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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998.
OR
[ _ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission File Number: 0-25590
Datastream Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 57-0813674
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Datastream Plaza, Greenville, South Carolina 29605
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 422-5001
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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 [ _ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ x ] No [ _ ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 19, 1999: $145,845,984.38.
Number of shares of Common Stock outstanding as of March 19, 1999:
19,515,211
DOCUMENTS INCORPORATED BY REFERENCE
None.
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DATASTREAM SYSTEMS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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ITEM PAGE
NUMBER NUMBER
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
PART I
1. Business....................................................................................... 1
2. Properties..................................................................................... 10
3. Legal Proceedings.............................................................................. 11
4. Submission of Matters to a Vote of Security Holders............................................ 11
PART II
5. Market for Registrant's Common Stock and Related Stockholder Matters........................... 12
6. Selected Financial Data........................................................................ 12
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................... 13
7(A). Quantitative and Qualitative Disclosures about Market Risk..................................... 28
8. Financial Statements and Supplementary Data.................................................... 28
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................................... 28
PART III
10. Directors and Executive Officers of the Registrant............................................. 29
11. Executive Compensation......................................................................... 33
12. Security Ownership of Certain Beneficial Owners and Management................................. 36
13. Certain Relationships and Related Transactions................................................. 37
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 37
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SIGNATURES
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"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 Securities and Exchange
Commission (the "SEC") in its rules, regulations and releases, including Section
27A of the Securities Act of 1933, as amended (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
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 Annual Report on Form
10-K (the "Annual Report"), as well as those made in other filings with the SEC.
Forward looking statements can be identified by the use of forward looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. Such forward looking statements 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 Annual
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: the ability of the Company to successfully transition to
the development of further Web-based products; the continued acceptance of the
Internet for business transactions; 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; the stability of certain of the Company's strategic relationships;
increasing competition in markets for the Company's products; the ability of the
Company to protect its proprietary technology; risks associated with integrating
and managing international operations, including, but not limited to, exposure
to foreign exchange fluctuations and the ability of the Company to successfully
compete in foreign markets; the ability of the Company to successfully implement
its restructuring plan; fluctuations in quarterly results due to seasonality and
longer sales cycles in certain regions where the Company markets its 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 including, but not limited to, the "Risk Factors" set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," As well as other risks identified from time to time in the
Company's SEC reports, registration statements and public announcements.
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.
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PART I
ITEM 1. BUSINESS.
BASIS OF PRESENTATION
As used herein, except as otherwise indicated by the context, the terms
"Datastream" and "Company" are used to refer to Datastream Systems, Inc. and its
subsidiaries, including (i) SQL Group, B.V. ("SQL"), following its December 31,
1996 acquisition by Datastream, (ii) Instandhaltung technischer Anlagen GmbH
("Insta"), following its March 31, 1998 acquisition by Datastream, (iii)
Strategic Information Systems PTE Ltd. ("SIS"), following its June 16, 1998
acquisition by Datastream, (iv) Datastream (Pacific) Pty Ltd. ("Datastream
Pacific"), following the July 13, 1998 acquisition of certain assets of
Datastream Pacific by Datastream and (v) Computec Sistemas S.A. and its
affiliate Computec Sistemas Mexicana S.A. de C.V. (together "Computec")
following its September 2, 1998 acquisition by Datastream.
BUSINESS OVERVIEW
Datastream develops, markets, sells and supports personal desktop computer,
file server and client/server enterprise software for the industrial automation
market. The Company's products are designed to enable customers to reduce
downtime, control maintenance expenses, cut spare parts inventories and costs,
improve purchasing efficiency and more effectively deploy productive assets,
personnel and other resources. The Company is an established leader in the
market for computerized maintenance management systems ("CMMS") and enterprise
asset management ("EAM") systems based on the number of system units sold,
having sold approximately 47,900 system units to approximately 22,500 customers.
The Company's objective is to maintain its leading position in the CMMS/EAM
market by continuing to provide feature-rich software solutions and being a
value leader in each segment of the CMMS/EAM market.
The CMMS/EAM market includes process and discrete manufacturers, government
agencies, universities, hospitals and other organizations which maintain high-
value capital assets such as plants, facilities, and production equipment.
Automation Research Corporation, an independent research firm, estimates that
the size of the global CMMS/EAM market was approximately $900 million in 1997.
The Company's line of products includes solutions for virtually any size
operation, from the single, small shop with basic requirements to the large,
multi-site client needing a full-featured enterprise solution. Datastream's
products have garnered one of Plant Engineering magazine's Product of the Year
awards in the software category each year since 1993. The Company complements
its wide range of product offerings with a diversified sales approach targeted
at each segment of the global CMMS/EAM market. Management believes that its
large installed customer base provides opportunities for additional software and
professional services revenue as its customers experience internal growth and
migrate to more complex CMMS/EAM applications. The broad applicability of the
Company's systems is illustrated by the diversity of the Company's customer
base, which includes AT&T Wireless, Caterpillar, Chevron, Dow Chemical, Emerson
Electric, Frito-Lay, Georgia-Pacific, Hewlett-Packard, Kaiser Permanente,
Kroger, Paris Metro, Southern Nuclear and Total Oil.
The components of the Company's strategy are: to maintain and extend its
technological leadership through a more aggressive migration to further
Internet-based applications; to increase market share through diversified sales
efforts; to leverage and expand its existing customer base; to continue to
pursue strategic alliances; to increase professional services, training and
support revenues; and to capitalize on potential electronic commerce
opportunities in the maintenance, repair and operations ("MRO") market.
Datastream was incorporated as a South Carolina corporation in February 1986
upon consummation of the acquisition of the assets and liabilities of the
Datastream Systems Division of a subsidiary of Wisconsin Power & Light.
Datastream reincorporated as a Delaware corporation in January 1995.
Datastream's executive offices are located at 50 Datastream Plaza, Greenville,
South Carolina 29605, and its telephone number is (864) 422-5001. The Company
also has a home page on the World Wide Web at www.dstm.com. Information
contained on the Company's home page shall not be deemed to be part of this
Annual Report.
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Datastream, e-MRO, MaintainIt, MaintainIt Pro, MP2, MP2 Enterprise, MP2
Messenger, MP2 PagerLink, MP2 Professional, MP2 Weblink, MP5, Pocket MP2 and
RequestLink are trademarks or service marks of the Company. SQL Server, Windows
CE, Windows 95, Windows NT and Microsoft BackOffice are either trademarks or
registered trademarks of Microsoft Corporation. Oracle is a registered
trademark of Oracle Corporation. Other product and company names mentioned
herein may be trademarks of their respective owners.
INDUSTRY
The CMMS/EAM market includes process and discrete manufacturers, government
agencies, universities, hospitals and other organizations which maintain high-
value capital assets such as plants, facilities, and production equipment.
Automation Research Corporation, an independent research firm, estimates that
the size of the global CMMS/EAM market was approximately $900 million in 1997.
CMMS generally includes any computer software application designed to track,
monitor and maintain histories on capital assets such as production equipment,
spare parts inventories, plants and facilities and to compare and contrast key
asset performance data. Catastrophic equipment failures, sub-optimal equipment
performance and unnecessary "preventive repairs" are common occurrences at
facilities that do not employ some means of systematically managing maintenance
and repair activities. Manual methods represent an inefficient way to perform
data collection and statistical analysis. CMMS enables corporations to increase
efficiency and reduce costs by, among other things, reducing the probability of
catastrophic failures, reducing unscheduled downtime, eliminating costly excess
repair parts inventories, improving spare parts procurement processes and
allowing maintenance tasks to be scheduled more effectively to permit maximum
utilization of resources. The resulting incremental gains in efficiency
generally translate directly into lower operating costs.
EAM generally refers to that segment of the CMMS market that is oriented
toward organizations with large, multinational operations with a number of
geographically dispersed locations and very large investments in multiple plants
or facilities. EAM installations are differentiated by enterprise scaled
features such as large relational databases, global asset tracking capability,
configurable workflow, multiple concurrent language capability, centralized
inventory control and coordinated worldwide purchasing functionality.
Enterprises deploying EAM solutions seek a combination of technology, database
capability and features that are able to be implemented over wide area networks,
intranets, or satellite-based communications systems.
A critical component of CMMS/EAM software is procurement of MRO parts and
supplies. For example, a preventive maintenance routine might require spare
parts for completion. CMMS/EAM software will check the spare parts inventory
managed by the system, execute a purchase order in the event of inventory
depletion, and prepare the work order. Currently, MRO purchase orders are
executed via fax and/or telephone to a large and highly fragmented group of MRO
suppliers. According to a study released by Industrial Market Information, Inc.
in January 1998, the current size of the market for MRO procurement is estimated
to be $220 billion. It is expected that much of this procurement activity will
eventually be processed through the Internet. According to the U.S. Department
of Commerce, business to business e-commerce is expected to grow from $17
billion in 1998 to over $300 billion in 2002. Also, in a November 1997 study,
The Yankee Group estimated that the market for MRO procurement through the
Internet will grow from $3.0 billion in 1997 to $71.0 billion in 2000.
The market for CMMS/EAM software is relatively fragmented. Most of the larger
vendors, including the traditional enterprise resource planning ("ERP") software
providers, have focused predominantly on the high-end of the CMMS/EAM market
with solutions costing several million dollars and requiring lengthy
implementations. Organizations of all sizes deploy CMMS/EAM solutions in an
effort to increase operating efficiencies and reduce overall maintenance costs.
Such organizations seek a solution that offers a broad range of advanced
features and functions integrated within a broader ERP solution, scales to the
specific needs of a particular organization, is easily used and installed and is
well supported with upgrades and services.
THE DATASTREAM SOLUTION
The Company has met the highly diversified needs of the CMMS/EAM market by
providing a range of software and services that increase productive use of
capital assets through both standard and customized solutions geared toward
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the particular needs of virtually any size manufacturer or facility. Management
estimates that, on average, through the use of its CMMS/EAM solutions, companies
can reduce maintenance and production costs between 10% and 30%. The Company is
the world leader in providing such CMMS/EAM solutions, with approximately 47,900
system units sold worldwide and a 55% market share, based on system units sold.
The Datastream solution is based on the following four hallmarks:
SIMPLICITY. The Company's software is designed as a broadly applicable
best-of-breed CMMS/EAM solution which offers customers ease of use, ease of
implementation and ease of integration with existing operations, including ERP
systems. Common graphical user interfaces across products and platforms allow
customers to smoothly upgrade and/or migrate to next generation solutions. The
Company's software includes wizards that provide step-by-step instructions to
simplify maintenance management and ensure full realization of the benefits of
the Datastream solution.
TECHNOLOGY. Datastream is a technology leader within the CMMS/EAM industry.
The Company's software is based on industry standards including Microsoft
Windows and NT operating systems and Microsoft and Oracle databases. This
provides a high degree of scalability from a smaller shop with basic
requirements to global enterprises needing a full-featured enterprise solution.
Datastream is also forward thinking in upgrading its software to take advantage
of proven new technologies such as the Internet, thin client architecture and
wireless connectivity.
FUNCTIONALITY. Datastream provides customers with a fully integrated end-
to-end CMMS/EAM solution that schedules maintenance tasks and repairs, generates
work orders, manages multi-site inventory and centralizes spare parts
purchasing. Datastream's open architecture facilitates integration with
financial management, production, building controls and personnel software
applications for more comprehensive data analysis and business planning. This
analysis and planning helps customers identify critical information to improve
equipment reliability and increase plant capacity.
VALUE. Datastream offers an attractive value proposition to its customers.
The Company's efficient software development efforts, diversified sales and
marketing approach, and low-cost infrastructure allow Datastream to consistently
compete as a full-featured CMMS/EAM solution provider at a value price. In
addition, given the simplicity and functionality of the Datastream solution,
customers are able to rapidly implement a solution that delivers reduced
maintenance costs and an increased return on investment.
STRATEGY
The Company's objective is to maintain its leading position in the CMMS/EAM
market by continuing to provide feature-rich software solutions and being a
value leader in each segment of the CMMS/EAM market. To achieve this objective,
the Company intends to continue to pursue the following strategies:
MAINTAIN AND EXTEND TECHNOLOGICAL LEADERSHIP. The foundation of the
Company's success is its ability to offer one of the most technologically
advanced CMMS/EAM solutions. Since 1986, Datastream has successfully migrated
its products from Microsoft-DOS to Windows desktop to file server to
client/server versions and is now producing Web-enabled versions. The Company
continues to increase its ability to integrate its products with third-party
applications, including those of leading ERP providers, and was among the first
to establish an Internet-based product line. The Company intends to continue to
enhance and redesign its products to keep it at the forefront of its customers'
evolving technology needs.
INCREASE MARKET SHARE THROUGH DIVERSIFIED SALES EFFORTS. The Company
complements its wide range of product offerings with a diversified sales
approach that targets each segment of the CMMS/EAM market. Domestically, the
Company intends to continue to grow its large telesales team as a cost-effective
means of maintaining its dominant position in the low-end and middle segments of
the market. The Company plans to continue to increase its geographically
dispersed, direct sales force to add market share at the high-end segment of the
market, building on its significant expansion in 1998. The Company plans to
maintain its indirect channel relationships to sell products in the low-end
segment of the market. Internationally, the Company employs a direct sales
approach for most major markets and uses third party distributors in those
markets where it does not have a direct presence.
LEVERAGE AND EXPAND EXISTING CUSTOMER BASE. The Company intends to generate
additional software and professional services revenue from its large installed
base of approximately 22,500 customers by providing a wide range
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of software and services that address the particular needs of any size
enterprise. The Company offers its customers additional products and services to
address on-going increases in demands for increased plant capacity utilization,
improved MRO procurement efficiency and reduced costs. Datastream also intends
to target its customers that are smaller divisions of larger corporations to
sell a broader enterprise solution.
CONTINUE TO PURSUE STRATEGIC ALLIANCES. The Company intends to leverage its
position as the established unit sales leader in the CMMS/EAM market by
continuing to enter into strategic technical and distribution alliances with
leading ERP and MRO vendors both domestically and internationally. Management
believes that such alliances will enable the Company to further penetrate the
increasingly competitive high-end segment of the market and provide cost-
effective distribution channels in the low-end.
INCREASE PROFESSIONAL SERVICES, TRAINING AND SUPPORT REVENUES. As the
Company sells more complex CMMS/EAM systems (particularly client/server
systems), management expects to have additional opportunities to increase
professional services, training and support revenues. The Company intends to
continue to expand its professional services personnel and capabilities to meet
the sophisticated systems integration and customization needs of its customers.
The Company plans to expand its product support and training capabilities, which
management believes strengthens long-term relationships with customers.
CAPITALIZE ON MRO ELECTRONIC COMMERCE OPPORTUNITY. Management estimates
that the Company's existing customer base utilizes the Company's software to
generate several billions of dollars of purchase orders each year for spare
parts and supplies. Although those purchase orders are typically executed via
fax or phone to a highly fragmented market of MRO suppliers, the Company
believes customers will increasingly process orders through the Internet in
order to reduce administrative and transactional costs. The Company believes
that, because of its large installed customer base and strong MRO supplier
relationships, it is well positioned to capitalize on this potential electronic
commerce opportunity. During 1998, the Company entered into alliance agreements
with three major MRO parts distributors -- Applied Industrial Technologies,
Inc., Fastenal Company and WESCO Distribution, Inc.. Further, the Company
completed beta testing on its Web-based e-MRO product that links customer
purchasing departments directly with the alliance partners and began to
distribute the e-MRO upgrade to those customers that use the file server version
of MP2 Professional (approximately 30% of the Company's installed system units)
without charge in February 1999. The Company intends to add the e-MRO module to
its upcoming beta-release of MP2 Enterprise 7.0, which is currently scheduled
for the third quarter of 1999.
PRODUCTS
The Company's line of products include solutions for virtually any size
operation, from the single, small shop with basic requirements to the large,
multi-site client needing a full-featured enterprise solution. New software
versions are developed routinely to reflect changes in technology and market
demand. A common graphical user interface facilitates seamless upgrades across
most platforms and releases of the Company's products. The Company's products
are distributed through telesales, direct sales and an international distributor
network. MaintainIt is also sold through indirect channels and marketing
alliances. An earlier version of MaintainIt can be downloaded free of charge
from the Company's Web site.
The following is a detailed description of the Company's primary products:
MAINTAINIT AND MAINTAINIT PRO. MaintainIt is an off-the-shelf, entry-level
maintenance system marketed primarily to small businesses (fewer than 20
employees) as an inexpensive alternative to the Company's other products.
MaintainIt provides basic tools for scheduling routine maintenance tasks and
repairs, generating work orders, tracking parts inventory and equipment history,
and creating purchase orders and basic management reports. MaintainIt Pro
contains all the features of MaintainIt as well as numerous custom fields and a
scheduling calendar. Both MaintainIt and MaintainIt Pro feature the Microsoft
Access database, run on Windows 95/NT, and are available in single-user and
networked versions. MaintainIt and MaintainIt Pro are available through MRO
distributors and directly from the Company.
MP2 PROFESSIONAL. MP2 Professional, available in both file server and
client/server versions, is designed for small- to medium-sized facilities where
greater numbers of users need access to maintenance data and records for
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cost/benefit analysis as well as maintenance functions. MP2 Professional offers
a large number of advanced capabilities not available in MaintainIt or
MaintainIt Pro, including barcoding capabilities, field level security, safety
notes and training records. MP2 Professional is able to generate over 4,000
standard reports providing analysis down to specific location, piece of
equipment, and employee. Add-on features to MP2 Professional include the
capability to integrate OSHA regulations and FDA validation. The file server
version of MP2 Professional is available for Microsoft Access database; the
client/server version is available for Microsoft SQL Server database. The
client/server version of MP2 Professional has a thin client, leaving most of the
work to the server, which minimizes processing time, ensures data integrity and
security, and reduces network traffic. The SQL Server version features wizards,
context sensitive on-line help, customizable toolbars and Microsoft BackOffice
compatibility.
MP2 ENTERPRISE. This product is designed to handle the functional demands
of large organizations where enterprise-wide solutions are required to manage
capital assets and personnel in multiple locations across the globe. Aside from
all of the features provided by MP2 Professional, MP2 Enterprise offers support
for multi-site inventory management, global security and centralized purchasing,
and provides data to detect equipment problems leading to downtime and to assist
in root cause failure analysis. MP2 Enterprise's open system interface
architecture facilitates integration with other software applications, such as
ERP, financial management, production, building controls and personnel
applications, for more comprehensive data analysis and business planning. MP2
Enterprise has been integrated with the products of ERP vendors such as SAP,
Oracle, QAD and Platinum. The Company has current projects with PeopleSoft,
BAAN, SSA and JD Edwards. This product is available for both Oracle and
Microsoft SQL Server databases and runs on Windows 95/NT operating systems. MP2
Enterprise has a thin client "intranet ready" architecture and features full
e-mail integration and Microsoft OLE (Object Linking and Embedding) capability.
Pocket MP2, which runs in conjunction with the 6.0 Oracle version of MP2
Enterprise, runs on SH-3 RISC Microprocessor Windows CE based handheld units,
and allows for remote access data entry to MP2 with landline or wireless upload
capability to the host system.
INTERNET-BASED MP2 ADD-ON PRODUCTS. In 1998, the Company expanded the
capabilities of MP2 Professional and MP2 Enterprise through the introduction of
a range of Internet-based products. These products include MP2 Weblink, MP2
Messenger, and PagerLink. Weblink is designed to help a customer capitalize on
its corporate intranet investment and the global Internet by easily extending
basic MP2 Enterprise functionality to any machine with intranet/Internet access
using a standard Internet browser. Through MP2 Messenger, work requests may be
sent by e-mail to non-system workstations. PagerLink automatically notifies any
employee with a text pager when MP2 Enterprise generates a work order on
assigned equipment. If the first page gets no response, the system automatically
escalates to another employee or supervisor.
MP2 ENTERPRISE 7.0. The Company plans to beta release MP2 Enterprise 7.0 in
the third quarter of 1999. MP2 Enterprise 7.0 will be a fully Web-based EAM
system which was developed using Microsoft's Windows Distributed Internet
Applications for Manufacturing (Windows DNA-M). This version utilizes
Microsoft's COM/DCOM architecture, Active Server Pages, DHTML (dynamic HTML) and
Javascript. MP2 Enterprise is an n-tiered application, relying on the scalable
Microsoft Transaction Server for the application layer between the client and
database. Because version 7.0 is a Web-based application, users will be able to
choose between a Web-based client with an Internet browser or a standard
client/server front-end. This version will also contain a customizable "home
page" that can be configured based on user need. The home page may include key
performance indicators, pending work assignments and other vital information.
MP2 Enterprise 7.0 will include integrated access to Datastream's e-MRO product
for ordering MRO parts and supplies through the Internet. Further enhancements
to this product will include the ability to create customized forms, rearrange
fields and create menu items. Form customization in MP2 Enterprise 7.0 will
operate through a simple "drag and drop" interface.
MP5. MP5 is designed for large enterprises with asset intensive and safety
critical operations, such as utilities, telecommunications, oil and gas,
transportation and mining industries. It is also well-suited for very large
organizations with high transaction volumes that require highly configurable
applications. MP5 supports multiple platforms and multiple languages
concurrently. Its open system architecture allows rapid deployment with ERP
systems, equipment monitoring devices, handheld computers, barcode scanners, and
virtually any other data source. MP5 has been integrated with the products of
ERP vendors such as Oracle and SAP. MP5 addresses configuration management,
workflow management, inventory management, document management, purchasing
management, project management, workflow capacity management and
financial/budgets management through its various modules and options. Other
unique features include an outsourced maintenance activity tracker, a standard
library of frequently executed work
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orders, a short-term scheduling feature, a report manager, extensive security
features and on-line, context sensitive help. MP5 operates on all Oracle
compatible systems for up to 1,000 concurrent users, is fully Web-enabled, and
is accessible anywhere in the world via a common Internet browser.
E-MRO. The Company began the commercial release of its electronic commerce
product, e-MRO, to those customers that use the file server version of MP2
Professional in February 1999 (approximately 30% of the Company's installed
system units). The Company intends to add the e-MRO module to its upcoming beta
release of MP2 Enterprise 7.0, which is currently scheduled for the third
quarter of 1999. This product integrates MRO procurement by linking Datastream's
MP2 Professional file server customers directly with Datastream's e-MRO
distribution partners -- Applied Industrial Technologies, Inc., Fastenal
Company, and WESCO Distribution, Inc. e-MRO allows those customers to access
catalog content through the Internet and utilize the purchasing module of MP2
Professional file server to place parts orders. Use of e-MRO results in an
integrated purchasing system that reduces item costs, improves catalog search
time, streamlines requisition processes, decreases data entry, shortens parts
delivery time, and improves inventory control. Customers can launch an MP2
Professional browser to search an Internet-based catalog that has a large
selection of parts. Upon the selection of parts, orders are sent to the
suppliers via the Internet at no additional cost to the customer. In addition,
Datastream provides cross-reference services that link parts in the customer's
local MP2 Professional file server database with parts hosted by the MRO
catalog. Thereafter, through MP2 Professional's automatic purchase replenishment
system, each purchase transaction can be placed via the Internet, with order-
related information such as shipping, billing, delivery and receipt details
automatically recorded in the customer's database. Datastream's e-MRO supplier
partners will distribute Datastream's MaintainIt product, which will include a
link to e-MRO. Collectively, the three suppliers generate annual revenues of
approximately $5.5 billion and maintain an inventory of 1.4 million parts to
service over 200,000 customers. Datastream intends to generate revenues from e-
MRO through an average 2% transaction fee levied on each dollar of procurement
sourced through e-MRO, fees from specialized installation needs and other
inventory and purchasing consulting fees related to the specific Datastream
product being utilized by the customer.
The Company's products meet the needs of a wide range of customers, from the
single small shop with basic requirements to the large multinational client
needing a full-featured enterprise solution. The Company's pricing structure
recognizes such varied requirements from the entry level MaintainIt product
priced at $249 to MP5 solutions, including software license, support and
services, priced to several million dollars.
The Company has developed a number of foreign language versions of its
products: MaintainIt Pro is available in eleven languages; MP2 Professional file
server version, MP2 Professional client/server version and MP2 Enterprise are
each available in thirteen languages; MP5 is available in seven languages.
PROFESSIONAL AND SUPPORT SERVICES
The Company offers four types of professional services to customers: (i)
customization, which enhances the functionality of a customer's system, (ii)
integration, which provides on-site installation and systems integration
services for client/server systems, (iii) consulting and advisory services to
provide solutions to customer-specific applications problems, such as spare
parts inventory management or preventive maintenance, and (iv) customer
training. The Company offered a total of 492 training sessions in 1998 at its
training facilities in Greenville, South Carolina, Irvine, California, Dallas,
Texas and Chicago, Illinois and at certain remote locations. On-site customer
training is also available. As of February 28, 1999, the Company employed 236
professional services personnel. Most of the Company's professional services are
performed on a daily fee arrangement in connection with installations of the
Company's systems.
Maintenance and support services include unlimited, toll-free international
access to Datastream's TechSupport staff, free product upgrades (including data
conversions), a searchable Internet site for common questions and requests, e-
mail support and an Internet-based file download service. As of February 28,
1999, the Company employed 90 support personnel in support operations. The
Company provides support for its international customers via a tiered approach:
first-level support is provided by the local sales office, with back-up
expertise being supplied by the corporate help desk in Greenville, South
Carolina.
6
<PAGE>
CUSTOMERS
Datastream's customer base is highly diversified. To date, Datastream has
sold systems to approximately 22,500 companies in 129 countries through a
combination of telesales, direct sales and international distributors in
virtually every major industry. Datastream products are found in almost every
industry where capital investments are the norm, including aerospace and
defense, automotive, chemicals, communications, computers and electronics, food,
general facilities, general manufacturing, government, healthcare, hospitality,
metals, petroleum, shipping and transport and utilities.
The Company has sold approximately 47,900 system units since inception and
has grown its installed base by an average of 56.5% annually during the last 5
years. The Company has developed a number of foreign language versions of its
products. Each of these translations is adapted to the country served and
technical assistance is provided by local experts in order to ensure that the
Company's standard for training and technical support is the same worldwide.
No customer has represented more than 5% of the Company's total annual
revenue in any of the last three fiscal years.
SALES AND MARKETING
The Company markets and sells its products and services through 247 sales and
marketing professionals (as of February 28, 1999), including a telesales force
of 111 representatives and a direct sales force of 98. In addition, the
Company's low-end products are sold through indirect channels and marketing
alliances. During 1998, the Company expanded its direct sales force
significantly in order to call on larger accounts and to market its enterprise-
wide CMMS/EAM solutions, including MP5, worldwide. The Company uses a
computerized sales and marketing software system with database marketing,
telemarketing, lead tracking and analysis and customer support capabilities.
The Company's marketing department consists of 22 employees (as of February
28, 1999) and is responsible for generating leads through advertising, public
relations, trade shows and seminars, strategic partnerships and direct mail. The
marketing department is also responsible for product marketing, market research
and competitive analysis and provides competitive, customer and prospect input
for the Company's product development efforts. To enhance its marketing efforts,
Datastream sponsors a users conference each year. The conference provides an
opportunity for decision makers in targeted industries to attend training
sessions, workshops and presentations addressing both maintenance issues
generally and Datastream products specifically, and to interact with other users
and Company employees.
The cornerstone of the Company's sales and marketing efforts is its 111-
person telesales team (as of February 28, 1999). The relatively inexpensive
nature of the Company's systems available for the low-end and middle segments of
the market, combined with the high quality of product information and order
fulfillment items generated by the marketing department, make the Company's
telesales approach a cost-effective vehicle for accessing these segments of the
market and achieving gains in market share. Management routinely monitors the
performance of the Company's personnel to determine that each member of the
telesales staff is performing acceptably.
Internationally the Company uses a direct and telesales sales force out of
its offices in The Netherlands, Germany, the United Kingdom, France, Singapore,
China, Argentina and Mexico as well as its Greenville, South Carolina
headquarters. In addition, the Company has a network of distributors located
throughout the balance of Europe, Latin America and the Pacific Rim. For
financial information about the Company's operations in different geographic
locations, see note 14 to the Company's consolidated financial statements.
7
<PAGE>
PRODUCT DEVELOPMENT
As of February 28, 1999, the Company's product development department
consisted of 139 people, spread among four groups: Development, Quality
Assurance, Documentation and Localization. The Development group consisted of 75
software developers, most of whom hold advanced programming or engineering
degrees. From time to time, the Company utilizes outside contractors for certain
product development projects.
Management believes that the Company has been able to respond quickly to
technology trends. The Company introduced its first DOS-based desktop product in
1986. In 1994, it released a Windows-based desktop product and shortly
thereafter added PC networking capabilities with its file server products. In
1996, the Company released the first of its enterprise class products based on a
client/server architecture. These products have quickly achieved widespread
market acceptance. During 1998, the Company released MP2 Enterprise version 6.0.
Version 6.0 features improved functionality, security, multi-site capability and
an open architecture that facilitates the integration of the product with other
accounting and ERP packages. Such features will enable improved management of
data from multiple sites on one physical database server, thereby allowing
centralized control of purchasing and inventory across multiple sites. Late in
1998 the Company shifted its focus to aggressively develop products for use on
the Internet, and to consolidate or eliminate some of the international products
it acquired during 1998 that are not Web-enabled. The Company's product
development efforts are currently focused on making extensive use of the
Internet as a medium for client connection to the Company's mid- and high-end
products. In 1998, the Company expanded the capabilities of MP2 Professional
and MP2 Enterprise through the introduction of a range of Internet-based
products, including MP2 Weblink, MP2 Messenger and PagerLink.
MP2 Enterprise version 7.0, which the Company plans to beta release in the
third quarter of 1999, will represent a major architecture shift to take
advantage of the Internet. Version 7.0 will be browser based, meaning that no
setup or maintenance will be needed for any workstation using version 7.0. This
architecture will present significant savings to customers in decreased cost of
implementation, as well as reduced support expenditures. Version 7.0 will also
feature an n-tier architecture, which will allow version 7.0 to be scaleable,
serving anywhere from a small 3-user maintenance operation to the multi-site
enterprise installations. Version 7.0 will also incorporate enhanced workflow
capabilities and a customizable interface. Because version 7.0 is a Web-based
application, users will be able to choose between a Web-based client with an
Internet browser or a standard client/server front-end. See "--Products--MP2
Enterprise 7.0."
The Company plans to continue its Web-centric development of MP5 with a focus
on improving the alignment of MP5 with the Company's products to facilitate
seamless customer migration. Planned improvements to MP5 will also include
enhanced ERP integration capabilities and additional functional modules,
including a training register module to comply with OSHA and NRC requirements.
Datastream received Year 2000 certification for its development methods from
the Information Technology Association of America (ITAA). This means the Company
is believed to have the correct controls in its development process and methods
to ensure the software it produces is Year 2000 compliant. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000."
Although management believes that the Company's product development staff
will be able to meet their development challenges, there can be no assurance
that the above or any other development projects will be completed in a timely
manner or will result in a product that achieves market acceptance.
Product development expenses consist principally of salaries and certain
other expenses related to development and modifications of software products,
which are capitalized in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" ("Statement No. 86"). Capitalization of such
costs begins only upon establishment of technological feasibility as defined in
Statement No. 86 and ends when the resulting product is available for
distribution. Annual amortization of capitalized product development costs is
provided at the greater of the ratio of current product revenue to the total of
current and anticipated product revenue or on a straight line basis over the
estimated economic life of the software, which is not more than eighteen months
or three years, depending on the product. The Company's software development
expenditures were approximately $4.0 million, $6.6 million and $11.8 million in
1996, 1997 and 1998, respectively. Of these amounts, the amounts capitalized
were approximately $2.6 million, $2.3 million and $3.7 million, respectively. In
December 1996 and March 1998 the Company took one-time charges of $1.8 million
and $598,000, respectively,
8
<PAGE>
related to the write-off of capitalized software deemed obsolete or superseded
by the products obtained through acquisitions of SQL and Insta. In December 1998
the Company took a one-time charge of $2.3 million related to the write-off of
software acquired from SQL, Insta and SIS and $1.0 million related to internally
capitalized software deemed obsolete pursuant to a restructuring plan that
provides for more aggressive development of Internet-based software products.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments."
COMPETITION
The Company's products compete on the basis of quality, price, technical
support and service, application features and ease-of-use. Management believes
that the Company's products and services compete favorably with respect to these
factors. However, certain of the Company's existing competitors, as well as a
number of potential market entrants, have greater financial, marketing, service
and support and technical resources than the Company. The Company will be
required to make continued investments in product development, particularly the
development of Web-enabled products, to meet competitive pressures. There can be
no assurance that the Company will have sufficient resources to make those
investments or that the Company will be able to make the technical advances
necessary to continue to compete effectively in the future.
The Company has historically concentrated its efforts in the low-end segment
of the CMMS/EAM market, in which typical transaction sizes (including software
and customization, integration, training and support services) are up to
$20,000. In this segment, Datastream encounters competition from a variety of
vendors, including companies such as CK Systems, JB Systems and DP Solutions,
Inc., that offer off-the-shelf CMMS applications for desktop and file server
systems. Management believes the Company has achieved a dominant position at the
low end of the market.
Competition in the high-end segment of the market is less fragmented and is
dominated by large vendors such as Project Software and Development, Inc.
(PSDI), Indus International, Mincom, Inc., Marcam Corporation and several ERP
vendors such as SAP, who offer enterprise-wide management systems (including
maintenance modules) for use in a client/server environment. Increasing customer
demand for client/server products may subject the Company to increased
competition if these vendors choose to modify their products to offer lower-
priced client/server capabilities in PC network markets.
The introduction of the Company's MP2 Enterprise and MP5 products subjected
the Company to increased competition with certain of its competitors who offer
client/server products, such as PSDI and Indus. Further, its international
acquisitions places the Company in direct client/server competition across each
of the product lines offered by PSDI and Indus, as well as with products offered
by certain ERP vendors. The Company competes internationally with both local or
regional providers of CMMS/EAM, and with CMMS/EAM vendors that operate on a
global basis. Local and regional competitors are generally smaller, but are more
knowledgeable of the specific markets in which they compete. Global competitors
such as PSDI and Indus participate actively in the European, Latin American and
Pacific Rim countries, entering these markets through distributors, direct sales
and service offices or through strategic partnerships. Competition in these
countries is frequently intense and while the Company has been successful in
integrating SQL and Insta so as to compete from a local basis in Europe, and
extending elsewhere through distributorships, there is no assurance that the
Company will continue to be successful in these markets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- The market for CMMS/EAM continues to be highly competitive."
INTELLECTUAL PROPERTY
The Company claims exclusive title to and ownership of the software it
develops. The Company relies on a combination of trade secrets, copyright and
trademark laws, nondisclosure and licensing agreements, "shrink-wrap" licenses
and other contractual provisions and technical measures to protect its
intellectual property rights. There can be no assurance that these protections
will be adequate to protect the Company's intellectual property rights or that
the Company's competitors will not independently develop software products that
are superior to the Company's products. Existing copyright laws provide limited
protection to the Company in prohibiting competitors from independently
9
<PAGE>
producing software products that are substantially similar to Datastream's
products. The Company does not hold any patents or have any patent applications
pending.
Although in limited instances involving large sales the Company may
specifically negotiate license agreements that are signed by both the licensee
and the Company, in the substantial majority of sales, the Company relies on a
"shrink-wrap" license for protection against unauthorized use of its products.
Certain provisions of these licenses, including restrictions on use, copying,
transfer and disclosure of the licensed program, may be unenforceable under the
laws of certain jurisdictions. In addition, through its international
acquisitions, and based upon its internal expansion efforts, the Company is
increasing the sales of its products internationally. This entails certain
additional intellectual property risks in that the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. Although the Company believes that its
products, trademarks and other proprietary rights do not infringe upon the
proprietary rights of third parties, there can be no assurance that such parties
will not assert infringement claims against the Company. Any such claim made
against the Company, with or without merit, could be time-consuming and
expensive to defend. The loss of proprietary technology or a successful claim
against the Company could have a material adverse effect on the Company's
financial condition and results of operations.
EMPLOYEES
As of February 28, 1999, the Company employed approximately 800 persons on a
full-time basis, including 247 sales and marketing personnel, 326 service and
support representatives, 88 administrative personnel and 139 employees involved
in product development. Additionally, the company relied upon the efforts of 45
contract developers to augment its development efforts. None of Datastream's
employees is represented by a labor organization and the Company is not a party
to any collective bargaining agreement. Management considers relations between
the Company and its employees to be very good.
SEASONALITY
The Company's acquisitions of SQL, Insta, SIS, Datastream Pacific and
Computec have exposed the Company to seasonal revenue fluctuations in Europe,
Asia and Latin America, principally consisting of slower business conditions in
the first and third quarters of the year. Datastream has historically
experienced an increase in services revenue in the second quarter during which
the Company holds its annual Technical User Group Conference. The next such
conference is presently scheduled to be held in May 1999.
ITEM 2. PROPERTIES
The Company conducts its principle operations out of a 125,000 square foot
headquarters building owned by the Company located in Greenville, South
Carolina. The Company also owns a 15,000 square foot building in Dessau,
Germany. The Company also has the following properties under lease:
<TABLE>
<CAPTION>
SQUARE FOOTAGE
LOCATION LEASE EXPIRATION (APPROX.)
-------- ---------------- --------
<S> <C> <C>
Munich, Germany November 2002 16,000
Rotterdam, The Netherlands November 2002 12,000
Singapore November 1999 6,000
Paris, France March 2002 4,521
Buenos Aires, Argentina June 2001 4,306
Slough, Great Britain March 2000 4,000
Grenoble, France February 1999 3,250
Irvine, California January 2000 3,200
Brisbane, Australia August 7, 2000 2,971
Woodbridge, New Jersey November 30, 2003 2,753
Atlanta, Georgia February 28, 2001 1,827
Chicago, Illinois December 1999 1,419
Dallas, Texas January 2000 1,380
Mexico City, Mexico July 31, 1999 1,056
Shanghai, China Month-to-Month 1,000
</TABLE>
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Since January 11, 1999, Datastream, its Chief Executive Officer and its Chief
Financial Officer have been named as defendants in shareholder class action
lawsuits filed in the United States District Court for the District of South
Carolina, Greenville Division. The complaints alleged violations of Section
10(b) and 20(a) of the Exchange Act of 1934. Plaintiffs seek to represent a
class of individuals who purchased the Company's common stock from April 1 to
October 20, 1998. The Company has not yet filed its answer to the complaints
filed to date, and expects a single, consolidated, amended complaint to be filed
on or before April 26, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of Datastream's stockholders during the
fiscal quarter ended December 31, 1998.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, $.01 par value per share (the "Common Stock"), is
traded on the Nasdaq National Market under the symbol DSTM. The Company has
never declared or paid any cash dividends on its Common Stock. However, in
anticipation of its secondary public offering in October 1995, the Company
declared a two-for-one stock split, effected in the form of a one-for-one share
dividend, effective September 12, 1995. The Company declared a second two-for-
one stock split, effected in the form of a one-for-one share dividend, effective
January 30, 1998. The Company anticipates that all of its earnings will be
retained for the development and expansion of the Company's business and does
not anticipate paying any cash dividends in the foreseeable future. The chart
below sets forth the high/ask and low/bid prices for each quarter of the
Company's last two fiscal years. The prices below reflect the two-for-one stock
splits which occurred on September 12, 1995 and January 30, 1998.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH/ASK LOW/BID
------------- -------- -------
<S> <C> <C>
March 31, 1997 12.25 7.875
June 30, 1997 10.625 6.25
September 30, 1997 19.50 7.50
December 31, 1997 19.125 10.50
March 31, 1998 23.375 13.50
June 30, 1998 27.50 17.25
September 30, 1998 19.875 9.50
December 31, 1998 18.25 8.625
</TABLE>
The closing price of a share of the Company's Common Stock on March 19,
1999, was $9.375. As of March 19, 1999, the Company had 202 shareholders of
record of its Common Stock. As of the date of the Company's last Annual Meeting
of Stockholders, the Company had approximately 6,300 beneficial owners of its
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................. $10,374 $20,346 $ 32,466 $69,768 $98,555
Total cost of revenues (1)................. 3,136 5,218 11,507 22,131 34,756
------- ------- -------- ------- -------
Gross profit............................... 7,238 15,128 20,959 47,637 63,799
Total operating expenses (2)............... 4,813 9,216 47,758 31,076 53,251
------- ------- -------- ------- -------
Operating income (loss).................... 2,425 5,912 (26,799) 16,561 10,548
Net other income........................... 42 1,176 2,370 987 536
------- ------- -------- ------- -------
Income (loss) before income taxes.......... 2,467 7,088 (24,429) 17,548 11,084
Income taxes............................... 915 2,742 3,581 6,110 6,384
------- ------- -------- ------- -------
Net income (loss).......................... $ 1,552 $ 4,346 $(28,010) $11,438 $ 4,700
======= ======= ======== ======= =======
Basic net income (loss) per share.......... $ .15 $ .33 $ (1.65) $ .62 $ .25
======= ======= ======== ======= =======
Diluted net income (loss) per share........ $ .15 $ .30 $ (1.65) $ .59 $ .23
======= ======= ======== ======= =======
Net income before one time charges......... $ 1,552 $ 4,346 $ 7,394 $11,438 $15,311
======= ======= ======== ======= =======
Basic net income per share before one
time charges.............................. $ .15 $ .33 $ .44 $ .62 $ .81
======= ======= ======== ======= =======
Diluted net income per share before one
time charges.............................. $ .15 $ .30 $ .42 $ .59 $ .76
======= ======= ======== ======= =======
Basic weighted average common shares
outstanding............................... 10,366 13,004 16,977 18,397 18,935
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Diluted weighted average common
shares outstanding......................... 10,366 14,366 16,977 19,246 20,279
Operating Data:
Software units sold at period-end
(cumulative)............................... 7,332 11,964 24,787 35,465 47,985
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $1,569 $19,965 $13,633 $22,290 $25,792
Total assets............................... 5,790 50,692 57,577 65,097 86,790
Long-term debt, less current portion....... 46 22 2,893 603 297
Total stockholders' equity................. 916 46,034 33,125 47,108 60,606
</TABLE>
(1) In 1996, includes $1,804 of capitalized software written off as a result of
the acquisition of SQL. In 1998, includes $3,944 of capitalized and
acquired software written off as a result of the acquisition of Insta and
pursuant to a plan for re-organization and restructuring (see note 1(i) of
notes to consolidated financial statements).
(2) In 1996, includes $33,600 of in-process research and development acquired
and written off as part of the acquisition of SQL. In 1998, includes $9,990
of in-process research and development acquired and written off as a part
of the acquisition of Insta and SIS, and other charges pursuant to a plan
of re-organization and restructuring (see notes 2 and 3 of the notes to
consolidated financial statements).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Company's consolidated financial statements and notes
thereto included herein.
OVERVIEW
Datastream was incorporated in 1986 to develop, market, sell and support
software products for the industrial automation market. The Company's revenues
have grown each calendar year since inception. Excluding the one-time charges
related to the acquisitions of SQL and Insta, the Company has been profitable in
each of the last five years and has experienced a compounded annual growth rate
of 76% in revenues and 108% in earnings during that period.
The Company offers a complete family of CMMS/EAM products to the industrial
automation market. See "Business--Products." Generally these products consist
of 4 major categories based on price and functionality. MaintainIt and
MaintainIt Pro are off-the-shelf, entry-level solutions primarily for the low-
end segment of the CMMS/EAM market. MP2 Professional provides maintenance
solutions for the middle segment and MP2 Enterprise offers enterprise-wide
maintenance solutions for the middle and high-end segments of the CMMS/EAM
market. MP5, offers a high-end EAM solution. Datastream supports its software
products with professional and support services. Through December 31, 1997, the
Company recognized revenue in accordance with SOP 91-1, "Software Revenue
Recognition." On January 1, 1998, the Company adopted SOP 97-2, "Software
Revenue Recognition." See note 1(c) of the notes to consolidated financial
statements for additional information concerning the Company's revenue
recognition policies.
In December 1998, the Company adopted a restructuring plan pursuant to which
it intends to aggressively migrate to new Web-based products to permit it to
continue to compete effectively both domestically and internationally and
improve operating efficiencies and customer service by consolidating research
and development and certain administrative functions and eliminating
redundancies in its acquired subsidiaries. The restructuring resulted in
certain one-time charges. See "--Recent Developments."
13
<PAGE>
International revenues were $37,438,000 or 37.9% of total revenues in 1998,
increasing from $25,570,000 or 36.7% in 1997, primarily as a result of the
acquisitions of Insta, SIS, Datastream Pacific and Computec. The Company hedges
against a defined range of movements in the exchange rates between the
currencies in which it does virtually all its business. As the Company begins to
accept increased payments in foreign currency, significant changes in the values
of these foreign currencies relative to the United States dollar may affect the
Company's financial condition and results of operations. In addition, gains and
losses on currency translations could contribute to fluctuations in the
Company's results of operations. See "Risk Factors -- If we fail to integrate
and manage our international operations, our business could be adversely
affected."
Because the Company consummated the acquisition of SQL on the last day of
fiscal 1996 and the transaction was accounted for as a purchase, SQL's results
of operations for fiscal 1996 are not included in the Company's fiscal 1996
results. For 1996, SQL generated revenues of approximately $17.3 million and a
net loss of approximately $5.9 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- If we fail to
integrate an manage our international operations, our business could be
adversely affected."
Product development costs consist principally of salaries and certain other
expenses related to development and modification of software products, which are
capitalized in accordance with Statement of Financial Accounting Standards No.
86 ("Statement 86"), "Accounting for the Costs of Computer Software to Be Sold,
Leased or Otherwise Marketed." Capitalization of such costs begins only upon
establishment of technological feasibility as defined in Statement 86 and ends
when the resulting product is available for distribution. Annual amortization of
capitalized product development costs is provided at the greater of the ratio of
current product revenue to the total of current and anticipated product revenue
or on a straight line basis over the estimated economic life of the software,
which is not more than eighteen months or three years, depending on the product.
RECENT DEVELOPMENTS
In 1998, the Company made three stock acquisitions of foreign enterprise
software companies, Insta (March 1998), SIS (June 1998) and Computec (September
1998), and one asset acquisition, Datastream Pacific (July 1998), to expand its
international markets and reduce the Company's reliance on outside distributors.
Insta, a German corporation headquartered in Munich, is a leading provider of
CMMS software, having previously developed a state-of-the-art enterprise system.
SIS, a developer of EAM software headquartered in Singapore, specializes in
vertical markets that are asset-intensive, such as the petrochemical and
utilities industries. Computec is a marketer of CMMS software in Latin America.
Datastream Pacific was an exclusive distributor of Datastream's products in
Australia and New Zealand.
Like many software companies, the Company experiences seasonal variations in
revenues. The Company believes that its future results of operations may be
subject to quarterly variations. The acquisitions of SQL, Insta, SIS, Datastream
Pacific and Computec have exposed Datastream to seasonal revenue fluctuations
overseas, principally slower business conditions in the first and third quarters
of the year.
At the time of the acquisitions of Insta, SIS and Computec, the Company's
approach was to continue acquired product development, marketing and sales on
parallel paths with the Company's products. In the fourth quarter of 1998, the
Company experienced increased competition in international markets. The Company
determined that continued development of some acquired product lines would
divert resources that could be used to enhance the Company's ability to respond
quickly to this increased competition. Additionally, the Company determined that
it should aggressively move to Web-enabled products and Web-centric solutions
for the CMMS/EAM market such as MP2 Enterprise version 7.0, e-MRO and MP5 to
respond to rapid technological changes in the industry.
As a result of changes described above, the Company adopted a restructuring
plan in the fourth quarter of 1998 designed to (i) permit more rapid development
of Web-centric products and services by consolidating and centralizing product
development, services and support and (ii) centralize management control and
administrative functions in recently acquired international operations to
eliminate redundancies and generate cost savings. The implementation of the
restructuring plan will involve, among other things, the immediate cessation of
certain international product offerings and related customer services and
support, and reductions in staffing in certain international offices and
closings of redundant offices throughout 1999. The Company anticipates that the
cessation of product offerings may
14
<PAGE>
inhibit international cash collection efforts and increase related collection
expenses, thereby requiring increases in reserves for doubtful accounts
receivables.
The aggregate amount of $7.3 million in write-downs and write-offs of
obsolete products and capitalized software and increased reserves resulting from
the restructuring plan was reflected in the fourth quarter of 1998. See also
note 3 to the consolidated financial statements.
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, the Company voluntarily
adjusted the allocation of the purchase price related to its acquisitions of
Insta and SIS and the related goodwill amortization. In connection therewith,
on March 1, 1999, the Company filed amended quarterly reports for each of its
fiscal quarters ended March 31, June 30 and September 30, 1998 with the SEC.
Although the Company believes that its original accounting treatment was in
accordance with GAAP, it made the adjustments to be consistent with the new
methodology set forth by the Staff.
RESULTS OF OPERATIONS
The following tables set forth statement of operations data for the three
years ended December 31, 1996, 1997 and 1998, the percentage change in such data
from period to period for each of the corresponding periods and the percentage
that such data bears to total revenues for each period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERCENT CHANGE
----------------------- ------------------
1996 1997 1998 96-97 97-98
---- ---- ---- ----- -----
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product................................... $ 14,018 $31,174 $38,226 122.4% 22.6%
Professional services..................... 12,326 26,438 42,622 114.5 61.2
Support................................... 6,122 12,156 17,707 98.6 45.7
-------- ------- ------- ----- ------
Total revenues.......................... 32,466 69,768 98,555 114.9 41.3
Cost of revenues:
Cost of product revenues.................. 1,879 3,133 3,680 66.7 17.5
Cost of professional
services revenues....................... 6,729 15,160 22,402 125.3 47.8
Cost of support revenues.................. 1,095 3,838 4,730 250.5 23.3
Write-off of capitalized software......... 1,804 -- 3,944 N/M N/M
-------- ------- ------- ----- ------
Total costs of revenues................. 11,507 22,131 34,756 92.3 57.0
Gross Profit................................ 20,959 47,637 63,799 127.3 33.9
Operating expenses:
Sales and marketing....................... 9,399 18,617 25,398 98.1 36.4
Product development................... .. 1,390 4,364 8,174 213.9 87.3
General and administrative................ 3,369 8,095 9,689 140.2 19.7
Write-off of in-process research and
development, restructuring and
other charges........................... 33,600 -- 9,990 N/M N/M
-------- ------- ------- ----- ------
Total operating expenses.................. 47,758 31,076 53,251 (34.9) 71.4
-------- ------- ------- ----- ------
Operating income (loss)..................... (26,799) 16,561 10,548 161.8 (36.3)
Net other income............................ 2,370 987 536 (58.4) (45.7)
-------- ------- ------- ----- ------
Income (loss) before income taxes........... (24,429) 17,548 11,084 171.8 (36.8)
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Income taxes............................ 3,581 6,110 6,384 70.6 4.5
-------- ------- ------- ----- ------
Net income (loss)....................... $(28,010) $11,438 $ 4,700 140.8 (58.9)
======== ======= ======= ===== ======
Basic net income (loss) per share....... $ (1.65) $ .62 $ .25 137.6% (59.8%)
======== ======= ======= ===== ======
Diluted net income (loss) per share..... $ (1.58) $ .59 $ .23 137.3% (61.0%)
======== ======= ======= ====== ======
</TABLE>
N/M - Not meaningful
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product...................................................... 43.2% 44.7% 38.8%
Professional services........................................ 38.0 37.9 43.2
Support...................................................... 18.8 17.4 18.0
------ ----- -----
Total revenues.............................................. 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues..................................... 5.8 4.5 3.7
Cost of professional services revenues....................... 20.7 21.7 22.7
Cost of support revenues..................................... 3.4 5.5 4.8
Write off of capitalized software............................ 5.6 -- 4.0
------ ----- -----
Total cost of revenues...................................... 35.5 31.7 35.3
Gross Profit.................................................. 64.5 68.3 64.7
Operating expenses:
Sales and marketing.......................................... 28.9 26.7 25.8
Product development.......................................... 4.3 6.3 8.3
General and administrative................................... 10.4 11.6 9.8
Write-off of in-process research and development............. 103.5 -- 10.1
------ ----- -----
Total operating expenses.................................... 147.1 44.6 54.0
Operating income (loss)....................................... (82.6) 23.7 10.7
Net other income.............................................. 7.3 1.4 0.5
------ ----- -----
Income (loss) before income taxes............................. (75.3) 25.1 11.2
Income taxes.................................................. 11.0 8.7 6.5
------ ----- -----
Net income (loss)............................................. (86.3)% 16.4% 4.8%
====== ===== =====
</TABLE>
1998 COMPARED TO 1997 AND 1997 COMPARED TO 1996
TOTAL REVENUES. Total revenues for 1998 increased 41.3% to approximately
$98.6 million from approximately $69.8 million in 1997, due principally to (i)
the continued acceptance of the Company's products in the global industrial
automation market, (ii) expansion of the Company's sales, marketing,
professional and technical support service organizations, (iii) the acquisitions
of Insta on March 31, 1998, SIS on June 16, 1998, Datastream Pacific on July 13,
1998 and Computec on September 2, 1998, (iv) the introduction of new products
including MP2 v5.0 for Access and Weblink in March of 1998, and PagerLink, MP2
v6.0 for Oracle and MP5 v5.4 in June 1998, followed by translated language
versions. The revenue growth is comprised of a 27.8% increase in Datastream's
revenues and a 13.5% increase attributable to the international acquisitions.
16
<PAGE>
Total revenues for 1997 increased 114.9% to approximately $69.8 million from
approximately $32.5 million in 1996, due principally to the (i) acquisition of
SQL on December 31, 1996, (ii) introduction of foreign language versions of
Datastream's MP2 Professional and MaintainIt Pro in Europe through the SQL
channels, (iii) continued acceptance of the Company's products in the global
industrial automation market, (iv) expansion of the Company's sales, marketing
professional and technical support service organizations, (v) introduction of
MP2 Enterprise in March 1997, followed by translated versions catering to
several European languages and (vi) introduction of MP2 Messenger in late 1996.
The total growth in revenues of 114.9% is comprised of a 49.9% increase in
Datastream's revenues, and 36.0% attributable to the acquisition of SQL and a
29.0% growth in SQL's revenues for fiscal 1997.
International revenues were approximately $37.4 million, or 37.9% of total
revenues in 1998, compared to $25.6 million, or 36.7% of total revenues in 1997,
compared to approximately $4.4 million, or 13.4% of total revenues, in 1996.
Product revenues increased 22.6% to approximately $38.2 million in 1998 from
approximately $31.2 million in 1997, and 122.4% to approximately $31.2 million
in 1997 from approximately $14.0 million in 1996. These increases are due to
expansion of the number of software products being sold, growth in the number of
software units sold, and an increase in the average selling price of the systems
sold. As a percentage of revenues, revenues from software products decreased
to 38.8% in 1998 from 44.7% in 1997 and increased to 44.7% in 1997 from 43.2% in
1996.
Professional service revenues increased 61.2% to approximately $42.6 million
in 1998 from approximately $26.4 million in 1997 and 114.5% to approximately
$26.4 million in 1997 from approximately $12.3 million in 1996. These increases
generally reflect the impact of the acquisitions of SQL, Insta, SIS, Datastream
Pacific and Computec, and increased installation, training and integration
services provided to support increased product sales. As a percentage of
revenues, revenues from professional services increased to 43.2% in 1998 from
37.9% in 1997 and decreased slightly to 37.9% in 1997 from 38.0% in 1996.
Technical support service revenues increased 45.7% to approximately $17.7
million in 1998 from approximately $12.2 million in 1997, and 98.6% to
approximately $12.2 million in 1997 from approximately $6.1 million in 1996.
These increases reflect the impact of the acquisitions of SQL, Insta, SIS,
Datastream Pacific and Computec, and an increase in the type and variety of
services provided to a larger installed customer base. As a percentage of total
revenues, revenues from technical support services increased to 18.0% in 1998
from 17.4% in 1997 and 18.8% in 1996.
COST OF REVENUES. Cost of product revenues as a percentage of total revenues
decreased to 3.7% in 1998 from 4.5% in 1997 and decreased to 4.5% in 1997 from
5.8% in 1996. The decrease as a percentage of revenues in 1998 from 1997 and
1996 principally reflects decreased amortization of capitalized software costs
as a percentage of product costs, decreased costs associated with printing and
replication of the Company's software products, and volume discounts realized on
shipping costs.
Cost of professional services increased as a percentage of total revenues to
22.7% in 1998 from 21.7% in 1997 and 20.7% in 1996. The increase as a
percentage of revenues in 1998 from 1997 was due primarily to the acquisition of
Insta, SIS and Computec which generally experience lower utilization of
professional services people. The increase as a percentage of revenues in 1997
from 1996 was due primarily to the acquisition of SQL which experiences lower
utilization of professional service personnel during the first and third
quarters resulting from seasonal business cycles in Europe.
Cost of technical support services as a percentage of total revenues was
4.8%, 5.5%, and 3.4% in 1998, 1997 and 1996, respectively. The decrease from
1997 to 1998 as a percentage of revenues reflects savings realized upon
consolidation of worldwide support activities in Greenville, SC during 1998.
The increase from 1996 to 1997 as a percentage of revenues reflected the impact
of the acquisition of SQL which sells larger contracts containing a larger
component of technical support service cost.
Cost of revenue in 1998 included one-time charges totaling $3.9 million,
including a $600,000 write-off of capitalized software rendered obsolete as a
result of the acquisition of Insta, and a $3.3 million write-off of acquired and
capitalized software rendered obsolete by management's decision in the fourth
quarter of 1998 to focus future software development on Internet-based software
pursuant to its restructuring plan. Cost of revenue in 1996 included a one-time
17
<PAGE>
$1.8 million write-off of capitalized software which became obsolete as a result
of the acquisition of SQL. No such charges against income were taken in 1997.
See note 1(i) to the consolidated financial statements.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for 1998
increased 36.4% to approximately $25.4 million from approximately $18.6 million
in 1997, and increased 98.1% to approximately $18.6 million from approximately
$9.4 million in 1996. As a percentage of total revenues, these expenses were
25.8% in 1998, 26.7% in 1997 and 28.9% in 1996. The decrease as a percentage
of revenues in 1998 from 1997 and 1996 was due primarily to increased
productivity of the sales and marketing staff combined with increased market
acceptance of the Company's products.
PRODUCT DEVELOPMENT EXPENSES. Total expenditures on product development,
including capitalized expenses, increased to approximately $11.8 million in 1998
from approximately $6.7 million in 1997 and from approximately $4.0 million in
1996. The increases were primarily due to the hiring of additional employees and
third party consultants to work on the Company's file server, client/server,
MaintainIt/Pro and foreign language products. The Company capitalized software
expense of approximately $3.7 million, $2.3 million and $2.6 million,
respectively, in 1998, 1997 and 1996, which represented 30.9%, 34.8% and 65.0%
of total expenditures for product development in the respective periods.
Capitalization of software expense is expected to decrease as a percentage of
total development expense in 1999. Net product development expenditures were
approximately $8.2 million, $4.4 million and $1.4 million in 1998, 1997 and
1996, respectively. Net product development expenses as a percentage of revenues
were 8.3%, 6.3% and 4.3% in 1998, 1997 and 1996, respectively. Amortization of
capitalized product development costs is charged to cost of product sales and
totaled approximately $1.6 million, $1.5 million and $0.5 million in 1998, 1997
and 1996, respectively. Management believes that these capitalized software
assets will be recoverable out of future product sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include the cost of the Company's finance, human resources and information
services. General and administrative expenses increased 19.7% to approximately
$9.7 million in 1998 from approximately $8.1 million in 1997, and 140.2% to
approximately $8.1 million in 1997 from approximately $3.4 million in 1996, due
primarily to the acquisitions of Insta, SIS, Datastream Pacific and Computec
which historically spent more on general and administrative categories, and
increased administrative personnel required to support the Company's growth,
increased reserves and increased expenses associated with being a public
company. As a percentage of total revenues, general and administrative expenses
were 9.8% in 1998, 11.6% in 1997 and 10.4% in 1996.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT COSTS, RESTRUCTURING AND
OTHER CHARGES. The Company expensed $3.5 million of in-process research and
development acquired as part of the acquisitions of Insta, SIS and Computec in
the amount of $2.1 million, $1.1 million and $373,000, respectively. In July
1998, the Company withdrew its proposed offering of Common Stock and wrote off
the related capitalized costs of $231,000, which is included with the other
charges. The Company expensed $2.2 million in 1998 related to the discontinuance
of the Company's indirect sales model. The Company also adopted a restructuring
plan in December 1998 pursuant to which it intends to aggressively develop
Internet-based software products, consolidate product development, customer
support and administrative services and eliminate redundancies in its acquired
international subsidiaries. As a result, the Company expensed $4.0 million
related to the restructuring in the fourth quarter of 1998. See "--Recent
Developments" and note 3 to the consolidated financial statements.
OTHER INCOME/EXPENSE. Other income decreased to $0.5 million in 1998 from
approximately $1.4 million in 1997 and $2.4 million in 1996. The decreases from
1996 to 1997 and 1998 was primarily due to lower interest earned on smaller
investment balances which resulted after remitting the cash portion of the
purchases of SQL, Insta, SIS, Datastream Pacific and Computec to their
respective shareholders.
INCOME TAXES. The Company's effective income tax rate for 1998 increased to
38.8% from 34.8% in 1997, primarily due to the fact taxable operating profits
were earned in each of the foreign countries in which the company operated
subsidiaries during all or part of 1998. The Company's effective tax rate for
1997 increased to 34.8% from (14.6%) in 1996, primarily due to the tax treatment
of the SQL acquisition and related costs. Without the effect of the
acquisition, the Company's effective tax rate for 1996 would have been 36.5%
and the decrease from 1996 to 1997 could be attributed principally to increased
product development tax credits.
NET INCOME (LOSS). The Company's net income decreased (58.9%) in 1998 to
approximately $4.7 million or $.25 basic earnings per share ($.23 diluted
earnings per share) from a profit of approximately $11.4 million in 1997 or $.62
18
<PAGE>
basic earnings per share ($.59 diluted earnings per share), and increased 140.8%
in 1997 to a profit of approximately $11.4 million or $.62 basic earnings per
share ($.59 diluted earnings per share), from a loss of approximately $(28.0)
million, or $(1.65) basic earnings per share ($(1.65) diluted earnings per
share) in 1996. The decrease in net income is due to the impact of the write-
offs incurred upon the acquisitions of Insta, SIS, Datastream Pacific and
Computec, offset in part by improved profitability of the former SQL Group, B.V.
and internal growth of revenues during 1998. The loss in 1996 is directly
attributable to the one-time write-off of costs associated with the acquisition
of SQL. Before accounting for the one time charges associated with the
acquisitions, the Company's net income increased 33.9% to $15.3 million in 1998
from $11.4 million in 1997, and increased 61% to $11.4 from $7.1 million in
1996.
QUARTERLY RESULTS
GENERAL. Many software companies experience seasonal variations in revenues.
While historically the Company has demonstrated revenue growth over the prior
year, sequential revenue growth is stronger in the second and fourth fiscal
quarters than that experienced in the first and third quarters. The Company
believes that its future results of operations may be subject to similar
quarterly variations. The acquisitions of SQL, Insta, SIS, Datastream Pacific
and Computec have exposed the Company to seasonal revenue fluctuations in
Europe, Asia and Latin America, principally consisting of slower business
conditions in the first and third quarters of the year. Datastream has
historically experienced an increase in service revenues in the second quarter
during which the Company holds its annual Technical User Group Conference. The
next such conference is presently scheduled to be held in May 1999.
The following table presents certain unaudited quarterly financial
information for each of the eight quarters through the quarter ended
December 31, 1998. In the opinion of management, this information has been
prepared on the same basis as the audited financial statements appearing
elsewhere in this Annual Report and all necessary adjustments (consisting only
of normal recurring adjustments) have been included in the amounts stated below
to present fairly the unaudited quarterly results when read in conjunction with
the audited financial statements of the Company and notes thereto. The Company's
quarterly results have in the past been subject to fluctuations, and thus the
operating results for any quarter are not necessarily indicative of results for
any future period. All amounts shown (except per share amounts) are expressed in
thousands.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------
1997 1998
------------------------------------- -------------------------------------
MARCH JUNE SEPT. DEC. MARCH JUNE SEPT. DEC.
31, 30, 30, 31, 31, 30, 30, 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product....................... $ 6,148 $ 6,851 $ 8,195 $ 9,980 $ 7,365 $ 9,332 $ 9,401 $12,128
Professional services......... 5,783 6,909 6,187 7,559 8,956 9,832 11,169 12,665
Support....................... 2,751 3,054 3,018 3,333 3,808 4,278 4,591 5,029
------- ------- ------- ------- ------- ------- ------- -------
Total revenues............. 14,682 16,814 17,400 20,872 20,129 23,442 25,161 29,822
Cost of revenues:
Cost of product revenues...... 844 695 746 848 776 772 1,044 1,087
Cost of professional services
revenues................... 3,530 3,712 3,738 4,180 4,145 5,221 5,972 7,064
Cost of support revenues...... 687 1,090 1,134 927 930 1,214 1,156 1,431
Write-off of capitalized
software................... -- -- -- -- 598 -- -- 3,346
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues........ 5,061 5,497 5,618 5,955 6,449 7,207 8,172 12,928
------- ------- ------- ------- ------- ------- ------- -------
Gross profit..................... 9,621 11,317 11,782 14,917 13,680 16,235 16,989 16,894
Operating expenses:
Sales and marketing........... 4,273 4,694 4,605 5,045 5,549 6,492 6,326 7,030
Product development........... 834 1,036 1,180 1,314 1,522 1,961 1,855 2,836
General and administrative.... 2,236 1,773 1,522 2,564 2,030 2,015 2,294 3,350
Write off of in-process
research and development,
restructuring and other
charges.................... -- -- -- -- 2,057 1,360 1,104 5,469
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 7,343 7,503 7,307 8,923 11,158 11,828 11,579 18,685
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating income (loss).......... 2,278 3,814 4,475 5,994 2,522 4,407 5,410 (1,791)
Net other income................. 208 282 249 248 253 203 49 31
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes...................... 2,486 4,096 4,724 6,242 2,775 4,610 5,459 (1,760)
Income taxes..................... 508 1,495 1,748 2,359 2,064 2,358 2,625 (664)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)................ $ 1,978 $ 2,601 $ 2,976 $ 3,883 $ 711 $ 2,252 $ 2,834 $(1,096)
======= ======= ======= ======= ======= ======= ======= =======
Basic net income (loss)
per share.................. $ .11 $.14 $.16 $.21 $.04 $.12 $.15 $(.06)
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income (loss)
per share.................. $ .11 $.14 $.15 $.19 $.03 $.11 $.14 $(.06)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The table below sets forth the percentage relationship of certain items to
total revenues with regard to the Company's results of operations for each of
the eight quarters through the quarter ended December 31, 1998.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------
1997 1998
-------------------------------- ----------------------------------
MARCH JUNE SEPT. DEC. MARCH JUNE SEPT. DEC.
31, 30, 30, 31, 31, 30, 30, 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product...................... 41.9% 40.7% 47.1% 47.8% 36.6% 39.8% 37.4% 40.7%
Professional services........ 39.4 41.1 35.6 36.2 44.5 41.9 44.4 42.5
Support...................... 18.7 18.2 17.3 16.0 18.9 18.3 18.2 16.9
----- ----- ----- ----- ----- ----- ------ -----
Total revenues............ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues..... 5.7 4.1 4.3 4.1 3.9 3.3 4.2 3.6
Cost of professional services
revenues................... 24.0 22.1 21.5 20.0 20.6 22.3 23.7 23.7
Cost of support revenues..... 4.7 6.5 6.5 4.4 4.6 5.2 4.6 4.8
Write-off of capitalized
software.................. -- -- -- -- 3.0 -- -- 11.2
----- ----- ----- ----- ----- ----- ------ -----
Total cost of revenues....... 34.5 32.7 32.3 28.5 32.0 30.7 32.5 43.4
----- ----- ----- ----- ----- ----- ------ -----
Gross profit..................... 65.5 67.3 67.7 71.5 68.0 69.3 67.5 56.6
Operating expenses:
Sales and marketing.......... 29.1 27.9 26.5 24.2 27.6 27.7 25.1 23.6
Product development.......... 5.7 6.2 6.8 6.3 7.6 8.4 7.4 9.5
General and administrative... 15.2 10.5 8.7 12.3 10.1 8.6 9.1 11.2
Write-off of in-process
research and development,
restructuring and other
charges................... -- -- -- -- 10.2 5.8 4.4 18.3
----- ----- ----- ----- ----- ----- ------ -----
Total operating expenses......... 50.0 44.6 42.0 42.8 55.4 50.5 46.0 62.7
----- ----- ----- ----- ----- ----- ------ -----
Operating income (loss).......... 15.5 22.7 25.7 28.7 12.5 18.8 21.5 (6.0)
Net other income................. 1.4 1.7 1.4 1.2 1.3 0.9 0.2 .01
----- ----- ----- ----- ----- ----- ------ -----
Income (loss) before income
taxes...................... 16.9 24.4 27.1 29.9 13.8 19.7 21.7 (5.9)
Income taxes..................... 3.5 8.9 10.0 11.3 10.3 10.1 10.4 (2.2)
----- ----- ----- ----- ----- ----- ------ -----
Net income (loss)................ 13.5% 15.5% 17.1% 18.6% 3.5% 9.6% 11.3%1 (3.7)%
===== ===== ===== ===== ===== ===== ====== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its activities entirely from cash generated from
operations. The Company ended 1998 with $6,739,209 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.
20
<PAGE>
In July 1997, the Company made a $2 million investment in Distinction
Software, Inc. ("Distinction"). This investment represents less than 20% of the
outstanding capital stock of Distinction. In October 1998, Distinction and
PeopleSoft entered into an agreement whereby, pursuant to the satisfactory
delivery of interim software development and revenue targets, PeopleSoft agreed
to purchase Distinction on or about October 15, 1999, subject to certain
contingencies and purchase price adjustments.
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 was completed on
July 13, 1998 for $600,000, consisting of $300,000 in cash and $300,000 (13,274
shares) in Common Stock issued pursuant to Regulation S.
The acquisition of Computec 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 December 31, 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 investments available for sale will be sufficient to meet its
working capital and capital expenditure needs for at least the next 12 months.
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.
YEAR 2000
DATASTREAM DESIGNATES ALL STATEMENTS MADE BY IT IN THIS ANNUAL REPORT
REGARDING ITS YEAR 2000 EFFORTS AS "YEAR 2000 READINESS DISCLOSURES." SUCH
DISCLOSURES 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.
21
<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 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
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 $300,000 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.
NEW EUROPEAN CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing currencies and
the Euro, a new European currency, and adopted 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
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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.
RISK FACTORS
The terms "we," "our," "us" or similar terms used in this section refers to
Datastream Systems, Inc. and its subsidiaries.
WE FACE RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE AND IN OUR TRANSITION
TO WEB-BASED PRODUCTS.
The CMMS/EAM market is characterized by rapidly changing technology, evolving
industry standards, changes in customer requirements and frequent new product
introductions and enhancements. Our future success depends greatly on our
ability to enhance certain of our existing products. Our success also depends
on our ability to develop and introduce, on a timely and cost-effective basis,
new products and product features to meet our customers' changing needs and
emerging industry standards, particularly involving the Internet. Industry
standards for product development in the CMMS/EAM market are still evolving and
we will have to modify our products or develop and support new versions of our
products. Our ability to successfully develop such products and versions will
require high levels of innovation, as well as an accurate anticipation of
technological and market trends. We cannot assure you that we will be able to
successfully identify, develop, manufacture and market new products or product
enhancements that comply with evolving industry standards or achieve market
acceptance. If new technologies or the emergence of new industry standards that
we have not anticipated render existing products as well as products in
development obsolete or unmarketable, it could have a material adverse effect on
our business, financial condition or results of operations.
Our software products may also contain undetected errors or bugs when first
introduced or as new versions are released. Our software products or media may
also contain undetected viruses. Further, software we license from third parties
and incorporate into our products may contain errors, bugs or viruses. Errors,
bugs or viruses may cause a loss of or delay in market acceptance, recalls of
hardware products incorporating the software or loss of data. Any such defects
and errors could cause adverse customer reactions, negative publicity regarding
our business and our products, harm to our reputation, loss of or delay in
market acceptance, loss of revenue or required product changes, any of which
could materially adversely affect our business, financial condition and results
of operations.
OUR NEW PRODUCT STRATEGY DEPENDS ON THE CONTINUED ACCEPTANCE OF THE INTERNET FOR
BUSINESS TRANSACTIONS.
The development of the Internet as a medium for business to business
transactions is still in a formative stage. As we continue to develop and
market Web-based products, our success will increasingly depend on the continued
use and development of the Internet as a tool for the transaction of business.
The Internet could be limited in its viability or its usage could decline due to
many factors, including delays in the development of Internet infrastructure,
disruptions due to the inability of computer systems to recognize the year 2000
or changes or increases in government regulation. We cannot assure you that the
infrastructure or complementary services necessary to maintain the Internet will
be developed or maintained.
We have also begun to provide a software enhancement that will enable certain
of our customers to direct MRO procurement to a select group of MRO suppliers
via the Internet through our e-MRO product. The success of our e-MRO initiative
will depend on:
. our ability to introduce and install the e-MRO product effectively
throughout our customer base;
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. our ability to attract and retain high quality national and international
MRO suppliers that cover comprehensively our customers' MRO procurement
needs; and
. our ability to compete effectively with both traditional and Internet-
based MRO procurement alternatives now available or that may become
available to our customers in the future.
OUR SUCCESS IS SUBSTANTIALLY DEPENDENT ON CERTAIN STRATEGIC RELATIONSHIPS.
A principal element of our strategy is the establishment and maintenance of
strategic marketing alliances or other similar collaborative relationships with
other companies. We have established and intend to continue creating 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, our products. Certain of our 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 us. We
cannot assure you that we will be able to negotiate such additional strategic
relationships, that such additional relationships will be available to us on
acceptable terms or that any such relationships, if established, will be
commercially successful. If we fail to do so, it could have a material adverse
effect on our business, financial condition and results of operations.
The success of our e-MRO product is substantially dependent upon our
strategic partnerships with certain MRO parts suppliers. We have signed
strategic supplier agreements with Applied Industrial Technologies, Inc.,
Fastenal Company and WESCO Distribution, Inc. We formed these existing
relationships recently, and they have not yet produced significant revenues. We
view these strategic relationships as a key factor in our overall business
strategy. However, our strategic partners may not view their relationships with
us as significant to their own business, and they may reassess their commitment
to, or decide to compete directly with us for our customers' MRO procurement in
the future. Therefore, we cannot assure you that these relationships will be
successful. We also cannot assure you that we will be able to establish new
agreements or that these agreements can be renewed on commercially acceptable
terms.
We also rely on third parties that supply us with certain technology that is
crucial to our success. As we continue to introduce new products that
incorporate new technologies, we may license additional technology from those
third parties or others. We cannot assure you that those third parties will
continue to develop new versions of products in a timely manner or that third
party technology licenses will continue to be available to us on commercially
reasonable terms, if at all. Any failure to obtain any of these technology
upgrades or licenses could result in delays or reductions in the introduction of
new products, features or functions.
THE MARKET FOR CMMS/EAM CONTINUES TO BE HIGHLY COMPETITIVE.
The current market for CMMS/EAM is both fragmented and highly competitive. We
expect competition to intensify as new companies enter the market and existing
ones, including ERP companies, expand their product lines. We have entered into
the high-end segment of the market through both our introduction of an
internally developed client/server product line and through our acquisitions of
SQL, Insta, SIS and Computec. We expect to face increased competition in all
segments of the CMMS/EAM market and across all product lines in the future. Our
future performance is partially dependent upon our ability to respond to
technological changes, evolving standards and our competitors' innovations.
Certain competitors, including ERP companies, have greater financial, marketing,
technical, service and support resources than us. Also, we are likely to
experience a significant amount of competition in connection with our continued
development and release of Web-based products. We cannot assure you that we will
be able to successfully compete against current and future competitors. If we
fail to compete successfully, our business, financial condition and results of
operations could suffer a material adverse effect.
OUR SUCCESS IS HIGHLY DEPENDENT UPON OUR PROPRIETARY TECHNOLOGY.
Our success and ability to compete is dependent in part on our proprietary
technology. We rely on a combination of trade secret, copyright and trademark
laws, software licenses, nondisclosure agreements and technical measures to
establish and protect our proprietary technology. We generally enter into
confidentiality and/or license agreements with our employees, distributors and
strategic partners as well as with our customers and potential customers seeking
proprietary information. We also limit access to and distribution of our
software, documentation and other proprietary
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information. We cannot assure you that the steps we have taken in this regard,
however, will be adequate to deter misappropriation or independent third party
development of our technology. Further, we cannot assure you that third parties
will not assert infringement or misappropriation claims against us in the future
with respect to our 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
us to enter into royalty or licensing arrangements. Such royalty or licensing
arrangements, if required, may not be available on terms acceptable to us, if at
all, which could have a material adverse effect on our business, financial
condition and results of operations. Adverse determinations in such claims or
litigation also could have a material adverse effect on our business, financial
condition and results of operations. Litigation to defend and enforce our
intellectual property rights could result in substantial costs and diversion of
resources and could have a material adverse effect on our business, financial
condition and results of operations, regardless of the final outcome of such
litigation. We may be subject to additional risks as we enter into transactions
in countries where intellectual property laws are not well developed or are
poorly enforced. Legal protections of our rights may be ineffective in such
countries, which could have a material adverse effect on our business, financial
condition and results of operations.
IF WE FAIL TO INTEGRATE AND MANAGE OUR INTERNATIONAL OPERATIONS, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.
In 1998 we acquired Insta, SIS, Datastream Pacific and Computec and are in
the process of integrating those international operations. If we fail to
successfully integrate these businesses in a timely manner, our business,
financial condition and results of operations could suffer a material adverse
effect. These and any future acquisitions involve a number of special risks,
including the 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 our business, financial condition and results of
operations.
Our business, and our ability to maintain and expand our operations
internationally, are subject to the risks inherent in international business
activities, including, in particular:
. greater difficulty in safeguarding our intellectual property;
. general economic and political conditions in each country;
. foreign currency exchange rate fluctuations;
. overlap of different tax structures;
. longer accounts receivable payment cycles in certain countries;
. difficulty in staffing and managing an organization spread over various
countries;
. unexpected changes in regulatory requirements; and
. compliance with a variety of foreign laws and regulations.
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 our ability
to expand our international operations which could materially and adversely
affect our business, financial condition and results of operations. In addition,
we must continue to translate our software into more foreign languages. To the
extent that we are unable to accomplish such translations in a timely manner,
our ability to further penetrate international markets would be adversely
affected. In addition, our deeper exposure to international markets opens new
areas with which we are not familiar and places us in competition with new
vendors. We cannot assure you that we will be successful in our efforts to
compete in these international markets.
Further, we conduct virtually all of our business in US dollars, Dutch
guilders, French francs, German marks, British pounds, Singapore dollars and
Argentinean Pesos. We hedge exchange rate movements on either side of a locked-
in spot rate for movements within a defined range on the dollar-pound rate and
the dollar-Euro rate.
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Changes in the value of these currencies relative to the dollar beyond the
ranges we hedge could affect our financial condition and results of operations,
and gains and losses on currency translations could contribute to fluctuations
in our results of operations.
IF WE ARE NOT SUCCESSFUL IN IMPLEMENTING OUR RESTRUCTURING PLAN, OUR OPERATING
RESULTS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.
We expect to continue to spend substantial financial and other resources on
developing and introducing new product offerings, and expanding our sales and
marketing efforts, strategic relationships and operating infrastructure. In the
fourth quarter of 1998, we implemented a restructuring plan pursuant to which we
intend to aggressively develop new Web-based software products. Components of
our restructuring include consolidating research and development and certain
administrative functions and eliminating redundancies in our acquired
subsidiaries. Our goal in implementing the plan is to continue to compete
effectively both domestically and internationally and to achieve sales growth
and improve operating efficiencies and customer service. If we are not
successful in implementing our restructuring plan, our cost of revenues, sales
and marketing expenses, general and administrative expenses, operations and
customer support expenses, and depreciation and amortization expenses could
continue to increase in absolute dollars and may increase as a percent of
revenues. If that happens and our revenues do not correspondingly increase, our
operating results and financial condition could be negatively affected.
MANY FACTORS MAY AFFECT OUR OPERATING RESULTS, INCLUDING SEASONALITY, AND THESE
COULD CAUSE FLUCTUATIONS IN OUR QUARTERLY RESULTS.
Traditionally we have operated with very little backlog, and a significant
portion of our revenues in any quarter have been the result of a large number of
relatively small orders received during a period. Accordingly, we have
experienced fluctuations in the number of overall orders in any given period,
which in turn has been influenced by the overall level of economic and
industrial activity. We establish our expense levels based in part on our
expectations as to future net sales. A substantial portion of our 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 our operating results and net income. In
addition, our acquisitions of SQL, Insta, SIS and Computec have given us access
to the market for high-end maintenance software solutions, which generally has
larger transaction sizes, which take longer to implement and often result in a
longer sales process. The seasonality of our international operations may result
in fluctuations in our quarterly results. If our revenues in any given quarter
are below expectations due to any of the aforementioned influences, our results
of operations may be materially adversely affected, which in turn could
materially adversely affect the market price of our Common Stock. We cannot
assure you that we will be able to maintain profitability in the future on a
quarterly or annual basis.
WE MUST RETAIN KEY EMPLOYEES AND RECRUIT QUALIFIED TECHNICAL AND SALES PERSONNEL
IN ORDER TO REMAIN SUCCESSFUL.
Our continued success depends on the services of several of our key
executive, sales and marketing and technical employees. The loss of the services
of these personnel, particularly those of Larry G. Blackwell, our founder,
Chairman, Chief Executive Officer and President, or our inability to attract and
retain other qualified management, sales and marketing and technical employees,
could have a material adverse effect on our business and results of operations.
We do not maintain any key-man life insurance policy with respect to Mr.
Blackwell.
Our success also depends in part on our ability to attract, hire, train,
retain and motivate qualified technical and sales personnel, with appropriate
levels of managerial and technical capabilities. Our complex technology
generally requires a significant level of expertise to effectively develop and
market our products and services and to perform our custom application
development services. We have at times experienced, and continue to experience,
difficulty in recruiting qualified personnel. We believe that the pool of
potential applicants with such requisite expertise is limited. Recruiting
qualified personnel is an intensely competitive and time-consuming process. We
compete for such personnel with companies in the software, telecommunications
and other industries, many of which have greater resources than us. Such
competition has resulted in demands for increased compensation from qualified
applicants. Due to such competition, we have experienced, and expect to continue
to experience, turnover in technical personnel. We cannot
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assure you that we will be successful in attracting and retaining the technical
personnel required to continue to conduct and expand our operations
successfully. Our business, financial condition and results of operations could
be materially adversely affected if we were unable to attract, hire, train,
retain and motivate qualified technical and sales personnel.
OUR STOCK PRICE HAS FLUCTUATED SUBSTANTIALLY SINCE OUR INITIAL PUBLIC OFFERING
AND MAY CONTINUE TO DO SO.
The market price of our Common Stock has fluctuated substantially since our
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 our operating performance. In
addition, we believe that factors such as quarterly fluctuations in our
financial results, the overall economy and the condition of the financial
markets could cause the price of our Common Stock to fluctuate substantially.
IF WE DO NOT ADEQUATELY ADDRESS YEAR 2000 ISSUES, WE MAY INCUR SIGNIFICANT COSTS
AND OUR BUSINESS COULD SUFFER.
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 21/st/ century dates from
20/th/ 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.
We have already identified our internal systems that may have Year 2000
issues. We have contacted the manufacturers of suspect systems and believe that
we can finish correcting and testing problem systems by the end of June 1999.
We also believe that the current versions of our products are Year 2000
compliant. However, some of our customers may still be running earlier versions
of our products that are not Year 2000 compliant. Although we do not currently
believe that we will experience material disruptions in our business associated
with preparing our internal systems and products for the year 2000, we cannot
assure you that we will not experience unanticipated negative consequences
and/or material costs caused by undetected errors or defects in the technology
we use in our internal systems, which are composed of third party software, and
third party hardware that contain embedded technology. We also cannot assure
you that our products will have all of the features and functionality that
customers, distributors, resellers and systems integrators will consider
necessary for Year 2000 compliance. Also, our products are being increasingly
installed as a part of integrated systems used by our customers. These
integrated systems may not be Year 2000 compliant. If we are included in any
Year 2000 claims by our customers or the customers of systems integrators,
whether or not such claims have merit, it could materially adversely affect our
business, operating results and financial conditions. Although we do not
anticipate that we will experience any disruptions in our supplier or vendor
relationships due to Year 2000 issues, we cannot currently predict whether
failure of infrastructure services provided by third parties will have a
material effect on our business, operating results and financial condition.
WE MAY FACE CERTAIN RISKS IN CONNECTION WITH THE CONVERSION TO THE EURO.
On January 1, 1999, eleven of the fifteen member countries of the European
Union adopted the Euro as their common legal currency and established fixed
conversion rates between their existing sovereign currencies and the Euro.
Either the Euro or a participating country's present currency will be accepted
as legal tender from January 1, 1999 to January 1, 2000, 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 conversion to
the Euro. Such customers will likely have to upgrade or modify their computer
systems and software to comply with Euro requirements. The Euro conversion may
also have competitive implications for our pricing and marketing strategies,
which could be material in nature; however, we cannot accurately predict any
such impact at this time. We have also begun to analyze which of our internal
systems (such as payroll, accounting and financial reporting) will need to be
modified to deal with the Euro conversion.
Although we do not currently expect the cost of product development and
modifications necessitated by the Euro conversion to have a material effect on
our results of operations or financial condition, we cannot assure you that we
will be able to foresee and correct all potential problems related to the Euro
conversion, or that we will not experience a material disruption in our business
due to the conversion to the Euro.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk primarily from changes in foreign
currency exchange rates and, to a lesser extent, from interest rates. The
following describes the nature of such risks.
FOREIGN CURRENCY EXCHANGE RATE RISK. The Company's foreign currency revenues
continue to grow. In 1998, revenue generated outside the United States
accounted for approximately 38% of total revenue. Significant revenues (i.e.,
greater than 5% of total revenues) were derived in France, the United Kingdom
and The Netherlands, with the balance derived primarily from the six remaining
countries (Germany, Mexico, Argentina, Singapore, Australia and China) in which
the Company maintains Subsidiary or branch operations. Virtually all of the
Company's foreign sales were denominated in the currencies of the local country.
As such the Company's reported profits and cash flows are exposed to changing
exchange rates. Historically, exchange rate exposure has been minimal, however,
management believes it is prudent to reduce the risk associated with
fluctuations in the value of the US dollar in the foreign exchange markets.
In 1998, the Company deployed an average rate range forward or "collared"
hedge to protect against major fluctuations in the UK pound sterling and the
Dutch guilder. Under this contract, the Company absorbed the risk of currency
gains or losses within a range of movement approximately 5% up or down, but was
protected against currency losses greater than 5% by a hedge derivative obtained
through First Union National Bank. Currency gains greater than 5% were remitted
to First Union. Gains and losses under this contract were immaterial in 1998. A
similar contract was deployed in January 1999 to protect against major
fluctuations in the UK pound sterling and European "Euro."
The balance of the currencies in which the Company generates foreign
denominated sales are geographically widespread and individually represent
relatively low dollar exposure. Local currency revenues generated by the
Company's foreign subsidiaries are used to pay local currency expenses. At any
point in time, the Company's foreign operations hold financial assets and
liabilities that are denominated in the local currency. These financial assets
and liabilities consist primarily of short-term, third party and intercompany
receivables and payables. For the most part, gains or loses arise from
translation and as such do not significantly affect net income. At December 31,
1998, cash denominated in foreign currencies was $3.1 million.
INTEREST RATE RISK. The Company is subject to market risk exposure related
to changes in interest rates. The Company has in place two revolving bank
credit facilities, one for $5 million which bears interest at a pre-agreed
percentage spread from LIBOR (London Interbank Rate) and the second for Dfl 1
million which bears interest at a pre-agreed spread from AIBOR (Amsterdam
Interbank Rate). The interest rate risk posed by borrowings under these
facilities is low because the amount of debt historically has been small in
relation to annual cash flow. While changes in the interbank rates would affect
the cost of funds borrowed in the future, the Company believes the effect of
changes in interest rates on the Company's consolidated financial position,
results of operations or cash flows would not be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary financial information required by
this item are filed as part of this Annual Report on pages F-1 through F-27 and
pages S-1 through S-2 immediately preceding the signature page to this Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company and their ages as of
March 18, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Larry G. Blackwell.......................... 58 Chairman of the Board, President and Chief Executive Officer
Daniel H. Christie.......................... 45 Chief Financial Officer and Corporate Secretary
John M. Sterling, III....................... 37 Vice President of International
John Fury Christ............................ 43 Vice President of Development and Chief Technology Officer
Richard T. Brock/(1)/....................... 51 Director
Ira D. Cohen/(2)/........................... 47 Director
John M. Sterling, Jr. /(1)(2)/.............. 61 Director
Kenneth D. Tracy/(1)(2)/.................... 56 Director
</TABLE>
_______________
/(1)/ Member of Compensation Committee.
/(2)/ Member of Audit Committee.
DIRECTOR NOMINEES BIOGRAPHICAL INFORMATION
Set forth below is certain biographical information furnished to the Company
by its directors, including Larry G. Blackwell and John M. Sterling, Jr., the
director nominees for the Company's Class III directorships. Messrs. Blackwell
and Sterling are proposed for election at the Company's 1999 Annual Meeting of
Stockholders (presently scheduled to be held June 11, 1999) to serve a term
expiring in the year 2002. Messrs. Blackwell and Sterling currently serve as
directors of the Company.
LARRY G. BLACKWELL
AGE: 58
CLASS III DIRECTOR - TERM EXPIRES 1999
Dr. Blackwell, the founder of the Company, has served as Chairman of the
Board, Chief Executive Officer and President of the Company from its inception
in 1986. Prior to founding the Company, he was President of the Datastream
Systems Division of a subsidiary of Wisconsin Power & Light. He also co-founded
and formerly served as Chairman of the Board of EDI Technology Companies, an
environmental process engineering consulting company. Dr. Blackwell holds a
B.S. degree in Engineering from the University of Mississippi, a Master of
Science degree from the Georgia Institute of Technology and a Ph.D. in
Environmental Systems Engineering from Clemson University. Dr. Blackwell is a
registered Professional Engineer in Illinois, Pennsylvania and South Carolina
and was named Inc. magazine's 1994 "Entrepreneur of the Year" in the Master
Entrepreneur category for the State of South Carolina. Dr. Blackwell has been a
member of the Board of Directors of HomeGold Financial, Inc. (formerly Emergent
Group, Inc.) since 1997.
JOHN M. STERLING, JR.
AGE: 61
CLASS III DIRECTOR - TERM EXPIRES 1999
Mr. Sterling has served as a director of the Company since February 1986. He
has also served as the Chairman of the Board of Directors and Chief Executive
Officer of HomeGold Financial, Inc. since December 1990 and served as President
of Emergent Group from December 1990 to August 1996. Mr. Sterling has also
served as President of Palmetto Seed Capital Corp. from September 1993 to
October 1998 and served as a General Partner of Reedy River Ventures Limited
Partnership from 1981 until August 1995. Reedy River provided venture capital
financing to the Company to fund its early development, and Mr. Sterling
originally served on the Board of Directors of the Company pursuant to that
relationship. Mr. Sterling is the father of John M. Sterling, III, an executive
officer of the Company. Mr. Sterling holds a Bachelor of Science
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degree in Civil Engineering from The Citadel and an M.B.A. from Darden Graduate
School of Business, University of Virginia.
BIOGRAPHICAL INFORMATION CONCERNING OTHER DIRECTORS
KENNETH D. TRACY
AGE: 56
CLASS I DIRECTOR - TERM EXPIRES 2000
Dr. Tracy has served as a director of the Company since 1990. He currently
serves as Vice President-Environmental Technology for Warner-Lambert Company, a
position he has held since February 1991. From 1984 to 1991, he held positions
of increasing responsibility with Air Products and Chemicals, Inc., including
Director of Research from January 1990 to February 1991. Prior to joining Air
Products, Dr. Tracy was a principal in EDI Technology Companies, where he was
involved with process engineering consulting as well as software design and
sales. Dr. Tracey holds B.S. and Master of Science degrees in engineering from
Penn State University and a Ph.D. in Environmental Systems from Clemson
University.
RICHARD T. BROCK
AGE: 51
CLASS II DIRECTOR - TERM EXPIRES 2001
Mr. Brock has served as a director of the Company since August 1993. In 1984,
Mr. Brock founded the predecessor of Firstwave Technologies, Inc., a publicly-
held provider of sales and marketing automation software, for which he has
served in various capacities, including Chief Executive Officer and President,
since 1984. He currently serves as President and Chief Executive Officer and as
a director of Firstwave Technologies. He is also the founding partner of Brock
Capital Partners, a privately-held venture capital fund. He also founded and
formerly served as Chief Executive Officer of Management Control Systems, Inc.
Mr. Brock is a nationally-recognized developer, author and speaker on sales,
marketing and service automation and business development strategy. Mr. Brock
received a B.S. degree from Spring Hill College and an M.B.A. from Louisiana
State University. He is also a certified public accountant.
IRA D. COHEN
AGE: 47
CLASS II DIRECTOR - TERM EXPIRES 2001
Mr. Cohen has been a director of the Company since February 1995. Since 1988,
Mr. Cohen has served as a Managing Director of Updata Capital, Inc., an
investment banking firm focused on mergers and acquisitions in the information
technology industry. Mr. Cohen founded Updata Software, Inc., and from 1986 to
1988 served as that company's Chief Financial Officer. Mr. Cohen is also a
director of Computer Learning Centers, Inc. Mr. Cohen holds a Bachelor of
Science degree in Accounting from City University of New York, Herbert H. Lehman
College, and he is a registered certified public accountant in New York and New
Jersey.
ADDITIONAL INFORMATION CONCERNING THE BOARD OF DIRECTORS
The Company's Board of Directors held eight meetings during fiscal 1998.
During fiscal 1998, the Board had an Audit Committee and a Compensation
Committee, but did not have a Nominating Committee. No director attended less
than 75% of the aggregate number of meetings of the Board and the committees of
the Board on which he served that were held during his term as a director of the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS. In connection with its initial public
offering in March 1995, the Company established an Audit Committee and a
Compensation Committee. The Audit Committee is responsible for reviewing and
making recommendations regarding the Company's employment of independent
auditors, the annual audit of the Company's financial statements and the
Company's internal accounting practices and policies. It consists of Messrs.
Cohen (Chairman), Sterling and Tracy. In fiscal 1998, the Audit Committee held
one meeting.
The Compensation Committee is responsible for making recommendations to the
Board of Directors regarding compensation arrangements for senior management of
the Company (including annual bonus compensation),
30
<PAGE>
recommendations concerning the adoption of any compensation plans in which
management is eligible to participate and grants of stock options or other
benefits under such plans. It consists of Messrs. Brock (Chairman), Sterling and
Tracy. The Compensation Committee held one meeting in fiscal 1998.
COMPENSATION OF DIRECTORS. The Company's Board of Directors is comprised of
five members. In fiscal 1998, non-management directors received an annual
retainer of $7,000 and were reimbursed for expenses incurred in connection with
attendance at meetings of the Board of Directors or committees thereof. The
Company also has adopted a Stock Option Plan for Directors, which provides for
an annual automatic grant of options to purchase 1,000 shares of Common Stock to
non-management directors.
EXECUTIVE OFFICERS
The executive officers of the Company serve at the discretion of the Board of
Directors and presently include Mr. Blackwell, John Fury Christ, Daniel H.
Christie and John M. Sterling, III. See "Biographical Information Concerning
Other Directors" for information about Mr. Blackwell.
JOHN FURY CHRIST
VICE PRESIDENT OF DEVELOPMENT AND CHIEF TECHNOLOGY OFFICER
AGE: 43
Dr. Christ served as Manager of Development of the Company from May 1992 to
December 1994, and has held the position of Vice President of Development since
December 1994. In January 1997, Dr. Christ was named Chief Technology Officer
of the Company. Prior to joining the Company on a full-time basis, Dr. Christ
served as President of Positech, Inc. from January 1990 to May 1992. During
this period, Positech was awarded a Small Business Innovative Research Contract
for the application of neural networks in support of the U.S. Government's
Strategic Defense Initiative. From 1988 to 1990, Dr. Christ provided contract
software development services to the Company. Dr. Christ holds B.S. and Master
of Science degrees in Electrical and Computer Engineering, and a Ph.D. in
Computer Science, all from Clemson University.
DANIEL H. CHRISTIE
CHIEF FINANCIAL OFFICER AND CORPORATE SECRETARY
AGE: 45
Mr. Christie served as Controller of the Company from July 1993 to December
1994, and has held the position of Chief Financial Officer since December 1994.
Prior to joining the Company, from 1991 to 1993, Mr. Christie served as Group
Finance Manager for Digital Equipment Corporation. From 1989 to 1991, Mr.
Christie served as Digital Equipment's PWB Group Cost and Budgets Manager and
the Plant Controller for Digital Equipment's Printed Wiring Board Advanced
Technology Center in Greenville, South Carolina. He presently serves as a
director and as the President and Treasurer of Vaughn-Russell Candy Co., a
small, family-run business. Mr. Christie holds an A.B. degree in Economics from
Colgate University and an M.B.A. in Accounting/International Finance from the
Johnson School, Cornell University.
JOHN M. STERLING, III
VICE PRESIDENT OF INTERNATIONAL
AGE: 37
Mr. Sterling has served as the Company's Vice President of International
since September 1997, overseeing the Company's international operations. Prior
to holding such position, Mr. Sterling served as the Company's Managing Director
of European Operations from February through August 1997. Mr. Sterling also
served as the Company's Vice President of Sales from 1989 to January 1997.
Prior to joining Datastream, Mr. Sterling was a Regional Sales Manager for
Silicon Valley Products. Mr. Sterling holds a B.S. degree in Political Science
from The Citadel. Mr. Sterling is the son of John M. Sterling, Jr., one of the
Company's directors.
31
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's directors, executive
officers and persons who own beneficially more than 10% of the Company's Common
Stock to file reports of ownership and changes in ownership of such stock with
the SEC and the National Association of Securities Dealers, Inc. Directors,
executive officers and greater than 10% stockholders are required by SEC
regulations to furnish the Company with copies of all such forms they file. To
the Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, its directors, executive officers and greater than 10% stockholders
complied during fiscal 1998 with all applicable Section 16(a) filing
requirements.
32
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is comprised of
Messrs. Brock, Sterling (Jr.) and Tracy. During fiscal 1998, the Compensation
Committee did not include any member of the Board of Directors who at that time
served as an officer or employee of, or a consultant to, the Company. The
Company's Chief Executive Officer, Mr. Blackwell, is not a member of the
Compensation Committee, but typically participates in its deliberations by
making recommendations to the Compensation Committee concerning the performance
of the Company's executive officers and recommendations concerning proposed
adjustments to their compensation. During fiscal 1998, Mr. Blackwell served as
a member of the Board of Directors of HomeGold Financial, Inc. for which Mr.
Sterling serves as Chairman of the Board of Directors and Chief Executive
Officer.
EXECUTIVE COMPENSATION TABLES
TABLE I - SUMMARY COMPENSATION TABLE
The following table presents certain information required by the SEC relating
to various forms of compensation awarded to, earned by or paid to the Company's
Chief Executive Officer, Vice President of International, Chief Financial
Officer and Vice President of Development during fiscal 1998 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
------------
NAME AND PRINCIPAL POSITION(S) YEAR SALARY OPTIONS (# OF SHARES) COMPENSATION
------------------------------ ---- ------ --------------------- ------------
<S> <C> <C> <C> <C>
Larry G. Blackwell 1998 $173,004/(1)/ 26,000 $5,000/(2)/
Chairman, President and 1997 $186,851/(1)/ 34,000 $4,750/(2)/
Chief Executive Officer 1996 $176,024/(1)/ -- $4,750/(2)/
John M. Sterling, III 1998 $ 97,840/(3)/ 23,432 $2,935/(2)/
Vice President of 1997 $103,600/(3)/ 34,000 $3,528/(2)/
International 1996 $ 97,683/(3)/ -- $2,930/(2)/
Mr. Daniel Christie 1998 $113,000/(4)/ 20,400 $3.390/(2)/
Chief Financial Officer 1997 $ 93,100/(4)/ 34,000 $2,505/(2)/
and Corporate Secretary 1996 $ 80,745/(4)/ -- $2,242/(2)/
Mr. John F. Christ 1998 $115,000/(5)/ 15,000 $3,450/(2)/
Vice President of 1997 $102,900/(5)/ 34,000 $3,296/(2)/
Development and Chief 1996 $ 92,042/(5)/ -- $2,761/(2)/
Technology Officer
</TABLE>
- --------------------------------------
/(1)/ Includes $10,000 (1997: $9,500; 1996: $9,500) deferred at the election of
Mr. Blackwell pursuant to the Company's 401(k).
/(2)/ Reflects matching contributions to the Company's 401(k) paid by the
Company on behalf of the executive officer.
/(3)/ Includes $7,827 (1997: $8,288; 1996: $5,997) deferred at the election of
Mr. Sterling pursuant to the Company's 401(k).
/(4)/ Includes $9,876 (1997: $9,500; 1996: $8,969) deferred at the election of
Mr. Christie pursuant to the Company's 401(k).
/(5)/ Includes $8,050 (1997: $7,203; 1996: $4,749) deferred at the election of
Mr. Christ pursuant to the Company's 401(k).
33
<PAGE>
TABLE II -- OPTION/SAR GRANTS IN FISCAL 1998
This table presents information regarding options granted to the Company's Named
Executive Officers during fiscal 1998 to purchase shares of the Company's Common
Stock. The Company has no outstanding stock appreciation rights (SARs) and
granted no SARs during fiscal 1998. In accordance with SEC rules, the table
shows the hypothetical gains or option spreads that would exist for the
respective options based on assumed rates of annual compound stock price growth
of 5% and 10% from the date the options were granted over the full option term.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------
% OF TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF STOCK
UNDERLYING EMPLOYEES EXERCISE OR BASE PRICE APPRECIATION
OPTIONS IN FISCAL PRICE EXPIRATION FOR THE OPTION TERM/(1)/
------------------------------
NAME GRANTED (#) YEAR ($/SHARE) DATE 5% 10%
- ----------------------- ----------- ---- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Mr. Blackwell............ 6,000/(2)/ 0.97% $10.125 8/31/08 $ 38,205.35 $ 96,819.85
6,667/(3)/ 1.08% $11.138 8/31/03 $ 11,896.27 $ 34,457.81
13,333/(3)/ 2.16% $10.125 8/31/08 $ 84,898.65 $215,149.85
------ ---- ----------- -----------
26,000 4.21% $135,000.27 $346,427.51
Mr. Christ............... 10,000/(3)/ 1.62% $10.125 8/31/08 $ 63,675.58 $161,366.42
5,000/(3)/ 0.81% $10.125 8/31/08 $ 31,837.79 $ 80,683.21
------ ---- ----------- -----------
15,000 2.43% $ 95,513.37 $242,049.63
Mr. Christie............. 400/(2)/ 0.06% $10.125 8/31/08 $ 2,547.02 $ 6,454.66
6,667/(3)/ 1.08% $10.125 8/31/08 $ 42,452.51 $107,582.99
13,333/(3)/ 2.16% $10.125 8/31/08 $ 84,898.65 $215,149.85
------ ---- ----------- -----------
20,400 3.31% $129,898.19 $329,187.50
Mr. Sterling............. 3,432/(2)/ 0.56% $10.125 8/31/08 $ 21,853.46 $ 55,380.96
6,667/(3)/ 1.08% $10.125 8/31/08 $ 42,452.51 $107,582.99
13,333/(3)/ 2.16% $10.125 8/31/08 $ 84,898.65 $215,149.85
------ ---- ----------- -----------
23,432 3.80% $149,204.62 $378,113.80
</TABLE>
- -------------------------
/(1)/ Potential realizable value is based on the assumption that the price of
the Common Stock appreciates at the rate shown (compounded annually) from
the date of grant to the expiration date. These numbers are presented in
accordance with the requirements of the SEC and do not reflect the
Company's estimate of future stock price performance.
/(2)/ Option became fully exercisable on February 28, 1999.
/(3)/ Option vests in 33% increments on each of August 31, 1999, 2000 and 2001.
34
<PAGE>
TABLE III -- OPTION EXERCISES IN FISCAL 1998
AND FISCAL 1998 YEAR-END OPTION VALUES
The following table shows the number of options exercised during fiscal 1998 and
the number of shares of Common Stock subject to exercisable and unexercisable
stock options held by the Company's Named Executive Officers as of December 31,
1998. The table also reflects the values of such options based on the positive
spread between the exercise price of such options and $11.50, which was the
closing sales price of a share of Common Stock reported on the Nasdaq National
Market as of December 31, 1998 (the last trading day of the Company's fiscal
year).
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END (#) AT YEAR-END/(2)/
ACQUIRED ON VALUE ----------------------- ----------------
NAME EXERCISE (#) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- ------------ -------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Blackwell -- -- 70,630 103,370 $459,297 $434,725
Mr. Christ -- -- 73,334 49,000 $454,539 $138,185
Mr. Christie 19,742 $184,797.89 53,592 54,400 $301,538 $145,610
Mr. Sterling -- -- 100,000 57,432 $661,200 $149,779
</TABLE>
(1) These values have been calculated by subtracting the option exercise price
from the market price of the Common Stock on the date of exercise and
multiplying that figure by the total number of options exercised. For
presentation purposes only, the calculation assumes that all shares
acquired on exercise were sold in the open market on the date of exercise.
However, Mr. Christie did not sell and still holds 9,742 of the shares he
acquired upon exercising certain of his options in 1998.
(2) The value of unexercised in-the-money options at December 31, 1998 is
calculated as follows: [(Per Share Closing Sales Price on December 31,
1998) - (Per Share Exercise Price)] X Number of Shares Subject to
Unexercised Options. The closing sales price reported by the Nasdaq
National Market of the Company's Common Stock for December 31, 1998 was
$11.50 per share.
35
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information concerning (i) those persons
known by management of the Company to own beneficially more than 5% of the
Company's outstanding Common Stock, (ii) the directors of the Company, (iii) the
executive officers of the Company named in the Summary Compensation Table
included elsewhere herein and (iv) all directors and executive officers of the
Company as a group. Such information is provided as of March 19, 1999. According
to rules adopted by the SEC, a person is the "beneficial owner" of securities if
he or she has or shares the power to vote them or to direct their investment or
has the right to acquire beneficial ownership of such securities within 60 days
through the exercise of an option, warrant or right, the conversion of a
security or otherwise. Except as otherwise noted, the indicated owners have sole
voting and investment power with respect to shares beneficially owned. An
asterisk in the percent of class column indicates beneficial ownership of less
than 1% of the outstanding Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
------------------------- ----------------------- --------
<S> <C> <C>
Larry G. Blackwell.................. 3,499,444/(1)/ 17.8%
John M. Sterling, III............... 516,480/(2)/ 2.6
Daniel H. Christie.................. 74,168/(3)/ *
John F. Christ...................... 88,530/(4)/ *
John M. Sterling, Jr................ 143,072/(5)/ *
Richard T. Brock.................... 18,000/(6)/ *
Kenneth D. Tracy.................... 16,000/(7)/ *
Ira D. Cohen........................ 5,000/(8)/ *
All current directors and
executive officers as a
group (8 persons)................. 4,360,694/(9)/ 21.9%
</TABLE>
____________________
/(1)/ Includes 103,630 shares of Common Stock subject to options exercisable on
or within 60 days after March 19, 1999. Mr. Blackwell's address is that
of the Company.
/(2)/ Includes 110,432 shares of Common Stock subject to options exercisable on
or within 60 days after March 19, 1999.
/(3)/ Includes 60,992 shares of Common Stock subject to options exercisable on
or within 60 days after March 19, 1999.
/(4)/ Includes 80,334 shares of Common Stock subject to options exercisable on
or within 60 days after March 19, 1999, and 129,072 shares of Common
Stock held by Mr. Sterling's wife.
/(5)/ Includes 14,000 shares of Common Stock subject to options exercisable on
or within 60 days after March 19, 1999, and 129,072 shares of Common
Stock held by Mr. Sterling's wife.
/(6)/ Includes 14,000 shares of Common Stock subject to options exercisable on
or within 60 days after March 19, 1999.
/(7)/ Includes 14,000 shares of Common Stock subject to options exercisable on
or within 60 days after March 19, 1999 and 2,000 shares of Common Stock
to which Mr. Tracy shares voting and investment power with his spouse.
/(8)/ Represents 5,000 shares of Common Stock subject to options exercisable on
or within 60 days after March 19, 1999.
/(9)/ Includes 402,388 shares of Common Stock subject to options exercisable on
or within 60 days after March 19, 1999.
36
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. FINANCIAL STATEMENTS
o Independent Auditors' Report.
o Consolidated Balance Sheets as of December 31, 1997 and 1998.
o Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998.
o Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998.
o Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998.
o Notes to Consolidated Financial Statements.
2. FINANCIAL STATEMENT SCHEDULES:
o Allowance for Doubtful Accounts Receivable.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
3. EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
3.1* Amended and Restated Certificate of Incorporation.
3.1(a)** Amendment to Amended and Restated Certificate of
Incorporation, dated January 12, 1998.
3.2* By-Laws.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Certificate of Incorporation and By-Laws of the
Company defining rights of holders of Common Stock of the
Company.
4.2* Specimen Stock Certificate.
10.1*** The Datastream Systems, Inc. 1995 Stock Option Plan (as
amended and restated through May 7, 1997).
10.1(a)** First Amendment to the Datastream Systems, Inc. 1995 Stock
Option Plan (as amended and restated through May 7, 1997),
dated March 14, 1998.
10.1(b) Second Amendment to the Datastream Systems, Inc. 1995 Stock
Option Plan (as amended and restated through May 7, 1997),
dated May 8, 1998.
10.1(c) Third Amendment to the Datastream Systems, Inc. 1995 Stock
Option Plan (as amended
37
<PAGE>
and restated May 7, 1997), dated March 12, 1999.
10.2+ The Datastream Systems, Inc. Stock Option Plan for Directors
(as amended and restated as of April 12, 1996).
10.2(a)** First Amendment to Datastream Systems, Inc. Stock Option
Plan for Directors (as amended and restated as of April 12,
1996), dated March 13, 1998.
10.2(b) Second Amendment to the Datastream Systems, Inc. Stock
Option Plan for Directors (as amended and restated as of
April 12, 1996), dated March 12, 1999.
10.3++ The Datastream Systems, Inc. 1998 Stock Option Plan.
10.3(a) First Amendment to the Datastream Systems, Inc. 1998 Stock
Option Plan, dated March 12, 1999.
21 Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP.
24 Power of Attorney (included on signature page hereto).
27 Financial Data Schedule.
_______________
* Incorporated herein by reference to exhibit of the same number in the
from S-1 Registration Statement of the Company's Registration Statement
on Form S-1 (File No. 33-89498).
** Incorporated herein by reference to exhibit of the same number in
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 (File No. 000-25590)
*** Incorporated herein by reference to Appendix A to the Company's
definitive Proxy Statement for the Company's 1997 Annual Meeting of
Stockholders, filed May 12, 1997 (File No. 000-25590).
+ Incorporated herein by reference to Appendix C to the Company's
definitive Proxy Statement for the Company's 1996 Annual Meeting of
Stockholders, filed April 23, 1996 (File No. 000-25590).
++ Incorporated herein by reference to Appendix A to the Company's
definitive Proxy Statement for the Company's 1998 Annual Meeting of
Stockholders, filed May 12, 1998 (File No. 000-25590)
(B) REPORTS ON FORM 8--K.
The Company did not file any Current Reports on Form 8-K during the
fiscal quarter ended December 31, 1998.
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Datastream Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Datastream
Systems, Inc. and subsidiaries as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Datastream Systems,
Inc. and subsidiaries, as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina
February 4, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1997 and 1998
Assets 1997 1998
------ ------------------ ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,409,387 $ 6,739,209
Accounts receivable, net of allowance for doubtful accounts
of $1,589,910 and $3,073,837 in 1997 and 1998, respectively 21,968,539 32,440,963
Unbilled receivables 2,271,375 2,761,922
Investments 9,735,585 2,574,898
Prepaid expenses 614,447 1,633,227
Inventories 369,486 274,502
Deferred income taxes 796,000 2,322,600
Other assets 619,448 1,662,716
------------------ ------------------
Total current assets $ 38,784,267 $ 50,410,037
Investments 6,637,286 2,034,744
Property and equipment, net 10,166,101 12,886,791
Goodwill, net of accumulated amortization of $1,091,001 and $3,135,002
in 1997 and 1998, respectively 6,545,747 18,323,801
Capitalized software development costs, net of accumulated
amortization of $2,676,132 and $3,180,813 in 1997 and
1998, respectively 2,963,842 3,134,779
----------------- -----------------
Total assets $ 65,097,243 $ 86,790,152
================= =================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable 2,696,240 3,143,893
Other accrued liabilities 4,135,258 9,768,179
Income taxes payable 2,816,800 2,762,451
Current portion of long-term debt 346,197 650,884
Unearned revenue 6,499,953 8,292,829
----------------- -----------------
Total current liabilities 16,494,448 24,618,236
Long-term debt, less current portion 603,098 297,092
Deferred income taxes 892,000 1,268,400
----------------- -----------------
Total liabilities 17,989,546 26,183,728
----------------- ------------------
Commitments
Stockholders' equity:
Preferred stock $1 par value, 1,000,000 shares authorized;
none issued -- --
Common stock, $.01 par value, 40,000,000 shares authorized;
18,585,518 and 19,183,305 shares issued and outstanding at
December 31, 1997 and 1998, respectively 185,855 191,833
Additional paid-in capital 58,049,212 66,138,405
Accumulated deficit (11,375,601) (6,675,096)
Other accumulated comprehensive income 248,231 951,282
----------------- -----------------
Total stockholders' equity 47,107,697 60,606,424
------------------ ------------------
Total liabilities and stockholders' equity $ 65,097,243 $ 86,790,152
================== ==================
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -----------------
<S> <C> <C> <C>
Revenues:
Product $ 14,018,478 $ 31,174,408 $ 38,226,287
Applications engineering 12,325,593 26,437,697 42,621,294
Support 6,122,332 12,156,190 17,707,276
---------------- --------------- -------------
Total revenues 32,466,403 69,768,295 98,554,857
---------------- --------------- -------------
Cost of revenues:
Cost of product revenues 1,879,258 3,132,996 3,679,607
Cost of applications engineering revenues 6,729,072 15,160,409 22,401,797
Cost of support revenues 1,094,745 3,837,565 4,730,756
Write-off of capitalized software 1,803,637 -- 3,943,544
---------------- --------------- -------------
Total cost of revenues 11,506,712 22,130,970 34,755,704
---------------- --------------- -------------
Gross profit 20,959,691 47,637,325 63,799,153
Operating expenses:
Sales and marketing 9,398,675 18,616,981 25,397,349
Product development 1,390,325 4,364,234 8,174,226
General and administrative 3,369,338 8,094,762 9,688,883
Write-off of in-process research and developmen
restructuring and other charges 33,600,000 -- 9,990,256
---------------- --------------- -------------
Total operating expenses 47,758,338 31,075,977 53,250,714
---------------- --------------- -------------
Operating income (loss) (26,798,647) 16,561,348 10,548,439
Other income (expense):
Interest and other income 2,374,158 1,220,256 668,097
Interest expense (4,240) (233,395) (131,833)
---------------- --------------- -------------
Net other income 2,369,918 986,861 536,264
---------------- --------------- -------------
Income (loss) before income taxes (24,428,729) 17,548,209 11,084,703
Income taxes 3,581,000 6,110,312 6,384,198
---------------- --------------- -------------
Net income (loss) $ (28,009,729) $ 11,437,897 $ 4,700,505
================ =============== =============
Basic net income (loss) per share $ (1.65) $ 0.62 $ 0.25
================ =============== =============
Diluted net income (loss) per share $ (1.65) $ 0.59 $ 0.23
================ =============== =============
Basic weighted average number of common
and potential common shares outstanding 16,977,134 18,396,920 18,935,092
================ =============== =============
Diluted weighted average number of common
and potential common shares outstanding 16,977,134 19,245,948 20,279,434
================ =============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 1996, 1997 and 1998
OTHER
ADDITIONAL RETAINED ACCUMULATED TOTAL
COMMON PAID-IN EARNINGS COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) INCOME EQUITY
---------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 168,110 $ 40,669,700 $ 5,196,231 $ -- $ 46,034,041
Comprehensive loss
Net loss -- -- (28,009,729) -- (28,009,729)
Total comprehensive loss ------------
(28,009,729)
------------
Exercise of stock options 2,328 920,762 -- -- 923,090
Tax benefit of options exercised -- 115,000 -- -- 115,000
Stock issued for Employee Stock
Purchase Plan 76 62,726 -- -- 62,802
Stock issued in acquisition 12,022 13,987,978 -- -- 14,000,000
-------- ------------ ----------- ----------- ------------
Balance at December 31, 1996 182,536 55,756,166 (22,813,498) -- 33,125,204
Comprehensive income
Net income -- -- 11,437,897 -- 11,437,897
Unrealized gains on securities
available-for-sale -- -- -- 30,956 30,956
Foreign currency translation
adjustment -- -- -- 217,275 217,275
------------
Total comprehensive income 11,686,128
------------
Exercise of stock options 3,130 2,042,457 -- -- 2,045,587
Tax benefit of options exercised -- 113,000 -- -- 113,000
Stock issued for Employee Stock
Purchase Plan 189 137,589 -- -- 137,778
------- --------- ----------- ----------- ------------
Balance at December 31, 1997 185,855 58,049,212 (11,375,601) 248,231 47,107,697
Comprehensive income/(loss)
Net income -- -- 4,700,505 -- 4,700,505
Unrealized losses on securities
available-for-sale -- -- -- (30,956) (30,956)
Foreign currency translation
adjustment -- -- -- 734,007 734,007
------------
Total comprehensive income 5,403,556
------------
Exercise of stock options 2,974 1,958,556 -- -- 1,961,530
Tax benefit of options exercised -- 182,000 -- -- 182,000
Stock issued for Employee Stock
Purchase Plan 237 245,909 -- -- 246,146
Stock issued in acquisitions 2,767 5,702,728 -- -- 5,705,495
-------- ---------- ---------- ----------- ------------
Balance at December 31, 1998 $ 191,833 $ 66,138,405 $ (6,675,096) $ 951,282 60,606,424
======== ========== ========== =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1997 and 1998
1996 1997 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (28,009,729) $ 11,437,897 $ 4,700,505
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 948,460 2,285,278 3,502,000
Amortization of capitalized software development costs 500,065 1,478,955 1,570,250
Amortization of goodwill -- 1,091,001 2,044,001
Foreign currency translation adjustment -- 217,275 734,007
Accretion of investment discount, net (576,431) (49,497) (127,516)
Loss on disposal of equipment 19,378 45,037 43,540
Provision for doubtful accounts 590,525 754,910 1,233,927
Deferred income taxes (42,000) (178,000) (522,000)
Write-off of in-process research and development 33,600,000 -- 3,540,008
Write-off of capitalized software 1,803,637 -- 3,943,544
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable (4,420,619) (10,997,521) (9,560,807)
Unbilled receivables -- (833,145) (490,547)
Prepaid expenses (190,238) (27,800) (947,589)
Inventories (73,087) (45,468) 223,963
Other assets (23,836) 125,645 (244,381)
Accounts payable 642,429 (1,706,965) (3,639)
Other accrued liabilities 529,394 (5,003,820) (1,288,596)
Income taxes payable (242,082) 2,186,093 (278,611)
Unearned revenue 1,117,436 1,383,946 1,487,375
------------ ------------ -------------
Net cash provided by operating activities 6,173,302 2,163,821 9,559,434
------------ ------------ -------------
Cash flows from investing activities:
Purchase of investments (36,079,529) (12,317,057) (767,793)
Proceeds from sale and maturities of investments 56,751,813 13,602,714 12,627,581
Additions to property and equipment (3,765,805) (3,862,735) (4,462,480)
Proceeds from the sale of equipment 9,135 58,643 --
Capitalized software development costs (2,609,521) (2,284,361) (3,654,731)
Cash paid for acquisition, net of cash acquired (16,428,660) -- (10,874,284)
------------ ------------ -------------
Net cash used in investing activities (2,122,567) (4,802,796) (7,131,707)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,038,090 2,045,587 1,961,530
Proceeds for stock issuances under employee purchase plan 62,802 137,778 246,146
Principal payments on long-term debt (20,000) (3,450,722) (811,931)
Proceeds from issuance of net debt -- -- 506,350
------------ ------------ -------------
Net cash provided by (used in) financing 1,080,892 (1,267,357) 1,902,095
activities
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents 5,131,627 (3,906,332) 4,329,822
Cash and cash equivalents at beginning of year 1,184,092 6,315,719 2,409,387
------------ ------------ -------------
Cash and cash equivalents at end of year $ 6,315,719 $ 2,409,387 $ 6,739,209
============ ============ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,240 $ 379,553 $ 178,113
============ ============ ============
Income taxes $ 3,750,082 $ 3,806,534 $ 7,094,949
============ ============ ============
Supplemental disclosure of non-cash activities:
Unrealized net gain (loss) on investments available
for sale, net of income taxes $ -- $ 30,956 $ (30,956)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DATASTREAMS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Datastream Systems, Inc. (the "Company" or "Datastream") develops,
markets, sells and supports Microsoft and Oracle based software
products for the industrial automation market. These products serve
the desktop, file server, client-server and enterprise-wide networking
environments. Datastream's software enables users to schedule
preventive maintenance, record equipment maintenance histories,
organize and control spare parts inventories, schedule equipment and
parts inventory purchases and deploy maintenance personnel. In
addition to its U.S. operations, the Company has direct sales or
distribution offices in Canada, the United Kingdom, The Netherlands,
France, Germany, Denmark, Sweden, Norway, Portugal, Mexico, Brazil,
Argentina, Chile, Venezuela, Peru, Malaysia, Australia, Indonesia,
Singapore, China and South Africa.
On December 31, 1996, the Company acquired SQL Group B.V. ("SQL") (see
note 2).
On March 31, 1998, the Company acquired Insta Instandhaltung
technischer Anlagen GmbH, ("Insta") (see note 2).
On June 16, 1998, the Company acquired Strategic Information Systems
PTE. Ltd., ("SIS) (see note 2).
On July 13, 1998, the Company acquired certain assets of Datastream
(Pacific) Pty Ltd., ("DSTM-PAC") (see note 2).
On September 2, 1998, the Company acquired Computec Sistemas S.A.
("Computec"), and its affiliate Computec Sistemas Mexicana S.A. de
C.V., a Mexican corporation ("Computec-Mexico) (see note 2).
(B) CONSOLIDATION POLICY
The consolidated financial statements include the accounts of
Datastream Systems, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated.
F-6
<PAGE>
DATASTREAMS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(C) 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". SOP 97-2 superceded Statement of Position 91-1. SOP 97-2
generally requires revenue earned on software arrangements involving
multiple elements (i.e., software products, upgrades/enhancements,
postcontract customer support, installation, training, etc.) to be
allocated to each element based on the relative fair values of the
elements. The fair value of an element must be 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 a vendor 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 adoption of SOP 97-2 did not significantly
affect the Company's results from operations.
The Company continually evaluates its obligations with respect to
warranties, returns and refunds. Based on historical trends and
management's evaluation of current conditions, any potential
obligations that are inherent in the accounts receivable balance are
adequately provided for through the allowance for doubtful accounts.
The Company may in certain circumstances grant discounts when a
purchase order is received. The discounts are recognized in the
product revenue at the time of shipment.
(D) CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(E) CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company has not experienced significant losses related
to receivables from individual customers or groups of customers in a
particular industry or geographic area. As a result, management
believes no additional credit risk beyond the amounts provided for
estimated future collection losses is inherent in the Company's
accounts receivable.
(F) INVESTMENT SECURITIES
The Company classifies its debt and equity securities in one of three
categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling
them in the near term. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold
until maturity. All other securities not included in trading or held-
to-maturity are classified as available-for-sale.
F-7
<PAGE>
DATASTREAMS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses on trading securities are included in
earnings. Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from earnings
and are reported as a separate component of stockholders' equity until
realized. Equity securities without readily determinable fair values
are recorded at cost. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific
identification basis.
A decline in the market value of any available-for-sale or held-to-
maturity security below cost that is deemed to be other than temporary
results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the
security established. Premiums and discounts are amortized or accreted
over the life of the related held-to-maturity security as an
adjustment to yield using the effective interest method. Dividend and
interest income are recognized when earned.
(G) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out)
basis or market (net realizable value). Substantially all of the
Company's inventory is software related product.
(H) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed
under the straight-line method over the estimated useful lives for
financial reporting and under the accelerated and modified accelerated
cost recovery systems for income tax reporting. The estimated useful
lives generally assigned are as follows:
Building 40 years
Computer equipment 3 to 5 years
Furniture and fixtures 5 years
Automobiles 5 years
(I) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist principally of salaries
and certain other expenses related to development and modifications of
software products and are capitalized in accordance with the
provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed". Capitalization of such costs begins only upon
establishment of technological feasibility, which is defined by the
Company as completion of a working model of the software and ends when
the resulting product is available for sale.
F-8
<PAGE>
DATASTREAMS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
Amortization of capitalized software development costs is provided on
a product-by-product basis and begins when the product is available
for sale. Annual amortization is the greater of the amount computed
using the ratio of current product revenue to the total of current and
anticipated product revenue or the straight-line basis over the
remaining estimated economic life of the software, which is generally
from eighteen months to three years. The ongoing assessment of the
realizability of these costs requires considerable judgment as to
anticipated future product revenues, related estimated economic life,
and changes in hardware and software technology. Amortization of
software development costs is included in cost of product revenues in
the accompanying statements of income.
During the years ended December 1996, 1997 and 1998, total costs
incurred (excluding amortization of capitalized software development
costs) for software development activities were $3,999,845, $6,648,595
and $11,828,957, respectively; total capitalized software development
costs were $2,609,520, $2,284,361 and $3,654,731, respectively; and
amortization of capitalized costs was $500,065, $1,478,955 and
$1,570,250, respectively.
In connection with the acquisition of SQL in 1996 (see note 2), the
Company acquired software technology valued at $900,000. In addition,
the Company wrote-off $1,803,637 of its existing capitalized software
in 1996 which became obsolete as a result of the SQL acquisition.
In connection with the acquisitions of Insta, SIS, and Computec in
1998 (see note 2), the Company acquired software technology valued at
$210,000, $1,050,000 and $770,000 respectively. In addition, in
connection with the acquisition of Insta, the Company wrote off
$597,944 of its existing capitalized software which became obsolete as
a result of the acquisition. The Company also wrote off $2,311,667 of
acquired software and $1,033,933 of internally capitalized software
which became obsolete as a result of the Company's plan of
reorganization (see note 3).
(J) GOODWILL
Goodwill is amortized using the straight-line method over its
estimated useful life of seven years. The recoverability of goodwill
is periodically reviewed when events or circumstances warrant.
Impairment, determined when the carrying value of an asset cannot be
recovered over its remaining useful life from undiscounted future cash
flows, will be measured and recognized when the fair value is less
than the asset's carrying amounts.
(K) STOCK OPTION PLANS
Statement of Financial Accounting Standards No. 123 allows an entity
to apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the fair-
value-based method defined in Statement No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of Statement
No. 123.
F-9
<PAGE>
DATASTREAMS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(L) INCOME TAXES
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(M) NET INCOME (LOSS) PER SHARE
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.
(N) FOREIGN CURRENCY TRANSLATION
The financial statements of subsidiaries outside the United States are
generally measured using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated
at the rates of exchange at the balance sheet date. Revenues and
expenses are translated at the average rate of exchange during the
period.
(O) COMPREHENSIVE INCOME
In January 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement No.
130). Statement No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set
of financial statements. Comprehensive income consists of net income
and net unrealized gains (losses) on securities and is presented in
the consolidated statements of stockholders' equity and comprehensive
income. Statement No. 130 requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's
financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of
Statement No. 130.
F-10
<PAGE>
DATASTREAMS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(P) SEGMENT REPORTING
In January 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (Statement No. 131). Statement No. 131 defines
segments as those used in the management of the business. Statement
No. 131 requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial
position or results of operations. Prior year disclosures have been
restated to conform to the requirements of Statement No. 131.
(Q) 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.
(R) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period including estimates and
assumptions for allowance for doubtful accounts, allowance for
deferred tax assets, and useful lives of goodwill and capitalized
software development costs. Actual results could differ from those
estimates.
(2) ACQUISITIONS
On December 31, 1996, the Company acquired all of the capital stock and
equity interests of SQL for a total purchase price of $42.1 million. The
purchase price consisted of approximately $17 million in cash, $14 million
of common stock (1,202,210 shares valued at $11.31 per share) and the
assumption of net liabilities and costs incurred. At December 31, 1997 and
1998, an additional $3 million of common stock (300,552 shares at $11.31
per share) was being held in escrow pending the resolution of certain
matters. The value of any subsequently issued shares will be allocated to
goodwill and amortized over its remaining useful life. SQL is a
computerized maintenance management software vendor in Europe. The
acquisition has been accounted for using the purchase method. The purchase
price has been allocated to the tangible and intangible assets purchased
and the liabilities assumed based on the fair values on the date of
acquisition, including $33.6 million recorded as in-process research and
development.
F-11
<PAGE>
DATASTREAMS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
On March 31, 1998, the Company acquired all of the capital stock and equity
interests of Insta for a total purchase price of $7.2 million. The purchase
price consisted of $4,375,000 in cash, $2,625,000 of common stock (130,435
shares valued at $20.12 per share) and the assumption of net liabilities
and costs incurred. Insta is a computerized maintenance management software
vendor in Germany. The acquisition has been accounted for using the
purchase method. The purchase price has been allocated to the tangible and
intangible assets purchased and the liabilities assumed based on the fair
values on the date of acquisition as illustrated in the table below.
On June 16, 1998, the Company acquired all of the capital stock and equity
interests of SIS for a total purchase price of $7.9 million. The purchase
price consisted of $4,575,091 in cash, $1,928,181 of common stock (88,652
shares valued at $21.75 per share) and the assumption of net liabilities
and costs incurred. SIS is a computerized maintenance management software
vendor based in Singapore. The acquisition has been accounted for using the
purchase method. The purchase price has been allocated to the tangible and
intangible assets purchased and the liabilities assumed based on the fair
values on the date of acquisition as illustrated in the table below.
On July 13, 1998, the Company acquired certain assets of DSTM-PAC, an
Australian corporation, for a total purchase price of $1.2 million. The
purchase price consisted of $299,823 in cash, $299,823 of common stock
(13,274 shares valued at $22.59 per share) and costs incurred. The
acquisition has been accounted for using the purchase method. The purchase
price has been allocated to the tangible and intangible assets purchased
based on the fair values on the date of acquisition as illustrated in the
table below.
On September 2, 1998, the Company acquired all of the capital stock and
equity interests of Computec and Computec-Mexico for a total purchase price
of $3.8 million. The purchase price consisted of $1,766,138 in cash,
$852,498 of common stock (44,304 shares valued at $19.24 per share) and the
assumption of net liabilities and costs incurred. Computec is a
computerized maintenance management software vendor based in Argentina and
Computec-Mexico in an affiliated computerized maintenance management
software vendor based in 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 as illustrated in the table
below.
<TABLE>
<S> <C>
Total purchase price for 1998 acquisitions $ 16,721,554
Net liabilities acquired, including costs incurred 3,416,247
-----------------
Excess cost over fair value of net liabilities assumed and costs incurred $ 20,137,801
=================
Excess of cost over fair value of net liabilities assumed and cost has been
allocated to:
Software technology 2,030,000
Goodwill 14,567,793
In-process research development (see note 3) 3,540,008
-----------------
$ 20,137,801
=================
</TABLE>
F-12
<PAGE>
DATASTREAMS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
The in-process research and development represents the fair value of in-
process development projects that had not reached technological feasibility
and had no probable alternative future uses, which the Company expensed at
the date of the acquisition.
The following unaudited pro forma information presents the results of
operations of the Company as though the aforementioned acquisitions
occurred as of the beginning of the year in which the acquisition occurred.
The pro forma adjustments (i) reflect increased amortization expense
related to the acquired assets and reduced interest income related to
investments used as part of the consideration, and (ii) exclude the non-
recurring charges for in-process research and development and the write-off
of capitalized software.
<TABLE>
<CAPTION>
1997 1998
---------------- -----------------
<S> <C> <C>
Total revenue $ 81,520,000 $ 103,352,000
Operating income 16,220,000 11,120,000
Net income 11,488,000 6,419,000
Basic net income per share .62 .34
Diluted net income per share .60 .32
</TABLE>
(3) RESTRUCTURING AND OTHER CHARGES
For the years ended December 31, 1996 and 1998, the Company recorded in-
process research and development, restructuring and other charges as
follow:
<TABLE>
<CAPTION>
1996 1998
<S> <C>
In-process research and development (see note 2) $ 33,600,000 $ 3,540,008
Restructuring and other charges -- 6,450,248
-------------- --------------
$ 33,600,000 $ 9,990,256
============== ==============
</TABLE>
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 the following charges: (i)
involuntary relocation and termination costs of $2,421,000 related to the
centralization of product development, services and support functions, (ii)
provision for increased credit risk on outstanding receivable balances
related to product obsolescence of $900,000, (iii) cost of closing
redundant facilities of $656,000 and (iv) charges related to the
discontinuance of the Company's indirect sales model of $2,242,281. In
addition to the amounts noted above, the Company also recorded $3,345,600
of capitalized software write-offs related to the obsolescence and
discontinuance of certain products (see note 1 (i)).
In July 1998, the Company withdrew its proposed offering of common stock
and wrote off the related capitalized offering costs of $230,967, which is
included in other charges.
F-13
<PAGE>
DATASTREAMS SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(4) INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
market value of investment securities at December 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
December 31, 1997
-----------------
Available-for-sale:
U.S. Treasury Securities $ 14,288,170 51,862 (1,905) 14,338,127
Cost basis:
Equity Securities 2,034,744 -- -- 2,034,744
---------------- ---------------- ---------------- ----------------
$ 16,322,914 51,862 (1,905) 16,372,871
================ ================ ================ ================
December 31, 1998
-----------------
Available-for-sale:
State of S.C. Bonds 2,574,898 -- -- 2,574,898
Cost basis:
Equity Securities 2,034,744 -- -- 2,034,744
---------------- ---------------- ---------------- ----------------
$ 4,609,642 -- -- 4,609,642
================ ================ ================ ================
</TABLE>
In December 1996, the Company sold inv stments classified as held-to-
maturity with an amortized cost of $10,155,487 and recognized a gain of
$24,218. The proceeds from this sale and the proceeds from maturing
held-to-maturity investments represented the cash consideration for the
Company's acquisition of SQL (see note 2). Proceeds from the sale of
investment securities available-for-sale during 1997 and 1998 were
approximately $670,000 and $11.9 million, respectively, which approximated
amortized costs.
During 1997, the Company entered into a preferred stock purchase agreement
with an unrelated software company (the "Investee"). Under the agreement,
the Company purchased 221,910 shares of the Investee's convertible
preferred stock for a total purchase price of approximately $2.0 million.
The investment is being accounted for under the cost method and is included
in non-current investments in the accompanying balance sheet.
All available-for-sale securities are due in less than one year at December
31, 1998 and are, therefore, included in current assets.
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
F-14
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
At December 31, 1997 and 1998, the carrying value of financial instruments
such as cash and cash equivalents, accounts receivable, and accounts
payable approximated their fair values, based upon the short maturities of
these instruments.
The fair value of the Company's long-term debt is estimated using
discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The carrying
value of such instruments approximated their fair value at December 31,
1997 and 1998.
The fair values of investment securities presented in note 4 are based on
quoted market prices at the reporting date for those or similar
investments.
(6) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------------- ---------------
<S> <C> <C>
Land $ 500,981 $ 555,856
Building 4,570,254 5,576,993
Computer equipment 7,479,403 13,267,271
Furniture and fixtures 1,358,281 2,552,847
-------------- ---------------
13,908,919 21,952,967
Accumulated depreciation 3,742,818 9,066,176
-------------- ---------------
$ 10,166,101 $ 12,886,791
============== ===============
</TABLE>
(7) OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------------- ---------------
<S> <C> <C>
Accrued salaries and commission $ 1,094,908 $ 793,089
Sales and payroll taxes payable 1,470,362 3,196,224
Restructuring reserve -- 2,977,000
Other accrued liabilities 1,569,988 2,801,866
-------------- ---------------
$ 4,135,258 $ 9,768,179
============== ===============
</TABLE>
F-15
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(8) LONG-TERM DEBT
Long-term debt as of December 31, consists of the following:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Note payable in monthly payments of $1,667, plus interest at
prime plus .5% through March 1998; collateralized by equipment $ 1,667 $ --
Subordinated note payable in bi-annual payments of $123,750,
plus interest at 7% through December 2000 371,250 124,725
Note payable in annual payments of $16,500, plus interest at
5.5% through December 2001; collateralized by building -- 304,262
Subordinated note payable due May 1999, plus interest at 4.88% -- 506,350
Subordinated note payable in annual payments of $97,030, plus
interest at 6.5% through December 2002 563,739 --
Subordinated note payable in annual payments of $3,073, plus
interest at 6.5% through December 2002 12,639 12,639
------------------- -------------------
949,295 947,976
Less current portion (346,197) (650,884)
------------------- -------------------
Long-term debt, less current portion $ 603,098 $ 297,092
=================== ===================
</TABLE>
The remaining annual maturities of long-term debt in the five years
subsequent to December 31, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 650,884
2000 19,809
2001 274,571
2002 2,712
2003 --
----------
Total $ 947,976
==========
</TABLE>
F-16
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(9) LINE OF CREDIT
The Company maintains a multicurrency line of credit that provides for
borrowings of 70% of accounts receivable less than 60 days aged up to
$5,000,000. There were no borrowings outstanding under the line at December
31, 1997. There were 950,000 Dutch Guilders ($506,350) outstanding under
the line at December 31, 1998 which is included in the current portion of
long-term debt (see footnote 8).
In addition the Company maintains lines of credits or over draft facilities
in certain locations including a Dutch guilder line for Dfl 1 million
(approximately $533,000) which bears interest at a pre-agreed percentage
spread from AIBOR (Amsterdam Interbank Rate), a Singapore dollar line for
Sgd 1,712,500 (approximately $1,038,000) which bears interest at 1% over
the Singapore dollar prime lending rate and an Argentina peso line for
500,000 (approximately $500,000) which bears interest at 13.50%.
(10) INCOME TAXES
Income tax expense for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------------------- ------------------- -------------------
<S> <C> <C> <C>
1996:
Federal $ 3,230,000 $ (30,000) $ 3,200,000
State 393,000 (12,000) 381,000
Foreign -- -- --
------------------- ------------------- -------------------
Total $ 3,623,000 $ (42,000) $ 3,581,000
=================== =================== ===================
1997:
Federal $ 4,729,219 (159,000) 4,570,219
State 503,000 (19,000) 484,000
Foreign 1,056,093 -- 1,056,093
------------------- ------------------- -------------------
Total 6,288,312 $ (178,000) $ 6,110,312
=================== =================== ===================
1998:
Federal $ 3,528,249 571,000 4,099,249
State 432,383 35,000 467,383
Foreign 2,945,566 (1,128,000) 1,817,566
------------------- ------------------- -------------------
Total $ 6,906,198 $ (522,000) $ 6,384,198
=================== =================== ===================
</TABLE>
F-17
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
Income tax expense differed from the amounts computed by applying the Federal
income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ (8,306,000) $ 5,966,391 $ 3,768,799
Increase (decrease) in income taxes resulting
from:
State and local income taxes, net of Federal
income tax benefits 251,000 319,440 308,473
In process research and development 11,424,000 -- 1,282,131
Rate differential on foreign source income -- (592,453) --
Effect of graduated income tax rates -- 75,482 10,847
Goodwill amortization -- 322,364 694,960
Other, net 212,000 19,088 318,988
-------------------- -------------------- --------------------
Actual tax expense $ 3,581,000 $ 6,110,312 $ 6,384,198
==================== ==================== ====================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1997 1998
------------------- -------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,891,000 $ 959,000
Accrued expenses and allowances 797,000 2,322,600
------------------- -------------------
Total gross deferred tax assets 2,688,000 3,281,600
Less valuation allowance (1,705,000) (959,000)
------------------- -------------------
Net deferred tax assets $ 983,000 $ 2,322,600
=================== ===================
Deferred tax liabilities:
Fixed assets, principally due to differences in depreciation 341,000 100,000
Software development costs capitalized for financial reporting 719,000 1,149,400
Unrealized gain on marketable securities 19,000 19,000
------------------- -------------------
Total gross deferred tax liabilities 1,079,000 1,268,400
------------------- -------------------
Net deferred tax liabilities (asset) $ 96,000 $ (1,054,200)
=================== ===================
</TABLE>
F-18
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
The valuation allowance for deferred tax assets as of December 31, 1997 and
1998 was approximately $1,705,000 and $959,000 and relates to net operating
loss carryforwards of foreign subsidiaries, which at this time are
uncertain of recovery. Subsequently recognized tax benefits relating to the
valuation allowance for deferred tax assets as of December 31, 1998 will be
allocated to goodwill and other noncurrent intangible assets.
At December 31, 1998 the Company has net operating loss carryforwards for
foreign income tax purposes of approximately $2,600,000.
(11) EMPLOYEE SAVINGS AND RETIREMENT PLAN
Effective September 1, 1992, the Company established a 401(k) Retirement
Plan under Section 401(k) of the Internal Revenue Code. The Plan is funded
in part from employee voluntary contributions with the Company's
contribution equal to one-half of the employee's contribution up to 3% of
their compensation. The Plan provides for voluntary employee contributions
of up to 15% of their total compensation.
The Company's contributions to the Plan totaled approximately $135,000,
$238,000 and $388,000 in 1996, 1997 and 1998, respectively.
(12) STOCK COMPENSATION PLANS
1995 Stock Option Plan
----------------------
On September 8, 1995, the Company amended and restated the Datastream
Systems, Inc. 1995 Stock Option Plan (the "1995 Plan") to provide for the
grant of both incentive and non-qualified options to purchase up to
2,000,000 shares of the Company's common stock. The Company's stockholders
approved the amendment and restatement at the Company's 1996 annual meeting
of stockholders held on May 25,1996. On December 26, 1996, the Company's
Board of Director's authorized an additional 1,000,000 shares to be added
to the 2,000,000 share limit available under the 1995 Plan, subject to
stockholder approval. The Company's stockholders approved of this increase
at the Company's 1997 annual meeting of stockholders held on June 13, 1997.
Options granted under this plan vest incrementally over a period of one to
five years and expire either five or ten years from the date of grant,
depending on the terms of the particular option agreement. Options under
the plan are granted with an exercise price at least equal to the fair
market value of the underlying shares at the grant date. Incentive options
granted to a participant who is an over 10% owner are not granted at less
than 110% of the fair market value of the underlying shares at the grant
date.
F-19
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
Datastream Systems, Inc. 1997 European Stock Option Plan
--------------------------------------------------------
On June 13, 1997, the Company's board of directors approved the Datastream
Systems, Inc. 1997 European Stock Option Plan (the "1997 EU Plan") to provide
for grants of stock options to purchase shares of the Company's common stock
to employees of the Company's subsidiaries in The Netherlands, the United
Kingdom and France. The 1997 EU Plan consists of three sub-plans for each of
the respective subsidiaries. Initially, the board authorized and reserved for
issuance a total of 500,000 shares of common stock under the three sub-plans
of the 1997 EU Plan (200,000 for The Netherlands sub-plan; 150,000 for the
U.K. sub-plan; and 150,000 for the French sub-plan). On June 12, 1998, the
board authorized and reserved a total of 110,000 additional shares of common
stock for issuance under The Netherlands sub-plan (75,000 shares) and the
French sub-plan (35,000 shares). Options granted pursuant to these plans have
varying vesting patterns up to five years from the date of grant, depending
on the applicable laws of the foreign jurisdiction and the terms of the
particular option agreement. Options granted under the EU Plan expire ten
years after the date of grant and are granted at the fair market value of the
underlying shares at the date of grant.
Datastream Systems, Inc. 1998 Stock Option Plan
-----------------------------------------------
On May 8, 1998 and June, 12 1998, respectively, the Company's board of
directors and stockholders approved and adopted the Datastream Systems, Inc.
1998 Stock Option Plan (the "1998 Plan") to provide for the grant of both
incentive and non-qualified options to purchase up to 500,000 shares of the
Company's common stock to the Company's employees. Options granted under this
plan vest incrementally over a period of one to five years and expire either
five or ten years from the date of grant, depending on the terms of the
particular option agreement. Options under the Plan are granted with an
exercise price at least equal to the fair market value of the underlying
shares at the grant date. Incentive options granted to a participant who is
an over 10% owner are not granted at less than 110% of the fair market value
of the underlying shares at the grant date.
Datastream Systems, Inc. 1998 Singapore Stock Option Plan
---------------------------------------------------------
On June 12, 1998 , the Company's board of directors authorized the
establishment of the Datastream Systems, Inc. 1998 Singapore Stock Option
Plan (the "Singapore Plan") and authorized and reserved for issuance 125,000
shares of common stock for grants of stock options under the Singapore Plan
for the employees of the Company's Singapore subsidiary. Options granted
pursuant to the Singapore Plan will vest incrementally over a period of one
to three years, depending on the terms of the particular options 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.
F-20
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
Datastream Systems, Inc. German Stock Option Plan, and Datastream Systems,
--------------------------------------------------------------------------
Inc. Australian Stock Option Plan
---------------------------------
Although formal plan documents have not yet been finalized, the board of
directors of the Company has authorized the establishment of stock option
plans for the employees of the Company's subsidiaries in Germany and
Australia. On June 12, 1998, the board of directors authorized and reserved
for issuance 125,000 shares of common stock under the Datastream Systems, Inc.
German Stock Option Plan. On December 11, 1998, the board of directors
authorized and reserved for issuance 75,000 shares of common stock under the
Datastream Systems, Inc. Australia Stock Option Plan.
A summary of activity in the plans noted above during the periods indicated is
as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
------------------- -------------------
<S> <C> <C>
Stock options outstanding:
Balance at December 31, 1996 1,618,208 7.06
Granted 1,705,516 7.86
Exercised (313,018) 6.57
Forfeited (172,334) 8.52
------------------- -------------------
Balance at December 31, 1997 2,838,372 7.50
Granted 625,626 11.76
Exercised (301,126) 6.76
Forfeited (148,566) 8.66
------------------- -------------------
Balance at December 31, 1998 3,014,306 8.41
=================== ===================
</TABLE>
F-21
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
The following table summarizes information about stock options outstanding
under the plans noted above at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED -
REMAINING AVERAGE
RANGE OF NUMBERS CONTRACTUAL NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE EXERCISABLE PRICE
- --------------------------- --------------- ---------------- ------------ ------------
<S> <C> <C> <C> <C>
2.25 - 4.50 470,848 5.1 430,848 3.80
4.50 - 6.75 130,370 8.2 39,100 6.38
6.75 - 9.00 1,311,900 8.5 448,260 8.00
9.00 - 11.25 794,040 8.1 347,902 9.46
11.25 - 13.50 159,965 8.3 79,600 12.13
13.50 - 15.75 80,433 8.9 15,599 15.25
15.75 - 18.00 16,250 9.6 -- --
18.00 - 20.25 40,500 9.1 -- --
20.25 - 22.50 10,000 9.2 -- --
-------------- ---------------- ------------- ----------
3,014,306 7.8 1,361,309 7.32
============== ================ ============= ==========
</TABLE>
The per share weighted-average fair value of stock options granted under the
plans noted above during 1997 and 1998 was $6.33 and $11.84 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield of 0%, expected
volatility of 85.07%, risk-free interest rate of 6.55%, and an expected life
of 10 years; 1998 - expected dividend yield of 0%, expected volatility of
90.77%, risk-free interest rate of 5.21%, and an expected life of 10 years.
Stock Option Plan for Directors
-------------------------------
On February 7, 1995, the Board of Directors of the Company established the
Datastream Systems, Inc. Stock Option Plan for Directors (the "Directors'
Plan") which provides for the grant of non-qualified stock options to purchase
up to 200,000 shares of Common Stock to directors who are not employees of the
Company. The Directors' Plan was amended and restated by the Board of
Directors on April 12, 1996 and approved by the Company's stockholders at the
Company's 1996 annual meeting of stockholders held May 23, 1996. Under the
Director's Plan, eligible directors automatically receive options to purchase,
at the fair market value of a share on the date of grant, (i) 4,500 shares of
Common Stock upon the commencement of their service as a director and (ii)
1,000 shares of Common Stock annually as of the first business day of each
fiscal year.
F-22
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
A summary of activity in the Director's Plan during the periods indicated
are as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Stock options outstanding:
Balance at December 31, 1996 31,000 4.52
Granted 8,000 9.56
Exercised -- --
------- -------
Balance at December 31, 1997 39,000 5.56
Granted 8,000 15.25
Exercised -- --
------- -------
December 31, 1998 47,000 7.21
======= =======
</TABLE>
The following table summarizes information about stock options outstanding
under the Director's Plan at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------------------
WEIGHTED
AVERAGE WEIGHTED -
REMAINING AVERAGE
RANGE OF NUMBERS CONTRACTUAL NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE EXERCISABLE PRICE
---------------------- ----------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
2.25 - 4.50 27,000 6.1 27,000 3.75
9.00 - 11.25 12,000 7.7 12,000 9.62
13.50 - 15.75 8,000 9.0 -- --
--------- ------- --------- -------
47,000 7.0 39,000 5.56
========= ======= ========= =======
</TABLE>
The per share weighted-average fair value of stock options granted under the
Director's Plan during 1997 and 1998 was $5.31 and $13.54 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield of 0%, expected
volatility of 85.07%, risk-free interest rate of 7.24%, and an expected life
of 10 years; 1998 - expected dividend yield of 0%, expected volatility of
90.77%, risk-free interest rate of 5.75%, and expected life of 10 years.
F-23
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
Employee Stock Purchase Plan
----------------------------
On October 12, 1995, the Board of Directors of the Company adopted the
Datastream Systems, Inc. Amended and Restated Employee Stock Purchase Plan
(the "Purchase Plan"). The Company's stockholders approved the Plan at the
Company's 1996 annual meeting of stockholders held May 23, 1996. The
Purchase Plan permits eligible employees to elect to contribute up to 15%
of their regular compensation through payroll deductions, toward the
purchase of common stock at 85% of the fair market value of a share on
either the date the right is granted (the first day of each semi-annual
period) or the date it is exercised (the last day of such period),
whichever is lower. The Purchase Plan is intended to comply with Section
423 of the Internal Revenue Code of 1986, as amended. The Board of
Directors has reserved 200,000 shares of common stock for future issuance
pursuant to the Purchase Plan. Under the Plan, the Company sold 18,924 and
23,710 shares in 1997 and 1998, respectively.
Under Statement No. 123, compensation expense for the Purchase Plan is
determined based on the discount percentage at which the stock is
purchased.
The Company applies APB Opinion No. 25 in accounting for its stock option
and stock purchase plans and, accordingly, no compensation cost has been
recognized for its stock options or for stock purchased under the Purchase
Plan in the financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for stock options or based
on the discount percentage under the Purchase Plan under Statement No. 123,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C> <C>
Net income (loss) As reported $11,437,897 $ 4,700,505
Pro forma 6,422,066 (1,592,974)
Basic:
Net income (loss) As reported $ .62 $ .25
per share Pro forma .35 (.08)
Diluted:
Net income (loss) As reported $ .59 $ .23
per share Pro forma .33 (.08)
</TABLE>
Pro forma net income reflects options granted in 1995 through 1998.
Compensation cost related to the Plans is reflected over the options'
vesting period of one to five years. No options were granted prior to 1995.
F-24
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(13) LEASES
As Lessee
---------
The Company leases office space, automobiles and equipment under
agreements which have been classified as operating leases for financial
reporting purposes. At December 31, 1998, the approximate future minimum
lease payments under noncancelable operating leases that expire at various
dates through 2004 are as follows:
<TABLE>
<S> <C>
1999 $ 1,236,477
2000 814,741
2001 617,470
2002 462,483
2003 145,732
Thereafter 95,663
------------
$ 3,372,566
============
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 totaled
$307,534, $1,367,830 and $1,069,569, respectively.
As Lessor
---------
The Company leases a portion of its building and related leasehold
improvements to outside parties under noncancelable operating leases.
Rental income (included in other income in the accompanying statement of
operations) for the years ended December 31, 1996, 1997 and 1998 was
$88,415, $338,957 and $126,308, respectively.
(14) SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates principally in one industry segment which includes the
development, marketing, selling and supporting of Microsoft and Oracle
based software products for the industrial automation market.
F-25
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
The Company's principal areas of operation include the United States,
Europe, Latin America and Asia. Information about the Company's operations
in different geographic locations is as follows:
<TABLE>
<CAPTION>
UNITED LATIN
STATES EUROPE AMERICA ASIA TOTAL
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1997:
Total revenues $ 52,298,576 $ 17,469,719 $ -- $ -- $ 69,768,295
Operating income 11,178,505 5,382,843 -- -- 16,561,348
Total assets 56,696,883 8,400,360 -- -- 65,097,243
1998:
Total revenues 68,316,535 24,928,462 1,180,028 4,129,832 98,554,857
Operating income 10,892,830 1,804,773 (1,061,354) (1,087,810) 10,548,439
Operating income
before one-time
charges 14,997,956 7,419,595 426,964 1,637,724 24,482,239
Total assets 65,957,630 16,978,033 1,055,202 2,799,287 86,790,152
</TABLE>
In 1998, one-time charges include write-offs of capitalized software (see
note 1(i)), write-off of in-process research and development, restructuring
and other charges (see note 3).
The United States revenues include international revenues of $8,100,000 and
$7,200,000 for the years ended December 31, 1997 and 1998.
For the year ended December 31, 1996, all revenues were generated from the
United States and included approximately $4,354,000 of international sales.
F-26
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1998
(15) RECONCILIATION OF BASIC AND DILUTED INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
<S> <C> <C> <C>
1996:
Basic loss per share $ (28,009,729) $ 16,977,134 (1.65)
===============
Effect of dilutive securities:
Stock options -- --
------------- -------------
Diluted loss per share $ (28,009,729) $ 16,977,134 (1.65)
============= ============= ===============
1997:
Basic income per share $ 11,437,897 $ 18,396,920 .62
===============
Effect of dilutive securities:
Stock options -- 849,028
------------- -------------
Diluted income per share $ 11,437,897 $ 19,245,948 .59
============= ============= ===============
1998:
Basic income per share $ 4,700,505 $ 18,935,092 .25
===============
Effect of dilutive securities:
Stock options -- 1,344,342
------------- -------------
Diluted income per share $ 4,700,505 $ 20,279,434 .23
============= ============= ===============
</TABLE>
F-27
<PAGE>
Independent Auditors' Report
The Board of Directors
Datastream Systems, Inc.:
Under the date of February 4, 1999, we reported on the consolidated balance
sheets of Datastream Systems, Inc. and subsidiaries as of December 31, 1997 and
1998, and the related consolidated statements of operations, stockholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 1998, which are included herein. In
connection with our audit of the aforementioned consolidated financial
statements, we also audited the related accompanying consolidated financial
statement schedule listed in Item 14(a)2. The consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on the consolidated financial statement schedule based
on our audits.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina
February 4, 1999
S-1
<PAGE>
<TABLE>
<CAPTION>
DATASTREAM SYSTEMS, INC.
Allowance for Doubtful Accounts Receivable
Balance at Provision for
Beginning Doubtful Balance at
Description of Year Accounts (1) Deductions End of Year
----------- ------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
receivable:
Year ended December 31, 1996.......... $ 244,475 $ 602,616 $ (12,091) $ 835,000
========== ========== ========= ==========
Year ended December 31, 1997.......... $ 835,000 $ 986,300 $(231,390) $1,589,910
========== ========== ========= ==========
Year ended December 31, 1998.......... $1,589,910 $1,943,463 $(459,536) $3,073,837
========== ========== ========= ==========
</TABLE>
(1) The Provision for Doubtful Accounts for 1997 and 1998 includes amounts
established through acquisitions and other charges that are not reflected in
bad debt expense on the statement of operations. These amounts are
approximately $215,000 for 1997 and $1.5 million in 1998.
S-2
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1* Amended and Restated Certificate of Incorporation.
3.1(a)** Amendment to Amended and Restated Certificate of
Incorporation, dated January 12, 1998.
3.2* By-Laws.
4.1 See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Certificate of Incorporation and By-Laws of the
Company defining rights of holders of Common Stock of the
Company.
4.2* Specimen Stock Certificate.
10.1*** The Datastream Systems, Inc. 1995 Stock Option Plan (as
amended and restated through May 7, 1997).
10.1(a)** First Amendment to the Datastream Systems, Inc. 1995 Stock
Option Plan (as amended and restated through May 7, 1997),
dated March 14, 1998.
10.1(b) Second Amendment to the Datastream Systems, Inc. 1995 Stock
Option Plan (as amended and restated through May 7, 1997),
dated May 8, 1998.
10.1(c) Third Amendment to the Datastream Systems, Inc. 1995 Stock
Option Plan (as amended and restated May 7, 1997), dated
March 12, 1999.
10.2+ The Datastream Systems, Inc. Stock Option Plan for Directors
(as amended and restated as of April 12, 1996).
10.2(a)** First Amendment to Datastream Systems, Inc. Stock Option
Plan for Directors (as amended and restated as of April 12,
1996), dated March 13, 1998.
10.2(b) Second Amendment to the Datastream Systems, Inc. Stock
Option Plan for Directors (as amended and restated as of
April 12, 1996), dated March 12, 1999.
10.3++ The Datastream Systems, Inc. 1998 Stock Option Plan.
10.3(a) First Amendment to the Datastream Systems, Inc. 1998 Stock
Option Plan, dated March 12, 1999.
21 Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP.
24 Power of Attorney (included on signature page hereto).
27 Financial Data Schedule.
_________
* Incorporated herein by reference to exhibit of the same number in the from
S-1 Registration Statement of the Company's Registration Statement on Form
S-1 (File No. 33-89498).
** Incorporated herein by reference to exhibit of the same number in Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997
(File No. 000-25590)
*** Incorporated herein by reference to Appendix A to the Company's definitive
Proxy Statement for the Company's 1997 Annual Meeting of Stockholders,
filed May 12, 1997 (File No. 000-25590).
+ Incorporated herein by reference to Appendix C to the Company's definitive
Proxy Statement for the Company's 1996 Annual Meeting of Stockholders,
filed April 23, 1996 (File No. 000-25590).
++ Incorporated herein by reference to Appendix A to the Company's definitive
Proxy Statement for the Company's 1998 Annual Meeting of Stockholders,
filed May 12, 1998 (File No. 000-25590)
<PAGE>
EXHIBIT 10.1(b)
SECOND AMENDMENT TO THE AMENDED AND RESTATED
DATASTREAM SYSTEMS, INC. 1995 STOCK OPTION PLAN
THIS SECOND AMENDEMENT TO THE AMENDED AND RESTATED DATASTREAM SYSTEMS, INC.
1995 STOCK OPTION PLAN (this "Second Amendment") is made effective as of the 8th
day of May, 1998, by Datastream Systems, Inc., a Delaware corporation (the
"Company").
W I T N E S S E T H
-------------------
WHEREAS, the Company has adopted the Amended and Restated Datastream
Systems, Inc. 1995 Stock Option Plan (as Amended and Restated through May 7,
1997) (the "Plan"); and
WHEREAS, Section 4.8 of the Plan authorizes the Board of Directors of the
Company to amend the Plan without stockholder approval; and
WHEREAS, the Board of Directors of the Company now desires to amend the
Plan to effect the immediate exercisablity in full of any and all outstanding
stock options granted under the Plan in the event of a "change of control" of
the Company.
NOW, THEREFORE, the Board of Directors of the Company hereby amends the
Plan as follows:
I.
A new Section 1.2 of the Plan is hereby added as follows and former
Sections 1.2 through 1.16 are accordingly renumbered as Sections 1.3 through
1.17:
"1.2 "Change of Control" means (i) an acquisition by any individual,
-----------------
entity or group (within the meaning of Sections 13(d)(3) or 14(d)(2) of the
Exchange Act (a "Person") of beneficial ownership of 50 percent or more of
the total outstanding Voting Securities of the Company, other than any
acquisition by the Company or any employee benefit plan that the Company
sponsors, (ii) any sale, exchange, merger, consolidation, reorganization,
tender offer for shares of Stock or other similar business transaction
involving the Company (a "business transaction"), unless, following such
business transaction, more than 50 percent of the total outstanding Voting
Securities of the Company (or other entity surviving such business
transaction) is then beneficially owned, directly or indirectly, by all or
substantially all of the Persons who were beneficial owners of the Voting
Securities of the Company immediately before such business transaction, and
(iii) the sale or other disposition of all or substantially all of the
assets of the Company, other than to a corporation
<PAGE>
with respect to which following such sale or other disposition more than 50
percent of the total outstanding Voting Securities of such corporation is
then beneficially owned, directly or indirectly, by all or substantially
all of the Persons who were beneficial owners of the Voting Securities of
the Company immediately before such sale or other disposition."
II.
A new Section 1.18 of the Plan is hereby added as follows:
"1.18 "Voting Securities" means the shares of capital stock of an entity
-----------------
entitled to vote generally in the election of that entity's directors."
III.
Section 4.2.2 of the Plan is hereby deleted in its entirety and replaced
with the following new Section 4.2.2:
"4.2.2 In the event of or in anticipation of a sale, exchange, merger,
consolidation, reorganization, tender offer for shares of Stock or other
similar business transaction involving the Company, the Committee may make
such adjustments with respect to awards and take such other action as it
deems necessary or appropriate to reflect such sale, exchange, merger,
consolidation, reorganization, tender offer or other similar business
transaction including, without limitation, the substitution of new awards,
the termination or adjustment of outstanding awards, the acceleration of
awards, or the removal of restrictions on outstanding awards.
Notwithstanding the foregoing sentence, however, in the event of or in
anticipation of a sale, exchange, merger, consolidation, reorganization,
tender offer for shares of Stock or other similar business transaction
involving the Company that would result in a Change of Control, any Option
granted hereunder shall become immediately exercisable in full, and shall
remain so, regardless of any provisions contained in the applicable Stock
Option Agreement with respect thereto limiting the exercisability of the
Option for any length of time or terminating the Option prior to the
expiration of its remaining term, subject to all the terms hereof and of
the Stock Option Agreement with respect thereto not inconsistent with this
sentence. Any adjustment pursuant to this Section 4.2 may provide, in the
Committee's discretion, for the elimination without payment therefor of any
fractional shares that might otherwise become subject to any Option, but
shall not otherwise diminish the then-current value of the Option."
-2-
<PAGE>
IV.
Except as specifically amended hereby, the Plan shall continue to
remain in full force and effect as before this Second Amendment, and this Second
Amendment shall be effective with respect to any Options granted under the Plan,
including those granted before the effective date of this Second Amendment.
IN WITNESS WHEREOF, the Board of Directors of the Company have caused
this Second Amendment to be executed in the form and as of the date set forth
above.
DATASTREAM SYSTEMS, INC.
/s/ Larry G. Blackwell
--------------------------
By: Larry G. Blackwell
Title: Chairman, President and
Chief Executive Officer
-3-
<PAGE>
EXHIBIT 10.1(c)
THIRD AMENDMENT TO THE AMENDED AND RESTATED
DATASTREAM SYSTEMS, INC. 1995 STOCK OPTION PLAN
THIS THIRD AMENDEMENT TO THE AMENDED AND RESTATED DATASTREAM SYSTEMS, INC.
1995 STOCK OPTION PLAN (the "Third Amendment") is made effective as of the 12th
day of March, 1999, by Datastream Systems, Inc., a Delaware corporation (the
"Company").
W I T N E S S E T H
-------------------
WHEREAS, the Company has adopted the Amended and Restated Datastream
Systems, Inc. 1995 Stock Option Plan (as Amended and Restated through May 7,
1997) (the "Plan"); and
WHEREAS, Section 4.8 of the Plan authorizes the Board of Directors of the
Company to amend the Plan without stockholder approval; and
WHEREAS, the Board of Directors of the Company now desires to amend the
Plan to redefine the class of transferees to whom non-qualified stock options
may be transferred under the Plan.
NOW, THEREFORE, the Board of Directors of the Company hereby amends the
Plan as follows:
I.
Section 3.1.11 of the Plan is hereby deleted in its entirety and replaced
with the following new Section 3.1.11:
"3.1.11 Nonassignability. Options shall not be transferable or assignable
----------------
except by will or by the laws of descent and distribution. Such Options
shall be exercisable, during the Participant's lifetime, only by the
Participant; or in the event of the death of the Participant, by the legal
representatives of the Participant's estate or if no legal representative
has been appointed, by the successor in interest determined under the
Participant's will. Notwithstanding the two prior sentences, however, if
the applicable Stock Option Agreement so provides, a Participant may assign
all or any portion of an Option granted to him that is not an incentive
stock option to (i) the Participant's child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, sister-in-law, niece or
nephew, including adoptive relationships, a former spouse of the
Participant or any person sharing the Participant's household that is not a
tenant or employee of the Participant; (ii) any entity in which the persons
<PAGE>
included in (i) (or the Participant) own more than 50 percent of the voting
interests; (iii) trusts in which any of the persons included in (i) have
more than a fifty percent beneficial interest; and (iv) foundations in
which the persons in (i) (or the Participant) control the management of
assets, as may be permitted under Rule 16b-3 of the Exchange Act of 1934,
as in effect from time to time. In that event, the assignee will be
entitled to all of the rights of the Participant with respect to the
assigned portion of such Option, and such Option will continue to be
subject to all the terms and conditions that governed the Option during the
period that it was held by the Participant; provided, however, that such
assignee may not further assign the Option except by will or by the laws of
descent and distribution. Any such assignment will be permitted only if
made by gift, pursuant to a domestic relations order, or in exchange for an
interest in an entity of which more than 50 percent of the voting interests
are held by the persons included in (i). Additionally, in order for an
assignment by a Participant to be effective, (i) at least 30 days prior to
the date of assignment, the Participant must notify the Company in writing
of the date of the assignment, the Option or portion thereof to be assigned
and the name, address, telephone number and social security or employer
identification number of the assignee, (ii) at the time of assignment, the
Participant must execute an appropriate written agreement that the company
provides to evidence the assignment and to agree to remit any applicable
withholding the Company may require and (iii) at the time of assignment,
the assignee pursuant to a written agreement that the Company provides must
agree to be bound by the same terms and conditions that governed the Option
during the period it was held by the Participant."
II.
Except as specifically amended hereby, the Plan shall continue to remain in
full force and effect as before this Third Amendment, and this Third Amendment
shall be effective with respect to any Options granted under the Plan, including
those granted before the effective date of this Third Amendment.
IN WITNESS WHEREOF, the Board of Directors of the Company have caused this
Third Amendment to be executed in the form and as of the date set forth above.
DATASTREAM SYSTEMS, INC.
By: /s/ Larry G. Blackwell
-----------------------
Title: Chairman, President and
Chief Executive Officer
-2-
<PAGE>
EXHIBIT 10.2(b)
SECOND AMENDMENT TO THE AMENDED AND RESTATED
DATASTREAM SYSTEMS, INC. STOCK OPTION PLAN FOR DIRECTORS
THIS SECOND AMENDMENT TO THE AMENDED AND RESTATED DATASTREAM SYSTEM, INC.
STOCK OPTION PLAN FOR DIRECTORS (the "Second Amendment") is made effective as of
the 12th day of March, 1999, by Datastream Systems, Inc., a Delaware corporation
(the "Company").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Company has adopted the Amended and Restated Datastream
Systems, Inc. Stock Option Plan for Directors (as Amended and Restated through
April 12, 1996) (the "Plan"); and
WHEREAS, Section 11 of the Plan authorizes the Board of Directors of the
Company to make certain amendments to the Plan without stockholder approval; and
WHEREAS, the Board of Directors now desires to amend the Plan to redefine
the class of transferees to whom non-qualified stock options may be transferred
under the Plan.
NOW, THEREFORE, the Board of Directors of the Company hereby amends the
Plan as follows:
I.
Section 10 of the Plan is hereby amended by deleting Paragraph (c) in its
entirety and replacing it with the following new Paragraphs (c) and (d):
"(c) Notwithstanding (a) and (b) of this Section 10, a Director may
assign all or any portion of a non-qualified stock option granted to
him to (i) the Director's child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-
law, son-in-law, daughter-in-law, brother-in-law, sister-in-law, niece
or nephew, including adoptive relationships, a former spouse of the
Director or any person sharing the Director's household that is not a
tenant or employee of the Director; (ii) any entity in which the
persons included in (i) (or the Director) own more than 50 percent of
the voting interests; (iii) trusts in which any of the persons
included in (i) have more than a fifty percent beneficial interest;
and (iv) foundations in which the persons in (i) (or the Director)
control the management of assets, as may be permitted under Rule 16b-3
of the Exchange Act of 1934, as in effect from time to time. In that
event, the assignee will be entitled to all of
1
<PAGE>
the rights of the Director with respect to the assigned portion of
such non-qualified option, and such non-qualified option will continue
to be subject to all of the terms and conditions that governed the
non-qualified option during the period that it was held by the
Director; provided, however, that such assignee may not further assign
the non-qualified option except by will or by the laws of descent and
distribution. Any such assignment will be permitted only if made by
gift, pursuant to a domestic relations order, or in exchange for an
interest in an entity of which more than 50 percent of the voting
interests are held by the persons included in (i). Additionally, in
order for an assignment by a Director to be effective, (i) at least 30
days prior to the date of assignment, the Director must notify the
Company in writing of the date of the assignment, the non-qualified
option or portion thereof to be assigned and the name, address,
telephone number and social security or employer identification number
of the assignee, (ii) at the time of assignment, the Director must
execute an appropriate written agreement that the Company provides to
evidence the assignment and to agree to remit any applicable
withholding the Company may require and (iii) at the time of
assignment, the assignee pursuant to a written agreement that the
Company provides must agree to be bound by the same terms and
conditions that governed the non-qualified option during the period it
was held by the Director.
(d) A Director, his transferee upon his death and his permitted
assignee may not transfer any of the Common Stock acquired pursuant to
the exercise of an Option until six months from the date of grant of
the Option."
II.
Except as specifically amended hereby, the Plan shall continue to remain in
full force and effect as before this Second Amendment, and the Second Amendment
shall be effective with respect to any options granted under the Plan, including
those granted before the effective date of this Second Amendment,
notwithstanding any provisions in the applicable non-qualified stock option
agreement to the contrary.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused this
Second Amendment to be executed in the form and as of the date set forth above.
DATASTREAM SYSTEMS, INC.
By: /s/ Larry G. Blackwell
-----------------------
Title: Chairman, President and
Chief Executive Officer
-2-
<PAGE>
EXHIBIT 10.3(a)
FIRST AMENDMENT TO THE
DATASTREAM SYSTEMS, INC. 1998 STOCK OPTION PLAN
THIS FIRST AMENDEMENT TO THE DATASTREAM SYSTEMS, INC. 1998 STOCK OPTION
PLAN (the "First Amendment") is made effective as of the 12th day of March,
1999, by Datastream Systems, Inc., a Delaware corporation (the "Company").
W I T N E S S E T H
-------------------
WHEREAS, the Company has adopted the Datastream Systems, Inc. 1998 Stock
Option Plan (the "Plan"); and
WHEREAS, Section 4.8 of the Plan authorizes the Board of Directors of the
Company to amend the Plan without stockholder approval; and
WHEREAS, the Board of Directors of the Company now desires to amend the
Plan to redefine the class of transferees to whom non-qualified stock options
may be granted under the Plan.
NOW, THEREFORE, the Board of Directors of the Company hereby amends the
Plan as follows:
I.
Section 3.1.11 of the Plan is hereby deleted in its entirety and replaced
with the following new Section 3.1.11:
"3.1.11 Nonassignability. Options shall not be transferable or assignable
----------------
except by will or by the laws of descent and distribution. Such Options
shall be exercisable, during the Participant's lifetime, only by the
Participant; or in the event of the death of the Participant, by the legal
representatives of the Participant's estate or if no legal representative
has been appointed, by the successor in interest determined under the
Participant's will. Notwithstanding the two prior sentences, however, if
the applicable Stock Option Agreement so provides, a Participant may assign
all or any portion of an Option granted to him that is not an incentive
stock option to (i) the Participant's child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, sister-in-law, niece or
nephew, including adoptive relationships, a former spouse of the
Participant or any person sharing the Participant's household that is not a
tenant or employee of the Participant; (ii) any entity in which the persons
included in (i) (or the Participant) own more than 50 percent of the voting
interests; (iii) trusts in which any of the persons included in (i) have
more
<PAGE>
than a fifty percent beneficial interest; and (iv) foundations in which the
persons in (i) (or the Participant) control the management of assets, as in
effect from time to time. In that event, the assignee will be entitled to
all of the rights of the Participant with respect to the assigned portion
of such Option, and such Option will continue to be subject to all the
terms and conditions that governed the Option during the period that it was
held by the Participant; provided, however, that such assignee may not
further assign the Option except by will or by the laws of descent and
distribution. Any such assignment will be permitted only made by gift,
pursuant to a domestic relations order, or in exchange for an interest in
an entity of which more than 50 percent of the voting interests are held by
the persons included in (i). Additionally, in order for an assignment by a
Participant to be effective, (i) at least 30 days prior to the date of
assignment, the Participant must notify the Company in writing of the date
of the assignment, the Option or portion thereof to be assigned and the
name, address, telephone number and social security or employer
identification number of the assignee, (ii) at the time of assignment, the
Participant must execute an appropriate written agreement that the company
provides to evidence the assignment and to agree to remit any applicable
withholding the Company may require and (iii) at the time of assignment,
the assignee pursuant to a written agreement that the Company provides must
agree to be bound by the same terms and conditions that governed the Option
during the period it was held by the Participant."
II.
Except as specifically amended hereby, the Plan shall continue to remain in
full force and effect as before this First Amendment, and this First Amendment
shall be effective with respect to any Options granted under the Plan, including
those granted before the effective date of this First Amendment.
IN WITNESS WHEREOF, the Board of Directors of the Company have caused this
First Amendment to be executed in the form and as of the date set forth above.
DATASTREAM SYSTEMS, INC.
By: /s/ Larry G. Blackwell
--------------------------
Title: Chairman, President and
Chief Executive Officer
-2-
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE COMPANY
. Datastream Systems International, Inc.
. Datastream FSC, Inc.
. SQL Systems Group, B.V.
. Datastream Systems, BV
. Datastream Systems (UK), Ltd.
. Sirlog, SA (Groupe Datastream)
. SQL Rapier France, Sarl
. SQL System Participaties, BV
. SQL Systems Deutschland, GmbH
. Datastream Systems, GmbH
. Datastream Insta Holding GmbH
. Insta Instandhaltung technischer Anlagen GmbH & Co. KG
. Asystum Participations, BV
. SQL Rapier France, SA
. SQL Products, BV
. SQL Products, NV
. Sikasso Pte Ltd.
. Datastream-SIS Pte Ltd.
. Datastream Systems Pty Ltd.
. Computec Sistemas S.A.
. Computec Sistemas Mexicana S.A. de C.V.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Datastream Systems, Inc.:
We consent to incorporation by reference in the Registration Statements on Forms
S-8 of Datastream Systems, Inc. of our reports dated February 4, 1999, relating
to the consolidated balance sheets of Datastream Systems, Inc. and subsidiaries
as of December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity and comprehensive income, and cash flows for
each of the years in the three-year period ended December 31, 1998, and related
schedule, which reports appear in the December 31, 1998 annual report on Form
10-K of Datastream Systems, Inc.
/s/ KPMG Peat Marwick LLP
Greenville, South Carolina
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998
AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,739,209
<SECURITIES> 2,574,898
<RECEIVABLES> 32,440,963
<ALLOWANCES> (3,073,837)
<INVENTORY> 274,502
<CURRENT-ASSETS> 50,410,037
<PP&E> 16,021,793
<DEPRECIATION> (3,135,002)
<TOTAL-ASSETS> 86,790,152
<CURRENT-LIABILITIES> 24,618,236
<BONDS> 297,092
0
0
<COMMON> 191,833
<OTHER-SE> 60,414,591
<TOTAL-LIABILITY-AND-EQUITY> 86,790,152
<SALES> 38,226,287
<TOTAL-REVENUES> 98,554,857
<CGS> 3,679,607
<TOTAL-COSTS> 34,755,704
<OTHER-EXPENSES> 53,250,714
<LOSS-PROVISION> 421,303
<INTEREST-EXPENSE> 131,833
<INCOME-PRETAX> 11,084,703
<INCOME-TAX> 6,384,198
<INCOME-CONTINUING> 4,700,505
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,700,505
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.23
</TABLE>
