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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 MARCH 31, 2001
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.)
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
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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 9, 2001
----- ---------------------------
Common Stock $0.01 par value 11,337,639
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DATAWATCH CORPORATION AND SUBSIDIARIES
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements Page #
------
a) Consolidated Condensed Balance Sheets: 3
March 31, 2001 and September 30, 2000
b) Consolidated Condensed Statements of Operations: 4
Three and Six Months Ended March 31, 2001 and 2000
c) Consolidated Condensed Statements of Cash Flows: 5
Six Months Ended March 31, 2001 and 2000
d) Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings *
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Default upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
* 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, September 30,
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,709,155 $ 1,695,832
Short-term investments -- 348,121
Accounts receivable, net 5,467,559 7,662,454
Inventories 292,022 395,291
Prepaid expenses 1,322,525 943,465
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Total current assets 9,791,261 11,045,163
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PROPERTY AND EQUIPMENT:
Property and equipment 3,708,286 3,805,599
Less accumulated depreciation and amortization (2,558,298) (2,635,005)
------------ ------------
Net property and equipment 1,149,988 1,170,594
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CAPITALIZED SOFTWARE AND OTHER ASSETS 1,235,870 945,844
EXCESS OF COSTS OVER NET ASSETS OF ACQUIRED
COMPANY 344,538 411,216
------------ ------------
TOTAL ASSETS $ 12,521,657 $ 13,572,817
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,168,885 $ 2,064,501
Accrued expenses 1,184,558 1,589,423
Borrowings under credit lines 960,000 960,000
Deferred revenue 1,898,443 2,092,002
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Total current liabilities 6,211,886 6,705,926
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 113,333 94,083
Additional paid-in capital 21,270,055 20,165,954
Accumulated deficit (14,355,811) (12,666,364)
Accumulated other comprehensive loss (577,418) (586,394)
------------ ------------
6,450,159 7,007,279
Less treasury stock - at cost (140,388) (140,388)
------------ ------------
Total shareholders' equity 6,309,771 6,866,891
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,521,657 $ 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 Six Months Ended
March 31, March 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
NET SALES $ 5,551,345 $ 7,182,880 $ 11,603,388 $ 13,893,316
COSTS AND EXPENSES:
Cost of sales 1,429,938 1,934,087 2,847,107 3,504,986
Engineering & product
development 523,816 550,664 943,101 956,872
Selling, general &
administrative 4,802,746 4,755,694 9,489,690 9,921,699
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,205,155) (57,565) (1,676,510) (490,241)
INTEREST EXPENSE (30,323) (39,593) (52,349) (80,626)
OTHER INCOME, primarily
interest 19,175 9,344 35,134 45,709
FOREIGN CURRENCY GAIN 553 -- 4,278 --
------------ ------------ ------------ ------------
NET LOSS $ (1,215,750) $ (87,814) $ (1,689,447) $ (525,158)
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
Basic and diluted $ (.11) $ (.01) $ (.17) $ (.06)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic and diluted 10,950,436 9,246,372 10,229,983 9,217,850
============ ============ ============ ============
See notes to consolidated condensed financial statements.
-4-
Item 1. FINANCIAL STATEMENTS (continued)
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DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended March 31,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,689,447) $ (525,158)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposition of equipment 22,182 8,651
Depreciation and amortization 492,711 433,715
Amortization of interest on short-term investments -- (8,279)
Changes in current assets and liabilities:
Accounts receivable 2,091,600 (282,240)
Inventories 97,842 (65,923)
Prepaid advertising and other expenses (401,892) (321,576)
Accounts payable and accrued expenses (216,964) 188,126
Deferred revenue (143,113) 290,303
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Net cash provided by (used in) operating activities 252,919 (282,381)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and fixtures (303,040) (197,182)
Proceeds from sale of short-term investments 348,121 1,668,166
Purchase of short-term investments -- (980,963)
Proceeds from sale of equipment - net 4,086 16,163
Capitalized software (444,139) (97,996)
Other assets 46,013 (16,916)
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Net cash provided by (used in) investing activities (348,959) 391,272
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from sale of common stock
1,083,351 184,401
Principal payments on long-term obligations (311) (29,274)
Borrowings (payments) under credit line, net -- (253,705)
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Net cash provided by (used in) financing activities 1,083,040 (98,578)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH 26,323 (45,101)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,013,323 (34,788)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,695,832 1,684,485
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CASH AND EQUIVALENTS, END OF PERIOD $ 2,709,155 $ 1,649,697
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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. 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 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. Concentration of Credit Risks and Major Customers: The Company sells its
products and services to U.S and non-U.S. dealers and other software
distributors, as well as to end users under normal credit terms. One customer
individually accounted for 14% and 16% of net sales for the three months ended
March 31, 2001 and March 31, 2000, respectively, and 11% and 18% of net sales
for the six months ended March 31, 2001 and March 31, 2000, respectively. This
same customer accounted for 32% of outstanding trade receivables as of March 31,
2001, as compared to 34% on September 30, 2000. Other than this customer, no
base of customers in one geographic area constitutes a significant portion of
sales. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. Allowances are provided for anticipated
doubtful accounts and sales returns.
4. Inventories: Inventories consist of software components - primarily software
manuals, diskettes and retail packaging materials. Inventories are valued at the
lower of cost (first-in, first out) method or market. Inventories were comprised
of the following:
March 31, September 30,
2001 2000
------------ ------------
Materials $ 181,191 $ 247,089
Finished goods 110,831 148,202
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TOTAL $ 292,022 $ 395,291
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-6-
Item 1. FINANCIAL STATEMENTS (continued)
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5. Comprehensive Loss: The following table sets forth the reconciliation of net
loss to comprehensive loss:
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
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Net loss $(1,215,750) $ (87,814) $(1,689,447) $ (525,158)
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustments (34,025) (38,937) 8,976 (103,311)
------------------------ ------------------------
Comprehensive loss $(1,249,775) $(126,751) $(1,680,471) $ (628,469)
======================== ========================
Accumulated other comprehensive loss reported in the condensed
consolidated balance sheets consists only of foreign currency translation
adjustments.
6. Earnings (Loss) per Share: Basic net 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 March 31, 2001 and March 31, 2000,
569,327 and 625,837 potential shares, respectively, were therefore excluded from
the calculation as the effect would be antidilutive.
7. 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, 2001, with maximum borrowings up
to the lesser of $3,500,000 or 50% to 90% of defined eligible accounts
receivable. As of March 31, 2001, the Company had approximately $960,000 of
outstanding borrowings under these lines with available borrowings of $980,584.
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 17, 2011.
8. 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.
9. Issuance of Common Stock: 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 net proceeds from this transaction totaled $1,083,351 after
expenses.
10. 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 Six Months Ended
March 31, March 31,
2001 2000 2001 2000
------------------ ------------------
Monarch and Monarch|ES 57 % 52 % 58 % 54 %
Quetzal|SC 26 27 25 27
Third-party and other 17 21 17 19
-------- -------- -------- --------
100 % 100 % 100 % 100 %
======== ======== ======== ========
-7-
Item 1. FINANCIAL STATEMENTS (continued)
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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
-------- ------ ------------ -----
Three Months ended 3/31/01 $ 2,802,100 $ 3,156,075 $ (406,830) $ 5,551,345
Three Months ended 3/31/00 3,551,674 4,061,229 (430,023) 7,182,880
Six Months ended 3/31/01 $ 5,800,503 $ 6,612,160 $ (809,275) $ 11,603,388
Six Months ended 3/31/00 7,075,138 7,740,725 (922,547) 13,893,316
Long-lived Assets
-----------------
Domestic Europe Eliminations Total
-------- ------ ------------ -----
At March 31, 2001 $ 1,930,029 $ 787,867 $ -- $ 2,717,896
At September 30, 2000 1,615,423 899,231 -- 2,514,654
Export sales aggregated approximately $1,162,000 and $1,269,000,
respectively, for the three months ended March 31, 2001 and March 31, 2000, and
$2,577,000 and $2,654,000, respectively, for the six months ended March 31, 2001
and March 31, 2000.
-8-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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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 introduced Q|SM, a major
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 MARCH 31, 2001 AND 2000.
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Net sales for the three months ended March 31, 2001 were $5,551,000
which represents a decrease of $1,632,000, or approximately 23%, from net sales
of $7,183,000 for the three months ended March 31, 2000. This decrease in net
sales is primarily attributable to two specific factors. First, 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 of approximately 9% for international sales when stated in
dollars and a reduction of approximately 5% for the Company's net sales. Second,
there was a decrease in the Company's domestic sales and a somewhat smaller
decrease in the Company's international sales, when comparing sales in local
currencies. These decreases were across all products and services provided by
the Company and the Company attributes these decreases to a broad reduction in
corporate spending due to a slowing worldwide economy. The decrease in domestic
sales accounted for a decrease of approximately 10% in the Company's net sales,
while the decrease in international sales accounted for a reduction of
approximately 8% in the Company's net sales. For the second quarter of fiscal
2001, Monarch and Monarch|ES accounted for approximately 57% of net sales (as
compared to 52% of net sales for the second quarter of fiscal 2000), Quetzal|SC
accounted for approximately 26% of net sales (as compared to 27% of net sales
for the second quarter of fiscal 2000), and third-party products accounted for
approximately 17% of net sales (as compared to 21% of net sales for the second
quarter of fiscal 2000).
Cost of sales for the three months ended March 31, 2001 was
$1,430,000 or approximately 26% of net sales which is comparable to cost of
sales of $1,934,000 or approximately 27% of net sales for the three months ended
March 31, 2000.
Engineering and product development expenses for the three months
ended March 31, 2001 were $524,000, which represents a decrease of $27,000 or
approximately 5% from $551,000 for the three months ended March 31, 2000. This
decrease does not imply that the Company's development efforts are slowing but
is reflective of an increase in the Company's purchase and capitalization of
software from external sources. Capitalized software additions totaled $170,000
for the three months ended March 31, 2001, as compared to $30,000 for the three
months ended March 31, 2000.
Selling, general and administrative expenses for the three months
ended March 31, 2001 were $4,803,000, which represents an increase of $47,000 or
approximately 1% from
-9-
$4,756,000 for the three months ended March 31, 2000. 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 of approximately 5% for international selling, general, and
administrative expenses when stated in dollars. This was offset by an increase
of approximately 5% in international marketing expenses for Monarch. This
principally accounts for the slight increase in total selling, general and
administrative expenses as reported in the Consolidated Statement of Operations.
As a result of the foregoing, the loss from operations for the three
months ended March 31, 2001 was $1,205,000, which compares to a loss from
operations of $58,000 for the three months ended March 31, 2000. This loss for
the most recent quarter is primarily attributable to a decline in revenues for
this period. The Company has not recorded any benefit for income taxes in either
the second quarter of fiscal 2001 or the second 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 March 31, 2001 was $1,216,000, which compares to a net loss
of $88,000 for the three months ended March 31, 2000.
SIX MONTHS ENDED MARCH 31, 2001 AND 2000.
- -----------------------------------------
Net sales for the six months ended March 31, 2001 were $11,603,000,
which represents a decrease of $2,290,000 or approximately 16% from net sales of
$13,893,000 for the six months ended March 31, 2000. This decrease in net sales
is primarily attributable to two specific factors. First, 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 of approximately 5% for the Company's net sales. Second,
there was a decrease in the Company's domestic sales and a smaller decrease in
the Company's international sales, when comparing sales in local currencies.
These decreases were across all products and services provided by the Company
and the Company attributes these decreases to a broad reduction in corporate
spending due to a slowing worldwide economy. The decrease in domestic sales
accounted for a decrease of approximately 9% in the Company's net sales, while
the decrease in international sales accounted for a reduction of approximately
2% in the Company's net sales. For the six months ended March 31, 2001, Monarch
products accounted for approximately 58% of net sales (as compared to 54% of net
sales for the six months ended March 31, 2000), Quetzal|SC products accounted
for approximately 25% of net sales, (as compared to 27% of net sales for the six
months ended March 31, 2000) and third-party product lines accounted for
approximately 17% of net sales (as compared to 19% of net sales for the six
months ended March 31, 2000).
Cost of sales for the six months ended March 31, 2001 was $2,847,000
or approximately 25% of net sales which is comparable to cost of sales of
$3,505,000 or approximately 25% of net sales for the six months ended March 31,
2000.
Engineering and product development expenses for the six months ended
March 31, 2001 were $943,000, which represents a decrease of $14,000 or
approximately 1% from $957,000 for the six months ended March 31, 2000. This
decrease does not imply that the Company's development efforts are slowing but
is reflective of an increase in the Company's purchase and capitalization of
software from external sources. Capitalized software additions totaled $484,000
for the six months ended March 31, 2001 as compared, to $98,000 for the six
months ended March 31, 2000.
Selling, general and administrative expenses for the six months ended
March 31, 2001 were $9,490,000, which represents a decrease of $432,000 or
approximately 4% from $9,922,000 for six months ended March 31, 2000. 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 of approximately 6% for international selling, general,
and administrative expenses when stated in dollars. This was partially offset by
an increase of approximately 2% primarily for the international marketing of
Monarch. This principally accounts for the 4% reduction in total selling,
general and administrative expenses as reported in the Consolidated Condensed
Statement of Operations.
-10-
As a result of the foregoing, the loss from operations for the six
months ended March 31, 2001 was $1,677,000, which compares to a loss from
operations of $490,000 for the six months ended March 31, 2000. The loss for the
six months ended March 31, 2001 is primarily attributable to a decline in
revenues for this period. The Company has not recorded any benefit for income
taxes in either the six months ended March 31, 2001 or the six months ended
March 31, 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 six months ended March 31, 2001 was $1,689,000, which
compares to a net loss of $525,000 for the six months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by approximately $760,000 during the six
months ended March 31, 2001 primarily as a result of unprofitable operations.
The net cash provided by operating activities totaled $253,000 for the six
months ended March 31, 2001 (as compared to $282,000 used in operating
activities for the six months ended March 31, 2000). This increase is primarily
the result of the reduction of accounts receivable which more than offset the
net loss from operations. The cash provided by the reduction in accounts
receivable totaled $2,092,000 for the six months ended March 31, 2001 (as
compared to $282,000 used in the increase in accounts receivable for the period
ended March 31, 2000).
Investing activities used $349,000 for the six months ended March 31,
2001 (as compared to $391,000 provided by investing activities for the six
months ended March 31, 2000). This change was primarily the result of reduced
proceeds from the purchase and sale of short-term investments and an increase in
the investment in capitalized software for Monarch|ES and Q|SM. The net of cash
provided by the purchase and sale of short-term investments was $348,000 for the
six months ended March 31, 2001 (as compared to $687,000 for the six months
ended March 31, 2000). The net investment in capitalized software totaled
$444,000 for the six months ended March 31, 2001 (as compared to a net
investment of $98,000 for the six months ended March 31, 2000).
Financing activities provided $1,083,000 for the six months ended
March 31, 2001 (as compared to $99,000 used in financing activities for the six
months ended March 31, 2000). This increase is primarily attributable to the
Company's January 2001 issuance of 1,875,000 shares of common stock in a private
placement to investors for an aggregate of $1,162,500.
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. 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 March 31, 2001, 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.
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
-11-
have a material adverse effect upon the Company's business, results of
operations and financial condition.
Fluctuations in Quarterly Operating Results
The Company's future operating results could vary substantially from
quarter to quarter because of uncertainties and/or risks associated with such
things as technological change, competition, and delays in the introduction of
products or product enhancements and general market trends. Historically, the
Company has operated with little backlog of orders because its software products
are generally shipped as orders are received. As a result, net sales in any
quarter are substantially dependent on orders booked and shipped in that
quarter. Because the Company's staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the Company's costs are
fixed in the short-term, small variations in the timing of revenues can cause
significant variations in operating results from quarter to quarter. Because of
these factors, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indications of future performance. There can be no assurance that the
Company will not experience such variations in operating results in the future
or that such variations will not have a material adverse effect on the Company's
business, financial condition or results of operation.
Weakening of World Wide Economic Conditions and the Computer Software Market May
Result in Lower Revenue Growth Rates, Decreased Revenues or Reduced
Profitability
The revenue growth and profitability of the Company's business depends on
the overall demand for computer software and services, particularly in the
market segments in which it competes. Because the Company's sales are primarily
to major corporate customers, its business also depends on general economic and
business conditions. A softening of demand for computer software and services,
caused by a weakening of the economy in the United States or abroad, may result
in lower revenue growth rates, decreased revenues or reduced profitability. In
this weakened economy, the Company cannot be assured that it will be able to
effectively promote future growth in its software and services revenues or
maintain its level of profitability.
Dependence on Principal Products
For the six months ended March 31, 2001, Monarch and Monarch|ES
products and Quetzal|SC products accounted for approximately 58% 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.
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
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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.
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.
-13-
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.
Notice of Potential Delisting
On March 30, 2001 the Company announced that it had received a notice
from The Nasdaq Stock Market, Inc. that the Company's Common Stock failed to
comply with the $1.00 minimum bid price requirement for continued listing on The
Nasdaq National Market as set forth in marketplace Rule 4450(a)(5), and that the
Company's Common Stock is, therefore, subject to delisting from The Nasdaq
National Market. The Company also announced that it had requested and had been
granted an oral hearing with the Nasdaq Listing Qualifications Panel to be held
on Thursday, May 10, 2001 and that the delisting of the Company's Common Stock
would be stayed pending the outcome of the hearing. On May 10, 2001, management
presented the Company's plan to regain compliance with the minimum bid price
requirement to the Nasdaq Listing Qualifications Panel and is awaiting notice of
the Listing Qualifications Panel's determination. Presently, shares of the
Company's Common Stock are trading below the $1.00 minimum bid price and, as
such, there can be no assurance that the panel will grant the Company's request
for continued listing. Further, there can be no assurance that the Company will
remain in compliance with all of the requirements for continued listing on The
Nasdaq National Market. In the event that the Company's shares are delisted, the
Company will attempt to have its Common Stock traded on The Nasdaq SmallCap
Market or, if for any reason it is unable to have its Common Stock traded on The
Nasdaq SmallCap Market, on the NASD OTC Bulletin Board; however, the delisting
of the Common Stock may materially impair the ability of stockholders to buy and
sell shares of the Common Stock and could have an adverse effect on the market
price of, and the efficiency of the trading market for, the Common Stock. In
addition, the delisting of the Common Stock could significantly impair the
Company's ability to raise capital in the public markets should it desire to do
so in the future.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
At March 31, 2001, 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% (9% at March 31, 2001), 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 March 31,
2001. As of March 31, 2001, 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
-----------------------------------------
In January 2001, the Company issued a warrant to purchase up to
70,000 shares of Common Stock at an exercise price per share of $.50, subject to
adjustment as described in the warrant, to Silicon Valley Bank in consideration
for Silicon Valley Bank's entering into certain loan modification agreements
with the Company. No underwriter was involved in the foregoing issuance. 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.
In January 2001, the Company issued 1,552,420 shares of Common Stock
to WC Capital, LLC for total aggregate consideration of $962,500.40 and 322,580
shares of Common Stock to Carnegie Hill Associates, LLC for total aggregate
consideration of $199,999.60. No underwriter was involved in the foregoing
issuances of Common Stock. Such issuances were made by the Company in reliance
upon an exemption from the registration provisions of the Securities Act of 1933
set forth in Section 4(2) thereof as a transaction by an issuer not involving a
public offering.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
A. The annual meeting of stockholders of Datawatch Corporation was held
on March 16, 2001.
B. The directors elected at the meeting are Bruce R. Gardner, Jerome
Jacobson, Richard de J. Osborne, Terry W. Potter, David T. Riddiford
and James Wood which constitute all of the directors of the Company.
C. A vote was proposed to elect a Board of Directors to serve for the
ensuing year or until their respective successors are duly elected
and qualified:
Nominee Total Votes For Total Votes Against
------- --------------- -------------------
Bruce R. Gardner 9,570,366 114,393
Jerome Jacobson 9,570,366 114,393
Richard de J. Osborne 9,570,366 114,393
Terry W. Potter 9,570,366 114,393
David T. Riddiford 9,570,366 114,393
James Wood 9,570,366 114,393
A proposal to approve an increase in the number of shares of Common
Stock, $.01 par value, available for issuance under the Datawatch
1996 Stock Plan (the "1996 Stock Plan") from 1,250,000 to 1,650,000
shares, was approved and adopted with 9,188,875 shares voting in
favor, 492,481 voting against, and 3,403 abstaining.
D. No information provided due to inapplicability of item.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A. Exhibits
10.1 Form of Indemnification Agreement between Datawatch Corporation
and each of its Non-Employee Directors (filed herewith).
10.2 Advisory Agreement dated April 5, 2001 by and between Datawatch
Corporation and Richard de J. Osborne (filed herewith).
B. Reports on Form 8-K
The Company filed a Report on Form 8-K with the Securities and
Exchange Commission on February 2, 2001, which reported the Company's sale of
Common Stock to WC Capital, LLC and Carnegie Hill Associates, LLC.
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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 May 15, 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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