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 September 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: November 13,
2002: 20,083,844 shares, $0.01 par
value.
Datastream Systems, Inc.
FORM 10-Q
Quarter ended September 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 September 30, 2002
Assets 4
Liabilities and Stockholders' Equity 5
Consolidated Statements of Operations -
Three months ended September 30, 2001 and 2002 6
Nine months ended September 30, 2001 and 2002 7
Consolidated Statement of Changes in Stockholders' Equity
and Comprehensive Loss -
Nine months ended September 30, 2002 8
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2001 and 2002 9
Notes to 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
Item 4. Controls and Procedures 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
Certifications 17
"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 our 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.
ITEM 1. Consolidated Financial Statements
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
Assets
(unaudited)
December 31, September 30,
2001 2002
---- ----
Current assets:
Cash and cash equivalents ....................... $25,396,939 $32,420,017
Accounts receivable,
net of allowance for doubtful accounts
of $1,868,072 and $1,797,663, respectively ... 17,483,350 17,242,072
Unbilled revenue, net of allowance of
$320,000 and $100,000 respectively ........... 2,675,670 2,060,128
Prepaid expenses ................................ 1,270,568 1,116,548
Inventories ..................................... 17,765 4,811
Income tax receivable ........................... 1,098,919 308,905
Deferred income taxes ........................... 981,488 981,488
Other assets ----------- -----------
1,728,295 1,495,163
----------- -----------
Total current assets ....................... 50,652,994 55,629,132
Investments ........................................ 2,000,000 2,000,000
Property and equipment, net ........................ 12,031,550 10,394,989
Deferred income taxes .............................. 6,664,009 5,912,137
Other long term assets ............................. 68,750 93,241
----------- -----------
Total assets ............................... $71,417,303 $74,029,499
=========== ==========
See accompanying notes to consolidated financial statements.
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets (Continued)
Liabilities and Stockholders' Equity
(unaudited)
December 31, September 30,
2001 2002
---- ----
Current liabilities:
Accounts payable ............................... $ 2,432,947 $ 2,449,073
Other accrued liabilities ..........................8,019,997 8,341,070
Current portion of long-term debt ..................... 9,995 --
Unearned revenue ..................................12,330,840 14,779,242
------------ ------------
Total liabilities ........................ 22,793,779 25,569,385
Stockholders' equity:
Preferred stock, $1 par value, 1,000,000 shares
authorized; none issued -- --
Common stock, $.01 par value, 40,000,000 shares
authorized;
21,000,668 shares issued at December 31, 2001,
21,082,444 shares issued at September 30, 2002 210,006 210,825
Additional paid-in capital ........................86,501,216 87,130,287
Accumulated deficit ..............................(30,602,457) (29,918,729)
Accumulated other comprehensive loss ..............(1,303,570) (2,167,708)
Treasury stock, at cost;
859,000 shares at December 31, 2001,
953,500 shares at September 30, 2002 ...........(6,181,671) (6,794,561)
----------- ----------
Total stockholders' equity ...................48,623,524 48,460,114
----------- ----------
Total liabilities and stockholders' equity $ 71,417,303 $74,029,499
============ ===========
See accompanying notes to consolidated financial statements.
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three months ended September 30, 2001 and 2002
September 30, September 30,
2001 2002
---- ----
Revenues:
Product $ 5,038,672 $ 6,040,013
Service and support 15,138,354 15,935,403
----------- ----------
Total revenues 20,177,026 21,975,416
Cost of revenues:
Cost of product revenues 356,420 234,916
Cost of service and support revenues 7,911,842 8,128,439
---------- ---------
Total cost of revenues 8,268,262 8,363,355
--------- ---------
Gross profit 11,908,764 13,612,061
Operating expenses:
Sales and marketing 8,093,162 8,347,083
Product development 3,065,161 2,647,870
General and administrative 2,632,367 2,216,055
Goodwill amortization 755,416 -
Impairment of goodwill and other
long-lived assets 9,955,330 -
--------- ----------
Total operating expenses 24,501,436 13,211,008
---------- ----------
Operating income (loss) (12,592,672) 401,053
Other income, net 322,671 123,156
------- -------
Income (loss) before income taxes (12,270,001) 524,209
Income tax expense (benefit) (408,914) 183,476
--------- -------
Net income (loss) $ (11,861,087) $ 340,733
============== ===========
Basic net income (loss) per share $ (.58) $ .02
============= ==========
Diluted net income (loss) per share $ (.58) $ .02
============= ==========
Basic weighted average number of common
shares outstanding 20,465,969 20,155,027
========== ==========
Diluted weighted average number of common
and potential common shares outstanding 20,465,969 20,517,169
========== ==========
See accompanying notes to consolidated financial statements.
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Nine months ended September 30, 2001 and 2002
September 30, September 30,
2001 2002
---- ----
Revenues:
Product $ 18,947,113 $ 18,670,826
Service and support 48,775,891 47,715,128
----------- ----------
Total revenues 67,723,004 66,385,954
Cost of revenues:
Cost of product revenues 1,158,615 860,455
Cost of service and support revenues 25,974,895 23,870,626
----------- ----------
Total cost of revenues 27,133,510 24,731,081
---------- ----------
Gross profit 40,589,494 41,654,873
Operating expenses:
Sales and marketing 27,477,305 25,193,322
Product development 9,814,163 7,949,168
General and administrative 7,553,214 7,731,330
Goodwill amortization 2,266,247 -
Impairment of goodwill and other
long-lived assets 9,955,330 -
----------- -----------
Total operating expenses 57,066,259 40,873,820
---------- ----------
Operating income (loss) (16,476,765) 781,053
Other income, net 634,220 268,043
------- -------
Income (loss) before income taxes (15,842,545) 1,049,096
Income tax expense (benefit) (1,076,473) 365,368
----------- -------
Net income (loss) $ (14,766,072) $ 683,728
============== ============
Basic net income (loss) per share $ (.72) $ .03
-------------- ------------
Diluted net income (loss) per share $ (.72) $ .03
--------------- ------------
Basic weighted average number of common
shares outstanding 20,491,407 20,152,443
========== ==========
Diluted weighted average number of common
and potential common shares outstanding20,491,407 20,607,078
========== ==========
See accompanying notes to consolidated financial statements.
Datastream Systems, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity and Comprehensive Loss
(unaudited)
Nine months ended September 30, 2002
Accumulated
Additional Accumulated Other Total
Common Paid-In (Deficit) Comprehensive Treasury Stockholders'
Stock Capital Earnings 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 .................. -- -- 683,728 -- -- 683,728
Foreign currency translation
adjustment -- -- -- (864,138) -- (864,138)
---------
Total comprehensive loss ...... (180,410)
Exercise of stock options ...... 476 254,824 -- -- -- 255,300
Stock issued for employee
stock purchase plan ......... 343 176,556 -- -- -- 176,899
Amortization of compensatory
stock options .............. -- 83,906 -- -- -- 83,906
Acquisition of 94,500 shares ... -- -- -- -- (612,890) (612,890)
Warrants issued ................ -- 113,785 -- -- -- 113,785
------ -------- ----------- ----------- ---------- -----------
Balance at September 30, 2002... $210,825 $87,130,287 $(29,918,729) $(2,167,708) $(6,794,561) $48,460,114
======== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended September 30, 2001 and 2002
September 30, September 30,
2001 2002
Cash flows from operating activities:
Net (loss) income $ (14,766,072) $ 83,728
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation 3,619,876 3,062,209
Goodwill amortization 2,266,247 -
Other amortization 206,250 89,294
Provision for doubtful accounts (697,661) (290,409)
Stock based compensation 60,378 83,906
Issuance of shares in legal settlement 1,250,000 -
Impairment of goodwill and other
long-lived assets 9,955,330 -
Changes in operating assets
and liabilities:
Accounts receivable 7,318,703 311,687
Unbilled receivable (619,617) 835,542
Income taxes receivable 8,908,633 790,014
Prepaid expenses (48,617) 154,020
Inventories 109,665 12,954
Deferred income taxes (1,852,000) 751,872
Other assets (321,475) 233,132
Accounts payable (750,655) 16,126
Other accrued liabilities (2,787,833) 321,073
Unearned revenue 1,138,668 2,448,402
--------- ---------
Net cash provided by operating
activities 12,989,820 9,503,550
---------- ---------
Cash flows from investing activities:
Additions to property and equipment (2,283,623) (1,425,648)
----------- -----------
Net cash used in investing activities (2,283,623) (1,425,648)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 591,844 255,300
Proceeds from issuances of shares under
employee stock purchase plan 366,338 176,899
Cash paid to acquire treasury stock (1,620,288) (612,890)
Principal payments on long-term debt (16,479) (9,995)
--------- -------
Net cash provided by financing activities (678,585) (190,686)
--------- ---------
Foreign currency translation adjustment (489,595) (864,138)
Net increase in cash and cash equivalents 9,538,017 7,023,078
Cash and cash equivalents at beginning
of period 15,487,515 25,396,939
---------- ----------
Cash and cash equivalents at end of period $ 25,025,532 $ 32,420,017
============= ============
See accompanying notes to consolidated financial statements.
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. The
Company manages the segment 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 September 30, 2001 and 2002 (US dollars):
United Latin
States Europe America Asia Total
September 30, 2001:
Total revenues 13,086,464 4,120,203 1,788,242 1,182,117 20,177,026
Impairment charge (9,955,330) - - - (9,955,330)
Operating loss (11,551,206) (450,513) (320,144) (270,809) (12,592,672)
Total assets 48,728,875 11,004,111 4,766,185 3,759,969 68,259,140
September 30, 2002:
Total revenues 13,699,689 5,338,152 1,429,494 1,508,081 21,975,416
Operating income
(loss) (89,558) 515,726 (10,087) (15,028) 401,053
Total assets 51,526,223 13,889,109 3,202,211 5,411,956 74,029,499
For the nine months ended September 30, 2001 and 2002 (US dollars):
United Latin
States Europe America Asia Total
September 30, 2001:
Total revenues 44,362,474 14,083,845 5,485,948 3,790,737 67,723,004
Impairment charge (9,955,330) - - - (9,955,330)
Operating loss (15,256,142) (573,863) (363,172) (283,588) (16,476,765)
Total assets 48,728,875 11,004,111 4,766,185 3,759,969 68,259,140
September 30, 2002:
Total revenues 42,143,504 14,935,505 4,807,505 4,499,440 6,385,954
Operating income
(loss) 385,662 (17,362) 340,357 72,396 781,053
Total assets 51,526,223 13,889,109 3,202,211 5,411,956 74,029,499
The United States revenues include international revenues of approximately
$404,000 and $617,000 for the third quarters of 2001 and 2002, respectively and
approximately $2,098,000 and $1,905,000 for the first nine months of 2001 and
2002, respectively.
3. Reconciliation of Basic and Diluted Net Income Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted net income
(loss) per share is computed by dividing net income (loss) by the weighted
average number of common and potential 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 September 30, 2001, basic loss per share
equaled diluted loss per share. The reconciliation of basic and diluted income
per share as of September 30, 2002 is as follows:
Per
Share
Income Shares Amount
------ ------ ------
For the three months ended:
September 30, 2002:
Basic net income
per share $340,733 20,155,027 $ .02
======== ========== =====
Effect of dilutive
securities:
Stock options -- 362,142
-------- -------
Diluted net income
per share $340,733 20,517,169 $ .02
======== ========== =====
For the nine months ended:
September 30, 2002:
Basic net income
per share $ 683,728 20,152,443 $ .03
========= ========== =====
Effect of dilutive
securities:
Stock options -- 454,635
-------- ----------
Diluted net income $ 683,728 20,607,078 $ .03
per share ========= ========== =====
Antidilutive shares totaling 3,318,203 and 3,058,762 were excluded from the
diluted net income calculation for the three and nine months ended September 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.
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 nine months ended September 30, 2001 was $755,416 and $2,266,247,
respectively. If SFAS 142 had been effective in those periods, operating loss
would have been reduced by the amount of amortization.
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
Accounting Principles Board Opinion (APBO) No. 30 into one single accounting
standard. The effective date of SFAS 144 was January 1, 2002.
The FASB issued Statement No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, in July 2002. The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Statement 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002.
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 effect on the Company.
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 $21,975,416 in the third quarter of 2002
increased 9% from $20,177,026 in the third quarter of 2001. Total revenues
decreased 2% to $66,385,954 for the first nine months of 2002 from $67,723,004
for the first nine months of 2001, due principally to unfavorable market
conditions and longer sales cycles incurred with the transition to Datastream
7i. International revenues were approximately $8,892,000 (40% of total revenues)
in the third quarter of 2002 and approximately $7,495,000 (37% of total
revenues) in the third quarter of 2001. International revenues were
approximately $26,147,000 (39% of total revenues) for the first nine months of
2002 and approximately $25,460,000 (38% of total revenues) for the first nine
months of 2001. See Note 2 to consolidated financial statements.
Product revenues increased 20% to $6,040,013 (27% of total revenues) in the
third quarter of 2002 from $5,038,672 (25% of total revenues) in the third
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 1% to
$18,670,827 (28% of total revenues) in the first nine months of 2002 from
$18,947,113 (28% of total revenues) in the first nine months of 2001. The
decrease was a result of unfavorable market conditions and longer sales cycles
incurred with the transition to Datastream 7i.
Service and support revenues increased 5% to $15,935,403 (73% of total
revenues) in the third quarter of 2002 from $15,138,354 (75% of total revenues)
in the third quarter of 2001. The increase is due to the impact of support
renewal contracts entered into during the third quarter of 2002 and is offset by
decreased software license revenues in prior quarters resulting in a decrease in
installation, training and services revenue. Service and support revenues
decreased 2% to $47,715,130 (72% of total revenues) in the first nine months of
2002 from $48,775,891 (72% of total revenues) in the first nine months of 2001.
Cost of Revenues. Cost of revenues increased 1% to $8,363,355 (38% of
revenues) in the third quarter of 2002, as compared to $8,268,262 (41% of total
revenues) in the third quarter of 2001. The increase in cost of revenues is due
to an increase in third party contract service expenses. Cost of revenues
decreased 13% to $24,731,081 (36% of total revenues) in the first nine months of
2002 from $27,133,510 (40% of total revenues) in the first nine months of 2001
due to cost savings in the support department as a result of improved
utilization and improved organizational efficiency in the first half of 2002.
Sales and Marketing Expenses. Sales and marketing expenses increased 3% to
$8,347,083 (38% of total revenues) in the third quarter of 2002 from $8,093,162
(40% of total revenues) in the third quarter of 2001. The increase is due an
increase in sales commissions. Sales and marketing expenses decreased 8% to
$25,193,322 (38% of total revenues) in the first nine months of 2002 from
$27,477,305 (41% of total revenues) in the first nine months of 2001 as a result
of the consolidation of sales activities and reduction of certain marketing
activities in the first half of 2002.
Product Development Expenses. Total product development expenditures
decreased 14% to $2,647,870 (12% of total revenues) in the third quarter of 2002
from $3,065,161 (15% of total revenues) in the third quarter of 2001. Total
product development expenditures decreased 19% to $7,949,168 (12% of total
revenues) in the first nine months of 2002 from $9,814,163 (14% of total
revenues) in the first nine months 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.
General and Administrative Expenses. General and administrative expenses
decreased 16% to $2,216,055 (10% of total revenues) in the third quarter of 2002
from $2,632,367 (13% of total revenues) in the third quarter of 2001, due to
reduced professional service fees, a reduction in bad debt expense and a benefit
from foreign currency transactions. General and administrative expenses
increased 2% to $7,731,330 (12% of total revenues) in the first nine months of
2002 from $7,553,214 (11% of total revenues) in the first nine 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.
Impairment of goodwill and other long-lived assets. During the third quarter
of 2001, the company wrote off $9,785,330 of impaired goodwill and $170,000 for
an impaired building.
Other income, net. Other income, net decreased to $123,156 in the third
quarter of 2002 from $322,671 in the third quarter of 2001. The decrease was due
to a decrease in return on investments during the third quarter of 2002 due
primarily to a reduction in yields on cash equivalent investment instruments.
Other income, net decreased to $268,043 in the first nine months of 2002 from
$634,220 in the first nine months of 2001.
Tax Rate. The Company's effective tax rate was 35% for the third quarter of
2002 as compared to 3% for the third quarter of 2001. The Company's effective
tax rate was 35% for the first nine months of 2002 as compared to 7% for the
first nine months 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.
Net income (loss). Net income (loss) improved to $340,733 (2% of total
revenues) in the third quarter of 2002 from $(11,861,087) ((59%) of total
revenues) in the third quarter of 2001. Net income (loss) improved to $683,728
(1% of total revenues) for the first nine months of 2002 from $(14,766,072)
((22%) of total revenues) for the first nine month of 2002. The improvement is
attributed to the absence of goodwill amortization and related impairment
charges which occurred during the third quarter of 2001.
Liquidity and Capital Resources
The Company has funded its operating activities primarily from cash
generated from operations. The Company ended its third quarter of 2002 with
$32,420,017 in cash and cash equivalents.
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 September 30, 2002, the
Company has repurchased 953,500 shares (94,500 shares in 2002) under separate
stock repurchase plans. The repurchased shares may be used, when needed, 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"), on February 13, 2002,
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 September 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.
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 lived 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
third quarter of 2002.
ITEM 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Within 90 days
prior to the filing of this Report , (the "Evaluation Date"),
our Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and
15d-14(c) under the Exchange Act). Based on such evaluation,
our Chief Executive Officer and Chief Financial Officer have
concluded that as of the Evaluation Date, our disclosure
controls and procedures provide reasonable assurance that the
information required to be disclosed by us in the reports that
we file or submit under the Exchange Act, is recorded,
processed, summarized and reported in the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls. Since the Evaluation Date, there have been
no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the Evaluation
Date.
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on From 8-K
Datastream filed a Current Report on Form 8-K on July 24, 2002
to report the Company's announcement of a stock repurchase plan.
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: November 14, 2002 /s/ C. Alex Estevez
-------------------
C. Alex Estevez
Chief Financial Officer (principal
financial and accounting officer)
CERTIFICATIONS
I, Larry G. Blackwell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Datastream
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Larry G. Blackwell
Larry G. Blackwell
President and Chief Executive Officer
Datastream Systems, Inc.
CERTIFICATIONS
I, C. Alex Estevez, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Datastream
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses._
Date: November 14, 2002
/s/ C. Alex Estevez
C. Alex Estevez
Chief Financial Officer
Datastream Systems, Inc.