SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(Mark One)
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
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: SEPTEMBER 30, 1998 19,143,401 shares, $0.01 par value.
<PAGE>
AMENDED FILING OF FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
After methodology changes were set forth by the Staff at the Securities
and Exchange Commission ( the "Staff") in its letter dated September 15,
1998 to the American Institute of Certified Public Accountants,
Datastream Systems, Inc. (the "Company" or "Datastream") voluntarily
adjusted the allocation of the purchase price related to its March 31,
1998 acquisition of Insta Instandhaltung Technischer Anlagen GmbH
("Insta") and its June 16, 1998 acquistion of Strategic Information
Systems PTE. Ltd., a Singapore corporation ("SIS") and the related
goodwill amortization. Although the Company believes that its original
accounting treatment was in accordance with generally accepted accounting
principles, it has made the adjustments to be consistent with the new
methodology set forth by the Staff. This amended filing contains related
financial information and disclosures as of and for the nine months ended
September 30, 1998. See Note 1 to the Consolidated Financial Statements.
Datastream Systems, Inc.
FORM 10-Q/A
Quarter ended September 30, 1998
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 Sheet-
December 31, 1997 and September 30, 1998
Assets 4
Liabilities and Owners Equity 5
Consolidated Income Statement -
for the Three Months ended September 30, 1997 and 1998 6
Consolidated Income Statement -
for the Nine Months ended September 30, 1997 and 1998 7
Consolidated Statement of Changes in Stockholders Equity -
for the Nine Months ended September 30, 1998 8
Consolidated Statement of Cash Flows -
for the Nine Months ended September 30, 1997 and 1998 9
Notes to the Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About 20
Market Risk
Part II. Other Information 21
Signature 22
<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
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, 1997.
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, September 30,
1997 1998
---- ----
(unaudited and
restated)
Current assets:
Cash and cash equivalents $ 2,409,387 $ 3,530,437
Accounts receivable, net of allowance
for doubtful accounts of $1,589,910
and $2,395,487, respectively 21,968,539 31,083,632
Unbilled receivables 2,271,375 3,214,487
Investments 9,735,585 160
Prepaid expenses 614,447 2,121,250
Inventories 369,486 385,552
Deferred income taxes 796,000 796,000
Other assets 619,448 1,802,489
------- ---------
Total current assets 38,784,267 42,934,007
Investments 6,637,286 4,613,486
Property and equipment, net 10,166,101 13,523,274
Goodwill 6,545,747 20,202,766
Capitalized software development costs,
net of accumulated amortization of
$1,197,177 and $3,617,085, respectively 2,963,842 5,622,722
Total assets $65,097,243 $86,896,255
=========== ===========
See notes to Consolidated Financial Statements
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
Liabilities and Stockholders' Equity
December 31, September 30,
1997 1998
---- ----
(unaudited and
restated)
Current liabilities:
Accounts payable $ 2,696,240 $ 2,996,544
Other accrued liabilities 4,135,258 6,038,869
Income taxes payable 2,816,800 5,947,754
Current portion of long-term debt 346,197 793,472
Unearned revenue 6,499,953 8,921,358
--------- ---------
Total current liabilities 16,494,448 24,697,997
Long-term debt, less current portion 603,098 304,640
Deferred income taxes 892,000 892,000
------- -------
Total liabilities 17,989,546 25,894,637
Stockholders' equity:
Preferred stock, $1 par value,
1,000,000 shares authorized;
none outstanding - -
Common stock, $.01 par value,
40,000,000 shares authorized;
18,585,518 shares issued and
outstanding at December 31, 1997,
19,143,401 shares issued and
outstanding at September 30, 1998 185,855 191,434
Additional paid-in capital 58,049,212 65,666,498
Accumulated deficit (11,375,601) (5,578,715)
Other accumulated comprehensive income 248,231 722,401
------- -------
Total stockholders' equity 47,107,697 61,001,618
Total liabilities and stockholders' equity $65,097,243 $86,896,255
=========== ===========
See Notes to Consolidated Financial Statements
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Statements of Income
(unaudited)
Three months ended September 30, 1997 and 1998
September 30, September 30,
1997 1998
---- ----
(restated)
Revenues:
Product $ 8,194,800 $ 9,401,198
Professional service 6,187,778 11,168,981
Support 3,017,597 4,591,265
--------- ---------
Total revenues 17,400,175 25,161,444
Cost of revenues:
Cost of product revenues 745,550 1,044,554
Cost of professional service revenues 3,738,612 5,971,820
Cost of support revenues 1,134,280 1,155,600
--------- ---------
Total cost of revenues 5,618,442 8,171,974
Gross profit 11,781,733 16,989,470
Operating expenses:
Sales and marketing 4,604,504 6,325,960
Product development 1,180,355 1,855,410
General and administrative 1,522,411 2,294,355
Write off of in-process research and development
and other acquisition charges - 1,103,967
--------- ---------
Total operating expenses 7,307,270 11,579,692
Operating income 4,474,463 5,409,778
Other income (expense):
Interest income 198,571 110,142
Interest expense (48,792) (28,886)
Other 99,658 (32,464)
------ -------
Net other income 249,437 48,792
Income before income taxes 4,723,900 5,458,570
Income taxes 1,748,000 2,625,047
--------- ---------
Net income $ 2,975,900 $ 2,833,523
=========== ===========
Basic net income per share $ .16 $ .15
----------- -----------
Diluted net income per share $ .15 $ .14
----------- -----------
Basic weighted average number of common and
potential common shares outstanding 18,451,151 19,072,774
========== ==========
Diluted weighted average number of common and
potential common shares outstanding 19,434,160 20,288,891
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Statements of Income
(unaudited)
Nine months ended September 30, 1997 and 1998
September 30, September 30,
1997 1998
---- ----
(restated)
Revenues:
Product $21,194,296 $26,098,409
Professional service 18,878,489 29,956,410
Support 8,823,343 12,677,755
--------- ----------
Total revenues 48,896,128 68,732,574
Cost of revenues:
Cost of product revenues 2,284,532 2,592,323
Cost of professional service revenues 10,980,210 15,337,526
Cost of support revenues 2,911,807 3,299,930
Write off of capitalized software costs - 597,944
--------- ----------
Total cost of revenues 16,176,549 21,827,723
Gross profit 32,719,579 46,904,851
Operating expenses:
Sales and marketing 13,571,866 18,367,015
Product development 3,050,566 5,338,622
General and administrative 5,530,108 6,339,228
Write off of in-process research and development
and other acquisition charges - 4,520,975
---------- ----------
Total operating expenses 22,152,540 34,565,840
Operating income 10,567,039 12,339,011
Other income (expense):
Interest income 707,431 462,430
Interest expense (186,954) (88,400)
Other 218,281 131,503
------- -------
Net other income 738,758 505,533
Income before income taxes 11,305,797 12,844,544
Income taxes 3,750,812 7,047,658
--------- ---------
Net income $ 7,554,985 $ 5,796,886
=========== ===========
Basic net income per share $ .41 $ .31
----------- -----------
Diluted net income per share $ .40 $ .28
----------- -----------
Basic weighted average number of common and
potential common shares outstanding 18,346,436 18,861,271
========== ==========
Diluted weighted average number of common and
potential common shares outstanding 18,985,305 20,376,944
========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
(unaudited and restated)
For the nine months ended September 30, 1998
<CAPTION>
Other
Additional Accumulated Accumulated Total
Common Paid-In Earnings Comprehensive Stockholders'
Stock Capital (Deficit) Income Equity
----- ------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $185,855 $58,049,212 $(11,375,601) $248,231 $47,107,697
Net income - - 5,796,886 - 5,796,886
Stock options exercised 2,575 1,668,649 - - 1,671,224
Shares issued for Employee
Stock Purchase Plan 237 245,909 - - 246,146
Shares issued for acquisitions 2,767 5,702,728 - - 5,705,495
Other accumulated
comprehensive income - - - 474,170 474,170
-------- -------- -------- -------- -----------
Balance at September 30, 1998 $191,434 $65,666,498 $ (5,578,715) $722,401 $61,001,618
======== =========== ============ ======== ===========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Statements of Cash Flows
(unaudited)
Nine months ended September 30, 1997 and 1998
September 30, September 30,
1997 1998
---- ----
(restated)
Cash flows from operating activities:
Net income $ 7,554,985 $ 5,796,886
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,590,698 2,366,601
Amortization of capitalized software
development costs 988,544 1,194,009
Amortization of goodwill 818,251 1,485,543
Other accumulated comprehensive income 334,538 469,552
Loss on disposal of fixed assets 45,037 -
Provision for doubtful accounts - 312,005
Write-off of in-process research and development - 4,520,975
Write-off of capitalized software costs - 597,944
Changes in operating assets and liabilities:
Accounts receivable (6,748,801) (9,685,995)
Accrued interest receivable 126,340 59,421
Prepaid expenses (233,374) (1,666,763)
Inventories 15,565 241,892
Other assets (1,947,944) (1,772,712)
Accounts payable (1,124,848) (241,929)
Other accrued liabilities (4,619,847) (4,035,634)
Income taxes payable 841,397 2,766,504
Unearned revenue 1,576,194 2,421,405
--------- ---------
Net cash provided by (used in)
operating activities (783,265) 4,829,704
Cash flows from investing activities:
Net proceeds from investments 1,370,801 12,371,702
Additions to property and equipment (3,111,340) (3,033,720)
Proceeds from sale of equipment 58,644 -
Capitalized software development costs (1,593,909) (2,485,647)
Cash paid for acquisition, net of cash acquired - (12,246,291)
----------- -----------
Net cash used in investing activities (3,275,804) (5,393,957)
Cash flows from financing activities:
Proceeds from exercise of stock options 1,755,148 1,671,224
Proceeds from issuance of shares under employee
stock purchase plan - 246,145
Proceeds from line of credit 400,000 -
Principal payments on long-term debt (3,262,128) (232,066)
---------- --------
Net cash provided by (used in)
financing activities (1,106,980) 1,685,303
Net increase (decrease) in cash and cash equivalents (5,166,049) 1,121,050
Cash and cash equivalents at beginning of period 6,315,719 2,409,387
--------- ---------
Cash and cash equivalents at end of period $ 1,149,67 $ 3,530,437
========== ===========
See Notes to Consolidated Financial Statement
<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, Venezuela, Peru, Malaysia, Australia,
Singapore, China and South Africa.
On March 31, 1998, the Company acquired Insta, a German corporation
headquartered in Munich, Germany. On June 16, 1998, the Company acquired
Strategic Information Systems PTE. Ltd., a Singapore corporation ("SIS"). The
acquisitions have been accounted for using the purchase method. In accordance
with Accounting Principles Board ("APB") Opinion No. 16, "Accounting for
Business Combinations," the purchase price for each acquisition was allocated to
the tangible and intangible assets purchased and the liabilities assumed
(including in-process research and development) based on the fair values using
valuation methods appropriate at the time. Subsequently, the Staff set forth a
new methodology for calculating in-process research and development in its
letter dated September 15, 1998 to the American Institute of Certified Public
Accountants. Although the Company believes that its original accounting
treatment was in accordance with generally accepted accounting principles, it
has made the adjustments to be consistent with the new methodology set forth by
the Staff. This resulted in a reduction in the amount allocated to in-process
research and development from $2,531,078 to $2,057,008 for the Insta acquisition
and from $2,700,000 to $1,110,000 for SIS. The reduction in the amount allocated
to in-process research and development resulted in an increase in goodwill and
related amortization expense. This restatement does not affect previously
reported net cash flows for the period. The effect of this reallocation on the
previously reported consolidated financial statements as of and for the three
and nine months ended September 30, 1998 is as follows (unaudited):
<TABLE>
Three Months Ended Six Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
<CAPTION>
Consolidated Statement of Income: As Reported As Restated As Reported As Restated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
General and administrative expenses 2,220,638 2,294,355 6,248,581 6,339,228
Write off of in process research and
development and other acquisition charges 1,103,697 1,103,697 6,585,045 4,520,975
Operating income 5,483,495 5,409,778 10,365,588 12,339,011
Income before income taxes 5,532,287 5,458,570 10,871,121 12,844,544
Net income 2,877,740 2,833,523 3,787,263 5,796,886
Basic net income per share $ .15 $ .15 $ .20 $ .31
Diluted net income per share $ .14 $ .14 $ .19 $ .28
</TABLE>
September 30, 1998
------------------
Balance Sheet: As Reported As Restated
----------- -----------
Goodwill 18,299,343 20,202,766
Total Assets 84,922,832 86,896,255
Income taxes payable 5,983,954 5,947,754
Total Liabilities 25,930,837 25,894,637
Accumulated deficit (7,588,338) (5,578,715)
Total stockholders' equity 58,991,995 61,001,618
Total Liabilities and stockholders' equity 84,922,832 86,896,255
<PAGE>
On July 13, 1998, the Company acquired certain assets of Datastream (Pacific)
Pty Ltd., an Australian corporation ("DSTM-PAC"). The purchase price has been
allocated to the tangible and intangible assets purchased based on the fair
values on the date of the acquisition.
On September 2, 1998, the Company acquired Computec Sistemas S.A., an
Argentinean corporation ("Computec"), and its affiliate Computec Sistemas
Mexicana S.A. de C.V., a Mexican corporation ("Computec-Mexico"). 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.
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 filed with the SEC on March 31, 1998. 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
On January 1, 1998, the Company adopted Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"). The adoption of SOP 97-2 did not
significantly affect the Company's results of operations.
Net Income Per Share
The Company calculates earnings per share in accordance with 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 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:
For the three months ended September 30, 1998 and 1997:
Per Share
Income Shares Amount
------ ------ ------
Three months ended September 30, 1998:
Basic income per share $ 2,833,523 19,072,774 .15
Effect of dilutive securities: ===
Stock options - 1,216,117
---------- ---------- ----
Diluted income per share $ 2,833,523 20,288,891 .14
=========== ========== ===
Three months ended September 30, 1997:
Basic income per share $ 2,975,900 18,451,151 .16
Effect of dilutive securities: ===
Stock options - 983,009
---------- ---------- ----
Diluted income per share $ 2,975,900 19,434,160 .15
=========== ========== ===
For the nine months ended September 30, 1998 and 1997:
Per Share
Income Shares Amount
------ ------ ------
Nine months ended September 30, 1998:
Basic income per share $ 5,796,886 18,861,271 .31
Effect of dilutive securities: ===
Stock options - 1,515,673
---------- ---------- ----
Diluted income per share $ 5,796,886 20,376,944 .28
=========== ========== ===
Nine months ended September 30, 1997:
Basic income per share $ 7,554,985 18,346,436 .41
Effect of dilutive securities: ===
Stock options - 638,869
---------- ---------- ----
Diluted income per shar $ 7,554,985 18,985,305 .40
=========== ========== ===
<PAGE>
On March 31, 1998, the Company issued 130,435 shares of stock as partial
consideration in the Insta acquisition. On June 16, 1998, the Company issued
88,652 shares of stock as partial consideration in the SIS acquisition. On July
13, 1998, the Company agreed to issue 13,274 shares of stock as partial
consideration in the DSTM-PAC acquisition. On September 2, 1998, the Company
issued 44,304 shares of stock as partial consideration in the Computec and
Computec-Mexico acquisition. See "Liquidity and Capital Resources".
Comprehensive Income
On January 1, 1998, the Company adopted Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." As required by the Statement, 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 Sheets. 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 the periods ended September 30, 1998
and 1997 is as follows:
For the three months ended September 30, 1997 and 1998:
September 30, September 30,
1997 1998
---- ----
Net income $ 2,975,900 2,833,523
Foreign currency translation adjustment 65,365 284,052
----------- ---------
Comprehensive income $ 3,041,265 3,117,575
=========== =========
For the nine months ended September 30, 1997 and 1998:
September 30, September 30,
1997 1998
---- ----
Net income $ 7,554,985 5,796,886
Foreign currency translation adjustment 452,149 505,126
Unrealized loss on securities
available-for-sale - (30,956)
----------- ---------
Comprehensive income $ 8,007,134 6,271,056
=========== =========
C. 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 the common stock and stock options
included in the accompanying financial statements reflect the stock split.
D. Recent Accounting Pronouncements
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.
<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") / "enterprise asset management software" ("EAMS") to the
maintenance, repair and operations ("MRO") industry. Generally these products
consists of 5 major categories based on price and functionality. Maintainit and
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 EAMS
product. Datastream supports its software products through professional
services, including installation, consulting, integration, custom programming
and training. Ongoing technical support services are supplied pursuant to
renewable annual technical support contracts.
On March 31, 1998, the Company completed the acquisition of all of the
outstanding shares of Insta, a German based CMMS provider and on June 16, 1998,
the Company completed the acquisition of all of the outstanding shares of SIS, a
Singapore based CMMS provider. The acquisitions were accounted for as a purchase
in accordance with APB Opinion No. 16, "Accounting for Business Combinations."
Under the purchase method of accounting, the purchase price is allocated to the
assets acquired and the liabilities assumed based on their estimated fair value
at the date of the acquisition. Using the valuation methods appropriate at the
time, the purchase price allocation included in-process research and development
of $2,531,078 for INSTA and $2,700,000 for SIS. Subsequently, the Staff set
forth a new methodology for calculating in-process research and development in
its letter dated September 15, 1998 to the American Institute of Certified
Public Accountants. Although the Company believes that its original accounting
treatment was in accordance with generally accepted accounting principles, it
has made the adjustments to be consistent with the new methodology set forth by
the Staff. As a result, Datastream has decreased the amounts previously expensed
as in-process research and development to $2,057,008 for Insta and $1,110,000
for SIS.
Results of Operations
Total Revenues. The Company reported higher revenues for the third quarter
of 1998. Total revenues increased 45% to $25,161,444 in the third quarter of
1998 from $17,400,175 in the third quarter of 1997, due principally 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 third quarter of 1998 includes
$3,231,038 of revenue from the newly acquired entities of Insta, SIS, DSTM-PAC,
Computec and Computec-Mexico. Total revenues increased 41% to $68,732,574 during
the first nine months of 1998 from $48,896,128 in the first nine months of 1997.
Revenues for the first nine months of 1998 includes $5,084,362 of revenue from
the newly acquired entities of Insta, SIS, DSTM-PAC, Computec and
Computec-Mexico.
Product revenues increased 15% to $9,401,198 (37% of total revenues) in the
third quarter of 1998 from $8,194,800 (47% of total revenues) in the third
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.
Product revenues increased 23% to $26,098,409 (38% of total revenues) in the
first nine months of 1998 from $21,194,296 (43% of total revenues) in the first
nine months of 1997.
Professional service revenues increased 81% to $11,168,981 (44% of total
revenues) in the third quarter of 1998 from $6,187,778 (36% of total revenues)
in the third quarter of 1997. 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 59% to $29,956,410 (44%
of total revenues) in the first nine months of 1998 from $18,878,489 (39% of
total revenues) in the first nine months of 1997.
Technical support services revenues for the third quarter of 1998 increased
52% to $4,591,265 (18% of total revenues) from $3,017,597 (17% of total
revenues) in the third quarter of 1997, primarily due to the expansion of the
Company's installed base of systems. Technical support services revenues
increased 44% to $12,677,755 (18% of total revenues) in the first nine months of
1998 from $8,823,343 (18% of total revenues) in the first nine months of 1997.
Cost of Revenues. Cost of revenues increased 45% to $8,171,974 (33% of
total revenues) in the third quarter of 1998, as compared to $5,618,442 (32% of
total revenues) in the comparable quarter of 1997. The increase as a percentage
of total revenues was due to increase in services revenue and increases in staff
needed to meet increased services revenue demand.
Cost of revenues increased 35% to $21,827,723 (32% of total revenues)
during the first nine months of 1998 from $16,176,549 (33% of total revenues) in
the first nine months of 1997.
Cost of product revenues was 4% of total revenues in the third quarter of
1998, and 4% of total revenues during the same period of 1997.
Cost of professional service revenues was 24% of total revenues during the
third quarter of 1998, and 21% of total revenues during the same period in 1997.
The increase as a percentage of total revenues was due to increased staff needed
to meet service revenue demand.
Cost of technical support service revenues was 5% of total revenues during
the third quarter of 1998 and 6% 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 European support operations
during 1997.
Sales and Marketing Expenses. Sales and marketing expenses increased 37% to
$6,325,960 (25% of total revenues) during the third quarter of 1998 from
$4,604,504 (26% of total revenues) during the third 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. Sales and marketing expenses increased 35% to $18,367,015
(27% of total revenues) in the first nine months of 1998 from $13,571,866 (28%
of total revenues) in the first nine months of 1997.
Product Development Expenses. Total product development expenditures
increased 37% to $2,646,976 (11% of total revenues) during the third quarter of
1998 from $1,932,207 (11% of total revenues) during the same period in 1997. The
capitalized portion of these amounts were $791,566 and $751,852, respectively.
Giving effect to amounts capitalized, net product development expense increased
57% to $1,855,410 (7% of total revenues) in the third quarter of 1998 from
$1,180,355 (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, integrating newly
acquired products, foreign language development and other new products.
Total product development expenditures increased 68% to $7,824,269 (11% of
total revenues) during the first nine months of 1998 from $4,644,475 (9% of
total revenues) during the same period in 1997. The capitalized portion of these
amounts were $2,485,647 and $1,593,909, respectively. Giving effect to amounts
capitalized, net product development expense increased 75% to $5,338,622 (8% of
total revenues) in the first nine months of 1998 from $3,050,566 (6% of total
revenues) during the same period in 1997.
General and Administrative Expenses. General and administrative expenses
increased 51% to $2,294,355 (9% of total revenues) during the third quarter of
1998 from $1,522,411 (9% of total revenues) in the third quarter of 1997,
primarily due to increased salaries. General and administrative expenses
increased 15% to $6,339,228 (9% of total revenues) during the first nine months
of 1998 from $5,530,108 (11% of total revenues) in the first nine months of
1997.
Miscellaneous Income. Miscellaneous income decreased to ($32,464) in the
third quarter of 1998 from $99,658 in the third quarter of 1997. Miscellaneous
income decreased to $131,503 in the first nine months of 1998 from $218,281 in
the first nine months of 1997. The decrease was due to decreased rental income
from leasing a smaller portion of the Company's building in Greenville, South
Carolina. A smaller portion of the Greenville, South Carolina building was
leased to third parties during 1998 because of the Company's growth and need for
additional space. 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 $110,142 in the
third quarter of 1998 from $198,571 in the third quarter of 1997, due to lower
investment balances realized upon completion of various acquisitions. Interest
expense decreased to $28,886 in the third quarter of 1998 from $48,792 in the
third quarter of 1997. The decrease in interest expense is due to debt
repayments in 1997. Interest income decreased to $462,430 in the first nine
months of 1998 from $707,431 in the first nine months of 1997. Interest expense
decreased to $88,400 in the first nine months of 1998 from $186,954 in the first
nine months of 1997.
<PAGE>
Tax Rate. The Company's tax rate per the income statement was 48% for the
third quarter of 1998 but due to non-deductible items associated with the
acquisitions, the Company's effective tax rate was 40% as compared to 37% for
the third quarter of 1997. The Company's tax rate per the income statement was
55% for the first nine months of 1998 but due to non-deductible items associated
with the acquisitions, the Company's effective tax rate was 39% as compared to
33% in the first nine months of 1997.
Net Income. Net income decreased 5% to $2,833,523 (11% of total revenues)
in the third quarter of 1998 from $2,975,900 (17% of total revenues) in the
third quarter of 1997. Net income decreased 23% to $5,796,886 (8% of total
revenues) in the first nine months of 1998 from $7,554,985 (15% of total
revenues) in the first nine months of 1997. These decreases are directly
attributed to the charges for the acquisition of INSTA on March 31, 1998, SIS on
June 16,1998, and Computec and Computec-Mexico on September 2, 1998. Without the
acquisition related charges third quarter net income would have increased 34% to
$3,981,707 (16% of total revenues) and net income for the first nine months of
the year would have increased 45% to $10,970,252 (16% of total revenues).
<PAGE>
Liquidity and Capital Resources
The Company has funded its activities entirely from cash generated from
operations. The Company ended its third quarter of 1998 with $3,530,437 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 July 1997, the Company made a $2 million investment in Distinction Software,
Inc. ("Distinction") This investment represents less than 20% of the outstanding
equity interests of Distinction.
The acquisition of Insta was completed on March 31, 1998 for $7 million,
consisting of $4,375,000 in cash and $2,625,000 (130,435 shares) in common stock
issued pursuant to Regulation S. In connection with the acquisition, the Company
deposited into escrow 34,783 shares of common stock, and assumed certain of
Insta's outstanding liabilities.
The acquisition of SIS was completed on June 16, 1998 for $6.5 million,
consisting of $4,575,000 in cash and $1,925,000 (88,652 shares) in common stock
issued pursuant to Regulation S. In connection with the acquisition, the Company
deposited into escrow 29,566 shares of common stock, and assumed certain of
SIS's outstanding liabilities.
The acquisition of certain assets of Datastream (Pacific) Pty Ltd. was completed
on July 13, 1998 for $600,000, consisting of $300,000 in cash and $300,000
(13,274 shares) in common stock to be issued pursuant to Regulation S.
The acquisition of Computec and its affiliate, Computec-Mexico, was completed on
September 2, 1998 for $2.6 million, consisting of $1,766,138 in cash and
$834,000 (44,304 shares) in common stock issued pursuant to Regulation S. In
connection with the acquisition, the Company deposited into escrow 44,304 shares
of common stock, and assumed certain of Computec's outstanding liabilities.
The Company's principal commitments as of June 30, 1998, 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
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 two years, 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 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 that are critical to its ongoing operations will be
completed and tested by the end of the second quarter of 1999. 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, (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 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 has made available to them
a software patch that management believes will bring these products into Year
<PAGE>
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 incurred immaterial expenses associated with 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 software. 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 provide by third parties, such as electricity, phone
service, 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.
New European Currency
On January 1, 1999, eleven of the fifteen member countries of the European Union
are scheduled to establish fixed conversion rates between their existing
currencies and the Euro, a new European currency, and to adopt the Euro as their
common legal currency (the "Euro Conversion"). Either the Euro or a
participating country's present currency will be accepted as legal tender from
January 1, 1999 to January 1, 2002, from which date forward only the Euro will
be accepted.
The Company has a significant number of customers located in European Union
countries participating in the Euro Conversion. Such customers will likely have
to upgrade or modify their computer systems and software to comply with Euro
requirements. The amount of money the Company anticipates spending in connection
with product development related to the Euro Conversion is not expected to have
a material adverse effect on the Company's results of operations or financial
condition. The Euro Conversion may also have competitive implications for the
Company's pricing and marketing strategies, which could be material in nature;
however, any such impact is not know at this time.
The Company has also begun to analyze which of its internal systems (such as
payroll, accounting and financial reporting) will need to be modified to deal
with the Euro Conversion. The Company does not currently expect the cost of such
modifications to have a material effect on the Company's results of operations
or financial condition. There is no assurance, however, that all problems
related to the Euro Conversion will be foreseen and corrected, or that no
material disruptions of the Company's business will occur.
Other Factors
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, SIS and Computec. 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.
<PAGE>
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, SIS, DSTM-PAC, Computec
and Computec-Mexico and is in the process of integrating those operations. The
failure to successfully complete such 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 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 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.
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.
<PAGE>
Risks Associated with International Sales. International sales increased 55% to
35% of the Company's third quarter 1998 revenues (from 32% in the third quarter
of 1997), 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
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, British pounds, Singapore dollars and Argentinean
Pesos. 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,
SIS and Computec 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.
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 believes such opportunities
are achievable, these efforts are still in a developmental phase and while the
Company established the strategic relationships it believes are necessary to
initiate such a program, the software code logic and business rules have not
been completed. 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.
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.
<PAGE>
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.
Stock Price Volatility. The market price of the Company's Common Stock has risen
substantially since the Company's initial public offering in April 1995. The
Common Stock is quoted on the Nasdaq National 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.
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Pursuant to the general instructions to Item 305 of SEC Regulation S-K,
quantitative and qualitative disclosures called for by this Item 3 and by Item
305 of SEC Regulation S-K are inapplicable to the Company at this time.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
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 a Current Report on Form 8-K on July 23, 1998 to report the
Company's acquisition of certain assets of Datastream (Pacific) PTY Ltd. on July
13, 1998.
The Company filed a Current Report on Form 8-K on September 16, 1998 to report
the Company's acquisition of Computec Sistemas S.A. and its affiliate Computec
Mexicana S.A. de C.V. on September 2, 1998.
<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/ Daniel H. Christie
Date: 2/26/99 ______________________
Daniel H. Christie
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
September 30, 1998 and the consolidated balance sheet as of September 30, 1998
contained in the Company's Quarterly Report on Form 10 Q/A for the Quarter Ended
Septmber 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1998 SEP-30-1997 SEP-30-1996
<CASH> 3,530,437 1,149,670 3,175,674
<SECURITIES> 160 10,292,437 12,538,755
<RECEIVABLES> 33,479,119 18,474,729 6,916,031
<ALLOWANCES> (2,395,487) (835,000) (380,000)
<INVENTORY> 385,552 308,453 261,338
<CURRENT-ASSETS> 42,934,007 35,445,235 23,325,580
<PP&E> 21,448,613 13,425,029 9,121,231
<DEPRECIATION> (7,925,339) (3,252,188) (1,471,461)
<TOTAL-ASSETS> 86,896,255 61,058,103 57,765,583
<CURRENT-LIABILITIES> 24,697,997 16,763,606 5,388,453
<BONDS> 304,640 849,171 6,667
0 0 0
0 0 0
<COMMON> 191,434 92,707 85,173
<OTHER-SE> 60,810,184 42,702,619 51,807,290
<TOTAL-LIABILITY-AND-EQUITY> 86,896,255 61,058,103 57,765,583
<SALES> 26,098,409 21,194,296 9,983,265
<TOTAL-REVENUES> 68,732,574 48,896,128 22,869,765
<CGS> 2,592,323 2,284,532 1,327,546
<TOTAL-COSTS> 21,827,723 16,176,549 6,445,173
<OTHER-EXPENSES> 34,565,840 22,152,540 10,006,723
<LOSS-PROVISION> 226,594 0 0
<INTEREST-EXPENSE> 88,400 186,954 3,678
<INCOME-PRETAX> 12,844,544 11,305,797 8,164,848
<INCOME-TAX> 7,047,658 3,705,797 3,145,000
<INCOME-CONTINUING> 5,796,886 7,554,985 5,019,848
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 5,796,886 7,554,985 5,019,848
<EPS-PRIMARY> 0.31 0.41 0.30
<EPS-DILUTED> 0.28 0.40 0.28
</TABLE>
