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, 1999.
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
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 Datastream Plaza, Greenville, South Carolina 29605
(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. [x]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 10, 2000, assuming for these purposes, but not conceding,
that all executive officers and directors are "affiliates" of the Registrant:
$708,932,138.
Number of shares of Common Stock outstanding as of March 10, 2000:
20,385,016.
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, 1999
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
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1. Business...................................................................... 1
2. Properties.................................................................... 6
3. Legal Proceedings............................................................. 6
4. Submission of Matters to a Vote of Security Holders........................... 7
PART II
5. Market for Registrant's Common Stock and Related Stockholder Matters.......... 8
6. Selected Financial Data....................................................... 8
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 9
7(A). Quantitative and Qualitative Disclosures about Market Risk.................... 23
8. Financial Statements and Supplementary Data................................... 23
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 23
PART III
10. Directors and Executive Officers of the Registrant............................ 24
11. Executive Compensation........................................................ 28
12. Security Ownership of Certain Beneficial Owners and Management................ 31
13. Certain Relationships and Related Transactions................................ 33
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 33
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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,"
"believe," "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 Internet-based products; the continued
acceptance of the Internet for business transactions; our ability to
successfully implement an application service provider business model;
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, including those with suppliers of
maintenance, repair and operations parts; increasing competition in markets for
the Company's products; the ability of the Company to protect its proprietary
technology; risks associated with 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; fluctuations in
quarterly results due to seasonality and longer sales cycles in certain regions
where the Company markets its products; 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.
BUSINESS OVERVIEW
Datastream is a leading provider of Internet-based solutions for asset
maintenance and industrial procurement. The Company's asset maintenance
solutions allow businesses, government and other organizations to optimize the
productivity of high-value capital assets through increased maintenance
productivity and improved management of assets, personnel and other resources.
Datastream's business-to-business electronic commerce industrial procurement
solutions provide companies an on-line marketplace where they can efficiently
manage the procurement of a wide range of industrial maintenance, repair and
operations ("MRO") parts. Combined, the Company's solutions offer a complete,
scaleable asset management solution representing a unique value proposition to
the market.
Datastream believes that its large installed base of over 55,000 systems,
representing over 24,000 companies, represents a strategic advantage for
generating additional electronic commerce, software and professional services
revenue as its customers migrate to expanded Internet-based solutions. The broad
applicability of the Company's solutions is illustrated by the diversity of the
Company's customer base, which includes AT&T Wireless, Chevron, ConAgra, Dell
Corporation, Dow Chemical, Emerson Electric, Frito-Lay, Georgia-Pacific, General
Electric, Hewlett-Packard, Kaiser Permanente, Kroger, Lucent Technologies,
Motorola, Southern Nuclear and Total Oil.
Datastream's asset maintenance division provides solutions that optimize
the productivity of high value capital assets through various preventive
maintenance and asset management programs. The Company's line of products
includes solutions for virtually any size of operation, from the large,
multi-site organization needing a full featured enterprise solution to the
single, small shop with basic requirements. iProcure, Datastream's
business-to-business electronic commerce industrial procurement division,
enables customers to automate their industrial procurement. By aggregating
suppliers to a single Internet-based solution, iProcure streamlines the process
of purchasing industrial MRO parts, thereby reducing the cost of maintaining
assets.
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. Additional
information on the Company can be found at www.dstm.com and www.iprocure.com.
Information contained on the Company's home page shall not be deemed to be part
of this Annual Report.
Datastream(R), iProcure(TM), MP2(R), MP2i(TM), MP2(R) Enterprise(TM), MP2(R)
Professional(TM), MP5i(TM), MPXconnect(TM), MP2(R) WebLink(TM), PagerLink(TM)
and e-MRO(TM) are trademarks or service marks of the Company and are used in
this report to denote the products and services 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 Company's market includes process and discrete manufacturers,
government agencies, universities, hospitals and other organizations which aim
to optimize productivity of high-value capital assets such as plants,
facilities, and production equipment. Catastrophic equipment failures,
sub-optimal equipment performance and unnecessary 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
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and statistical analysis. By reducing the probability of catastrophic failures,
unscheduled downtime, and costly excess MRO procurement, companies experience
productivity improvements that generally translate into lower operating costs.
A critical component of this market is procurement of MRO parts and
supplies. For example, a preventive maintenance routine might require spare
parts for completion. Asset maintenance applications 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, most MRO purchase
orders are executed via fax and/or telephone to a large and highly fragmented
group of MRO suppliers. According to a 1999 study by Granada Research, the
current size of the of the industrial MRO market is estimated to be $287
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 electronic commerce is expected to grow from $17 billion in
1998 to over $300 billion in 2002.
PRODUCTS AND OFFERINGS
The Company's line of products include solutions for virtually any size
operation, from the large, multi-site global client needing a full featured
enterprise solution to the single, small shop with basic requirements. 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 following is a
detailed description of the Company's primary products:
MP5i. MP5i is designed for large enterprises with asset intensive and
safety critical operations, such as those found in mining, petrochemical,
pharmaceutical, telecommunication, utilities and transportation industries. It
is also well-suited for very large multi-national organizations with high
transaction volumes that require highly configurable applications. An
Internet-based application, MP5i supports multiple platforms and multiple
languages concurrently. Its open system architecture allows rapid deployment
with enterprise resource planning ("ERP") systems, equipment monitoring devices,
handheld computers, barcode scanners and virtually any other data source. MP5i
addresses configuration management, workflow management, inventory 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, support for
corrosion/inspection routines, a short-term scheduling feature, a report
manager, extensive security features and on-line, context sensitive help. MP5i
operates on all Oracle compatible systems and is an n-tiered application relying
on the scalable Oracle application server for the application layer between the
client and database and can scale for an infinite number of concurrent users, is
fully Web-architected, and is accessible anywhere in the world via a common
Internet browser. MP5i is available in seven languages.
MP2i. MP2i is the Company's latest version of the award winning MP2
Enterprise line of products. This product is designed to handle the functional
demands of large and mid-sized organizations where enterprise-wide solutions are
required to manage capital assets and personnel in multiple locations. An
Internet-based application, MP2i supports 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. MP2i'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. MP2i is currently in beta.
MP2 PROFESSIONAL. MP2 Professional, available in both file server and
client server versions, is designed for small- to medium-sized facilities where
multiple users need access to maintenance data and records for cost/benefit
analysis as well as maintenance functions. 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 Professional is available in thirteen languages.
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MPXCONNECT HOSTED APPLICATION. MPXconnect is an application service
provider ("ASP") offering that enables customers to access MP2 functionality
without the associated costs of data and network management. End users can
obtain all software functionality via an Internet browser and a fast
Internet/frame relay connection, with the actual application secured within a
data center, either managed by Datastream or a third party, assuring extremely
high availability, security and performance. Key user benefits include faster
implementations, reduced capital costs, lower cost of ownership, configurable
industry-specific implementations and an ability to use a top-tier application
for the broader market. Datastream plans to sell and market MPXconnect on a
monthly fee basis in the first half of 2000.
iPROCURE INDUSTRIAL TRADING NETWORK. The iProcure network, a product of
Datastream's iProcure division, is a business-to-business Internet procurement
application that enables customers to automate their industrial MRO procurement
processes. The iProcure network can function as a stand-alone procurement module
or seamlessly integrate with existing demand driven systems (ERP or Enterprise
Asset Maintenance Systems) to fully automate the MRO supply chain. Use of
iProcure reduces item costs, improves catalog search time, streamlines
requisition processes, controls "maverick" purchasing and improves inventory
control. Datastream generates revenues from the iProcure network through
transaction fees charged to suppliers. Additionally, the Company expects to
generate service revenue from specialized installation requirements, content
services and other inventory and purchasing consulting fees.
PROFESSIONAL SERVICES
The Company offers five types of professional services to customers: (i)
consulting and advisory services to provide solutions to customer-specific
applications problems, such as spare parts inventory management or preventive
maintenance, (ii) integration, which provides on-site installation and systems
integration services, (iii) customization, which enhances the functionality of a
customer's system, (iv) maintenance and support services and (v) customer
training.
The Company offered a total of 409 training sessions in 1999 at its
training facilities in Greenville, South Carolina, Irvine, California, Dallas,
Texas and Chicago, Illinois Additionally, the Company offered training sessions
at certain international locations and at customer locations. Most of the
Company's training and consulting services are performed on a daily fee
arrangement in connection with installations of the Company's systems. As of
February 29, 2000, the Company employed 352 training and consulting personnel
worldwide.
Maintenance and support services include unlimited, toll-free
international access to Datastream's Support staff, free product upgrades, a
searchable Internet site for common questions and requests, an Internet-based
support tool for self help via the Internet, e-mail support and an
Internet-based file download service. As of February 29, 2000, the Company
employed 123 support personnel in support operations worldwide. 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.
CUSTOMERS
Datastream's customer base is highly diversified. To date, Datastream has
sold systems to approximately 24,200 companies in 128 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 important, 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 over 55,000 systems since inception and has grown its
installed base by an average of approximately 50% annually during the last 6
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.
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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 334 sales
and marketing professionals (as of February 29, 2000), including a telesales
force of 148 representatives and a direct sales force of 145. During 1999, the
Company expanded its direct sales force significantly in order to call on larger
accounts and to market its enterprise-wide solutions, including MP5i, worldwide.
The Company uses a marketing software system with database marketing,
telemarketing, lead tracking and analysis and customer support capabilities.
The Company's marketing department consists of 44 employees (as of
February 29, 2000) 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 web site design and
management, 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
user's 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.
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, Brazil 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 segments and operations in different
geographic locations, see note 14 to the Company's consolidated financial
statements.
PRODUCT DEVELOPMENT
As of February 29, 2000, the Company's product development department
consisted of 169 people, spread among four groups: Development, Quality
Assurance, Documentation and Localization. The Development group consisted of
100 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 1999, the Company focused on developing Internet-based
applications, including MP5i and MP2i, along with aggressive development and
marketing of an electronic commerce initiative, iProcure. MP5i, the industry's
first fully Internet-based enterprise asset management system, added critical
features during 1999, including Euro compliance, global asset management
capabilities, and multi-language, multi-currency support. MP2i entered beta
testing as an Internet-based asset management solution in 1999, and development
efforts began on MPXconnect, an ASP solution to reduce customers' system
administration costs. The iProcure network is the next generation of the
Company's previous e-MRO product, launched in 1998, and provides an on-line
purchasing system for MRO parts. iProcure works in tandem with Datastream's
asset management solutions or as a stand alone procurement system. The Company's
product development efforts are currently focused on continued use of the
Internet as a medium for client connection to the Company's high-end products
and as a conduit for purchasing transactions through the iProcure system.
The Company plans to continue its Internet-based development of MP5i and
MP2i with a focus on increased alignment of MP5i with the Company's products to
facilitate seamless customer migration. Planned improvements to MP5i will also
include enhanced workflow capabilities, improved ERP integration capabilities,
improved electronic commerce capabilities and additional functional modules.
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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.
The Company's software development expenditures were approximately $6.6 million,
$11.8 million and $15.5 million in 1997, 1998 and 1999 respectively.
COMPETITION
The market for application software is intensely competitive. 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
Internet-based 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.
In the asset maintenance market, the Company competes with Indus
International, Marcam Corporation, Mincom, Inc., Peregrine Systems, Project
Software and Development, Inc. (PSDI) and several ERP vendors such as SAP and
J.D. Edwards, who offer enterprise-wide management systems with asset
maintenance modules. The Company competes internationally with both local and
global providers of asset maintenance solutions. 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
there is no assurance that the Company will be successful in these markets.
In the industrial procurement market, the Company competes with existing
asset maintenance competitors, including PSDI, and the Company expects to
compete more frequently with companies such as Ariba, Clarus, Commerce One,
Concur, PurchasePro and VerticalNet. This market is characterized by competitors
with significantly higher capital and human resources than the Company, and it
is an industry driven by highly dynamic changes in technology. The Company
expects this market to increase significantly in terms of competition and
technological change.
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
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 the Company relies on a "shrink-wrap" license for protection
against unauthorized use of its products for it file server and certain of its
client server licensing transactions, in instances involving large sales, the
Company may specifically negotiate license agreements that are signed by both
the licensee and the Company. 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. The Company's
international operations expose it to certain additional intellectual property
risks in that the laws of some 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, servicemarks 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
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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.
SEASONALITY
The Company's international operations expose the Company to seasonal
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 2000.
EMPLOYEES
As of February 29, 2000, the Company employed approximately 1,088 persons
on a full-time basis, including 334 sales and marketing personnel, 465 service
and support representatives, 121 administrative personnel and 168 employees
involved in product development. 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 good.
ITEM 2. PROPERTIES
The Company conducts its principal 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:
SQUARE FOOTAGE
LOCATION LEASE EXPIRATION (APPROX.)
-------- ---------------- ---------
Munich, Germany November 2002 16,000
Rotterdam, The Netherlands November 2002 12,000
Singapore March 2001 9,900
Grenoble, France February 2002 6,500
Buenos Aires, Argentina June 2001 4,306
Slough, Great Britain March 2000 4,000
Irvine, California April 2003 3,800
Toronto, Canada May 2003 3,600
Brisbane, Australia August 2000 3,000
Woodbridge, New Jersey November 2003 2,800
Paris, France August 2001 2,000
Mexico City, Mexico July 2000 1,900
Atlanta, Georgia April 2001 1,800
Sao Paulo, Brazil January 2002 1,500
Chicago, Illinois Month-to-Month 1,400
Dallas, Texas February 2003 1,400
Shanghai, China Month-to-Month 1,000
Tokyo, Japan October 2001 420
Naples, Florida Month-to-Month 180
Lancaster, Pennsylvania September 2000 150
ITEM 3. 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
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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. The plaintiffs
seek compensatory damages and unspecified equitable relief. On September 13,
1999, the Company and the individual defendants moved to dismiss the
consolidated amended complaint. The court denied the defendants' motion to
dismiss on January 27, 2000. The Company filed its answer to the consolidated
class action complaint on February 24, 2000. 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 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, 1999.
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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, 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 and low 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.
QUARTER ENDED HIGH LOW
- ------------- ----- ----
March 31, 1998 23.375 13.500
June 30, 1998 27.500 17.250
September 30, 1998 19.875 9.500
December 31, 1998 18.250 8.625
March 31, 1999 12.250 8.313
June 30, 1999 16.000 6.625
September 30, 1999 16.688 11.000
December 31, 1999 25.000 7.125
The closing price of a share of the Company's Common Stock on March 10,
2000, was $43.438. As of March 10, 2000, the Company had 185 shareholders of
record of its Common Stock. As of the date of the Company's last Annual Meeting
of Stockholders, June 11, 1999, the Company had approximately 9,500 beneficial
owners of its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $ 20,346 $ 32,466 $ 69,768 $ 98,555 $118,776
Total cost of revenues (1) 5,218 11,507 22,131 34,756 46,545
-------- -------- -------- -------- --------
Gross profit 15,128 20,959 47,637 63,799 72,231
Total operating expenses (2) 9,216 47,758 31,076 53,251 61,845
-------- -------- -------- -------- --------
Operating income (loss) 5,912 (26,799) 16,561 10,548 10,386
Net other income 1,176 2,370 987 536 1,461
-------- -------- -------- -------- --------
Income (loss) before income taxes 7,088 (24,429) 17,548 11,084 11,847
Income taxes 2,742 3,581 6,110 6,384 4,412
-------- -------- -------- -------- --------
Net income (loss) $ 4,346 $(28,010) $ 11,438 $ 4,700 $ 7,435
======== ======== ======== ======== ========
Basic net income (loss) per share $ .33 $ (1.65) $ .62 $ .25 $ .39
======== ======== ======== ======== ========
Diluted net income (loss) per share $ .30 $ (1.65) $ .59 $ .23 $ .37
======== ======== ======== ======== ========
Net income before one time charges . $ 4,346 $ 7,394 $ 11,438 $ 15,311 $ 7,141
======== ======== ======== ======== ========
Basic net income per share before one
time charges $ .33 $ .44 $ .62 $ .81 $ .37
======== ======== ======== ======== ========
Diluted net income per share before
one time charges $ .30 $ .42 $ .59 $ .76 $ .36
======== ======== ======== ======== ========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Basic weighted average common shares
outstanding 13,004 16,977 18,397 18,935 19,118
Diluted weighted average common
shares outstanding 14,366 16,977 19,246 20,279 20,098
Operating Data:
Software units sold at period-end
(cumulative) 11,964 24,787 35,465 47,985 55,250
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................... $19,965 $13,633 $22,290 $25,792 $34,652
Total assets........................ 50,692 57,577 65,097 86,790 88,175
Long-term debt, less current portion 22 2,893 603 297 224
Total stockholders' equity.......... 46,034 33,125 47,108 60,606 67,284
</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 Datastream
Systems GmbH & Co. KG and pursuant to a plan of re-organization and
restructuring.
(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 Datastream Systems GmbH & Co KG and Datastream-SIS
PTE, Ltd, and other charges pursuant to a plan of re-organization and
restructuring. In 1999, includes ($294) of restructuring reserves written
off at completion of re-organization and restructuring plan. (See note 3 of
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 is a leading provider of Internet-based solutions for asset
management and industrial procurement for businesses, governments and other
organizations. The Company's revenues have grown each calendar year since
inception. Excluding one-time charges related to acquisitions, the Company has
been profitable in each of the last five years and has experienced a compounded
annual growth rate of 55% in revenues during that period.
The Company divides its business into two main segments. Datastream's
asset maintenance division provides solutions that optimize productivity of
assets through various preventative maintenance and asset management programs.
The Company's asset maintenance products includes solutions for virtually any
size of operation, from the large, multi-site organization needing a full
featured enterprise solution to the single, small shop with basic requirements.
The Company's newly formed iProcure division provides business-to-business
electronic commerce industrial procurement solutions, enabling customers to
automate their industrial procurement resulting in reduced costs of maintaining
assets.
The asset maintenance products consist of 3 major categories based on
price and functionality. MP2 Professional provides maintenance solutions for the
small to medium size facility, MP2i offers enterprise-wide maintenance solutions
for the large and mid-sized organization that are required to manage capital
assets and personnel in multiple locations, and MP5i is designed for larger
enterprises with asset intensive and safety critical operations. IProcure is a
business-to-business Internet procurement application that enables customers to
automate their industrial procurement. Datastream supports its products with
professional and support services. See note 1(c) of the notes to consolidated
financial statements for information concerning the Company's revenue
recognition policies.
9
<PAGE>
In 1998 the Company made four acquisitions to expand its international
markets and reduce the Company's reliance on outside distributors. The Company
made three stock acquisitions of foreign asset management software companies,
Datastream Systems GmbH & Co KG, a German company, in March 1998, Datastream-SIS
PTE Ltd., a Singapore company, in June 1998 and Computec Sistemas S.A., an
Argentine company, and its affiliate Datastream Systems de Mexico S.A. de C.V.,
a Mexican company, in September 1998. Additionally, the Company made one asset
acquisition, Datastream Pacific Pty Ltd., an Australian company, in July 1998.
These acquisitions will be referred to as the "1998 Acquisitions".
In December 1998, the Company adopted a restructuring plan pursuant to
which it aggressively migrated to new Internet-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. 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. In 1999, the
restructuring plan was completed. See "--Recent Developments."
RECENT DEVELOPMENTS
In 1999, the Company completed its restructuring plan utilizing $3.6
million of the $3.9 million of reserves established at December 31, 1998.
Approximately $300,000 of unutilized restructuring related reserves were
recognized as a reduction in operating expenses during the fourth quarter of
1999. See also note 3 to the consolidated financial statements.
During 1999, the Company announced the formation of a new division
iProcure. This division focuses on Internet-based business-to-business
electronic commerce industrial procurement solutions. iProcure is structured to
include Datastream's electronic commerce assets, including iProcure.com,
Datastream's Internet based industrial procurement application, and
BizSurplus.com, Datastream's industrial auction site. Additionally, the company
formed a wholly-owned subsidiary, iProcure, Inc. The iProcure division had a net
loss in 1999 of $2.2 million and total expenses of $3.7 million. The expenses
were 38% sales and marketing, 39% product development, 16% general and
administrative and 7% cost of sales. The results for iProcure are included in
the Results of Operations discussed below. Additionally, results for the
iProcure division are reported as a separate segment under Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". See also note 14 to the consolidated
financial statements.
RESULTS OF OPERATIONS
The following tables set forth statement of operations data for the three
years ended December 31, 1997, 1998 and 1999, 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
-------------------------------- --------------
1997 1998 1999 97-98 98-99
---- ---- ---- ----- -----
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product................................... $31,174 $38,226 $39,268 22.6% 2.7%
Professional services..................... 26,438 42,622 56,334 61.2 32.2
Support................................... 12,156 17,707 23,174 45.7 30.9
------ -------- -------- ---- ----
Total revenues......................... 69,768 98,555 118,776 41.3 20.5
Cost of revenues:
Cost of product revenues.................. 1,654 2,109 2,320 27.5 10.0
Cost of professional
services revenues...................... 15,160 22,402 34,718 47.8 55.0
Cost of support revenues.................. 3,838 4,731 5,406 23.3 14.3
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Amortization and
write off of capitalized software...... 1,479 5,514 4,101 N/M N/M
------- ------- ------- ------ -----
Total costs of revenues................ 22,131 34,756 46,545 57.0 33.9
Gross profit................................... 47,637 63,799 72,231 33.9 13.2
Operating expenses:
Sales and marketing....................... 18,617 25,398 33,695 36.4 32.7
Product development........................ 4,364 8,174 14,555 87.3 78.1
General and administrative................ 7,004 7,645 10,833 9.2 41.7
Goodwill amortization .................... 1,091 2,044 3,056 87.4 49.5
In-process research and development,
restructuring and other.................. -- 9,990 (294) N/M N/M
----------- ------- -------- ----- -----
Total operating expenses.................. 31,076 53,251 61,845 71.4 16.1
------ ------- ------ ----- -----
Operating income (loss)........................ 16,561 10,548 10,386 (36.3) (1.5)
Net other income............................... 987 536 1,461 (45.7) 172.5
--- -------- ------- ----- -----
Income (loss) before income taxes ............. 17,548 11,084 11,847 (36.8) 6.9
Income taxes................................... 6,110 6,384 4,412 4.5 (30.9)
----- ------- ------- ----- -----
Net income (loss).............................. $ 11,438 $ 4,700 $ 7,435 (58.9) 58.2
======== ======= ======= ====
Basic net income (loss) per share.............. $ .62 $ .25 $ .39 (59.8%) 56.0%
======== ====== ======= ==== =====
Diluted net income (loss) per share............ $ .59 $ .23 $ .37 (61.0%) 60.9%
======== ====== ======= ==== =====
</TABLE>
N/M - Not meaningful
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product................................................. 44.7% 38.8% 33.1%
Professional services................................... 37.9 43.2 47.4
Support................................................. 17.4 18.0 19.5
---- ---- ----
Total revenues..................................... 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues................................ 2.4 2.1 1.9
Cost of professional services revenues.................. 21.7 22.7 29.2
Cost of support revenues................................ 5.5 4.8 4.6
Amortization and write off of capitalized software...... 2.1 5.7 3.5
--- ---- ----
Total cost of revenues............................. 31.7 35.3 39.2
Gross profit................................................. 68.3 64.7 60.8
Operating expenses:
Sales and marketing..................................... 26.7 25.8 28.4
Product development..................................... 6.3 8.3 12.2
General and administrative.............................. 10.0 7.7 9.1
Goodwill amortization .................................. 1.6 2.1 2.6
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
In-process research and development,
restructuring and other.............................. -- 10.1 (0.2)
---- ---- ------
Total operating expenses........................... 44.6 54.0 52.1
Operating income (loss)...................................... 23.7 10.7 8.7
Net other income............................................. 1.4 0.5 1.2
----- ----- -----
Income (loss) before income taxes............................ 25.1 11.2 9.9
Income taxes................................................. 8.7 6.5 3.7
----- ----- -----
Net income (loss)............................................ 16.4% 4.8% 6.2%
===== ===== =====
</TABLE>
1999 COMPARED TO 1998 AND 1998 COMPARED TO 1997
TOTAL REVENUES. Total revenues for 1999 increased 20.5% to approximately
$118.8 million from approximately $98.6 million in 1998, due principally to (i)
the expansion of the Company's professional service and technical support
service organizations, (ii) the continued acceptance of the Company's products
in the asset maintenance market, (iii) full integration of the 1998
Acquisitions, and (iv) the introduction of new products including MP5 v5.5 in
the first quarter of 1999.
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 asset maintenance market, (ii)
expansion of the Company's sales, marketing, professional and technical support
service organizations, (iii) the 1998 Acquisitions, (iv) the introduction of new
products including MP2 v5.0 for Access and MP2 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 1998
acquisitions.
International revenues were approximately $42.8 million, or 36.1% of total
revenues in 1999, compared to $37.4 million, or 37.9% of total revenues in 1998,
compared to $25.6 million, or 36.7% of total revenues in 1997.
Product revenues increased 2.7% to approximately $39.3 million in 1999
from approximately $38.2 million in 1998, and 22.6% to approximately $38.2
million in 1998 from approximately $31.2 million in 1997. These increases are
due to an increase in the average selling price of the systems sold and reflect
the impact of the 1998 Acquisitions. As a percentage of revenues, revenues from
software products decreased to 33.1% in 1999 from 38.8% in 1998 and decreased to
38.8% in 1998 from 44.7% in 1997.
Professional service revenues increased 32.2% to approximately $56.3
million in 1999 from approximately $42.6 million in 1998 and 61.2% to
approximately $42.6 million in 1998 from approximately $26.4 million in 1997.
These increases generally reflect the impact of the 1998 Acquisitions, and
increased installation, training and integration services provided to support
increased product sales. As a percentage of revenues, revenues from professional
services increased to 47.4% in 1999 from 43.2% in 1998 and increased to 43.2% in
1998 from 37.9% in 1997.
Technical support service revenues increased 30.9% to approximately $23.2
million in 1999 from approximately $17.7 million in 1998, and 45.7% to
approximately $17.7 million in 1998 from approximately $12.2 million in 1997.
These increases reflect a larger installed customer base and the impact of the
1998 Acquisitions. As a percentage of total revenues, revenues from technical
support services increased to 19.5% in 1999 from 18.0% in 1998 and 17.4% in
1997.
COST OF REVENUES. Cost of product revenues as a percentage of total
revenues decreased to 1.9% in 1999 from 2.1% in 1998 and decreased to 2.1% in
1998 from 2.4% in 1997. The decrease as a percentage of revenues in 1999 from
1998 and 1997 principally reflects decreased costs associated with printing and
replication of the Company's software products, and volume discounts realized on
shipping costs.
12
<PAGE>
Cost of professional services increased as a percentage of total revenues
to 29.2% in 1999 from 22.7% in 1998 and 21.7% in 1997. The increase as a
percentage of revenues in 1999 from 1998 and 1997 was due primarily to lower
utilization of personnel in the companies acquired in the 1998 Acquisitions and
larger implementation projects.
Cost of technical support services as a percentage of total revenues was
4.6%, 4.8%, and 5.5% in 1999, 1998 and 1997, respectively. The decrease from
1997 to 1998 and 1998 to 1999 as a percentage of revenues reflects savings
realized upon increased consolidation of worldwide support activities during
1998 and 1999.
Amortization and write off of capitalized software includes approximately
$4.1 million of amortization of capitalized software for 1999. Amortization and
write off of capitalized software costs in 1998 includes $1.6 million of
amortization of capitalized software and 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 Datastream Systems GmbH & Co, KG, 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 1997 included approximately $1.5 million of amortization of
capitalized software. See note 1(i) to the consolidated financial statements.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for 1999
increased 32.7% to approximately $33.7 million from approximately $25.4 million
in 1998, and increased 36.4% to approximately $25.4 million from approximately
$18.6 million in 1997. As a percentage of total revenues, these expenses were
28.4% in 1999, 25.8% in 1998 and 26.7% in 1997. The increase as a percentage of
revenues in 1999 from 1998 and 1997 was due primarily to increased commissions
to sales people and increased marketing in the iProcure division.
PRODUCT DEVELOPMENT EXPENSES. Total expenditures on product development,
including capitalized expenses, increased to approximately $15.5 million in 1999
from approximately $11.8 million in 1998 and from approximately $6.7 million in
1997. The increases were primarily due to the hiring of additional employees and
third party consultants to work on the Company's Internet-based products, MP2i
and MP5i, and on the iProcure product. The Company capitalized software expense
of approximately $1.0 million, $3.7 million and $2.3 million, respectively, in
1999, 1998 and 1997, which represented 6.2%, 30.9% and 34.8% of total
expenditures for product development in the respective periods. Capitalization
of software expense is expected to decrease further as a percentage of total
development expense in 2000. Net product development expenditures were
approximately $14.5 million, $8.2 million and $4.4 million in 1999, 1998 and
1997, respectively. Net product development expenses as a percentage of revenues
were 12.2%, 8.3% and 6.3% in 1999, 1998 and 1997, respectively. Amortization of
capitalized product development costs is charged to cost of product sales and
totaled approximately $4.1 million, $1.6 million and $1.5 million in 1999, 1998
and 1997, respectively. At December 31, 1999, the Company has no remaining
capitalized software costs on the balance sheet.
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 41.7% to approximately
$10.8 million in 1999 from approximately $7.6 million in 1998, and 9.2% to
approximately $7.6 million in 1998 from approximately $7.0 million in 1997, due
primarily to the 1998 Acquisitions, which companies historically spent more on
general and administrative categories, and increased administrative personnel
required to support the Company's growth and increased reserves. As a percentage
of total revenues, general and administrative expenses were 9.1% in 1999, 7.7%
in 1998 and 10.0% in 1997.
GOODWILL AMORTIZATION. Goodwill amortization increased 49.5% to
approximately $3.1 million in 1999 from approximately $2.0 million in 1998, and
87.4% to approximately $2.0 million in 1998 from approximately $1.1 million in
1997, due to the 1998 Acquisitions resulting in higher goodwill balances. As a
percentage of total revenues, goodwill amortization was 2.6% in 1999, 2.1% in
1998 and 1.6% in 1997.
IN-PROCESS RESEARCH AND DEVELOPMENT COSTS, RESTRUCTURING AND OTHER. In
1998, the Company expensed $3.5 million of in-process research and development
acquired as part of the 1998 Acquisitions. 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
13
<PAGE>
to which it aggressively developed Internet-based software products,
consolidated product development, customer support and administrative services
and eliminated redundancies in its acquired international subsidiaries. As a
result, the Company expensed approximately $4.0 million related to the
restructuring in the fourth quarter of 1998. In 1999, the Company completed its
restructuring plan utilizing approximately $3.6 million of the $4.0 million of
reserves established at December 31, 1998. Approximately $300,000 of unutilized
restructuring related reserves were written off at December 31, 1999. See
"--Recent Developments" and note 3 to the consolidated financial statements.
OTHER INCOME/EXPENSE. Other income increased to $1.5 million in 1999 from
$0.5 million in 1998 and decreased to $0.5 million in 1998 from $1.0 million in
1997. The increase from 1998 to 1999 is primarily due to a gain recognized on
the sale of equity securities the Company acquired through the disposition of an
investment in an unrelated software company. The decrease from 1997 to 1998 is
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 and to
decreased rental income from leasing of the Company's building in Greenville,
South Carolina.
INCOME TAXES. The Company's effective income tax rate for 1999
decreased to 37.2% from 57.6% in 1998.The decrease in the effective tax rate
from 1998 to 1999 is a result of the absence of non-deductible in process
research and development, higher amortization of non-deductible goodwill and the
benefit of a reduction in the liability to properly reflect the Company's
exposure for tax related contingencies.. The Company's effective income tax rate
for 1998 increased to 57.6% from 34.8% in 1997. The increase is due to
non-deductible in process research and development, increase in non-deductible
goodwill amortization and an increase in international operations resulting in
more income earned in higher tax jurisdictions.
NET INCOME. The Company's net income increased 58.2% in 1999 to
approximately $7.4 million or $.39 basic earnings per share ($.37 diluted
earnings per share) from a profit of approximately $4.7 million in 1998 or $.25
basic earnings per share ($.23 diluted earnings per share), and 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 $.62 basic earnings per share ($.59 diluted earnings per share). The
1999 increase in net income is due to the impact of the write-offs incurred upon
the 1998 Acquisitions off set by increased cost of sales, amortization expense
and iProcure division expenses. The 1998 decrease in net income is due to the
impact of the write-offs incurred upon the 1998 Acquisitions, offset in part by
improved international profitability and internal growth of revenues during
1998. The 1999 net loss for the iProcure division is approximately $2.2 million.
QUARTERLY RESULTS
GENERAL. The Company believes that its future results of operations may be
subject to quarterly variations. The Company's international acquisitions 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 2000.
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 two of its 1998
Acquisitions 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.
The following table presents certain unaudited quarterly financial
information for each of the eight quarters through the quarter ended December
31, 1999. 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
14
<PAGE>
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
------------------------------------------------------------------------------------------
1998 1999
----------------------------------------- ---------------------------------------------
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................. $7,365 $9,332 $9,401 $12,128 $10,422 $10,596 $8,420 $9,830
Professional services... 8,956 9,832 11,169 12,665 13,175 14,180 14,958 14,021
Support................. 3,808 4,278 4,591 5,029 5,202 5,768 5,857 6,347
----- ----- ----- ----- ----- ----- ----- -----
Total revenues....... 20,129 23,442 25,161 29,822 28,799 30,544 29,235 30,198
Cost of revenues:
Cost of product revenues 776 772 1,044 1,087 535 531 495 759
Cost of professional
services revenues.... 4,145 5,221 5,972 7,064 6,690 8,182 9,588 10,258
Cost of support revenues 930 1,214 1,156 1,431 1,318 1,281 1,394 1,413
Amortization and write
off of capitalized
software............. 598 -- -- 3,346 583 765 1,440 1,313
----- ------ ------ ------ ----- ------ ------ ------
Total cost of revenues.. 6,449 7,207 8,172 12,928 9,126 10,759 12,917 13,743
----- ----- ----- ------ ----- ------ ------ ------
Gross profit............... 13,680 16,235 16,989 16,894 19,673 19,785 16,318 16,455
Operating expenses:
Sales and marketing..... 5,549 6,492 6,326 7,030 7,656 7,973 8,676 9,390
Product development..... 1,522 1,961 1,855 2,836 2,897 3,945 3,913 3,800
General and administrative 1,832 1,446 1,575 2,792 2,643 2,463 3,061 2,666
Goodwill amortization .. 198 569 719 558 764 764 764 764
In-process research and
development, restructuring
and other ........... 2,057 1,360 1,104 5,469 -- -- -- (294)
------ ------ ------ ------ -------- -------- -------- ---------
Total operating expenses... 11,158 11,828 11,579 18,685 13,960 15,145 16,414 16,326
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss).... 2,522 4,407 5,410 (1,791) 5,713 4,640 (96) 129
Net other income........... 253 203 49 31 122 138 102 1,099
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes................ 2,775 4,610 5,459 (1,760) 5,835 4,778 6 1,228
Income taxes............... 2,064 2,358 2,625 (664) 2,188 1,768 2 454
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).......... $ 711 $2,252 $2,834 $(1,096) $3,647 $3,010 $ 4 $774
===== ====== ====== ======== ====== ====== ==== ====
Basic net income (loss)
per share............ $ .04 $ .12 $ .15 $(.06) $ .19 $ .16 $ .00 $ .04
===== ===== ===== ====== ===== ===== ===== =====
Diluted net income (loss)
per share............ $ .03 $ .11 $ .14 $(.06) $ .18 $ .15 $ .00 $ .04
===== ===== ===== ====== ===== ===== ===== =====
</TABLE>
15
<PAGE>
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, 1999.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------
1998 1999
----------------------------------------- ----------------------------------------------
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................. 36.6% 39.8% 37.4% 40.7% 36.2% 34.7% 28.8% 32.6%
Professional services... 44.5 41.9 44.4 42.5 45.7 46.4 51.2 46.4
Support................. 18.9 18.3 18.2 16.9 18.1 18.9 20.0 21.0
---- ---- ---- ---- ---- ---- ---- ----
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 3.9 3.3 4.2 3.6 1.9 1.7 1.7 2.5
Cost of professional
services revenues... 20.6 22.3 23.7 23.7 23.2 26.8 32.8 34.0
Cost of support revenues 4.6 5.2 4.6 4.8 4.6 4.2 4.8 4.7
Amortization and writeoff of
capitalized software. 3.0 -- -- 11.2 2.0 2.5 4.9 4.3
---- ---- ---- ---- ---- ---- ---- ----
Total cost of revenues.. 32.0 30.7 32.5 43.4 31.7 35.2 44.2 45.5
---- ---- ---- ---- ---- ---- ---- ----
Gross profit............... 68.0 69.3 67.5 56.6 68.3 64.8 55.8 54.5
Operating expenses:
Sales and marketing..... 27.6 27.7 25.1 23.6 26.6 26.1 29.7 31.1
Product development..... 7.6 8.4 7.4 9.5 10.1 12.9 13.3 12.6
General and administrative 9.1 6.2 6.3 9.4 9.1 8.1 10.5 8.8
Goodwill amortization... 1.0 2.4 2.8 1.8 2.6 2.5 2.6 2.5
In-process research and
development, restructuring
and other ........... 10.2 5.8 4.4 18.3 -- -- -- (0.9)
---- ---- ---- ---- ---- ---- ---- ----
Total operating expenses... 55.4 50.5 46.0 62.7 48.4 49.6 56.1 54.1
---- ---- ---- ---- ---- ---- ---- ----
Operating income (loss).... 12.5 18.8 21.5 (6.0) 19.9 15.2 (0.3) 0.4
Net other income........... 1.3 0.9 0.2 .01 0.4 0.5 0.3 3.7
---- ---- ---- ---- ---- ---- ---- ----
Income (loss) before income
taxes................ 13.8 19.7 21.7 (5.9) 20.3 15.7 0.0 4.1
Income taxes............... 10.3 10.1 10.4 (2.2) 7.6 5.8 0.0 1.5
---- ---- ---- ---- ---- ---- ---- ----
Net income (loss).......... 3.5% 9.6% 11.3% (3.7%) 12.7% 9.9% 0.0% 2.6%
===== ===== ===== ====== ===== ===== ==== ====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operating activities entirely from cash
generated from operations. The Company ended 1999 with $17.9 million in cash and
cash equivalents defined as securities maturing in less than 90 days. The
Company intends to reinvest the proceeds of maturing U.S. Government securities
in similar U.S. Government securities.
In July 1997, the Company made a $2.0 million investment in Distinction
Software, Inc. ("Distinction"). This investment represents less than 20% of the
outstanding capital stock of Distinction. In November 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. In 1999, the purchase of Distinction by Peoplesoft was
completed. The Company received 161,767 shares of Peoplesoft common stock in
exchange for its investment in Distinction. During the fourth quarter of 1999,
the Company sold 150,000 shares of Peoplesoft common stock. The company has
11,767 shares remaining, these shares are classified as current assets on the
December 31, 1999 balance sheet.
The acquisition of Datastream Systems GmbH & Co. KG was completed on March
31, 1998 for $7.0 million, consisting of $4.4 million in cash and $2.6 million
(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 outstanding liabilities.
16
<PAGE>
The acquisition of Datastream -SIS PTE, Ltd. was completed on June 16,
1998 for $6.5 million, consisting of $4.6 million in cash and $1.9 million
(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 outstanding liabilities.
The acquisition of certain assets of Datastream Systems Pty Ltd was
completed on July 13, 1998 for $600,000, consisting of $300,000 in cash and
$300,000 (13,274 shares) in Common Stock issued pursuant to Regulation S.
The acquisition of Computec Sistemas S.A. and its affiliates Datastream
Systems de Mexico S.A. de C.V. was completed on September 2, 1998 for $2.6
million, consisting of $1.7 million 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 outstanding liabilities.
Subsequent to year end, in March 2000, the Company made a $2.0 million
investment in Dovebid, Inc. ("Dovebid"), one of the world's leading auctioneers
and operators of a business to business Internet auction site. This investment
represents less than 20% of the outstanding capital stock of Dovebid.
The Company's principal commitments as of December 31, 1999, consisted
primarily of long term debt assumed in its international acquisitions, and there
were no material commitments for capital expenditures. In March 2000, the
Company entered into an 10 year operating lease for approximately $1 million for
improvements to the Company's heating ventilation and air conditioning ("HVAC")
system at its Greenville, SC headquarters. 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.
In July 1999, the 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.
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 needed 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 needed to be upgraded to comply with such "Year 2000"
requirements. To address the Year 2000 issue, the Company 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. We implemented a Year 2000 plan
as described in our Form 10-Q for the quarter ended September 30, 1999.
As of December 31, 1999, the Company had implemented its Year 2000 plan.
To date, and with the January 1, 2000 date rollover, the Company has not
experienced any material disruptions associated with the Year 2000 issue and the
Company's internal systems, products, customers, or suppliers and vendors. The
Company does not expect to experience any material disruptions associated with
the Year 2000 issue in the future. As of December 31, 1999, the Company had
spent approximately $1.4 million in connection with its Year 2000 plan. Such
costs have been funded with operating cash flows and cash on hand.
17
<PAGE>
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.
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
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 and negative in impact; however, any such impact is not known
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 INTERNET-BASED PRODUCTS.
The Company's target markets are 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 asset maintenance
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.
WE FACE PRODUCT RISKS AS WE TRANSITION TO INTERNET-BASED APPLICATIONS.
Our software products may contain undetected errors or bugs when first
introduced or as new versions are released. Our software products 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.
18
<PAGE>
OUR 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
Internet-based products, our success will increasingly depend on the continued
use and development of the Internet as a tool for the transaction of business.
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 iProcure product. The success of our
iProcure initiative will depend on:
o our ability to introduce and install the iProcure product effectively
throughout our customer base;
o our ability to attract and retain high quality national and
international MRO suppliers that cover comprehensively our customers'
MRO procurement needs; and
o 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 APPLICATION SERVICE PROVIDER ("ASP") PRODUCT STRATEGY MAY REDUCE REVENUES
AND PROFITS.
Our traditional business model charges an up-front licensing fee for
access to our software applications. In contrast, our newly introduced ASP model
will be charged at a significantly lower monthly fee for rights to the same
application. We plan to move aggressively towards the adoption of this new
business model. Currently, the hosting of these applications are outsourced to a
third party. However, in the future, we may begin to host applications through
internal resources as well. Whether outsourced or hosted internally, to be
successful, the hosting application must be accessible to customers continually,
without any disruptions, which will require redundancy, high quality Internet
access, and high speed bandwidth features sufficient to host the increasing
number of customers expected to use this system. If our outsourced host, or our
internal resources, fail to provide consistent and expanding access of the
application to our customers, it would have a material adverse effect on our
business. We cannot assure you that there will not be disruptions in Internet
services beyond our control or that of our third party host. Further, we cannot
assure you that the infrastructure of the internet, or the complementary
services necessary to provide these continual and expanding services will be
adequate to meet our needs in providing our ASP service on a competitive basis.
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 IN IPROCURE IS SUBSTANTIALLY DEPENDENT ON RELATIONSHIPS WITH
SUPPLIERS OF MRO PARTS.
The success of our iProcure product is substantially dependent upon our
strategic partnerships with certain MRO parts suppliers who pay a transaction
fee for orders placed through the network. We have signed several strategic
supplier, none of which represent 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
19
<PAGE>
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.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR CONDUCTING
ELECTRONIC COMMERCE.
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. Advances
in computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of our security
systems or those of other web sites to protect proprietary information. If any
well-publicized compromises of security were to occur, it could have the effect
of substantially reducing the use of the Internet for commerce and
communications. Anyone who circumvents our security measures could
misappropriate proprietary information or cause interruptions in our services or
operations. The Internet is a public network, and data is sent over this network
from many sources. In the past, computer viruses, software programs that disable
or impair computers, have been distributed and have rapidly spread over the
Internet. Computer viruses could be introduced into our systems or those of our
customers or suppliers, which could disrupt iProcure or make it inaccessible to
customers or suppliers. We may be required to expend significant capital and
other resources to protect against the threat of security breaches or to
alleviate problems caused by breaches. To the extent that our activities may
involve the storage and transmission of proprietary information, such as credit
card numbers, security breaches, could expose us to a risk of loss or litigation
and possible liability. Our security measures may be inadequate to prevent
security breaches, and our business would be harmed if we do not prevent them.
THE MARKET FOR ASSET MAINTENANCE CONTINUES TO BE HIGHLY COMPETITIVE.
The current market for asset maintenance 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 international acquisitions. We expect to face increased competition in all
segments of the 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 we do. Also, we are likely to
experience a significant amount of competition in connection with our continued
development and release of Internet-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 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
20
<PAGE>
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 MANAGE OUR INTERNATIONAL OPERATIONS, OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
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:
o difficulty in staffing and managing an organization spread over various
countries;
o greater difficulty in safeguarding our intellectual property;
o general economic and political conditions in each country;
o foreign currency exchange rate fluctuations;
o overlap of different tax structures;
o longer accounts receivable payment cycles in certain countries;
o unexpected changes in regulatory requirements; and
o 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, European
Euros, 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-Euro
rate. 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.
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 international acquisitions
21
<PAGE>
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 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.
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.
22
<PAGE>
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. In 1999, revenue generated outside
the United States accounted for approximately 36% of total revenue. Significant
revenues (i.e., greater than 5% of total revenues) were derived in France and
The Netherlands, with the balance derived primarily from the seven remaining
countries (Germany, the United Kingdom, 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 1999, the Company deployed an average rate range forward or "collared"
hedge to protect against major fluctuations in the UK pound sterling and the
European "Euro". 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 1999. A
similar contract was deployed in the first quarter of 2000 to protect against
major fluctuations in the 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,
1999, cash denominated in foreign currencies was $5.5 million.
INTEREST RATE RISK. The Company is subject to market risk exposure related
to changes in interest rates. The Company has in place three revolving bank
credit facilities, one for $5 million which bears interest at a pre-agreed
percentage spread from LIBOR (London Interbank Rate) , the second for Dfl 1
million which bears interest at a pre-agreed spread from AIBOR (Amsterdam
Interbank Rate) and the third for SGD 1.7 million which bears interest at a
pre-agreed spread from the Singapore prime lending 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 required by this item are filed as part of this
Annual Report on pages F-1 through F-28 immediately preceding the signature page
to this Annual Report. The supplementary financial information required by this
item are filed as part of this Annual Report under the section titled "Quarterly
Results" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and on 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.
23
<PAGE>
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 13, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Larry G. Blackwell................... 59 Chairman of the Board, President and Chief Executive Officer
C. Alex Estevez...................... 29 Chief Financial Officer and Corporate Secretary
John M. Sterling, III................ 38 President of iProcure
Robert J. Baddorf.................... 50 Vice President World-Wide Operations
W. Scott Millwood.................... 36 Executive Vice President of Sales and Marketing
Richard T. Brock(1).................. 52 Director
Ira D. Cohen(2)...................... 48 Director
John M. Sterling, Jr. (1)(2)......... 61 Director
Kenneth D. Tracy(1)(2)............... 57 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 Kenneth D. Tracy, the director nominee for
the Company's Class I directorship. Dr. Tracy is proposed for election at the
Company's 2000 Annual Meeting of Stockholders (presently scheduled to be held
June 9, 2000) to serve a term expiring in the year 2003. Dr. Tracy currently
serves as a director of the Company.
KENNETH D. TRACY
AGE: 57
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. Tracy holds B.S. and Master of Science degrees in engineering from
Pennsylvania State University and a Ph.D. in Environmental Systems from Clemson
University.
BIOGRAPHICAL INFORMATION CONCERNING OTHER DIRECTORS
LARRY G. BLACKWELL
AGE: 59
CLASS III DIRECTOR - TERM EXPIRES 2002
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 is the father-in-law of
W. Scott Millwood, an executive officer of the Company.
24
<PAGE>
JOHN M. STERLING, JR.
AGE: 61
CLASS III DIRECTOR - TERM EXPIRES 2002
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. (formerly Emergent Group, Inc.) since
December 1990 and served as President of HomeGold 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 degree in Civil Engineering from The Citadel and an M.B.A. from Darden
Graduate School of Business, University of Virginia.
RICHARD T. BROCK
AGE: 52
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: 48
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 he co-founded which focuses on mergers and acquisitions
in the information technology industry. Mr. Cohen also co-founded Updata
Software, Inc., and from 1986 to 1988 served as that company's Chief Financial
Officer. Mr. Cohen is also a director of Alphanet Solutions, Inc. and several
privately held companies. 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 four meetings during fiscal 1999.
During fiscal 1999, 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 Dr. Tracy. In fiscal 1999, 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),
25
<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 1999.
COMPENSATION OF DIRECTORS. The Company's Board of Directors is comprised
of five members. In fiscal 1999, 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 2,000 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 Dr. Blackwell, C. Alex Estevez, John M.
Sterling, III, Robert J. Baddorf, and W. Scott Millwood. See "Biographical
Information Concerning Other Directors" for information about Dr. Blackwell.
C. ALEX ESTEVEZ
CHIEF FINANCIAL OFFICER
AGE: 29
Mr. Estevez was named Chief Financial Officer of the Company in April
1999. Prior to that time, he served as the Company's Director of Planning from
June 1997 to June 1998 and then as Vice President of Corporate Development until
April 1999. Prior to joining the Company, Mr. Estevez worked in the investment
banking technology group at Raymond James & Associates from September 1992
through June 1995, where he focused on technology-based mergers and acquisitions
and equity offerings, including the Company's initial public offering. From June
to August 1996, he was an associate with Deloitte & Touche LLP. Mr. Estevez
holds an A.B. degree from Harvard College and attended the J.L. Kellogg Graduate
School of Management, Northwestern University from September 1995 through May
1997, where he received a Masters of Management (M.B.A.) in Finance and
Strategy.
JOHN M. STERLING, III
PRESIDENT OF IPROCURE
AGE: 38
Mr. Sterling has served as the President of iProcure, a division of the
Company, since January of 2000. Prior to being named President of iProcure, he
served as the Company's Vice President of Electronic Commerce from February 1999
to December 1999. Prior to being named Vice President of Electronic Commerce,
Mr. Sterling served as the Company's Vice President of International from
September 1997 to January 1999, 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 1986 to
January 1997. Prior to joining Datastream, Mr. Sterling was a Regional Sales
Manager for Silicon Valley Products in San Mateo, California. 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.
ROBERT J. BADDORF
VICE PRESIDENT WORLD-WIDE OPERATIONS
AGE: 50
Mr. Baddorf has served as Vice President of World-Wide Operations for
the Company since August of 1999. In that capacity, he is responsible for all
maintenance and asset management products and services, including product
management, development, consulting, customization, conversion, integration, and
training. Prior to being named Vice President of World-Wide Operations, Mr.
Baddorf served as Vice President of Information from August 1998 to May 1999 and
Vice President of Services from June 1999 to July 1999. Prior to joining the
Company in August 1998, Mr. Baddorf was Vice President and General Manager of
the Software Products Division of DetNorske Veritas from 1990 to 1997. He also
served as Vice President, Product Management for Simulation Sciences from 1986
to 1990 and CIO of Epson America from 1984 to 1986. Prior to Epson, Mr. Baddorf
served at TRW
26
<PAGE>
in a variety of IT, Marketing, Strategy, and Financial management positions from
1967 to 1984. Mr. Baddorf holds a B.A. degree in Mathematics from the University
of California at Los Angeles and an M.B.A. in Information Systems from UCLA's
Anderson School of Management.
W. SCOTT MILLWOOD
EXECUTIVE VICE PRESIDENT OF SALES AND MARKETING
AGE: 36
Mr. Millwood has served as Executive Vice President of Sales and Marketing
since January of 2000. Prior to becoming Executive Vice President of Sales and
Marketing, Mr. Millwood served as the Company's Vice President of Operations
from October of 1998 to January 2000. Prior to becoming Vice President of
Operations, Mr. Millwood served as the Company's Vice President of Corporate
Sales from August 1995 to October 1998. Prior to joining the Company in 1995,
Mr. Millwood served as regional manager for PowerCerv Corporation, a
manufacturing ERP company and as a vertical market manager for Harbinger
Corporation. Mr. Millwood holds a B.S. in economics from Clemson University and
an M.B.A. from Georgia State University. Mr. Millwood is the son-in-law of Larry
G. Blackwell, Chairman of the Board, Chief Executive Officer and President of
the Company.
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 1999 with all applicable Section 16(a)
filing requirements.
27
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is comprised of
Messrs. Brock and Sterling (Jr.), and Dr. Tracy. During fiscal 1999, 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, Dr. 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 1999, Dr. 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, Chief Financial Officer, President of
iProcure, Vice President World-Wide Operations and Executive Vice President of
Sales and Marketing during fiscal 1999 (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 1999 $239,280(1) 30,000 $5,000(2)
Chairman, President and 1998 $173,004(1) 26,000 $5,000(2)
Chief Executive Officer 1997 $186,851(1) 34,000 $4,750(2)
C. Alex Estevez 1999 $102,996(3) 30,000 $2,090(2)
Chief Financial Officer 1998 $ 92,833(3) 15,600 $1,205(2)
and Corporate Secretary 1997 $ 57,318 55,000 ---
John M. Sterling, III 1999 $135,000(4) 30,000 $3,750(2)
President of 1998 $ 97,840(4) 23,432 $2,935(2)
iProcure 1997 $103,600(4) 34,000 $3,528(2)
Robert J. Baddorf 1999 $109,442(5) 30,000 $1,075(2)
Vice President World-Wide 1998 $ 23,199 16,200 ---
Operations 1997 --- --- ---
W. Scott Millwood 1999 $129,329(6) 30,000 $2,381(2)
Executive Vice President 1998 $134,329(6) 25,500 $2,593(2)
of Sales and Marketing 1997 $ 95,000(6) 30,000 $2,850(2)
</TABLE>
- --------------------------------------
(1) Includes $10,000 (1998: $10,000; 1997: $9,500) deferred at the election of
Dr. 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 $10,000 (1998: $3,675) deferred at the election of Mr. Estevez
pursuant to the Company's 401(k).
(4) Includes $10,000 (1998: $7,827; 1997: $8,288) deferred at the election of
Mr. Sterling pursuant to the Company's 401(k).
(5) Includes $6,451 deferred at the election of Mr. Baddorf pursuant to the
Company's 401(k).
(6) Includes $10,000 (1998: $10,000; 1997: $9,500) deferred at the election of
Mr. Millwood pursuant to the Company's 401(k).
28
<PAGE>
TABLE II - OPTION/SAR GRANTS IN FISCAL 1999
This table presents information regarding options granted to the Company's Named
Executive Officers during fiscal 1999 to purchase shares of the Company's Common
Stock. The Company has no outstanding stock appreciation rights (SARs) and
granted no SARs during fiscal 1999. In accordance with SEC rules, the table
shows the hypothetical gains or option spreads that would exist for the
respective options based on assumed rates of annual compound stock price growth
of 5% and 10% from the date the options were granted over the full option term.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------
% OF TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE
SECURITIES GRANTED TO VALUE AT ASSUMED
UNDERLYING EMPLOYEES EXERCISE OR ANNUAL RATES OF STOCK
OPTIONS IN FISCAL BASE PRICE EXPIRATION PRICE APPRECIATION
NAME GRANTED (#) YEAR ($/SHARE) DATE FOR THE OPTION TERM(1)
---- ----------- ---- --------- ---- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
5% 10%
---------- ----------
Dr. Blackwell........ 18,353(2) 1.8% $11.38 08/06/09 $131,291 $332,718
11,647(2) 1.2% $12.52 08/06/04 $ 70,070 $197,897
--------- ---- ------ --------
30,000 3.0% $201,361 $530,616
Mr. Estevez.......... 30,000(2) 3.0% $11.38 08/06/09 $214,610 $543,864
Mr. Sterling......... 30,000(2) 3.0% $11.38 08/06/09 $214,610 $543,864
Mr. Baddorf.......... 30,000(2) 3.0% $11.38 08/06/09 $214,610 $543,864
Mr. Millwood......... 30,000(2) 3.0% $11.38 08/06/09 $214,610 $543,864
</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 vests in 33% increments on the first, second, and third
anniversaries of the date of grant (August 6, 2000, 2001, and 2002).
29
<PAGE>
TABLE III - OPTION EXERCISES IN FISCAL 1999
AND FISCAL 1999 YEAR-END OPTION VALUES
The following table shows the number of options exercised during fiscal 1999 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,
1999. The table also reflects the values of such options based on the positive
spread between the exercise price of such options and $24.56, which was the
closing sales price of a share of Common Stock reported on the Nasdaq National
Market as of December 31, 1999 (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(1)
ACQUIRED ON VALUE -------------------------- -----------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Blackwell -- -- 119,760 84,240 $2,240,536 $1,308,054
Mr. Estevez -- -- 30,600 70,000 $ 505,558 $1,049,400
Mr. Sterling -- -- 127,098 60,334 $2,393,714 $ 868,610
Mr. Baddorf -- -- 6,200 40,000 $ 89,466 $ 539,700
Mr. Millwood -- -- 52,833 56,667 $ 780,685 $ 718,800
</TABLE>
(1) The value of unexercised in-the-money options at December 31, 1999 is
calculated as follows: [(Per Share Closing Sales Price on December 31, 1999)
- (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, 1999 was $24.56 per share.
30
<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 10, 2000. 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.
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
Larry G. Blackwell................. 3,561,154(1) 17.4%
C. Alex Estevez.................... 45,695(2) *
John M. Sterling, III.............. 541,403(3) 2.6%
Robert J. Baddorf.................. 398 *
W. Scott Millwood.................. 63,366(4) *
Richard T. Brock................... 20,000(5) *
Ira D. Cohen....................... 7,000(6) *
John M. Sterling, Jr............... 145,072(7) *
Kenneth D. Tracy................... 18,000(8) *
All current directors and
executive officers as a
group (8 persons)............... 4,402,088(9) 21.2%
OTHER STOCKHOLDERS
Brown Capital Management, Inc.(10) 2,036,000 10.0%
Eagle Asset Management, Inc.(11) 991,560 4.9%
- -------------------------------
(1) Includes 46,760 shares of Common Stock subject to options exercisable on or
within 60 days after March 10, 2000. Dr. Blackwell's address is that of the
Company.
(2) Includes 45,600 shares of Common Stock subject to options exercisable on or
within 60 days after March 10, 2000.
(3) Includes 134,098 shares of Common Stock subject to options exercisable on
or within 60 days after March 10, 2000.
(4) Includes 56,166 shares of Common Stock subject to options exercisable on or
within 60 days after March 10, 2000, 6,220 shares held in joint ownership
with his spouse and 980 shares held by his minor son. Mr. Millwood
disclaims beneficial ownership of the securities held by his son.
(5) Includes 16,000 shares of Common Stock subject to options exercisable on or
within 60 days after March 10, 2000.
(6) Represents 7,000 shares of Common Stock subject to options exercisable on
or within 60 days after March 10, 2000.
(7) Represents 16,000 shares of Common Stock subject to options exercisable on
or within 60 days after March 10, 2000, and 129,072 shares of Common Stock
held by Mr. Sterling's spouse.
31
<PAGE>
(8) Includes 16,000 shares of Common Stock subject to options exercisable on or
within 60 days after March 10, 2000, and 2,000 shares of Common Stock to
which Dr. Tracy shares voting and investment power with his spouse.
(9) Includes 337,624 shares of Common Stock subject to options exercisable on
or within 60 days after March 10, 2000.
(10) The business address of Brown Capital Management, Inc. is 1201 N. Calvert
Street, Baltimore, Maryland 21202. The numbers reported were derived from a
Schedule 13G executed by Brown Capital Management on February 3, 2000 and
filed with the Securities and Exchange Commission on February 10, 2000.
According to the Schedule 13G, all of the shares of the Common Stock are
owned by various investment advisory clients of Brown Capital Management,
Inc. Brown Capital Management, Inc. has both investment and voting power
over such shares. No individual client of Brown Capital Management holds
more than five percent of the class.
(11) The business address of Eagle Asset Management, Inc. is 880 Carillon
Parkway, St. Petersburg, Florida 33716. The numbers reported were derived
from a Schedule 13G executed by Eagle Asset Management on January 7, 2000
and filed with the Securities and Exchange Commission on January 10, 2000.
32
<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, 1998 and 1999.
o Consolidated Statements of Operations for the Years Ended December
31, 1997, 1998 and 1999
o Consolidated Statements of Stockholders' Equity and Comprehensive
Income (Loss) for the Years Ended December 31, 1997, 1998 and 1999.
o Consolidated Statements of Cash Flows for the Years Ended December
31, 1997, 1998 and 1999.
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).(1)
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.(1)
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.(1)
33
<PAGE>
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.(1)
10.2+ The Datastream Systems, Inc. Stock Option Plan for
Directors (as amended and restated as of April 12,
1996).(1)
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.(1)
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.(1)
10.3++ The Datastream Systems, Inc. 1998 Stock Option
Plan.(1)
10.3(a)**** First Amendment to the Datastream Systems, Inc.
1998 Stock Option Plan, dated March 12, 1999.(1)
21 Subsidiaries of the Company.
23 Consent of KPMG 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 exhibit of the same number in
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (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)
(1) Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of
this report.
(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, 1999.
34
<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, 1998 and 1999, and the related
consolidated statements of income, stockholders' equity and comprehensive income
(loss), and cash flows for each of the years in the three-year period ended
December 31, 1999. 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, 1998 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/S/ KMPG LLP
Greenville, South Carolina
February 4, 2000
F-1
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1999
<TABLE>
<CAPTION>
Assets 1998 1999
------ ------------------- -----------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 6,739,209 $ 17,912,797
Accounts receivable, net of allowance for doubtful accounts
of $3,073,837 and $3,388,719 in 1998 and 1999, respectively 32,440,963 30,221,995
Unbilled receivables 2,761,922 2,311,247
Investments 2,574,898 250,790
Prepaid expenses 1,633,227 1,392,028
Inventories 274,502 109,453
Deferred income taxes 2,322,600 1,410,000
Other assets 1,662,716 1,710,019
------------------- -----------------
Total current assets 50,410,037 55,318,329
Investments 2,034,744 4,200,000
Property and equipment, net 12,886,791 13,583,471
Goodwill, net of accumulated amortization of $3,135,004 and $6,191,464
in 1998 and 1999, respectively 18,323,801 15,073,239
Capitalized software development costs, net of accumulated
amortization of $3,180,813 in 1998 3,134,779 --
------------------- -----------------
Total assets $ 86,790,152 $ 88,175,039
=================== =================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable 3,143,893 3,919,404
Other accrued liabilities 9,768,179 7,387,417
Income taxes payable 2,762,451 120,928
Current portion of long-term debt 650,884 650,578
Unearned revenue 8,292,829 8,587,980
------------------- -----------------
Total current liabilities 24,618,236 20,666,307
Long-term debt, less current portion 297,092 224,285
Deferred income taxes 1,268,400 --
------------------- -----------------
Total liabilities 26,183,728 20,890,592
------------------- -----------------
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 and 19,674,208 shares issued and outstanding at
December 31, 1998 and 1999, respectively 191,833 196,742
Additional paid-in capital 66,138,405 70,533,683
Retained earnings (accumulated deficit) (6,675,096) 760,050
Other accumulated comprehensive income (loss) 951,282 (153,265)
Treasury stock, 405,000 shares at December 31, 1999 -- (4,052,763)
------------------- -----------------
Total stockholders' equity 60,606,424 67,284,447
------------------- -----------------
Total liabilities and stockholders' equity $ 86,790,152 $ 88,175,039
=================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
---------------- ---------------- ---------------
Revenues:
<S> <C> <C> <C>
Product $ 31,174,408 $ 38,226,287 $ 39,267,761
Professional services 26,437,697 42,621,294 56,333,517
Support 12,156,190 17,707,276 23,174,800
---------------- ---------------- ---------------
Total revenues 69,768,295 98,554,857 118,776,078
---------------- ---------------- ---------------
Cost of revenues:
Cost of product revenues 1,654,401 2,109,357 2,319,732
Cost of professional services revenue 15,160,409 22,401,797 34,718,039
Cost of support revenues 3,837,565 4,730,756 5,405,844
Amortization and write off of capitalized software 1,478,595 5,513,794 4,101,785
---------------- ---------------- ---------------
Total cost of revenues 22,130,970 34,755,704 46,545,400
---------------- ---------------- ---------------
Gross profit 47,637,325 63,799,153 72,230,678
Operating expenses:
Sales and marketing 18,616,981 25,397,349 33,694,598
Product development 4,364,234 8,174,226 14,554,565
General and administrative 7,003,761 7,644,882 10,833,236
Goodwill amortization 1,091,001 2,044,001 3,056,460
In-process research and development,
restructuring and other -- 9,990,256 (294,201)
---------------- ---------------- ---------------
Total operating expenses 31,075,977 53,250,714 61,844,658
---------------- ---------------- ---------------
Operating income 16,561,348 10,548,439 10,386,020
Other income (expense):
Interest and other income 1,220,256 668,097 1,643,668
Interest expense (233,395) (131,833) (182,323)
---------------- ---------------- ---------------
Net other income 986,861 536,264 1,461,345
---------------- ---------------- ---------------
Income before income taxes 17,548,209 11,084,703 11,847,365
Income taxes 6,110,312 6,384,198 4,412,219
---------------- ---------------- ---------------
Net income $ 11,437,897 $ 4,700,505 $ 7,435,146
================ ================ ===============
Basic net income per share $ 0.62 $ 0.25 $ 0.39
================ ================ ===============
Diluted net income per share $ 0.59 $ 0.23 $ 0.37
================ ================ ===============
Basic weighted average number of common
and potential common shares outstanding 18,396,920 18,935,092 19,118,535
================ ================ ===============
Diluted weighted average number of common
and potential common shares outstanding 19,245,948 20,279,434 20,098,519
================ ================ ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
OTHER
ACCUMULATED
ADDITIONAL RETAINED COMPREHENSIVE
COMMON PAID-IN EARNINGS INCOME
STOCK CAPITAL (DEFICIT) (LOSS)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 182,536 $ 55,756,166 $(22,813,498) $ --
Comprehensive income
Net income -- -- 11,437,897 --
Unrealized gains on securities available-for-sale -- -- -- 30,956
Foreign currency translation adjustment -- -- -- 217,275
Total comprehensive income
Exercise of stock options 3,130 2,042,457 -- --
Tax benefit of options exercised -- 113,000 -- --
Stock issued for Employee Stock Purchase Plan 189 137,589 -- --
------------ ------------ ------------ ------------
Balance at December 31, 1997 185,855 58,049,212 (11,375,601) 248,231
Comprehensive income/(loss)
Net income -- -- 4,700,505 --
Unrealized losses on securities available-for-sale -- -- -- (30,956)
Foreign currency translation adjustment -- -- -- 734,007
Total comprehensive income
Exercise of stock options 2,974 1,958,556 -- --
Tax benefit of options exercised -- 182,000 -- --
Stock issued for Employee Stock Purchase Plan 237 245,909 -- --
Stock issued in acquisitions 2,767 5,702,728 -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 191,833 66,138,405 (6,675,096) 951,282
Comprehensive income/(loss)
Net income -- -- 7,435,146 --
Unrealized gain on securities available-for-sale -- -- -- 102,622
Foreign currency translation adjustment -- -- -- (1,207,169)
Total comprehensive income
Exercise of stock options 4,536 3,568,477 -- --
Tax benefit of options exercised -- 352,000 -- --
Stock issued for Employee Stock Purchase Plan 373 349,026 -- --
Amortization of compensatory stock options -- 125,775 -- --
Acquisition of 405,000 shares -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1999 $ 196,742 $ 70,533,683 $ 760,050 $ (153,265)
============ ============ ============ ============
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
------------ ------------
Balance at December 31, 1996 $ -- $ 33,125,204
Comprehensive income
Net income -- 11,437,897
Unrealized gains on securities available-for-sale -- 30,956
Foreign currency translation adjustment -- 217,275
------------
Total comprehensive income 11,686,128
------------
Exercise of stock options -- 2,045,587
Tax benefit of options exercised -- 113,000
Stock issued for Employee Stock Purchase Plan -- 137,778
------------ ------------
Balance at December 31, 1997 -- 47,107,697
Comprehensive income/(loss)
Net income -- 4,700,505
Unrealized losses on securities available-for-sale -- (30,956)
Foreign currency translation adjustment -- 734,007
------------
Total comprehensive income 5,403,556
------------
Exercise of stock options -- 1,961,530
Tax benefit of options exercised -- 182,000
Stock issued for Employee Stock Purchase Plan -- 246,146
Stock issued in acquisitions -- 5,705,495
------------ ------------
Balance at December 31, 1998 -- 60,606,424
Comprehensive income/(loss)
Net income -- 7,435,146
Unrealized gain on securities available-for-sale -- 102,622
Foreign currency translation adjustment -- (1,207,169)
------------
Total comprehensive income 6,330,599
------------
Exercise of stock options -- 3,573,013
Tax benefit of options exercised -- 352,000
Stock issued for Employee Stock Purchase Plan -- 349,399
Amortization of compensatory stock options -- 125,775
Acquisition of 405,000 shares (4,052,763) (4,052,763)
------------ ------------
Balance at December 31, 1999 $ (4,052,763) $ 67,284,447
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
-------------- ---------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 11,437,897 $ 4,700,505 $ 7,435,146
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,285,278 3,502,000 4,566,238
Amortization of capitalized software development costs 1,478,955 1,570,250 4,101,785
Amortization of goodwill 1,091,001 2,044,001 3,056,460
Foreign currency translation adjustment 217,275 734,007 (1,207,169)
Accretion of investment discount, net (49,497) (127,516) (320)
Loss on disposal of equipment 45,037 43,540 (26,935)
Provision for doubtful accounts 754,910 1,233,927 314,882
Stock based compensation -- -- 125,775
Deferred income taxes (178,000) (522,000) (355,800)
Write-off of in-process research and development -- 3,540,008 --
Write-off of capitalized software -- 3,943,544 --
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable (10,997,521) (9,560,807) 1,904,086
Unbilled receivables (833,145) (490,547) 450,675
Prepaid expenses (27,800) (947,589) 241,199
Inventories (45,468) 223,963 165,049
Other assets 125,645 (244,381) (47,303)
Accounts payable (1,706,965) (3,639) 775,511
Other accrued liabilities (5,003,820) (1,288,596) (2,380,762)
Income taxes payable 2,186,093 (278,611) (2,289,523)
Unearned revenue 1,383,946 1,487,375 295,101
-------------- ---------------- --------------
Net cash provided by operating activities 2,163,821 9,559,434 17,124,095
-------------- ---------------- --------------
Cash flows from investing activities:
Purchase of investments (12,317,057) (767,793) (4,310,000)
Proceeds from sale and maturities of investments 13,602,714 12,627,581 4,571,794
Additions to property and equipment (3,862,735) (4,462,480) (5,041,827)
Proceeds from the sale of equipment 58,643 -- --
Capitalized software development costs (2,284,361) (3,654,731) (967,007)
Cash paid for acquisition, net of cash acquired -- (10,874,284) --
-------------- ---------------- --------------
Net cash used in investing activities (4,802,796) (7,131,707) (5,747,040)
-------------- ---------------- --------------
Cash flows from financing activities:
Proceeds from exercise of stock options 2,045,587 1,961,530 3,573,013
Proceeds for stock issuances under employee purchase plan 137,778 246,146 349,399
Cash paid to acquire treasury stock -- -- (4,052,763)
Principal payments on long-term debt (3,450,722) (811,931) (691,116)
Proceeds from issuance of net debt -- 506,350 618,000
-------------- ---------------- --------------
Net cash provided by (used in) financing activities (1,267,357) 1,902,095 (203,467)
-------------- ---------------- --------------
Net increase (decrease) in cash and cash equivalents (3,906,332) 4,329,822 11,173,588
Cash and cash equivalents at beginning of year 6,315,719 2,409,387 6,739,209
-------------- ---------------- --------------
Cash and cash equivalents at end of year $ 2,409,387 $ 6,739,209 $ 17,912,797
============== ================ ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 379,553 $ 178,113 $ 171,778
============== ================ ==============
Income taxes $ 3,806,534 $ 7,094,949 $ 7,123,200
============== ================ ==============
Supplemental disclosure of non-cash activities:
Unrealized net gain (loss) on investments available
for sale, net of income taxes $ 30,956 $ (30,956) $ 102,622
============== ================ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Datastream Systems, Inc. (the "Company" or "Datastream") is a
leading provider of Internet-based solutions for asset maintenance
and industrial procurement. The Company's asset maintenance
solutions allow businesses, government and other organizations to
optimize the productivity of high-value capital assets through
increased maintenance productivity and improved management of
assets, personnel and other resources. Datastream's
business-to-business electronic commerce industrial procurement
solutions provide companies an on-line marketplace where they can
efficiently manage the procurement of a wide range of industrial
maintenance, repair and operations ("MRO") parts. Combined, the
Company's solutions offer a complete, scaleable asset management
solution that is more unique to the market. 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.
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 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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 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.
In December 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position 98-9,
"Modifications of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions" ("SOP 98-9"), which amends SOP
97-2 and supercedes Statement of Position 98-4. SOP 98-9 requires
the recognition of revenue using the residual method with respect
to certain transactions. The Company adopted SOP 98-9 in fiscal
year 1999 and there was no material effect on the financial
position, results of operations or cash flows.
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-7 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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.
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
F-8 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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.
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 1997, 1998 and 1999, total costs
incurred (excluding amortization of capitalized software development
costs) for software development activities were $6,648,595,
$11,828,957 and $15,521,571, respectively; total capitalized
software development costs were $2,284,361, $3,654,731 and $967,007,
respectively; and amortization of capitalized costs was $1,478,955,
$1,570,250 and $4,101,785, respectively.
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. In 1998, 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).
In March 1998, the AICPA issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance
that requires capitalization of certain costs during an
internal-use software development project. Capitalizable costs
consist of (a) certain external direct costs of materials and
services incurred in developing or obtaining internal-use software,
(b) payroll and payroll-related costs for employees who are
directly associated with and who devote time to the project, and
(c) interest costs incurred. The Company adopted and applied the
provisions of SOP 98-1 in fiscal year 1999 to internal-use computer
software costs incurred during the year including those projects in
progress upon initial application of SOP 98-1.
F-9 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(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.
(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 PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net
income per share is computed by dividing net income 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.
F-10 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(O) COMPREHENSIVE INCOME
Comprehensive income consists of net income, net unrealized foreign
currency translation adjustment and net unrealized gains (losses)
on securities and is presented in the consolidated statements of
stockholders' equity and comprehensive income (loss).
(P) 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 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.
(Q) 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 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 approximately $4.4 million in cash,
approximately $2.6 million 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.
F-11 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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 approximately $4.6 million in cash,
approximately $1.9 million of common stock (88,652 shares valued at
$21.75 per share) and the assumption of net liabilities and costs
incurred. SIS is an enterprise asset maintenance solution provider 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.
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.
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 approximately $1.8
million 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 an enterprise asset maintenance solution provider based in
Argentina and Computec-Mexico is an affiliated enterprise asset
maintenance solution provider 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.
(3) IN-PROCESS RESEARCH AND DEVELOPMENT, RESTRUCTURING AND OTHER CHARGES
For the years ended December 31, 1998 and 1999, the Company recorded
in-process research and development, restructuring and other charges
(benefits) as follows:
<TABLE>
<CAPTION>
1998 1999
--------------- -----------------
<S> <C> <C>
In-process research and development $ 3,540,008 $ --
Restructuring and other charges (benefits) 6,450,248 (294,201)
--------------- -----------------
$ 9,990,256 $ (294,201)
=============== =================
</TABLE>
F-12 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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.
In 1999, the Company completed its plans to reorganize and centralize
certain functions and to discontinue certain product lines, as announced
at December 31, 1998.
As the Company implemented its restructuring plan, 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 higher costs than
originally anticipated related to the credit risks and warranty on
outstanding receivable balances in connection with product obsolescence.
F-13 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
The major components of the 1998 charges, the amounts utilized in 1999
and the remaining balance at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
ORIGINAL ADJUSTED AMOUNT REMAINING
CHARGE REALLOCATION CHARGE UTILIZED BALANCE
-------------- --------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Involuntary
terminations
related to
centralized
functions $ 2,421,000 (1,541,000) 880,000 (616,768) 263,232
Provisions for
credit risk and
warranty on
obsolete products
900,000 1,645,000 2,545,000 (2,542,548) 2,452
Costs of closing
redundant
facilities 656,000 (104,000) 552,000 (523,483) 28,517
-------------- --------------- -------------- ------------- ----------------
Total $ 3,977,000 -- 3,977,000 (3,682,799) 294,201
============== =============== ============== ============= ================
</TABLE>
The remaining balance of the reserves was recognized as a reduction to
operating expense in the fourth quarter of 1999.
(4) INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
market value of investment securities at December 31, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- -------------- -------------- --------------
December 31, 1998
-----------------
<S> <C> <C> <C> <C>
Held to maturity:
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
============= ============== ============== ==============
<CAPTION>
December 31, 1999
-----------------
<S> <C> <C> <C> <C>
Available for sale:
Equity securities 148,168 102,622 -- 250,790
Held to maturity:
State of S.C. Bonds 4,200,000 -- -- 4,200,000
------------- -------------- -------------- --------------
$ 4,348,168 102,622 -- 4,450,790
============= ============== ============== ==============
</TABLE>
F-14 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
Proceeds from the sale of investment securities available-for-sale during
1998 and 1999 were approximately $11.9 million and $4.6 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. At December 31, 1998, the investment is being accounted for
under the cost method and is included in non-current investments in the
accompanying balance sheet. During 1999, the Investee was purchased. The
Company sold shares with a carrying value of approximately $1.9 million
during 1999. The remaining shares are classified as available for sale
investments.
All available-for-sale securities will be sold in less than one year at
December 31, 1999 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.
At December 31, 1998 and 1999, 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,
1998 and 1999.
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>
1998 1999
-------------------- --------------------
<S> <C> <C>
Land $ 555,856 $ 548,304
Building 5,576,993 6,231,542
Computer equipment 13,267,271 15,459,399
Furniture and fixtures 2,552,847 2,704,463
-------------------- --------------------
21,952,967 24,943,708
Accumulated depreciation 9,066,176 11,360,237
-------------------- --------------------
$ 12,886,791 $ 13,583,471
==================== ====================
</TABLE>
F-15 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(7) OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------------------- -------------------
<S> <C> <C>
Accrued salaries and commission $ 793,089 $ 1,821,475
Sales and payroll taxes payable 3,196,224 2,380,068
Restructuring reserve 2,977,000 --
Other accrued liabilities 2,801,866 3,185,874
------------------- -------------------
$ 9,768,179 $ 7,387,417
=================== ===================
</TABLE>
(8) LONG-TERM DEBT
Long-term debt as of December 31, consists of the following:
<TABLE>
<CAPTION>
1998 1999
------------------- --------------------
<S> <C> <C>
Subordinated note payable in bi-annual payments of $123,750,
plus interest at 7% $ 124,725 --
Note payable in annual payments of $16,500, plus interest at 5.5%
through December 2001; collateralized by building
304,262 245,387
Subordinated note paid in May 1999, plus interest at 4.88%
506,350 --
Subordinated note payable due January 2000, plus interest at
4.25% -- 618,000
Subordinated note payable in annual payments of $2,837, plus
interest at 6.5% through December 2002 12,639 11,476
------------------- --------------------
947,976 874,863
Less current portion (650,884) (650,578)
------------------- --------------------
Long-term debt, less current portion $ 297,092 $ 224,285
=================== ====================
</TABLE>
The remaining annual maturities of long-term debt subsequent to December
31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 650,578
2001 218,482
2002 5,803
--------------------
Total $ 874,863
====================
</TABLE>
F-16 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(9) LINES 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 950,000 Dutch Guilders ($506,350) outstanding
under the line at December 31, 1998. There were 1,200,000 German Marks
($618,000) outstanding under the line at December 31, 1999 which is
included in the current portion of long-term debt (see footnote 8).
In addition the Company maintains lines of credit or over draft
facilities in certain locations including a Dutch guilder line for Dfl 1
million (approximately $457,000) which bears interest at a pre-agreed
percentage spread from AIBOR (Amsterdam Interbank Rate), a Singapore
dollar line for Sgd 1,712,500 (approximately $1,025,000) 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 (benefit) for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------------------- -------------------- --------------------
--------------------
<S> <C> <C> <C>
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
==================== ==================== ====================
1999:
Federal $ 3,002,073 $ (1,887,160) $ 1,114,913
State 367,900 (226,235) 141,665
Foreign 1,398,046 1,757,595 3,155,641
-------------------- -------------------- --------------------
Total $ 4,768,019 $ (355,800) $ 4,412,219
==================== ==================== ====================
</TABLE>
F-17 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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>
1997 1998 1999
------------------- ------------------- -------------------
<S> <C> <C> <C>
Computed "expected" tax expense
(benefit) $ 5,966,391 $ 3,768,799 $ 4,028,104
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net
of Federal income tax benefits 319,440 308,473 93,500
In process research and development
-- 1,282,131 --
Rate differential on foreign
source income (592,453) -- --
Effect of graduated income tax
rates 75,482 10,847 49,197
Goodwill amortization 322,364 694,960 1,039,197
Reduction in expected liability -- -- (803,207)
Other, net 19,088 318,988 5,428
------------------- ------------------- -------------------
Actual tax expense $ 6,110,312 $ 6,384,198 $ 4,412,219
=================== =================== ===================
</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>
1998 1999
-------------------- --------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 959,000 $ 1,057,000
Accrued expenses and allowances 2,322,600 1,410,000
-------------------- --------------------
Total gross deferred tax assets 3,281,600 2,467,000
Less valuation allowance (959,000) (1,057,000)
-------------------- --------------------
Net deferred tax assets $ 2,322,600 $ 1,410,000
==================== ====================
Deferred tax liabilities:
Fixed assets, principally due to differences in
depreciation 100,000 --
Software development costs capitalized for financial
reporting 1,149,400 --
Unrealized gain on marketable securities 19,000 --
-------------------- --------------------
Total gross deferred tax liabilities 1,268,400 --
-------------------- --------------------
Net deferred tax asset $ 1,054,200 $ 1,410,000
==================== ====================
</TABLE>
F-18 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
The valuation allowance for deferred tax assets as of December 31, 1998
and 1999 was $959,000 and $1,057,000, respectively, 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,
1999 will be allocated to goodwill and other noncurrent intangible
assets.
At December 31, 1999 the Company has net operating loss carryforwards for
foreign income tax purposes of approximately $2,885,000.
(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 $238,000,
$388,000 and $527,000 in 1997, 1998 and 1999, 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 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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 Options 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. On March
12, 1999, the Company's board of directors authorized an additional
750,000 shares to be added to the 500,000 share limit available under the
1998 Plan, subject to shareholder approval. The Company's stockholders
approved this increase at the Company's annual meeting of stockholders on
June 11, 1999. 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 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
Datastream Systems, Inc. 1998 German Stock Option Plan
------------------------------------------------------
On June 12, 1998, the Company's board of directors authorized the
establishment of the Datastream Systems, Inc. 1998 German Stock Option
Plan (the "German Plan") and authorized and reserved for issuance 125,000
shares of common stock for grants of stock options under the German Plan
for the employees of the Company's German subsidiary. Options granted
pursuant to the German Plan will vest incrementally over a period of one
to five 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.
Datastream Systems, Inc. 1998 Australian Stock Option Plan
----------------------------------------------------------
On December 11, 1998, the Company's board of directors authorized the
establishment of the Datastream Systems, Inc. 1998 Australian Stock
Option Plan (the "Australian Plan") and authorized and reserved for
issuance 75,000 shares of common stock for grants of stock options under
the Australian Plan for the employees of the Company's Australian
subsidiary. Options granted pursuant to the Australian Plan will vest
incrementally over a period of one to five 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.
Datastream Systems, Inc. 1999 Argentinean Stock Option Plan
-----------------------------------------------------------
On March 12, 1999, the Company's board of directors authorized the
establishment of the Datastream Systems, Inc. 1999 Argentinean Stock
Option Plan (the "Argentinean Plan") and authorized and reserved for
issuance 125,000 shares of common stock for grants of stock options under
the Argentinean Plan for the employees of the Company's Argentinean
subsidiary. Options granted pursuant to the Argentinean Plan will vest
incrementally over a period of one to five 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-21 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
A summary of activity in the plans noted above during the periods
indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE
NUMBER OF PRICE
SHARES
------------------- -------------------
Stock options outstanding:
<S> <C> <C>
Balance at December 31, 1997 2,838,372 7.50
Granted 704,218 11.76
Exercised (301,126) 6.76
Forfeited (148,566) 8.66
------------------- -------------------
Balance at December 31, 1998 3,092,898 8.30
------------------- -------------------
Granted 987,675 10.63
Exercised (456,307) 7.91
Forfeited (207,357) 9.79
------------------- -------------------
Balance at December 31, 1999 3,416,909 8.93
=================== ===================
</TABLE>
The following table summarizes information about stock options
outstanding under the plans noted above at December 31, 1999:
<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> <C>
2.28 - 4.55 400,382 3.9 380,382 3.83
4.55 - 6.83 92,942 7.3 60,720 6.38
6.83 - 9.10 1,312,107 7.8 677,493 8.00
9.10 - 11.38 1,348,072 8.2 478,656 9.71
11.38 - 13.65 177,407 8.1 90,278 12.16
13.65 - 15.93 67,499 7.8 29,674 14.83
15.93 - 18.20 8,000 8.5 3,167 17.70
18.20 - 20.48 500 8.1 500 19.25
20.48 - 22.75 10,000 8.2 3,333 22.50
--------------- --------------- ---------------- ----------------
3,416,909 7.5 1,724,203 7.88
=============== =============== ================ ================
</TABLE>
F-22 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
The per share weighted-average fair value of stock options granted under
the plans during 1998 and 1999 was $11.84 and $8.75 on the date of grant
using the Black Scholes option-pricing model with the following
weighted-average assumptions: 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; 1999 - expected dividend yield of 0%; expected
volatility of 77.42%; risk-free interest rate of 5.65%, 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) 9,000 shares of Common Stock
upon the commencement of their service as a director and (ii) 2,000
shares of Common Stock annually as of the first business day of each
fiscal year.
A summary of activity in the Directors' Plan during the periods indicated
are as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE
NUMBER OF PRICE
SHARES
------------------- -------------------
<S> <C> <C>
Stock options outstanding:
Balance at December 31, 1997 39,000 5.56
Granted 8,000 15.25
Exercised -- --
------------------- -------------------
December 31, 1998 47,000 7.21
------------------- -------------------
Granted 8,000 9.53
Exercised -- --
------------------- -------------------
Balance at December 31, 1999 55,000 7.55
=================== ===================
</TABLE>
F-23 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
The following table summarizes information about stock options
outstanding under the Director's Plan at December 31, 1999:
<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> <C>
2.28 - 4.55 27,000 5.1 27,000 3.75
6.83 - 9.10 4,000 9.3 -- --
9.10 - 11.38 16,000 7.3 12,000 9.62
13.65 - 15.93 8,000 8.0 8,000 15.25
---------------- ---------------- ---------------- ---------------
55,000 6.5 47,000 7.21
================ ================ ================ ===============
</TABLE>
The per share weighted-average fair value of stock options granted under
the Director's Plan during 1998 and 1999 was $13.54 and $7.87 on the date
of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1998 - expected dividend yield of 0%,
expected volatility of 90.77%, risk-free interest rate of 5.75%, and
expected life of 10 years; 1999 - expected dividend yield of 0%; expected
volatility of 77.42%, risk-free interest rate of 5.65%; and expected life
of 10 years.
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 23,710
and 37,227 shares in 1998 and 1999, respectively.
Under Statement No. 123, compensation expense for the Purchase Plan is
determined based on the discount percentage at which the stock is
purchased.
F-24 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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>
1998 1999
---- ----
<S> <C> <C> <C>
Net income (loss) As reported $ 4,700,505 7,435,146
Pro forma (1,592,974) (316,987)
Basic:
Net income (loss) As reported $ .25 .39
per share Pro forma (.08) (.02)
Diluted:
Net income (loss) As reported $ .23 .37
per share Pro forma (.08) (.02)
</TABLE>
Pro forma net income reflects options granted in 1995 through 1999.
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.
(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, 1999, the approximate future minimum
lease payments under noncancelable operating leases that expire at
various dates through 2004 are as follows:
2000 $ 955,512
2001 750,077
2002 533,843
2003 173,317
2004 114,211
Thereafter --
-------------------
$ 2,526,960
===================
Rent expense for the years ended December 31, 1997, 1998 and 1999 totaled
$1,367,830, $1,069,569 and $1,322,271, respectively.
F-25 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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
income) for the years ended December 31, 1997, 1998 and 1999 was
$338,957, $126,308 and $0, respectively.
(14) SEGMENT AND GEOGRAPHIC INFORMATION
The Company has identified two reportable industry segments: the asset
maintenance division provides solutions that optimize productivity of
assets through various preventative maintenance and asset management
programs ("asset maintenance") and the business-to-business electronic
commerce industrial procurement division, enables customers to automate
their industrial procurement ("iProcure"). Asset information by industry
segment is not reported, as the Company does not produce such information
internally. The Company manages the asset maintenance segment across
geographically reportable segments. The principal areas of operation
include the United States, Europe, Latin America and Asia. The iProcure
segment operates in the United States market only. Information about the
Company's operations in different segments and geographic locations is as
follows:
<TABLE>
<CAPTION>
ASSET
UNITED LATIN MAINTENANCE IPROCURE
STATES EUROPE AMERICA ASIA TOTAL TOTAL TOTAL
------------- ------------ ------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997:
Total revenues 52,298,576 17,469,719 -- -- 69,768,295 -- 69,768,295
Operating
income 11,178,505 5,382,843 -- -- 16,561,348 -- 16,561,348
Total assets 56,696,883 8,400,360 -- -- 65,097,243 -- 65,097,243
1998:
Total revenues
68,316,535 24,928,462 1,180,028 4,129,832 98,554,857 -- 98,554,857
Operating
income 10,892,830 1,804,773 (1,061,354) (1,087,810) 10,548,439 -- 10,548,439
Operating
income
before
one-time 14,997,956 7,419,595 426,964 1,637,724 24,482,239 -- 24,482,239
charges
Total assets 65,957,630 16,978,033 1,055,202 2,799,287 86,790,152 -- 86,790,152
1999:
Total revenues
80,733,793 26,267,878 5,028,733 6,587,632 118,618,036 158,042 118,776,078
Operating
income 9,232,632 3,091,766 1,143,885 488,391 13,956,674 (3,570,654) 10,386,020
(loss)
Total assets 64,955,845 15,759,880 3,042,961 4,416,353 88,175,039 -- 88,175,039
</TABLE>
F-26 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
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 $7,200,000
and $4,968,000 for the years ended December 31, 1998 and 1999.
(15) RECONCILIATION OF BASIC AND DILUTED INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
1997:
<S> <C> <C> <C>
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
=================== =================== ===================
1999:
Basic income per share $ 7,435,146 19,118,535 .39
===================
Effect of dilutive securities:
Stock options -- 979,984
------------------- -------------------
Diluted loss per share $ 7,435,146 20,098,519 .37
=================== =================== ===================
</TABLE>
F-27 (Continued)
<PAGE>
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1999
(16) COMMITMENTS AND CONTINGENCIES
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, the
Company's Chief Executive Officer and 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 the Company's
earnings and stock price by (i) taking certain one-time charges not in
accordance with generally accepted accounting principles ("GAAP") in
connection with the Company's acquisitions of Insta and SIS and (ii)
materially understating the Company's reserves for doubtful accounts in
violation of GAAP. The plaintiffs seek compensatory damages and
unspecified equitable relief. On September 13, 1999, the Company and
the individual defendants moved to dismiss the consolidated amended
complaint. The court denied the defendants' motion to dismiss on
January 27, 2000. The Company filed its answer to the consolidated
class action complaint on February 24, 2000. 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.
The Company 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.
F-28
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Datastream Systems, Inc.:
Under the date of February 4, 2000, we reported on the consolidated balance
sheets of Datastream Systems, Inc. and subsidiaries as of December 31, 1998 and
1999, and the related consolidated statements of income, stockholders' equity
and comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 1999, which are included herein. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related accompanying consolidated financial
statement schedule. 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, present fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Greenville, South Carolina
February 4, 2000
S-1
<PAGE>
Datastream Systems, Inc.
Allowance for Doubtful Accounts Receivable
<TABLE>
<CAPTION>
Balance at Provision Balance at
Beginning of for Doubtful End of
DESCRIPTION Year Accounts Deductions Year
----------------- ---------------- --------------- --------------
Allowance for doubtful accounts receivable:
<S> <C> <C> <C> <C>
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
================= ================ =============== ==============
Year ended December 31, 1999 $ 3,073,837 2,139,482 (1,824,600) 3,388,719
================= ================ =============== ==============
</TABLE>
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 income. These amounts are approximately
$215,000 for 1997 and $1.5 million in 1998. The Provision for Doubtful Accounts
for 1999 includes a $600,000 reclassification related to the 1998 Restructuring
Charge which is not reflected in the bad debt expense on the statement of
income. See note 3 to the consolidated financial statements.
S-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Datastream Systems, Inc.
Date: March 29,2000 By: /s/ Larry G. Blackwell
-------------------------
Larry G. Blackwell
Chairman of the Board,
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
on the signature page to this Registration Statement constitutes and appoints
Larry G. Blackwell and C. Alex Estevez and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits hereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and grants or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities
indicated on March 29, 2000.
SIGNATURE TITLE
/s/ Larry G. Blackwell Chairman of the Board, President
- ------------------------------- and Chief Executive Officer
Larry G. Blackwell (principal executive officer)
/s/ C. Alex Estevez Chief Financial Officer
- ------------------------------- (principal financial and accounting officer)
C. Alex Estevez
/s/ Richard T. Brock Director
- -------------------------------
Richard T. Brock
/s/ Ira D. Cohen Director
- -------------------------------
Ira D. Cohen
/s/ John M. Sterling, Jr. Director
- -------------------------------
John M. Sterling, Jr.
Director
- -------------------------------
Kenneth D. Tracy
<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).(1)
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.(1)
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.(1)
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.(1)
10.2+ The Datastream Systems, Inc. Stock Option Plan for
Directors (as amended and restated as of April 12, 1996).
(1)
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.(1)
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.(1)
10.3++ The Datastream Systems, Inc. 1998 Stock Option Plan.(1)
10.3(a)**** First Amendment to the Datastream Systems, Inc. 1998 Stock
Option Plan, dated March 12, 1999.(1)
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
24 Power of Attorney (included on signature page hereto).
27 Financial Data Schedule.
- ---------------
<PAGE>
* 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 exhibit of the same number in
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (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)
(1) Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of
this report.
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE COMPANY
o iProcure, Inc.
o Datastream Systems International, Inc.
o Datastream FSC, Inc.
o SQL Systems Group, B.V.
o Datastream Systems, BV
o Datastream Systems (UK), Ltd.
o Datastream, SA
o SQL System Participates, BV
o SQL Systems Deutschland, GmbH
o Datastream Systems, GmbH
o Datastream Insta Holding GmbH
o Datastream Systems GmbH & Co. KG
o Asystum Participations, BV
o Datastream Systems Ireland Ltd.
o Sikasso Pte Ltd.
o Datastream-SIS Pte Ltd.
o Datastream Systems Pty Ltd.
o Computec Sistemas S.A.
o Datastream Systems de Mexico S.A. de C.V.
o Datastream Servicios Mexicanos, S. de R.L. de C.V.
o Datastream Systems do Brasil Ltda.
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, 2000, relating
to the consolidated balance sheets of Datastream Systems, Inc. and subsidiaries
as of December 31, 1998 and 1999, and the related consolidated statements of
income, stockholders' equity and comprehensive income (loss), and cash flows for
each of the years in the three-year period ended December 31, 1999, and related
schedule, which reports are incorporated by reference or appear in the December
31, 1999 annual report on Form 10-K of Datastream Systems, Inc.
/s/ KPMG LLP
Greenville, South Carolina
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statements of income for the twelve months ended December 31, 1999
and the consolidated balance sheet as of December 31, 1999 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 17,912,797
<SECURITIES> 250,790
<RECEIVABLES> 30,221,995
<ALLOWANCES> (3,388,719)
<INVENTORY> 109,453
<CURRENT-ASSETS> 55,318,329
<PP&E> 24,943,708
<DEPRECIATION> (11,360,237)
<TOTAL-ASSETS> 88,175,039
<CURRENT-LIABILITIES> 20,666,307
<BONDS> 224,285
0
0
<COMMON> 196,742
<OTHER-SE> 67,087,705
<TOTAL-LIABILITY-AND-EQUITY> 88,175,039
<SALES> 39,267,761
<TOTAL-REVENUES> 118,776,078
<CGS> 2,319,732
<TOTAL-COSTS> 46,545,400
<OTHER-EXPENSES> 61,844,658
<LOSS-PROVISION> 2,139,482
<INTEREST-EXPENSE> 182,323
<INCOME-PRETAX> 11,847,365
<INCOME-TAX> 4,412,219
<INCOME-CONTINUING> 7,435,146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,435,146
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.37
</TABLE>
