================================================================================
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, 2002
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: 000-19960
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, 2002
----- -----------------------------
Common Stock $0.01 par value 2,587,605
================================================================================
DATAWATCH CORPORATION AND SUBSIDIARIES
--------------------------------------
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Unaudited Financial Statements Page #
------
a) Consolidated Condensed Balance Sheets:
June 30, 2002 and September 30, 2001 3
b) Consolidated Condensed Statements of Operations:
Three and Nine Months Ended June 30, 2002 and 2001 4
c) Consolidated Condensed Statements of Cash Flows:
Nine Months Ended June 30, 2002 and 2001 5
d) Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings *
Item 2. Changes in Securities and Use of Proceeds 21
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 21
SIGNATURES 22
* 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,
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,497,058 $ 1,568,691
Accounts receivable, net 3,657,020 4,255,809
Inventories 180,307 230,878
Prepaid expenses 754,939 853,332
------------ ------------
Total current assets 7,089,324 6,908,710
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment 3,421,296 3,516,765
Less accumulated depreciation and amortization (2,625,387) (2,491,996)
------------ ------------
Net property and equipment 795,909 1,024,769
------------ ------------
OTHER ASSETS 1,368,427 1,490,505
------------ ------------
TOTAL ASSETS $ 9,253,660 $ 9,423,984
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES:
Accounts payable $ 1,142,039 $ 1,556,286
Accrued expenses 1,937,399 1,965,911
Borrowings under credit lines -- 635,000
Deferred revenue 2,321,501 2,155,377
------------ ------------
Total current liabilities 5,400,939 6,312,574
------------ ------------
ACCRUED SEVERANCE, less current portion 18,469 126,121
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 25,876 25,478
Additional paid-in capital 21,609,555 21,495,497
Accumulated deficit (17,124,954) (17,782,258)
Accumulated other comprehensive loss (535,837) (613,040)
------------ ------------
3,974,640 3,125,677
Less treasury stock - at cost (140,388) (140,388)
------------ ------------
Total shareholders' equity 3,834,252 2,985,289
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 9,253,660 $ 9,423,984
============ ============
See accompanying 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 JUNE 30, NINE MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES:
License $ 3,705,246 $ 2,888,212 $ 10,406,307 $ 9,735,957
Services 1,459,961 1,395,269 4,210,198 4,199,401
------------ ------------ ------------ ------------
Net Sales 5,165,207 4,283,481 14,616,505 13,935,358
COSTS AND EXPENSES:
Cost of sales 757,212 821,933 2,394,772 2,359,495
Engineering & product development 310,822 536,420 972,136 1,479,521
Selling, general & administrative 3,788,112 4,340,646 10,439,468 13,117,368
Restructuring -- -- 87,651 --
------------ ------------ ------------ ------------
Total Costs and Expenses 4,856,146 5,698,999 13,894,027 16,956,384
INCOME (LOSS) FROM OPERATIONS 309,061 (1,415,518) 722,478 (3,021,026)
INTEREST EXPENSE (24,584) (49,126) (98,359) (101,465)
OTHER INCOME, primarily interest 4,351 8,917 15,219 33,171
FOREIGN CURRENCY GAIN (LOSS) 5,878 (2,616) 870 1,714
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS $ 294,706 $ (1,458,343) $ 640,208 $ (3,087,606)
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from Guildsoft Operations -- (43,490) -- (103,674)
Gain on sale of Guildsoft -- -- 17,096 --
------------ ------------ ------------ ------------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS -- (43,490) 17,096 (103,674)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 294,706 $ (1,501,833) $ 657,304 $ (3,191,280)
============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE-
Basic & diluted:
Continuing Operations-Basic $ .11 $ (.58) $ .25 $ (1.31)
------------ ------------ ------------ ------------
Continuing Operations-Diluted $ .11 $ (.58) $ .24 $ (1.31)
------------ ------------ ------------ ------------
Discontinued Operations $ .00 $ (.02) $ .01 $ (.04)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE-Basic $ .11 $ (.60) $ .26 $ (1.35)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE-Diluted $ .11 $ (.60) $ .25 $ (1.35)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 2,571,868 2,518,739 2,558,225 2,355,229
ADJUSTMENT FOR DILUTIVE POTENTIAL
COMMON STOCK 112,341 -- 112,341 --
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Diluted 2,684,209 2,518,739 2,670,566 2,355,229
============ ============ ============ ============
See accompanying 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,
------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 657,304 $ (3,191,280)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 689,915 718,920
Gain on sale of Guildsoft (17,096) --
Loss on disposition of equipment 848 14,448
Stock-based compensation 37,500 --
Changes in current assets and liabilities, net of
acquisitions:
Accounts receivable 738,175 2,797,359
Inventories 52,904 120,949
Prepaid expenses 131,704 (247,607)
Accounts payable and accrued expenses (494,893) (218,301)
Deferred revenue 115,176 (7,418)
------------ ------------
Net cash provided by (used in) operating activities 1,911,537 (12,930)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and fixtures (94,748) (435,858)
Proceeds from sale of equipment - net 191 19,393
Proceeds from sale of short-term investments -- 348,121
Proceeds from sale of Guildsoft 20,509 --
Capitalized software development costs (174,042) (576,219)
Other assets 8,268 41,416
------------ ------------
Net cash used in investing activities (239,822) (603,147)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 1,183,438
Principal payments on long-term obligations (107,652) (311)
Borrowings (Payments) under credit lines, net (635,000) (325,000)
------------ ------------
Net cash provided by (used in) financing activities (742,652) 858,127
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (696) 16,245
NET INCREASE IN CASH AND EQUIVALENTS 928,367 258,295
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,568,691 1,695,832
------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 2,497,058 $ 1,954,127
============ ============
See accompanying 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 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 Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("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 FASB issued 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.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. SFAS No. 146 nullifies EITF No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity," which required a liability be recognized at the commitment date
to an exit plan. The Company is required to adopt the provisions of SFAS No. 146
effective for exit or disposal activities initiated after December 31, 2002. The
effect of adopting this statement is being evaluated.
6
Item 1. Financial Statements (continued)
--------------------
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 20% and 13% of net sales for the three months ended
June 30, 2002 and June 30, 2001, respectively, and 18% and 14% of the net sales
for the nine months ended June 30, 2002 and June 30, 2001, respectively. This
same customer accounted for 24% and 21% of outstanding trade receivables as of
June 30, 2002 and September 30, 2001, respectively. Other than this customer, no
other customer constitutes a significant portion (more than 10%) of sales or
accounts receivable. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. Allowances are provided for
anticipated doubtful accounts and sales returns
4. Inventories: Inventories consisted of the following at June 30, 2002 and
September 30, 2001:
JUNE 30, SEPTEMBER 30,
2002 2001
---------- ----------
Materials $ 135,810 $ 222,976
Finished goods 44,497 7,902
---------- ----------
TOTAL $ 180,307 $ 230,878
========== ==========
5. Comprehensive Income: The following table sets forth the reconciliation of
net income (loss) to comprehensive income (loss):
THREE MONTHS ENDED JUNE 30, NINE MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income (loss) $ 294,706 $ (1,501,833) $ 657,304 $ (3,191,280)
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustments 96,380 (96,211) 77,203 (87,235)
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 391,086 $ (1,598,044) $ 734,507 $ (3,278,515)
============ ============ ============ ============
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 income (loss) per common share is
computed by dividing net loss by the weighted average number of common shares
outstanding during the period. Diluted net income (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,
2,349 and 16,416 potential shares were excluded from the calculation,
respectively, 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.
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
7
Item 1. Financial Statements (continued)
--------------------
7. Line of Credit (continued)
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.
On May 3, 2002, the Company issued 24,498 shares of it common stock to the bank
pursuant to the cashless exercise of this warrant and another existing Warrant
to Purchase Stock dated January 17, 2001. As a result of this cashless exercise
using a conversion right allowed under the terms of both Warrants to Purchase
Stock, the bank has no further rights to acquire the Company's common stock
under these warrants. 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 June 30, 2002, the Company had no outstanding borrowings
under its bank lines of credit with approximately $880,000 in 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.
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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Monarch and Monarch|ES 74% 68% 72% 69%
Q|Service Management 26 32 28 31
-------- -------- -------- --------
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 6/30/02 $ 3,410,803 $ 2,059,424 $ (305,020) $ 5,165,207
Three months ended 6/30/01 2,582,419 1,920,739 (219,677) 4,283,481
Nine months ended 6/30/02 $ 9,429,910 $ 6,050,688 $ (864,093) $ 14,616,505
Nine months ended 6/30/01 8,382,922 6,299,229 (746,793) 13,935,358
LONG-LIVED ASSETS Domestic Europe Eliminations Total
----------------- ------------ ------------ ------------ ------------
At June 30, 2002 $ 1,654,863 $ 498,223 $ -- $ 2,153,086
At September 30, 2001 1,943,505 559,769 -- 2,503,274
Export sales aggregated approximately $1,102,000 and $894,000,
respectively, for the three months ended June 30, 2002 and June 30, 2001, and
$3,270,000 and $3,470,000, respectively, for the nine months ended June 30, 2002
and June 30, 2001.
8
Item 1. Financial Statements (continued)
--------------------
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. For the three months and nine months ended June 30,
2001, Guildsoft Limited had net sales of $821,536 and $2,773,047, respectively,
and a loss before taxes of $43,490 and $103,674, respectively. These losses are
shown on the accompanying consolidated condensed statements of operations for
those periods 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 nine months ended June 30, 2002.
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 June 30, 2002, the accrual related to this restructuring totaled $167,000
(reflecting cash payments of approximately $219,000 since September 30, 2001) of
which the long-term portion is $18,000. The charges are expected to be fully
paid in January 2005.
During the second quarter of fiscal 2002, there was an additional
reorganization undertaken to further improve efficiencies and reduce costs,
which resulted in an additional restructuring charge of approximately $88,000
for severance benefits and related costs for 4 terminated employees. Of these
charges, $75,000 was paid during the second and third quarters and $13,000
accrued as of June 30, 2002. The charges for this restructuring are expected to
be fully paid in July 2002.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
GENERAL
Datawatch Corporation (the "Company" or "Datawatch") is engaged in the
design, development, manufacture, marketing, and support of business computer
software primarily for the Windows-based market. Its products address the
enterprise reporting, business intelligence, data replication and service
management 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 service management and information technology support software
package with integrated change management features, business process automation
tools and a 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 June 30, 2002, $105,000 was accrued
for the returns reserve and approximately $16,000 in returns were applied
against the reserve. This compares to $150,000 accrued for the returns reserve
and approximately $82,000 in returns applied against the returns reserve for the
quarter ended June
10
30, 2001. During the nine months ended June 30, 2002, $205,000 was accrued for
the returns reserve and approximately $138,000 in returns were applied against
the reserve. This compares to $250,000 accrued for the returns reserve and
approximately $350,000 in returns applied against the returns reserve for the
nine months ended June 30, 2001. At June 30, 2002, the returns reserve was
approximately $312,000, with 63% related to specific accounts, as compared to
approximately $246,000, with 62% related to specific accounts, at September 30,
2001.
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 June 30, 2002, the Company did not
capitalize any software development costs as compared to capitalized software
development costs of approximately $62,000 for the quarter ended June 30, 2001.
For the three months ended June 30, 2002 and June 30 2001, the Company
capitalized approximately $47,000 and $70,000, 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 both the three months ended June 30,
2002 and 2001, amortization of these costs was approximately $90,000. The
unamortized balance of capitalized software, including purchased software, is
approximately $963,000 and $1,085,000 as of June 30, 2002 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 June 30, 2002 and September 30, 2001, the accumulated foreign
currency translation loss totaled approximately $536,000 and $613,000,
respectively. The foreign currency translation gain for the quarter ended June
30, 2002 was approximately $96,000 compared to a loss of approximately $96,000
for the quarter ended June 30, 2001. Currently the Company does not engage in
foreign currency hedging activities.
RESULTS OF OPERATIONS
Financial information for the three months ended June 30, 2001 and the nine
months ended June 30, 2001 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 June 30, 2002 and 2001.
- ------------------------------------------
Net sales for the three months ended June 30, 2002 totaled $5,165,000 which
represents an increase of $882,000 or approximately 21% from net sales of
$4,283,000 for the three months ended June 30, 2001. Revenue from the sale of
licenses was approximately $3,705,000 and $2,888,000 in the quarters ended June
30, 2002 and June 30, 2001, respectively. Revenue from the sale of services was
approximately $1,460,000 and $1,395,000 for the quarters ended June 30, 2002 and
June 30, 2001, respectively. For the three months ended June 30, 2002, revenue
11
from the sale of licenses accounted for 72% of total sales and revenue from the
sale of services accounted for 28% of total sales, as compared to 67% from
license sales and 33% from services sales for the three months ended June 30,
2001. For the third quarter of fiscal 2002, Monarch and Monarch|ES accounted for
approximately 74% of net sales (as compared to 68% of net sales for the third
quarter of fiscal 2001) and Q|SM accounted for approximately 26% of net sales
(as compared to 32% of net sales for the third quarter of fiscal 2001). Monarch
family sales increased by $908,000 or 31% and Q|SM family sales decreased by
$26,000 or 2% in the three months ended June 30, 2002 as compared to the three
months ended June 30, 2001. Datawatch attributes the increase in Monarch family
sales to strong sales of the latest version of the Monarch desktop and server
products and the decrease in the Q|SM family sales to a reduction in corporate
spending on high ticket software solutions due to an uncertain worldwide economy
and reaction to the events of September 11, 2001.
Cost of sales for the three months ended June 30, 2002 was $757,000 or
approximately 15% of net sales as compared to cost of sales of $822,000 or
approximately 19% of net sales for the three months ended June 30, 2001. The
year-over-year decrease in cost of sales is attributable to a decrease in the
cost of sales for Q|SM, which is primarily the result of decreased sales of
third party products, which have low margins, as part of Q|SM solutions, and
reduced costs from amortization of acquired software and capitalized development
for the current version of Q|SM as compared to the previous version. This
decrease was partially offset by increases in cost of sales for Monarch desktop
and server products due to increased sales of these products, and for the latest
version of Monarch|ES, which has higher costs from royalties and amortization of
acquired software and development than previous versions. Cost of sales for Q|SM
was $23,000 or 2% of Q|SM sales for the three months ended June 30, 2002 as
compared to $163,000 or 12% of Q|SM sales for the three months ended June 30,
2001. Cost of sales for Monarch desktop and server products was $486,000 or 15%
of Monarch desktop and server sales for the three months ended June 30, 2002 as
compared to $441,000 or 19% of Monarch desktop and server sales for the three
months ended June 30, 2001. Cost of sales for Monarch|ES was $168,000 or 22% of
Monarch|ES sales for the three months ended June 30, 2002 as compared to
$139,000 or 20% of Monarch|ES sales for the three months ended June 30, 2001.
Engineering and product development expenses were $311,000 for the three
months ended June 30, 2002, a decrease of $225,000 or approximately 42% from
$536,000 for the three months ended June 30, 2001. This decrease is primarily
attributable to reduced expenses resulting from the restructurings which took
place in the fourth quarter of fiscal 2001 and the second quarter of fiscal
2002, and reduced expenses for maintenance of the older versions of the
Company's help desk and asset management products by external developers. The
realized cost savings from the reduction in employee compensation and benefits
directly related to the Company's restructurings was $124,000, or 55% of the
decrease, and the reduction in expenses for the maintenance of the help desk and
asset management products totaled $94,000, or 42% of the decrease.
Selling, general and administrative expenses were $3,788,000 for the three
months ended June 30, 2002, a decrease of $553,000 or approximately 13% from
$4,341,000 for the three months ended June 30, 2001. 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 were fully realized in the first quarter of fiscal 2002.
The approximate distribution of the realized cost savings when comparing the
quarters ended June 30, 2002 and June 30, 2001 is as follows:
12
o $178,000 or 32% from savings in professional services expenses
provided by non-related companies
o $164,000 or 30% from savings in marketing expenses primarily from
reduced expenses for trade shows
o $146,000 or 26% from savings in employee compensation and benefits
o $38,000 or 7% from savings in travel and entertainment expenses
o $13,000 or 2% from savings in facilities rent expenses
o $5,000 or 1% from savings in equipment and software expenses
o $9,000 or 2% from savings in all other expense types
Income from continuing operations for the three months ended June 30, 2002
was approximately $295,000, which compares to a loss from continuing operations
of approximately $1,458,000 for the three months ended June 30, 2001. 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 June 30, 2002 was $295,000, which compares to a net loss of
$1,502,000 for the three months ended June 30, 2001.
Nine months Ended June 30, 2002 and 2001.
- -----------------------------------------
Net sales for the nine months ended June 30, 2002 totaled $14,617,000 which
represents an increase of $682,000 or approximately 5% from net sales of
$13,935,000 for the nine months ended June 30, 2001. Revenue from the sale of
licenses was approximately $10,407,000 and $9,736,000 in the nine months ended
June 30, 2002 and June 30, 2001, respectively. Revenue from the sale of services
was approximately $4,210,000 and $4,199,000 for the nine months ended June 30,
2002 and June 30, 2001, respectively. For the nine months ended June 30, 2002,
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, as compared to 70%
from license sales and 30% from services sales for the nine months ended June
30, 2001. For the first nine months of fiscal 2002, Monarch and Monarch|ES
accounted for approximately 72% of net sales (as compared to 69% of net sales
for the first nine months of fiscal 2001) and Q|SM accounted for approximately
28% of net sales (as compared to 31% of net sales for the first nine months of
fiscal 2001). Monarch family sales increased by $971,000 or 10% and Q|SM family
sales decreased by $289,000 or 7% in the nine months ended June 30, 2002 as
compared to the nine months ended June 30, 2001. Datawatch attributes the
increase in Monarch family sales to strong sales of the latest version of
Monarch desktop and server products and the decrease in the Q|SM family sales to
a reduction in corporate spending on high ticket software solutions due to an
uncertain worldwide economy and reaction to the events of September 11, 2001.
Cost of sales for the nine months ended June 30, 2002 was $2,395,000 or
approximately 16% of net sales as compared to cost of sales of $2,359,000 or
approximately 17% of net sales for the nine months ended June 30, 2001. 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.
This increase was partially offset by a decrease in cost of sales for Q|SM,
which is the result of reduced costs from amortization of acquired software and
capitalized development for the current version as compared to the previous
version and decreased sales of third party products, which have low margins, as
part of Q|SM solutions. Cost of sales for Monarch|ES was $595,000 or 27% of
Monarch|ES sales for the nine months ended June 30, 2002 as compared to $320,000
or 16% of Monarch|ES sales for the nine months ended June 30, 2001. Cost of
sales for Q|SM was $149,000 or 4% of Q|SM sales for the nine months ended June
30, 2002 as compared to $389,000 or 9% of Q|SM sales for the nine months ended
June 30, 2001.
13
Engineering and product development expenses were $972,000 for the nine
months ended June 30, 2002, a decrease of $507,000 or approximately 34% from
$1,479,000 for the nine months ended June 30, 2001. This decrease is primarily
attributable to reduced expenses for maintenance of the older versions of the
Company's help desk and asset management products by external developers and
reduced expenses resulting from the restructurings which took place in the
fourth quarter of fiscal 2001 and the second quarter of fiscal 2002. The
realized cost savings from the reduction in expenses for the maintenance of the
help desk and asset management products was $295,000, or 58% of the decrease,
and $205,000, or 40% of the decrease, was from a reduction in employee
compensation and benefits directly related to the restructurings.
Selling, general and administrative expenses were $10,439,000 for the nine
months ended June 30, 2002, a decrease of $2,678,000 or approximately 20% from
$13,117,000 for the nine months ended June 30, 2001. 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 were fully realized in the first quarter of fiscal 2002.
The approximate distribution of the realized cost savings when comparing the
nine months ended June 30, 2002 to the nine months ended June 30, 2001 is as
follows:
o $999,000 or 37% from savings in employee compensation and benefits
o $699,000 or 26% from savings in professional services expenses
provided by non-related companies
o $633,000 or 24% from savings in marketing expenses primarily from
reduced expenses for direct mail and trade shows
o $130,000 or 5% from savings in travel and entertainment expenses
o $81,000 or 3% from savings in facilities rent expenses
o $58,000 or 2% from savings in equipment and software expenses
o $78,000 or 3% from savings in all other expense types
Income from continuing operations for the nine months ended June 30, 2002
was approximately $640,000, which compares to a loss from continuing operations
of approximately $3,088,000 for the nine months ended June 30, 2001. 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 nine months
ended June 30, 2002 was $657,000, which compares to a net loss of $3,191,000 for
the nine months ended June 30, 2001.
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 nine
months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by approximately $1,092,000 during the nine
months ended June 30, 2002 primarily as a result of profitable operations. The
net cash provided by operating activities totaled $1,912,000 for the nine months
ended June 30, 2002 (as compared to $13,000 used in operating activities for the
nine months ended June 30, 2001). The primary sources of cash during the first
nine months of fiscal 2002 were profitable operations, collection of accounts
receivable and
14
collections from sales that have deferred revenue, offset by accounts payable
and accrued expenses.
Cash used in investing activities (primarily in capitalized software) was
$240,000 for the nine months ended June 30, 2002 as compared to $603,000 for the
nine months ended June 30, 2001.
Cash used in financing activities was $743,000 for the nine months ended
June 30, 2002 as a result of a $635,000 reduction in the Company's borrowings
under its credit lines and a reduction of long-term obligations of $108,000. In
the nine months ended June 30, 2001, $858,000 was provided by financing
activities; this amount was primarily attributable to the Company's issuance of
1,875,000 shares of common stock in a private placement to investors for an
aggregate of $1,162,500.
Management believes that the currently anticipated capital requirements of
the Company will be satisfied through at least March 31, 2003 and the
foreseeable future 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 June 30, 2002, the
Company had no outstanding borrowings under these lines with approximately
$880,000 in 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.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. SFAS No. 146 nullifies EITF No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
and Activity," which required a liability be recognized at the commitment date
to an exit plan. The Company is required to adopt the provisions of SFAS No. 146
effective for exit or disposal activities initiated after December 31, 2002. The
effect of adopting this statement is being evaluated.
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
15
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.
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 nine months ended June 30, 2002, Monarch and Monarch|ES products
and Q|Service Management products accounted for approximately 72% and 28%,
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
16
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
In the nine months ended June 30, 2002, 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 agreements, 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
17
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 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.
18
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.
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.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
At June 30, 2002, 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 working capital line of credit agreements. The lines, which currently
bear an interest rate of prime plus 2% (6.75% at June 30, 2002), 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,
2002. As of June 30, 2002, the Company had no 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.
20
PART II.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
On May 3, 2002, the Company issued twenty-four thousand, four hundred
ninety-eight (24,498) shares of its common stock to Silicon Valley Bancshares
pursuant to the cashless exercise of two existing Warrants to Purchase Stock,
respectively dated January 17, 2001 and October 30, 2001. This sale was exempt
from the registration requirements of the Securities Act of 1933 (the "Act")
pursuant to Section 4(2) of the rules promulgated by the SEC pursuant to the
Securities Act as the transaction was completed as a private placement to only
one investor and the Company did not make any general solicitation relating to
the issuance of these shares.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
10.1 Executive Agreement dated April 25, 2002 by and between
Datawatch Corporation and Alan R. MacDougall (filed
herewith).
10.2 Executive Agreement dated April 25, 2002 by and between
Datawatch Corporation and John Kitchen (filed herewith).
10.3 Professional Services Agreement dated May 16, 2002 by and
between Vested Development Corporation and Datawatch
Corporation (filed herewith).
99.1 CEO Certification Pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
99.2 CFO Certification Pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
* The Company has the originally signed certificate and will
provide it to the Securities and Exchange Commission upon
request.
B. Reports on Form 8-K
No Current Report on Form 8-K was filed during the quarterly period
ended June 30, 2002.
21
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, 2002.
DATAWATCH CORPORATION
/s/ Alan R. MacDougall
----------------------
Alan R. MacDougall
Vice President of Finance and
Chief Financial Officer
(Principal Financial Officer)
22