,089,324 6,908,710 ------------ ------------ PROPERTY AND EQUIPMENT: Property and equipment 3,421,296 3,516,765 Less accumulated depreciation and amortization (2,625,387) (2,491,996) ------------ ------------ Net property and equipment 795,909 1,024,769 ------------ ------------ OTHER ASSETS 1,368,427 1,490,505 ------------ ------------ TOTAL ASSETS $ 9,253,660 $ 9,423,984 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,142,039 $ 1,556,286 Accrued expenses 1,937,399 1,965,911 Borrowings under credit lines -- 635,000 Deferred revenue 2,321,501 2,155,377 ------------ ------------ Total current liabilities 5,400,939 6,312,574 ------------ ------------ ACCRUED SEVERANCE, less current portion 18,469 126,121 ------------ ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock 25,876 25,478 Additional paid-in capital 21,609,555 21,495,497 Accumulated deficit (17,124,954) (17,782,258) Accumulated other comprehensive loss (535,837) (613,040) ------------ ------------ 3,974,640 3,125,677 Less treasury stock - at cost (140,388) (140,388) ------------ ------------ Total shareholders' equity 3,834,252 2,985,289 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,253,660 $ 9,423,984 ============ ============
See accompanying notes to consolidated condensed financial statements 3 Item 1. Financial Statements (continued) -------------------- DATAWATCH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, ------------------------------ ------------------------------ 2002 2001 2002 2001 ------------ ------------ ------------ ------------ NET SALES: License $ 3,705,246 $ 2,888,212 $ 10,406,307 $ 9,735,957 Services 1,459,961 1,395,269 4,210,198 4,199,401 ------------ ------------ ------------ ------------ Net Sales 5,165,207 4,283,481 14,616,505 13,935,358 COSTS AND EXPENSES: Cost of sales 757,212 821,933 2,394,772 2,359,495 Engineering & product development 310,822 536,420 972,136 1,479,521 Selling, general & administrative 3,788,112 4,340,646 10,439,468 13,117,368 Restructuring -- -- 87,651 -- ------------ ------------ ------------ ------------ Total Costs and Expenses 4,856,146 5,698,999 13,894,027 16,956,384 INCOME (LOSS) FROM OPERATIONS 309,061 (1,415,518) 722,478 (3,021,026) INTEREST EXPENSE (24,584) (49,126) (98,359) (101,465) OTHER INCOME, primarily interest 4,351 8,917 15,219 33,171 FOREIGN CURRENCY GAIN (LOSS) 5,878 (2,616) 870 1,714 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS $ 294,706 $ (1,458,343) $ 640,208 $ (3,087,606) ------------ ------------ ------------ ------------ DISCONTINUED OPERATIONS: Loss from Guildsoft Operations -- (43,490) -- (103,674) Gain on sale of Guildsoft -- -- 17,096 -- ------------ ------------ ------------ ------------ INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- (43,490) 17,096 (103,674) ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 294,706 $ (1,501,833) $ 657,304 $ (3,191,280) ============ ============ ============ ============ INCOME (LOSS) PER COMMON SHARE- Basic & diluted: Continuing Operations-Basic $ .11 $ (.58) $ .25 $ (1.31) ------------ ------------ ------------ ------------ Continuing Operations-Diluted $ .11 $ (.58) $ .24 $ (1.31) ------------ ------------ ------------ ------------ Discontinued Operations $ .00 $ (.02) $ .01 $ (.04) ------------ ------------ ------------ ------------ NET INCOME (LOSS) PER SHARE-Basic $ .11 $ (.60) $ .26 $ (1.35) ============ ============ ============ ============ NET INCOME (LOSS) PER SHARE-Diluted $ .11 $ (.60) $ .25 $ (1.35) ============ ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 2,571,868 2,518,739 2,558,225 2,355,229 ADJUSTMENT FOR DILUTIVE POTENTIAL COMMON STOCK 112,341 -- 112,341 -- ------------ ------------ ------------ ------------ WEIGHTED AVERAGE SHARES OUTSTANDING: Diluted 2,684,209 2,518,739 2,670,566 2,355,229 ============ ============ ============ ============
See accompanying notes to consolidated condensed financial statements. 4 Item 1. Financial Statements (continued) -------------------- DATAWATCH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED JUNE 30, ------------------------------ 2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 657,304 $ (3,191,280) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 689,915 718,920 Gain on sale of Guildsoft (17,096) -- Loss on disposition of equipment 848 14,448 Stock-based compensation 37,500 -- Changes in current assets and liabilities, net of acquisitions: Accounts receivable 738,175 2,797,359 Inventories 52,904 120,949 Prepaid expenses 131,704 (247,607) Accounts payable and accrued expenses (494,893) (218,301) Deferred revenue 115,176 (7,418) ------------ ------------ Net cash provided by (used in) operating activities 1,911,537 (12,930) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and fixtures (94,748) (435,858) Proceeds from sale of equipment - net 191 19,393 Proceeds from sale of short-term investments -- 348,121 Proceeds from sale of Guildsoft 20,509 -- Capitalized software development costs (174,042) (576,219) Other assets 8,268 41,416 ------------ ------------ Net cash used in investing activities (239,822) (603,147) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock -- 1,183,438 Principal payments on long-term obligations (107,652) (311) Borrowings (Payments) under credit lines, net (635,000) (325,000) ------------ ------------ Net cash provided by (used in) financing activities (742,652) 858,127 ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (696) 16,245 NET INCREASE IN CASH AND EQUIVALENTS 928,367 258,295 CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,568,691 1,695,832 ------------ ------------ CASH AND EQUIVALENTS, END OF PERIOD $ 2,497,058 $ 1,954,127 ============ ============
See accompanying notes to consolidated condensed financial statements. 5 Item 1. Financial Statements (continued) -------------------- NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation: The accompanying unaudited consolidated condensed financial statements include the accounts of Datawatch Corporation (the "Company") and its wholly owned subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2001. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments necessary for fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. 2. Recent Accounting Pronouncements: In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." These pronouncements provide guidance on how to account for the acquisition of businesses and intangible assets, including goodwill, which arise from such activities. SFAS No. 141 affirms that only one method of accounting may be applied to a business combination, the purchase method. SFAS No. 141 also provides guidance on the allocation of purchase price to the assets acquired. SFAS No. 142 provides that goodwill resulting from business combinations no longer be amortized to expense, but rather requires an annual assessment of impairment and, if necessary, adjustments to the carrying value of goodwill. Adoption of these pronouncements is not expected to have a significant effect on the Company's consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions relating to the disposal of a component of a business of Accounting Principles Board Opinion ("APB") No. 30. In the fourth quarter of fiscal 2001, the Company elected to adopt the provisions of SFAS No. 144. In accordance with the provisions of SFAS No. 144, Guildsoft Limited, a UK distribution subsidiary sold in September 2001, is considered a discontinued operation, and prior years' financial statements have been reclassified to present Guildsoft Limited on that basis. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 nullifies EITF No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity," which required a liability be recognized at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The effect of adopting this statement is being evaluated. 6 Item 1. Financial Statements (continued) -------------------- 3. Concentration of Credit Risks and Major Customers: The Company sells its products and services to U.S and non-U.S. dealers and other software distributors, as well as to end users under normal credit terms. One customer individually accounted for 20% and 13% of net sales for the three months ended June 30, 2002 and June 30, 2001, respectively, and 18% and 14% of the net sales for the nine months ended June 30, 2002 and June 30, 2001, respectively. This same customer accounted for 24% and 21% of outstanding trade receivables as of June 30, 2002 and September 30, 2001, respectively. Other than this customer, no other customer constitutes a significant portion (more than 10%) of sales or accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Allowances are provided for anticipated doubtful accounts and sales returns 4. Inventories: Inventories consisted of the following at June 30, 2002 and September 30, 2001: JUNE 30, SEPTEMBER 30, 2002 2001 ---------- ---------- Materials $ 135,810 $ 222,976 Finished goods 44,497 7,902 ---------- ---------- TOTAL $ 180,307 $ 230,878 ========== ========== 5. Comprehensive Income: The following table sets forth the reconciliation of net income (loss) to comprehensive income (loss):
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30, --------------------------- --------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net income (loss) $ 294,706 $ (1,501,833) $ 657,304 $ (3,191,280) Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 96,380 (96,211) 77,203 (87,235) ------------ ------------ ------------ ------------ Comprehensive income (loss) $ 391,086 $ (1,598,044) $ 734,507 $ (3,278,515) ============ ============ ============ ============
Accumulated other comprehensive loss reported in the condensed consolidated balance sheets consists only of foreign currency translation adjustments. 6. Earnings (Loss) per Share: Basic net income (loss) per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share reflects the impact, when dilutive, of the exercise of options and warrants using the treasury stock method. For the three and nine month periods ended June 30, 2001, 2,349 and 16,416 potential shares were excluded from the calculation, respectively, as the effect would be antidilutive. 7. Line of Credit: On October 30, 2001 and December 19, 2001, respectively, the Company entered into amended and restated domestic and international credit lines for a period to expire on October 1, 2002. As part of the agreement to enter into these credit lines, warrants to purchase 49,669 shares of the Company's common stock were issued to the bank at an exercise price of $1.51. The fair market value of the warrants (determined by the Black-Scholes pricing model and the following assumptions: 134% volatility, 7 year estimated life and 4.8% risk-free interest 7 Item 1. Financial Statements (continued) -------------------- 7. Line of Credit (continued) rate) was determined to be $76,956 which was recorded in prepaid interest (being recognized as a component of interest expense during the term of the amended agreement period) with a corresponding increase in additional paid in capital. On May 3, 2002, the Company issued 24,498 shares of it common stock to the bank pursuant to the cashless exercise of this warrant and another existing Warrant to Purchase Stock dated January 17, 2001. As a result of this cashless exercise using a conversion right allowed under the terms of both Warrants to Purchase Stock, the bank has no further rights to acquire the Company's common stock under these warrants. The amended and restated domestic credit line provides for maximum borrowings of the lesser of $1,000,000 or 70% of defined eligible receivables and the amended and restated international credit line provides for maximum borrowings of the lesser of $500,000 or 80% of defined eligible receivables. As of June 30, 2002, the Company had no outstanding borrowings under its bank lines of credit with approximately $880,000 in borrowings available under the lines. 8. Non-cash issuance of Common Stock: In November 2001, the Company issued 15,312 shares of common stock with an aggregate fair value of $37,500 to a director for services. The fair value of the stock issued to the director was expensed as the services were provided. 9. Segment Information: The Company has determined that it has only one reportable segment meeting the criteria established under SFAS No. 131. The Company's chief operating decision maker, as defined, (determined to be the Chief Executive Officer and the Board of Directors) does not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on the Company's consolidated operations and operating results. The following table presents information about the Company's sales by product lines: THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, --------------------- --------------------- 2002 2001 2002 2001 -------- -------- -------- -------- Monarch and Monarch|ES 74% 68% 72% 69% Q|Service Management 26 32 28 31 -------- -------- -------- -------- 100% 100% 100% 100% ======== ======== ======== ======== The Company's operations are conducted in the U.S. and in Europe (principally in the United Kingdom). The following tables present information about the Company's geographic operations:
NET SALES Domestic Europe Eliminations Total --------- ------------ ------------ ------------ ------------ Three months ended 6/30/02 $ 3,410,803 $ 2,059,424 $ (305,020) $ 5,165,207 Three months ended 6/30/01 2,582,419 1,920,739 (219,677) 4,283,481 Nine months ended 6/30/02 $ 9,429,910 $ 6,050,688 $ (864,093) $ 14,616,505 Nine months ended 6/30/01 8,382,922 6,299,229 (746,793) 13,935,358 LONG-LIVED ASSETS Domestic Europe Eliminations Total ----------------- ------------ ------------ ------------ ------------ At June 30, 2002 $ 1,654,863 $ 498,223 $ -- $ 2,153,086 At September 30, 2001 1,943,505 559,769 -- 2,503,274
Export sales aggregated approximately $1,102,000 and $894,000, respectively, for the three months ended June 30, 2002 and June 30, 2001, and $3,270,000 and $3,470,000, respectively, for the nine months ended June 30, 2002 and June 30, 2001. 8 Item 1. Financial Statements (continued) -------------------- 10. Discontinued Operations: On September 20, 2001, the Company sold the operations of Guildsoft Limited, a United Kingdom distribution subsidiary, to a third party, as part of a restructuring plan (Note 11). The sale resulted in gross proceeds of $1,179,000 and a gain of approximately $413,000. The operations of Guildsoft Limited have been reflected as a discontinued operation in all periods presented. For the three months and nine months ended June 30, 2001, Guildsoft Limited had net sales of $821,536 and $2,773,047, respectively, and a loss before taxes of $43,490 and $103,674, respectively. These losses are shown on the accompanying consolidated condensed statements of operations for those periods as a loss from Guildsoft operations as part of discontinued operations. In December 2001 there was a purchase price settlement between Datawatch and the purchaser of Guildsoft Limited, resulting in a gain of $17,096 which is shown as a gain on the sale of Guildsoft as part of discontinued operations on the accompanying consolidated condensed statement of operations for the nine months ended June 30, 2002. 11. Restructuring and Centralized Operations: 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 for severance benefits and related costs for 42 terminated employees. Of these charges, totaling approximately $763,000, $377,000 was paid in fiscal 2001 and $386,000 accrued as of September 30, 2001. On June 30, 2002, the accrual related to this restructuring totaled $167,000 (reflecting cash payments of approximately $219,000 since September 30, 2001) of which the long-term portion is $18,000. The charges are expected to be fully paid in January 2005. During the second quarter of fiscal 2002, there was an additional reorganization undertaken to further improve efficiencies and reduce costs, which resulted in an additional restructuring charge of approximately $88,000 for severance benefits and related costs for 4 terminated employees. Of these charges, $75,000 was paid during the second and third quarters and $13,000 accrued as of June 30, 2002. The charges for this restructuring are expected to be fully paid in July 2002. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- GENERAL Datawatch Corporation (the "Company" or "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 service management markets. Datawatch's principal products are: Monarch, a report mining and business intelligence application that lets users extract and manipulate data from ASCII report files or HTML files produced on any mainframe, midrange, client/server or PC system; Monarch|ES, a web-enabled business information portal that allows an organization to quickly deliver business intelligence and decision support derived from existing reporting systems with no new programming or report writing; 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; Q|Service Management ("Q|SM"), an integrated service management and information technology support software package with integrated change management features, business process automation tools and a unique user-interface that promotes ease-of-use and ease-of-learning; VorteXML, a new data transformation product for the emerging XML market which converts existing, structured ASCII/ANSI text documents or HTML into valid XML on an ad hoc, programming-free basis; and Redwing, a plug-in for Adobe Acrobat that lets users extract text and tables from Adobe PDF documents. CRITICAL ACCOUNTING POLICIES Revenue Recognition and Returns Reserve Datawatch generally recognizes revenue from the sale of software products at the time of shipment, providing there are no uncertainties surrounding product acceptance, the fee is fixed and determinable, collection is considered probable, persuasive evidence of the arrangement exists and there are no significant obligations remaining. For enterprise solutions products, the Company applies the residual method in determining revenue from license sales. Revenue from implementation, integration, training and consulting services is recognized as the services are performed. Revenue from post-contract customer support services is deferred and recognized ratably over the contract period (generally one year). Post-contract customer support includes technical support and rights to unspecified software upgrades and enhancements on a when-and-if available basis. The Company's software products are sold under warranty against certain defects in material and workmanship for a period of 30 to 60 days from the date of purchase. Certain software products, including desktop versions of Monarch, Monarch Data Pump, VorteXML and Redwing sold directly to end-users, include a guarantee under which such customers may return products within 30 to 60 days for a full refund. The Company offers its distributors the ability to return obsolete versions of its products and slow-moving products for refund or credit. Reserves are provided for potential returns under these arrangements based upon historical experience and anticipated exposures. Returns reserves are primarily calculated by accruing a fixed amount each period, assessing the level of the reserve at the end of the period against anticipated returns and adjusting the reserve as needed. During the quarter ended June 30, 2002, $105,000 was accrued for the returns reserve and approximately $16,000 in returns were applied against the reserve. This compares to $150,000 accrued for the returns reserve and approximately $82,000 in returns applied against the returns reserve for the quarter ended June 10 30, 2001. During the nine months ended June 30, 2002, $205,000 was accrued for the returns reserve and approximately $138,000 in returns were applied against the reserve. This compares to $250,000 accrued for the returns reserve and approximately $350,000 in returns applied against the returns reserve for the nine months ended June 30, 2001. At June 30, 2002, the returns reserve was approximately $312,000, with 63% related to specific accounts, as compared to approximately $246,000, with 62% related to specific accounts, at September 30, 2001. Capitalized Software Development Costs The Company capitalizes certain software development costs as well as purchased software upon achieving technological feasibility of the related products. For the three months ended June 30, 2002, the Company did not capitalize any software development costs as compared to capitalized software development costs of approximately $62,000 for the quarter ended June 30, 2001. For the three months ended June 30, 2002 and June 30 2001, the Company capitalized approximately $47,000 and $70,000, respectively, of purchased software. 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 sales 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 both the three months ended June 30, 2002 and 2001, amortization of these costs was approximately $90,000. The unamortized balance of capitalized software, including purchased software, is approximately $963,000 and $1,085,000 as of June 30, 2002 and September 30, 2001, respectively. Foreign Currency Translations Datawatch translates the financial statements of foreign subsidiaries into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation." The related translation adjustments are reported as a separate component of shareholders' equity under the heading "Accumulated Other Comprehensive Loss." Accumulated other comprehensive loss reported in the accompanying consolidated condensed balance sheets consists only of foreign currency translation adjustments. At June 30, 2002 and September 30, 2001, the accumulated foreign currency translation loss totaled approximately $536,000 and $613,000, respectively. The foreign currency translation gain for the quarter ended June 30, 2002 was approximately $96,000 compared to a loss of approximately $96,000 for the quarter ended June 30, 2001. Currently the Company does not engage in foreign currency hedging activities. RESULTS OF OPERATIONS Financial information for the three months ended June 30, 2001 and the nine months ended June 30, 2001 has been reclassified to conform to the presentation of Guildsoft Limited as a discontinued operation. See Note 10 to the consolidated condensed financial statements. Three Months Ended June 30, 2002 and 2001. - ------------------------------------------ Net sales for the three months ended June 30, 2002 totaled $5,165,000 which represents an increase of $882,000 or approximately 21% from net sales of $4,283,000 for the three months ended June 30, 2001. Revenue from the sale of licenses was approximately $3,705,000 and $2,888,000 in the quarters ended June 30, 2002 and June 30, 2001, respectively. Revenue from the sale of services was approximately $1,460,000 and $1,395,000 for the quarters ended June 30, 2002 and June 30, 2001, respectively. For the three months ended June 30, 2002, revenue 11 from the sale of licenses accounted for 72% of total sales and revenue from the sale of services accounted for 28% of total sales, as compared to 67% from license sales and 33% from services sales for the three months ended June 30, 2001. For the third quarter of fiscal 2002, Monarch and Monarch|ES accounted for approximately 74% of net sales (as compared to 68% of net sales for the third quarter of fiscal 2001) and Q|SM accounted for approximately 26% of net sales (as compared to 32% of net sales for the third quarter of fiscal 2001). Monarch family sales increased by $908,000 or 31% and Q|SM family sales decreased by $26,000 or 2% in the three months ended June 30, 2002 as compared to the three months ended June 30, 2001. Datawatch attributes the increase in Monarch family sales to strong sales of the latest version of the Monarch desktop and server products and the decrease in the Q|SM family sales to a reduction in corporate spending on high ticket software solutions due to an uncertain worldwide economy and reaction to the events of September 11, 2001. Cost of sales for the three months ended June 30, 2002 was $757,000 or approximately 15% of net sales as compared to cost of sales of $822,000 or approximately 19% of net sales for the three months ended June 30, 2001. The year-over-year decrease in cost of sales is attributable to a decrease in the cost of sales for Q|SM, which is primarily the result of decreased sales of third party products, which have low margins, as part of Q|SM solutions, and reduced costs from amortization of acquired software and capitalized development for the current version of Q|SM as compared to the previous version. This decrease was partially offset by increases in cost of sales for Monarch desktop and server products due to increased sales of these products, and for the latest version of Monarch|ES, which has higher costs from royalties and amortization of acquired software and development than previous versions. Cost of sales for Q|SM was $23,000 or 2% of Q|SM sales for the three months ended June 30, 2002 as compared to $163,000 or 12% of Q|SM sales for the three months ended June 30, 2001. Cost of sales for Monarch desktop and server products was $486,000 or 15% of Monarch desktop and server sales for the three months ended June 30, 2002 as compared to $441,000 or 19% of Monarch desktop and server sales for the three months ended June 30, 2001. Cost of sales for Monarch|ES was $168,000 or 22% of Monarch|ES sales for the three months ended June 30, 2002 as compared to $139,000 or 20% of Monarch|ES sales for the three months ended June 30, 2001. Engineering and product development expenses were $311,000 for the three months ended June 30, 2002, a decrease of $225,000 or approximately 42% from $536,000 for the three months ended June 30, 2001. This decrease is primarily attributable to reduced expenses resulting from the restructurings which took place in the fourth quarter of fiscal 2001 and the second quarter of fiscal 2002, and reduced expenses for maintenance of the older versions of the Company's help desk and asset management products by external developers. The realized cost savings from the reduction in employee compensation and benefits directly related to the Company's restructurings was $124,000, or 55% of the decrease, and the reduction in expenses for the maintenance of the help desk and asset management products totaled $94,000, or 42% of the decrease. Selling, general and administrative expenses were $3,788,000 for the three months ended June 30, 2002, a decrease of $553,000 or approximately 13% from $4,341,000 for the three months ended June 30, 2001. This decrease in primarily attributable to reduced expenses related to the cost reduction and restructuring plan which was implemented during the fourth quarter of fiscal 2001. The cost savings from this plan were fully realized in the first quarter of fiscal 2002. The approximate distribution of the realized cost savings when comparing the quarters ended June 30, 2002 and June 30, 2001 is as follows: 12 o $178,000 or 32% from savings in professional services expenses provided by non-related companies o $164,000 or 30% from savings in marketing expenses primarily from reduced expenses for trade shows o $146,000 or 26% from savings in employee compensation and benefits o $38,000 or 7% from savings in travel and entertainment expenses o $13,000 or 2% from savings in facilities rent expenses o $5,000 or 1% from savings in equipment and software expenses o $9,000 or 2% from savings in all other expense types Income from continuing operations for the three months ended June 30, 2002 was approximately $295,000, which compares to a loss from continuing operations of approximately $1,458,000 for the three months ended June 30, 2001. The Company has not recorded any benefit for income taxes in either period owing to the Company's conclusion that the realization of net operating loss carryforwards was not more likely than not and based upon the expected effective tax rates for the full years being 0% in both periods. The net income for the three months ended June 30, 2002 was $295,000, which compares to a net loss of $1,502,000 for the three months ended June 30, 2001. Nine months Ended June 30, 2002 and 2001. - ----------------------------------------- Net sales for the nine months ended June 30, 2002 totaled $14,617,000 which represents an increase of $682,000 or approximately 5% from net sales of $13,935,000 for the nine months ended June 30, 2001. Revenue from the sale of licenses was approximately $10,407,000 and $9,736,000 in the nine months ended June 30, 2002 and June 30, 2001, respectively. Revenue from the sale of services was approximately $4,210,000 and $4,199,000 for the nine months ended June 30, 2002 and June 30, 2001, respectively. For the nine months ended June 30, 2002, revenue from the sale of licenses accounted for 71% of total sales and revenue from the sale of services accounted for 29% of total sales, as compared to 70% from license sales and 30% from services sales for the nine months ended June 30, 2001. For the first nine months of fiscal 2002, Monarch and Monarch|ES accounted for approximately 72% of net sales (as compared to 69% of net sales for the first nine months of fiscal 2001) and Q|SM accounted for approximately 28% of net sales (as compared to 31% of net sales for the first nine months of fiscal 2001). Monarch family sales increased by $971,000 or 10% and Q|SM family sales decreased by $289,000 or 7% in the nine months ended June 30, 2002 as compared to the nine months ended June 30, 2001. Datawatch attributes the increase in Monarch family sales to strong sales of the latest version of Monarch desktop and server products and the decrease in the Q|SM family sales to a reduction in corporate spending on high ticket software solutions due to an uncertain worldwide economy and reaction to the events of September 11, 2001. Cost of sales for the nine months ended June 30, 2002 was $2,395,000 or approximately 16% of net sales as compared to cost of sales of $2,359,000 or approximately 17% of net sales for the nine months ended June 30, 2001. The increase in cost of sales is primarily attributable to the cost of sales of the latest version of the Monarch|ES product, which has higher costs from royalties and amortization of acquired software and development than previous versions. This increase was partially offset by a decrease in cost of sales for Q|SM, which is the result of reduced costs from amortization of acquired software and capitalized development for the current version as compared to the previous version and decreased sales of third party products, which have low margins, as part of Q|SM solutions. Cost of sales for Monarch|ES was $595,000 or 27% of Monarch|ES sales for the nine months ended June 30, 2002 as compared to $320,000 or 16% of Monarch|ES sales for the nine months ended June 30, 2001. Cost of sales for Q|SM was $149,000 or 4% of Q|SM sales for the nine months ended June 30, 2002 as compared to $389,000 or 9% of Q|SM sales for the nine months ended June 30, 2001. 13 Engineering and product development expenses were $972,000 for the nine months ended June 30, 2002, a decrease of $507,000 or approximately 34% from $1,479,000 for the nine months ended June 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 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 $295,000, or 58% of the decrease, and $205,000, or 40% of the decrease, was from a reduction in employee compensation and benefits directly related to the restructurings. Selling, general and administrative expenses were $10,439,000 for the nine months ended June 30, 2002, a decrease of $2,678,000 or approximately 20% from $13,117,000 for the nine months ended June 30, 2001. This decrease in primarily attributable to reduced expenses related to the cost reduction and restructuring plan, which was implemented during the fourth quarter of fiscal 2001. The cost savings from this plan were fully realized in the first quarter of fiscal 2002. The approximate distribution of the realized cost savings when comparing the nine months ended June 30, 2002 to the nine months ended June 30, 2001 is as follows: o $999,000 or 37% from savings in employee compensation and benefits o $699,000 or 26% from savings in professional services expenses provided by non-related companies o $633,000 or 24% from savings in marketing expenses primarily from reduced expenses for direct mail and trade shows o $130,000 or 5% from savings in travel and entertainment expenses o $81,000 or 3% from savings in facilities rent expenses o $58,000 or 2% from savings in equipment and software expenses o $78,000 or 3% from savings in all other expense types Income from continuing operations for the nine months ended June 30, 2002 was approximately $640,000, which compares to a loss from continuing operations of approximately $3,088,000 for the nine months ended June 30, 2001. The Company has not recorded any benefit for income taxes in either period owing to the Company's conclusion that the realization of net operating loss carryforwards was not more likely than not and based upon the expected effective tax rates for the full years being 0% in both periods. The net income for the nine months ended June 30, 2002 was $657,000, which compares to a net loss of $3,191,000 for the nine months ended June 30, 2001. In December 2001 there was a purchase price settlement between Datawatch and the purchaser of Guildsoft Limited, resulting in a gain of $17,096 which is shown as a gain on the sale of Guildsoft as part of discontinued operations on the accompanying consolidated condensed statement of operations for the nine months ended June 30, 2002. LIQUIDITY AND CAPITAL RESOURCES Working capital increased by approximately $1,092,000 during the nine months ended June 30, 2002 primarily as a result of profitable operations. The net cash provided by operating activities totaled $1,912,000 for the nine months ended June 30, 2002 (as compared to $13,000 used in operating activities for the nine months ended June 30, 2001). The primary sources of cash during the first nine months of fiscal 2002 were profitable operations, collection of accounts receivable and 14 collections from sales that have deferred revenue, offset by accounts payable and accrued expenses. Cash used in investing activities (primarily in capitalized software) was $240,000 for the nine months ended June 30, 2002 as compared to $603,000 for the nine months ended June 30, 2001. Cash used in financing activities was $743,000 for the nine months ended June 30, 2002 as a result of a $635,000 reduction in the Company's borrowings under its credit lines and a reduction of long-term obligations of $108,000. In the nine months ended June 30, 2001, $858,000 was provided by financing activities; this amount was primarily attributable to the Company's issuance of 1,875,000 shares of common stock in a private placement to investors for an aggregate of $1,162,500. Management believes that the currently anticipated capital requirements of the Company will be satisfied through at least March 31, 2003 and the foreseeable future by cash flow from operations and funds available under the Company's line of credit agreements. On October 30, 2001 and December 19, 2001, respectively, the Company entered into amended and restated domestic and international credit lines for a period to expire on October 1, 2002. The amended and restated domestic credit line provides for maximum borrowings of the lesser of $1,000,000 or 70% of defined eligible receivables and the amended and restated international credit line provides for maximum borrowings of the lessor of $500,000 or 80% of defined eligible receivables. As of June 30, 2002, the Company had no outstanding borrowings under these lines with approximately $880,000 in borrowings available under the lines. Management believes that the Company's current operations are not materially impacted by the effects of inflation. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." These pronouncements provide guidance on how to account for the acquisition of businesses and intangible assets, including goodwill, which arise from such activities. SFAS No. 141 affirms that only one method of accounting may be applied to a business combination, the purchase method. SFAS No. 141 also provides guidance on the allocation of purchase price to the assets acquired. SFAS No. 142 provides that goodwill resulting from business combinations no longer be amortized to expense, but rather requires an annual assessment of impairment and, if necessary, adjustments to the carrying value of goodwill. Adoption of these pronouncements is not expected to have a significant effect on the Company's consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 nullifies EITF No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity," which required a liability be recognized at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The effect of adopting this statement is being evaluated. 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 15 made by its employees may contain "forward looking" information that involves risks and uncertainties. In particular, statements contained in this Report on Form 10-Q 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 Report on Form 10-Q relating to liquidity and capital resources) may constitute forward looking statements and are made under the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. The Company's actual results of operations and financial condition have varied and may in the future vary significantly from those stated in any forward looking statements. Factors that may cause such differences include, without limitation, the risks, uncertainties and other information discussed below and within this Report on Form 10-Q, as well as the accuracy of the Company's internal estimates of revenue and operating expense levels. The following discussion of the Company's risk factors should be read in conjunction with the financial statements contained herein and related notes thereto. Such factors, among others, may have a material adverse effect upon the Company's business, results of operations and financial condition. Fluctuations in Quarterly Operating Results The Company's future operating results could vary substantially from quarter to quarter because of uncertainties and/or risks associated with such things as technological change, competition, and delays in the introduction of products or product enhancements and general market trends. Historically, the Company has operated with little backlog of orders because its software products are generally shipped as orders are received. As a result, net sales in any quarter are substantially dependent on orders booked and shipped in that quarter. Because the Company's staffing and operating expenses are based on anticipated revenue levels and a high percentage of the Company's costs are fixed in the short-term, small variations in the timing of revenues can cause significant variations in operating results from quarter to quarter. Because of these factors, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. There can be no assurance that the Company will not experience such variations in operating results in the future or that such variations will not have a material adverse effect on the Company's business, financial condition or results of operation. Weakening of World Wide Economic Conditions and the Computer Software Market May Result in Lower Revenue Growth Rates or Decreased Revenues The revenue growth and profitability of the Company's business depends on the overall demand for computer software and services, particularly in the markets in which it competes. Because the Company's sales are primarily to major corporate customers, its business also depends on general economic and business conditions. A softening of demand for computer software and services, caused by a weakening of the economy in the United States or abroad, may result in lower revenue growth rates, decreased revenues or reduced profitability. In addition, recent terrorist attacks against the United States, and the United States military response to these attacks, have added to economic and political uncertainty which may adversely affect worldwide demand for computer software and services and result in significant fluctuations in the value of foreign currencies. 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 restore profitability. Dependence on Principal Products For the nine months ended June 30, 2002, Monarch and Monarch|ES products and Q|Service Management products accounted for approximately 72% and 28%, respectively, of the Company's net sales. The Company is wholly dependent on Monarch, Monarch|ES and Q|Service Management products. As a result, any factor 16 adversely affecting sales of either of these products could have a material adverse effect on the Company. The Company's future financial performance will depend in part on the successful introduction of its new and enhanced versions of these products and development of new versions of these and other products and subsequent acceptance of such new and enhanced products. In addition, competitive pressures or other factors may result in significant price erosion that could have a material adverse effect on the Company's business, financial condition or results of operations. International Sales In the nine months ended June 30, 2002, international sales accounted for approximately 43% of the Company's net sales. The Company anticipates that international sales will continue to account for a significant percentage of its net sales. A significant portion of the Company's net sales will therefore be subject to risks associated with international sales, including unexpected changes in legal and regulatory requirements, changes in tariffs, exchange rates and other barriers, political and economic instability, 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 Although the Company has no current acquisition agreements, it has addressed and may continue to address the need to develop new products, in part, through the acquisition of other companies. Acquisitions involve numerous risks including difficulties in the assimilation of the operations, technologies and products of the acquired companies, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no or limited direct prior experience and where competitors in such markets have stronger market positions, and the potential loss of key employees of the acquired company. Achieving and maintaining the anticipated benefits of an acquisition will depend in part upon whether the integration of the companies' business is accomplished in an efficient and effective manner, and there can be no assurance that this will occur. The successful combination of companies in the high technology industry may be more difficult to accomplish than in other industries. Dependence on New Introductions; New Product Delays Growth in the Company's business depends in substantial part on the continuing introduction of new products. The length of product life cycles depends in part on end-user demand for new or additional functionality in the Company's products. If the Company fails to accurately anticipate the demand for, or encounters any significant delays in developing or introducing, new products or additional functionality on its products, there could be a material adverse effect on the Company's business. Product life cycles can also be affected by the introduction by suppliers of operating systems of comparable functionality within their products. The failure of the Company to anticipate the introduction of additional functionality in products developed by such suppliers could have a material adverse effect on the Company's business. In addition, the Company's competitors may introduce products with more features and lower prices than the Company's products. Such increase in competition could adversely affect the life cycles of the Company's products, which in turn could have a material adverse effect on the Company's business. Software products may contain undetected errors or failures when first introduced or as new versions are released. There can be no assurance that, despite testing by the Company and by current and potential end-users, errors will not be found in new products after commencement of commercial shipments, resulting 17 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 Peregrine, Actuate, Quest, and others, have substantially greater financial, marketing and technological resources than the Company. No assurance can be given that the Company will have the resources required to compete successfully in the future. Dependence on Proprietary Software Technology The Company's success is dependent upon proprietary software technology. Although the Company does not own any patents on any such technology, it does hold exclusive licenses to such technology and relies principally on a combination of trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect its rights to such proprietary technology. Despite such precautions, there can be no assurance that such steps will be adequate to deter misappropriation of such technology. Reliance on Software License Agreements Substantially all of the Company's products incorporate third-party proprietary technology, which is generally licensed to the Company on an exclusive, worldwide basis. Failure by such third-parties to continue to develop technology for the Company and license such technology to the Company could have a material adverse effect on the Company's business and results of operations. Indirect Distribution Channels The Company sells a significant portion of its products through resellers, none of which are under the direct control of the Company. The loss of major resellers of the Company's products, or a significant decline in their sales, could have a material adverse effect on the Company's operating results. There can be no assurance that the Company will be able to attract or retain additional qualified resellers or that any such resellers will be able to effectively sell the Company's products. The Company seeks to select and retain resellers on the basis of their business credentials and their ability to add value through expertise in specific vertical markets or application programming expertise. In addition, the Company relies on resellers to provide post-sales service and support, and any deficiencies in such service and support could adversely affect the Company's business. 18 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 In March 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, in May 2001, the Listing Qualifications Panel 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. Since July 24, 2001, the Company's Common Stock has evidenced a closing bid price in excess of $1.00 per share, demonstrating compliance with the minimum bid price requirement. However, the Company has not maintained compliance with the continued listing requirement for market value of public float of $5 million. In response to the extraordinary market conditions that resulted from the tragedies of September 11, 2001, Nasdaq declared an emergency moratorium on the enforcement of the minimum bid price and market value of public float requirements which expired on January 2, 2002. In January 2002 the Company received a notice from The Nasdaq Stock Market, Inc. that the Company had failed to comply 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 such listing had been approved and that the listing of the Company's Common Stock would be 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. 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments. At June 30, 2002, the Company did not participate in any derivative financial instruments, or other financial and commodity instruments. The Company holds no investment securities. Primary Market Risk Exposures The Company's primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Company utilizes U.S. dollar denominated borrowings to fund its operational needs through its $1,500,000 working capital line of credit agreements. The lines, which currently bear an interest rate of prime plus 2% (6.75% at June 30, 2002), are subject to annual renewal. Had the interest rates under the lines of credit been 10% greater or lesser than actual rates, the impact would not have been material in the Company's consolidated financial statements for the period ended June 30, 2002. As of June 30, 2002, the Company had no outstanding borrowings under its working capital lines. The Company's exposure to currency exchange rate fluctuations has been and is expected to continue to be immaterial due to the fact that the operations of its international subsidiaries are almost exclusively conducted in their respective local currencies. As a result, foreign exchange fluctuations can impact the Company's consolidated results while having no impact on cash flows. Dollar advances to the Company's international subsidiaries, if any, are usually considered to be of a long-term investment nature. Therefore, the majority of currency movements are reflected in the Company's other comprehensive income. There are, however, certain situations where the Company will invoice customers in currencies other than its own. Such gains or losses, whether realized or unrealized, are reflected in income. These have not been material in the past nor does management believe that they will be material in the future. Currently the Company does not engage in foreign currency hedging activities. 20 PART II. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- On May 3, 2002, the Company issued twenty-four thousand, four hundred ninety-eight (24,498) shares of its common stock to Silicon Valley Bancshares pursuant to the cashless exercise of two existing Warrants to Purchase Stock, respectively dated January 17, 2001 and October 30, 2001. This sale was exempt from the registration requirements of the Securities Act of 1933 (the "Act") pursuant to Section 4(2) of the rules promulgated by the SEC pursuant to the Securities Act as the transaction was completed as a private placement to only one investor and the Company did not make any general solicitation relating to the issuance of these shares. Item 6. Exhibits and Reports on Form 8-K -------------------------------- A. Exhibits 10.1 Executive Agreement dated April 25, 2002 by and between Datawatch Corporation and Alan R. MacDougall (filed herewith). 10.2 Executive Agreement dated April 25, 2002 by and between Datawatch Corporation and John Kitchen (filed herewith). 10.3 Professional Services Agreement dated May 16, 2002 by and between Vested Development Corporation and Datawatch Corporation (filed herewith). 99.1 CEO Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* 99.2 CFO Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* * The Company has the originally signed certificate and will provide it to the Securities and Exchange Commission upon request. B. Reports on Form 8-K No Current Report on Form 8-K was filed during the quarterly period ended June 30, 2002. 21 SIGNATURES Pursuant to the requirements 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 on August 14, 2002. DATAWATCH CORPORATION /s/ Alan R. MacDougall ---------------------- Alan R. MacDougall Vice President of Finance and Chief Financial Officer (Principal Financial Officer) 22 EX-10.1 3 exhibit10-1_11413.txt EMPLOYMENT AGREEMENT EXHIBIT 10.1 ------------ April 25, 2002 Mr. Alan R. MacDougall 8 Nakomo Drive Litchfield, NH 03052 Dear Alan: The purpose of this letter is to memorialize the terms of your eligibility for severance with Datawatch Corporation ("the Company") in the event that you are involuntarily terminated by the Company without Cause (as defined in Paragraph 3) or if you terminate your employment for Good Reason (as defined in Paragraph 2). 1. As an at-will employee, either you or the Company may terminate your employment at any time for any or no reason with or without notice. Neither this letter nor its terms constitute a contract for continued employment or a contract for a specific term of employment. Instead, this letter sets forth the terms of our agreement with respect to your eligibility for severance. 2. In the event that you voluntarily terminate your employment with the Company at your own election and without Good Reason, you shall be entitled to no severance. For the purpose of this Agreement, "Good Reason" is defined as a material diminution in the nature or scope of your responsibilities, duties or authority; provided, however, that the transfer of certain job responsibilities, or the assignment to others of your duties and responsibilities while you are out of work due to a disability or on a leave of absence for any reason, shall not constitute a material diminution in the nature or scope of the your responsibilities, duties or authority as set forth in this Section. 3. In the event that the Company terminates your employment for "Cause," you shall be entitled to no severance. Termination by the Company shall constitute a termination for Cause under this Paragraph 3 if such termination is for one or more of the following reasons: (a) the willful and continuing failure or refusal by you to render services to the Company in accordance with your obligations to the Company; (b) gross negligence, dishonesty, breach of fiduciary duty or breach of the terms of any other agreements executed in connection herewith; (c) the commission by you of an act of fraud, embezzlement or substantial disregard of the rules or policies of the Company; (d) acts which, in the judgment of the Board of Directors, would tend to generate significant adverse publicity toward the Company; (e) the commission, or plea of nolo contendere, by you of a felony; or (f) a breach by you of the terms of the Proprietary Information and Inventions Agreement executed by you. 4. In the event that the Company terminates your employment for any reason other than those stated in Paragraph 3 above or if you terminate your employment for Good Reason as defined in Paragraph 2, and you sign a comprehensive release in the form, and of a scope, acceptable to the Company (the "Release"), the Company will pay you severance payments in equal monthly installments at your then monthly base salary for six months following your termination (the "Severance Period"). Such payments shall be made in accordance with the Company's customary payroll practices and shall be subject to all applicable federal and state withholding, payroll and other taxes. If you breach your post-employment obligations under your Proprietary Information and Inventions Agreement, the Company may immediately cease payment of all severance and/or benefits described in this Agreement. This cessation of severance and/or benefits shall be in addition to, and not as an alternative to, any other remedies in law or in equity available to the Company, including the right to seek specific performance or an injunction. 5. The terms of this agreement constitute the entire understanding relating to your employment and supersede and cancel all agreements, written or oral, made prior to the date hereof between you and the Company relating to your employment with the Company; provided, however, that nothing herein shall be deemed to limit or terminate the provisions of Proprietary Information and Inventions Agreement executed by you or in any manner alter the terms of any stock option entered into between you and the Company. 6. This Agreement, the employment relationship contemplated herein and any claim arising from such relationship, whether or not arising under this Agreement, shall be governed by and construed in accordance with the internal laws of Massachusetts, without giving effect to the principles of choice of law or conflicts of law of Massachusetts and this Agreement shall be deemed to be performable in Massachusetts. Any claims or legal actions by one party against the other arising out of the relationship between the parties contemplated herein (whether or not arising under this Agreement) shall be commenced or maintained in any state or federal court located in Massachusetts, and Executive hereby submits to the jurisdiction and venue of any such court. 7. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. This Agreement and its terms may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. No modification or waiver by the Company shall be effective without the consent of the Board of Directors then in office at the time of such modification or waiver. 8. You acknowledge that the services to be rendered by you to the Company are unique and personal in nature. Accordingly, you may not assign any of your rights or delegate any of your duties or obligations under this Agreement. The rights and obligations of the Company under this Agreement may be assigned by the Company and shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. If this letter correctly states the understanding we have reached, please indicate your acceptance by countersigning the enclosed copy and returning it to me. Very truly yours, DATAWATCH CORPORATION /s/ Robert Hagger --------------------------------- Robert Hagger President and Chief Executive Officer YOU REPRESENT THAT YOU HAVE READ THE FOREGOING AGREEMENT, THAT YOU FULLY UNDERSTAND THE TERMS AND CONDITIONS OF SUCH AGREEMENT AND THAT YOU ARE VOLUNTARILY EXECUTING THE SAME. ACCEPTED: /s/ Alan R. MacDougall April 25, 2002 - -------------------------- ------------------ Alan R. MacDougall Date EX-10.2 4 exhibit10-2_11413.txt EMPLOYMENT AGREEMENT EXHIBIT 10.2 ------------ April 25, 2002 John Kitchen 374 Dover Road Westwood, MA 02090 Dear John: The purpose of this letter is to memorialize the terms of your eligibility for severance with Datawatch Corporation ("the Company") in the event that you are involuntarily terminated by the Company without Cause (as defined in Paragraph 3) or if you terminate your employment for Good Reason (as defined in Paragraph 2). 1. As an at-will employee, either you or the Company may terminate your employment at any time for any or no reason with or without notice. Neither this letter nor its terms constitute a contract for continued employment or a contract for a specific term of employment. Instead, this letter sets forth the terms of our agreement with respect to your eligibility for severance. 2. In the event that you voluntarily terminate your employment with the Company at your own election and without Good Reason, you shall be entitled to no severance. For the purpose of this Agreement, "Good Reason" is defined as a material diminution in the nature or scope of your responsibilities, duties or authority; provided, however, that the transfer of certain job responsibilities, or the assignment to others of your duties and responsibilities while you are out of work due to a disability or on a leave of absence for any reason, shall not constitute a material diminution in the nature or scope of the your responsibilities, duties or authority as set forth in this Section. 3. In the event that the Company terminates your employment for "Cause," you shall be entitled to no severance. Termination by the Company shall constitute a termination for Cause under this Paragraph 3 if such termination is for one or more of the following reasons: (a) the willful and continuing failure or refusal by you to render services to the Company in accordance with your obligations to the Company; (b) gross negligence, dishonesty, breach of fiduciary duty or breach of the terms of any other agreements executed in connection herewith; (c) the commission by you of an act of fraud, embezzlement or substantial disregard of the rules or policies of the Company; (d) acts which, in the judgment of the Board of Directors, would tend to generate significant adverse publicity toward the Company; (e) the commission, or plea of nolo contendere, by you of a felony; or (f) a breach by you of the terms of the Proprietary Information and Inventions Agreement executed by you. 4. In the event that the Company terminates your employment for any reason other than those stated in Paragraph 3 above or if you terminate your employment for Good Reason as defined in Paragraph 2, and you sign a comprehensive release in the form, and of a scope, acceptable to the Company (the "Release"), the Company will pay you severance payments in equal monthly installments at your then monthly base salary for six months following your termination (the "Severance Period"). Such payments shall be made in accordance with the Company's customary payroll practices and shall be subject to all applicable federal and state withholding, payroll and other taxes. If you breach your post-employment obligations under your Proprietary Information and Inventions Agreement, the Company may immediately cease payment of all severance and/or benefits described in this Agreement. This cessation of severance and/or benefits shall be in addition to, and not as an alternative to, any other remedies in law or in equity available to the Company, including the right to seek specific performance or an injunction. 5. The terms of this agreement constitute the entire understanding relating to your employment and supersede and cancel all agreements, written or oral, made prior to the date hereof between you and the Company relating to your employment with the Company; provided, however, that nothing herein shall be deemed to limit or terminate the provisions of Proprietary Information and Inventions Agreement executed by you or in any manner alter the terms of any stock option entered into between you and the Company. 6. This Agreement, the employment relationship contemplated herein and any claim arising from such relationship, whether or not arising under this Agreement, shall be governed by and construed in accordance with the internal laws of Massachusetts, without giving effect to the principles of choice of law or conflicts of law of Massachusetts and this Agreement shall be deemed to be performable in Massachusetts. Any claims or legal actions by one party against the other arising out of the relationship between the parties contemplated herein (whether or not arising under this Agreement) shall be commenced or maintained in any state or federal court located in Massachusetts, and Executive hereby submits to the jurisdiction and venue of any such court. 7. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. This Agreement and its terms may not be waived, changed, discharged or terminated orally or by any course of dealing between the parties, but only by an instrument in writing signed by the party against whom any waiver, change, discharge or termination is sought. No modification or waiver by the Company shall be effective without the consent of the Board of Directors then in office at the time of such modification or waiver. 8. You acknowledge that the services to be rendered by you to the Company are unique and personal in nature. Accordingly, you may not assign any of your rights or delegate any of your duties or obligations under this Agreement. The rights and obligations of the Company under this Agreement may be assigned by the Company and shall inure to the benefit of, and shall be binding upon, the successors and assigns of the Company. If this letter correctly states the understanding we have reached, please indicate your acceptance by countersigning the enclosed copy and returning it to me. Very truly yours, DATAWATCH CORPORATION /s/ Robert Hagger ----------------------------------- Robert Hagger President and Chief Executive Officer YOU REPRESENT THAT YOU HAVE READ THE FOREGOING AGREEMENT, THAT YOU FULLY UNDERSTAND THE TERMS AND CONDITIONS OF SUCH AGREEMENT AND THAT YOU ARE VOLUNTARILY EXECUTING THE SAME. ACCEPTED: /s/ John Kitchen May 13, 2002 - -------------------- ---------------- John Kitchen Date EX-10.3 5 exhibit10-3_11413.txt PROFESSIONAL SERVICES AGREEMENT EXHIBIT 10.3 ------------ PROFESSIONAL SERVICES AGREEMENT This Professional Services Agreement ("Agreement") is entered into on May 16, 2002 ("Effective Date"), by and between: 1. VESTED DEVELOPMENT INC. ("VDI"), whose offices are at 5 New England Executive Park, 1st Floor, Burlington, MA 01803. 2. DATAWATCH CORPORATION ("DATAWATCH"), whose offices are at 175 Cabot Street, Suite 503, Lowell, MA 01854 OPERATIVE PROVISIONS 1 TERM This Agreement is effective from Effective Date until terminated pursuant to, and in accordance with the provisions of this Agreement. 2 THE SERVICES 2.1 VDI has cooperated with Datawatch to develop specifications (the "Specifications") for software for a new version of Monarch ES (the "Software") as set forth as part of the Statement of Work ("SOW") to be agreed upon and executed by both parties. 2.2 Datawatch may in its sole and absolute discretion amend the Specifications from time to time. 2.3 VDI shall design, create, develop, test and document the Software in accordance with the Specifications. 2.4 VDI shall test the Software so as to verify that the Software complies with, and functions and performs fully in accordance with, the Specifications and test plans developed by VDI and any additional test plans provided by Datawatch as provided in Sections 2.4.1 and 2.4.2 of this Agreement before delivering the source code and executable code form of the Software in electronic form to Datawatch. All test plans developed by VDI must be approved in writing by Datawatch. 2.4.1 VDI shall provide "Black Box" testing (as defined on Schedule C hereto) of the Software so as to verify that the Software functions and performs in accordance with the Specifications and in accordance with any additional scenario test plans ("Black Box Test Plans") to be developed by Datawatch and delivered to VDI within thirty (30) days of the Effective Date of this Agreement. 2.4.2 VDI shall provide "White Box" testing (as defined on Schedule C hereto) so as to verify that the Software functions and performs in accordance with the Specifications and in accordance with any additional scenario test plans ("White Box Test Plans") to be developed by Datawatch and delivered to VDI within fifteen (15) days of the delivery of the first beta version of the Software to Datawatch. 2.5 VDI shall develop and deliver to Datawatch complete product documentation as specified in the SOW and, as requested, shall explain to Datawatch's nominated representative, the Software and its functions, features and use. 2.6 All of the Services to be provided to Datawatch by VDI hereunder shall be hereinafter referred to collectively as the "Services". All Services to be performed by VDI shall be performed by employees of VDI acting within the scope of their employment. 3 PROVISION OF THE SERVICES 3.1 VDI and Datawatch shall agree upon the SOW that defines a work package for the Software to be designated for the purposes of this contract version 3.1. The SOW includes the Specifications for the Software to be developed which shall be developed according to such Specifications. The SOW contains a timetable and milestones for development of the Software. Each time VDI delivers Software to Datawatch, VDI shall also deliver a copy of the current source code for the Software. 3.2 VDI shall ensure that the Services will be performed with all due care, skill and attention and in accordance with best industry practices or in accordance with development standards as may be agreed between the parties from time to time. 3.3 VDI shall ensure that the Services are provided in accordance with the plan and timetable as set forth in the SOW. Where delays in agreed timetable are attributable to Datawatch and VDI promptly notifies Datawatch in writing of such delays, the timetable shall be adjusted accordingly. 3.4 VDI shall deliver alpha, beta and release candidate version of the Software to Datawatch in accordance with the timetable set forth in the SOW. Upon each delivery, Datawatch shall have a period of up to 7 days (in the case of the alpa and beta versions) and 30 days (in the case of the release candidate version) to determine if such version of the Software in acceptable. If the Software is not acceptable, Datawatch shall notify VDI of the defects in the Software, and VDI shall have a period of up to 30 days to correct such defects. 3.5 When the release candidate version of the Software performs in accordance with the Specification and has been developed in accordance with the SOW, Datawatch shall formally accept the Software. 3.6 Other than for the agreed SOW, there is no obligation on Datawatch to provide work for VDI. There is no obligation on VDI to provide Services outside of the SOW. 2 4 CHARGES: 4.1 VDI shall develop and deliver the Software to Datawatch in consideration of the payment of commissions on the Net License Revenue (as hereinafter defined) generated by Datawatch (the "Commissions") for the sale of the Software developed under this Agreement in the twelve (12) calendar months beginning with the calendar month immediately following written acceptance by Datawatch of the "RELEASE TO MANFACTURING"(RTM) build of the Software. The Commission rate shall be calculated as follows: 4.1.1 A Commission of 10% shall be paid on Net License Revenue up to and including one million five hundred thousand dollars ($1,500,000). 4.1.2 A Commission of five percent (5%) shall be paid to VDI on Net License Revenue in excess of one million five hundred thousand dollars ($1,500,000). 4.1.3 "Net License Revenue" shall mean license revenues recognised by Datawatch with respect to the Software (but not prior versions of the Software), net of returns and credits. 4.2 Datawatch shall provide to VDI a monthly commissions report within thirty (30) days after the month in which the Net License Revenue was generated. 4.3 Datawatch shall pay VDI accumulated Commissions within sixty (60) days after the end of the month in which the Net License Revenue was generated. 4.4 VDI shall provide Datawatch with a time and materials report on a monthly basis for work completed as part of this Agreement for the purposes of calculating the alternative payment amount which may be payable by Datawatch to VDI as provided in Section 9.3.2 upon termination of this Agreement. 4.5 If the Software is not in acceptable form within 60 days after the date scheduled in the SOW for delivery to Datawatch of the release candidate version of the Software, the period for the payment of Commissions shall be reduced by one month for each month from the end of such 60 day period until acceptance. 4.6 Datawatch shall assign a "primary point of contact" for technical questions related to the Services as defined in the SOW. As a necessary function to provide the Services, VDI must present technical questions related to the SOW to this point of contact. Datawatch understands and agrees that excessive non-responsiveness to these questions can have a significant impact on VDI's ability to meet the timetable set forth in the SOW. VDI shall clearly warn Datawatch in advance in writing if excessive non-responsiveness will cause such changes. VDI shall also designate a "primary point of contact" for issues related to this Agreement and the SOW. The initial primary point of contact for Datawatch and VDI is specified in the SOW. 5 INTELLECTUAL PROPERTY RIGHTS 5.1 If at any time during the term of this Agreement VDI should in the course of providing the Services create any design or copyright work (including the Software and any other computer program), (all of the aforesaid being collectively "the Development") in each case whether or not capable of 3 protection in any part of the world by patent or registration and whether or not relating directly or indirectly to the business of Datawatch, VDI shall treat the Development and all information relating to it as "work-for-hire" and confidential to Datawatch and shall promptly disclose full details of the Development, including all drawings and models (if any), to a director of Datawatch. 5.2 All ownership and other intellectual property rights whatsoever (including, without limitation, all intellectual property rights together with the right to any revival, renewal or extension of any such rights) and property in the Development anywhere in the world, whether those rights exist or are of a nature or type which exist at the time of this Agreement or shall only come into existence afterwards, (collectively the "Rights') shall belong to and (to the maximum extent possible) vest in Datawatch absolutely for their full terms (including any revival, renewal or extension). 5.2.1 Certain software programs or routines developed and/or owned by VDI through the course of it's regular business activities may be incorporated and/or utilized in the Development provided to Datawatch. Notwithstanding the terms in Section 5.2 VDI hereby grants to Datawatch a non-exclusive, perpetual, worldwide royalty-free license to such programs in the case that ownership is not transferred. 5.3 By way of confirmation, and for the avoidance of doubt, in consideration of Datawatch entering into this Agreement VDI hereby assigns to Datawatch (including, to the extent necessary, by way of assignment of future copyright) in each part of the world all Rights which are in that part of the world capable of assignment, for their full terms (including any revival, renewal or extension). 5.4 VDI hereby irrevocably and unconditionally waives any and all Rights, which cannot be assigned to Datawatch and grants to Datawatch a general, perpetual, worldwide royalty-free license of all such Rights. 5.5 Notwithstanding any prior termination of this Agreement, at the request and expense of Datawatch VDI shall: 5.5.1 Execute, acknowledge, seal and deliver all documents, including but not limited to all instruments of assignment, patent and copyright applications and supporting documentation, and perform all acts, that Datawatch may reasonably request to perfect, secure, defend and maintain Datawatch's rights hereunder and to carry out the intent of this Agreement. VDI agrees to assist Datawatch, at Datawatch's expense, in every proper way to obtain for Datawatch's sole benefit, in any and all countries, patents, trademarks, copyrights or other legal protection for all deliverables and intellectual property rights that by virtue of Section 5 hereof are the sole property of Datawatch. Datawatch shall reimburse VDI for its reasonable expenses incurred in the foregoing. 5.5.2 Provide to Datawatch all such assistance as Datawatch may require in relation to the resolution of any questions or disputes concerning the Development or the Rights. 4 5.6 Decisions as to the procuring of any protection for any Development (including patent or registration), and the exploitation of any Development, shall be in the sole and absolute discretion of Datawatch. 6 WARRANTY & LIMITATION OF LIABILITY 6.1 Datawatch shall be responsible for implementation, installation, and operational acceptance of the Software product developed under this agreement. Reasonable telephone support will be provided by VDI to Datawatch during initial testing, implementation and deployment. After the warranty period, VDI, under T&M billing, shall act as an "escalated technical support" for technical questions generated by Datawatch staff on behalf of Datawatch customers during the duration of this contract. At the conclusion of work specified by the SOW, Datawatch shall have the exclusive option to sign an ongoing T&M agreement for ongoing escalated technical and development support. 6.2 VDI hereby warrants (a) that the Software and Services provided hereunder shall at all times conform to the specifications of the SOW and (b) that VDI has and will have title to the goods and agrees to indemnify and hold Datawatch harmless from any and all damages, liability, loss, costs or expenses, including, but not limited to, reasonable attorney's fees and costs, arising out of or resulting from any actual patent, copyright, or trade secret claim or action regarding the goods, or from any breach of warranty or misrepresentation under the terms of this Agreement. THERE ARE NO OTHER EXPRESS WARRANTIES OF VDI'S SOFTWARE PRODUCTS OR SERVICES FURNISHED HEREUNDER. VDI DISCLAIMS WITH REGARD TO SUCH SOFTWARE PRODUCTS AND SERVICES ALL OTHER WARRANTIES WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 6.3 DATAWATCH'S EXCLUSIVE REMEDY FOR A DEFECT IN VDI'S SOFTWARE MARKETED AND DISTRIBUTED UNDER THIS AGREEMENT SHALL BE THAT IF ANY DEFECTS MATERIALLY AFFECT THE PERFORMANCE OF THE SPECIFIED FEATURES OR FUNCTIONS, AS DEFINED BY THE SOW AND THE ASSOCIATED PROJECT DOCUMENTS (INCLUDING BUT NOT LIMITED TO THE REQUIREMENTS DOCUMENT(S), THE FUNCTIONAL DESIGN DOCUMENT(S), THE TECHNICAL DESIGN DOCUMENT(S) AND/OR THE TEST PLAN(S) ) AFTER THE FINAL WRITTEN ACCEPTANCE OF A "RELEASE TO MANFACTURING"(RTM) BUILD OF THE PRODUCT BY DATAWATCH, THE DEFECT WILL BE REPAIRED OR THE SOFTWARE WILL BE REPLACED. IF AFTER VDI HAS BEEN PROVIDED REASONABLE OPPORTUNITIES TO REPAIR THE DEFECT, THIS LIMITED REMEDY FAILS OF ITS ESSENTIAL PURPOSE WITH REGARD TO THE SOFTWARE OR A UNIT OF SOFTWARE WITHIN A PERIOD OF TIME NOT TO EXCEED 90 DAYS FROM DATAWATCH'S ACCEPTANCE OF THE SOFTWARE, VDI WILL REFUND TO DATAWATCH THE PRICE PAID FOR THE DEFECTIVE SOFTWARE OR UNIT OF SOFTWARE AND COMMISSIONS OR OTHER AMOUNTS PAYABLE WITH RESPECT TO THE SOFTWARE WILL BE REDUCED TO REFLECT THE DEFECTIVE UNIT. EXCEPT FOR A CLAIM FOR INDEMNIFICATION UNDER 6.2(B) OR 7.3, VDI'S LIABILITY FOR DAMAGES TO DATAWATCH 5 RELATED TO ANY SOFTWARE FOR ANY CAUSE WHATSOEVER, REGARDLESS OF THE FORM OF ANY CLAIM OR ACTION, SHALL NOT EXCEED THE AGGREGATE PRICE PAID FOR THE SOFTWARE UNDER THIS AGREEMENT. VDI SHALL IN NO EVENT BE LIABLE FOR ANY LOSS OF DATA, PROFITS OR USE OF THE SOFTWARE, OR FOR ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE USE OR PERFORMANCE OF THE SOFTWARE. 6.4 IN NO EVENT SHALL VDI BE LIABLE TO DATAWATCH FOR ANY DAMAGES (i) CAUSED BY ALTERATIONS OR MODIFICATIONS TO THE SOFTWARE WITHOUT VDI'S WRITTEN APPROVAL; (ii) DUE TO DETERIORATION DURING PERIODS OF STORAGE OR USE OF THE SOFTWARE. EXCEPT FOR A CLAIM FOR INDEMNIFICATION UNDER 6.2(B) OR 7.3, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY NATURE WHATSOEVER. 7 CONFIDENTIAL INFORMATION 7.1 VDI acknowledges that it may on occasion have access to, and be entrusted with, information in respect of the business of Datawatch and its customers, suppliers, dealings, transactions, affairs, plans and proposals, which information is secret or confidential and important to Datawatch or the subject of an obligation of confidence owed to a third party or protected by legislation. In this Agreement such information is called "Confidential Information" and includes, without limitation, confidential or secret information relating to Datawatch's >> ideas >> business methods >> finances >> prices >> business, financial, marketing, development or manpower plans >> customer lists or details >> computer systems and software >> know-how or other matters connected with the products (and their operation) or Services used, marketed, provided, created or obtained by Datawatch, including designs, structures, source code and object code for any computer programs produced or used by Datawatch, including, without limitation, the Software. >> confidential or secret information concerning its relationships with actual or potential clients or customers and the needs and requirements of such persons 7.2 VDI acknowledges that the disclosure of Confidential Information (whether directly or indirectly) to actual or potential competitors of Datawatch would place Datawatch at a competitive disadvantage and that any unauthorized disclosure or misuse of Confidential Information would irreparably and immediately harm Datawatch and that in such event Datawatch could not be made whole by monetary damages alone. In the event of such a breach and without prejudice to any rights and remedies otherwise available to Datawatch, Datawatch shall be entitled to seek equitable relief by way of injunction without the requirement of posting any bond in connection therewith. 6 7.3 VDI shall not other than in the proper performance of their duties under this Agreement, either during the term of this Agreement or at any time after its termination: 7.3.1 disclose Confidential Information to any person except as authorized by Datawatch; or 7.3.2 use Confidential Information for their own purposes or for any purposes other than those of Datawatch; or 7.3.3 through any failure to exercise all due care and diligence, cause or permit any unauthorized disclosure of any Confidential Information 7.4 The restrictions in clause 7.3 shall cease to apply to information other than Personnel Data which (otherwise than through the default of VDI) becomes available to the public generally, with effect from the time that any such information becomes available to the public generally. 7.5 VDI shall indemnify Datawatch and keep it indemnified in respect of any breach of the obligations and restrictions in clause 7.3. 7.6 Each of the restrictions set out above, and each of the categories of Confidential Information set out above, are separate and severable and enforceable accordingly. If any one or more of such restrictions (or part of a restriction) or categories (or part of a category) is held to be against the public interest, or unlawful or in any way unenforceable, the remaining restrictions (or remaining part of the restriction) and categories (or the remaining part of the category) shall continue in full force and effect and shall bind VDI. 7.7 All computer programs and other software, notes, memoranda, records, papers, documents, correspondence and writing (which, without limitation, shall collectively include information recorded or stored in writing or on optical or magnetic tape or disc or otherwise recorded or stored for reproduction whether by mechanical or electronic or optical means and whether or not such reproductions will result in a permanent record being made) relating to the business of Datawatch which from time to time may be delivered to, or otherwise come into the possession of, VDI (whether made by it or not), shall be and shall remain the property of Datawatch and VDI shall procure the delivery of them to Datawatch immediately upon request and shall not make or keep any copies or extracts of them. 8 NON-SOLICITATION OF STAFF 8.1 During the term of this Agreement, Datawatch shall not solicit or entice away from Vested Development, Inc., any individual in the employment of VDI in a managerial supervisory or technical capacity who has had personal contact or dealings with Datawatch or its representatives in relation to the Services. 8.2 During the term of this Agreement and for a period of six months following its termination, VDI shall not employ any individual who was employed by Datawatch in a managerial supervisory or technical capacity at any time during the immediately preceding period of six months who at any time during that period of employment with Datawatch had personal contact or dealings with VDI or its representatives in relation to the Services. 7 9 TERMINATION 9.1 Either party to this agreement shall have the right to terminate this Agreement upon 30 days written notice if the other has materially failed to comply with the terms and conditions of this Agreement or if all agreed SOWs have been delivered and outstanding fees or invoices which are not the subject of a genuine dispute have been paid. 9.2 Notwithstanding 9.1 above, Datawatch shall have the right to terminate the Agreement or the work on SOW if VDI, despite repeated attempts, is unable to make the developed Software perform in accordance with the Specifications. In such event any monies paid to VDI for the SOW will be returned and no further monies against the SOW will be payable. Datawatch shall retain its ownership of the Software and all Rights. 9.3 Upon termination of the Agreement except under clause 9.2, within ten business days thereafter, Datawatch shall elect one of the following: 9.3.1 Datawatch shall surrender its ownership of the Software with no further payment obligation to VDI, and must either deliver to VDI or, at Datawatch's option, destroy the original and all copies of the Software and Documentation confirming in writing that it has fully complied with this provision and VDI shall return any amounts paid to VDI prior to such termination by Datawatch hereunder; or 9.3.2 Datawatch shall retain its ownership of the Software and all Rights, and in lieu of payment of the fees set forth in Section 4.1, shall pay to VDI the aggregate time and materials amount incurred reduced by the aggregate amount of Commissions paid or as determined in Section 6.3. 9.4 Termination of this Agreement, howsoever caused, does not free either party from their respective obligations to comply with all the terms of the Agreement which call for performance prior or subsequent to the termination date, including the VDI's obligation to protect Confidential Information and to return such confidential information as provided in this Agreement. 10 EFFECTS OF TERMINATION 10.1 Termination of this Agreement is without prejudice to any rights or duties or liabilities of either party against the other which may have accrued up to the date of such termination. 10.2 Upon termination of this Agreement for any reason, all rights and obligations of the parties under this Agreement shall cease, except as follows: 10.2.1 Datawatch' liability for fees and other charges accrued prior to the termination date shall not be extinguished by termination of this Agreement, and such amounts shall be due and payable as and to the extent provided in Section 9.3. Any credits to the Datawatch will be paid in full. 8 10.2.2 Datawatch shall retain all Rights and shall have the right to market, distribute or use any Software, for which is has paid the applicable fee as and to the extent provided in Section 9.3. 10.3 Rights granted by VDI to Datawatch under this Agreement shall continue in full force with respect to any software for which it has paid the applicable fee. 11 FORCE MAJEURE 11.1 Neither party shall be in breach of this Agreement nor liable to the other party in any way whatsoever for any failure or delay in performing any of its obligations under this Agreement due to any cause beyond the reasonable control of that party ("Force Majeure") provided always that: 11.1.1 the date performance of the obligation, which has been delayed by the Force Majeure, shall be deemed suspended only for a period equal to the delay caused by that Force Majeure; 11.1.2 the party seeking to exempt itself from liability by virtue of the provisions of clause 11.1. has given written notice to the other party within 14 days of becoming aware of the Force Majeure event; 11.1.3 the party seeking to exempt itself from liability by virtue of the provisions of clause 11.1 shall at all times use its reasonable endeavors to mitigate the severity of the Force Majeure; 11.1.4 if the delay caused by the Force Majeure continues for a continuous period of 3 months the party not seeking to exempt itself from liability will have the right to terminate this Agreement forthwith by notice at any time after the expiry of such 3 month period without incurring any liability to the other party as a result; 11.1.5 the party seeking to exempt itself from liability by virtue of the provisions of clause 11.1 will not be entitled to payment in respect of extra costs and expenses incurred by virtue of the Force Majeure. 12 VARIATIONS No variation to this Agreement will be effective unless it is in writing and signed by an officer of Datawatch and Vested Development, Inc. This Agreement sets forth the entire agreement of the parties regarding the subject matter hereof, and supersedes all prior promises, agreements or representations, whether written or oral, regarding such subject matter. 13. INDEMNIFICATION VDI agrees to indemnify and hold harmless Datawatch and its officers, directors, employees, agents, and representatives from any and all losses, liabilities damages, reasonable costs or expenses, whatsoever as incurred, including reasonable attorneys' fees, based on a claim that any software owned by VDI as described in Section 5.2.1 and incorporated in the Development, for which 9 Datawatch has been granted pursuant to Section 5.2.1 a non-exclusive perpetual license, infringes any United States copyright or patent, or is defamatory or slanderous, provided that Datawatch provides to VDI (a) notice in writing of the claim within twenty-one (21) days after Datawatch's discovery or notification of same, (b) all information in Datawatch's control regarding the claim, (c) reasonable cooperation and assistance in defending the claim of VDI's expense, and (d) the opportunity to exercise sole control of the defense, and all negotiations pertaining to the claim. VDI shall have the right, at its expense, either to procure the right for the Datawatch to continue to use the software, or to replace or modify it so it becomes non-infringing. If neither of the foregoing alternatives is available on terms that VDI, in its sole discretion, deems commercially reasonable, Datawatch shall, upon written request of VDI, return the infringing software in its possession, in which event VDI shall refund to Datawatch the price paid by Datawatch for such software. 14 GENERAL 14 (a) Independent Parties, No Third Party Beneficiaries. The parties hereto are independent contractors, and are not partners, co-venturers, agents or representatives of the other party. Nothing in this Agreement will be interpreted to create any obligations except between the parties hereto, and no person or entity will be regarded as a third-party beneficiary hereunder. 14 (b) Governing Law, Jurisdiction, Severability. This Agreement shall be governed by and construed and enforced in accordance with the substantive laws of the Commonwealth of Massachusetts, without regard to its principles of conflicts of laws. All litigation arising from or relating to this Agreement will be filed and prosecuted before any court of competent subject matter jurisdiction in Massachusetts. The parties hereto consent to the jurisdiction of such courts over them, stipulate to the convenience, efficiency and fairness of proceeding in such courts, and covenant not to allege or assert the inconvenience, inefficiency or unfairness of proceeding in such courts. If any provision of this Agreement is found to be invalid or unenforceable, this Agreement will remain in full force and effect and will be reformed to be valid and enforceable while reflecting the intent of the parties to the greatest extent permitted by law. 14 (c) Assignment: Datawatch may assign this Agreement and any rights granted under this Agreement in the context of its merger or acquisition of all or substantially all of its assets relating to the subject matter of this Agreement. 10 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized representatives as of the Effective Date. COMPANY: CLIENT: VESTED DEVELOPMENT, INC. DATAWATCH CORPORATION By: /s/ Brian Phelps By: /s/ Alan R. MacDougall ---------------------------- ------------------------------------ Printed: Brian Phelps Printed: Alan R. MacDougall ---------------------- ------------------------------ Title: CEO Title: Vice President of Finance & CFO ------------------------- --------------------------------- 11 SCHEDULE C Black Box Testing Software testing technique whereby the internal workings of the item being tested are not known by the tester. Testing focuses on the functional aspects of the software product. In a black box tests on a software product the tester only knows the inputs and what the expected outcomes should be and not how the program arrives at those outputs. The tester does not ever examine the programming code and does not need any further knowledge of the program other than its specifications. Black box testing is performed by developing a testing script, or test plan, that lists EXACT test procedure and an expected result. Only items on the test script are covered and any behavior outside the expected result is noted. Items, scenarios, configurations or behaviors not covered in the test script or plans will, by definition, not be tested. White Box Testing A software testing technique whereby explicit knowledge of the internal workings of the item being tested are used to select the test data. Unlike black box testing, white box testing uses specific knowledge of programming code to examine outputs. The test is accurate only if the tester knows what the program is supposed to do and has access and understanding of the source code and supporting design documentation. With this understanding, the tester can then see if the program diverges from its intended goal. White box testing does not account for errors caused by omission. White box testing is characterized by "free testing" - pushing the product in areas not intended by the original design specifications, but areas where a "reasonable user" might attempt to direct the product. 12 EX-99.1 6 exhibit99-1_11413.txt CERTIFICATION OF EXECUTIVE OFFICER EXHIBIT 99.1 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Datawatch Corporation (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert W. Hagger, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Robert W. Hagger - ------------------------------------------------ Robert W. Hagger Chief Executive Officer August 14, 2002 EX-99.2 7 exhibit99-2_11413.txt CERTIFICATION OF EXECUTIVE OFFICER EXHIBIT 99.2 ------------ CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Datawatch Corporation (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alan R. MacDougall, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Alan R. MacDougall - ------------------------------------------------ Alan R. MacDougall Chief Financial Officer August 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----