SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
(Mark One)
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
________________to_________________
COMMISSION FILE NUMBER: 000-25590
DATASTREAM SYSTEMS, INC.
Incorporated pursuant to the laws of the State of Delaware
-------------------------------------------
Internal Revenue Service -- Employer Identification No. 57-0813674
50 DATASTREAM PLAZA, GREENVILLE, SC 29605
(864) 422-5001
-------------------------------------------
NOT APPLICABLE
(Former Name, Former Address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of the issuer's common stock as of the latest practicable date:
September 30, 1999 19,505,763 shares, $0.01 par value.
<PAGE>
Datastream Systems, Inc.
FORM 10-Q
Quarter ended September 30, 1999
Index
Page No.
Part I. Consolidated Financial Information
"Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995 3
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets-
December 31, 1998 and September 30, 1999
Assets 4
Liabilities and Stockholders' Equity 5
Consolidated Income Statements -
for the Three Months ended
September 30, 1998 and 1999 6
Consolidated Income Statements -
for the Nine Months ended
September 30, 1998 and 1999 7
Consolidated Statement of Changes in Stockholders'
Equity and Comprehensive Income - for the
Nine Months ended September 30, 1999 8
Consolidated Statements of Cash Flows -
for the Nine Months ended
September 30, 1998 and 1999 9
Notes to the Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About 17
Market Risk
Part II. Other Information 18
Signature 19
<PAGE>
PART I. CONSOLIDATED FINANCIAL INFORMATION
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Datastream Systems, Inc. ("Datastream" or the "Company")
makes oral and written statements that may constitute "forward-looking
statements" (rather than historical facts) as defined in the Private
Securities Litigation Reform Act of 1995 (the "Act") or by the SEC in its
rules, regulations and releases. The Company desires to take advantage of
the "safe harbor" provisions in the Act for forward-looking statements made
from time to time, including, but not limited to, the forward-looking
statements made in this Quarterly Report on Form 10-Q (the "Report"), as well
as those made in other filings with the SEC. Forward-looking statements
contained in this Report are based on management's current plans and
expectations and are subject to risks and uncertainties that could cause
actual results to differ materially from those described in the
forward-looking statements. In the preparation of this Report, where such
forward-looking statements appear, the Company has sought to accompany such
statements with meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
described in the forward-looking statements. Such factors include, but are
not limited to: increasing competition in the markets in which the Company
competes; the ability of the Company to enhance its current products and
develop new products that address technological and market developments;
risks associated with increasing international sales, including, but not
limited to, exposure to foreign exchange fluctuations and the ability of the
Company to successfully compete in foreign markets; fluctuations in quarterly
results due to seasonality and longer sales cycles in certain regions where
the Company markets its products, especially in connection with the Company's
high-end products; the Company's ability to complete the implementation of
its Year 2000 program on a timely basis and the ability of the Company's
suppliers, vendors, customers and other third parties on which the Company
relies to be Year 2000 ready; and changes in economic conditions generally,
both domestic and international. The preceding list of risks and
uncertainties, however, is not intended to be exhaustive, and should be read
in conjunction with other cautionary statements made herein and in the
Company's other publicly filed reports, including, but not limited to, the
"Risk Factors" set forth in the Company's Form 10-K for the fiscal year ended
December 31, 1998.
The Company does not have, and expressly disclaims, any obligation to release
publicly any updates or any changes in the Company's expectations or any
changes in events, conditions or circumstances on which any forward-looking
statement is based.
<PAGE>
ITEM 1. Consolidated Financial Statements
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
Assets
December 31, September 30,
1998 1999
---- ----
(unaudited)
Cash and cash equivalents $6,739,209 $10,673,729
Accounts receivable, net of allowance
for doubtful accounts of $3,073,837
and $ 3,926,337, respectively 32,440,963 32,499,240
Unbilled receivables 2,761,922 2,487,219
Investments 2,574,898 2,034,904
Prepaid expenses 1,633,227 1,779,841
Inventories 274,502 89,450
Deferred income taxes 2,322,600 2,011,000
Other assets 1,662,716 1,587,398
--------- ---------
Total current assets 50,410,037 53,162,781
Investments 2,034,744 4,230,000
Property and equipment, net 12,886,791 13,223,783
Goodwill, net 18,323,801 16,031,456
Capitalized software development costs,
net of accumulated amortization of
$3,180,813 and $5,969,792, respectively 3,134,779 1,312,806
--------- ---------
Total assets $86,790,152 $87,960,826
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
Liabilities and Stockholders' Equity
December 31, September 30,
1998 1999
---- ----
(unaudited)
Current liabilities:
Accounts payable $3,143,893 $4,716,711
Other accrued liabilities 9,768,179 7,431,340
Income taxes payable 2,762,451 1,223,438
Current portion of long-term debt 650,884 15,770
Unearned revenue 8,292,829 8,176,393
---------- ----------
Total current liabilities 24,618,236 21,563,652
Long-term debt, less current portion 297,092 264,766
Deferred income taxes 1,268,400 540,000
--------- ----------
Total liabilities 26,183,728 22,368,418
---------- ----------
Stockholders' equity:
Preferred stock, $1 par value,
1,000,000 shares authorized; none issued - -
Common stock, $.01 par value,
40,000,000 shares authorized;
19,183,305 shares issued and
outstanding at December 31, 1998,
19,505,763 shares issued and
outstanding at September 30, 1999 191,833 195,058
Additional paid-in capital 66,138,405 68,781,708
Accumulated deficit (6,675,096) (13,873)
Other accumulated comprehensive income 951,282 682,278
Treasury stock, 0 shares at December 31, 1998 and
405,000 shares at September 30, 1999, at cost - (4,052,763)
---------- ----------
Total stockholders' equity 60,606,424 65,592,408
---------- ----------
Total liabilities and stockholders' equity $86,790,152 $87,960,826
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
Three months ended September 30, 1998 and 1999
September 30, September 30,
1998 1999
---- ----
Revenues:
Product $ 9,401,198 $ 8,420,398
Professional service 11,168,981 14,958,040
Support 4,591,265 5,856,972
---------- ----------
Total revenues 25,161,444 29,235,410
Cost of revenues:
Cost of product revenues 407,889 495,067
Cost of professional service revenues 5,971,820 9,587,786
Cost of support revenues 1,155,600 1,393,936
Amortization and
write-off of capitalized software 636,665 1,439,943
---------- ----------
Total cost of revenues 8,171,974 12,916,732
---------- ----------
Gross profit 16,989,470 16,318,678
Operating expenses:
Sales and marketing 6,325,960 8,676,118
Product development 1,855,410 3,912,895
General and administrative 1,575,821 3,060,840
Amortization of goodwill 718,534 764,115
Write-off of in-process research and development
and other acquisition charges 1,103,967 -
---------- ----------
Total operating expenses 11,579,692 16,413,968
---------- ----------
Operating income(loss) 5,409,778 (95,290)
Other income (expense):
Interest income 110,142 145,105
Interest expense (28,886) (39,997)
Other (32,464) (3,085)
-------- --------
Net other income 48,792 102,023
Income before income taxes 5,458,570 6,733
Income taxes 2,625,047 2,490
---------- -------
Net income $ 2,833,523 $ 4,243
=========== =======
Basic net income per share $ .15 $ .00
---------- ----------
Diluted net income per share $ .14 $ .00
---------- ----------
Basic weighted average number of common and
potential common shares outstanding 19,072,774 19,007,096
Diluted weighted average number of common and
potential common shares outstanding 20,288,891 20,229,085
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(unaudited)
Nine months ended September 30, 1998 and 1999
September 30, September 30,
1998 1999
---- ----
Revenues:
Product $ 26,098,409 $ 29,437,519
Professional service 29,956,410 42,313,355
Support 12,677,755 16,827,390
---------- ----------
Total revenues 68,732,574 88,578,264
Cost of revenues:
Cost of product revenues 1,402,978 1,560,932
Cost of professional service revenues 15,337,526 24,459,559
Cost of support revenues 3,299,930 3,992,749
Amortization and
write-off of capitalized software 1,787,289 2,788,979
---------- ----------
Total cost of revenues 21,827,723 32,802,219
---------- ----------
Gross profit 46,904,851 55,776,045
Operating expenses:
Sales and marketing 18,367,015 24,304,616
Product development 5,338,622 10,754,522
General and administrative 4,853,677 8,167,647
Amortization of goodwill 1,485,551 2,292,345
Write-off of in-process research and development
and other acquisition charges 4,520,975 -
---------- ----------
Total operating expenses 34,565,840 45,519,130
---------- ----------
Operating income 12,339,011 10,256,915
Other income (expense):
Interest income 462,430 383,272
Interest expense (88,400) (121,965)
Other 131,503 101,104
-------- --------
Net other income 505,533 362,411
Income before income taxes 12,844,544 10,619,326
Income taxes 7,047,658 3,958,103
---------- ----------
Net income $ 5,796,886 $ 6,661,223
=========== ===========
Basic net income per share $ .31 $ .35
---------- ----------
Diluted net income per share $ .28 $ .33
---------- ----------
Basic weighted average number of common and
potential common shares outstanding 18,861,271 19,075,539
Diluted weighted average number of common and
potential common shares outstanding 20,376,944 19,969,495
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity and Comprehensive Income
(unaudited)
For the nine months ended September 30, 1999
<CAPTION>
Other
Additional Accumulated Accumulated Total
Common Paid-In Earnings Comprehensive Treasury Stockholders'
Stock Capital (Deficit) Income Stock Equity
----- ------- --------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $191,833 $66,138,405 $(6,675,096) $ 951,282 $ - $60,606,424
Comprehensive income
Net income - - 6,661,223 - - 6,661,223
Foreign currency
translation adjustment - - - (269,004) - (269,004)
--------
Total comprehensive income 6,392,219
---------
Exercise of stock options 2,853 2,210,427 - - - 2,213,280
Stock issued for Employee
Stock Purchase Plan 372 349,026 - - - 349,398
Amortization of compensatory
stock options - 83,850 - - - 83,850
Acquisition of 405,000 common shares - - - - (4,052,763) (4,052,763)
Balance at September 30, 1999 $195,058 $68,781,708 $ (13,873) $ 682,278 $(4,052,763) $65,592,408
======== =========== =========== ========= =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended September 30, 1998 and 1999
September 30, September 30,
1998 1999
---- ----
Cash flows from operating activities:
Net income $ 5,796,886 $ 6,661,223
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,366,601 3,383,373
Amortization of capitalized software
development costs 1,194,009 2,788,979
Amortization of goodwill 1,485,543 2,292,345
Other accumulated comprehensive income (loss) 469,552 (269,004)
Accretion of investment discount, net (105,717) (320)
Gain on disposal of fixed assets - (26,985)
Provision for doubtful accounts 312,005 1,039,500
Amortization of compensatory stock options - 83,850
Deferred income taxes - (416,800)
Write-off of in-process
research and development 4,520,975 -
Write-off of capitalized software 597,944 -
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable (9,685,995) (910,777)
Unbilled receivable (943,112) 87,703
Accrued interest receivable 59,421 23,889
Prepaid expenses (1,666,763) (146,614)
Inventories 241,892 185,052
Other assets (829,600) 51,430
Accounts payable (241,929) 1,572,818
Other accrued liabilities (4,035,634) (2,336,834)
Income taxes payable 2,766,504 (1,539,013)
Unearned revenue 2,421,405 (116,436)
--------- --------
Net cash provided by operating activities 4,723,987 12,407,379
--------- --------
Cash flows from investing activities:
Purchase of investments (1,705,402) (4,310,000)
Proceeds from sale and maturities of investments 14,182,820 2,655,058
Additions to property and equipment (3,033,720) (3,693,366)
Capitalized software development costs (2,485,647) (967,007)
Cash paid for acquisition, net of cash acquired (12,246,291) -
--------- --------
Net cash used in investing activities (5,288,240) (6,315,315)
--------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,671,224 2,213,280
Proceeds from issuances of shares under employee
stock purchase plan 246,145 349,398
Cash paid to acquire treasury stock - (4,052,763)
Principal payments on long-term debt (232,066) (667,459)
--------- --------
Net cash provided by (used in)
financing activities 1,685,303 (2,157,544)
--------- --------
Net increase in cash and cash equivalents 1,121,050 3,934,520
Cash and cash equivalents at beginning of period 2,409,387 6,739,209
--------- --------
Cash and cash equivalents at end of period $ 3,530,437 $10,673,729
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1) Summary of Significant Accounting Policies
A. Organization and Basis of Presentation
Datastream Systems, Inc. (the "Company" or "Datastream") develops, markets,
sells and supports Microsoft and Oracle based software products for the
industrial automation market. These products serve the desktop, file server,
client-server and enterprise-wide networking environments. Datastream's software
enables users to schedule preventive maintenance, record equipment maintenance
histories, organize and control spare parts inventories, schedule equipment and
parts inventory purchases and deploy maintenance personnel. In addition to its
U.S. operations, the Company has direct sales or distribution offices in Canada,
the United Kingdom, The Netherlands, France, Germany, Ireland, Denmark, Sweden,
Norway, Portugal, Mexico, Brazil, Argentina, Chile, Venezuela, Peru, Malaysia,
Australia, Indonesia, Singapore, China and South Africa. The company operates
principally in one industry segment.
The company made the following acquisitions during 1998:
o On March 31, 1998, the Company acquired Insta Instandhaltung technischer
Anlagen GmbH ("Insta"), a German corporation headquartered in Munich,
Germany.
o On June 16, 1998, the Company acquired Strategic Information Systems PTE
Ltd., a Singapore corporation ("SIS").
o On July 13, 1998, the Company acquired certain assets of Datastream
(Pacific) Pty Ltd., an Australian corporation ("DSTM-PAC").
o On September 2, 1998, the Company acquired Computec Sistemas S.A., an
Argentinean corporation, and its affiliate Computec Sistemas Mexicana
S.A. de C.V., a Mexican corporation (together "Computec").
The interim financial information included herein is unaudited. Certain
information and footnote disclosures normally included in the financial
statements have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC), although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. In the opinion of management, such unaudited information reflects
all adjustments, consisting only of normal recurring accruals and other
adjustments as disclosed herein, necessary for a fair presentation of the
unaudited information. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's Form 10-K for the year ended December 31, 1998 filed
with the SEC on March 31, 1999. Other than as indicated herein, there have been
no significant changes from the financial data published in those reports.
Results for interim periods are not necessarily indicative of results expected
for the full year.
B. Accounting Policies
Revenue Recognition
The Company's revenue, which consists primarily of fees for product sales,
professional services and support, is recognized in accordance with AICPA
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition". Revenue
earned on software arrangements involving multiple elements (i.e., software
products, upgrades/enhancements, postcontract customer support, installation,
training, etc.) is allocated to each element based on the relative fair values
of the elements. The fair value of an element is based on evidence which is
specific to the vendor. The revenue allocated to software products (including
specified upgrades/enhancements) generally is recognized upon delivery of the
products. The revenue allocated to postcontract customer support generally is
recognized ratably over the term of the support and revenue allocated to service
elements (such as training and installation) generally is recognized as the
services are performed. If the Company does not have evidence of the fair value
for all elements in a multiple-element arrangement, all revenue from the
arrangement is deferred until such evidence exists or until all elements are
delivered.
The Company continually evaluates its obligations with respect to warranties,
returns and refunds. Based on historical trends and management's evaluation of
current conditions, any potential obligations that are inherent in the accounts
receivable balance are adequately provided for through the allowance for
doubtful accounts. The Company may in certain circumstances grant discounts when
a purchase order is received. The discounts are recognized in the product
revenue at the time of shipment.
Net Income Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted net income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common and potential common shares outstanding. Diluted
weighted average common and potential common shares include common shares and
stock options using the treasury stock method. The reconciliation of basic and
diluted income per share is as follows:
<PAGE>
For the three months ended September 30,1999 and 1998
Per Share
Income Shares Amount
Three months ended September 30, 1999:
Basic income per share $ 4,243 19,007,096 .00
Effect of dilutive securities:
Stock options - 1,221,989
----------- ----------
Diluted income per share $ 4,243 20,229,085 .00
=========== ========== ===
Three months ended September 30, 1998:
Basic income per share $2,833,523 19,072,774 .15
Effect of dilutive securities:
Stock options - 1,216,117
----------- ----------
Diluted income per share $2,833,523 20,288,891 .14
=========== ========== ===
For the nine months ended September 30,1999 and 1998
Per Share
Income Shares Amount
Nine months ended September 30, 1998:
Basic income per share $6,661,223 19,075,539 .35
Effect of dilutive securities:
Stock options - 893,956
----------- ----------
Diluted income per share $6,661,223 19,969,495 .33
=========== ========== ===
Nine months ended September 30, 1998:
Basic income per share $5,796,886 18,861,271 .31
Effect of dilutive securities:
Stock options - 1,515,673
----------- ----------
Diluted income per share $5,796,886 20,376,944 .28
=========== ========== ===
C. Restructuring Charges
In 1998, the Company determined that it was necessary to aggressively migrate
its current and future products to a new web-based technology platform and
developed a plan to restructure certain of its operations in response to
increased competition and rapidly changing technology. The restructuring plan
required the discontinuance of certain internally developed and acquired
products and the reorganization of the Company's product development and
distribution structures domestically and internationally to improve efficiencies
and customer service and eliminate redundancy. As a result, the Company recorded
a restructuring charge at December 31, 1998 of $3,977,000 and established
certain reserves for the costs.
As the Company implemented its restructuring plan during Q1 1999, it determined
that certain of the estimates used at the time the restructuring plan was
prepared had changed. Due to natural attrition, restructuring costs for the
involuntary terminations related to centralization of product development,
services and support functions were determined to be lower than originally
estimated. The Company also recognized it would face higher costs related to the
credit risks and warranty on outstanding receivable balances in connection with
product obsolescence. The change in the estimated costs are as follows:
Original Charge Revised Charge
Involuntary terminations related to
centralized functions $2,421,000 $1,425,000
Provision for credit risk and warranty
on obsolete products 900,000 2,000,000
Costs of closing redundant facilities 656,000 552,000
------- -------
Total $3,977,000 $3,977,000
========== ==========
As of September 30, 1999, approximately $1,595,000 of the restructuring accruals
were utilized as follows: $359,000 for severance and related costs, $478,000 for
costs of closing redundant facilities and $758,000 for provisions for increased
credit risks.
D. 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.
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 six months to 36 months. 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 third quarter of 1999, the Company evaluated the estimated economic
lives of the capitalized software resulting in a reduction in the lives of the
capitalized software. The change in estimated economic lives resulted in a
decrease in net income of $387,000 ($0.02 basic net income per share) for the
third quarter of 1999 and for the nine months ended September 30, 1999.
E. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (Statement No. 133). This standard requires
a public company to recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair value.
In July 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities- Deferral of Effective Date of FASB Statement
No. 133 - an amendment of FASB Statement No. 133" (Statement No. 137). Statement
No. 137 delayed the effective date for Statement No. 133 for one year. The
Company is required to adopt Statement No. 133 in the first quarter of 2001. The
Company has not yet assessed the impact this standard will have on its financial
condition or results of operations at the time of adoption; however, the impact
will ultimately depend on the amount and type of derivative instruments held at
the time of adoption, if any.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report contains certain forward-looking statements with respect to the
Company's operations, industry, financial condition and liquidity. These
statements reflect the Company's assessment of a number of risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
factors set forth in this Report. An additional statement made pursuant to the
Private Securities Litigation Reform Act of 1995 and summarizing certain of the
principal risks and uncertainties inherent in the Company's business is included
in Part I of this Report under the caption "'Safe Harbor' Statement Under the
Private Securities Litigation Reform Act of 1995". Readers of this Report are
encouraged to read such statement carefully.
Overview
The Company offers a complete family of "computerized maintenance
management systems" ("CMMS") and "enterprise asset management" ("EAM") systems
to the maintenance, repair and operations ("MRO") industry. Generally these
products consist of 4 major categories based on price and functionality.
MaintainIt/MaintainIt Pro are off-the-shelf, entry-level solutions for small to
medium businesses. MP2 Professional is a full-featured integrated maintenance
system for small to mid-size companies, and MP2 Enterprise and MP5i provide
solutions for larger global operations. Datastream supports its software
products through professional services, including installation, consulting,
integration and training. On-going technical support services are supplied
pursuant to renewable annual technical support contracts.
In July 1999, the Company established a new wholly owned subsidiary,
Maintenance.com, Inc. This subsidiary focuses on Internet-based
business-to-business electronic commerce solutions. Maintenance.com, Inc. is
structured to include Datastream's e-commerce assets, including iProcure.com,
Datastream's internet based industrial procurement application, and
BizSurplus.com, Datastream's industrial auction site.
Results of Operations
Total Revenues. The Company reported higher revenues for the third quarter
of 1999. Total revenues increased 16% to $29,235,410 in the third quarter of
1999 from $25,161,444 in the third quarter of 1998, due principally to the
expansion of the Company's professional service and technical support service
organizations. The third quarter of 1998 includes $3,231,038 of revenue from the
newly acquired entities of Insta, SIS, DSTM-PAC, Computec and Computec-Mexico.
Total revenues increased 29% to $88,578,264 during the first nine months of 1999
from $68,732,574 in the first nine months of 1998. Revenues for the first nine
months of 1998 includes $5,084,362 of revenue from the newly acquired entities
of Insta, SIS, DSTM-PAC, Computec and Computec-Mexico.
Product revenues decreased 10% to $8,420,398 (29% of total revenues) in the
third quarter of 1999 from $9,401,198 (37% of total revenues) in the third
quarter of 1998, as a result of changes within the sales organization causing a
disruption to license sales. Product revenues increased 13% to $29,437,519 (33%
of total revenues) in the first nine months of 1999 from $26,098,409 (38% of
total revenues) in the first nine months of 1998.
Professional service revenues increased 34% to $14,958,040 (51% of total
revenues) in the third quarter of 1999 from $11,168,981 (44% of total revenues)
in the third quarter of 1998. The increase resulted from the addition of
professional service personnel to service expansion of the Company's installed
base of systems. Professional service revenues increased 41% to $42,313,355 (48%
of total revenues) in the first nine months of 1999 from $29,956,410 (44% of
total revenues) in the first nine months of 1998.
Technical support services revenues for the third quarter of 1999 increased
28% to $5,856,972 (20% of total revenues) from $4,591,265 (18% of total
revenues) in the third quarter of 1998, primarily due to the expansion of the
Company's installed base of systems. Technical support services revenues
increased 33% to $16,827,390 (19% of total revenues) in the first nine months of
1999 from $12,677,755 (18% of total revenues) in the first nine months of 1998.
Cost of Revenues. Cost of revenues increased 58% to $12,916,732 (44% of
total revenues) in the third quarter of 1999, as compared to $8,171,974 (33% of
total revenues) in the comparable quarter of 1998. The increase in cost of
revenues is attributed to increased expenses incurred in the Professional
Services and Support Departments related to increased head count to meet
customer demand, increased travel costs and increased amortization of
capitalized software.
Cost of revenues increased 50% to $32,802,219 (37% of total revenues)
during the first nine months of 1999 from $21,827,723 (32% of total revenues) in
the first nine months of 1999.
Cost of product revenues was 2% of total revenues in the third quarter of
1999 and 2% of total revenues during the same period in 1998.
<PAGE>
Cost of professional service revenues was 33% of total revenues during the
third quarter of 1999, and 24% of total revenues during the same period in 1998.
The increase as a percentage of total revenues was due to higher costs of
providing services in the companies acquired during 1998 and costs incurred in
implementing international organizational changes.
Cost of technical support service revenues was 5% of total revenues during
the third quarter of 1999 and 5% of total revenues during the same period in
1998.
Amortization and write off of capitalized software costs for the third
quarter of 1999 includes $1,439,943 (5% of total revenues) of amortization
expense and $636,665 (3% of total revenues) of amortization expense for the same
period in 1998. Cost of revenues for the first nine months of 1999 includes
$2,788,979 (3% of total revenues) of amortization expense. Cost of revenues for
the first nine months of 1998 includes $1,189,345 (2% of total revenues) of
amortization expense and a $597,944 write-off of capitalized software (1% of
total revenues), which became obsolete as a result of the acquisition of Insta.
Sales and Marketing Expenses. Sales and marketing expenses increased 37% to
$8,676,118 (30% of total revenues) during the third quarter of 1999 from
$6,325,960 (25% of total revenues) during the third quarter of 1998, as a result
of an increased number of sales personnel and increased sales and marketing
expenditures for the Company's internet businesses strategies. Sales and
marketing expenses increased 32% to $24,304,616 (27% of total revenues) in the
first nine months of 1999 from $18,367,015 (27% of total revenues) in the first
nine months of 1998.
Product Development Expenses. Total product development expenditures
increased 48% to $3,912,895 (13% of total revenues) during the third quarter of
1999 from $2,646,976 (11% of total revenues) during the same period in 1998. The
capitalized portion of these amounts were $0 and $791,566, respectively. The
increase in total product development expense resulted from increasing the
number of development personnel to support continued development of MP2i and
iProcure.com, foreign language development and other new products. FASB No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" requires software development costs to be capitalized upon the
establishment of technological feasibility. The establishment of technological
feasibility requires considerable judgment by management with respect to changes
in software and hardware technologies. Due to changes in the development process
and increased complexity in the products, costs incurred after technological
feasibility has been attained are not expected to be significant in future
quarters.
Total product development expenditures increased 50% to $11,721,529 (13% of
total revenues) during the first nine months of 1999 from $7,824,269 (11% of
total revenues) during the same period in 1998. The capitalized portion of these
amounts were $967,007 and $2,485,647, respectively.
General and Administrative Expenses. General and administrative expenses
increased 94% to $3,060,840 (11% of total revenues) during the third quarter of
1999 from $1,575,821 (5% of total revenues) in the third quarter of 1998,
primarily due to costs incurred implementing international organizational
changes and increased administrative costs incurred at acquired companies.
General and administrative expenses increased 68% to $8,167,647 (9% of total
revenues) during the first nine months of 1999 from $4,853,677 (7% of total
revenues) in the first nine months of 1998.
Amortization of Goodwill. Amortization of goodwill expense increased 6% to
$764,115 (3% of total revenues) during the third quarter of 1999 from $718,534
(3% of total revenues) in the third quarter of 1998, due to increased goodwill
balances from the acquisitions of Insta, SIS, DSTM-PAC and Computec during 1998.
Amortization of goodwill expense increased 54% to $2,292,345 (3% of total
revenues) during the first nine months of 1999 from $1,485,551 (2% of total
revenues) in the first nine months of 1998.
Write-off of in-process research and development costs. During the first
quarter of 1998, the Company expensed $2,057,008 of in-process research and
development acquired as part of the acquisition of Insta. During the second
quarter of 1998, the Company expensed $1,110,000 of in-process research and
development acquired as part of the acquisition of SIS. During the third quarter
of 1998, the Company expensed $373,000 of in-process research and development
acquired as part of the acquisition of Computec and Computec-Mexico.
Miscellaneous Income(Loss). Miscellaneous income(loss) increased to
($3,085) in the third quarter of 1999 from ($32,464)in the third quarter of
1998. Miscellaneous income decreased to $101,104 in the first nine months of
1999 from $131,503 in the first nine months of 1998. The decrease was due to
decreased rental income from leasing of the Company's building in Greenville,
South Carolina. Beginning in the third quarter of 1998, the Company no longer
leased any of the building to third parties.
Interest Income/(Expense). Interest income increased to $145,105 in the
third quarter of 1999 from $110,142 in the third quarter of 1998, due to higher
cash balances. Interest expense increased to $39,997 in the third quarter of
1999 from $28,886 in the third quarter of 1998. Interest income decreased to
$383,272 in the first nine months of 1999 from $462,430 in the first nine months
of 1998. Interest expense increased to $121,965 in the first nine months of 1999
from $88,400 in the first nine months of 1998.
Tax Rate. The Company's effective tax rate was 37% for the third quarter of
1999 as compared to 48% for the third quarter of 1998. The Company's effective
tax rate was 37.3% for the first nine months of 1999 as compared to 55% for the
first nine months of 1998. Acquisition related charges were included in income
before income taxes for the third quarter of 1998 and the nine months ended
September 30, 1998. The effective tax rate before non-deductible items
associated with the 1998 acquisitions was 40% for the third quarter of 1998 and
39% for the nine months ended September 30, 1998.
Net Income. Net income decreased 100% to $4,243 (0% of total revenues) in
the third quarter of 1999 from $2,833,523 (11% of total revenues) in the third
quarter of 1998. The decrease is attributed to lower than expect sales during
the third quarter of 1999. Net income increased 15% to $6,661,223 (8% of total
revenues) in the first nine months of 1999 from $5,796,886 (8% of total
revenues) in the first nine months of 1998. These increases are largely
attributed to the charges for the 1998 acquisition.
Liquidity and Capital Resources
The Company has funded its operating activities entirely from cash
generated from operations. The Company ended its third quarter of 1999 with
$10,673,729 in cash and cash equivalents defined as securities maturing in less
than 90 days. The Company intends to re-invest the proceeds of maturing U.S.
Government securities in similar U.S. Government securities.
On March 19, 1999 the Company announced that its board of directors had
authorized the repurchase of up to 500,000 shares of Datastream's outstanding
common stock. The repurchased shares will be used for general corporate
purposes, including grants of employee stock options. At September 30, 1999 the
Company had repurchased 405,000 shares at a cost of $4,052,763. The shares are
classified as treasury stock on the balance sheet and are reported at cost.
The Company's principal commitments as of September 30, 1999, consisted
primarily of long term debt assumed in the acquisitions, and there were no
material commitments for capital expenditures. The Company believes that its
current cash balances, availability under its line of credit and cash flow from
operations will be sufficient to meet its working capital and capital
expenditure needs for the next 12 months.
<PAGE>
Year 2000
Many currently installed computer systems and software products are coded
to accept only a two-digit format in the date field. These date code fields will
need to accept a four-digit format to distinguish 21st century dates from 20th
century dates. As a result, 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 upon which the Company relies,
including suppliers and vendors. The Committee includes the Company's directors
of development and corporate systems, product managers, and representatives from
the Company's financial, legal and technical support areas. The Committee has
focused its efforts on both internal operating and information systems
("Internal Systems") and the Company's products.
The Committee is responsible for (i) identifying and collecting data on all
Internal Systems, (ii) determining which Internal Systems need corrective
action, (iii) modifying, upgrading or replacing those systems and conducting
follow-up testing, and (iv) establishing related contingency plans where
necessary. The Committee has identified all Internal Systems that may have Year
2000 issues, has contacted the manufacturers of those systems to determine
whether they are Year 2000 ready, and has assessed the cost and timing of
achieving readiness. Based on information received from substantially all of the
manufacturers, the Committee believes that all of Datastream's Internal Systems
are currently Year 2000 ready.
The 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 for the entire operational range, (ii) provides the user a two-digit
short-cut that is recognized in a four-digit format clearly defined in its
documentation, (iii) can correctly execute leap year calculations, (iv) does not
use special values for dates, and (v) correctly processes date specific data
from and after January 1, 2000. The Company regularly runs regression tests on
its current products, including tests of the Year 2000 date rollover. Based on
these tests, the Company does not anticipate that current versions of the
Company's products will be materially adversely affected by date changes
involving year 2000.
The Company continues to run regression tests on certain earlier versions
of its products. These tests have identified areas in certain earlier versions
of its products that do not meet the Company's definition of Year 2000
compliant. As the Company becomes aware of these Year 2000 issues, it notifies
its customers of the need to migrate to current versions that management
believes are Year 2000 compliant and/or makes available to them a software
release that management believes will bring these products into Year 2000
compliance. The Company has developed a seamless migration path from earlier
versions to current versions.
The Company does not intend to test all of the earlier versions of its
products. Certain customers of the Company may still be running these earlier
versions of the Company's products that may not be Year 2000 compliant. However,
the Company has and will continue, as necessary, to notify these customers of
the need to migrate to current products that management believes are Year 2000
compliant.
There can be no assurance that the Company's products contain and will
contain all features and functionality considered necessary by customers,
distributors, resellers and systems integrators to be Year 2000 compliant or
that the Company's products do not contain undetected errors or defects
associated with Year 2000 issues. In addition, the Company's products
increasingly are customized and/or installed as part of substantial integrated
systems utilized by customers, which customized products, systems or their
components may not be Year 2000 compliant. Datastream provides limited
warranties as to Year 2000 compliance of certain of our products and services.
Except as specifically provided for in the limited warranties, the Company does
not believe that it is legally responsible for costs incurred by customers to
achieve Year 2000 compliance. Commentators have predicted a significant amount
of litigation concerning Year 2000 compliance issues and the Company is aware of
such claims having been asserted against other software companies. Because of
the unprecedented nature of the Year 2000 issues, it is uncertain whether or to
what extent the Company may be affected by any such claims. If the Company is
substantially involved in Year 2000 claims made by its customers or customers of
systems integrators, whether or not such claims have merit, the Company cannot
be certain the extent to which it may be affected by such claims. For example,
while the Company does not believe that it is legally responsible for its
customers' Year 2000 compliance obligations, it is unclear whether different
governments or governmental agencies may decide to allocate liability to the
Company relating to its customers' Year 2000 compliance without regard to the
absence or limitation of warranties or specific warranty disclaimers. The
Company's business, operating results or financial condition in any given
quarter could suffer if such liability is allocated to the Company.
Most of the costs of addressing Year 2000 issues are included in the
budgets for the Company's individual business units or for system upgrades and
the Company cannot separately identify those costs with precision. Although the
Company believes that the total costs associated with its Year 2000 efforts in
connection with its Internal Systems and products will not be material in the
aggregate, it currently estimates that such costs will be approximately $1.3
million (of which approximately $1 million has been spent through September 30,
1999). These costs are estimates because the Company does not separately track
internal labor costs associated with Year 2000 issues, unless such costs are
incurred by individuals assigned primarily to Year 2000 compliance. The Company
plans to fund its Year 2000 efforts with operating cash flows and cash on hand.
The Company cannot make any assurances that total costs associated with
corrective actions taken with respect to its Internal Systems and products will
not become material.
While the Company does not currently believe that it will experience
material disruptions 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 or
products. Those Internal Systems and the Company's products may utilize or
include third-party software or hardware that may contain embedded technology.
The Company cannot make any assurance that such third party software and
hardware, including embedded technology, is Year 2000 compliant. Similarly,
while 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 assess the likelihood of failures of infrastructure
services provided by third parties, such as electricity, phone service and
Internet services (particularly outside of countries such as the United States
where Year 2000 remediation has progressed the furthest) and what effects such
potential failures will have on such third party vendors. As a result, the
Company is unable to assess the likelihood of a material adverse effect on the
Company's business, operating results and financial condition due to such
failures.
The contingency planning process involves identifying reasonably likely
business disruption scenarios that, if they were to occur, could create
significant problems in the critical functions or operations of each business
unit. The Company's business units are continuing to develop plans to respond to
such scenarios so that critical business functions and operations may continue
to operate with minimal disruption. If these plans are not successful or if
unanticipated Year 2000 issues not covered by the Company's plans emerge, the
Company's business and operating results may be adversely affected. Contingency
planning for Internal Systems was substantially completed during the third
quarter of 1999 and the Company anticipates that its plans will continue to be
reviewed and updated, as necessary, up to and into 2000. The Company's
contingency plans include, among other things, manual work arounds for software
and hardware failures, as well as substitution of systems, suppliers and/or
vendors, if necessary. With regard to its products, the Company has projected
the most reasonably likely worst case Year 2000 scenario to include a partial
failure of a widely-used Company product that is of mission-critical importance
to the Company's customers. Datastream believes it has skilled in-house
developers and relationships with third party vendors sufficient to allow a
prompt response in the event of any such failure. If it is necessary to
re-deploy internal resources to address Year 2000 concerns on a large scale,
however, such efforts could divert resources from other aspects of the Company's
business. In addition, such re-deployment could result in a delay or loss of
revenue, increased service and warranty costs, and/or increased litigation
claims, any of which could potentially affect materially the Company's business,
operating results or financial condition. Because of the unprecedented nature of
the Year 2000 issues, it is uncertain to what extent the Company could be
affected by such a scenario.
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 and
cost of trained 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.
Datastream designates all statements in this Report regarding its Year 2000
efforts as "Year 2000 Readiness Disclosures" pursuant to the Year 2000
Information and Readiness Disclosure Act.
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company did not experience any material changes in market risk
in the third quarter of 1999.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 11, 1999, several shareholders filed a putative class action
complaint in the United States District Court for the District of South
Carolina, Greenville Division, naming as defendants, the Company, Larry G.
Blackwell and the Company's former Chief Financial Officer. Several
substantially similar complaints were filed in the same court shortly
thereafter. The complaints alleged violations of Sections 10(b) and 20(a) of the
Securities 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. On June 25, 1999, the court ordered that the actions be consolidated and
that a single consolidated complaint be filed. On August 13, 1999, the
plaintiffs filed a consolidated amended class action complaint. The consolidated
amended complaint alleges that defendants artificially inflated Datastream's
earnings and stock price by (i) taking certain one-time charges not in
accordance with generally accepted accounting principles ("GAAP") in connection
with Datastream's acquisitions of Insta and SIS and (ii) materially understating
the Company's reserves for doubtful accounts in violation of GAAP. On September
13, 1999, the Company and the individual defendants moved to dismiss the
consolidated amended complaint. That motion to dismiss is currently pending
before the court. The Company intends to defend this action 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 claims arising out of its
operations in the normal course of business, none of which are expected,
individually or in the aggregate, to have a material adverse affect on the
Company.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Stockholders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Datastream Systems, Inc.
/s/ C. Alex Estevez
Date: 11/12/99 ______________________
C. Alex Estevez
Chief Financial Officer (principal
financial and accounting officer)
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated (unaudited) statements of income for the nine months ended
September 30, 1999 and the consolidated balance sheet as of September 30, 1999
contained in the Company's Quarterly Report on Form 10 Q for the Quarter Ended
September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,673,729
<SECURITIES> 2,034,904
<RECEIVABLES> 32,499,240
<ALLOWANCES> (3,926,337)
<INVENTORY> 89,450
<CURRENT-ASSETS> 53,162,781
<PP&E> 26,504,720
<DEPRECIATION> (13,280,937)
<TOTAL-ASSETS> 87,960,826
<CURRENT-LIABILITIES> 21,563,652
<BONDS> 264,766
0
0
<COMMON> 195,058
<OTHER-SE> 65,397,350
<TOTAL-LIABILITY-AND-EQUITY> 87,960,826
<SALES> 29,437,519
<TOTAL-REVENUES> 88,578,264
<CGS> 1,560,932
<TOTAL-COSTS> 32,802,219
<OTHER-EXPENSES> 45,519,130
<LOSS-PROVISION> 439,500
<INTEREST-EXPENSE> 121,965
<INCOME-PRETAX> 10,619,326
<INCOME-TAX> 3,958,103
<INCOME-CONTINUING> 6,661,223
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,661,223
<EPS-BASIC> 0.35
<EPS-DILUTED> 0.33
</TABLE>
