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 MARCH 31, 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: MARCH 31, 1998 19,216,659 shares, $0.01 par value.
<PAGE>
Datastream Systems, Inc.
FORM 10-Q
Quarter ended March 31, 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 March 31, 1999
Assets 4
Liabilities and Stockholders' Equity 5
Consolidated Income Statements -
for the Three Months ended March 31,1998 and 1999 6
Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Income -
for the Three Months ended March 31, 1999 7
Consolidated Statements of Cash Flows -
for the Three Months ended March 31, 1998 and 1999 8
Notes to the Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About 14
Market Risk
Part II. Other Information 15
Signature 16
<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, March 31,
1998 1999
---- ----
(unaudited)
Current assets:
Cash and cash equivalents $6,739,209 $9,694,211
Accounts receivable, net of allowance
for doubtful accounts of $3,073,837
and $ 3,482,977, respectively 32,440,963 33,296,327
Unbilled receivables 2,761,922 2,899,014
Investments 2,574,898 160
Prepaid expenses 1,633,227 1,623,003
Inventories 274,502 152,653
Deferred income taxes 2,322,600 2,322,600
Other assets 1,662,716 1,662,605
--------- ---------
Total current assets 50,410,037 51,650,573
Investments 2,034,744 6,344,744
Property and equipment, net 12,886,791 12,647,699
Goodwill, net 18,323,801 17,559,686
Capitalized software development costs,
net of accumulated amortization of
$3,180,813 and $3,764,204, respectively 3,134,779 3,518,395
--------- ---------
Total assets $86,790,152 $91,721,097
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
Liabilities and Stockholders' Equity
December 31, March 31,
1998 1999
---- ----
(unaudited)
Current liabilities:
Accounts payable $3,143,893 $3,769,529
Other accrued liabilities 9,768,179 8,844,917
Income taxes payable 2,762,451 4,491,898
Current portion of long-term debt 650,884 591,163
Unearned revenue 8,292,829 9,780,062
--------- ---------
Total current liabilities 24,618,236 27,477,569
Long-term debt, less current portion 297,092 284,493
Deferred income taxes 1,268,400 1,268,400
--------- ---------
Total liabilities 26,183,728 29,030,462
---------- ----------
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,
19,216,659 shares issued and outstanding
at March 31, 1999 191,833 192,167
Additional paid-in capital 66,138,405 66,447,050
Accumulated deficit (6,675,096) (3,028,460)
Other accumulated comprehensive income (loss) 951,282 (1,372)
Treasury stock, 0 shares at December 31, 1998 and
100,000 shares at March 31, 1999, at cost - (918,750)
---------- ----------
Total stockholders' equity 60,606,424 62,690,635
---------- ----------
Total liabilities and stockholders' equity $86,790,152 $91,721,097
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three months ended March 31, 1998 and 1999
March 31, March 31,
1998 1999
---- ----
Revenues:
Product $ 7,365,099 $ 10,422,468
Professional service 8,955,524 13,173,938
Support 3,808,038 5,202,315
--------- ---------
Total revenues 20,128,661 28,798,721
Cost of revenues:
Cost of product revenues 776,139 1,118,477
Cost of professional service revenues 4,144,932 6,689,912
Cost of support revenues 929,829 1,317,820
Write-off of capitalized software 597,944 -
--------- ---------
Total cost of revenues 6,448,844 9,126,209
--------- ---------
Gross profit 13,679,817 19,672,512
Operating expenses:
Sales and marketing 5,549,360 7,655,576
Product development 1,521,755 2,897,020
General and administrative 2,029,787 3,407,420
Write-off of in-process research and development 2,057,008 -
--------- ---------
Total operating expenses 11,157,910 13,960,016
---------- ----------
Operating income 2,521,907 5,712,496
Other income (expense):
Interest income 205,790 128,600
Interest expense (28,266) (52,370)
Other 75,988 45,823
------ ------
Net other income 253,512 122,053
Income before income taxes 2,775,419 5,834,549
Income taxes 2,064,156 2,187,913
--------- ---------
Net income $ 711,263 $ 3,646,636
=========== ===========
Basic net income per share $ .04 $ .19
----------- -----------
Diluted net income per share $ .04 $ .18
----------- -----------
Basic weighted average number of common and
common equivalent shares outstanding 18,640,122 19,203,241
Diluted weighted average number of common and
common equivalent shares outstanding 20,246,844 19,837,256
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 three months ended March 31, 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 - - 3,646,636 - - 3,646,636
Foreign currency
translation adjustment - - - (952,654) - (952,654)
--------
Total comprehensive income 2,693,982
---------
Exercise of stock options 133 112,395 - - - 112,528
Stock issued for Employee
Stock Purchase Plan 201 196,250 - - - 196,451
Acquisition of 100,000 common shares - - - - (918,750) (918,750)
Balance at March 31, 1999 $192,167 $66,447,050 $(3,028,460) $ (1,372) $(918,750) $62,690,635
======== =========== =========== ========= ========= ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Statements of Cash Flows
(unaudited)
Three months ended March 31, 1998 and 1999
March 31, March 31,
1998 1999
---- ----
Cash flows from operating activities:
Net income $ 711,263 $ 3,646,636
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 683,900 1,140,395
Amortization of capitalized software
development costs 195,133 583,391
Amortization of goodwill 272,750 764,115
Other accumulated comprehensive income (323,882) (952,648)
Accretion of investment discount, net (60,115) (320)
(Gain) Loss on disposal of fixed assets - (32,809)
Provision for doubtful accounts 282,377 409,140
Write-off of in-process
research and development 2,057,008 -
Write-off of capitalized software 597,944 -
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (1,837,672) (1,264,504)
Unbilled receivable (771,969) (137,092)
Accrued interest receivable (24,194) 10,237
Prepaid expenses (582,338) 10,224
Inventories 112,782 121,849
Other assets (437,541) (10,127)
Accounts payable 659,629 625,635
Other accrued liabilities 694,499 (923,262)
Income taxes payable 983,101 1,729,047
Unearned revenue 2,284,878 1,487,233
--------- ---------
Net cash provided by (used in)
operating activities 5,497,553 7,207,140
--------- ---------
Cash flows from investing activities:
Purchase of investments (372,891) (4,310,000)
Proceeds from sale and maturities of investments 4,853,860 2,575,058
Additions to property and equipment (1,212,368) (868,098)
Capitalized software development costs (806,836) (967,007)
Cash paid for acquisition, net of cash acquired (6,467,189) -
--------- ---------
Net cash used in investing activities (4,005,424) (3,570,047)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options 473,699 112,528
Proceeds from issuances of shares under employee
stock purchase plan 74,547 196,451
Cash paid to acquire treasury stock - (918,750)
Principal payments on long-term debt (1,667) (72,320)
--------- ---------
Net cash provided by (used in)
financing activities 546,579 (682,091)
--------- ---------
Net increase (decrease) in cash and cash equivalent 2,038,708 2,955,002
Cash and cash equivalents at beginning of perio 2,409,387 6,739,209
--------- ---------
Cash and cash equivalents at end of period $ 4,448,095 $ 9,694,211
=========== ===========
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, 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:
On March 31, 1998, the Company acquired Insta Instandhaltung technischer Anlagen
GmbH ("Insta"), a German corporation headquartered in Munich, Germany.
On June 16, 1998, the Company acquired Strategic Information Systems PTE Ltd., a
Singapore corporation ("SIS").
On July 13, 1998, the Company acquired certain assets of Datastream (Pacific)
Pty Ltd., an Australian corporation ("DSTM-PAC").
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.
<PAGE>
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:
Per Share
Income Shares Amount
March 31, 1999:
Basic income per share $ 3,646,636 19,203,241 .19
Effect of dilutive securities: ===
Stock options - 634,015
----------- ----------
Diluted income per share $ 3,646,636 19,837,256 .18
=========== ========== ===
March 31, 1998:
Basic income per share $ 711,263 18,640,122 .04
===
Effect of dilutive securities:
Stock options - 1,606,722
----------- ----------
Diluted income per share $ 711,263 20,246,844 .04
=========== ========== ===
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 Reallocated 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 March 31, 1999, approximately $679,000 of the restructuring accruals were
utilized as follows: $120,000 for severance and related costs, $237,000 for
costs of closing redundant facilities and $322,000 for provisions for increased
credit risks.
D. Datastream Systems, Inc. Argentinean Stock Option Plan
On March 12, 1999, the Company's board of directors authorized the establishment
of the Datastream Systems, inc. Argentinean Stock option Plan (the "Argentina
Plan") and authorized and reserved for issuance 125,000 shares of common stock
for grants of stock options under the Argentina Plan for the employees of the
Company's Argentinean subsidiary. Generally, options granted pursuant to the
Argentina Plan will vest incrementally over a period of one to three years,
depending on the terms of the particular option agreement, and expire ten years
from the date of grant. Options are granted at the fair market value of the
underlying shares at the grant date.
E. 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.
The Company is required to adopt this standard in the first quarter of 2000. 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 consists 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. MP5 (formally R5 CAMMS) is a high-end client-server EAM
product. Datastream supports its software products through professional
services, including installation, consulting, integration, custom programming
and training. On-going technical support services are supplied pursuant to
renewable annual technical support contracts.
Results of Operations
Total Revenues. The Company reported higher revenues for the first quarter
of 1999. Total revenues increased 43% to $28,798,721 in the first quarter of
1999 from $20,128,661 in the first 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 first quarter of 1999 includes $3,246,029 of revenue
from the entities of Insta, SIS, DSTM-PAC and Computec, which were acquired
during 1998.
Product revenues increased 42% to $10,422,468 (36% of total revenues) in
the first quarter of 1999 from $7,365,099 (37% of total revenues) in the first
quarter of 1998, as a result of the growth in product sales, including MP5, MP2
Enterprise and MP2 Professional - Access, and the growth in international sales.
Professional service revenues increased 47% to $13,173,938 (46% of total
revenues) in the first quarter of 1999 from $8,955,524 (45% of total revenues)
in the first quarter of 1998. The increase resulted from the addition of
professional service personnel to service expansion of the Company's installed
base of systems.
Technical support revenues for the first quarter 1999 increased 37% to
$5,202,315 (18% of total revenues) from $3,808,038 (19% of total revenues) in
the first quarter of 1998, primarily due to the expansion of the Company's
installed base of systems.
Cost of Revenues. Cost of revenues increased 42% to $9,126,209 (32% of
total revenues) in the first quarter of 1999, as compared to $6,448,844 (32% 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 salaries and customer reimbursed
travel and increased amortization of capitalized software.
Cost of product revenues was 4% of total revenues in the first quarter of
1999, and 4% of total revenues during the same period of 1998. The overall
increase in cost of product revenues is attributed to increased amortization
expense for capitalized software.
Cost of professional service revenues was 23% of total revenues during the
first quarter of 1999, and 21% 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 5% of total revenues during
the first quarter of 1999 and 5% of total revenues during the same period in
1998.
Cost of revenues for the first quarter of 1998 includes a $597,944
write-off of capitalized software (3% of total revenues) which became obsolete
as a result of the acquisition of Insta.
Sales and Marketing Expenses. Sales and marketing expenses increased 38% to
$7,655,576 (27% of total revenues) during the first quarter of 1998 from
$5,549,360 (28% of total revenues) during the first quarter in 1998, as a result
of an increased number of sales personnel and commissions associated with the
increase in sales revenue.
<PAGE>
Product Development Expenses. Total product development expenditures
increased 66% to $3,864,027 (13% of total revenues) during the first quarter of
1999 from $2,328,591 (12% of total revenues) during the same period in 1998. The
capitalized portion of these amounts were $967,007 and $806,836, respectively.
Giving effect to amounts capitalized, product development expense increased 90%
to $2,897,020 (10% of total revenues) in the first quarter of 1999 from
$1,521,755 (8% of total revenues) during the same period in 1998. The increase
in total product development expense resulted from increasing the number of
development personnel to support continued development of MP2 7.0 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 and will be expensed as incurred.
General and Administrative Expenses. General and administrative expenses
increased 68% to $3,407,420 (12% of total revenues) during the first quarter of
1999 from $2,029,787 (10% of total revenues) in the first quarter of 1998,
primarily due to increased amortization of goodwill related to the 1998
acquisitions of Insta, SIS, DSTM-PAC, Computec and Computec-Mexico and costs
incurred implementing international organizational changes.
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.
Miscellaneous Income. Miscellaneous income decreased to $45,823 in the
first quarter of 1999 from $75,988 in the first quarter 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 $128,600 in the
first quarter of 1999 from $205,790 in the first quarter of 1998, due to lower
investment balances realized upon completion of the 1998 acquisitions. Interest
expense increased to $52,370 in the first quarter of 1999 from $28,266 in the
first quarter of 1998, due to increase debt balances acquired during the 1998
acquisitions.
Tax Rate. The Company's effective tax rate was 37.5% for the first quarter
of 1999 as compared to 38% before non-deductible items associated with the
acquisition of Insta for the first quarter of 1998.
Net Income. Net income increased 81% to $3,646,635 (13% of total revenues)
in the first quarter of 1999 from $711,263 (4% of total revenues) in the first
quarter of 1998. This increase is largely attributed to the charges for the
acquisition of Insta on March 31, 1998. Without the acquisition related charges,
net income would have increased 8%.
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
$9,694,211 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 March 31, 1999 the
company had repurchased 100,000 shares at a cost of $918,750. The shares are
classified as treasury stock on the balance sheet and are reported at cost.
The Company's principal commitments as of March 31, 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.
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.
<PAGE>
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 anticipates that corrective actions for the
Company's Internal Systems will be completed and tested by the end of the second
quarter of 1999. However, the Committee believes that all of Datastream's
critical 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 second and third quarters 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 software, 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 has notified its
customers of the need to migrate to current products that management believes
are Year 2000 compliant and, where appropriate, has made available to them a
software patch that management believes will bring these products into Year 2000
compliance. 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. The Company's products increasingly are installed as part of
substantial integrated systems utilized by customers, which systems may not be
Year 2000 compliant. Also, certain customers of the Company may still be running
earlier versions of the Company's products that are not 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 $325,000 in its
Year 2000 efforts in connection with both Internal Systems and products. The
Company estimates that total costs associated with corrective actions taken with
respect to its Internal Systems and product upgrades will be immaterial.
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
first quarter of 1999.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Since January 11, 1999, Datastream, Larry G. Blackwell and Daniel H.
Christie 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
second or 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
Not Applicable
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 an Amended Current Report on Form 8-K/A on
January 11, 1999 to report the Company's issuance of shares of
common stock related to the acquisition of Datastream (Pacific)
PTY Ltd. on July 13, 1998.
The Company filed a Current Report on Form 8-K on February 17,
1999 to report the Company's announcement of its voluntary
restatement of results of operations for the first, second and
third quarters of fiscal year 1998 to reduce the charge for
in-process research and development and to increase the related
goodwill amortization expense in connection with the
acquisitions of Insta Instandhaltung technischer Anlagen GmbH on
March 31, 1998 and Strategic Information Systems PTE Ltd. on
June 16, 1998.
The Company filed a Current Report on Form 8-K on March 19, 1999
to report the Company's announcement of a stock repurchase plan.
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.
Date: 5/7/99 /s/ C. Alex Estevez
-------------------
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 three months ended March
31, 1999 and the consolidated balance sheet as of March 31, 1999 contained in
the Company's Quarterly Report on Form 10 Q for the Quarter Ended March 31, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,694,211
<SECURITIES> 160
<RECEIVABLES> 33,296,327
<ALLOWANCES> (3,482,977)
<INVENTORY> 152,684
<CURRENT-ASSETS> 51,650,573
<PP&E> 23,653,204
<DEPRECIATION> (11,005,505)
<TOTAL-ASSETS> 91,721,097
<CURRENT-LIABILITIES> 27,477,569
<BONDS> 284,493
0
0
<COMMON> 192,167
<OTHER-SE> 62,498,468
<TOTAL-LIABILITY-AND-EQUITY> 91,721,097
<SALES> 10,422,468
<TOTAL-REVENUES> 28,798,721
<CGS> 1,118,477
<TOTAL-COSTS> 9,126,209
<OTHER-EXPENSES> 13,960,016
<LOSS-PROVISION> 409,140
<INTEREST-EXPENSE> 52,370
<INCOME-PRETAX> 5,834,549
<INCOME-TAX> 2,187,913
<INCOME-CONTINUING> 3,646,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,646,636
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
</TABLE>
