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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 DECEMBER 31, 2000
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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
175 CABOT STREET
SUITE 503
LOWELL, MASSACHUSETTS 01854
---------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 978-441-2200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at February 7, 2001
----- -------------------------------
Common Stock $0.01 par value 11,301,274
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DATAWATCH CORPORATION AND SUBSIDIARIES
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements Page #
a) Consolidated Condensed Balance Sheets:
December 31, and September 30, 2000 3
b) Consolidated Condensed Statements of Operations:
Three Months Ended December 31, 2000 and 1999 4
c) Consolidated Condensed Statements of Cash Flows:
Three Months Ended December 31, 2000 and 1999 5
d) Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings *
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Default upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
* No information provided due to inapplicability of item.
PART I.
Item 1. Financial Statements
- -----------------------------
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
December 31, September 30,
2000 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,917,605 $ 1,695,832
Short-term investments -- 348,121
Accounts receivable, net 7,001,042 7,662,454
Inventories 343,626 395,291
Prepaid expenses 843,594 943,465
------------ ------------
Total current assets 10,105,867 11,045,163
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PROPERTY AND EQUIPMENT:
Property and equipment 3,814,281 3,805,599
Less accumulated depreciation and amortization (2,618,191) (2,635,005)
------------ ------------
Net property and equipment 1,196,090 1,170,594
------------ ------------
OTHER ASSETS 1,188,166 945,844
EXCESS OF COSTS OVER NET ASSETS OF ACQUIRED COMPANY 377,877 411,216
------------ ------------
TOTAL ASSETS $ 12,868,000 $ 13,572,817
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,204,392 $ 2,064,501
Accrued expenses 1,276,403 1,589,423
Borrowings under credit lines 960,000 960,000
Deferred revenue 1,951,011 2,092,002
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Total current liabilities 6,391,806 6,705,926
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 94,582 94,083
Additional paid-in capital 20,205,454 20,165,954
Accumulated deficit (13,140,061) (12,666,364)
Accumulated other comprehensive loss (543,393) (586,394)
------------ ------------
6,616,582 7,007,279
Less treasury stock - at cost (140,388) (140,388)
------------ ------------
Total shareholders' equity 6,476,194 6,866,891
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,868,000 $ 13,572,817
============ ============
See notes to consolidated condensed financial statements.
3
Item 1. Financial Statements (continued)
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DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
2000 1999
----------- -----------
NET SALES $ 6,052,043 $ 6,710,436
COSTS AND EXPENSES:
Cost of sales 1,417,169 1,570,899
Engineering & product development 419,285 406,208
Selling, general and administrative 4,686,944 5,166,005
----------- -----------
LOSS FROM OPERATIONS (471,355) (432,676)
INTEREST EXPENSE (22,026) (41,033)
OTHER INCOME, primarily interest 15,959 36,905
FOREIGN CURRENCY GAIN (LOSS) 3,725 (540)
----------- -----------
NET LOSS $ (473,697) $ (437,344)
=========== ===========
NET LOSS PER COMMON SHARE:
Basic and diluted $ (.05) $ (.05)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and diluted 9,406,165 9,189,638
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See notes to consolidated condensed financial statements.
4
Item 1. Financial Statements (continued)
- ----------------------------
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (473,697) $ (437,344)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 249,164 207,123
Loss on disposition of equipment 5,489 --
Changes in current assets and liabilities, net of
acquisitions:
Accounts receivable 723,447 417,664
Inventories 53,447 28,484
Prepaid advertising and other expenses 105,319 43,403
Accounts payable and accrued expenses (198,688) 118,106
Deferred revenue (156,323) (133,574)
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Net cash provided by (used in) operating activities 308,158 243,862
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and fixtures (175,510) (59,313)
Proceeds from sale of equipment - net 2,812 --
Proceeds from sale of short-term investments 348,121 782,646
Purchase of short-term investments -- (588,599)
Capitalized software (274,579) (67,875)
Other assets 4,218 (33,645)
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Net cash provided by (used in) investing activities (94,938) 33,214
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock -- 2,655
Principal payments on long-term obligations (212) (15,627)
Borrowings under credit lines, net -- --
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Net cash provided by (used in) financing activities (212) (12,972)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH 8,765 (37,918)
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 221,773 226,186
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,695,832 1,684,485
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,917,605 $ 1,910,671
=========== ===========
See notes to consolidated condensed financial statements.
5
Item 1. Financial Statements (continued)
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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, 2000.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements, and include all adjustments necessary
for fair presentation of the results of the interim periods presented. The
operating results for the interim periods presented are not necessarily
indicative of the results expected for the full year.
2. Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which, as amended, is effective for fiscal years beginning after
June 15, 2000. 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. The Company adopted SFAS No. 133, as required, on October
1, 2000 with no material impact on the Company's consolidated financial
statements.
The Securities and Exchange Commission has released Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
sets forth its views regarding how revenue should be recognized in financial
statements. The Company's revenue recognition practices are in conformity with
accounting standards generally accepted in the U.S., and the adoption of this
bulletin, as required, on October 1, 2000 had no material impact on the
Company's consolidated financial statements.
3. Inventories: The Company accounts for its inventories using a standard cost
methodology. Inventories were comprised of the following:
December 31, September 30,
2000 2000
-------- --------
Materials $201,318 $247,089
Finished goods 142,308 148,202
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TOTAL $343,626 $395,291
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4. Comprehensive Income: The following table sets forth the reconciliation of
net loss to comprehensive loss:
Three Months Ended
December 31,
2000 1999
--------- ---------
Net loss $(473,697) $(437,344)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments 43,001 (64,374)
--------- ---------
Comprehensive loss $(430,696) $(501,718)
========= =========
Accumulated other comprehensive loss reported in the condensed consolidated
balance sheets consists only of foreign currency translation adjustments.
6
Item 1. Financial Statements (continued)
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5. Earnings (Loss) per Share: Basic net earnings (loss) per common share is
computed by dividing net loss by the weighted average number of common shares
outstanding during the period. Diluted net earnings (loss) per share reflects
the impact, when dilutive, of the exercise of options and warrants using the
treasury stock method. For the periods ended December 31, 2000 and December 31,
1999, 13,804 and 272,910 potential shares, respectively, were therefore excluded
from the calculation as the effect would be antidilutive.
6. Line of Credit: On January 17, 2001, the Company renewed its two
line-of-credit agreements effective December 29, 2000. The two lines provide for
working capital borrowings through December 31, 2000, with maximum borrowings up
to the lesser of $3,500,000 or 50% to 90% of defined eligible accounts
receivable. As of December 31, 2000, the Company had approximately $960,000
outstanding borrowings under these lines. As part of the renewal of the lines of
credit, warrants to purchase 70,000 shares of the Company's common stock were
issued to Silicon Valley Bank at an exercise price of $0.50 per share. These
warrants expire on January 27, 2011.
7. Non-cash issuance of Common Stock: On November 7, 2000, 50,000 shares of
common stock, valued at $40,000, were issued to a developer for certain product
rights.
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 sales by product
lines:
Three Months Ended
December 31,
2000 1999
----- -----
Monarch and Monarch|ES 59 % 56 %
Quetzal|SC 25 28
Third-party and other 16 16
----- -----
100 % 100 %
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The Company's operations are conducted in the U.S. and in Europe (principally in
the United Kingdom). The following tables present information about the
Company's geographic operations:
Net Sales
---------
Domestic Europe Eliminations Total
-------- ------ ------------ -----
Q1 FY2001 $ 2,998,403 $ 3,456,085 $ (402,445) $ 6,052,043
Q1 FY2000 3,523,464 3,679,496 (492,524) 6,710,436
Long-lived Assets
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Domestic Europe Eliminations Total
-------- ------ ------------ -----
At December 31, 2000 $ 1,913,318 $ 836,065 $ - $ 2,749,383
At September 30, 2000 1,615,423 899,231 - 2,514,654
Export sales aggregated approximately $1,416,000 and $1,385,000, respectively,
for the three months ended December 31, 2000 and December 31, 1999.
9. Subsequent event: In January 2001, the Company issued 1,875,000 shares of
common stock in a private placement to investors for an aggregate of $1,162,500.
7
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. Its products address the enterprise reporting, business intelligence,
data replication and help desk markets.
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; Redwing, a
plug-in for Adobe Acrobat that lets users extract text and tables from Adobe PDF
documents; Monarch|ES, a configurable enterprise reporting solution that allows
an organization to quickly deliver business intelligence and decision support
derived from existing reporting systems with no new programming or report
writing; Monarch Data Pump, a data replication and migration tool that offers a
shortcut for populating and refreshing data marts and data warehouses, for
migrating legacy data into new applications and for providing automated delivery
of reports in a variety of formats via email; and Quetzal|SC, an integrated help
desk and asset management software with advanced service level management
capabilities, integrated change management features, business process automation
tools and unique user-interface that promotes ease-of-use and ease-of-learning.
In the second quarter of fiscal 2001 the Company will introduce Q|SM, a major
new release of the Company's service management software, and VorteXML, a data
transformation tool that converts ASCII data into valid XML without programming.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2000 and 1999.
- ----------------------------------------------
Net sales for the three months ended December 31, 2000 were $6,052,000
which represents a decrease of $658,000 or approximately 10% from net sales of
$6,710,000 for the three months ended December 31, 1999. This decrease in net
sales is primarily attributable to two specific factors. First, there was a
decrease in the Company's domestic Monarch product sales that accounted for a 5%
reduction in the Company's net sales. Second, sales decreased because of the
impact of foreign exchange movements on the translation of the financial
statements; movements which do not have a cash impact on the Company.
Approximately 50% of the Company's sales come from international operations that
conduct business in local currencies. Over the past 12 months the dollar has
significantly strengthened against these local currencies, resulting in a
comparative reduction in excess of 10% for international sales when stated in
dollars and a reduction in excess of 5% for the Company's net sales. For the
first quarter of fiscal 2001, Monarch and Monarch|ES accounted for approximately
59% of net sales (as compared to 56% of net sales for the first quarter of
fiscal 2000), Quetzal|SC accounted for approximately 25% of net sales (as
compared to 28% of net sales for the first quarter of fiscal 2000), and
third-party products accounted for approximately 16% of net sales (as compared
to 16% of net sales for the first quarter of fiscal 2000).
Cost of sales for the three months ended December 31, 2000 was
$1,417,000 or approximately 23% of net sales which is comparable to cost of
sales of $1,571,000 or approximately 23% of net sales for the three months ended
December 31, 1999.
Engineering and product development expenses were $419,000 for the
three months ended December 31, 2000, an increase of $13,000 or approximately 3%
from $406,000 for the three months ended December 31, 1999. This increase is
primarily
8
attributable to expenses related to the Company's development of its new
products including Q|SM, VorteXML and Monarch|ES version 2.5.
Selling, general and administrative expenses were $4,687,000 for the
three months ended December 31, 2000, a decrease of $479,000 or approximately 9%
from $5,166,000 for the three months ended December 31, 1999. As is the case
with sales, approximately 50% of the Company's selling, general and
administrative expenses are attributable to international subsidiaries that
conduct business in their local currencies. Over the past 12 months the dollar
has significantly strengthened against these local currencies, resulting in a
comparative reduction in excess of 10% for international selling, general, and
administrative expenses when stated in dollars. This principally accounts for
the reduction in total selling, general and administrative expenses as reported
in the Consolidated Statement of Operations.
The loss from operations for the three months ended December 31, 2000
was approximately $471,000 which compares to a loss from operations of
approximately $433,000 for the three months ended December 31, 1999. The Company
has not recorded any benefit for income taxes in either the first quarter of
fiscal 2001 or the first quarter of fiscal 2000 on the net loss from operations
owing to the Company's conclusion that the realization of such net operating
losses was not more likely than not. The net loss for the three months ended
December 31, 2000 was $474,000 which compares to a net loss of $437,000 for the
three months ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by approximately $625,000 during the first
quarter of fiscal 2001 primarily as a result of unprofitable operations and
investments in capitalized software for Q|SM and Monarch|ES. The net cash
provided by operating activities totaled $308,000 for the three months ended
December 31, 2000 (as compared to $244,000 for the three months ended December
31, 1999). The investment in capitalized software totaled $315,000 for the three
months ended December 31, 2000 (as compared to $68,000 for the three months
ended December 31, 1999).
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, 2001 by funds available under the Company's line of credit
agreements and from an equity investment in the Company of $1,162,500 which
occurred in January 2001. In January 2001, the Company issued 1,875,000 shares
of common stock in a private placement to investors for an aggregate of
$1,162,500. The Company's lines of credit, which were renewed effective December
29, 2000 and expire on December 31, 2001, provide for maximum borrowings up to
the lesser of $3,500,000 or 50% to 90% of defined eligible accounts receivable.
As of December 31, 2000, the Company had approximately $960,000 outstanding
borrowings under these lines.
Management believes that the Company's current operations are not materially
impacted by the effects of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which, as amended, is effective for fiscal
years beginning after June 15, 2000. 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. The Company adopted SFAS No. 133,
as required, on October 1, 2000, with no material impact on the Company's
consolidated financial statements.
9
The Securities and Exchange Commission has released Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which
sets forth its views regarding how revenue should be recognized in financial
statements. The Company's revenue recognition practices are in conformity with
accounting standards generally accepted in the U.S., and the adoption of this
bulletin, as required, on October 1, 2000 has no material impact on the
Company's consolidated financial statements.
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
Report on Form 10-Q that are not historical facts (including, but not limited to
statements contained in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of Part I of this Report on Form
10-Q relating to liquidity and capital resources) may constitute forward looking
statements and are made under the safe harbor provisions of The Private
Securities Litigation Reform Act of 1995. The Company's actual results of
operations and financial condition have varied and may in the future vary
significantly from those stated in any forward looking statements. Factors that
may cause such differences include, without limitation, the risks, uncertainties
and other information discussed below and within this Report on Form 10-Q, as
well as the accuracy of the Company's internal estimates of revenue and
operating expense levels. The following discussion of the Company's risk factors
should be read in conjunction with the financial statements contained herein and
related notes thereto. Such factors, among others, may have a material adverse
effect upon the Company's business, results of operations and financial
condition.
Fluctuations in Quarterly Operating Results
The Company's future operating results could vary substantially from
quarter to quarter because of uncertainties and/or risks associated with such
things as technological change, competition, 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 three months ended December 31, 2000, Monarch and Monarch|ES
products and Quetzal|SC products accounted for approximately 59% and 25%,
respectively, of the Company's net sales. The Company is substantially dependent
on Monarch, Monarch|ES and Quetzal|SC products. 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.
10
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
11
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 IBM, Remedy, Actuate and
Seagate 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
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which, on occasion, have appeared to be unrelated to the operating performance
of such companies.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
At December 31, 2000, 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 its
$3,500,000 working capital line of credit agreements. The lines, which currently
bear an interest rate of prime plus 1% (10.5% at December 31, 2000), are subject
to annual renewal. Had the interest rates under the lines of credit been 10%
greater or lesser than actual rates, the impact would not have been material in
the Company's consolidated financial statements for the period ended December
31, 2000. As of December 31, 2000, the Company had approximately $960,000 in
outstanding borrowings under working capital lines.
The Company's exposure to currency exchange rate fluctuations has been
and is expected to continue to be immaterial due to the fact that the operations
of its international subsidiaries are almost exclusively conducted in their
respective local currencies. As a result, foreign exchange fluctuations can
impact the Company's consolidated results while having no impact on cash flows.
Dollar advances to the Company's international subsidiaries, if any, are usually
considered to be of a long-term investment nature. Therefore, the majority of
currency movements are reflected in the Company's other comprehensive income.
There are, however, certain situations where the Company will invoice customers
in currencies other than its own. Such gains or losses, whether realized or
unrealized, are reflected in income. These have not been material in the past
nor does management believe that they will be material in the future. Currently
the Company does not engage in foreign currency hedging activities.
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PART II.
Item 2. Changes in Securities and Use of Proceeds
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In November 2000, the Company issued 50,000 shares of Common Stock to
Russell Ryan in exchange for the assignment of his right title and interest in
certain software he developed pursuant to an Assignment and Consulting Agreement
with the Company. 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 6. Exhibits and Reports on Form 8-K
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A. Exhibits
4.1 Warrant to Purchase Stock issued to Silicon Valley Bank, dated
January 17, 2001 (filed herewith)
(1)4.2 Investment Agreement, dated as of January 12, 2001, by and among
Datawatch Corporation, WC Capital, LLC, and Carnegie Hill
Associates, LLC (Exhibit 4.1)
10.1 Registration Rights Agreement between Silicon Valley Bank and
Datawatch Corporation, dated January 17, 2001 (filed herewith)
10.2 Export-Import Bank of the United States Working Capital Guarantee
Program Borrower Agreement, dated January 17, 2001, by and among
Datawatch Corporation, Datawatch International Limited, Datawatch
Europe Limited, Guildsoft Limited and Silicon Valley Bank in
favor of Export-Import Bank of the United States (filed herewith)
10.3 Second Loan Modification Agreement, dated January 17, 2001, by
and between Datawatch Corporation and Silicon Valley Bank, doing
business as Silicon Valley East (filed herewith)
10.4 First Loan Modification Agreement (EXIM Line), dated January 17,
2001, by and among Datawatch Corporation, Datawatch International
Limited, Datawatch Europe Limited, Guildsoft Limited and Silicon
Valley Bank, doing business as Silicon Valley East, in favor of
Export-Import Bank of the United States (filed herewith)
10.5 Revolving Promissory Note (Export-Import Line), dated January 17,
2001, by and among Datawatch Corporation, Datawatch International
Limited, Datawatch Europe Limited, Guildsoft Limited and Silicon
Valley Bank (filed herewith)
10.6 Supplemental Deed of Guarantee, dated January 17, 2001, by and
between Datawatch International Limited and Silicon Valley Bank
(filed herewith)
10.7 Supplemental Deed of Guarantee, dated January 17, 2001, by and
between Datawatch Europe Limited and Silicon Valley Bank (filed
herewith)
10.8 Supplemental Deed of Guarantee, dated January 17, 2001, by and
between Guildsoft Limited and Silicon Valley Bank (filed
herewith)
10.9 Assignment and Consulting Agreement, effective June 30, 2000, by
and between Datawatch Corporation and Russell Ryan, also doing
business as Edge IT (filed herewith)
(1)10.10 Indemnification Agreement between Datawatch Corporation and James
Wood, dated January 12, 2001 (Exhibit 10.1)
(1)10.11 Indemnification Agreement between Datawatch Corporation and
Richard de J. Osborne, dated January 12, 2001 (Exhibit 10.2)
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(1) Previously filed as an exhibit to Registrant's Current Report on Form
8-K dated February 2, 2001 and incorporated herein by reference (the
number in parenthesis indicates the corresponding exhibit in such Form
8-K)
B. Reports on Form 8-K
No Current Report on Form 8-K was filed during the quarterly period ended
December 31, 2000.
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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 February 14, 2001.
DATAWATCH CORPORATION
/s/ Alan R. MacDougall
------------------------------------
Alan R. MacDougall
Vice President of Finance and Chief
Financial Officer
(Principal Financial Officer)
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