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 June 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: June 30, 2000 20,080,584 shares, $0.01 par value.
<PAGE>
Datastream Systems, Inc.
FORM 10-Q
Quarter ended June 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 June 30, 2000
Assets 4
Liabilities and Stockholders' Equity 5
Consolidated Statements of Operations -
for the Three Months ended June 30, 1999 and 2000 6
Consolidated Statements of Operations -
for the Six Months ended June 30, 1999 and 2000 7
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Income -
for the Six Months ended June 30, 2000 8
Consolidated Statements of Cash Flows -
for the Six Months ended June 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 17
Market Risk
Part II. Other Information 18
Signature 19
<PAGE>
PART I. CONSOLIDATED FINANCIAL INFORMATION
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Datastream Systems, Inc. ("Datastream" or the "Company")
makes oral and written statements that may constitute "forward looking
statements" (rather than historical facts) as defined in the Private Securities
Litigation Reform Act of 1995 (the "Act") or by the 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 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 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
Assets
December 31, June 30,
1999 2000
---- ----
(unaudited)
Current assets:
Cash and cash equivalents $17,912,797 $13,411,460
Accounts receivable, net of allowance
for doubtful accounts
of $3,388,719 and $ 3,191,893,
respectively 30,221,995 23,625,533
Unbilled receivables 2,311,247 2,672,959
Investments 250,790 160
Prepaid expenses 1,392,028 2,059,772
Inventories 109,453 91,978
Income tax receivable - 8,933,814
Deferred income taxes 1,410,000 1,410,000
Other assets 1,710,019 1,670,264
---------- ----------
Total current assets 55,318,329 53,875,940
Investments 4,200,000 6,140,000
Property and equipment, net 13,583,471 14,905,909
Goodwill, net 15,073,239 13,562,408
Other long term assets - 481,250
----------- -----------
Total assets $88,175,039 $88,965,507
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
Liabilities and Stockholders' Equity
December 31, June 30,
1999 2000
---- ----
(unaudited)
Current liabilities:
Accounts payable $3,919,404 $5,155,967
Other accrued liabilities 7,387,417 7,726,802
Income taxes payable 120,928 -
Current portion of long-term debt 650,578 -
Unearned revenue 8,587,980 10,795,621
---------- ----------
Total current liabilities 20,666,307 23,678,390
Long-term debt, less current portion 224,285 229,332
---------- ----------
Total liabilities 20,890,592 23,907,722
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,
20,485,584 shares issued at June 30, 2000 196,742 204,856
Additional paid-in capital 70,533,683 78,475,686
Retained earnings (deficit) 760,050 (8,567,123)
Other accumulated comprehensive income (loss) (153,265) (1,002,871)
Treasury stock, 405,000 shares at cost (4,052,763) (4,052,763)
---------- ----------
Total stockholders' equity 67,284,447 65,057,785
----------- -----------
Total liabilities and stockholders' equity $88,175,039 $88,965,507
=========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three months ended June 30, 1999 and 2000
June 30, June 30,
1999 2000
---- ----
Revenues:
Product $ 10,594,653 $ 5,574,687
Professional service 14,181,376 11,573,680
Support 5,768,104 5,862,630
----------- -----------
Total revenues 30,544,133 23,010,998
Cost of revenues:
Cost of product revenues 530,778 567,789
Cost of professional service revenues 8,181,861 8,989,728
Cost of support revenues 1,280,993 1,764,985
Amortization of capitalized software 765,645 -
----------- -----------
Total cost of revenues 10,759,277 11,322,502
----------- -----------
Gross profit 19,784,856 11,688,495
Operating expenses:
Sales and marketing 7,972,922 12,408,519
Product development 3,944,607 4,744,996
General and administrative 2,463,502 3,428,367
Goodwill amortization 764,115 755,416
----------- -----------
Total operating expenses 15,145,146 21,337,297
----------- -----------
Operating income (loss) 4,639,710 (9,648,801)
Other income (expense):
Interest and other income 167,934 313,725
Interest expense (29,599) (11,752)
----------- -----------
Net other income 138,335 301,973
----------- -----------
Income (loss) before income taxes 4,778,045 (9,346,828)
Income tax expense (benefit) 1,767,700 (3,087,433)
----------- -----------
Net income (loss) $ 3,010,345 $ (6,259,396)
=========== ===========
Basic net income (loss) per share $ .16 $ (.31)
----------- -----------
Diluted net income (loss) per share $ .15 $ (.31)
----------- -----------
Basic weighted average number of common and
potential common shares outstanding 19,016,280 20,074,827
Diluted weighted average number of common and
potential common shares outstanding 19,842,144 20,074,827
See accompanying notes to consolidated financial statements.
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Six months ended June 30, 1999 and 2000
June 30, June 30,
1999 2000
---- ----
Revenues:
Product $ 21,017,121 $ 13,127,616
Professional service 27,355,315 23,240,913
Support 10,970,418 11,893,413
----------- -----------
Total revenues 59,342,854 48,261,942
Cost of revenues:
Cost of product revenues 1,065,865 1,029,930
Cost of professional service revenues 14,871,773 17,944,520
Cost of support revenues 2,598,813 3,379,301
Amortization and
write-off of capitalized software 1,349,036 -
----------- -----------
Total cost of revenues 19,885,487 22,353,751
----------- -----------
Gross profit 39,457,367 25,908,191
Operating expenses:
Sales and marketing 15,628,497 23,884,805
Product development 6,841,627 8,972,042
General and administrative 5,106,808 6,435,261
Amortization of goodwill 1,528,230 1,510,831
----------- -----------
Total operating expenses 29,105,162 40,802,940
----------- -----------
Operating income (loss) 10,352,205 (14,894,748)
Other income (expense):
Interest income 342,358 474,960
Interest expense (81,970) (42,751)
----------- -----------
Net other income 260,388 432,209
----------- -----------
Income (loss) before income taxes 10,612,593 (14,462,540)
Income taxes 3,955,613 (5,135,367)
----------- -----------
Net income (loss) $ 6,656,980 $ (9,327,173)
=========== ===========
Basic net income (loss) per share $ .35 $ (.47)
----------- -----------
Diluted net income (loss) per share $ .34 $ (.47)
----------- -----------
Basic weighted average number of common and
potential common shares outstanding 19,109,761 19,838,839
Diluted weighted average number of common and
potential common shares outstanding 19,839,700 19,838,839
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 six months ended June 30, 2000
<CAPTION>
Other
Additional Accumulated Accumulated Total
Common Paid-In Earnings Comprehensive Treasury Stockholders'
Stock Capital (Deficit) Income(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 - - (9,327,173) - - (9,327,173)
Unrealized losses on
securities available for sale - - - (102,622) - (102,622)
Foreign currency
translation adjustment - - - (746,984) - (746,984)
----------
Total comprehensive loss (10,176,779)
----------
Exercise of stock options 7,940 5,735,309 - - - 5,743,249
Tax benefit of options exercised - 1,851,000 - - - 1,851,000
Stock issued for Employee
Stock Purchase Plan 174 236,880 - - - 237,054
Amortization of compensatory
stock options - 118,814 - - - 118,814
-------- ----------- ----------- --------- ----------- -----------
Balance at June 30, 2000 $204,856 $78,475,686 $(8,567,123) $(1,002,871) $(4,052,763) $65,057,785
======== =========== =========== ========= =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Six months ended June 30, 1999 and 2000
June 30, June 30,
1999 2000
---- ----
Cash flows from operating activities:
Net income (loss) $ 6,656,980 $ (9,327,173)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation 2,204,343 2,632,670
Amortization of capitalized software
development costs 1,349,036 -
Goodwill amortization 1,528,230 1,510,831
Other amortization - 68,750
Other accumulated comprehensive (loss) (695,377) (746,984)
Accretion of investment discount, net (320) -
Gain on disposal of fixed assets (57,760) -
Provision for doubtful accounts 587,387 (192,326)
Stock based compensation 41,925 118,814
Changes in operating assets and liabilities:
Accounts receivable (372,847) 6,793,288
Unbilled receivable (267,081) (366,212)
Accrued interest receivable 21,826 4,888
Prepaid expenses (276,026) (667,744)
Inventories 234,072 17,475
Other assets (444,900) 34,867
Accounts payable (98,247) 1,236,563
Other accrued liabilities (1,233,819) 339,371
Income taxes payable 1,162,308 (7,203,742)
Unearned revenue (323,839) 2,207,641
---------- ----------
Net cash provided by
(used in) operating activities 10,015,891 (3,539,023)
---------- ----------
Cash flows from investing activities:
Purchase of investments (4,310,000) (2,000,000)
Proceeds from sale and maturities of investments 2,625,058 208,008
Additions to property and equipment (1,806,273) (3,955,108)
Purchase of customer list - (550,000)
Capitalized software development costs (967,007) -
--------- ---------
Net cash used in investing activities (4,458,222) (6,297,100)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options 472,616 5,743,249
Proceeds from issuances of shares under employee
stock purchase plan 196,451 237,054
Cash paid to acquire treasury stock (2,554,637) -
Principal payments on long-term debt (655,906) (645,517)
--------- ---------
Net cash provided by (used in)
financing activities (2,541,476) 5,334,786
--------- ---------
Net increase (decrease) in cash and cash equivalents 3,016,193 (4,501,337)
Cash and cash equivalents at beginning of period 6,739,209 17,912,797
--------- ---------
Cash and cash equivalents at end of period $ 9,755,402 $ 13,411,460
============ ============
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, 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 June 30,2000 and 1999
Per Share
Income Shares Amount
Three months ended June 30, 2000:
Basic income per share $ (6,259,396) 20,074,827 (.31)
Effect of dilutive securities:
Stock options - -
----------- ----------
Diluted income per share $ (6,259,396) 20,074,827 (.31)
=========== ========== =====
Three months ended June 30, 1999:
Basic income per share $ 3,010,345 19,016,280 .16
Effect of dilutive securities:
Stock options - 825,864
----------- ----------
Diluted income per share $ 3,010,345 19,842,144 .15
=========== ========== =====
For the six months ended June 30, 2000 and 1999
Per Share
Income Shares Amount
Six months ended June 30, 2000:
Basic income per share $ (9,327,173) 19,838,839 (.47)
Effect of dilutive securities:
Stock options - -
----------- ----------
Diluted income per share $ (9,327,173) 19,838,839 (.47)
=========== ========== =====
Six months ended June 30, 1999:
Basic income per share $ 6,656,980 19,109,761 .35
Effect of dilutive securities:
Stock options - 729,939
----------- ----------
Diluted income per share $ 6,656,980 19,839,700 .34
=========== ========== =====
C. Restructuring Charges
In 1998, the Company determined that it was necessary to aggressively migrate
its current and future products to a new web-based technology platform and
developed a plan to restructure certain of its operations in response to
increased competition and rapidly changing technology. The restructuring plan
required the discontinuance of certain internally developed and acquired
products and the reorganization of the Company's product development and
distribution structures domestically and internationally to improve efficiencies
and customer service and eliminate redundancy. As a result, the Company recorded
a restructuring charge at December 31, 1998 of $3,977,000 and established
certain reserves for the costs.
As of June 30, 1999, approximately $1,050,000 of the restructuring accruals were
utilized as follows: $315,000 for severance and related costs, $279,000 for
costs of closing redundant facilities and $456,000 for provisions for increased
credit risks.
D. Geographical and Segment 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 industrial procurement division, which 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. 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. 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:
<PAGE>
<TABLE>
For the three months ended June 30, 1999 and 2000:
<CAPTION>
Asset
United Latin Maintenance iProcure
States Europe America Asia Total Total Total
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 1999:
Total revenues $21,274,045 $ 6,506,591 $ 918,115 $ 1,843,263 $30,542,014 $ 2,119 $30,544,133
Operating income (loss) 2,759,634 1,692,659 92,103 572,395 5,116,791 (477,081) 4,639,710
Total assets 68,565,035 16,076,030 1,600,346 3,517,192 89,758,603 NA 89,758,603
June 30, 2000:
Total revenues 15,433,303 4,782,376 1,607,286 977,071 22,800,036 210,962 23,010,998
Operating income (loss) (4,615,351) (346,571) 258,450 (344,031) (5,047,503) (4,601,298) (9,648,801)
Total assets 68,638,584 12,980,017 3,199,596 4,147,310 88,965,507 NA 88,965,507
For the six months ended June 30, 1999 and 2000:
<CAPTION>
Asset
United Latin Maintenance iProcure
States Europe America Asia Total Total Total
<S> <C> <C> <C> <C> <C> <C> <C>
June 30, 1999:
Total revenues $40,320,647 $13,905,181 $ 2,550,921 $ 2,563,786 $59,340,535 $ 2,319 $59,342,854
Operating income (loss) 5,728,818 4,141,617 623,410 640,782 11,134,627 (782,422) 10,352,205
Total assets 68,565,035 16,076,030 1,600,346 3,517,192 89,758,603 NA 89,758,603
June 30, 2000:
Total revenues 31,938,044 10,578,784 2,958,168 2,551,634 48,026,630 235,312 48,261,942
Operating income (loss) (6,627,469) (377,652) 518,911 (385,980) (6,872,190) (8,022,558) (14,894,748)
Total assets 68,638,584 12,980,017 3,199,596 4,147,310 88,965,507 NA 88,965,507
</TABLE>
E. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (Statement No. 133). This standard requires
a public company to recognize all derivatives as either assets or liabilities in
the statement of financial position and measure those instruments at fair value.
In July 1999, the 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.
F. Commitments and Contingencies
On January 11, 1999, a class action lawsuit was filed 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 second quarter of 2000, the Company entered into a Memorandum of
Understanding with counsel for the plaintiff setting forth a non-binding
understanding for a possible settlement of the class action lawsuit. The
understanding reached is not binding either upon the Company or the class action
plaintiffs. A settlement of the class action, as outlined in the Memorandum of
Understanding, would not occur unless and until several material conditions are
favorably resolved, including discovery, the negotiation of a definitive
settlement agreement and court approval. Thus, the Memorandum of Understanding
is not, in itself, a settlement of the litigation.
<PAGE>
The Memorandum of Understanding reflects that, if approved as a full settlement
of the claims against it and the other defendants, the Company would pay $5
million, in a combination of cash and stock, into a settlement fund for the
benefit of the class. In addition, the Company reached an agreement with its
directors and officers liability insurer for the insurer to contribute $2.4
million in cash to the settlement fund. There can be no assurance, however, that
the litigation will settle or, if it does settle that it would be on these
terms. Due to the contingent nature of the Memorandum of Understanding, the
Company has not recorded a liability in connection with this lawsuit.
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. 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 iProcure division provides 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 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 second quarter of
2000. Total revenues decreased 25% to $23,010,998 in the second quarter of 2000
from $30,544,133 in the second quarter of 1999, due principally to lower than
expected product revenues and a related decrease in services revenue. Total
revenues decreased 19% to $48,261,942 during the first six months of 2000 from
$59,342,854 in the first six months of 1999.
Product revenues decreased 47% to $5,574,687 (24% of total revenues) in the
second quarter of 2000 from $10,594,653 (35% of total revenues) in the second
quarter of 1999, as a result of changes within the sales organization causing a
disruption in license sales. Product revenues decreased 38% to $13,127,616 (27%
of total revenues) in the first six months of 2000 from $21,017,121 (35% of
total revenues) in the first six months of 1999. Product revenues include
approximately $136,000 of revenue attributed to the iProcure division for the
second quarter of 2000 and approximately $160,000 for the first six months of
2000.
Professional service revenues decreased 18% to $11,573,680 (50% of total
revenues) in the second quarter of 2000 from $14,181,376 (46% of total revenues)
in the second quarter of 1999. The decrease is a result of decreased software
license sales in 2000. Professional service revenues decreased 15% to
$23,240,913 (48% of total revenues) in the first six months of 2000 from
$27,355,315 (46% of total revenues) in the first six months of 1999.
Professional services revenue include approximately $75,000 of revenue
attributed to the iProcure division for both the second quarter of 2000 and the
first six months of 2000.
Support services revenues for the second quarter of 2000 increased 2% to
$5,862,630 (26% of total revenues) from $5,768,104 (19% of total revenues) in
the second quarter of 1999, primarily due to the expansion of the Company's
installed base of systems during 1999. Support services revenues increased 8% to
$11,893,413 (25% of total revenues) in the first six months of 1999 from
$10,970,418 (19% of total revenues) in the first six months of 1999.
Cost of Revenues. Cost of revenues increased 5% to $11,322,502 (49% of total
revenues) in the second quarter of 2000, as compared to $10,759,277 (35% of
total revenues) in the comparable quarter of 1999. The increase in cost of
revenues is attributed to increased expenses incurred in the Professional
Services and Support Departments related to increased travel costs and expenses
incurred to support iProcure. Cost of revenues increased 12% to $22,353,751 (46%
of total revenues) during the first six months of 2000 from $19,885,487 (34% of
total revenues) in the first six months of 1999.
Cost of product revenues was 2% of total revenues in the second quarter of 2000
and first six months of 2000 and 2% of total revenues during the same periods in
1999.
Cost of professional service revenues was 39% of total revenues during the
second quarter of 2000, and 27% of total revenues during the same period in
1999. The increase as a percentage of total revenues was due to decreased
revenues, lower utilization rates and increased costs for iProcure. Cost of
professional service revenues includes approximately $549,000 of expenses
attributed to the iProcure division for the second quarter of 2000 and
approximately $893,000 for the first six months of 2000.
Cost of support service revenues was 8% of total revenues during the second
quarter of 2000 and 4% 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
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support service revenues was 7% of total revenues during the first six months of
2000 and 4% of total revenues during the same period in 1999. Cost of support
service revenues includes approximately $51,000 of expenses attributed to the
iProcure division for the second quarter of 2000 and approximately $86,000 for
the first six months of 2000.
Amortization of capitalized software costs was $765,645 (2% of total revenues)
in the second quarter of 1999 and $1,349,036 (2% of total revenues) for the
first six 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 56% to
$12,408,519 (54% of total revenues) during the second quarter of 2000 from
$7,972,922 (26% of total revenues) during the second quarter of 1999, as a
result of an increased number of sales personnel and increased sales and
marketing expenditures for iProcure. Sales and marketing expenses increased 53%
to $23,884,805 (49% of total revenues) in the first six months of 2000 from
$15,628,497 (26% of total revenues) in the first six months of 1999. Sales and
marketing expenses include approximately $3,078,000 of expenses attributed to
the iProcure division for the second quarter of 2000 and approximately
$5,254,000 for the first six months of 2000.
Product Development Expenses. Total product development expenditures increased
20% to $4,744,996 (21% of total revenues) during the second quarter of 2000 from
$ 3,944,607 (13% of total revenues) during the same period in 1999. There was no
capitalized portion of these expenses in 2000. The increase in total product
development expense resulted from increasing the number of development personnel
to support continued development of MP5i and iProcure. Total product development
expenditures increased 31% to $8,972,042 (19% of total revenues) during the
first half of 2000 from $6,841,627 (11% of total revenues) during the same
period in 1999. There was no capitalized portion of these amounts in the first
six months of 2000 as compared to $967,007 in the first six months of 1999.
Total product development expenses include approximately $654,000 of expenses
attributed to the iProcure division for the second quarter of 2000 and
approximately $1,280,000 for the first six months of 2000.
General and Administrative Expenses. General and administrative expenses
increased 39% to $3,428,367 (15% of total revenues) during the second quarter of
2000 from $2,463,502 (8% of total revenues) in the second quarter of 1999,
primarily due to costs associated with the iProcure division. General and
administrative expenses increased 26% to $6,435,261 (13% of total revenues)
during the first half of 2000 from $5,106,808 (9% of total revenues) during the
first half of 1999. Total general and administrative expenses include
approximately $480,000 of expenses attributed to the iProcure division for the
second quarter of 2000 and approximately $746,000 for the first six months of
2000.
Amortization of Goodwill. Amortization of goodwill expense decreased 1% to
$755,416 (3% of total revenues) during the second quarter of 2000 from $764,115
(2% of total revenues) in the second quarter of 1999, due to adjustments made to
goodwill balances in 1999. Amortization of goodwill expense decreased 1% to
$1,510,831 (3% of total revenues) during the first half of 2000 from $1,528,230
(3% of total revenues) in the first half of 1999.
Interest and other income. Interest and other income increased to $313,725 in
the second quarter of 2000 from $167,934 in the second quarter of 1999. The
increase was due to increased investment income resulting from increased cash
and investment balances. Interest and other income increased to $474,960 in the
first six months of 2000 from $342,358 in the first six months of 1999.
Interest Expense. Interest expense decreased to $11,752 in the second quarter of
2000 from $29,599 in the second quarter of 1999 due to lower third party debt
balances. Interest expense decreased to $42,751 in the first six months of 2000
from $81,970 in the first six months of 1999.
Tax Rate. The Company's effective tax rate was 33% for the second quarter of
2000 as compared to 37% for the second quarter of 1999. The Company's effective
tax rate was 35.5% for the first six months of 2000 as compared to 37% for the
first six months of 1999.
Net Income. Net income decreased 308% to ($6,259,396) ((27%) of total revenues)
in the second quarter of 2000 from $3,010,345 (10% of total revenues) in the
second quarter of 2000. The decrease is attributed to lower than expect sales
and an increase in iProcure division expenses. Net income decreased 240% to
($9,327,173) ((19%) of total revenues) in the first six months of 2000 from
$6,656,980 (11% of total revenues) in the first six months of 1999.
Liquidity and Capital Resources
The Company has funded its operating activities entirely from cash generated
from operations. The Company ended its second quarter of 2000 with $13,411,460
in cash and cash equivalents defined as securities maturing in less than 90
days. The Company intends to re-invest the proceeds of maturing U.S. Government
securities in similar U.S. Government securities.
In 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 June 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.
<PAGE>
Year 2000
Many currently installed computer systems and software products are coded to
accept only a two-digit format in the date field. These date code fields 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. The Company 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.
Datastream designates all statements in this Report regarding its Year 2000
efforts as "Year 2000 Readiness Disclosures" pursuant to the Year 2000
Information and Readiness Disclosure Act.
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company did not experience any material changes in market risk in
the second quarter of 2000.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 11, 1999, a class action lawsuit was filed 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 second quarter of 2000, the Company entered into a Memorandum of
Understanding with counsel for the plaintiff setting forth a non-binding
understanding for a possible settlement of the class action lawsuit. The
understanding reached is not binding either upon the Company or the class action
plaintiffs. A settlement of the class action, as outlined in the Memorandum of
Understanding, would not occur unless and until several material conditions are
favorably resolved, including discovery, the negotiation of a definitive
settlement agreement and court approval. Thus, the Memorandum of Understanding
is not, in itself, a settlement of the litigation.
The Memorandum of Understanding reflects that, if approved as a full settlement
of the claims against it and the other defendants, the Company would pay $5
million, in a combination of cash and stock, into a settlement fund for the
benefit of the class. In addition, the Company reached an agreement with its
directors and officers liability insurer for the insurer to contribute $2.4
million in cash to the settlement fund. There can be no assurance, however, that
the litigation will settle or, if it does settle that it would be on these
terms. Due to the contingent nature of the Memorandum of Understanding, the
Company has not recorded a liability in connection with this lawsuit.
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
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Stockholders
The 2000 Annual Meeting of Stockholders was held on June 9, 2000, at which time
certain matters were submitted to the stockholders of Datastream for a vote.
Present in person or by proxy at the meeting were holders of 18,737,804 shares
of the issued and outstanding shares of Datastream's common stock, which
represents 92% of the 20,374,007 shares of common stock issued and outstanding
as of April 21, 2000, the record date for the Annual Meeting. Below is a brief
description of each matter, as well as the number (and percentage) of shares
represented at the meeting and entitled to vote and voting for, against or
abstaining as to each matter.
1. The stockholders elected the following class of director to serve a
three-year term expiring 2003 by the following vote:
Name For Withhold Authority
Kenneth D. Tracy 18,031,742 (96.2%) 706,062 (3.8%)
Each of the following directors continued their term of office
as a director after the Annual Meeting: Larry G. Blackwell,
Richard T. Brock, Ira D. Cohen, and John M. Sterling, Jr.
2. The stockholders approved a proposal to increase the number of
shares of common stock reserved for issuance under the
Datastream Systems, Inc. 1998 Stock Option Plan by 1,500,000
shares by the following vote:
For Against Abstain
8,857,932 (47.3%) 5,939,457 (31.7%) 31,830 (0.2%)
3. The stockholders approved a proposal to increase the number of
shares of common stock reserved for issuance under the Amended
and Restated Datastream Systems, Inc. Employee Stock Purchase
Plan by 200,000 shares by the following vote:
For Against Abstain
14,509,959 (77.4%) 285,777 (1.5%) 33,483(0.2%)
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Datastream Systems, Inc.
/s/ C. Alex Estevez
Date: 8/10/00 ______________________
C. Alex Estevez
Chief Financial Officer (principal
financial and accounting officer)
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
27 Financial Data Schedule
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