UNITED STATES
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, 2002
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:
August 12, 2002: 20,159,244 shares, $0.01 par value.
1
Datastream Systems, Inc.
FORM 10-Q
Quarter ended June 30, 2002
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, 2001 and June 30, 2002
Assets 4
Liabilities and Stockholders' Equity 5
Consolidated Statements of Operations -
for the three months ended June 30, 2001 and 2002 6
for the six months ended June 30, 2001 and 2002 7
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Loss -
for the six months ended June 30, 2002 8
Consolidated Statements of Cash Flows -
for the six months ended June 30, 2001 and 2002 9
Notes to the Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Part II. Other Information 15
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Stockholders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
2
PART I. CONSOLIDATED FINANCIAL INFORMATION
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, we make 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 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"). We desire to take advantage of the "safe harbor" provisions in
the Private Securities Litigation Reform Act of 1995 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 our 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 our management's current plans and expectations and are subject to
risks, uncertainties and changes in plans that could cause actual results to
differ materially from those described in the forward looking statements. In the
preparation of this Report, where such forward looking statements appear, we
have 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 increasing competitiveness of the market
for asset lifecycle management solutions; our ability to keep pace with rapid
technological changes and demands in our markets in order to remain competitive;
increasing sales cycles and other factors that may result in volatility of our
quarterly results; our ability to successfully implement an application service
provider business model; the stability of certain of our strategic
relationships, including those with iProcure network suppliers and technology
providers; our ability to develop products timely to be an innovator in the
industry; increasing competition in markets for our products; our ability to
protect our proprietary technology; risks associated with security that may
deter the use of the Internet for conducting electronic commerce; risks
associated with managing international operations including, but not limited to,
exposure to foreign exchange fluctuations and our ability to successfully
compete in foreign markets; retaining our key personnel; 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 that we make 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, 2001, as well as other risks
and uncertainties identified from time to time in our SEC reports, registration
statements and public announcements.
We do not have, and expressly disclaim, any obligation to release publicly
any updates or any changes in our expectations or any changes in events,
conditions or circumstances on which any forward-looking statement is based.
3
ITEM 1. Consolidated Financial Statements
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
Assets
(unaudited)
December 31, June 30,
2001 2002
---- ----
Current assets:
Cash and cash equivalents $25,396,939 $31,003,974
Accounts receivable, net of allowance for doubtful accounts
of $1,868,072 and $2,016,508, respectively 17,483,350 18,433,209
Unbilled revenue, net of allowance of
$320,000 and $100,000, respectively 2,675,670 2,315,133
Prepaid expenses 1,270,568 1,881,324
Inventories 17,765 14,428
Income tax receivable 1,098,919 347,648
Deferred income taxes 981,488 981,488
Other assets 1,728,295 1,831,032
----------- -----------
Total current assets 50,652,994 56,808,236
Investments 2,000,000 2,000,000
Property and equipment, net 12,031,550 10,687,844
Deferred income taxes 6,664,009 5,912,137
Other long term assets 68,750 102,723
----------- -----------
Total assets $71,417,303 $75,510,940
=========== ===========
See accompanying notes to consolidated financial statements.
4
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
Liabilities and Stockholders' Equity
(unaudited)
December 31, June 30,
2001 2002
---- ----
Current liabilities:
Accounts payable $ 2,432,947 $ 2,582,977
Other accrued liabilities 8,019,997 8,990,909
Current portion of long-term debt 9,995 8,639
Unearned revenue 12,330,840 15,212,087
---------- ----------
Total liabilities 22,793,779 26,794,612
Stockholders' equity:
Preferred stock, $1 par value, 1,000,000 shares authorized; - -
none issued
Common stock, $.01 par value, 40,000,000 shares authorized; 210,006 210,637
21,000,668 shares issued at December 31, 2001,
21,063,639 shares issued at June 30, 2002
Additional paid-in capital 86,501,216 87,009,301
Accumulated deficit (30,602,457) (30,259,462)
Other accumulated comprehensive loss (1,303,570) (1,753,976)
Treasury stock, at cost;
859,000 shares at December 31, 2001,
899,000 shares at June 30, 2002 (6,181,671) (6,490,172)
----------- -----------
Total stockholders' equity 48,623,524 48,716,328
---------- ----------
Total liabilities and stockholders' equity $ 71,417,303 $ 75,510,940
========== ==========
See accompanying notes to consolidated financial statements.
5
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three months ended June 30, 2001 and 2002
June 30, June 30,
2001 2002
---- ----
Revenues:
Product $ 6,474,906 $ 6,838,414
Service and support 16,538,184 15,975,126
---------- -----------
Total revenues 23,013,090 22,813,540
Cost of revenues:
Cost of product revenues 135,354 265,404
Cost of service and support revenues 9,063,107 7,811,020
--------- ----------
Total cost of revenues 9,198,461 8,076,424
--------- ---------
Gross profit 13,814,629 14,737,116
Operating expenses:
Sales and marketing 9,468,298 8,926,243
Product development 3,376,297 2,624,870
General and administrative 2,459,310 2,696,492
Goodwill amortization 755,416 -
---------- -----------
Total operating expenses 16,059,321 14,247,605
---------- ----------
Operating income (loss) (2,244,692) 489,511
Other income, net 218,108 83,401
------- ------
Income (loss) before income taxes (2,026,584) 572,912
Income tax expense (benefit) (364,768) 200,622
--------- -------
Net income (loss) $ (1,661,816) $ 372,290
============= ==========
Basic net income (loss) per share $ (.08) $ .02
============= ==========
Diluted net income (loss) per share $ (.08) $ .02
============= ==========
Basic weighted average number of common
shares outstanding 20,510,383 20,165,733
========== ==========
Diluted weighted average number of common and
potential common shares outstanding 20,510,383 20,628,580
========== ==========
See accompanying notes to consolidated financial statements.
6
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Six months ended June 30, 2001 and 2002
June 30, June 30,
2001 2002
---- ----
Revenues:
Product $ 13,908,441 $ 12,630,813
Service and support 33,637,536 31,779,725
----------- ----------
Total revenues 47,545,977 44,410,538
Cost of revenues:
Cost of product revenues 802,193 625,539
Cost of service and support revenues 18,063,054 15,742,187
----------- ----------
Total cost of revenues 18,865,247 16,367,726
---------- ----------
Gross profit 28,680,730 28,042,812
Operating expenses:
Sales and marketing 19,384,143 16,846,238
Product development 6,749,002 5,301,298
General and administrative 4,920,847 5,515,275
Goodwill amortization 1,510,831 -
--------- -------
Total operating expenses 32,564,823 27,662,811
---------- ----------
Operating income (loss) (3,884,093) 380,001
Other income, net 311,549 144,887
------- -------
Income (loss) before income taxes (3,572,544) 524,888
Income tax expense (benefit) (667,559) 181,893
--------- -------
Net income (loss) $ (2,904,985) $ 342,995
============== ===========
Basic net income (loss) per share $ (.14) $ .02
============== ===========
Diluted net income (loss) per share $ (.14) $ .02
============== ===========
Basic weighted average number of common
shares outstanding 20,504,126 20,155,510
========== ==========
Diluted weighted average number of common and
potential common shares outstanding 20,504,126 20,645,798
========== ==========
See accompanying notes to consolidated financial statements.
7
Datastream Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity and Comprehensive Loss
(unaudited)
Six months ended June 30, 2002
Other
Additional Accumulated Total
Common Paid-In Accumulated Comprehensive Treasury Stockholders'
Stock Capital Deficit Loss Stock Equity
----- ------- ------- ---- ----- ------
Balance at December 31, 2001 $ 210,006 $ 86,501,216 $(30,602,457) $(1,303,570) $(6,181,671) $ 48,623,524
Comprehensive loss
Net income - - 342,995 - - 342,995
Foreign currency translation
adjustment - - - (450,406) - (450,406)
---------
Total comprehensive loss (107,411)
Exercise of stock options 456 247,344 - - - 247,800
Stock issued for employee
stock purchase plan 175 91,018 - - - 91,193
Amortization of compensatory
stock options - 55,938 - - - 55,938
Acquisition of 40,000 shares - - - - (308,501) (308,501)
Warrants issued - 113,785 - - - 113,785
------ --------- ----------- --------- ---------- ---------
Balance at June 30, 2002 $ 210,637 $ 87,009,301 $ (30,259,462) $(1,753,976) $(6,490,172) $ 48,716,328
=========== ============= ============== ============ ============ ==============
See accompanying notes to consolidated financial statements.
8
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Six months ended June 30, 2001 and 2002
June 30, June 30,
2001 2002
---- ----
Cash flows from operating activities:
Net income (loss) $ (2,904,985) $ 342,995
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 2,454,111 2,071,502
Goodwill amortization 1,510,831 -
Other amortization 137,500 79,812
Provision for doubtful accounts (578,955) (71,564)
Stock based compensation 16,544 55,938
Issuance of shares in legal settlement 1,250,000 -
Changes in operating assets and liabilities:
Accounts receivable 5,232,605 (1,098,295)
Unbilled receivable (175,250) 580,537
Income taxes receivable 698,726 (610,756)
Prepaid expenses (36,544) 751,271
Inventories 118,183 3,337
Deferred income taxes (1,050,000) 751,872
Other assets (149,671) (102,737)
Accounts payable (328,769) 150,030
Other accrued liabilities (2,498,092) 970,912
Unearned revenue 1,878,079 2,881,247
--------- ---------
Net cash provided by operating activities 5,574,313 6,756,101
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (1,839,146) (727,796)
----------- ---------
Net cash used in investing activities (1,839,146) (727,796)
----------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options 487,969 247,800
Proceeds from issuances of shares under employee
stock purchase plan 236,044 91,193
Purchases of treasury stock (322,738) (308,501)
Principal payments on long-term debt (37,327) (1,356)
----------- ---------
Net cash provided by financing activities 363,948 29,136
----------- ---------
Foreign currency translation adjustment (753,229) (450,406)
Net increase in cash and cash equivalents 3,345,886 5,607,035
Cash and cash equivalents at beginning of period 15,487,515 25,396,939
---------- ----------
Cash and cash equivalents at end of period $ 18,833,401 $ 31,003,974
============= =============
See accompanying notes to consolidated financial statements.
9
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
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, 2001 filed
with the SEC on March 29, 2002. 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.
2. Segment and Geographic Information
The Company has identified one business segment for reporting purposes:
Asset Lifecycle Management. The Company manages the Asset Lifecycle Management
business over geographical regions. The principal areas of operation include the
United States, Europe, Latin America and Asia. Financial information concerning
the Company's operations in different geographical regions is as follows:
For the three months ended June 30, 2001 and 2002:
United Latin
States Europe America Asia Total
June 30, 2001:
Total revenues 14,953,611 4,906,280 1,895,923 1,257,276 23,013,090
Operating loss (1,235,746) (640,543) (226,523) (141,880)(2,244,692)
Total assets 60,426,692 13,519,295 4,721,155 3,639,187 82,306,329
June 30, 2002:
Total revenues 14,811,816 5,018,539 1,629,243 1,353,942 22,813,540
Operating income
(loss) 621,277 (189,199) 227,919 (170,487) 489,510
Total assets 52,284,050 13,983,713 3,804,065 5,439,112 75,510,940
For the six months ended June 30, 2001 and 2002:
United Latin
States Europe America Asia Total
June 30, 2001:
Total revenues 31,276,009 9,963,642 3,697,706 2,608,620 47,545,977
Operating loss (3,704,936) (123,349) (43,028) (12,780)(3,884,093)
Total assets 60,426,692 13,519,295 4,721,155 3,639,187 82,306,329
June 30, 2002:
Total revenues 28,443,815 9,597,353 3,378,011 2,991,359 44,410,538
Operating income
(loss) 475,220 (533,088) 350,444 87,425 380,001
Total assets 52,284,050 13,983,713 3,804,065 5,439,112 75,510,940
The United States revenues include international revenues of approximately
$1,018,000 and $913,000 for the second quarters of 2001 and 2002, respectively
and approximately $1,694,000 and $1,566,000 for the first six months of 2001 and
2002, respectively.
10
3. Reconciliation of Basic and Diluted Income Per Share
Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common and potential 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. At June 30, 2001, basic loss
per share equaled diluted loss per share. The reconciliation of basic and
diluted income per share as of June 30, 2002 is as follows:
Per Share
Income Shares Amount
------ ------ ---------
For the three months ended:
June 30, 2002:
Basic income per share $ 372,290 20,165,733 $ .02
===========
Effect of dilutive
securities:
Stock options - 462,847
-------------- -------------
Diluted income per share $ 372,290 20,628,580 $ .02
============== ============== ===========
For the six months ended:
June 30, 2002:
Basic income per share $ 342,995 20,155,510 $ .02
===========
Effect of dilutive
securities:
Stock options - 490,288
-------------- --------------
Diluted income per share $ 342,995 20,645,798 $ .02
============== ============== ===========
Antidilutive shares totaling 3,434,011 and 3,406,570 were excluded from the
diluted net income (loss) calculation for the three and six months ended June
30, 2002, respectively.
4. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS 141), and Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS 141 also specifies criteria that intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment. The effective date of SFAS 142 was January 1,
2002.
In August 2001, FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144). SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". SFAS 144 essentially combines the requirements of SFAS 121 and
APBO 30 into one single accounting standard. The effective date of SFAS 144 was
January 1, 2002.
As reported in the Company's third quarter 2001, significant events
occurred which triggered the impairment of its goodwill under FAS 121.
Therefore, no amortization has been recorded since that time and adoption of
SFAS 142 did not impact the Company. Goodwill amortization for the three months
and six months ended June 30, 2001 was $755,415 and $1,510,831, respectively. If
SFAS 142 had been effective in those periods, operating loss would have been
reduced by the amount of amortization.
5. Commitments and Contingencies
The Company is occasionally involved in legal proceedings and other
claims arising out of its operations in the normal course of business. None of
such current claims are expected, individually or in the aggregate, to have a
material adverse affect on the Company.
11
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 asset lifecycle management solutions.
These solutions enable businesses, government agencies and other organizations
to maximize the performance and profitability of assets. One important component
of this lifecycle is the procurement of spare parts used to maintain assets.
Datastream's iProcure solution automates this process by connecting suppliers
with buyers of industrial spare parts through the Internet. Combined, these
offerings create a complete, scaleable asset lifecycle management solution
representing a unique value proposition to the market.
Results of Operations
Total Revenues. Total revenues of $22,813,540 in the second quarter of
2002 decreased 0.9% from $23,013,090 in the second quarter of 2001. Total
revenues decreased 7% to $44,410,538 for the first six months of 2002 from
$47,545,977 for the first six months of 2001, due principally to product, sales
and marketing transitions, unfavorable market conditions, longer sales cycles
and decreased service and support revenue resulting from decreased license
revenues. International revenues were approximately $8,915,000 (39% of total
revenues) in the second quarter of 2002 and approximately $9,077,000 (39% of
total revenues) in the second quarter of 2001. International revenues were
approximately $17,533,000 (39% of total revenues) for the first six months of
2002 and approximately $17,964,000 (38% of total revenues) for the first six
months of 2001. See Note B to consolidated financial statements.
Product revenues increased 6% to $6,838,414 (30% of total revenues) in the
second quarter of 2002 from $6,474,906 (28% of total revenues) in the second
quarter of 2001, as a result of increased sales of Datastream 7i, which has a
higher license fee than the MP2 product family, partially offset by lower
license sales in the MP2 product family. Product revenues decreased 9% to
$12,630,813 (28% of total revenues) in the first six months of 2002 from
$13,908,441 (29% of total revenues) in the first six months of 2001. The
decrease was a result of longer sales cycles due to product transition and
macroeconomic factors in the first half of 2002 relative to the first half of
2001.
Service and support revenues decreased 3% to $15,975,126 (70% of total
revenues) in the second quarter of 2002 from $16,538,184 (72% of total revenues)
in the second quarter of 2001. The decrease is partially a result of decreased
software license revenues in prior quarters resulting in a decrease in
installation, training and services revenue, offset by an increase in support
revenue. Service and support revenues decreased 6% to $31,779,725 (72% of total
revenues) in the first six months of 2002 from $33,637,536 (71% of total
revenues) in the first six months of 2001.
Cost of Revenues. Cost of revenues decreased 12% to $8,076,424 (35% of
revenues) in the second quarter of 2002, as compared to $9,198,461 (40% of total
revenues) in the second quarter of 2001. The decrease in cost of revenues is due
to cost savings in the services and support department as a result of improved
utilization and improved organizational efficiency. Cost of revenues decreased
13% to $16,367,726 (37% of total revenues) in the first six months of 2002 from
$18,865,247 (40% of total revenues) in the first six months of 2001.
Sales and Marketing Expenses. Sales and marketing expenses decreased 6% to
$8,926,243 (39% of total revenues) in the second quarter of 2002 from $9,468,298
(41% of total revenues) in the second quarter of 2001. The decrease is due to
consolidation of sales activities and reduction of certain marketing activities.
Sales and marketing expenses decreased 13% to $16,846,238 (38% of total
revenues) in the first six months of 2001 from $19,384,143 (41% of total
revenues) in the first six months of 2001.
Product Development Expenses. Total product development expenditures
decreased 22% to $2,624,870 (12% of total revenues) in the second quarter of
2002 from $3,376,297 (15% of total revenues) in the second quarter of 2001. The
decrease in total product development expense resulted from cost savings
realized upon consolidation of the MP2, MP5i and iProcure development teams and
a reduction in outside contract labor costs. Total product development
expenditures decreased 21% to $5,301,298 (12% of total revenues) in the first
six months of 2002 from $6,749,002 (14% of total revenues) in the first six
months of 2001.
12
General and Administrative Expenses. General and administrative expenses
increased 10% to $2,696,492 (12% of total revenues) in the second quarter of
2002 from $2,459,310 (11% of total revenues) in the second quarter of 2001, due
primarily to increased administrative costs in Europe and increased professional
fees in the United States. General and administrative expenses increased 12% to
$5,515,275 (12% of total revenues) in the first six months of 2002 from
$4,920,847 (10% of total revenues) in the first six months of 2001.
Goodwill Amortization. The Company wrote off the remaining balance
of goodwill in the third quarter of 2001, therefore, no amortization expense
was incurred in 2002.
Other income, net. Other income, net decreased to $83,401 in the second
quarter of 2002 from $218,108 in the second quarter of 2001. The decrease was
due to a decrease in return on investments during the second quarter of 2002 due
primarily to a reduction in yields on cash equivalent investment instruments.
Other income, net decreased to $144,887 in the first six months of 2002 from
$311,549 in the first six months of 2001.
Tax Rate. The Company's effective tax rate was 35% for the second quarter
of 2002 as compared to 18% for the second quarter of 2001. The increase in the
effective tax rate is due to the elimination of goodwill and related
amortization, which significantly reduced the Company's permanent book/tax
differences. The Company's effective tax rate was 35% for the first six months
of 2002 as compared to 19% for the first six months of 2001.
Net income (loss). Net income (loss) improved to $372,290 (2% of total
revenues) in the second quarter of 2002 from $(1,661,816) ((7%) of total
revenues) in the second quarter of 2001. The improvement is attributed to
increased operational efficiency and a reduction in total operating costs. Net
income (loss) improved to $342,995 (1% of total revenues) for the first six
months of 2001 from $(2,904,985) ((6%) of total revenues) for the first six
month of 2002.
Liquidity and Capital Resources
The Company has funded its operating activities primarily from cash
generated from operations. The Company ended its second quarter of 2002 with
$31,003,974 in cash and cash equivalents.
Subsequent to the end of the second quarter, on July 23, 2002 the
Company announced that its board of directors had authorized the repurchase of
up to 500,000 shares of Datastream's outstanding common stock. This plan expires
on July 23, 2003. As of June 30, 2002, the Company has repurchased 899,000
shares (40,000 shares in 2002) under separate stock repurchase plans. The
repurchased shares will be used for general corporate purposes, including grants
of employee stock options. The shares are classified as treasury stock on the
balance sheet and are reported at cost.
In connection with entering into a software development and licensing
agreement with GE Fanuc North America, Inc. ("GE Fanuc"), Datastream issued a
warrant to GE Fanuc to purchase up to 50,000 shares of common stock of the
Company. The warrant was exercisable on the date of issuance and remains
exercisable for three years from the date of issuance. The exercise price per
share is $6.95, which was the market price of the Company's common stock on the
date of issuance of the warrant. The warrant agreement allows for net issuance
at the option of GE Fanuc and provides "piggy back" registration rights for the
underlying common stock.
The Company has accounted for the warrant using the guidance of Emerging
Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services and EITF 00-25, Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products. As a result, on the
date of issuance the Company recorded the fair value of the warrant as a credit
to Additional Paid-In Capital and a debit to prepaid commissions. The Company
will record amortization of the prepaid commissions as a reduction of revenue
over the three years the warrant is exercisable. The impact to the financial
condition of the Company will be immaterial over the three year period.
As of June 30, 2002, the Company had no long-term debt commitments and no
material commitments for capital expenditures. The Company believes that its
current cash balances, cash flows 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.
13
Other Events
Larry G. Blackwell, the Company's President and Chief Executive Officer
and Chairman of its Board of Directors, has informed the Company that on May 17,
2002, he entered into an amended divorce decree with his ex-spouse, Ms. Sharron
Blackwell, pursuant to which he placed in Ms. Blackwell's name title to a total
of 1,242,488 shares (the "Shares") of the Company's common stock as part of
completing the division of their marital property. The original 1992 divorce
decree apportioned to Ms. Blackwell a percentage of the shares of the Company
owned by Mr. Blackwell, but the shares remained titled in Mr. Blackwell's name,
as contemplated by the terms of such original decree, with the arrangement that
Ms. Blackwell would receive such percentage of the proceeds of any sale of
shares by Mr. Blackwell. By placing title of the Shares in Ms. Blackwell's name,
she will no longer need to wait for Mr. Blackwell to make a sale of shares to
realize the benefit of her percentage interests, and she will no longer have any
interest in any sales by Mr. Blackwell. Although the Shares are freely
transferable by Ms. Blackwell, she has agreed to restrict the number of these
shares that she may decide to sell to a maximum of 100,000 shares per calendar
quarter for so long as Mr. Blackwell is the Chief Executive Officer of the
Company.
Critical Accounting Polices
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company's
critical accounting policies include revenue recognition, income taxes,
impairment of goodwill and other long -term assets, functional currencies for
the purpose of consolidation and allowance for doubtful accounts. For a detailed
discussion on the application of these and other accounting policies, see the
Company's Form 10-K filed for the year ended December 31, 2001.
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 2002.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is occasionally involved in legal proceedings and
other claims arising out of its operations in the normal course
of business. None of such current claims 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
The 2002 Annual Meeting of Stockholders was held on June 14,
2002, 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 19,158,246 shares of the
issued and outstanding shares of Datastream's common stock, which
represents 95% of the 20,143,139 shares of common stock issued
and outstanding as of April 30, 2002, 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 III directors
to serve a three-year term expiring in 2005 by the following
vote:
Name For Withhold Authority
---- --- ------------------
Larry G. Blackwell 14,263,805 (74.4%) 4,894,441 (25.5%)
John M. Sterling, Jr. 18,364,696 (95.8%) 793,550 (4.1%)
Each of the following directors continued their term of office
as a director after the Annual Meeting: Richard T. Brock, Ira D.
Cohen and James R. Talton, 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 500,000 shares
by the following vote:
For Against Abstain
--- ------- -------
16,085,811 (84.0%) 3,049,480 (15.9%) 22,955 (0.1%)
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Datastream Systems, Inc. 1998 Stock Option Plan (as
amended through April 10, 2002) (incorporated herein by
reference to Appendix B to the Registrant's Proxy
Statement, dated and filed with the Securities and
Exchange Commission on May 10, 2002).
99.1 Statement of Chief Executive Officer and Chief
Financial Officer of Datastream Systems, Inc. Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to ss.906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on July 24,
2002 to report the Company's announcement of a stock
repurchase plan.
15
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.
Date: 08/14/02 /s/ C. Alex Estevez
C. Alex Estevez
Chief Financial Officer (principal
financial and accounting officer)
16
EXHIBIT INDEX
Exhibit
Number Exhibit Description
10.1 Datastream Systems, Inc. 1998 Stock Option Plan (as
amended through April 10, 2002)(incorporated herein by
reference to Appendix B to the Registrant's Proxy Statement,
dated and filed with the Securities and Exchange Commission
on May 10, 2002).
99.1 Statement of Chief Executive Officer and Chief Financial
Officer of Datastream Systems, Inc. Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Subsection 906 of the
Sarbanes-Oxley Act of 2002.
EXHIBIT 99.1
Statement of Chief Executive Officer AND
CHIEF FINANCIAL OFFICER of
DATASTREAM SYSTEMS, INC.
Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to
Subsection 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Datastream Systems, Inc. (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Larry G. Blackwell, President and Chief Executive Officer of the
Company, and C. Alex Estevez, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Larry G. Blackwell /s/ C. Alex Estevez
- ---------------------- -------------------
Larry G. Blackwell C. Alex Estevez
President and Chief Executive Officer Chief Financial Officer
Datastream Systems, Inc. Datastream Systems, Inc.
August 14, 2002 August 14, 2002