WWW.EXFILE.COM, INC. -- 888-775-4789 -- DATAWATCH CORPORATION -- FORM 10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For
the Quarterly Period Ended March 31, 2008
OR
o
|
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: 000-19960
DATAWATCH
CORPORATION
(Exact name of registrant as
specified in its charter)
DELAWARE
|
|
02-0405716
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
271
MILL ROAD
QUORUM
OFFICE PARK
CHELMSFORD,
MASSACHUSETTS 01824
(978)
441-2200
(Address
and telephone number of principal executive office)
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
ý
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o Accelerated
filer o
|
Non-accelerated
filer o (Do not check if
a smaller reporting company)
|
Smaller
reporting company ý
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes o
No ý
The
number of shares of the registrant’s common stock, $.01 par value, outstanding
as of May 12, 2008 was 5,903,524.
QUARTERLY
REPORT ON FORM 10-Q
For
the Quarterly Period Ended March 31, 2008
TABLE
OF CONTENTS
|
|
Page
#
|
PART I.
|
FINANCIAL INFORMATION
|
|
|
|
|
|
Item 1.
|
|
Financial Statements
(Unaudited)
|
|
|
|
|
|
a)
|
|
Condensed Consolidated Balance
Sheets:
|
|
|
|
March 31, 2008 and September 30,
2007
|
3
|
|
|
|
|
b)
|
|
Condensed Consolidated Statements of
Operations:
|
|
|
|
Three and Six Months Ended March 31, 2008 and
2007
|
4
|
|
|
|
|
c)
|
|
Condensed Consolidated Statements of Cash
Flows:
|
|
|
|
Six Months Ended March 31, 2008 and
2007
|
5
|
|
|
|
|
d)
|
|
Notes to Condensed Consolidated Financial
Statements
|
6
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|
|
|
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Item 2.
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Management’s Discussion and Analysis of Financial
Condition and Results of Operations
|
15
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|
|
|
|
Item 3.
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Quantitative and Qualitative Disclosures About
Market Risk
|
28
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|
|
|
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Item 4.
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Controls and Procedures
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29
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|
|
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|
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PART II.
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OTHER INFORMATION
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|
|
|
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Item 1.
|
|
Legal Proceedings
|
30
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|
|
|
|
Item 1A.
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Risk Factors
|
30
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|
|
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Item 4
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Submission of Matters to a Vote of Security
Holders
|
30
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|
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Item 6.
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Exhibits
|
30
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SIGNATURES
|
31
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|
CERTIFICATIONS
|
32
|
|
|
DATAWATCH
CORPORATION
(In
thousands, except share and per share amounts)
|
|
March
31,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
4,027 |
|
|
$ |
3,841 |
|
Accounts
receivable, net
|
|
|
3,964 |
|
|
|
4,174 |
|
Inventories
|
|
|
40 |
|
|
|
48 |
|
Prepaid
expenses
|
|
|
574 |
|
|
|
527 |
|
Total
current assets
|
|
|
8,605 |
|
|
|
8,590 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
833 |
|
|
|
856 |
|
Goodwill
|
|
|
6,116 |
|
|
|
6,020 |
|
Other
intangible assets, net
|
|
|
2,424 |
|
|
|
2,676 |
|
Restricted
cash
|
|
|
125 |
|
|
|
125 |
|
Other
long-term assets
|
|
|
61 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,164 |
|
|
$ |
18,337 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
1,307 |
|
|
|
1,215 |
|
Accrued
expenses
|
|
|
2,293 |
|
|
|
2,839 |
|
Deferred
revenue
|
|
|
4,163 |
|
|
|
4,486 |
|
Accrued
cost of acquisition
|
|
|
— |
|
|
|
329 |
|
Total
current liabilities
|
|
|
7,763 |
|
|
|
8,869 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
|
Deferred
rent
|
|
|
150 |
|
|
|
179 |
|
Deferred
revenue - long-term
|
|
|
106 |
|
|
|
122 |
|
Deferred
tax liability
|
|
|
204 |
|
|
|
147 |
|
Other
liabilities
|
|
|
88 |
|
|
|
— |
|
Total
long-term liabilities
|
|
|
548 |
|
|
|
448 |
|
|
|
|
|
|
|
|
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COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock, par value $.01; 20,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
issued,
5,915,770 shares and 5,647,666 shares, respectively;
|
|
|
|
|
|
|
|
|
outstanding,
5,901,524 shares and 5,633,420 shares, respectively
|
|
|
59 |
|
|
|
56 |
|
Additional
paid-in capital
|
|
|
23,283 |
|
|
|
22,684 |
|
Accumulated
deficit
|
|
|
(12,817 |
) |
|
|
(13,072 |
) |
Accumulated
other comprehensive loss
|
|
|
(532 |
) |
|
|
(508 |
) |
|
|
|
9,993 |
|
|
|
9,160 |
|
Less
treasury stock, at cost—14,246 shares
|
|
|
(140 |
) |
|
|
(140 |
) |
Total
shareholders’ equity
|
|
|
9,853 |
|
|
|
9,020 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,164 |
|
|
$ |
18,337 |
|
See
notes to condensed consolidated financial statements.
DATAWATCH
CORPORATION
(In
thousands, except per share amounts)
|
|
Three
Months Ended March 31,
|
|
|
Six
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses and subscriptions
|
|
$ |
3,155 |
|
|
$ |
3,257 |
|
|
$ |
6,488 |
|
|
$ |
6,695 |
|
Maintenance
and services
|
|
|
2,718 |
|
|
|
2,892 |
|
|
|
5,452 |
|
|
|
5,230 |
|
Total
revenue
|
|
|
5,873 |
|
|
|
6,149 |
|
|
|
11,940 |
|
|
|
11,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software licenses and subscriptions
|
|
|
550 |
|
|
|
560 |
|
|
|
1,122 |
|
|
|
1,097 |
|
Cost
of maintenance and services
|
|
|
1,177 |
|
|
|
983 |
|
|
|
2,297 |
|
|
|
2,015 |
|
Sales
and marketing
|
|
|
1,968 |
|
|
|
2,140 |
|
|
|
4,189 |
|
|
|
4,484 |
|
Engineering
and product development
|
|
|
836 |
|
|
|
788 |
|
|
|
1,586 |
|
|
|
1,494 |
|
General
and administrative
|
|
|
1,273 |
|
|
|
1,210 |
|
|
|
2,478 |
|
|
|
2,278 |
|
Total
costs and expenses
|
|
|
5,804 |
|
|
|
5,681 |
|
|
|
11,672 |
|
|
|
11,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
69 |
|
|
|
468 |
|
|
|
268 |
|
|
|
557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
(33 |
) |
Interest
income and other income (expense), net
|
|
|
49 |
|
|
|
(11 |
) |
|
|
146 |
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
118 |
|
|
|
449 |
|
|
|
414 |
|
|
|
505 |
|
Provision
for income taxes
|
|
|
35 |
|
|
|
25 |
|
|
|
84 |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
83 |
|
|
$ |
424 |
|
|
$ |
330 |
|
|
$ |
458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share—Basic
|
|
$ |
0.01 |
|
|
$ |
0.08 |
|
|
$ |
0.06 |
|
|
$ |
0.08 |
|
Net
income per share—Diluted
|
|
$ |
0.01 |
|
|
$ |
0.07 |
|
|
$ |
0.06 |
|
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding—Basic
|
|
|
5,871 |
|
|
|
5,519 |
|
|
|
5,762 |
|
|
|
5,516 |
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding—Diluted
|
|
|
6,062 |
|
|
|
5,784 |
|
|
|
5,978 |
|
|
|
5,776 |
|
See
notes to condensed consolidated financial statements.
DATAWATCH
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In
thousands)
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
330 |
|
|
$ |
458 |
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
412 |
|
|
|
486 |
|
Provision
for doubtful accounts and sales returns
|
|
|
(9 |
) |
|
|
11 |
|
Loss
on disposal of equipment
|
|
|
— |
|
|
|
3 |
|
Stock-based
compensation
|
|
|
106 |
|
|
|
58 |
|
Deferred
income taxes
|
|
|
58 |
|
|
|
47 |
|
Changes
in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
203 |
|
|
|
251 |
|
Inventories
|
|
|
8 |
|
|
|
(9 |
) |
Prepaid
expenses and other
|
|
|
(48 |
) |
|
|
(86 |
) |
Accounts
payable, accrued expenses and other
|
|
|
(459 |
) |
|
|
307 |
|
Deferred
revenue
|
|
|
(319 |
) |
|
|
(12 |
) |
Cash
provided by operating activities
|
|
|
282 |
|
|
|
1,514 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of equipment and fixtures
|
|
|
(138 |
) |
|
|
(65 |
) |
Proceeds
from sale of equipment
|
|
|
— |
|
|
|
1 |
|
Purchase
of IDARS business
|
|
|
(425 |
) |
|
|
— |
|
Capitalized
software development costs
|
|
|
— |
|
|
|
(26 |
) |
Other
assets
|
|
|
6 |
|
|
|
— |
|
Cash
used in investing activities
|
|
|
(557 |
) |
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayments
on line of credit
|
|
|
— |
|
|
|
(1,000 |
) |
Proceeds
from exercise of stock options
|
|
|
496 |
|
|
|
10 |
|
Cash
provided by (used in) financing activities
|
|
|
496 |
|
|
|
(990 |
) |
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS
|
|
|
(35 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH AND EQUIVALENTS
|
|
|
186 |
|
|
|
418 |
|
CASH
AND EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
3,841 |
|
|
|
1,862 |
|
CASH
AND EQUIVALENTS, END OF PERIOD
|
|
$ |
4,027 |
|
|
$ |
2,280 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
INFORMATION:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
— |
|
|
$ |
42 |
|
Income
taxes paid
|
|
$ |
16 |
|
|
$ |
1 |
|
See
notes to condensed consolidated financial statements.
DATAWATCH
CORPORATION
(UNAUDITED)
Note
1 - Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying 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 accounting principles generally accepted in the United
States of America 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, 2007 filed
with the Securities and Exchange Commission (the “SEC”). All intercompany
accounts and transactions have been eliminated in consolidation.
In the
opinion of management, the accompanying condensed consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements for the fiscal year ended September 30, 2007, 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.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and judgments, which are evaluated on an on-going basis, that affect
the amounts reported in the Company’s condensed consolidated financial
statements and accompanying notes. Management bases its estimates on historical
experience and on various other assumptions that it believes are reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results could differ from those
estimates and judgments. In particular, significant estimates and judgments
include those related to revenue recognition, allowance for doubtful accounts,
sales returns reserve, useful lives of property and equipment, valuation of net
deferred tax assets, business combinations, valuation of goodwill and other
intangible assets and valuation of share-based awards.
Revenue
Recognition
The
Company follows the guidance as defined by the American Institute of Certified
Public Accountants (“AICPA”) Statement of Position 97-2, “Software Revenue Recognition”
(“SOP 97-2”), as amended by Statement of Position 98-9, “Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”)
in recognizing revenue on software transactions. SOP 97-2 requires
that revenue allocated to software products, specified upgrades and enhancements
is recognized upon delivery of the related product, upgrades or
enhancements. Revenue allocated by vendor specific objective evidence
(“VSOE”) of fair value to post-contract customer support (primarily maintenance)
is recognized ratably over the term of the support, and revenue allocated by
VSOE to service elements (primarily training and consulting) is recognized as
the services are performed. The residual method of revenue
recognition is used for multi-element arrangements when the VSOE of the fair
value does not exist for one of the delivered elements. Under the
residual method, the arrangement fee is recognized as follows: (1) the total
fair value of the undelivered elements, as supported by VSOE, is deferred and
subsequently recognized in accordance with relevant sections of SOP 97-2 and (2)
the difference between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered
elements.
The
Company has two types of software product offerings: Enterprise Software and
Desktop and Server Software. Enterprise Software products are sold directly to
end-users and through value added resellers. The
Company
sells its Desktop and Server Software products directly to end-users and through
distributors and resellers. Sales to distributors and resellers
accounted for approximately 40% and 38%, respectively, of total sales for the
three months ended March 31, 2008 and 2007, and 40% and 36%, respectively, of
total sales for the six months ended March 31, 2008 and 2007. Revenue from the
sale of all software products (separately sold) is generally recognized at the
time of shipment, provided there are no uncertainties surrounding product
acceptance, the fee is fixed and determinable, collection is considered
probable, persuasive evidence of the arrangement exists and there are no
significant obligations remaining. Both types of the Company’s software product
offerings are “off-the-shelf” as such term is defined by SOP
97-2. The Company’s software products can be installed and used by
customers on their own with little or no customization required. Multi-user
licenses marketed by the Company are sold as a right to use the number of
licenses and license fee revenue is recognized upon delivery of all software
required to satisfy the number of licenses sold. Upon delivery, the licensing
fee is payable without further delivery obligations to the
Company.
Desktop
and Server Software products are generally not sold in multiple element
arrangements. Accordingly, the price paid by the customer is
considered VSOE of fair value for those products. Enterprise Software sales are
generally multiple element arrangements which include software license
deliverables, professional services and post-contract customer support, which
primarily consists of maintenance. In such multiple element arrangements, the
Company applies the residual method in determining revenue to be allocated to a
software license. In applying the residual method, the Company deducts from the
sale proceeds the VSOE of fair value of the services and post-contract customer
support in determining the residual fair value of the software license. The VSOE
of fair value of the services and post-contract customer support is based on the
amounts charged for these elements when sold separately. Professional services
include implementation, integration, training and consulting services with
revenue recognized as the services are performed. These services are generally
delivered on a time and materials basis, are billed on a current basis as the
work is performed, and do not involve modification or customization of the
software or any other unusual acceptance clauses or terms. Post-contract
customer support is typically provided under a maintenance agreement which
provides technical support and rights to unspecified software maintenance
updates and bug fixes on a when-and-if available basis. Revenue from
post-contract customer support services is deferred and recognized ratably over
the contract period (generally one year). Such deferred amounts are recorded as
part of deferred revenue in the Company’s Condensed Consolidated Balance
Sheets.
The
Company also licenses its Enterprise Software using a subscription model. At the
time a customer enters into a binding agreement to purchase a subscription, the
customer is invoiced for an initial 90 day service period and an account
receivable and deferred revenue are recorded. Beginning on the date the software
is installed at the customer site and available for use by the customer, and
provided that all other criteria for revenue recognition are met, the deferred
revenue amount is recognized ratably over the period the service is provided.
The customer is then invoiced every 90 days and revenue is recognized ratably
over the period the service is provided. The subscription arrangement includes
software, maintenance and unspecified future upgrades including major version
upgrades. The initial subscription rate is the same as the renewal rate.
Subscriptions can be cancelled by the customer at any time by providing 90 days
prior written notice following the first year of the subscription
term.
The
Company’s software products are sold under warranty against certain defects in
material and workmanship for a period of 30 days from the date of purchase.
Certain software products, including desktop versions of Monarch, Monarch Data
Pump and VorteXML sold directly to end-users, include a guarantee under which
such customers may return products within 30 days for a full refund.
Additionally, the Company provides its distributors with stock-balancing rights
and applies the guidance found in Statement of Financial Accounting Standards
(“SFAS”) No. 48, “Revenue
Recognition when Right of Return Exists.” Revenue from the sale of
software products to distributors and resellers is recognized at the time of
shipment providing all other criteria for revenue recognition as stated above
are met and (i) the distributor or reseller is unconditionally obligated to pay
for the products, including no contingency as to product resale, (ii) the
distributor or reseller has independent economic substance apart from the
Company, (iii) the Company is not obligated for future performance to bring
about product resale, and (iv) the amount of future returns can be reasonably
estimated. The Company’s experience and history with its distributors and
resellers allows for reasonable estimates of future returns. Among other things,
estimates of potential future returns are made based on the inventory levels at
the various distributors and resellers, which the Company monitors
frequently.
Stock-Based
Compensation
The
Company recognizes stock-based compensation expense in accordance with Statement
of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment.” SFAS
123(R) requires all share-based awards, including grants of employee stock
options, to be recognized in the financial statements based on their fair
value.
Under the
provisions of SFAS No. 123(R), the Company recognizes the fair value of
share-based awards over the requisite service period of the individual awards,
which generally equals the vesting period. All of the Company’s share-based
awards are accounted for as equity instruments and there have been no liability
awards granted. See additional Stock-Based Compensation disclosure in Note 4 to
the Company’s Condensed Consolidated Financial Statements.
Concentration
of Credit Risks and Major Customers
The
Company sells its products and services to U.S. and non-U.S. dealers and other
software distributors, as well as to end users, under customary credit terms.
Two customers, Ingram Micro, Inc. and Tech Data Product Management, individually
accounted for 22% and 6%, respectively, of total revenue for the three months
ended March 31, 2008 and 13% and 14%, respectively, of total revenue for the
three months ended March 31, 2007. Ingram Micro, Inc. and Tech
Data Product Management individually accounted for 20% and 8%, respectively, of
total revenue for the six months ended March 31, 2008 and 13% and 12%,
respectively, of total revenue for the six months ended March 31, 2007. Ingram
Micro, Inc. and Tech Data Product Management accounted for 19% and 10%,
respectively, of outstanding gross trade receivables as of March 31, 2008 and
15% and 19%, respectively, of outstanding gross trade receivables as of
September 30, 2007. The Company sells to Ingram Micro, Inc. and Tech Data
Product Management under separate distribution agreements which automatically
renew for successive one-year terms unless terminated. Other than these two
customers, no other customer constitutes a significant portion (more than 10%)
of sales or accounts receivable. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral. Allowances are
provided for anticipated doubtful accounts and sales returns based on
management’s review of receivables, inventory and historical
trends.
Capitalized
Software Development Costs
The
Company capitalizes certain software development costs as well as purchased
software upon achieving technological feasibility of the related products.
Software development costs incurred and software purchased prior to achieving
technological feasibility are charged to research and development expense as
incurred. Commencing upon initial product release, capitalized costs
are amortized to cost of software licenses using the straight-line method over
the estimated life (which approximates the ratio that current gross revenues for
a product bear to the total of current and anticipated future gross revenues for
that product), which is generally 24 to 36 months. The Company’s capitalized
software was $329,000 and $395,000 at March 31, 2008 and September 30, 2007,
respectively.
Goodwill
and Other Intangible Assets
Other
intangible assets consist of capitalized software costs, acquired technology,
patents, customer lists, trademarks and non-compete agreements acquired through
business combinations. The values allocated to the majority of these intangible
assets are amortized using the straight-line method over the estimated useful
life of the related asset and are recorded in cost of software license and
subscriptions. The values allocated to customer relationships and non-compete
agreements are amortized using the straight-line method over the estimated
useful life of the related asset and are recorded in sales and marketing
expenses. Intangible assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable and an impairment loss is recognized when it is probable that the
estimated cash flows are less than the carrying amount of the
asset.
Goodwill
and certain trademarks are not subject to amortization and are tested annually
for impairment or more frequently if events and circumstances indicate that the
asset might be impaired. Goodwill is tested for impairment using a two-step
approach. The first step is to compare the fair value of the reporting unit to
its carrying amount, including goodwill. If the fair value of the reporting unit
is greater than its carrying amount, goodwill is not considered impaired, but if
the fair value of the reporting unit is less than its carrying amount, the
amount of the impairment loss, if any, must be measured. An impairment loss is
recognized to the extent that the carrying amount exceeds the asset’s fair
value.
Restructuring
In
October 2006, the Company initiated and completed a restructuring plan in an
effort to reduce costs and focus resources on key areas of the
business. The restructuring plan was limited to one of the Company’s
wholly-owned subsidiaries, Datawatch International Limited (“DWI”), and resulted
in charges for severance benefits and related costs for nine terminated
employees of approximately $128,000 during the three months ended December 31,
2006. These restructuring costs are included primarily within sales and
marketing expenses for the six months ended March 31, 2007.
Income
Taxes
Deferred
income taxes are provided for the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes and operating loss carryforwards
and credits. Valuation allowances are recorded to reduce the net deferred tax
assets to amounts the Company believes are more likely than not to be
realized.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”), which establishes a framework for measuring fair value and
expands disclosures about the use of fair value measurements and liabilities in
interim and annual reporting periods subsequent to initial
recognition. Prior to SFAS 157, which emphasizes that fair value is a
market-based measurement and not an entity-specific measurement, there were
different definitions of fair value and limited definitions for applying those
definitions in GAAP. SFAS 157 is effective for the Company on a
prospective basis for the reporting period beginning October 1, 2008. In
February 2008, the FASB delayed the effective date of SFAS 157 for all
nonrecurring fair value measurements of nonfinancial assets and nonfinancial
liabilities until fiscal years beginning after November 15, 2008. The effect of
adoption on the Company’s financial position and results of operations has not
been determined.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. This Statement is effective for fiscal years beginning after
November 15, 2007. The Company has not decided if it will early adopt SFAS 159
or if it will choose to measure any eligible financial assets and liabilities at
fair value.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008. The
adoption of SFAS 141(R) will have an impact on accounting for business
combinations once adopted, but the effect is dependent upon acquisitions at that
time.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting
standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to
the noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years or interim periods beginning after December
15, 2008. The Company has not determined the effect that the application of SFAS
160 will have on its consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133” (“SFAS 161”). SFAS 161 amends and expands the disclosure
requirements of SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.” SFAS 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on
derivative instruments and disclosures about credit-risk-related contingent
features in derivative agreements. SFAS 161 also amends SFAS No. 107, “Disclosures About Fair Value of
Financial Instruments” (“SFAS 107”), to clarify that derivative
instruments are subject to SFAS 107’s concentration-of-credit risk disclosures.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. Early adoption is
permitted, and entities are encouraged, but not required, to provide comparative
disclosures for earlier periods. The adoption of SFAS 161 will not affect the
Company’s consolidated financial statements or financial condition, but may
require additional disclosures if the Company enters into derivative and hedging
activities.
Note
2 –
Acquisition
On May 3,
2006, the Company acquired certain assets and assumed certain liabilities of
ClearStory Systems, Inc’s Integrated Document Archiving and Retrieval Systems
(“IDARS”) business. The acquisition of IDARS was consummated pursuant to an
asset purchase agreement dated March 10, 2006 among the Company and ClearStory
Systems, Inc. The acquisition cost for IDARS was approximately $4,790,000,
consisting of $4,349,000 in cash and direct acquisition costs of approximately
$441,000. Additional acquisition costs included an 18-month earn-out payment
equal to 30% of net revenues from the IDARS business excluding the first
$337,500 of revenues, net of any claims. The earn-out payments were considered
additional purchase price and were recorded as additional goodwill when
incurred. At September 30, 2007, the Company accrued approximately $329,000
related to such earn-out payments. In accordance with the asset purchase
agreement, the final earn-out payments were made in the first quarter of fiscal
year 2008. Accordingly, no amounts are accrued as of March 31, 2008. Since the
acquisition date, the Company recorded approximately $1.1 million related to
such earn-out payments.
Note
3 – Income Taxes
SFAS No.
109, “Accounting for Income
Taxes,” requires recognition of deferred tax liabilities and deferred tax
assets (and related valuation allowances, if necessary) for the excess of
tax-deductible goodwill over goodwill for financial reporting purposes. The tax
benefit for the excess tax-deductible goodwill is recognized when realized on
the tax return. During fiscal year 2006, Datawatch acquired the business assets
of IDARS that resulted in tax-deductible amortization being recognized as a
deferred tax expense in fiscal years 2007 and 2008. As the goodwill is deducted
for tax purposes, a deferred tax expense will be recognized each year with a
corresponding deferred tax liability equal to the excess of tax amortization
over the amortization for financial reporting purposes. During the three months
ended March 31, 2008 and 2007, the Company recorded additional deferred tax
expense of approximately $29,000 and $25,000, respectively. During the six
months ended March 31, 2008 and 2007, the Company recorded additional deferred
tax expense of approximately $58,000 and $47,000, respectively. Additionally,
during the three and six months ended March 31, 2008, the Company recorded
approximately $6,000 and $26,000, respectively, related to estimated alternative
minimum taxes and uncertain tax positions relative to foreign
taxes.
Deferred Tax
Assets
The
Company’s deferred tax assets include net operating loss carry forwards and tax
credits that expire at different times through and until 2026. Significant
judgment is required in determining the Company’s provision for income taxes,
the carrying value of deferred tax assets and liabilities and the valuation
allowance recorded against net deferred tax assets. Factors such as future
reversals of deferred tax assets and liabilities, projected future taxable
income, changes in enacted tax rates and the period over which the Company’s
deferred tax assets will be recoverable are considered in making these
determinations. Management does not believe the deferred tax assets are
more likely than not to be realized and a full valuation allowance, previously
provided against the deferred tax assets, continues to be
provided.
FASB Interpretation
No. 48
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes — An Interpretation of FASB Statement No. 109”
(“FIN 48”) on October 1, 2007. FIN 48 provides a comprehensive model
for the financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be taken in income
tax returns.
Under
FIN 48, the Company first determines whether a tax authority would “more
likely than not” sustain its tax position if it were to audit the position with
full knowledge of all the relevant facts and other information. For those tax
positions that meet this threshold, the Company measures the amount of tax
benefit based on the largest amount of tax benefit that the Company has a
greater than 50% chance of realizing in a final settlement with the relevant
authority. Those tax positions failing to qualify for initial recognition are
recognized in the first interim period in which they meet the more likely than
not standard, or are resolved through negotiation or litigation with the taxing
authority, or upon expiration of the statute of limitations.
Upon
adoption of FIN 48, the Company recorded a reduction of the Company’s deferred
tax asset in the amount of $690,000 and a corresponding reduction to the
valuation allowance of $690,000. The Company recorded a $75,000 tax liability
related to tax exposures that could result in cash payments. This amount was
recorded as an increase to other long-term liabilities and an increase in the
accumulated deficit on the Company’s Condensed Consolidated Balance Sheets. The
Company also increased this liability by $6,000 during each of the three months
ended December 31, 2007 and March 31, 2008. It does not expect this liability to
change significantly during the next twelve months. The Company has not accrued
any interest and penalties associated with this liability. The Company’s policy
is to recognize interest and penalties related to uncertain tax positions as a
component of income tax expense in its Consolidated Statements of
Operations.
As of
October 1, 2007, the Company had approximately $721,000 of total gross
unrecognized tax benefits (before consideration of any valuation allowance).
These unrecognized tax benefits represent differences between tax positions
taken by the Company in its various consolidated and separate worldwide tax
returns and the benefits recognized and measured pursuant to FIN 48. This amount
also represents the amount of unrecognized tax benefits that, if recognized,
would favorably affect the effective income tax rate in any future
periods.
In the
normal course of business, the Company is subject to examination by taxing
authorities throughout the world, including such major jurisdictions as the
United Kingdom, Germany, France, Australia, and the United States, and as a
result, files numerous consolidated and separate income tax returns in the U.S.
federal jurisdiction and various state and foreign jurisdictions. The fiscal
years ended September 30, 2004 through September 30, 2007 are generally still
open to examination in the major jurisdictions.
Note
4 – Shareholders’ Equity
Stock-based
compensation expense for the three months ended March 31, 2008 and March 31,
2007 was $55,000 and $30,000, respectively, and $106,000 and $58,000 for the six
months ended March 31, 2008 and 2007, respectively, as included in the following
expense categories:
|
|
Three
months ended March 31,
|
|
|
Six
months ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and Marketing
|
|
$ |
14 |
|
|
$ |
12 |
|
|
$ |
39 |
|
|
$ |
23 |
|
Engineering
and product development
|
|
|
4 |
|
|
|
3 |
|
|
|
8 |
|
|
|
6 |
|
General
and administrative
|
|
|
37 |
|
|
|
15 |
|
|
|
59 |
|
|
|
29 |
|
|
|
$ |
55 |
|
|
$ |
30 |
|
|
$ |
106 |
|
|
$ |
58 |
|
The
Company’s stock compensation plans provide for the granting of restricted shares
and either incentive or nonqualified stock options to employees and non-employee
directors. Options are subject to terms and conditions determined by the
Compensation and Stock Committee of the Board of Directors, and generally vest
over a three year period beginning three months from the date of grant and
expire either seven or ten years from the date of grant.
Stock
Options
The
Company uses the Black-Scholes option-pricing model to calculate the fair value
of options. The key assumptions for this valuation method include the expected
life of the option, stock price volatility, risk-free interest rate, dividend
yield and exercise price. The weighted-average fair values of the options
granted under the stock option plans for the three months ended March 31, 2008
and 2007 were $4.45 and $2.04, respectively, and $3.29 and $1.51 for the six
months ended March 31, 2008 and 2007, respectively. The total intrinsic value of
options exercised during the three months ended March 31, 2008 and 2007 was
approximately $595,000 and $2,000, respectively. The total intrinsic value of
options exercised during the six months ended March 31, 2008 and 2007 was
approximately $1.1 million and $9,000, respectively. As of March 31, 2008, there
was $421,000 of total unrecognized compensation cost related to nonvested stock
option arrangements, which is expected to be recognized over a weighted-average
period of 2.3 years.
Many of
these assumptions are judgmental and highly sensitive in the determination of
compensation expense. The table below indicates the key assumptions used in the
option valuation calculations for options granted in the six months ended March
31, 2008 and 2007:
|
2008 |
2007 |
Expected
life
|
5
years
|
5
years
|
Expected
volatility
|
72.79%
- 73.26%
|
75.88%
- 83.34%
|
Weighted-average
volatility
|
72.84%
|
77.52%
|
Risk
free interest rate
|
2.87%
- 4.03%
|
4.48%
- 4.74%
|
Dividend
yield
|
0.0%
|
0.0%
|
The
dividend yield of zero is based on the fact that the Company has never paid cash
dividends and has no present intention to pay cash dividends. The Company uses
an expected stock-price volatility assumption that is based on historical
volatilities of the underlying stock which are obtained from public data
sources. The risk-free interest rate is the U.S. Treasury bill rate with
constant maturities with a remaining term equal to the expected life of the
option. The expected life is based on historical trends and
data. With regard to the weighted-average option life assumption, the
Company considers the exercise behavior of past grants and models the pattern of
aggregate exercises. Patterns are determined on specific criteria of the
aggregate pool of optionees including the reaction to vesting, realizable value
and short-time-to-maturity effect. Based on the Company’s historical voluntary
turnover rates, an annualized estimated forfeiture rate of 10% has been used in
calculating the estimated cost. Additional expense will be recorded if the
actual forfeiture rate is lower than estimated, and a recovery of prior expense
will be recorded if the actual forfeiture rate is higher than
estimated.
The
following table summarizes information about the Company’s stock option plans
for the six months ended March 31, 2008.
|
Options
Outstanding
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining Contractual Term
|
|
Aggregate
Intrinsic
Value
$(000)
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
October 1, 2007
|
809,543
|
|
$
|
2.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
88,000
|
|
5.27
|
|
|
|
|
|
Canceled
|
(29,753)
|
|
5.26
|
|
|
|
|
|
Exercised
|
(265,488)
|
|
1.88
|
|
|
|
|
|
Outstanding,
March 31, 2008
|
602,302
|
|
$
|
3.11
|
|
5.56
|
|
$
|
564
|
|
|
|
|
|
|
|
|
|
Vested
or expected to vest, March 31, 2008
|
585,356
|
|
$
|
3.08
|
|
5.23
|
|
$
|
558
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
March 31, 2008
|
432,845
|
|
$
|
2.71
|
|
4.98
|
|
$
|
505
|
Restricted
Stock Units
The
Company periodically grants awards of restricted stock units (“RSU”) to each of
its non-employee Directors on a discretionary basis pursuant to its 2006 Equity
Compensation and Incentive Plan. Each RSU entitles the holder to receive, at the
end of each vesting period, a specified number of shares of the Company’s common
stock. The total number of RSUs unvested at March 31, 2008 was 28,330. Each RSU
vests at the rate of 33.33% on each of the first through third anniversaries of
the grant date with final vesting scheduled to occur in March 2011. The fair
value related to the RSUs was calculated based on the average stock price of the
Company’s common stock on the date of the grant and is being amortized evenly on
a pro-rata basis over the vesting period to general and administrative expense.
The fair value of the RSUs granted in the six months ended March 31, 2008 and
2007, respectively, was approximately $62,000 (or $3.53 fair value per share)
and $38,000 (or $3.02 fair value per share). The Company recorded compensation
expense related to RSUs of approximately $5,000 and $1,000 for the three months
ended March 31, 2008 and 2007, respectively, and $10,000 and $1,000 for the six
months ended March 31, 2008 and 2007, respectively. These amounts are included
in the total stock-based compensation expense disclosed above. As of March 31,
2008, there was $96,000 of total unrecognized compensation cost related to RSUs,
which is expected to be recognized over a weighted average period of 2.6
years.
Note
5 - Comprehensive Income
The
following table sets forth the reconciliation of net income to comprehensive
income:
|
|
Three
Months Ended March 31,
|
|
|
Six
Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
83 |
|
|
$ |
424 |
|
|
$ |
330 |
|
|
$ |
458 |
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(2 |
) |
|
|
(26 |
) |
|
|
(24 |
) |
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
81 |
|
|
$ |
398 |
|
|
$ |
306 |
|
|
$ |
386 |
|
Accumulated
other comprehensive loss reported in the Condensed Consolidated Balance Sheets
consists solely of foreign currency translation adjustments.
Note
6 - Basic and Diluted Net Income Per Share
Basic net
income per common share is computed by dividing net income by the
weighted-average number of common shares outstanding during the quarter. Diluted
net income per share reflects the impact, when dilutive, of the exercise of
stock options and RSUs using the treasury stock method.
Potentially
dilutive common stock options aggregating 187,596 and 330,090 shares for the
three months ended March 31, 2008 and 2007, respectively, and 107,778 and
329,585 shares for the six months ended March 31, 2008 and 2007, respectively,
have been excluded from the computation of diluted net income per share because
their inclusion would be anti-dilutive. Potentially dilutive restricted stock
units aggregating 2,500 and 3,056 shares for the three months ended March 31,
2008 and 2007, respectively, and 2,500 and 1,511 shares for the six months ended
March 31, 2008 and 2007, respectively, have been excluded from the computation
of diluted net income per share because their inclusion would be
anti-dilutive.
Note
7 - Commitments and Contingencies
As a
result of the acquisition of certain assets of the IDARS business on May 3, 2006
(see Note 2), the Company is required to make payments equal to 30% of net
revenues from the IDARS business, excluding the first $337,500 of this revenue,
covering the 18 month earn-out period from May 3, 2006 until November 3, 2007.
In accordance with the purchase and sale agreement, payments commenced during
the Company’s third quarter of fiscal year 2007 and the final payments were made
in the first quarter of fiscal year 2008.
On August
11, 2004, the Company acquired 100% of the shares of Mergence Technologies
Corporation. The purchase agreement includes a provision for quarterly cash
payments to the former Mergence shareholders equal to 10% of revenue, as
defined, of the Datawatch|Researcher product until September 30,
2010. The Company expensed approximately $1,000 and $5,000 for the
three months ended March 31, 2008 and 2007, respectively, and $1,000 and $9,000
for the six months ended March 31, 2008 and 2007, respectively.
From time
to time, the Company is subject to other claims and may be party to other
actions that arise in the normal course of business. The Company does not
believe the eventual outcome of any pending matters will have a material effect
on the Company’s consolidated financial condition or results of
operations.
Note
8 - Segment Information
The
Company has determined that it has only one reportable segment. The Company’s
chief operating decision maker, who is determined to be the Chief Executive
Officer, does not manage any part of the Company separately, and the allocation
of resources and assessment of performance is based solely on the Company’s
consolidated operations and operating results.
The following table presents
information about the Company’s revenue by product lines:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Business
Intelligence Solutions (including Monarch, Monarch
Data Pump, Monarch|RMS, Datawatch|ES, Datawatch|Researcher,
Visual|Insight, iMergence and VorteXML)
|
|
|
67% |
|
|
|
63% |
|
|
|
67% |
|
|
|
63% |
|
Content
Management Solutions (including Datawatch|BDS
and Datawatch|MailManager)
|
|
|
15% |
|
|
|
15% |
|
|
|
15% |
|
|
|
14% |
|
Business
Service Management and Workflow Solutions (including Visual|QSM and
Visual|HD)
|
|
|
18% |
|
|
|
22% |
|
|
|
18% |
|
|
|
23% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company conducts operations in the U.S. and internationally (principally in the
United Kingdom). The following tables present information about the Company’s
geographic operations:
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
(Principally
|
|
|
Intercompany
|
|
|
|
|
|
|
Domestic
|
|
|
U.K.)
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2008
|
|
$ |
4,377 |
|
|
$ |
1,841 |
|
|
$ |
(345 |
) |
|
$ |
5,873 |
|
Three
months ended March 31, 2007
|
|
$ |
4,243 |
|
|
$ |
2,178 |
|
|
$ |
(272 |
) |
|
$ |
6,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended March 31, 2008
|
|
$ |
8,916 |
|
|
$ |
3,716 |
|
|
$ |
(692 |
) |
|
$ |
11,940 |
|
Six
months ended March 31, 2007
|
|
$ |
8,099 |
|
|
$ |
4,421 |
|
|
$ |
(595 |
) |
|
$ |
11,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 31, 2008
|
|
$ |
57 |
|
|
$ |
12 |
|
|
$ |
— |
|
|
$ |
69 |
|
Three
months ended March 31, 2007
|
|
$ |
285 |
|
|
$ |
183 |
|
|
$ |
— |
|
|
$ |
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended March 31, 2008
|
|
$ |
409 |
|
|
$ |
(141 |
) |
|
$ |
— |
|
|
$ |
268 |
|
Six
months ended March 31, 2007
|
|
$ |
406 |
|
|
$ |
151 |
|
|
$ |
— |
|
|
$ |
557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
March 31, 2008
|
|
$ |
9,448 |
|
|
$ |
111 |
|
|
$ |
— |
|
|
$ |
9,559 |
|
At
September 30, 2007
|
|
$ |
9,632 |
|
|
$ |
115 |
|
|
$ |
— |
|
|
$ |
9,747 |
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
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
Quarterly Report on Form 10-Q that are not historical facts may constitute
forward looking statements and are made under the safe harbor provisions of The
Private Securities Litigation Reform Act of 1995. The Company cautions
readers not to place undue reliance on any such forward looking-statements,
which speak only as of the date they are made. The Company disclaims any
obligation, except as specifically required by law and the rules of the
Securities and Exchange Commission, to publicly update or revise any such
statements to reflect any change in the Company’s
expectations
or in events, conditions or circumstances on which any such statements may be
based, or that may affect the likelihood that actual results will differ from
those set forth in the forward-looking statements. 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 in Item 1A
of the Company’s Annual Report on Form 10-K for the fiscal year ended September
30, 2007, as well as the accuracy of the Company’s internal estimates of revenue
and operating expense levels.
The
Company is engaged in the design, development, manufacture, marketing, and
support of business computer software primarily for the Enterprise Information
Management market which incorporates business intelligence, enterprise content
management, business service management, help desk and workflow to allow
organizations to access and analyze information in a more meaningful
fashion.
The
Company’s principal products are Business Intelligence Solutions (including
Datawatch|ES, Monarch, Monarch Data Pump, Monarch|RMS, Datawatch|Researcher,
Visual|Insight, iMergence and VorteXML), Content Management Solutions (including
Datawatch|BDS, BDS|Workflow and Datawatch|MailManager) and Business Service
Management and Workflow Solutions (including Visual|QSM and Visual|HD). Included
in the above categories are: Datawatch|ES, an enterprise business intelligence
system that provides web-enabled report management, mining and distribution as
well as data analysis and MS Excel integration; Monarch, a desktop report mining
and business intelligence application that lets users extract and manipulate
data from ASCII report files, PDF files or HTML files produced on any mainframe,
midrange, client/server or PC system; Monarch Data Pump, a data replication and
migration tool that offers a shortcut for populating and refreshing data marts
and data warehouses, for migrating legacy data into new applications and for
providing automated delivery of reports in a variety of formats via email;
Monarch|RMS, a web-based report mining and analysis solution that integrates
with any existing Enterprise Report Management (“ERM”) document or content
management archiving solution; Datawatch|Researcher, a development platform for
building performance management, content and data aggregation and workflow
solutions; Visual|Insight, a performance management solution that provides
web-based knowledge management and Key Performance Indicator (“KPI”) reporting;
iMergence, an enterprise report mining system; VorteXML, a data transformation
product for the emerging XML market that easily and quickly converts structured
text output from any system into valid XML for web services and more using any
DTD or XDR schema without programming; Datawatch|BDS, a system for high-volume
document capture, archiving, and online presentation; BDS|Workflow, a
web-enabled enterprise business process management solution that provides highly
effective processing of document intensive business transactions;
Datawatch|MailManager, a highly scalable email management solution that provides
complete lifecycle, compliance and storage management for Microsoft Exchange
environments; Visual|QSM, a fully internet-enabled IT service management
solution that incorporates workflow and network management capabilities and
provides web access to multiple databases via a standard browser; and
Visual|Help Desk or Visual|HD, a web-based help desk and call center solution
operating on the IBM Lotus Domino platform.
On May 3,
2006, the Company acquired certain assets and assumed certain liabilities of
ClearStory Systems, Inc.’s Integrated Document Archiving and Retrieval Systems
(“IDARS”) business in exchange for $4,349,000 in cash and incurred $441,000 in
direct costs. In accordance with the purchase and sale agreement, payments equal
to 30% of revenue for a period of eighteen months from the closing date (May 3,
2006) of the Datawatch|BDS product, excluding the first $337,500 of revenue, net
of any claims, commenced during the Company’s third and fourth quarters of
fiscal year 2007 and the final payments were made in the first quarter of fiscal
year 2008. These amounts were recorded as goodwill as additional purchase price,
as incurred or accrued. At September 30, 2007, the Company had accrued
approximately $329,000 related to future earn out payments. The final earn out
payments were made in the first quarter of fiscal 2008 and, accordingly, no
amounts are accrued at March 31, 2008. Since the acquisition date, the Company
recorded approximately $1.1 million related to such earn-out payments. The
activities of the IDARS business from May 3, 2006 are included in the Company’s
condensed consolidated financial statements. See Note 2 to the Condensed
Consolidated Financial Statements for more detailed financial information on the
acquisition of the IDARS business.
During
the first quarter of fiscal 2004, the Company introduced a subscription sales
model for the sale of its enterprise products. The Company continues to offer
its enterprise products through perpetual licenses and introduced the
subscription pricing model to allow customers to begin using the Company’s
products at a lower initial cost of software acquisition. Subscriptions
automatically renew unless terminated with 90 days notice following the first
year of the subscription term. The subscription arrangement includes software,
maintenance and unspecified future upgrades including major version upgrades.
The initial subscription rate is the same as the renewal rate. During the three
months ended March 31, 2008 and 2007, revenues under the subscription model were
$149,000 and $183,000, respectively. During the six months ended March 31, 2008
and 2007, revenues under the subscription model were $293,000 and $361,000,
respectively.
CRITICAL
ACCOUNTING POLICIES
In the
preparation of financial statements and other financial data, management applies
certain accounting policies to transactions that, depending on choices made by
management, can result in different outcomes. In order for a reader to
understand the following information regarding the financial performance and
condition of the Company, an understanding of those accounting policies is
important. Certain of those policies are comparatively more important to the
Company’s financial results and condition than others. The policies that the
Company believes are most important for a reader’s understanding of the
financial information provided in this report are described below.
Revenue Recognition,
Allowance for Bad Debts and Returns Reserve
The
Company has two types of software product offerings: Enterprise Software and
Desktop and Server Software. Enterprise Software products are sold directly to
end-users and through the use of value added resellers. The Company licenses its
Desktop and Server Software products directly to end-users and through
distributors and resellers. Sales to distributors and resellers
accounted for approximately 40% and 38%, respectively, of total sales for the
three months ended March 31, 2008 and 2007, and 40% and 36%, respectively, for
the six months ended March 31, 2008 and 2007. Revenue from the license of all
software products (separately sold) is generally recognized at the time of
shipment, provided there are no uncertainties surrounding product acceptance,
the fee is fixed and determinable, collection is considered probable, persuasive
evidence of the arrangement exists and there are no significant obligations
remaining. Both types of the Company’s software product offerings are
“off-the-shelf” as such term is defined by Statement of Position No. 97-2,
“Software Revenue
Recognition.” The Company’s software products can be installed and used
by customers on their own with little or no customization
required. Multi-user licenses marketed by the Company are sold as a
right to use the number of licenses and license fee revenue is recognized upon
delivery of all software required to satisfy the number of licenses sold. Upon
delivery, the licensing fee is payable without further delivery obligations of
the Company.
Desktop
and Server Software products are generally not sold in multiple element
arrangements. Enterprise Software sales are generally multiple element
arrangements which include software license deliverables, professional services
and post-contract customer support, which primarily consists of maintenance. In
such multiple element arrangements, the Company applies the residual method in
determining revenue to be allocated to a software license. In applying the
residual method, the Company deducts from the sale proceeds the vendor specific
objective evidence (“VSOE”) of fair value of the services and post-contract
customer support in determining the residual fair value of the software license.
The VSOE of fair value of the services and post-contract customer support is
based on the amounts charged for these elements when sold separately.
Professional services include implementation, integration, training and
consulting services with revenue recognized as the services are performed. These
services are generally delivered on a time and materials basis, are billed on a
current basis as the work is performed, and do not involve modification or
customization of the software or any other unusual acceptance clauses or terms.
Post-contract customer support is typically provided under a maintenance
agreement which provides technical support and rights to unspecified software
maintenance updates and bug fixes on a when-and-if available
basis. Revenue from post-contract customer support services is
deferred and recognized ratably over the contract period (generally one
year). Such deferred amounts are recorded as part of deferred revenue
in the Company’s Condensed Consolidated Balance Sheets included elsewhere
herein.
The
Company also licenses its Enterprise Software using a subscription model. At the
time a customer enters into a binding agreement to purchase a subscription, the
customer is invoiced for an initial 90 day service period and an account
receivable and deferred revenue are recorded. Beginning on the date the software
is installed at the customer site and available for use by the customer, and
provided that all other criteria for revenue recognition are met, the deferred
revenue amount is recognized ratably over the period the service is provided.
The customer is then invoiced every 90 days and, in accordance with SOP 97-2,
revenue is recognized ratably over the period the service is provided. The
subscription arrangement includes software, maintenance and unspecified future
upgrades including major version upgrades. The initial subscription rate is the
same as the renewal rate. Subscriptions can be cancelled by the customer at any
time by providing 90 days written notice following the first year of the
subscription term.
The
Company’s software products are sold under warranty against certain defects in
material and workmanship for a period of 30 days from the date of purchase.
Certain software products, including desktop versions of Monarch, Monarch Data
Pump, and VorteXML licensed directly to end-users, include a guarantee under
which such customers may return products within 30 days for a full refund.
Additionally, the Company provides its distributors with stock-balancing rights
and applies the guidance found in Statement of Financial Accounting Standards
No. 48, “Revenue Recognition
when Right of Return Exists” (“SFAS No. 48”). Revenue from the
license of software products to distributors and resellers is recognized at the
time of shipment providing all other criteria for revenue recognition as stated
above are met and (i) the distributor or reseller is unconditionally obligated
to pay for the products, including no contingency as to product resale, (ii) the
distributor or reseller has independent economic substance apart from the
Company, (iii) the Company is not obligated for future performance to bring
about product resale, and (iv) the amount of future returns can be reasonably
estimated. The Company’s experience and history with its distributors and
resellers allows for reasonable estimates of future returns. Among other things,
estimates of potential future returns are made based on the inventory levels at
the various distributors and resellers, which the Company monitors frequently.
Once the estimates of potential future returns from all sources are made, the
Company determines if it has adequate returns reserves to cover anticipated
returns and the returns reserve is adjusted as required. Adjustments are
recorded as increases or decreases in revenue in the period of adjustment.
Actual returns have historically been within the range estimated by the Company.
The Company’s returns reserves were $140,000 and $80,000 as of March 31, 2008
and September 30, 2007, respectively.
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of customers to make required payments. The Company
analyzes accounts receivable and the composition of the accounts receivable
aging, historical bad debts, customer creditworthiness, current economic trends,
foreign currency exchange rate fluctuations and changes in customer payment
terms when evaluating the adequacy of the allowance for doubtful accounts. Based
upon the analysis and estimates of the collectibility of its accounts
receivable, the Company records an increase in the allowance for doubtful
accounts when the prospect of collecting a specific account receivable becomes
doubtful. Actual results could differ from the allowances for doubtful accounts
recorded, and this difference may have a material effect on the Company’s
financial position and results of operations. The Company’s allowance for
doubtful accounts was $154,000 and $223,000 as of March 31, 2008 and September
30, 2007, respectively.
Income
Taxes
The
Company has deferred tax assets related to net operating loss carryforwards and
tax credits that expire at different times through and until 2026. Significant
judgment is required in determining the Company’s provision for income taxes,
the carrying value of deferred tax assets and liabilities and the valuation
allowance recorded against net deferred tax assets. Factors such as future
reversals of deferred tax assets and liabilities, projected future taxable
income, changes in enacted tax rates and the period over which the Company’s
deferred tax assets will be recoverable are considered in making these
determinations. Management does not believe the deferred tax assets are more
likely than not to be realized and a full valuation allowance, previously
provided against the deferred tax assets, continues to be provided. Management
evaluates the realizability of the deferred tax assets quarterly and, if current
economic conditions change or future results of operations are better than
expected, future assessments may result in the Company concluding that it is
more likely than not that all or a portion of the
deferred
tax assets are realizable. If this conclusion were reached, the valuation
allowance against deferred tax assets would be reduced resulting in a tax
benefit being recorded for financial reporting purposes. Total net deferred tax
assets subject to a valuation allowance were approximately $4.5 million as of
March 31, 2008.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes — An Interpretation of FASB Statement No. 109”
(“FIN 48”) on October 1, 2007. FIN 48 provides a comprehensive model
for the financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be taken in income
tax returns.
Under
FIN 48, the Company first determines whether a tax authority would “more
likely than not” sustain its tax position if it were to audit the position with
full knowledge of all the relevant facts and other information. For those tax
positions that meet this threshold, the Company measures the amount of tax
benefit based on the largest amount of tax benefit that the Company has a
greater than 50% chance of realizing in a final settlement with the relevant
authority. Those tax positions failing to qualify for initial recognition are
recognized in the first interim period in which they meet the more likely than
not standard, or are resolved through negotiation or litigation with the taxing
authority, or upon expiration of the statute of limitations. The Company
maintains a cumulative risk portfolio relating to all of its uncertainties in
income taxes in order to perform this analysis, but the evaluation of the
Company’s tax position in connection with FIN 48 requires significant
judgment and estimation in part because, in certain cases, tax law is subject to
varied interpretation, and whether a tax position will ultimately be sustained
may be uncertain. The actual outcome of the Company’s tax positions, if
significantly different from its estimates, could materially impact the
financial statements.
Upon
adoption of FIN 48, the Company recorded a reduction of the Company’s deferred
tax asset in the amount of $690,000 and a corresponding reduction to the tax
asset valuation reserve of $690,000 for all identified uncertain tax positions,
for any years open under the statute of limitations. The Company recorded a
$75,000 tax liability fully related to foreign tax exposure. This amount was
recorded as an increase to other long-term liabilities and an increase in the
accumulated deficit on the Company’s Consolidated Balance
Sheets.
Capitalized Software
Development Costs
The
Company capitalizes certain software development costs as well as purchased
software upon achieving technological feasibility of the related products.
Software development costs incurred and software purchased prior to achieving
technological feasibility are charged to research and development expense as
incurred. Commencing upon initial product release, capitalized costs
are amortized to cost of software licenses using the straight-line method over
the estimated life (which approximates the ratio that current gross revenues for
a product bear to the total of current and anticipated future gross revenues for
that product), which is generally 24 to 36 months. The Company’s capitalized
software was $329,000 and $395,000 at March 31, 2008 and September 30, 2007,
respectively.
Goodwill, Other Intangible
Assets and Other Long-Lived Assets
The
Company performs an evaluation of whether goodwill is impaired annually or when
events occur or circumstances change that would more likely than not reduce the
fair value of the applicable reporting unit below its carrying amount. The
annual impairment analysis is performed as of May 31 each fiscal year. The
Company also reviews other intangible assets and other long-lived assets when
indication of potential impairment exists, such as a significant reduction in
cash flows associated with the assets. Should the fair value of the Company’s
long-lived assets decline because of reduced operating performance, market
declines, or other indicators of impairment, a charge to operations for
impairment may be necessary.
Accounting for Stock-Based
Compensation
The
Company recognizes stock-based compensation expense in accordance with Statement
of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123(R)”), “Share-Based Payment.” SFAS
123(R) requires all share-based awards, including grants of employee stock
options, to be recognized in the financial statements based on their fair
value.
Under the
provisions of SFAS No. 123(R), the Company recognizes the fair value of
share-based awards over the requisite service period of the individual awards,
which generally equals the vesting period. For the three months ended March 31,
2008 and 2007, the Company recorded stock-based compensation expense of
approximately $55,000 and $30,000, respectively. For the six months ended March
31, 2008 and 2007, the Company recorded stock-based compensation expense of
approximately $106,000 and $58,000, respectively. In order to determine the fair
value of stock options on the date of grant, the Company applies the
Black-Scholes option-pricing model. Inherent in this model are assumptions
related to expected stock-price volatility, option life, risk-free interest rate
and dividend yield. While the risk-free interest rate and dividend yield are
less subjective assumptions, typically based on factual data derived from public
sources, the expected stock-price volatility and option life assumptions require
a greater level of judgment which makes them critical accounting
estimates.
The
Company uses an expected stock-price volatility assumption that represents
historical volatilities of the underlying stock which are obtained from public
data sources. The Company believes this approach results in a reasonable
estimate of volatility. For stock option grants issued during the six months
ended March 31, 2008, the Company used an expected stock-price volatility of 73%
based upon the historical volatility at the time of issuance.
With
regard to the weighted-average option life assumption, the Company considers the
exercise behavior of past grants and models the pattern of aggregate historical
exercises. Patterns are determined on specific criteria of the aggregate pool of
optionees including the reaction to vesting, realizable value and
short-time-to-maturity effect. For stock option grants issued during the three
months ended March 31, 2008, the Company used an expected option life assumption
of five years.
With
regard to the forfeiture rate assumption, the Company reviews historical
voluntary turnover rates. For stock option grants issued during the three months
ended March 31, 2008, the Company used an annual estimated forfeiture rate of
10%. Additional expense will be recorded if the actual forfeiture rate is lower
than estimated, and a recovery of prior expense will be recorded if the actual
forfeiture rate is higher than estimated.
RESULTS
OF OPERATIONS
The
following table sets forth certain statements of operations data as a percentage
of total revenues for the periods indicated. The data has been derived from the
unaudited condensed consolidated financial statements contained in this
Quarterly Report on Form 10-Q. The operating results for any period should not
be considered indicative of the results expected for any future period. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Company’s Annual Report on Form
10-K for the fiscal year ended September 30, 2007.
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
March
31,
|
|
March
31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
REVENUE:
|
|
|
|
|
|
|
|
|
Software
licenses and subscriptions
|
|
53.7%
|
|
53.0%
|
|
54.3%
|
|
56.1%
|
Maintenance
and services
|
|
46.3%
|
|
47.0%
|
|
45.7%
|
|
43.9%
|
Total
Revenue
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
Cost
of software licenses and subscriptions
|
|
9.4%
|
|
9.1%
|
|
9.4%
|
|
9.2%
|
Cost
of maintenance and services
|
|
20.0%
|
|
16.0%
|
|
19.2%
|
|
16.9%
|
Sales
and marketing
|
|
33.5%
|
|
34.8%
|
|
35.1%
|
|
37.6%
|
Engineering
and product development
|
|
14.2%
|
|
12.8%
|
|
13.3%
|
|
12.5%
|
General
and administrative
|
|
21.7%
|
|
19.7%
|
|
20.8%
|
|
19.1%
|
Total
costs and expenses
|
|
98.8%
|
|
92.4%
|
|
97.7%
|
|
95.3%
|
INCOME
FROM OPERATIONS
|
|
1.2%
|
|
7.6%
|
|
2.3%
|
|
4.7%
|
Interest
expense
|
|
—
|
|
(0.1%)
|
|
—
|
|
(0.3%)
|
Interest
income and other income (expense), net
|
|
0.8%
|
|
(0.2%)
|
|
1.2%
|
|
(0.2%)
|
INCOME
BEFORE INCOME TAXES
|
|
2.0%
|
|
7.3%
|
|
3.5%
|
|
4.2%
|
Provision
for income taxes
|
|
0.6%
|
|
0.4%
|
|
0.7%
|
|
0.4%
|
NET
INCOME
|
|
1.4%
|
|
6.9%
|
|
2.8%
|
|
3.8%
|
Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007
Total
Revenues
The
following table presents total revenue, total revenue decrease and percentage
change in total revenue for the three months ended March 31, 2008 and
2007:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses and subscriptions
|
|
$ |
3,155 |
|
|
$ |
3,257 |
|
|
$ |
(102 |
) |
|
|
-3.1 |
% |
Maintenance
and services
|
|
|
2,718 |
|
|
|
2,892 |
|
|
|
(174 |
) |
|
|
-6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
5,873 |
|
|
$ |
6,149 |
|
|
$ |
(276 |
) |
|
|
-4.5 |
% |
Software
license and subscription revenue for the three months ended March 31, 2008 was
$3,155,000 or approximately 54% of total revenue, as compared to $3,257,000 or
approximately 53% of total revenue for the three months ended March 31, 2007.
This represents a decrease of $102,000 or approximately 3% from the second
quarter of fiscal 2007 to the second quarter of fiscal 2008. The overall net
decrease in software license and subscription revenue for the three months ended
March 31, 2008 consists of an $87,000 decrease in Business Service Management
and Workflow Solutions (including Visual|QSM and Visual|HD products) and a
$21,000 decrease in Business Intelligence Solutions (including Monarch, Monarch
Data Pump, Monarch|RMS, Datawatch|ES, Datawatch|Researcher, Visual|Insight,
iMergence and VorteXML products) which were partially offset by a $6,000
increase in Content Management Solutions (including Datawatch|BDS and
Datawatch|MailManager products). The $87,000 decrease in Business Service
Management and Workflow Solutions relates primarily to a decrease in Visual|QSM
license sales internationally as compared to the same period in fiscal
2007.
Maintenance
and services revenue for the three months ended March 31, 2008 was $2,718,000 or
approximately 46% of total revenue, as compared to $2,892,000 or approximately
47% of total revenue for the three months ended March 31, 2007. This represents
a decrease of $174,000 or approximately 6% from the second quarter of fiscal
2007 as compared to the second quarter of fiscal 2008. The decrease in
maintenance and services revenue includes a $206,000 decrease in Business
Service Management and Workflow Solutions (including Visual|QSM and Visual|HD
products) and a $40,000 decrease in Content Management Solutions (including
Datawatch|BDS and Datawatch|MailManager products) which were partially offset by
a $72,000 increase in Business Intelligence Solutions (including Monarch,
Monarch Data Pump, Monarch|RMS, Datawatch|ES, Datawatch|Researcher,
Visual|Insight, iMergence and VorteXML products). Maintenance and services
revenue for the Business Service Management and Workflow Solutions product line
decreased due to a reduction in annual maintenance contracts of $127,000 and
lower professional services of $79,000. Maintenance and services revenue for the
Content Management Solutions product line decreased due to a reduction in annual
maintenance contracts of $14,000 and lower professional services of $26,000.
Maintenance and services revenue for the Business Intelligence Solutions product
line increased due to higher annual maintenance contracts of $148,000 which were
partially offset by lower professional services of $76,000.
Costs
and Operating Expenses
The
following table presents costs and operating expenses, increase/(decrease) in
costs and operating expenses and percentage changes in costs and operating
expenses for the three months ended March 31, 2008 and 2007:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software licenses and subscriptions
|
|
$ |
550 |
|
|
$ |
560 |
|
|
$ |
(10 |
) |
|
|
-1.8 |
% |
Cost
of maintenance and services
|
|
|
1,177 |
|
|
|
983 |
|
|
|
194 |
|
|
|
19.7 |
% |
Sales
and marketing expenses
|
|
|
1,968 |
|
|
|
2,140 |
|
|
|
(172 |
) |
|
|
-8.0 |
% |
Engineering
and product development
|
|
|
836 |
|
|
|
788 |
|
|
|
48 |
|
|
|
6.1 |
% |
General
and administrative
|
|
|
1,273 |
|
|
|
1,210 |
|
|
|
63 |
|
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and operating expenses
|
|
$ |
5,804 |
|
|
$ |
5,681 |
|
|
$ |
123 |
|
|
|
2.2 |
% |
Cost of
software licenses and subscriptions for the three months ended March 31, 2008
was $550,000 or approximately 17% of software license and subscription revenue,
as compared to $560,000 or approximately 17% of software license and
subscription revenues for the three months ended March 31, 2007. The slight
decrease in cost of software licenses and subscriptions is due to lower
amortization expense of acquired and capitalized software costs due to various
capitalized software projects which became fully amortized after the first
quarter of fiscal 2007 with minimal new software projects being capitalized in
fiscal 2008.
Cost of
maintenance and services for the three months ended March 31, 2008 was
$1,177,000 or approximately 43% of maintenance and services revenue, as compared
to $983,000 or approximately 34% of maintenance and services revenue for the
three months ended March 31, 2007. The increase in total cost of
maintenance and services of $194,000 is primarily attributable
to employee-related costs, travel related expenses and increased
international consulting costs.
Sales and
marketing expenses for the three months ended March 31, 2008 were $1,968,000, or
34% of total revenues as compared to $2,140,000 or 35% of total revenues for the
three months ended March 31, 2007. The decrease in sales and marketing expenses
of $172,000, or approximately 8%, is attributable to lower external consulting
costs, a reduction in travel related costs and slightly lower wages attributable
to lower headcount as compared to the same period last year.
Engineering
and product development expenses for the three months ended March 31, 2008 were
$836,000, or 14% of total revenues as compared to $788,000, or 13% of total
revenues for the three months ended March 31,
2007.
The increase in engineering and product development expenses of $48,000,
or approximately 6%, is primarily attributable to higher use of external
development consultants and employee-related costs.
General
and administrative expenses for the three months ended March 31, 2008 were
$1,273,000, or 22% of total revenues as compared to $1,210,000, or 20% of total
revenues for the three months ended March 31, 2007. The increase in general and
administrative expenses of $63,000, or 5%, is primarily attributable to higher
accounting and auditing fees, legal costs, and fees associated with other
consulting services performed during the period.
Interest
expense for the three months ended March 31, 2007 was $8,000 which resulted from
the Company’s $1 million borrowing under its line of credit in the third quarter
of fiscal 2006. There was no interest expense for the three months ended March
31, 2008 as the Company elected to repay its outstanding balance under its line
of credit in the second quarter of fiscal 2007.
Interest
income for the three months ended March 31, 2008 was $31,000 as compared to
$6,000 for the three months ended March 31, 2007. The increase in interest
income was a result of higher cash balances generated by the business. Gain
(loss) on foreign currency transactions for the three months ended March 31,
2008 was a gain of $18,000 as compared to a loss of $17,000 for the three months
ended March 31, 2007.
Income
taxes for the three months ended March 31, 2008 were $35,000 as compared to
$25,000 for the three months ended March 31, 2007. Income tax expense in both
periods primarily represents additional deferred tax expense related to the
tax-deductible goodwill generated by the Company’s acquisition of the business
assets of IDARS. The goodwill resulting from this transaction is deductible for
tax purposes and a deferred tax expense will be recognized for financial
reporting purposes equal to the tax rate on the excess of tax amortization over
the amortization for financial reporting purposes, which is zero unless there is
an impairment. The increase in income taxes of $10,000 is primarily due to
additional deferred tax expense as well as provision for uncertain tax positions
relative to foreign taxes.
Net
income for the three months ended March 31, 2008 was $83,000 as compared to net
income of $424,000 for the three months ended March 31, 2007.
Six
months Ended March 31, 2008 Compared to Six Months Ended March 31,
2007
Total
Revenues
The
following table presents total revenue, total revenue increase (decrease) and
percentage change in total revenue for the six months ended March 31, 2008 and
2007:
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses and subscriptions
|
|
$ |
6,488 |
|
|
$ |
6,695 |
|
|
$ |
(207 |
) |
|
|
-3.1 |
% |
Maintenance
and services
|
|
|
5,452 |
|
|
|
5,230 |
|
|
|
222 |
|
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
11,940 |
|
|
$ |
11,925 |
|
|
$ |
15 |
|
|
|
0.1 |
% |
Software
license and subscription revenue for the six months ended March 31, 2008 was
$6,488,000 or approximately 54% of total revenue, as compared to $6,695,000 or
approximately 56% of total revenue for the six months ended March 31, 2007. This
represents a decrease of $207,000 or approximately 3% from the six months of
fiscal 2007 to the six months of fiscal 2008. The overall net decrease in
software license and subscription revenue for the six months ended March 31,
2008 consists of a $369,000 decrease in Business Service Management and Workflow
Solutions (including Visual|QSM and Visual|HD products) and an $89,000 decrease
in Content Management Solutions (including Datawatch|BDS and
Datawatch|MailManager products) which were partially offset by a $251,000
increase in Business Intelligence Solutions (including Monarch, Monarch Data
Pump, Monarch|RMS, Datawatch|ES, Datawatch|Researcher, Visual|Insight, iMergence
and VorteXML products). The $369,000 decrease in Business Service Management and
Workflow Solutions relates primarily to a decrease in Visual|QSM license sales
internationally as compared to the same period in fiscal 2007.
Maintenance
and services revenue for the six months ended March 31, 2008 was $5,452,000 or
approximately 46% of total revenue, as compared to $5,230,000 or approximately
44% of total revenue for the six months ended March 31, 2007. This represents an
increase of $222,000, or approximately 4%, from the first six months of fiscal
2007 as compared to the first six months of fiscal 2008. The increase in
maintenance and services revenue includes a $237,000 increase in Content
Management Solutions (including Datawatch|BDS and Datawatch|MailManager
products) and a $179,000 increase in Business Intelligence Solutions (including
Monarch, Monarch Data Pump, Monarch|RMS, Datawatch|ES, Datawatch|Researcher,
Visual|Insight, iMergence and VorteXML products) which were partially offset by
a $194,000 decrease in Business Service Management and Workflow Solutions
(including Visual|QSM and Visual|HD products). Maintenance and services revenue
for the Content Management Solutions product line increased due to higher annual
maintenance contracts of $205,000 and higher professional services of
$32,000. Maintenance and services revenue for the Business Intelligence
Solutions product line increased due to higher annual maintenance contracts of
$272,000 which were partially offset by lower professional services of $93,000.
Maintenance and services revenue for the Business Service Management and
Workflow Solutions product line decreased due to a reduction in annual
maintenance contracts of $128,000 and lower professional services of
$66,000.
Costs
and Operating Expenses
The
following table presents costs and operating expenses, increase (decrease) in
costs and operating expenses and percentage changes in costs and operating
expenses for the six months ended March 31, 2008 and 2007:
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software licenses and subscriptions
|
|
$ |
1,122 |
|
|
$ |
1,097 |
|
|
$ |
25 |
|
|
|
2.3 |
% |
Cost
of maintenance and services
|
|
|
2,297 |
|
|
|
2,015 |
|
|
|
282 |
|
|
|
14.0 |
% |
Sales
and marketing
|
|
|
4,189 |
|
|
|
4,484 |
|
|
|
(295 |
) |
|
|
-6.6 |
% |
Engineering
and product development
|
|
|
1,586 |
|
|
|
1,494 |
|
|
|
92 |
|
|
|
6.2 |
% |
General
and administrative
|
|
|
2,478 |
|
|
|
2,278 |
|
|
|
200 |
|
|
|
8.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and operating expenses
|
|
$ |
11,672 |
|
|
$ |
11,368 |
|
|
$ |
304 |
|
|
|
2.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
software licenses and subscriptions for the six months ended March 31, 2008 was
$1,122,000 or approximately 17% of software license and subscription revenue, as
compared to $1,097,000 or approximately 16% of software license and subscription
revenues for the six months ended March 31, 2007. The increase in cost of
software licenses and subscriptions of $25,000 is due to an increase in royalty
cost specifically related to an increase in desktop sales of $623,000 which was
partially offset by reduced amortization expenses of patents and acquired
software costs.
Cost of
maintenance and services for the six months ended March 31, 2008 was $2,297,000
or approximately 42% of maintenance and services revenue, as compared to
$2,015,000 or approximately 39% of maintenance and services revenue for the six
months ended March 31, 2007. The increase in cost of maintenance and
services of $282,000 is primarily due to higher employee and travel-related
expenses and increased international consulting costs.
Sales and
marketing expenses for the six months ended March 31, 2008 were $4,189,000, or
35% of total revenues as compared to $4,484,000, or 38% of total revenues for
the six months ended March 31, 2007. The decrease in sales and
marketing expenses of $295,000, or approximately 7%, is primarily attributable
to cost savings resulting from the Company’s restructuring plan which was
initiated and completed during the first quarter of fiscal year 2007.
Additionally, the Company incurred fewer consulting and travel related expenses
during the six months ended March 31, 2008 as compared to the previous
period.
Engineering
and product development expenses for the six months ended March 31, 2008 were
$1,586,000, or 13% of total revenues as compared to $1,494,000, or 13% of total
revenues, for the six months ended March 31, 2007. The increase in engineering
and product development expenses of $92,000, or approximately 6%, is primarily
attributable to higher use of external development consultants and
employee-related costs.
General
and administrative expenses for the six months ended March 31, 2008 were
$2,478,000, or 21% of total revenues, as compared to $2,278,000, or 19% of total
revenues for the six months ended March 31, 2007. The increase in general and
administrative expenses of $200,000, or approximately 9%, is primarily
attributable to costs associated with accounting and auditing fees, consulting,
travel and employee-related costs.
Interest
expense for the six months ended March 31, 2007 was $33,000 which resulted from
the Company’s $1 million borrowing under its line of credit in the third quarter
of fiscal 2006. There was no interest expense for the six months ended March 31,
2008 as the Company elected to repay its outstanding balance under the line of
credit in the second quarter of fiscal 2007.
Interest
income for the six months ended March 31, 2008 was $71,000 as compared to $8,000
for the six months ended March 31, 2007. The increase in interest income was the
result of higher cash balances generated by the business. Gain (loss) on foreign
currency transactions for the six months ended March 31, 2008 was $75,000 as
compared to a loss of $27,000 for the six months ended March 31,
2007.
Income
taxes for the six months ended March 31, 2008 were $84,000 as compared to
$47,000 for the six months ended March 31, 2007. Income tax expense for both
periods includes additional deferred tax expense related to the tax-deductible
goodwill generated by the Company’s acquisition of the business assets of
IDARS. The goodwill resulting from this transaction is deductible for
tax purposes and a deferred tax expense will be recognized for financial
reporting purposes equal to the tax rate on the excess of tax amortization over
the amortization for financial reporting purposes, which is zero unless there is
an impairment. The increase in income taxes of $37,000 is a result of additional
deferred tax expense related to the earn-out provisions of the IDARS
acquisition, additional estimated alternative minimum taxes in the U.S. and
uncertain tax positions relative to foreign taxes.
Net
income for the six months ended March 31, 2008 was $330,000 as compared to net
income of $458,000 for the six months ended March 31, 2007.
OFF
BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES
AND COMMITMENTS
The
Company leases various facilities and equipment in the U.S. and overseas under
non-cancelable operating leases that expire through 2011. The lease agreements
generally provide for the payment of minimum annual rentals, pro rata share of
taxes, and maintenance expenses. Rental expense for all operating
leases was approximately $99,000 and $122,000 for the three months ended March
31, 2008 and 2007, respectively, and $249,000 and $258,000 for the six months
ended March 31, 2008 and 2007, respectively.
As of
March 31, 2008, contractual obligations include minimum rental commitments under
non-cancelable operating leases as follows:
(In
thousands)
Contractual
Obligations:
|
|
Total
|
|
Less
than 1 Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More
than 5
Years
|
Operating
Lease Obligations
|
|
$
|
844
|
|
$
|
333
|
|
$
|
454
|
|
$
|
57
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company is also obligated to pay royalties ranging from 7% to 50% on revenue
generated by the sale of certain licensed software products. Royalty expense
included in cost of software licenses was approximately $437,000 and $389,000,
respectively, for the three months ended March 31, 2008 and 2007, and $894,000
and 776,000 for the six months ended March 31, 2008 and 2007, respectively. The
Company is not obligated to pay any minimum amounts for royalties.
On August
11, 2004, the Company acquired 100% of the shares of Mergence Technologies
Corporation. The purchase agreement includes a provision for quarterly cash
payments to the former Mergence shareholders equal to 10% of revenue, as
defined, of the Datawatch|Researcher product until September 30, 2010. The
Company expensed approximately $1,000 and $5,000 for the three months ended
March 31, 2008 and 2007, respectively, and $1,000 and $9,000 for the six months
ended March 31, 2008 and 2007, respectively.
On May 3,
2006, the Company acquired certain assets of ClearStory Systems, Inc’s. IDARS
business. The initial acquisition cost for IDARS was approximately $4,790,000,
consisting of $4,349,000 in cash and direct acquisition costs of approximately
$441,000. The acquisition also includes an 18-month earn-out payment equal to
30% of net revenues from the IDARS business excluding the first $337,500 of
revenues. The earn-out payments are considered additional purchase price and
were recorded as additional goodwill. At September 30, 2007, the Company had
accrued approximately $329,000 related to such earn-out payments. In accordance
with the asset purchase agreement, payments commenced during the Company’s third
quarter of fiscal year 2007 and the final payments were made in the first
quarter of fiscal year 2008. Accordingly, no amounts are accrued as of March 31,
2008. See Note 2 to the Condensed Consolidated Financial Statements for more
detailed financial information on the acquisition of IDARS.
The
Company’s software products are sold under warranty against certain defects in
material and workmanship for a period of 30 days from the date of purchase. If
necessary, the Company would provide for the estimated cost of warranties based
on specific warranty claims and claim history. However, the Company has never
incurred significant expense under its product or service warranties. As a
result, the Company believes the estimated fair value of these warranty
agreements is minimal. Accordingly, there are no liabilities recorded for
warranty claims as of March 31, 2008.
The
Company is required by a sublease agreement related to its Chelmsford,
Massachusetts facility to provide a letter of credit in the amount of
approximately $125,000 as a security deposit to the landlord of amounts due
under the lease. Cash on deposit providing security in the amount of this letter
of credit is classified as restricted cash in the Company’s Condensed
Consolidated Balance Sheets as of March 31, 2008 and September 30,
2007.
The
Company enters into indemnification agreements in the ordinary course of
business. Pursuant to these agreements, the Company agrees to indemnify, hold
harmless, and reimburse the indemnified party for losses suffered or incurred by
the indemnified party, generally its customers, in connection with any patent,
copyright or other intellectual property infringement claim by any third party
with respect to the Company’s products. The term of these indemnification
agreements is generally perpetual. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited. The Company has never incurred costs to defend lawsuits
or settle claims related to these indemnification agreements. As a result, the
Company believes the estimated fair value of these agreements is minimal.
Accordingly, the Company has no liabilities recorded for these agreements as of
March 31, 2008.
Certain
of the Company’s agreements also provide for the performance of services at
customer sites. These agreements may contain indemnification clauses, whereby
the Company will indemnify the customer from any and all damages, losses,
judgments, costs and expenses for acts of its employees or subcontractors
resulting in bodily injury or property damage. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company has general and
umbrella insurance policies that would enable us to recover a portion of any
amounts paid. The Company has never incurred costs to defend lawsuits or settle
claims related to these indemnification agreements. As a result, the Company
believes the estimated fair value of these agreements is minimal. Accordingly,
the Company has no liabilities recorded for these agreements as of March 31,
2008.
As
permitted under Delaware law, the Company has agreements with its directors
whereby the Company will indemnify them for certain events or occurrences while
the director is, or was, serving at the Company’s request in such capacity. The
term of the director indemnification period is for the later of ten years after
the date that the director ceases to serve in such capacity or the final
termination of proceedings against the director as outlined in the
indemnification agreement. The maximum potential amount of future payments the
Company could be required to make under these indemnification agreements is
unlimited; however, the Company’s director and officer insurance policy would
enable it to recover a portion of any future amounts paid. As a result of its
insurance policy coverage, the Company believes the estimated fair value of
these indemnification agreements is minimal. The Company has no liabilities
recorded for these agreements as of March 31, 2008.
LIQUIDITY
AND CAPITAL RESOURCES
Management
believes that its current cash balances and cash generated from operations will
be sufficient to meet the Company’s cash needs for
working capital and anticipated capital expenditures for at least the next
twelve months. At March 31, 2008, the Company had $4,027,000 of cash and
equivalents, an increase of $186,000 from September 30, 2007.
At March
31, 2008, the Company had working capital of approximately $842,000 as compared
to a working capital deficit of $279,000 at September 30, 2007. The Company
expects cash flows from operations to remain positive as it anticipates
continued profitability during the fiscal year ended September 30, 2008.
However, if the Company’s cash flow from operations were to decline
significantly, it may need to consider further reductions to its operating
expenses. The Company does not anticipate additional cash requirements to fund
significant growth or the acquisition of complementary technology or businesses.
However, if in the future, such expenditures are anticipated or required, the
Company may need to seek additional financing by issuing equity or obtaining
credit facilities to fund such requirements.
The
Company had net income of approximately $330,000 for the six months ended March
31, 2008 as compared to net income of approximately $458,000 for the six months
ended March 31, 2007. During the six months ended March 31, 2008 and 2007,
approximately $282,000 and $1.5 million, respectively, of cash was provided by
the Company’s operations. During the six months ended March 31, 2008, the main
source of cash from operations was the adjustment to net income adjusted for
depreciation and amortization as well as a decrease in accounts receivable
offset by a decrease in accounts payable, accrued expenses and
other.
Net cash
used in investing activities for the six months ended March 31, 2008 of $557,000
is primarily related to earn-out payments associated with the Company’s IDARS
acquisition and the purchase of property and equipment.
Net cash
provided by financing activities for the six months ended March 31, 2008 of
$496,000 is related to proceeds from the exercise of stock options.
On May 3,
2006, the Company acquired certain assets of ClearStory Systems, Inc’s.
Integrated Document Archiving and Retrieval Systems (“IDARS”) business. The
acquisition of IDARS was consummated pursuant to an asset purchase agreement
dated as of March 10, 2006 among the Company and Clearstory Systems, Inc. The
purchase agreement includes a provision for payments over an 18 month period
equal to 30% of net revenues
from the
IDARS business, excluding the first $337,500 of revenues, net of any claims. The
earn-out payments are considered additional purchase price and were recorded as
additional goodwill as incurred. At September 30, 2007, the Company had accrued
approximately $329,000 related to such earn-out payments. In accordance with the
asset purchase agreement, payments commenced during the Company’s third and
fourth quarters of fiscal year 2007 and the final payments were made in the
first quarter of fiscal year 2008. Accordingly, no amounts are accrued as of
March 31, 2008.
The
Mergence purchase agreement dated August 11, 2004 includes a provision for
quarterly cash payments to the former Mergence shareholders equal to 10% of
revenue, as defined, of the Datawatch|Researcher product for a period of six
years. As the cash payments are based on recognized revenue and no minimum
payments are required, they are not expected to have a significant impact on the
Company’s liquidity or cash flows. See the section titled “Off Balance
Sheet Arrangements, Contractual Obligations and Contingent Liabilities and
Commitments” included elsewhere herein for a more complete disclosure of the
Company’s commitments and contingent liabilities.
An
existing agreement between Datawatch and Math Strategies grants the Company
exclusive worldwide rights to use and distribute certain intellectual property
owned by Math Strategies and incorporated by the Company in its Monarch, Monarch
Data Pump, VorteXML and certain other products. On April 29, 2004, the
Company entered into a two year Option Purchase Agreement with Math Strategies
giving the Company the option to purchase these intellectual property rights for
$8 million. This option, if exercised, would provide the Company with increased
flexibility to utilize the purchased technology in the future. In February 2006,
the Company entered into an amendment to the original agreement with Math
Strategies dated January 19, 1989. Pursuant to the amendment to the
license agreement, the term of the license agreement was extended to April 30,
2015. In conjunction with the license amendment, the Company also entered into
an amendment to the Option Purchase Agreement dated as of April 29, 2004. Under
the option purchase amendment, the option has been extended until April 30,
2015. The option purchase amendment changes the purchase price for the option to
a formula price based on a multiple of the aggregate royalties paid to Math
Strategies by the Company for the four fiscal quarters preceding the exercise of
the option.
Management
believes that the Company’s current operations have not been materially impacted
by the effects of inflation.
Derivative
Financial Instruments, Other Financial Instruments, and Derivative Commodity
Instruments
At March
31, 2008, the Company did not participate in any derivative financial
instruments or commodity instruments. The Company holds no investment securities
that possess significant market risk.
Primary
Market Risk Exposures
The
Company’s primary market risk exposure is foreign currency exchange rate risk.
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. Therefore, the majority of currency movements are reflected in the
Company’s other comprehensive income (loss). There are, however, certain
situations where the Company will invoice customers in currencies other than its
own. Such gains or losses from operating activity, whether realized or
unrealized, are reflected in interest income and other income (expense), net in
the condensed consolidated statements of operations. These have not been
material in the past nor does management believe that they will be material in
the future. Currently, the Company does not engage in foreign currency hedging
activities.
ITEM
4. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure
Controls and Procedures.
The
principal executive officer and principal financial officer, with the
participation of the Company’s management, evaluated the effectiveness of the
Company’s disclosure controls and procedures as of March 31, 2008. The term
“disclosure controls and procedures,” as defined in Rules 13a−15(e) and
15d−15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any system of controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving
their objectives. Based upon that evaluation, the Company’s principal executive
officer and principal financial officer concluded that the Company’s disclosure
controls and procedures are effective in enabling the Company to record,
process, summarize and report information required to be included in the
Company’s periodic SEC filings within the required time period.
(b)
Changes in Internal
Controls.
PART
II. OTHER INFORMATION
Item
1A. Risk
Factors
In
addition to the other information set forth in this report, the reader should
carefully consider the factors discussed in Part I, Item 1A under the heading
“Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended
September 30, 2007, which could materially affect its business, financial
condition or future results. The risks described in the Company’s Annual Report
on Form 10-K are not the only risks facing the Company. Additional risks and
uncertainties not currently known or that it currently deems to be immaterial
also may materially adversely affect the Company’s business, financial condition
and/or operating results.
Item
4. Submission of Matters to a
Vote of Security Holders
A.
|
The
Annual Meeting of Stockholders of Datawatch Corporation was held on March
14, 2008.
|
B.
|
The
directors elected at the meeting were Kenneth P. Bero, Robert W. Hagger,
Thomas H. Kelly, Richard de J. Osborne, Terry W. Potter, David T.
Riddiford, William B. Simmons and James Wood, which constitute all of the
directors of the Company.
|
C.
|
A
vote was proposed to elect the foregoing nominees to the Board of
Directors to serve for the ensuing year or until their respective
successors are duly elected and
qualified:
|
Nominee
|
|
Total
Votes For:
|
|
Total
Votes Withheld:
|
Kenneth
P. Bero
|
|
5,421,578
|
|
233,690
|
Robert
W. Hagger
|
|
5,071,489
|
|
583,779
|
Thomas
H. Kelly
|
|
5,427,703
|
|
227,565
|
Richard
de J. Osborne
|
|
5,428,278
|
|
226,990
|
Terry
W. Potter
|
|
5,427,718
|
|
227,550
|
David
T. Riddiford
|
|
5,346,851
|
|
308,417
|
William
B. Simmons
|
|
5,340,151
|
|
315,117
|
James
Wood
|
|
5,428,278
|
|
226,990
|
D.
|
No
information provided due to inapplicability of
item.
|
31.1
|
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
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 May 15, 2008.
|
DATAWATCH
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Kenneth P. Bero
|
|
|
|
Kenneth
P. Bero
|
|
|
President,
Chief Executive Officer, and
|
|
|
Director
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Murray P. Fish
|
|
|
|
Murray
P. Fish
|
|
|
Chief
Financial Officer,
|
|
(Principal
Financial Officer)
|
|