SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
(Mark One)
__X__ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to_______________
COMMISSION FILE NUMBER: 000-25590
DATASTREAM SYSTEMS, INC.
Incorporated pursuant to the laws of the State of Delaware
-------------------------------------------
Internal Revenue Service -- Employer Identification No. 57-0813674
50 DATASTREAM PLAZA, GREENVILLE, SC 29605
(864) 422-5001
-------------------------------------------
NOT APPLICABLE
(Former Name, Former Address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes _X_ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of the issuer's common stock as of the latest
practicable date: September 30, 2000 20,134,576 shares, $0.01 par
value.
<PAGE>
Datastream Systems, Inc.
FORM 10-Q
Quarter ended September 30, 2000
Index
Page No.
Part I. Consolidated Financial Information
"Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995 3
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets-
December 31, 1999 and September 30, 2000
Assets 4
Liabilities and Stockholders' Equity 5
Consolidated Statements of Operations -
for the Three Months ended
September 30, 1999 and 2000 6
Consolidated Statements of Operations -
for the Nine Months ended
September 30, 1999 and 2000 7
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income (Loss) -
for the Nine Months ended September 30, 2000 8
Consolidated Statements of Cash Flows -
for the Nine Months ended September 30, 1999 and 2000 9
Notes to the Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About 16
Market Risk
Part II. Other Information 17
Signature 18
<PAGE>
PART I. CONSOLIDATED FINANCIAL INFORMATION
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Datastream Systems, Inc. ("Datastream" or the
"Company") makes oral and written statements that may constitute
"forward looking statements" (rather than historical facts) as
defined in the Private Securities Litigation Reform Act of 1995 (the
"Act") or by the 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 Quarterly Report on Form 10-Q (the
"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 sell larger and more complex software solutions; 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; the Company's 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 the Company's Form 10-K for the fiscal year ended December
31, 1999, 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.
<PAGE>
ITEM 1. Consolidated Financial Statements
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(unaudited)
Assets
December 31, September 30,
1999 2000
---- ----
Current assets:
Cash and cash equivalents $17,912,797 $13,361,935
Accounts receivable, net of allowance
for doubtful accounts of
$3,388,719 and $ 3,193,521, respectively 30,221,995 22,764,262
Unbilled receivables 2,311,247 2,456,282
Investments 250,790 160
Prepaid expenses 1,392,028 1,884,195
Inventories 109,453 53,665
Income tax receivable - 11,596,330
Deferred income taxes 1,410,000 1,410,000
Other assets 1,710,019 1,160,577
----------- -----------
Total current assets 55,318,329 54,687,406
Investments 4,200,000 2,000,000
Property and equipment, net 13,583,471 14,802,927
Goodwill, net 15,073,239 12,806,993
Other long term assets - 412,500
----------- -----------
Total assets $88,175,039 $84,709,826
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
(unaudited)
Liabilities and Stockholders' Equity
December 31, September 30,
1999 2000
---- ----
Current liabilities:
Accounts payable $ 3,919,404 $ 3,248,904
Other accrued liabilities 7,387,417 11,660,234
Income taxes payable 120,928 -
Current portion of long-term debt 650,578 -
Unearned revenue 8,587,980 9,739,756
----------- -----------
Total current liabilities 20,666,307 24,648,894
Long-term debt, less current portion 224,285 222,430
----------- -----------
Total liabilities 20,890,592 24,871,324
Stockholders' equity:
Preferred stock, $1 par value,
1,000,000 shares authorized; none issued - -
Common stock, $.01 par value,
40,000,000 shares authorized;
19,674,208 shares issued
at December 31, 1999,
20,539,576 shares issued
at September 30, 2000 196,742 205,396
Additional paid-in capital 70,533,683 79,048,270
Retained earnings (deficit) 760,050 (14,335,229)
Other accumulated comprehensive (loss) (153,265) (1,027,172)
Treasury stock, 405,000 shares at cost (4,052,763) (4,052,763)
----------- -----------
Total stockholders' equity 67,284,447 59,838,502
----------- -----------
Total liabilities and stockholders' equity $88,175,039 $84,709,826
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three months ended September 30, 1999 and 2000
September 30, September 30,
1999 2000
---- ----
Revenues:
Product $ 8,420,398 $ 7,745,758
Professional service 14,958,040 11,054,268
Support 5,856,972 5,616,873
----------- -----------
Total revenues 29,235,410 24,416,899
Cost of revenues:
Cost of product revenues 495,067 548,898
Cost of professional service revenues 9,587,786 7,805,348
Cost of support revenues 1,393,936 1,672,529
Amortization of capitalized software 1,439,943 -
----------- -----------
Total cost of revenues 12,916,732 10,026,775
Gross profit 16,318,678 14,390,124
Operating expenses:
Sales and marketing 8,676,118 10,374,715
Product development 3,912,895 3,733,767
General and administrative 3,060,840 3,384,588
Amortization of goodwill 764,115 755,416
----------- -----------
Total operating expenses 16,413,968 18,248,486
Operating income (loss) (95,290) (3,858,362)
Other income (expense):
Interest and other income 142,020 159,274
Interest expense (39,997) (15,801)
Other expense - (4,703,423)
----------- -----------
Net other income (expense) 102,023 (4,559,950)
----------- -----------
Income (loss) before income taxes 6,733 (8,418,312)
Income tax expense (benefit) 2,490 (2,650,206)
----------- -----------
Net income (loss) $ 4,243 $ (5,768,106)
=========== ===========
Basic net income (loss) per share $ .00 $ (.29)
----------- -----------
Diluted net income (loss) per share $ .00 $ (.29)
----------- -----------
Basic weighted average number of common and
potential common shares outstanding 19,007,096 20,113,107
Diluted weighted average number of common and
potential common shares outstanding 20,229,085 20,113,107
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Nine months ended September 30, 1999 and 2000
September 30, September 30,
1999 2000
---- ----
Revenues:
Product $ 29,437,519 $ 20,873,375
Professional service 42,313,355 34,295,181
Support 16,827,390 17,510,286
----------- -----------
Total revenues 88,578,264 72,678,842
Cost of revenues:
Cost of product revenues 1,560,932 1,578,828
Cost of professional service revenues 24,459,559 25,749,868
Cost of support revenues 3,992,749 5,051,829
Amortization of capitalized software 2,788,979 -
----------- -----------
Total cost of revenues 32,802,219 32,380,525
Gross profit 55,776,045 40,298,317
Operating expenses:
Sales and marketing 24,304,616 34,259,520
Product development 10,754,522 12,705,809
General and administrative 8,167,647 9,819,850
Amortization of goodwill 2,292,345 2,266,246
----------- -----------
Total operating expenses 45,519,130 59,051,425
Operating income (loss) 10,256,915 (18,753,108)
Other income (expense):
Interest and other income 484,376 634,234
Interest expense (121,965) (58,553)
Other expense - (4,703,423)
----------- -----------
Net other income (expense) 362,411 (4,127,742)
----------- -----------
Income (loss) before income taxes 10,619,326 (22,880,850)
Income tax expense (benefit) 3,958,103 (7,785,571)
----------- -----------
Net income (loss) $ 6,661,223 $(15,095,279)
=========== ===========
Basic net income (loss) per share $ .35 $ (.76)
----------- -----------
Diluted net income (loss) per share $ .33 $ (.76)
----------- -----------
Basic weighted average number of common and
potential common shares outstanding 19,075,539 19,930,262
Diluted weighted average number of common and
potential common shares outstanding 19,969,495 19,930,262
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity and Comprehensive Income(Loss)
(unaudited)
For the nine months ended September 30, 2000
<CAPTION>
Other
Additional Accumulated Accumulated Total
Common Paid-In Earnings Comprehensive Treasury Stockholders'
Stock Capital (Deficit) (Loss) Stock Equity
----- ------- --------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $196,742 $70,533,683 $ 760,050 $ (153,265) $(4,052,763) $67,284,447
Comprehensive (loss)
Net loss - - (15,095,279) - - (15,095,279)
Unrealized losses on
securities available for sale - - - (102,622) - (102,622)
Foreign currency
translation adjustment - - - (771,285) - (771,285)
----------
Total comprehensive loss (15,969,186)
----------
Exercise of stock options 8,259 6,013,012 - - - 6,021,271
Tax benefit of options exercised - 1,851,000 - - - 1,851,000
Stock issued for Employee
Stock Purchase Plan 395 472,349 - - - 472,744
Amortization of compensatory
stock options - 178,226 - - - 178,226
-------- ----------- ----------- --------- ----------- -----------
Balance at September 30, 2000 $205,396 $79,048,270 $(14,335,229) $(1,027,172) $(4,052,763) $59,838,502
======== =========== =========== ========= =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended September 30, 1999 and 2000
September 30, September 30,
1999 2000
---- ----
Cash flows from operating activities:
Net income (loss) $ 6,661,223 $(15,095,279)
Adjustments to reconcile
net income (loss) to net cash
provided by (used in)operating activities:
Depreciation 3,383,373 3,945,926
Amortization of capitalized
software development costs 2,788,979 -
Goodwill amortization 2,292,345 2,266,246
Other amortization - 137,500
Amortization of compensatory stock options 83,850 178,226
Other accumulated comprehensive (loss) (269,004) (771,285)
Accretion of investment discount, net (320) -
Gain on disposal of fixed assets (26,985) -
Provision for doubtful accounts 1,039,500 (206,698)
Deferred income taxes (416,800) -
Changes in operating assets and liabilities:
Accounts receivable (910,777) 7,652,932
Unbilled receivable 87,703 (133,535)
Accrued interest receivable 23,889 19,362
Prepaid expenses (146,614) (492,167)
Inventories 185,052 55,788
Other assets 51,430 530,079
Accounts payable 1,572,818 (670,500)
Other accrued liabilities (2,336,834) 4,272,817
Income taxes payable/receivable (1,539,013) (9,866,258)
Unearned revenue (116,436) 1,151,776
---------- ----------
Net cash provided by (used in)
operating activities 12,407,379 (7,025,070)
---------- ----------
Cash flows from investing activities:
Purchase of investments (4,310,000) (2,000,000)
Proceeds from sale and maturities of investments 2,655,058 4,348,008
Additions to property and equipment (3,693,366) (5,165,382)
Purchase of customer list - (550,000)
Capitalized software development costs (967,007) -
---------- ----------
Net cash used in investing activities (6,315,315) (3,367,374)
---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options 2,213,280 6,021,271
Proceeds from issuances of shares under employee
stock purchase plan 349,398 472,744
Cash paid to acquire treasury stock (4,052,763) -
Principal payments on long-term debt (667,459) (652,433)
---------- ----------
Net cash provided by (used in)
financing activities (2,157,544) 5,841,582
---------- ----------
Net increase (decrease) in cash and cash equivalents 3,934,520 (4,550,862)
Cash and cash equivalents at beginning of period 6,739,209 17,912,797
---------- ----------
Cash and cash equivalents at end of period $ 10,673,729 $ 13,361,935
============ =============
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1) Summary of Significant Accounting Policies
A. Organization and Basis of Presentation
Datastream Systems, Inc. (the "Company" or "Datastream") is a leading provider
of Internet-based solutions for asset maintenance and industrial procurement.
The Company's asset maintenance solutions allow businesses, governments 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 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
Argentina, Australia, Brazil, Canada, Chile, China, Denmark, France, Germany,
Indonesia, Ireland, Japan, Malaysia, Mexico, The Netherlands, Norway, Peru,
Portugal, Singapore, South Africa, Sweden, the United Kingdom and Venezuela.
The interim financial information included herein is unaudited. Certain
information and footnote disclosures normally included in the financial
statements have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC), although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. In the opinion of management, such unaudited information reflects
all adjustments, consisting only of normal recurring accruals and other
adjustments as disclosed herein, necessary for a fair presentation of the
unaudited information. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's Form 10-K for the year ended December 31, 1999 filed
with the SEC on March 30, 2000. Other than as indicated herein, there have been
no significant changes from the financial data published in those reports.
Results for interim periods are not necessarily indicative of results expected
for the full year.
B. Accounting Policies
Revenue Recognition
The Company's revenue, which consists primarily of fees for product sales,
professional services and support, is recognized in accordance with AICPA
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition". 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.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted net income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common and potential dilutive common shares outstanding.
Diluted weighted average common and potential dilutive common shares include
common shares and stock options using the treasury stock method, except when
those shares result in antidilution. The reconciliation of basic and diluted
income per share is as follows:
<PAGE>
For the three months ended September 30, 2000 and 1999
Per Share
Income(Loss) Shares Amount
Three months ended September 30, 2000:
Basic income (loss) per share $ (5,768,106) 20,113,107 (.29)
Effect of dilutive securities:
Stock options - -
----------- ----------
Diluted income(loss) per share $ (5,768,106) 20,113,107 (.29)
============ ========== ====
Three months ended September 30, 1999:
Basic income per share $ 4,243 19,007,096 .00
Effect of dilutive securities:
Stock options - 1,221,989
----------- ----------
Diluted income per share $ 4,243 20,229,085 .00
============ ========== ===
For the nine months ended September 30, 2000 and 1999
Per Share
Income(Loss) Shares Amount
Nine months ended September 30, 2000:
Basic income (loss) per share $(15,095,279) 19,930,262 (.76)
Effect of dilutive securities:
Stock options - -
----------- ----------
Diluted income(loss) per share $(15,095,279) 19,930,262 (.76)
============ ========== ===
Nine months ended September 30, 1999:
Basic income per share $ 6,661,223 19,075,539 .35
Effect of dilutive securities
Stock options - 893,956
----------- ----------
Diluted income per share $ 6,661,223 19,969,495 .33
============ ========== ===
C. Restructuring Charges
In 1998, the Company determined that it was necessary to aggressively migrate
its current and future products to a new web-based technology platform and
developed a plan to restructure certain of its operations in response to
increased competition and rapidly changing technology. The restructuring plan
required the discontinuance of certain internally developed and acquired
products and the reorganization of the Company's product development and
distribution structures domestically and internationally to improve efficiencies
and customer service and eliminate redundancy. As a result, the Company recorded
a restructuring charge at December 31, 1998 of $3,977,000 and established
certain reserves for the costs. The restructuring was completed and the reserves
fully utilized as of December 31, 1999; therefore there are no restructuring
costs in 2000.
As of September 30, 1999, approximately $1,595,000 of the restructuring accruals
were utilized as follows: $359,000 for severance and related costs, $478,000 for
costs of closing redundant facilities and $758,000 for provisions for increased
credit risks.
D. Other Expense
During the third quarter of 2000, the Company reached a settlement agreement in
its class action shareholder lawsuit (see footnote (G) of Notes to Consolidated
Financial Statements) resulting in a charge for the settlement and the
associated legal fees, net of insurance benefit. Additionally, during the third
quarter of 2000, the Company reached agreement, subject to the execution of a
final settlement agreement, to settle an escrow dispute related to its 1996
acquisition of SQL Systems. The settlement calls for the issuance of 70,000
shares of Datastream Systems, Inc. common stock. Finally, the Company recorded
other non-operating expenses primarily related to realized foreign exchange
losses and non-operating professional fees.
<PAGE>
E. Geographical and Segment Information
The Company operates principally in one business segment, which includes the
development, marketing and selling and supporting of Internet-based solutions
for asset maintenance and industrial procurement. Prior to the third quarter of
2000, the Company had identified two reportable industry segments: the asset
maintenance division ("asset maintenance") and the industrial procurement
division ("iProcure"). As reported in the Company's Form 10-Q for the period
ending June 30, 2000, beginning in the third quarter of 2000, the company merged
its two business segments and began operating, managing and reporting the
segments as one business, asset maintenance. 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.
Information about the Company's operations in different geographic locations is
as follows:
<TABLE>
For the three months ended September 30, 1999 and 2000:
<CAPTION>
United Latin
States Europe America Asia Total
<S> <C> <C> <C> <C> <C>
September 30, 1999:
Total revenues $20,658,978 $ 5,791,067 $ 1,506,565 $ 1,278,800 $29,235,410
Operating income (loss) (1,074,470) 612,578 371,211 (4,609) (95,290)
Total assets 66,989,955 15,845,788 1,973,789 3,151,295 87,960,827
September 30, 2000:
Total revenues 16,880,905 4,546,985 1,931,018 1,057,991 24,416,899
Operating income (loss) (3,668,803) (105,536) 226,299 (310,322) (3,858,362)
Total assets 66,469,382 11,151,870 3,177,183 3,911,391 84,709,826
For the nine months ended September 30, 1999 and 2000:
<CAPTION>
United Latin
States Europe America Asia Total
<S> <C> <C> <C> <C> <C>
September 30, 1999:
Total revenues $60,981,944 $19,696,248 $ 4,057,486 $ 3,842,586 $88,578,264
Operating income (loss) 3,871,926 4,754,195 994,621 636,173 10,256,915
Total assets 66,989,955 15,845,788 1,973,789 3,151,295 87,960,827
September 30, 2000:
Total revenues 49,054,262 15,125,769 4,889,186 3,609,625 72,678,842
Operating income (loss) (18,318,828) (483,188) 745,210 (696,302) (18,753,108)
Total assets 66,469,382 11,151,870 3,177,183 3,911,391 84,709,826
</TABLE>
F. 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. In June 2000, the FASB issued Statement of
Financial Accounting Standards No. 138 "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No.
133"(Statement No. 138). Statement No. 138 proposed changes intended to simplify
the accounting required under Statement No. 133. The Company has not yet
assessed the impact this standard will have on its financial condition or
results of operations at the time of adoption; however, the impact will
ultimately depend on the amount and type of derivative instruments held at the
time of adoption, if any.
<PAGE>
G. Commitments and Contingencies
On January 11, 1999, a class action lawsuit was filed in the United States
District Court for the District of South Carolina, Greenville Division, against
the Company, its Chief Executive Officer and its former Chief Financial Officer,
alleging violations of federal securities laws and seeking unspecified damages.
During the third quarter of 2000, the parties reached an agreement, which is
subject to final approval by the court, that would operate as a complete
settlement of the claims made against the Company and the individual defendants.
The principal financial terms of the agreement call for a payment to the
plaintiffs, for the benefit of the class, of a total of $5 million in a
combination of $3.75 million in cash and $1.25 million in shares of the
Company's common stock. The Company's insurance carrier will fund $2.4 million
of the settlement. The parties have taken steps to secure final court approval
of the settlement and the court has scheduled a hearing on the proposed
settlement of the action. The court has also approved the form of notice to be
mailed to the affected class members by the attorneys for the plaintiffs. This
legal proceeding was reported in the Company's Form 10-K for the year ended
December 31, 1999 and Forms 10-Q for the period ending March 31, 2000 and the
period ending June 30, 2000.
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.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Report contains certain forward-looking statements with respect to the
Company's operations, industry, financial condition and liquidity. These
statements reflect the Company's assessment of a number of risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
factors set forth in this Report. An additional statement made pursuant to the
Private Securities Litigation Reform Act of 1995 and summarizing certain of the
principal risks and uncertainties inherent in the Company's business is included
in Part I of this Report under the caption "'Safe Harbor' Statement Under the
Private Securities Litigation Reform Act of 1995". Readers of this Report are
encouraged to read such statement carefully.
Overview
Datastream is a leading provider of Internet-based solutions for asset
management and industrial procurement for businesses, governments and other
organizations. Datastream's asset maintenance solutions optimize productivity of
assets through various preventative maintenance and asset management programs.
The Company's industrial procurement solutions enable customers to automate
their industrial procurement resulting in reduced costs of maintaining assets.
The Company's products include 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 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 organizations 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 an Internet
procurement application that enables customers to automate their industrial
procurement. Datastream supports its products with professional and support
services.
Results of Operations
Total Revenues. The Company reported lower revenues for the third quarter
of 2000. Total revenues decreased 16% to $24,416,899 in the third quarter of
2000 from $29,235,410 in the third quarter of 1999, due to lower than expected
product revenues and a related decrease in services revenue. Total revenues
decreased 18% to $72,678,842 during the first nine months of 2000 from
$88,578,264 in the first nine months of 1999.
Product revenues decreased 8% to $7,745,758 (32% of total revenues) in the
third quarter of 2000 from $8,420,398 (29% of total revenues) in the third
quarter of 1999, as a result of changes within the sales organization causing a
disruption in license sales. Product revenues decreased 29% to $20,873,375 (29%
of total revenues) in the first nine months of 2000 from $29,437,519 (33% of
total revenues) in the first nine months of 1999.
Professional service revenues decreased 26% to $11,054,268 (45% of total
revenues) in the third quarter of 2000 from $14,958,040 (51% of total revenues)
in the third quarter of 1999. The decrease is a result of decreased software
license sales in 2000. Professional service revenues decreased 19% to
$34,295,181 (47% of total revenues) in the first nine months of 2000 from
$42,313,355 (48% of total revenues) in the first nine months of 1999.
Support services revenues for the third quarter of 2000 decreased 4% to
$5,616,873 (23% of total revenues) from $5,856,972 (20% of total revenues) in
the third quarter of 1999, primarily due to decreased software license sales in
2000. Support services revenues increased 4% to $17,510,286 (24% of total
revenues) in the first nine months of 1999 from $16,827,390 (19% of total
revenues) in the first nine months of 1999.
Cost of Revenues. Cost of revenues decreased 22% to $10,026,775 (41% of
total revenues) in the third quarter of 2000, as compared to $12,916,732 (44% of
total revenues) in the comparable quarter of 1999. The decrease in cost of
revenues is due to no amortization expense for capitalized software costs in
2000 and cost savings realized by the Professional Services Department due to
merging the Company's business segments. Cost of revenues decreased 1% to
$32,380,525 (45% of total revenues) during the first nine months of 2000 from
$32,802,219 (37% of total revenues) in the first nine months of 1999.
Cost of product revenues was 2% of total revenues in the third quarter of
2000 and first nine months of 2000 and 2% of total revenues during the same
periods in 1999.
Cost of professional service revenues was 32% of total revenues during the
third quarter of 2000, and 33% of total revenues during the same period in 1999.
Cost of professional services revenues was 35% for the first nine months of 2000
and 28% in the first nine months of 1999. The increase as a percentage of total
revenues for the first nine months was due to decreased revenues, lower
utilization rates and increased costs for iProcure.
Cost of support service revenues was 7% of total revenues during the third
quarter of 2000 and 5% of total revenues during the same period in 1999. The
increase as a percentage of total revenues was due to decreased revenues and
increased costs incurred in establishing a European support center. Cost of
support service revenues was 7% of total revenues during the first nine months
of 2000 and 5% of total revenues during the same period in 1999.
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Amortization of capitalized software costs was $1,439,943 (5% of total
revenues) in the third quarter of 1999 and $2,788,979 (3% of total revenues) for
the first nine months of 1999. No amortization expense was recorded in 2000 due
to capitalized software costs being fully amortized as of December 31, 1999.
Sales and Marketing Expenses. Sales and marketing expenses increased 20% to
$10,374,715 (42% of total revenues) during the third quarter of 2000 from
$8,676,118 (30% of total revenues) during the third quarter of 1999, as a result
of an increased number of sales personnel and increased sales and marketing
expenditures for new products, including iProcure. Sales and marketing expenses
increased 41% to $34,259,520 (47% of total revenues) in the first nine months of
2000 from $24,304,616 (27% of total revenues) in the first nine months of 1999.
Product Development Expenses. Total product development expenditures
decreased 5% to $3,733,767 (15% of total revenues) during the third quarter of
2000 from $ 3,912,895 (13% of total revenues) during the same period in 1999.
There was no capitalized portion of these expenses in 2000. The decrease in
total product development expense resulted from cost savings realized during the
third quarter of 2000 upon consolidation of the Company's business segments.
Total product development expenditures increased 18% to $12,705,809 (17% of
total revenues) during the first nine months of 2000 from $10,754,522 (12% of
total revenues) during the same period in 1999. There was no capitalized portion
of these amounts in the first nine months of 2000 as compared to $967,007 in the
first nine months of 1999.
General and Administrative Expenses. General and administrative expenses
increased 11% to $3,384,588 (14% of total revenues) during the third quarter of
2000 from $3,060,840 (11% of total revenues) in the third quarter of 1999, due
to costs associated with managing the iProcure product and costs related to an
increased international infrastructure costs. General and administrative
expenses increased 20% to $9,819,850 (14% of total revenues) during the first
nine months of 2000 from $8,167,647 (9% of total revenues) during the first nine
months of 1999.
Amortization of Goodwill. Amortization of goodwill expense decreased 1% to
$755,416 (3% of total revenues) during the third quarter of 2000 from $764,115
(3% of total revenues) in the third quarter of 1999, due to adjustments made to
goodwill balances in 1999. Amortization of goodwill expense decreased 1% to
$2,266,246 (3% of total revenues) during the first nine months of 2000 from
$2,292,345 (3% of total revenues) in the first nine months of 1999.
Interest and other income. Interest and other income increased to $159,274
in the third quarter of 2000 from $142,020 in the third quarter of 1999.
Interest and other income increased to $634,234 in the first nine months of 2000
from $484,376 in the first nine months of 1999. The increase was due to
increased investment income resulting from increased cash and investment
balances.
Interest Expense. Interest expense decreased to $15,801 in the third
quarter of 2000 from $39,997 in the third quarter of 1999 due to lower third
party debt balances. Interest expense decreased to $58,553 in the first nine
months of 2000 from $121,965 in the first nine months of 1999.
Other Expense. Other expense recorded in the third quarter consists of
primarily of costs incurred to settle the Company's class action lawsuit and to
settle the escrow claims dispute with the former shareholders of SQL Systems.
See footnote (D) of the Notes to the Consolidated Financial Statements.
Tax Rate. The Company's effective tax rate was 31% for the third quarter of
2000 as compared to 37% for the third quarter of 1999. The Company's effective
tax rate was 34% for the first nine months of 2000 as compared to 37% for the
first nine months of 1999. The decrease in the effective tax rate is due to the
impact of the company's permanent book/tax differences when considering the
operating losses in 2000.
Net Income (loss). Net income (loss) decreased to $(5,768,106) ((24%) of
total revenues) in the third quarter of 2000 from $4,243 (0% of total revenues)
in the third quarter of 2000. The decrease is attributed to lower than expect
sales and legal and professional fees incurred in settlement agreements. Net
income decreased to $(15,095,279) ((21%) of total revenues) in the first nine
months of 2000 from $6,661,223 (8% of total revenues) in the first nine months
of 1999.
Liquidity and Capital Resources
The Company has funded its operating activities primarily from cash
generated from operations in 1999. The Company ended its third quarter of 2000
with $13,361,935 in cash and cash equivalents defined as securities maturing in
less than 90 days.
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. The investment is accounted for on a cost
basis.
The Company's principal commitments as of September 30, 2000, consisted
primarily of long term debt and there were no material commitments for capital
expenditures. The Company believes that its current cash balances, availability
under its line of credit and cash flow from operations will be sufficient to
meet its working capital and capital expenditure needs for the next 12 months.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company did not experience any material changes in market
risk in the third quarter of 2000.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 11, 1999, a class action lawsuit was filed in the United States
District Court for the District of South Carolina, Greenville Division, against
the Company, its Chief Executive Officer and its former Chief Financial Officer,
alleging violations of federal securities laws and seeking unspecified damages.
During the third quarter of 2000, the parties reached an agreement, which is
subject to final approval by the court, that would operate as a complete
settlement of the claims made against the Company and the individual defendants.
The principal financial terms of the agreement call for a payment to the
plaintiffs, for the benefit of the class, of a total of $5 million in a
combination of $3.75 million in cash and $1.25 million in shares of the
Company's common stock. The Company's insurance carrier will fund $2.4 million
of the settlement. The parties have taken steps to secure final court approval
of the settlement and the court has scheduled a hearing on the proposed
settlement of the action. The court has also approved the form of notice to be
mailed to the affected class members by the attorneys for the plaintiffs. This
legal proceeding was reported in the Company's Form 10-K for the year ended
December 31, 1999 and Forms 10-Q for the period ending March 31, 2000 and the
period ending June 30, 2000.
Datastream is occasionally involved in other claims arising out of its
operations in the normal course of business, none of which are expected,
individually or in the aggregate, to have a material adverse affect on the
Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Stockholders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Datastream Systems, Inc.
/s/ C. Alex Estevez
Date: 11/13/00 ______________________
C. Alex Estevez
Chief Financial Officer (principal
financial and accounting officer)
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EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
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