-----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, KnVp7FaD0TupjZ0dnNyBQx/YE81Vy5OGSgjxiRGzsuQTbPzzPiXsJ2V+1MNtReek NnbnDd3EDD9eszgf3BSMWw== 0001072613-03-000827.txt : 20030515 0001072613-03-000827.hdr.sgml : 20030515 20030515115033 ACCESSION NUMBER: 0001072613-03-000827 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 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: 03702222 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 form10-q_11938.txt FORM 10-Q [PERIOD ENDED MARCH 31, 2003] ================================================================================ 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 MARCH 31, 2003 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 by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] 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 May 12, 2003 ----- --------------------------- Common Stock $0.01 par value 2,599,694 ================================================================================ DATAWATCH CORPORATION AND SUBSIDIARIES -------------------------------------- TABLE OF CONTENTS ----------------- PART I. FINANCIAL INFORMATION - ------- --------------------- Item 1. Unaudited Financial Statements Page# a) Consolidated Condensed Balance Sheets: March 31, 2003 and September 30, 2002 3 b) Consolidated Condensed Statements of Operations: Three Months and Six Months Ended March 31, 2003 and 2002 4 c) Consolidated Condensed Statements of Cash Flows: Six Months Ended March 31, 2003 and 2002 5 d) Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Item 4. Controls and Procedures 23 PART II. OTHER INFORMATION - -------- ----------------- Item 1. Legal Proceedings * Item 2. Changes in Securities and Use of Proceeds 24 Item 3. Defaults upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders 24 Item 5. Other Information * Item 6. Exhibits and Reports on Form 8-K 24 SIGNATURES 25 CERTIFICATIONS 26 *No information provided due to inapplicability of item. PART I. Item 1. Financial Statements DATAWATCH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, September 30, 2003 2002 ------------ ------------ ASSETS CURRENT ASSETS: Cash and equivalents $ 3,041,545 $ 3,605,044 Accounts receivable, net 3,391,616 3,057,356 Inventories 125,777 170,735 Prepaid expenses 597,557 571,026 ------------ ------------ Total current assets 7,156,495 7,404,161 ------------ ------------ PROPERTY AND EQUIPMENT: Property and equipment 1,810,352 3,328,717 Less accumulated depreciation and amortization (1,255,027) (2,596,107) ------------ ------------ Net property and equipment 555,325 732,610 ------------ ------------ OTHER ASSETS 1,507,314 1,317,695 ------------ ------------ TOTAL ASSETS $ 9,219,134 $ 9,454,466 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 993,264 $ 1,156,966 Accrued expenses 1,544,735 1,996,554 Deferred revenue 2,584,401 2,227,939 ------------ ------------ Total current liabilities 5,122,400 5,381,459 ------------ ------------ ACCRUED SEVERANCE, less current portion 7,997 12,795 ------------ ------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $.01 par value, 20,000,000 shares authorized; issued, 2,606,817 and 2,587,605, respectively; outstanding, 2,599,694 and 2,580,482, respectively 26,068 25,876 Additional paid-in capital 21,669,132 21,609,555 Accumulated deficit (16,952,038) (16,918,783) Accumulated other comprehensive loss (514,037) (516,048) ------------ ------------ 4,229,125 4,200,600 Less treasury stock, at cost, 7,123 shares (140,388) (140,388) ------------ ------------ Total shareholders' equity 4,088,737 4,060,212 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,219,134 $ 9,454,466 ============ ============
See accompanying notes to consolidated condensed financial statements. 3
Item 1. Financial Statements (continued) -------------------- DATAWATCH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS Three Months Ended Six Months Ended March 31, March 31, 2003 2002 2003 2002 ----------- ----------- ----------- ----------- REVENUE Software licenses $ 2,627,221 $ 3,396,038 $ 5,920,102 $ 6,662,387 Maintenance and services 1,480,781 1,415,843 2,689,520 2,750,237 ----------- ----------- ----------- ----------- TOTAL REVENUE 4,108,002 4,811,881 8,609,622 9,412,624 ----------- ----------- ----------- ----------- COSTS AND EXPENSES: Cost of software licenses 577,716 711,770 1,144,745 1,444,006 Cost of maintenance and services 615,886 746,016 1,230,243 1,416,018 Sales and marketing 1,437,795 1,591,357 2,962,005 3,114,804 Engineering and product development 473,261 337,830 815,253 661,314 General and administrative 1,057,698 1,076,082 2,308,208 2,275,414 Restructuring and centralization costs -- 87,651 181,459 87,651 ----------- ----------- ----------- ----------- TOTAL COSTS AND EXPENSES 4,162,356 4,550,706 8,641,913 8,999,207 ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS (54,354) 261,175 (32,291) 413,417 INTEREST EXPENSE (4,221) (26,792) (5,893) (73,775) OTHER INCOME, primarily interest 8,594 6,040 15,031 10,868 FOREIGN CURRENCY TRANSACTION GAIN (LOSS) (309) (3,532) (10,102) (5,008) ----------- ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS (50,290) 236,891 (33,255) 345,502 ----------- ----------- ----------- ----------- DISCONTINUED OPERATIONS: Gain on sale of Guildsoft -- -- -- 17,096 ----------- ----------- ----------- ----------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- -- -- 17,096 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ (50,290) $ 236,891 $ (33,255) $ 362,598 =========== =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE: Continuing operations - basic ($ 0.02) $ 0.09 ($ 0.01) $ 0.14 ----------- ----------- ----------- ----------- Continuing operations - diluted ($ 0.02) $ 0.09 ($ 0.01) $ 0.13 ----------- ----------- ----------- ----------- Discontinued operations - basis and diluted -- -- -- $ 0.01 ----------- ----------- ----------- ----------- NET INCOME (LOSS) PER SHARE - Basic and diluted ($ 0.02) $ 0.09 ($ 0.01) $ 0.14 =========== =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 2,596,747 2,555,984 2,594,771 2,551,403 =========== =========== =========== =========== Diluted 2,596,747 2,652,767 2,594,771 2,648,186 =========== =========== =========== ===========
See accompanying notes to consolidated condensed financial statements 4
Item 1. Financial Statements (continued) -------------------- DATAWATCH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS Six Months Ended March 31, 2003 2002 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (33,255) $ 362,598 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 362,513 462,981 Gain on sale of Guildsoft -- (17,096) Loss on disposition of equipment 105,903 848 Stock-based compensation 3,811 37,500 Changes in current assets and liabilities, net of acquisitions: Accounts receivable (121,016) 234,486 Inventories 45,342 23,087 Prepaid expenses (24,332) 17,075 Accounts payable and accrued expenses (882,252) (455,505) Deferred revenue 278,370 223,485 ----------- ----------- Net cash (used in) provided by operating activities (264,916) 889,459 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and fixtures (93,845) (21,081) Proceeds from sale of equipment - net 22,260 184 Proceeds from sale of Guildsoft -- 20,509 Purchase of Auxilor, Inc., including direct costs of $59,855 (172,150) -- Long term notes receivable 6,579 -- Capitalized software development costs (53,880) (127,542) Other assets 82,972 5,193 ----------- ----------- Net cash used in investing activities (208,064) (122,737) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 5,957 -- Principal payments on long-term obligations (4,798) (71,768) Payments under credit lines, net -- (403,379) ----------- ----------- Net cash provided by (used in) financing activities 1,159 (475,147) ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (91,678) (51,448) ----------- ----------- NET (DECREASE) INCREASE IN CASH AND EQUIVALENTS (563,499) 240,127 CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,605,044 1,568,691 ----------- ----------- CASH AND EQUIVALENTS, END OF PERIOD $ 3,041,545 $ 1,808,818 =========== =========== NON-CASH INVESTING AND FINANCING ACTIVITIES: Director stock option acceleration 3,811 -- =========== =========== Issuance of 15,312 shares of common stock for services -- $ 37,500 =========== =========== Issuance of warrants -- $ 76,956 =========== ===========
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 accounting principles generally accepted in the United States of America 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, 2002. In the opinion of management, the accompanying unaudited consolidated condensed 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. Certain amounts for the periods ended March 31, 2002 have been reclassified to conform with the March 31, 2003 presentation. 2. Revenue Recognition: The Company has two software product offerings: Enterprise Software and Desktop and Server Software. The Company sells its Desktop and Server Software products directly to end-users and through distributors and resellers. Enterprise Software products are generally sold directly to end-users. Sales to distributors and resellers accounted for approximately 26% and 22%, respectively, of total sales during the three months ended March 31, 2003 and 2002, and 25% and 20%, respectively, of total sales during the six months ended March 31, 2003 and 2002. Revenue from the sale of all software products is generally recognized at the time of shipment, provided there are no uncertainties surrounding product acceptance, the fee is fixed and determinable, collection is considered probable, persuasive evidence of the arrangement exists and there are no significant obligations remaining. All of the Company's software product offerings are "off-the-shelf" as such term is defined by Statement of Position No. 97-2, "Software Revenue Recognition." Our products are relatively straightforward and the software can be installed and used by customers on their own with little or no customization required. Multi-user licenses marketed by the Company are sold as a right to use the number of licenses and license fee revenue is recognized upon delivery of all software required to satisfy the number of licenses sold. Upon delivery, the licensing fee is payable without further delivery obligations to the Company. Desktop and Server Software products are generally not sold in multiple element arrangements. Accordingly, the price paid by the customer is considered the vendor specific objective evidence ("VSOE") of fair value for those products. Enterprise Software sales are generally multiple element arrangements which include software license deliverables, professional services and post-contract customer support. In such multiple element arrangements, the Company applies the residual method in determining revenue to be allocated to a software license. In applying the residual method, the Company deducts from the sale proceeds the VSOE of fair value of the services and post-contract customer support in determining the residual fair value of the software license. The VSOE of fair value of the services and post-contract customer support is based on the amounts charged for these elements when sold separately. Professional services include implementation, integration, training and consulting services with revenue recognized as the services are performed. These services are generally delivered on a time and materials basis, are billed on a current basis as the work is performed, and do not involve modification or customization of the software or any other unusual acceptance clauses or terms. Post-contract customer support is typically provided under a maintenance agreement which provides technical support and rights to unspecified software maintenance updates and bug fixes on a when-and-if available basis. Revenue from post-contract customer support services is deferred and recognized ratably over the contract period (generally one year). The Company provides its distributors with stock-balancing rights and applies the guidance found in Statement of Financial Accounting Standards No. 48, "Revenue Recognition when Right of Return Exists." Revenue from the sale of software products to distributors and resellers is recognized at the time of shipment providing all other criteria for revenue recognition as stated above are met and (i) the distributor or reseller is unconditionally obligated to pay for the products, including no contingency as to product resale, (ii) the distributor or reseller has independent economic substance apart from the Company, (iii) the Company is not obligated for future performance to bring about product resale, and (iv) the amount of future returns can be reasonable estimated. The Company's experience and history with its distributors and resellers allows for reasonable estimates of future returns. Among other things, estimates of potential future returns are 6 Item 1. Financial Statements (continued) -------------------- made based on the inventory levels at the various resellers, which the Company monitors frequently. Once the estimates of potential future returns are made, the Company determines if it has adequate returns reserves to cover anticipated returns and the returns reserve is adjusted as required. Adjustments are recorded as increases or decreases in revenue in the period of adjustment. 3. Stock Options: The following table presents selected information regarding the Company's stock option plans as of March 31, 2003:
Shares Authorized Available for for Grant Future Grant ------------ ------------ 1996 International Employee Non-Qualified Stock Option Plan 44,444 9,764 Datawatch Corporation 1996 Stock Plan 624,000 150,028 --------- --------- 668,444 159,792
The following table is a summary of combined activity for all of the Company's stock option plans for the six months ended March 31, 2003: Options Weighted-Average Outstanding Exercise Price -------------- ---------------- Outstanding, October 1, 2002 402,247 $ 4.56 Granted 60,167 3.13 Canceled (23,744) 2.98 Exercised (4,448) 1.34 --------- -------- Outstanding, March 31, 2003 434,222 $ 4.51 ========= Exercisable, March 31, 2003 233,895 $ 6.34 ========= The following table presents weighted-average price and life information regarding stock options outstanding and exercisable at March 31, 2003: Options Outstanding Options Exercisable - ---------------------------------------------------------- ------------------- Weighted-Average Weighted- Weighted- Remaining Average Average Exercise Number of Contractual Exercise Exercise Prices Shares Life (Years) Price Shares Price - ------------ ----------- ----------------- --------- ------ ---------- $ 1.48-2.16 150,131 9 $ 1.60 58,268 $ 1.64 2.53-3.60 150,934 9 2.93 44,114 2.85 5.20-7.17 53,366 6 5.57 52,540 5.55 7.61-10.97 39,152 5 9.21 38,334 9.18 11.52-15.19 33,527 5 13.13 33,527 13.13 19.41-21.92 4,445 3 20.91 4,445 20.91 31.78 2,667 3 31.78 2,667 31.78 -------- --- ------ -------- ------ 434,222 8 $ 4.51 233,895 $ 6.34 ======== === ====== ======== ====== 7 Item 1. Financial Statements (continued) -------------------- The Company uses the intrinsic method of valuing its stock options to measure compensation expense associated with grants of stock options to employees and directors. As permitted under SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", which amended SFAS No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees", and related interpretations including Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation", an interpretation of APB No. 25. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant. Had the Company recognized compensation for its stock options and purchase plans based on the fair value for awards under those plans, pro forma net income (loss) and pro forma net income (loss) per share would have been as follows:
Three Months Ended March 31, Six Months Ended March 31, 2003 2002 2003 2002 -------------------------- -------------------------- Net income (loss), as reported $ (50,290) $ 236,891 $ (33,255) $ 362,598 Less: Total stock-based employee compensation expense determined under fair value based method for all awards $ (71,402) $ (62,426) $ (140,072) $ (126,961) -------------------------- -------------------------- Pro forma net income (loss) $ (121,692) $ 174,465 $ (173,327) $ 235,637 ========================== ========================== Earnings (Loss) per share: Basic - as reported ($0.02) $0.09 ($0.01) $0.14 Basic - pro forma ($0.05) $0.07 ($0.07) $0.09 Diluted - as reported ($0.02) $0.09 ($0.01) $0.14 Diluted - pro forma ($0.05) $0.07 ($0.07) $0.09
The fair values used to compute pro forma net income (loss) and pro forma net income (loss) per share were estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:
Three months ended March 31, Six months ended March 31, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Risk-free interest rate 2.7% 4.7% 3.0% 4.7% Expected life of option grants (years) 4.0 3.0 4.0 3.0 Expected volatility of underlying stock 116.6% 109.1% 118.1% 115.0% Expected dividend payment rate 0.0% 0.0% 0.0% 0.0% Expected forfeiture rate 0.0% 0.0% 0.0% 0.0%
The weighted-average fair value of stock options granted was $2.76 and $1.48, respectively, for the three months ended March 31, 2003 and 2002, and $3.13 and $1.55, respectively, for the six months ended March 31, 2003 and 2002. 4. Concentration of Credit Risks and Major Customers: One customer, Ingram Micro Inc., individually accounted for 19% and 18% of revenue for the three months ended March 31, 2003 and March 31, 2002, respectively, and 17% and 16% of revenue for the six months ended March 31, 2003 and March 31, 2002, respectively. Ingram Micro Inc. accounted for 16% and 23%, respectively, of outstanding trade receivables as of March 31, 2003 and September 30, 2002. The Company sells to Ingram Micro Inc. under a distribution agreement which automatically renews for successive one (1) year terms unless terminated. 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. 8 Item 1. Financial Statements (continued) -------------------- 5. Inventories: Inventories consisted of the following at March 31, 2003 and September 30, 2002: March 31, September 30, 2003 2002 ------------ ------------ Materials $ 104,425 $ 105,814 Finished goods 21,352 64,921 ------------ ------------ TOTAL $ 125,777 $ 170,735 ============ ============ 6. Comprehensive Income: The following table sets forth the reconciliation of net income (loss) to comprehensive income (loss):
Three Months Ended Six Months Ended March 31, March 31, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net income (loss) $ (50,290) $ 236,891 $ (33,255) $ 362,598 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments (21,747) (21,653) 2,011 (19,177) ------------ ------------ ------------ ------------ Comprehensive income (loss) $ (72,037) $ 215,238 $ (31,244) $ 343,421 ============ ============ ============ ============
Accumulated other comprehensive loss reported in the consolidated condensed balance sheets consists only of foreign currency translation adjustments. 7. Earnings (Loss) per Share: Basic net income (loss) per common share is computed by dividing net income (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 six month periods ended March 31, 2003, 74,086 and 83,050 potential shares were excluded from the calculation, respectively, as the effect would be antidilutive. 8. 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 revenue by product lines: Three Months Ended Six Months Ended March 31, March 31, 2003 2002 2003 2002 ------ ------ ------ ------ Monarch 56% 58% 57% 56% Datawatch|ES 12 14 12 15 Q|SM & Visual Help Desk 32 28 31 29 ----- ----- ----- ----- 100% 100% 100% 100% ===== ===== ===== ===== 9 Item 1. Financial Statements (continued) -------------------- The Company's operations are conducted in the U.S. and internationally (principally in the United Kingdom). The following tables present information about the Company's geographic operations:
Total Revenue ------------- Domestic International Eliminations Total -------- ------------- ------------ ------ Three months ended 3/31/03 $ 2,696,867 $ 1,664,671 $ (253,536) $ 4,108,002 Three months ended 3/31/02 3,066,102 2,008,807 (263,028) 4,811,881 Six months ended 3/31/03 $ 5,677,264 $ 3,474,116 $ (541,758) $ 8,609,622 Six months ended 3/31/02 5,980,433 3,991,264 (559,073) 9,412,624 Long-lived Assets ----------------- Domestic International Eliminations Total -------- ------------- ------------ ------ At March 31, 2003 $ 1,863,787 $ 198,852 $ -- $ 2,062,639 At September 30, 2002 1,571,978 436,171 -- 2,008,149
The reconciliation of total long-lived assets to the amounts contained in our financial statements is as follows: At March 31, At September 30, 2003 2002 ----------- --------------- Property and equipment, net $ 555,325 $ 732,610 Capitalized software development costs, net* 922,092 962,312 Restricted cash* 222,314 221,729 Trademarks* 296,152 -- Long term notes receivable* 24,577 -- Deposits* 42,179 91,498 ----------- ----------- Total Long-lived assets $ 2,062,639 $ 2,008,149 * Included in other assets in the accompanying consolidated financial statements. Export sales aggregated approximately $762,000 and $1,112,000, respectively, for the three months ended March 31, 2003 and March 31, 2002, and $1,768,000 and $2,168,000, respectively, for the six months ended March 31, 2003 and March 31, 2002. 9. Line of Credit: On November 15, 2002, the Company renewed its domestic bank line-of-credit for a period to expire on October 29, 2003. The Company also had an international line-of-credit which expired on October 1, 2002. The renewed domestic credit line, which bears interest at the bank's prime rate plus 3/4% (5% at March 31, 2003), contains customary covenants which require, among other items, that the Company maintain a minimum level of consolidated tangible net worth. The renewed domestic credit line provides for maximum borrowings of the lesser of $1,500,000 or 70% of defined eligible receivables. As of March 31, 2003, the Company had no outstanding borrowings under its bank line-of-credit with approximately $617,000 in borrowings available under the line. 10. 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. On March 31, 2003, the accrual related to this restructuring totaled $59,000 (reflecting cash payments of approximately $327,000 since September 30, 2001) of which the long-term portion is $8,000. 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. The charges for this restructuring were fully paid in July 2002. 10 Item 1. Financial Statements (continued) -------------------- During the first quarter of fiscal 2003, the Company approved and completed a restructuring undertaken to reduce costs related to its international operations. In accordance with SFAS No. 146, the Company recorded a restructuring charge of approximately $181,000 for severance benefits for 5 terminated employees and costs resulting from the cancellation of leases and the disposal of fixed assets related to a relocation to smaller facilities. The charges for this restructuring were fully paid in February 2003. 11. Acquisition: On October 16, 2002, the Company acquired 100% of the outstanding shares of Auxilor, Inc. for a total consideration of approximately $561,000 comprised of $127,000 in cash, 14,764 shares of Datawatch common stock valued at approximately $50,000, direct costs of approximately $60,000, and assumed liabilities totaling approximately $324,000. In exchange, the Company received Auxilor tangible assets valued at approximately $152,000 resulting in $409,000 to be allocated to intangible assets in accordance with SFAS No. 141 and SFAS No. 142. A valuation analysis subsequently allocated approximately $285,000 and $124,000, respectively, to trademarks and acquired software. The Auxilor purchase agreement also includes an earn-out clause, which provides for a cash payout equal to 10% of the sales of Auxilor products in fiscal 2003. The earn-out will be expensed as a cost of revenue as Auxilor products and services are sold. The activities of Auxilor from October 1, 2002 to October 16, 2002 are not consolidated into the Company's consolidated condensed financial statements and are not significant. 11 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 Data Pump, a data replication and migration tool that offers a shortcut for populating and refreshing data marts and data warehouses, for migrating legacy data into new applications and for providing automated delivery of reports in a variety of formats via email; Datawatch|ES (formerly 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; Q|Service Management ("Q|SM"), a fully internet-enabled IT support solution that incorporates workflow and network management capabilities and provides web access to multiple databases via a standard browser; Visual Help Desk, a web-based help desk and call center solution operating on the IBM Lotus Domino platform, acquired in the Auxilor, Inc. purchase; VorteXML, a data transformation product for the emerging XML market that easily and quickly converts structured text output from any system into valid XML for web services and other uses using any DTD or XDR schema without programming; and Redwing, a plug-in for Adobe Acrobat that lets users extract text and tables from Adobe PDF documents. CRITICAL ACCOUNTING POLICIES In the preparation of financial statements and other financial data, management applies certain accounting policies to transactions that, depending on choices made by management, can result in various outcomes. In order for a reader to understand the following information regarding the financial performance and condition of the Company, an understanding of those accounting policies is important. Certain of those policies are comparatively more important to our financial results and condition than others. The policies that we believe are most important for a reader's understanding of the financial information provided in this report are described below. Revenue Recognition, Allowance for Bad Debts and Returns Reserve The Company has two software product offerings: Enterprise Software and Desktop and Server Software. The Company sells its Desktop and Server Software products directly to end-users and through distributors and resellers. Enterprise Software products are generally sold directly to end-users. Sales to distributors and resellers accounted for approximately 26% and 22%, respectively, of total sales during the three months ended March 31, 2003 and 2002, and 25% and 20%, respectively, of total sales during the six months ended March 31, 2003 and 2002. Revenue from the sale of all software products is generally recognized at the time of shipment, provided there are no uncertainties surrounding product acceptance, the fee is fixed and determinable, collection is considered probable, persuasive evidence of the arrangement exists and there are no significant obligations remaining. All of the Company's software product offerings are "off-the-shelf" as such term is defined by Statement of Position No. 97-2, "Software Revenue Recognition." Our products are relatively straightforward and the software can be installed and used by customers on their own with little or no customization required. Multi-user licenses marketed by the Company are sold as a right to use the number of licenses and license fee revenue is recognized upon delivery of all software required to satisfy the number of licenses sold. Upon delivery, the licensing fee is payable without further delivery obligations to the Company. Desktop and Server Software products are generally not sold in multiple element arrangements. Accordingly, the price paid by the customer is considered the vendor specific objective evidence ("VSOE") of fair value for those products. Enterprise Software sales are generally multiple element arrangements which include software license deliverables, professional services and post-contract customer support. In such multiple element arrangements, the Company applies the residual method in determining revenue to be allocated to a software license. In applying the residual method, the Company deducts from the sale proceeds the VSOE of fair value of the services and post-contract customer support in determining the residual fair value of the software license. The VSOE of fair value of the services and post-contract customer support is based on the amounts charged for these elements when sold separately. Professional services include implementation, integration, training and consulting services with revenue recognized as the services are performed. These services are 12 generally delivered on a time and materials basis, are billed on a current basis as the work is performed, and do not involve modification or customization of the software or any other unusual acceptance clauses or terms. Post-contract customer support is typically provided under a maintenance agreement which provides technical support and rights to unspecified software maintenance updates and bug fixes on a when-and-if available basis. Revenue from post-contract customer support services is deferred and recognized ratably over the contract period (generally one year). The Company's software products are sold under warranty against certain defects in material and workmanship for a period of 30 to 90 days from the date of purchase. Certain software products, including desktop versions of Monarch, Monarch Data Pump, VorteXML and Redwing sold directly to end-users, include a guarantee under which such customers may return products within 30 to 60 days for a full refund. Additionally, the Company provides its distributors with stock-balancing rights and applies the guidance found in Statement of Financial Accounting Standards No. 48, "Revenue Recognition when Right of Return Exists." Revenue from the sale of software products to distributors and resellers is recognized at the time of shipment providing all other criteria for revenue recognition as stated above are met and (i) the distributor or reseller is unconditionally obligated to pay for the products, including no contingency as to product resale, (ii) the distributor or reseller has independent economic substance apart from the Company, (iii) the Company is not obligated for future performance to bring about product resale, and (iv) the amount of future returns can be reasonable estimated. The Company's experience and history with its distributors and resellers allows for reasonable estimates of future returns. Among other things, estimates of potential future returns are made based on the inventory levels at the various distributors and resellers, which the Company monitors frequently. Once the estimates of potential future returns from all sources are made, the Company determines if it has adequate returns reserves to cover anticipated returns and the returns reserve is adjusted as required. Adjustments are recorded as increases or decreases in revenue in the period of adjustment. During the three months ended March 31, 2003, changes to the returns reserve were comprised of $50,000 accrued for the returns reserve and approximately $152,000 in returns applied against the reserve. This compares to $50,000 accrued for the returns reserve and approximately $72,000 in returns applied against the returns reserve for the three months ended March 31, 2002. During the six months ended March 31, 2003, changes to the returns reserve were comprised of $100,000 accrued for the returns reserve and approximately $244,000 in returns applied against the reserve. This compares to $100,000 accrued for the returns reserve and approximately $122,000 in returns applied against the returns reserve for the six months ended March 31, 2002. At March 31, 2003, approximately $140,000 was recorded for the returns reserve on the Company's balance sheet, with 63% related to specific accounts, as compared to approximately $285,000, with 70% related to specific accounts, at September 30, 2002. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. The Company analyzes accounts receivable and the composition of the accounts receivable aging, historical bad debts, customer creditworthiness, current economic trends, foreign currency exchange rate fluctuations, and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Based upon the analysis and estimates of the uncollectibility of its accounts receivable, the Company records an increase in the allowance for doubtful accounts when the prospect of collecting a specific account receivable becomes doubtful. Actual results could differ from the allowances for doubtful accounts recorded, and this difference may have a material effect on our financial position and results of operations. The Company recorded in its statements of operations, provisions for doubtful accounts of $5,000 and $10,000, respectively, for the three months ended March 31, 2003 and 2002, and $10,000 and $27,000, respectively, for the six months ended March 31, 2003 and 2002. The Company had write-offs against its allowances for doubtful accounts of $28,000 and $68,000, respectively, during the three months ended March 31, 2003 and 2002, and $29,000 and $110,000, respectively, for the six months ended March 31, 2003 and 2002. The Company's balance sheets as of March 31, 2003 and September 30, 2002, include allowances for doubtful accounts of $301,000 and $259,000, respectively. Capitalized Software Development Costs The Company capitalizes certain software development costs as well as purchased software upon achieving technological feasibility of the related products. For the three months ended March 31, 2003 and 2002, the Company capitalized software development costs and purchased software totaling $27,000 and $65,000, respectively. For the three months ended March 31, 2003 and 2002, the Company capitalized $27,000 and $16,000 of software development costs, respectively, and the Company purchased and capitalized software amounting to $0 and $49,000, respectively. Software development costs incurred and software purchased prior to achieving technological feasibility are charged to research and development expense as incurred. Commencing upon initial product release, capitalized costs are amortized to cost of software licenses using the straight-line method over the estimated life (which approximates the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product), generally 12 to 36 13 months. For the three months ended March 31, 2003 and 2002, amortization of these costs was approximately $101,000 and $90,000, respectively. The unamortized balance of capitalized software, including approximately $93,000 relating to the acquisition of Auxilor (see Note 11 of the Consolidated Condensed Financial Statements included elsewhere herein), was approximately $922,000 at March 31, 2003. The unamortized balance of capitalized software at September 30, 2002 was approximately $962,000. Foreign Currency Translations Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at rates in effect at each balance sheet date. Revenues, expenses and cash flows are translated into U.S. dollars at average rates prevailing when transactions occur. The related translation adjustments are reported as a separate component of shareholders' equity under the heading "Accumulated Other Comprehensive Income (Loss)." Accumulated other comprehensive loss reported in the consolidated balance sheets consists only of foreign currency translation adjustments. At March 31, 2003 and September 30, 2002, the accumulated foreign currency translation loss totaled approximately $514,000 and $516,000, respectively. Foreign currency translation losses arising during the three months ended March 31, 2003 and 2002 were both approximately $22,000. The Company does not currently engage in foreign currency hedging activities. RESULTS OF OPERATIONS Financial information for the three months and six months ended March 31, 2002 has been reclassified to conform with the March 31, 2003 presentation and to comply with the requirements of EITF 01-9 which requires that certain amounts paid by a vendor for advertising and marketing to a customer be recorded as a reduction of revenue, when certain conditions are met. The Company previously accounted for payments of this type to certain distributors as marketing expenses. For the three months and six months ended March 31, 2002, the Company has reclassified payments totaling $18,346 and $38,674, respectively, as a reduction of revenue. Three Months Ended March 31, 2003 and 2002 - ------------------------------------------ Revenue from continuing operations for the three months ended March 31, 2003 was $4,108,000 which represents a decrease of $704,000, or approximately 15%, from revenue of $4,812,000 for the three months ended March 31, 2002. For three months ended March 31, 2003, Monarch, Q|SM and Visual Help Desk, and Datawatch|ES sales accounted for 56%, 32% and 12% of total revenue, respectively, as compared to 58%, 28% and 14%, respectively, for the three months ended March 31, 2002. Visual Help Desk revenues which are the result of the recent Auxilor acquisition totaled approximately $150,000 for the three months ended March 31, 2003. Software license revenue for the three months ended March 31, 2003 was $2,627,000 or approximately 64% of total revenue, as compared to $3,396,000 or approximately 71% of total revenue for the three months ended March 31, 2002. This represents a decrease of $769,000 or approximately 23% from fiscal 2002 to fiscal 2003. For the three months ended March 31, 2003, Monarch license revenue (including Data Pump, VorteXML and Redwing) decreased by $505,000, Datawatch|ES license revenue decreased by $220,000, and Q|SM and Visual Help Desk license revenue decreased by $44,000 (Visual Help Desk license revenue increased by $100,000, while Q|SM license revenue decreased by $144,000) when compared to the three months ended March 31, 2002. The Company attributes the decrease in software license revenue to concerns regarding the possible effects of war and terrorism on an uncertain worldwide economy and the resulting reduction in corporate spending on software solutions. Maintenance and services revenue for the three months ended March 31, 2003 was $1,481,000, or approximately 36% of total revenue, as compared to $1,416,000, or approximately 29% of total revenue, for the three months ended March 31, 2002. This represents an increase of $65,000 or approximately 5%. This increase is primarily attributable to a net increase for Datawatch|ES maintenance and services revenue of $53,000 and an increase for Monarch maintenance and services revenue of $14,000, partially offset by a decrease in Q|SM and Visual Help Desk maintenance and services revenue of approximately $2,000. The increases in Datawatch|ES and Monarch maintenance and services revenue are the result of increased emphasis on the sale of maintenance contracts and professional services during the quarter, which resulted in increased recognizable revenue. It should be noted that while there was a net decrease in Q|SM and Visual Help Desk maintenance and services revenue of only $2,000, professional services revenues for these products decreased by $175,000 while maintenance revenues increased by $173,000 during the three months ended March 31, 2003. The decrease in professional services revenue is primarily the result of decreased in Q|SM professional services revenue which the Company believes is the result of a declining demand for such services due to a weakened economy in the United Kingdom where they are primarily sold. 14 Cost of software licenses for the three months ended March 31, 2003 was $578,000 or approximately 22% of software license revenues, as compared to $712,000 or approximately 21% of software license revenues for the three months ended March 31, 2002. This decrease of $134,000 is primarily attributable to decreased software license sales during the quarter. Cost of maintenance and services for the three months ended March 31, 2003 was $616,000 or approximately 42% of maintenance and service revenues, as compared to $746,000 or approximately 53% of maintenance and service revenues, for the three months ended March 31, 2002. This decrease of $130,000 is primarily attributable to reductions in services headcount and related expenses. Sales and marketing expenses were $1,438,000 for the three months ended March 31, 2003, which represents a decrease of $153,000 from $1,591,000 for the three months ended March 31, 2002. This decrease is primarily attributable to decreases in marketing expenses for direct mail and lead generation. The decrease in direct mail expense totaled $82,000 and the decrease in lead generation expense totaled $75,000 for the three months ended March 31, 2003. Engineering and product development expenses were $473,000 for the three months ended March 31, 2003, which represents an increase of $135,000 or approximately 40% from $338,000 for the three months ended March 31, 2002. This increase is primarily attributable to severance charges for product development personnel totaling approximately $84,000 and engineering and development expenses of $54,000 related to the Visual Help Desk product acquired in the Auxilor purchase. During the three months ended March 31, 2003, the Company capitalized $27,000 in purchased software and software development costs. This compares to $65,000 capitalized in the three months ended March 31, 2002. This decrease in capitalized costs in the second quarter of fiscal 2003, as compared to the second quarter of fiscal 2002, is due to reduced capitalized costs associated with a development project for a new version of Q|SM which was completed during the three months ended March 31, 2003. General and administrative expenses were $1,058,000 for the three months ended March 31, 2003, which represents a decrease of $18,000 or approximately 2% from $1,076,000 for the three months ended March 31, 2002. This decrease is primarily due to reduced expense levels resulting from cost controls implemented by management, including restructuring activities which took place in the second quarter of fiscal 2002 and the first quarter of fiscal 2003. As a result of the foregoing, the loss from continuing operations for the three months ended March 31, 2003 was $50,000, which compares to income from continuing operations of $237,000 for the three months ended March 31, 2002. During the three months ended March 31, 2002, no provision for income taxes was recorded due to the availability of loss carryforwards for which valuation allowances had previously been provided. During the three months ended March 31, 2003, no benefit for the current period operating loss was recorded due to the continued uncertainty regarding eventual recovery of this loss in cash reductions in income taxes. At March 31, 2003, the Company had federal tax loss carryforwards available to offset future taxable income of approximately $7 million; a full valuation reserve has been established against these assets as uncertainty continues to exist regarding the Company's ability to generate sufficient future taxable income for the utilization of these losses. Net loss for the three months ended March 31, 2003 was $50,000, which compares to net income of $237,000 for the three months ended March 31, 2002. Six Months Ended March 31, 2003 and 2002 - ---------------------------------------- Revenue from continuing operations for the six months ended March 31, 2003 was $8,610,000 which represents a decrease of $803,000, or approximately 9%, from revenue of $9,413,000 for the six months ended March 31, 2002. For six months ended March 31, 2003, Monarch, Q|SM and Visual Help Desk, and Datawatch|ES sales accounted for 57%, 31% and 12% of total revenue, respectively, as compared to 56%, 29% and 15%, respectively, for the six months ended March 31, 2002. Visual Help Desk revenues which are the result of the recent Auxilor acquisition totaled approximately $264,000 for the six months ended March 31, 2003. Software license revenue for the six months ended March 31, 2003 was $5,920,000 or approximately 69% of total revenue, as compared to $6,662,000 or approximately 71% of total revenue for the six months ended March 31, 2002. This represents a decrease of $742,000 or approximately 11% from fiscal 2002 to fiscal 2003. For the six months ended March 31, 2003, Datawatch|ES license revenue decreased by $511,000 and Monarch license revenue (including Data Pump, VorteXML and Redwing) decreased by $405,000 when compared to the six months ended March 31, 2002. Together these 15 decreases account for a decrease of approximately 14% in total software license revenue. These decreases were partially offset by an increase in Q|SM and Visual Help Desk license revenue of $173,000 (Visual Help Desk license revenue increased by $172,000 and Q|SM license revenue increased by $1,000) when compared to the same period of fiscal 2002. This increase accounts for an increase in total software license revenue of approximately 3%. The Company attributes the decrease in software license revenue to concerns regarding the possible effects of war and terrorism on an uncertain worldwide economy and the resulting reduction in corporate spending on software solutions. Maintenance and services revenue for the six months ended March 31, 2003 was $2,690,000, or approximately 31% of total revenue, as compared to $2,750,000, or approximately 29% of total revenue, for the six months ended March 31, 2002. This represents a decrease of $60,000 or approximately 2%. This decrease is primarily attributable to a net decrease for Q|SM maintenance and services revenue of $277,000, which accounts for a decrease of approximately 10% in total maintenance and services revenue. This was partially offset by Visual Help Desk, Datawatch|ES and Monarch maintenance and services revenue increases of $92,000, $91,000 and $34,000, respectively, which account for an increase of 8% in total maintenance and services revenue. The decrease in Q|SM maintenance and services revenue is the result of reduced revenue from the Company's Q|SM professional services (decrease of $451,000 for the six months ended March 31, 2003) which the Company believes is the result of a declining demand for such services due to a weakened economy in the United Kingdom where they are primarily sold. This decline in Q|SM professional services revenue was partially offset by an increase in Q|SM maintenance revenue of approximately $174,000. Cost of software licenses for the six months ended March 31, 2003 was $1,145,000 or approximately 19% of software license revenues, as compared to $1,444,000 or approximately 22% of software license revenues for the six months ended March 31, 2002. This decrease of $299,000 is primarily attributable to decreased software license sales during the six months ended March 31, 2003, especially those for Datawatch|ES which has a substantially higher cost of royalties than the Company's other products. Cost of maintenance and services for the six months ended March 31, 2003 was $1,230,000 or approximately 46% of maintenance and service revenues, as compared to $1,416,000 or approximately 51% of maintenance and service revenues, for the six months ended March 31, 2002. This decrease of $186,000 is primarily attributable to the reductions in services headcount and related expenses. Sales and marketing expenses were $2,962,000 for the six months ended March 31, 2003, which represents a decrease of $153,000 from $3,115,000 for the six months ended March 31, 2002. This decrease is primarily attributable to decreases in marketing expenses for direct mail and lead generation, partially offset by an increase in sales and marketing expenses for services provided by outside consultants. The decrease in direct mail expense totaled $183,000 and the decrease in lead generation expense totaled $134,000. The increase in sales and marketing expenses for services provided by outside consultants was $134,000. Engineering and product development expenses were $815,000 for the six months ended March 31, 2003, which represents an increase of $154,000 or approximately 23% from $661,000 for the six months ended March 31, 2002. This increase is attributable to severance charges for product development personnel totaling approximately $84,000 and engineering and development expenses of $81,000 related to the Visual Help Desk product acquired in the Auxilor purchase. During the six months ended March 31, 2003, the Company capitalized $54,000 in purchased software and software development costs. This compares to $128,000 capitalized in the six months ended March 31, 2002. This decrease in capitalized costs during the six months ended March 31, 2003, as compared to the six months ended March 31, 2002, is due to reduced capitalized costs associated with a development project for a new version of Q|SM which was completed during the quarter ended March 31, 2003. General and administrative expenses were $2,308,000 for the six months ended March 31, 2003, which represents an increase of $33,000 or approximately 1% from $2,275,000 for the six months ended March 31, 2002. This increase is primarily attributable to general and administrative expenses of $95,000 related to the Company's newly acquired Auxilor subsidiary offset by reductions in international general and administrative expenses. As a result of the foregoing, the loss from continuing operations for the six months ended March 31, 2003 was $33,000, which compares to income from continuing operations of $346,000 for the six months ended March 31, 2002. During the six months ended March 31, 2003 and 2002, no benefit or provision for income taxes was recorded due to the availability of loss carryforwards for which valuation allowances had previously been provided. At March 31, 2003, the Company had federal tax loss carryforwards available to offset future taxable income of approximately $7 million; a full valuation reserve 16 has been established against these assets as uncertainty continues to exist regarding the Company's ability to generate sufficient future taxable income for the utilization of these losses. In September 2001, Datawatch sold the operations of Guildsoft Limited, a United Kingdom distribution subsidiary, to a third party. In December 2001 there was a purchase price settlement between Datawatch and the purchaser of Guildsoft Limited, resulting in a gain of $17,000 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 six months ended March 31, 2002. Net loss for the six months ended March 31, 2003 was $33,000, which compares to net income of $363,000 for the six months ended March 31, 2002. OFF BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS The Company leases various facilities, equipment and automobiles in the U.S. and overseas under noncancelable operating leases which expire through 2006. The lease agreements generally provide for the payment of minimum annual rentals, pro rata share of taxes, and maintenance expenses. Rental expense for all operating leases was approximately $131,000 and $166,000 for the three months ended March 31, 2003 and 2002, respectively, and approximately $323,000 and $332,000 for the six months ended March 31, 2003 and 2002, respectively. As of March 31, 2003, minimum rental commitments under noncancelable operating leases are as follows: Year Ending September 30, 2003 $ 357,359 2004 477,269 2005 370,185 2006 120,215 Thereafter -- ----------- Total minimum lease payments $ 1,325,028 =========== The Company is also committed to pay royalties ranging from 7% to 50% on revenue generated by the sale of certain licensed software products. Royalty expense included in cost of software licenses was approximately $332,000 and $490,000 for the three months ended March 31, 2003 and 2002, respectively, and approximately $689,000 and $978,000 for the six months ended March 31, 2003 and 2002, respectively. The Company is not obligated to pay any minimum royalty amounts. On October 16, 2002, the Company acquired 100% of the shares of Auxilor, Inc. The purchase agreement includes an earn-out clause, which provides for a cash payout equal to 10% of the sales of Auxilor products in fiscal 2003. Accordingly, the Company expensed earn-out payments of approximately $15,000 and $26,000, respectively, during the three months and six months ended March 31, 2003. LIQUIDITY AND CAPITAL RESOURCES Working capital increased by approximately $11,000 during the six months ended March 31, 2003. During the six months ended March 31, 2003, approximately $265,000 of cash was used by the Company's operations as compared to approximately $889,000 of cash provided by operations for the six months ended March 31, 2002. During the three month periods ended September 30, 2001, March 31, 2002 and December 31, 2002, management took a series of steps to reduce operating expenses and to restructure operations. See Note 10 to the Consolidated Condensed Financial Statements included elsewhere herein for a further discussion of the reductions in the workforce as well as other restructuring actions taken to reduce operating expenses. During the six months ended March 31, 2003 net cash used in operating activities was primarily the result of cash payments required to reduce the assumed liabilities resulting from the purchase of Auxilor, Inc., decreases in accounts payable and accrued expenses, and an increase in accounts receivable, partially offset by a increase in deferred revenue and a decrease in inventories. As discussed in Note 11 of the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, the Company assumed liabilities totaling 17 approximately $324,000 as a result of the acquisition of Auxilor. From the date of acquisition of Auxilor to March 31, 2003, approximately $214,000 was used to reduce these assumed liabilities. The decrease in accounts payable during the six months ended March 31, 2003 was primarily the result of reduced expense levels due to the restructuring which took place during the quarter ended December 31, 2002. The decrease in accrued expenses which took place during the same period was primarily the result of a reduction in accrued royalties due to outside developers and the payment of annual bonuses. The increase in accounts receivable is primarily due to the large number of maintenance contracts invoiced during the quarter ended March 31, 2003 but remaining in accounts receivable as of March 31, 2003. This also primarily accounts for the increase in deferred revenue as the revenue from maintenance contracts is deferred at the time of invoicing and recognized over the term of the maintenance contract. The decrease in inventory is the result of reduced inventory levels for Monarch desktop products. On November 15, 2002, the Company renewed its domestic bank line-of-credit for a period to expire on October 29, 2003. The renewed domestic line provides for maximum borrowings of the lesser of $1,500,000 or 70% of defined eligible receivables and is collateralized by substantially all assets of the Company. The credit line contains customary covenants which require, among other items, the Company maintain a minimum level of consolidated tangible net worth. Borrowings under the credit line bore interest at the bank's prime rate plus 3/4%, or 5%, at March 31, 2003. The Company had no outstanding borrowings under its bank line-of-credit, with approximately $617,000 in borrowings available under the line, as of March 31, 2003. Management believes that by continuing to control operating expenses and capital expenditures and with the borrowings available under its line-of-credit, the Company will have sufficient liquidity through at least September 30, 2003 to fund its cash requirements. Management believes that the Company's current operations have not been materially impacted by the effects of inflation. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Standards Accounting Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements SFAS Nos. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS No. 145 will impact how companies account for sale-leaseback transactions and how gains or losses on debt extinguishments are presented in financial statements. The Company adopted SFAS No. 145 on October 1, 2002. Adoption did not have a significant effect on the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit and Disposal Activities." SFAS No. 146 will impact how companies account for costs incurred with exit activities, such as employee severance and facility closure costs. The Company adopted SFAS No. 146 on October 1, 2002. Accordingly, the Company recorded $181,459 in restructuring and centralization costs for severance benefits for 5 terminated employees and costs resulting from the cancellation of leases and the disposal of fixed assets related to a relocation to smaller facilities. (See Note 10 of the consolidated condensed financial statements elsewhere herein.) In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure" which addresses financial accounting and reporting for recording expenses for the fair value of stock options. SFAS No. 148 provides alternative methods of transition for a voluntary change to a fair value based method of accounting for stock-based employee compensation and requires more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The Company adopted the disclosure provisions for the interim periods ending March 31, 2003. The Company will continue to account for its stock-based compensation under the intrinsic value method prescribed under Accounting Principles Board Opinion No. 25. (See Note 3 of the consolidated condensed financial statements elsewhere herein.) In November 2002, the FASB issued Financial Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires certain guarantees to be recorded at fair value and requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. Generally, FIN 45 applies to certain types of financial guarantees that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability, or an equity security of the guaranteed party; performance guarantees involving contracts which require the guarantor to make payments to the guaranteed party based on another entity's failure 18 to perform under an obligating agreement; indemnification agreements that contingently require the guarantor to make payments to an indemnified party based on changes in an underlying that is related to an asset, liability, or an equity security of the indemnified party; or indirect guarantees of the indebtedness of others. The Company's policies with regard to warranty are disclosed in the Company's Annual Report on Form 10-K for the year ended September 30, 2002. The Company does not have an accrued warranty liability at any reporting date. The Company is not a guarantor under any arrangement. In January 2003, the FASB issued Financial Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities" with the objective of improving financial reporting by companies involved with variable interest entities. The Company is not involved with any variable interest entities as defined within this interpretation. No additional disclosures are required under FIN 46 for the quarter ended March 31, 2003. RISK FACTORS The Company does not provide forecasts of its future financial performance. However, from time to time, information provided by the Company or statements made by its employees may contain "forward looking" information that involves risks and uncertainties. In particular, statements contained in this Quarterly 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 Quarterly 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 cautions readers not to place undue reliance on any such forward looking statements, which speak only as of the date they are made. The Company disclaims any obligation, except as specifically required by law and the rules of the Securities and Exchange Commission, to publicly update or revise any such statements to reflect any change in the Company's expectations or in events, conditions or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward looking statements. The Company's actual results of operations and financial condition have varied and may in the future vary significantly from those stated in any forward looking statements. Factors that may cause such differences include, without limitation, the risks, uncertainties and other information discussed below and within this Quarterly Report on Form 10-Q, as well as the accuracy of the Company's internal estimates of revenue and operating expense levels. Further information on factors that could cause actual results to differ from those anticipated is detailed in various filings made by the Company from time to time with the Securities and Exchange Commission, including but not limited to, those appearing under the caption "Risk Factors" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended September 30, 2002. 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 19 growth rates, decreased revenues or reduced profitability. In addition, recent terrorist attacks against the United States, and the United States military response to these attacks, as well as the worldwide reaction to SARS, have added to economic and political uncertainty which may adversely affect worldwide demand for computer software and services and result in significant fluctuations in the value of foreign currencies. In a weakened economy, the Company cannot be assured that it will be able to effectively promote future growth in its software and services revenues or maintain profitability. Dependence on Principal Products In the six months ended March 31, 2003, Monarch, Q|SM and Visual Help Desk, and Datawatch|ES accounted for approximately 57%, 31% and 12%, respectively, of the Company's total revenue. The Company is wholly dependent on the Monarch, Q|SM, Visual Help Desk and Datawatch|ES products. As a result, any factor adversely affecting sales of any of these products could have a material adverse effect on the Company. The Company's future financial performance will depend in part on the successful introduction of its new and enhanced versions of these products and development of new versions of these and other products and subsequent acceptance of such new and enhanced products. In addition, competitive pressures or other factors may result in significant price erosion that could have a material adverse effect on the Company's business, financial condition or results of operations. International Sales In the six months ended March 31, 2003 and 2002, international sales accounted for approximately 42% and 44%, respectively, of the Company's total revenue. The Company anticipates that international sales will continue to account for a significant percentage of its total revenue. A significant portion of the Company's total revenue will therefore be subject to risks associated with international sales, including unexpected changes in legal and regulatory requirements, changes in tariffs, exchange rates and other barriers, political and economic instability, possible effects of war and acts of terrorism, difficulties in account receivable collection, difficulties in managing distributors or representatives, difficulties in staffing and managing international operations, difficulties in protecting the Company's intellectual property overseas, seasonality of sales and potentially adverse tax consequences. Acquisition Strategy As evidenced by its October 2002 acquisition of Auxilor, Inc., the Company continues to address the need to develop new products, in part, through the acquisition of other companies. Acquisitions involve numerous risks including difficulties in the assimilation of the operations, technologies and products of the acquired companies, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no or limited direct prior experience and where competitors in such markets have stronger market positions, and the potential loss of key employees of the acquired company. Achieving and maintaining the anticipated benefits of an acquisition will depend in part upon whether the integration of the companies' business is accomplished in an efficient and effective manner, and there can be no assurance that this will occur. The successful combination of companies in the high technology industry may be more difficult to accomplish than in other industries. Dependence on New Introductions; New Product Delays Growth in the Company's business depends in substantial part on the continuing introduction of new products. The length of product life cycles depends in part on end-user demand for new or additional functionality in the Company's products. If the Company fails to accurately anticipate the demand for, or encounters any significant delays in developing or introducing, new products or additional functionality on its products, there could be a material adverse effect on the Company's business. Product life cycles can also be affected by the introduction by suppliers of operating systems of comparable functionality within their products. The failure of the Company to anticipate the introduction of additional functionality in products developed by such suppliers could have a material adverse effect on the Company's business. In addition, the Company's competitors may introduce products with more features and lower prices than the Company's products. Such increase in competition could adversely affect the life cycles of the Company's products, which in turn could have a material adverse effect on the Company's business. Software products may contain undetected errors or failures when first introduced or as new versions are released. There can be no assurance that, despite testing by the Company and by current and potential end-users, errors will not be found in new products after commencement of commercial shipments, resulting in loss of or delay in market acceptance. Any failure 20 by the Company to anticipate or respond adequately to changes in technology and customer preferences, or any significant delays in product development or introduction, could have a material adverse effect on the Company's business. Rapid Technological Change The markets in which the Company competes have undergone, and can be expected to continue to undergo, rapid and significant technological change. The ability of the Company to grow will depend on its ability to successfully update and improve its existing products and market and license new products to meet the changing demands of the marketplace and that can compete successfully with the existing and new products of the Company's competitors. There can be no assurance that the Company will be able to successfully anticipate and satisfy the changing demands of the personal computer software marketplace, that the Company will be able to continue to enhance its product offerings, or that technological changes in hardware platforms or software operating systems, or the introduction of a new product by a competitor, will not render the Company's products obsolete. Competition in the PC Software Industry The software market for personal computers is highly competitive and characterized by continual change and improvement in technology. Several of the Company's existing and potential competitors, including BMC Software, Actuate Corporation, Quest Software Inc., and others, have substantially greater financial, marketing and technological resources than the Company. No assurance can be given that the Company will have the resources required to compete successfully in the future. Dependence on Proprietary Software Technology The Company's success is dependent upon proprietary software technology. Although the Company does not own any patents on any such technology, it does hold exclusive licenses to such technology and relies principally on a combination of trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect its rights to such proprietary technology. Despite such precautions, there can be no assurance that such steps will be adequate to deter misappropriation of such technology. Reliance on Software License Agreements Substantially all of the Company's products incorporate third-party proprietary technology which is generally licensed to the Company on an exclusive, worldwide basis. Failure by such third-parties to continue to develop technology for the Company and license such technology to the Company could have a material adverse effect on the Company's business and results of operations. Indirect Distribution Channels The Company sells a significant portion of its products through resellers, none of which are under the direct control of the Company. The loss of major resellers of the Company's products, or a significant decline in their sales, could have a material adverse effect on the Company's operating results. There can be no assurance that the Company will be able to attract or retain additional qualified resellers or that any such resellers will be able to effectively sell the Company's products. The Company seeks to select and retain resellers on the basis of their business credentials and their ability to add value through expertise in specific vertical markets or application programming expertise. In addition, the Company relies on resellers to provide post-sales service and support, and any deficiencies in such service and support could adversely affect the Company's business. Volatility of Stock Price As is frequently the case with the stocks of high technology companies, the market price of the Company's common stock has been, and may continue to be, volatile. Factors such as quarterly fluctuations in results of operations, increased competition, the introduction of new products by the Company or its competitors, expenses or other difficulties associated with assimilating companies acquired by the Company, changes in the mix of sales channels, the timing of significant customer orders, and macroeconomic conditions generally, may have a significant impact on the market price of the stock of the Company. Any shortfall in revenue or earnings from the levels anticipated by securities analysts could have an immediate and significant adverse effect on the market price of the Company's common stock in any given period. In 21 addition, the stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market price for many high technology companies and which, on occasion, have appeared to be unrelated to the operating performance of such companies. Transfer of Common Stock Listing On March 30, 2001 the Company announced that it had received a notice from The Nasdaq Stock Market, Inc. that the Company's Common Stock failed to comply with the $1.00 minimum bid price requirement for continued listing on The Nasdaq National Market as set forth in marketplace Rule 4450(a)(5), and that the Company's Common Stock was, therefore, subject to delisting from The Nasdaq National Market. Management presented the Company's plan to regain compliance with the minimum bid price requirement to the Nasdaq Listing Qualifications Panel and, on May 30, 2001, the Listing Qualifications Panel's notified the Company that it had determined to continue listing the Company's common stock on the Nasdaq National Market, provided that on or before July 31, 2001, the Company's Common Stock evidenced a closing bid price of at least $1.00 per share and, immediately thereafter, a closing bid price of at least $1.00 for a minimum of ten consecutive trading days and that the Company remained in compliance with all other requirements for continued listing on The Nasdaq National Market. Effective as of the close of business on July 23, 2001 the Company effected a 1-for-4.5 reverse stock split which resulted in compliance with the $1.00 per share minimum bid price requirement for the Company's common stock. In January 2002, the Company received a notice from the Nasdaq Stock Market, Inc. that it was not in compliance with the $4 million net tangible asset requirement for continued listing on The Nasdaq National Market and, in response, the Company applied for listing of its Common Stock on The Nasdaq SmallCap Market. In early February 2002, the Company was notified that its application for listing on The Nasdaq SmallCap Market had been approved. The listing of the Company's Common Stock was transferred to The Nasdaq SmallCap Market at the opening of business on February 7, 2002. There can be no assurance that the Company will remain in compliance with the requirements for continued listing on The Nasdaq SmallCap Market. In addition, the transfer of the Company's Common Stock listing to The Nasdaq SmallCap Market may impair the ability of stockholders to buy and sell shares of the Company's Common Stock and could adversely affect the market price of, and the efficiency of the trading market for, the shares of Common Stock. Further, the transfer of the Common Stock from The Nasdaq National Market could significantly impair the Company's ability to raise capital in the public markets should it desire to do so in the future. 22 Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments At March 31, 2003, the Company did not participate in any derivative financial instruments, or other financial and commodity instruments. The Company holds no investment securities that possess significant market risk. Primary Market Risk Exposures The Company's primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. The Company utilizes U.S. dollar denominated borrowings to fund its operational needs through its working capital line of credit agreement. The line, which currently bears an interest rate of prime plus 3/4%, or 5%, is subject to annual renewal. Had the interest rate under the line of credit been 10% greater or lesser than actual rates, the impact would not have been material in the Company's consolidated financial statements for the three months ended March 31, 2003. As of March 31, 2003, the Company had no outstanding borrowings under the working capital line. The Company's exposure to currency exchange rate fluctuations has been and is expected to continue to be modest due to the fact that the operations of its international subsidiaries are almost exclusively conducted in their respective local currencies, and dollar advances to the Company's international subsidiaries, if any, are usually considered to be of a long-term investment nature. Therefore, the majority of currency movements are reflected in the Company's other comprehensive income. There are, however, certain situations where the Company will invoice customers in currencies other than its own. Such gains or losses, whether realized or unrealized, are reflected in income. These have not been material in the past nor does management believe that they will be material in the future. Currently the Company does not engage in foreign currency hedging activities. Item 4. Controls and Procedures ----------------------- (a) Evaluation of disclosure controls and procedures. ------------------------------------------------- As of a date (the "Evaluation Date") within ninety days prior to the filing date of this Quarterly Report on Form 10-Q, the Company, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are operating in an effective manner and are designed to ensure that material information relating to the Company (including its consolidated subsidiaries) required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, including ensuring that such material information is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. It should be noted that any system of controls is designed to provide reasonable, but not absolute, assurances that the system will achieve its goals under all reasonably foreseeable circumstances. (b) Changes in internal controls. ----------------------------- There were no significant changes in the Company's internal controls or, to the knowledge of the Company, in other factors that could significantly affect the Company's internal controls subsequent to the Evaluation Date, nor were there any corrective actions with regard to significant deficiencies and material weaknesses. 23 PART II. Item 2. Changes in Securities and Use of Proceeds ----------------------------------------- On October 16, 2002, the Company issued 14,764 shares of Common Stock valued at approximately $50,000, to three individuals as part of the consideration given for the purchase of 100% of the shares of Auxilor, Inc. No underwriter was involved in the foregoing issuance of Common Stock. Such issuance was made by the Company in reliance upon an exemption from the registration provisions of the Securities Act of 1933 set forth in Section 4(2) thereof as a transaction by an issuer not involving a public offering. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- A. The Annual Meeting of Stockholders of Datawatch Corporation was held on March 7, 2003. B. The directors elected at the meeting are Robert W. Hagger, Kevin R. Morano, Richard de J. Osborne, Terry W. Potter, David T. Riddiford and James Wood, which constitute all of the directors of the Company. C. A vote was proposed to elect the following nominees to the Board of Directors to serve for the ensuing year or until their respective successors are duly elected and qualified: Nominee Total Votes For Total Votes Against ------- --------------- ------------------- Robert W. Hagger 2,304,163 64,548 Kevin R. Morano 2,304,163 64,548 Richard de J. Osborne 2,304,163 64,548 Terry W. Potter 2,304,163 64,548 David T. Riddiford 2,303,419 65,292 James Wood 2,304,163 64,548 A proposal to approve an increase in the number of shares of Common Stock, $.01 par value, available for issuance under the Datawatch 1996 Stock Plan (the "1996 Stock Plan") from 494,400 to 624,000 shares, was approved and adopted with 2,239,021 shares voting in favor, 127,545 voting against, and 2,145 abstaining. D. No information provided due to inapplicability of item. Item 6. Exhibits and Reports on Form 8-K -------------------------------- A. Exhibits 10.1 1996 Stock Plan as amended as of March 7, 2003. (filed herewith) 10.2 Distribution Agreement, dated December 10, 1992, by and between Datawatch Corporation and Ingram Micro Inc. (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 March 31, 2003. 24 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 May 15, 2003. DATAWATCH CORPORATION /s/ Alan R. MacDougall -------------------------------- Alan R. MacDougall Vice President of Finance and Chief Financial Officer (Principal Financial Officer) 25 CERTIFICATIONS I, Robert W. Hagger, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Datawatch Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Robert W. Hagger ---------------------------------- Robert W. Hagger President, Chief Executive Officer and Director 26 I, Alan R. MacDougall, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Datawatch Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Alan R. MacDougall ------------------------------- Alan R. MacDougall Vice President Finance, Chief Financial Officer, Treasurer and Assistant Secretary 27 EX-10.1 3 exh10-1_11938.txt 1996 STOCK PLAN EXHIBIT 10.1 ------------ DATAWATCH CORPORATION 1996 STOCK PLAN --------------- 1. PURPOSE. The purpose of the Datawatch Corporation 1996 Stock Plan (the "Plan") is to encourage key employees of Datawatch Corporation (the "Company") and of any present or future parent or subsidiary of the Company (collectively, "Related Corporations") and other individuals who render services to the Company or a Related Corporation, by providing opportunities to participate in the ownership of the Company and its future growth through (a) the grant of options which qualify as "incentive stock options" ("ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"); (b) the grant of options which do not qualify as ISOs ("Non-Qualified Options"); (c) awards of stock in the Company ("Awards"); and (d) opportunities to make direct purchases of stock in the Company ("Purchases"). Both ISOs and Non-Qualified Options are referred to hereafter individually as an "Option" and collectively as "Options." Options, Awards and authorizations to make Purchases are referred to hereafter collectively as "Stock Rights." As used herein, the terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary corporation," respectively, as those terms are defined in Section 424 of the Code. 2. ADMINISTRATION OF THE PLAN. A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall (be administered by the Board of Directors of the Company (the "Board") or, subject to paragraph 2(D) (relating to compliance with Section 162(m) of the Code), by a committee appointed by the Board (the "Committee"). Hereinafter, all references in this Plan to the "Committee" shall mean the Board if no Committee has been appointed. Subject to ratification of the grant or authorization of each Stock Right by the Board (if so required by applicable state law), and subject to the terms of the Plan, the Committee shall have the authority to (i) determine to whom (from among the class of employees eligible under paragraph 3 to receive ISOs) ISOs shall be granted, and to whom (from among the class of individuals and entities eligible under paragraph 3 to receive Non-Qualified Options and Awards and to make Purchases) Non-Qualified Options, Awards and authorizations to make Purchases may be granted; (ii) determine the time or times at which Options or Awards shall be granted or Purchases made; (iii) determine the purchase price of shares subject to each Option or Purchase, which prices shall not be less than the minimum price specified in paragraph 6; (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7) the time or times when each Option shall become exercisable and the duration of the exercise period; (vi) extend the period during which outstanding Options may be exercised; (vii) determine whether restrictions such as repurchase options are to be imposed on shares subject to Options, Awards and Purchases -2- and the nature of such restrictions, if any, and (viii) interpret the Plan and prescribe and rescind rules and regulations relating to it. If the Committee determines to issue a Non-Qualified Option, it shall take whatever actions it deems necessary, under Section 422 of the Code and the regulations promulgated thereunder, to ensure that such Option is not treated as an ISO. The interpretation and construction by the Committee of any provisions of the Plan or of any Stock Right granted under it shall be final unless otherwise determined by the Board. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem advisable. No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Stock Right granted under it. B. COMMITTEE ACTIONS. The Committee may select one of its members as its chairman, and shall hold meetings at such time and places as it may determine. A majority of the Committee shall constitute a quorum and acts of a majority of the members of the Committee at a meeting at which a quorum is present, or acts reduced to or approved in writing by all the members of the Committee (if consistent with applicable state law), shall be the valid acts of the Committee. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan. C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be granted to members of the Board. All grants of Stock Rights to members of the Board shall in all respects be made in accordance with the provisions of this Plan applicable to other eligible persons. Members of the Board who either (i) are eligible to receive grants of Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights may vote on any matters affecting the administration of the Plan or the grant of any Stock Rights pursuant to the Plan, except that no such member shall act upon the granting to himself or herself of Stock Rights, but any such member may be counted in determining the existence of a quorum at any meeting of the Board during which action is taken with respect to the granting to such member of Stock Rights. D. PERFORMANCE-BASED COMPENSATION. The Board, in its discretion, may take such action as may be necessary to ensure that Stock Rights granted under the Plan qualify as "qualified performance-based compensation" within the meaning of Section 162(m) of the Code and applicable regulations promulgated thereunder ("Performance-Based Compensation"). Such action may include, in the Board's discretion, some or all of the following (i) if the Board determines that Stock Rights granted under the Plan generally shall constitute Performance-Based Compensation, the Plan shall be administered, to the extent required for such Stock Rights to constitute Performance-Based Compensation, by a -3- Committee consisting solely of two or more "outside directors" (as defined in applicable regulations promulgated under Section 162(m) of the Code), (ii) if any Non-Qualified Options with an exercise price less than the fair market value per share of Common Stock are granted under the Plan and the Board determines that such Options should constitute Performance-Based Compensation, such options shall be made exercisable only upon the attainment of a pre-established, objective performance goal established by the Committee, and such grant shall be submitted for, and shall be contingent upon shareholder approval and (iii) Stock Rights granted under the Plan may be subject to such other terms and conditions as are necessary for compensation recognized in connection with the exercise or disposition of such Stock Right or the disposition of Common Stock acquired pursuant to such Stock Right, to constitute Performance-Based Compensation. 3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees of the Company or any Related Corporation. Non-Qualified Options, Awards and authorizations to make Purchases may be granted to any employee, officer or director (whether or not also an employee) or consultant of the Company or any Related Corporation. The Committee may take into consideration a recipient's individual circumstances in determining whether to grant a Stock Right. The granting of any Stock Right to any individual or entity shall neither entitle that individual or entity to, nor disqualify such individual or entity from, participation in any other grant of Stock Rights. 4. STOCK. The stock subject to Stock Rights shall be authorized but unissued shares of Common Stock of the Company, par value $.01 per share (the "Common Stock"), or shares of Common Stock reacquired by the Company in any manner. The aggregate number of shares which may be issued pursuant to the Plan is 624,0001, subject to adjustment as provided in paragraph 13. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part or shall be repurchased by the Company, the unpurchased shares of Common Stock subject to such Option shall again be available for grants of Stock Rights under the Plan. No employee of the Company or any Related Corporation may be granted Options to acquire, in the aggregate, more than 155,556 shares of Common Stock under the Plan during any fiscal year of the Company. If any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part or shall be repurchased by the Company, the shares subject to such Option shall be included in the determination of the aggregate number of shares of Common Stock deemed to have been granted to such employee under the Plan. 5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan at any time on or after December 10, 1996 and prior to December 10, 2006. The date of grant of a Stock Right under the Plan will be the date specified by the Committee at the time it grants the - -------- 1 An amendment increasing the number of shares available for issuance under the Plan from 494,400 to 624,000 was approved by the Board of Directors in December 2002 and was approved by the stockholders at the Annual Meeting of Stockholders held on March 7, 2003. -4- Stock Right; provided, however, that such date shall not be prior to the date on which the Committee acts to approve the grant. 6. MINIMUM OPTION PRICE; ISO LIMITATIONS. A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS AND PURCHASES. Subject to paragraph 2(D) (relating to compliance with Section 162(m) of the Code), the exercise price per share specified in the agreement relating to each Non-Qualified Option granted, and the purchase price per share of stock granted in any Award or authorized as a Purchase, under the Plan may be less than the fair market value of the Common Stock of the Company on the date of grant; provided that, in no event shall such exercise price or such purchase price be less than the minimum legal consideration required therefor under the laws of any jurisdiction in which the Company or its successors in interest may be organized. B. PRICE FOR ISOS. The exercise price per share specified in the agreement relating to each ISO granted under the Plan shall not be less than the fair market value per share of Common Stock on the date of such grant. In the case of an ISO to be granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, the price per share specified in the agreement relating to such ISO shall not be less than one hundred ten percent (110%) of the fair market value per share of Common Stock on the date of grant. For purposes of determining stock ownership under this paragraph, the rules of Section 424(d) of the Code shall apply. C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible employee may be granted Options treated as ISOs only to the extent that, in the aggregate under this Plan and all incentive stock option plans of the Company and any Related Corporation, ISOs do not become exercisable for the first time by such employee during any calendar year with respect to stock having a fair market value (determined at the time the ISOs were granted) in excess of $100,000. The Company intends to designate any Options granted in excess of such limitation as Non-Qualified Options, and the Company shall issue separate certificates to the optionee with respect to Options that are Non-Qualified Options and Options that are ISOs. D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is granted under the Plan, the Company's Common Stock is publicly traded, "fair market value" shall be determined as of the date of grant or, if the prices or quotes discussed in this sentence are unavailable for such date, the last business day for which such prices or quotes are available prior to the date of grant and shall mean (i) the average (on that date) of the high and low prices of the Common Stock on the principal national securities exchange on which the Common Stock is traded, if the Common Stock is then traded on a national securities exchange; or (ii) the -5- last reported sale price (on that date) of the Common Stock on the Nasdaq National Market, if the Common Stock is not then traded on a national securities exchange; or (iii) the closing bid price (or average of bid prices) last quoted (on that date) by an established quotation service for over-the-counter securities, if the Common Stock is not reported on the Nasdaq National Market. If the Common Stock is not publicly traded at the time an Option is granted under the Plan, "fair market value" shall mean the fair value of the Common Stock as determined by the Committee after taking into consideration all factors which it deems appropriate, including, without limitation, recent sale and offer prices of the Common Stock in private transactions negotiated at arm's length. 7. OPTION DURATION. Subject to earlier termination as provided in paragraphs 9 and 10 or in the agreement relating to such Option, each Option shall expire on the date specified by the Committee, but not more than (i) ten years from the date of grant in the case of Options generally and (ii) five years from the date of grant in the case of ISOs granted to an employee owning stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Related Corporation, as determined under paragraph 6(B). Subject to earlier termination as provided in paragraphs 9 and 10, the term of each ISO shall be the term set forth in the original instrument granting such ISO, except with respect to any part of such ISO that is converted into a Non-Qualified Option pursuant to paragraph 16. 8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through 12, each Option granted under the Plan shall be exercisable as follows: A. VESTING. The Option shall either be fully exercisable on the date of grant or shall become exercisable thereafter in such installments as the Committee may specify. B. FULL VESTING OF INSTALLMENTS. Once an installment becomes exercisable, it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee. C. PARTIAL EXERCISE. Each Option or installment may be exercised at any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable. D. ACCELERATION OF VESTING. The Committee shall have the right to accelerate the date that any installment of any Option becomes exercisable; provided that the Committee shall not, without the consent of an optionee, accelerate the permitted exercise date of any installment of any Option granted to any employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to paragraph 16) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in paragraph 6(C). -6- 9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the agreement relating to such ISO, if an ISO optionee ceases to be employed by the Company and all Related Corporations other than by reason of death or disability as defined in paragraph 10, no further installments of his or her ISOs shall become exercisable, and his or her ISOs shall terminate on the earlier of (a) three months after the date of termination of his or her employment, or (b) their specified expiration dates, except to the extent that such ISOs (or unexercised installments thereof) have been converted into Non-Qualified Options pursuant to paragraph 16. For purposes of this paragraph 9, employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed 90 days or, if longer, any period during which such optionee's right to reemployment is guaranteed by statute or by contract. A bona fide leave of absence with the written approval of the Committee shall not be considered an interruption of employment under this paragraph 9, provided that such written approval contractually obligates the Company or any Related Corporation to continue the employment of the optionee after the approved period of absence. ISOs granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations, so long as the optionee continues to be an employee of the Company or any Related Corporation. Nothing in the Plan shall be deemed to give any grantee of any Stock Right the right to be retained in employment or other service by the Company or any Related Corporation for any period of time. 10. DEATH; DISABILITY. A. DEATH. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his or her death, any ISO owned by such optionee may be exercised, to the extent otherwise exercisable on the date of death, by the estate, personal representative or beneficiary who has acquired the ISO by will or by the laws of descent and distribution, until the earlier of (i) the specified expiration date of the ISO or (ii) 180 days from the date of the optionee's death. B. DISABILITY. If an ISO optionee ceases to be employed by the Company and all Related Corporations by reason of his or her disability, such optionee shall have the right to exercise any ISO held by him or her on the date of termination of employment, for the number of shares for which he or she could have exercised it on that date, until the earlier of (i) the specified expiration date of the ISO or (ii) 180 days from the date of the termination of the optionee's employment. For the purposes of the Plan, the term "disability" shall mean "permanent and total disability" as defined in Section 22(e)(3) of the Code or any successor statute. 11. ASSIGNABILITY. No ISO shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution, and during the lifetime of the optionee shall be -7- exercisable only by such optionee. Stock Rights other than ISOs shall be transferable to the extent set forth in the agreement relating to such Stock Right. 12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by instruments (which need not be identical) in such forms as the Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in paragraphs 6 through 11 hereof and may contain such other provisions as the Committee deems advisable which are not inconsistent with the Plan, including restrictions applicable to shares of Common Stock issuable upon exercise of Options. The Committee may specify that any Non-Qualified Option shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination and cancellation provisions as the Committee may determine. The Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more officers of the Company to execute and deliver such instruments. The proper officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments. 13. ADJUSTMENTS. Upon the occurrence of any of the following events, an optionee's rights with respect to Options granted to such optionee hereunder shall be adjusted as hereinafter provided, unless otherwise specifically provided in the written agreement between the optionee and the Company relating to such Option: A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, the number of shares of Common Stock deliverable upon the exercise of Options shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with or acquired by another entity in a merger or other reorganization in which the holders of the outstanding voting stock of the Company immediately preceding the consummation of such event, shall, immediately following such event, hold, as a group, less than a majority of the voting securities of the surviving or successor entity, or in the event of a sale of all or substantially all of the Company's assets or otherwise (each, an "Acquisition"), the Committee or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the shares then subject to such Options either (a) the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition, (b) shares of stock of the surviving or successor corporation or (c) such other securities as the Successor Board deems appropriate, the fair market value of which shall not materially exceed the fair -8- market value of the shares of Common Stock subject to such Options immediately preceding the Acquisition; or (ii) upon written notice to the optionees, provide that all Options must be exercised, to the extent then exercisable or to be exercisable as a result of the Acquisition, within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iii) terminate all Options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to such Options (to the extent then exercisable or to be exercisable as a result of the Acquisition) over the exercise price thereof. C. RECAPITALIZATION OR REORGANIZATION. In the event of a recapitalization or reorganization of the Company (other than a transaction described in subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, an optionee upon exercising an Option shall be entitled to receive for the purchase price paid upon such exercise the securities he or she would have received if he or she had exercised such Option prior to such recapitalization or reorganization. D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any adjustments made pursuant to subparagraphs A, B or C with respect to ISOs shall be made only after the Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424 of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs or would cause adverse tax consequences to the holders, it may refrain from making such adjustments. E. DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution or liquidation of the Company, each Option will terminate immediately prior to the consummation of such proposed action or at such other time and subject to such other conditions as shall be determined by the Committee. F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Options. No adjustments shall be made for dividends paid in cash or in property other than securities of the Company. G. FRACTIONAL SHARES. No fractional shares shall be issued under the Plan and the optionee shall receive from the Company cash in lieu of such fractional shares. -9- H. ADJUSTMENTS. Upon the happening of any of the events described in subparagraphs A, B or C above, the class and aggregate number of shares set forth in paragraph 4 hereof that are subject to Stock Rights which previously have been or subsequently may be granted under the Plan shall also be appropriately adjusted to reflect the events described in such subparagraphs. The Committee or the Successor Board shall determine the specific adjustments to be made under this paragraph 13 and, subject to paragraph 2, its determination shall be conclusive. 14. MEANS OF EXERCISING OPTIONS. An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address, or to such transfer agent as the Company shall designate. Such notice shall identify the Option being exercised and specify the number of shares as to which such Option is being exercised, accompanied by full payment of the purchase price therefor either (a) in United States dollars in cash or by check, (b) at the discretion of the Committee, through delivery of shares of Common Stock having a fair market value equal as of the date of the exercise to the cash exercise price of the Option, (c) at the discretion of the Committee, by delivery of the grantee's personal recourse note bearing interest payable not less than annually at no less than 100% of the lowest applicable Federal rate, as defined in Section 1274(d) of the Code, (d) at the discretion of the Committee and consistent with applicable law, through the delivery of an assignment to the Company of a sufficient amount of the proceeds from the sale of the Common Stock acquired upon exercise of the Option and an authorization to the broker or selling agent to pay that amount to the Company, which sale shall be at the participant's direction at the time of exercise, or (e) at the discretion of the Committee, by any combination of (a), (b), (c) and (d) above. If the Committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in clauses (b), (c), (d) or (e) of the preceding sentence, such discretion shall be exercised in writing at the time of the grant of the ISO in question. The holder of an Option shall not have the rights of a shareholder with respect to the shares covered by such Option until the date of issuance of a stock certificate to such holder for such shares. Except as expressly provided above in paragraph 13 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued. 15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on December 10, 1996, subject, with respect to the validation of ISOs granted under the Plan, to approval of the Plan by the stockholders of the Company at the next Meeting of Stockholders or, in lieu thereof, by written consent. If the approval of stockholders is not obtained prior to December 10, 1997, any grants of ISOs under the Plan made prior to that date will be rescinded. The Plan shall expire at the end of the day on December 9, 2006 (except as to Options outstanding on that date). Subject to the provisions of paragraph 5 above, Options may be granted under the Plan prior to the date of stockholder approval of the Plan. The Board may terminate or amend the Plan in any respect at any time, except that, without the approval of the stockholders obtained within 12 months before or after the Board adopts a resolution authorizing any of the following actions: (a) the total number of shares that may be issued under the Plan -10- may not be increased (except by adjustment pursuant to paragraph 13); (b) the provisions of paragraph 3 regarding eligibility for grants of ISOs may not be modified; (c) the provisions of paragraph 6(B) regarding the exercise price at which shares may be offered pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph 13); and (d) the expiration date of the Plan may not be extended. Except as otherwise provided in this paragraph 15, in no event may action of the Board or stockholders alter or impair the rights of a grantee, without such grantee's consent, under any Stock Right previously granted to such grantee. 16. MODIFICATIONS OF ISOS; CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS. Subject to paragraph 13(D), without the prior written consent of the holder of an ISO, the Committee shall not alter the terms of such ISO (including the means of exercising such ISO) if such alteration would constitute a modification (within the meaning of Section 424(h)(3) of the Code). The Committee, at the written request or with the written consent of any optionee, may in its discretion take such actions as may be necessary to convert such optionee's ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or a Related Corporation at the time of such conversion. Such actions may include, but shall not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such ISOs. At the time of such conversion, the Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Committee in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Committee takes appropriate action. Upon the taking of such action, the Company shall issue separate certificates to the optionee with respect to Options that are Non-Qualified Options and Options that are ISOs. 17. APPLICATION OF FUNDS. The proceeds received by the Company from the sale of shares pursuant to Options granted and Purchases authorized under the Plan shall be used for general corporate purposes. 18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO granted under the Plan, each optionee agrees to notify the Company in writing immediately after such optionee makes a Disqualifying Disposition (as described in Sections 421, 422 and 424 of the Code and regulations thereunder) of any stock acquired pursuant to the exercise of ISOs granted under the Plan. A Disqualifying Disposition is generally any disposition occurring on or before the later of (a) the date two years following the date the ISO was granted or (b) the date one year following the date the ISO was exercised. 19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a Non-Qualified Option, the transfer of a Non-Qualified Stock Option pursuant to an arm's-length transaction, the grant of an Award, the making of a Purchase of Common Stock for less than its fair market value, the making of a Disqualifying Disposition (as defined in paragraph 18), the vesting or transfer of restricted stock or securities acquired on the exercise of an Option -11- hereunder, or the making of a distribution or other payment with respect to such stock or securities, the Company may withhold taxes in respect of amounts that constitute compensation includible in gross income. The Committee in its discretion may condition (i) the exercise of an Option, (ii) the transfer of a Non-Qualified Stock Option, (iii) the grant of an Award, (iv) the making of a Purchase of Common Stock for less than its fair market value, or (v) the vesting or transferability of restricted stock or securities acquired by exercising an Option, on the grantee's making satisfactory arrangement for such withholding. Such arrangement may include payment by the grantee in cash or by check of the amount of the withholding taxes or, at the discretion of the Committee, by the grantee's delivery of previously held shares of Common Stock or the withholding from the shares of Common Stock otherwise deliverable upon exercise of a Option shares having an aggregate fair market value equal to the amount of such withholding taxes. 20. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares. Government regulations may impose reporting or other obligations on the Company with respect to the Plan. For example, the Company may be required to send tax information statements to employees and former employees that exercise ISOs under the Plan, and the Company may be required to file tax information returns reporting the income received by grantees of Options in connection with the Plan. 21. GOVERNING LAW. The validity and construction of the Plan and the instruments evidencing Stock Rights shall be governed by the laws of the State of Delaware, or the laws of any jurisdiction in which the Company or its successors in interest may be organized. EX-10.2 4 exh10-2_11938.txt DISTRIBUTION AGREEMENT EXHIBIT 10.2 ------------ DISTRIBUTION AGREEMENT ---------------------- THIS AGREEMENT (the "Agreement") is made and entered into as of December 10, 1992 by and between INGRAM MICRO INC., a California corporation (hereinafter "Ingram") and DATAWATCH CORPORATION, a Delaware corporation (hereinafter "Vendor"). RECITALS -------- Vendor manufactures, produces, and/or supplies microcomputer products and desires to grant to Ingram the right to sell and distribute certain of those products, as hereinafter defined, upon the terms and conditions set forth below. Ingram is engaged in the sales and distribution of microcomputer products and desires to have the right to sell and distribute Vendor's products upon said terms and conditions. In consideration of the mutual covenants and agreements set forth below, the parties hereto agree as follows: 1. GRANT OF DISTIRUBUTION RIGHTS. 1.1 Vendor hereby grants to Ingram, and Ingram accepts the non-exclusive right to distribute worldwide all computer products produced and/or offered by Vendor during the term of this Agreement, including those products listed on Exhibit A attached hereto and made a part hereof (hereinafter all products to be distributed shall be referred to as the "Product" or "Products"). 1.2 Vendor agrees to make available and to sell to Ingram such Product as Ingram shall order from Vendor at the prices and subject to the terms set forth in this Agreement. Ingram shall not be required to purchase any minimum amount or quantity of the Product. 1.3 Vendor may appoint other distributors to distribute its Products. Ingram shall have the right to obtain and/or retain the rights to distribute any other products, including products which may compete with the Products. 2. TERM. 2.1 The term of this Agreement shall be for a period of one (1) year, beginning on the date first above written. Thereafter, this Agrreement shall be renewed for successive one (1) year terms without further notice, unless terminated sooner as provided under the provisions of this Agreement. 2.2 Either party may terminate this Agreement, with or without cause, by giving ninety (90) days' written notice to the other party. 1 3. OBLIGATIONS OF VENDOR. 3.1 Vendor shall use its best efforts to ship the Product within five (5) days after receipt of Ingram's order for the Product, unless otherwise directed by Ingram. 3.2 At no charge to Ingram, Vendor shall support the Product and any efforts to sell the Product by Ingram, and provide sales literature, advertising materials and reasonable training and support in the sale and use of the Product to Ingram's employees and customers, if requested by Ingram. 3.3 Vendor shall notify Ingram at least thirty (30) days prior to the date any new Product is to be introduced and shall make such Product available for distribution by Ingram not later than the date it is first introduced in the marketplace. 3.4 Vendor agrees to maintain sufficient Product inventory to permit it to fill Ingram's orders as required herein. If a shortage of any Product in Vendor's inventory exists in spite of Vendor's good faith efforts, Vendor agrees to allocate its available inventory of such Product to Ingram in proportion to Ingram's percentage of all of Vendor's customer orders for such Product during the previous sixty (60) days. 3.5 For each Product shipment to Ingram, Vendor shall issue to Ingram an invoice showing Ingram's order number and the Product part number, description, price and any discount. At least monthly, Vendor shall provide Ingram with a current statement of account, listing all invoices outstanding and any payments made and credits given since the date of the previous statement, if any. 4. OBLIGATIONS OF INGRAM. 4.1 Ingram will list the Product in one or more of its catalogs and make the Product available to its customers. 4.2 Ingram will advertise and/or promote the Products in a commercially reasonable manner and will transmit Product information and promotional materials to its customers, as reasonably necessary. 4.3 As reasonably necessary, Ingram will make its facilities available for, and will assist Vendor in providing, Product training and support required under Section 3.2 hereof. 4.4 Ingram will provide Product technical assistance to its customers as it is reasonably able to do so, and will refer all other technical matters directly to Vendor. 4.5 Ingram will handle its customer's Product returns and batch them for return to Vendor at regular intervals. 2 5. PRICE AND TERMS. 5.1 The price and applicable discount, if any, for the Product shall be as set forth in Exhibit A. Ingram shall not be bound to sell Product to its customers at any prices suggested by Vendor. 5.2 Vendor shall have the right to change the list price of any Product upon giving thirty (30) days' prior written notice to Ingram. In the event that Vendor shall raise the list price of a Product, all orders for such Product placed prior to the effective date of the price increase shall be invoiced at the lower price. 5.3 In the event that Vendor reduces the price of any Product or offers the Product at a lower price, including raising the discount offered, to any other party, Vendor shall promptly credit Ingram for the difference between the invoice price charged to Ingram and the reduced price for each unit of Product held in inventory by Ingram on the date the reduced price is first offered. Vendor will also credit Ingram for the difference between the invoice price charged to Ingram and the reduced price for each unit of Product held in inventory by Ingram's customers on the date the reduced price is first offered by Vendor if Ingram's customers request a credit resulting from Vendor's price reduction. Should any of Ingram's customers request a price adjustment as outlined in this Section, Ingram shall provide for an independent third party audit of that customer's inventory upon Vendor's reasonable request and at Vendor's expense. Ingram will use commercially reasonable efforts to provide inventory reporting of its customers' inventory. 5.4 Terms of payment for any order shall be net forty-five (45) days from receipt of the applicable invoice by Ingram. For the purposes of earning a discount, payment is deemed to be made on the postmark date of Ingram's transmittal. 5.5 Notwithstanding any other provision in this Agreement to the contrary, Ingram shall not be deemed in default under this Agreement if it withholds any payment to Vendor because of a legitimate dispute between the parties. 6. SHIPPING. 6.1 Vendor shall ship Product only pursuant to Ingram purchase orders received by Vendor. Product shall be shipped F.O.B. Vendor's warehouse, with risk of loss or damage to pass to Ingram upon delivery by Vendor to the carrier designated on Ingram's freight routing instructions, attached hereto as Exhibit B, which may be changed by Ingram from to time. 7. COOPERATIVE ADVERTISING AND MARKETING FUNDS. 7.1 Ingram may advertise and promote the Product and/or Vendor in a commercially reasonable manner and may use Vendor's trademarks, service marks and trade names in connection 3 therewith; provided that, Ingram shall submit the advertisement or promotion to Vendor for review and approval prior to initial release, which approval shall not be unreasonably withheld or delayed. 7.2 Vendor agrees to cooperate with Ingram in advertising and promoting the Product and/or Vendor and hereby grants Ingram a cooperative advertising allowance of up to two percent (2%) of invoice amounts for Product purchased by Ingram from Vendor to the extent that Ingram or customer/dealers use the allowance for any advertising and promoting which features Product and/or Vendor. Upon receipt of reasonable evidence of advertising expenditures, Vendor agrees to credit the amount of any such expenditures against future purchases by Ingram. 7.3 Vendor agrees to participate in the "Go With Ingram Micro" marketing program currently in effect. The cooperative advertising allowance granted under Section 7.2 above shall be reduced by two percent (2%) as specified in Exhibit B attached hereto. This program is subject to the terms and conditions set forth on Exhibit B attached hereto and made a part hereof. 7.4 Vendor understands that additional marketing programs may be offered by Ingram to Vendor. Such programs may include a launch program that requires additional funds in addition to the cooperative advertising funds specified in Section 7.2. 8. DEMONSTRATION UNITS. 8.1 At the request of Ingram, Vendor shall consign to Ingram a reasonable number of demonstration units of the Product to aid Ingram and its sales staff in the support and promotion of the Product. All units consigned will be returned to Vendor in good condition, reasonable wear and tear excepted, when requested by Vendor at any time eleven (11) months after delivery to Ingram. 9. STOCK BALANCING. 9.1 GENERAL STOCK BALANCING. Notwithstanding anything else to the contrary in this Agreement, at any time during the term of this Agreement, Ingram may return any Products which are in their original packaging to Vendor for full credit of the Products, purchase price, less any discounts or credits previously received. All freight charges for returned Products will be paid by Ingram. 9.2 RETURNS AFTER TERMINATION. Ingram may return any Product in its inventory to Vendor for credit against outstanding invoices, or for cash refund if there are no invoices then outstanding, within sixty (60) days following the expiration or earlier termination of this Agreement. Any credit or refund due Ingram for returned Product shall be equal to the purchase price of the Product, less any discounts or credits previously received, except for early payment or prepayment discounts. 4 9.3 RETURNS AFTER PRODUCT DISCONTINUATION. Vendor shall provide Ingram with thirty (30) days written notice prior to the Vendor's discontinuation of any Product. Upon receipt of such notice, Ingram shall have the right to, at any time during the term of this Agreement, return all discontinued Products purchased from Vendor for full credit of the Products' purchase price, less any discounts or credits previously received, except for early payment or prepayment discounts. 10. PRODUCT WARRANTIES. 10.1 Vendor warrants that the Products will be free from defects in materials and workmanship for a period of one (1) year from the date of purchase by any end user. Vendor warrants that the Products will perform in conformance with the specifications and documentation provided with the Products. Vendor agrees that such warranties are made for the benefit of Ingram, its customers and dealers, and the Product end user. 10.2 Ingram may return Product found to be defective, or returned as defective by a customer of Ingram, for immediate credit of the amount of the Product's purchase price plus all freight charges incurred by Ingram in returning the Product. 10.3 In the event Vendor recalls any or all of the Products due to defects, revisions, or upgrades, Ingram shall provide reasonable assistance in such recall; provided that Vendor shall pay all of Ingram's expenses in connection with such recall, including handling charges per unit of Product of not less than two and one-half percent (2-1/2%) of the Product's list price. 11. INDEMNITY. 11.1 Vendor shall defend, indemnify, and hold harmless Ingram from and against any claims, demands, liabilities, or expenses (including attorney's fees and costs) for any injury or damage, including, but not limited to, any personal or bodily injury or property damage, arising out of or resulting in any way from any defect in Products. This duty to indemnify Ingram shall be in addition to the warranty obligations of Vendor. 11.2 Vendor shall defend, indemnify and hold Ingram harmless from and against all damages and costs incurred by Ingram arising from the infringement of any patents, copyrights, trademarks, trade secrets, or other proprietary rights in the manufacture or marketing of the Products; provided that, Ingram promptly notifies Vendor of the charge of infringement or legal proceeding. If there is a claim made or threatened, Vendor may, at its expense and option, either procure the right to continue using any part of Product, replace same with a non infringing Product, or modify Product such that it is non infringing; provided that, if within ninety (90) days after a claim has been made, Vendor has not procured such right, replaced the Product, or modified the Product so that it does not infringe, Ingram may 5 return the Product to Vendor for a full credit against future purchases or for a cash refund, at Ingram's option. 12. PRODUCT MARKINGS. 12.1 Vendor shall clearly mark on the packaging of each unit of Product the Product's name and computer compatibility. Such packaging shall also bear a machine-readable bar code identifier scannable in Standard ABCD format which identifies the Product and its serial number and fully complies with all conditions regarding standard product labeling set forth in "Ingram Micro's Guide To Bar Code: The Product Label," as amended from time to time. 13. REPRESENTATIONS AND WARRANTIES. Vendor warrants and represents that: 13.1 The Products or their use do not infringe upon any patents, copyrights, trademarks, trade secrets, or other proprietary rights of others, and that there are not any suits or proceedings pending or threatened which allege that any Product or the use thereof infringes upon such proprietary rights; 13.2 The Product prices offered herein are the best prices available to any distributor to whom Vendor sells, and that in the future all prices for Product made available to Ingram shall be the best prices available to any distributor of the Products; 13.3 Sales to Ingram of the Products at the listed prices and/or discounts do not in any way constitute violations of federal, state, or local laws, ordinances, rules or regulations, including any antitrust laws or trade regulations; 13.4 It has sufficient Product liability insurance to enable it to meet its obligations under Section 11 hereof. 14. DEFAULTS. 14.1 For purposes of this Agreement, a party shall be in default if (a) it materially breaches a term of this Agreement and such breach continues for a period of ten (10) business days after it has been notified of the breach, or (b) it shall cease conducting business in the normal course, become insolvent, make a general assignment for the benefit of creditors, suffer or permit the appointment of a receiver for its business or assets, or shall avail itself of or become subject to any proceeding under the Federal Bankruptcy Act or any other federal or state statute relating to insolvency or the protection of rights of creditors. 14.2 Upon the occurrence of an event of default as described in Section 14.1, the party not in default may immediately terminate this Agreement by giving written notice to the party in default. 6 14.3 The rights and remedies provided to the parties in this Section 14 shall not be exclusive and are in addition to any other rights and remedies provided by this Agreement or by law or in equity. 15. INSURANCE. 15.1 During the term of this Agreement, Vendor shall carry insurance coverage for product liability/completed operations with minimum limits of one million dollars ($1,000,000). Within ten (10) days of the full execution of this Agreement, Vendor shall provide Ingram with a Certificate of Insurance evincing such insurance coverage including (a) a broad form vendor's endorsement naming Ingram as an additional insured and (b) a mandatory thirty (30) day notice of cancellation to Ingram. 16. OTHER PROVISIONS. 16.1 CONSTRUCTION. This Agreement shall be construed and enforced in accordance with the laws of the State of California, except that body of law concerning conflicts of law. 16.2 NOTICES. All notices, requests, demands and other communications called for or contemplated hereunder shall be in writing and shall be deemed to have been duly given when (i) personally delivered; (ii) two (2) days after mailing by U.S. certified or registered first-class mail, prepaid; or (iii) one (1) after deposit with any nationally recognized overnight courier, with written verification of receipt, and addressed to the parties at the addresses set forth at the end of this Agreement or at such other addresses as the parties may designate by written notice. 16.3 ATTORNEY'S FEES. In the event suit is commenced to enforce this Agreement or otherwise relating to this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs incurred in connection therewith. 16.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument; however, this Agreement shall be of no force or effect until executed by both parties. 16.5 CONFIDENTIAL INFORMATION. Neither party shall disclose to the other any information regarded as confidential information by the disclosing party or any third party. Any confidential disclosures shall be exclusively governed by a separate agreement. 16.6 NO IMPLIED WAIVERS. The failure of either party at any time to require performance by the other party of any provision hereof shall not affect in any way the full rights to require such performance at any time thereafter. The waiver by either party of a breach of any provision hereof shall not be taken, construed, 7 or held to be a waiver of the provision itself or a waiver of any breach thereafter or any other provision hereof. 16.7 CAPTIONS AND SECTION HEADINGS. Captions and section headings used herein are for convenience only, are not a part of this Agreement, and shall not be used in construing it. 16.8 COVENANT OF FURTHER COOPERATION. Each of the parties agrees to execute and deliver such further documents and to cooperate in such manner as may be necessary to implement and give effect to the agreements contained herein. 16.9 BINDING ON HEIRS AND SUCCESSORS. This Agreement shall be binding upon and shall inure to the benefit of each party, its successors and assigns. 16.10 SEVERABILITY. A judicial determination that any provision of this Agreement is invalid in whole or in part shall not affect the enforceability of those provisions found not to be invalid. 16.11 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof, superseding any and all previous proposals, representations or statements, oral or written. Any previous agreements between the parties pertaining to the subject matter of this Agreement are hereby expressly canceled and terminated. The terms and conditions of each party's purchase orders, invoices, acknowledgments /confirmations or similar documentation shall not apply to any order hereunder, and any such terms and conditions thereon shall be deemed to be objected to without need of further notice or objection. Any modifications of this Agreement must be in writing and signed by authorized representatives of both parties hereto. 8 16.12 PARTIES EXECUTING. The parties executing this Agreement warrant that they have the requisite authority to do so. IN WITNESS WHEREOF, the parties hereunto have executed this Agreement. "Ingram" "Vendor" Ingram Micro Inc. Datawatch Corporation 1600 E. St. Andrew Place 3700 Lyckan Parkway Santa Ana, California 92705 Durham, NC 27707 By: /s/ Sanat K. Dutta By: /s/ Andrew W. Mathews -------------------------- ----------------------------- Sanat K. Dutta Senior Vice President Name: Andrew W. Mathews Operations ------------------------ (print or type) Title: Vice President, General Manager Date: 12/18/92 Date: 12/29/92 ------------------------- ------------------- *AGREEMENT MUST BE SIGNED BY PRESIDENT OR BY A DULY AUTHORIZED VICE PRESIDENT OR PARTNER. 9 Amendment No. 1 April 16, 1996 Reseller Agreement Page One of One Ingram Micro Inc. ("Reseller") and Datawatch Corporation hereby agree to amend their mutual Distribution Agreement, dated December 10, 1992 as follows: 1. A revised Exhibit A is attached hereto which contains no Data Encrypted Software (DES) items. All items are authorized under section 1.1 for worldwide distribution with the exception of Virex with Speed Scan which may not be distributed in Australia. 2. This amendment shall remain in effect for the current and any renewal term of the Agreement. Notwithstanding the foregoing, all other provisions of the Agreement remain unchanged. The signer has read this Amendment, agrees hereto, and is an authorized representative of its respective party. INGRAM MICRO INC. DATAWATCH CORPORATION By: /s/ Sanat K. Dutta By: /s/ A.W. Mathews --------------------------- ------------------------- Name: Sanat K. Dutta Name: A.W. Mathews Title: Executive Vice President Title: Vice President of Sales Date: 4/19/96 Date: 5/9/96 ------------------------- ----------------------- 10 EX-99.1 5 exh99-1_11938.txt CERTIFICATION OF CHIEF 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 March 31, 2003 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 results of operations of the Company. /s/ Robert W. Hagger ---------------------------- Robert W. Hagger Chief Executive Officer May 15, 2003 EX-99.2 6 exh99-2_11938.txt CERTIFICATION OF CHIEF FINANCIAL 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 March 31, 2003 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 results of operations of the Company. /s/ Alan R. MacDougall ---------------------------- Alan R. MacDougall Chief Financial Officer May 15, 2003 -----END PRIVACY-ENHANCED MESSAGE-----