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 December 31, 1997
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 February 6, 1998
Common stock, $.01 par value 9,127,477
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page #
a) Consolidated Condensed Balance Sheets: 3
December 31, 1997 and September 30, 1997
b) Consolidated Condensed Statements of Operations: 4
Three Months Ended December 31, 1997 and 1996
c) Consolidated Condensed Statements of Cash Flows: 5
Three Months Ended December 31, 1997 and 1996
d) Notes to Unaudited Consolidated Financial Statements 6
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 *
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES
* No information provided due to inapplicability of item.
<PAGE>
PART I.
Item 1. Financial Statements
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
December 31, September 30,
1997 1997
----------------- -----------------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 7,483,668 $ 1,586,875
Short-term investments 4,879,481
Accounts receivable, net 6,859,604 7,810,169
Inventories 603,985 876,767
Prepaid advertising and other expenses 1,031,623 2,000,717
------------- -------------
Total current assets 20,858,361 12,274,528
------------- -------------
PROPERTY AND EQUIPMENT:
Property and equipment 3,782,278 4,198,085
Less accumulated depreciation and
amortization (2,035,137) (2,304,705)
------------- -------------
Net property and equipment 1,747,141 1,893,380
------------- -------------
OTHER ASSETS 267,471 551,639
------------- -------------
EXCESS OF COSTS OVER NET ASSETS
OF ACQUIRED COMPANIES 1,037,365 1,427,098
------------- -------------
TOTAL ASSETS $23,910,338 $16,146,645
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,483,480 $ 3,834,038
Accrued expenses 3,851,247 1,340,995
Deferred revenue 1,133,360 2,143,203
Borrowings under credit lines 3,338
Current portion of long-term debt 199,826 501,133
------------- -------------
Total current liabilities 7,667,913 7,822,707
------------- -------------
LONG-TERM DEBT 120,705 1,399,089
------------- -------------
TOTAL LIABILITIES 7,788,618 9,221,796
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock 91,429 91,160
Additional paid-in capital 19,772,963 19,737,963
Accumulated deficit (3,460,116) (12,533,550)
Cumulative translation adjustment (142,168) (230,336)
------------- -------------
16,262,108 7,065,237
Less treasury stock - at cost (140,388) (140,388)
Total shareholders' equity 16,121,720 6,924,849
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $23,910,338 $16,146,645
============= =============
See notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
Item 1. Financial Statements (continued)
<TABLE>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
1997 1996
------------ ------------
<S> <C> <C>
NET SALES:
IBM PC based products $6,206,085 $6,833,448
Macintosh based products 172,254 1,386,024
------------ ------------
6,378,339 8,219,472
COST AND EXPENSES:
Cost of sales 1,460,004 1,460,033
Engineering & product development 419,137 659,417
Selling, general and administrative 6,388,328 5,710,576
Restructuring costs 2,364,246
------------ ------------
INCOME (LOSS) FROM OPERATIONS (4,253,376) 389,446
INTEREST EXPENSE (18,470) (30,095)
OTHER INCOME, primarily interest 143,243 16,029
GAIN ON SALE OF PRODUCT LINE 15,431,253
FOREIGN CURRENCY TRANSACTION GAIN (LOSS) (4,216) 47,058
PROVISION FOR INCOME TAX 2,225,000
------------- -------------
NET INCOME $9,073,434 $ 422,438
============= =============
NET INCOME PER COMMON SHARE - Basic $ 1.00 $ .05
============= =============
NET INCOME PER COMMON SHARE - Diluted $ .97 $ .05
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 9,129,335 9,042,576
LESS WEIGHTED AVERAGE SHARES HELD IN TREASURY (32,052) (19,161)
------------- -------------
WEIGHTED AVERAGE SHARES
OUTSTANDING - Basic 9,097,283 9,023,415
ADJUSTMENT FOR COMMON STOCK EQUIVALENTS 248,512 130,785
------------- -------------
WEIGHTED AVERAGE SHARES
OUTSTANDING - Diluted 9,345,795 9,154,200
============= =============
See notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
Item 1. Financial Statements (continued)
<TABLE>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $9,073,434 $ 422,438
Adjustment to reconcile net income to net cash:
Gain on sale of product line to Dr Solomon's
Software (15,431,253)
Depreciation and amortization 286,611 383,397
Changes in current assets and liabilities:
Inventories 183,568 (86,127)
Prepaid advertising and other expenses 721,303 (280,387)
Accounts receivable 578,756 (1,489,576)
Accounts payable and accrued expenses 382,853 270,136
Deferred revenue (171,216) 215,888
------------- -----------
Net cash used in operating activities (4,375,944) (564,231)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and fixtures (171,265) (304,783)
Acquisition of Datawatch Europe Ltd. (formerly
Guildsoft Holdings Ltd.), net of working capital
acquired 49,470
Proceeds from sale of product line to
Dr Solomon's Software 16,750,000
Proceeds from maturity of short-term investments 637,956
Purchase of short-term investments (4,879,481) (488,811)
Other assets 124,975 31,135
------------ -----------
Net cash used (provided by) investing activities 11,824,229 (75,033)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 35,269 9,333
Principal payments on long-term obligations (83,423) (44,498)
Principal payments on bank term loan (1,500,000)
Borrowings under credit lines, net (3,338) (318,811)
------------ -----------
Net cash used in financing activities (1,551,492) (353,976)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 5,896,793 (993,240)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,586,875 1,696,349
------------ -----------
CASH AND EQUIVALENTS, END OF PERIOD $7,483,668 $ 703,109
============ ===========
See notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
Item 1. Financial Statements (continued)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation: The consolidated condensed balance sheet as of
December 31, 1997 and the consolidated condensed statements of operations for
the three months ended December 31, 1997 and 1996, and the consolidated
condensed statements of cash flows for the three months ended December 31, 1997
and 1996 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
financial statements for the year ended September 30, 1997 which appear in the
Company's Form 10-K.
2. Inventories: The Company accounts for its inventories using a standard cost
methodology. Inventories were comprised of the following:
December 31, September 30,
1997 1997
----------------- ----------------
Raw materials $ 210,192 $ 338,560
Work in process 1,825 1,825
Finished goods 391,968 536,382
----------------- ----------------
TOTAL $ 603,985 $ 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 $13,200,000. The assets sold consist primarily of inventory,
property and equipment, trademarks, and the technological rights related to
these product lines.
4. Long-term Debt: During the three months ended December 31, 1997 the Company
paid down its outstanding $1,500,000 term loan with proceeds from the sale of
its two product lines.
5. Restructuring: Subsequent to the sale of its Macintosh software product
lines, 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 first quarter 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 were either paid ($1,549,000) or accrued
($335,000) in the first quarter. The restructuring plan also included payments
made to outside developers associated with the centralization of the Company's
development efforts. These charges, totaling $433,000, were either paid
($339,000) or accrued ($94,000) in the first quarter. Those benefits accrued
will be paid in the second quarter of fiscal 1998.
<PAGE>
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
innovative, knowledge-based software solutions for the business enterprise.
DATAWATCH's principal products are: Monarch(TM), a report mining solution
that leverages legacy reports and reporting systems to provide business
intelligence on the Windows desktop; Monarch/ES(TM), a client/server version of
Monarch with an integrated report warehouse subsystem; Redwing(TM), a plug-in
for Abode(R) Acrobat(R) that accurately extracts text and tables from PDF files;
Q-Support(TM) (in the United States) and Quetzal(TM) (internationally), an
integrated help desk and asset management solution for multi-user, networked
support centers.
On October 9, 1997, the Company sold its Virex(R) and netOctopus(TM)
product lines to Dr Solomon's Software, Inc. ("Dr Solomon's Software") for
$16,750,000 in cash, resulting in an after tax gain of approximately
$13,200,000.
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 the 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 maintain profitability or that revenue
growth can be sustained in the future.
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended December 31, 1997 and 1996.
Net sales for the three months ended December 31, 1997 were $6,378,000, which
represents a decrease of $1,841,000 from the sales of $8,219,000 for the three
months ended December 31, 1996. 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 three months ended December 31, 1997 were $6,206,000 which represents a
decrease of $627,000 from net sales of $6,833,000 for the three months ended
December 31, 1996. This decrease in net sales results from a decrease in
international sales of the Company's Quetzal product and a decrease in domestic
sales of the Company's Monarch product line. Excluding sales of the Company's
Macintosh based products, Monarch accounted for approximately 46% of sales,
while Quetzal/Q-Support accounted for approximately 40%.
Cost of sales for the three months ended December 31, 1997 was $1,460,000 or
approximately 23% of net sales. Cost of sales for the three months ended
December 31, 1996 was $1,460,000 or approximately 18% of net sales. Excluding
the Company's Macintosh based products, cost of sales would have been 23% of net
sales for the three months ended December 31, 1997 which compares to 20% for the
same period a year earlier. This increase in cost of sales, as a percentage of
net sales, is principally due to product sales through Guildsoft Limited, an
indirect wholly owned subsidiary of the Company based in England, which bear
lower gross margins than the Company's other products. Guildsoft sales
represented 13% of net sales for the three months ended December 31, 1997 and 7%
of net sales for the comparable period in the prior year. Guildsoft's higher
percentage of total net sales is principally due to lower sales resulting from
sale of the Macintosh product lines. This results in an increase to cost of
sales when expressed as a percentage of net sales.
Engineering and product development expenses were $419,000 for the three months
ended December 31, 1997, a decrease of $240,000 or approximately 36% from
$659,000 for the three months ended December 31, 1996. 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 subsequent reorganization.
Selling, general and administrative expenses were $6,388,000 for the three
months ended December 31, 1997, an increase of $677,000 from $5,711,000 for the
three months ended December 31, 1996. Included in the expenses for the three
months ended December 31, 1997 were $196,000 of one-time expenses associated
with leased spaced no longer required as a result of the Company's restructuring
subsequent to the sale of its Macintosh product lines. Excluding these expenses,
the increase would have been $481,000 or approximately 8%. This increase is
primarily attributable to increases in personnel within the Company's worldwide
sales and marketing organizations.
<PAGE>
During the three months ended December 31, 1997, 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 $13,200,000. This is
reflected in the financial statements in "other income". The sale of these
product lines precipitated 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 first
quarter 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 were either paid ($1,549,000) or
accrued ($335,000) in the first quarter. The restructuring plan also included
payments made to outside developers associated with the centralization of the
Company's development efforts. These charges, totaling $433,000, were either
paid ($339,000) or accrued ($94,000) in the first quarter. Those benefits
accrued will be paid in the second quarter of fiscal 1998. The restructuring is
expected to lower annual operating expenses and cash outflows by approximately
$2,300,000 annually.
As a result of the foregoing, the loss from operations for the three months
ended December 31, 1997 was $4,253,000, which compares to income from operations
of $389,000 for the three months ended December 31, 1996. Due to the $15,431,000
pre-tax gain on the sale of the Macintosh software product lines, the net income
for the three months ended December 31, 1997 was $9,073,000 which compares to
net income of $422,000 for the three months ended December 31, 1996.
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 $13,200,000.
The Company's management believes that its currently anticipated capital needs
for future operations of the Company will be satisfied through at least
September 30, 1998 by funds currently available from the above mentioned sale.
Working capital increased by approximately $8,739,000 during the three months
ended December 31, 1997 primarily as a result of the above mentioned
divestiture.
Management believes that the Company's current operations are not 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. The adoption of this standard did not have a
material effect on the Company's earnings per share.
<PAGE>
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 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.
<PAGE>
PART II.
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
Current Report on Form 8-K dated October 9, 1997 filed with the Securities and
Exchange Commission on October 24, 1997 and relating to the sale of the
Company's Virex and netOctopus product lines to Dr Solomon's Software.
<PAGE>
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 13, 1998.
DATAWATCH CORPORATION
/s/ Betsy J. Hartwell
---------------------------------
Betsy J. Hartwell
Vice President of Finance and
Chief Financial Officer
(Principal Financial officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-30-1997
<CASH> 7,483,668
<SECURITIES> 4,879,481
<RECEIVABLES> 6,859,604
<ALLOWANCES> 0
<INVENTORY> 603,985
<CURRENT-ASSETS> 20,858,361
<PP&E> 3,782,278
<DEPRECIATION> 2,035,137
<TOTAL-ASSETS> 23,910,338
<CURRENT-LIABILITIES> 7,667,913
<BONDS> 0
0
0
<COMMON> 91,429
<OTHER-SE> 16,030,291
<TOTAL-LIABILITY-AND-EQUITY> 23,910,338
<SALES> 6,378,339
<TOTAL-REVENUES> 6,378,339
<CGS> 1,460,004
<TOTAL-COSTS> 9,171,711
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,470
<INCOME-PRETAX> 11,298,434
<INCOME-TAX> 2,225,000
<INCOME-CONTINUING> 9,073,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,073,434
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .97
</TABLE>
