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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
175 CABOT STREET
SUITE 503
LOWELL, MASSACHUSETTS 01854
---------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 978-441-2200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at February 7, 2002
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Common Stock $0.01 par value 2,555,984
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DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. FINANCIAL STATEMENTS Page #
a) Consolidated Condensed Balance Sheets:
December 31, and September 30, 2001 3
b) Consolidated Condensed Statements of Operations:
Three Months Ended December 31, 2001 and 2000 4
c) Consolidated Condensed Statements of Cash Flows:
Three Months Ended December 31, 2001 and 2000 5
d) Notes to Consolidated Condensed Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings *
Item 2. Changes in Securities and Use of Proceeds *
Item 3. Defaults 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 18
SIGNATURES 19
* No information provided due to inapplicability of item.
2
PART I.
Item 1. FINANCIAL STATEMENTS
--------------------
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
December 31, September 30,
2001 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,619,136 $ 1,568,691
Accounts receivable, net 3,483,646 4,255,809
Inventories 208,104 230,878
Prepaid expenses 824,005 853,332
------------ ------------
Total current assets 6,134,891 6,908,710
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment 3,249,240 3,516,765
Less accumulated depreciation and amortization (2,326,709) (2,491,996)
------------ ------------
Net property and equipment 922,531 1,024,769
------------ ------------
OTHER ASSETS 1,430,784 1,490,505
------------ ------------
TOTAL ASSETS $ 8,488,206 $ 9,423,984
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,150,930 $ 1,556,286
Accrued expenses 1,828,167 1,965,911
Borrowings under credit lines 229,058 635,000
Deferred revenue 1,961,888 2,155,377
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Total current liabilities 5,170,043 6,312,574
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ACCRUED SEVERANCE, less current portion 90,235 126,121
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 25,631 25,478
Additional paid-in capital 21,609,800 21,495,497
Accumulated deficit (17,656,551) (17,782,258)
Accumulated other comprehensive loss (610,564) (613,040)
------------ ------------
3,368,316 3,125,677
Less treasury stock - at cost (140,388) (140,388)
------------ ------------
Total shareholders' equity 3,227,928 2,985,289
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,488,206 $ 9,423,984
============ ============
See accompanying notes to consolidated condensed financial statements.
3
Item 1. FINANCIAL STATEMENTS (continued)
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DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
2001 2000
------------ ------------
License $ 3,286,677 $ 3,616,644
Services 1,334,394 1,442,268
------------ ------------
NET SALES 4,621,071 5,058,912
Cost of sales 805,538 739,208
Engineering & product development 323,484 419,285
Selling, general and administrative 3,339,807 4,333,622
------------ ------------
INCOME (LOSS) FROM OPERATIONS 152,242 (433,203)
INTEREST EXPENSE (46,983) (22,026)
OTHER INCOME, primarily interest 4,828 11,484
FOREIGN CURRENCY GAIN (LOSS) (1,476) 3,725
BENEFIT FOR INCOME TAXES - -
------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 108,611 (440,020)
------------ ------------
DISCONTINUED OPERATIONS:
Loss from Guildsoft operations - (33,677)
Gain on sale of Guildsoft 17,096 -
------------ ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 17,096 (33,677)
------------ ------------
NET INCOME (LOSS) $ 125,707 $ (473,697)
============ ============
NET INCOME (LOSS) PER COMMON SHARE -
Basic and diluted:
Continuing operations $ .04 $ (.21)
Discontinued operations .01 (.02)
------------ ------------
NET INCOME (LOSS) PER SHARE-Basic and diluted $ .05 $ (.23)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 2,546,922 2,090,403
ADJUSTMENT FOR DILUTIVE POTENTIAL COMMON STOCK 3,411 -
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING: Diluted 2,550,333 2,090,403
============ ============
See accompanying 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)
Three Months Ended
December 31,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 125,707 $ (473,697)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 242,820 249,164
Gain on sale of Guildsoft (17,096) -
Loss on disposition of equipment - 5,489
Stock-based compensation 37,500 -
Changes in current assets and liabilities,
net of acquisitions:
Accounts receivable 767,464 723,447
Inventories 22,019 53,447
Prepaid advertising and other expenses 82,409 105,319
Accounts payable and accrued expenses (530,495) (198,688)
Deferred revenue (178,892) (156,323)
------------ ------------
Net cash provided by operating activities 551,436 308,158
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and fixtures (8,928) (175,510)
Proceeds from sale of equipment - net - 2,812
Proceeds from sale of short-term investments - 348,121
Proceeds from sale of Guildsoft 20,509 -
Capitalized software development costs (62,750) (274,579)
Other assets 4,522 4,218
------------ ------------
Net cash used in investing activities (46,647) (94,938)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations (35,886) (212)
Borrowings (Payments) under credit lines, net (405,942) -
------------ ------------
Net cash used in financing activities (441,828) (212)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (12,516) 8,765
NET INCREASE IN CASH AND EQUIVALENTS 50,445 221,773
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,568,691 1,695,832
------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,619,136 $ 1,917,605
============ ============
See accompanying 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 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 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, 2001.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements, and include all adjustments necessary
for fair presentation of the results of the interim periods presented. The
operating results for the interim periods presented are not necessarily
indicative of the results expected for the full year.
2. Recent Accounting Pronouncements: In June 2001, the FASB issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." These pronouncements provide guidance on how to account for the
acquisition of businesses and intangible assets, including goodwill, which arise
from such activities. SFAS No. 141 affirms that only one method of accounting
may be applied to a business combination, the purchase method. SFAS No. 141 also
provides guidance on the allocation of purchase price to the assets acquired.
SFAS No. 142 provides that goodwill resulting from business combinations no
longer be amortized to expense, but rather requires an annual assessment of
impairment and, if necessary, adjustments to the carrying value of goodwill.
Adoption of these pronouncements is not expected to have a significant effect on
the Company's consolidated financial statements.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions relating to the
disposal of a component of a business of Accounting Principles Board Opinion
("APB") No. 30. In the fourth quarter of fiscal 2001, the Company elected to
adopt the provisions of SFAS No. 144. In accordance with the provisions of SFAS
No. 144, Guildsoft Limited, a UK distribution subsidiary sold in September 2001,
is considered a discontinued operation, and prior years' financial statements
have been reclassified to present Guildsoft Limited on that basis.
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 15% and 11% of net sales for the three months ended
December 31, 2001 and December 31, 2000, respectively. This same customer
accounted for 21% of outstanding trade receivables as of December 31, 2001 and
September 30, 2001. 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: The Company accounts for its inventories using a standard
cost methodology. Inventories were comprised of the following:
December 31, September 30,
2001 2001
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Materials $ 184,835 $ 222,976
Finished goods 23,269 7,902
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TOTAL $ 208,104 $ 230,878
============ ============
5. Comprehensive Income: The following table sets forth the reconciliation of
net income (loss) to comprehensive income (loss):
Three Months Ended December 31,
2001 2000
------------ ------------
Net income (loss) $ 125,707 $ (473,697)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments 2,476 43,001
------------ ------------
Comprehensive income (loss) $ 128,183 $ (430,696)
============ ============
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 period ended December 31, 2000, 3,068 potential
shares were excluded from the calculation, as the effect would be antidilutive.
7. Line of Credit: On October 30, 2001 and December 19, 2001, respectively,
the Company entered into amended and restated domestic and international credit
lines for a period to expire on October 1, 2002. As part of the agreement to
enter into these credit lines, warrants to purchase 49,669 shares of the
Company's common stock were issued to the bank at an exercise price of $1.51.
These warrants expire on October 30, 2008. The fair market value of the warrants
(determined by the Black-Scholes pricing model and the following assumptions:
134% volatility, 7 year estimated life and 4.8% risk-free interest rate) was
determined to be $76,956 which was recorded in prepaid interest (being
recognized as a component of interest expense during the term of the amended
agreement period) with a corresponding increase in additional paid in capital.
The amended and restated domestic credit line provides for maximum borrowings of
the lesser of $1,000,000 or 70% of defined eligible receivables and the amended
and restated international credit line provides for maximum borrowings of the
lesser of $500,000 or 80% of defined eligible receivables. As of December 31,
2001, the Company had approximately $229,000 of outstanding borrowings under
these lines with approximately $245,000 in additional borrowings available under
the lines.
8. Non-cash issuance of Common Stock: In November 2001, the Company issued
15,312 shares of common stock with an aggregate fair value of $37,500 to a
director for services. The fair value of the stock issued to the director was
expensed as the services were provided.
7
Item 1. FINANCIAL STATEMENTS (continued)
--------------------
9. Segment Information: The Company has determined that it has only one
reportable segment meeting the criteria established under SFAS No. 131. The
Company's chief operating decision maker, as defined, (determined to be the
Chief Executive Officer and the Board of Directors) does not manage any part of
the Company separately, and the allocation of resources and assessment of
performance is based solely on the Company's consolidated operations and
operating results.
The following table presents information about the Company's sales by product
lines:
Three Months Ended December 31,
2001 2000
------------ ------------
Monarch and Monarch|ES 71% 70%
Q|Service Management 29 30
------------ ------------
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
--------- ------------ ------------ ------------ ------------
Q1 FY2002 $ 2,934,659 $ 1,982,457 $ (296,045) $ 4,621,071
Q1 FY2001 2,998,403 2,316,847 (256,338) 5,058,912
Long-lived Assets Domestic Europe Eliminations Total
----------------- ------------ ------------ ------------ ------------
At December 31, 2001 $ 1,830,070 $ 511,495 $ - $ 2,341,565
At September 30, 2001 1,943,505 559,769 - 2,503,274
Export sales aggregated approximately $1,055,778 and $1,414,405, respectively,
for the three months ended December 31, 2001 and December 31, 2000.
10. Discontinued Operations: On September 20, 2001, the Company sold the
operations of Guildsoft Limited, a United Kingdom distribution subsidiary, to a
third party, as part of a restructuring plan (Note 11). The sale resulted in
gross proceeds of $1,179,000 and a gain of approximately $413,000. The
operations of Guildsoft Limited have been reflected as a discontinued operation
in all periods presented. In the quarter ended December 31, 2000, Guildsoft
Limited had net sales of $1,139,237 and a loss before taxes of $33,677. This
loss is shown on the accompanying consolidated condensed statement of operations
for that period as a loss from Guildsoft operations as part of discontinued
operations. In December 2001 there was a purchase price settlement between
Datawatch and the purchaser of Guildsoft Limited, resulting in a gain of $17,096
which is shown as a gain on the sale of Guildsoft as part of discontinued
operations on the accompanying consolidated condensed statement of operations
for the three months ended December 31, 2001.
11. Restructuring and Centralized Operations: During the fourth quarter of
fiscal 2001, the Company approved and completed a corporate-wide restructuring
plan in an effort to reduce costs and centralize administrative operations. The
restructuring plan resulted in charges for severance benefits and related costs
for 42 terminated employees. Of these charges, totaling approximately $763,000,
$377,000 was paid in fiscal 2001 and $386,000 accrued as of September 30, 2001.
On December 31, 2001, the accrual related to this restructuring totaled $278,000
(reflecting cash payments of approximately $108,000 since September 30, 2001) of
which the long-term portion is $90,000. The charges are expected to be fully
paid in January 2005. During the quarter ended December 31, 2001, there were no
changes made to the plan or changes in estimated costs associated with the plan.
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 primarily for the Windows-based market. Its products address the
enterprise reporting, business intelligence, data replication and help desk
markets.
Datawatch's principal products are: Monarch, a report mining and business
intelligence application that lets users extract and manipulate data from ASCII
report files or HTML files produced on any mainframe, midrange, client/server or
PC system; Monarch|ES, a web-enabled business information portal that allows an
organization to quickly deliver business intelligence and decision support
derived from existing reporting systems with no new programming or report
writing; 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; Q|Service Management ("Q|SM"), 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; VorteXML, a new data transformation product for the emerging
XML market which converts existing, structured ASCII/ANSI text documents or HTML
into valid XML on an ad hoc, programming-free basis; and Redwing, a plug-in for
Adobe Acrobat that lets users extract text and tables from Adobe PDF documents.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition and Returns Reserve
Datawatch generally recognizes revenue from the sale of software products
at the time of shipment, providing there are no uncertainties surrounding
product acceptance, the fee is fixed and determinable, collection is considered
probable, persuasive evidence of the arrangement exists and there are no
significant obligations remaining. For enterprise solutions products, the
Company applies the residual method in determining revenue from license sales.
Revenue from implementation, integration, training and consulting services is
recognized as the services are performed. Revenue from post-contract customer
support services is deferred and recognized ratably over the contract period
(generally one year). Post-contract customer support includes technical support
and rights to unspecified software upgrades and enhancements on a when-and-if
available basis.
The Company's software products are sold under warranty against certain
defects in material and workmanship for a period of 30 to 60 days from the date
of purchase. Certain software products, including desktop versions of Monarch,
Monarch Data Pump, VorteXML and Redwing sold directly to end-users, include a
guarantee under which such customers may return products within 30 to 60 days
for a full refund. The Company offers its distributors the ability to return
obsolete versions of its products and slow-moving products for refund or credit.
Reserves are provided for potential returns under these arrangements based upon
historical experience and anticipated exposures. Returns reserves are primarily
calculated by accruing a fixed amount each period, assessing the level of the
reserve at the end of the period against anticipated returns and adjusting the
reserve as needed. During the quarter ended December 31, 2001, $50,000 was
accrued for the returns reserve and approximately $50,000 in returns were
applied against the reserve. This compares to $50,000 accrued for the returns
reserve and approximately $256,000 in returns applied against the returns
reserve for the quarter ended December 31, 2000. At December 31, 2001, the
returns reserve was approximately $246,000, with 86% related to specific
accounts, as compared to approximately $246,000, with 62% related to specific
accounts, at September 30, 2001.
9
Capitalized Software Development Costs
The Company capitalizes certain software development costs as well as
purchased software upon achieving technological feasibility of the related
products. For the three months ended December 31, 2001 and 2000, the Company
capitalized approximately $12,000 and $219,000, respectively, of software
development costs and $51,000 and $96,000, respectively, of purchased software.
Software development costs incurred and software purchased prior to achieving
technological feasibility are charged to research and development expense as
incurred. Commencing upon initial product release, capitalized costs are
amortized to cost of sales using the straight-line method over the estimated
life (which approximates the ratio that current gross revenues for a product
bear to the total of current and anticipated future gross revenues for that
product), generally 12 to 36 months. For the three months ended December 31,
2001 and 2000, amortization of these costs was approximately $115,000 and
$69,000, respectively. The unamortized balance of capitalized software is
approximately $1,033,000 and $1,085,000 as of December 31, 2001 and September
30, 2001, respectively.
Foreign Currency Translations
Datawatch translates the financial statements of foreign subsidiaries into
U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation." The
related translation adjustments are reported as a separate component of
shareholders' equity under the heading "Accumulated Other Comprehensive Loss."
Accumulated other comprehensive loss reported in the accompanying consolidated
condensed balance sheets consists only of foreign currency translation
adjustments. At December 31, 2001 and September 30, 2001, the accumulated
foreign currency translation loss totaled approximately $611,000 and $613,000,
respectively. Foreign currency translation losses arising during the quarters
ended December 31, 2001 and December 31, 2000 were approximately $2,000 and
$43,000, respectively. Currently the Company does not engage in foreign currency
hedging activities.
RESULTS OF OPERATIONS
Financial information for the three months ended December 31, 2000 has been
reclassified to conform to the presentation of Guildsoft Limited as a
discontinued operation. See Note 10 to the consolidated condensed financial
statements.
Three Months Ended December 31, 2001 and 2000.
- ----------------------------------------------
Net sales for the three months ended December 31, 2001 totaled $4,621,000
which represents a decrease of $438,000 or approximately 9% from net sales of
$5,059,000 for the three months ended December 31, 2000. Revenue from the sale
of licenses was approximately $3,287,000 and $3,617,000 in the quarters ended
December 31, 2001 and December 31, 2000, respectively. Revenue from the sale of
services was approximately $1,334,000 and $1,442,000 for the quarters ended
December 31, 2001 and December 31, 2000, respectively. In both periods revenue
from the sale of licenses accounted for 71% of total sales and revenue from the
sale of services accounted for 29% of total sales. For the first quarter of
fiscal 2002, Monarch and Monarch|ES accounted for approximately 71% of net sales
(as compared to 70% of net sales for the first quarter of fiscal 2001) and Q|SM
accounted for approximately 29% of net sales (as compared to 30% of net sales
for the first quarter of fiscal 2001). The decrease in net sales in the first
quarter of fiscal 2002 as compared to the first quarter of fiscal 2001 is
attributable to a decrease in both license and service revenue across all
product lines. Monarch family sales decreased by $231,000 or 7% and Q|SM family
sales decreased by $207,000 or 14% in the three months ended December 31, 2001
as compared to the three months ended December 31, 2000. Datawatch attributes
these decreases in sales to a reduction in corporate spending due to an
uncertain worldwide economy and reaction to the events of September 11, 2001.
10
Cost of sales for the three months ended December 31, 2001 was $806,000 or
approximately 17% of net sales as compared to cost of sales of $739,000 or
approximately 15% of net sales for the three months ended December 31, 2000. The
increase in cost of sales is primarily attributable to the cost of sales of the
latest version of the Monarch|ES product, which has higher costs from royalties
and amortization of acquired software and development than previous versions.
Cost of sales for Monarch|ES was $233,000 or 30% of Monarch|ES sales in the
quarter ended December 31, 2001 as compared to $55,000 or 7% of Monarch|ES sales
in the quarter ended December 31, 2000.
Engineering and product development expenses were $323,000 for the three
months ended December 31, 2001, a decrease of $96,000 or approximately 23% from
$419,000 for the three months ended December 31, 2000. This decrease is
primarily attributable to reduced expenses related to the maintenance of the
older versions of the Company's help desk and asset management products by
external developers.
Selling, general and administrative expenses were $3,340,000 for the three
months ended December 31, 2001, a decrease of $994,000 or approximately 23% from
$4,334,000 for the three months ended December 31, 2000. This decrease in
primarily attributable to reduced expenses related to the cost reduction and
restructuring plan which was implemented during the fourth quarter of fiscal
2001. The cost savings from this plan was fully realized in the first quarter of
fiscal 2002. The approximate distribution of the realized cost savings when
comparing the quarters ended December 31, 2001 to December 31, 2000 is as
follows:
o $371,000 or 37% from savings in employee compensation and benefits
o $305,000 or 31% from savings in marketing expenses primarily from
reduced expenses for direct mail and trade shows
o $161,000 or 16% from savings in professional services expenses
provided by non-related companies
o $72,000 or 7% from savings in travel and entertainment expenses
o $85,000 or 9% from savings in all other expense types
Income from continuing operations for the three months ended December 31,
2001 was approximately $109,000 which compares to a loss from continuing
operations of approximately $440,000 for the three months ended December 31,
2000. The Company has not recorded any benefit for income taxes in either period
owing to the Company's conclusion that the realization of net operating loss
carryforwards was not more likely than not and based upon the expected effective
tax rates for the full years being 0% in both periods. The net income for the
three months ended December 31, 2001 was $126,000 which compares to a net loss
of $474,000 for the three months ended December 31, 2000.
In December 2001 there was a purchase price settlement between Datawatch
and the purchaser of Guildsoft Limited, resulting in a gain of $17,096 which is
shown as a gain on the sale of Guildsoft as part of discontinued operations on
the accompanying consolidated condensed statement of operations for the three
months ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by approximately $369,000 during the first
quarter of fiscal 2002 primarily as a result of profitable operations. The net
cash provided by operating activities totaled $551,000 for the three months
ended December 31, 2001 (as compared to $308,000 for the three months ended
December 31, 2000). The primary reasons for the increase in cash provided by
operating activities during the first quarter of fiscal 2002 were profitable
operations and a decrease in accounts receivable. The net profit for the three
months ended December 31, 2001 was $126,000 and the decrease in accounts
receivable was $767,000; these were partially offset by a decrease in accounts
payable and
11
accrued expenses of $530,000. This compares to a net loss of $474,000, a
decrease in accounts receivable of $723,000 and a decrease in accounts payable
and accrued expenses of $199,000 for the quarter ended December 31, 2000.
Cash used in investing activities was $47,000 for the three months ended
December 31, 2001 and $95,000 for the three months ended December 31, 2000. The
cash used in investment activities was primarily the result of investment in
capitalized software totaling $63,000 for the three months ended December 31,
2001. This compares to an investment in capitalized software of $275,000 in the
quarter ended December 31, 2000.
Cash used in financing activities was $442,000 for the three months ended
December 31, 2001 primarily as a result of a $406,000 reduction in the Company's
borrowings under its credit lines and a reduction of long-term obligations of
$36,000. In the quarter ended December 31, 2000, there was an insignificant
amount of cash used in financing activities.
Management believes that the currently anticipated capital requirements of
the Company will be satisfied through at least September 30, 2002 by cash flow
from operations and funds available under the Company's line of credit
agreements. On October 30, 2001 and December 19, 2001, respectively, the Company
entered into amended and restated domestic and international credit lines for a
period to expire on October 1, 2002. The amended and restated domestic credit
line provides for maximum borrowings of the lesser of $1,000,000 or 70% of
defined eligible receivables and the amended and restated international credit
line provides for maximum borrowings of the lessor of $500,000 or 80% of defined
eligible receivables. As of December 31, 2001, the Company had approximately
$229,000 of outstanding borrowings under these lines with approximately $245,000
in additional borrowings available under the lines.
Management believes that the Company's current operations are not
materially impacted by the effects of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." These pronouncements
provide guidance on how to account for the acquisition of businesses and
intangible assets, including goodwill, which arise from such activities. SFAS
No.141 affirms that only one method of accounting may be applied to a business
combination, the purchase method. SFAS No. 141 also provides guidance on the
allocation of purchase price to the assets acquired. SFAS No. 142 provides that
goodwill resulting from business combinations no longer be amortized to expense,
but rather requires an annual assessment of impairment and, if necessary,
adjustments to the carrying value of goodwill. Adoption of these pronouncements
is not expected to have a significant effect on the Company's consolidated
financial statements.
RISK FACTORS
The Company does not provide forecasts of its future financial performance.
However, from time to time, information provided by the Company or statements
made by its employees may contain "forward looking" information that involves
risks and uncertainties. In particular, statements contained in this Report on
Form 10-Q that are not historical facts (including, but not limited to
statements contained in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of Part I of this Report on Form
10-Q relating to liquidity and capital resources) may constitute forward looking
statements and are made under the safe harbor provisions of The Private
Securities Litigation Reform Act of 1995. The Company's actual results of
operations and financial condition have varied and may in the future vary
significantly from those stated in any forward looking statements. Factors that
may cause such differences include, without
12
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.
Weakening of World Wide Economic Conditions and the Computer Software Market May
Result in Lower Revenue Growth Rates or Decreased Revenues
The revenue growth and profitability of the Company's business depends on
the overall demand for computer software and services, particularly in the
markets in which it competes. Because the Company's sales are primarily to major
corporate customers, its business also depends on general economic and business
conditions. A softening of demand for computer software and services, caused by
a weakening of the economy in the United States or abroad, may result in lower
revenue growth rates, decreased revenues or reduced profitability. In addition,
recent terrorist attacks against the United States, and the United States
military response to these attacks, have added to economic and political
uncertainty which may adversely affect worldwide demand for computer software
and services and result in significant fluctuations in the value of foreign
currencies. In a weakened economy, the Company cannot be assured that it will be
able to effectively promote future growth in its software and services revenues
or restore profitability.
Dependence on Principal Products
For the three months ended December 31, 2001, Monarch and Monarch|ES
products and Q|Service Management products accounted for approximately 71% and
29%, respectively, of the Company's net sales. The Company is wholly dependent
on Monarch, Monarch|ES and Q|Service Management 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.
13
International Sales
In the three months ended December 31, 2001, international sales accounted
for approximately 43% of the Company's net 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, possible effects of war
and acts of terrorism, difficulties in account receivable collection,
difficulties in managing distributors or representatives, difficulties in
staffing and managing international operations, difficulties in protecting the
Company's intellectual property overseas, seasonality of sales and potentially
adverse tax consequences.
Acquisition Strategy
Although the Company has no current acquisition plans, it has addressed and
may continue to address the need to develop new products, in part, through the
acquisition of other companies. Acquisitions involve numerous risks including
difficulties in the assimilation of the operations, technologies and products of
the acquired companies, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience and where competitors in such markets have
stronger market positions, and the potential loss of key employees of the
acquired company. Achieving and maintaining the anticipated benefits of an
acquisition will depend in part upon whether the integration of the companies'
business is accomplished in an efficient and effective manner, and there can be
no assurance that this will occur. The successful combination of companies in
the high technology industry may be more difficult to accomplish than in other
industries.
Dependence on New Introductions; New Product Delays
Growth in the Company's business depends in substantial part on the
continuing introduction of new products. The length of product life cycles
depends in part on end-user demand for new or additional functionality in the
Company's products. If the Company fails to accurately anticipate the demand
for, or encounters any significant delays in developing or introducing, new
products or additional functionality on its products, there could be a material
adverse effect on the Company's business. Product life cycles can also be
affected by the introduction by suppliers of operating systems of comparable
functionality within their products. The failure of the Company to anticipate
the introduction of additional functionality in products developed by such
suppliers could have a material adverse effect on the Company's business. In
addition, the Company's competitors may introduce products with more features
and lower prices than the Company's products. Such increase in competition could
adversely affect the life cycles of the Company's products, which in turn could
have a material adverse effect on the Company's business.
Software products may contain undetected errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by the Company and by current and potential end-users, errors
will not be found in new products after commencement of commercial shipments,
resulting in loss of or delay in market acceptance. Any failure by the Company
to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business.
Rapid Technological Change
The markets in which the Company competes have undergone, and can be
expected to continue to undergo, rapid and significant technological change. The
ability of the Company to grow will depend on its ability to successfully update
and improve its existing products and market and license new products to meet
the changing demands of the marketplace and that can compete successfully with
the existing and new products of the Company's competitors. There can be no
assurance
14
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 Peregrine, Actuate,
Quest, and others, have substantially greater financial, marketing and
technological resources than the Company. No assurance can be given that the
Company will have the resources required to compete successfully in the future.
Dependence on Proprietary Software Technology
The Company's success is dependent upon proprietary software technology.
Although the Company does not own any patents on any such technology, it does
hold exclusive licenses to such technology and relies principally on a
combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its rights to
such proprietary technology. Despite such precautions, there can be no assurance
that such steps will be adequate to deter misappropriation of such technology.
Reliance on Software License Agreements
Substantially all of the Company's products incorporate third-party
proprietary technology which is generally licensed to the Company on an
exclusive, worldwide basis. Failure by such third-parties to continue to develop
technology for the Company and license such technology to the Company could have
a material adverse effect on the Company's business and results of operations.
Indirect Distribution Channels
The Company sells a significant portion of its products through resellers,
none of which are under the direct control of the Company. The loss of major
resellers of the Company's products, or a significant decline in their sales,
could have a material adverse effect on the Company's operating results. There
can be no assurance that the Company will be able to attract or retain
additional qualified resellers or that any such resellers will be able to
effectively sell the Company's products. The Company seeks to select and retain
resellers on the basis of their business credentials and their ability to add
value through expertise in specific vertical markets or application programming
expertise. In addition, the Company relies on resellers to provide post-sales
service and support, and any deficiencies in such service and support could
adversely affect the Company's business.
Volatility of Stock Price
As is frequently the case with the stocks of high technology companies, the
market price of the Company's common stock has been, and may continue to be,
volatile. Factors such as quarterly fluctuations in results of operations,
increased competition, the introduction of new products by the Company or its
competitors, expenses or other difficulties associated with assimilating
companies acquired by the Company, changes in the mix of sales channels, the
timing of significant customer orders, and macroeconomic conditions generally,
may have a significant impact on the market price of the stock of the Company.
Any shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant adverse effect on the market
price of the Company's common stock in any given period. In 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.
15
Transfer of Common Stock Listing
In March 2001 the Company announced that it had received a notice from The
Nasdaq Stock Market, Inc. that the Company's Common Stock failed to comply with
the $1.00 minimum bid price requirement for continued listing on The Nasdaq
National Market as set forth in marketplace Rule 4450(a)(5), and that the
Company's Common Stock was, therefore, subject to delisting from The Nasdaq
National Market. Management presented the Company's plan to regain compliance
with the minimum bid price requirement to the Nasdaq Listing Qualifications
Panel and, in May 2001, the Listing Qualifications Panel 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 has not
maintained compliance with the continued listing requirement for market value of
public float of $5 million.
In response to the extraordinary market conditions that resulted from the
tragedies of September 11, 2001, Nasdaq declared an emergency moratorium on the
enforcement of the minimum bid price and market value of public float
requirements which expired on January 2, 2002. In January 2002 the Company
received a notice from The Nasdaq Stock Market, Inc. that the Company had failed
to comply with the $4 million net tangible asset requirement for continued
listing on The Nasdaq National Market and, in response, the Company applied for
listing of its Common Stock on The Nasdaq SmallCap Market. In early February
2002, the Company was notified that its application for such listing had been
approved and that the listing of the Company's Common Stock would be transferred
to The Nasdaq SmallCap Market at the opening of business on February 7, 2002.
There can be no assurance that the Company will remain in compliance with
the requirements for continued listing on The Nasdaq SmallCap Market. In
addition, the transfer of the Company's Common Stock listing to the Nasdaq
SmallCap Market may impair the ability of stockholders to buy and sell shares of
the Company's Common Stock and could adversely affect the market price of, and
the efficiency of the trading market for, the shares of Common Stock. Further,
the transfer of the Common Stock from the Nasdaq National Market could
significantly impair the Company's ability to raise capital in the public
markets should it desire to do so in the future.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
At December 31, 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
$1,500,000
16
working capital line of credit agreements. The lines, which currently bear an
interest rate of prime plus 2% (6.75% at December 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 December
31, 2001. As of December 31, 2001, the Company had approximately $229,000 in
outstanding borrowings under its 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.
17
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 December 31, 2001.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on February 14, 2002.
DATAWATCH CORPORATION
/s/ Alan R. MacDougall
---------------------------------
Alan R. MacDougall
Vice President of Finance and Chief
Financial Officer (Principal Financial Officer)
19