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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 JUNE 30, 2000
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
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 02-0405716
-------- ----------
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
900 CHELMSFORD STREET
TOWER 3, 5TH FLOOR
LOWELL, MASSACHUSETTS 01851
---------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 978-441-2200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at August 9, 2000
----- -----------------------------
Common Stock $0.01 par value 9,301,274
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<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
--------------------------------------
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements Page #
------
a) Consolidated Condensed Balance Sheets:
June 30, 2000 and September 30, 1999 3
b) Consolidated Condensed Statements of Operations:
Three and Nine Months Ended June 30, 2000 and 1999 4
c) Consolidated Condensed Statements of Cash Flows:
Nine Months Ended June 30, 2000 and 1999 5
d) Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
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 14
SIGNATURES 15
* No information provided due to inapplicability of item
<PAGE>
PART I.
Item 1. Financial Statements
--------------------
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
<TABLE><CAPTION>
June 30, September 30,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and equivalents $ 1,642,434 $ 1,684,485
Short-term investments 841,123 1,479,698
Accounts receivable, net 7,382,029 7,282,452
Income tax recoverable 230,922 230,922
Inventories 443,067 409,753
Prepaid expenses 968,551 713,618
------------ ------------
Total current assets 11,508,126 11,800,928
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment 3,937,930 4,298,545
Less accumulated depreciation and amortization (2,650,805) (2,805,418)
------------ ------------
Net property and equipment 1,287,125 1,493,127
------------ ------------
OTHER ASSETS 850,678 942,128
------------ ------------
EXCESS OF COSTS OVER NET ASSETS OF ACQUIRED
COMPANIES, NET 444,555 544,572
------------ ------------
TOTAL ASSETS $ 14,090,484 $ 14,780,755
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 2,228,158 $ 2,851,120
Accrued expenses 1,485,649 1,136,365
Borrowings under credit lines 1,175,000 1,313,705
Deferred revenue 1,927,221 1,619,715
Current portion of long-term obligations 4,528 41,789
------------ ------------
Total current liabilities 6,820,556 6,962,694
------------ ------------
LONG-TERM DEBT -- 354
------------ ------------
TOTAL LIABILITIES 6,820,556 6,963,048
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
---------------------
Common stock 93,320 92,211
Additional paid-in capital 20,048,867 19,864,296
Accumulated deficit (12,198,295) (11,676,735)
Accumulated other comprehensive loss (533,576) (321,677)
------------ ------------
7,410,316 7,958,095
Less treasury stock, at cost (140,388) (140,388)
------------ ------------
Total shareholders' equity 7,269,928 7,817,707
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,090,484 $ 14,780,755
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE><CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 6,873,801 $ $6,687,263 $ 20,767,117 $ 20,371,451
COSTS AND EXPENSES:
Cost of sales 1,578,085 1,545,817 5,083,071 4,768,722
Engineering & product Development 423,643 572,817 1,380,515 1,948,890
Selling, general & Administrative 4,853,009 4,979,108 14,774,708 16,878,061
Restructuring & centralization costs -- 449,130 -- 648,767
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 19,064 (859,609) (471,177) (3,872,989)
INTEREST EXPENSE (37,237) (33,586) (117,863) (98,207)
OTHER INCOME, primarily Interest 21,771 28,838 67,480 141,406
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAX 3,598 (864,357) (521,560) (3,829,790)
PROVISION (BENEFIT) FOR INCOME TAX -- (411,630) -- (411,630)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 3,598 $ (452,727) $ (521,560) $ (3,418,160)
============ ============ ============ ============
NET INCOME (LOSS) PER:
COMMON SHARE - Basic $ (.00) $ (.05) $ (.06) $ (.37)
============ ============ ============ ============
COMMON SHARE - Diluted $ (.00) $ (.05) $ (.06) $ (.37)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING - Basic 9,300,736 9,157,133 9,245,378 9,151,300
ADJUSTMENT FOR DILUTIVE
POTENTIAL COMMON STOCK 278,635 -- -- --
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES
OUTSTANDING: Diluted 9,579,371 9,157,133 9,245,378 9,151,300
============ ============ ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE><CAPTION>
Nine Months Ended June 30,
---------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (521,560) $(3,418,160)
Adjustment to reconcile net loss to net cash used in
operating activities:
Loss on disposition of equipment 16,665 3,080
Depreciation and amortization 624,879 866,181
Amortization of interest on short-term investments (8,491) (5,660)
Changes in current assets and liabilities:
Accounts receivable (232,502) (1,084,885)
Inventories (47,478) 68,566
Prepaid expenses (291,999) 511,424
Accounts payable and accrued expenses (78,218) (702,370)
Deferred revenue 418,074 244,136
----------- -----------
Net cash used in operating activities (120,630) (3,517,688)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and fixtures (365,193) (264,018)
Proceeds from sale of short-term investments 2,265,024 6,906,947
Purchase of short-term investments (1,617,958) (5,257,325)
Proceeds from sale of equipment-net 36,497 8,849
Other assets (160,606) (431,023)
----------- -----------
Net cash provided by investing activities 157,764 963,430
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock pursuant to
option exercises 185,680 40,817
Principal payments on long-term obligations (35,761) (121,314)
Borrowings (payments) under credit line, net (138,705) 1,250,000
----------- -----------
Net cash provided by financing activities 11,214 1,169,503
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (90,399) (99,478)
----------- -----------
NET DECREASE IN CASH AND EQUIVALENTS (42,051) (1,484,233)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,684,485 3,575,256
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,642,434 $ 2,091,023
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation: The accompanying unaudited condensed consolidated
financial statements include the accounts of Datawatch Corporation (the
"Company") and its wholly owned subsidiaries and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission regarding
interim financial reporting. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements and should be read in conjunction with the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended September 30, 1999.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements, and include all adjustments necessary
for fair presentation of the results of the interim periods presented. The
operating results for the interim periods presented are not necessarily
indicative of the results expected for the full year.
2. Inventories: The Company accounts for its inventories using a standard cost
methodology. Inventories were comprised of the following:
June 30, September 30,
2000 1999
-------- --------
Materials $252,461 $233,830
Finished goods 190,606 175,923
-------- --------
TOTAL $443,067 $409,753
======== ========
3. Comprehensive Income: The following table sets forth the reconciliation of
net loss to comprehensive loss:
<TABLE><CAPTION>
Three Months Ended June 30, Nine Months Ended June 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 3,598 $ (452,727) $ (521,560) $(3,418,160)
Other comprehensive loss:
Foreign currency translation
adjustments (108,588) (1,348) (211,899) (74,685)
----------- ----------- ----------- -----------
Comprehensive loss $ (104,990) $ (454,075) $ (733,459) $(3,492,845)
=========== =========== =========== ===========
</TABLE>
Accumulated other comprehensive loss reported in the condensed consolidated
balance sheets consists only of foreign currency translation adjustments.
4. Income Taxes: The three and nine months comparative periods do not reflect
a provision for income taxes. This reflects the Company's current estimate that
it will not be in a taxable position at the end of the current year in any
jurisdiction owing primarily to the presence of net operating loss carryforwards
(that are still fully reserved) and the uncertainty surrounding whether or not
the Company will have taxable income in the current year. Such estimates are
reviewed by management and are subject to change.
5. Recent Accounting Pronouncements: In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which, as
amended, is required to be adopted by the Company on October 1, 2000. This
standard requires that all companies record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting.
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<PAGE>
Management is currently assessing whether there will be any impact of SFAS No.
133 on the Company's consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
GENERAL
Datawatch Corporation (the "Company" or "Datawatch"), is engaged in the
design, development, manufacture, marketing, and support of business computer
software. Its products address the enterprise reporting, business intelligence,
data transformation and help desk markets.
Datawatch's principal products are: Monarch, a report mining application
that lets users extract and manipulate data from ASCII report files produced on
any mainframe, midrange, client/server or PC system; Redwing, a plug-in for
Adobe Acrobat that lets users extract text and tables from Adobe PDF documents;
Monarch|ES, a configurable enterprise reporting solution that lets organizations
deliver reports electronically via their network; Monarch|ES Report Portal, a
newly released interface to Monarch|ES that provides thin client access to all
of an organization's reporting systems without new programming; Monarch Data
Pump, a data transformation and migration tool for populating and refreshing
data marts and data warehouses, for migrating legacy data into new applications,
and for providing automated delivery of reports via email; and Quetzal|SC, an
integrated help desk and asset management solution for multi-user, networked
support centers.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999.
------------------------------------------
Net sales for the three months ended June 30, 2000 were $6,874,000 which
represents an increase of $187,000 from net sales of $6,687,000 for the three
months ended June 30, 1999. This increase in net sales results primarily from an
increase in the net sales of the Company's Monarch and third-party products. For
the three months ended June 30, 2000, Monarch products accounted for
approximately 63% of net sales (as compared to 53% of net sales for the third
quarter of fiscal 1999), Quetzal|SC products accounted for approximately 21% of
net sales, (as compared to 34% of net sales for the third quarter of fiscal
1999) and third-party product lines accounted for approximately 16% of net sales
(as compared to 13% of net sales for the third quarter of fiscal 1999).
Cost of sales for the three months ended June 30, 2000 was $1,578,000 or
approximately 23% of net sales which is comparable to cost of sales for the
three months ended June 30, 1999 of $1,546,000 or approximately 23% of net
sales.
Engineering and product development expenses for the three months ended
June 30, 2000 were $424,000, which represents a decrease of $149,000 or
approximately 26% from $573,000 for the three months ended June 30, 1999. This
decrease does not imply that the Company's development efforts are slowing but
is reflective of a reduction of expenditures for development efforts undertaken
by developers under contract to the Company for the Quetzal|SC and Monarch|ES
products.
Selling, general and administrative expenses for the three months ended
June 30, 2000 were $4,853,000, which represents a decrease of $126,000 or
approximately 3% from $4,979,000 for the three months ended June 30, 1999. This
decrease is primarily due to the decrease in aggregate salaries, wages and
expenses resulting from the Company's fiscal 1999 restructuring efforts.
During the three months ended June 30, 1999, the Company approved and
completed a restructuring plan to further reduce costs and focus resources on
7
<PAGE>
key areas of the business. The restructuring plan consisted of charges for
severance benefits and related costs for 21 terminated employees. These charges,
totaling approximately $449,000, have been paid. There was no change to the
initial estimate in subsequent quarters.
Therefore, while revenues were generally consistent period over period, the
Company's costs decreased owing to the aforementioned restructuring program. As
a result the Company recorded income from operations for the three months ended
June 30, 2000 of $19,000, which compares to a loss from operations of $860,000
for the three months ended June 30, 1999. The Company has not recorded any
provision for income taxes in the third quarter of fiscal 2000. This reflects
the Company's current estimate that it will not be in a taxable position at the
end of the current year in any jurisdiction owing primarily to the presence of
net operating loss carryforwards (that are still fully reserved) and the
uncertainty surrounding whether or not the Company will have taxable income in
the current year. Such estimates are reviewed by management and are subject to
change. During the three months ended June 30, 1999, the Company recorded an
income tax benefit of approximately $412,000 which reflected tax refunds. Net
income for the three months ended June 30, 2000 was $4,000, which compares to a
net loss of $453,000 for the three months ended June 30, 1999.
Nine Months Ended June 30, 2000 and 1999.
-----------------------------------------
Net sales for the nine months ended June 30, 2000 were $20,767,000, which
represents an increase of $396,000 or approximately 2% from net sales of
$20,371,000 for the nine months ended June 30, 1999. Net sales for the nine
months ended June 30, 1999 included a non-recurring licensing and development
fee of $740,000 received from Adobe for integration of certain technology from
the Company's Redwing product into Adobe Acrobat. Excluding this fee, the
increase in 1999 net sales would have been $1,136,000 or 6%. This increase in
net sales results primarily from an increase in net sales of the Company's
Monarch, Monarch|ES and third-party products. For the nine months ended June 30,
2000, Monarch products accounted for approximately 57% of net sales (as compared
to 52% of net sales for the nine months ended June 30, 1999), Quetzal|SC
products accounted for approximately 25% of net sales, (as compared to 35% of
net sales for the nine months ended June 30, 1999) and third-party product lines
accounted for approximately 18% of net sales (as compared to 13% of net sales
for the nine months ended June 30, 1999).
Cost of sales for the nine months ended June 30, 2000 was $5,083,000 or
approximately 24% of net sales. Cost of sales for the nine months ended June 30,
1999 was $4,769,000 or approximately 23% of net sales. Included in the cost of
sales for the nine months ended June 30, 1999 were non-recurring engineering
expenses of approximately $420,000 paid to a third-party developer on behalf of
Adobe which has licensed certain technology from the Company's Redwing product.
Excluding these expenses from cost of sales and excluding from net sales the
non-recurring licensing and development fee received from Adobe, cost of sales
for the nine months ended June 30, 1999 would have been $4,349,000 or 22%. This
increase in cost of goods sold as a percentage of net sales results from the
increase in net sales of the Company's third-party product lines, which have a
lower margin.
Engineering and product development expenses for the nine months ended June
30, 2000 were $1,381,000, which represents a decrease of $568,000 or
approximately 29% from $1,949,000 for the nine months ended June 30, 1999. This
decrease does not imply that the Company's development efforts are slowing but
is reflective of a reduction of expenditures for development efforts undertaken
by developers under contract to the Company and internal quality assurance
personnel for the Company's Quetzal|SC and Monarch|ES products.
Selling, general and administrative expenses for the nine months ended June
30, 2000 were $14,775,000, which represents a decrease of $2,103,000 or
approximately 12% from $16,878,000 for nine months ended June 30, 1999.
8
<PAGE>
Included in the expenses for the nine months ended June 30, 1999 were
approximately $631,000 of non-recurring legal expenses associated with
litigation which has been settled. Excluding these costs, selling, general and
administrative expenses would have been $16,247,000 for the nine months ended
June 30, 1999. The decrease of $1,472,000, or approximately 9%, is due primarily
to the decrease in aggregate salaries, wages and expenses resulting from the
Company's fiscal 1999 restructuring efforts as well as a decrease in promotional
activities.
During the nine months ended June 30, 1999, the Company approved and
completed a restructuring plan to centralize in the U.S. the quality assurance
efforts for its Quetzal|SC product. The restructuring plan consisted of charges
for severance benefits and related costs for 10 terminated employees. These
charges, totaling approximately $200,000, have been paid. There was no change to
the initial estimate in subsequent quarters.
During the nine months ended June 30, 1999, the Company approved and
completed a restructuring plan to further reduce costs and focus resources on
key areas of the business. The restructuring plan consisted of charges for
severance benefits and related costs for 21 terminated employees. These charges,
totaling approximately $449,000, have been paid. There was no change to the
initial estimate in subsequent quarters.
Therefore, while revenues were generally consistent period over period, the
Company's costs decreased owing to the aforementioned restructuring programs. As
a result the Company recorded a loss from operations for the nine months ended
June 30, 2000 of $471,000, which compares to a loss from operations of
$3,873,000 for the nine months ended June 30, 1999. The Company has not recorded
any provision for income taxes in the nine months ended June 30, 2000. This
reflects the Company's current estimate that it will not be in a taxable
position at the end of the current year in any jurisdiction owing primarily to
the presence of net operating loss carryforwards (that are still fully reserved)
and the uncertainty surrounding whether or not the Company will have taxable
income in the current year. Such estimates are reviewed by management and are
subject to change. During the nine months ended June 30, 1999, the Company
recorded an income tax benefit of approximately $412,000 which reflected tax
refunds. Net loss for the nine months ended June 30, 2000 was $522,000, which
compares to a net loss of $3,418,000 for the nine months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by approximately $151,000 during the nine months
ended June 30, 2000 primarily as a result of unprofitable operations.
The Company's management believes that its currently anticipated capital
needs for future operations of the Company will be satisfied through at least
December 27, 2000 by funds generated from operations and by availability under
the Company's line of credit agreements. The lines provide for maximum
borrowings up to the lesser of $3,500,000 or 50% to 90% of defined eligible
accounts receivable, and expire on December 27, 2000. The Company anticipates
the line of credit agreements will be renewed. As of June 30, 2000, the Company
had approximately $1,175,000 in outstanding borrowings under these lines.
Management believes that the Company's current operations are not
materially impacted by the effects of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended, is required to be
adopted by the Company on October 1, 2000. This standard requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
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<PAGE>
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. Management is currently assessing
whether there will be any impact of SFAS No. 133 on the Company's consolidated
financial statements.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The Company believes its Year 2000 compliance program has allowed it to
identify and correct any material Year 2000 compliance deficiencies. It is
unlikely that the Company will be required to initiate additional Year 2000
compliance efforts other than those required in the normal operation of its
business. If unforeseen compliance efforts are required, the Year 2000 issue
could result in material costs and have a material adverse effect on the
Company. However, the Company believes that this risk is minimal. The Company
has warranted, to certain customers, that certain of its products are Year 2000
compliant. Non-compliance with these warranties may result in legal action for
breach of warranty. The Company believes that the risk of such legal action is
minimal.
Since January 1, 2000, a few of the Company's customers have reported Year
2000 compliance issues with the Company's products. All known product Year 2000
compliance issues are considered minor in nature and, to our knowledge, have not
adversely affected mission critical operations of any of the Company's
customers. All such product related Year 2000 compliance issues have either been
corrected or are in the process of being corrected by free-of-charge product
updates. The Company believes that no material costs or material adverse effects
will result from product related Year 2000 compliance issues.
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 Report on
Form 10-Q that are not historical facts (including, but not limited to
statements contained in "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" of Part I of this Report on Form
10-Q relating to liquidity and capital resources) may constitute forward looking
statements and are made under the safe harbor provisions of The Private
Securities Litigation Reform Act of 1995. The Company's actual results of
operations and financial condition have varied and may in the future vary
significantly from those stated in any forward looking statements. Factors that
may cause such differences include, without limitation, the risks, uncertainties
and other information discussed below and within this Report on Form 10-Q, as
well as the accuracy of the Company's internal estimates of revenue and
operating expense levels. The following discussion of the Company's risk factors
should be read in conjunction with the financial statements contained herein and
related notes thereto. Such factors, among others, may have a material adverse
effect upon the Company's business, results of operations and financial
condition.
Fluctuations in Quarterly Operating Results
The Company's future operating results could vary substantially from
quarter to quarter because of uncertainties and/or risks associated with such
things as technological change, competition, delays in the introduction of
products or product enhancements and general market trends. Historically, the
Company has operated with little backlog of orders because its software products
are generally shipped as orders are received. As a result, net sales in any
quarter are substantially dependent on orders booked and shipped in that
quarter. Because the Company's staffing and operating expenses are based on
anticipated revenue levels and a high percentage of the Company's costs are
fixed in the short-term, small variations in the timing of revenues can cause
10
<PAGE>
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.
Dependence on Principal Products
For the nine months ended June 30, 2000, Monarch and Quetzal|SC products
accounted for approximately 57% and 25%, respectively, of the Company's net
sales. The Company is wholly dependent on Monarch and Quetzal|SC products. As a
result, any factor adversely affecting sales of either of these products could
have a material adverse effect on the Company. The Company's future financial
performance will depend in part on the successful introduction of its new and
enhanced versions of these products and development of new versions of these and
other products and subsequent acceptance of such new and enhanced products. In
addition, competitive pressures or other factors may result in significant price
erosion that could have a material adverse effect on the Company's business,
financial condition or results of operations.
International Sales
The Company anticipates that international sales will continue to account
for a significant percentage of its net sales. A significant portion of the
Company's net sales will therefore be subject to risks associated with
international sales, including unexpected changes in legal and regulatory
requirements, changes in tariffs, exchange rates and other barriers, political
and economic instability, difficulties in account receivable collection,
difficulties in managing distributors or representatives, difficulties in
staffing and managing international operations, difficulties in protecting the
Company's intellectual property overseas, seasonality of sales and potentially
adverse tax consequences.
Acquisition Strategy
Although the Company has no current acquisition plans, it has addressed and
may continue to address the need to develop new products, in part, through the
acquisition of other companies. Acquisitions involve numerous risks including
difficulties in the assimilation of the operations, technologies and products of
the acquired companies, the diversion of management's attention from other
business concerns, risks of entering markets in which the Company has no or
limited direct prior experience and where competitors in such markets have
stronger market positions, and the potential loss of key employees of the
acquired company. Achieving and maintaining the anticipated benefits of an
acquisition will depend in part upon whether the integration of the companies'
business is accomplished in an efficient and effective manner, and there can be
no assurance that this will occur. The successful combination of companies in
the high technology industry may be more difficult to accomplish than in other
industries.
Dependence on New Introductions; New Product Delays
Growth in the Company's business depends in substantial part on the
continuing introduction of new products. The length of product life cycles
depends in part on end-user demand for new or additional functionality in the
Company's products. If the Company fails to accurately anticipate the demand
for, or encounters any significant delays in developing or introducing, new
products or additional functionality on its products, there could be a material
adverse effect on the Company's business. Product life cycles can also be
affected by the introduction by suppliers of operating systems of comparable
functionality within their products. The failure of the Company to anticipate
11
<PAGE>
the introduction of additional functionality in products developed by such
suppliers could have a material adverse effect on the Company's business. In
addition, the Company's competitors may introduce products with more features
and lower prices than the Company's products. Such increase in competition could
adversely affect the life cycles of the Company's products, which in turn could
have a material adverse effect on the Company's business.
Software products may contain undetected errors or failures when first
introduced or as new versions are released. There can be no assurance that,
despite testing by the Company and by current and potential end-users, errors
will not be found in new products after commencement of commercial shipments,
resulting 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.
Year 2000 Issue
Although the Company does not expect that the Year 2000 issue will have a
material effect on the Company's results of operations or financial condition,
the Company is potentially exposed to Year 2000 issues with respect to internal
software and external product offerings. If the Company's internal systems or
its products fail to operate properly as a result of Year 2000, the Company's
results of operations and financial condition could be materially and adversely
impacted. The Company continues to evaluate the Year 2000 issue. See "Year 2000
Readiness Disclosure Statement," particularly the subsection headed "Risks
Associated with Year 2000 Issue" which appears immediately before this "Risk
Factors" section of this Report on Form 10-Q, for a discussion of the Company's
Year 2000 readiness and the risks associated with the Year 2000 issue.
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 IBM, Cognos and Network
Associates) have substantially greater financial, marketing and technological
resources than the Company. No assurance can be given that the Company will have
the resources required to compete successfully in the future.
Dependence on Proprietary Software Technology
The Company's success is dependent upon proprietary software technology.
Although the Company does not own any patents on any such technology, it does
hold exclusive licenses to such technology and relies principally on a
combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its rights to
such proprietary technology. Despite such precautions, there can be no
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assurance that such steps will be adequate to deter misappropriation of such
technology.
Reliance on Software License Agreements
Some of the Company's products incorporate third-party proprietary
technology that is generally licensed to the Company on an exclusive, worldwide
basis. Failure by such third parties to continue to develop technology for the
Company and license such technology to the Company could have a material adverse
effect on the Company's business and results of operations.
Indirect Distribution Channels
The Company sells 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 June 30, 2000, the Company did not participate in any derivative
financial instruments, or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. The Company holds no
investment securities which would require disclosure of market risk.
Primary Market Risk Exposures.
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company utilizes U.S.
dollar denominated borrowings to fund its operational needs through its
$3,500,000 working capital line of credit agreements. The lines, which currently
bear an interest rate of prime plus 1% (10.5% at June 30, 2000), are subject to
annual renewal. Had the interest rates under the lines of credit been 10%
greater or lesser than actual rates, the impact would not have been material
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in the Company's consolidated financial statements for the period ended June 30,
2000. As of June 30, 2000, the Company had approximately $1,175,000 in
outstanding borrowings under working capital lines.
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. Accordingly, none of the currency movements are reflected in the
Company's consolidated statement of operations. Currently the Company does not
engage in foreign currency hedging activities.
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
No Current Report on Form 8-K was filed during the quarterly period
ended June 30, 2000.
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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 10, 2000.
DATAWATCH CORPORATION
/s/ Betsy J. Hartwell
--------------------------------------
Betsy J. Hartwell
Vice President of Finance and Chief
Financial Officer (Principal Financial Officer)
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