-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D295U/OdLCXuxdjOMsCMykXyEC7i3FiMdMHRd34oaJkDgmlK6D8dX14D0VQFdtft fuJ3o8ERgbR/vDEr2/UxjA== 0000792130-98-000015.txt : 19980817 0000792130-98-000015.hdr.sgml : 19980817 ACCESSION NUMBER: 0000792130-98-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATAWATCH CORP CENTRAL INDEX KEY: 0000792130 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 020405716 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19960 FILM NUMBER: 98689858 BUSINESS ADDRESS: STREET 1: 234 BALLARDVALE ST CITY: WILMINGTON STATE: MA ZIP: 01887 BUSINESS PHONE: 5089889700 10-Q 1 13 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 0-19960 Datawatch Corporation (Exact name of registrant as specified in its charter) Delaware 02-0405716 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 234 Ballardvale Street, Wilmington Massachusetts 01887 (Address of principal executive offices) (Zip Code) (978) 988-9700 (Registrant's telephone number, including area code) None (Former name, former address, former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: Class Outstanding at August 5, 1998 Common stock, $.01 par value 9,148,312 DATAWATCH CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page # a) Consolidated Condensed Balance Sheets: 3 June 30, 1998 and September 30, 1997 b) Consolidated Condensed Statements of Operations: 4 Three Months Ended June 30, 1998 and 1997 Nine Months Ended June 30, 1998 and 1997 c) Consolidated Condensed Statements of Cash Flows: 5 Nine Months Ended June 30, 1998 and 1997 d) Notes to Unaudited Consolidated Condensed Financial 6 Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings * Item 2. Changes in Securities * Item 3. Default upon Senior Securities * Item 4. Submission of Matters to a Vote of Security Holders * Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES * No information provided due to inapplicability of item. PART I. Item 1. Financial Statements DATAWATCH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS June 30, September 30, 1998 1997 ASSETS (Unaudited) (Audited) CURRENT ASSETS: Cash and equivalents $3,395,697 $ 1,586,875 Short-term investments 3,775,669 Accounts receivable, net 7,174,941 7,810,169 Inventories 511,735 876,767 Prepaid advertising and other 1,883,402 2,000,717 expenses Total current assets 16,741,444 12,274,528 PROPERTY AND EQUIPMENT: Property and equipment 4,255,415 4,198,085 Less accumulated depreciation and amortization (2,376,310) (2,304,705) Net property and equipment 1,879,105 1,893,380 OTHER ASSETS 374,472 551,639 EXCESS OF COSTS OVER NET ASSETS OF ACQUIRED COMPANIES 829,182 1,427,098 TOTAL ASSETS $19,824,203 $16,146,645 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $2,461,186 $ 3,837,376 Accrued expenses 1,291,442 1,340,995 Deferred revenue 1,174,863 2,143,203 Current portion of long-term 185,580 501,133 debt Total current liabilities 5,113,071 7,822,707 LONG-TERM DEBT 36,481 1,399,089 TOTAL LIABILITIES 5,149,552 9,221,796 SHAREHOLDERS' EQUITY: Common stock 91,802 91,160 Additional paid-in capital 19,823,888 19,737,963 Accumulated deficit (5,014,481) (12,533,550 ) Cumulative translation (86,170) adjustment (230,336) 14,815,039 7,065,237 Less treasury stock - at cost (140,388) (140,388) Total shareholders' equity 14,674,651 6,924,849 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $19,824,203 $16,146,645 See notes to unaudited consolidated condensed financial statements. Item 1. Financial Statements (continued) DATAWATCH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, 1998 1997 1998 1997 IBM PC based products $6,533,423 $5,968,968 $19,116,255 $19,609,464 Macintosh based products - 1,638,971 172,254 4,414,847 NET SALES 6,533,423 7,607,939 19,288,509 24,024,311 COSTS AND EXPENSES: Cost of sales 1,263,342 1,488,181 3,987,016 4,403,260 Engineering & product development 739,584 789,899 1,658,110 2,104,635 Selling, general and administrative 6,280,434 6,737,419 18,298,650 18,398,343 Restructuring costs 2,364,246 INCOME (LOSS) FROM OPERATIONS (1,749,937) (1,407,560) (7,019,513) (881,927) INTEREST EXPENSE (13,178) (55,497) (45,514) (106,376) OTHER INCOME, primarily interest 105,040 15,643 392,571 36,226 GAIN ON SALE OF PRODUCT LINE 15,431,253 FOREIGN CURRENCY TRANSACTION GAIN(LOSS) (4,526) 10,623 (14,728) 23,501 PROVISION (BENEFIT) FOR INCOME TAX (1,000,000) 1,225,000 NET INCOME (LOSS) $ (662,601) $(1,436,791) $7,519,069 $ (928,576) NET INCOME (LOSS) PER COMMON SHARE-Basic $ (.07) $ (.16) $ .82 $ (.10) COMMON SHARE-Diluted $ (.07) $ (.16) $ .81 $ (.10) WEIGHTED AVERAGE SHARES OUTSTANDING - Basic 9,147,542 9,070,271 9,128,355 9,064,505 ADJUSTMENT FOR COMMON STOCK EQUIVALENTS 203,698 WEIGHTED AVERAGE SHARES OUTSTANDING - Diluted 9,147,542 9,070,271 9,332,053 9,064,505 See notes to unaudited consolidated condensed financial statements. Item 1. Financial Statements (continued) DATAWATCH CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended June 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) from continuing operations $ 7,519,068 $ (928,576) Adjustment to reconcile net income to net cash: Gain on sale of product line (15,431,253) Gain on disposition of fixed assets (12,383) Depreciation and amortization 936,489 1,030,426 Interest accrued on short-term investments (5,387) Changes in current assets and liabilities: Inventories 275,818 (156,354) Prepaid advertising and other expenses (130,476) (793,466) Accounts receivable 263,419 332,008 Accounts payable and accrued expenses (2,143,247) (262,277) Deferred revenue (129,713) 70,978 Net cash used in operating activities (8,857,665) (707,261) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to equipment and fixtures (654,995) (616,656) Proceeds from maturity of short-term 4,879,482 investments 1,423,848 Purchase of short-term investments (8,649,764) (1,127,582) Proceeds from sale of fixed assets 18,400 Proceeds from sale of product line to Dr _ Solomon's 16,750,000 Software, Inc. Acquisition of Guildsoft Holdings Ltd., net of - working capital acquired 19,833 Other assets (53,680) 112,240 Net cash provided by (used in)investing 12,289,443 activities (188,317) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 86,567 18,125 Proceeds from bank term loan 1,500,000 Principal payments on long-term obligations (206,185) (178,884) Principal payments on bank term-loan (1,500,000) Borrowings under credit lines, net (3,338) (636,806) Net cash provided by (used in) financing activities (1,622,956) 702,435 NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 1,808,822 (193,143) CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,586,875 1,696,349 CASH AND EQUIVALENTS, END OF PERIOD $ 3,395,697 $ 1,503,206 See notes to unaudited consolidated condensed financial statements. Item 1. Financial Statements (continued) NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation: The consolidated condensed balance sheet as of June 30, 1998 and the consolidated condensed statements of operations for the three months and nine months ended June 30, 1998 and 1997, and the consolidated condensed statements of cash flows for the nine months ended June 30, 1998 and 1997 are unaudited. In the opinion of management, these statements include all adjustments necessary for the fair presentation of the financial data for such periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company's audited condensed financial statements for the year ended September 30, 1997 which appear in the Company's Annual Report on Form 10-K. 2. Inventories: The Company accounts for its inventories using a standard cost methodology. Inventories were comprised of the following: June 30, September 30, 1998 1997 Raw materials $227,595 $ 338,560 Work in process 631 1,825 Finished goods 283,509 536,382 TOTAL $511,735 $ 876,767 3. Divestitures: On October 9, 1997, the Company sold two of its software product lines for $16,750,000 in cash, resulting in an after tax gain of approximately $14,200,000. The assets sold consisted primarily of inventory, property and equipment, trademarks, and the technological rights related to these product lines. This divesture gave rise to the utilization of net operating loss carryforwards that had not previously been recognized. 4. Long-term Debt: During the nine months ended June 30, 1998, the Company paid down its outstanding $1,500,000 term loan with proceeds from the sale of two of its product lines. 5. Restructuring: Subsequent to the sale of its Macintosh software product lines, during the first quarter of fiscal 1998, the Company undertook a corporate wide restructuring effort so as to centralize both its administrative infrastructure and its development efforts for its remaining products. The total amount charged to operations was approximately $2,364,000. The restructuring plan included charges for salaries and wages and the related severance benefits for terminated personnel. The restructuring plan also included payments totaling $433,000 made to outside developers associated with the centralization of the Company's development efforts. 6. Earnings per Share: In the first quarter of fiscal 1998, the Company adopted Statement of Financial Accounting Standard No. 128 "Earnings per Share." All prior period figures have been restated to reflect the adoption of the Standard. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL DATAWATCH CORPORATION (the "Company" or "Datawatch") is a provider of knowledge-based software solutions for the business enterprise. DATAWATCH's principal products are: MonarchT, a report mining solution that leverages legacy reports and reporting systems to provide business intelligence on the Windows desktop; Monarch/EST, a client/server product for integrated report archiving, distribution and management; RedwingT, a plug-in for Aboder Acrobatr that accurately extracts text and tables from PDF files; and Q- SupportT (in the United States) and QuetzalT (internationally), an integrated help desk and asset management solution for multi-user, networked support centers. On October 9, 1997, the Company sold its Virexr and netOctopusT product lines to Dr Solomon's Software, Inc. ("Dr Solomon's Software"). From time to time, information provided by the Company, statements made by its employees or information in its filings with the Securities and Exchange Commission (including statements in this Form 10-Q) may contain statements which are not historical facts (so called "forward-looking statements"), and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and releases of the Securities and Exchange Commission. In that regard, the discussion in this Item 2 contains forward-looking statements which involve certain risks and uncertainties, including statements related to liquidity and capital resources. The Company's operating results may continue to vary significantly from quarter to quarter or year to year depending on a number of factors, including technological changes, competition and general market trends, and other factors such as the Company's dependence on continued sales of its Monarch and Q-Support/Quetzal product lines both domestically and internationally, the Company's dependence on the continued introduction of new products, the Company's dependence on indirect distribution channels for the sale of its products, the Company's dependence on the continued protection of its proprietary technology, and the Company's reliance on licensing agreements relating to third party technology incorporated into the Company's products. These factors are more fully described in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1997. The Company's current planned expense levels are based in part upon expectations as to future revenue. Consequently, operating results may vary significantly from quarter to quarter or year to year, based on timing of revenue. Revenue or net income in any period will not necessarily be indicative of results of subsequent periods and there can be no assurance that the Company will achieve profitability or that revenue growth can be sustained in the future. RESULTS OF OPERATIONS Three Months Ended June 30, 1998 and 1997. Net sales for the three months ended June 30, 1998 were $6,533,000, which represents a decrease of $1,075,000 from net sales of $7,608,000 for the three months ended June 30, 1997. Excluding sales of the Company's Macintosh based products, which were sold on October 9, 1997 to Dr Solomon's Software, net sales would have been $5,969,000 for the three months ended June 30, 1997 and, therefore, would have represented an increase of $564,000 or approximately 9% to net sales of $6,533,000 for the three months ended June 30, 1998. This increase in net sales results from an increase in sales for all of the Company's product lines domestically and internationally. For the three months ended June 30, 1998, the Monarch suite of products accounted for approximately 54% of net sales, the Q-Support/Quetzal product line accounted for approximately 35% of net sales, and third party product lines accounted for approximately 10% of net sales. Cost of sales for the three months ended June 30, 1998 was $1,263,000 or approximately 19% of net sales. Cost of sales for the three months ended June 30, 1997 was $1,488,000 or approximately 20% of net sales. Excluding the Company's Macintosh based products, cost of sales would have been 19% of net sales for the three months ended June 30, 1998 which compares to 22% for the three months ended June 30, 1997. This decrease in cost of sales, as a percentage of net sales, is principally due to reductions in overhead as a result of the restructuring subsequent to the sale of the Company's Macintosh based products. Engineering and product development expenses were $740,000 for the three months ended June 30, 1998, a decrease of $50,000 or approximately 6% from $790,000 for the three months ended June 30, 1997. This decrease is primarily attributable to reductions in personnel and expenses associated with development of the Virex and netOctopus product lines which were sold to Dr Solomon's Software in October 1997, as well as expense reductions resulting from the Company's restructuring subsequent to the sale of those product lines. Selling, general and administrative expenses were $6,280,000 for the three months ended June 30, 1998, a decrease of $457,000 or approximately 7% from $6,737,000 for the three months ended June 30, 1997. This decrease is primarily attributable to reductions of salaries and wages and expenses resulting from the Company's restructuring during the first quarter of fiscal 1998. As a result of the foregoing, the loss from operations for the three months ended June 30, 1998 was $1,750,000 which compares to a loss from operations of $1,408,000 for the three months ended June 30, 1997. The net loss for the three months ended June 30, 1998 was $663,000 given the effect of income tax recoveries, which compares to net a loss of $1,437,000 for the three months ended June 30, 1997. Nine Months Ended June 30, 1998 and 1997. Net sales for the nine months ended June 30, 1998 were $19,288,000 which represents a decrease of $4,736,000 from net sales of $24,024,000 for the nine months ended June 30, 1997. Excluding sales of the Company's Macintosh based products, which were sold on October 9, 1997 to Dr Solomon's Software, net sales for the nine months ended June 30, 1998 would have been $19,116,000 which represents a decrease of $493,000 from net sales of $19,609,000 for the nine months ended June 30, 1997. This decrease in net sales results from a decrease in international sales of the Company's Quetzal product. Excluding sales of the Company's Macintosh based products for the nine months ended June 30, 1998, the Monarch suite of products accounted for approximately 50% of net sales, the Q- Support/Quetzal product line accounted for approximately 38%, and third party product lines accounted for approximately 12%. Cost of sales for the nine months ended June 30, 1998 was $3,987,000 or approximately 21% of net sales. Cost of sales for the nine months ended June 30, 1997 was $4,403,000 or approximately 18% of net sales. Excluding the Company's Macintosh based products, cost of sales would have been 21% of net sales for the nine months ended June 30, 1998, which is comparable to 20% for the same period in the prior year. Engineering and product development expenses were $1,658,000 for the nine months ended June 30, 1998, a decrease of $447,000 or approximately 21% from $2,105,000 for the nine months ended June 30, 1997. This decrease is primarily attributable to reductions in personnel and expenses associated with development of the Virex and netOctopus product lines sold to Dr Solomon's Software in October 1997, as well as expense reductions resulting from the Company's restructuring subsequent to the sale of those product lines. Selling, general and administrative expenses were $18,299,000 for the nine months ended June 30, 1998, a decrease of $99,000 or approximately 1% from $18,398,000 for nine months ended June 30, 1997. Included in the expenses for the nine months ended June 30, 1998 were approximately $196,000 of one-time expenses associated with the Company's restructuring subsequent to the sale of its Macintosh product lines. Excluding these expenses, the decrease would have been $295,000 or approximately 2%, from the same period in the prior year. The reduction is attributable to lower salaries and wages and related expenses resulting from the Company's restructuring. During the nine months ended June 30, 1998, the Company sold its Macintosh software product lines to Dr Solomon's Software for $16,750,000. The Company realized an after tax gain on the sale of approximately $14,200,000. After the sale of these product lines the Company initiated a corporate-wide restructuring effort so as to allow the Company to centralize both its administrative infrastructure and the development efforts of its remaining products. The total amount charged to operations was approximately $2,364,000. The restructuring plan included charges for salaries and wages and the related severance benefits for terminated personnel. These charges, totaling $1,884,000, have been paid. The restructuring plan also included payments totaling $433,000 made to outside developers associated with the centralization of the Company's development efforts. As a result of the foregoing, the loss from operations for the nine months ended June 30, 1998 was $7,020,000 which compares to the loss from operations of $882,000 for the nine months ended June 30, 1997. As a result of the foregoing, and due to the $15,431,000 pre-tax gain on the sale of the Macintosh software product lines, net income for the nine months ended June 30, 1998 was $7,519,000 which compares to net loss of $929,000 for the nine months ended June 30, 1997. The gain recognized on the Dr Solomon's Software transaction allowed the Company to utilize net operating losses that had previously been reserved. LIQUIDITY AND CAPITAL RESOURCES In October 1997, the Company received $16,750,000 in cash from Dr Solomon's Software in connection with the sale of its Virex and netOctopus product lines, resulting in an after tax profit of approximately $14,200,000. The Company's management believes that its currently anticipated capital needs for future operations of the Company will be satisfied through at least June 30, 1999 by funds currently available from the above mentioned sale and its unused $1,500,000 bank line of credit. Working capital increased by approximately $7,177,000 during the nine months ended June 30, 1998 primarily as a result of the above mentioned divestiture offset by outflows for costs associated with the subsequent restructuring of the Company. Management believes that the Company's current operations have not been materially impacted by the effects of inflation. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per Share" which became effective during the first quarter of fiscal 1998. SFAS No. 128 replaces the presentation of primary earnings per share with basic earnings per share, which excludes dilution, and requires the dual presentation of basic and diluted earnings per share. All per share amounts have been restated to conform with the Standard. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," both of which will be effective for the Company in fiscal 1999. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 131 establishes standards for the way that public business enterprises report selected information about operating segments in annual and interim financial reports. SFAS 131 also established standards for related disclosures about products and services, geographic areas, and major customers. The implementation of SFAS 130 and 131 are not expected to have a material effect on the Company's financial statements. In October 1997, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition." SOP 97-2 provides guidance on when revenue should be recognized and in what amounts for licensing, selling, leasing, or otherwise marketing computer software. SOP 97-2 will be adopted by the Company during the first quarter of fiscal 1999 and is not expected to have a material effect on the Company's consolidated financial position, results of operations or financial statement disclosures. In March 1998, the AICPA released SOP 98-1 "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" which requires certain expenditures made for internal use software to be capitalized. The Company is currently studying the impact of SOP 98-1. PART II. Item 5. Other Information Proposals of stockholders intended for inclusion in the proxy statement to be furnished to all stockholders entitled to vote at the next annual meeting of stockholders of the Company must be received at the Company's principal executive offices not later than October 10, 1998. The deadline for providing timely notice to the Company of matters that stockholders otherwise desire to introduce at the next annual meeting of stockholders of the Company is December 24, 1998. In order to curtail any controversy as to the date on which a proposal was received by the Company, it is suggested that proponents submit their proposals by Certified Mail, Return Receipt Requested. Item 6. Exhibits and Reports on Form 8-K A. Exhibits 27 Financial Data Schedule (filed with SEC Edgar version only). B. Reports on Form 8-K No Current Report on Form 8-K was filed during the quarterly period ended June 30, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 14, 1998. DATAWATCH CORPORATION /s/ Betsy J. Hartwell Betsy J. Hartwell Vice President of Finance and Chief Financial Officer (Principal Financial Officer) EX-27 2
5 9-MOS SEP-30-1997 JUN-30-1998 3,395,697 3,775,669 7,174,941 0 511,735 16,741,444 4,255,415 2,376,310 19,824,203 5,113,071 0 0 0 91,802 14,582,849 19,824,202 19,288,509 19,288,509 3,987,016 19,956,760 2,364,246 0 45,514 6,294,069 1,225,000 7,519,069 0 0 0 7,519,069 .82 .81
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