EXHIBIT 99.3
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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
AS OF AND FOR THE NINE MONTHS ENDED JUNE 30, 2004
AND FOR THE YEAR ENDED SEPTEMBER 30, 2003
On August 11, 2004, Datawatch Corporation ("Datawatch") acquired all of the
outstanding stock of Mergence Technologies Corporation ("Mergence"). The
acquisition of Mergence was consummated pursuant to a stock purchase agreement
dated as of August 11, 2004, among Datawatch, Mergence and the four sellers who
owned a majority of the Mergence stock and managed Mergence, and separate stock
purchase agreements with the non-management sellers. The acquisition cost for
Mergence was approximately $2,600,000, consisting of $2,500,000 in cash and
direct acquisition costs of approximately $100,000.
The following unaudited pro forma combined condensed financial information has
been prepared to give effect to the acquisition of Mergence using the purchase
method of accounting and the assumptions and adjustments to reflect the
allocation of purchase price to the acquired assets and liabilities of Mergence
described in the accompanying notes to the unaudited pro forma combined
condensed financial information. The unaudited pro forma combined condensed
financial information is presented based on Datawatch's fiscal year end of
September 30th.
The unaudited pro forma combined condensed balance sheet as of June 30, 2004
combines the historical balance sheets of Datawatch and Mergence as of June 30,
2004, as if the acquisition had been consummated on that date.
The unaudited pro forma combined condensed statement of operations for the nine
months ended June 30, 2004 combines the historical operating results for
Datawatch and Mergence for the nine months ended June 30, 2004 and gives effect
to the acquisition as if it had been completed on October 1, 2002. While
Datawatch has a fiscal year end of September 30th, Mergence has a December 31st
year end. As a result, the statement of operations for Mergence for the nine
months ended June 30, 2004 combines its results for the six months ended June
30, 2004 with results established for the three months ended December 31, 2003
using the records and financial statements for the year ended December 31, 2003,
thus deriving the statement of operations for the nine month period ended June
30, 2004. Further, for purposes of the unaudited proforma combined condensed
statement operations for the year ended September 30, 2003, the results of
operations of Mergence for the twelve-month period ended December 31, 2003 are
combined with the results of operations for Datawatch's fiscal year for the year
ended September 30, 2003, and gives effect to the acquisition as if it had been
completed on October 1, 2002. The results of operations for Mergence's three
months ended December 31, 2003 are, therefore, included in both the combined
fiscal year and combined interim results. Mergence's revenues for the three
months ended December 31, 2003 were approximately $271,000 and net income for
the period was $8,000. There were no intervening events that would materially
affect Mergence's financial position or operating results for a year ended
September 30, 2003 from those presented for the year ended December 31, 2003.
The unaudited pro forma combined financial information is based on the
respective historical financial information of Datawatch and Mergence and should
be read in conjunction with: (i) Datawatch's Annual Report on Form 10-K for the
year ended September 30, 2003; (ii) Datawatch's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2004; and (iii) the accompanying notes
to the unaudited pro forma combined condensed financial information.
The acquisition of Mergence is being accounting for using the purchase method of
accounting in accordance with Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations" and the resultant goodwill and other
intangible assets will be accounting for under SFAS No. 142, "Goodwill and Other
Intangible Assets." The unaudited pro forma combined condensed financial
information includes adjustments,
which are based on preliminary estimates to reflect the allocation of the
purchase price to the acquired assets and assumed liabilities of Mergence. The
purchase price allocation as presented herein is preliminary and the final
purchase accounting adjustments may differ from the pro forma combined condensed
financial information.
The unaudited pro forma combined condensed financial information included herein
has been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission. Certain information and certain footnote disclosures
normally included in financial information prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to such rules and regulations.
This unaudited pro forma combined condensed financial information is intended
for informational purposes only and are not necessarily indicative of the
combined financial position or results of operations that would have actually
been reported had the acquisition occurred as of the beginning of each of the
periods, nor are they necessarily indicative of the future financial position or
results of operations of the combined companies.
This unaudited pro forma combined condensed financial information does not
include potential cost savings from operating efficiencies or synergies that may
result from the acquisition.
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Datawatch Corporation
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 2004
The following unaudited pro forma combined condensed balance sheet presents the
historical balance sheets of Datawatch Corporation and Mergence Technologies
Corporation as if the Companies had been combined on June 30, 2004
- --------------------------------------------------------------------------------
Pro Forma
Adjustments
for Pro Forma
Datawatch(1) Mergence(2) Acquisition Combined
------------ ------------ ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 6,226,475 $ 95,246 $ (2,500,000)(3) $ 3,821,721
Accounts receivable, net 3,607,128 89,956 -- 3,697,084
Loans receivable -- 16,153 -- 16,153
Inventories, net 82,272 -- -- 82,272
Prepaid expenses 526,860 10,643 -- 537,503
------------ ------------ ------------ ------------
Total Current Assets 10,442,735 211,998 (2,500,000) 8,154,733
Property and equipment, net 426,406 11,153 -- 437,559
Amortizing intangible assets 423,331 -- 890,000 (4) 1,313,331
Trademarks 285,152 -- 60,000 (4) 345,152
Goodwill -- -- 1,673,764 (5) 1,673,764
Restricted Cash 234,269 -- -- 234,269
Other (primarily deposits) 29,101 5,418 -- 34,519
------------ ------------ ------------ ------------
TOTAL ASSETS $ 11,840,994 $ 228,569 $ 123,764 $ 12,193,327
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,784,794 $ 77,029 100,000 (3) $ 2,961,823
Deferred revenue 2,890,323 27,304 -- 2,917,627
------------ ------------ ------------ ------------
Total current liabilities 5,675,117 104,333 100,000 5,879,450
DEFERRED TAX LIABILITIES, NET -- -- 148,000 (6) 148,000
------------ ------------ ------------ ------------
TOTAL LIABILITIES 5,675,117 104,333 248,000 6,027,450
------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY
Common stock 53,144 1,641 (1,641)(7) 53,144
Additional paid-in capital 21,827,817 1,006,109 (1,006,109)(7) 21,827,817
Treasury stock (140,388) -- -- (140,388)
Accumulated deficit (15,253,500) (883,514) 883,514 (7) (15,253,500)
Accumulated other comprehensive loss (321,196) -- -- (321,196)
------------ ------------ ------------ ------------
Total stockholders' equity 6,165,877 124,236 (124,236) 6,165,877
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,840,994 $ 228,569 $ 123,764 $ 12,193,327
============ ============ ============ ============
See accompanying notes to the unaudtited pro forma combined condensed financial information.
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NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED BALANCE SHEET
JUNE 30, 2004
The following unaudited pro forma adjustments relate to the acquisition as if it
had occurred on June 30, 2004. The pro forma adjustments are based on
preliminary estimates that may change as additional information is obtained.
1. PURCHASE PRICE ALLOCATION
The following table represents the preliminary allocation of the purchase
price paid for Mergence based on the estimated fair values of the
acquired assets and assumed liabilities of Mergence as of June 30, 2004.
The actual fair values will be determined as a more detailed analysis is
completed and are, therefore, subject to change.
Net tangible assets $ 124,236
Goodwill 1,673,764
Deferred tax liabilities, net (148,000)
Intangible assets:
Existing technology 520,000
Patents 140,000
Customer list 130,000
Non-compete agreements 100,000
Trademark 60,000
------------
Total purchase price $ 2,600,000
============
The allocation of the purchase price was based on a preliminary
evaluation of assets acquired and liabilities assumed. The valuation of
the intangible assets is based in part on assistance from an independent
valuation firm. The valuation method used to determine the intangible
asset values was the income approach. The income approach presumes that
the value of an asset can be estimated by the net economic benefit (i.e.
cash flows) to be received over the life of the asset, discounted to
present value. The discounting process uses a rate of return that
accounts for both the time value of money and investment risk factors.
The intangible asset for existing technology is for two technologies
developed and owned by Mergence. Datawatch has estimated the life of
these products as three and six years, respectively, The patents have an
estimated life of twenty years, which represents the legal life, and the
Company has estimated the lives of the customer list at four years and
non-compete agreements at five years. The existing technology, patent,
customer list, and non-complete agreement fair values will be amortized
over the estimated life, unless, in the future it is determined that the
assets are impaired. Datawatch has determined that the trademark
intangible asset has an indefinite life and is not being amortized.
The acquisition of Mergence results in the recording of deferred tax
assets and deferred liabilities with the result being a net deferred tax
liability of approximately $148,000. This net deferred tax liability is
included in the purchase price allocation and has the effect of
increasing the goodwill in Mergence and is included as an adjustment in
the Pro Forma Combined Condensed Balance Sheet as of June 30, 2004. The
Pro Forma Combined Condensed Statement of Operations for the year ended
September 30, 2003 does not
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include an adjustment for a non-recurring tax benefit of $148,000 for the
recognition of a reduction in the valuation allowance as a result of
realizing the benefit of certain of the Company's deferred tax assets
resulting directly from the net deferred tax liability related to the
Mergence acquisition. Such non-recurring benefit will be included in the
income of Datawatch for the year ended September 30, 2004.
2. AMORTIZING AND NON-AMORTIZING INTANGIBLE ASSETS
Amortizing intangible assets include the following as of June 30, 2004:
Datawatch Mergence
---------- ----------
Capitalized software development $ 423,331 $ --
Existing technology -- 520,000
Patents -- 140,000
Customer list -- 130,000
Non-competes -- 100,000
---------- ----------
Total amortizing intangible assets $ 423,331 $ 890,000
========== ==========
The non-amortizing intangible assets, determined to have an indefinite
life, are as follows as of June 30, 2004:
Datawatch Mergence
---------- ----------
Trademarks $ 285,152 $ 60,000
========== ==========
3. PRO FORMA ADJUSTMENTS
(1) Represents the historical financial position of Datawatch as of June
30, 2004.
(2) Represents the historical financial position of Mergence as of June
30, 2004.
(3) To record purchase price of $2,500,000 paid and $100,000 of
estimated expenses.
(4) To record intangible assets related to the acquisition.
(5) To record goodwill related to the acquisition.
(6) To record net deferred tax liabilities resulting from the
acquisition.
(7) To eliminate the historical stockholders' equity balances of
Mergence.
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Datawatch Corporation
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2004
The following unaudited pro forma combined condensed statement of operations
presents the historical statements of operations of Datawatch Corporation and
Mergence Technologies Corporation as if the Companies had been combined on
October 1, 2002
- --------------------------------------------------------------------------------
Pro Forma
Adjustments
for Pro Forma
Datawatch(8) Mergence(9) Acquisition Combined
------------ ------------ ------------ ------------
REVENUE
Software licenses $ 9,360,815 $ 200,907 $ -- $ 9,561,722
Maintenance and services 4,950,230 618,614 -- 5,568,844
------------ ------------ ------------ ------------
Total revenue 14,311,045 819,521 -- 15,130,566
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of software licenses 1,981,146 -- 127,125 (10) 2,108,271
Cost of maintenance and services 1,953,977 278,710 -- 2,232,687
Sales and marketing 5,515,346 144,057 -- 5,659,403
Engineering and product development 932,187 360,649 -- 1,292,836
General and administrative 3,088,095 102,427 -- 3,190,522
Restructuring and centralization costs -- -- -- --
------------ ------------ ------------ ------------
Total costs and expenses 13,470,751 885,843 127,125 14,483,719
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 840,294 (66,322) (127,125) 646,847
INTEREST EXPENSE (187) -- -- (187)
INTEREST INCOME AND OTHER 36,110 -- -- 36,110
FOREIGN CURRENCY TRANSACTION --
LOSSES (34,629) -- -- (34,629)
------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 841,588 (66,322) (127,125) 648,141
PROVISION FOR INCOME TAXES (22,850) -- -- (22,850)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 818,738 $ (66,322) $ (127,125) $ 625,291
============ ============ ============ ============
NET INCOME PER SHARE - Basic $ 0.16 $ 0.12
============ ============
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING - Basic 5,256,353 5,256,353
============ ============
NET INCOME PER SHARE - Diluted $ 0.14 $ 0.11
============ ============
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING - Diluted 5,758,009 5,758,009
============ ============
See accompanying notes to the unaudited pro forma combined condensed financial information.
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NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 2004
The following unaudited pro forma adjustments relate to the acquisition as if it
had occurred on October 1, 2003. The pro forma adjustments are based on
preliminary estimates that may change as additional information is obtained.
1. PRO FORMA ADJUSTMENTS
(8) Represents the historical statement of operations of Datawatch for
the nine months ended June 30, 2004.
(9) Represents the historical operating results of Mergence for the nine
months ended June 30, 2004 by combining the statements of operations
for the six months ended June 30, 2004 and the three months ended
December 31, 2003. The statement of operations for Mergence for the
three months ended December 31, 2003 has been established using the
records and financial statements for the year ended December 31,
2003.
(10) To record the amortization of amortizing intangible assets resulting
from the acquisition on a straight-line basis. The amounts amortized
reflect the amortization of two intangible assets for existing
technology with estimated lives of three and six years,
respectively, patents with estimated lives of twenty years, a
customer list with an estimated life of four years, and non-compete
agreements with estimated lives of five years.
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Datawatch Corporation
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2003
The following unaudited pro forma combined condensed statement of operations
presents the historical statements of operations of Datawatch Corporation and
Mergence Technologies Corporation as if the Companies had been combined on
October 1, 2002
- --------------------------------------------------------------------------------
Pro Forma
Datawatch Mergence Adjustments
Year ended Year ended for Pro Forma
9/30/2003 (11) 12/31/2003 (12) Acquisition Combined
------------ ------------ ------------ ------------
REVENUE
Software licenses $ 12,209,857 $ 127,997 $ -- $ 12,337,854
Maintenance and services 5,502,349 926,243 -- 6,428,592
------------ ------------ ------------ ------------
Total revenue 17,712,206 1,054,240 -- 18,766,446
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of software licenses 2,563,400 -- 169,500 (13) 2,732,900
Cost of maintenance and services 2,368,556 354,288 -- 2,722,844
Sales and marketing 6,128,640 145,499 -- 6,274,139
Engineering and product development 1,507,223 435,943 -- 1,943,166
General and administrative 4,136,740 88,948 -- 4,225,688
Restructuring and centralization costs 181,459 -- -- 181,459
------------ ------------ ------------ ------------
Total costs and expenses 16,886,018 1,024,678 169,500 18,080,196
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 826,188 29,562 (169,500) 686,250
INTEREST EXPENSE (7,243) (920) -- (8,163)
INTEREST INCOME AND OTHER 40,568 -- -- 40,568
FOREIGN CURRENCY TRANSACTION --
LOSSES (7,468) -- -- (7,468)
------------ ------------ ------------ ------------
NET INCOME BEFORE PROVISION FOR
INCOME TAXES 852,045 28,642 (169,500) 711,187
PROVISION FOR INCOME TAXES (5,500) -- -- (5,500)
------------ ------------ ------------ ------------
NET INCOME $ 846,545 $ 28,642 $ (169,500) $ 705,687
============ ============ ============ ============
NET INCOME PER SHARE - Basic $ 0.16 $ 0.14
============ ============
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING - Basic 5,196,824 5,196,824
============ ============
NET INCOME PER SHARE - Diluted $ 0.16 $ 0.13
============ ============
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING - Diluted 5,444,692 5,444,692
============ ============
See accompanying notes to the unaudited pro forma combined condensed financial information.
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NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2003
The following unaudited pro forma adjustments relate to the acquisition as if it
had occurred on October 1, 2002. The pro forma adjustments are based on
preliminary estimates that may change as additional information is obtained. The
pro forma adjustments for the year ended September 30, 2003 do not include a
non-recurring tax benefit of $148,000 for the recognition of a reduction in the
valuation allowance as a result of realizing the benefit of certain of the
Company's deferred tax assets resulting directly from the Mergence acquisition.
Such non-recurring benefit will be included in the income of Datawatch for the
year ended September 30, 2004.
1. PRO FORMA ADJUSTMENTS
(11) Represents the historical statement of operations of Datawatch for
the year ended September 30, 2003.
(12) Represents the historical statement of operations of Mergence for
the year ended December 31, 2003. The financial statements of
Mergence have historically been prepared on a calendar year basis
and recasting financial results based on a year ended September 30,
2003 was determined to be impractical. The effects of any
intervening events would not materially affect the financial
position or operating results presented for the year ended December
31, 2003 from those for the year ended September 30, 2003.
(13) To record the amortization of amortizing intangible assets resulting
from the acquisition on a straight-line basis. The amounts amortized
reflect the amortization of two intangible assets for existing
technology with estimated lives of three and six years,
respectively, patents with estimated lives of twenty years, a
customer list with an estimated life of four years, and non-compete
agreements with estimated lives of five years.
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