SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
(Mark One)
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
________________to_________________
COMMISSION FILE NUMBER: 000-25590
DATASTREAM SYSTEMS, INC.
Incorporated pursuant to the laws of the State of Delaware
-------------------------------------------
Internal Revenue Service -- Employer Identification No. 57-0813674
50 DATASTREAM PLAZA, GREENVILLE, SC 29605
(864) 422-5001
-------------------------------------------
NOT APPLICABLE
(Former Name, Former Address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of the issuer's common stock as of the latest practicable date:
June 30, 1998 19,261,046 shares, $0.01 par value.
<PAGE>
Datastream Systems, Inc.
FORM 10-Q
Quarter ended June 30, 1999
Index
Page No.
Part I. Consolidated Financial Information
"Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995 3
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets-
December 31, 1998 and June 30, 1999
Assets 4
Liabilities and Stockholder' Equity 5
Consolidated Income Statements -
for the Three Months ended June 30, 1998 and 1999 6
Consolidated Income Statements -
for the Six Months ended June 30, 1998 and 1999 7
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income -
for the Six Months ended June 30, 1999 8
Consolidated Statements of Cash Flows -
for the Six Months ended June 30, 1998 and 1999 9
Notes to the Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About 15
Market Risk
Part II. Other Information 16
Signature 17
<PAGE>
PART I. CONSOLIDATED FINANCIAL INFORMATION
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Datastream Systems, Inc. ("Datastream" or the "Company")
makes oral and written statements that may constitute "forward-looking
statements" (rather than historical facts) as defined in the Private
Securities Litigation Reform Act of 1995 (the "Act") or by the SEC in its
rules, regulations and releases. The Company desires to take advantage of
the "safe harbor" provisions in the Act for forward-looking statements made
from time to time, including, but not limited to, the forward-looking
statements made in this Quarterly Report on Form 10-Q (the "Report"), as well
as those made in other filings with the SEC. Forward-looking statements
contained in this Report are based on management's current plans and
expectations and are subject to risks and uncertainties that could cause
actual results to differ materially from those described in the
forward-looking statements. In the preparation of this Report, where such
forward-looking statements appear, the Company has sought to accompany such
statements with meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
described in the forward-looking statements. Such factors include, but are
not limited to: increasing competition in the markets in which the Company
competes; the ability of the Company to enhance its current products and
develop new products that address technological and market developments;
risks associated with increasing international sales, including, but not
limited to, exposure to foreign exchange fluctuations and the ability of the
Company to successfully compete in foreign markets; fluctuations in quarterly
results due to seasonality and longer sales cycles in certain regions where
the Company markets its products, especially in connection with the Company's
high-end products; the Company's ability to complete the implementation of
its Year 2000 program on a timely basis and the ability of the Company's
suppliers, vendors, customers and other third parties on which the Company
relies to be Year 2000 ready; and changes in economic conditions generally,
both domestic and international. The preceding list of risks and
uncertainties, however, is not intended to be exhaustive, and should be read
in conjunction with other cautionary statements made herein and in the
Company's other publicly filed reports, including, but not limited to, the
"Risk Factors" set forth in the Company's Form 10-K for the fiscal year ended
December 31, 1998.
The Company does not have, and expressly disclaims, any obligation to release
publicly any updates or any changes in the Company's expectations or any
changes in events, conditions or circumstances on which any forward-looking
statement is based.
<PAGE>
ITEM 1. Consolidated Financial Statements
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
Assets
December 31, June 30,
1998 1999
---- ----
(unaudited)
Current assets:
Cash and cash equivalents $ 6,739,209 $ 9,755,402
Accounts receivable, net of allowance
for doubtful accounts of $3,073,837
and $ 3,449,224, respectively 32,440,963 32,438,424
Unbilled receivables 2,761,922 2,817,003
Investments 2,574,898 2,034,904
Prepaid expenses 1,633,227 1,909,253
Inventories 274,502 40,430
Deferred income taxes 2,322,600 2,322,600
Other assets 1,662,716 2,085,790
--------- ---------
Total current assets 50,410,037 53,403,806
Investments 2,034,744 4,260,000
Property and equipment, net 12,886,791 12,546,477
Goodwill, net 18,323,801 16,795,571
Capitalized software development costs,
net of accumulated amortization of
$3,180,813 and $4,529,849, respectively 3,134,779 2,752,749
--------- ---------
Total assets $86,790,152 $89,758,603
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
Liabilities and Stockholders' Equity
December 31, June 30,
1998 1999
---- ----
(unaudited)
Current liabilities:
Accounts payable $ 3,143,893 $ 3,045,645
Other accrued liabilities 9,768,179 8,534,357
Income taxes payable 2,762,451 3,924,759
Current portion of long-term debt 650,884 28,255
Unearned revenue 8,292,829 7,968,990
--------- ---------
Total current liabilities 24,618,236 23,502,006
Long-term debt, less current portion 297,092 263,815
Deferred income taxes 1,268,400 1,268,400
--------- ---------
Total liabilities 26,183,728 25,034,221
---------- ----------
Stockholders' equity:
Preferred stock, $1 par value,
1,000,000 shares authorized; none issued - -
Common stock, $.01 par value,
40,000,000 shares authorized;
19,183,305 shares issued and outstanding
at December 31, 1998,
19,261,046 shares issued and outstanding
at June 30, 1999 191,833 192,611
Additional paid-in capital 66,138,405 66,848,619
Accumulated deficit (6,675,096) (18,116)
Other accumulated comprehensive income 951,282 255,905
Treasury stock, 0 shares at December 31, 1998 and
280,000 shares at June 30, 1999, at cost - (2,554,637)
---------- ----------
Total stockholders' equity 60,606,424 64,724,382
---------- ----------
Total liabilities and stockholders' equity $86,790,152 $89,758,603
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three months ended June 30, 1998 and 1999
June 30, June 30,
1998 1999
---- ----
Revenues:
Product $ 9,332,113 $10,594,653
Professional service 9,831,906 14,181,376
Support 4,278,451 5,768,104
---------- ----------
Total revenues 23,442,470 30,544,133
Cost of revenues:
Cost of product revenues 494,928 530,778
Cost of professional service revenues 5,220,774 8,181,861
Cost of support revenues 1,214,502 1,280,993
Amortization and
write-off of capitalized software 276,702 765,645
---------- ----------
Total cost of revenues 7,206,906 10,759,277
---------- ----------
Gross profit 16,235,564 19,784,856
Operating expenses:
Sales and marketing 6,491,694 7,972,922
Product development 1,961,458 3,944,607
General and administrative 1,445,828 2,463,502
Amortization of goodwill 569,259 764,115
Write-off of in-process research and development
and other acquisition charges 1,360,000 -
---------- ----------
Total operating expenses 11,828,239 15,145,146
---------- ----------
Operating income 4,407,325 4,639,710
Other income (expense):
Interest income 146,498 109,567
Interest expense (31,246) (29,599)
Other 87,978 58,367
------ ------
Net other income 203,230 138,335
Income before income taxes 4,610,555 4,778,045
Income taxes 2,358,455 1,767,700
---------- ----------
Net income $ 2,252,100 $ 3,010,345
=========== ===========
Basic net income per share $ .12 $ .16
----------- -----------
Diluted net income per share $ .11 $ .15
----------- -----------
Basic weighted average number of common and
potential common shares outstanding 18,870,916 19,016,280
Diluted weighted average number of common and
potential common shares outstanding 20,595,098 19,842,144
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
Six months ended June 30, 1998 and 1999
June 30, June 30,
1998 1999
---- ----
Revenues:
Product $16,697,210 $21,017,121
Professional service 18,787,430 27,355,315
Support 8,086,490 10,970,418
---------- ----------
Total revenues 43,571,130 59,342,854
Cost of revenues:
Cost of product revenues 1,150,934 1,065,865
Cost of professional service revenues 9,365,706 14,871,773
Cost of support revenues 2,144,331 2,598,813
Amortization and
write-off of capitalized software 994,779 1,349,036
---------- ----------
Total cost of revenues 13,655,750 19,885,487
---------- ----------
Gross profit 29,915,380 39,457,367
Operating expenses:
Sales and marketing 12,041,054 15,628,497
Product development 3,483,212 6,841,627
General and administrative 3,127,865 5,106,808
Amortization of goodwill 917,009 1,528,230
Write-off of in-process research and development
and other acquisition charges 3,417,008 -
---------- ----------
Total operating expenses 22,986,148 29,105,162
---------- ----------
Operating income 6,929,232 10,352,205
Other income (expense):
Interest income 352,288 238,168
Interest expense (59,513) (81,970)
Other 163,966 104,190
------- -------
Net other income 456,741 260,388
Income before income taxes 7,385,973 10,612,593
Income taxes 4,422,611 3,955,613
---------- ----------
Net income $ 2,963,362 $ 6,656,980
=========== ===========
Basic net income per share $ .16 $ .35
----------- -----------
Diluted net income per share $ .15 $ .34
----------- -----------
Basic weighted average number of common and
potential common shares outstanding 18,755,519 19,109,761
Diluted weighted average number of common and
potential common shares outstanding 20,420,971 19,839,700
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity and Comprehensive Income
(unaudited)
For the six months ended June 30, 1999
<CAPTION>
Other
Additional Accumulated Accumulated Total
Common Paid-In Earnings Comprehensive Treasury Stockholders'
Stock Capital (Deficit) Income Stock Equity
----- ------- --------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $191,833 $66,138,405 $(6,675,096) $ 951,282 $ - $60,606,424
Comprehensive income
Net income - - 6,656,980 - - 6,656,980
Foreign currency
translation adjustment - - - (695,377) - (695,377)
--------
Total comprehensive income 5,961,603
---------
Exercise of stock options 577 472,039 - - - 472,616
Stock issued for Employee
Stock Purchase Plan 201 196,250 - - - 196,451
Amortization of compensatory
stock options - 41,925 - - - 41,925
Acquisition of 280,000 common shares - - - - (2,554,637) (2,554,637)
Balance at June 30, 1999 $192,611 $66,848,619 $ (18,116) $ 255,905 $(2,554,637) $64,724,382
======== =========== ============ ========= =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Six months ended June 30, 1998 and 1999
June 30, June 30,
1998 1999
---- ----
Cash flows from operating activities:
Net income $ 2,963,362 $ 6,656,980
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,456,146 2,204,343
Amortization of capitalized software
development costs 547,251 1,349,036
Amortization of goodwill 767,009 1,528,230
Other accumulated comprehensive income (267,465) (695,377)
Accretion of investment discount, net (104,741) (320)
Gain on disposal of fixed assets - (57,760)
Provision for doubtful accounts 85,411 587,387
Amortization of compensatory stock options - 41,925
Write-off of in-process
research and development 3,417,008 -
Write-off of capitalized software 597,944 -
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (4,690,979) (372,847)
Unbilled receivable (464,838) (267,081)
Accrued interest receivable 5,178 21,826
Prepaid expenses (1,525,005) (276,026)
Inventories 345,623 234,072
Other assets (353,639) (444,900)
Accounts payable 1,386,412 (98,247)
Other accrued liabilities (3,362,101) (1,233,819)
Income taxes payable 1,449,799 1,162,308
Unearned revenue 2,047,378 (323,839)
--------- ----------
Net cash provided by operating activities 4,299,753 10,015,891
--------- ----------
Cash flows from investing activities:
Purchase of investments (1,705,401) (4,310,000)
Proceeds from sale and maturities of investments 11,269,760 2,625,058
Additions to property and equipment (1,768,622) (1,806,273)
Capitalized software development costs (1,694,081) (967,007)
Cash paid for acquisition, net of cash acquired (10,054,691) -
---------- ----------
Net cash used in investing activities (3,953,035) (4,458,222)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,203,879 472,616
Proceeds from issuances of shares under employee
stock purchase plan 74,547 196,451
Cash paid to acquire treasury stock - (2,554,637)
Principal payments on long-term debt (130,515) (655,906)
---------- ----------
Net cash provided by (used in)
financing activities 1,147,911 (2,541,476)
---------- ----------
Net increase in cash and cash equivalents 1,494,629 3,016,193
Cash and cash equivalents at beginning of period 2,409,387 6,739,209
---------- ----------
Cash and cash equivalents at end of period $ 3,904,016 $ 9,755,402
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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, Germany, Ireland, Denmark, Sweden, Norway,
Portugal, Mexico, Brazil, Argentina, Chile, Venezuela, Peru, Malaysia,
Australia, Indonesia, Singapore, China and South Africa. The company
operates principally in one industry segment.
The company made the following acquisitions during 1998:
o On March 31, 1998, the Company acquired Insta Instandhaltung technischer
Anlagen GmbH ("Insta"), a German corporation headquartered in Munich,
Germany.
o On June 16, 1998, the Company acquired Strategic Information Systems PTE
Ltd., a Singapore corporation ("SIS").
o On July 13, 1998, the Company acquired certain assets of Datastream
(Pacific) Pty Ltd., an Australian corporation ("DSTM-PAC").
o On September 2, 1998, the Company acquired Computec Sistemas S.A., an
Argentinean corporation, and its affiliate Computec Sistemas Mexicana
S.A. de C.V., a Mexican corporation (together "Computec").
The interim financial information included herein is unaudited. Certain
information and footnote disclosures normally included in the financial
statements have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC), although the
Company believes that the disclosures made are adequate to make the
information presented not misleading. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes contained in the Company's Form 10-K for
the year ended December 31, 1998 filed with the SEC on March 31, 1999.
Other than as indicated herein, there have been no significant changes
from the financial data published in those reports. In the opinion of
management, such unaudited information reflects all adjustments,
consisting only of normal recurring accruals and other adjustments as
disclosed herein, necessary for a fair presentation of the unaudited
information.
Results for interim periods are not necessarily indicative of results
expected for the full year.
B. Accounting Policies
Revenue Recognition
The Company's revenue, which consists primarily of fees for product
sales, professional services and support, is recognized in accordance
with AICPA Statement of Position 97-2 ("SOP 97-2"), "Software Revenue
Recognition". Revenue earned on software arrangements involving multiple
elements (i.e., software products, upgrades/enhancements, postcontract
customer support, installation, training, etc.) is allocated to each
element based on the relative fair values of the elements. The fair value
of an element is based on evidence which is specific to the vendor. The
revenue allocated to software products (including specified
upgrades/enhancements) generally is recognized upon delivery of the
products. The revenue allocated to postcontract customer support
generally is recognized ratably over the term of the support and revenue
allocated to service elements (such as training and installation)
generally is recognized as the services are performed. If the Company
does not have evidence of the fair value for all elements in a
multiple-element arrangement, all revenue from the arrangement is
deferred until such evidence exists or until all elements are delivered.
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.
Net Income 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 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 reconciliation of basic and diluted income per share is as
follows:
<PAGE>
For the three months ended June 30,1999 and 1998
Per Share
Income Shares Amount
Three months ended June 30, 1999:
Basic income per share $ 3,010,345 19,016,280 .16
Effect of dilutive securities:
Stock options - 825,864
----------- ----------
Diluted income per share $ 3,010,345 19,842,144 .15
=========== ========== ===
Three months ended June 30, 1998:
Basic income per share $ 2,252,100 18,870,916 .12
Effect of dilutive securities:
Stock options - 1,724,182
----------- ----------
Diluted income per share $ 2,252,100 20,595,098 .11
=========== ========== ===
For the six months ended June 30,1999 and 1998
Per Share
Income Shares Amount
Six months ended June 30, 1999:
Basic income per share $ 6,656,980 19,109,761 .35
Effect of dilutive securities:
Stock options - 729,939
----------- ----------
Diluted income per share $ 6,656,980 19,839,700 .34
=========== ========== ===
March 31, 1998:
Basic income per share $ 2,963,362 18,755,519 .16
Effect of dilutive securities:
Stock options - 1,665,452
----------- ----------
Diluted income per share $ 2,963,362 20,420,971 .15
=========== ========== ===
C. Restructuring Charges
In 1998, the Company determined that it was necessary to aggressively
migrate its current and future products to a new web-based technology
platform and developed a plan to restructure certain of its operations in
response to increased competition and rapidly changing technology. The
restructuring plan required the discontinuance of certain internally
developed and acquired products and the reorganization of the Company's
product development and distribution structures domestically and
internationally to improve efficiencies and customer service and
eliminate redundancy. As a result, the Company recorded a restructuring
charge at December 31, 1998 of $3,977,000 and established certain
reserves for the costs.
As the Company implemented its restructuring plan during Q1 1999, it
determined that certain of the estimates used at the time the
restructuring plan was prepared had changed. Due to natural attrition,
restructuring costs for the involuntary terminations related to
centralization of product development, services and support functions
were determined to be lower than originally estimated. The Company also
recognized it would face higher costs related to the credit risks and
warranty on outstanding receivables balances in connection with product
obsolescence. The change in the estimated costs are as follows:
Original Charge Revised Charge
Involuntary terminations related to
centralized functions $2,421,000 $1,425,000
Provision for credit risk and warranty
on obsolete products 900,000 2,000,000
Costs of closing redundant facilities 656,000 552,000
------- -------
Total $3,977,000 $3,977,000
========== ==========
As of June 30, 1999, approximately $1,050,000 of the restructuring
accruals were utilized as follows: $315,000 for severance and related
costs, $279,000 for costs of closing redundant facilities and $456,000
for provisions for increased credit risks.
D. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement No. 133).
This standard requires a public company to recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. In July 1999, the Financial
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities- Deferral of Effective Date of FASB Statement No. 133
- - an amendment of FASB Statement No. 133" (Statement No. 137).
Statement No. 137 delayed the effective date for Statement No. 133 for
one year. The Company is required to adopt Statement No. 133 in the
first quarter of 2001. The Company has not yet assessed the impact this
standard will have on its financial condition or results of operations at
the time of adoption; however, the impact will ultimately depend on the
amount and type of derivative instruments held at the time of adoption,
if any.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report contains certain forward-looking statements with respect
to the Company's operations, industry, financial condition and
liquidity. These statements reflect the Company's assessment of a number
of risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking
statements as a result of certain factors set forth in this Report. An
additional statement made pursuant to the Private Securities Litigation
Reform Act of 1995 and summarizing certain of the principal risks and
uncertainties inherent in the Company's business is included in Part I of
this Report under the caption "'Safe Harbor' Statement Under the Private
Securities Litigation Reform Act of 1995". Readers of this Report are
encouraged to read such statement carefully.
Overview
The Company offers a complete family of "computerized maintenance
management systems" ("CMMS") and "enterprise asset management " ("EAM")
systems to the maintenance, repair and operations ("MRO") industry.
Generally these products consist of 4 major categories based on price and
functionality. MaintainIt/MaintainIt Pro are off-the-shelf, entry-level
solutions for small to medium businesses. MP2 Professional is a
full-featured integrated maintenance system for small to mid-size
companies. MP2 Enterprise combines the benefits of PC servers and PC
networks with a Windows graphical user interface and SQL relational
database. MP5i is an internet-based high-end EAM product. Datastream
supports its software products through professional services, including
installation, consulting, integration and training. On-going technical
support services are supplied pursuant to renewable annual technical
support contracts.
In July 1999, the Company established a new wholly owned subsidiary,
Maintenance.com, Inc. This subsidiary will be focused on Internet-based
business-to-business electronic commerce solutions. Maintenance.com, Inc.
is structured to include Datastream's e-commerce assets, including e-MRO
and BizSurplus.com, Datastream's new auction site.
Results of Operations
Total Revenues. The Company reported higher revenues for the second
quarter of 1999. Total revenues increased 30% to $30,544,133 in the
second quarter of 1999 from $23,442,470 in the second quarter of 1998 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. The second quarter of
1999 includes $2,645,886 of revenue from the entities of Insta, SIS,
DSTM-PAC and Computec, which were acquired during 1998. The second
quarter of 1998 includes $1,853,324 of revenue from Insta and SIS. Total
revenues increased 36% to $59,342,854 during the first six months of 1999
from $43,571,130 in the first six months of 1998.
Product revenues increased 14% to $10,594,653 (35% of total revenues)
in the first quarter of 1999 from $9,332,113 (40% of total revenues) in
the second quarter of 1998, as a result of the growth in product sales,
including MP5, MP2 Enterprise and MP2 Professional - Access. Product
revenues increased 26% to $21,017,121 (35% of total revenues) in the first
six months of 1999 from $16,697,210 (38% of total revenues) in the first
six months of 1998.
Professional service revenues increased 44% to $14,181,376 (46% of
total revenues) in the first quarter of 1999 from $9,831,906 (42% of total
revenues) in the second quarter of 1998. The increase resulted from the
addition of professional service personnel to service expansion of the
Company's installed base of systems. Professional service revenues
increased 46% to $27,355,315 (46% of total revenues) in the first six
months of 1999 from $18,787,430 (43% of total revenues) in the first six
months of 1998.
Technical support revenues for the second quarter of 1999 increased
35% to $5,768,104 (19% of total revenues) to $4,278,451 (18% of total
revenues) in the second quarter of 1998, primarily due to the expansion of
the Company's installed base of systems. Technical support services
revenues increased 36% to $10,970,418 (19% of total revenues) in the first
six months of 1999 from $8,086,490 (19% of total revenues) in the first
six months of 1998.
Cost of Revenues. Cost of revenues increased 49% to $10,759,277 (35%
of total revenues) in the second quarter of 1999, as compared to
$7,206,906 (31% of total revenues) in the comparable quarter of 1998.
The increase in cost of revenues is attributed to increased expenses
incurred in the Professional Services and Support Departments related to
increased head count to meet customer demand, customer reimbursed travel
and increased amortization of capitalized software.
Cost of revenues increased 46% to $19,885,487 (34% of total revenues)
during the first six months of 1999 from $13,655,750 (31% of total
revenues) in the first six months of 1998.
Cost of product revenues was 2% of total revenues in the second
quarter of 1999 and 2% of total revenues during the same period in 1998.
Cost of professional service revenues was 27% of total revenues
during the second quarter of 1999, and 22% of total revenues during the
same period in 1998. The increase as a percentage of total revenues was
due to higher costs of providing services in the companies acquired
during 1998 and costs incurred in implementing international
organizational changes.
Cost of technical support service revenues was 4% of total revenues
during the first quarter of 1999 and 5% of total revenues during the same
period in 1998. The decrease as a percentage of total revenues was due to
increased efficiencies realized in companies acquired during 1998.
Amortization and write off of capitalized software costs for the
second quarter of 1999 includes $765,645 (3% of total revenues) of
amortization expense and $276,702 (1% of total revenues) of amortization
expense for the same period in 1998. Cost of revenues for the first six
months of 1999 includes $1,349,036 (2% of total revenues) of amortization
expense. Cost of revenues for the first six months of 1998 includes
$396,835 (1% of total revenues) of amortization expense and a $597,944
write-off of capitalized software (1% of total revenues), which became
obsolete as a result of the acquisition of Insta.
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses increased
23% to $7,972,922 (26% of total revenues) during the second quarter of
1999 from $6,491,694 (28% of total revenues) during the second quarter of
1998, as a result of an increased number of sales personnel and
commissions associated with the increase in sales revenue. Sales and
marketing expenses increased 30% to $15,628,497 (26% of total revenues)
in the first six months of 1999 from $12,041,054 (28% of total revenues)
in the first six months of 1998.
Product Development Expenses. Total product development
expenditures increased 39% to $3,944,607 (13% of total revenues) during
the second quarter of 1999 from $2,848,702 (12% of total revenues)
during the same period in 1998. The capitalized portion of these amounts
were $0 and $887,244, respectively. The increase in total product
development expense resulted from increasing the number of development
personnel to support continued development of MP2i and e-mro, foreign
language development and other new products. FASB No. 86 "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
requires software development costs to be capitalized upon the
establishment of technological feasibility. The establishment of
technological feasibility requires considerable judgment by management
with respect to changes in software and hardware technologies. Due to
changes in the development process and increased complexity in the
products, costs incurred after technological feasibility has been
attained are not expected to be significant in future quarters.
Total product development expenditures increased 51% to $7,808,634
(13% of total revenues) during the first half of 1999 from $5,177,293 (12%
of total revenues) during the same period in 1998. The capitalized portion
of these amounts were $967,007 and $1,694,081, respectively.
General and Administrative Expenses. General and administrative
expenses increased 70% to $2,463,502 (8% of total revenues) during the
second quarter of 1999 from $1,445,828 (6% of total revenues) in the
second quarter of 1998, primarily due to costs incurred implementing
international organizational changes and increased administrative costs
incurred at acquired companies. General and administrative expenses
increased 63% to $5,106,808 (9% of total revenues) during the first half
of 1999 from $3,127,865 (7% of total revenues) in the first half of 1998.
Amortization of Goodwill. Amortization of goodwill expense
increased 34% to $764,115 (3% of total revenues) during the second
quarter of 1999 from $569,259 (2% of total revenues) in the second
quarter of 1998, due to increased goodwill balances from the acquisitions
of Insta, SIS, DSTM-PAC and Computec during 1998. Amortization of
goodwill expense increased 67% to $1,528,230 (3% of total revenues)
during the first half of 1999 from $917,009 (2% of total revenues) in the
first half of 1998.
Write-off of in-process research and development costs. During the
first quarter of 1998, the Company expensed $2,057,008 of in-process
research and development acquired as part of the acquisition of Insta.
During the second quarter of 1998, the Company expensed $1,110,000 of
in-process research and development acquired as part of the acquisition
of SIS.
Miscellaneous Income. Miscellaneous income decreased to $58,367 in
the second quarter of 1999 from $87,978 in the second quarter of 1998.
Miscellaneous income decreased to $104,190 in the first half of 1999 from
$163,966 in the first half of 1998. The decrease was due to decreased
rental income from leasing of the Company's building in Greenville, South
Carolina. Beginning in the third quarter of 1998, the Company no longer
leased any of the building to third parties.
Interest Income/(Expense). Interest income decreased to $109,567 in
the second quarter of 1999 from $146,498 in the first quarter of 1998, due
to lower investment balances realized upon completion of the 1998
acquisitions and the 1999 stock repurchase plan. Interest expense
decreased to $29,599 in the second quarter of 1999 from $31,246 in the
second quarter of 1998. Interest income decreased to $238,168 in the
first half of 1999 from $352,288 in the first half of 1998. Interest
expense increased to $81,970 in the first half of 1999 from $59,513 in the
first half of 1998.
Tax Rate. The Company's effective tax rate was 37% for the second
quarter of 1999 as compared to 39.5% before non-deductible items
associated with the acquisition of SIS for the second quarter of 1998.
The Company's effective tax rate was 37.3% for the first six months of
1999 as compared to 38.8% before non-deductible items associated with the
acquisition of Insta and SIS for the first six months of 1998 .
Net Income. Net income increased 34% to $3,010,345 (10% of total
revenues) in the second quarter of 1999 from $2,252,100 (10% of total
revenues) in the second quarter of 1998. Net income increased 125% to
$6,656,980 (11% of total revenues) in the first half of 1999 from
$2,963,362 (7% of total revenues) in the first half of 1998. These
increases are largely attributed to the charges for the acquisition of
Insta and SIS in 1998.
Liquidity and Capital Resources
The Company has funded its operating activities entirely from cash
generated from operations. The Company ended its first quarter of 1999
with $9,755,402 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.
On March 19, 1999 the Company announced that its board of directors
had authorized the repurchase of up to 500,000 shares of Datastream's
outstanding common stock. The repurchased shares will be used for
general corporate purposes, including grants of employee stock options.
At June 30, 1999 the Company had repurchased 280,000 shares at a cost of
$2,554,637. The shares are classified as treasury stock on the balance
sheet and are reported at cost.
The Company's principal commitments as of June 30, 1999, consisted
primarily of long term debt assumed in the acquisitions, and there were
no material commitments for capital expenditures. The Company believes
that its current cash balances, availability under its line of credit,
cash flow from operations and available for sale investments will be
sufficient to meet its working capital and capital expenditure needs for
at least the next 12 months.
<PAGE>
Year 2000
DATASTREAM DESIGNATES ALL STATEMENTS MADE BY IT IN THIS REPORT REGARDING
ITS YEAR 2000 EFFORTS AS "YEAR 2000 READINESS DISCLOSURES." SUCH
DISCOSURES ARE MADE PURSUANT TO THE YEAR 2000 INFORMATION AND READINESS
DISCLOSURE ACT.
Many currently installed computer systems and software products are
coded to accept only a two-digit format in the date 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 a year,
computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. To address the
Year 2000 issue, the Company has organized a Year 2000 Committee with the
responsibility of determining the Company's Year 2000 readiness, as well
as the Year 2000 readiness of third parties on which the Company relies,
including suppliers and vendors. The Committee includes the Company's
directors of development and corporate systems, product managers, and
representatives from the Company's financial, legal and technical support
areas. The Committee has focused its efforts on both internal operating
and information systems ("Internal Systems") and the Company's products.
The Committee is responsible for (i) identifying and collecting data
on all Internal Systems, (ii) determining which Internal Systems need
corrective action, (iii) modifying, upgrading or replacing those systems
and conducting follow-up testing, and (iv) establishing related
contingency plans where necessary. The Committee has identified all
Internal Systems that may have Year 2000 issues, has contacted the
manufacturers of those systems to determine whether they are Year 2000
ready, and has assessed the cost and timing of achieving readiness.
Based on information received from substantially all of the
manufacturers, the Committee believes that all of Datastream's Internal
Systems are currently Year 2000 ready. The Committee intends to complete
contingency planning for Internal Systems (if any) that may not be Year
2000 ready during the third quarter of 1999. The Company expects its
contingency plans to include, among other things, manual work arounds for
software and hardware failures, as well as substitution of systems,
suppliers and/or vendors, if necessary.
The Company believes that the current versions of its products are
Year 2000 compliant. The Company generally defines a product as Year
2000 "compliant" when that product (i) stores and calculates dates
consistent with a four-digit format, (ii) provides the user a two-digit
short-cut that is recognized in a four-digit format clearly defined in
its documentation, (iii) can correctly execute leap year calculations,
(iv) does not use special values for dates, and (v) correctly processes
date specific data from and after January 1, 2000. The Company regularly
runs regression tests on its current products, including tests of the
Year 2000 date rollover. Based on these tests, the Company does not
anticipate that current versions of the Company's products will be
materially adversely affected by date changes involving year 2000.
The Company is also running regression tests on certain earlier
versions of its products. These tests have identified areas in certain
earlier versions that do not meet the Company's definition of Year 2000
compliant. As the Company becomes aware of these Year 2000 issues, it
notifies its customers of the need to migrate to current versions that
management believes are Year 2000 compliant and/or makes available to
them a software patch that management believes will bring these products
into Year 2000 compliance. The Company has developed a seamless
migration path from earlier versions to current versions.
The Company is not testing all of the earlier versions of its
products. Certain customers of the Company may still be running these
earlier versions of the Company's products that may not be Year 2000
compliant. However, the Company is in the process of notifying these
customers of the need to migrate to current products that management
believes are Year 2000 compliant.
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. In addition, the Company's products increasingly are
installed as part of substantial integrated systems utilized by
customers, which systems may not be Year 2000 compliant. If the Company
is included in any Year 2000 claims by its customers or customers of
systems integrators, whether or not such claims have merit, it could have
a material adverse effect on the Company's business, operating results
and financial condition.
To date, the Company has not incurred expenses in excess of $500,000
in its Year 2000 efforts in connection with both Internal Systems and
products. The Company can not make any assurances that total costs
associated with corrective actions taken with respect to its Internal
Systems and products will not become material.
Although the Company does not currently believe that it will
experience material disruptions in its business associated with preparing
its Internal Systems and products for the year 2000, there can be no
assurance that the Company will not experience unanticipated negative
consequences and/or material costs caused by undetected errors or defects
in the technology used in its Internal Systems, which are composed of
third party software, and third party hardware that contain embedded
technology. Although the Company does not anticipate that it will
experience any disruptions in its supplier or vendor relationships due to
Year 2000 issues, it is not currently possible to predict whether failure
of infrastructure services provided by third parties, such as
electricity, phone service and Internet services will have a material
adverse effect on the Company's business, operating results and financial
condition.
The estimates and conclusions regarding the Company's Year 2000
program contain forward looking statements and are based on management's
best estimates of future events. Risks to completing the program include
the availability of resources, the Company's ability to discover and
correct potential Year 2000 problems, and the ability of certain third
parties to bring their systems into Year 2000 compliance.
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company did not experience any material changes in market risk
in the second quarter of 1999.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Since January 11, 1999, Datastream, Larry G. Blackwell and
Daniel H. Christie, the Company's former Chief Financial Officer, have
been named as defendants in shareholder class action lawsuits filed in
the United States District Court for the District of South Carolina,
Greenville Division. The complaints alleged violations of Section 10(b)
and 20(a) of the Exchange Act of 1934. Plaintiffs seek to represent a
class of individuals who purchased the Company's common stock from April
1 to October 20, 1998. The Company has not yet filed its answer to the
complaints filed to date, and expects a single, consolidated, amended
complaint to be filed during the third quarter of 1999.
The complaints filed to date allege that defendants
artificially inflated Datastream's earnings and stock price by taking
certain one-time charges not in compliance with generally accepted
accounting principles ("GAAP") in connection with Datastream's
acquisitions of Insta and SIS and materially understating operating costs
by improperly capitalizing certain expenses in the fiscal quarter ended
June 30, 1998 in violation of GAAP. The Company intends to defend these
lawsuits vigorously, but due to the inherent uncertainties of the
litigation process, the Company is unable to predict the outcome of this
litigation. If the outcome of the litigation is adverse to the Company,
it could have a material adverse effect on the Company's business,
financial condition and results of operations.
Datastream is occasionally involved in other litigation
relating to claims arising out of its operations in the normal course of
business. Other than the above-described shareholder litigations,
Datastream is currently not engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse
affect on the Company.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Stockholders
The 1999 Annual Meeting of Stockholders was held on June 11,
1999, at which time certain matters were submitted to the
stockholders of Datastream for a vote. Present in person or by
proxy at the meeting were holders of 16,863,431 shares of the
issued and outstanding shares of Datastream's common stock,
which represented 86.4% of the 19,517,211 shares of common
stock issued and outstanding as of April 27, 1999, the record
date for the Annual Meeting. Below is a brief description of
each matter, as well as the number (and percentage) of shares
represented at the meeting and entitled to vote and voting,
for, against, or abstaining as to each matter.
1. The stockholders elected the following class of directors to serve a
three-year term expiring in 2002 by the following vote:
Withhold
Name For Authority
Larry G. Blackwell 16,766,306 (99.4%) 97,125 (0.6%)
John M. Sterling, Jr. 16,769,192 (99.4%) 94,239 (0.6%)
2. The stockholders approved a proposal to increase the number of shares of
common stock reserved for issuance under the Datastream
Systems, Inc. 1998 Stock Option Plan by 750,000 shares by the
following vote:
For Against Abstain
15,257,015 (90.5%) 1,557,079 (9.2%) 49,337(0.3%)
3. The stockholders approved an amendment to the Amended and Restated
Datastream Systems, Inc. Employee Stock Purchase Plan to
shorten the waiting period for eligible employees to
participate in such plan from one year to 60 days by the
following vote:
For Against Abstain
16,554,103 (98.2%) 274,372 (1.6%) 34,956 (0.2%)
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on April 26,
1999 to report changes in the Company's management.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Datastream Systems, Inc.
/s/ C. Alex Estevez
Date: 8/11/99 ______________________
C. Alex Estevez
Chief Financial Officer (principal
financial and accounting officer)
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated (unaudited) statements of income for the six months ended June
30, 1999 and the consolidated balance sheet as of June 30, 1999 contained in
the Company's Quarterly Report on Form 10 Q for the Quarter Ended June 30,
1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,755,402
<SECURITIES> 2,034,904
<RECEIVABLES> 32,438,424
<ALLOWANCES> (3,449,224)
<INVENTORY> 40,430
<CURRENT-ASSETS> 53,403,806
<PP&E> 24,606,431
<DEPRECIATION> (12,059,954)
<TOTAL-ASSETS> 89,758,603
<CURRENT-LIABILITIES> 23,502,006
<BONDS> 263,815
0
0
<COMMON> 192,611
<OTHER-SE> 64,531,771
<TOTAL-LIABILITY-AND-EQUITY> 89,758,603
<SALES> 21,017,121
<TOTAL-REVENUES> 59,342,854
<CGS> 1,065,865
<TOTAL-COSTS> 19,885,487
<OTHER-EXPENSES> 29,105,162
<LOSS-PROVISION> 587,387
<INTEREST-EXPENSE> 81,970
<INCOME-PRETAX> 10,612,593
<INCOME-TAX> 3,955,613
<INCOME-CONTINUING> 6,656,980
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,656,980
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.34
</TABLE>
