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, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-19960
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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.)
900 Chelmsford Street, Tower 3, 5th Floor, Lowell, Massachusetts 01851
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(Address of principal executive offices) (Zip Code)
(978) 441-2200
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(Registrant's telephone number, including area code)
None
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(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 7, 2000
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Common stock, $.01 par value 9,194,779
<PAGE>
DATAWATCH CORPORATION AND SUBSIDIARIES
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements Page #
a) Consolidated Condensed Balance Sheets:
December 31, and September 30, 1999 3
b) Consolidated Condensed Statements of Operations:
Three Months Ended December 31, 1999 and 1998 4
c) Consolidated Condensed Statements of Cash Flows:
Three Months Ended December 31, 1999 and 1998 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 14
PART II. OTHER INFORMATION
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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
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DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE><CAPTION>
December 31, September 30,
1999 1999
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 1,910,671 $ 1,684,485
Short-term investments 1,285,651 1,479,698
Accounts receivable, net 6,486,647 7,282,452
Income tax recoverable 230,922 230,922
Inventories 377,985 409,753
Prepaid expenses 664,577 713,618
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Total current assets 10,956,453 11,800,928
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PROPERTY AND EQUIPMENT:
Property and equipment 4,145,635 4,298,545
Less accumulated depreciation and amortization (2,767,370) (2,805,418)
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Net property and equipment 1,378,265 1,493,127
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OTHER ASSETS 967,118 942,128
EXCESS OF COSTS OVER NET ASSETS
OF ACQUIRED COMPANY 511,233 544,572
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TOTAL ASSETS $ 13,813,069 $ 14,780,755
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,470,886 $ 2,851,120
Accrued expenses 1,217,458 1,136,365
Borrowings under credit lines 1,313,705 1,313,705
Deferred revenue 1,466,522 1,619,715
Current portion of long-term debt 25,854 41,789
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Total current liabilities 6,494,425 6,962,694
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LONG-TERM DEBT -- 354
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TOTAL LIABILITIES 6,494,425 6,963,048
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 92,227 92,211
Additional paid-in capital 19,866,935 19,864,296
Accumulated deficit (12,114,079) (11,676,735)
Accumulated other comprehensive loss (386,051) (321,677)
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7,459,032 7,958,095
Less treasury stock - at cost (140,388) (140,388)
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Total shareholders' equity 7,318,644 7,817,707
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,813,069 $ 14,780,755
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
3
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Item 1. Financial Statements (continued)
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DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE><CAPTION>
Three Months Ended
December 31,
---------------------------------
1999 1998
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<S> <C> <C>
NET SALES $ 6,710,436 $ 6,523,425
COSTS AND EXPENSES:
Cost of sales 1,570,899 1,454,520
Engineering & product development 406,208 638,635
Selling, general and administrative 5,166,005 5,998,137
Restructuring and centralization costs -- 199,637
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LOSS FROM OPERATIONS (432,676) (1,767,504)
INTEREST EXPENSE (41,033) (30,846)
OTHER INCOME, primarily interest 36,905 70,882
LOSS ON DISPOSAL OF FIXED ASSETS -- (7,766)
FOREIGN CURRENCY GAIN (LOSS) (540) 4,602
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NET LOSS $ (437,344) $(1,730,632)
=========== ===========
NET LOSS PER COMMON SHARE:
Basic $ (.05) $ (.19)
=========== ===========
=========== ===========
Diluted $ (.05) $ (.19)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING - Basic 9,189,638 9,148,312
ADJUSTMENT FOR POTENTIAL COMMON STOCK -- --
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WEIGHTED AVERAGE SHARES OUTSTANDING - Diluted 9,189,638 9,148,312
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
Item 1. Financial Statements (continued)
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DATAWATCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE><CAPTION>
Three Months Ended
December 31,
---------------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (437,344) $(1,730,632)
Adjustment to reconcile net loss to net cash:
Gain on disposition of fixed assets -- 7,766
Depreciation and amortization 207,123 311,927
Amortization of interest on short-term investments -- (53,905)
Changes in current assets and liabilities:
Accounts receivable 417,664 229,571
Inventories 28,484 94,058
Prepaid expenses 43,403 67,647
Accounts payable and accrued expenses 118,106 (832,388)
Deferred revenue (133,574) 32,063
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Net cash provided by (used in) operating activities 243,862 (1,873,893)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment and fixtures (59,313) (113,714)
Proceeds from sale of short-term investments 782,646 3,015,000
Purchase of short-term investments (588,599) (2,966,085)
Other assets (101,520) (121,901)
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Net cash provided by (used in) investing activities 33,214 (186,700)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,655 --
Principal payments on long-term obligations (15,627) (51,408)
Borrowings under credit lines, net -- 900,000
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Net cash (used in) provided by financing activities (12,972) 848,592
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EFFECT OF EXCHANGE RATE CHANGES ON CASH (37,918) --
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 266,186 (1,212,001)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,684,485 3,575,256
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,910,671 $ 2,363,255
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
Item 1. Financial Statements (continued)
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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. Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which, as amended, is effective after June 15, 2000. The new
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.
Management is currently assessing whether there will be any impact of SFAS No.
133 on the Company's consolidated financial statements upon adoption, which is
required in October 2000.
3. Inventories: The Company accounts for its inventories using a standard
cost methodology. Inventories were comprised of the following:
December 31, September 30,
1999 1999
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Materials $211,792 $233,830
Finished goods 166,193 175,923
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TOTAL $377,985 $409,753
======== ========
4. Comprehensive Income: The following table sets forth the reconciliation
of net loss to comprehensive loss:
<TABLE><CAPTION>
Three Months Ended December 31,
---------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net loss $ (437,344) $(1,730,632)
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments (64,374) 23,396
----------- -----------
Comprehensive loss $ (501,718) $(1,707,236)
=========== ===========
</TABLE>
Accumulated other comprehensive loss reported in the condensed
consolidated balance sheets consists only of foreign currency translation
adjustments.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
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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 replication 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 test and tables from Adobe PDF documents;
Monarch|ES, a configurable enterprise reporting solution that lets organizations
deliver reports electronically via their network; Monarch|ES Web, an extension
to Monarch|ES that supports browser-based report retrieval via the Worldwide
Web; Monarch|ES Report Publisher, an extension to Monarch|ES that supports
automated delivery of reports via MAPI-compliant email; Monarch Data Pump, a
data replication and migration tool that offers a shortcut for populating and
refreshing data marts and data warehouses and for migrating legacy data into new
applications; Quetzal (internationally) and Q-Support (in the U.S.), an
integrated help desk and asset management solution for multi-user, networked
support centers; and Quetzal|SC, a major new release of the Company's
Quetzal/Q-Support software, introduced in December, 1998.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1999 and 1998.
- ----------------------------------------------
Net sales for the three months ended December 31, 1999 were $6,710,000
which represents an increase of $187,000 or approximately 3% from net sales of
$6,523,000 for the three months ended December 31, 1998. This increase in net
sales is primarily attributable to an increase in the Company's Monarch,
Monarch|ES and Monarch Data Pump product sales. For the first quarter of fiscal
2000, the Monarch products accounted for approximately 56% of net sales (48% of
net sales for the first quarter of fiscal 1999), the Quetzal/Q-Support products
accounted for approximately 28% of net sales (37% of net sales for the first
quarter of fiscal 1999), and third-party product lines accounted for
approximately 16% of net sales (15% of net sales for the first quarter of fiscal
1999).
Cost of sales for the three months ended December 31, 1999 was
$1,571,000 or approximately 23% of net sales which is comparable to cost of
sales of $1,455,000 or approximately 22% of net sales for the three months ended
December 31, 1998.
Engineering and product development expenses were $406,000 for the three
months ended December 31, 1999, a decrease of $232,000 or approximately 36% from
$638,000 for the three months ended December 31, 1998. This decrease is
primarily attributable to a reduction in expenditures for development efforts
undertaken by developers under contract to the Company and internal quality
assurance personnel. During the first quarter of fiscal 1999 the Company
completed a restructuring that eliminated certain of its quality assurance
personnel.
Selling, general and administrative expenses were $5,166,000 for the
three months ended December 31, 1999, a decrease of $832,000 or approximately
14% from $5,998,000 for the three months ended December 31, 1998. This decrease
is primarily attributable to reductions of salaries, wages and expenses
resulting from the Company's restructuring efforts as well as a decrease in
promotional activities associated with the Company's Monarch products.
During the first quarter of fiscal 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
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approximately $200,000, have been paid. There was no change to the initial
estimate in subsequent quarters.
As a result of the foregoing, the loss from operations for the three
months ended December 31, 1999 was approximately $433,000 which compares to a
loss from operations of approximately $1,768,000 for the three months ended
December 31, 1998. The Company has not recorded any provision for income taxes
in the first 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 either to the presence of net operating loss
carryforwards (that are still reserved for) or the possibility of losses. Such
estimates are reviewed by management and are subject to change. The net loss for
the three months ended December 31, 1999 was $437,000 which compares to a net
loss of $1,731,000 for the three months ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by approximately $376,000 during the first
quarter of fiscal 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
September 30, 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. As of December 31,1999, the
Company had approximately $1,314,000 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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which, as amended, is effective
after June 15, 2000. The new 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. Management is currently assessing whether there
will be any impact of SFAS No. 133 on the Company's consolidated financial
statements upon adoption, which is required in October 2000.
YEAR 2000 READINESS DISCLOSURE STATEMENT
General
The Company is aware of the global concerns related to what is known as
the Year 2000 issue and the potential for the associated system failures and
business interruptions that may result. The Year 2000 issue concerns three main
areas: the ambiguity that may result from processing and storing data using
2-digit year formats; the recognition that the year 2000 is a leap year; and the
use of dates (most commonly 9/9/99) for special programming functions. Any of
these problems could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities for both the
Company and its customers who rely on its products.
Year 2000 Compliance Program
The Company has been aware of the Year 2000 issue for several years and
has been actively engaged in correcting Year 2000 deficiencies as they are
recognized.
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In late 1998, the Company appointed a Year 2000 Readiness Coordinator
responsible for developing and administering the Company's Year 2000 compliance
program. The purpose of the compliance program is to identify important internal
systems that are not yet Year 2000 compliant; to initiate replacement or
remedial action to assure that key systems and products will continue to operate
in the Year 2000 and to test the replaced or remediated systems and products; to
identify and contact key suppliers, vendors, customers and business partners to
evaluate their ability to maintain normal operations in the Year 2000; and to
develop appropriate contingency plans for dealing with foreseeable Year 2000
complications.
Internal Systems
The Company currently believes that all "mission critical" internal use
software is Year 2000 compliant. The Company also believes that internal use
hardware, including network servers and telephone systems, has been upgraded or
replaced so that it is now Year 2000 compliant. The only Year 2000 compliance
issues encountered since January 1, 2000 have been minor reporting issues caused
by internal use software, with all known problems now corrected. The total cost
to bring internal systems into compliance was approximately $38,000.
The Company contacted mission critical vendors concerning the status of
their Year 2000 readiness and received statements back from all such vendors
that they are Year 2000 compliant. The Company has not incurred any delays in
obtaining goods and services from any of its vendors due to Year 2000 related
issues. Should any vendor have Year 2000 compliance issues that result in a
disruption in its ability to deliver products or services, alternative suppliers
can and will be utilized immediately.
Software Products
The Company has designed, tested and continues to test the most current
versions of its products for Year 2000 issues. With respect to certain of those
products, the Company has relied on testing and representations by its
third-party developers. Based on its internal testing and the testing done by
its third-party developers to date, the Company believes that the latest
versions of its products are substantially Year 2000 compliant and are not
likely to pose a significant Year 2000 liability issue for the Company or any
significant operational problems for its customers. In the event problems are
discovered, the Company intends to issue product updates to correct such
anomalies. The Company has received Year 2000 compliance statements from vendors
of certain widely-accepted database and middleware tools which are used in the
development of its products and there are no known Year 2000 compliance issues
with such tools. In the event that Year 2000 compliance issues are found with
such tools in the future, the Company believes achieving compliance will require
upgrades to newer versions of such tools.
The Company also has performed and continues to perform limited Year
2000 compliance assessments of certain older versions of its products, and where
problems are discovered, will determine the practicality of modifying older
versions. Where such modifications are deemed impractical, the Company will
discontinue the sale of such older versions. Certain of the Company's customers
use older 16-bit operating systems which are believed not to be Year 2000
compliant and, until recently, the Company made available to these customers
older 16-bit versions of its software, which in some cases are not Year 2000
compliant. The Company believes it does not have material financial exposure to
customers with respect to older versions of its products. The Company estimates
the total cost for testing its products for Year 2000 compliance to be
approximately $35,000 and estimates the total cost associated with customer
communication to be approximately $17,000.
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
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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.
Contingency Plans
The Company developed Year 2000 contingency plans that provided limited
worldwide support for customers utilizing its software products for the period
December 31, 1999 through January 2, 2000. These contingency plans provided for
technical support and assistance during this holiday period for major customers
utilizing the Company's products in mission critical applications. Only three
calls were received during this period and the issues were either caused by
third-party software purchased from another supplier or resolved when the
customer was upgraded to more current versions of the Company's products.
The Company also developed a general corporate contingency plan to allow
immediate recognition of any internal system failures and identify resources
needed and available to restore operations in a timely manner. This plan which
was utilized to deal with some minor reporting problems associated with Year
2000 compliance issues of internal use software with no interruption to business
operations.
Risks Associated with Year 2000 Issue
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 utilizes third-party vendors for product development and
testing, for processing data and payments (e.g. payroll services), 401(k) plan
administration, check processing, medical benefits processing, etc. No Year 2000
compliance issues with third-party vendors have been identified to date. If it
is later shown that they are not Year 2000 compliant, the Company may be
required to process transactions manually or delay processing until such time as
the vendors are Year 2000 compliant. 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.
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 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations" 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 and related notes thereto. Such
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factors, among others, may have a material adverse effect upon the Company's
business, results of operations and financial condition.
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
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
In the first fiscal quarter of 2000, Monarch and Quetzal/Q-Support
accounted for approximately 56% and 28%, respectively, of the Company's net
sales. The Company is wholly dependent on Monarch and Quetzal/Q-Support. 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
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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
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.
12
<PAGE>
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, Remedy, and
Actuate) have substantially greater financial, marketing and technological
resources than the Company. No assurance can be given that the Company will have
the resources required to compete successfully in the future.
Dependence on Proprietary Software Technology
The Company's success is dependent upon proprietary software technology.
Although the Company does not own any patents on any such technology, it does
hold exclusive licenses to such technology and relies principally on a
combination of trade secret, copyright and trademark laws, nondisclosure and
other contractual agreements and technical measures to protect its rights to
such proprietary technology. Despite such precautions, there can be no assurance
that such steps will be adequate to deter misappropriation of such technology.
Reliance on Software License Agreements
Substantially all of the Company's products incorporate third-party
proprietary technology 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
13
<PAGE>
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, 1999, 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% (9.5% at December 31, 1999), are subject
to annual renewal. Had the interest rates under the lines of credit been 10%
greater or lesser than actual rates, the impact would not have been material in
the Company's consolidated financial statements for the three months ended
December 31, 1999. As of December 31, 1999, the Company had approximately
$1,314,000 outstanding on its 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. International subsidiary operating results are
translated into U.S. dollars and consolidated for reporting purposes. The impact
of currency exchange rate movements on intercompany transactions was immaterial
for the three months ended December 31, 1999 and 1998. 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 December 31, 1999.
14
<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 14th, 2000.
DATAWATCH CORPORATION
/s/ Betsy J. Hartwell
-----------------------------------
Betsy J. Hartwell
Vice President of Finance and Chief
Financial Officer
(Principal Financial Officer)
15
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