UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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: 0-19960
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.)
234 Ballardvale Street, Wilmington Massachusetts 01887
(Address of principal executive offices) (Zip Code)
(978) 988-9700
(Registrant's telephone number, including area code)
None
(Former name, former address, former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at May 7, 1999
Common stock, $.01 par value 9,150,821
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page #
a) Consolidated Condensed Balance Sheets: 3
March 31, 1999 and September 30, 1998
b) Consolidated Condensed Statements of Operations: 4
Three Months Ended March 31, 1999 and 1998
Six Months Ended March 31, 1999 and 1998
c) Consolidated Condensed Statements of Cash Flows: 5
Six Months Ended March 31, 1999 and 1998
d) Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities *
Item 3. Default upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
* No information provided due to inapplicability of item.
PART I.
Item 1. Financial Statements
--------------------
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
March 31, 1999 September 30, 1998
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,130,802 $ 3,575,256
Short-term investments 2,083,649 3,395,410
Accounts receivable, net 6,915,055 6,401,965
Inventories 424,249 511,669
Prepaid expenses 951,437 1,270,671
--------------- ---------------
Total current assets 12,505,192 15,154,971
--------------- ---------------
PROPERTY AND EQUIPMENT:
Property and equipment 4,147,429 4,280,100
Less accumulated depreciation
and amortization (2,539,086) (2,453,240)
--------------- ---------------
Net property and equipment 1,608,343 1,826,860
--------------- ---------------
OTHER ASSETS 848,944 625,293
--------------- ---------------
EXCESS OF COSTS OVER NET ASSETS
OF ACQUIRED COMPANIES 611,250 725,091
--------------- ---------------
TOTAL ASSETS $ $ 15,573,729 $ 18,332,215
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,761,728 $ 3,791,323
Accrued expenses 853,611 1,301,599
Borrowings under credit lines 960,177 250,000
Deferred revenue 1,305,320 1,161,556
Current portion of long-term
debt 79,881 147,065
--------------- ---------------
Total current liabilities 6,960,717 6,651,543
--------------- ---------------
LONG-TERM DEBT 12,775 44,190
--------------- ---------------
TOTAL LIABILITIES $ 6,973,492 $ 6,695,733
=============== ===============
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY:
Common stock $ 91,828 $ 91,803
Additional paid-in capital 19,826,387 19,823,887
Accumulated deficit (10,794,987) (7,829,554)
Accumulated other comprehensive
loss (382,603) (309,266)
--------------- ---------------
8,740,625 11,776,870
--------------- ---------------
Less treasury stock - at cost (140,388) (140,388)
--------------- ---------------
Total shareholders' equity 8,600,237 11,636,482
--------------- ---------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ $ 15,573,729 $ 18,332,215
=============== ===============
See notes to consolidated condensed financial statements.
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
--------------- --------------- --------------- --------------
IBM-PC based products $ 7,160,763 $ 6,376,747 $ 13,684,188 $ 12,582,832
Macintosh-based products 172,254
--------------- ---------------- --------------- --------------
NET SALES 7,160,763 6,376,747 13,684,188 12,755,086
--------------- ---------------- --------------- --------------
COSTS AND EXPENSES:
Cost of sales 1,768,385 1,263,670 3,222,905 2,723,674
Engineering and product
development 737,438 499,389 1,376,073 918,526
Selling, general and
administrative 5,900,816 5,629,888 11,898,953 12,018,216
Restructuring and
centralization costs 199,637 2,364,246
--------------- ---------------- --------------- --------------
LOSS FROM OPERATIONS (1,245,876) (1,016,200) (3,013,380) (5,269,576)
INTEREST EXPENSE (33,775) (13,866) (64,621) (32,336)
OTHER INCOME, primarily
interest 42,509 144,288 113,391 287,531
GAIN (LOSS) ON DISPOSITION
OF FIXED ASSETS 5,636 (2,130)
GAIN ON SALE OF PRODUCT
LINE 15,431,253
FOREIGN CURRENCY
TRANSACTION GAIN(LOSS) (3,295) (5,986) 1,307 (10,202)
--------------- ---------------- -------------- --------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAX (1,234,801) (891,764) (2,965,433) 10,406,670
PROVISION FOR INCOME TAX 2,225,000
--------------- ---------------- -------------- --------------
NET INCOME (LOSS) $ (1,234,801) $ (891,764) $ (2,965,433) $ 8,181,670
================ =============== ============== ==============
NET INCOME (LOSS) PER
COMMON SHARE-Basic $ (.13) $ (.10) $ (.32) $ .90
COMMON SHARE-Diluted $ (.13) $ (.10) $ (.32) $ .87
WEIGHTED AVERAGE SHARES
OUTSTANDING - Basic 9,148,457 9,140,718 9,148,384 9,118,762
ADJUSTMENT FOR DILUTIVE
POTENTIAL COMMON STOCK 241,459
---------------- --------------- -------------- --------------
WEIGHTED AVERAGE SHARES
OUTSTANDING - Diluted 9,148,457 9,140,718 9,148,384 9,360,221
================ =============== ============== ==============
See notes to consolidated condensed financial statements.
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended March 31,
1999 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,965,433) $ 8,181,670
Adjustment to reconcile net income to net cash:
Gain on sale of product line (15,431,253)
(Gain) loss on disposition of fixed assets 2,130
Depreciation and amortization 622,422 601,488
Interest accrued on short-term investments (81,702) (66,577)
Changes in current assets and liabilities:
Inventories 87,420 199,785
Prepaid expenses 319,234 356,635
Accounts receivable (513,090) 488,164
Accounts payable and accrued expenses (550,920) (1,333,915)
Deferred revenue 143,764 (157,061)
--------------- ---------------
Net cash used in operating activities (2,936,175) (7,161,064)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and fixtures (178,634) (466,042)
Proceeds from maturity of short-term investments 4,905,000
Purchase of short-term investments (3,511,537) (4,879,481)
Proceeds from sale of product line to Dr Solomon's
Software, Inc. 16,750,000
Proceeds from disposition of fixed assets 5,641
Purchased software development (242,586)
Other assets (100,266) 122,611
--------------- ---------------
Net cash provided by investing activities 877,618 11,527,088
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,525 84,066
Principal payments on long-term obligations (98,599) (109,316)
Principal payments on bank term-loan (1,500,000)
Borrowings under credit line, net 710,177
--------------- ---------------
Net cash provided by (used in) financing activities 614,103 (1,525,250)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (1,444,454) 2,840,774
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,575,256 1,586,875
--------------- ---------------
CASH AND EQUIVALENTS, END OF PERIOD $ 2,130,802 $ 4,427,649
=============== ===============
See notes to consolidated condensed financial statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements include the accounts of Datawatch Corporation (the
"Company") and its wholly owned subsidiaries and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements and should be read in conjunction with the
audited consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 1998.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments necessary
for fair presentation of the results of the interim periods presented. The
operating results for the interim periods presented are not necessarily
indicative of the results expected for the full year.
2. Recent Accounting Pronouncements: The American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 97-2,
"Software Revenue Recognition," and interpretive guidance in SOP Nos. 98-4 and
98-9 which supersede SOP No. 91-1. The Company has adopted SOP No. 97-2 and
the successor SOPs effective October 1, 1998. SOP No. 97-2 generally requires
revenue earned on software arrangements involving multiple elements to be
allocated to each element based on the relative fair values of the elements.
The adoption of SOP No. 97-2 did not have a material effect on the Company's
operating results for either the three or six months ended March 31, 1999.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
About Segments of an Enterprise and Related Information." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 will be adopted by the Company in its annual
consolidated financial statements for fiscal 1999. Such standard is
"disclosure standards" and will not impact the Company's consolidated results
of operations.
In March 1998, the AICPA released SOP 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use," which requires
certain expenditures made for internal use software to be capitalized. The
Company is currently studying the impact of SOP 98-1, which is required to be
adopted by the Company in October 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. The new standard requires that all companies record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains
or losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. Management is currently assessing whether there will be
any impact of SFAS No. 133 on the Company's consolidated financial statements
upon adoption, which is required in October 1999.
3. Inventories: The Company accounts for its inventories using a standard
cost methodology. Inventories were comprised of the following:
March 31, 1999 September 30, 1998
------------------ ------------------
Materials $ 278,507 $ 303,426
Finished goods 145,742 208,243
------------------ ------------------
TOTAL $ 424,249 $ 511,669
================== ==================
4. Restructuring and Centralization Costs: During the fourth quarter of
fiscal 1998, the Company approved and completed a restructuring plan to further
centralize its administrative infrastructure and its development efforts.
These charges, totaling approximately $315,000 have been paid. There were no
changes in these estimates in the six months ended March 31, 1999.
During the first quarter of fiscal 1999, the Company approved and completed a
restructuring plan to centralize in the United States the quality assurance
efforts for its Quetzal/SC product. The restructuring plan consisted of
charges for severance benefits and related costs for 10 terminated employees.
These charges, totaling approximately $200,000, have been paid.
5. Litigation: The Company is not a party to any litigation that management
believes will have a material adverse effect on the Company's consolidated
financial statements or its business.
6. Comprehensive Income: Effective October 1, 1998, the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income." The following is
presented in accordance with this statement:
Six Months Ended March 31,
1999 1998
--------------- ---------------
Net income (loss) $ (2,965,433) $ 8,181,670
Other comprehensive income, net of tax:
Foreign currency translation adjustments (73,337) (38,606)
--------------- ---------------
Comprehensive income (loss) $ (3,038,770) $ 8,143,064
=============== ===============
Accumulated other comprehensive loss reported in the condensed consolidated
balance sheets consists only of foreign currency translation adjustments.
7. Financing Arrangement: On March 16, 1999 the Company amended its line of
credit with a bank. As amended, the line of credit, expires on January 30,
2000 and provides for maximum borrowings up to the lesser of $1,500,000 or
50%-80% of defined eligible accounts receivable. Borrowings under the line are
collateralized by substantially all assets of the Company. Outstanding
borrowings bear interest at the bank's prime rate plus 1% (8.5% at March 31,
1999). As of March 31, 1999, the Company had approximately $960,000 of
outstanding borrowings under the line of credit. The line of credit contains
customary covenants which require, among other items, a minimum level of
consolidated tangible net worth and the maintenance of a minimum liquidity
ratio, as defined.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
GENERAL
DATAWATCH CORPORATION (the "Company" or "Datawatch") is a provider of
knowledge-based software solutions for the business enterprise.
DATAWATCH's principal products are: Monarch?, a report mining application
that lets users extract and manipulate data from ASCII report files produced on
any mainframe, midrange, client/server or PC system; Monarch/ES?, a
configurable enterprise reporting solution that lets organizations store and
deliver reports electronically via their local area network; Monarch/ES Web?,
a Monarch/ES extension introduced in October 1998 that supports browser-based
report retrieval via the World Wide Web; Monarch/ES Report Publisher?, a
Monarch/ES extension also introduced in October 1998 that supports automated
delivery of reports via MAPI-compliant email; Redwing? a plug-in for Aboder
Acrobatr that lets users extract text and tables from Adobe PDF documents;
Monarch Data Pump?, a data replication and migration tool that offers a
shortcut for populating and refreshing data marts and data warehouses; and
Quetzal/SC? an integrated help desk and asset management solution for
multi-user networked support centers.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998.
- ------------------------------------------
Net sales for the three months ended March 31, 1999 were $7,161,000 which
represents an increase of $784,000, or approximately 12% from net sales of
$6,377,000 for the three months ended March 31, 1998. This increase in net
sales results from an increase of the Company's Monarch/ES product sales and
approximately $420,000 of non-recurring revenue resulting from the
reimbursement by Adobe Systems Incorporated ("Adobe") of engineering expenses
paid to a third-party developer for the customization of the Company's Redwing
product. Such an arrangement is unusual in that customization work is usually
undertaken and billed by a third-party. For the three months ended March 31,
1999, the Monarch suite of products accounted for approximately 56% of net
sales, the Quetzal/SC product accounted for approximately 33% of net sales, and
the third-party product lines accounted for approximately 11% of net sales.
Cost of sales for the three months ended March 31, 1999 was $1,768,000 or
approximately 25% of net sales. Cost of sales for the three months ended March
31, 1998 was $1,264,000 or approximately 20% of net sales. Included in the cost
of sales for the three months ended March 31, 1999 were non-recurring
engineering expenses of approximately $420,000 paid to a third-party developer
on behalf of Adobe which has licensed certain technology from the Company's
Redwing product. Excluding these expenses from cost of sales and excluding the
reimbursement from Adobe from net sales, cost of sales for the three months
ended March 31, 1999 would have been $1,348,000 or 20%, which is comparable to
cost of sales for the same period of fiscal 1998.
Engineering and product development expenses were $737,000 for the three
months ended March 31, 1999, an increase of $238,000 or approximately 48% from
$499,000 for the three months ended March 31, 1998. This increase is primarily
attributable to expenditures for development efforts undertaken by developers
under contract to the Company and internal quality assurance personnel for the
Company's Quetzal/SC and Monarch/ES products.
Selling, general and administrative expenses were $5,901,000 for the three
months ended March 31, 1999, an increase of $271,000 or approximately 5% from
$5,630,000 for the three months ended March 31, 1998. Included in expenses for
the three months ended March 31, 1999 were non-recurring legal expenses of
approximately $550,000 associated with the litigation with Palms Technology,
which has been settled. Excluding these costs, selling, general and
administrative expenses would have been $5,351,000 for the three months ended
March 31, 1999, a decrease of $279,000 or approximately 5% from the prior year.
This decrease is primarily due to the reduction of personnel in the Company's
foreign subsidiaries pursuant to a restructuring during the fourth quarter of
fiscal 1998, as well as a decrease in promotional activities associated with
the Company's Monarch product line.
As a result of the foregoing, the loss from operations for the three
months ended March 31, 1999 was $1,246,000 which compares to a loss from
operations of $1,016,000 for the three months ended March 31, 1998. The net
loss for the three months ended March 31, 1999 was $1,235,000, which compares
to a net loss of $892,000 for the three months ended March 31, 1998.
Six Months Ended March 31, 1999 and 1998.
- ----------------------------------------
Net sales for the six months ended March 31, 1999 were $13,684,000, which
represents an increase of $929,000 or approximately 7% from net sales of
$12,755,000 for the six months ended March 31, 1998. This increase in net
sales results from an increase of the Company's Monarch/ES product sales and
approximately $420,000 of non-recurring revenue resulting from the
reimbursement by Adobe of engineering expenses paid to a third-party developer
for customization of the Company's Redwing product. Such an arrangement is
unusual in that customization work is usually undertaken and billed by a
third-party. For the six months ended March 31, 1999, the Monarch suite of
products accounted for approximately 52% of net sales, Quetzal/SC accounted for
approximately 35% and third-party product lines accounted for approximately 13%
of net sales.
Cost of sales for the six months ended March 31, 1999 was $3,223,000 or
approximately 24% of net sales. Cost of sales for the six months ended March
31, 1998 was $2,724,000 or approximately 21% of net sales. Included in the cost
of sales for the six months ended March 31, 1999 were non-recurring engineering
expenses of approximately $420,000 paid to a third-party developer on behalf of
Adobe which has licensed certain technology from the Company's Redwing product.
Excluding these expenses from cost of sales and excluding the reimbursement
from Adobe from net sales, cost of sales for the six months ended March 31,
1999 would have been $2,803,000 or 21%, which is comparable to cost of sales
for the same period of fiscal 1998.
Engineering and product development expenses were $1,376,000 for the six
months ended March 31, 1999, an increase of $457,000 or approximately 50% from
$919,000 for the six months ended March 31, 1998. This increase is primarily
attributable to expenditures for development efforts undertaken by developers
under contract to the Company and internal quality assurance personnel for the
Company's Quetzal/SC and Monarch/ES products.
Selling, general and administrative expenses were $11,899,000 for the six
months ended March 31, 1999, a decrease of $119,000 or approximately 1% from
$12,018,000 for six months ended March 31, 1998. Included in the expenses for
the six months ended March 31, 1999 were approximately $631,000 of
non-recurring legal expenses associated with the litigation with Palms
Technology, which has been settled. Excluding these costs, selling, general
and administrative expenses would have been $11,268,000 for the six months
ended March 31, 1999, a decrease of $750,000 or approximately 6% from the same
period of fiscal year 1998. This decrease is primarily due to the reduction of
personnel in the Company's foreign subsidiaries pursuant to a restructuring
during the fourth quarter of fiscal 1998, as well as a decrease in promotional
activities associated with the Company's Monarch product line.
During the six months ended March 31, 1999, the Company approved and
completed a restructuring plan to centralize in the United States the quality
assurance efforts for its Quetzal/SC product. The restructuring plan consisted
of charges for severance benefits and related costs for 10 terminated
employees. These charges, totaling approximately $200,000, have been paid.
The Company has not recorded any provision for income taxes in the six
months ended March 31, 1999. This reflects the Company's current estimate that
it will not be in a taxable position at the end of the current year in any
jurisdiction owing either to the presence of net operating loss carryforwards
(that are still reserved for) or anticipated loss for the fiscal year based on
the results of the first two quarters. Such estimates are reviewed by
management and are subject to change. The Company did record a provision for
income taxes in the six months ended March 31, 1998 owing to management's
estimate, at that time, of taxable income for the year.
As a result of the foregoing, the loss from operations for the six months
ended March 31, 1999 was $3,013,000 which compares to a loss from operations of
$5,270,000 for the six months ended March 31, 1998. The net loss for the six
months ended March 31, 1999 was $2,965,000, which compares to net income of
$8,182,000 for the six months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's management believes that its currently anticipated capital
needs for future operations of the Company will be satisfied through at least
September 30, 1999 by funds currently available, funds generated from
operations and available borrowings. On March 16, 1999 the Company amended its
line of credit with a bank. The line of credit, as amended, expires on January
20, 2000 and provides for maximum borrowings up to the lesser of $1,500,000 or
50%-80% of defined eligible accounts receivable. Borrowings under the line are
collateralized by substantially all assets of the Company. Outstanding
borrowings bear interest at the bank's prime rate plus 1% (8.5% at March 31,
1999). As of March 31, 1999, the Company had approximately $960,000 of
outstanding borrowings under the line of credit.
Working capital decreased by approximately $2,959,000 during the six months
ended March 31, 1999 primarily as a result of unprofitable operations, cash
flow requirements of the Company's international subsidiaries, and legal
expenses associated with the litigation with Palm Technology which has been
settled.
Management believes that the Company's current operations are not materially
impacted by the effects of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 will be
adopted by the Company in its annual consolidated financial statements for
fiscal 1999. Such standard is a "disclosure standard" and will not impact the
Company's consolidated results of operations.
In March 1998, the AICPA released SOP 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use," which requires
certain expenditures made for internal use software to be capitalized. The
Company is currently studying the impact of SOP 98-1, which is required to be
adopted by the Company in October 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal years beginning after
June 15, 1999. The new standard requires that all companies record derivatives
on the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. Management is currently assessing whether there will be
any impact of SFAS No. 133 on the Company's consolidated financial statements
upon adoption, which is required in October 1999.
YEAR 2000 READINESS DISCLOSURE STATEMENT
General
The Company is aware of the global concerns related to what is known as
the Year 2000 issue and the potential for the associated system failures and
business interruptions that may result. The Year 2000 issue concerns three
main areas: the ambiguity that may result from processing and storing data
using 2-digit year formats; the recognition that the year 2000 is a leap year;
and the use of dates (most commonly 9/9/99) for special programming functions.
Any of these problems could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in normal business activities for
both the Company and its customers who rely on its products.
Year 2000 Compliance Program
The Company has been aware of the Year 2000 issue for several years and
has been actively engaged in correcting Year 2000 deficiencies as they are
recognized, but has not yet completed reviewing, correcting and testing all
facets of the Year 2000 compliance issues facing it. The implementation of the
Company's Year 2000 compliance program continues with corrective action taken
as Year 2000 issues are identified. The purpose of the compliance program is
to identify important internal systems that are not yet Year 2000 compliant; to
initiate replacement or remedial action to assure that key systems and products
will continue to operate in the Year 2000 and to test the replaced or
remediated systems and products; to identify and contact key suppliers,
vendors, customers and business partners to evaluate their ability to maintain
normal operations in the Year 2000; and to develop appropriate contingency
plans for dealing with foreseeable Year 2000 complications. The Company has
appointed a Year 2000 Readiness Coordinator who is responsible for
administering the Company's Year 2000 compliance program.
Internal Systems
Based on the preliminary results of the Company's assessment of its
internal use hardware and software, including telephone systems and other
facilities equipment, the Company has determined that it may be necessary to
modify or replace some of its internal use software and hardware. During 1998,
a project was initiated at the corporate offices in Wilmington, Massachusetts
and at the Company's largest subsidiary, Datawatch International, in Potters
Bar, England to upgrade the Company's accounting software to a Year 2000
compliant version. These simultaneous projects were completed in September
1998. Although the Company anticipates that the accounting systems at some of
its other subsidiaries will be replaced by the end of 1999, the accounting
systems at these locations are significantly less critical than at the
locations already upgraded. The Company currently believes that all other
"mission critical" software is Year 2000 compliant. The Company also believes
that all major internal use hardware, including network servers and telephone
systems, have been upgraded or replaced so that they are now Year 2000
compliant. A complete review of all desktop and laptop computers is in
progress, with corrective action taken as Year 2000 compliance issues are
identified. The Company now anticipates completing its review of all internal
software and hardware by June 30, 1999. The cost to bring internal operations
into compliance is estimated to be approximately $100,000.
The Company has begun contacting vendors concerning the status of their
Year 2000 readiness. All supplies used to market, sell or produce the
Company's products are readily available from many different suppliers.
Therefore, the Company intends to use only vendors who are determined to be
Year 2000 compliant for supplies after September 30, 1999.
Software Products
The Company has designed, tested and continues to test the most current
versions of its products for Year 2000 issues. With respect to certain of
those products, the Company has relied on testing and representations by its
third-party developers. Based on its internal testing and the testing done by
its third-party developers to date, the Company believes that the latest
versions of its products are substantially Year 2000 compliant and are not
likely to pose a significant Year 2000 liability issue for the Company or any
significant operational problems for its customers. In the event problems are
discovered, the Company intends to issue product updates to correct such
anomalies. The Company has requested and is waiting to receive Year 2000
compliance statements from vendors of certain widely-accepted database and
middleware tools which are used in the development of its products; in the
event such tools are not compliant, the Company believes achieving compliance
will require upgrades to newer versions of such tools.
The Company also has performed and continues to perform limited Year 2000
compliance assessments of certain older versions of its products, and where
problems are discovered, will determine the practicality of modifying older
versions. Certain of the Company's customers use older 16-bit operating
systems which are believed not to be Year 2000 compliant and the Company makes
available to these customers older 16-bit versions of its software, which in
ome cases are not Year 2000 compliant. The Company believes it does not have
material financial exposure to customers with respect to older versions of its
products.
The Company estimates the total cost for testing its products for Year
2000 compliance to be approximately $100,000, including $28,000 already
expended, and estimates the cost associated with vendor compliance and customer
communication to be approximately $50,000.
As the Year 2000 compliance assessment and/or testing of a product is
completed, the Company makes this information available to its customers via
the Company's web site. Information is also communicated to registered
customers in newsletters and other special mailings.
Risks Associated with Year 2000 Issue
The Company believes its Year 2000 compliance program will allow it to
identify and correct any Year 2000 compliance deficiencies. This assessment is
subject to revision based on the results of the Company's on-going Year 2000
compliance efforts. If unforeseen compliance efforts are required or if
present compliance efforts are not completed on time, or if the cost of any
required updating, modification or replacement of the Company's systems or
equipment exceeds the Company's estimates, the Year 2000 issue could result
in material costs and have a material adverse effect on the Company. However,
the Company believes that the risk is minimal.
The Company utilizes third-party vendors for product development and
testing. Should these vendors not be compliant in a timely manner, product
releases scheduled to take place after December 31, 1999 could be delayed. The
Company also utilizes third-party vendors for processing data and payments,
e.g. payroll services, 401(k) plan administration, check processing, medical
benefits processing, etc. Should these vendors not be compliant in a timely
manner, the Company may be required to process transactions manually or delay
processing until such time as the vendors are Year 2000 compliant. The Company
has warranted, to certain customers, that certain of its products are or will
be Year 2000 compliant. Non-compliance with these warranties may result in
legal action for breach of warranty.
Various statements in this discussion of Year 2000 are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995 as discussed below under "Risk Factors". These statements include
statements of the Company's expectations, statements with regard to schedules
and expected completion dates and statements regarding expected Year 2000
compliance. These forward-looking statements are subject to various risk
factors which may materially affect the Company's efforts to achieve Year 2000
compliance. These risk factors include: the inability of the Company to
complete in a timely manner the plans and modifications that it has identified;
any inaccuracy in the assessment of the cost and financial exposure of the
Company with respect to current and older versions of the Company's products;
the failure of software vendors to deliver the upgrades and repairs to which
they have committed; the wide variety of information technology systems and
components, both hardware and software, that must be evaluated; and the large
number vendors and customers with which the Company interacts. The Company's
assessments of the effects of Year 2000 on the Company are based, in part, upon
information received from third parties and the Company's reasonable reliance
on that information. Therefore, the risk that inaccurate information is
supplied by third parties upon which the Company reasonably relies must be
considered as a risk factor that might affect the Company's Year 2000 efforts.
The Company is attempting to reduce the risks by utilizing an organized
approach, extensive testing, and allowance of ample contingency time to address
issues identified by tests.
Contingency Plans
The Company has not established a specific Year 2000 contingency plan at
this time. The Company is in the process of developing a general corporate
contingency plan which it anticipates will be in place prior to December 31,
1999. The purpose of this plan will be to allow the Company to recognize system
failures, if any, and identify resources needed and available to restore
operations in a timely manner.
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
Form 10-Q that are not historical facts (including, but not limited to
statements contained in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of Part I of this Report on Form
10-Q relating to liquidity and capital resources) may constitute forward-
looking statements and are made under the safe harbor provisions of The Private
Securities Litigation Reform Act of 1995. The Company's actual results of
operations and financial condition have varied and may in the future vary
significantly from those stated in any forward-looking statements. Factors
that may cause such differences include, without limitation, the risks,
uncertainties and other information discussed below and within this Form 10-Q,
as well as the accuracy of the Company's internal estimates of revenue and
operating expense levels. The following discussion of the Company's risk
factors should be read in conjunction with the financial statements contained
herein and related notes thereto. Such factors, among others, may have a
material adverse effect upon the Company's business, results of operations and
financial condition.
Fluctuations in Quarterly Operating Results
The Company's future operating results could vary substantially from
quarter to quarter because of uncertainties and/or risks associated with such
things as technological change, competition, delays in the introduction of
products or product enhancements and general market trends. Historically, the
Company has operated with little backlog of orders because its software
products are generally shipped as orders are received. As a result, net sales
in any quarter are substantially dependent on orders booked and shipped in that
quarter. Because the Company's staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the Company's costs are
fixed in the short-term, small variations in the timing of revenues can cause
significant variations in operating results from quarter to quarter. Because
of these factors, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. There can be no assurance that the
Company will not experience such variations in operating results in the future
or that such variations will not have a material adverse effect on the
Company's business, financial condition or results of operation.
Dependence on Principal Products
For the six months ended March 31, 1999, the Monarch suite of products and
the Quetzal/SC product accounted for approximately 52% and 35%, respectively,
of the Company's net sales. With the disposal of the Macintosh-based product
line, the Company is wholly dependent on Monarch and Quetzal/SC. As a result,
any factor adversely affecting sales of either of these products could have a
material adverse effect on the Company. The Company's future financial
performance will depend in part on the successful introduction of its new and
enhanced versions of these products and development of new versions of these
and other products and subsequent acceptance of such new and enhanced products.
In addition, competitive pressures or other factors may result in significant
price erosion that could have a material adverse effect on the Company's
business, financial condition or results of operations.
International Sales
The Company anticipates that international sales will continue to account
for a significant percentage of its net sales. A significant portion of the
Company's net sales will therefore be subject to risks associated with
international sales, including unexpected changes in legal and regulatory
requirements, changes in tariffs, exchange rates and other barriers, political
and economic instability, difficulties in account receivable collection,
difficulties in managing distributors or representatives, difficulties in
staffing and managing international operations, difficulties in protecting the
Company's intellectual property overseas, seasonality of sales and potentially
adverse tax consequences.
Acquisition Strategy
Although the Company has no current acquisition plans, it has addressed
and may continue to address the need to develop new products, in part, through
the acquisition of other companies. Acquisitions involve numerous risks
including difficulties in the assimilation of the operations, technologies and
products of the acquired companies, the diversion of management's attention
from other business concerns, risks of entering markets in which the Company
has no or limited direct prior experience and where competitors in such markets
have stronger market positions, and the potential loss of key employees of the
acquired Company. Achieving and maintaining the anticipated benefits of an
acquisition will depend in part upon whether the integration of the companies'
business is accomplished in an efficient and effective manner, and there can be
no assurance that this will occur. The successful combination of companies in
the high technology industry may be more difficult to accomplish than in other
industries.
Dependence on New Introductions; New Product Delays
Growth in the Company's business depends in substantial part on the
continuing introduction of new products. The length of product life cycles
depends in part on end-user demand for new or additional functionality in the
Company's products. If the Company fails to accurately anticipate the demand
for, or encounters any significant delays in developing or introducing, new
products or additional functionality on its products, there could be a material
adverse effect on the Company's business. Product life cycles can also be
affected by the introduction by suppliers of operating systems of comparable
functionality within their products. The failure of the Company to anticipate
the introduction of additional functionality in products developed by such
suppliers could have a material adverse effect on the Company's business. In
addition, the Company's competitors may introduce products with more features
and lower prices than the Company's products. Such increase in competition
could adversely affect the life cycles of the Company's products, which in turn
could have a material adverse effect on the Company's business.
Software products may contain undetected errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by the Company and by current and potential end-users, errors
will not be found in new products after commencement of commercial shipments,
resulting in loss of or delay in market acceptance. Any failure by the Company
to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business.
Rapid Technological Change
The markets in which the Company competes have undergone, and can be
expected to continue to undergo, rapid and significant technological change.
The ability of the Company to grow will depend on its ability to successfully
update and improve its existing products and market and license new products to
meet the changing demands of the marketplace and that can compete successfully
with the existing and new products of the Company's competitors. There can be
no assurance that the Company will be able to successfully anticipate and
satisfy the changing demands of the personal computer software marketplace,
that the Company will be able to continue to enhance its product offerings, or
that technological changes in hardware platforms or software operating systems,
or the introduction of a new product by a competitor, will not render the
Company's products obsolete.
Year 2000 Issue
Although the Company does not expect that the Year 2000 issue will have a
material effect on the Company's results of operations or financial condition,
the Company is potentially exposed to Year 2000 issues with respect to internal
software and external product offerings. If the Company's internal systems or
its products fail to operate properly as a result of Year 2000, the Company's
results of operations and financial condition could be materially and adversely
impacted. The Company continues to evaluate the Year 2000 issue. See "Year
2000 Readiness Disclosure Statement," particularly the subsection headed "Risks
Associated with Year 2000 Issue" which appears immediately before this "Risk
Factors" section of this Report on Form 10-Q, for a discussion of the Company's
Year 2000 readiness and the risks associated with the Year 2000 issue.
Competition in the PC Software Industry
The software market for personal computers is highly competitive and
characterized by continual change and improvement in technology. Several of
the Company's existing and potential competitors (including IBM, Network
Associates, Inc., Remedy, and Actuate) have substantially greater financial,
marketing and technological resources than the Company. No assurance can be
given that the Company will have the resources required to compete successfully
in the future.
Dependence on Proprietary Software Technology
The Company's success is dependent upon proprietary software technology.
Although the Company does not own any patents on any such technology, it does
hold exclusive licenses to such technology and relies principally on a
combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its rights to
such proprietary technology. Despite such precautions, there can be no
assurance that such steps will be adequate to deter misappropriation of such
technology.
Reliance on Software License Agreements
Substantially all of the Company's products incorporate third-party
proprietary technology which is generally licensed to the Company on an
exclusive, worldwide basis. Failure by such third parties to continue to
develop technology for the Company and license such technology to the Company
could have a material adverse effect on the Company's business and results of
operations.
Indirect Distribution Channels
The Company sells its products through resellers, none of which are under
the direct control of the Company. The loss of major resellers of the
Company's products, or a significant decline in their sales, could have a
material adverse effect on the Company's operating results. There can be no
assurance that the Company will be able to attract or retain additional
qualified resellers or that any such resellers will be able to effectively sell
the Company's products. The Company seeks to select and retain resellers on
the basis of their business credentials and their ability to add value through
expertise in specific vertical markets or application programming expertise.
In addition, the Company relies on resellers to provide post-sales service and
support, and any deficiencies in such service and support could adversely
affect the Company's business.
Volatility of Stock Price
As is frequently the case with the stocks of high technology companies,
the market price of the Company's common stock has been, and may continue to
be, volatile. Factors such as quarterly fluctuations in results of operations,
increased competition, the introduction of new products by the Company or its
competitors, expenses or other difficulties associated with assimilating
companies acquired by the Company, changes in the mix of sales channels, the
timing of significant customer orders, and macroeconomic conditions generally,
may have a significant impact on the market price of the stock of the Company.
Any shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant adverse effect on the market
price of the Company's common stock in any given period. In addition, the
stock market has from time to time experienced extreme price and volume
fluctuations, which have particularly affected the market price for many high
technology companies and which, on occasion, have appeared to be unrelated to
the operating performance of such companies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments.
At March 31, 1999 the Company did not participate in any derivative
financial instruments, or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. The Company holds
no investment securities which would require disclosure of market risk.
Primary Market Risk Exposures.
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company utilizes U.S.
dollar denominated borrowings to fund its operational needs through a working
capital line of credit pursuant to which the Company is permitted to borrow up
to a maximum of $1,500,000. The line of credit, which currently bears an
interest rate of prime plus 1.% (8.5% at March 31, 1999), is subject to annual
renewal and expires on January 30, 2000. Had the interest rates under the line
of credit been 10% greater or lesser than actual rates, the impact would not
have been material in the Company's consolidated financial statements for the
period ended March 31, 1999. As of March 31, 1999, the Company had
approximately $960,000 of outstanding borrowings under the line of credit.
The Company's exposure to currency exchange rate fluctuations has been and
is expected to continue to be modest due to the fact that the operations of its
international subsidiaries are almost exclusively conducted in their respective
local currencies. International subsidiary operating results are translated
into U.S. dollars and consolidated for reporting purposes. The impact of
currency exchange rate movements on intercompany transactions was immaterial
for the period ended March 31, 1999. Currently the Company does not engage in
foreign currency hedging activities.
PART II.
Item 1. Legal Proceedings
-----------------
The litigation between the Company and Palms Technology described in Item
1 of Part II of the Company's Quarterly Report on Form 10-Q for the Quarterly
Period ended December 31, 1998 has been settled. The Company does not believe
that the settlement will have a material adverse effect on its consolidated
financial condition, results of operations or cash flows. However, the Company
incurred substantial legal expenses in connection with the litigation and its
settlement. See "Results of Operations" under Item 2 of Part I of this
Quarterly Report on Form 10-Q.
From time to time the Company is also involved in litigation matters which
arise in the ordinary course of business, including one current action brought
by a former employee. The Company does not believe that the ultimate
resolution of this matter will have a material adverse effect on its
consolidated financial condition, results of operations, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
A. The annual meeting of stockholders of DATAWATCH CORPORATION was held on
March 23, 1999.
B. No information provided due to inapplicability of item.
C. A vote was proposed to elect a Board of Directors to serve for the
ensuing year or until their respective successors are duly elected and
qualified.
The ballot results are as follows:
Voted Voted Broker
For Against Abstained Non-Votes
---------- ---------- ---------- ----------
Bruce R. Gardner 8,304,978 184,832
Jerome Jacobson 8,305,178 184,632
Don M. Lyle 8,305,178 184,632
Terry W. Potter 8,304,978 184,832
David T. Riddiford 8,305,178 184,632
D. No information provided due to inapplicability of item.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
10.1 Amended and Restated Loan and Security Agreement dated March 16, 1999,
by and between Datawatch Corporation, Personics Corporation and Silicon
Valley Bank.
27 Financial Data Schedule (filed with SEC Edgar version only).
B. Reports on Form 8-K
No Current Report on Form 8-K was filed during the quarterly period ended
March 31, 1999.
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, 1999.
DATAWATCH CORPORATION
/s/ Betsy J. Hartwell
---------------------
Betsy J. Hartwell
Vice President of Finance and Chief Financial
Officer (Principal Financial Officer)
5