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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, 2004
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
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(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
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(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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [_] No [X]
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 January 31, 2005
----- -------------------------------
Common Stock $.01 par value 5,303,344
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DATAWATCH CORPORATION
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QUARTERLY REPORT ON FORM 10-Q
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FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2004
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements Page #
a) Consolidated Condensed Balance Sheets:
December 31, 2004 (unaudited) and September 30, 2004 ............. 3
b) Consolidated Condensed Statements of Operations:
Three Months Ended December 31, 2004 and 2003 (unaudited) ........ 4
c) Consolidated Condensed Statements of Cash Flows:
Three months Ended December 31, 2004 and 2003 (unaudited) ........ 5
d) Notes to Consolidated Condensed Financial Statements (unaudited).. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 27
Item 4. Internal Controls and Procedures ................................. 27
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings ................................................ 29
Item 6. Exhibits ......................................................... 29
SIGNATURES ................................................................ 30
2
PART I. - FINANCIAL INFORMATION
Item 1: Financial Statements
--------------------
DATAWATCH CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
2004 2004
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 3,440,944 $ 4,260,632
Accounts receivable, net 4,076,231 3,672,218
Inventories 48,287 67,955
Prepaid expenses 648,337 614,566
------------ ------------
Total current assets 8,213,799 8,615,371
------------ ------------
Property and equipment, net 421,709 433,567
Goodwill 1,630,646 1,632,646
Other intangible assets, net 1,544,105 1,650,507
Restricted cash 268,299 268,299
Other 35,043 28,404
------------ ------------
$ 12,113,601 $ 12,628,794
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 995,240 $ 1,137,539
Accrued expenses 1,717,787 2,026,830
Deferred revenue 2,929,093 2,903,123
Escrow for Mergence shareholders 126,080 125,373
------------ ------------
Total current liabilities 5,768,200 6,192,865
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COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, par value $.01- 20,000,000 shares authorized;
issued, 5,317,590 shares and 5,315,108 shares, respectively;
outstanding, 5,303,344 shares and 5,300,862 shares, respectively 53,176 53,151
Additional paid-in capital 21,831,076 21,828,621
Accumulated deficit (15,141,244) (14,987,462)
Accumulated other comprehensive loss (257,219) (317,993)
------------ ------------
6,485,789 6,576,317
Less treasury stock, at cost - 14,246 shares (140,388) (140,388)
------------ ------------
Total shareholders' equity 6,345,401 6,435,929
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$ 12,113,601 $ 12,628,794
============ ============
THE ACCOMPANYING NOTES ARE AN INTERGRAL PART OF
THESE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
3
DATAWATCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
------------------------------
2004 2003
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REVENUE:
Software licenses and subscriptions $ 3,216,938 $ 2,953,896
Maintenance and services 1,870,390 1,453,192
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Total Revenue 5,087,328 4,407,088
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COSTS AND EXPENSES:
Cost of software licenses and subscriptions 593,915 630,093
Cost of maintenance and services 915,937 611,677
Sales and marketing 2,178,400 1,538,951
Engineering and product development 549,963 279,644
General and administrative 1,029,074 1,035,901
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Total costs and expenses 5,267,289 4,096,266
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(LOSS) INCOME FROM OPERATIONS (179,961) 310,822
INTEREST EXPENSE (713) --
INTEREST INCOME AND OTHER 26,892 18,203
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (153,782) 329,025
PROVISION FOR INCOME TAXES -- 5,500
------------ ------------
NET (LOSS) INCOME $ (153,782) $ 323,525
============ ============
NET (LOSS) INCOME PER SHARE - Basic and Diluted $ (0.03) $ 0.06
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - Basic 5,301,804 5,230,846
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING - Diluted 5,301,804 5,710,836
============ ============
THE ACCOMPANYING NOTES ARE AN INTERGRAL PART OF
THESE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
4
DATAWATCH CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
------------------------------
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (153,782) $ 323,525
Adjustments to reconcile net (loss) income to cash (used in)
provided by operating activities:
Depreciation and amortization 164,347 205,053
Allowances for doubtful accounts and sales returns 18,895 9,544
Loss on disposition of equipment 21,286 --
Changes in current assets and liabilities:
Accounts receivable (349,348) 217,761
Inventories 20,437 19,718
Prepaid expenses and other (14,170) (77,018)
Accounts payable and accrued expenses (506,169) (221,777)
Deferred revenue (71,161) 126,626
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Cash (used in) provided by operating activities (869,665) 603,432
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and fixtures (54,508) (51,094)
Proceeds from sale of equipment 2,047 --
Capitalized software development costs (9,040) --
Other assets (5,180) 25,832
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Cash used in investing activities (66,681) (25,262)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 2,479 1,308
Principal payments on long-term obligations -- (2,651)
Restricted cash 707 --
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Cash provided by (used in) financing activities 3,186 (1,343)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS 113,472 145,740
------------ ------------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS (819,688) 722,567
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 4,260,632 5,070,850
------------ ------------
CASH AND EQUIVALENTS, END OF PERIOD $ 3,440,944 $ 5,793,417
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 713 $ --
============ ============
THE ACCOMPANYING NOTES ARE AN INTERGRAL PART OF
THESE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
5
DATAWATCH CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated condensed financial statements include the
accounts of Datawatch Corporation (the "Company") and its wholly owned
subsidiaries and have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and notes required by
accounting principles generally accepted in the United States of America for
complete financial statements and should be read in conjunction with the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 2004 filed with the Securities and
Exchange Commission (the "SEC"). All significant intercompany accounts and
transactions have been eliminated.
In the opinion of management, the accompanying consolidated condensed
financial statements have been prepared on the same basis as the audited
consolidated financial statements, and include all adjustments necessary for
fair presentation of the results of the interim periods presented. The operating
results for the interim periods presented are not necessarily indicative of the
results expected for the full year. Presentation of certain amounts for the
period ended December 31, 2003 and as of September 30, 2004 have been changed to
conform to the December 31, 2004 presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and judgments, which are evaluated on an on-going basis, that affect
the amounts reported in the Company's consolidated condensed financial
statements and accompanying notes. Management bases its estimates on historical
experience and on various other assumptions that it believes are reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from those
estimates and judgments. In particular, significant estimates and judgments
include those related to revenue recognition, allowance for doubtful accounts,
sales returns reserve, useful lives of property and equipment, valuation of
deferred tax assets, business combinations, and valuation of goodwill and
intangible assets.
REVENUE RECOGNITION
The Company has two types of software product offerings: Enterprise
Software and Desktop and Server Software. Enterprise Software products are
generally sold directly to end-users. The Company sells its Desktop and Server
Software products directly to end-users and through distributors and resellers.
Sales to distributors and resellers accounted for approximately 30% and 29%,
respectively, of total sales for the three months ended December 31, 2004 and
2003. Revenue from the sale of all software products is generally recognized at
the time of shipment, provided there are no uncertainties surrounding product
acceptance, the fee is fixed or determinable, collection is considered probable,
persuasive evidence of the arrangement exists and there are no significant
obligations remaining. Both types of the Company's software product offerings
are "off-the-shelf" as such term is defined by Statement of Position No. 97-2,
"SOFTWARE REVENUE RECOGNITION." The Company's products are relatively
straightforward and the software can be installed and used by customers on their
own with little or no customization required. Multi-user licenses marketed by
the Company are sold as a right to use the number of licenses and license fee
revenue is recognized upon delivery of all software required to satisfy the
number of licenses sold. Upon delivery, the licensing fee is payable without
further delivery obligations to the Company.
6
DATAWATCH CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Desktop and Server Software products are generally not sold in multiple
element arrangements. Accordingly, the price paid by the customer is considered
the vendor specific objective evidence ("VSOE") of fair value for those
products. Enterprise Software sales are generally multiple element arrangements
which include software license deliverables, professional services and
post-contract customer support. In such multiple element arrangements, the
Company applies the residual method in determining revenue to be allocated to a
software license. In applying the residual method, the Company deducts from the
sale proceeds the VSOE of fair value of the services and post-contract customer
support in determining the residual fair value of the software license. The VSOE
of fair value of the services and post-contract customer support is based on the
amounts charged for these elements when sold separately. Professional services
include implementation, integration, training and consulting services with
revenue recognized as the services are performed. These services are generally
delivered on a time and materials basis, are billed on a current basis as the
work is performed, and do not involve modification or customization of the
software or any other unusual acceptance clauses or terms. Post-contract
customer support is typically provided under a maintenance agreement which
provides technical support and rights to unspecified software maintenance
updates and bug fixes on a when-and-if available basis. Revenue from
post-contract customer support services is deferred and recognized ratably over
the contract period (generally one year).
The Company also sells its Enterprise Software using a subscription
model. At the time a customer enters into a binding agreement to purchase a
subscription, the customer is invoiced for an initial 90 day service period and
an account receivable and deferred revenue are recorded. Beginning on the date
the software is installed at the customer site and available for use by the
customer, and provided that all other criteria for revenue recognition are met,
the deferred revenue amount is recognized ratably over the period the service is
provided. The customer is then invoiced every 90 days and revenue is recognized
ratably over the period the service is provided. Subscriptions can be cancelled
by the customer at any time by providing 90 days written notice.
The Company's software products are sold under warranty against certain
defects in material and workmanship for a period of 30 to 90 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. Additionally, the Company provides its distributors with
stock-balancing rights and applies the guidance found in Statement of Financial
Accounting Standards ("SFAS") No. 48, "REVENUE RECOGNITION WHEN RIGHT OF RETURN
EXISTS." Revenue from the sale of software products to distributors and
resellers is recognized at the time of shipment providing all other criteria for
revenue recognition as stated above are met and (i) the distributor or reseller
is unconditionally obligated to pay for the products, including no contingency
as to product resale, (ii) the distributor or reseller has independent economic
substance apart from the Company, (iii) the Company is not obligated for future
performance to bring about product resale, and (iv) the amount of future returns
can be reasonably estimated. The Company's experience and history with its
distributors and resellers allows for reasonable estimates of future returns.
Among other things, estimates of potential future returns are made based on the
inventory levels at the various distributors and resellers, which the Company
monitors frequently. Once the estimates of potential future returns from all
sources are made, the Company determines if it has adequate returns reserves to
cover anticipated returns and the returns reserve is adjusted as required.
Adjustments are recorded as increases or decreases in revenue in the period of
adjustment. Actual returns have historically been within the range estimated by
management.
7
DATAWATCH CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
STOCK OPTIONS
The Company uses the intrinsic-value method of valuing its stock options
to measure compensation expense associated with grants of stock options to
employees and directors. As permitted under SFAS No. 148, "ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE," that amended SFAS No. 123
("SFAS 123"), "ACCOUNTING FOR STOCK-BASED COMPENSATION," the Company has elected
to continue to follow the intrinsic-value method in accounting for its
stock-based employee compensation arrangements as defined by Accounting
Principles Board Opinion ("APB") No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES," and related interpretations including Financial Accounting Standards
Board ("FASB") Interpretation No. 44, "ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION," an interpretation of APB No. 25. No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of the grant. Had the Company recognized
compensation for its stock options and purchase plans based on the fair value
for awards under those plans, pro forma net (loss) income and pro forma net
(loss) income per share would have been as follows:
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2004 2003
------------ ------------
(unaudited)
Net (loss) income, as reported $ (153,782) $ 323,525
Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards (67,213) (53,756)
------------ ------------
Pro forma net (loss) income $ (220,995) $ 269,769
============ ============
Net (loss) income per share:
Basic - as reported ($0.03) $0.06
Basic - pro forma ($0.04) $0.05
Diluted - as reported ($0.03) $0.06
Diluted - pro forma ($0.04) $0.05
The fair values used to compute pro forma net (loss) income and pro
forma net (loss) income per share were estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions:
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2004 2003
------------ ------------
Risk-free interest rate 3.4% 3.2%
Expected life of option grants (years) 5.0 4.0
Expected volatility of underlying stock 110.3% 119.4%
Expected dividend payment rate 0.0% 0.0%
On December 16, 2004, FASB issued a revision to SFAS No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION" titled "SHARE-BASED PAYMENT." This
revision requires that all share-based payments to employees, including grants
of employee stock options, be recognized in the financial statements based on
the grant-date fair value. The revised standard will be effective for public
companies for fiscal periods beginning after June 15, 2005. The standard offers
the Company alternative methods of adopting the standard. The Company has not
yet determined which alternative method it will use. See Note 10 for further
explanation.
8
DATAWATCH CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
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 customary and
normal credit terms. One customer, Ingram Micro Inc., individually accounted for
22% and 17% of total revenue for the three months ended December 31, 2004 and
2003, respectively. Ingram Micro Inc. accounted for 25% and 31% of outstanding
gross trade receivables as of December 31, 2004 and September 30, 2004,
respectively. The Company sells to Ingram Micro Inc. under a distribution
agreement, which automatically renews for successive one-year terms unless
terminated. 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.
GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets consist of capitalized software cost, acquired
technology, patents, customer relationships, trademarks and trade names acquired
through business combinations. The values allocated to these intangible assets
are amortized using the straight-line method over the estimated useful life of
the related asset and are recorded in cost of software license and
subscriptions. Intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable and an impairment loss is recognized when it is probable that the
estimated cash flows are less than the carrying amount of the asset.
Goodwill and certain trademarks are not subject to amortization and are
tested annually for impairment or more frequently if events and circumstances
indicate that the asset might be impaired. Goodwill is tested for impairment
using a two-step approach. The first step is to compare the fair value of the
reporting unit to its carrying amount, including goodwill. If the fair value of
the reporting unit is greater than its carrying amount, goodwill is not
considered impaired, but if the fair value of the reporting unit is less than
its carrying amount, the amount of the impairment loss, if any, must be
measured. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset's fair value.
NOTE 2. BUSINESS COMBINATIONS
MERGENCE TECHNOLOGIES CORPORATION
On August 11, 2004, the Company acquired 100% of the outstanding shares
of Mergence Technologies Corporation for an acquisition cost of $2,596,691
comprised of $2,500,000 in cash and direct costs of $96,691. The Mergence
purchase agreement also includes a provision for quarterly cash payments to the
former Mergence shareholders equal to 10% of the revenues, as defined, of
Mergence's Researcher product for a period of six years. Payment amounts will be
expensed as a cost of revenue as the Researcher product is recognized as
revenue. The Company did not expense any such payments during fiscal 2004 and as
of the three months ended December 31, 2004 as no Researcher products were
recognized as revenue from the date of acquisition through December 31, 2004.
Mergence was acquired to broaden and expand the Company's product
offerings. Mergence's results are included with those of the Company from the
date of acquisition.
9
DATAWATCH CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
The allocation of the purchase price was based on an 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 weighted-average discount rate (or rate of return) used to
determine the value of the identifiable intangible assets was 30%.
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 years and six years, respectively. The patents have an
estimated life of twenty years, which represents the legal life. The customer
list and non-compete agreements have estimated lives of four years and five
years, respectively. The fair values for the existing technology, patents,
customer list and non-compete agreements 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 has an indefinite life and
as such the trademark is not being amortized. The trademark and goodwill will be
tested for impairment annually, or on an interim basis, if an event or
circumstance indicates that it is more likely than not that an impairment loss
has been incurred. No portion of the goodwill is deductible for tax purposes.
NOTE 3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Other intangible assets, net were comprised of the following as of
December 31, 2004 (unaudited) and September 30, 2004:
DECEMBER 31, 2004 SEPTEMBER 30, 2004
-------------------------------------- --------------------------------------
WEIGHTED GROSS NET GROSS NET
IDENTIFIED AVERAGE USEFUL CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
INTANGIBLE ASSET LIFE IN YEARS AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
- ------------------------------------------------------------------------------- --------------------------------------
Capitalized software 3 $1,632,160 $ (1,263,672) $ 368,488 $1,623,120 $ (1,194,931) $ 428,189
Purchased software 5 520,000 (37,222) 482,778 520,000 (11,667) 508,333
Patents 20 140,000 (2,625) 137,375 140,000 (1,167) 138,833
Customer lists 4 130,000 (12,188) 117,812 130,000 -- 130,000
Non-compete agreements 5 100,000 (7,500) 92,500 100,000 -- 100,000
Trademarks indefinite 345,152 -- 345,152 345,152 -- 345,152
-------------------------------------- --------------------------------------
Total $2,867,312 $ (1,323,207) $1,544,105 $2,858,272 $ (1,207,765) $1,650,507
========== ============ ========== ========== ============ ==========
For the three months ended December 31, 2004 and 2003, amortization
expense related to identified intangible assets was $115,442 and $140,343,
respectively.
10
DATAWATCH CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
The estimated future amortization expense related to other intangible
assets as of December 31, 2004 was as follows:
FISCAL YEAR
- ------------------------
Remainder of fiscal 2005 $ 343,657
2006 317,675
2007 163,557
2008 118,771
2009 87,833
2010 70,335
Thereafter 97,125
----------
Total $1,198,953
==========
The carrying amount of goodwill and certain trademarks that have been
determined to have indefinite lives as of December 31, 2004 was $1,630,646 and
$345,152, respectively.
NOTE 4. INVENTORIES
Inventories consisted of the following at December 31, 2004 and
September 30, 2004:
DECEMBER 31, SEPTEMBER 30,
2004 2004
---------- ----------
(unaudited)
Raw materials $ 28,757 $ 46,931
Finished goods 19,530 21,024
---------- ----------
Total $ 48,287 $ 67,955
========== ==========
NOTE 5. DEFERRED REVENUE
Deferred revenue consisted of the following at December 31, 2004 and
September 30, 2004:
DECEMBER 31, SEPTEMBER 30,
2004 2004
---------- ----------
(unaudited)
Maintenance $2,373,782 $2,440,719
Other 555,311 462,404
---------- ----------
Total $2,929,093 $2,903,123
========== ==========
11
DATAWATCH CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Maintenance consists of the unearned portion of post-contract customer
support services provided by the Company to customers who purchase maintenance
agreements for the Company's products. Maintenance revenues are recognized on a
straight-line basis over the term of the maintenance period, generally 12
months.
Other consists of deferred license, subscription and professional
services revenue generated from arrangements that are invoiced in accordance
with the terms and conditions of the arrangement but do not meet all the
criteria of the Company's revenue recognition policies, and are, therefore,
deferred until all revenue recognition criteria are met.
NOTE 6. COMPREHENSIVE (LOSS) INCOME
The following table sets forth the reconciliation of net (loss) income
to comprehensive (loss) income:
THREE MONTHS ENDED
DECEMBER 31,
------------------------
2004 2003
---------- ----------
Net (loss) income $ (153,782) $ 323,525
Other comprehensive income:
Foreign currency translation adjustments 60,774 75,728
---------- ----------
Comprehensive (loss) income $ (93,008) $ 399,253
========== ==========
Accumulated other comprehensive (loss) income reported in the
consolidated condensed balance sheets consists only of foreign currency
translation adjustments.
NOTE 7. BASIC AND DILUTED NET (LOSS) INCOME PER SHARE
Basic net (loss) income per common share is computed by dividing net
(loss) income by the weighted-average number of common shares outstanding during
the period. Diluted net (loss) income per share reflects the impact, when
dilutive, of the exercise of options and warrants using the treasury stock
method.
Potential dilutive common stock options aggregating 603,198 and 111,578
shares for the three months ended December 31, 2004 and 2003, respectively, have
been excluded from the computation of diluted net (loss) income per share
because their inclusion would be antidilutive.
NOTE 8. COMMITMENTS AND CONTINGENCIES
In May 2004, the Company was served with a charge of discrimination
filed with the Massachusetts Commission Against Discrimination (MCAD) by a
current employee. In addition to the Company, the employee has named an
executive of the Company as well as the employee's former supervisor as
defendants. The employee alleges that her former supervisor engaged in sexually
harassing conduct. The employee accuses the executive of engaging in retaliation
upon learning of the employee's complaint. The complaint was withdrawn from the
MCAD in August 2004, with the stated intent of pursuing the claim in Superior
Court in the state of Massachusetts. To date, the Company has not been notified
of any further filing. Given the early stage and current status of the claim,
the Company is unable to predict the ultimate outcome. The Company intends to
vigorously defend the claims.
From time to time, the Company receives other claims and may be party to
other actions that arise in the normal course of business. Other than as noted
above, the Company does not believe the eventual outcome of any other pending
matters will have a material effect on the Company's consolidated financial
condition or results of operations.
12
DATAWATCH CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 9. SEGMENT INFORMATION
The Company has determined that it has only one reportable segment. The
Company's chief operating decision maker, as defined, (determined to be the
Chief Executive Officer) 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 revenue by
product lines:
THREE MONTHS ENDED
DECEMBER 31,
---------------------
2004 2003
-------- --------
Desktop and Server Software
(primarily Monarch) 56% 62%
Report Management Solutions
(including Datawatch|ES & iMergence) 15% 8%
Service Management Solutions
(including Visual|QSM & Visual|HD) 29% 30%
-------- --------
Total 100% 100%
======== ========
The Company's operations are conducted in the U.S. and internationally
(principally in the United Kingdom). The following tables present information
about the Company's geographic operations:
INTERNATIONAL
(PRINCIPALLY
DOMESTIC U.K.) ELIMINATIONS TOTAL
------------ ------------ ------------ ------------
TOTAL REVENUE
------------------------------------
Three months ended December 31, 2004 $ 3,152,071 $ 2,194,190 $ (258,933) $ 5,087,328
Three months ended December 31, 2003 $ 2,980,590 $ 1,672,829 $ (246,331) $ 4,407,088
TOTAL OPERATING (LOSS) INCOME
------------------------------------
Three months ended December 31, 2004 $ (59,410) $ (120,551) $ -- $ (179,961)
Three months ended December 31, 2003 $ 323,783 $ (12,961) $ -- $ 310,822
NON-CURRENT ASSETS
------------------------------------
At December 31, 2004 $ 3,770,303 $ 129,499 $ 3,899,802
At September 30, 2004 $ 3,896,946 $ 116,477 $ 4,013,423
13
DATAWATCH CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
The reconciliation of total non-current assets to the amounts contained
in the Company's financial statements is as follows:
DECEMBER 31, SEPTEMBER 30,
2004 2004
------------ ------------
(unaudited)
Property and equipment, net $ 421,709 $ 433,567
Capitalized software development costs, net 368,488 428,189
Acquired software, net 482,778 508,333
Patents, net 137,375 138,833
Goodwill 1,630,646 1,632,646
Restricted cash 268,299 268,299
Trademarks 345,152 345,152
Customer list, net 117,812 130,000
Non -compete agreements, net 92,500 100,000
Deposits * 35,043 28,404
------------ ------------
Total long-lived assets $ 3,899,802 $ 4,013,423
============ ============
* Included in other assets in the accompanying consolidated condensed
financial statements.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
In December 16, 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT
("SFAS No. 123R"). This Statement is a revision of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, and supersedes Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related implementation
guidance. SFAS No. 123R focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
The Statement requires entities to recognize stock compensation expense for
awards of equity instruments to employees based on the grant-date fair value of
those awards (with limited exceptions). SFAS No. 123R is effective for the first
interim or annual reporting period that begins after June 15, 2005. We are
evaluating the two methods of adoption allowed by SFAS No. 123R; the
modified-prospective transition method and the modified-retrospective transition
method.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
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 content management and
reporting, business intelligence, data replication, service management and help
desk markets.
Datawatch's principal products are: Monarch, a desktop 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 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; Monarch|RMS, a
web-based report mining and analysis solution that integrates with any existing
COLD/ERM, document or content management archiving solution; Datawatch|ES, a
web-enabled business information portal, providing complete report management,
business intelligence and content management, and the ability to analyze data
within reports derived from existing reporting systems with no new programming
or report writing; Datawatch|Researcher, a .NET based content and data
aggregation solution that searches inter-related data, documents, and
communications scattered over multiple and disparate repositories, then merges
and analyzes the results into comprehensive actionable case records; Visual|QSM,
a fully internet-enabled IT support solution that incorporates workflow and
network management capabilities and provides web access to multiple databases
via a standard browser; Visual|Help Desk or Visual|HD, a web-based help desk and
call center solution operating on the IBM Lotus Domino platform; and VorteXML, a
data transformation product for the emerging XML market that easily and quickly
converts structured text output from any system into valid XML for web services
and more using any DTD or XDR schema without programming.
On August 11, 2004, Datawatch acquired 100% of the shares of Mergence
Technologies Corporation in exchange for $2.5 million in cash. The purchase
agreement also included a provision for quarterly cash payments to the former
Mergence shareholders equal to 10% of revenue, as defined, of the
Datawatch|Researcher product for a period of six years. The activities of
Mergence from August 11, 2004 are included in the Company's consolidated
financial statements. See Note 2 to the Consolidated Condensed Financial
Statements which appear elsewhere herein for more detailed financial information
on the acquisition of Mergence.
During the first quarter of fiscal 2004, the Company introduced a
subscription sales model for the sale of its enterprise products. The Company
continues to offer its enterprise products through the sale of perpetual
licenses and introduced the subscription pricing model to allow customers to
begin using the Company's products at a lower initial cost of software
acquisition. Subscriptions automatically renew unless terminated with 90 days
notice. During fiscal 2004 and the three months ended December 31, 2004,
revenues under the subscription model were not significant, however, customer
interest in the model and sales under the model have been increasing.
CRITICAL ACCOUNTING POLICIES
In the preparation of financial statements and other financial data,
management applies certain accounting policies to transactions that, depending
on choices made by management, can result in different outcomes. In order for a
reader to understand the following information regarding the financial
performance and condition of the Company, an understanding of those accounting
policies is important. Certain of those policies are comparatively more
important to the Company's financial results and condition than others. The
policies that the Company believes are most important for a reader's
understanding of the financial information provided in this report are described
below.
Revenue Recognition, Allowance for Bad Debts and Returns Reserve
The Company has two types of software product offerings: Enterprise
Software and Desktop and Server Software. Enterprise Software products are
generally sold directly to end-users. The Company sells its Desktop and Server
Software products directly to end-users and through distributors and resellers.
Sales to distributors and resellers accounted for approximately 30% and 29%,
respectively, of total sales for the three months ended December 31, 2004 and
2003. Revenue
15
from the sale of all software products is generally recognized at the time of
shipment, provided there are no uncertainties surrounding product acceptance,
the fee is fixed or determinable, collection is considered probable, persuasive
evidence of the arrangement exists and there are no significant obligations
remaining. Both types of the Company's software product offerings are
"off-the-shelf" as such term is defined by Statement of Position No. 97-2,
"SOFTWARE REVENUE RECOGNITION." The Company's products are relatively
straightforward and the software can be installed and used by customers on their
own with little or no customization required. Multi-user licenses marketed by
the Company are sold as a right to use the number of licenses and license fee
revenue is recognized upon delivery of all software required to satisfy the
number of licenses sold. Upon delivery, the licensing fee is payable without
further delivery obligations of the Company.
Desktop and Server Software products are generally not sold in multiple
element arrangements. Accordingly, the price paid by the customer is considered
the vendor specific objective evidence ("VSOE") of fair value for those
products.
Enterprise Software sales are generally multiple element arrangements
which include software license deliverables, professional services and
post-contract customer support. In such multiple element arrangements, the
Company applies the residual method in determining revenue to be allocated to a
software license. In applying the residual method, the Company deducts from the
sale proceeds the VSOE of fair value of the services and post-contract customer
support in determining the residual fair value of the software license. The VSOE
of fair value of the services and post-contract customer support is based on the
amounts charged for these elements when sold separately. Professional services
include implementation, integration, training and consulting services with
revenue recognized as the services are performed. These services are generally
delivered on a time and materials basis, are billed on a current basis as the
work is performed, and do not involve modification or customization of the
software or any other unusual acceptance clauses or terms. Post-contract
customer support is typically provided under a maintenance agreement which
provides technical support and rights to unspecified software maintenance
updates and bug fixes on a when-and-if available basis. Revenue from
post-contract customer support services is deferred and recognized ratably over
the contract period (generally one year). Such deferred amounts are recorded as
part of deferred revenue in the Company's Consolidated Condensed Balance Sheets
included elsewhere herein.
The Company also sells its Enterprise Software using a subscription
model. At the time a customer enters into a binding agreement to purchase a
subscription, the customer is invoiced for an initial 90 day service period and
an account receivable and deferred revenue are recorded. Beginning on the date
the software is installed at the customer site and available for use by the
customer, and provided that all other criteria for revenue recognition are met,
the deferred revenue amount is recognized ratably over the period the service is
provided. The customer is then invoiced every 90 days and revenue is recognized
ratably over the period the service is provided. Subscriptions can be cancelled
by the customer at any time by providing 90 days written notice.
The Company's software products are sold under warranty against certain
defects in material and workmanship for a period of 30 to 90 days from the date
of purchase. Certain software products, including desktop versions of Monarch,
Monarch Data Pump, and VorteXML sold directly to end-users, include a guarantee
under which such customers may return products within 30 to 60 days for a full
refund. Additionally, the Company provides its distributors with stock-balancing
rights and applies the guidance found in SFAS No. 48, "REVENUE RECOGNITION WHEN
RIGHT OF RETURN EXISTS." Revenue from the sale of software products to
distributors and resellers is recognized at the time of shipment providing all
other criteria for revenue recognition as stated above are met and (i) the
distributor or reseller is unconditionally obligated to pay for the products,
including no contingency as to product resale, (ii) the distributor or reseller
has independent economic substance apart from the Company, (iii) the Company is
not obligated for future performance to bring about product resale, and (iv) the
amount of future returns can be reasonably estimated. The Company's experience
and history with its distributors and resellers allows for reasonable estimates
of future returns. Among other things, estimates of potential future returns are
made based on the inventory levels at the various distributors and resellers,
which the Company monitors frequently. Once the estimates of potential future
returns from all sources are made, the Company determines if it has adequate
returns reserves to cover anticipated returns and the returns reserve is
adjusted as required. Adjustments are recorded as increases or decreases in
revenue in the period of adjustment. Actual returns have historically been
within the range estimated by the Company. The Company's returns reserve was
$194,670 and $186,277 for the period as of December 31, 2004 and September 30,
2004, respectively.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of customers to make required payments. The
Company analyzes accounts receivable and the composition of the accounts
16
receivable aging, historical bad debts, customer creditworthiness, current
economic trends, foreign currency exchange rate fluctuations and changes in
customer payment terms when evaluating the adequacy of the allowance for
doubtful accounts. Based upon the analysis and estimates of the uncollectibility
of its accounts receivable, the Company records an increase in the allowance for
doubtful accounts when the prospect of collecting a specific account receivable
becomes doubtful. Actual results could differ from the allowances for doubtful
accounts recorded, and this difference may have a material effect on the
Company's financial position and results of operations. The Company's allowance
for doubtful accounts was $244,295 and $230,034 for the period as of December
31, 2004 and September 30, 2004, respectively.
Deferred Tax Assets
The Company has deferred tax assets related to net operating loss
carryforwards and tax credits that expire at different times through and until
2020. Significant judgment is required in determining the Company's provision
for income taxes, the carrying value of deferred tax assets and liabilities and
the valuation allowance recorded against net deferred tax assets. Factors such
as future reversals of deferred tax assets and liabilities, projected future
taxable income, changes in enacted tax rates and the period over which the
Company's deferred tax assets will be recoverable are considered in making these
determinations. The Company's domestic operations have been profitable during
the past three years while international operations have continued to generate
operating losses. During fiscal 2004, the Company increased sales and marketing
expense by approximately 24% and introduced a subscription sales model, both of
which could have an adverse effect on profitability in the near term.
Accordingly, management does not believe the deferred tax assets are more likely
than not to be realized and a full valuation allowance, previously provided
against the deferred tax assets, continues to be provided. Management evaluates
the realizability of the deferred tax assets quarterly and, if current economic
conditions change or future results of operations are better than expected,
future assessments may result in the Company concluding that it is more likely
than not that all or a portion of the deferred tax assets are realizable. If
this conclusion were reached, the valuation allowance against deferred tax
assets would be reduced resulting in a tax benefit being recorded for financial
reporting purposes. Total net deferred tax asset subject to a valuation
allowance was approximately $4.7 million as of December 31, 2004.
Capitalized Software Development Costs
The Company capitalizes certain software development costs as well as
purchased software upon achieving technological feasibility of the related
products. 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 software licenses 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 24 to 72 months.
Goodwill, other intangible assets and other long-lived assets.
The Company performs an evaluation of whether goodwill is impaired
annually or when events occur or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
Fair value is determined using market comparables for similar businesses or
forecasts of discounted future cash flows. The Company also reviews other
intangible assets and other long-lived assets when indication of potential
impairment exists, such as a significant reduction in cash flows associated with
the assets. Should the fair value of the Company's long-lived assets decline
because of reduced operating performance, market declines, or other indicators
of impairment, a charge to operations for impairment may be necessary.
17
RESULTS OF OPERATIONS
Three Months Ended December 31, 2004 and 2003
- ---------------------------------------------
The following table sets forth certain statements of operations data as
a percentage of total revenues for the periods indicated. The data has been
derived from the unaudited consolidated condensed financial statements contained
in this Quarterly Report on Form 10-Q. The operating results for any period
should not be considered indicative of the results expected for any future
period. This information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2004.
Three Months Ended December 31,
2004 2003
-------- --------
REVENUE:
Software licenses and subscriptions 63.2% 67.0%
Maintenance and services 36.8% 33.0%
-------- --------
Total Revenue 100.0% 100.0%
-------- --------
COSTS AND EXPENSES:
Cost of software licenses and subsriptions 11.7% 14.3%
Cost of maintenance and services 18.0% 13.9%
Sales and marketing 42.8% 34.9%
Engineering and product development 10.8% 6.3%
General and administrative 20.2% 23.5%
-------- --------
Total costs and expenses 103.5% 92.9%
-------- --------
(LOSS) INCOME FROM OPERATIONS (3.5)% 7.1%
INTEREST EXPENSE
INTEREST INCOME AND OTHER 0.5% 0.4%
-------- --------
(LOSS) INCOME BEFORE INCOME TAXES (3.0)% 7.5%
PROVISION FOR INCOME TAXES 0.0% 0.1%
-------- --------
NET (LOSS) INCOME (3.0)% 7.4%
======== ========
18
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003
TOTAL REVENUES
The following table presents total revenue, change in total revenue
and total revenue growth for the three months ended December 31, 2004 and 2003:
THREE MONTHS ENDED PERCENTAGE
DECEMBER 31, INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
---------- ---------- ---------- ----------
Software licenses and subscriptions $3,216,938 $2,953,896 263,042 8.9%
Maintenance and services 1,870,390 1,453,192 417,198 28.7%
---------- ---------- ----------
Total revenue $5,087,328 $4,407,088 $ 680,240 15.4%
========== ========== ==========
Software licenses and subscription revenue increased by approximately
$263,000 or 8.9% as compared to the three months ended December 31, 2003.
Revenues from Datawatch|ES license and subscription revenue and iMergence iStore
revenue, resulting from the inclusion of Mergence products subsequent to the
Mergence acquisition, represented the majority of the increase for the three
months ended December 31, 2004. These increases were partially offset by a
decrease in Visual|QSM and Visual|HD license revenue for the quarter. The
Company attributes the increases in Datawatch|ES and Monarch software license
and subscription revenue to increased capital spending and an improved domestic
and international economic outlook. The decrease in Visual|QSM and Visual|HD
software license and subscription revenue is related to increased competitive
pressures and product pricing for products in this mature market.
Maintenance and services revenues increased approximately $417,000 or
28.7% as compared to the three months ended December 31, 2003. This increase is
primarily attributable to increases in service revenues from Visual|QSM
solutions. Additionally, the Datawatch|ES revenue includes iMergence iStore
maintenance and services revenue of approximately $112,000 resulting from the
inclusion of Mergence products subsequent to the Mergence acquisition. The
Company attributes the increases in maintenance and services revenue to
continued customer loyalty resulting in increased demand for professional
services and a high percentage of maintenance renewals.
COSTS AND OPERATING EXPENSES
The following table presents costs and operating expenses, changes
in costs and operating expenses and costs and operating expenses growth for the
three months ended December 31, 2004 and 2003:
THREE MONTHS ENDED PERCENTAGE
DECEMBER 31, INCREASE INCREASE
2004 2003 (DECREASE) (DECREASE)
----------- ----------- ----------- -----------
Costs of software licenses and subscriptions $ 593,915 $ 630,093 (36,178) (5.7)%
Costs of maintenance and services 915,937 611,677 304,260 49.7%
Sales and marketing expenses 2,178,400 1,538,951 639,449 41.6%
Engineering and product development expenses 549,963 279,644 270,319 96.7%
General and administrative expenses 1,029,074 1,035,901 (6,827) (0.7)%
----------- ----------- -----------
Total costs and operating expenses $ 5,267,289 $ 4,096,266 $ 1,171,023 28.6%
=========== =========== ===========
Cost of software licenses and subscriptions for the three months ended
December 31, 2004 was 18.5% of software license and subscription revenues, as
compared to 21.3% of software license revenues for the three months ended
December 31, 2003.
19
Cost of maintenance and services for the three months ended December
31, 2004 was 49% of maintenance and service revenues, as compared to 42% for the
three months ended December 31, 2003. Cost of maintenance and services as a
percentage of maintenance and service revenues increased for the three months
ended December 31, 2004 when compared to the three months ended December 31,
2003, primarily due to the use of third-party consultants to supplement the
Company's internal consulting and training staff. During Fiscal year 2004, the
Company implemented a Sales Performance Strategy and increased the consulting
staff as well as the Company's sales staff. We have temporarily increased
service costs as the Company transitions outsourced service activities in-house.
Another factor is that as the Company's product model has changed. The Company
begins to see a shift in selling more subscriptions, the revenues are recognized
over future periods rather than at the point of sale. Due to an increase in
subscription orders over the last 6 months, extra professional services
expenses, and systems installation costs, were incurred in the quarter for
project work associated with the implementation of the systems for these
customers.
Sales and marketing expenses increased approximately $639,000, or 42%.
This increase is primarily attributable to increased sales staff salaries and
related expenses. During fiscal year 2004, the Company implemented a Sales
Performance Strategy to increase its sales and marketing team in order to focus
on driving our top line revenue growth.
Engineering and product development expenses increased approximately
$270,000 or 97%. This increase is primarily attributable to increased costs of
product development expenses resulting from the Datawatch Technologies
subsidiary (formerly Mergence Technologies) acquired in August 2004. As part of
this acquisition, the Company intends to transition some outsourced development
activities in-house, but currently continues to use third-party development
activities as well as in-house development.
General and administrative expenses decreased approximately $7,000 or
1%. General and administrative expenses remained relatively consistent for the
three months ended December 31, 2004.
The Company's current estimate is that it will not be in a significant
taxable position in any jurisdiction primarily as a result of the availability
of loss carryforwards for which valuation allowances had previously been
provided. At December 31, 2004, the Company had federal tax loss carryforwards
available to offset future taxable income of approximately $5 million; a full
valuation reserve has been established against these assets as uncertainty
continues to exist regarding the Company's ability to generate sufficient future
taxable income for the utilization of these losses. (See the section titled
Critical Accounting Policies included elsewhere in this Part I, Item 2 for a
further discussion of the Company's income tax policy.)
Net (loss) for the three months ended December 31, 2004 was
approximately $(154,000), which compares to net income of approximately $324,000
for the three months ended December 31, 2003.
OFF BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT
LIABILITIES AND COMMITMENTS
The Company leases various facilities, equipment and automobiles in the
U.S. and overseas under noncancelable operating leases that expire through 2008.
The lease agreements generally provide for the payment of minimum annual
rentals, pro rata share of taxes, and maintenance expenses. Rental expense for
all operating leases was approximately $162,000 and $150,000 for the three
months ended December 31, 2004 and 2003, respectively.
As of December 31, 2004, minimum rental commitments under noncancelable
operating leases are as follows:
Fiscal Year
-----------
Remainder of 2005 $467,943
2006 192,693
2007 21,105
2008 8,794
--------
Total minimum lease payments $690,535
========
20
The Company is also committed to pay royalties ranging from 7% to 50%
on revenue generated by the sale of certain licensed software products. Royalty
expense included in cost of software licenses was approximately $372,000 and
$393,000, respectively, for the three months ended December 31, 2004 and 2003.
The Company is not obligated to pay any minimum royalty amounts.
On August 11, 2004, the Company acquired 100% of the shares of Mergence
Technologies Corporation. The purchase agreement includes a provision for
quarterly cash payments to the former Mergence shareholders equal to 10% of
revenue, as defined, of the Datawatch|Researcher product until September 30,
2010. There was no revenue recognized from the sale of the Datawatch|Researcher
product from the date of acquisition to December 31, 2004. Accordingly, the
Company expensed no such amounts during fiscal 2004 and the three months ended
December 31, 2004. See Note 2 to the Consolidated Condensed Financial Statements
which appear elsewhere herein for more detailed financial information on the
acquisition of Mergence.
The Company's software products are sold under warranty against certain
defects in material and workmanship for a period of 30 to 90 days from the date
of purchase. If necessary, the Company would provide for the estimated cost of
warranties based on specific warranty claims and claim history. However, the
Company has never incurred significant expense under its product or service
warranties. As a result, the Company believes the estimated fair value of these
warranty agreements is minimal. Accordingly, there are no liabilities recorded
for warranty claims as of December 31, 2004.
The Company is required by the lease related to its Lowell,
Massachusetts facility to provide a letter of credit in the amount of
approximately $143,000 as a security deposit to provide credit support payment
to the landlord of amounts due under the lease. Cash on deposit providing
security in the amount of this letter of credit is classified as part of
restricted cash in the Company's consolidated condensed balance sheets as of
December 31, 2004 and September 30, 2004.
In the August 2004 Stock Purchase Agreement for the acquisition of
Mergence, the Company made certain warranties regarding, among other things, its
legal authority to enter into the agreement consummating the acquisition and its
ability to continue in its business. The Company further agreed to indemnify the
sellers of Mergence and hold them harmless for any damages incurred or suffered
arising out of any misrepresentation or breach of such warranties made by the
Company in the agreement. The Company believes that no such misrepresentations
or breaches of warranty exist, or are likely to exist in the future, and,
accordingly, has recorded no liabilities related to such indemnification.
The Company enters into indemnification agreements in the ordinary
course of business. Pursuant to these agreements, the Company agrees to
indemnify, hold harmless, and reimburse the indemnified party for losses
suffered or incurred by the indemnified party, generally its customers, in
connection with any patent, copyright or other intellectual property
infringement claim by any third party with respect to the Company's products.
The term of these indemnification agreements is generally perpetual. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited. The Company has never incurred
costs to defend lawsuits or settle claims related to these indemnification
agreements. As a result, the Company believes the estimated fair value of these
agreements is minimal. Accordingly, the Company has no liabilities recorded for
these agreements as of December 31, 2004.
Certain of the Company's agreements also provide for the performance of
services at customer sites. These agreements may contain indemnification
clauses, whereby the Company will indemnify the customer from any and all
damages, losses, judgments, costs and expenses for acts of its employees or
subcontractors resulting in bodily injury or property damage. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is unlimited; however, the Company has general
and umbrella insurance policies that would enable us to recover a portion of any
amounts paid. The Company has never incurred costs to defend lawsuits or settle
claims related to these indemnification agreements. As a result, the Company
believes the estimated fair value of these agreements is minimal. Accordingly,
the Company has no liabilities recorded for these agreements as of December 31,
2004.
21
As permitted under Delaware law, the Company has agreements with its
directors whereby the Company will indemnify them for certain events or
occurrences while the director is, or was, serving at the Company's request in
such capacity. The term of the director indemnification period is for the later
of ten years after the date that the director ceases to serve in such capacity
or the final termination of proceedings against the director as outlined in the
indemnification agreement. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
unlimited; however, the Company's director and officer insurance policy limits
the Company's exposure and enables it to recover a portion of any future amounts
paid. As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification agreements is minimal. The Company
has no liabilities recorded for these agreements as of December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net loss of approximately $(154,000) for the three
months ended December 31, 2004 as compared to net income of approximately
$324,000 for the three months ended December 31, 2003. During the three months
ended December 31, 2004, approximately $(870,000) of cash was used by the
Company's operations as compared to approximately $603,000 of cash provided by
operations during the three months ended December 31, 2003. The main use of cash
from operations for the three months ended December 31, 2004 was a result of the
payment of accrued expenses and accounts payables related to accounting fees,
legal fees and year-end bonus amounts, as well as an increase in the accounts
receivable balances due to the timing of invoicing and cash collections.
Net cash used in investing activities for the three months ended
December 31, 2004 of $(67,000) is primarily the result of the purchase of fixed
assets.
Net cash provided by financing activities for the three months ended
December 31, 2004 of $3,000 is primarily the result of the cash received from
the exercise of employee stock options.
During fiscal 2004, the Company introduced a subscription sales model
for the sale of its enterprise products. This new pricing model allows customers
to begin using the Company's products at a lower initial cost of software
acquisition when compared to the more traditional perpetual license sale. While
this initiative is designed to increase the number of enterprise solutions sold
and also reduce dependency on short-term sales by building a recurring revenue
stream, it introduces increased risks for the Company primarily associated with
the timing of revenue recognition and reduced cash flows. The subscription model
delays revenue recognition when compared to the typical perpetual license sale
and also, as the Company allows termination of certain subscriptions with 90
days notice, could result in decreased revenue for solutions sold under the
model if the Company experiences a high percentage of subscription cancellations
during the first two years of the subscription. Further, as amounts due from
customers are invoiced over the life of the subscription, there are delayed cash
flows from subscription sales when compared to perpetual license sales.
The Mergence purchase agreement includes a provision for quarterly cash
payments to the former Mergence shareholders equal to 10% of revenue, as
defined, of the Datawatch|Researcher product for a period of six years. As the
cash payments are based on recognized revenue and no minimum payments are
required, they are not expected to have a significant impact on the Company's
liquidity or cash flows. See the section titled OFF BALANCE SHEET ARRANGEMENTS,
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS included
elsewhere herein for a more complete disclosure of the Company's commitments and
contingent liabilities.
An existing agreement between Datawatch and Math Strategies grants the
Company exclusive worldwide rights to use and distribute certain intellectual
property owned by Math Strategies and incorporated by the Company in its
Monarch, Monarch Data Pump, VorteXML and certain other products. In April 2004,
the Company entered into an Option Purchase Agreement with Math Strategies
giving the Company the option to purchase these intellectual property rights for
$8,000,000. This option, if exercised, would provide the Company with increased
flexibility to utilize the purchased technology in the future. The option can be
exercised by Datawatch at any time during the two years following the effective
date of the Option Purchase Agreement.
22
Management believes that its current cash balances and cash generated
from operations will be sufficient to meet the Company's cash needs for working
capital and anticipated capital expenditures for at least the next twelve
months. The Company does not currently anticipate any cash requirements, during
that time, to fund significant growth, capital expenditures or the acquisition
of complementary technology or businesses. However, if in the future, such
expenditures are anticipated or required, the Company may need to seek
additional financing by issuing equity or obtaining credit facilities to fund
such requirements.
Management believes that the Company's current operations have not been
materially impacted by the effects of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 16, 2004, the FASB issued SFAS No. 123R, SHARE-BASED
PAYMENT ("SFAS No. 123R"). This Statement is a revision of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, and supersedes Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related
implementation guidance. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. The Statement requires entities to recognize stock compensation
expense for awards of equity instruments to employees based on the grant-date
fair value of those awards (with limited exceptions). SFAS No. 123R is effective
for the first interim or annual reporting period that begins after June 15,
2005. We are evaluating the two methods of adoption allowed by SFAS No. 123R;
the modified-prospective transition method and the modified-retrospective
transition method.
23
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
Quarterly 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 Quarterly
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 cautions readers
not to place undue reliance on any such forward looking-statements, which speak
only as of the date they are made. The Company disclaims any obligation, except
as specifically required by law and the rules of the Securities and Exchange
Commission, to publicly update or revise any such statements to reflect any
change in the Company's expectations or in events, conditions or circumstances
on which any such statements may be based, or that may affect the likelihood
that actual results will differ from those set forth in the forward-looking
statements. 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 Quarterly 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.
Subscription Sales Model Risk
During fiscal 2004, the Company introduced a subscription sales model
for the sale of its enterprise products. This new pricing model allows customers
to begin using the Company's products at a lower initial cost of software
acquisition when compared to the more traditional perpetual license sale. While
this initiative is designed to increase the number of enterprise solutions sold
and also reduce dependency on short-term sales by building a recurring revenue
stream, it introduces increased risks for the Company primarily associated with
the timing of revenue recognition and reduced cash flows. The subscription model
delays revenue recognition when compared to the typical perpetual license sale
and also, as the Company allows termination of certain subscriptions with 90
days notice, could result in decreased revenue for solutions sold under the
model if the Company experiences a high percentage of subscription cancellations
during the first two years of the subscription. Further, as amounts due from
customers are invoiced over the life of the subscription, there are delayed cash
flows from subscription sales when compared to perpetual license sales.
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. Further, the Company's introduction of the subscription sales model
could result in decreased revenues over the short term. 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
24
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 and reduced profitability. In addition,
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
maintain profitability.
Dependence on Principal Products
In the three months ended December 31, 2004, Monarch, Visual|QSM and
Visual|HD, and Datawatch|ES accounted for approximately 56%, 29% and 15%,
respectively, of the Company's total revenue. The Company is wholly dependent on
the Monarch, Visual|QSM, Visual|HD, Datawatch|ES and the recently acquired
Datawatch|Researcher products. As a result, any factor adversely affecting sales
of any 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, results of operations, or
cash flows.
International Sales
In the three months ended December 31, 2004, and fiscal years 2004 and
2003, international sales, including export sales from domestic operations,
accounted for approximately 44%, 41% and 39%, respectively, of the Company's
total revenue. The Company anticipates that international sales will continue to
account for a significant percentage of its total revenue. A significant portion
of the Company's total revenue 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
As evidenced by its August 2004 acquisition of Mergence Technologies
Corporation and its October 2002 acquisition of Auxilor Inc., the Company
continues 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
25
products. Such increase in competition could adversely affect the life cycles of
the Company's products, which in turn could have a material adverse effect on
the Company's business.
Software products may contain undetected errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by the Company and by current and potential end-users, errors
will not be found in new products after commencement of commercial shipments,
resulting in loss of or delay in market acceptance. Any failure by the Company
to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business.
Rapid Technological Change
The markets in which the Company competes have undergone, and can be
expected to continue to undergo, rapid and significant technological change. The
ability of the Company to grow will depend on its ability to successfully update
and improve its existing products and market and license new products to meet
the changing demands of the marketplace and that can compete successfully with
the existing and new products of the Company's competitors. There can be no
assurance that the Company will be able to successfully anticipate and satisfy
the changing demands of the personal computer software marketplace, that the
Company will be able to continue to enhance its product offerings, or that
technological changes in hardware platforms or software operating systems, or
the introduction of a new product by a competitor, will not render the Company's
products obsolete.
Competition in the PC Software Industry
The software market for personal computers is highly competitive and
characterized by continual change and improvement in technology. Several of the
Company's existing and potential competitors, including BMC Software, Actuate
Corporation, Mobius Management Systems, Inc., 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 all 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.
Dependence on the Ability to Hire and Retain Skilled Personnel
Qualified personnel are in great demand throughout the software
industry. The Company's success depends, in large part, upon its ability to
attract, train, motivate and retain highly skilled employees, particularly,
technical personnel and product development and professional services personnel,
sales and marketing personnel and other senior personnel. The Company's failure
to attract and retain the highly trained technical personnel that are integral
to the Company's product development, professional services and direct sales
teams may limit the rate at which the Company can generate sales and develop new
products or product enhancements. A change in key management could result in
transition and attrition in the affected department. This could have a material
adverse effect on the Company's business, operating results and financial
condition.
26
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments
At December 31, 2004, the Company did not participate in any derivative
financial instruments, or other financial and commodity instruments. The Company
holds no investment securities that possess significant market risk.
Primary Market Risk Exposures
The Company's primary market risk exposure is in the area of foreign
currency exchange rate risk. The Company's exposure to currency exchange rate
fluctuations has been and is expected to continue to be modest due to the fact
that the operations of its international subsidiaries are almost exclusively
conducted in their respective local currencies, and 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 loss. 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.
ITEM 4. INTERNAL CONTROLS AND PROCEDURES
--------------------------------
The principal executive officer and principal financial officer, with
the participation of the Company's management, evaluated the effectiveness of
the Company's "disclosure controls and procedures" (as defined in Exchange Act
Rule 13(a)-15(e)) as of the end of the period covered by this Quarterly Report
on Form 10-Q. Based on this evaluation, they have concluded that, as of the end
of the period covered by this Quarterly Report on Form 10-Q, the Company's
disclosure controls and procedures are operating in an effective manner and are
designed to ensure that information required to be disclosed in the Company's
filings and submissions under the Securities and Exchange Act of 1934 is
accumulated and communicated to management, including the Company's principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure, and is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. It should be noted that any system of controls is designed to
27
provide reasonable, but not absolute, assurances that the system will achieve
its stated goals under all reasonably foreseeable circumstances. The Company's
principal executive officer and principal financial officer have concluded that
the Company's disclosure controls and procedures are effective at a level that
provides such reasonable assurances.
There were no changes in the Company's internal controls over financial
reporting, or in other factors that could significantly affect these controls,
during the fiscal quarter to which this report relates that materially affected,
or are reasonably likely to materially affect, the Company's internal controls
over financial reporting.
28
PART II.
Item 1. Legal Proceedings
-----------------
In May 2004, the Company was served with a charge of discrimination
filed with the Massachusetts Commission Against Discrimination (MCAD) by a
current employee. In addition to the Company, the employee has named an
executive of the Company as well as the employee's former supervisor as
defendants. The employee alleges that her former supervisor engaged in sexually
harassing conduct. The employee accuses the executive of engaging in retaliation
upon learning of the employee's complaint. The complaint was withdrawn from the
MCAD in August 2004, with the stated intent of pursuing the claim in Superior
Court in the state of Massachusetts. To date, the Company has not been notified
of any further filing. Given the early stage and current status of the claim,
the Company is unable to predict the ultimate outcome. The Company intends to
vigorously defend the claims.
From time to time, the Company receives other claims and may be party
to other actions that arise in the normal course of business. Other than as
noted above, the Company does not believe the eventual outcome of any other
pending matters will have a material effect on the Company's consolidated
condensed financial condition or results of operations.
Item 6. Exhibits
--------
31.1 Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of the Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of the Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
29
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 8, 2005.
DATAWATCH CORPORATION
/s/ Robert W. Hagger
--------------------------
Robert W. Hagger.
President, Chief Executive Officer, and
Director (Principal Executive Officer)
/s/ John J. Hulburt
--------------------------
John J. Hulburt
Vice President of Finance and Chief Financial Officer
(Principal Financial Officer)
30