PART
I. FINANCIAL INFORMATION
DATAWATCH
CORPORATION
(In
thousands, except share and per share amounts)
|
|
June
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
4,446 |
|
|
$ |
3,841 |
|
Accounts
receivable, net
|
|
|
3,604 |
|
|
|
4,174 |
|
Inventories
|
|
|
41 |
|
|
|
48 |
|
Prepaid
expenses
|
|
|
455 |
|
|
|
527 |
|
Total
current assets
|
|
|
8,546 |
|
|
|
8,590 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
820 |
|
|
|
856 |
|
Goodwill
|
|
|
6,116 |
|
|
|
6,020 |
|
Other
intangible assets, net
|
|
|
2,429 |
|
|
|
2,676 |
|
Restricted
cash
|
|
|
125 |
|
|
|
125 |
|
Other
long-term assets
|
|
|
62 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,098 |
|
|
$ |
18,337 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
922 |
|
|
$ |
1,215 |
|
Accrued
expenses
|
|
|
2,519 |
|
|
|
2,839 |
|
Deferred
revenue
|
|
|
4,138 |
|
|
|
4,486 |
|
Accrued
cost of acquisition
|
|
|
— |
|
|
|
329 |
|
Total
current liabilities
|
|
|
7,579 |
|
|
|
8,869 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
|
Deferred
rent
|
|
|
135 |
|
|
|
179 |
|
Deferred
revenue - long-term
|
|
|
128 |
|
|
|
122 |
|
Deferred
tax liability
|
|
|
233 |
|
|
|
147 |
|
Other
liabilities
|
|
|
94 |
|
|
|
- |
|
Total
long-term liabilities
|
|
|
590 |
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock, par value $.01; 20,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
issued,
5,917,770 shares and 5,647,666 shares, respectively;
|
|
|
|
|
|
|
|
|
outstanding,
5,903,524 shares and 5,633,420 shares, respectively
|
|
|
59 |
|
|
|
56 |
|
Additional
paid-in capital
|
|
|
23,345 |
|
|
|
22,684 |
|
Accumulated
deficit
|
|
|
(12,726 |
) |
|
|
(13,072 |
) |
Accumulated
other comprehensive loss
|
|
|
(609 |
) |
|
|
(508 |
) |
|
|
|
10,069 |
|
|
|
9,160 |
|
Less
treasury stock, at cost—14,246 shares
|
|
|
(140 |
) |
|
|
(140 |
) |
Total
shareholders’ equity
|
|
|
9,929 |
|
|
|
9,020 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,098 |
|
|
$ |
18,337 |
|
See
notes to condensed consolidated financial statements.
DATAWATCH
CORPORATION
(In
thousands, except per share amounts)
|
|
Three
Months Ended June 30,
|
|
|
Nine
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses and subscriptions
|
|
$ |
3,116 |
|
|
$ |
4,091 |
|
|
$ |
9,605 |
|
|
$ |
10,786 |
|
Maintenance
and services
|
|
|
2,659 |
|
|
|
2,392 |
|
|
|
8,110 |
|
|
|
7,622 |
|
Total
revenue
|
|
|
5,775 |
|
|
|
6,483 |
|
|
|
17,715 |
|
|
|
18,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software licenses and subscriptions
|
|
|
556 |
|
|
|
691 |
|
|
|
1,678 |
|
|
|
1,788 |
|
Cost
of maintenance and services
|
|
|
1,031 |
|
|
|
922 |
|
|
|
3,328 |
|
|
|
2,937 |
|
Sales
and marketing
|
|
|
2,156 |
|
|
|
2,515 |
|
|
|
6,344 |
|
|
|
7,000 |
|
Engineering
and product development
|
|
|
704 |
|
|
|
750 |
|
|
|
2,290 |
|
|
|
2,243 |
|
General
and administrative
|
|
|
1,310 |
|
|
|
1,205 |
|
|
|
3,788 |
|
|
|
3,483 |
|
Total
costs and expenses
|
|
|
5,757 |
|
|
|
6,083 |
|
|
|
17,428 |
|
|
|
17,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
FROM OPERATIONS
|
|
|
18 |
|
|
|
400 |
|
|
|
287 |
|
|
|
957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(33 |
) |
Interest
income and other income (expense), net
|
|
|
95 |
|
|
|
10 |
|
|
|
240 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
113 |
|
|
|
410 |
|
|
|
527 |
|
|
|
915 |
|
Provision
for income taxes
|
|
|
22 |
|
|
|
28 |
|
|
|
106 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
91 |
|
|
$ |
382 |
|
|
$ |
421 |
|
|
$ |
840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share—Basic
|
|
$ |
0.02 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.15 |
|
Net
income per share—Diluted
|
|
$ |
0.02 |
|
|
$ |
0.06 |
|
|
$ |
0.07 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding—Basic
|
|
|
5,902 |
|
|
|
5,570 |
|
|
|
5,809 |
|
|
|
5,534 |
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding—Diluted
|
|
|
6,031 |
|
|
|
6,032 |
|
|
|
6,049 |
|
|
|
5,976 |
|
See
notes to condensed consolidated financial statements.
DATAWATCH
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In
thousands)
|
|
Nine
Months Ended
|
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income
|
|
$ |
421 |
|
|
$ |
840 |
|
Adjustments
to reconcile net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
633 |
|
|
|
713 |
|
Provision
for doubtful accounts and sales returns
|
|
|
140 |
|
|
|
87 |
|
Loss
on disposal of equipment
|
|
|
— |
|
|
|
3 |
|
Stock-based
compensation
|
|
|
165 |
|
|
|
92 |
|
Deferred
income taxes
|
|
|
86 |
|
|
|
75 |
|
Changes
in current assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
416 |
|
|
|
(559 |
) |
Inventories
|
|
|
7 |
|
|
|
15 |
|
Prepaid
expenses and other assets
|
|
|
70 |
|
|
|
96 |
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
(624 |
) |
|
|
249 |
|
Deferred
revenue
|
|
|
(321 |
) |
|
|
(41 |
) |
Cash
provided by operating activities
|
|
|
993 |
|
|
|
1,570 |
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of equipment and fixtures
|
|
|
(219 |
) |
|
|
(116 |
) |
Proceeds
from sale of equipment
|
|
|
1 |
|
|
|
1 |
|
Purchase
of IDARS business
|
|
|
(425 |
) |
|
|
— |
|
Capitalized
software development costs
|
|
|
(132 |
) |
|
|
(43 |
) |
Other
assets
|
|
|
5 |
|
|
|
— |
|
Cash
used in investing activities
|
|
|
(770 |
) |
|
|
(158 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayments
on line of credit
|
|
|
— |
|
|
|
(1,000 |
) |
Proceeds
from exercise of stock options
|
|
|
499 |
|
|
|
286 |
|
Cash
provided by (used in) financing activities
|
|
|
499 |
|
|
|
(714 |
) |
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS
|
|
|
(117 |
) |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
INCREASE
IN CASH AND EQUIVALENTS
|
|
|
605 |
|
|
|
729 |
|
CASH
AND EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
3,841 |
|
|
|
1,862 |
|
CASH
AND EQUIVALENTS, END OF PERIOD
|
|
$ |
4,446 |
|
|
$ |
2,591 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
INFORMATION:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
— |
|
|
$ |
42 |
|
Income
taxes paid
|
|
$ |
23 |
|
|
$ |
4 |
|
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 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 allocated to 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 42% and 43%, respectively, of total sales for the three months
ended June 30, 2008 and 2007, and 41% and 39%, respectively, of total sales for
the nine months ended June 30, 2008 and 2007. Revenue from the sale of all
software products (when separately sold) are 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 on the part 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 the 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 sells 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 subscription renewal rate is the same as
the initial subscription 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 SFAS 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 5 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 19% and 12%, respectively, of total revenue for the three months
ended June 30, 2008 and 18% and 13%, respectively, of total revenue for the
three months ended June 30, 2007. Ingram Micro, Inc. and Tech Data Product
Management individually accounted for 20% and 9%, respectively, of total revenue
for the nine months ended June 30, 2008 and 15% and 12%, respectively, of total
revenue for the nine months ended June 30, 2007. Ingram Micro, Inc. and Tech
Data Product Management accounted for 15% and 18%, respectively, of outstanding
gross trade receivables as of June 30, 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 revenue or accounts receivable. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral before extending credit. 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 net amount of capitalized
software development costs and purchased software was approximately $426,000 and
$395,000 at June 30, 2008 and September 30, 2007, respectively. During the three
and nine months ended June 30, 2008, the Company capitalized approximately
$132,000 of software development costs related to new products in
development.
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,
on May 31, 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 nine months ended June 30, 2007.
These restructuring costs are included primarily within sales and marketing
expenses for the nine months ended June 30, 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 Financial Accounting Standards Board issued Statement 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 generally accepted
accounting principles (“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 measurements 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 the Company beginning October 1,
2008. The Company has not decided if it will choose to measure any eligible
financial assets and liabilities at fair value.
In
December 2007, the FASB issued Statement 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 after
that time.
In
December 2007, the FASB issued Statement 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 Statement 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 June 30, 2008. Since the
acquisition date, the Company made payments of approximately $1.1 million
related to the IDARS earn-out arrangement.
Note
3 – Other Intangible Assets, Net
Other
intangible assets, net, were comprised of the following as of June 30, 2008 and
September 30, 2007:
|
|
Weighted
|
|
|
June
30, 2008
|
|
|
September
30, 2007
|
|
|
|
Average
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
Identified
Intangible
|
|
Useful
Life
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
Asset
|
|
in
Years
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
software
|
|
|
2
|
|
|
$ |
1,879 |
|
|
$ |
1,696 |
|
|
$ |
183 |
|
|
$ |
1,747 |
|
|
$ |
1,671 |
|
|
$ |
76 |
|
Purchased
software
|
|
|
5
|
|
|
|
700 |
|
|
|
456 |
|
|
|
244 |
|
|
|
700 |
|
|
|
381 |
|
|
|
319 |
|
Patents
|
|
|
20
|
|
|
|
160 |
|
|
|
30 |
|
|
|
130 |
|
|
|
160 |
|
|
|
24 |
|
|
|
136 |
|
Customer
lists
|
|
|
10
|
|
|
|
1,790 |
|
|
|
486 |
|
|
|
1,304 |
|
|
|
1,790 |
|
|
|
337 |
|
|
|
1,453 |
|
Non-compete
agreements
|
|
|
4
|
|
|
|
640 |
|
|
|
370 |
|
|
|
270 |
|
|
|
640 |
|
|
|
254 |
|
|
|
386 |
|
Trademark
|
|
|
2
|
|
|
|
21 |
|
|
|
8 |
|
|
|
13 |
|
|
|
21 |
|
|
|
— |
|
|
|
21 |
|
Trademark
|
|
indefinite
|
|
|
|
285 |
|
|
|
— |
|
|
|
285 |
|
|
|
285 |
|
|
|
— |
|
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$ |
5,475 |
|
|
$ |
3,046 |
|
|
$ |
2,429 |
|
|
$ |
5,343 |
|
|
$ |
2,667 |
|
|
$ |
2,676 |
|
For the
three months ended June 30, 2008 and 2007, amortization expense related to
intangible assets was $128,000 and $132,000, respectively, and $379,000 and
$398,000 for the nine months ended June 30, 2008 and 2007,
respectively.
The
estimated future amortization expense related to other intangible assets as of
June 30, 2008 is as follows:
Fiscal Years Ended
September 30,
|
|
(In thousands)
|
|
|
|
|
|
Remainder
of fiscal 2008
|
|
$ |
140 |
|
2009
|
|
|
538 |
|
2010
|
|
|
406 |
|
2011
|
|
|
195 |
|
2012
|
|
|
174 |
|
2013 |
|
|
174 |
|
Thereafter
|
|
|
802 |
|
|
|
|
|
|
Total
|
|
$ |
2,429 |
|
Note
4 – 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 June 30, 2008 and 2007, the Company recorded additional deferred tax
expense of approximately $29,000 and $28,000, respectively. During the nine
months ended June 30, 2008 and 2007, the Company recorded additional deferred
tax expense of approximately $86,000 and $75,000, respectively. During the three
and nine months ended June 30, 2008, the Company recorded provision-to-return
adjustments reducing its income tax liability by approximately $13,000.
Additionally, during the three and nine months ended June 30, 2008, the Company
recorded approximately $6,000 and $33,000, 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, March 31, 2008 and June
30, 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 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, 2005 through September 30, 2007 are generally still open to
examination in the jurisdictions listed above.
Note
5 – Shareholders’ Equity
Stock-based
compensation expense for the three months ended June 30, 2008 and 2007 was
$59,000 and $35,000, respectively, and $165,000 and $92,000 for the nine months
ended June 30, 2008 and 2007, respectively, as included in the following expense
categories:
|
|
Three
months ended June 30,
|
|
|
Nine
months ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
$ |
14 |
|
|
$ |
13 |
|
|
$ |
53 |
|
|
$ |
36 |
|
Engineering
and product development
|
|
|
4 |
|
|
|
3 |
|
|
|
12 |
|
|
|
8 |
|
General
and administrative
|
|
|
41 |
|
|
|
19 |
|
|
|
100 |
|
|
|
48 |
|
|
|
$ |
59 |
|
|
$ |
35 |
|
|
$ |
165 |
|
|
$ |
92 |
|
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. No options were granted under the stock option plans
for the three months ended June 30, 2008. The weighted-average fair value of the
options granted under the stock option plans for the three months ended June 30,
2007 was $2.84. The weighted-average fair values of the options
granted under the stock option plans for the nine months ended June 30, 2008 and
2007 were $3.29 and $1.75, respectively. No options were exercised during the
three months ended June 30, 2008. The total intrinsic value of options exercised
during the three months ended June 30, 2007 was approximately $179,000. The
total intrinsic value of options exercised during the nine months ended June 30,
2008 and 2007 was approximately $1.1 million and $186,000, respectively. As of
June 30, 2008, there was $363,000 of total unrecognized compensation cost
related to nonvested stock option arrangements, which is expected to be
recognized over a weighted-average period of 2.1 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 nine months ended June
30, 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%
|
77.63%
|
Risk
free interest rate
|
2.87%
- 4.03%
|
4.48%
- 4.99%
|
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 nine months ended June 30, 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
|
(31,003)
|
|
5.23
|
|
|
|
Exercised
|
(265,934)
|
|
1.88
|
|
|
|
Outstanding,
June 30, 2008
|
600,606
|
|
$
|
3.11
|
|
5.30
|
$
227
|
|
|
|
|
|
|
|
Vested
or expected to vest, June 30, 2008
|
585,912
|
|
$
|
3.08
|
|
5.04
|
$
226
|
|
|
|
|
|
|
|
|
Exercisable,
June 30, 2008
|
453,662
|
|
$
|
2.76
|
|
4.83
|
$
220
|
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 June 30, 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 of the most recent grants 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 nine
months ended June 30, 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 $10,000
and $3,000 for the three months ended June 30, 2008 and 2007, respectively, and
$19,000 and $4,000 for the nine months ended June 30, 2008 and 2007,
respectively. These amounts are included in the total stock-based compensation
expense disclosed above. As of June 30, 2008, there was $87,000 of total
unrecognized compensation cost related to RSUs, which is expected to be
recognized over a weighted average period of 2.4 years.
Note
6 - Comprehensive Income
The
following table sets forth the reconciliation of net income to comprehensive
income:
|
|
Three
Months Ended June 30,
|
|
|
Nine
Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
91 |
|
|
$ |
382 |
|
|
$ |
421 |
|
|
$ |
840 |
|
Other
comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
(77 |
) |
|
|
19 |
|
|
|
(101 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
14 |
|
|
$ |
401 |
|
|
$ |
320 |
|
|
$ |
787 |
|
Accumulated
other comprehensive (loss) income reported in the condensed consolidated balance
sheets consists solely of foreign currency translation adjustments.
Note
7 - 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 period. 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 280,810 and 82,024 shares for the
three months ended June 30, 2008 and 2007, respectively, and 203,134 and 258,663
shares for the nine months ended June 30, 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 20,000 shares for the three months ended June 30, 2008 and 2,500
shares for the nine months ended June 30, 2008 have been excluded from the
computation of diluted net income per share because their inclusion would be
anti-dilutive. No potentially dilutive restricted stock units have been excluded
from the computation of diluted net income per share for either the three or
nine months ended June 30, 2007.
Note
8 - 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 payment was 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 $3,000 and $5,000 for the three months ended June
30, 2008 and 2007, respectively, and $4,000 and $14,000 for the nine months
ended June 30, 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
9 - 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
|
|
|
Nine
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Business
Intelligence Solutions (including Monarch, Monarch
Data Pump, Monarch|RMS, Datawatch|ES, Datawatch|Researcher,
Visual|Insight, iMergence and VorteXML)
|
|
|
67% |
|
|
|
70% |
|
|
|
67% |
|
|
|
66% |
|
Content
Management Solutions (including Datawatch|BDS
and Datawatch|MailManager)
|
|
|
16% |
|
|
|
13% |
|
|
|
15% |
|
|
|
14% |
|
Business
Service Management and Workflow Solutions (including Visual|QSM and
Visual|HD)
|
|
|
17% |
|
|
|
17% |
|
|
|
18% |
|
|
|
20% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
The
Company conducts operations in the U.S. and internationally (principally in the
United Kingdom). The following table presents information about the Company’s
geographic operations:
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
(Principally
|
|
|
Intercompany
|
|
|
|
|
|
|
Domestic
|
|
|
U.K.)
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2008
|
|
$ |
4,360 |
|
|
$ |
1,755 |
|
|
$ |
(340 |
) |
|
$ |
5,775 |
|
Three
months ended June 30, 2007
|
|
$ |
5,022 |
|
|
$ |
1,677 |
|
|
$ |
(216 |
) |
|
$ |
6,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended June 30, 2008
|
|
$ |
13,276 |
|
|
$ |
5,471 |
|
|
$ |
(1,032 |
) |
|
$ |
17,715 |
|
Nine
months ended June 30, 2007
|
|
$ |
13,121 |
|
|
$ |
6,098 |
|
|
$ |
(811 |
) |
|
$ |
18,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2008
|
|
$ |
(65 |
) |
|
$ |
83 |
|
|
$ |
— |
|
|
$ |
18 |
|
Three
months ended June 30, 2007
|
|
$ |
396 |
|
|
$ |
4 |
|
|
$ |
— |
|
|
$ |
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended June 30, 2008
|
|
$ |
344 |
|
|
$ |
(57 |
) |
|
$ |
— |
|
|
$ |
287 |
|
Nine
months ended June 30, 2007
|
|
$ |
208 |
|
|
$ |
749 |
|
|
$ |
— |
|
|
$ |
957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
June 30, 2008
|
|
$ |
9,441 |
|
|
$ |
111 |
|
|
$ |
— |
|
|
$ |
9,552 |
|
At
September 30, 2007
|
|
$ |
9,632 |
|
|
$ |
115 |
|
|
$ |
— |
|
|
$ |
9,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Datawatch
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
and business service management and workflow solutions to allow organizations to
access and analyze information in a more meaningful fashion.
The
Company’s principal products are Business Intelligence Solutions (including
Monarch, Monarch Data Pump, Monarch|RMS, Datawatch|ES, Datawatch|Researcher,
Visual|Insight, iMergence and VorteXML), Content Management Solutions (including
Datawatch|BDS, Datawatch|BDS Workflow and Datawatch|MailManager) and Business
Service Management and Workflow Solutions (including Visual|QSM and Visual|HD).
Included in the above categories are: 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|ES, an enterprise business intelligence
system that provides web-enabled report management, mining and distribution as
well as data analysis and MS Excel integration; 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; Datawatch|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 June 30, 2008. Since the acquisition date, the Company
made payments of approximately $1.1 million related to the IDARS earn-out
arrangement. 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.
The
Company offers its enterprise products through perpetual licenses and
subscription pricing models. 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 subscription renewal rate is the
same as the initial subscription rate. During the three and nine months ended
June 30, 2008 and 2007, revenues under the subscription model were not
significant.
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 sells its
Desktop and Server Software products directly to end-users and through
distributors and resellers. Sales to distributors and resellers accounted for
approximately 42% and 43%, respectively, of total sales for the three months
ended June 30, 2008 and 2007, and 41% and 39%, respectively, for the nine months
ended June 30, 2008 and 2007. Revenue from the license of all software products
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 sells 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 subscription renewal rate is the same as the initial subscription
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 $250,000 and $80,000 as of June 30, 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 $192,000 and $223,000 as of June 30, 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 domestic net deferred tax assets subject
to a valuation allowance was approximately $4.7 million as of June 30,
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 approximately $426,000 and $395,000 at June 30, 2008 and September
30, 2007, respectively. During the three and nine months ended June 30, 2008,
the Company capitalized approximately $132,000 of software development costs
related to new products in development.
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. Fair
value is determined using market comparables for similar businesses, current
market valuations of the Company’s common stock, or forecasts of discounted
future cash flows. 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 June 30,
2008 and 2007, the Company recorded stock-based compensation expense of
approximately $59,000 and $35,000, respectively. For the nine months ended June
30, 2008 and 2007, the Company recorded stock-based compensation expense of
approximately $165,000 and $92,000, 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
nine months ended June 30, 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 nine
months ended June 30, 2008, the Company used an expected option life assumption
of 5 years.
With
regard to the forfeiture rate assumption, the Company reviews historical
voluntary turnover rates. For stock option grants issued during the nine months
ended June 30, 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
|
|
Nine
Months Ended
|
|
|
June
30,
|
|
June
30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
REVENUE:
|
|
|
|
|
|
|
|
|
Software
licenses and subscriptions
|
|
54.0%
|
|
63.1%
|
|
54.2%
|
|
58.6%
|
Maintenance
and services
|
|
46.0%
|
|
36.9%
|
|
45.8%
|
|
41.4%
|
Total
Revenue
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
Cost
of software licenses and subscriptions
|
|
9.6%
|
|
10.7%
|
|
9.5%
|
|
9.7%
|
Cost
of maintenance and services
|
|
17.9%
|
|
14.2%
|
|
18.8%
|
|
16.0%
|
Sales
and marketing
|
|
37.3%
|
|
38.8%
|
|
35.8%
|
|
38.0%
|
Engineering
and product development
|
|
12.2%
|
|
11.6%
|
|
12.9%
|
|
12.2%
|
General
and administrative
|
|
22.7%
|
|
18.5%
|
|
21.4%
|
|
18.9%
|
Total
costs and expenses
|
|
99.7%
|
|
93.8%
|
|
98.4%
|
|
94.8%
|
INCOME
FROM OPERATIONS
|
|
0.3%
|
|
6.2%
|
|
1.6%
|
|
5.2%
|
Interest
expense
|
|
—
|
|
—
|
|
—
|
|
(0.2%)
|
Interest
income and other income (expense), net
|
|
1.7%
|
|
0.1%
|
|
1.4%
|
|
—
|
INCOME
BEFORE INCOME TAXES
|
|
2.0%
|
|
6.3%
|
|
3.0%
|
|
5.0%
|
Provision
for income taxes
|
|
0.4%
|
|
0.4%
|
|
0.6%
|
|
0.4%
|
NET
INCOME
|
|
1.6%
|
|
5.9%
|
|
2.4%
|
|
4.6%
|
Three
months ended June 30, 2008 Compared to Three months ended June 30,
2007
Total
Revenues
The
following table presents total revenue, total revenue decrease and percentage
change in total revenue for the three months ended June 30, 2008 and
2007:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses and subscriptions
|
|
$ |
3,116 |
|
|
$ |
4,091 |
|
|
$ |
(975 |
) |
|
|
-23.8 |
% |
Maintenance
and services
|
|
|
2,659 |
|
|
|
2,392 |
|
|
|
267 |
|
|
|
11.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
5,775 |
|
|
$ |
6,483 |
|
|
$ |
(708 |
) |
|
|
-10.9 |
% |
Software
license and subscriptions revenue for the three months ended June 30, 2008 was
$3,116,000 or approximately 54% of total revenue, as compared to $4,091,000 or
approximately 63% of total revenue for the three months ended June 30, 2007.
This represents a decrease of $975,000 or approximately 24% from the third
quarter of fiscal 2007 to the third quarter of fiscal 2008. The overall net
decrease in software license and subscription revenue for the three months ended
June 30, 2008 consists of a $975,000 decrease in Business Intelligence Solutions
(including Monarch, Monarch Data Pump, Monarch|RMS, Datawatch|ES,
Datawatch|Researcher, Visual|Insight, iMergence and VorteXML products) and a
$17,000 decrease in Content Management Solutions (including Datawatch|BDS and
Datawatch|MailManager products) which was partially offset by a $17,000 increase
in revenue from the Company’s Service Management and Workflow Solutions
(including Visual|QSM and Visual|HD products). The decrease in Business
Intelligence Solutions is primarily due to decreased Monarch license sales as
compared to the three months ended June 30, 2007. Sales from the Company’s
Monarch product were significantly higher during the third quarter of fiscal
2007 due to the release of upgrade version 9.0 in February 2007.
Maintenance
and services revenue for the three months ended June 30, 2008 was $2,659,000 or
approximately 46% of total revenue, as compared to $2,392,000 or approximately
37% of total revenue for the three months ended June 30, 2007. This represents
an increase of $267,000 or approximately 11% from the third quarter of fiscal
2007 to the third quarter of fiscal 2008. The overall increase in maintenance
and services revenue consists of a $235,000 increase in Business Intelligence
Solutions (including Monarch, Monarch Data Pump, Monarch|RMS, Datawatch|ES,
Datawatch|Researcher, Visual|Insight, iMergence and VorteXML products) and a
$133,000 increase in Content Management Solutions (including Datawatch|BDS and
Datawatch|MailManager products) which were partially offset by a $101,000
decrease in Business Service Management and Workflow Solutions (including
Visual|QSM and Visual|HD products). Maintenance and services revenue for the
Business Intelligence Solutions product line increased due to higher maintenance
revenue of $146,000 as well as increased professional services revenue of
$89,000. Maintenance and services revenue for the Content Management Solutions
product line increased due to an increase in maintenance revenue of $80,000 and
higher professional services revenue of $53,000. Maintenance and services
revenue for the Business Service Management and Workflow Solutions product line
decreased due to lower professional services of $95,000 and a slight reduction
in maintenance revenue of $6,000.
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 June 30, 2008 and 2007:
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software licenses and subscriptions
|
|
$ |
556 |
|
|
$ |
691 |
|
|
$ |
(135 |
) |
|
|
-19.5 |
% |
Cost
of maintenance and services
|
|
|
1,031 |
|
|
|
922 |
|
|
|
109 |
|
|
|
11.8 |
% |
Sales
and marketing
|
|
|
2,156 |
|
|
|
2,515 |
|
|
|
(359 |
) |
|
|
-14.3 |
% |
Engineering
and product development
|
|
|
704 |
|
|
|
750 |
|
|
|
(46 |
) |
|
|
-6.1 |
% |
General
and administrative
|
|
|
1,310 |
|
|
|
1,205 |
|
|
|
105 |
|
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and operating expenses
|
|
$ |
5,757 |
|
|
$ |
6,083 |
|
|
$ |
(326 |
) |
|
|
-5.4 |
% |
Cost of
software licenses and subscriptions for the three months ended June 30, 2008 was
$556,000 or approximately 18% of software license and subscription revenue, as
compared to $691,000 or approximately 17% of software license and subscription
revenue for the three months ended June 30, 2007. The decrease in cost of
software licenses and subscriptions of $135,000 is primarily due to lower
royalty costs associated with lower sales of Monarch during the three months
ended June 30, 2008. As previously described, sales of the Company’s Monarch
product were significantly higher during the third quarter of fiscal 2007 due to
the release of upgrade version 9.0 in February 2007. Additionally, the decrease
in cost of software licenses and subscription revenue was partially attributable
to lower amortization expense of acquired and capitalized software costs due to
various capitalized software projects which became fully amortized in fiscal
2007.
Cost of
maintenance and services for the three months ended June 30, 2008 was $1,031,000
or approximately 39% of maintenance and services revenue, as compared to
$922,000 or approximately 39% of maintenance and services revenue for the three
months ended June 30, 2007. The increase in the total cost of maintenance and
services of $109,000 is primarily due to higher employee-related costs due to
increased headcount and higher incentive compensation costs attributable to
increased services revenue as compared to the same period last
year.
Sales and
marketing expenses for the three months ended June 30, 2008 were $2,156,000, or
37% of total revenues as compared to $2,515,000 or 39% of total revenues for the
three months ended June 30, 2007. The
decrease
in sales and marketing expenses of $359,000, or approximately 14%, is
attributable to lower external consulting costs, a reduction in travel related
costs and lower wages attributable to lower headcount as compared to the same
period last year.
Engineering
and product development expenses for the three months ended June 30, 2008 were
$704,000, or 12% of total revenues as compared to $750,000, or 12% of total
revenues for the three months ended June 30, 2007. The decrease in engineering
and product development expenses of $46,000, or approximately 6%, is primarily
attributable to a higher percentage of external consulting resources allocated
to development activities surrounding two new product offerings which will be
released in the fourth quarter of fiscal 2008 and the first quarter of fiscal
2009. Additionally, the decrease in engineering and product development expenses
is partially attributable to lower employee-related costs due to lower headcount
as compared to the same period last year.
General
and administrative expenses for the three months ended June 30, 2008 were
$1,310,000, or 23% of total revenues as compared to $1,205,000, or 19% of total
revenues for the three months ended June 30, 2007. The increase in general and
administrative expenses of $105,000, or 9%, is primarily attributable to higher
accounting and auditing fees, compliance costs associated with the
Sarbanes-Oxley Act and fees associated with other consulting services performed
during the period.
Interest
income and other income (expense) includes the following components: interest
income, gains or (losses) on foreign currency transactions and a gain on the
dissolution of the Company’s French subsidiary (Datawatch France SARL). Interest
income for the three months ended June 30, 2008 was $33,000 as compared to
$11,000 for the three months ended June 30, 2007. The increase in interest
income was the result of higher cash balances held in interest-bearing accounts.
Gain (loss) on foreign currency transactions for the three months ended June 30,
2008 was a gain of $5,000 as compared to a loss of $1,000 for the three months
ended June 30, 2007. Additionally, during the three months ended June 30, 2008,
there was a gain of $57,000 recorded upon the dissolution of Datawatch France
SARL.
Income
taxes for the three months ended June 30, 2008 were $22,000 as compared to
$28,000 for the three months ended June 30, 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. Additionally, for the three months ended June 30, 2008, the
Company recorded provision-to-return adjustments, estimated alternative minimum
taxes and a provision for uncertain tax positions relative to foreign taxes, the
net effect of which was a reduction in the Company’s income tax liability of
approximately $7,000.
Net
income for the three months ended June 30, 2008 was $91,000 as compared to net
income of $382,000 for the three months ended June 30, 2007.
Nine
months ended June 30, 2008 Compared to Nine months ended June 30,
2007
Total
Revenues
The
following table presents total revenue, total revenue increase (decrease) and
percentage change in total revenue for the nine months ended June 30, 2008 and
2007:
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
licenses and subscriptions
|
|
$ |
9,605 |
|
|
$ |
10,786 |
|
|
$ |
(1,181 |
) |
|
|
-10.9 |
% |
Maintenance
and services
|
|
|
8,110 |
|
|
|
7,622 |
|
|
|
488 |
|
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
17,715 |
|
|
$ |
18,408 |
|
|
$ |
(693 |
) |
|
|
-3.8 |
% |
Software
license and subscriptions revenue for the nine months ended June 30, 2008 was
$9,605,000 or approximately 54% of total revenue, as compared to $10,786,000 or
approximately 59% of total revenue for the nine months ended June 30,
2007. This represents a decrease of $1,181,000, or approximately 11%,
from the nine months of fiscal 2007 to the nine months of fiscal 2008. The
overall net decrease in software license and subscription revenue for the nine
months ended June 30, 2008 consists of a $723,000 decrease in Business
Intelligence Solutions (including Monarch, Monarch Data Pump, Monarch|RMS,
Datawatch|ES, Datawatch|Researcher, Visual|Insight, iMergence and VorteXML
products), a $352,000 decrease in Business Service Management and Workflow
Solutions (including Visual|QSM and Visual|HD products) and a $106,000 decrease
in Content Management Solutions (including Datawatch|BDS and
Datawatch|MailManager products). The decrease in Business Intelligence Solutions
is primarily due to a reduction in Monarch sales during the current fiscal
year. As previously mentioned, the Company introduced version 9 of
its Monarch product in February 2007 which resulted in significantly higher
upgrade sales during the second and third quarters of fiscal 2007. The 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 nine months ended June 30, 2008 was $8,110,000 or
approximately 46% of total revenue, as compared to $7,622,000 or approximately
41% of total revenue for the nine months ended June 30, 2007. This represents an
increase of $488,000, or approximately 6%, from the first nine months of fiscal
2007 to the first nine months of fiscal 2008. The increase in maintenance and
services revenue consists of a $413,000 increase in Business Intelligence
Solutions (including Monarch, Monarch Data Pump, Monarch|RMS, Datawatch|ES,
Datawatch|Researcher, Visual|Insight, iMergence and VorteXML products) and a
$370,000 increase in Content Management Solutions (including Datawatch|BDS and
Datawatch|MailManager products) which were partially offset by a $295,000
decrease in Business Service Management and Workflow Solutions (including
Visual|QSM and Visual|HD products). Maintenance and services revenue for the
Business Intelligence Solutions product line increased due to higher maintenance
revenue of $417,000 which was partially offset by lower professional services of
$4,000. Maintenance and services revenue for the Content Management Solutions
product line increased due to higher maintenance revenue of $285,000 and higher
professional services of $85,000. Maintenance and services revenue for the
Business Service Management and Workflow Solutions product line decreased due to
a reduction in maintenance revenue of $133,000 and lower professional services
of $162,000.
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 growth for the nine months ended June 30, 2008 and 2007:
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
Increase
|
|
|
Percentage
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Change
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of software licenses and subscriptions
|
|
$ |
1,678 |
|
|
$ |
1,788 |
|
|
$ |
(110 |
) |
|
|
-6.2 |
% |
Cost
of maintenance and services
|
|
|
3,328 |
|
|
|
2,937 |
|
|
|
391 |
|
|
|
13.3 |
% |
Sales
and marketing
|
|
|
6,344 |
|
|
|
7,000 |
|
|
|
(656 |
) |
|
|
-9.4 |
% |
Engineering
and product development
|
|
|
2,290 |
|
|
|
2,243 |
|
|
|
47 |
|
|
|
2.1 |
% |
General
and administrative
|
|
|
3,788 |
|
|
|
3,483 |
|
|
|
305 |
|
|
|
8.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and operating expenses
|
|
$ |
17,428 |
|
|
$ |
17,451 |
|
|
$ |
(23 |
) |
|
|
-0.1 |
% |
Cost of
software licenses and subscriptions for the nine months ended June 30, 2008 was
$1,678,000 or approximately 17% of software license and subscription revenue, as
compared to $1,788,000 or approximately 17% of software license and subscription
revenues for the nine months ended June 30, 2007. The decrease in cost of
software licenses and subscriptions of $110,000 is primarily due to reduced
amortization expenses of capitalized and acquired software costs due to various
capitalized software projects which became fully amortized in fiscal
2007.
Cost of
maintenance and services for the nine months ended June 30, 2008 was $3,328,000
or approximately 41% of maintenance and service revenue, as compared to
$2,937,000 or approximately 39% of maintenance and services revenue for the nine
months ended June 30, 2007. The increase in cost of maintenance and services of
$391,000 is primarily due to higher employee and travel-related expenses and
increased international consulting costs.
Sales and
marketing expenses for the nine months ended June 30, 2008 were $6,344,000, or
36% of total revenues as compared to $7,000,000, or 38% of total revenues for
the nine months ended June 30, 2007. The decrease in sales and marketing
expenses of $656,000, or 9%, 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 nine months ended June 30,
2008 as compared to the previous period.
Engineering
and product development expenses for the nine months ended June 30, 2008 were
$2,290,000, or 13% of total revenues as compared to $2,243,000, or 12% of total
revenues, for the nine months ended June 30, 2007. The increase in engineering
and product development expenses of $47,000, or 2%, is primarily attributable to
higher use of external development consultants and employee-related
costs.
General
and administrative expenses for the nine months ended June 30, 2008 were
$3,788,000, or 21% of total revenues, as compared to $3,483,000, or 19% of total
revenues, for the nine months ended June 30, 2007. The increase in general and
administrative expenses of $305,000, or 9%, is primarily attributable to higher
accounting and auditing fees, compliance costs associated with the
Sarbanes-Oxley Act and increased travel and employee-related costs.
Interest
expense for the nine months ended June 30, 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 nine months ended June 30,
2008 as the Company elected to repay its outstanding balance under its line of
credit in the second quarter of fiscal 2007.
Interest
income and other income (expense) includes the following components: interest
income, gains or (losses) on foreign currency transactions and a gain on the
dissolution of the Company’s French subsidiary (Datawatch France SARL). Interest
income for the nine months ended June 30, 2008 was $104,000 as compared to
$19,000 for the nine months ended June 30, 2007. The increase in interest income
was the result of higher cash
balances
held in interest-bearing accounts. Gain (loss) on foreign currency transactions
for the nine months ended June 30, 2008 was a gain of $79,000 as compared to a
loss of $28,000 for the nine months ended June 30, 2007. Additionally, during
the nine months ended June 30, 2008, there was a gain of $57,000 recorded upon
the dissolution of Datawatch France SARL.
Income
taxes for the nine months ended June 30, 2008 were $106,000 as compared to
$75,000 for the nine months ended June 30, 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 $31,000 is a result of additional deferred tax
expense related to the earn-out provisions of the IDARS acquisition,
provision-to-return adjustments, additional estimated alternative minimum taxes
in the U.S. and uncertain tax positions relative to foreign taxes.
Net
income for the nine months ended June 30, 2008 was $421,000 as compared to net
income of $840,000 for the nine months ended June 30, 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 $98,000 and $131,000 for the three months ended June
30, 2008 and 2007, respectively, and $347,000 and $390,000 for the nine months
ended June 30, 2008 and 2007, respectively.
As of
June 30, 2008, contractual obligations include minimum rental commitments under
non-cancelable operating leases as follows:
Contractual
Obligations:
|
|
Total
|
|
|
Less
than 1 Year
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
than 5 Years
|
|
|
|
(in
thousands)
|
|
Operating
Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
|
|
$ |
773 |
|
|
$ |
362 |
|
|
$ |
411 |
|
|
$ |
— |
|
|
$ |
— |
|
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 $452,000 and $550,000,
respectively, for the three months ended June 30, 2008 and 2007, and $1,346,000
and $1,326,000 for the nine months ended June 30, 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 $3,000 and $5,000 for the three months ended June
30, 2008 and 2007, respectively, and $4,000 and $14,000 for the nine months
ended June 30, 2008 and 2007, respectively.
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 June 30, 2008.
The
Company is required by the 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 June 30, 2008 and September 30,
2007.
The
Company enters into indemnification agreements in the ordinary course of
business. Pursuant to these agreements, the Company generally 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 generally 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 June 30, 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, among other things, bodily injury or property damage. The maximum
potential amount of future payments the Company could be required to make under
these indemnification agreements is generally 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 June 30, 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 June 30, 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 June 30, 2008, the Company had $4,446,000 of cash and
equivalents, an increase of $605,000 from September 30, 2007.
At June
30, 2008, the Company had working capital of $967,000 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 $421,000 for the nine months ended June
30, 2008 as compared to net income of approximately $840,000 for the nine months
ended June 30, 2007. During the nine months ended June 30, 2008 and 2007,
approximately $993,000 and $1.6 million, respectively, of cash was provided by
the Company’s operations. During the nine months ended June 30, 2008,
the main source of cash from operations was 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 nine months ended June 30, 2008 of $770,000
is primarily related to earn-out payments associated with the Company’s IDARS
acquisition, the purchase of property and equipment and capitalized software
development costs.
Net cash
provided by financing activities for the nine months ended June 30, 2008 of
$499,000 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 June 30, 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 (“Option Purchase Agreement”). In February 2006, the Company entered
into an amendment to the original license agreement with Math Strategies dated
January 19, 1989. Pursuant to the amendment, the term of the license
agreement was extended to April 30, 2015. Contemporaneous with the license
amendment, the Company also entered into an amendment to the Option Purchase
Agreement. After amending this agreement, the option has been extended to 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. This option, if exercised, would provide the Company
with increased flexibility to utilize the purchased technology in the
future.
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 June
30, 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 June 30, 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
The
Company is occasionally involved in legal proceedings and other claims arising
out of its operations in the normal course of business. The Company is not party
to any litigation that management believes will have a material adverse effect
on the Company’s consolidated financial condition, results of operations or cash
flows.
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.
31.1
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Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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31.2
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Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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32.1
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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.
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32.2
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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.
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Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized on August 13, 2008.
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DATAWATCH
CORPORATION
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/s/
Kenneth P. Bero
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Kenneth
P. Bero
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President,
Chief Executive Officer, and
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Director
(Principal Executive Officer)
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/s/
Murray P. Fish
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Murray
P. Fish
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Chief
Financial Officer
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(Principal
Financial Officer)
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