<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1998.
REGISTRATION NO. 333-57897
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
DATASTREAM SYSTEMS, INC.
(EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7372 57-0813674
(STATE OR OTHER JURIS- (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DICTION OF
INCORPORATION OR ORGANI- CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ZATION)
</TABLE>
50 DATASTREAM PLAZA
GREENVILLE, SOUTH CAROLINA 29605
(864) 422-5001
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
----------------
LARRY G. BLACKWELL
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATASTREAM SYSTEMS, INC.
50 DATASTREAM PLAZA
GREENVILLE, SOUTH CAROLINA 29605
(864) 422-5001
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------------
WITH COPIES TO:
<TABLE>
<S> <C>
B. Lynn Walsh, Esq. Larry W. Shackelford, Esq.
Kelly A. Carlos, Esq. Grant W. Collingsworth, Esq.
Hunton & Williams Morris, Manning & Martin, L.L.P.
NationsBank Plaza, Suite 4100 1600 Atlanta Financial Center
600 Peachtree Street, NE 3343 Peachtree Road, N.E.
Atlanta, GA 30308 Atlanta, Georgia 30326
(404) 888-4000 (404) 233-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
----------------
If the only securities being registered on this Form are to be offered
pursuant to a dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
4,000,000 SHARES JULY 8, 1998
LOGO OF DATASTREAMS SYSTEMS APPEARS HERE
COMMON STOCK
------------
Of the 4,000,000 shares of Common Stock (the "Common Stock") offered hereby,
3,500,000 shares are being issued and sold by Datastream Systems, Inc.
("Datastream" or the "Company") and 500,000 shares are being sold by a
stockholder of the Company (the "Selling Stockholder"). See "Principal and
Selling Stockholders." The Company will not receive any proceeds from the sale
of shares by the Selling Stockholder. The Common Stock is traded on the Nasdaq
National Market under the symbol "DSTM." On July 6, 1998, the last reported
sale price of the Common Stock on the Nasdaq National Market was $18.063 per
share. See "Price Range of Common Stock."
------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER(2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share........ $ $ $ $
- ------------------------------------------------------------------------------
Total(3)......... $ $ $ $
- ------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting estimated offering expenses of $460,000, which will be
payable by the Company.
(3) The Selling Stockholder and certain other stockholders have granted the
Underwriters a 30-day option to purchase up to 600,000 additional shares of
Common Stock, solely to cover over-allotments, if any. If the Underwriters
exercise this option in full, the Price to Public will total $ ,
the Underwriting Discount and Commissions will total $ and the
Proceeds to Company and Selling Stockholder will total $ and
, respectively. See "Principal and Selling Stockholders" and
"Underwriting."
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about July
, 1998.
BT ALEX. BROWN
HAMBRECHT & QUIST
LEHMAN BROTHERS
RAYMOND JAMES & ASSOCIATES, INC.
THE ROBINSON-HUMPHREY COMPANY
THE DATE OF THIS PROSPECTUS IS JULY , 1998
<PAGE>
[ART]
Graphic: An image with a circle in the middle, with lines connecting five
screen shots to it. In the circle are photographs of people's faces. Above the
circle are the words, "Simplicity, Technology, Functionality, Value". To the
right of the circle is the Datastream Logo. To the left of the circle are the
words, "World Leader in Maintenance Solutions(SM)". The first screen shot is
titled "Quick Access", and contains the Datastream Logo, the words "MP2
Enterprise", and a set of twelve navigation buttons, whose labels include
"Employees", "Inventory", "Tasks" and "Work Orders". The second screen shot is
of an Internet browser titled "Submit Work Request By Equipment", and includes
a number of fields to be filled out, such as "telephone number", "equipment
number", and "task description". The third screen shot is titled "Submit Work
Request", and has on it a similar set of fields to be completed. The fourth
screen shot is titled "Purchasing History" and includes a number of fields
such as for dates, and various buttons and boxes to select parameters for
analysis (e.g. "Employee," "Inventory," "Tasks," and "Equipment"). The fifth
screen shot is titled "Jobs", and includes various fields to describe job
tasks, such as "Job number," "Job type," "Status" and "Priority."
Datastream(R), MaintainIt(R), MaintainIt Pro(TM), MP2(R), MP2
Professional(TM), MP2 Enterprise(TM), PagerLink(TM), RequestLink(R),
Weblink(TM), MP5(TM) and R5-CAMMS(R) are trademarks of the Company.
Windows(R), Windows 95(R), Windows NT(R) and Microsoft BackOffice(R) are
registered trademarks of Microsoft Corporation. Other product and company
names mentioned herein may be the trademarks of their respective owners.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO
COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information and
consolidated financial statements and notes thereto appearing elsewhere in this
Prospectus. Unless otherwise indicated, all of the information in this
Prospectus (i) has been adjusted to give effect to two two-for-one stock splits
effected in the form of stock dividends as of September 12, 1995 and January
30, 1998, respectively and (ii) assumes no exercise of the Underwriters' over-
allotment option. See "Underwriting." As used herein, except as otherwise
indicated by the context, the terms "Datastream" and the "Company" are used to
refer to the combined operations of Datastream Systems, Inc. and its
subsidiaries, including: (i) SQL Group, B.V. and its respective subsidiaries
("SQL"); (ii) Insta Instandhaltung Technischer Anlagen GmbH ("Insta"); and
(iii) Strategic Information Systems Pte Ltd. ("SIS").
THE COMPANY
Datastream develops, markets, sells and supports personal desktop computer,
file server and client/server enterprise software for the industrial automation
market. The Company's products are designed to enable customers to reduce
downtime, control maintenance expenses, cut spare parts inventories and costs,
improve purchasing efficiency and more effectively deploy productive assets,
personnel and other resources. The Company is an established leader in the
market for computerized maintenance management systems ("CMMS") and enterprise
asset management systems ("EAMS") based on the number of systems sold, having
sold over 39,000 systems to approximately 20,000 customers. The Company's
objective is to maintain its leading position in the CMMS/EAMS market by
continuing to provide feature-rich software solutions and being a value leader
in each segment of the CMMS/EAMS market.
Similar to the wide acceptance and rapid adoption of enterprise resource
planning ("ERP") packaged applications targeted at improving efficiencies in
manufacturing, finance and human resources functions, organizations are
adopting CMMS/EAMS to reduce costs, improve plant efficiency and increase
capacity utilization. The CMMS/EAMS market includes process and discrete
manufacturers, government agencies, universities, hospitals and other
organizations which maintain high-value capital assets such as plants,
facilities, and production equipment. Automation Research Corporation, an
independent research firm, estimates that the size of the global CMMS/EAMS
market was approximately $900 million in 1997.
The Company's line of products includes solutions for virtually any size
operation, from the single, small shop with basic requirements to the large,
multi-site client needing a full-featured enterprise solution. Datastream's
products have garnered Plant Engineering magazine's "Gold Product of the Year"
award in the software category in each of the last five years. The Company
complements its wide range of product offerings with a diversified sales
approach targeted at each segment of the global CMMS/EAMS market. Management
believes that its large installed customer base provides opportunities for
additional software and professional services revenue as its customers
experience internal growth and migrate to more complex CMMS/EAMS applications.
The broad applicability of the Company's systems is illustrated by the
diversity of the Company's customer base, which includes AT&T Wireless,
Caterpillar, Chevron, Dow Chemical, Emerson Electric, Frito-Lay, Hewlett-
Packard, Kaiser Permanente, Kroger, Paris Metro, Southern Nuclear and Total
Oil.
The components of the Company's strategy are: to maintain and extend its
technological leadership; to increase market share through diversified sales
efforts; to leverage and expand its existing customer base; to continue to
pursue strategic alliances and acquisitions; to increase professional services,
training and support revenues; and to capitalize on potential electronic
commerce opportunities in the maintenance, repair and operations ("MRO")
market.
One of the Company's strategies is to acquire foreign CMMS/EAMS companies
that have built a strong regional presence and have technologies and products
that complement those of the Company. In pursuit of such
3
<PAGE>
strategy, the Company has made three international acquisitions within the past
two years. In December 1996, the Company acquired SQL, based in The
Netherlands, which develops, markets, sells and supports high-end client/server
EAMS software. In March 1998, the Company acquired Insta, a leading European
provider of CMMS software based in Munich, Germany. In June 1998, the Company
acquired SIS, a Singapore-based CMMS developer specializing in high-end asset
management systems for vertical markets that are asset-intensive, such as
utilities and petrochemical industries.
Datastream was incorporated as a South Carolina corporation in February 1986
upon consummation of the acquisition of the assets and liabilities of the
Datastream Systems Division of a subsidiary of Wisconsin Power & Light.
Datastream reincorporated as a Delaware corporation in January 1995.
Datastream's executive offices are located at 50 Datastream Plaza, Greenville,
South Carolina 29605, and its telephone number is (864) 422-5001. The Company
also has a home page on the World Wide Web at www.dstm.com. Information
contained on the Company's home page shall not be deemed to be part of this
Prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company..... 3,500,000 shares
Common Stock offered by the Selling 500,000 shares
Stockholder............................
Common Stock to be outstanding after the 22,385,936 shares (1)
Offering...............................
Use of proceeds by the Company.......... Working capital, possible acquisitions
and
other general corporate purposes
Nasdaq National Market Symbol........... DSTM
</TABLE>
- --------
(1) Based on 18,885,936 shares outstanding as of May 31, 1998. Excludes
2,717,164 shares of Common Stock issuable upon the exercise of stock
options outstanding as of May 31, 1998 at a weighted average exercise price
of $7.96 per share, of which options to purchase 879,717 shares of Common
Stock are exercisable.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ---------------
1998
1993 1994 1995 1996 (1) 1997 1997 (2)
------ ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $5,878 $10,374 $20,346 $ 32,466 $69,768 $14,682 $20,129
Operating income (loss). 814 2,425 5,912 (26,799) 16,561 2,279 2,048
Net income (loss)....... 507 1,552 4,346 (28,010) 11,438 1,978 237
Basic net income (loss)
per share.............. $ 0.05 $ 0.15 $ 0.33 $ (1.65) $ 0.62 $ 0.11 $ 0.01
Basic weighted average
common shares outstand-
ing.................... 10,366 10,366 13,004 16,977 18,397 18,263 18,640
Diluted net income
(loss) per share....... $ 0.05 $ 0.15 $ 0.30 $ (1.58) $ 0.59 $ 0.11 $ 0.01
Diluted weighted average
common shares outstand-
ing.................... 10,366 10,366 14,366 17,686 19,246 18,768 20,247
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED (3)
------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital......................................... $18,670 $ 78,268
Total assets............................................ 74,234 133,832
Long-term debt, less current portion.................... 1,334 1,334
Total stockholders' equity.............................. $50,298 $109,896
</TABLE>
- --------
(1) Operating and net income (loss) for the year ended December 31, 1996
include $1.8 million of capitalized software write-offs, and $33.6 million
of in-process research and development write-offs, as part of the
acquisition of SQL (see Notes 1(i) and 2 of the Notes to Consolidated
Financial Statements).
(2) Operating and net income (loss) for the three months ended March 31, 1998
include $598,000 of capitalized software write-offs, and $2.5 million of
in-process research and development write-offs, as part of the acquisition
of Insta.
(3) Adjusted to give effect to the estimated net proceeds to the Company of
the Offering. See "Use of Proceeds."
When used in this Prospectus, the words "may," "will," "intends," "plans,"
"expects," "anticipates," "estimates" and similar expressions are intended to
identify forward-looking statements. Prospective investors are cautioned that
such statements are only predictions and that actual events or results may
differ materially. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors," as well as
those discussed elsewhere in this Prospectus. See "Forward-Looking Statements."
5
<PAGE>
RISK FACTORS
Investment in the Common Stock involves a high degree of risk. Prospective
investors in the Common Stock offered hereby should consider carefully the
following factors, in addition to other information contained in this
Prospectus. This Prospectus contains certain statements of a forward-looking
nature relating to future events or the future financial performance of the
Company.
Competition. The current market for CMMS/EAMS is both fragmented and highly
competitive, and management expects competition to intensify as new companies
enter the market and existing ones, including ERP companies, expand their
product lines. The Company has entered into the high-end segment of the market
through both its introduction of an internally developed client/server product
line and through its acquisitions of SQL, Insta and SIS. Management expects
the Company to face increased competition in all segments of the CMMS/EAMS
market and across all product lines in the future. The Company's future
performance is partially dependent upon the Company's ability to respond to
technological changes, evolving standards and its competitors' innovations.
Certain competitors, including ERP companies, have greater financial,
marketing, technical, service and support resources than Datastream. Also, the
Company is likely to experience a significant amount of competition in
connection with its continued development and release of Internet- and Web-
related products. There can be no assurance that the Company will be able to
successfully compete against current and future competitors and failure to do
so could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Competition."
Effects of Technological Change and Risks of Product Development. The
Company's industry is characterized by rapidly changing technology, frequent
new product introductions and evolving industry standards. The Company's
future success will depend upon its ability to enhance its current products
and develop new ones that address technological and market developments. In
particular, an element of the Company's strategy is to address perceived
electronic commerce opportunities relating to MRO procurement. There can be no
assurance that the Company will develop products that are successful in
capitalizing on such perceived opportunities. The Company's product
development efforts have required, and are expected to require, substantial
investments by the Company. There can be no assurance that these efforts will
be successful or that the resulting products will achieve market acceptance.
If the Company is unable to develop and introduce new and enhanced products in
a timely manner, or if such products fail to achieve market acceptance, the
Company's business, financial condition and results of operations would likely
be materially and adversely affected. Software products may also contain
undetected errors or bugs when first introduced or as new versions are
released, and software products or media may contain undetected viruses.
Errors or bugs may also be present in software licensed by the Company from
third parties and incorporated into the Company's products. Errors, bugs or
viruses may result in loss of or delay in market acceptance, recalls of
hardware products incorporating the software or loss of data. Any such defects
and errors could result in adverse customer reactions, negative publicity
regarding the Company and its products, harm to the Company's reputation, loss
of or delay in market acceptance, loss of revenue or required product changes,
any of which could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Risks Associated with Acquisitions. The Company intends in the future to
engage in selective acquisitions of other businesses or technologies,
including other providers of CMMS/EAMS software. There can be no assurance
that the Company will be able to identify suitable acquisition candidates
available for sale at reasonable prices, consummate any acquisition or
successfully integrate any acquired business into the Company's operations.
The success of any completed acquisition will depend in large measure on the
Company's ability to integrate the operations of the acquired business with
those of the Company and otherwise to maintain and improve the results of
operations of the acquired business. The Company has recently completed
acquisitions of Insta and SIS and is in the process of integrating those
operations. The failure to successfully complete such
6
<PAGE>
integration in a timely manner could have a material adverse effect on the
Company's business, financial condition and results of operations. Further
acquisitions may involve a number of special risks, including diversion of
management's attention, failure to retain key acquired personnel,
unanticipated events or circumstances, legal liabilities and amortization of
acquired intangible assets, some or all of which could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, the Company has acquired, and may in the future
acquire, foreign businesses, which entail additional risks and complications.
Problems with an acquired business could have a material adverse impact on the
performance of the Company as a whole. The Company may elect to finance any
future acquisitions with the proceeds of the Offering, as well as with
possible debt financing or through the issuance or sale of equity securities
(common or preferred stock), or any combination of the foregoing. There can be
no assurance that the Company will be able to arrange adequate financing on
acceptable terms. If the Company were to proceed with one or more significant
future acquisitions in which the consideration consisted of cash, a
substantial portion of the Company's available cash (including a portion of
the proceeds of the Offering) could be used to consummate the acquisitions. If
the Company were to consummate one or more significant acquisitions in which
the consideration consisted of stock, shareholders of the Company could suffer
dilution of their interests in the Company. Most of the businesses that might
become attractive acquisition candidates for the Company are likely to have
significant intangible assets, and acquisition of these businesses, if
accounted for as a purchase, would typically result in substantial goodwill
amortization charges to the Company, which would reduce future earnings. In
addition, such acquisitions could involve non-recurring acquisition-related
charges, such as write-offs or write-downs of acquired software development
costs or other intangible items, which could have a material adverse effect on
the Company's results of operations for the quarter in which such charges
occur. See "Business--Strategy."
Dependence on Proprietary Technology. The Company's success and ability to
compete is dependent in part upon its proprietary technology. The Company
relies on a combination of trade secret, copyright and trademark laws,
software licenses, nondisclosure agreements and technical measures to
establish and protect its proprietary technology. The Company generally enters
into confidentiality and/or license agreements with its employees,
distributors and strategic partners as well as with its customers and
potential customers seeking proprietary information, and limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the Company in this regard
will be adequate to deter misappropriation or independent third-party
development of its technology. Further, there can be no assurance that third
parties will not assert infringement or misappropriation claims against the
Company in the future with respect to current or future products. Any claims
or litigation, with or without merit, could be time-consuming, result in
costly litigation, diversion of management's attention and cause product
shipment delays or require the Company to enter into royalty or licensing
arrangements. Such royalty or licensing arrangements, if required, may not be
available on terms acceptable to the Company, if at all, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Adverse determinations in such claims or litigation
also could have a material adverse effect on the Company's business, financial
condition and results of operations. Litigation to defend and enforce the
Company's intellectual property rights could result in substantial costs and
diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations, regardless
of the final outcome of such litigation. The Company may be subject to
additional risks as it enters into transactions in countries where
intellectual property laws are not well developed or are poorly enforced.
Legal protections of the Company's rights may be ineffective in such
countries, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
Risks Associated with International Sales. International sales increased to
36.6% of the Company's 1997 revenues (from 13.4% in 1996), and management
expects that an increasing portion of the Company's total revenues will be
derived from international operations conducted in foreign currencies.
Further, the Company intends to continue to expand its international
operations by increasing the number of direct sales persons in
7
<PAGE>
existing markets and additional international markets as well as by acquiring
business in international markets. Accordingly, the Company's business, and
its ability to expand its operations internationally, is subject to the risks
inherent in international business activities, including, in particular,
greater difficulty in safeguarding its intellectual property, general economic
and political conditions in each country, foreign currency exchange rate
fluctuations, overlap of different tax structures, difficulty in staffing and
managing an organization spread over various countries, unexpected changes in
regulatory requirements, compliance with a variety of foreign laws and
regulations, and longer accounts receivable payment cycles in certain
countries. Other risks associated with international operations include import
and export licensing requirements, trade restrictions and changes in tariff
rates. Any of the foregoing factors could have a material adverse effect on
the Company's ability to expand its international operations which could
materially and adversely affect the Company's business, financial condition
and results of operations. In addition, the Company must continue to translate
its software into more foreign languages. To the extent that the Company is
unable to accomplish such translations in a timely manner, the Company's
ability to further penetrate international markets would be adversely
affected. In addition, the deeper exposure to international markets opens new
areas with which the Company is not familiar and places the Company in
competition with new vendors. There is no assurance the Company will be
successful in its efforts to compete in these international markets.
The Company conducts virtually all its business in US dollars, Dutch
guilders, French francs, German marks and British pounds. The Company hedges
exchange rate movements on either side of a locked-in spot rate for movements
within a range of 3.1% on the dollar-pound rate and 7.5% on the dollar-guilder
rate. Changes in the value of these currencies relative to the dollar beyond
the ranges hedged by the Company could affect Datastream's financial condition
and results of operations, and gains and losses on currency translations could
contribute to fluctuations in the Company's results of operations.
Fluctuations in Quarterly Results. Traditionally the Company has operated
with very little backlog, and a significant portion of Datastream's revenues
in any quarter were the result of a large number of relatively small orders
received during a period. Accordingly, the Company was subject to fluctuations
in the number of overall orders in any given period, which in turn was
influenced by the overall level of economic and industrial activity. The
Company establishes expense levels based in part on its expectations as to
future net sales. A substantial portion of the Company's operating expenses,
particularly personnel and facilities costs, are relatively fixed in advance
of any particular quarter. As a result, any unexpected decline in revenue is
likely to adversely affect operating results and net income. In addition, the
acquisitions of SQL, Insta and SIS have given the Company access to the market
for high-end maintenance software solutions, which generally have larger
transaction sizes, take longer to implement and may result in a longer sales
process. The seasonality of the Company's international operations may result
in fluctuations in quarterly results. If the Company's revenues in any given
quarter are below expectations due to any of the aforementioned influences,
results of operations may be materially adversely affected, which in turn
could materially adversely affect the market price of the Company's Common
Stock. No assurance can be given that the Company in the future will be able
to maintain profitability on a quarterly or annual basis.
Need to Establish and Maintain Strategic Relationships. A significant
business strategy of the Company is to enter into strategic marketing
alliances or other similar collaborative relationships. The Company intends to
establish technology and marketing alliances with leading ERP vendors, ERP
systems integrators and MRO suppliers to create new distribution channels for,
and enhance the capabilities of, its products. Certain of the Company's
competitors at the high-end segment of the market have already established
such alliances with ERP vendors, which could limit ERP vendors' interests in
creating alliances with the Company. There can be no assurance that the
Company will be able to negotiate such additional strategic relationships,
that such additional relationships will be available to the Company on
acceptable terms or that any such relationships, if established, will be
commercially successful. Failure to do so could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business--Strategy."
The Company is exploring opportunities to generate additional revenues by
directing MRO procurement activities of its customer base to a select group of
MRO suppliers via the Internet. Although management
8
<PAGE>
believes such opportunities are achievable, these efforts are still in a
developmental phase and the Company has not yet established the strategic
relationships it believes are necessary to initiate such a program.
Consequently, there can be no assurance that the Company will be able to
successfully implement a program of this nature or generate any revenues from
such opportunities. See "Business--Strategy."
Anti-Takeover Provisions. The Company's Articles of Incorporation and Bylaws
contain provisions that may discourage other persons from attempting to acquire
control of the Company, including, without limitation, a classified Board of
Directors and procedural requirements in connection with stockholder proposals
or director nominations. In addition, the Company has available for issuance
1,000,000 shares of Preferred Stock, $1.00 par value per share, which the Board
of Directors of the Company is authorized to issue, in one or more series,
without any further action on the part of the stockholders. Each of these
provisions could render more difficult or discourage an attempt by a third
party to obtain control of the Company. In the event the Company issues a
series of Preferred Stock in the future that has preference over the Common
Stock with respect to the payment of dividends and upon the Company's
liquidation, dissolution or winding up, the rights of the holders of the Common
Stock offered hereby could be adversely affected.
Dependence on Key Personnel. The Company's continued success depends on the
services of several key executive, sales and marketing and technical employees.
The loss of the services of these personnel, particularly those of Larry G.
Blackwell, the Company's founder, Chairman, Chief Executive Officer and
President, or the Company's inability to attract and retain other qualified
management, sales and marketing and technical employees, could have a material
adverse effect on the Company's business and results of operations. The Company
does not maintain any key-man life insurance policy with respect to Mr.
Blackwell.
Competitive Market for Technical and Sales Personnel. The Company's success
depends in part on its ability to attract, hire, train, retain and motivate
qualified technical and sales personnel, with appropriate levels of managerial
and technical capabilities. The Company's complex technology generally requires
a significant level of expertise to effectively develop and market the
Company's products and services and to perform its custom application
development services. The Company has at times experienced, and continues to
experience, difficulty in recruiting qualified personnel. The Company believes
that the pool of potential applicants with such requisite expertise is limited.
Recruiting qualified personnel is an intensely competitive and time-consuming
process. The Company competes for such personnel with companies in the
software, telecommunications and other industries, many of which have greater
resources than the Company. Such competition has resulted in demands for
increased compensation from qualified applicants. Due to such competition, the
Company has experienced, and expects to continue to experience, turnover in
technical personnel. There can be no assurance that the Company will be
successful in attracting and retaining the technical personnel it requires to
conduct and expand its operations successfully. The Company's business,
financial condition and results of operations could be materially adversely
affected if the Company were unable to attract, hire, train, retain and
motivate qualified technical and sales personnel. See "Business--Employees."
Shares Eligible for Future Sale. The market price of the Common Stock could
be adversely affected by the availability for sale of additional shares of
Common Stock owned by the Company's principal stockholders. The Company's
principal stockholders, executive officers and directors, who will collectively
own approximately 15.5% of the Company's outstanding Common Stock following the
Offering (12.8% if the Underwriters' over-allotment option is exercised in
full), have agreed not to offer, sell or otherwise dispose of such shares for a
period of 90 days following the effective date of the Registration Statement of
which this Prospectus is a part without the prior written consent of the
representatives of the Underwriters. After the expiration of such 90-day
period, such shares may be sold in accordance with Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Securities Act"), or upon
registration under such Act without regard to the volume limitations of Rule
144. The sale of a substantial number of such shares could adversely affect the
market price of the Common Stock. See "Principal and Selling Stockholders,"
"Shares Eligible for Future Sale" and "Underwriting."
Stock Price Volatility. The market price of the Company's Common Stock has
risen substantially since the Company's initial public offering in March 1995.
The Common Stock is quoted on the Nasdaq National
9
<PAGE>
Market, which has experienced and is likely to experience in the future
significant price and volume fluctuations, which could adversely affect the
market price of the Common Stock without regard to the operating performance of
the Company. In addition, management believes that factors such as quarterly
fluctuations in the financial results of the Company, the overall economy and
the condition of the financial markets could cause the price of the Common
Stock to fluctuate substantially.
Broad Management Discretion as to Use of Proceeds. Substantially all of the
net proceeds to be received by the Company in connection with the Offering will
be allocated to working capital and be made available for general corporate
purposes. Accordingly, management will have broad discretion with respect to
the expenditure of such proceeds. Purchasers of shares of Common Stock offered
hereby will be entrusting their funds to the Company's management, upon whose
judgment they must depend, with limited information concerning the specific
working capital requirements and general corporate purposes to which the funds
will ultimately be applied. See "Use of Proceeds."
Year 2000. Many currently installed computer systems and software products
are coded to accept only a two digit format in the date code field. These date
code fields will need to accept a four digit format to distinguish 21st century
dates from 20th century dates. As a result, in less than two years, computer
systems and/or software used by many companies may need to be upgraded to
comply with such "Year 2000" requirements. Many companies are expending
significant resources to correct or patch their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products such as those offered by the Company. Further,
certain customers of the Company may still be running earlier versions of the
Company's products, which earlier versions are not Year 2000 compliant. The
Company is in the process of notifying customers of the need to migrate to
current products of the Company that management believes are Year 2000
compliant. For those products that can be made compliant through the use of a
software script, the Company has made or is in the process of making such
script available to customers. Management anticipates that generally throughout
the software industry substantial litigation may be brought against software
vendors of non-compliant operating environments. Management believes that any
such claims against the Company, with or without merit, could have a material
adverse effect on the Company's business, operating results and financial
condition. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered by the Company hereby are estimated to be $59.6 million
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company and assuming a public offering price
of $18.063 per share (last reported sales price on July 6, 1998). The Company
will not receive any of the net proceeds from the sale of shares of Common
Stock by the Selling Stockholder. See "Principal and Selling Stockholders."
The net proceeds to the Company will be used for working capital, possible
acquisitions and other general corporate purposes. Although the Company
discusses opportunities with potential target companies from time to time, the
Company has no specific agreements, commitments or understandings with respect
to any such acquisitions. The amounts actually expended for each purpose may
vary significantly and are subject to change at the Company's discretion
depending upon certain factors, including economic or industry conditions,
changes in the competitive environment and strategic opportunities that may
arise. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business--
Strategy."
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, interest-bearing securities
backed by the U.S. Government.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company has been quoted on the Nasdaq National
Market under the symbol "DSTM" since the Company's initial public offering on
March 29, 1995 at a price of $3.75 per share. Prior to that time, there was no
public market for the Common Stock. The following table sets forth the high
and low closing sales prices per share for the Company's Common Stock for the
periods indicated as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
FISCAL 1995
<S> <C> <C>
First Quarter (commencing March 29, 1995)....................... $ 5.44 $ 5.06
Second Quarter.................................................. 6.25 5.06
Third Quarter................................................... 12.75 6.19
Fourth Quarter.................................................. 12.75 8.00
<CAPTION>
FISCAL 1996
<S> <C> <C>
First Quarter................................................... $11.25 $ 8.50
Second Quarter.................................................. 18.25 11.63
Third Quarter................................................... 17.50 12.13
Fourth Quarter.................................................. 15.00 8.50
FISCAL 1997
First Quarter................................................... $11.56 $ 7.88
Second Quarter.................................................. 10.25 6.38
Third Quarter................................................... 19.25 8.38
Fourth Quarter.................................................. 18.66 13.06
FISCAL 1998
First Quarter................................................... $22.25 $14.38
Second Quarter (through June 23, 1998).......................... 27.38 18.50
</TABLE>
On July 6, 1998, the closing sales price for the Company's Common Stock was
$18.063 per share. As of July 6, 1998, there were 166 holders of record of the
Company's Common Stock. This number does not include beneficial owners of the
Common Stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
In October 1995, the Company declared a two-for-one stock split, effected in
the form of a one-for-one share dividend, effective September 12, 1995. The
Company declared a second two-for-one stock split, effected in the form of a
one-for-one share dividend, effective January 30, 1998. The Company currently
intends to retain all future earnings after consummation of the Offering for
use in the expansion and operation of its business. The Company does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The payment of future dividends will be at the sole discretion of the
Company's Board of Directors and will depend on, among other things, future
earnings, capital requirements, the general financial condition of the Company
and general business conditions.
12
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as of
March 31, 1998 and as adjusted to reflect the sale of 3,500,000 shares of
Common Stock by the Company at an assumed public offering price of $18.063 per
share, after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company, and the application of
the net proceeds therefrom as described under "Use of Proceeds." The table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31,
1998
(UNAUDITED)
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt............................................... $ 1,334 $ 1,334
Stockholders' equity:
Preferred Stock:
1,000,000 shares authorized; none outstanding............... -- --
Common Stock:
40,000,000 shares authorized; 18,822,594 shares issued and
outstanding; 22,322,594 shares issued and outstanding, as
adjusted(1)................................................ 188 223
Additional paid-in capital................................... 61,235 120,798
Accumulated deficit.......................................... (11,138) (11,138)
Other accumulated comprehensive income....................... 13 13
------- --------
Total stockholders' equity................................... 50,298 109,896
------- --------
Total capitalization......................................... $51,632 $111,230
======= ========
</TABLE>
- --------
(1) Excludes (i) 2,826,839 shares of Common Stock issuable upon the exercise
of outstanding stock options and (ii) 250,080 shares available for grant
under the Company's stock option plans.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this Prospectus. The statement of
operations data and balance sheet data set forth below as of and for each of
the years in the five-year period ended December 31, 1997 have been derived
from the Company's Consolidated Financial Statements, which have been audited
by KPMG Peat Marwick LLP, the Company's independent certified public
accountants. The Consolidated Financial Statements as of December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31,
1997, and the related reports thereon are included elsewhere in this
Prospectus. The statement of operations data and balance sheet data for the
three months ended March 31, 1997 and March 31, 1998 have been derived from
the Company's unaudited financial statements included elsewhere in this
Prospectus and include all adjustments (consisting only of normal recurring
accruals) which management considers necessary for a fair presentation of the
financial position and results of operations of the Company as of such time
and for such periods. The results of operations for the three months ended
March 31, 1998 are not necessarily indicative of the results that may be
achieved for the full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31, (1)
---------------------------------------- ---------------
1993 1994 1995 1996 1997 1997 1998
------ ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product............... $2,719 $ 4,859 $ 9,343 $ 14,018 $31,174 $ 6,148 $ 7,365
Professional services. 1,692 3,084 6,660 12,326 26,438 5,784 8,956
Support............... 1,467 2,431 4,343 6,122 12,156 2,750 3,808
------ ------- ------- -------- ------- ------- -------
Total revenues...... 5,878 10,374 20,346 32,466 69,768 14,682 20,129
Cost of revenues:
Cost of product
revenues............. 404 822 1,136 1,879 3,133 844 776
Cost of professional
services revenues.... 998 1,857 3,383 6,729 15,160 3,530 4,145
Cost of support
revenues............. 302 457 699 1,095 3,838 687 930
Write-off of
capitalized software. -- -- -- 1,804 -- -- 598
------ ------- ------- -------- ------- ------- -------
Total cost of
revenues (2)....... 1,704 3,136 5,218 11,507 22,131 5,061 6,449
------ ------- ------- -------- ------- ------- -------
Gross profit............ 4,174 7,238 15,128 20,959 47,637 9,621 13,680
Operating expenses:
Sales and marketing... 1,985 2,736 5,216 9,399 18,617 4,273 5,549
Product development... 456 830 1,741 1,390 4,364 834 1,522
General and
administrative....... 919 1,247 2,259 3,369 8,095 2,235 2,030
Write-off of in-
process research &
development.......... -- -- -- 33,600 -- -- 2,531
------ ------- ------- -------- ------- ------- -------
Total operating expenses
(3).................... 3,360 4,813 9,216 47,758 31,076 7,342 11,632
------ ------- ------- -------- ------- ------- -------
Operating income (loss). 814 2,425 5,912 (26,799) 16,561 2,279 2,048
Net other income........ 13 42 1,176 2,370 987 207 253
------ ------- ------- -------- ------- ------- -------
Income (loss) before
income taxes........... 827 2,467 7,088 (24,429) 17,548 2,486 2,301
Income taxes............ 320 915 2,742 3,581 6,110 508 2,064
------ ------- ------- -------- ------- ------- -------
Net income (loss)....... $ 507 $ 1,552 $ 4,346 $(28,010) $11,438 $ 1,978 $ 237
====== ======= ======= ======== ======= ======= =======
Basic net income (loss)
per share.............. $ 0.05 $ 0.15 $ 0.33 $ (1.65) $ 0.62 $ 0.11 $ 0.01
Diluted net income
(loss) per share....... $ 0.05 $ 0.15 $ 0.30 $ (1.58) $ 0.59 $ 0.11 $ 0.01
Basic weighted average
common shares
outstanding............ 10,366 10,366 13,004 16,977 18,397 18,263 18,640
Diluted weighted average
common shares
outstanding............ 10,366 10,366 14,366 17,686 19,246 18,768 20,247
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, MARCH 31,
------------------------------------- ---------
1993 1994 1995 1996 1997 1998
------ ------ ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital............ $ 622 $1,569 $19,965 $13,633 $22,290 $18,670
Total Assets............... 2,978 5,790 50,692 57,577 65,097 74,234
Long-term debt, less cur-
rent portion.............. 68 46 22 2,893 603 1,334
Total stockholders' equity. $ 564 $ 916 $46,034 $33,125 $47,108 $50,298
</TABLE>
- --------
(1) The business of the Company is seasonal, and results for any period within
a fiscal year are not necessarily indicative of the results that may be
achieved for a full fiscal year.
(2) Includes $1.8 million of capitalized software write-offs in 1996 as a
result of the acquisition of SQL (see Note 1(i) of Notes to Consolidated
Financial Statements); in March 1998, includes $598,000 of capitalized
software write-offs as a result of the acquisition of Insta.
(3) Includes $33.6 million of in-process research and development write-offs
in 1996 as part of the acquisition of SQL (see Notes 1(i) and 2 of the
Notes to Consolidated Financial Statements) and $2.5 million of in-process
research and development write-offs in March 1998 as part of the
acquisition of Insta.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included herein.
OVERVIEW
Datastream was incorporated in 1986 to develop, market, sell and support
software products for the industrial automation market. The Company's revenues
have grown each calendar year since inception. Excluding the one-time charges
related to the acquisitions of SQL and Insta, the Company has been profitable
in each of the last five years and has experienced a compounded annual growth
rate of 76% in revenues and 108% in earnings during that period.
The Company offers a complete family of CMMS/EAMS products to the industrial
automation market. See "Business--Products." Generally these products consist
of 4 major categories based on price and functionality. MaintainIt and
MaintainIt Pro are off-the-shelf, entry-level solutions primarily for the low-
end segment of the CMMS/EAMS market. MP2 Professional provides maintenance
solutions for the middle segment and MP2 Enterprise offers enterprise-wide
maintenance solutions for the middle and high-end segments of the CMMS/EAMS
market. MP5, obtained through the Company's acquisition of SQL in December
1996, offers a high-end EAMS solution. Datastream supports its software
products with professional and support services. Through December 31, 1997,
the Company recognized revenue in accordance with SOP 91-1, "Software Revenue
Recognition." See Note 1(c) of the Notes to Consolidated Financial Statements
for additional information concerning the Company's revenue recognition
policies. On January 1, 1998, the Company adopted SOP 97-2, "Software Revenue
Recognition." See "--Impact of Recent Accounting Pronouncements."
International revenues were 13.4% of total revenues in 1996 and increased to
36.6% in 1997, primarily as a result of the acquisition of SQL. Management
expects that international revenues will continue to increase as a percentage
of total revenues, due to the Company's internal expansion efforts, including
improved operations of the companies it has acquired. On a pro forma basis,
1996 revenues adjusted for the inclusion of SQL would have been approximately
$49.2 million. Of that figure, approximately 37% would have been derived from
international sources. The Company hedges against a defined range of movements
in the exchange rates between the currencies in which it does virtually all
its business. As the Company begins to accept increased payments in foreign
currency, significant changes in the values of these foreign currencies
relative to the United States dollar may affect the Company's financial
condition and results of operations. In addition, gains and losses on currency
translations could contribute to fluctuations in the Company's results of
operations. See "Risk Factors--Risks Associated With International Sales."
Product development costs consist principally of salaries and certain other
expenses related to development and modification of software products, which
are capitalized in accordance with Statement of Financial Accounting Standards
No. 86 (the "Statement"), "Accounting for the Costs of Computer Software to Be
Sold, Leased or Otherwise Marketed." Capitalization of such costs begins only
upon establishment of technological feasibility as defined in the Statement
and ends when the resulting product is available for distribution. Annual
amortization of capitalized product development costs is provided at the
greater of the ratio of current product revenue to the total of current and
anticipated product revenue or on a straight line basis over the estimated
economic life of the software, which is not more than eighteen months or three
years, depending on the product.
16
<PAGE>
The Company's principal areas of operation include the United States and
Europe. Information about the Company's operations in different geographic
locations in 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
UNITED STATES EUROPE TOTAL
------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues......................... $52,299 75.0% $17,470 25.0% $69,768 100%
Operating income....................... $11,179 67.5% $ 5,383 32.5% $16,561 100%
Identifiable assets.................... $56,697 87.1% $ 8,400 12.9% $65,097 100%
</TABLE>
The United States operations include international revenues of approximately
$8,100,000 for the year ended December 31, 1997. International revenues for
the year ended December 31, 1995 and 1996 were approximately $2,180,000 and
$4,354,000, respectively.
Many software companies experience seasonal variations in revenues. The
Company believes that its future results of operations may be subject to
quarterly variations. The acquisitions of SQL, Insta and SIS have exposed the
company to seasonal revenue fluctuations overseas, principally slower business
conditions in the first and third quarters of the year.
Because the Company consummated the acquisition of SQL on the last day of
fiscal 1996 and the transaction was accounted for as a purchase, SQL's results
of operations for fiscal 1996 are not included in the Company's fiscal 1996
results. For 1996, SQL generated revenues of approximately $17.3 million and a
net loss of approximately $5.9 million. The acquisitions of SQL, Insta and SIS
will continue to impact the reporting, control and management capabilities of
the Company in 1998. See "Risk Factors--Risks Associated with Acquisitions."
RECENT DEVELOPMENTS
One of Datastream's strategies is to acquire foreign CMMS/EAMS companies
that have built a strong regional presence and have technologies and products
that complement those of the Company. Since December 1996, the Company has
made three acquisitions of foreign companies, SQL (December 1996), Insta
(March 1998) and SIS (June 1998).
SQL develops, markets, sells and supports high-end client/server EAMS
software for sale internationally and domestically. SQL's products are used in
businesses, government agencies and other organizations to assist these
entities in maintaining high-value capital assets such as facilities, plants
and manufacturing/production facilities. Like Datastream's products, SQL's
products are designed to enable customers to reduce down time, control
maintenance expenses, cut spare parts inventories and costs, improve
purchasing efficiency and more effectively deploy productive assets, personnel
and other resources. SQL generated revenues of $21.4 million in 1997 and $5.3
million in the first quarter of 1998.
Insta, a German corporation headquartered in Munich, is a leading provider
of CMMS software and has developed a state-of-the-art enterprise system,
written in Visual C++, offering cross platform capabilities in 11 languages.
Insta had revenues of approximately $5.0 million in 1997 and $928,000 for the
first quarter of 1998.
SIS, a developer of EAMS software headquartered in Singapore, specializes in
high-end asset management systems for vertical markets that are asset-
intensive, such as petrochemical and utilities industries. SIS generated
revenues of $4.6 million for its fiscal year ended February 28, 1998.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage that certain statement of
operations data bears to total revenues for each of the years ended December
31, 1993 through 1997, and for the three months ended March 31, 1997 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- --------------
1993 1994 1995 1996 1997 1997 1998
----- ----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
Revenues:
Product.................. 46.3% 46.9% 46.0% 43.2 % 44.7% 41.9% 36.6%
Professional services.... 28.8 29.7 32.7 38.0 37.9 39.4 44.5
Support.................. 24.9 23.4 21.3 18.8 17.4 18.7 19.0
----- ----- ----- ----- ----- ------ ------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues. 6.9 7.9 5.6 5.8 4.5 5.7 3.8
Cost of professional
services revenues....... 17.0 17.9 16.6 20.7 21.7 24.0 20.6
Cost of support revenues. 5.1 4.4 3.4 3.4 5.5 4.7 4.6
Write-off of capitalized
software................ -- -- -- 5.6 -- -- 3.0
----- ----- ----- ----- ----- ------ ------
Total cost of
revenues............ 29.0 30.2 25.6 35.5 31.7 34.4 32.0
----- ----- ----- ----- ----- ------ ------
Gross Profit............. 71.0 69.8 74.4 64.5 68.3 65.6 68.0
Operating expenses:
Sales and marketing...... 33.8 26.4 25.6 28.9 26.7 29.1 27.6
Product development...... 7.8 8.0 8.6 4.3 6.3 5.7 7.5
General and
administrative.......... 15.6 12.0 11.1 10.4 11.6 15.2 10.1
Write-off of in-process
research & development.. -- -- -- 103.5 -- -- 12.6
----- ----- ----- ----- ----- ------ ------
Total operating
expenses............ 57.2 46.4 45.3 147.1 44.6 50.0 57.8
----- ----- ----- ----- ----- ------ ------
Operating income (loss).... 13.8 23.4 29.1 (82.6) 23.7 15.6 10.2
Net other income........... 0.2 0.4 5.8 7.3 1.4 1.4 1.2
----- ----- ----- ----- ----- ------ ------
Income (loss) before income
taxes..................... 14.0 23.8 34.9 (75.3) 25.1 17.0 11.4
Income taxes............... 5.4 8.8 13.5 11.0 8.7 3.5 10.2
----- ----- ----- ----- ----- ------ ------
Net income (loss).......... 8.6% 15.0% 21.4% (86.3)% 16.4% 13.5% 1.2%
===== ===== ===== ===== ===== ====== ======
Net income before one-time
charges related to
acquisitions(1)........... 8.6% 15.0% 21.4% 21.9 % 16.4% 13.5% 17.0%
===== ===== ===== ===== ===== ====== ======
</TABLE>
- --------
(1) Excludes charges related to acquisition of SQL in December 1996 and Insta
in March 1998.
18
<PAGE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31,
1997
Total Revenues. Total revenues increased 37.1% to $20.1 million in the first
quarter of 1998 from $14.7 million in the first quarter of 1997 due to the
continued acceptance of the Company's products in the industrial automation
market and the expansion of the Company's sales, professional service and
technical support service organizations.
Product revenues increased 19.8% to $7.4 million (36.6% of total revenues)
in the first quarter of 1998 from $6.1 million (41.9% of total revenues) in
the first quarter of 1997, as a result of the growth in new product sales,
including MP2 Enterprise and MP2 Professional--Access, and the growth in
international sales.
Professional services revenues increased 54.8% to $9.0 million (44.5% of
total revenues) in the first quarter of 1998 from $5.8 million (39.4% of total
revenues) in the first quarter of 1997. The increase resulted from the
addition of professional service personnel to service expansion of the
Company's installed base of systems.
Support revenues for the first quarter of 1998 increased 38.5% to $3.8
million (19.0% of total revenues) from $2.8 million (18.7% of total revenues)
in the first quarter of 1997, primarily due to the expansion of the Company's
installed base of systems.
Cost of Revenues. Cost of revenues increased 27.4% to $6.4 million (32.0% of
total revenues) in the first quarter of 1998, as compared to $5.1 million
(34.4% of total revenues) in the comparable quarter of 1997. The increase in
cost of revenues is attributed to increased expenses incurred in the
Professional Services and Support Departments related to salaries and customer
reimbursed travel and the write-off of capitalized software rendered obsolete
or redundant by the acquisition of Insta on March 31, 1998.
Cost of product revenues was 3.8% of total revenues in the first quarter of
1998, and 5.7% of total revenues during the same period of 1997. The decrease
as a percent of total revenues is due to a lower rate of capitalized software
amortization and decreased costs of shipping and packaging related items.
Cost of professional services revenues was 20.6% of total revenues during
the first quarter of 1998, and 24.0% of total revenues during the same period
in 1997. The decrease as a percentage of total revenues was due to increased
efficiencies realized in the restructuring of the Company's European
operations during 1997 and higher utilization rates of consulting personnel.
Cost of support revenues was 4.6% of total revenues during the first quarter
of 1998 and 4.7% of total revenues during the same period in 1997.
Cost of revenues in the three months ended March 31, 1998 includes a
$598,000 write-off of capitalized software (3.0% of total revenues) which
became obsolete as a result of the acquisition of Insta.
Sales and Marketing Expenses. Sales and marketing expenses increased 29.9%
to $5.5 million (27.6% of total revenues) during the first quarter of 1998
from $4.3 million (29.1% of total revenues) during the first quarter of 1997,
as a result of an increased number of sales personnel and commissions
associated with the increase in sales revenue and increased marketing expenses
associated with new product introductions and one time charges for the
National Plant Engineering & Management trade show.
Product Development Expenses. Total product development expenditures
increased 107% to $2.3 million (12% of total revenues) during the first
quarter of 1998 from $1.1 million (7% of total revenues) during the same
period in 1997. The capitalized portion of these amounts were $807,000 and
$292,000, respectively. Giving effect to amounts capitalized, product
development expense increased 82.5% to $1.5 million (7.5% of total revenues)
in the first quarter of 1998 from $834,000 (5.7% of total revenues) during the
same period in 1997. The increase in total product development expense
resulted from increasing the number of development personnel to support
continued development of MP5, the increased use of outside contractors for
development work, foreign language development and other new products.
19
<PAGE>
General and Administrative Expenses. General and administrative expenses
decreased 9.2% to $2.0 million (10.1% of total revenues) during the first
quarter of 1998 from $2.2 million (15.2% of total revenues) in the first
quarter of 1997, primarily due to efficiencies realized during the
restructuring of the European operations.
Write-off of In-process Research and Development Costs. The Company expensed
$2.5 million of in-process research and development acquired as part of the
acquisition of Insta.
Other Income (Expense). Other income increased to $253,000 in the first
quarter of 1998 from $207,000 in the first quarter of 1997, due primarily to
lower debt balances in 1998.
Income Taxes. The Company's effective tax rate was 38% for the first quarter
of 1998 as compared to 20% for the first quarter of 1997.
Net Income. Net income decreased 88.0% to $237,000 (1.2% of total revenues)
in the first quarter of 1998 from $2.0 million (13.5% of total revenues) in
the first quarter of 1997. This decrease is directly attributed to the charges
for the acquisition of Insta on March 31, 1998. Without the acquisition
related charges net income would have increased 70.2% to $3.4 million (17.0%
of total revenues).
1997 Compared to 1996 and 1996 Compared to 1995
Total Revenues. Total revenues for 1997 increased 114.9% to approximately
$69.8 million from approximately $32.5 million in 1996, due principally to the
impact of the acquisition of SQL on December 31, 1996, introduction of foreign
language versions of Datastream's MP2 Professional and MaintainIt Pro in
Europe through the SQL channels, continued acceptance of the Company's
products in the global industrial automation market, expansion of the
Company's sales, professional and technical support service organizations,
introduction of MP2 Enterprise in March 1997, followed by translated versions
catering to several European languages, introduction of RequestLink in late
1997 and the expansion of the sales and marketing functions to support the
Company's telesales and direct sales programs. The total growth in revenues of
114.9% is comprised of a 49.9% increase in Datastream's revenues, an
additional growth of 36.0% attributable to the acquisition of SQL and a 29.0%
growth in SQL's revenues for fiscal 1997. Total revenues for 1996 increased
59.6% to approximately $32.5 million from approximately $20.3 million in 1995,
due principally to a number of factors, including the continued acceptance of
the Company's products, particularly the client/server version of MP2
Professional, in the industrial automation market, expansion of the Company's
sales, professional and technical support service organizations, introduction
of MP2 for Windows95/NT in June 1996, introduction of MaintainIt Pro in
September 1996, and the addition of sales personnel and marketing resources to
support the Company's telesales and direct sales programs. International
revenues were approximately $25.4 million, or 36% of total revenues in 1997,
compared to $4.4 million, or 13.4% of total revenues in 1996, compared to
approximately $2.2 million, or 10.7% of total revenues, in 1995.
Product revenues increased 122.4% to approximately $31.2 million in 1997
from approximately $14.0 million in 1996, and 50.0% to approximately $14.0
million in 1996 from approximately $9.3 million in 1995. These increases are
due to expansion of the number of software products being sold, growth in the
number of software units sold, and an increase in the average selling price of
the systems sold. As a percentage of revenues, revenues from software products
increased to 44.7% in 1997 from 43.2% in 1996 and decreased to 43.2% in 1996
from 46.0% in 1995.
20
<PAGE>
Professional services revenues increased 114.5% to approximately $26.4
million in 1997 from approximately $12.3 million in 1996 and 85.1% to
approximately $12.3 million in 1996 from approximately $6.7 million in 1995.
These increases generally reflect the impact of the acquisition of SQL,
increased installation, training and integration services provided to support
increased product sales. As a percentage of revenues, revenues from
professional services decreased slightly to 37.9% in 1997 from 38.0% in 1996
and increased to 38.0% in 1996 from 32.7% in 1995.
Support revenues increased 98.6% to approximately $12.2 million in 1997 from
approximately $6.1 million in 1996, and 41.0% to approximately $6.1 million in
1996 from approximately $4.3 million in 1995. These increases reflect the
impact of the acquisition of SQL and an increase in the type and variety of
services provided to a larger installed customer base. As a percentage of
total revenues, revenues from technical support services decreased to 17.4% in
1997 from 18.8% in 1996 and 21.3% in 1995.
Cost of Revenues. Cost of product revenues as a percentage of total revenues
decreased to 4.5% in 1997 from 5.8% in 1996 and increased to 5.8% in 1996 from
5.6% in 1995. The decrease as a percentage of revenues in 1997 from 1996 and
1995 principally reflects decreased amortization of capitalized software costs
as a percentage of product costs, the smaller component of product cost
reflected in SQL's product revenues, decreased costs associated with printing
and replication of the Company's software products, and volume discounts
realized on shipping costs. The slight increase as a percentage of revenues in
1996 from 1995 principally reflects increased amortization of capitalized
software costs as a percentage of product costs.
Cost of professional services revenues increased as a percentage of total
revenues to 21.7% in 1997 from 20.7% in 1996 and 16.6% in 1995. The increase
as a percentage of revenues in 1997 from 1996 was due primarily to the
acquisition of SQL which experiences lower utilization of professional service
personnel during the first and third quarters resulting from seasonal business
cycles in Europe. The decrease as a percentage of revenues in 1996 from 1995
was due primarily to decreased utilization of engineers during the second half
of the year resulting from increased hiring to support planned services
growth.
Cost of support revenues as a percentage of total revenues was 5.5%, 3.4%
and 3.4% in 1997, 1996 and 1995, respectively. The increase from 1996 to 1997
as a percentage of revenues reflects the impact of the acquisition of SQL
which sells larger contracts containing a larger component of technical
support service cost.
Cost of revenues in 1996 included a one-time $1.8 million write-off of
capitalized software which became obsolete as a result of the acquisition of
SQL (see Note 1(i) to the Notes to Consolidated Financial Statements). No such
charges against income were taken in 1997.
Sales and Marketing Expenses. Sales and marketing expenses for 1997
increased 98.1% to approximately $18.6 million from approximately $9.4 million
in 1996, and increased 80.2% to approximately $9.4 million from approximately
$5.2 million in 1995. As a percentage of total revenues, these expenses were
26.7% in 1997, 28.9% in 1996 and 25.6% in 1995. The decrease as a percentage
of revenues in 1997 from 1996 was due primarily to increased productivity of
the sales and marketing staff combined with increased market acceptance of the
Company's products. The increase as a percentage of revenues in 1996 from 1995
was due primarily to increased commissions and sales travel expenses.
Product Development Expenses. Total expenditures on product development,
including capitalized expenses, increased to approximately $6.7 million in
1997 from approximately $4.0 million in 1996 and from approximately $2.3
million in 1995. The increases were primarily due to the hiring of additional
employees and third party consultants to work on the Company's file server,
client/server and foreign language products. The Company capitalized software
expense of approximately $2.3 million, $2.6 million and $573,000,
respectively, in 1997, 1996 and 1995, which represented 34.4%, 65.2% and 24.8%
of total expenditures for product development in the respective periods.
Capitalization of software expense is expected to decrease as a percentage of
total development expense in 1998 because the majority of projects qualifying
for capitalization have been or will be released for revenue shipments in
1998. Net product development expenditures were approximately
21
<PAGE>
$4.4 million, $1.4 million and $1.7 million in 1997, 1996 and 1995,
respectively. Net product development expenses as a percentage of revenues
were 6.3%, 4.3% and 8.6% in 1997, 1996 and 1995, respectively. Amortization of
capitalized product development costs is charged to cost of product sales and
totaled approximately $1.5 million, $500,000 and $300,000 in 1997, 1996 and
1995, respectively. Management believes that these capitalized software assets
will be recoverable out of future product sales.
General and Administrative Expenses. General and administrative expenses
increased 140.2% to approximately $8.1 million in 1997 from approximately $3.4
million in 1996, and 49.1% to approximately $3.4 million in 1996 from
approximately $2.3 million in 1995, due primarily to the acquisition of SQL
which historically spent more on general and administrative categories,
increased administrative personnel required to support the Company's growth,
increased reserves and increased expenses associated with being a public
company. As a percentage of total revenues, general and administrative
expenses were 11.6% in 1997, 10.4% in 1996 and 11.1% in 1995.
Write-off of In-process Research and Development Costs. The Company expensed
$33.6 million of in-process research and development acquired as part of the
acquisition of SQL. Also in conjunction with the acquisition of SQL in 1996,
the Company wrote off approximately $1.8 million of capitalized software which
represented investments in products rendered redundant or obsolete by the
acquisition of the SQL product line. These one-time charges resulted in the
Company reporting a loss in 1996 (see Note 2 to the Notes to Consolidated
Financial Statements).
Other Income (Expense). Other income decreased $1.4 million in 1997 from
approximately $2.4 million in 1996, after having increased approximately $1.2
million in 1996 from approximately $1.2 million in 1995. The decrease from
1996 to 1997 was primarily due to lower interest earned on smaller investment
balances which resulted after remitting the cash portion of the purchase of
SQL to its shareholders. The increase from 1995 to 1996 was due to the
interest earned on higher investment balances realized upon completion of two
public offerings of Common Stock in April 1995 and October 1995, respectively.
Income Taxes. The Company's effective income tax rate for 1997 increased to
34.8% from (14.6%) in 1996, primarily due to the tax treatment of the SQL
acquisition and related costs. Without the effect of the acquisition, the
Company's effective tax rate for 1996 would have been 36.5% and the decrease
from 1996 to 1997 could be attributed principally to increased product
development tax credits. Likewise, the effective tax rate decrease from 38.7%
in 1995 to 36.5% in 1996, excluding the effects of the SQL acquisition, was
due primarily to increased development tax credits.
Net Income (Loss). The Company's net income increased 140.8% in 1997 to
approximately $11.4 million or $0.62 basic earnings per share ($0.59 diluted
earnings per share) from a loss of approximately ($28.0) million in 1996, and
decreased 744.5% in 1996 to a loss of approximately $(28.0) million or $(1.65)
basic earnings per share (($1.58) diluted earnings per share), from
approximately $4.35 million, or $0.33 basic earnings per share ($0.30 diluted
earnings per share) in 1995. The increase in net income is due to the impact
of the acquisition of SQL and internal growth of revenues during 1997. The
loss in 1996 is directly attributable to the one-time write-off of costs
associated with the acquisition of SQL. Before accounting for the one time
charges associated with the acquisition, the Company's net income increased
64% to $7.1 million in 1996.
QUARTERLY RESULTS
Many software companies experience seasonal variations in revenues. The
Company believes that its future results of operations may be subject to
quarterly variations. The acquisitions of SQL, Insta and SIS have exposed the
company to seasonal revenue fluctuations overseas, principally slower business
conditions in the first and third quarters of the year.
22
<PAGE>
The following table presents certain unaudited quarterly financial
information for each of the eight quarters through the quarter ended March 31,
1998. In the opinion of management, this information has been prepared on the
same basis as the audited financial statements appearing elsewhere in this
Prospectus and all necessary adjustments (consisting only of normal recurring
adjustments) have been included in the amounts stated below to present fairly
the unaudited quarterly results when read in conjunction with the audited
financial statements of the Company and notes thereto. The Company's quarterly
results have in the past been subject to fluctuations, and thus the operating
results for any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product............... $3,259 $3,652 $ 4,034 $ 6,148 $ 6,851 $ 8,195 $ 9,980 $ 7,365
Professional services. 2,813 3,070 3,954 5,783 6,909 6,187 7,559 8,956
Support............... 1,632 1,543 1,607 2,751 3,054 3,018 3,333 3,808
------ ------ -------- ------- ------- ------- ------- -------
Total revenues....... 7,704 8,265 9,595 14,682 16,814 17,400 20,872 20,129
Cost of revenues:
Cost of product
revenues............. 491 473 554 844 695 746 848 776
Cost of professional
services revenues.... 1,443 1,716 2,393 3,530 3,712 3,738 4,180 4,145
Cost of support
revenues............. 261 258 311 687 1,090 1,134 927 930
Write-off of
capitalized software. -- -- 1,804 -- -- -- -- 598
------ ------ -------- ------- ------- ------- ------- -------
Total cost of
revenues............ 2,195 2,447 5,062 5,061 5,497 5,618 5,955 6,449
------ ------ -------- ------- ------- ------- ------- -------
Gross profit.......... 5,509 5,818 4,533 9,621 11,317 11,782 14,917 13,680
Operating expenses:
Sales and marketing... 2,234 2,269 2,768 4,273 4,694 4,605 5,045 5,549
Product development... 301 358 314 834 1,036 1,180 1,314 1,522
General and
administrative....... 867 805 1,068 2,236 1,773 1,522 2,564 2,030
Write-off of in-
process research &
development.......... -- -- 33,600 -- -- -- -- 2,531
------ ------ -------- ------- ------- ------- ------- -------
Total operating
expenses............. 3,402 3,432 37,750 7,343 7,503 7,307 8,923 11,632
------ ------ -------- ------- ------- ------- ------- -------
Operating income (loss). 2,107 2,385 (33,217) 2,278 3,814 4,475 5,994 2,048
Net other income........ 581 590 623 208 282 249 248 253
------ ------ -------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 2,687 2,976 (32,594) 2,486 4,096 4,724 6,242 2,301
Income taxes............ 1,036 1,146 436 508 1,495 1,748 2,359 2,064
------ ------ -------- ------- ------- ------- ------- -------
Net income (loss)....... $1,651 $1,830 $(33,030) $ 1,978 $ 2,601 $ 2,976 $ 3,883 $ 237
====== ====== ======== ======= ======= ======= ======= =======
Basic net income (loss)
per share.............. $ 0.10 $ 0.11 $ (1.95) $ 0.11 $ 0.14 $ 0.16 $ 0.21 $ 0.01
====== ====== ======== ======= ======= ======= ======= =======
Diluted net income
(loss) per share....... $ 0.10 $ 0.11 $ (1.88) $ 0.11 $ 0.14 $ 0.15 $ 0.19 $ 0.01
====== ====== ======== ======= ======= ======= ======= =======
</TABLE>
23
<PAGE>
The table below sets forth the percentage relationship of certain items to
total revenues with regard to the Company's results of operations for each of
the eight quarters through the quarter ended March 31, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product............... 42.3% 44.2% 42.0% 41.9% 40.7% 47.1% 47.8% 36.6%
Professional services. 36.5 37.2 41.2 39.4 41.1 35.6 36.2 44.5
Support............... 21.2 18.6 16.8 18.7 18.2 17.3 16.0 19.0
----- ----- ------ ----- ----- ----- ----- -----
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product
revenues............. 6.4 5.7 5.8 5.7 4.1 4.3 4.1 3.8
Cost of professional
services revenues.... 18.7 20.8 24.9 24.0 22.1 21.5 20.0 20.6
Cost of support
revenues............. 3.4 3.1 3.2 4.7 6.5 6.5 4.4 4.6
Write-off of
capitalized software. -- -- 18.7 -- -- -- -- 3.0
----- ----- ------ ----- ----- ----- ----- -----
Total cost of
revenues............ 28.5 29.6 52.6 34.5 32.7 32.3 28.5 32.0
----- ----- ------ ----- ----- ----- ----- -----
Gross profit.......... 71.5 70.4 47.4 65.5 67.3 67.7 71.5 68.0
Operating expenses:
Sales and marketing... 29.0 27.5 28.9 29.1 27.9 26.5 24.2 27.6
Product development... 3.9 4.3 3.3 5.7 6.2 6.8 6.3 7.5
General &
administrative....... 11.3 9.8 11.1 15.2 10.5 8.7 12.3 10.1
Write-off of in-
process research &
development.......... -- -- 350.2 -- -- -- -- 12.6
----- ----- ------ ----- ----- ----- ----- -----
Total operating
expenses............ 44.2 41.5 393.5 50.0 44.6 42.0 42.8 57.8
----- ----- ------ ----- ----- ----- ----- -----
Operating income (loss). 27.3 28.9 (346.1) 15.5 22.7 25.7 28.7 10.2
Net other income........ 7.5 7.1 6.5 1.4 1.7 1.4 1.2 1.2
----- ----- ------ ----- ----- ----- ----- -----
Income (loss) before
income taxes........... 34.9 36.0 (339.6) 16.9 24.4 27.1 29.9 11.4
Income taxes............ 13.5 13.9 4.5 3.5 8.9 10.0 11.3 10.2
----- ----- ------ ----- ----- ----- ----- -----
Net income (loss)....... 21.4% 22.2% (344.1)% 13.5% 15.5% 17.1% 18.6% 1.2%
===== ===== ====== ===== ===== ===== ===== =====
</TABLE>
Traditionally the Company has operated with very little backlog, and a
significant portion of Datastream's revenues in any quarter were the result of
a large number of relatively small orders received during a period.
Accordingly, the Company was subject to fluctuations in the number of overall
orders in any given period, which in turn was influenced by the overall level
of economic and industrial activity. The Company establishes expense levels
based in part on its expectations as to future net sales. As a result, any
unexpected decline in revenue is likely to adversely affect operating results
and net income. In addition, the acquisitions of SQL, Insta and SIS have given
the Company access to the market for high-end maintenance software solutions,
which generally have larger transaction sizes, take longer to implement and
may result in a longer sales process. The seasonality of the Company's
international operations may result in fluctuations in quarterly results. If
the Company's revenues are below expectations, operating results may be
materially adversely affected. No assurance can be given that the Company will
be able to maintain profitability on a quarterly or annual basis in the
future.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through a
combination of public and private equity financing, bank loans and lines of
credit, and, beginning in 1988, through cash flows from operations. In 1995,
1996 and 1997 operating activities generated cash totaling approximately $2.8
million, $6.2 million and $2.2 million, respectively, primarily related to
increases in net income in 1995 and 1997, and increases in net income before
acquisition related charges in 1996. The Company ended its first quarter of
1998 with $4.4 million in cash and cash equivalents defined as securities
maturing in less than 90 days. The Company intends to re-invest the proceeds
of maturing U.S. Government securities in similar U.S. Government securities.
In 1995, 1996 and 1997, the Company used cash from investing activities of
approximately $41.5 million, $2.1 million and $4.8 million primarily related
to the purchase of short-term investments, additions to property, plant and
equipment and additions to capitalized software development costs. The Company
completed its initial public offering in April 1995, raising net proceeds of
approximately $13.6 million, and a second public offering in October 1995,
raising net proceeds of approximately $25.1 million.
The Company maintains a multi-currency bank line of credit that provides for
borrowings of 70% of accounts receivable less than 60 days aged up to $5.0
million. This line expires on May 31, 1999. No borrowings were outstanding
under the line of credit at March 31, 1998.
The acquisition of SQL was completed for $31 million, consisting of $17
million in cash and $14 million in Common Stock issued pursuant to Regulation
S. In connection with the acquisition, the Company also deposited into escrow
an additional $3 million in Common Stock and assumed certain of SQL's
outstanding liabilities. Following the acquisition, SQL's long-term debt
totaling approximately $2.7 million was repaid by the Company and additional
working capital infusions of approximately $2.5 million were required to
sustain SQL's operations and pay current liabilities. Approximately $950,000
of SQL's long-term debt remains, of which approximately $346,000 is scheduled
to be repaid by the end of 1998 out of income from operations.
In July 1997, the Company made a $2 million investment in Distinction
Software, Inc. ("Distinction"), a leading U.S. provider of supply chain
planning software. This investment represents less than 20% of the outstanding
equity interests of Distinction and is included in long-term investments on
the balance sheet.
Datastream acquired Insta on March 31, 1998 for approximately $7 million,
consisting of approximately $4.4 million in cash and approximately $2.6
million (130,435 shares) in Common Stock issued pursuant to Regulation S. In
connection with the acquisition, the Company assumed approximately $2.1
million of Insta's outstanding liabilities and deposited into escrow 34,783 of
such shares of Common Stock to cover the selling stockholders' indemnification
obligations for representations and warranties made to the Company in
connection with the sale of Insta.
On June 16, 1998, the Company acquired SIS for approximately $6.5 million,
consisting of $4.6 million in cash and $1.9 million (88,652 shares) in Common
Stock issued pursuant to Regulation S. The Company also paid off approximately
$767,000 of SIS's debt, assumed approximately $344,000 in outstanding
liabilities and deposited into escrow 29,566 shares of Common Stock to cover
indemnification obligations of the selling stockholders.
The Company's principal commitments as of March 31, 1998 consisted primarily
of long-term debt assumed in the acquisitions of SQL and Insta and leases of
operating equipment and its foreign office facilities, and there were no
material commitments for capital expenditures. The Company believes that its
current cash balances, availability under its line of credit and cash flow
from operations, available-for-sale investments and the proceeds of this
public offering will be sufficient to finance current operating requirements,
including capital expenditures, acquisitions and Year 2000 compliance costs
for at least the next 12 months.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"). Statement No. 130 requires that an enterprise
display, with the same prominence as other financial statements, the
components of comprehensive income. Statement No. 130 requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
25
<PAGE>
income separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. Statement No. 130 is
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes
is required. The Company adopted Statement No. 130 on January 1, 1998. The
Company's financial statements have been adjusted to reflect the provisions of
Statement No. 130.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("Statement No. 131"). Statement No. 131 requires that an enterprise disclose
certain information about operating segments and is effective for financial
statements for periods beginning after December 15, 1997.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP
97-2 is effective for financial statements for fiscal years beginning after
December 15, 1997. The Company adopted SOP 97-2 on January 1, 1998. The
adoption of SOP 97-2 did not significantly affect the Company's results of
operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("Statement No. 133"). Statement No. 133 requires that an enterprise recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Statement No. 133 is
effective for all fiscal quarters and all fiscal years beginning after June
15, 1999. The Company is currently assessing the effects of Statement No. 133
on its financial position.
INFLATION
The Company believes that inflation has not had a material impact on the
Company's operating results and does not expect inflation to have a material
impact on the Company's operating results in 1998.
YEAR 2000
Risks Associated with the Year 2000. Many currently installed computer
systems and software products are coded to accept only a two digit format in
the date code field. These date code fields will need to accept a four digit
format to distinguish 21st century dates from 20th century dates. As a result,
in less than two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000"
requirements. There are several aspects to the Year 2000 issue, as follows:
Impact on Revenue. The Company believes that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues in a
variety of ways. Many companies are expending significant resources to correct
or patch their current software systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase software
products such as those offered by the Company. Conversely, Year 2000 issues
may cause other companies to accelerate purchases of software to replace non-
year 2000 compliant applications, causing a short-term increase in demand for
the Company's products. There is no assurance that such increase in demand
will be realized. Either of the foregoing could have a material adverse effect
upon the Company's business, operating results and financial condition.
Year 2000 Compliance. The Company has obtained ITAA Year 2000 certification
and believes that the current versions of its products are Year 2000
compliant. Datastream's current products store and calculate dates in a four
digit format for the entire operational range. The Company regularly runs
regression tests on its software, including tests of the Year 2000 rollover.
Based on the above, it is not expected that the Company's products will be
adversely affected by date changes in the year 2000. However, there can be no
assurance that the Company's products contain and will contain all features
and functionality considered necessary by customers, distributors, resellers
and systems integrators to be Year 2000 compliant. Certain customers of the
Company may still be running earlier versions of the Company's products, which
earlier versions are not Year
26
<PAGE>
2000 compliant. The Company is in the process of informing customers of the
need to migrate to current products that management believes are Year 2000
compliant. For those products that can be made compliant through the use of a
software script, the Company has made or is in the process of making such
script available to customers. The Company anticipates that generally
throughout the software industry substantial litigation may be brought against
software vendors of non-compliant operating environments. The Company believes
that any such claims against the Company, with or without merit, could have a
material adverse effect on the Company's business, operating results and
financial condition.
Internal Systems. The Company has also reviewed its internal systems for
Year 2000 compliance and is in the process of upgrading to Year 2000 compliant
versions from third party software vendors, modifying certain systems, and
planning to replace certain systems with new third party software, which the
Company expects to complete prior to January 1, 2000. In addition to making
its own systems Year 2000 ready, the Company has also begun to contact its key
suppliers and vendors to determine the extent to which the systems of such
suppliers and vendors are Year 2000 compliant and the extent to which the
Company could be affected by the failure of such third parties to be Year 2000
compliant. The Company has created a Year 2000 Committee to coordinate the
efforts to become Year 2000 compliant. Management does not believe that the
cost to bring its software products and internal systems into Year 2000
compliance will have a material adverse effect on the Company's results of
operations or financial condition. However, delays in upgrading some systems
to Year 2000 compliance, or a failure to fully identify all Year 2000
dependencies in the Company's systems and in the systems of its suppliers,
vendors, and financial institutions could have material adverse consequences,
including delays in the delivery or sale of products.
Expenses Related to Year 2000 Compliance. The Company has not incurred
significant expense in becoming Year 2000 compliant as this has been achieved
as a part of regular upgrades to its internal operating systems. Future costs
related to Year 2000 compliance are not expected to have a material adverse
effect on the Company's results of operations or financial condition.
27
<PAGE>
BUSINESS
OVERVIEW
Datastream develops, markets, sells and supports personal desktop computer,
file server and client/server enterprise software for the industrial
automation market. The Company's products are designed to enable customers to
reduce downtime, control maintenance expenses, cut spare parts inventories and
costs, improve purchasing efficiency and more effectively deploy productive
assets, personnel and other resources. The Company's line of products include
solutions for virtually any size operation--from the single, small shop with
basic requirements to the large, multi-site client needing a full-featured
enterprise solution. Datastream's products have garnered Plant Engineering
magazine's "Gold Product of the Year" award in the software category in each
of the last five years. The Company is an established leader in the CMMS/EAMS
market based on unit sales, having sold over 39,000 CMMS systems to
approximately 20,000 customers. The Company sells its products through a
combination of direct and telesales efforts. The Company's objective is to
maintain its leading position in the CMMS/EAMS market by continuing to provide
feature-rich software solutions and being a value leader in each area of the
CMMS/EAMS market.
INDUSTRY BACKGROUND
Similar to the wide acceptance and rapid adoption of ERP packaged
applications targeted at improving efficiencies in manufacturing, finance, and
human resources functions, organizations are adopting CMMS/EAMS solutions to
reduce costs, improve plant efficiency and increase capacity utilization. The
CMMS/EAMS market includes process and discrete manufacturers, government
agencies, universities, hospitals and other organizations which maintain high-
value capital assets such as plants, facilities, and production equipment.
Automation Research Corporation, an independent research firm, estimates that
the size of the global CMMS/EAMS market was approximately $900 million in
1997.
CMMS generally includes any computer software application designed to track,
monitor and maintain histories on capital assets such as production equipment,
spare parts inventories, plants and facilities and to compare and contrast key
asset performance data. Catastrophic equipment failures, sub-optimal equipment
performance and unnecessary "preventive repairs" are common occurrences at
facilities that do not employ some means of systematically managing
maintenance and repair activities. Manual methods represent an inefficient way
to perform data collection and statistical analysis. CMMS enables corporations
to increase efficiency and reduce costs by, among other things, reducing the
probability of catastrophic failures, reducing unscheduled downtime,
eliminating costly excess repair parts inventories, improving spare parts
procurement processes and allowing maintenance tasks to be scheduled more
effectively to permit maximum utilization of resources. The resulting
incremental gains in efficiency generally translate directly into lower
operating costs.
EAMS generally refers to that segment of the CMMS market that is oriented
towards organizations with large, multinational operations with a number of
geographically dispersed locations and very large investments in multiple
plants or facilities. EAMS installations are differentiated by enterprise
scaled features such as large relational databases, global asset tracking
capability, configurable workflow, multiple concurrent language capability,
centralized inventory control and coordinated worldwide purchasing
functionality. Enterprises deploying EAMS solutions seek a combination of
technology, database capability and features that are able to be implemented
over wide area networks, intranets, or satellite-based communications systems.
A critical component of CMMS/EAMS software is MRO procurement. For example,
a preventive maintenance routine might require spare parts for completion.
CMMS/EAMS software will check the spare parts inventory managed by the system,
execute a purchase order in the event of inventory depletion, and prepare the
work order. Currently, MRO purchase orders are executed via fax and/or
telephone to a large and highly fragmented group of MRO suppliers. According
to a study released by Industrial Market Information, Inc. in January 1998,
the current size of the market for MRO procurement is estimated to be $220
billion. It is expected
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<PAGE>
that much of this procurement activity will eventually be processed through
the Internet. According to a November 1997 study by The Yankee Group, the
market for MRO procurement through the Internet is expected to grow from $3.0
billion in 1997 to $71.0 billion in 2000.
The market for CMMS/EAMS software is relatively fragmented. Most of the
larger vendors, including the traditional ERP software providers, have focused
predominantly on the high-end of the CMMS/EAMS market with solutions costing
several million dollars and requiring lengthy implementations. Organizations
of all sizes deploy CMMS/EAMS solutions in an effort to increase operating
efficiencies and reduce overall maintenance costs. Such organizations seek a
solution that offers a broad range of advanced features and functions
integrated within a broader ERP solution, scales to the specific needs of a
particular organization, is easily used and installed and is well supported
with upgrades and services.
THE DATASTREAM SOLUTION
The Company has met the highly diversified needs of the CMMS/EAMS market by
providing a range of software and services that increase productive use of
capital assets through both standard and customized solutions geared toward
the particular needs of virtually any size manufacturer or facility.
Management estimates that, on average, through the use of its CMMS/EAMS
solutions, companies can reduce maintenance and production costs between 10%
and 30%. The Company is the world leader in providing such CMMS/EAMS
solutions, with approximately 39,000 systems sold worldwide and a 43% market
share, based on systems sold, among the top ten providers. The Datastream
solution is based on the following four hallmarks:
Simplicity. The Company's software is designed as a broadly applicable best-
of-breed CMMS/EAMS solution which offers customers ease of use, ease of
implementation and ease of integration with existing operations, including ERP
systems. Common graphical user interfaces across products and platforms allow
customers to smoothly upgrade and/or migrate to next generation solutions. The
Company's software includes wizards that provide step-by-step instructions to
simplify maintenance management and ensure full realization of the benefits of
the Datastream solution.
Technology. Datastream is a technology leader within the CMMS/EAMS industry.
The Company's software is based on industry standards including Microsoft
Windows and NT operating systems and Microsoft and Oracle databases. This
provides a high degree of scalability from a smaller shop with basic
requirements to global enterprises needing a full-featured enterprise
solution. Datastream is also forward thinking in upgrading its software to
take advantage of proven new technologies such as the Internet, thin client
architecture and wireless connectivity.
Functionality. Datastream provides customers with a fully integrated end-to-
end CMMS/EAMS solution that schedules maintenance tasks and repairs, generates
work orders, manages multi-site inventory and centralizes spare parts
purchasing. Datastream's open architecture facilitates integration with
financial management, production, building controls and personnel software
applications for more comprehensive data analysis and business planning. This
analysis and planning helps customers identify critical information to improve
equipment reliability and increase plant capacity.
Value. Datastream offers an attractive value proposition to its customers.
The Company's efficient software development efforts, diversified sales and
marketing approach, and low-cost infrastructure allow Datastream to
consistently compete as a full-featured CMMS/EAMS solution provider at a value
price. In addition, given the simplicity and functionality of the Datastream
solution, customers are able to rapidly implement a solution that delivers
reduced maintenance costs and an increased return on investment.
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<PAGE>
STRATEGY
The Company's objective is to maintain its leading position in the CMMS/EAMS
market by continuing to provide feature-rich software solutions and being a
value leader in each segment of the CMMS/EAMS market. To achieve this
objective, the Company intends to continue to pursue the following strategies:
Maintain and Extend Technological Leadership. The foundation of the
Company's success is its ability to offer one of the most technologically
advanced CMMS/EAMS solutions. Since 1986, Datastream has successfully migrated
its products from Microsoft-DOS to Windows desktop, file server and then
client/server versions. The Company has and continues to increase its ability
to integrate its products with third-party applications, including those of
leading ERP providers, and was among the first to establish an Internet-based
product line. The Company intends to continue to enhance and redesign its
products to keep it at the forefront of its customers' evolving technology
needs.
Increase Market Share Through Diversified Sales Efforts. The Company
complements its wide range of product offerings with a diversified sales
approach that targets each segment of the CMMS/EAMS market. Domestically, the
Company intends to continue to grow its large telesales team as a cost-
effective means of maintaining its dominant position in the low-end and middle
segments of the market. The Company plans to continue to increase its
geographically dispersed, direct sales force to add market share at the high-
end segment of the market, building on its significant expansion in 1997. The
Company plans to maintain its indirect channel relationships to sell products
in the low-end segment of the market. Internationally, the Company employs a
direct sales approach for most major markets and uses third party distributors
in those markets where it does not have a direct presence.
Leverage and Expand Existing Customer Base. The Company intends to generate
additional software and professional services revenue from its large installed
base of approximately 20,000 customers by providing a wide range of software
and services that address the particular needs of any size enterprise. The
Company offers its customers additional products and services to address on-
going increases in demands for increased plant capacity utilization, improved
MRO procurement efficiency and reduced costs. Datastream also intends to
target its customers that are smaller divisions of larger corporations to sell
a broader enterprise solution.
Continue to Pursue Strategic Alliances and Acquisitions. The Company intends
to leverage its position as the established unit sales leader in the CMMS/EAMS
market by continuing to enter into strategic technical and distribution
alliances with leading ERP and MRO vendors both domestically and
internationally. Management believes that such alliances will enable the
Company to further penetrate the increasingly competitive high-end segment of
the market and provide cost-effective distribution channels in the low-end.
The Company also intends to continue to acquire foreign CMMS/EAMS companies
that have built a strong regional presence and have technologies and products
that complement those of the Company.
Increase Professional Services, Training and Support Revenues. As the
Company sells more complex CMMS/EAMS systems (particularly client/server
systems), management expects to have additional opportunities to increase
professional services, training and support revenues. The Company intends to
continue to expand its professional services personnel and capabilities to
meet the sophisticated systems integration and customization needs of its
customers. The Company plans to expand its product support and training
capabilities, which management believes strengthens long-term relationships
with customers.
Capitalize on MRO Electronic Commerce Opportunity. Management estimates that
the Company's existing customer base utilizes the Company's software to
generate several billions of dollars of purchase orders each year for spare
parts and supplies. Although those purchase orders are typically executed via
fax or phone to a highly fragmented market of MRO suppliers, the Company
believes customers will increasingly process orders through the Internet in
order to reduce administrative and transactional costs. The Company believes
that,
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<PAGE>
because of its large installed customer base and strong MRO supplier
relationships, it is well positioned to capitalize on this potential
electronic commerce opportunity.
PRODUCTS
The Company's line of products include solutions for virtually any size
operation from the single, small shop with basic requirements to the large,
multi-site client needing a full-featured enterprise solution. New software
versions are developed routinely to reflect changes in technology and market
demand. A common graphical user interface facilitates seamless upgrades across
most platforms and releases of the Company's products. The Company's products
are distributed through telesales, direct sales and an international
distributor network. MaintainIt is also sold through indirect channels and
marketing alliances. An earlier version of MaintainIt can be downloaded free
of charge from the Company's website.
The following graphic illustrates the range of the Company's software
products, including their target markets, segmented by target customer average
annual revenues, range of concurrent users, and sales channels:
[GRAPHIC]
TARGET MARKET PRODUCT SALES CHANNEL
HIGH-END MP5 DIRECT SALES
($500M+) Up to
1,000 users
MIDDLE MP2
($50M-$500M) (CLIENT/SERVER)
Up to 250 users
MP2 TELESALES
(FILE SERVER)
1-20 users
MAINTAINIT PRO
LOW-END 1-10 users
($0-$50M)
MAINTAINIT
1-10 users
INDIRECT/WEB
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The following is a detailed description of the Company's primary products:
MaintainIt and MaintainIt Pro. MaintainIt for Windows is an off-the-shelf,
entry-level maintenance system marketed primarily to small businesses (fewer
than 20 employees) as an inexpensive alternative to the Company's other
products. MaintainIt provides basic tools for scheduling routine maintenance
tasks and repairs, generating work orders, tracking parts inventory and
equipment history, and creating purchase orders and basic management reports.
MaintainIt Pro for Windows contains all the features of MaintainIt as well as
numerous custom fields and a scheduling calendar. Both MaintainIt and
MaintainIt Pro feature the Microsoft Access database, run on Windows 95/NT,
and are available in single-user and networked versions. MaintainIt and
MaintainIt Pro are available through catalogs and directly from the Company.
The cost for MaintainIt and MaintainIt Pro, including software license,
support and servicing, ranges on average from $189 for a single-user
configuration to $3,495 for a four- to ten-user configuration.
MP2 Professional. MP2 Professional, available in both file server and
client/server versions, is designed for small- to medium-sized facilities
where greater numbers of users need access to maintenance data and records for
cost/benefit analysis as well as maintenance functions. MP2 Professional
offers a large number of advanced capabilities not available in MaintainIt or
MaintainIt Pro, including a customizable graphical interface, field level
security, safety notes and training records. MP2 Professional is able to
generate over 4,000 standard reports providing analysis down to specific
location, piece of equipment, and employee. Add-on features to MP2
Professional include the capability to integrate OSHA regulations and FDA
validation. The file server version of MP2 Professional is available for
Microsoft Access databases; the client/server version is available for
Microsoft SQL Server databases. The client/server version of MP2 Professional
has a thin client, leaving most of the work to the server, which minimizes
processing time, ensures data integrity and security, and reduces network
traffic. This version features wizards, context sensitive on-line help,
customizable toolbars and Microsoft BackOffice compatibility. Including
software license, support and servicing, the cost of the file server version
of MP2 Professional currently ranges from $1,995 for a single-user
configuration to $15,000 for a four- to ten-user configuration; the
client/server version of MP2 Professional ranges from $4,995 for a single-user
configuration to $50,000 for more complex configurations.
MP2 Enterprise. This product is designed to handle the functional demands of
large organizations where enterprise-wide solutions are required to manage
capital assets and personnel in multiple locations across the globe. Aside
from all of the features provided by MP2 Professional, MP2 Enterprise offers
support for multi-site inventory management, global security and centralized
purchasing, and provides data to detect equipment problems leading to downtime
and to assist in root cause failure analysis. MP2 Enterprise's open system
interface architecture facilitates integration with other software
applications, such as ERP, financial management, production, building controls
and personnel applications, for more comprehensive data analysis and business
planning. MP2 Enterprise has been integrated with the products of ERP vendors
such as Platinum, J.D. Edwards and QAD. This product is available for both
Oracle and Microsoft SQL Server databases and runs on Windows 95/NT operating
systems. MP2 Enterprise has a thin client "intranet ready" architecture and
features full e-mail integration and Microsoft OLE (Object Linking and
Embedding) capability. The cost of MP2 Enterprise, including software license,
support and servicing, ranges on average from $20,000 for a three-user
configuration to $300,000 for more complex multi-user configurations (although
certain configurations can reach several millions of dollars).
Internet-based MP2 Add-on Products. In 1997, the Company expanded the
capabilities of MP2 Professional and MP2 Enterprise through the introduction
of a range of Internet-based products. These products include MP2 Weblink,
RequestLink and PagerLink. Weblink is designed to help a customer capitalize
on its corporate intranet investment and the global Internet by easily
extending basic MP2 Enterprise functionality to any machine with
intranet/Internet access using a standard Internet browser. Through
RequestLink, work requests may be sent by e-mail from non-system workstations.
PagerLink automatically notifies any employee with a text pager when MP2
Enterprise generates a work order on assigned equipment. If the first page
gets no response, the system automatically escalates to another employee or
supervisor. Weblink ranges in price from $995 for a five-user file server
configuration to $4,995 for an unlimited-user client/server version.
RequestLink ranges in
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<PAGE>
price from $995 for a five-user file server configuration to $4,995 for an
unlimited-user client/server version. Pagerlink is available for $1,995.
MP5. MP5 is designed for large enterprises with asset intensive and safety
critical operations, such as utilities, telecommunications, oil and gas,
transportation and mining industries. It is also well-suited for very large
organizations with high transaction volumes that require highly configurable
applications. MP5 supports multiple platforms and multiple languages
concurrently. Its open system architecture allows rapid deployment with ERP
systems, equipment monitoring devices, handheld computers, barcode scanners,
and virtually any other data source. MP5 has been integrated with the products
of ERP vendors such as Oracle and SAP. MP5 addresses configuration management,
workflow management, inventory management, document management, purchasing
management, project management, workflow capacity management and
financial/budgets management through its various modules and options. Other
unique features include an outsourced maintenance activity tracker, a standard
library of frequently executed work orders, a short-term scheduling feature, a
report manager, extensive security features and on-line, context sensitive
help. MP5 operates on all Oracle compatible systems for up to 1,000 concurrent
users, is fully Web-enabled, and is accessible anywhere in the world via a
common Internet browser. The cost of MP5, including software license, support
and servicing, ranges on average from $78,000 for a five module standard
configuration (base module plus asset, work, material and purchasing
management modules) supporting a minimum of eight users, to several millions
of dollars for systems supporting a very high number of users.
All prices of the Company's products are subject to change. The Company has
developed a number of foreign language versions of its products: MaintainIt
Pro is available in eleven languages; MP2 Professional file server version is
available in five languages; MP2 Professional client/server version and MP2
Enterprise are both available in ten languages; MP5 is available in seven
languages.
PROFESSIONAL AND SUPPORT SERVICES
The Company offers four types of professional services to customers: (i)
customization, which enhances the functionality of a customer's system, (ii)
integration, which provides on-site installation and systems integration
services for client/server systems, (iii) consulting and advisory services to
provide solutions to customer-specific applications problems, such as spare
parts inventory management or preventive maintenance, and (iv) customer
training. The Company offered a total of 505 training sessions in 1997 at its
training facilities in Greenville, South Carolina, Irvine, California, Dallas,
Texas and Chicago, Illinois. On-site customer training is also available. As
of May 31, 1998, the Company employed 173 professional services personnel.
Most of the Company's professional services are performed on a daily fee
arrangement in connection with installations of the Company's systems. Typical
daily rates range from $795 to $1,500.
Maintenance and support services include unlimited, toll-free international
access to Datastream's TechSupport staff, free product upgrades (including
data conversions), a searchable Internet site for common questions and
requests, e-mail support and an Internet-based file download service. As of
May 31, 1998, the Company employed 74 support personnel in support operations.
The Company provides support for its international customers via a tiered
approach: first-level support is provided by the local sales office, with
back-up expertise being supplied by the corporate help desk in Greenville,
South Carolina.
One-year maintenance and support subscriptions range in cost from $79 for
MaintainIt to $2,795 for a networked MP2 Professional system with 50 or more
users. The cost of a typical one-year maintenance and support subscription for
MP2 Enterprise and MP5 is approximately 18% of the price of the applicable
software license.
CUSTOMERS
Datastream's customer base is highly diversified. Datastream has sold
systems to approximately 20,000 companies in 96 countries through a
combination of telesales, direct sales and international distributors in
virtually every major industry. Datastream products are found in almost every
industry where capital investments are the norm, including aerospace and
defense, automotive, chemicals, communications, computers and
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<PAGE>
electronics, food, general facilities, general manufacturing, government,
healthcare, hospitality, metals, petroleum, shipping and transport and
utilities.
The Company has sold approximately 39,000 systems since inception and has
grown its installed base by an average of 70% annually during the last 5
years. The Company has developed a number of foreign language versions of its
products. Each of these translations is adapted to the country served and
technical assistance is provided by local experts in order to ensure that the
Company's standard for training and technical support is the same worldwide.
The broad applicability of the Company's systems is demonstrated by the
diversity of the Company's customer base, which includes the following
customers currently using the Company's products in selected industries:
<TABLE>
<CAPTION>
<S> <C> <C>
AEROSPACE/DEFENSE FOOD PROCESSING METALS
Allied Signal Ben & Jerry's Berg Steel Pipe
Lockheed Martin Cargill Company
Naval War Airfare Frito-Lay Nucor Steel
Department Kroger Reynolds Metals
Raytheon Stroh Brewery Spartan Steel
Rockwell International Worthington Steel
<S> <C> <C>
AUTOMOTIVE GENERAL FACILITIES PETROLEUM
Canadian Autoparts-- American Greetings Chevron
Toyota Cutler-Hammer Fina Oil & Chemical
Dana Corporation Family Dollar Marathon Oil
Harley Davidson Kmart Texaco
Lear Seating Corporation Maritz Total Oil
Subaru Isuzu Automotive
<S> <C> <C>
SHIPPING AND
CHEMICALS GENERAL MANUFACTURING TRANSPORTATION
Dow Chemical Caterpillar BC Transit--Vancouver
Great Lakes Chemicals Colgate Palmolive Go Transit--Toronto
Morton International Johnson Controls Paris Metro
Rhone-Poulenc Mattel Port of Rotterdam
Witco Corporation Polaroid TRW
<S> <C> <C>
COMMUNICATIONS GOVERNMENT UTILITIES
AT&T Global Information Arlington County Government Denver Metro Wastewater
Solutions City of Dallas ENRON
AT&T Wireless City of Las Vegas Gottenburg Energi
MCI West Virginia Department of London Electricity
Pacific Bell Mobile Administration Southern Nuclear
Services York County
US West Wireless
<S> <C>
COMPUTERS AND ELECTRONICS HEALTHCARE
Advanced Micro Devices Bellevue Hospital Center
Dell Computers Blue Cross/Blue Shield
Emerson Electric Huntsville Hospital
Hewlett-Packard Kaiser Permanente
Sony Memorial Sloan Kettering Cancer Center
</TABLE>
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<PAGE>
No customer has represented more than 1.5% of the Company's total annual
revenue in any of the last three fiscal years.
SALES AND MARKETING
The Company markets and sells its products and services through 205 sales
and marketing professionals (as of May 31, 1998), including a telesales force
of 99 representatives and a direct sales force of 72. In addition, the
Company's low-end products are sold through indirect channels and marketing
alliances. During 1997, the Company expanded its direct sales force
significantly in order to call on larger accounts and to market its
enterprise-wide CMMS/EAMS solutions, including MP5, worldwide. The Company
uses a computerized sales and marketing software system with database
marketing, telemarketing, lead tracking and analysis and customer support
capabilities.
The Company's marketing department consists of 23 employees and is
responsible for generating leads through advertising, public relations, trade
shows and seminars, strategic partnerships and direct mail. The marketing
department is also responsible for product marketing, market research and
competitive analysis and provides competitive, customer and prospect input
into the Company's product development efforts. To enhance its marketing
efforts, Datastream sponsors a users conference each year. The conference
provides an opportunity for decision makers in targeted industries to attend
training sessions, workshops and presentations addressing both maintenance
issues generally and Datastream products specifically, and to interact with
other users and Company employees.
The cornerstone of the Company's sales and marketing efforts is its 99-
person telesales team. The relatively inexpensive nature of the Company's
systems available for the low-end and middle segments of the market, combined
with the excellent quality of product information and order fulfillment items
generated by the marketing department, make the Company's telesales approach a
cost-effective vehicle for accessing these segments of the market and
achieving gains in market share. Management routinely monitors the performance
of the Company's personnel to determine that each member of the telesales
staff is performing acceptably.
Internationally the Company uses a direct and telesales sales force out of
its offices in The Netherlands, Germany, Singapore, the United Kingdom,
France, Mexico as well as its Greenville, South Carolina headquarters. In
addition, the Company has a network of distributors located throughout the
balance of Europe, Latin America and the Pacific Rim.
PRODUCT DEVELOPMENT
As of May 31, 1998, the Company's product development department consisted
of 103 people, spread among four groups: Development, Quality Assurance,
Documentation and Localization. The Development group consisted of 65 software
developers, most of whom hold advanced programming or engineering degrees.
From time to time, the Company utilizes outside contractors for certain
product development projects.
Datastream has been able to respond quickly to technology trends. The
Company introduced its first DOS-based desktop product in 1986. In 1994, it
released a Windows-based desktop product and shortly thereafter added PC
networking capabilities with its file server products. In 1996, the Company
released the first of its enterprise class products based on a client/server
architecture. These products have quickly achieved widespread market
acceptance. The Company's product development efforts are currently focused on
making extensive use of the Internet as a medium for client connection to the
Company's mid- and high-end products.
The Company is also currently focused on major enhancements to its flagship
MP2 Enterprise product. The next release, MP2 Enterprise version 6.0, will
feature improved functionality, security, and multi-site capability. Such
features will enable improved management of data from multiple sites on one
physical database server, thereby allowing centralized control of purchasing
and inventory across multiple sites. Version 6.0 is planned for release in
mid-1998 for Oracle and late-1998 for Microsoft SQL Server.
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<PAGE>
MP2 Enterprise version 7.0, which the Company plans to release in 1999, will
represent a major architecture shift needed to take advantage of the Internet.
Version 7.0 will be browser based, meaning that no setup or maintenance will
be needed for any workstation using version 7.0. This architecture will
present significant savings to customers in decreased cost of implementation,
as well as greatly reduced support expenditures. Version 7.0 will also feature
an n-tier architecture, which will allow version 7.0 to be scaleable serving
anywhere from a small 3-user maintenance operation to the multi-site
enterprise installations. Version 7.0 will also incorporate enhanced workflow
capabilities and a customizable interface.
The Company plans to continue its web-centric development of MP5 with a
focus on improving the alignment of MP5 with the Company's products to
facilitate seamless customer migration. Planned improvements to MP5 will also
include enhanced ERP integration capabilities and additional functional
modules, including a training register module to comply with OSHA and NRC
requirements.
Datastream received Year 2000 certification for its development methods from
the Information Technology Association of America (ITAA). This means the
Company is believed to have the correct controls in its development process
and methods to ensure the software produced is Year 2000 compliant. The
following primary products are considered Year 2000 compliant: MaintainIt 3.0,
MaintainIt Pro 3.01, MP2 Professional 4.6 (16 and 32 bit versions), MP2
Professional 5.0, MP2 Enterprise (all version 5 series), MP2 Enterprise (all
version 6 series) and MP5. See "Risk Factors--Year 2000."
Although management believes that the Company's product development staff
will be able to meet their development challenges, there can be no assurance
that the above or any other development projects will be completed in a timely
manner or will result in a product that achieves market acceptance.
Product development expenses consist principally of salaries and certain
other expenses related to development and modifications of software products,
which are capitalized in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" ("Statement No. 86"). Capitalization of such
costs begins only upon establishment of technological feasibility as defined
in Statement No. 86 and ends when the resulting product is available for
distribution. Annual amortization of capitalized product development costs is
provided at the greater of the ratio of current product revenue to the total
of current and anticipated product revenue or on a straight line basis over
the estimated economic life of the software, which is not more than eighteen
months or three years, depending on the product. The Company's software
development expenditures were approximately $2.3 million, $4.0 million and
$6.6 million in 1995, 1996 and 1997, respectively. Of these amounts, the
amounts capitalized were approximately $573,000, $2.6 million and $2.3
million, respectively. In December 1996 and in March 1998, the Company took
one-time charges of $1.8 million and $598,000, respectively, related to the
write-off of capitalized software deemed obsolete or superseded by the
products obtained through acquisitions of SQL and Insta.
COMPETITION
The Company has historically concentrated its efforts in the low-end segment
of the CMMS/EAMS market, in which typical transaction sizes (including
software and customization, integration, training and support services) are up
to $20,000. In this segment, Datastream encounters competition from a variety
of vendors, including companies such as CK Systems, JB Systems and DP
Solutions, Inc., that offer off-the-shelf CMMS applications for desktop and
file server systems. Management believes the Company has achieved a dominant
position at the low end of the market.
Competition in the high-end segment of the market is less fragmented and is
dominated by large vendors such as Indus International (which recently
acquired The System Works (TSW)), Marcam Corporation, Mincom, Inc., Project
Software and Development, Inc. (PSDI) and several ERP vendors such as SAP, who
offer enterprise-wide management systems (including maintenance modules) for
use in a client/server environment. Increasing customer demand for
client/server products may make the Company subject to increased competition
if these vendors choose to modify their products to offer lower-priced
client/server capabilities in PC network markets.
36
<PAGE>
The introduction of the Company's MP2 Enterprise and MP5 products placed the
Company into increased competition with certain of its competitors who offer
client/server products, such as PSDI and Indus. Further, its international
acquisitions puts the Company into direct client/server competition across
each of the product lines offered by PSDI and Indus, as well as in competition
with products offered by certain ERP vendors. The Company competes
internationally with both local or regional providers of CMMS/EAMS, and with
CMMS/EAMS vendors that operate on a global basis. Local and regional
competitors are generally smaller, but are more knowledgeable of the specific
markets in which they compete. Global competitors such as PSDI and Indus
participate actively in the European, Latin American and Pacific Rim
countries, entering these markets through distributors, direct sales and
service offices or through strategic partnerships. Competition in these
countries is frequently intense and while the Company has been successful in
integrating SQL and Insta so as to compete from a local basis in Europe, and
extending elsewhere through distributorships, there is no guarantee that the
company will continue to prevail in these markets.
The Company's products compete on the basis of quality, price, technical
support and service, application features and ease-of-use. Management believes
that the Company's products and services compete favorably with respect to
these factors. However, certain of the Company's existing competitors, as well
as a number of potential market entrants, have greater financial, marketing,
service and support and technical resources than the Company. The Company will
be required to make continued investment in product development to meet
competitive pressures. There can be no assurance that the Company will have
sufficient resources to make those investments or that the Company will be
able to make the technical advances necessary to continue to compete
effectively in the future.
INTELLECTUAL PROPERTY
The Company claims exclusive title to and ownership of the software it
develops. The Company relies on a combination of trade secret, copyright and
trademark laws, nondisclosure and licensing agreements, the contractual
provisions in "shrink-wrap" licenses and other contractual provisions and
technical measures to protect its intellectual property rights. There can be
no assurance that these protections will be adequate to protect the Company's
intellectual property rights or that the Company's competitors will not
independently develop software products that are superior to the Company's
products. Existing copyright laws provide limited protection to the Company in
prohibiting competitors from independently producing software products that
are substantially similar to Datastream's products. The Company does not hold
any patents or have any patent applications pending.
Although in limited instances involving large sales the Company may
specifically negotiate license agreements that are signed by both the licensee
and the Company, in the substantial majority of sales, the Company relies on a
"shrink-wrap" license for protection against unauthorized use of its products.
Certain provisions of these licenses, including restrictions on use, copying,
transfer and disclosure of the licensed program, may be unenforceable under
the laws of certain jurisdictions. In addition, through its international
acquisitions, and based upon its internal expansion efforts, the Company is
increasing the sales of its products internationally. This entails certain
additional intellectual property risks in that the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent
as do the laws of the United States. Although the Company believes that its
products, trademarks and other proprietary rights do not infringe upon the
proprietary rights of third parties, there can be no assurance that such
parties will not assert infringement claims against the Company. Any such
claim made against the Company, with or without merit, could be time-consuming
and expensive to defend. The loss of proprietary technology or a successful
claim against the Company could have a material adverse effect on the
Company's financial condition and results of operations.
EMPLOYEES
As of May 31, 1998, the Company employed approximately 628 persons on a
full-time basis, including 205 sales and marketing personnel, 248 service and
support representatives, 72 administrative personnel and 103 employees
involved in product development. None of Datastream's employees is represented
by a labor
37
<PAGE>
organization and the Company is not a party to any collective bargaining
agreement. Management considers relations between the Company and its
employees to be very good.
PROPERTIES
The Company conducts its principle operations out of a 125,000 square foot
headquarters building owned by the Company located in Greenville, South
Carolina. The Company also owns a 15,000 square foot building in Dessau,
Germany. The Company also has the following properties under lease:
<TABLE>
<CAPTION>
SQUARE FOOTAGE
LOCATION LEASE EXPIRATION (APPROX.)
-------- ---------------- --------------
<S> <C> <C>
Munich, Germany November 2002 16,000
Rotterdam, The November 2002
Netherlands 12,000
Singapore November 1999 6,000
Minneapolis, Minnesota October 1998 5,000
Slough, Great Britain March 2000 4,000
Grenoble, France February 1999 3,250
Irvine, California January 2000 3,000
Paris, France August 2001 2,000
Chicago, Illinois December 1999 1,500
Dallas, Texas January 2000 1,500
Monterrey, Mexico January 2000 1,000
Shanghai Month-to-Month 1,000
</TABLE>
LEGAL PROCEEDINGS
Datastream is occasionally involved in litigation relating to claims arising
out of its operations in the normal course of business. Datastream is not
currently engaged in any legal proceedings that are expected, individually or
in the aggregate, to have a material adverse effect on the Company.
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
June 26, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Larry G. Blackwell...... 57 Chairman of the Board, President and Chief Executive
Officer
Daniel H. Christie...... 45 Chief Financial Officer
John M. Sterling, III... 36 Vice President of International
John Fury Christ........ 42 Vice President of Development and Chief Technology
Officer
Richard T. Brock (1).... 50 Director
Ira D. Cohen (2)........ 47 Director
John M. Sterling, Jr. 60 Director
(1)(2).................
Kenneth D. Tracy (1)(2). 56 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Larry G. Blackwell, the founder of the Company, has served as Chairman of
the Board, Chief Executive Officer and President of the Company from its
inception in 1986. Prior to founding the Company, he was President of the
Datastream Systems Division of a subsidiary of Wisconsin Power & Light. He
also co-founded and formerly served as Chairman of the Board of EDI Technology
Companies, an environmental process engineering consulting company. Dr.
Blackwell holds a B.S. degree in Engineering from the University of
Mississippi, a Master of Science degree from The Georgia Institute of
Technology and a Ph.D. in Environmental Systems Engineering from Clemson
University. Dr. Blackwell is a registered Professional Engineer in Illinois,
Pennsylvania and South Carolina and was named Inc. magazine's 1994
"Entrepreneur of the Year" in the Master Entrepreneur category for the State
of South Carolina. Dr. Blackwell has been a member of the Board of Directors
of Emergent Group, Inc. since 1997.
Daniel H. Christie served as Controller of the Company from July 1993 to
December 1994, and has held the position of Chief Financial Officer since
December 1994. Prior to joining the Company, from 1991 to 1993, Mr. Christie
served as Group Finance Manager for Digital Equipment Corporation. From 1989
to 1991, Mr. Christie served as Digital Equipment's PWB Group Cost and Budgets
Manager and the Plant Controller for Digital Equipment's Printed Wiring Board
Advanced Technology Center in Greenville, South Carolina. He presently serves
as a director and as the President and Treasurer of Vaughn-Russell Candy Co.,
a small, family-run business. Mr. Christie holds an A.B. degree in Economics
from Colgate University and an M.B.A. in Accounting/International Finance from
the Johnson School, Cornell University.
John M. Sterling, III has served as the Company's Vice President of
International since September 1997, overseeing the Company's international
operations. Prior to holding such position, Mr. Sterling served as the
Company's Managing Director of European Operations from February through
August 1997. Mr. Sterling also served as the Company's Vice President of Sales
from 1989 to January 1997. Prior to joining Datastream, Mr. Sterling was a
Regional Sales Manager for Silicon Valley Products. Mr. Sterling holds a B.S.
degree in Political Science from The Citadel. Mr. Sterling is the son of John
M. Sterling, Jr., one of the Company's directors.
John Fury Christ served as Manager of Development of the Company from May
1992 to December 1994, and has held the position of Vice President of
Development since December 1994. In January 1997, Dr. Christ was named Chief
Technology Officer of the Company. Prior to joining the Company on a full-time
basis, Dr. Christ served as President of Positech, Inc. from January 1990 to
May 1992. During this period, Positech was awarded a Small Business Innovative
Research Contract for the application of neural networks in support of the
U.S. Government's Strategic Defense Initiative. From 1988 to 1990, Dr. Christ
provided contract software
39
<PAGE>
development services to the Company. Dr. Christ holds B.S. and Master of
Science degrees in Electrical and Computer Engineering, and a Ph.D. in
Computer Science, all from Clemson University.
Richard T. Brock has served as a director of the Company since August 1993.
In 1984, Mr. Brock founded the predecessor of Firstwave Technologies, Inc., a
publicly-held provider of sales and marketing automation software, for which
he has served in various capacities, including Chief Executive Officer and
President, since 1984. He currently serves as a director of Firstwave
Technologies and as the founding partner of Brock Capital Partners, a
privately-held venture capital fund. He also founded and formerly served as
Chief Executive Officer of Management Control Systems, Inc. Mr. Brock is a
nationally-recognized software developer, author and speaker on sales,
marketing and service automation and business development strategy. Mr. Brock
received a B.S. degree from Spring Hill College and an M.B.A. from Louisiana
State University. He is also a certified public accountant.
Ira D. Cohen has been a director of the Company since February 1995. Since
1988, Mr. Cohen has served as a Managing Director of Updata Capital, Inc., an
investment banking firm focused on mergers and acquisitions in the information
technology industry. Mr. Cohen founded Updata Software, Inc., and from 1986 to
1988 served as that company's Chief Financial Officer. Mr. Cohen is also a
director of Computer Learning Centers, Inc. Mr. Cohen holds a Bachelor of
Science degree in Accounting from City University of New York, Herbert H.
Lehman College, and he is a registered certified public accountant in New York
and New Jersey.
John M. Sterling, Jr. has served as a director of the Company since February
1986. He has also served as the Chairman of the Board of Directors and Chief
Executive Officer of Emergent Group, Inc. since December 1990 and served as
President of Emergent Group from December 1990 to August 1996. Mr. Sterling
has also served as President of Palmetto Seed Capital Corp. from September
1993 to the present and served as a General Partner of Reedy River Ventures
Limited Partnership from 1981 until August 1995. Reedy River provided venture
capital financing to the Company to fund its early development, and Mr.
Sterling originally served on the Board of Directors of the Company pursuant
to that relationship. Mr. Sterling is the father of John M. Sterling, III, an
executive officer of the Company. Mr. Sterling holds a Bachelor of Science
degree in Civil Engineering from The Citadel and an M.B.A. from Darden
Graduate School of Business, University of Virginia.
Kenneth D. Tracy has served as a director of the Company since 1990. He
currently serves as Vice President-Environmental Technology for Warner-Lambert
Company, a position he has held since February 1991. From 1984 to 1991, he
held positions of increasing responsibility with Air Products and Chemicals,
Inc., including Director of Research from January 1990 to February 1991. Prior
to joining Air Products, Dr. Tracy was a principal in EDI Technology
Companies, where he was involved with process engineering consulting as well
as software design and sales. Dr. Tracy holds B.S. and Master of Science
degrees in engineering from Penn State University and a Ph.D. in Environmental
Systems from Clemson University.
40
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of May 31, 1998 (prior to the
Offering), the number of shares being offered and the beneficial ownership of
the Common Stock of the Company upon consummation of the Offering. The
information is provided with respect to (i) each of the Company's executive
officers, (ii) each director of the Company, (iii) all of the directors and
executive officers of the Company as a group (8 persons), (iv) the Selling
Stockholder, and (v) each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING (1) SHARES OFFERING (1)(2)
--------------------- BEING ---------------------
NAME NUMBER PERCENT (3) OFFERED NUMBER PERCENT (3)
- ---- --------- ----------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
OFFICERS AND DIRECTORS
Larry G. Blackwell (4)..... 3,466,900 18.3% 500,000 2,966,900 13.2%
Daniel H. Christie (5)..... 57,676 * -- 57,676 *
John M. Sterling, III (6).. 498,208 2.6% -- 498,208 2.2%
John F. Christ (7)......... 74,863 * -- 74,863 *
Richard T. Brock (8)....... 16,000 * -- 16,000 *
Ira D. Cohen (9)........... 3,000 * -- 3,000 *
John M. Sterling, Jr.
(10)...................... 141,072 * -- 141,072 *
Kenneth D. Tracy (11)...... 14,000 * -- 14,000 *
All current directors and
executive officers
as a group (8 persons)
(12)...................... 4,271,719 22.2% 500,000 3,771,719 16.6%
</TABLE>
- --------
(1) According to rules adopted by the Securities and Exchange Commission (the
"Commission"), a person is the "beneficial owner" of securities if he or
she has or shares the power to vote them or to direct their investment or
has the right to acquire beneficial ownership of such securities within
60 days through the exercise of an option, warrant or right, the
conversion of a security or otherwise. Except as otherwise indicated by
footnote, the named person has sole voting and investment power with
respect to shares beneficially owned. An asterisk in the percent of class
column indicates beneficial ownership of less than 1% of the Common Stock
outstanding.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) The number of shares of Common Stock outstanding used to calculate these
percentages excludes 300,552 shares of Common Stock in escrow pursuant to
the Company's acquisition of SQL. See Note 2 to Notes to Consolidated
Financial Statements.
(4) Share numbers include 67,086 shares of Common Stock subject to options
exercisable on or within 60 days after May 31, 1998. Mr. Blackwell's
address is that of the Company. Mr. Blackwell has agreed to sell up to an
aggregate of 450,000 shares of Common Stock in the Underwriters' over-
allotment option, if the Underwriters choose to exercise such option.
(5) Share numbers include 46,924 shares of Common Stock subject to options
exercisable on or within 60 days after May 31, 1998.
(6) Share numbers include 93,332 shares of Common Stock subject to options
exercisable on or within 60 days after May 31, 1998. Mr. Sterling has
agreed to sell up to an aggregate of 100,000 shares of Common Stock in
the Underwriters' over-allotment option, if the Underwriters choose to
exercise such option.
(7) Share numbers include 66,667 shares of Common Stock subject to options
exercisable on or within 60 days after May 31, 1998. Mr. Christ has
agreed to sell up to an aggregate of 25,000 shares of Common Stock in the
Underwriters' over-allotment option, if the Underwriters choose to
exercise such option.
(8) Share numbers include 12,000 shares of Common Stock subject to options
exercisable on or within 60 days after May 31, 1998.
(9) Share numbers represent 3,000 shares of Common Stock subject to options
exercisable on or within 60 days after May 31, 1998.
(10) Share numbers include 12,000 shares of Common Stock subject to options
exercisable on or within 60 days after May 31, 1998 and 129,072 shares of
Common Stock owned by Mr. Sterling's spouse, of which Mr. Sterling may be
deemed to beneficially own. Mr. Sterling's spouse has agreed to sell up
to an aggregate of 25,000 shares of Common Stock in the Underwriters'
over-allotment option, if the Underwriters choose to exercise such
option.
(11) Share numbers include 12,000 shares of Common Stock subject to options
exercisable on or within 60 days after May 31, 1998 and 2,000 shares of
Common Stock to which Mr. Tracy shares voting and investment power with
his spouse.
(12) Share numbers include 313,009 shares of Common Stock subject to options
exercisable on or within 60 days after May 31, 1998.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Common Stock of the Company is included on the Nasdaq National Market
under the symbol "DSTM." Sales of substantial amounts of shares in the public
market or their availability for sale could adversely affect prevailing market
prices of the Common Stock and make it more difficult for the Company to sell
equity securities in the future at a time and price which is deemed
appropriate.
Upon completion of the Offering and without giving effect to the 88,652
shares of Common Stock issued to the former stockholders of SIS on June 16,
1998, the Company will have 22,385,936 shares of Common Stock outstanding. Of
these shares, all of the 4,000,000 shares sold in the Offering will be freely
tradable without restriction or further registration under the Securities Act.
Of the remaining 18,385,936 shares, 5,161,311 shares are deemed "restricted
shares" under Rule 144 in that they were originally issued and sold by the
Company in private transactions in reliance upon exemptions under the
Securities Act. All of such shares are eligible for immediate resale under the
provisions of Regulation S or Rule 144(k). All of the 3,458,710 shares held by
the executive officers, directors and one other stockholder of the Company are
subject to a lock-up agreement that does not permit their resale prior to 90
days from the date of this Prospectus without the prior consent of the
Underwriters and thereafter may be sold subject to the volume limitations of
Rule 144.
In general, Rule 144 allows a stockholder (including persons who may be
deemed "affiliates" of the Company under Rule 144) who has beneficially owned
restricted shares for at least one year to sell a number of shares within any
three-month period that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (22,385,936 shares after giving effect to
the Offering) or (ii) the average weekly trading volume in the Common Stock
during the four calendar weeks immediately preceding such sale. Sales under
Rule 144 are also subject to certain requirements as to the manner and notice
of sale and the availability of public information about the Company. A
stockholder (or stockholder whose shares are aggregated) who is not an
"affiliate" of the Company at any time during the 90 days immediately
preceding a sale, and who has beneficially owned his shares for at least two
years (as computed under Rule 144), is entitled to sell shares under Rule 144
without regard to the volume and manner of sale limitations described above.
Shares properly sold in reliance upon Rule 144 to persons who are not
"affiliates" are thereafter freely tradable without restriction or
registration under the Securities Act.
42
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through their Representatives
BT Alex. Brown Incorporated, Hambrecht & Quist LLC, Lehman Brothers Inc.,
Raymond James & Associates, Inc. and The Robinson-Humphrey Company, LLC (the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Stockholder the following respective number of shares of Common Stock
at the public offering price less the underwriting discounts and commissions
set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
BT Alex. Brown Incorporated........................................
Hambrecht & Quist LLC..............................................
Lehman Brothers Inc................................................
Raymond James & Associates, Inc....................................
The Robinson-Humphrey Company, LLC.................................
---------
Total............................................................ 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession not
in excess of $ per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain other
dealers. After the public offering, the public offering price and other
selling terms may be changed by the Representatives.
The Selling Stockholder and certain other stockholders of the Company have
granted to the Underwriters an option, exercisable not later than 30 days
after the date of this Prospectus, to purchase up to 600,000 additional shares
of Common Stock at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this Prospectus. To the extent
that the Underwriters exercise such option, each of the Underwriters will have
a firm commitment to purchase approximately the same percentage thereof that
the number of shares of Common Stock to be purchased by it shown in the above
table bears to 4,000,000 and the Selling Stockholder and certain other
stockholders of the Company will be obligated pursuant to the option to sell
such shares of Common Stock to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the shares of Common Stock offered hereby. If purchased, the Underwriters will
offer such additional shares of Common Stock on the same terms as those on
which the 4,000,000 shares of Common Stock are being offered hereby.
The Underwriting Agreement contains covenants of indemnity and contribution
among the Underwriters, the Company, the Selling Stockholder and certain other
stockholders of the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Company and its directors and executive officers, the Selling
Stockholder and one other stockholder of the Company have agreed, pursuant to
lock-up agreements, that they will not, directly or indirectly, without the
prior written consent of BT Alex. Brown Incorporated, offer, sell, offer to
sell, contract to sell or otherwise dispose of any shares of Common Stock or
securities convertible into or exercisable for shares of Common Stock
beneficially owned by them for a period of 90 days after the date of this
Prospectus, except that the Company may issue, and grant options to purchase
shares of Common Stock under its current stock option plans. BT Alex. Brown
Incorporated may, in its sole discretion and at any time without notice
release all or any portion of the securities subject to lock-up agreements.
43
<PAGE>
In connection with the Offering, certain Underwriters may engage in passive
market making transactions in the shares of Common Stock on the Nasdaq
National Market in accordance with Rule 103 of Regulation M under the Exchange
Act, prior to the pricing of the Offering. Passive market making consists of
displaying bids on Nasdaq limited by the bid prices of independent market
makers and making purchases limited by such prices and effected in response to
order flow. Net purchases by a passive market maker on each day are limited to
a specified percentage of the passive market maker's average daily trading
volume in the shares of Common Stock during a specified period and must be
discontinued when such limit is reached. Passive market making may stabilize
the market price of the shares of Common Stock at a level above that which
might otherwise prevail and, if commenced, may be discontinued at any time.
Subject to applicable limitations, the Underwriters, in connection with the
Offering, may place bids for or make purchases of shares of Common Stock in
the open market or otherwise, for long or short account, or cover short
positions incurred, to stabilize, maintain or otherwise affect the price of
the shares of Common Stock which may be higher than the price that might
otherwise prevail in the open market. There can be no assurance that the price
of the shares of Common Stock will be stabilized, or that stabilizing, if
commenced, will not be discontinued at any time. Subject to applicable
limitations, the Underwriters may also place bids or make purchases on behalf
of the underwriting syndicate to reduce a short position created in connection
with this Offering. The Underwriters are not required to engage in these
activities and may end these activities at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hunton & Williams, Atlanta, Georgia, and certain legal
matters will be passed upon for the Underwriters by Morris, Manning & Martin,
L.L.P., Atlanta, Georgia.
EXPERTS
The consolidated financial statements and schedule of Datastream Systems,
Inc. as of December 31, 1996 and 1997, and for each of the years in the three-
year period ended December 31, 1997, have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-3 under the
Securities Act, with the Securities and Exchange Commission (the "Commission")
with respect to the shares offered by this Prospectus. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. Statements contained herein concerning the
provisions of any documents are not necessarily complete and, in each
instance, reference is made to the copy of such documents filed as an exhibit
to the Registration Statement, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports and other information with
the Commission. A copy of the reports and other information filed by the
Company in accordance with Exchange Act may be inspected without charge at the
offices of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and will also be available for
44
<PAGE>
inspection and copying at the regional offices of the Commission located at 7
World Trade Center, Suite 1300, New York, New York, 10048, and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661-2511.
Copies of such material may also be obtained from the Public Records Section
of the Commission, Washington, D.C. 20549, upon payment of the fees prescribed
by the Commission. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission with a Web site address of
http:\\www.sec.gov. Such reports, proxy statements and other information
concerning the Company are also available for inspection at the offices of the
Nasdaq National Market, Reports Section, 735 K Street, N.W., Washington, D.C.
20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference: (i) the Company's Annual Report on Form 10-K
for the year ended December 31, 1997; (ii) the Company's Amendment No. 1 to
the Annual Report on Form 10-K for the year ended December 31, 1997; (iii) the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998;
(iv) the Company's Current Report on Form 8-K, filed April 14, 1998; (v) the
Company's Current Report on Form 8-K, filed June 26, 1998; and (vi) The
Company's Registration Statement on Form 8-A filed February 17, 1995,
registering the Company's Common Stock under Section 12(g) of the Exchange
Act. All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
hereof and prior to the termination of the offering of the Common Stock
registered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing of such documents.
Any statements contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is, or is deemed
to be, incorporated by reference herein modifies or supersedes such
statements. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this Prospectus
is delivered, upon the written request of such person, a copy of any or all of
the foregoing documents incorporated by reference into this Prospectus (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents). Request for such copies should
be delivered to Daniel H. Christie, Chief Financial Officer, Datastream
Systems, Inc., 50 Datastream Plaza, Greenville, South Carolina 29605.
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act, and Section 21E of the Exchange
Act, with respect to the Company's business, financial condition and results
of operations. When used in this prospectus, the words "may," "will,"
"intends," "plans," "expects," "anticipates," "estimates," and similar
expressions are intended to identify forward-looking statements. The forward-
looking statements included herein are subject to risks and uncertainties. The
Company's actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk
Factors," as well as those discussed elsewhere in this Prospectus. Investors
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation
to publicly release any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
45
<PAGE>
DATASTREAM SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets at December 31, 1996 and 1997 and (unaudited) March 31,
1998..................................................................... F-3
Statements of Operations for the Years Ended December 31, 1995, 1996 and
1997 and (unaudited) the Three Months Ended March 31, 1997 and 1998...... F-4
Statements of Stockholders' Equity For the Years Ended December 31, 1995,
1996 and 1997 and (unaudited) the Three Months Ended March 31, 1998...... F-5
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997 and (unaudited) the Three Months Ended March 31, 1997 and 1998...... F-6
Notes to Financial Statements............................................. F-8
Independent Auditor's Report.............................................. S-1
Allowance for Doubtful Accounts Receivable................................ S-2
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Datastream Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Datastream
Systems, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Datastream
Systems, Inc. and subsidiaries, as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Greenville, South Carolina KPMG Peat Marwick LLP
January 23, 1998
F-2
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------ -----------
1996 1997 1998
ASSETS ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 6,315,719 $ 2,409,387 $ 4,448,095
Accounts receivable, net of allowance
for doubtful accounts of $835,000 and
$1,589,910 in 1996 and 1997,
respectively, and $1,755,529 on March
31, 1998.............................. 11,725,928 21,968,539 23,676,930
Unbilled receivables................... 1,438,230 2,271,375 3,043,344
Investments............................ 13,011,856 9,735,585 5,670,266
Prepaid expenses....................... 586,647 614,447 1,208,650
Inventories............................ 324,018 369,486 385,684
Deferred income taxes.................. 395,000 796,000 796,000
Other assets........................... 745,093 619,448 1,151,053
----------- ----------- -----------
Total current assets................. 34,542,491 38,784,267 40,380,022
Investments............................. 4,547,220 6,637,286 6,587,975
Property and equipment, net............. 8,692,323 10,166,101 12,056,294
Goodwill, net of accumulated
amortization of $1,091,001 in 1997..... 7,636,748 6,545,747 12,049,193
Capitalized software development costs,
net of accumulated amortization of
$1,197,177 and $2,676,132 in 1996 and
1997, respectively, and $2,239,941 on
March 31, 1998......................... 2,158,436 2,963,842 3,160,596
----------- ----------- -----------
Total assets......................... $57,577,218 $65,097,243 $74,234,080
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 4,403,205 $ 2,696,240 $ 3,355,963
Other accrued liabilities.............. 9,139,078 4,135,258 5,502,627
Income taxes payable................... 743,707 2,816,800 3,799,901
Current portion of long-term debt...... 1,507,274 346,197 266,894
Unearned revenue....................... 5,116,007 6,499,953 8,784,831
----------- ----------- -----------
Total current liabilities............ 20,909,271 16,494,448 21,710,216
Long-term debt, less current portion.... 2,892,743 603,098 1,334,041
Deferred income taxes................... 650,000 892,000 892,000
----------- ----------- -----------
Total liabilities.................... 24,452,014 17,989,546 23,936,257
----------- ----------- -----------
Commitments.............................
Stockholders' equity:
Preferred stock $1 par value, 1,000,000
shares authorized; none issued......... -- -- --
Common stock, $.01 par value,
40,000,000 shares authorized;
18,253,578, 18,585,518 and 18,822,594
shares issued and outstanding at
December 31, 1996 and 1997 and March
31, 1998, respectively................ 182,536 185,855 188,226
Additional paid-in capital............. 55,756,166 58,049,212 61,235,493
Accumulated deficit.................... (22,813,498) (11,375,601) (11,138,408)
Other accumulated comprehensive income. -- 248,231 12,512
----------- ----------- -----------
Total stockholders' equity........... 33,125,204 47,107,697 50,297,823
----------- ----------- -----------
Total liabilities and stockholders'
equity.............................. $57,577,218 $65,097,243 $74,234,080
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product................ $ 9,342,978 $ 14,018,478 $31,174,408 $ 6,148,014 $ 7,365,099
Professional services.. 6,659,998 12,325,593 26,437,697 5,783,723 8,955,524
Support................ 4,343,008 6,122,332 12,156,190 2,750,674 3,808,038
----------- ------------ ----------- ----------- -----------
Total revenues....... 20,345,984 32,466,403 69,768,295 14,682,411 20,128,661
----------- ------------ ----------- ----------- -----------
Cost of revenues:
Cost of product reve-
nues.................. 1,135,779 1,879,258 3,132,996 843,963 776,139
Cost of professional
services revenues..... 3,382,730 6,729,072 15,160,409 3,529,973 4,144,932
Cost of support reve-
nues.................. 699,544 1,094,745 3,837,565 687,272 929,829
Write-off of capital-
ized software......... -- 1,803,637 -- -- 597,944
----------- ------------ ----------- ----------- -----------
Total cost of reve-
nues................ 5,218,053 11,506,712 22,130,970 5,061,208 6,448,844
----------- ------------ ----------- ----------- -----------
Gross profit........ 15,127,931 20,959,691 47,637,325 9,621,203 13,679,817
Operating expenses:
Sales and marketing.... 5,216,009 9,398,675 18,616,981 4,273,471 5,549,360
Product development.... 1,740,895 1,390,325 4,364,234 834,048 1,521,755
General and administra-
tive.................. 2,259,172 3,369,338 8,094,762 2,235,040 2,029,787
Write-off of in-process
research and
development........... -- 33,600,000 -- -- 2,531,078
----------- ------------ ----------- ----------- -----------
Total operating ex-
penses.............. 9,216,076 47,758,338 31,075,977 7,342,559 11,631,980
----------- ------------ ----------- ----------- -----------
Operating income
(loss).............. 5,911,855 (26,798,647) 16,561,348 2,278,644 2,047,837
Other income (expense):
Interest and other in-
come.................. 1,181,974 2,374,158 1,220,256 309,789 281,778
Interest expense....... (5,770) (4,240) (233,395) (102,449) (28,266)
----------- ------------ ----------- ----------- -----------
Net other income..... 1,176,204 2,369,918 986,861 207,340 253,512
----------- ------------ ----------- ----------- -----------
Income (loss) before
income taxes........ 7,088,059 (24,428,729) 17,548,209 2,485,984 2,301,349
Income taxes............ 2,742,000 3,581,000 6,110,312 507,787 2,064,156
----------- ------------ ----------- ----------- -----------
Net income (loss).... $ 4,346,059 $(28,009,729) $11,437,897 $ 1,978,197 $ 237,193
=========== ============ =========== =========== ===========
Basic net income (loss)
per share.............. $ 0.33 $ (1.65) $ 0.62 $ 0.11 $ 0.01
=========== ============ =========== =========== ===========
Diluted net income
(loss) per share....... $ 0.30 $ (1.58) $ 0.59 $ 0.11 $ 0.01
=========== ============ =========== =========== ===========
Basic weighted average
number of common and
common equivalent
shares outstanding..... 13,004,474 16,977,134 18,396,920 18,262,850 18,640,122
=========== ============ =========== =========== ===========
Diluted weighted average
number of common and
common equivalent
shares outstanding..... 14,365,756 17,685,522 19,245,948 18,767,970 20,246,844
=========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
RETAINED OTHER
ADDITIONAL EARNINGS ACCUMULATED TOTAL
COMMON PAID-IN (ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL DEFICIT) INCOME EQUITY
-------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... $ 69,400 $ -- $ 850,172 $ (3,487) $ 916,085
Net income............. -- -- 4,346,059 -- 4,346,059
Unrealized net gain on
investments available
for sale, net of
income tax............ -- -- -- 3,487 3,487
Issuance of common
shares in initial
public offering, net
of offering costs of
$387,787.............. 40,000 13,520,213 -- -- 13,560,213
Exercise of redeemable
stock warrants........ 34,424 2,031,125 -- -- 2,065,549
Issuance of common
shares in public
offering, net of
offering costs of
$225,064.............. 24,286 25,118,362 -- -- 25,142,648
-------- ----------- ------------ ----------- -----------
Balance at December 31,
1995................... 168,110 40,669,700 5,196,231 -- 46,034,041
Net loss............... -- -- (28,009,729) -- (28,009,729)
Exercise of stock
options............... 2,328 920,762 -- -- 923,090
Tax benefit of options
exercised............. -- 115,000 -- -- 115,000
Stock issued for
Employee Stock
Purchase Plan......... 76 62,726 -- -- 62,802
Stock issued in
acquisition........... 12,022 13,987,978 -- -- 14,000,000
-------- ----------- ------------ ----------- -----------
Balance at December 31,
1996................... 182,536 55,756,166 (22,813,498) -- 33,125,204
Net income............. -- -- 11,437,897 -- 11,437,897
Exercise of stock
options............... 3,130 2,042,457 -- -- 2,045,587
Tax benefit of options
exercised............. -- 113,000 -- -- 113,000
Stock issue for
Employee Stock
Purchase Plan......... 189 137,589 -- -- 137,778
Other accumulated
comprehensive income.. -- -- -- 248,231 248,231
-------- ----------- ------------ ----------- -----------
Balance at December 31,
1997................... 185,855 58,049,212 (11,375,601) 248,231 47,107,697
Net income (unaudited). -- -- 237,193 -- 237,193
Exercise of stock
options (unaudited)... 962 488,142 -- -- 489,104
Tax benefit of options
exercised (audited)...
Stock issue for
Employee Stock
Purchase Plan
(unaudited)........... 105 74,443 -- -- 74,548
Shares issued for
acquisition
(unaudited)........... 1,304 2,623,696 -- -- 2,625,000
Other accumulated
comprehensive income
(unaudited)........... -- -- -- (235,719) (235,719)
-------- ----------- ------------ ----------- -----------
Balance at March 31,
1998 (unaudited)....... $188,226 $61,235,493 $(11,138,408) $ 12,512 $50,297,823
======== =========== ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- -----------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)..... $ 4,346,059 $(28,009,729) $ 11,437,897 $1,978,198 $ 237,193
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation......... 355,263 948,460 2,285,278 458,577 683,900
Amortization of
capitalized software
development costs... 258,119 500,065 1,478,955 275,203 195,133
Amortization of
goodwill............ -- -- 1,091,001 272,750 272,750
Other accumulated
comprehensive
income.............. -- -- 217,275 373,672 (323,882)
Accretion of
investment discount,
net................. (337,045) (576,431) (49,497) -- --
(Gain) loss on
disposal of
equipment........... 54,788 19,378 45,037 53,420 --
Provision for
doubtful accounts... 149,075 590,525 754,910 -- 282,377
Deferred income
taxes............... 44,000 (42,000) (178,000) -- --
Write-off of in-
process research and
development......... -- 33,600,000 -- -- 2,531,078
Write-off of
capitalized
software............ -- 1,803,637 -- -- 597,944
Changes in operating
assets and
liabilities, net of
effects of
acquisition:
Accounts
receivable........ (3,087,227) (4,420,619) (10,997,521) (2,918,021) (1,837,672)
Unbilled
receivables....... -- -- (833,145) 135,867 (24,194)
Prepaid expenses... (103,687) (190,238) (27,800) (248,611) (582,338)
Inventories........ (171,258) (73,087) (45,468) 54,665 112,782
Other assets....... (375,145) (23,836) 125,645 (584,689) (1,209,510)
Accounts payable... 78,944 642,429 (1,706,965) (1,120,244) 659,629
Other accrued
liabilities....... 336,179 529,394 (5,003,820) (2,511,796) 694,499
Income taxes
payable........... 25,843 (242,082) 2,186,093 233,467 983,101
Unearned revenue... 1,233,298 1,117,436 1,383,946 2,060,701 2,284,878
------------ ------------ ------------ ---------- -----------
Net cash provided
by operating
activities....... 2,807,206 6,173,302 2,163,821 (1,486,841) 5,557,668
------------ ------------ ------------ ---------- -----------
Cash flows from
investing activities:
Purchase of
investments.......... (41,105,386) (36,079,529) (12,317,057) -- --
Proceeds from sale and
maturities of
investments.......... 4,801,648 56,751,813 13,602,714 2,045,000 4,420,854
Additions to property
and equipment........ (4,647,262) (3,765,805) (3,862,735) (832,569) (1,212,368)
Proceeds from the sale
of equipment......... 6,205 9,135 58,643 -- --
Capitalized software
development costs.... (541,953) (2,609,521) (2,284,361) (292,076) (806,836)
Cash paid for
acquisition, net of
cash acquired........ -- (16,428,660) -- -- (6,467,189)
------------ ------------ ------------ ---------- -----------
Net cash used in
investing
activities........ (41,486,748) (2,122,567) (4,802,796) 920,355 (4,065,539)
------------ ------------ ------------ ---------- -----------
</TABLE>
F-6
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
financing activities:
Net proceeds from
initial public offering
of common stock........ $13,560,213 $ -- $ -- $ -- $ --
Net proceeds from
secondary public
offering of stock...... 25,142,648 -- -- -- --
Proceeds from exercise
of stock warrants...... 35,463 -- -- -- --
Proceeds from exercise
of stock options....... -- 1,038,090 2,045,587 112,627 473,699
Proceeds for stock
issuances under
employee purchase plan. -- 62,802 137,778 -- 74,547
Principal payments on
long-term debt......... (26,667) (20,000) (3,450,722) (2,907,269) (1,667)
----------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) financing
activities.......... 38,711,657 1,080,892 (1,267,357) (2,794,642) 546,579
----------- ---------- ---------- ---------- ----------
Net increase in cash and
cash equivalents....... 32,115 5,131,627 (3,906,332) (3,361,128) 2,038,708
Cash and cash
equivalents at
beginning of year...... 1,151,977 1,184,092 6,315,719 6,315,719 2,409,387
----------- ---------- ---------- ---------- ----------
Cash and cash
equivalents at end of
year................... $ 1,184,092 $6,315,719 $2,409,387 $2,954,591 $4,448,095
=========== ========== ========== ========== ==========
Supplemental disclosures
of cash flow
information:
Cash paid during the
year for:
Interest............. $ 5,770 $ 4,240 $ 379,553 $ 71,968 $ 31,922
=========== ========== ========== ========== ==========
Income taxes......... $ 2,800,520 $3,750,082 $3,806,534 $ 489,960 $1,519,824
=========== ========== ========== ========== ==========
Supplemental disclosure
of non-cash activities:
Unrealized net gain
(loss) on investments
available for sale,
net of income taxes.. $ 3,487 $ -- $ 30,956 $ -- $ (30,956)
=========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Datastream Systems, Inc. (the "Company" or "Datastream") develops,
markets, sells and supports Microsoft and Oracle based software
products for the industrial automation market. These products serve the
desktop, file server, client-server and enterprise-wide networking
environments. Datastream's software enables users to schedule
preventive maintenance, record equipment maintenance histories,
organize and control spare parts inventories, schedule equipment and
parts inventory purchases and deploy maintenance personnel. In addition
to its U.S. operations, the Company has direct sales or distribution
offices in Canada, The United Kingdom, The Netherlands, France, Mexico,
Brazil, Argentina, Venezuela, Peru, Malaysia, Australia and South
Africa.
On December 31, 1996, the Company acquired SQL Group, B.V. (SQL) (see
note 2).
The balance sheet as of March 31, 1998 and the statements of
operations and cash flows for the three months ended March 31, 1997 and
1998 and the statement of stockholders' equity for the three months
ended March 31, 1998 have been prepared by management and are
unaudited. However, in the opinion of management, all adjustments
(consisting of normal recurring adjustments), necessary for the fair
presentation of the unaudited information, have been included.
(b) Consolidation Policy
The consolidated financial statements include the accounts of
Datastream Systems, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated.
(c) Revenue Recognition
The Company's revenue, which consists primarily of fees for product
sales, applications engineering and support, is recognized in
accordance with AICPA Statement of Position 91-1, "Software Revenue
Recognition" as there are no significant vendor obligations remaining
and collection of the related receivable is probable. The Company
accounts for insignificant vendor obligations by accruing such costs
and recognizing them ratably on completion of performance. Revenue from
product sales is recognized upon shipment of the product and
fulfillment of acceptance terms, if any. Revenue from professional
services is recorded as services are provided. Revenue from support is
deferred and recognized ratably over the terms of the support
agreements, generally one year. In instances where the support is
included with the product sale, the support fee is unbundled and
recognized ratably over the support period.
The Company continually evaluates its obligations with respect to
warranties, returns and refunds. Based on historical trends and
management's evaluation of current conditions, any potential
obligations that are inherent in the accounts receivable balance are
adequately provided for through the allowance for doubtful accounts.
The Company may in certain circumstances grant discounts when a
purchase order is received. The discounts are recognized in the product
revenue at the time of shipment.
(d) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-8
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(e) Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company has not experienced significant losses related
to receivables from individual customers or groups of customers in a
particular industry or geographic area. As a result, management
believes no additional credit risk beyond the amounts provided for
estimated future collection losses is inherent in the Company's
accounts receivable.
(f) Investment Securities
The Company classifies its debt and equity securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity securities are those securities
in which the Company has the ability and intent to hold until maturity.
All other securities not included in trading or held-to-maturity are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses on trading securities are included in
earnings. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholders' equity until
realized. Equity securities without readily determinable fair values
are recorded at cost. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific
identification basis.
A decline in the market value of any available-for-sale or held-to-
maturity security below cost that is deemed to be other than temporary
results in a reduction in carrying amount to fair value. The impairment
is charged to earnings and a new cost basis for the security
established. Premiums and discounts are amortized or accreted over the
life of the related held-to-maturity security as an adjustment to yield
using the effective interest method. Dividend and interest income are
recognized when earned.
(g) Inventories
Inventories are stated at the lower of cost (first-in, first-out)
basis or market (net realizable value). Substantially all of the
Company's inventory is software related product.
(h) Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
under the straight-line method over the estimated useful lives for
financial reporting and under the accelerated and modified accelerated
cost recovery systems for income tax reporting. The estimated useful
lives generally assigned are as follows:
<TABLE>
<CAPTION>
YEARS
------------
<S> <C>
Building.................................................... 40 years
Computer equipment.......................................... 3 to 5 years
Furniture and fixtures...................................... 5 years
Automobiles................................................. 5 years
</TABLE>
(i) Capitalized Software Development Costs
Capitalized software development costs consist principally of
salaries and certain other expenses related to development and
modifications of software products and are capitalized in accordance
with the provisions of Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed". Capitalization of such costs begins only upon
establishment of technological feasibility, which is defined by the
Company as completion of a working model of the software and ends when
the resulting product is available for sale.
F-9
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Amortization of capitalized software development costs is provided on
a product-by-product basis and begins when the product is available for
sale. Annual amortization is the greater of the amount computed using
the ratio of current product revenue to the total of current and
anticipated product revenue or the straight-line basis over the
remaining estimated economic life of the software, which is not more
than three years. The ongoing assessment of the realizability of these
costs requires considerable judgment as to anticipated future product
revenues, related estimated economic life, and changes in hardware and
software technology. Amortization of software development costs is
included in cost of product revenues in the accompanying statements of
income.
During the years ended December 1995, 1996 and 1997 and the three
months ended March 31, 1997 and 1998, total costs incurred (excluding
amortization of capitalized software development costs) for software
development activities were $2,314,003, $3,999,845, $6,648,595,
$2,328,591, and $1,126,123, respectively; total capitalized software
development costs were $573,108, $2,609,520, $2,284,361, $806,836, and
$292,075, respectively; and amortization of capitalized costs was
$258,119, $500,065, $1,478,955, $120,133, and $254,528, respectively.
In connection with the acquisition of SQL in 1996 (see note 2), the
Company acquired software technology valued at $900,000. In addition,
the Company wrote-off $1,803,637 of its existing capitalized software
in 1996 which became obsolete as a result of the SQL acquisition.
(j) Goodwill
Goodwill is being amortized using the straight-line method over its
estimated useful life of seven years.
The recoverability of goodwill is periodically reviewed when events
or circumstances warrant. Impairment, determined when the carrying
value of an asset cannot be recovered over its remaining useful life
from undiscounted future cash flows, will be measured and recognized
when the fair value is less than the asset's carrying amounts.
(k) Stock Option Plan
Statement of Financial Accounting Standards No. 123 allows an entity
to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and, if earnings per share is presented, pro forma earnings per
share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in Statement No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of Statement No. 123.
(l) Income Taxes
The Company records income taxes using the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
includes the enactment date.
(m) Net Income (Loss) Per Share
During 1997, the Company implemented Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Basic net income
(loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted net
income (loss) per share is
F-10
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
computed by dividing net income (loss) by the weighted average number
of common and potential common shares outstanding. Diluted weighted
average common and potential common shares include common shares and
stock options using the treasury stock method. The implementation of
Statement No. 128 had no impact on the Company's results of operations.
(n) Stock Split
Effective January 30, 1998, the Company's Board of Directors declared
a two-for-one stock split effected in the form of a stock dividend. All
share, per share and conversion amounts relating to common stock,
warrants and stock options included in the accompanying financial
statements and notes have been restated to reflect this stock split.
(o) Foreign Currency Translation
The financial statements of subsidiaries outside the United States
are generally measured using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated
at the rates of exchange at the balance sheet date. Revenues and
expenses are translated at the average rate of exchange during the
period.
(p) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (Statement No. 130). Statement No. 130 requires
that an enterprise display, with the same prominence as other financial
statements, the components of comprehensive income. Statement No. 130
requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of a statement of financial position. Statement No. 130 is effective
for fiscal years beginning after December 15, 1997. Reclassification of
financial statements for earlier periods provided for comparative
purposes is required. The Company adopted Statement No. 130 on January
1, 1998. The Company's financial statements have been restated to
reflect the provisions of Statement No. 130.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (Statement No. 131). Statement No. 131 requires
that an enterprise disclose certain information about operating
segments and is effective for financial statements for periods
beginning after December 15, 1997.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2).
SOP 97-2 is effective for financial statements for fiscal years
beginning after December 15, 1997. The Company adopted SOP 97-2 on
January 1, 1998. The adoption of SOP 97-2 did not significantly affect
the Company's results of operations.
(q) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period including estimates and
assumptions for allowance for doubtful accounts, allowance for deferred
tax assets, and useful lives of goodwill and capitalized software
development costs. Actual results could differ from those estimates.
(2) ACQUISITION
On December 31, 1996, the Company acquired all of the capital stock and
equity interests of SQL for a total purchase price of $42.1 million. The
purchase price consisted of $17,000,000 in cash, $14,000,000 of
F-11
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2)ACQUISITION -- (CONTINUED)
common stock (1,202,210 shares valued at $11.31 per share) and the assumption
of net tangible liabilities and costs incurred of $11.1 million. At December
31, 1996 and 1997 and March 31, 1998, an additional $3 million of common stock
(300,552 shares at $11.31 per share) was being held in escrow pending the
resolution of certain matters. The value of any subsequently issued shares
will be allocated to goodwill and amortized over its remaining useful life.
SQL is a computerized maintenance management software vendor in Europe. The
acquisition has been accounted for using the purchase method. The purchase
price has been allocated to the tangible and intangible assets purchased and
the liabilities assumed based on the fair values on the date of acquisition as
follows:
<TABLE>
<CAPTION>
Total purchase price......................................... $ 31,000,000
<S> <C>
------------
Net tangible liabilities assumed and costs incurred:
Current assets.............................................. 5,851,534
Furniture, fixtures, and equipment.......................... 606,428
Current liabilities......................................... (11,668,049)
Acquisition costs........................................... (965,000)
Acquisition related liabilities............................. (1,625,000)
Long-term debt, less current portion........................ (3,336,661)
------------
(11,136,748)
------------
Excess cost over fair value of net tangible liabilities
assumed and costs incurred.................................. $ 42,136,748
============
Excess cost over fair-value of net tangible liabilities
assumed has been allocated to:
Software technology......................................... $ 900,000
Goodwill.................................................... 7,636,748
In-process research and development......................... 33,600,000
------------
$ 42,136,748
============
</TABLE>
The in-process research and development of $33,600,000 represents the fair
value of in-process development projects that had not reached technological
feasibility and had no probable alternative future uses, which the Company
expensed at the date of the acquisition.
In conjunction with the acquisition, the Company recorded acquisition
related liabilities of approximately $1,625,000 to cover the anticipated cost
of combining its existing business with the business of SQL.
During 1997, the Company paid approximately $1,320,000 to involuntarily
terminate and relocate employees of SQL and approximately $305,000 to exit
activities of SQL in Germany and Italy.
The following unaudited pro forma information presents the results of
operations of the Company as though the aforementioned acquisition occurred as
of the beginning of the year in which the acquisition occurred. The pro forma
adjustments (i) reflect increased amortization expense related to the acquired
assets and reduced interest income related to investments used as part of the
consideration, and (ii) exclude the non-recurring charges for in-process
research and development and the write-off of capitalized software.
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Total revenue.................................................. $49,216,000
Operating loss................................................. (764,000)
Net loss....................................................... (2,910,000)
Basic and diluted net loss per share........................... $ (0.15)
</TABLE>
F-12
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3)INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
market value of investment securities are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Held-to-maturity:
U.S. Treasury Securities...... $17,559,076 $176,211 $(4,668) $17,730,619
=========== ======== ======= ===========
DECEMBER 31, 1997
Available-for-sale:
U.S. Treasury Securities...... $14,288,170 $ 51,862 $(1,905) $14,338,127
Cost basis:
Equity Securities............. 2,034,744 -- -- 2,034,744
----------- -------- ------- -----------
$16,322,914 $ 51,862 $(1,905) $16,372,871
=========== ======== ======= ===========
MARCH 31, 1998
Available-for-sale:
U.S. Treasury Securities....... $ 9,917,246 $ -- $ -- $ 9,917,246
Cost basis:
Equity Securities............. 2,034,744 -- -- 2,034,744
----------- -------- ------- -----------
$12,258,241 $ -- $ -- $12,258,241
=========== ======== ======= ===========
</TABLE>
In December 1996, the Company sold investments classified as held-to-
maturity with an amortized cost of $10,155,487 and recognized a gain of
$24,218. The proceeds from this sale and the proceeds from maturing held-to-
maturity investments represented the cash consideration for the Company's
acquisition of SQL (see note 2).
Proceeds from the sale of investment securities available-for-sale during
1997 were approximately $670,000, which approximated amortized costs.
During 1997, the Company entered into a preferred stock purchase agreement
with an unrelated software company (the "Investee"). Under the agreement, the
Company purchased 221,910 shares of the Investee's convertible preferred stock
for a total purchase price of approximately $2.0 million. The investment is
being accounted for under the cost method and is included in non-current
investments in the accompanying balance sheet. The fair value of the shares is
not readily determinable, therefore, no unrealized gains or losses have been
recorded.
The amortized cost and market value of investment securities held-to-
maturity at December 31, 1997, by contractual maturities are shown below:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less............................ $ 9,736,141 $ 9,735,585
Due after one year through five years.............. 4,552,029 4,602,542
Equity securities.................................. 2,034,744 2,034,744
----------- -----------
$16,322,914 $16,372,871
=========== ===========
</TABLE>
F-13
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4)FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
At December 31, 1996 and 1997 and March 31, 1998, the carrying value of
financial instruments such as cash and cash equivalents, accounts receivable,
and accounts payable approximated their fair values, based upon the short
maturities of these instruments.
The fair value of the Company's long-term debt is estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements. The carrying value of such
instruments approximated their fair value at December 31, 1996 and 1997 and
March 31, 1998.
The fair values of investment securities presented in note 3 are based on
quoted market prices at the reporting date for those or similar investments.
(5) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Land................................... $ 465,981 $ 500,981 $ 500,981
Building............................... 4,371,113 4,570,254 5,401,397
Computer equipment..................... 4,719,340 7,479,403 8,835,229
Furniture and fixtures................. 930,226 1,358,281 1,714,369
----------- ----------- -----------
10,486,660 13,908,919 16,451,976
Accumulated depreciation............... 1,794,337 3,742,818 4,395,682
----------- ----------- -----------
$ 8,692,323 $10,166,101 $12,056,294
=========== =========== ===========
</TABLE>
(6)OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Accrued salaries and commission............ $1,231,565 $1,094,908 $ 431,451
Sales and payroll taxes payable............ 1,449,468 1,470,362 1,848,281
Accrued acquisition costs.................. 1,373,316 -- 525,000
Acquisition related liabilities (see note
2)........................................ 1,625,000 -- --
Warranty reserve........................... 1,500,000 -- --
Other accrued liabilities.................. 1,959,729 1,569,988 2,697,895
---------- ---------- ----------
$9,139,078 $4,135,258 $5,502,627
========== ========== ==========
</TABLE>
F-14
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7)LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1996 1997 1998
----------- --------- ----------
<S> <C> <C> <C>
Note payable in monthly payments of
$1,667, plus interest at prime plus
0.5% through March 1998; collateralized
by equipment........................... $ 21,667 $ 1,667 $ --
Subordinated note payable in bi-annual
payments of $123,750, plus interest at
7% through December 2000............... 765,136 371,250 371,250
Subordinated note payable in annual
payments of $97,030, plus interest at
6.5% through December 2002............. 870,356 563,739 563,739
Note payable in monthly payments of
$2,604, plus interest at 5.5% through
December 2001; collateralized by
building............................... -- -- 286,191
Subordinated note payable in annual
payment of $48,150, plus interest at
6.5% paid in 1997...................... 481,513 -- --
Subordinated note payable in annual
payments of $57,320, plus interest at
10% paid in 1997....................... 515,907 -- --
Subordinated note payable in annual
payments of 11,465, plus interest at
10% paid in 1997....................... 51,591 -- --
Subordinated note payable in annual
payments of $34,394, plus interest at
10% paid in 1997....................... 171,979 -- --
Note payable in bi-annual payments of
$204,643, plus interest at 5.3% paid in
1997................................... 1,433,075 -- --
Note payable in annual payments of
$8,598, plus interest at 6.5% paid in
1997................................... 68,788 -- --
Subordinated note payable in annual
payments of $3,073, plus interest at
6.5% through December 2002............. 20,005 12,639 4,884
Other notes payable..................... -- -- 374,181
----------- --------- ----------
4,400,017 949,295 1,600,935
Less current portion.................... (1,507,274) (346,197) (266,894)
----------- --------- ----------
Long-term debt, less current portion.... $ 2,892,743 $ 603,098 $1,334,041
=========== ========= ==========
</TABLE>
The remaining annual maturities of long-term debt in the five years
subsequent to December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................ $346,197
1999................................................................ 223,853
2000................................................................ 100,103
2001................................................................ 100,450
2002................................................................ 178,692
--------
Total............................................................... $949,295
========
</TABLE>
F-15
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8)LINE OF CREDIT
The Company maintains a multicurrency line of credit that provides for
borrowings of 70% of accounts receivable less than 60 days aged up to
$5,000,000. No borrowings were outstanding under lines of credit at December
31, 1996 and 1997.
(9)INCOME TAXES
Income tax expense for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
---------- --------- ----------
<S> <C> <C> <C>
1995:
Federal....................................... $2,346,000 $ 47,000 $2,393,000
State......................................... 352,000 (3,000) 349,000
Foreign....................................... -- -- --
---------- --------- ----------
Total......................................... $2,698,000 $ 44,000 $2,742,000
========== ========= ==========
1996:
Federal....................................... $3,230,000 $ (30,000) $3,200,000
State......................................... 393,000 (12,000) 381,000
Foreign....................................... -- -- --
---------- --------- ----------
Total......................................... $3,623,000 $ (42,000) $3,581,000
========== ========= ==========
1997:
Federal....................................... $4,729,219 $(159,000) $4,570,219
State......................................... 503,000 (19,000) 484,000
Foreign....................................... 1,056,093 -- 1,056,093
---------- --------- ----------
Total......................................... $6,288,312 $(178,000) $6,110,312
========== ========= ==========
</TABLE>
F-16
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9)INCOME TAXES--(CONTINUED)
Income tax expense differed from the amounts computed by applying the
Federal income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense (bene-
fit)................................... $2,410,000 $(8,306,000) $5,966,391
Increase (decrease) in income taxes re-
sulting from:
State and local income taxes, net of
Federal income tax benefits........... 230,000 251,000 319,440
In process research and development.... -- 11,424,000 --
Rate differential on foreign source
income................................ -- -- (592,453)
Effect of graduated income tax rates... -- -- 75,482
Goodwill amortization.................. -- -- 322,364
Other, net............................. 102,000 212,000 19,088
---------- ----------- ----------
Actual tax expense...................... $2,742,000 $ 3,581,000 $6,110,312
========== =========== ==========
</TABLE>
Deferred income taxes reflect the net 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. Significant components
of the Company's deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 1,705,000 $ 1,891,000
Accrued expenses and allowances................. 395,000 797,000
----------- -----------
Total gross deferred tax assets................. 2,100,000 2,688,000
Less valuation allowance........................ (1,705,000) (1,705,000)
----------- -----------
Net deferred tax assets.......................... $ 395,000 $ 983,000
=========== ===========
Deferred tax liabilities:
Fixed assets, principally due to differences in
depreciation................................... $ 189,000 $ 341,000
Software development costs capitalized for
financial reporting 461,000 719,000
Unrealized gain on marketable securities........ -- 19,000
----------- -----------
Total gross deferred tax liabilities............ 650,000 1,079,000
----------- -----------
Net deferred tax liabilities..................... $ 255,000 $ 96,000
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996 and
1997 was approximately $1,705,000 and relates to net operating loss
carryforwards of foreign subsidiaries, which at this time are uncertain of
recovery. Subsequently recognized tax benefits relating to the valuation
allowance for deferred tax assets as of December 31, 1997 will be allocated to
goodwill and other noncurrent intangible assets.
(10)EMPLOYEE SAVINGS AND RETIREMENT PLAN
At December 31, 1997 the Company has net operating loss carryforwards for
foreign income tax purposes of approximately $4,800,000.
Effective September 1, 1992, the Company established a 401(k) Retirement
Plan under Section 401(k) of the Internal Revenue Code. The Plan is funded in
part from employee voluntary contributions with the Company's contribution
equal to one-half of the employee's contribution up to 3% of their
compensation. The Plan provides for voluntary employee contributions of up to
15% of their total compensation.
F-17
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10)EMPLOYEE SAVINGS AND RETIREMENT PLAN--(CONTINUED)
The Company's contributions to the Plan totaled approximately $79,000,
$135,000, $238,000, $55,000, and $90,000 in 1995, 1996 and 1997 and for the
three months ended March 31, 1997 and 1998, respectively.
(11) STOCK COMPENSATION PLANS
1995 Stock Option Plan
On September 12, 1995, the Company amended and restated the Datastream
Systems, Inc. 1995 Stock Option Plan (the "1995 Plan") to provide for the
grant of both incentive and non-qualified options to purchase up to 2,000,000
shares of the Company's common stock. On December 26, 1996, the Company's
Board of Director's authorized an additional 1,000,000 shares to be added to
the 2,000,000 share limit available under the 1995 Plan, subject to
stockholder approval. Such options will vest incrementally over a period of
one to five years and will expire either five or ten years from the date of
grant, depending on the terms of the option. Options are not to be granted at
less than the fair market value of the underlying shares at the grant date.
Incentive options granted to a participant who is an over 10% owner shall not
be granted at less than 110% of the fair market value of the underlying shares
at the grant date.
A summary of activity in the 1995 Plan during the periods indicated is as
follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
STOCK OPTIONS OUTSTANDING: SHARES EXERCISE PRICE
-------------------------- --------- ----------------
<S> <C> <C>
Balance at December 31, 1995..................... 1,640,000 $ 5.86
Granted......................................... 308,734 12.32
Exercised....................................... (232,814) 3.98
Forfeited....................................... (97,712) 7.55
---------
Balance at December 31, 1996..................... 1,618,208 $ 7.06
Granted......................................... 1,651,804 7.86
Exercised....................................... (313,018) 6.57
Forfeited....................................... (172,334) 8.52
---------
Balance at December 31, 1997..................... 2,784,660 $ 7.50
=========
</TABLE>
The following table summarizes information about stock options outstanding
under the 1995 Plan at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------- ---------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED-
EXERCISE NUMBER REMAINING NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISEABLE EXERCISE PRICE
-------- ----------- ---------------- ------------ --------------
<S> <C> <C> <C> <C>
$ 1.93--3.85 494,276 7.1 237,608 $ 3.75
$ 3.85--5.77 100,000 2.1 40,000 $ 4.13
$ 5.77--7.70 668,508 8.6 4,165 $ 7.31
$ 7.70--9.63 1,342,284 8.8 248,523 $ 9.44
$ 9.63--11.55 21,624 5.9 8,303 $10.01
$11.55--13.48 135,968 8.6 78,136 $12.12
$13.48--15.40 22,000 8.8 19,334 $15.25
--------- -------
2,784,660 636,069 $ 7.48
========= =======
</TABLE>
The per share weighted-average fair value of stock options granted under the
1995 Plan during 1996 and 1997 was $5.12 and $6.33 on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions: 1996--expected dividend yield of 0%, expected volatility of
62.41%, risk-free interest rate of 7.01%, and an expected life of 10 years;
1997--expected dividend yield of 0%, expected volatility of 85.07%, risk-free
interest rate of 6.55%, and an expected life of 10 years.
F-18
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) STOCK COMPENSATION PLANS--(CONTINUED)
Stock Option Plan for Directors
In February 1995, the Company established the Stock Option Plan for
Directors (the "Directors Plan") which provides for the grant of non-qualified
stock options to purchase up to 200,000 shares of Common Stock to directors
who are not employees of the Company. Under the Plan, eligible directors
automatically receive options to purchase, at the fair market value of a share
on the date of grant, (i) 9,000 shares of Common Stock upon the commencement
of their service as a director and (ii) 2,000 shares of Common Stock annually
in connection with each annual meeting of stockholders. Automatic grants of
options to purchase 9,000 shares of common stock at $3.75 per share were made
to each of the Company's four non-management directors upon consummation of
the Company's initial public offering (see note 13).
A summary of activity in the Director's Plan during the periods indicated
are as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
STOCK OPTIONS OUTSTANDING: SHARES EXERCISE PRICE
-------------------------- --------- ----------------
<S> <C> <C>
Balance of December 31, 1995...................... 36,000 $3.75
Granted.......................................... 4,000 $9.75
Exercised........................................ (9,000) $3.75
------
Balance at December 31, 1996...................... 31,000 $4.52
Granted.......................................... 8,000 $9.56
Exercised........................................ -- --
------
Balance at December 31, 1997...................... 39,000 $5.56
======
</TABLE>
The following table summarizes information about stock options outstanding
under the Director's Plan at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------- ---------------------------
RANGE OF WEIGHTED AVERAGE WEIGHTED-
EXERCISE NUMBER REMAINING NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISEABLE EXERCISE PRICE
-------- ----------- ---------------- ------------ --------------
<S> <C> <C> <C> <C>
$ 3.75 27,000 7.1 years 27,000 $3.75
$ 9.56--9.75 12,000 8.7 4,000 $9.75
------ ------
$ 3.75--9.75 39,000 7.6 31,000 $4.52
====== ======
</TABLE>
No options were exercisable at December 31, 1995.
The per share weighted-average fair value of stock options granted under the
Director's Plan during 1996 and 1997 was $3.37 and $5.31 on the date of grant
using the Black Scholes option-pricing model with the following weighted-
average assumptions: 1996--expected dividend yield of 0%, expected volatility
of 62.41%, risk-free interest rate of 7.56%, and an expected life of 10 years;
1997--expected dividend yield of 0%, expected volatility of 85.07%, risk-free
interest rate of 7.24%, and an expected life of 10 years.
Employee Stock Purchase Plan
On September 12, 1995, the Company established the Datastream Systems, Inc.
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan permits
eligible employees to elect to contribute up to 15% of their regular
compensation through payroll deductions, toward the purchase of common stock
at 85% of the fair market value of a share on either the date the right is
granted (the first day of each semi-annual period) or the date it is exercised
(the last day of such period), whichever is lower. The Purchase Plan is
intended to comply with Section 423 of the Internal Revenue Code of 1986, as
amended. The Board of Directors has reserved 200,000 shares of common stock
for future issuance pursuant to the Purchase Plan. Under the Plan, the Company
sold 7,578 and 18,924 shares in 1996 and 1997, respectively.
F-19
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11)STOCK COMPENSATION PLANS--(CONTINUED)
Under Statement No. 123, compensation expense for the Purchase Plan is
determined based on the discount percentage at which the stock is purchased.
The Company applies APB Opinion No. 25 in accounting for its three Plans
and, accordingly, no compensation cost has been recognized for its stock
options or for stock purchased under the Purchase Plan in the financial
statements. Had the Company determined compensation cost based on the fair
value at the grant date for stock options or based on the discount percentage
under the Purchase Plan under Statement No. 123, the Company's net income
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
------------ -----------
<C> <S> <C> <C>
Net income (loss) As reported.................... $(28,009,729) $11,437,897
Pro forma...................... (29,807,110) 6,422,066
Basic:
Net income (loss) As reported.................... $ (1.65) $ 0.62
per share Pro forma...................... (1.76) 0.35
Diluted:
Net income (loss) As reported.................... $ (1.58) $ 0.59
per share Pro forma...................... (1.69) 0.33
</TABLE>
Pro forma net income reflects options granted in 1995, 1996 and 1997.
Compensation cost related to the 1995 Plan is reflected over the options'
vesting period of one to five years. No options were granted prior to 1995.
(12)PUBLIC OFFERINGS OF COMMON STOCK
On April 5, 1995, the Company closed its initial public offering of
6,532,000 shares of common stock, 2,532,000 of which were sold by existing
shareholders, for $3.75 per share. The Company invested the net proceeds from
the offering in U.S. Government securities.
On October 4, 1995, the Company closed its second public offering of
4,000,000 shares of common stock, 2,171,340 of which were sold by existing
shareholders, for $11.13 per share. The Company invested the net proceeds from
the offering in U.S. Government securities. In conjunction with the second
offering, on October 17, 1995, the Company closed on the over-allotment option
of 600,000 shares of common stock. The Company invested the net proceeds from
the over-allotment option in U.S. Government securities.
(13)LEASES
As Lessee
The Company leases office space, automobiles and equipment under agreements
which have been classified as operating leases for financial reporting
purposes.
At December 31, 1997, the approximate future minimum lease payments under
noncancelable operating leases that expire at various dates through 2001 are
as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 769,897
1999.............................................................. 529,441
2000.............................................................. 367,839
2001.............................................................. 242,359
2002.............................................................. 187,949
Thereafter........................................................ 87,986
----------
$2,185,471
==========
</TABLE>
Rent expense for the years ended December 31, 1995, 1996 and 1997 and the
three months ended March 31, 1997 and 1998 totaled $174,193, $307,534,
$1,367,830, $167,409, and $212,116, respectively.
F-20
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13)LEASES--(CONTINUED)
As Lessor
The Company leases a portion of its building and related leasehold
improvements to outside parties under noncancelable operating leases.
At December 31, 1997, the approximate future minimum rental income under
noncancelable operating leases that expire through 1998 is $219,000.
Rental income (included in other income in the accompanying statement of
operations) for the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1997 and 1998 was $88,415, $338,957, $59,130, and
$81,787, respectively. There was no rental income for the year ended December
31, 1995.
(14)SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates principally in one industry segment which includes the
development, marketing, selling and supporting of Microsoft and Oracle based
software products for the industrial automation market.
The Company's principal areas of operation include the United States and
Europe. Information about the Company's operations in different geographic
locations is as follows:
<TABLE>
<CAPTION>
UNITED
STATES EUROPE TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Total revenues........................... $52,298,576 $17,469,719 $69,768,295
Operating income......................... 11,178,505 5,382,843 16,561,348
Identifiable assets...................... 56,696,883 8,400,360 65,097,243
</TABLE>
The United States operations include international revenues of approximately
$8,100,000 for the year ended December 31, 1997. International revenues for
the years ended December 31, 1995 and 1996 were approximately $2,180,000 and
$4,354,000, respectively.
F-21
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15)RECONCILIATION OF BASIC AND DILUTED INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
------------ ---------- ---------
<S> <C> <C> <C>
1995:
Basic income per share................... $ 4,346,059 13,004,474 $ 0.33
Effect of dilutive securities:
Stock options........................... -- 1,361,282
------------ ----------
Diluted income per share................. $ 4,346,059 14,365,756 $ 0.30
============ ========== ======
1996:
Basic loss per share..................... $(28,009,729) 16,977,134 $(1.65)
Effect of dilutive securities:
Stock options........................... -- 708,388
------------ ----------
Diluted loss per share................... $(28,009,729) 17,685,522 $(1.58)
============ ========== ======
1997:
Basic income per share................... $ 11,437,897 18,396,920 $ 0.62
Effect of dilutive securities:
Stock options........................... -- 849,028
------------ ----------
Diluted income per share................. $ 11,437,897 19,245,948 $ 0.59
============ ========== ======
Three months ended March 31, 1997:
Basic income per share................... $ 1,978,197 18,262,850 $ 0.11
Effect of dilutive securities:
Stock options........................... -- 505,120
------------ ----------
Diluted income per share................. $ 1,978,197 18,767,970 $ 0.11
============ ========== ======
Three months ended March 31, 1998:
Basic income per share................... $ 237,193 18,396,920 $ 0.01
Effect of dilutive securities:
Stock options........................... -- 1,606,722
------------ ----------
Diluted income per share................. $ 237,193 19,245,948 $ 0.01
============ ========== ======
</TABLE>
F-22
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16)COMPREHENSIVE INCOME
The Company displays the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the Consolidated Balance Sheet. Items considered to be other
comprehensive income include adjustments made for foreign currency translation
(under Statement 52) and unrealized holding gains and losses on available-for-
sale securities (under Statement 115). Comprehensive income for 1995, 1996 and
1997 and the three months ended March 31, 1998 and 1997 is as follows:
<TABLE>
<S> <C>
1995:
Net income................................................... $ 4,346,059
Foreign currency translation adjustment...................... --
Unrealized gain on securities available-for-sale............. 3,487
------------
Comprehensive income......................................... $ 4,349,546
============
1996:
Net loss..................................................... $(28,009,729)
Foreign currency translation adjustment...................... --
Unrealized gain (loss) on securities available-for-sale...... --
------------
Comprehensive loss........................................... $(28,009,729)
============
1997:
Net income................................................... $ 11,437,897
Foreign currency translation adjustment...................... 217,275
Unrealized gain on securities available-for-sale............. 30,956
------------
Comprehensive income......................................... $ 11,686,128
============
Three months ended March 31, 1997:
Net income................................................... $ 1,978,197
Foreign currency translation adjustment...................... 372,672
Unrealized gain (loss) on securities available-for-sale...... --
------------
Comprehensive income......................................... $ 2,350,869
============
Three months ended March 31, 1998:
Net income................................................... $ 237,193
Foreign currency translation adjustment...................... (204,763)
Unrealized loss on securities available-for-sale............. (30,956)
------------
Comprehensive income......................................... $ 1,474
============
</TABLE>
(17)SUBSEQUENT EVENTS (UNAUDITED)
On March 31, 1998, the Company acquired Insta Instandhaltung Technischer
Anlagen GmbH (Insta) for approximately $4,375,000 in cash and $2,625,000 in
stock. In connection with the acquisition, the Company acquired software
technology valued at $210,416. In addition, the Company wrote off $597,944 of
its existing capitalized software in the three months ended March 31, 1998
which became obsolete as a result of the Insta acquisition.
On June 16, 1998, the Company acquired Strategic Information Systems Pte
Ltd. (SIS) for approximately $4,575,000 in cash and $1,928,000 in stock.
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Datastream Systems, Inc.:
Under the date of January 23, 1998, we reported on the consolidated balance
sheets of Datastream Systems, Inc. and Subsidiaries as of December 31, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997, which are included herein. In connection with our audit of
the aforementioned consolidated financial statements, we also audited the
related accompanying consolidated financial statement schedule listed in Item
14(a)2. The consolidated financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
consolidated financial statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Greenville, South Carolina KPMG Peat Marwick LLP
January 23, 1998
S-1
<PAGE>
DATASTREAM SYSTEMS, INC.
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
BALANCE AT AMOUNTS
BEGINNING CHARGED TO BALANCE AT
DESCRIPTION OF YEAR BAD DEBT EXPENSE DEDUCTIONS END OF YEAR
----------- ---------- ---------------- ---------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts receivable:
Year ended December 31,
1995.................... $ 95,400 149,075 -- 244,475
======== ======= === =========
Year ended December 31,
1996.................... $244,475 590,525 -- 835,000
======== ======= === =========
Year ended December 31,
1997.................... $835,000 754,910 -- 1,589,910
======== ======= === =========
</TABLE>
S-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELL-
ING STOCKHOLDER OR BY THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICA-
TION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 11
Price Range of Common Stock............................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Selected Consolidated Financial Data...................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business.................................................................. 28
Management................................................................ 39
Principal and Selling Stockholders........................................ 41
Shares Eligible for Future Sale........................................... 42
Underwriting.............................................................. 43
Legal Matters............................................................. 44
Experts................................................................... 44
Additional Information.................................................... 44
Incorporation of Certain Documents by Reference........................... 45
Forward-Looking Statements................................................ 45
Index to Consolidated Financial
Statements............................................................... F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,000,000 Shares
LOGO
Common Stock
------------
PROSPECTUS
------------
BT ALEX. BROWN
HAMBRECHT & QUIST
LEHMAN BROTHERS
RAYMOND JAMES & ASSOCIATES, INC.
THE ROBINSON-HUMPHREY COMPANY
July , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
EXPENSES
--------
<S> <C>
Securities and Exchange Commission Registration Fee................ $ 27,778
National Association of Securities Dealers, Inc. Fee............... 9,916
Nasdaq/NMS Listing Fee............................................. 17,500
Legal Fees and Expenses............................................ 150,000
Accountants' Fees and Expenses..................................... 75,000
Printing and Engraving Expenses.................................... 150,000
Blue Sky Fees and Expenses......................................... 2,000
Transfer Agent's Fees and Expenses................................. 1,500
Miscellaneous...................................................... 26,306
--------
Total Expenses................................................... $460,000
========
</TABLE>
The foregoing items, except for the SEC registration fee, the NASD fee and
the Nasdaq/NMS listing fee, are estimated. None of such amounts are to be paid
by the Selling Stockholder.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware provides that a
corporation may indemnify its directors and officers against civil and
criminal liabilities. Directors and officers may be indemnified against
expenses if they acted in good faith and in a manner reasonably believed to be
in or not opposed to the best interests of the corporation and, with respect
to any criminal action, if they had no reasonable cause to believe their
conduct was unlawful. A director or officer may be indemnified against
expenses incurred in connection with a derivative suit if he acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made
without court approval if such person was adjudged liable for negligence or
misconduct in the performance of his or her duty to the corporation. The
statutory indemnification is not exclusive of any rights provided by any by-
law, agreement, vote of shareholders or disinterested directors or otherwise.
Article VII of the Registrant's Amended and Restated Certificate of
Incorporation sets forth the extent to which the Registrant's directors and
officers may be indemnified against liabilities and other monetary expenses
which they may incur while serving in such capacities. Such indemnification
will be provided to the full extent permitted and in the manner required by
the General Corporation Law of Delaware. Article XII of the Company's by-laws
also provides that the directors and officers of the Registrant will be
indemnified against any losses incurred in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was or a
director or officer of the Registrant or served with another corporation,
partnership, joint venture, trust or other enterprise at the request of the
Registrant and will provide advances, for expenses incurred in defending any
such action, suit or proceeding, upon receipt of an undertaking by or on
behalf of such officer or director to repay such advances, unless it is
ultimately determined that he is not entitled to indemnification by the
Registrant.
II-1
<PAGE>
ITEM 16. EXHIBITS.
Exhibits filed pursuant to Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Form of Underwriting Agreement.
2.1* Share Purchase Agreement dated as of December 15, 1996 by and among
Datastream Systems, Inc., SQL Group, B.V. and the Stockholders of
SQL Group, B.V. listed on the signature pages thereto.
2.2** Share Purchase Agreement, dated as of March 31, 1998, by and among
Datastream Systems, Inc., Datastream Systems GmbH (f/k/a Yvette 95
Vermogensverwaltungs GmbH), Insta Instandhaltung Technischer Anlagen
GmbH and the stockholders of Insta listed on the signature pages
thereto.
2.3*** Share Purchase Agreement, dated June 16, 1998, by and among
Datastream Systems, Inc., Sikasso Pte Ltd. and the Stockholders of
Strategic Information Systems Pte Ltd. on the signature pages
thereto.
4.1+ See provisions of the Registrant's Amended and Restated Certificate
of Incorporation, as amended, and By-Laws defining rights of holders
of the Registrant's Common Stock.
4.2++ Specimen Stock Certificate.
4.3+++ Escrow Agreement, dated as of December 31, 1996, by and among
Datastream Systems, Inc., the stockholders of SQL Group, B.V. listed
on the signature pages thereto and Robert J. J. Lijdsman, as Escrow
Agent.
4.4. Escrow Agreement, dated as of March 31, 1998, by and among
Datastream Systems, Inc., Datastream Systems GmbH (f/k/a Yvette 97
Vermogensverwaltungs GmbH), the stockholders of Insta Instandhaltung
Technischer Anlagen GmbH listed on the signature pages thereto and
Dr. Dieter Mayer, as Escrow Agent.
4.5.. Escrow Agreement, dated as of June 16, 1998, by and among Datastream
Systems, Inc., Sikasso Pte Ltd., the stockholders of Strategic
Information Systems Pte Ltd. listed on the signature pages thereto
and Hunton & Williams, as Escrow Agent.
5 Opinion of Hunton & Williams (to be filed by amendment).
23.1... Consent of KPMG Peat Marwick LLP.
23.2 Consent of Hunton & Williams (included as part of its opinion filed
as Exhibit 5 hereto).
24... Power of Attorney.
</TABLE>
- --------
* Incorporated herein by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K, filed January 10, 1997 (File No. 000-25590).
** Incorporated herein by reference to an exhibit to the Registrant's Current
Report on Form 8-K, filed April 14, 1998 (File No. 000-25590).
*** Incorporated herein by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K, filed June 26, 1998 (File No. 000-25590).
+ Incorporated herein by reference to: (i) Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (File No. 33-89498); (ii) Exhibit
3.1(a) to the Registrant's Report on Form 10-K, filed March 31, 1998 (File
No. 000-25590); and (iii) Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (File No. 33-89498).
++ Incorporated herein by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-89498).
+++ Incorporated by reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K, filed January 10, 1997 (File No. 000-25590).
. Incorporated by reference to an exhibit to the Registrant's Current Report
on Form 8-K, filed April 14, 1998 (File No. 000-25590).
.. Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report
on Form 8-K, filed June 26, 1998 (File No. 000-25590).
... Previously filed.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(i) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Greenville, State of South Carolina
on the 7th day of July, 1998.
Datastream Systems, Inc.
/s/ Larry G. Blackwell
By: _________________________________
Name: Larry G. Blackwell
Title: Chairman of the Board,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed by the following persons in the capacities indicated on July
7, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Larry G. Blackwell Chairman of the Board, President and Chief
______________________________________ Executive Officer (principal executive officer)
Larry G. Blackwell
/s/ Daniel H. Christie Chief Financial Officer (principal financial and
______________________________________ accounting officer)
Daniel H. Christie
* Director
______________________________________
Kenneth D. Tracy
* Director
______________________________________
Richard T. Brock
* Director
______________________________________
John M. Sterling, Jr.
* Director
______________________________________
Ira D. Cohen
</TABLE>
/s/ Larry G. Blackwell
* By: ______________________
Larry G. Blackwell
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Form of Underwriting Agreement.
2.1* Share Purchase Agreement dated as of December 15, 1996 by and among
Datastream Systems, Inc., SQL Group, B.V. and the Stockholders of SQL
Group, B.V. listed on the signature pages thereto.
2.2** Share Purchase Agreement, dated as of March 31, 1998, by and among
Datastream Systems, Inc., Datastream Systems GmbH (f/k/a Yvette 95
Vermogensverwaltungs GmbH), Insta Instandhaltung Technischer Anlagen
GmbH and the stockholders of Insta listed on the signature pages
thereto.
2.3*** Share Purchase Agreement, dated June 16, 1998, by and among Datastream
Systems, Inc., Sikasso Pte Ltd. and the Stockholders of Strategic
Information Systems Pte Ltd. on the signature pages thereto.
4.1+ See provisions of the Registrant's Amended and Restated Certificate of
Incorporation, as amended, and By-Laws defining rights of holders of
the Registrant's Common Stock.
4.2++ Specimen Stock Certificate.
4.3+++ Escrow Agreement, dated as of December 31, 1996, by and among
Datastream Systems, Inc., the stockholders of SQL Group, B.V. listed
on the signature pages thereto and Robert J. J. Lijdsman, as Escrow
Agent.
4.4. Escrow Agreement, dated as of March 31, 1998, by and among Datastream
Systems, Inc., Datastream Systems GmbH (f/k/a Yvette 97
Vermogensverwaltungs GmbH), the stockholders of Insta Instandhaltung
Technischer Anlagen GmbH listed on the signature pages thereto and Dr.
Dieter Mayer, as Escrow Agent.
4.5.. Escrow Agreement, dated as of June 16, 1998, by and among Datastream
Systems, Inc., Sikasso Pte Ltd., the stockholders of Strategic
Information Systems Pte Ltd. listed on the signature pages thereto and
Hunton & Williams, as Escrow Agent.
5 Opinion of Hunton & Williams (to be filed by amendment).
23.1... Consent of KPMG Peat Marwick LLP.
23.2 Consent of Hunton & Williams (included as part of its opinion filed as
Exhibit 5 hereto).
24... Power of Attorney.
</TABLE>
- --------
* Incorporated herein by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K, filed January 10, 1997 (File No. 000-25590).
** Incorporated herein by reference to an exhibit to the Registrant's Current
Report on Form 8-K, filed April 14, 1998 (File No. 000-25590).
*** Incorporated herein by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K filed June 26, 1998 (File No. 000-25590).
+ Incorporated herein by reference to: (i) Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 (File No. 33-89498); (ii) Exhibit
3.1(a) to the Registrant's Report on Form 10-K, filed March 31, 1998 (File
No. 000-25590); and (iii) Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (File No. 33-89498).
++ Incorporated herein by reference to Exhibit 4.1 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-89498).
+++ Incorporated by reference to Exhibit 4.1 to the Registrant's Current
Report on Form 8-K, filed January 10, 1997 (File No. 000-25590).
. Incorporated by reference to an exhibit to the Registrant's Current Report
on Form 8-K, filed April 14, 1998 (File No. 000-25590).
.. Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report
on Form 8-K, filed June 26, 1998 (File No. 000-25590).
... Previously filed.
<PAGE>
EXHIBIT 1
4,000,000 Shares
DATASTREAM SYSTEMS, INC.
Common Stock
($.01 Par Value)
EQUITY UNDERWRITING AGREEMENT
-----------------------------
July ___, 1998
BT Alex. Brown Incorporated
Hambricht & Quist LLC
Lehman Brothers Inc.
Raymond James & Associates, Inc.
The Robinson-Humphrey Company, LLC
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Datastream Systems, Inc., a Delaware corporation (the "Company") and the
stockholders of the Company named on Schedule II hereto (the "Selling
Stockholders") propose to sell to the several underwriters (the "Underwriters")
named in Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 4,000,000 shares of the Company's Common
Stock, $.01 par value (the "Firm Shares"), of which 3,500,000 shares will be
sold by the Company and 500,000 shares will be sold by the Selling Stockholders.
The respective amounts of the Firm Shares to be so purchased by the several
Underwriters are set forth opposite their names in Schedule I hereto, and the
respective amounts to be sold by the Selling Stockholders are set forth opposite
their names in Schedule II hereto. Selling Stockholders are sometimes referred
to herein collectively as the "Sellers." The Selling Stockholders also propose
to sell at the Underwriters' option an aggregate of up to 600,000 additional
shares of the Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company and the Selling
Stockholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro rata portion
of the Option Shares if you elect to exercise the over-allotment option in whole
or in part for the accounts of the several Underwriters. The Firm Shares and
the Option Shares (to the extent the aforementioned option is exercised) are
herein collectively called the "Shares."
<PAGE>
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
(a) The Company represents and warrants to each of the Underwriters as
follows:
(i) A registration statement on Form S-3 (File No. 333-57897) with
respect to the Shares has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. The Company has complied with the conditions for the use of Form
S-3. Copies of such registration statement, including any amendments thereto,
the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462 (b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means the form of prospectus first filed
with the Commission pursuant to Rule 424(b). Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus." Any reference herein to the
Registration Statement, any Preliminary Prospectus or to the Prospectus shall be
deemed to refer to and include any documents incorporated by reference therein,
and, in the case of any reference herein to any Prospectus, also shall be deemed
to include any documents incorporated by reference therein, and any supplements
or amendments thereto, filed with the Commission after the date of filing of the
Prospectus under Rules 424(b) or 430A, and prior to the termination of the
offering of the Shares by the Underwriters.
(ii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. Each of the subsidiaries
of the Company as listed in Exhibit A hereto (collectively, the "Subsidiaries")
has been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, with corporate
power and authority to own or lease its properties and conduct its business as
described in the Registration Statement. The Subsidiaries are the only
subsidiaries, direct or indirect, of the Company. The Company and each of the
Subsidiaries are duly qualified to transact business in all jurisdictions in
which the conduct of their respective businesses require such qualification
except for failures that would not result in any material adverse change in the
financial position, results of
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operations, business or prospects of the Company (a "Material Adverse Change").
The outstanding shares of capital stock of each of the Subsidiaries have been
duly authorized and validly issued, are fully paid and non-assessable and are
owned by the Company or another Subsidiary free and clear of all liens,
encumbrances and claims; and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in the
Subsidiaries are outstanding.
(iii) The outstanding shares of Common Stock of the Company,
including all shares to be sold by the Selling Stockholders, have been duly
authorized and validly issued and are fully paid and non-assessable; the portion
of the Shares to be issued and sold by the Company have been duly authorized and
when issued and paid for as contemplated herein will be validly issued, fully
paid and non-assessable; and no preemptive rights of stockholders exist with
respect to any of the Shares or the issue and sale thereof. Neither the filing
of the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the registration of any shares
of Common Stock.
(iv) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the jurisdiction of
the Company's incorporation.
(v) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform in all
material respects, to the requirements of the Act and the Rules and Regulations.
The documents incorporated by reference in the Prospectus, at the time filed
with the Commission conformed, in all material respects to the requirements of
the Securities Exchange Act of 1934 or the Act, as applicable, and the rules and
regulations of the Commission thereunder. When the Registration Statement and
any amendment thereto was, or is declared effective, and at each time of
delivery, do not contain, and will not contain, any untrue statement of a
material fact and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading. When the Prospectus or any amendments or supplements thereto is
filed with the Commission under Rule 424(b), and at each time of delivery
thereof, do not contain, and will not contain, any untrue statement of material
fact; and do not omit, and will not omit, to state any material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that the Company makes no representations or warranties as to information
contained in or omitted from the Registration Statement or the Prospectus, or
any such amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any Underwriter
through the Representatives, specifically for use in the preparation thereof.
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(vi) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth or
incorporated by reference in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the Company
and the consolidated Subsidiaries, at the indicated dates and for the indicated
periods. Such financial statements and related schedules have been prepared in
accordance with generally accepted principles of accounting, consistently
applied throughout the periods involved, except as disclosed therein, and, with
respect to the audited financial statements, all adjustments necessary for a
fair presentation of results for such periods have been made. The Company and
its Subsidiaries have no material contingent obligations which are not disclosed
in such financial statements. The summary financial and statistical data
included or incorporated by reference in the Registration Statement presents
fairly the information shown therein and such data has been compiled on a basis
consistent with the financial statements presented therein and the books and
records of the Company.
(vii) KPMG Peat Marwick LLP, who have certified certain of the
financial statements filed with the Commission as part of or incorporated by
reference in, the Registration Statement, are independent public accountants as
required by the Act and the Rules and Regulations.
(viii) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which if
determined adversely to the Company or any of its Subsidiaries might result in
any Material Adverse Change in the Company and of the Subsidiaries taken as a
whole or to prevent the consummation of the transactions contemplated hereby,
except as set forth in the Registration Statement.
(ix) The Company and the Subsidiaries have good and marketable title
to all of the properties and assets reflected in the financial statements (or as
described in the Registration Statement) hereinabove described, subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except those reflected
in such financial statements (or as described in the Registration Statement) or
which are not material in amount. The Company and the Subsidiaries occupy their
leased properties under valid and binding leases conforming in all material
respects to the description thereof set forth in the Registration Statement.
(x) The Company and the Subsidiaries have filed all federal, state,
local and foreign tax returns which have been required to be filed and have paid
all taxes indicated by said returns and all assessments received by them or any
of them to the extent that such taxes have become due and are not being
contested in good faith and for which an adequate reserve for accrual has been
established in accordance with generally accepted accounting principles. All
tax liabilities have been adequately provided for in the financial statements of
the Company, and the Company does not know of any actual or proposed additional
material tax assessments.
(xi) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has not
been any Material Adverse Change or any development involving a prospective
Material Adverse Change in the
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Company and its Subsidiaries taken as a whole, whether or not occurring in the
ordinary course of business, and there has not been any material transaction
entered into or any material transaction that is probable of being entered into
by the Company or the Subsidiaries, other than transactions in the ordinary
course of business and changes and transactions described in the Registration
Statement, as it may be amended or supplemented. The Company and the
Subsidiaries have no material contingent obligations which are not disclosed in
the Company's financial statements which are included in the Registration
Statement.
(xii) Neither the Company nor any of the Subsidiaries is or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Charter or By-Laws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by which
it is bound and which default would have a Material Adverse Change on the
Company and its Subsidiaries taken as a whole. The execution and delivery of
this Agreement and the consummation of the transactions herein contemplated and
the fulfillment of the terms hereof will not conflict with or result in a breach
of any of the terms or provisions of, or constitute a material default under,
any indenture, mortgage, deed of trust or other agreement or instrument to which
the Company or any Subsidiary is a party, or of the Charter or By-Laws of the
Company or any order, rule or regulation applicable to the Company or any
Subsidiary of any court or of any regulatory body or administrative agency or
other governmental body having jurisdiction.
(xiii) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except declaration of effectiveness of the Registration Statement
and such additional steps as may be required by the Commission, the National
Association of Securities Dealers, Inc. (the "NASD") or such additional steps as
may be necessary to qualify the Shares for public offering by the Underwriters
under state securities or Blue Sky laws) has been obtained or made and is in
full force and effect.
(xiv) The Company and each of the Subsidiaries holds all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of their respective businesses. The Company and the
Subsidiaries own or possess sufficient trademarks, trade names, patent rights,
copyrights, licenses, trade secrets and other similar rights reasonably
necessary to conduct their respective businesses; and to the knowledge of the
Company neither the Company nor any of the Subsidiaries has infringed any
patents, patent rights, trade names, trademarks or copyrights, which
infringement would have a Material Adverse Change on the Company and the
Subsidiaries taken as a whole. The Company has received no written notice of
any material infringement by others of patents, patent rights, trade names,
trademarks or copyrights owned by or licensed to the Company.
(xv) Neither the Company nor to the Company's knowledge, any of its
affiliates, has taken, directly or indirectly, any action designed to cause or
result in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of the shares of
Common Stock to facilitate the sale or resale of the Shares. The
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<PAGE>
Company acknowledges that the Underwriters may engage in passive market making
transactions in the Shares on the NASDAQ Stock Market in accordance with Rule
10b-6A under the Exchange Act.
(xvi) Neither the Company nor any Subsidiary is an "investment
company" within the meaning of such term under the Investment Company Act of
1940, (as amended, the "1940 Act") and the rules and regulations of the
Commission thereunder.
(xvii) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xviii) The Company and each of its Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as management
reasonably believes is adequate for the conduct of their respective businesses
and the value of their respective properties.
(xix) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not reasonably
expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or
4971 of the Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each "pension plan"
for which the Company would have any liability that is intended to be qualified
under Section 401(a) of the Code is so qualified in all material respects and,
to the Company's knowledge, nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
(xx) To the Company's knowledge, there are no affiliations or
associations between any member of the NASD and any of the Company's officers,
directors or 5% or greater securityholders, except as set forth in the
Registration Statement.
(xxi) Each of the Company and its Subsidiaries is in compliance with
all federal, state, local and foreign laws and regulations respecting employment
and employment practices, terms and conditions of employment and wages and
hours, except where the failure to so comply would not have a Material Adverse
Change on the Company and the Subsidiaries taken as a whole. There are no
pending investigations involving the Company or its Subsidiaries by the U.S.
Department of Labor or any other governmental agency responsible for the
enforcement of
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such federal, state, local or foreign laws and regulations. There is no unfair
labor practice charge or complaint against the Company or its Subsidiaries
pending before the National Labor Relations Board or any strike, picketing,
boycott, dispute, slowdown or stoppage pending or, to the Company's knowledge,
threatened against or involving the Company or its Subsidiaries. To the
Company's knowledge, no union representation efforts exist respecting the
employees of the Company or its Subsidiaries, and no collective bargaining
agreement or modification thereof is currently being negotiated by the Company
or its Subsidiaries. No grievance or arbitration proceeding is pending under any
expired or existing collective bargaining agreements of the Company or its
Subsidiaries. Except as disclosed in the Prospectus, no material labor dispute
with the employees of the Company or its Subsidiaries exists or, to the
knowledge of the Company, is imminent.
(xxii) Other than payments required or allowed by applicable law of
the United States, neither the Company nor its Subsidiaries has, nor, to the
knowledge of the Company, has any officer, director or employee of the Company
or its Subsidiaries or any other person acting on behalf of the Company or its
Subsidiaries, for the benefit of the Company or such Subsidiaries at any time
during the last five years, (i) made any unlawful gift or contribution to any
candidate for federal, state, local or foreign political office, or failed to
disclose fully any such gift or contribution in violation of law, or (ii) made
any payment to any federal, state, local or foreign governmental officer or
official, which would be reasonably likely to subject the Company or its
Subsidiaries to any damage or penalty in any civil, criminal or governmental
litigation or proceeding (domestic or foreign). Each of the Company's and the
Subsidiaries' internal accounting controls are sufficient to cause the Company
and its Subsidiaries to comply with the Foreign Corrupt Practices Act of 1977,
as amended.
(xxiii) Neither the Company nor its Subsidiaries has been notified or
is otherwise aware that it is potentially liable, under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, or
any similar law ("Environmental Laws"). The Company and the Subsidiaries are in
substantial compliance with all applicable existing Environmental Laws, except
for such instances of non-compliance which would not have a Material Adverse
Change. The term "Hazardous Material" means (i) any "hazardous substance" as
defined by the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, (ii) any "hazardous waste" as defined by the Resource
Conservation and Recovery Act, as amended, (iii) any petroleum or petroleum
product, (iv) any polychlorinated biphenyl and (v) any pollutant or contaminant
or hazardous, dangerous or toxic chemical, material, waste or substance
regulation under or within the meaning of any other Environmental Law. To the
best of the Company's knowledge, no disposal, release or discharge of "Hazardous
Material" has occurred on, in, at or about any of the facilities or properties
of the Company or its Subsidiaries.
(b) Each of the Selling Stockholders severally represents and warrants as
follows:
(i) Such Selling Stockholder now has and at the Closing Date and the
Option Closing Date, as the case may be (as such dates are hereinafter defined),
will have good and marketable title to the Firm Shares and the Option Shares to
be sold by such Selling Stockholder,
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<PAGE>
free and clear of any liens, encumbrances, equities and claims, and full right,
power and authority to effect the sale and delivery of such Firm Shares and
Option Shares; and upon the delivery of, against payment for, such Firm Shares
and Option Shares pursuant to this Agreement, the Underwriters will acquire good
and marketable title thereto, free and clear of any liens, encumbrances,
equities and claims.
(ii) Such Selling Stockholder has full right, power and authority to
execute and deliver this Agreement, the Power of Attorney, and the Custodian
Agreement referred to below and to perform its obligations under such
Agreements. The execution and delivery of this Agreement and the consummation
by such Selling Stockholder of the transactions herein contemplated and the
fulfillment by such Selling Stockholder of the terms hereof will not require any
consent, approval, authorization, or other order of any court, regulatory body,
administrative agency or other governmental body (except as may be required
under the Act, state securities laws or Blue Sky laws) and will not result in a
breach of any of the terms and provisions of, or constitute a default under,
organizational documents of such Selling Stockholder, if not an individual, or
any indenture, mortgage, deed of trust or other agreement or instrument to which
such Selling Stockholder is a party, or of any order, rule or regulation
applicable to such Selling Stockholder of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(iii) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted, or
which might reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Common Stock of the Company and, other than as
permitted by the Act, the Selling Stockholder will not distribute any prospectus
or other offering material in connection with the offering of the Shares.
(iv) Without having undertaken to determine independently the
accuracy or completeness of either the representations and warranties of the
Company contained herein or the information contained in the Registration
Statement, such Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in this Section 1 are
not true and correct, is familiar with the Registration Statement and has no
knowledge of any material fact, condition or information not disclosed in the
Registration Statement which has, or reasonably could be expected to have a
Material Adverse Change on the Company and the Subsidiaries; and the sale of the
Firm Shares and the Option Shares by such Selling Stockholder pursuant hereto is
not prompted by any information concerning the Company or any of the
Subsidiaries which is not set forth in the Registration Statement or the
documents incorporated by reference therein. The information pertaining to such
Selling Stockholder under the caption "Selling Stockholders" in the Prospectus
is complete and accurate in all material respects.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Sellers agree to
sell to the Underwriters and each Underwriter agrees, severally and not jointly,
to purchase, at a price of $_____ [net price] per share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I
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<PAGE>
hereof, subject to adjustments in accordance with Section 9 hereof. The number
of Firm Shares to be purchased by each Underwriter from each Seller shall be as
nearly as practicable in the same proportion to the total number of Firm Shares
being sold by each Seller as the number of Firm Shares being purchased by each
Underwriter bears to the total number of Firm Shares to be sold hereunder. The
obligations of the Company and of each of the Selling Stockholders shall be
several and not joint.
(b) Certificates in negotiable form for the total number of the Shares to
be sold hereunder by the Selling Stockholders have been placed in custody with
Hunton & Williams as custodian (the "Custodian") pursuant to the Custodian
Agreement executed by each Selling Stockholder for delivery of all Firm Shares
and any Option Shares to be sold hereunder by the Selling Stockholders. Each of
the Selling Stockholders specifically agrees that the Firm Shares and any Option
Shares represented by the certificates held in custody for the Selling
Stockholders under the Custodian Agreement are subject to the interests of the
Underwriters hereunder, that the arrangements made by the Selling Stockholders
for such custody are to that extent irrevocable, and that the obligations of the
Selling Stockholders hereunder shall not be terminable by any act or deed of the
Selling Stockholders (or by any other person, firm or corporation including the
Company, the Custodian or the Underwriters) or by operation of law (including
the death of any Selling Stockholder) or by the occurrence of any other event or
events, except as set forth in the Custodian Agreement. If any such event
should occur prior to the delivery to the Underwriters of the Firm Shares or the
Option Shares hereunder, certificates for the Firm Shares or the Options Shares,
as the case may be, shall be delivered by the Custodian in accordance with the
terms and conditions of this Agreement as if such event has not occurred. The
Custodian is authorized to receive and acknowledge receipt of the proceeds of
sale of the Shares held by it against delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to be made in
Federal (same day) funds to an account designated by the Company for the shares
to be sold by it and to an account designated by the Custodian for the shares to
be sold by the Selling Stockholders, in each case against delivery of
certificates therefor to the Representatives for the several accounts of the
Underwriters. Such payment and delivery are to be made through the facilities
of the Depository Trust Company at 10:00 a.m., New York time, on the third
business day after the date of this Agreement or at such other time and date not
later than five business days thereafter as you and the Company shall agree
upon, such time and date being herein referred to as the "Closing Date." (As
used herein, "business day" means a day on which the New York Stock Exchange is
open for trading and on which banks in New York are open for business and not
permitted by law or executive order to be closed.)
(d) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Selling
Stockholders listed on Schedule II hereto hereby grants an option to the several
Underwriters to purchase the Option Shares at the price per share as set forth
in the first paragraph of this Section 2. The maximum number of Option Shares
to be sold by the Selling Stockholders is set forth opposite their respective
names on Schedule II hereto. The option granted hereby may be exercised in
whole or in part by giving
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written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 30 days after the date of this Agreement, by you, as
Representatives of the several Underwriters, to the Company, the Attorney-in-
Fact, and the Custodian setting forth the number of Option Shares as to which
the several Underwriters are exercising the option, the names and denominations
in which the Option Shares are to be registered and the time and date at which
such certificates are to be delivered. If the option granted hereby is exercised
in part, the respective number of Option Shares to be sold by each of the
Selling Stockholders listed in Schedule II hereto shall be determined on a pro
rata basis in accordance with the percentages set forth opposite their names on
Schedule II hereto, adjusted by you in such manner as to avoid fractional
shares. The time and date at which certificates for Option Shares are to be
delivered shall be determined by the Representatives but shall not be earlier
than three nor later than 10 full business days after the exercise of such
option, nor in any event prior to the Closing Date (such time and date being
herein referred to as the "Option Closing Date"). If the date of exercise of the
option is three or more days before the Closing Date, the notice of exercise
shall set the Closing Date as the Option Closing Date. The number of Option
Shares to be purchased by each Underwriter shall be in the same proportion to
the total number of Option Shares being purchased as the number of Firm Shares
being purchased by such Underwriter bears to the total number of Firm Shares,
adjusted by you in such manner as to avoid fractional shares. The option with
respect to the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters. You, as
Representatives of the several Underwriters, may cancel such option at any time
prior to its expiration by giving written notice of such cancellation to the
Company and the Attorney-in-Fact. To the extent, if any, that the option is
exercised, payment for the Option Shares shall be made on the Option Closing
Date in Federal (same day) funds drawn to the order of the Company for the
Option Shares to be sold by it and to the order of "Hunton & Williams, as
Custodian" for the Option Shares to be sold by the Selling Stockholders against
delivery of certificates therefor through the facilities of the Depository Trust
Company, New York, New York.
(e) If on the Closing Date or Option Closing Date, as the case may be, any
Selling Stockholder fails to sell the Firm Shares or Option Shares which such
Selling Stockholder has agreed to sell on such date as set forth in Schedule II
-----------
hereto, the Company agrees that it will sell or arrange for the sale of that
number of shares of Common Stock to the Underwriters which represents Firm
Shares or the Option Shares which such Selling Stockholder has failed to so
sell, as set forth in Schedule II hereto, or such lesser number as may be
-----------
requested by the Representatives.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. To the extent, if at all,
that any Option Shares are purchased pursuant to Section 2 hereof, the
Underwriters will offer them to the public on the foregoing terms.
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It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS.
(a) The Company covenants and agrees with the several Underwriters that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A of
the Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form
approved by the Representatives containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A of
the Rules and Regulations, and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus or document incorporated by reference
therein of which the Representatives shall not previously have been advised and
furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Rules and
Regulations, and (C) file on a timely basis all reports and any definitive proxy
or information statements required to be filed by the Company with the
Commission subsequent to the date of the Prospectus and prior to the termination
of the offering of the Shares by the Underwriters.
(ii) The Company will advise the Representatives promptly (A) when
the Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (D) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the
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Prospectus in final form, or as thereafter amended or supplemented, as the
Representatives may reasonably request. The Company will deliver to the
Representatives at or before the Closing Date, four signed copies of the
Registration Statement and all amendments thereto including all exhibits filed
therewith, and will deliver to the Representatives such number of copies of the
Registration Statement (including such number of copies of the exhibits filed
therewith that may reasonably be requested), including documents incorporated by
reference therein, and of all amendments thereto, as the Representatives may
reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder, so as to
permit the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the reasonable
opinion of the Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will either (i) prepare
and file with the Commission an appropriate amendment to the Registration
Statement or supplement to the Prospectus or (ii) prepare and file with the
Commission an appropriate filing under the Securities Exchange Act of 1934 which
shall be incorporated by reference in the Prospectus so that the Prospectus as
so amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Prospectus will comply with the
law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earning statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(vii) Prior to the Closing Date, the Company will furnish to the
Underwriters, as soon as they have been prepared by or are available to the
Company, a copy of any unaudited interim financial statements of the Company for
any period subsequent to the period covered by the most recent financial
statements appearing in the Registration Statement and the Prospectus.
(viii) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of Common
Stock (or agreement for such) will be made for a period of 90 days after the
date of this Agreement, directly or indirectly, by the Company otherwise than
hereunder or with the prior written consent of BT Alex. Brown Incorporated,
except (a) as otherwise contemplated by this Agreement, (b) pursuant to the
exercise of stock options or warrants outstanding as of the date of the
Agreement, or (c) grants and options to employees and directors under existing
stock option and stock purchase plans.
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(ix) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the NASDAQ Stock Market.
(x) The Company has caused each officer and director and Elizabeth H.
Sterling of the Company to furnish to you, on or prior to the date of this
agreement, a letter or letters, in
form and substance satisfactory to the Underwriters, pursuant to which each such
person shall agree not to offer, sell, sell short or otherwise dispose of any
shares of Common Stock of the Company or other capital stock of the Company, or
any other securities convertible, exchangeable or exercisable for Common Shares
or derivative of Common Shares owned by such person or request the registration
for the offer or sale of any of the foregoing (or as to which such person has
the right to direct the disposition of) for a period of 90 days after the date
of this Agreement, directly or indirectly, except with the prior written consent
of BT Alex. Brown Incorporated ("Lockup Agreements").
(xi) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(xii) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as would
require the Company or any of the Subsidiaries to register as an investment
company under the 1940 Act.
(xiii) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(xiv) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
(b) Each of the Selling Stockholders, severally and not jointly, covenants
and agrees with the several Underwriters that:
(i) No offering, sale, short sale or other disposition of any shares
of Common Stock of the Company or other capital stock of the Company or other
securities convertible, exchangeable or exercisable for Common Stock or
derivative of Common Stock owned by the Selling Stockholder or request the
registration for the offer or sale of any of the foregoing (or as to which the
Selling Stockholder has the right to direct the disposition of) will be made for
a period of 90 days after the date of this Agreement, directly or indirectly, by
such Selling Stockholder otherwise than hereunder or with the prior written
consent of BT Alex. Brown Incorporated.
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with
respect to the transactions herein contemplated,
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each of the Selling Stockholders agrees to deliver to you prior to or at the
Closing Date a properly completed and executed United States Treasury Department
Form W-8 or W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof).
(iii) Such Selling Stockholder will not take, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any securities of the Company.
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting
fees of the Company; the fees and disbursements of counsel for the Company and
the Selling Stockholders; the cost of printing and delivering to, or as
requested by, the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, this Agreement, the Underwriters' Selling
Memorandum, the Underwriters' Invitation Letter, the Listing Application, the
Blue Sky Survey and any supplements or amendments thereto; the filing fees of
the Commission; the filing fees and expenses (including legal fees and
disbursements) incident to securing any required review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of
the Shares; the Listing Fee of the NASDAQ Stock Market; and the expenses,
including the fees and disbursements of counsel for the Underwriters, incurred
in connection with the qualification of the Shares under state securities or
Blue Sky laws. To the extent, if at all, that any of the Selling Stockholders
engage special legal counsel to represent them in connection with this offering,
the fees and expenses of such counsel shall be borne by such Selling
Stockholder. Any transfer taxes imposed on the sale of the Shares to the
several Underwriters will be paid by the Sellers pro rata. The Company agrees
to pay all costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, incident to the offer and sale of
directed shares of the Common Stock by the Underwriters to employees and persons
having business relationships with the Company and its Subsidiaries. The
Company shall not, however, be required to pay for any other of the Underwriters
expenses, including fees and disbursements of counsel for the Underwriters in
connection with the Offering, (other than those related to qualification under
NASD regulation and state securities or Blue Sky laws) except that, if this
Agreement shall not be consummated because the conditions in Section 6 hereof
are not satisfied, or because this Agreement is terminated by the
Representatives pursuant to Section 11 hereof, or by reason of any failure,
refusal or inability on the part of the Company or the Selling Stockholders to
perform any undertaking or satisfy any condition of this Agreement or to comply
with any of the terms hereof on their part to be performed, unless such failure
to satisfy said condition or to comply with said terms be due to the default or
omission of any Underwriter, then the Company shall reimburse the several
Underwriters for reasonable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of performing
their obligations hereunder; but the Company and the Selling Stockholders shall
not in any event
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be liable to any of the several Underwriters for damages on account of loss of
anticipated profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATION OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company and the
Selling Stockholders contained herein, and to the performance by the Company and
the Selling Stockholders of their respective covenants and obligations hereunder
and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request of
the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company or the Selling Stockholders, shall be
contemplated by the Commission and no injunction, restraining order, or order of
any nature by a Federal or state court of competent jurisdiction shall have been
issued as of the Closing Date which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Hunton & Williams,
counsel for the Company and the Selling Stockholders, dated the Closing Date or
the Option Closing Date, as the case may be, addressed to the Underwriters (and
stating that it may be relied upon by counsel to the Underwriters) to the effect
that:
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; each of the Subsidiaries
has been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, with corporate
power and authority to own or lease its properties and conduct its business as
described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in all jurisdictions in
which the conduct of their business requires such qualification, or in which the
failure to qualify would have a Materially Adverse Change upon the Company and
the Subsidiaries taken as a whole; and the outstanding shares of capital stock
of each of the Subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable and are owned by the Company or a Subsidiary; and,
to the best of such counsel's knowledge, the outstanding shares of capital stock
of each of the Subsidiaries are owned free and clear of all liens, encumbrances
and equities and claims, and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into any shares of capital stock or of ownership interests in the
Subsidiaries are outstanding.
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(ii) The Company has authorized and outstanding capital stock as set
forth under the caption "Capitalization" in the Prospectus; the authorized
shares of the Company's Common Stock have been duly authorized; the outstanding
shares of the Company's Common Stock, including the Shares to be sold by the
Selling Stockholders, have been duly authorized and validly issued and are fully
paid and non-assessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares, assuming they are
in the form filed with the Commission, are in due and proper form; the shares of
Common Stock, including the Option Shares, if any, to be sold by the Company
pursuant to this Agreement have been duly authorized and will be validly issued,
fully paid and non-assessable when issued and paid for as contemplated by this
Agreement; and no preemptive rights of stockholders exist with respect to any of
the Shares or the issue or sale thereof.
(iii) Except as described in or contemplated by the Prospectus, to
the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Shares or other securities of the Company
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the Act
and, to the best of the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or threatened under the
Act.
(v) The Registration Statement, the Prospectus and each amendment or
supplement thereto and document incorporated by reference therein, as of their
respective effective or issue dates, complied as to form in all material
respects with the requirements of the Act or the Securities Exchange Act of
1934, as applicable, and the applicable rules and regulations thereunder (except
that such counsel need express no opinion as to the financial statements and
related schedules or incorporated by reference therein). The conditions for the
use of Form S-3, set forth in the General Instructions thereto, have been
satisfied.
(vi) The statements under the captions "Risk Factors--Shares Eligible
for Future Sale," and "Shares Eligible for Future Sale" in the Prospectus,
insofar as such statements constitute a summary of documents referred to therein
or matters of law, fairly summarize in all material respects the information
called for with respect to such documents and matters. In the course of such
counsel representation of the Company, nothing has come to the attention of such
counsel to believe that the statement under the caption "Business-Intellectual
Property" do not
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<PAGE>
fairly summarize in all material respects the information called for with
respect to such documents and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to or incorporated by reference in the
Registration Statement or described in the Registration Statement or the
Prospectus which are no so filed, incorporated by reference or described as
required, and such contracts and documents as are summarized in the Registration
Statement or the Prospectus are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the Subsidiaries
except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or By-Laws of the Company, or any
material agreement or instrument known to such counsel to which the Company or
any of the Subsidiaries is a party or by which the Company or any of the
Subsidiaries may be bound.
(x) This Agreement has been duly authorized, executed and delivered
by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by State securities
and Blue Sky laws as to which such counsel need express no opinion) except such
as have been obtained or made, specifying the same.
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and application
of the net proceeds therefrom as described in the Prospectus, required to
register as an investment company under the 1940 Act.
(xiii) This Agreement has been duly authorized, executed and
delivered on behalf of the Selling Stockholders.
(xiv) Each Selling Stockholder has full legal right, power and
authority, and any approval required by law (other than as required by State
securities and Blue Sky laws as to which such counsel need express no opinion),
to sell, assign, transfer and deliver the portion of the Shares to be sold by
such Selling Stockholder.
(xv) The Custodian Agreement and the Power of Attorney executed and
delivered by each Selling Stockholder is valid and binding.
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(xvi) The Underwriters (assuming that they are bona fide purchasers
within the meaning of the Uniform Commercial Code) have acquired good and
marketable title to the Shares being sold by each Selling Stockholder on the
Closing Date, and the Option Closing Date, as the case may be, free and clear of
all liens, encumbrances, equities and claims.
In rendering such opinion Hunton & Williams may rely as to matters governed
by laws other than the law of the State of Georgia, the Delaware General
Corporation Law or Federal laws on local counsel in such jurisdictions and as to
the matters set forth in subparagraphs (xiii), (xiv) and (xv) on opinions of
other counsel representing the respective Selling Stockholders, provided that in
each case Hunton & Williams shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads them
to believe that (i) the Registration Statement, at the time it became effective
under the Act (but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements, in the light of
the circumstances under which they are made, not misleading (except that such
counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such statement, Hunton &
Williams may state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.
(c) The Representatives shall have received from Morris, Manning & Martin,
L.L.P., counsel for the Underwriters, an opinion dated the Closing Date or the
Option Closing Date, as the case may be, substantially to the effect specified
in subparagraphs (ii), (iii), (iv), (ix) and (xi) of Paragraph (b) of this
Section 6, and that the Company is a duly organized and validly existing
corporation under the laws of the State of Delaware. In rendering such opinion
Morris, Manning & Martin, L.L.P. may rely as to all matters governed other than
by the laws of the State of Georgia, the Delaware General Corporation Law or
Federal laws on the opinion of counsel referred to in Paragraph (b) of this
Section 6. In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of such
counsel which leads them to believe that (i) the Registration Statement, or any
amendment thereto, as of the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and (ii) the Prospectus, or any supplement thereto, on
the date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact, necessary in
order to make the statements, in the light of the circumstances
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<PAGE>
under which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and statistical information
therein). With respect to such statement, Morris, Manning & Martin, L.L.P. may
state that their belief is based upon the procedures set forth therein, but is
without independent check and verification.
(d) The Representatives shall have received at or prior to the Closing
Date from Morris, Manning & Martin, L.L.P., a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the qualification
for offering and sale by the Underwriters of the Shares under the State
securities or Blue Sky laws of such jurisdictions as the Representatives may
reasonably have designated to the Company.
(e) You shall have received, on each of the dates hereof, the Closing Date
and the Option Closing Date, as the case may be, a letter dated the date hereof,
the Closing Date or the Option Closing Date, as the case may be, in form and
substance satisfactory to you, of KPMG Peat Marwick, LLP confirming that they
are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in their
opinion the financial statements and schedules examined by them and included in
the Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(f) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the Act and
no stop order suspending the effectiveness of the Registrations Statement has
been issued, and no proceedings for such purpose have been taken or are, to his
knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct in all material respects as of the Closing
Date or the Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424 or
430A under the Act have been made;
(iv) He or she has carefully examined the Registration Statement and
the Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration Statement
were true and correct in all material respects, and such Registration Statement
and Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading, and
since
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the effective date of the Registration Statement, no event has occurred which
should have been set forth in a supplement to or an amendment of the Prospectus
which has not been so set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any Material
Adverse Change or any development involving a prospective Material Adverse
Change in the Company and its Subsidiaries taken as a whole.
(g) The Company and each of the Selling Stockholders shall have
furnished to the Representatives such further certificates and documents
confirming the representations and warranties, covenants and conditions
contained herein and related matters as the Representatives may reasonably have
requested.
(h) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the NASDAQ Stock Market.
(i) The Lockup Agreements described in Section 4(x) are in full force
and effect.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Morris, Manning & Martin,
L.L.P., counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company and each of the Selling Stockholders of
such termination in writing or by telegram at or prior to the Closing Date or
the Option Closing Date, as the case may be. In such event, the Selling
Stockholders, the Company and the Underwriters shall not be under any obligation
to each other (except to the extent provided in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company agrees:
(1) to indemnify and hold harmless each Underwriter and each person,
if any, who controls any Underwriter within the meaning of the Act, against
any losses, claims, damages or liabilities to which such Underwriter or any
such controlling person may
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become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) arise
out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto, (ii) the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading any act or failure to act, or (iii) any alleged act
or failure to act by any Underwriter in connection with, or relating in any
manner to, the Shares or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage, liability or
action arising out of or based upon matters covered by clause (i) or (ii)
above (provided, that the Company shall not be liable under this clause
(iii) to the extent that it is determined in a final judgment by a court of
competent jurisdiction that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence or
willful misconduct); provided, however, that the Company will not be liable
in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement, or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically for
use in the preparation thereof.
(2) to reimburse each Underwriter and each such controlling person
upon demand for any legal or other out-of-pocket expenses reasonably
incurred by such Underwriter or such controlling person in connection with
investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding. In the event
that it is finally judicially determined that the Underwriters were not
entitled to receive payments for legal and other expenses pursuant to this
subparagraph, the Underwriters will promptly return all sums that had been
advanced pursuant hereto.
(b) Each of the Selling Stockholders, severally and not jointly, agree to
indemnify the Underwriters and each person, if any, who controls any Underwriter
within the meaning of the Act, against any losses, claims, damages or
liabilities to which such Underwriter or controlling person may become subject
under the Act or otherwise to the same extent as indemnity is provided by the
Company pursuant to Section 8(a) above. In no event, however, shall the
liability of any Selling Stockholder for indemnification under this Section 8(a)
exceed the proceeds received by such Selling Stockholder from the Underwriters
in the offering. This indemnity obligation will be in addition to any liability
which the Company may otherwise have.
(c) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Stockholders, and each person, if
any, who controls the Company or the Selling Stockholders within the meaning of
the Act, against any losses, claims, damages or liabilities to
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which the Company or any such director, officer, Selling Stockholder or
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or (ii) the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made; and will reimburse any legal or other expenses reasonably
incurred by the Company or any such director, officer, Selling Stockholder or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding; provided, however, that each
Underwriter will be liable in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a), (b) or (c) shall be available to any party who shall fail to give notice
as provided in this Section 8(d) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a), (b) or (c). In
case any such proceeding shall be brought against any indemnified party and it
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party and shall pay as incurred the fees and disbursements of such
counsel related to such proceeding. In any such proceeding, any indemnified
party shall have the right to retain its own counsel at its own expense.
Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or
within 30 days of presentation) the reasonable fees and expenses of one counsel
retained by the indemnified party in the event (i) the indemnifying party and
the indemnified party shall have mutually agreed to the retention of such
counsel, (ii) the named parties to any such proceeding (including any impleaded
parties) include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them or (iii) the indemnifying
party shall have failed to assume the defense and employ counsel acceptable to
the indemnified party within a reasonable period of time after notice of
commencement of the action. It is understood that the indemnifying party shall
not, in connection with any proceeding or related proceedings in the
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same jurisdiction, be liable for the reasonable fees and expenses of more than
one separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant to
Section 8(a) or (b) and by the Company and each of the Selling Stockholders in
the case of parties indemnified pursuant to Section 8(c). The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written consent but if settled with such consent or if there be a final judgment
for the plaintiff, the indemnifying party agrees to indemnify the indemnified
party from and against any loss or liability by reason of such settlement or
judgment. In addition, the indemnifying party will not, without the prior
written consent of the indemnified party, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action or proceeding
of which indemnification may be sought hereunder (whether or not any indemnified
party is an actual or potential party to such claim, action or proceeding)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action
or proceeding.
(e) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8(a), (b)
or (c) above in respect of any losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) in such proportion as is appropriate
to reflect the relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other from the offering
of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law then each indemnifying
party shall contribute to such amount paid or payable by such indemnified party
in such proportion as is appropriate to reflect not only such relative benefits
but also the relative fault of the Company and each of the Selling Stockholders
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company and each of the Selling Stockholders on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company and each of the Selling Stockholders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or any
of the Selling Stockholders on the one hand or the Underwriters on the other and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Company, each of the Selling Stockholders and the Underwriters agree
that it would not be just and equitable if contributions pursuant to this
Section 8(e) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
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to above in this Section 8(e). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to above in this Section 8(e) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (e), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares purchased by
such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation, and (iii) no
Selling Stockholder shall be required to contribute any amount in excess of the
proceeds received by such Selling Stockholder from the Underwriters in the
offering. The Underwriters' obligations in this Section 8(e) to contribute are
several in proportion to their respective underwriting obligations and not
joint.
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company or a Selling Stockholder),
you, as Representatives of the Underwriters, shall use your reasonable efforts
to procure within 36 hours thereafter one or more of the other Underwriters, or
any others, to purchase from the Company and the Selling Stockholders such
amounts as may be agreed upon and upon the terms set forth herein, the Firm
Shares or Option Shares, as the case may be, which the defaulting Underwriter or
Underwriters failed to purchase. If during such 36
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hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company and the
Selling Stockholders or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company or of the Selling Stockholders
except to the extent provided in Section 8 hereof. In the event of a default by
any Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be, may be postponed for such
period, not exceeding seven days, as you, as Representatives, may determine in
order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to BT Alex. Brown Incorporated,
101 Federal Street, 15th Floor, Boston, Massachusetts 02110-1846; Attention:
Gregory J. Burkus; with a copy to BT Alex. Brown Incorporated, One Bankers Trust
Plaza, 130 Liberty Street, New York, New York 10006, Attention: General Counsel;
if to the Company or the Selling Stockholders, to
Datastream Systems, Inc.
50 Datastream Plaza
Greenville, South Carolina 29605
Attention: Larry Blackwell, Chief Executive Officer
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with a copy to: Hunton & Williams
600 Peachtree Street, NE, Suite 4100
Atlanta, Georgia 30308
Attention: B. Lynn Walsh, Esq.
11. TERMINATION.
(a) This Agreement may be terminated by you by notice to the Sellers at
any time prior to the Closing Date if any of the following has occurred: (i)
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, any Material Adverse Change or any development
involving a prospective Material Adverse Change in the Company and its
Subsidiaries taken as a whole, whether or not arising in the ordinary course of
business, (ii) any outbreak or escalation of hostilities or declaration of war
or national emergency or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
escalation, declaration, emergency, calamity, crisis or change on the financial
markets of the United States would, in your reasonable judgment, make it
impracticable or inadvisable to market the Shares or to enforce contracts for
the sale of the Shares, or (iii) suspension of trading in securities generally
on the New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such Exchange, (iv) the enactment, publication, decree or
other promulgation of any statute, regulation, rule or order of any court or
other governmental authority which in your opinion has, or could reasonably be
expected to have, a Material Adverse Change on the Company and the Subsidiaries,
taken as a whole, (v) declaration of a banking moratorium by United States or
New York State authorities, (vi) any downgrading, or placement on any watch list
for possible downgrading, in the rating of the Company's debt securities by any
"nationally recognized statistical rating organization" (as defined for purposes
of Rule 436(g) under the Exchange Act); (vii) the suspension of trading of the
Company's common stock by the NASDAQ Stock Market, the Commission, or any other
governmental authority, or (viii) the taking of any action by any governmental
body or agency in respect of its monetary or fiscal affairs which in your
reasonable opinion has a material adverse effect on the securities markets in
the United States; or
(b) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Stockholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. No purchaser of any of the Shares from
any Underwriter shall be deemed a successor or assign merely because of such
purchase.
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13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, the Selling Stockholders and the Underwriters acknowledge and
agree that the only information furnished or to be furnished by any Underwriter
to the Company for inclusion in any Prospectus or the Registration Statement
consists of the information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), legends required
by Item 502(d) of Regulation S-K under the Act and the information under the
caption "Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements contained in
this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers, and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Stockholders, the
Company and the several Underwriters in accordance with its terms.
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Stockholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such
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Selling Stockholder pursuant to a validly existing and binding Power of Attorney
which authorizes such Attorney-in-Fact to take such action.
Very truly yours,
DATASTREAM SYSTEMS, INC.
By: _______________________________________
Selling Stockholders listed on Schedule II
By: _______________________________________
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT ALEX. BROWN INCORPORATED
HAMBRICHT & QUIST LLC
LEHMAN BROTHERS INC.
RAYMOND JAMES & ASSOCIATES, INC.
THE ROBINSON-HUMPHREY COMPANY, LLC
As Representatives of the several
Underwriters listed on Schedule I
By: BT Alex. Brown Incorporated
By: ______________________________
Authorized Officer
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SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
----------- ------------------------
BT Alex. Brown Incorporated
Hambricht & Quist LLL
Lehman Brothers Inc.
Raymond James & Associates, Inc.
The Robinson-Humphrey Company, LLC
__________
Total __________
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SCHEDULE II
SCHEDULE OF SELLING STOCKHOLDERS
Number of Firm Shares Number of Option Shares
Selling Stockholder to be Sold to be Sold
- ------------------- --------------------- -----------------------
__________ __________
Total __________ __________
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