13
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-19960
Datawatch Corporation
(Exact name of registrant as specified in its charter)
Delaware 02-0405716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
234 Ballardvale Street, Wilmington Massachusetts 01887
(Address of principal executive offices) (Zip Code)
(978) 988-9700
(Registrant's telephone number, including area code)
None
(Former name, former address, former fiscal year,
if changed since last report)
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 5, 1998
Common stock, $.01 par value 9,148,312
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page #
a) Consolidated Condensed Balance Sheets: 3
June 30, 1998 and September 30, 1997
b) Consolidated Condensed Statements of Operations: 4
Three Months Ended June 30, 1998 and 1997
Nine Months Ended June 30, 1998 and 1997
c) Consolidated Condensed Statements of Cash Flows: 5
Nine Months Ended June 30, 1998 and 1997
d) Notes to Unaudited Consolidated Condensed Financial 6
Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Default upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES
* No information provided due to inapplicability of item.
PART I.
Item 1. Financial Statements
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, September
30,
1998 1997
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and equivalents $3,395,697 $ 1,586,875
Short-term investments 3,775,669
Accounts receivable, net 7,174,941 7,810,169
Inventories 511,735 876,767
Prepaid advertising and other 1,883,402 2,000,717
expenses
Total current assets 16,741,444 12,274,528
PROPERTY AND EQUIPMENT:
Property and equipment 4,255,415 4,198,085
Less accumulated depreciation
and
amortization (2,376,310)
(2,304,705)
Net property and equipment 1,879,105 1,893,380
OTHER ASSETS 374,472 551,639
EXCESS OF COSTS OVER NET ASSETS
OF ACQUIRED COMPANIES 829,182 1,427,098
TOTAL ASSETS $19,824,203 $16,146,645
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts payable $2,461,186 $ 3,837,376
Accrued expenses 1,291,442 1,340,995
Deferred revenue 1,174,863 2,143,203
Current portion of long-term 185,580 501,133
debt
Total current liabilities 5,113,071 7,822,707
LONG-TERM DEBT 36,481 1,399,089
TOTAL LIABILITIES 5,149,552 9,221,796
SHAREHOLDERS' EQUITY:
Common stock 91,802 91,160
Additional paid-in capital 19,823,888 19,737,963
Accumulated deficit (5,014,481) (12,533,550
)
Cumulative translation (86,170)
adjustment (230,336)
14,815,039 7,065,237
Less treasury stock - at cost (140,388)
(140,388)
Total shareholders' equity 14,674,651 6,924,849
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $19,824,203 $16,146,645
See notes to unaudited consolidated condensed financial statements.
Item 1. Financial Statements (continued)
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
IBM PC based products $6,533,423 $5,968,968 $19,116,255 $19,609,464
Macintosh based products - 1,638,971 172,254 4,414,847
NET SALES 6,533,423 7,607,939 19,288,509 24,024,311
COSTS AND EXPENSES:
Cost of sales 1,263,342 1,488,181 3,987,016 4,403,260
Engineering & product
development 739,584 789,899 1,658,110 2,104,635
Selling, general and
administrative 6,280,434 6,737,419 18,298,650 18,398,343
Restructuring costs 2,364,246
INCOME (LOSS) FROM
OPERATIONS (1,749,937) (1,407,560) (7,019,513) (881,927)
INTEREST EXPENSE (13,178) (55,497) (45,514) (106,376)
OTHER INCOME,
primarily interest 105,040 15,643 392,571 36,226
GAIN ON SALE OF PRODUCT
LINE 15,431,253
FOREIGN CURRENCY
TRANSACTION GAIN(LOSS) (4,526) 10,623 (14,728) 23,501
PROVISION (BENEFIT) FOR
INCOME TAX (1,000,000) 1,225,000
NET INCOME (LOSS) $ (662,601) $(1,436,791) $7,519,069 $ (928,576)
NET INCOME (LOSS) PER
COMMON SHARE-Basic $ (.07) $ (.16) $ .82 $ (.10)
COMMON SHARE-Diluted $ (.07) $ (.16) $ .81 $ (.10)
WEIGHTED AVERAGE SHARES
OUTSTANDING - Basic 9,147,542 9,070,271 9,128,355 9,064,505
ADJUSTMENT FOR COMMON
STOCK EQUIVALENTS 203,698
WEIGHTED AVERAGE SHARES
OUTSTANDING - Diluted 9,147,542 9,070,271 9,332,053 9,064,505
See notes to unaudited consolidated condensed financial statements.
Item 1. Financial Statements (continued)
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ 7,519,068 $
(928,576)
Adjustment to reconcile net income to net
cash:
Gain on sale of product line
(15,431,253)
Gain on disposition of fixed assets
(12,383)
Depreciation and amortization 936,489
1,030,426
Interest accrued on short-term investments
(5,387)
Changes in current assets and liabilities:
Inventories 275,818
(156,354)
Prepaid advertising and other expenses
(130,476) (793,466)
Accounts receivable 263,419
332,008
Accounts payable and accrued expenses
(2,143,247) (262,277)
Deferred revenue (129,713)
70,978
Net cash used in operating activities
(8,857,665) (707,261)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and fixtures
(654,995) (616,656)
Proceeds from maturity of short-term 4,879,482
investments 1,423,848
Purchase of short-term investments
(8,649,764) (1,127,582)
Proceeds from sale of fixed assets 18,400
Proceeds from sale of product line to Dr _
Solomon's 16,750,000
Software, Inc.
Acquisition of Guildsoft Holdings Ltd., net of -
working capital acquired 19,833
Other assets
(53,680) 112,240
Net cash provided by (used in)investing 12,289,443
activities (188,317)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 86,567
18,125
Proceeds from bank term loan
1,500,000
Principal payments on long-term obligations
(206,185) (178,884)
Principal payments on bank term-loan
(1,500,000)
Borrowings under credit lines, net
(3,338) (636,806)
Net cash provided by (used in) financing
activities (1,622,956) 702,435
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,808,822
(193,143)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,586,875
1,696,349
CASH AND EQUIVALENTS, END OF PERIOD $ 3,395,697 $
1,503,206
See notes to unaudited consolidated condensed financial statements.
Item 1. Financial Statements (continued)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation: The consolidated condensed balance sheet as of June
30, 1998 and the consolidated condensed statements of operations for the three
months and nine months ended June 30, 1998 and 1997, and the consolidated
condensed statements of cash flows for the nine months ended June 30, 1998 and
1997 are unaudited. In the opinion of management, these statements include all
adjustments necessary for the fair presentation of the financial data for such
periods. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the Company's audited condensed
financial statements for the year ended September 30, 1997 which appear in the
Company's Annual Report on Form 10-K.
2. Inventories: The Company accounts for its inventories using a standard cost
methodology. Inventories were comprised of the following:
June 30, September
30,
1998 1997
Raw materials $227,595 $ 338,560
Work in process 631 1,825
Finished goods 283,509 536,382
TOTAL $511,735 $ 876,767
3. Divestitures: On October 9, 1997, the Company sold two of its software
product lines for $16,750,000 in cash, resulting in an after tax gain of
approximately $14,200,000. The assets sold consisted primarily of inventory,
property and equipment, trademarks, and the technological rights related to
these product lines. This divesture gave rise to the utilization of net
operating loss carryforwards that had not previously been recognized.
4. Long-term Debt: During the nine months ended June 30, 1998, the Company
paid down its outstanding $1,500,000 term loan with proceeds from the sale of
two of its product lines.
5. Restructuring: Subsequent to the sale of its Macintosh software product
lines, during the first quarter of fiscal 1998, the Company undertook a
corporate wide restructuring effort so as to centralize both its administrative
infrastructure and its development efforts for its remaining products. The
total amount charged to operations was approximately $2,364,000. The
restructuring plan included charges for salaries and wages and the related
severance benefits for terminated personnel. The restructuring plan also
included payments totaling $433,000 made to outside developers associated with
the centralization of the Company's development efforts.
6. Earnings per Share: In the first quarter of fiscal 1998, the Company
adopted Statement of Financial Accounting Standard No. 128 "Earnings per Share."
All prior period figures have been restated to reflect the adoption of the
Standard.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
DATAWATCH CORPORATION (the "Company" or "Datawatch") is a provider of
knowledge-based software solutions for the business enterprise.
DATAWATCH's principal products are: MonarchT, a report mining solution that
leverages legacy reports and reporting systems to provide business intelligence
on the Windows desktop; Monarch/EST, a client/server product for integrated
report archiving, distribution and management; RedwingT, a plug-in for Aboder
Acrobatr that accurately extracts text and tables from PDF files; and Q-
SupportT (in the United States) and QuetzalT (internationally), an integrated
help desk and asset management solution for multi-user, networked support
centers.
On October 9, 1997, the Company sold its Virexr and netOctopusT product lines to
Dr Solomon's Software, Inc. ("Dr Solomon's Software").
From time to time, information provided by the Company, statements made by its
employees or information in its filings with the Securities and Exchange
Commission (including statements in this Form 10-Q) may contain statements which
are not historical facts (so called "forward-looking statements"), and are made
pursuant to the safe harbor provision of the Private Securities Litigation
Reform Act of 1995 and releases of the Securities and Exchange Commission. In
that regard, the discussion in this Item 2 contains forward-looking statements
which involve certain risks and uncertainties, including statements related to
liquidity and capital resources. The Company's operating results may continue
to vary significantly from quarter to quarter or year to year depending on a
number of factors, including technological changes, competition and general
market trends, and other factors such as the Company's dependence on continued
sales of its Monarch and Q-Support/Quetzal product lines both domestically and
internationally, the Company's dependence on the continued introduction of new
products, the Company's dependence on indirect distribution channels for the
sale of its products, the Company's dependence on the continued protection of
its proprietary technology, and the Company's reliance on licensing agreements
relating to third party technology incorporated into the Company's products.
These factors are more fully described in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1997. The Company's current
planned expense levels are based in part upon expectations as to
future revenue. Consequently, operating results may vary significantly from
quarter to quarter or year to year, based on timing of revenue. Revenue or
net income in any period will not necessarily be indicative of results of
subsequent periods and there can be no assurance that the Company will
achieve profitability or that revenue growth can be sustained in the future.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997.
Net sales for the three months ended June 30, 1998 were $6,533,000, which
represents a decrease of $1,075,000 from net sales of $7,608,000 for the three
months ended June 30, 1997. Excluding sales of the Company's Macintosh based
products, which were sold on October 9, 1997 to Dr Solomon's Software, net sales
would have been $5,969,000 for the three months ended June 30, 1997 and,
therefore, would have represented an increase of $564,000 or approximately 9% to
net sales of $6,533,000 for the three months ended June 30, 1998. This increase
in net sales results from an increase in sales for all of the Company's product
lines domestically and internationally. For the three months ended June 30,
1998, the Monarch suite of products accounted for approximately 54% of net
sales, the Q-Support/Quetzal product line accounted for approximately 35% of net
sales, and third party product lines accounted for approximately 10% of net
sales.
Cost of sales for the three months ended June 30, 1998 was $1,263,000 or
approximately 19% of net sales. Cost of sales for the three months ended June
30, 1997 was $1,488,000 or approximately 20% of net sales. Excluding the
Company's Macintosh based products, cost of sales would have been 19% of net
sales for the three months ended June 30, 1998 which compares to 22% for the
three months ended June 30, 1997. This decrease in cost of sales, as a
percentage of net sales, is principally due to reductions in overhead as a
result of the restructuring subsequent to the sale of the Company's Macintosh
based products.
Engineering and product development expenses were $740,000 for the three months
ended June 30, 1998, a decrease of $50,000 or approximately 6% from $790,000 for
the three months ended June 30, 1997. This decrease is primarily attributable to
reductions in personnel and expenses associated with development of the Virex
and netOctopus product lines which were sold to Dr Solomon's Software in October
1997, as well as expense reductions resulting from the Company's restructuring
subsequent to the sale of those product lines.
Selling, general and administrative expenses were $6,280,000 for the three
months ended June 30, 1998, a decrease of $457,000 or approximately 7% from
$6,737,000 for the three months ended June 30, 1997. This decrease is primarily
attributable to reductions of salaries and wages and expenses resulting from the
Company's restructuring during the first quarter of fiscal 1998.
As a result of the foregoing, the loss from operations for the three months
ended June 30, 1998 was $1,750,000 which compares to a loss from operations of
$1,408,000 for the three months ended June 30, 1997. The net loss for the three
months ended June 30, 1998 was $663,000 given the effect of income tax
recoveries, which compares to net a loss of $1,437,000 for the three months
ended June 30, 1997.
Nine Months Ended June 30, 1998 and 1997.
Net sales for the nine months ended June 30, 1998 were $19,288,000 which
represents a decrease of $4,736,000 from net sales of $24,024,000 for the nine
months ended June 30, 1997. Excluding sales of the Company's Macintosh based
products, which were sold on October 9, 1997 to Dr Solomon's Software, net sales
for the nine months ended June 30, 1998 would have been $19,116,000 which
represents a decrease of $493,000 from net sales of $19,609,000 for the nine
months ended June 30, 1997. This decrease in net sales results from a decrease
in international sales of the Company's Quetzal product. Excluding sales of the
Company's Macintosh based products for the nine months ended June 30, 1998, the
Monarch suite of products accounted for approximately 50% of net sales, the Q-
Support/Quetzal product line accounted for approximately 38%, and third party
product lines accounted for approximately 12%.
Cost of sales for the nine months ended June 30, 1998 was $3,987,000 or
approximately 21% of net sales. Cost of sales for the nine months ended June 30,
1997 was $4,403,000 or approximately 18% of net sales. Excluding the Company's
Macintosh based products, cost of sales would have been 21% of net sales for the
nine months ended June 30, 1998, which is comparable to 20% for the same period
in the prior year.
Engineering and product development expenses were $1,658,000 for the nine months
ended June 30, 1998, a decrease of $447,000 or approximately 21% from $2,105,000
for the nine months ended June 30, 1997. This decrease is primarily attributable
to reductions in personnel and expenses associated with development of the Virex
and netOctopus product lines sold to Dr Solomon's Software in October 1997, as
well as expense reductions resulting from the Company's restructuring subsequent
to the sale of those product lines.
Selling, general and administrative expenses were $18,299,000 for the nine
months ended June 30, 1998, a decrease of $99,000 or approximately 1% from
$18,398,000 for nine months ended June 30, 1997. Included in the expenses for
the nine months ended June 30, 1998 were approximately $196,000 of one-time
expenses associated with the Company's restructuring subsequent to the sale of
its Macintosh product lines. Excluding these expenses, the decrease would have
been $295,000 or approximately 2%, from the same period in the prior year. The
reduction is attributable to lower salaries and wages and related expenses
resulting from the Company's restructuring.
During the nine months ended June 30, 1998, the Company sold its Macintosh
software product lines to Dr Solomon's Software for $16,750,000. The Company
realized an after tax gain on the sale of approximately $14,200,000. After the
sale of these product lines the Company initiated a corporate-wide restructuring
effort so as to allow the Company to centralize both its administrative
infrastructure and the development efforts of its remaining products. The total
amount charged to operations was approximately $2,364,000. The restructuring
plan included charges for salaries and wages and the related severance benefits
for terminated personnel. These charges, totaling $1,884,000, have been paid.
The restructuring plan also included payments totaling $433,000 made to outside
developers associated with the centralization of the Company's development
efforts.
As a result of the foregoing, the loss from operations for the nine months ended
June 30, 1998 was $7,020,000 which compares to the loss from operations of
$882,000 for the nine months ended June 30, 1997. As a result of the foregoing,
and due to the $15,431,000 pre-tax gain on the sale of the Macintosh software
product lines, net income for the nine months ended June 30, 1998 was $7,519,000
which compares to net loss of $929,000 for the nine months ended June 30, 1997.
The gain recognized on the Dr Solomon's Software transaction allowed the Company
to utilize net operating losses that had previously been reserved.
LIQUIDITY AND CAPITAL RESOURCES
In October 1997, the Company received $16,750,000 in cash from Dr
Solomon's Software in connection with the sale of its Virex and netOctopus
product lines, resulting in an after tax profit of approximately $14,200,000.
The Company's management believes that its currently anticipated capital needs
for future operations of the Company will be satisfied through at least June 30,
1999 by funds currently available from the above mentioned sale and its unused
$1,500,000 bank line of credit. Working capital increased by approximately
$7,177,000 during the nine months ended June 30, 1998 primarily as a result of
the above mentioned divestiture offset by outflows for costs associated with the
subsequent restructuring of the Company.
Management believes that the Company's current operations have not been
materially impacted by the effects of inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per
Share" which became effective during the first quarter of fiscal 1998. SFAS No.
128 replaces the presentation of primary earnings per share with basic earnings
per share, which excludes dilution, and requires the dual presentation of basic
and diluted earnings per share. All per share amounts have been restated to
conform with the Standard.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," both of which will be effective for the Company in fiscal 1999.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No. 131 establishes
standards for the way that public business enterprises report selected
information about operating segments in annual and interim financial reports.
SFAS 131 also established standards for related disclosures about products and
services, geographic areas, and major customers. The implementation of SFAS 130
and 131 are not expected to have a material effect on the Company's financial
statements.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue
Recognition." SOP 97-2 provides guidance on when revenue should be recognized
and in what amounts for licensing, selling, leasing, or otherwise marketing
computer software. SOP 97-2 will be adopted by the Company during the first
quarter of fiscal 1999 and is not expected to have a material effect on the
Company's consolidated financial position, results of operations or financial
statement disclosures. In March 1998, the AICPA released SOP 98-1 "Accounting
for Costs of Computer Software Developed or Obtained for Internal Use" which
requires certain expenditures made for internal use software to be capitalized.
The Company is currently studying the impact of SOP 98-1.
PART II.
Item 5. Other Information
Proposals of stockholders intended for inclusion in the proxy statement to be
furnished to all stockholders entitled to vote at the next annual meeting of
stockholders of the Company must be received at the Company's principal
executive offices not later than October 10, 1998. The deadline for providing
timely notice to the Company of matters that stockholders otherwise desire to
introduce at the next annual meeting of stockholders of the Company is December
24, 1998. In order to curtail any controversy as to the date on which a
proposal was received by the Company, it is suggested that proponents submit
their proposals by Certified Mail, Return Receipt Requested.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
27 Financial Data Schedule (filed with SEC Edgar version only).
B. Reports on Form 8-K
No Current Report on Form 8-K was filed during the quarterly period ended June
30, 1998.
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, 1998.
DATAWATCH CORPORATION
/s/ Betsy J. Hartwell
Betsy J. Hartwell
Vice President of Finance and Chief Financial
Officer
(Principal Financial Officer)
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