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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 JUNE 30, 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at August 9, 2001
----- ------------------------------
Common Stock $0.01 par value 2,519,954
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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: 3
June 30, 2001 and September 30, 2000
b) Consolidated Condensed Statements of Operations: 4
Three and Nine Months Ended June 30, 2001 and 2000
c) Consolidated Condensed Statements of Cash Flows: 5
Nine Months Ended June 30, 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 16
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings *
Item 2. Changes in Securities and Use of Proceeds *
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 17
SIGNATURES 18
* No information provided due to inapplicability of item.
PART I.
Item 1. Financial Statements
--------------------
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
June 30, September 30,
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,954,127 $ 1,695,832
Short-term investments -- 348,121
Accounts receivable, net 4,699,633 7,662,454
Inventories 269,075 395,291
Prepaid expenses 1,169,617 943,465
------------ ------------
Total current assets 8,092,452 11,045,163
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment 3,778,830 3,805,599
Less accumulated depreciation and amortization (2,639,938) (2,635,005)
------------ ------------
Net property and equipment 1,138,892 1,170,594
------------ ------------
CAPITALIZED SOFTWARE AND OTHER ASSETS 1,282,129 945,844
EXCESS OF COSTS OVER NET ASSETS OF ACQUIRED COMPANY 311,199 411,216
------------ ------------
TOTAL ASSETS $ 10,824,672 $ 13,572,817
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,215,829 $ 2,064,501
Accrued expenses 1,132,068 1,589,423
Borrowings under credit lines 635,000 960,000
Deferred revenue 2,029,961 2,092,002
------------ ------------
Total current liabilities 6,012,858 6,705,926
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 113,711 94,083
Additional paid-in capital 21,369,764 20,165,954
Accumulated deficit (15,857,644) (12,666,364)
Accumulated other comprehensive loss (673,629) (586,394)
------------ ------------
4,952,202 7,007,279
Less treasury stock - at cost (140,388) (140,388)
------------ ------------
Total shareholders' equity 4,811,814 6,866,891
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,824,672 $ 13,572,817
============ ============
See notes to consolidated condensed financial statements.
3
Item 1. Financial Statements (continued)
--------------------
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
NET SALES $ 5,105,017 $ 6,873,801 $ 16,708,405 $ 20,767,117
COSTS AND EXPENSES:
Cost of sales 1,371,887 1,578,085 4,218,994 5,083,071
Engineering & product
development 536,420 423,643 1,479,521 1,380,515
Selling, general &
administrative 4,661,487 4,853,009 14,151,177 14,774,708
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (1,464,777) 19,064 (3,141,287) (471,177)
INTEREST EXPENSE (49,147) (37,237) (101,496) (117,863)
OTHER INCOME, primarily
interest 14,778 20,066 49,912 78,995
FOREIGN CURRENCY GAIN (LOSS) (2,687) 1,705 1,591 (11,515)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,501,833) $ 3,598 $ (3,191,280) $ (521,560)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
Basic and diluted $ (.60) $ .00 $ (1.35) $ (.25)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING: Basic 2,518,739 2,066,975 2,355,229 2,054,673
ADJUSTMENT FOR DILUTIVE
POTENTIAL COMMON STOCK -- 61,919 -- --
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING: Diluted 2,518,739 2,128,894 2,355,229 2,054,673
============ ============ ============ ============
See notes to consolidated condensed financial statements.
4
Item 1. Financial Statements (continued)
--------------------
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended June 30,
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,191,280) $ (521,560)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposition of equipment 14,448 16,665
Depreciation and amortization 718,920 624,879
Amortization of interest on short-term investments -- (8,491)
Changes in current assets and liabilities:
Accounts receivable 2,797,359 (232,502)
Inventories 120,949 (47,478)
Prepaid expenses (247,607) (291,999)
Accounts payable and accrued expenses (218,301) (78,218)
Deferred revenue (7,418) 418,074
----------- -----------
Net cash provided by (used in) operating activities (12,930) (120,630)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and fixtures (435,858) (365,193)
Proceeds from sale of short-term investments 348,121 2,265,024
Purchase of short-term investments -- (1,617,958)
Proceeds from sale of equipment - net 19,393 36,497
Capitalized software (576,219) (139,993)
Other assets 41,416 (20,613)
----------- -----------
Net cash provided by (used in) investing activities (603,147) 157,764
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from sale of common stock 1,183,438 185,680
Principal payments on long-term obligations (311) (35,761)
Borrowings (payments) under credit line, net (325,000) (138,705)
----------- -----------
Net cash provided by (used in) financing activities 858,127 11,214
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS 16,245 (90,399)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 258,295 (42,051)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,695,832 1,684,485
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,954,127 $ 1,642,434
=========== ===========
See notes to consolidated condensed financial statements.
5
Item 1. Financial Statements (continued)
--------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation: The accompanying unaudited consolidated condensed
financial statements include the accounts of Datawatch Corporation (the
"Company") and its wholly owned subsidiaries and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and notes required by accounting principles generally accepted in
the United States of America for complete financial statements and should be
read in conjunction with the audited consolidated financial statements included
in the Company's Annual Report on Form 10-K for the year ended September 30,
2000. On July 23, 2001 the Company effected a reverse split of 1 common share
for 4.5 common shares. All share and per share information has been adjusted to
reflect the effect of the split.
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements have been prepared on the same basis as the
audited consolidated financial statements, and include all adjustments necessary
for fair presentation of the results of the interim periods presented. The
operating results for the interim periods presented are not necessarily
indicative of the results expected for the full year.
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.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS 141 is effective as follows: a) use of the pooling-of-interest
method is prohibited for business combinations initiated after June 30, 2001;
and b) the provisions of SFAS 141 also apply to all business combinations
accounted for by the purchase method that are completed after June 30, 2001
(that is, the date of the acquisition is July 2001 or later). There are also
transition provisions that apply to business combinations completed before July
1, 2001, that were accounted for by the purchase method. SFAS 142 is effective
for fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized in an entity's statement of financial position at
that date, regardless of when those assets were initially recognized. The
Company is currently evaluating the provisions of SFAS 141 and SFAS 142.
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 11% and 14% of net sales for the three months ended
June 30, 2001 and June 30, 2000, respectively, and 11% and 16% of net sales for
the nine months ended June 30, 2001 and June 30, 2000, respectively. This same
customer accounted for 28% of outstanding trade receivables as of June 30, 2001,
as compared to 34% on September 30, 2000. Other than this customer, no other
customer 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.
6
Item 1. Financial Statements (continued)
--------------------
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:
June 30, September 30,
2001 2000
------------------- -------------------
Materials $ 175,590 $ 247,089
Finished goods 93,485 148,202
------------------- -------------------
TOTAL $ 269,075 $ 395,291
=================== ===================
5. Comprehensive Loss: The following table sets forth the reconciliation of net
income (loss) to comprehensive loss:
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
----------------------- -------------------------------
Net income (loss) $(1,501,833) $ 3,598 $(3,191,280) $ (521,560)
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustments (96,211) (108,588) (87,235) (211,899)
----------------------- -------------------------------
Comprehensive loss $(1,598,044) $(104,990) $(3,278,515) $ (733,459)
======================= ===============================
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 three and nine month periods ended June 30, 2001
and the nine month period ended June 30, 2000, 2,350 and 61,925 potential shares
were therefore excluded from the calculation as the effect would be
antidilutive.
On July 23, 2001 the Company effected a reverse split of 1 common share
for 4.5 common shares. All share and per share information has been adjusted to
reflect the effect of the split.
7. Line of Credit: On January 17, 2001, the Company renewed its two
line-of-credit agreements effective December 29, 2000. As part of the renewal of
the lines of credit, warrants to purchase 15,556 shares of the Company's common
stock were issued to the bank at an exercise price of $2.25 per share. These
warrants expire on January 17, 2011. The fair market value of the warrants
(determined using the Black-Scholes pricing model and the following assumptions:
116% volatility, 10 year estimated life and 6.2% risk-free interest rate) was
determined to be $76,333, which had been recorded in prepaid interest (being
recognized as a component of interest expense during the renewal period) with a
corresponding increase in additional paid in capital. 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 June 30, 2001, the Company had approximately $635,000 of
outstanding borrowings under these lines. The Company was in breach of certain
covenants of the agreements as of June 30, 2001. The Company is currently
negotiating these lines with the bank. See Bank Line of Credit Risk Factor in
Part I, Item 2.
8. Non-cash issuance of Common Stock: On November 7, 2000, 11,112 shares of
common stock, valued at $40,000, were issued to a developer for certain product
rights.
7
Item 1. Financial Statements (continued)
--------------------
9. Issuance of Common Stock: In January 2001, the Company issued 416,667 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 Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
----------------- ------------------
Monarch and Monarch|ES 57 % 63 % 57 % 57 %
Quetzal|SC 27 21 26 25
Third-party and other 16 16 17 18
------- ------- ------ -------
100 % 100 % 100 % 100 %
======= ======= ====== =======
The Company's operations are conducted in the U.S. and in Europe
(principally in the United Kingdom). The following tables present information
about the Company's geographic operations:
Net Sales
--------- Domestic Europe Eliminations Total
-------------- -------------- -------------- ---------------
Three Months ended 6/30/01 $ 2,582,419 $ 2,855,557 $ (332,959) $ 5,105,017
Three Months ended 6/30/00 3,953,191 3,311,068 (390,458) 6,873,801
Nine Months ended 6/30/01 $ 8,382,922 $ 9,467,717 $ (1,142,234) $ 16,708,405
Nine Months ended 6/30/00 11,028,329 11,051,793 (1,313,005) 20,767,117
Long-lived Assets
----------------- Domestic Europe Eliminations Total
-------------- -------------- -------------- ---------------
At June 30, 2001 $ 1,925,288 $ 794,682 $ - $ 2,719,970
At September 30, 2000 1,615,423 899,231 - 2,514,654
Export sales aggregated approximately $894,000 and $1,215,000,
respectively, for the three months ended June 30, 2001 and June 30, 2000, and
$3,471,000 and $3,869,000, respectively, for the nine months ended June 30, 2001
and June 30, 2000.
11. Restructuring Plan: On July 26, 2001, the Company announced a worldwide
restructuring plan to bring together worldwide operations under one
administration and improve operating efficiencies. The plan includes overhead
and headcount reductions in the United States of America, Europe and Australia.
It will be implemented and completed in the Company's fourth fiscal quarter,
ending September 30, 2001, and will result in a one-time charge estimated not to
exceed $800,000.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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; VortexML, a data transformation
tool that converts ASCII data into valid XML without programming; 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 in the third quarter of fiscal 2001 the Company made a major
release of the Monarch|ES software.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2001 and 2000.
- ------------------------------------------
Net sales for the three months ended June 30, 2001 were $5,105,000
which represents a decrease of $1,769,000, or approximately 26%, from net sales
of $6,874,000 for the three months ended June 30, 2000. This decrease in net
sales is attributable to the following factors:
o Domestic Monarch sales decreased by approximately 39%, which accounts
for an approximate decrease of 19% in total net sales. Net sales for
the three months ended June 30, 2000 included a one-time sale of
paid-up OEM licenses totaling $520,000. This accounts for approximately
a 16% decrease in domestic Monarch sales and accounts for an
approximate decrease in total net sales of 8% when comparing these
quarters. Also, sales of the Monarch product to the Company's largest
distributor have decreased over the past 12 months even though sales of
the product by this distributor have remained relatively unchanged
during this period. Decreasing sales to this distributor account for
approximately a 13% decrease in domestic Monarch sales and an
approximate decrease in total net sales of 7% for the three months
ended June 30, 2001 as compared to the same period in 2000. The Company
attributes the balance of the decrease in domestic Monarch sales to a
reduction in corporate spending due to a slowing economy.
o A decrease in third-party product sales accounts for approximately a 3%
decrease in the total net sales of the Company. Management believes
this decrease is attributable to a slowing worldwide economy.
o Total net sales decreased as a result 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 7% for international sales
when stated in dollars and a reduction of approximately 3% for the
Company's net sales.
For the third quarter of fiscal 2001, Monarch and Monarch|ES
accounted for approximately 57% of net sales (as compared to 63% of net sales
for the third quarter of fiscal 2000), Quetzal|SC accounted for approximately
27% of net sales (as compared to 21% of net sales for the third quarter of
fiscal 2000), and third-party products accounted
9
for approximately 16% of net sales (as compared to 16% of net sales for the
third quarter of fiscal 2000).
Cost of sales for the three months ended June 30, 2001 was $1,372,000
or approximately 27% of net sales which is comparable to cost of sales of
$1,578,000 or approximately 23% of net sales for the three months ended June 30,
2000. This increase in cost of sales as a percentage of net sales results from
the decrease in net sales of the Company's Monarch product line, which has a
higher margin.
Engineering and product development expenses for the three months
ended June 30, 2001 were $536,000, which represents an increase of $112,000 or
approximately 26% from $424,000 for the three months ended June 30, 2000. This
increase is primarily attributable to increased staffing levels in product
development required to support the release of Q|SM and a major version release
of Monarch|ES. During the third quarter of fiscal 2001, the Company capitalized
$132,000 in software development costs. This compares to $42,000 capitalized in
the third quarter of 2000. The increase in capitalized costs is due to the
development of the Q|SM product and the new major version of Monarch|ES.
Selling, general and administrative expenses for the three months
ended June 30, 2001 were $4,661,000, which represents a decrease of $192,000 or
approximately 4% from $4,853,000 for the three months ended June 30, 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 decrease of approximately 7% for international selling, general, and
administrative expenses when stated in dollars. This principally accounts for
the 4% decrease in total selling, general and administrative expenses.
As a result of the foregoing, the loss from operations for the three
months ended June 30, 2001 was $1,465,000, which compares to income from
operations of $19,000 for the three months ended June 30, 2000. The Company has
not recorded any benefit for income taxes in either period owing to the
Company's conclusion that the realization of its net operating loss
carryforwards was not more likely than not. The net loss for the three months
ended June 30, 2001 was $1,502,000, which compares to a net income of $4,000 for
the three months ended June 30, 2000.
Nine Months Ended June 30, 2001 and 2000.
- -----------------------------------------
Net sales for the nine months ended June 30, 2001 were $16,708,000,
which represents a decrease of $4,059,000 or approximately 20% from net sales of
$20,767,000 for the nine months ended June 30, 2000. This decrease in net sales
is attributable to the following factors:
o Domestic Monarch sales decreased by approximately 29%, which accounts
for an approximately decrease of 12% in total net sales. Sales of the
Monarch product to the Company's largest distributor have decreased
over the past 12 months even though sales of the product by this
distributor have remained relatively unchanged during this period.
Decreasing sales to this distributor account for approximately a 20%
decrease in domestic Monarch sales and an approximate decrease in total
net sales of 8% for the nine months ended June 30, 2001 as compared to
the same period in 2000. Also, net sales for the nine months ended June
30, 2000 included a one-time sale of paid-up OEM licenses totaling
$520,000. This accounts for approximately a 6% decrease in domestic
Monarch sales and accounts for approximately 3% of the decrease in
total net sales when comparing these quarters. The Company attributes
the balance of the decrease in domestic Monarch sales to a reduction in
corporate spending due to a slowing economy.
o A decrease in third-party product sales accounts for approximately a 4%
decrease in the total net sales of the Company. Management believes
this decrease is attributable to a slowing worldwide economy.
o Total net sales decreased as a result 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
10
currencies, resulting in a comparative reduction of approximately 9%
for international sales when stated in dollars and a reduction of
approximately 4% for the Company's net sales.
For the nine months ended June 30, 2001, Monarch products accounted
for approximately 57% of net sales (as compared to 57% of net sales for the nine
months ended June 30, 2000), Quetzal|SC products accounted for approximately 26%
of net sales, (as compared to 25% of net sales for the nine months ended June
30, 2000) and third-party product lines accounted for approximately 17% of net
sales (as compared to 18% of net sales for the nine months ended June 30, 2000).
Cost of sales for the nine months ended June 30, 2001 was $4,219,000
or approximately 25% of net sales which is comparable to cost of sales of
$5,083,000 or approximately 24% of net sales for the nine months ended June 30,
2000. This increase in cost of sales as a percentage of net sales results from
the decrease in net sales of the Company's Monarch product line, which has a
higher margin.
Engineering and product development expenses for the nine months
ended June 30, 2001 were $1,480,000, which represents an increase of $99,000 or
approximately 7% from $1,381,000 for the nine months ended June 30, 2000. This
increase is primarily the result of increased staffing levels in product
development required to support the release of Q|SM and a major version release
of Monarch|ES. During the nine months ended June 30, 2001, the company
capitalized $576,000 in software development costs. This compares to $140,000
capitalized in the nine months ended June 30, 2000. The increase in capitalized
costs is due to the development of the Q|SM product and the new major version
of Monarch|ES.
Selling, general and administrative expenses for the nine months
ended June 30, 2001 were $14,151,000, which represents a decrease of $624,000 or
approximately 4% from $14,775,000 for nine months ended June 30, 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 9% for international selling, general,
and administrative expenses when stated in dollars. This principally accounts
for the 4% reduction in total selling, general and administrative expenses. As a
result of the foregoing, the loss from operations for the nine months ended June
30, 2001 was $3,141,000, which compares to a loss from operations of $471,000
for the nine months ended June 30, 2000. The Company has not recorded any
benefit for income taxes in either period owing to the Company's conclusion that
the realization of its net operating loss carryforwards was not more likely than
not. The net loss for the nine months ended June 30, 2001 was $3,191,000, which
compares to a net loss of $522,000 for the nine months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by approximately $2,260,000 during the nine
months ended June 30, 2001 primarily as a result of unprofitable operations. The
net cash used in operating activities totaled $13,000 for the nine months ended
June 30, 2001 (as compared to $121,000 used in operating activities for the nine
months ended June 30, 2000). The net loss from operations of $3,191,000 was
primarily offset by $2,797,000 provided by accounts receivable for the nine
months ended June 30, 2001 (as compared to a net loss from operations of
$522,000 and $233,000 used in the increase in accounts receivable for the period
ended June 30, 2000).
Investing activities used $603,000 for the nine months ended June 30,
2001 (as compared to $158,000 provided by investing activities for the nine
months ended June 30, 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. Cash provided
from the sale of short-term investments was $348,000 for the nine months ended
June 30, 2001 (as compared to $647,000 for the nine months ended June 30, 2000).
Capitalized software totaled $576,000 for the nine months ended June 30, 2001
(as compared to $140,000 for the nine months ended June 30, 2000).
Financing activities provided $858,000 for the nine months ended June
30, 2001 (as compared to $11,000 provided by financing activities for the nine
months ended June 30, 2000). This increase is primarily attributable to the
Company's January 2001 sale of
11
416,667 shares of common stock in a private placement to investors for an
aggregate of $1,162,500.
Management believes that its currently anticipated capital needs for
future operations of the Company will be satisfied through at least September
30, 2001. The Company's lines of credit were renewed effective December 29, 2000
and expire on December 31, 2001 and provide for maximum borrowings up to the
lesser of $3,500,000 or 50% to 90% of defined eligible accounts receivable. As
of June 30, 2001, the Company had approximately $635,000 of outstanding
borrowings under these lines. The Company was in breach of certain covenants of
the agreements as of June 30, 2001. The Company is currently negotiating these
lines with the bank. See Bank Line of Credit Risk Factor below.
On July 26, 2001, the Company announced a worldwide restructuring plan to
bring together worldwide operations under one administration and improve
operating efficiencies. The plan includes overhead and headcount reductions in
the United States of America, Europe and Australia. It will be implemented and
completed in the Company's fourth fiscal quarter, ending September 30, 2001, and
will result in a one-time charge estimated not to exceed $800,000.
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 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.
Bank Line of Credit
The Company is in default on its two line of credit agreements with
Silicon Valley Bank as a result of the Company's breach of certain financial
covenants in these agreements. The Company is currently in negotiations with the
bank to revise the terms of the agreements and believes it will be able to enter
into revised agreements with the
12
bank. However, there can be no assurance that the Company will be able to
successfully renegotiate these existing bank lines or that the Company will be
able to access alternative sources of financing if it is unable to renegotiate
these lines. If the Company and the bank cannot reach an agreement and the
Company remains in default, the Company would no longer be able to borrow under
these lines and may be required to repay the amounts currently outstanding under
these lines, which would materially impair its ability to fund its operations
and would materially harm its business. If the Company is able to renegotiate
the lines but the revised terms are unduly restrictive, the Company's borrowing
flexibility could diminish, which could restrict its funding strategies and harm
its business.
Weakening of World Wide Economic Conditions and the Computer Software Market May
Result in Lower Revenue Growth Rates or Decreased Revenues
The revenue growth and profitability of the Company's business depends on
the overall demand for computer software and services, particularly in the
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
restore profitability.
Dependence on Principal Products
For the nine months ended June 30, 2001, Monarch and Monarch|ES
products and Quetzal|SC products accounted for approximately 57% and 26%,
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 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-
13
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.
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
14
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. Management presented the Company's plan to regain compliance
with the minimum bid price requirement to the Nasdaq Listing Qualifications
Panel and, on May 30, 2001, the Listing Qualifications Panel's notified the
Company that it had determined to continue listing the Company's common stock on
the Nasdaq National Market, provided that on or before July 31, 2001, the
Company's Common Stock evidenced a closing bid price of at least $1.00 per share
and, immediately thereafter, a closing bid price of at least $1.00 for a minimum
of ten consecutive trading days and that the Company remained in compliance with
all other requirements for continued listing on The Nasdaq National Market. .
Effective as of the close of business on July 23, 2001 the Company
effected a 1-for-4.5 reverse stock split. Since July 24, 2001, the Company's
Common Stock has evidenced a closing bid price in excess of $1.00 per share,
demonstrating compliance with the minimum bid price requirement. However, the
Company is not in compliance with the continued listing requirement for market
value of public float of $5 million. The Company has requested a 90-day
extension from Nasdaq to achieve compliance with the market value of public
float requirement. There can be no assurance that the Company will be granted
the 90-day extension or will achieve compliance with the market value of public
float requirement or remain in compliance with all of the other 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.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
At June 30, 2001, the Company did not participate in any derivative
financial instruments, or other financial and commodity instruments. The Company
holds no investment securities.
Primary Market Risk Exposures
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company utilizes U.S.
dollar denominated borrowings to fund its operational needs through its
$3,500,000 working capital line of credit agreements. The lines, which currently
bear an interest rate of prime plus 1% (7.75% at June 30, 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 June 30,
2001. As of June 30, 2001, the Company had approximately $635,000 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.
16
PART II.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
None
B. Reports on Form 8-K
No Current Report on Form 8-K was filed during the quarterly period
ended June 30, 2001.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 14, 2001.
DATAWATCH CORPORATION
/s/ Alan R. MacDougall
----------------------------------------------
Alan R. MacDougall
Vice President of Finance and Chief Financial
Officer (Principal Financial Officer)
18