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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996.
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number: 0-25590
Datastream Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 57-0813674
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 Datastream Plaza, Greenville, South Carolina 29605
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 422-5001
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 31, 1997: $133,810,429(?).
Number of shares of Common Stock outstanding as of March 31, 1997:
9,290,818
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of Datastream Systems, Inc. for
its Annual Meeting of Stockholders scheduled to be held June 13, 1997 are
incorporated by reference into Part III of this Report. Other than those
portions specifically incorporated by reference herein, the Proxy Statement for
the Annual Meeting of Stockholders scheduled to be held on June 13, 1997 shall
not be deemed to be filed as part of this Report.
PART I
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: Certain of the statements contained in the body of this Report are
forward-looking statements (rather than historical facts) that 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 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. An additional
statement made pursuant to the Private Securities Litigation Reform Act of 1995
and summarizing the principal risks and uncertainties inherent in the Company's
business is included herein under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Safe Harbor
Statement." Readers of this Report are encouraged to read these cautionary
statements carefully.
Item 1. Business.
Datastream Systems, Inc. ("Datastream" or the "Company") develops, markets,
sells and supports Microsoft Windows-based personal computer software for the
industrial automation market. Effective use of Datastream's software saves costs
by reducing downtime associated with key equipment failure, optimizing spare
parts inventories, improving purchasing efficiencies and reducing overall
maintenance costs. In 1996, Company currently derived over 99% of its software
unit sales from Windows-based products, including the Company's flagship
product, MP2 for Windows, which was named Plant Engineering magazine's 1994
"Product of the Year" in the Software category. The Company is an established
leader in the market for "computerized maintenance management systems" ("CMMS")
based on unit sales, having sold over 27,000 CMMS systems. Datastream's strategy
is to maintain its position in the CMMS market by providing feature-rich
software solutions to the maintenance, repair and operations ("MRO") industry
and being a value-price leader in each market in which it competes.
The Company was incorporated as a South Carolina corporation in February
1986 upon consummation of the acquisition of the assets and liabilities of the
Datastream Systems Division from a subsidiary of Wisconsin Power & Light. The
Company reincorporated as a Delaware corporation in January 1995. The Company's
executive offices are located at 50 Datastream Plaza, Greenville, South Carolina
29605, and its telephone number is (864) 422-5001.
On December 31, 1996, Datastream acquired all of the outstanding capital
stock of SQL Systems Group, B.V. ("SQL") for cash and shares of common stock of
Datastream having an aggregate value of approximately $34 million, $17 million
in cash, $14 million in stock issued pursuant to Regulation S, $3 million in
escrowed stock, and the assumption of outstanding liabilities. SQL (which is
based in Rotterdam, Holland) develops, markets, sells and supports high-end,
client/ server CMMS for sale internationally and domestically. SQL's products
are used in businesses, government agencies and other organizations to assist
these entities in maintaining high-value capital assets such as facilities,
plants and manufacturing production facilities. Like the Company's products,
SQL's products are designed to enable customers to reduce down-time, control
maintenance expenses, cut spare parts inventories and costs, improve purchasing
efficiency and more effectively deploy productive assets, personnel and other
resources.
SQL was incorporated as a Dutch corporation in February 1985 to sell a
portfolio of maintenance management software products. SQL currently derives
over 75% of its revenues from sales of its R5 CAMMS product. In 1988, SQL merged
with an English Subsidiary of Kvaerner. During 1994, SQL acquired a US
subsidiary of Hartford Steam Boiler, and during 1996, SQL acquired a French
partner from Sirlog, a leader in the French CMMS market. SQL's executive offices
are located at Marconistraat 16, Rotterdam, The Netherlands, and its telephone
number is 31 10 448 0700.
As used herein, except as otherwise indicated by the context, the terms
"Datastream" and "the Company" are used to refer to the historical and current
business and operations of Datastream Systems, Inc. and its subsidiaries other
than SQL and the term "SQL" is used to refer to the historical and current
business and operations of SQL Group, B.V. and it subsidiaries. Because the
acquisition of SQL was completed on the last day of 1996 and was accounted for
as a purchase, SQL's results of operations will be included with those of the
Company beginning in 1997. Accordingly, operations data provided for SQL prior
to 1997 is give solely for providing historical perspective about SQL prior to
its acquisition by the Company.
Industry
The computerization of maintenance and repair tasks has historically lagged
behind the computerization of other corporate functions such as production and
finance. Companies have historically neglected the computerization of the
maintenance and repair functions because of the low priority placed on
preventive maintenance management and the relative lack of knowledge about and
experience with the products and services available. Historically, most
companies adopted manual methods of monitoring their capital assets, maintaining
parts inventories, scheduling maintenance tasks and ordering repair services.
In recent years, industrial corporations have been faced with issues of
increasing competitiveness, often on a global basis. They have responded by
seeking new ways to reduce costs, improve efficiency and increase capacity
utilization. Structural changes implemented by these companies have included
placing emphasis on core competencies and restructuring, downsizing or
eliminating operations that do not contribute to financial performance. As a
result, departments responsible for maintenance and repair tasks have been asked
to ensure equipment performance, uptime and availability with increasingly
diminished resources. This pressure has forced maintenance departments to look
for new ways to manage these activities such as more effective scheduling of
equipment downtime and maintenance personnel and controlling inventory and other
costs. Today's sophisticated maintenance departments also seek to employ
statistical analysis techniques such as statistical preventive maintenance.
While the use of computers in maintenance departments has lagged, this trend is
being reversed as companies emphasize cost reduction to increase global
competitiveness and as reductions in prices and increases in computing power of
personal computers have lead to a proliferation of these tools in industry.
The term "computerized maintenance management systems" generally includes
any computer software application designed to track, monitor and maintain
histories on high value capital assets such as production equipment, spare parts
inventories, plants and facilities and to compare and contrast key asset
performance data. Manual methods represent an inefficient way to perform data
collection and statistical analysis. Catastrophic equipment failures,
sub-optimal equipment performance and unnecessary "preventive repairs" are
common occurrences at facilities that do not employ some means of managing
maintenance and repair activities. The advent of CMMS has, however, enabled
corporations to increase efficiency and reduce costs by, among other things,
reducing the probability of catastrophic failures, reducing unscheduled
downtime, eliminating costly excess repair parts inventories and allowing
maintenance tasks to be scheduled more effectively to permit maximum utilization
of resources. The resulting incremental gains in efficiency generally translate
directly into lower operating costs.
A 1993 benchmarking study published by A.T. Kearney, Inc. indicates that
maintenance costs range from approximately 1% to as much as 10% or more of an
organization's sales, depending on the industry. Datastream believes its systems
can reduce these costs by 10% to 20%. In its July 1996 report, Automation
Research Corporation ("ARC") revised its estimates of growth in CMMS demand
upward and reported that approximately $554 million (versus its previous
estimate of $486 million) was spent on CMMS software and related services in
1995 and that a $1 billion market for CMMS software will exist by the year 1998
(versus 2000), and that a $1.3 billion market will exist by the year 2000. ARC
notes that the Compound Annual Growth Rate (CAGR) of demand for CMMS software
and services is 18.9%. The Gartner Group projects a $1 billion market for CMMS
software and related services by the year 2000 and a $2 billion market by the
year 2002. A 1994 study prepared for Datastream by Market Insight indicates that
only approximately 15% of corporate and governmental users surveyed utilize CMMS
software to track maintenance functions, and that nearly 60% of these users
still perform such tasks manually. Although these figures are only projections,
management believes they reflect the substantial potential for future growth in
the use of CMMS.
The market for CMMS software is relatively fragmented, with an estimated 200
vendors competing for market share. Datastream's sales efforts have historically
been concentrated at the lower end of the CMMS market, and the Company could
encounter competition in this segment from vendors that have traditionally
provided software for mainframes and minicomputers and are now seeking to
convert their systems for use in the personal computer ("PC network")
client/server environment. The acquisition of SQL enables the Company to begin
to compete in the high-end segment of the CMMS market.
Certain competitors have greater financial, marketing, service and support
and technical resources than the Company and SQL. In addition, as the PC network
client/server market continues to develop, companies with significantly greater
resources than Datastream may seek to introduce products specifically designed
to provide CMMS solutions on PC network client/server systems at lower prices,
or to form strategic alliances with competitors of the Company. See
"--Competition."
Company Strategy
The Company's objective is to leverage its leadership position in the CMMS
market by providing feature-rich software solutions to the MRO industry and by
being a value-price leader in each segment of the market in which it competes.
To achieve this objective, Datastream and SQL intend to continue to pursue the
following strategies:
Enhance product offerings. The foundation of the Company's past success has
been the innovative quality of its product offerings and the value the Company's
products provide to its customers. In 1993, 1994, 1995 and again in 1996, the
Company was awarded Plant Engineering magazine's Software "Product of the Year"
for its products- SideArm for Windows, MP2 for Windows, the Personal Maintenance
Assistant, and MaintainIt Pro, respectively. MP2 for Windows includes audit
trail, warranty tracking and statistical predictive maintenance ("SPM") features
that are not commonly available in competitive products. The Personal
Maintenance Assistant is based on the Apple Newton operating system and is the
first entirely portable, handheld work order system that can be taken and used
at the maintenance job site. MaintainIt Pro provides is a feature rich, easy to
use, visually attractive product that is based on the Microsoft Access database.
Unlike many software companies, Datastream provides free upgrades of Company
products to customers that subscribe to annual maintenance and support
contracts. During 1996, the Company released Version 4.6 of MP2 for Windows
which is designed to run under Microsoft Windows95 operating system; an
entry-level product called MaintainIt Pro which is based on the Microsoft Access
database; a German Language version of MP2 for Windows; RequestLink, an Internet
work order request system; and beta versions of MP2 Professional and Enterprise,
client/server products that utilize the Microsoft SQL Server database. To
satisfy the increasingly sophisticated demands of large multinational
corporations, through the acquisition of SQL, the Company now offers SQL's high
end, Oracle-based R5 CAMMS (Computerized Asset Management Maintenance System)
product.
Utilize its cost-effective telesales program to increase market share. Given
the large and relatively untapped nature of the Company's potential market,
Datastream seeks to gain market share through its cost-effective telesales
efforts. The relatively inexpensive nature of the Company's systems (which sell
for an average of $179, $3,700, and $13,400 for MaintainIt, MP2 for Windows, and
MP2 for Windows Client/Server, respectively) makes Datastream's telesales
approach a very cost-effective means of accessing the Company's target market
and achieving gains in market share. The Company seeks to use its initial sale
as a platform from which to sell the customer (or affiliates of the customer)
additional products and services. During 1996, the Company expanded its sales
efforts through the addition of both a low-end `channel' sales force selling to
catalogue, retail and OEM customers, and a geographically-dispersed, regional
outside sales force. During 1996, Datastream also increased the size and scope
of its third-party distributor network in those countries where the size of the
local market did not warrant a direct investment. The Company is continuing to
aggressively add sales personnel to increase the scope of its channel sales
efforts, telesales efforts and direct selling efforts, both domestically within
Datastream and internationally within SQL, and sales support personnel in both
companies to increase the scope of the international distributor network.
Increase applications engineering, training and support revenues. As
Datastream's customers migrate to more complex CMMS systems (particularly
client/server systems), management expects that opportunities will increase to
maximize applications engineering, training and support revenues. The extent to
which this migration will actually occur is dependent upon the continued
acceptance in the marketplace of client/server computing as a computing model,
the success of the Company's client/server offerings, customer spending
decisions and other factors beyond the control of the Company. In 1996,
Datastream more than doubled the number of regional training classes it offers
and substantially increased the capacity of its Applications Engineering
Department, which provides consulting and advisory services. The Company has
also expanded its recently established Integration Services Group, whose mission
is to meet the sophisticated systems integration needs of client/server
customers, and its Customization Group, which focuses on establishing industry
expertise in the automation of MRO activities. The acquisition of SQL further
extends the ability of the Company to service an increasingly sophisticated
customer base. The Company emphasizes the importance of product support
concepts, which provide a recurring revenue stream and continued long-term
relationships with Datastream's customers.
Penetrate international markets. International sales of Datastream products
increased to 13.4% of Datastream's revenues for 1996 (from 10.7% of 1995
revenues), and management believes that substantial international demand exists
for high-quality software products with industrial applications. To meet this
demand, Datastream increased international sales in 1996 through the engagement
of distributors in Italy and Puerto Rico to complement those previously engaged
in Australia, South Africa and Malaysia. In September 1996, the Company opened
an office in The Netherlands to further penetrate the European market. In 1996,
Datastream also released a German language version of MP2 for Windows to serve
markets Germany, Austria and Switzerland. The development of a French language
version is underway and future projects will include the development of other
language versions of MP2 for Windows. In addition, in December 1996, the Company
completed the acquisition of SQL, an established leader in the European market
for CMMS. SQL held the largest market share of CMMS vendors in Europe with 1996
sales of approximately $17.3 million. Based on a 1995 study by ARC, SQL was
estimated to have a worldwide market share of 6.4% and was the largest European
based CMMS vendor with an estimated European market share of 13.0%. According to
ARC, Europe accounted for 24% of the total worldwide demand for CMMS in 1995. No
vendor of CMMS holds more than 17% of the market in Europe.
Increases in international sales as a percentage of revenues represents a
positive trend, although changes in the value of the foreign currencies from
which such revenues are derived relative to the United States dollar could
contribute to fluctuations in Datastream's results of operations and affect its
financial position. Gains and losses on translation to United States dollars
could influence the Company's results of operations.
Establish new strategic alliances. Datastream seeks to leverage its position
as the established unit sales leader in the CMMS market by entering into new
strategic relationships with leading companies in the MRO and software
industries, thereby opening new sales channels and enhancing its product
offerings. Continuation of the Company's leadership position in the CMMS market
is primarily a function of continued customer acceptance of Datastream's
products and the effects of competitive pressures experienced by the Company
from CMMS products offered by its competitors, as well as the Company's success
in establishing and maintaining effective strategic relationships. In 1994, the
Company entered into a cooperative relationship with W.W. Grainger, Inc.
("Grainger"), a $3 billion nationwide distributor of industrial equipment and
components sold through more than 1400 sales representatives and account
specialists. This agreement gives Datastream's customers direct access to
Grainger's Electronic Catalog of over 90,000 items of industrial and commercial
equipment and supplies for their MRO needs. This relationship also provides
Datastream with an additional channel for selling its products to Grainger's
customer base. Datastream also recently developed a paperless work order system
that allows MP2 for Windows to operate on Apple Computer, Inc.'s Apple Newton
operating system (a development project that management believes could be
replicated with other handheld devices) and, in coordination with Wonderware
Software Development Corporation ("Wonderware"), completed an automated work
order system that responds to requests from Wonderware's InTouch man-machine
interface software. In 1996, Datastream signed a distribution agreement with J.
Blackwood & Sons, Ltd. ("Blackwood's") a $420 million distributor of industrial
equipment and components located in Australia. In 1996, Datastream also entered
into an a strategic alliance with Deere and Company ("John Deere"). This
agreement gives customers of John Deere's industrial division direct access to
the John Deere on-line ordering system for John Deere spare parts. Included with
each sale of equipment (e.g. front end loaders, fork lifts, etc.) from this
division is a copy of Datastream's MaintainIt product that contains a complete
listing of spare parts for John Deere industrial equipment These relationships
and alliances provide additional and expanded channels of distribution for sales
of Datastream products.
Products
The Company develops, markets, sells and supports innovative personal
computer software for the industrial automation market. Datastream's software
products assist customers in managing high-value plants, facilities and
production equipment for increased efficiency and productivity. The Company's
products are designed to enable customers to reduce downtime, control
maintenance expenses, cut spare parts inventories and costs, improve purchasing
efficiency and more effectively deploy productive assets, personnel and other
resources. In 1996, Datastream derived over 99% of its software unit sales from
its Windows-based products, SideArm for Windows, MaintainIt, MaintainIt Pro, MP2
for Windows and MP2 for Windows Client/Server. Datastream products have garnered
Plant Engineering magazine's "Product of the Year" award in the Software
category in each of the last four years: MaintainIt Pro in 1996, Personal
Maintenance Assistant in 1995, MP2 for Windows in 1994 and SideArm for Windows
in 1993.
In 1996, through the acquisition of SQL, the Company added SQL's
Oracle-based R5 CAMMS product to its product mix. Management believes that the
addition of this product will give the Company increased opportunities to
penetrate into the high-end of the CMMS market.
The following chart describes the evolution of the Company's CMMS systems:
Initial
Release Date
Package/Platform Description
MP2 (DOS)................ Predecessor of MP2 for Windows. June 1989
SideArm (DOS)............ Predecessor of SideArm for December 1990
Windows.
SideArm for Windows...... Microsoft Windows operating September 1993
environment; provides work
orders, work request system,
inventory management, basic
graphs and reports.
MP2 for Windows.......... Microsoft Windows operating April 1994
environment; provides work
orders, work request system,
statistical process control,
graphs and reports, interface
with barcode and other
handheld devices, inventory
and purchasing, OSHA
regulations, training
management, audit trail,
security, FDA validation
specifications, access to
Grainger's Electronic Catalog
and network capability.
MaintainIt............... Microsoft Windows operating August 1995
environment; provides work
order scheduling, equipment
records, inventory, reports
and analysis tools.
Datastream Personal Microsoft Windows operating August 1995
Maintenance Assistant environment; provides work
on Apple Newton.......... orders, work request system,
statistical process control,
graphs and reports.
MP2 for Windows Microsoft Windows operating September 1995
(Spanish language)... environment; Spanish language
screens, text and documentation;
provides work order scheduling,
equipment records, inventory,
reports and analysis tools.
MP2 for Windows User-interface and November 1995
(client/server)........ functionality identical to
MP2 for Windows. The client/
server version of MP2 for
Windows is compatible with
Oracle databases that reside
on Unix, OS/2 and DOS/Windows
database servers.
MP2 for Windows95 and NT Microsoft Windows95 and NT 32 June 1996
bit operating environment;
provides the same functions
as MP2 for Windows 16 bit
operating system
Initial
Release Date
Package/Platform Description
MP2 for Windows Microsoft Windows operating September 1996
(German language).... environment; German language
screens, text and documentation;
provides work order scheduling,
equipment records, inventory,
reports and analysis tools.
MaintainIt Pro Microsoft Windows operating September 1996
environment; provides work
order scheduling, equipment
records, inventory, reports
and analysis tools On the
Microsoft Access database
RequestLink Internet/e-mail electronic September 1996
work order request system
provides remote work order
access to Datastream products
through Lotus cc:Mail/Notes,
Microsoft Mail/Exchange, or
Internet mail (SMTP/POP3)
MP2 for Windows for User-interface and December 1996
Microsoft SQL Server 5.0 functionality identical to
Server 5.0 (Beta) MP2 for Windows.
(client/server)........ The client/server version of
MP2 for Windows is compatible with
Microsoft SQL databases that
reside on Windows NT database
servers.
Oracle Financials 1.0 Provides data interchange December 1996
(Beta)......... capabilities between MP2 for
Windows Client/Server for
Oracle databases with
Oracle Financials suite of products.
R5 CAMMS Oracle Designer/Developer December 1996 (1)
2000, Oracle Forms 4.5,
Oracle 7 database product
developed, marketed, sold and
supported by SQL. High-end
multi-language, multi-platform,
double-byte client/server
technology.
(1) Originally developed in 1994 by SQL,
which was acquired in December
1996 by Datastream.
SideArm for Windows. SideArm for Windows is an off-the-shelf, maintenance
management package that provides tools for generating work orders, scheduling
preventive maintenance, controlling inventory, recording equipment histories and
producing basic charts and graphs. It is designed for intuitive use, enabling
unsophisticated users to begin using the software immediately upon installation.
Accordingly, it features pull-down menus, an array of shortcuts and hot keys, a
context-sensitive help function and a series of "quick-entry" commands for the
more frequently used functions of the package. SideArm for Windows is
"multi-tasking" (e.g., permits the user to work on as many as 10 functions at
once), has enhanced repair parts inventory control features and contains a
Service Request module that allows facilities managers to distinguish work
requests from work orders and thereby enhances the manager's ability to
prioritize tasks and maximize available resources. SideArm for Windows is
available in either single user or networked versions.
The Company continues to license and support the predecessor of SideArm for
Windows, known as SideArm, for use in DOS operating environments. Datastream
designs SideArm to be flexibly enhanced and upgraded. For example, first-time
users can purchase the single-user DOS version and upgrade to a network version
later. Datastream provides conversion programs to convert DOS and SideArm for
Windows packages to MP2 for Windows. This allows users of entry-level packages
to seamlessly upgrade to MP2 for Windows.
MP2 for Windows. MP2 for Windows is a full-featured, integrated maintenance
system that includes a flexible security system, sophisticated analysis,
reporting and regulatory compliance capabilities and a set of precise tools for
generating work orders, tracking equipment histories, managing inventory and
purchasing functions, maintaining complete labor records and allocating scarce
maintenance resources. It also offers innovative audit trail, warranty tracking
and statistical predictive maintenance ("SPM") features. The SPM module analyzes
process variables such as temperature, vibration and electrical current to
measure trends against established norms. If the variables exceed specified
tolerances or calculated statistical limits, the software alerts the user to
allow necessary repairs to be made before equipment failure is experienced.
Customers report that the SPM feature reduces corrective maintenance expenses
significantly and increases productivity. In addition, the entire user's manual
for MP2 for Windows is available on the user's screen through the help function.
MP2 for Windows offers a large number of advanced capabilities not available
in any other Datastream product. These capabilities include a work request
system that can request work from any workstation; a service request module that
allows the manager to track response times, prioritize service requests and
maintain records of requests by tenant or client; advanced inventory tracking
features that track inventory by LIFO, FIFO or weighted average price methods
and also perform "ABC" (inventory assessment) and "Economic Order Quantity"
analyses; exclusive purchasing and requisition features for establishing and
maintaining pre-approved cost thresholds to monitor and control purchasing; a
"shadowing" feature that automatically combines separate, but contemporaneously
scheduled preventive maintenance tasks that include the same procedure; and,
importantly, access to Grainger's Electronic Catalog. MP2 for Windows also
offers extensive graphic capabilities. A variety of optional add-on products are
also available for MP2 for Windows including (i) a Custom Toolbox that allows
the user to transfer data from MP2 for Windows to spreadsheets and to create
custom reports and programs, (ii) customized work order and purchase order
capability, (iii) networking capability, (iv) enhanced OSHA compliance features
and (v) compatibility with barcode technology. The barcode option allows
printing of labels, entry of equipment readings and meter data, receipt of
purchased materials, counting of physical inventory, inventory issue and return
and work order entries.
As with SideArm, Datastream continues to license and support the predecessor
of MP2 for Windows, called MP2, for use in DOS operating environments. MP2 for
Windows is compatible with Windows 95 and Windows NT operating systems.
The Client/Server Version of MP2 for Windows. The Company presently offers
its flagship product, MP2 for Windows, in both "file/server" and "client/server"
configurations. In the file/server configuration, MP2 for Windows allows
multiple users to share data files through access to a central file server. Each
PC network user controls all primary functions at the user's workstation,
including database search and sorting functions.
Management believes that many of the Company's existing customers and
prospects have either already adopted or may adopt in the foreseeable future a
"client/server" computing architecture. The client/server model is recognized as
an effective and cost-efficient approach for allowing multiple users to access,
utilize and share large databases. A typical client/server system features
software operating on "client" computers--high performance desktop personal
computers using a Windows graphical user interface that controls all inquiry and
command functions--connected through a local area network with database server
computers that organize and manage the resident relational database and manage
network functions such as data storage, printing, communications, data security
and data integrity.
The lower cost of increasingly powerful personal computers has made it
possible for smaller organizations to adopt a client/server approach to managing
their CMMS tasks. Many other factors favor the adoption of client/server
solutions, including improvements in operating systems and software
environments, the adoption of easy-to-use graphical interfaces supported by
Microsoft Windows and the broader availability of connectivity software that
links personal computer "clients" with mainframes and mini-computers to protect
an organization's investment in existing host systems. Finally, a PC network
client/server system can be deployed on an enterprise-wide basis, on multiple
networks, for customers that perform maintenance and repair operations at
multiple locations.
Datastream released its client/server version of MP2 for Windows during the
fourth quarter of 1995. The client/server version of MP2 for Windows combines
the benefits of PC servers and PC networks with a Windows graphical user
interface and SQL relational database server. Client workstations receive data,
command and query input from users and forward this input to the database,
perform all database command and query functions, organize selected data and
forward data to the client for presentation to the user. In a client/server
environment, each user thus has access to a common database, enhancing corporate
database sharing of inventory and purchasing data, equipment performance
information and work standards.
The client/server version of MP2 for Windows is priced in the $10,000 range
and is believed by management to be comparable, in terms of functionality, with
competitive product offerings typically priced from $40,000 to $250,000. The
graphical user interface for this product and the application features are
virtually identical to the current file/server version of MP2 for Windows,
although the client/server version processes large customer databases more
rapidly than the file/server version (a feature that management expects will
enhance customer acceptance). Management believes that many of the Company's
existing file/server users may elect to adopt client/server technology in the
foreseeable future to take advantage of data integrity, security, data sharing
and performance improvements. As this migration continues, management expects
opportunities for expanded revenues in the form of additional installation,
training and customization services.
Prior to the release of its first client/server version of MP2 for Windows
in November 1995, the Company did not participate in the market for
client/server tools and applications. Management recognizes that client/server
products are more expensive, time-consuming and difficult to install and
integrate into a customer's existing system than counterpart products offered
for use in file/server or other computing paradigms and that Datastream's entry
into this market presents challenges in terms of market acceptance that the
Company had not previously faced in selling lower-priced, easier-to-install
tools and applications. Continuing to expand its presence into the client/server
marketplace the Company also faces all of the risks inherent in any new product
introduction, including business risks beyond the scope of management's control.
MaintainIt for Windows. MaintainIt for Windows is an off-the-shelf,
entry-level maintenance system marketed primarily to small businesses (fewer
than 20 employees) as an inexpensive alternative to the Company's other
products. MaintainIt provides basic tools for creating work orders, scheduling
repair personnel activities, maintaining equipment records, controlling
inventory functions and generating management reports and graphs. A true Windows
product, MaintainIt is compatible with Windows 95 and is offered in both
single-user and networked versions.
MaintainItPro for Windows. MaintainItPro for Windows was released in
September 1996. MaintainItPro is an off-the-shelf, entry-level maintenance
system marketed primarily to small to medium businesses as a lower cost
alternative to the Company's MP2 for Windows product. MaintainItPro contains all
the features of MaintainIt as well as location based indexing, rotating spares
inventory, and more extensive graphs and report capabilities. MaintainItPro
operates on the Microsoft Access database. MaintainItPro is compatible with
Windows 95 and is offered in both single-user and networked versions.
Datastream Personal Maintenance Assistant on Apple Newton. The Personal
Maintenance Assistant was released in August 1995. It is a product that combines
the attributes of the Apple Newton with many of the features of MP2 for Windows.
The product enables a customer's employees to download work orders and other
data to the handheld Apple Newton, convert handwritten notes into text and
update data fields. These functions can be performed remotely from the shop
floor by electronic communication of data to MP2 for Windows. The product is
expected to increase accuracy and completeness of data input, reduce the need to
use printed work orders and permit remote data entry and retrieval. The Company
may consider future enhancement of this product to achieve compatibility with
other handheld computing devices and to permit wireless communication and
barcode compatibility. The Company was awarded Plant Engineering magazine's
Software "Product of the Year" for the Personal Maintenance Assistant in 1995.
RequestLink. RequestLink was released in August 1995. It is a product that
provides the opportunity to electronically enter work order service requests
from remote locations into any of the Datastream CMMS products via industry
standard electronic mail (e-mail) and Internet formats, including Lotus
cc:Mail/Notes, Microsoft Mail/Exchange and Internet e-mail protocols
(SMTP/POP3). RequestLink enables the customer to create a paperless work request
system in both local and wide area networks.
R5 CAMMS Through its acquisition of SQL in December 1996, Datastream
acquired the rights to SQL's R5 CAMMS product . R5 CAMMS is a portfolio of
integrated modules designed to enhance the management of high-value assets
throughout asset lifecycles and finds applicability in diverse industrial and
commercial applications, including process installations, transport, utilities,
consumer products/packaging, facilities, telecommunications, defense, etc. R5
addresses configuration management, workflow management, inventory management,
document management, purchasing management, project management, workflow
capacity management and financial/budgets management through its various modules
(base, assets, work, materials, purchasing, projects, inspections, budgets, and
business application integration) and options (documents, flexible reporting,
positions, systems, permits, quotations, contracts, bar-coding, scheduling and
asset tracking). Other unique features include an outsourced maintenance
activity tracker, a standard library of frequently executed work orders, a
short-term scheduling feature, a report manager, extensive security features and
on-line, context sensitive help. The R5 system is language independent, allowing
concurrent use of multiple languages within one installation. The system is
presently offered in twelve languages, including English, Spanish, French,
German, Italian, Danish, Dutch, Czechoslovakian, Polish, Swedish, Chinese, and
Portuguese. R5 is offers a widely scalable and flexible platform, having been
developed using the Oracle Designer/Developer 2000 tool set. R5 utilizes object
oriented design, stored procedures, Oracle Forms 4.5 and the Oracle 7 database
to ensure database integrity and a robust, scalable, enterprise-wide application
that is interface independent and will run concurrently in native Microsoft
Windows mode as well as on X/Motif or character based terminals. Specific links
have been established with Enterprise Resource Planning (ERP) vendors such as
Oracle, SAP, BAAN and Dun and Bradstreet. Generic applications integration
capabilities support diverse systems such a MRPII, JIT/TQC, financial
applications, scheduling, document management, condition monitoring, geographic
information systems (GIS) and Human Resources. Finally R5 supports OLE 2
integration with popular PC packages such as Microsoft.
Pricing. Datastream's entry-level package, MaintainIt, is available through
catalogs and directly from the Company for $189 in the single-user
configuration; networked configurations are priced at $299 for a two-user
network and $699 for a ten-user network. One-year maintenance and support
subscriptions for MaintainIt are presently available for $79 in the single user
configuration, $129 in the two-user network version and $299 in the ten-user
network version. Another entry-level package, SideArm for Windows, sells for
$1,495 in a single-user configuration; network versions are available in a two-
to three-user configuration for $2,495, a four- to ten- user configuration for
$2,995, and an 11+- user configuration for $3,495. A one-year maintenance and
support subscription for SideArm for Windows ranges in price from $595 in the
single user version to $1,295 for the 11+-user configuration. The DOS version of
SideArm presently sells for $995 for a single-user configuration, $1,990 for a
two to six user configuration and $2,990 for a seven or more user configuration.
Annual maintenance and support subscriptions for the DOS version of SideArm
presently sell for $295 to $595 per year. MaintainItPro is available directly
from the Company and through catalogs for $1,495 in a single-user configuration;
network versions are available in a two- to three-user configuration for $2,495,
a four- to ten- user configuration for $2,995, and an 11+- user configuration
for $3,495. A one-year maintenance and support subscription for SideArm for
Windows ranges in price from $595 in the single user version to $1,295 for the
11+-user configuration.
MP2 for Windows presently sells for $1,995 on a single-user basis, $3,995
for two to three users, $4,995 for four to ten users, $6,995 for 11 to 20 users,
$9,995 for 21 to 50 users and $11,995 for more than 50 users. Various modules of
optional software are also available. One-year maintenance and support
subscriptions for MP2 for Windows range in price from $795 for a single user to
$2,495 for 50 or more users. In 1994, the Company introduced the MP2 for Windows
"Bundle" as a means of packaging an array of optional modules and services to
increase the average sales per transaction. The Bundle is a package of standard
and optional features, including MP2 for Windows, Barcode Software, Custom
Toolbox, Custom Work Orders and Purchase Orders, OSHA regulations database and
Network Software. Management believes that per-transaction revenues have
increased since the MP2 for Windows Bundle was introduced.
The "Professional" client/server version of MP2 for Windows sells for $4,995
for a single seat installation with each seat thereafter selling for $995.
Options offered with MP2 for Windows Professional client/server include all
those offered with MP2 for Windows; pricing ranges from $494 to $1,495 depending
on the option. One-year maintenance and support subscriptions for MP2 for
Windows Professional client/server cost $900 for the initial installation with
support for each seat thereafter costing $180. Support for additional options
ranges from $90 to $1,800 per option depending on which options have been
purchased. The "Enterprise" client/server version of MP2 for Windows sells for
$14,995 for a three-seat installation with each seat thereafter selling for
$1,995. Options offered with MP2 for Windows Enterprise client/server include
all those offered with MP2 for Windows; pricing ranges from $495 to $9,995
depending on the option. One-year maintenance and support subscriptions for MP2
for Windows Enterprise client/server cost $2,700 for the initial three seat
installation with support for each seat thereafter costing $360. Support for
additional options ranges from $90 to $1,800 per option depending on which
options have been purchased.
The Datastream Personal Maintenance Assistant on Apple Newton is priced at
$1,495 (includes Apple Newton with MP2 for Windows Personal Maintenance
Assistant software pre-loaded). RequestLink ranges in price from $180 for a
five-user configuration to $1,800 for the unlimited-user version.
List price for SQL's R5 CAMMS product is $188,000 for a five-module base
configuration (base module plus asset, work, material and purchasing management
modules) supporting a minimum of 32 users. Additional modules are priced from
$14,000 - $34,000, depending on the module. Installation, consulting, training,
and network services generally add from 50% to 100% of the cost of the software
installation, and an annual technical support contract is priced at 18% of the
cost of the software installation. Systems supporting additional users are
priced higher.
All of the foregoing prices are subject to change.
Services
Approximately 57%, 54% and 53% of the Company's revenues for 1996, 1995 and
1994, respectively, were derived from sales of applications engineering and
support services. Management believes that the need for expertise in installing,
customizing and using CMMS systems will grow as products evolve and the
sophistication of software solutions increases, and as MRO software is
increasingly employed as a strategic cost reduction tool. For example,
management believes that revenues from applications engineering and support
services will continue to increase with the release of the client/server version
of MP2 for Windows due to the increased complexity and sophistication of the
needs of the client/server market. The extent to which the Company's services
revenues will grow is, as noted previously in this Report, dependent upon
continued customer acceptance of client/server tools and applications in general
and, specifically, the results of the Company's entry into this developing
market. Management believes that the integration of SQL's product mix into the
Company's product line will generate increasing opportunities for sales of
engineering services and accelerate the growth of services revenues as a
percentage of total revenues. SQL generated approximately 67%, 59% and 68% of
its revenues for 1996, 1995, and 1994, respectively, from sales of consulting
and support services.
Fee-based consulting and advisory services are offered by Datastream's
Applications Engineering Department. Applications engineering revenues also
include revenues from training, installation and customization services offered
by Datastream's Customization Group and system integration services provided by
its Integration Services Group. Support services revenues include revenues from
maintenance and support subscriptions.
Applications Engineering Services. Datastream's Applications Engineering
Department provides fee-based consulting and advisory services and configures
and implements CMMS software licensed by the Company. The Department's primary
function is to provide solutions to customer-specific applications problems such
as spare parts inventory management, meeting regulatory requirements and
reducing unplanned equipment downtime through improved work order planning and
preventive maintenance. Most Applications Engineering Department services are
performed in connection with installations of MP2 for Windows systems and the
Company's sales personnel actively seek to sell a five-day package of consulting
services as part of each MP2 for Windows license. There are presently 65 field
engineers assigned to the Applications Engineering Department. Most of these
individuals have backgrounds in manufacturing and operations.
The Applications Engineering Department also offers fee-based training
services at its Greenville, South Carolina headquarters, at its Irvine,
California training facility, and in frequent regional training seminars around
the country. The Company offered a total of 419 training seminars in 1996 and
286 training seminars in 1995. Custom training programs are also available.
In late 1994, Datastream increased its service offerings to include a
Customization Group, which enhances the functionality of a system for a
particular customer, and an Integration Services Group, which provides
fee-based, on-site installation and systems integration services for
client/server systems. In 1995, the Applications Engineering Department
implemented a SWAT team approach that invests whatever time is required at a
customer tool crib or parts store room (usually two or three weeks) to
inventory, sort, label and organize parts or tools, and load associated data
into MP2 for Windows. Management believes that revenues attributable to
customization, integration services and SWAT team services will increase as
Datastream continues to install client/server systems in the marketplace. In
1996, Datastream implemented a project management group to oversee and manage
large, project oriented installations of its software.
SQL's Consulting Services group also provides fee-based consulting and
advisory services and configures and implements CMMS software licensed by SQL.
There are presently 50 field engineers assigned to the SQL Consulting Services
group. SQL is a licensee of Aladon Reliability Centered Maintenance (RCM), a
functionality-based maintenance approach developed by the airline industry in
the early 1960's. Reliability- centered maintenance is most useful in
maintenance situations where the consequences of catastrophic failure are high,
such as airline crashes, fuel tank farm fires, etc. RCM focuses on testing,
inspection and redundant systems to ensure failure risk is minimized. Six
employees of SQL are RCM-licensed at present.
Support Services. One-year maintenance and support subscriptions range in
cost from $79 for MaintainIt to $295 for a single-user SideArm system in a DOS
environment to $2,495 for a 50+-user, networked MP2 for Windows system to
$19,620 for a similar 50-user networked MP2 for Windows Enterprise client/server
system. Maintenance and support services include unlimited, toll-free access to
Datastream's TechSupport staff, free product upgrades (including data
conversions), access to Datastream's electronic bulletin board, "Datastream
OnLine" (a 24-hours a day, 7-days a week electronic mail feature that allows
customers to communicate with the Company as well as with other customers), a
file download and upload service, product forums containing information and
problem solutions, and a "chat" mode that allows customers to engage in on-line
conversations.
Toll-free customer support numbers are presently available in the United
States as well as most Western European nations, the United Kingdom, Canada and
Mexico. Management believes that a majority of the Company's customer base
presently subscribes to a Datastream maintenance and support contract.
SQL provides support to its customers via a tiered approach. First-level
support is provided locally by the country sales office, with back-up expertise
being supplied by the corporate help desk in Rotterdam. Cost for a typical
one-year maintenance and support subscription is approximately 18% of the price
of the software installation. As of March 31, 1997, SQL employed 19 personnel in
support operations.
Customers
Datastream markets its products as cross-industry solutions for maintenance
and repair and spare parts inventory information management. Datastream has sold
systems to companies in 23 standard industrial classification ("SIC") codes
representing virtually every major industry. Datastream systems are found in any
industry in which large capital investments are the norm--electric, gas and
sanitary, chemicals and allied products, electronic and electrical equipment,
health services, transportation, property management, pulp and paper mills,
rubber and plastics, oil and gas extraction, petroleum refining, food and
kindred products, fabricated metals, industry and commercial machinery,
mining/quarrying non-metals, etc. While the Company has a customer base that
includes many Fortune 500 companies, its low-cost, high-value, high-volume
pricing strategy is designed to make its products economical for smaller
companies as well.
Datastream (exclusive of SQL) has sold over 27,000 units since inception and
has grown its installed base by over 70% annually during the period from 1989 to
1996. The broad applicability of the Company's systems is demonstrated by the
diversity of the Company's customer base, which includes the following customers
currently using the Company's products in selected industries:
Aerospace/Defense
Bell Helicopter Textron
General Dynamics
McDonnell Douglas
Automotive
Dana Corporation
Eaton
Echlin/Automotive Controls
Corp.
Harley Davidson
Lear Seating Corporation
Modine
Chemicals
Dow Chemical
DuPont
Glidden Company
Monsanto
Morton International
Rhone Poulenc
Computers, Electronics and
Electrical
AT&T Global Information
Solutions
Emerson Electric
Texas Instruments
Thermo Electron
Food
Cargill
Frito-Lay
Kraft Foods
Kroger
Pepsico
Pontiac Foods
Procter & Gamble
Stroh Brewery
Swiss Miss (Hunt Wesson)
General Facilities
A&S Jordan Marsh
American Greetings
Atlantic Union College
BMG Music
Cutler-Hammer,
Div. of Eaton Corp.
Family Dollar
Foster Wheeler
Gillette
Kmart
Maritz
New York University
Pillsbury Center
General Manufacturing
Bic
Caterpiller
Colgate Palmolive
Cooper Industries
Levi Strauss & Co.
Shaw Industries
Government
City of Baton Rouge, LA
Diego Garcia Naval Air Base
(Burns & Roe)
McClellan Air Force Base
New York Department of
Corrections
U.S. Army
U.S. Geological Survey
Healthcare
Gurwin Jewish Geriatric Center Greenville Hospital System
Gwinnett Hospital System
Indian Health Service
Memorial Sloan Kettering
Cancer Center
Mercy Medical Springfield
St. Martha's Regional Hospital
Tucson Medical
Metals
Alcoa
Alumax
American Steel
Kaiser Aluminum
Nucor Steel
Meynolds Metals
Petroleum
Chevron
Fina Oil
Mobil Chemical
Texaco
Unocal
Pharmaceuticals
Abbott Labs
Hospitality
Four Seasons Hotel--Philadelphia
Holiday Inn
Marriott
Registry Resort--Naples, FL
The acquisition of SQL in December 1996 added the following companies to the
Company's customer list: AT&T Wireless, Cox California PCS, AirTouch Cellular,
Pacific Bell Mobile Services, US West Wireless, London Underground, Paris Metro,
BC Transit, Toronto GO Transit, London Electricity, Denver Metro Wastewater,
Gottenburg Energi and Port of Rotterdam.
None of Datastream's customers generated more than 5% of its revenues in any
of the Company's last three fiscal years, and in 1996 none generated more than
1.5% of its revenues. None of SQL's customers generated more than 5% of its
revenues in any of SQL's last three fiscal years.
Sales and Marketing
Datastream continues to increase its sales and marketing efforts and staffs.
The Company markets its products and services through 118 sales and marketing
professionals (as of March 31, 1997), including a direct sales force of 66
telesales representatives with specific geographic responsibilities and a direct
outside sales force of 23 with specific geographic responsibilities. Datastream
also uses a computerized sales and marketing software system with database
marketing, telemarketing, lead tracking and analysis and customer support
capabilities.
The Company's marketing department consists of 18 employees and is
responsible for generating leads through advertising, public relations, trade
shows and seminars, strategic partnerships and direct mail. The marketing
department is also responsible for product marketing, market research and
competitive analysis and provides competitive, customer and prospect input into
the Company's product development efforts. To enhance its marketing efforts,
Datastream sponsors a National Users Conference each year. The conference
provides an opportunity for decision makers in the MRO industry to attend
training sessions, workshops and presentations addressing both maintenance
issues generally and Datastream products specifically, and to interact with
other users and Company employees.
The cornerstone of Datastream's sales and marketing efforts is its 66-person
telesales team. The relatively inexpensive nature of the Company's systems,
combined with the excellent quality of product information and order fulfillment
items generated by the marketing department, make Datastream's telesales
approach a cost-effective vehicle for accessing the Company's target market and
achieving gains in market share. Management routinely monitors the performance
of the Company's telesales personnel to determine that each member of the
telesales staff is performing acceptably. During 1996, the Company greatly
expanded its Corporate Accounts direct sales force to call on larger accounts.
Expansion of this group is expected to accelerate during 1997 as the Company
markets its enterprise-wide CMMS solutions worldwide.
SQL uses a combination of direct and distributor sales to market its
products. As of March 31, 1997, SQL had 31 sales and marketing personnel,
including 27 direct sales employees working out of seven subsidiary headquarters
(The Netherlands, United Kingdom, Germany, France, Italy, United States and
China), and a network of thirteen distributors located throughout the balance of
Europe and Latin America. Expansion of this sales force is expected to occur
during 1997 as the Company continues the process of consolidating and
integrating the SQL acquisition. Additionally, the Company intends to utilize
the existing SQL infrastructure as a platform from which to launch its low-end
and middle-tier Datastream products into Europe, Latin America and the Pacific
Rim countries.
Product Development
In its product development activities, the Company seeks to incorporate into
its products technologies already identified and embraced by the marketplace, as
opposed to expending development efforts on unproven or unaccepted technologies.
For example, the Company's products are designed to exploit proven technologies
such as client/server architectures, relational database management systems,
graphical user interfaces and application development tools. New opportunities,
whether technology-, application- or regulatory-driven, are evaluated for
technical feasibility and market acceptance prior to any development.
As of March 31, 1997, the Company's product development department,
excluding the SQL development group, consisted of 59 technical employees,
including 32 software developers (27 of whom hold advanced programming or
engineering degrees). Datastream's 1996 product development efforts focused on
several areas. The first area of development included projects to migrate the
Company's entire product platform from the visual interface provided by Paradox
(a relational database licensed from Borland International, Inc.) to a new
graphical user interface, written in a non-proprietary, object-oriented
language. This effort will continue into 1997. If successful, this project will
achieve the goal of enhancing the speed and portability of the software, provide
more direct access to leading database server products and facilitate the
development of new applications and upgrades. The second area of development was
completion of an inexpensive Microsoft Access based product aimed at small to
medium sized business. This product, called MaintainItPro, was introduced in
September 1996. The third area of development was an intensive effort to produce
a Microsoft SQL Server-based client/server version of MP2 for Windows to meet
the increasingly sophisticated needs of large corporations. The Beta version of
this product was completed on schedule and released to the public December 1996,
with final release scheduled for March 31, 1997. The fourth area of development
was completion of the Company's initial Internet product, an e-mail/Internet
work order request system called RequestLink. Management believes that these
development efforts, if successful, will substantially benefit the Company in
the future by making Datastream's products more compatible with a variety of
platforms and enhancing the Company's ability to detect and solve product
defects. However new product development efforts present the Company with a
variety of technical challenges. Although the Company believes that its research
and development staff will be able to meet such challenges, there can be no
assurance that this or any other development project will be completed in a
timely manner or will result in a product that achieves market acceptance.
Other, more minor areas of focus in 1996 included translation of MP2 for
Windows to the German language, development of the interface to the Oracle
Financials suite of products, and joint development with DataSphere
Technologies, Inc. of an AutoCAD engineering drawing application that utilizes
MP2 for Windows database capabilities.
As of March 31, 1997, SQL's product development department consisted of 12
technical employees, assisted by six contract programmers and four senior
consulting engineers assigned from other areas of the Company. During 1996, SQL
development efforts were focused on completion of the R5.3 version upgrade to
the R5 product, which is scheduled for release late in the second quarter of
1997. Although management believes that the SQL research and development staff
will be able to meet such challenges, there can be no assurance that this or any
other development project will be completed in a timely manner or will result in
a product that achieves market acceptance.
Product development expenses consist principally of salaries and certain
other expenses related to development and modifications of software products,
which are capitalized in accordance with Statement of Financial Accounting
Standards No. 86 ("Statement No. 86"), "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Capitalization of such costs
begins only upon establishment of technological feasibility as defined in
Statement No. 86 and ends when the resulting product is available for
distribution. Annual amortization of capitalized product development costs is
provided at the greater of the ratio of current product revenue to the total of
current and anticipated product revenue or on a straight line basis over the
estimated economic life of the software, which is not more than eighteen months
or three years, depending on the product. The Company's software development
expenditures were approximately $1.24 million, $2.31 million and $4.00 million
in 1994, 1995 and 1996, respectively. Of these amounts, the amounts capitalized
were approximately $411,000, $573,000 and $2.61 million, respectively. During
December 1996, the Company took a one-time charge of $1.804 million related to
the write-off of capitalized software deemed obsolete or superseded by the
products obtained through acquisition of SQL.
The Company's industry is characterized by rapidly changing technology,
frequent new product introductions and evolving industry standards that can
render Company products obsolete or unmarketable. The Company's future success
will depend upon its ability to enhance its current products, to introduce new
products that adequately address ethnological and market developments and to
meet the increasingly sophisticated needs of its customers. Furthermore,
approximately 99% of the Company's 1996 revenues were derived from sales of the
Windows versions of MP2, MaintainIt, MaintainItPro, Sidearm, and MP2 for Windows
client/server and related services and support. Accordingly, the Company's
financial performance in the near term will depend on continued market
acceptance of these products and, to a lesser extent, on the introduction and
acceptance of new products, such as the SQL Server client/server version of MP2
for Windows.
Competition
The current market for CMMS software is both fragmented and highly
competitive. Management estimates that there are more than 200 vendors of CMMS
software products and anticipates that the market will continue to attract new
competitors in the future. Competition at the high end of the market (in which a
typical transaction size, including not just software but also related
customization, integration and support services, may be as much as $1.25 million
or more) comes from large, sophisticated vendors such as Marcam Corporation, The
Indus Group, The System Works (TSW) and several Enterprise Resource Planning
(ERP) vendors such as SAP, whose programs originated with minicomputer and
mainframe-based programs, and which now offer enterprise-wide management systems
(including maintenance modules) for use in the client/server environment.
Increasing customer demand for client/server products may make the Company
subject to increased competition if these vendors choose to modify their
products to offer lower-priced client/server capabilities in PC network markets.
The Company has historically concentrated its efforts at the low end of the
CMMS market in which typical transaction sizes (including software and
customization, integration, training and support services) range from $1,000 to
$10,000. In these segments, Datastream encounters competition from a variety of
vendors, including companies such as CK Systems, JB Systems and DP Solutions,
Inc., that offer off-the-shelf CMMS applications for single users (or a limited
number of users) on personal computers and local area networks.
In late 1995, the Company introduced a client/server version of its MP2 for
Windows product and has sought to expand sales of its middle-tier client/server
technology both domestically and internationally. This move placed the Company
into increased competition with certain of its competitors who offer
client/server products, such as PSDI and The Systems Works. Further, the
acquisition of SQL puts the Company into direct client/server competition across
each of the product lines offered by PSDI and TSW, as well as in competition
with products offered by Revere Corporation and certain ERP vendors. Although
management believes that the Company's products are differentiated by
technology, product architecture, features, functionality and value pricing, and
that the Company itself is now differentiated from much of the competition with
respect to the ability to deliver sales, service and support on a global basis,
there is no assurance the Company will be successful in its efforts to compete
in middle and upper segments of the client/server market.
During late 1995 and throughout 1996, the Company also expanded into new
segments of the low-end CMMS market, through its entry-level products,
MaintainIt and MaintainIt Pro, which compete directly with other low-end
maintenance automation software products.
Management believes that while some competitors, particularly at the high
end of the market, are large, publicly-held companies, the majority of vendors
in the industry are small, privately-held companies, and that most new market
entrants will fall into this category. The emergence and establishment of new
competitors in the market may adversely impact Datastream's market share.
Moreover, many potential customers develop their own system internally,
utilizing methods such as spreadsheets and word processors to track repair parts
inventory and equipment, although the trend in the industry is toward purchasing
third-party maintenance software rather than developing such products
internally. A certain percentage of the Company's revenues are derived from
sales to large corporations whose internally developed systems did not meet
management's expectations, did not succeed in sufficiently reducing maintenance
budgets or lacked the capacity to adequately track historical data or provide
other necessary or desirable equipment-related information.
Datastream's products compete on the basis of quality, price, technical
support and service, application features and ease-of-use. Management believes
that the Company's products compete favorably with respect to these factors.
However, certain of the Company's existing competitors, as well as a number of
potential market entrants, have greater financial, marketing, service and
support and technical resources than the Company. The Company, including SQL,
will be required to make continued investment in product development to meet
competitive pressures. There can be no assurance that the Company will have
sufficient resources to make those investments or that the Company will be able
to make the technical advances necessary to continue to compete effectively in
the future.
Proprietary Rights and Licenses
The Company claims that title to and ownership of the software developed by
it and SQL resides exclusively with those companies. The Company relies on a
combination of trade secret, copyright and trademark laws, nondisclosure and
licensing agreements, the contractual provisions in "shrink-wrap" licenses and
other contractual provisions and technical measures to protect its intellectual
property rights. There can be no assurance that these protections will be
adequate to protect the Company's intellectual property rights or that the
Company's competitors will not independently develop software products that are
superior to the Company's products. Existing copyright laws provide limited
protection to the Company in prohibiting competitors from independently
producing software products that are substantially similar to Datastream's
products. Neither Datastream nor SQL currently holds any patents or has any
patent applications pending.
Although in limited instances involving large sales the Company may
specifically negotiate license agreements that are signed by both the licensee
and the Company, in the substantial majority of sales, Datastream relies on a
"shrink-wrap" license for protection against unauthorized use of the Company's
products. Certain provisions of these licenses, including restrictions on use,
copying, transfer and disclosure of the licensed program, may be unenforceable
under the laws of certain jurisdictions. In addition, through the acquisition of
SQL and based upon its internal expansion efforts, the Company is increasing the
sales of its products internationally. This entails certain additional
intellectual property risks in that the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. Although the Company believes that its products, trademarks
and other proprietary rights do not infringe upon the proprietary rights of
third parties, there can be no assurance that such parties will not assert
infringement claims against the Company. Any such claim made against the Company
or SQL, with or without merit, could be time-consuming and expensive to defend.
The loss of proprietary technology or a successful claim against the Company or
SQL could have a material adverse effect on the Company's financial condition
and results of operations.
Employees
The Company has recently experienced substantial growth in the scope of its
operations and the number of its employees. This growth has resulted in
increased levels of responsibility for management personnel. To meet its growth
objectives, Datastream will be required to devote significant resources to
enhance its existing products and develop new ones, manage the anticipated
development of its international operations and establish and manage cooperative
relationships such as its relationship with Grainger. There can be no assurance
that the management skills and systems currently in place will be adequate to
keep pace with the Company's growth objectives.
In addition, Datastream's continued success depends on the services of
several key executive, sales and marketing and technical employees. The loss of
the services of these personnel, particularly those of Larry G. Blackwell, the
Company's founder, Chairman, Chief Executive Officer and President, or the
Company's inability to attract and retain other qualified management, sales and
marketing and technical employees, could have a material adverse effect on the
Company's business and results of operations.
As of March 31, 1997, the Company employed 318 persons on a full-time basis,
including 118 sales and marketing personnel, 105 service and support
representatives, 36 administrative personnel and 59 employees involved in
product research and development. None of Datastream's employees is represented
by a labor organization and the Company is not a party to any collective
bargaining agreement . As of March 31, 1997, SQL employed 132 persons on a
full-time basis, including 31 sales and marketing personnel, 69 service and
support representatives, 20 administrative personnel and 12 employees involved
in product research and development. Management considers relations between the
both the Company and its employees, and SQL and its employees to be very good.
Trademarks
Datastream(R), Datastream Systems(R), MaintainIt(R), SideArm(R), MP2(R),
Personal Maintenance Assistant(R), The Maintenance Journal(R) and The Leader in
Maintenance Software(R) are registered trademarks of the Company. Grainger(R) is
a registered trademark of W.W. Grainger, Inc. ORACLE(R) is a registered
trademark of Oracle Systems Corporation. OS/2(R) is a registered trademark of
IBM Corporation. Paradox(R) is a registered trademark of Borland International,
Inc. Windows(R) and Windows(R) 95 are registered trademarks of Microsoft
Corporation. Apple(R) is a registered trademark of Apple Computer, Inc.
Wonderware(R) is a registered trademark of Wonderware Software Development
Corporation. AutoCAD(R) is a registered trademark of AutoCAD Corporation, Inc.
Item 2. Properties.
To accommodate continuing growth, the Company purchased a 125,000 square
foot headquarters building located in Greenville, South Carolina in December
1995 for $3.46 million in cash. Principal operations were moved and occupancy
was assumed in April 1996. The Company also has under lease approximately 3000
square feet of space in Irvine, CA (lease expiration March 2000) approximately
1000 square feet of space in Monterrey, Mexico (lease expiration May 1997), and
approximately 500 square feet of space in Sydney, Australia (lease expiration
September 1997).
SQL has under lease approximately 12,000 square feet of space to house its
headquarters operations in Rotterdam, The Netherlands (lease expiration November
1997), approximately 5,000 square feet of space in Minneapolis, Minnesota (lease
expiration October 1997), approximately 4,000 square feet of space in Slough,
Great Britain (lease expiration March 2007), approximately 2,000 square feet of
space in Paris, France (lease expiration September 2001), approximately 3,250
square feet of space in Grenoble, France (lease expiration March 1999),
approximately 1,500 square feet of space in Dussledorf, Germany (lease
expiration October 1997), approximately 1,000 square feet of space in Milan,
Italy (lease expiration June 1997), and six other 500 square foot offices
throughout the United States all with annual leases.
Item 3. Legal Proceedings.
Datastream is occasionally involved in litigation relating to claims arising
out of its operations in the normal course of business. Neither Datastream nor
SQL is currently engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol DSTM. The Company has never declared or paid any cash dividends
on its Common Stock. However, in anticipation of its secondary public offering
in October 1995, the Company declared a two-for-one stock split, effected in the
form of a one-for-one share dividend, effective September 12, 1995. The Company
anticipates that all of its earnings will be retained for the development and
expansion of the Company's business and does not anticipate paying any cash
dividends in the foreseeable future. The chart below sets forth the high and low
stock prices for each quarter since the completion of the Company's initial
public offering in March 1995.
Quarter Ended High Low
March 31, 1995(1) 11.38 10.00
June 30, 1995 13.00 10.00
September 30, 1995 26.25 15.75
December 31, 1995 26.50 14.75
March 31, 1996 23.50 16.25
June 30, 1996 36.50 23.25
September 30, 1996 35.00 24.25
December 31, 1996 30.00 17.00
March 31, 1997 24.50 15.75
(1)For the period from March 29, 1995, the first day on which the Company's
common stock was publicly traded, through March 31, 1995.
The closing price of a share of the Company's Common Stock on April 11, 1997
was $19.25. As of April 11, 1997, the Company had 157 shareholders of record and
approximately 5,000 beneficial owners of its Common Stock.
Item 6. Selected Financial Data.
For the year ended December 31,
1992 1993 1994 1995 1996
---- ----- ----- ----- ----
(in thousands, except operating
and per share data)
Statement of Operations Data:
Total revenues......... $4,104 $5,878 $10,374 $20,346 $32,466
Total cost of revenues (1) 1,368 1,704 3,136 5,218 11,507
------- ------- ------- ------- --------
Gross profit........... 2,736 4,174 7,238 15,128 20,959
Total operating expenses (2) 2,265 3,360 4,813 9,216 47,758
------- ------- ------- ------- --------
Operating income (loss)....... 471 814 2,425 5,912 (26,799)
Net other income.............. 18 13 42 1,176 2,370
------- ------- ------- ------- --------
Income (loss) before income 489 827 2,467 7,088 (24,429)
taxes
Income taxes................. 196 320 915 2,742 3,581
------- ------- ------- ------- --------
Net income (loss)............ $ 293 $ 507 $ 1,552 $ 4,346 $(28,010)
======= ======= ======== ======== =========
Net income (loss) per share $ .06 $ .10 $ .30 $ .61 $ (3.16)
======= ======= ======== ======== =========
Weighted average number of
common and common equivalent 5,183 5,183 5,183 7,183 8,843
shares outstanding...............
Operating Data:
Software units sold at
period-end (cumulative)..... 3,436 5,252 7,332 11,964 24,787
As of December 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Balance Sheet Data:
Working Capital............. $ 603 $662 $1,569 $19,965 $13,633
Total Assets................ 2,189 2,978 5,790 50,692 57,577
Long-term debt, less
current portion............. 28 68 46 22 2,893
Total stockholders' equity.. 309 564 916 46,034 33,125
(1)In 1996, includes $1,804 of capitalized software written off as a result of
the acquisition of SQL (see note 1(i) of notes to consolidated financial
statements).
(2)In 1996, includes $33,600 of in-process research and development acquired
and written off as part of the acquisition of SQL (see note 2 of the notes to
consolidated financial statements).
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Financial Statements and Notes thereto of the Company
included herein.
Overview
Datastream was incorporated in 1986 to develop, market, sell and support
software products for the industrial automation market. The Company's revenues
have grown each calendar year since inception. Excluding the one-time charges
related to the acquisition of SQL, Datastream has been profitable in each of the
last six years and has experienced a compounded annual growth rate of 154% in
revenues and 198% in earnings during that period.
The Company offers a family of CMMS products to the MRO industry. These
products currently consist of MP2 (DOS) (released June 1989), SideArm (DOS)
(released December 1990), SideArm for Windows (released September 1993), MP2 for
Windows (released April 1994), MaintainIt (released August 1995), the Datastream
Personal Maintenance Assistant on Apple Newton (released August 1995), MP2 for
Windows Client/Server- Oracle (released November 1995), MP2 for Windows 95 and
NT (released June 1996), MaintainIt Pro 3.0 (released September 1996), and MP2
for Windows Client/Server - Microsoft SQL Server (released in Beta, December
1996). To enable more rapid international expansion, Datastream introduced a
Spanish language version of MP2 for Windows in September 1995 and a German
language version of MP2 for Windows in September 1996. Through the Company's
acquisition of SQL in December 1996, the Company now also offers SQL's R5 CAMMS
product. Datastream and SQL support their software products through applications
engineering and support services. The Company recognizes revenue in accordance
with SOP 91-1, "Software Revenue Recognition." See Note 1(c) of the Company's
Financial Statements for additional information concerning the Company's revenue
recognition policies.
Until 1995, the Company concentrated its resources on developing Microsoft
DOS/Windows compatible software for use on standalone computers or PC network
systems. Recently, development efforts have focused on introducing
enterprise-wide Windows client/server products for Oracle and Microsoft SQL
Server. Product development costs consist principally of salaries and certain
other expenses related to development and modification of software products,
which are capitalized in accordance with Statement of Financial Accounting
Standards No. 86 ("Statement"), "Accounting for the Costs of Computer Software
to Be Sold, Leased or Otherwise Marketed." Capitalization of such costs begins
only upon establishment of technological feasibility as defined in the Statement
and ends when the resulting product is available for distribution. Annual
amortization of capitalized product development costs is provided at the greater
of the ratio of current product revenue to the total of current and anticipated
product revenue or on a straight line basis over the estimated economic life of
the software, which is not more than eighteen months or three years, depending
on the product.
Revenues from sales outside the United States were negligible until 1994,
when international revenues reached 7.2% of total revenues. International
revenues increased to 10.7% of total revenues in 1995, and 13.4% in 1996.
Management expects that international revenues will continue to increase as a
percentage of total revenues, primarily as a result of the acquisition of SQL,
but also due to Datastream's own internal expansion efforts. On a pro forma
basis, 1996 revenues adjusted for the inclusion of SQL would have been
approximately $49.2 million. Of that figure, approximately 37% would have been
derived from international sources. As the Company begins to accept increased
payments in foreign currency, changes in the values of these foreign currencies
relative to the United States dollar may affect the Company's results of
operations and affect its financial position. In addition, gains and losses on
currency translations could contribute to fluctuations in the Company's results
of operations.
Because the Company consummated the acquisition of SQL on the last day of
fiscal 1996and was accounted for as a purchase, SQL's results of operations for
the year are not included in the Company's results. For 1996, SQL generated
revenues of approximately $17.3 million and a net loss of approximately $5.9
million. The Company's efforts to integrate and rationalize SQL's operations are
well underway, and (although no assurance to this effect can be given)
management believes it can manage SQL to profitability in 1997. However, the
acquisition of SQL has impacted and will continue to impact the reporting
control and management capabilities of the Company in 1997. See "-`Safe Harbor'
Statement - Impact of SQL Acquisition".
Results of Operations
The following tables set forth statement of operations data for the three
years ended December 31, 1994, 1995 and 1996, the percentage change in such data
from period to period for each of the corresponding periods and the percentage
that such data bears to total revenues for each period.
Year Ended December 31, Percent Change
1994 1995 1996 94-95 95-96
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
Product.................... $4,859 $9,343 $14,018 92.3% 50.0%
Applications engineering.. 3,084 6,660 12,326 116.0 85.1
Support.................... 2,431 4,343 6,122 78.7 41.0
------- ------ ------ ----- -----
Total revenues.......... 10,374 20,346 32,466 96.1 59.6
Cost of revenues:
Cost of product revenues... 822 1,136 1,879 38.2 65.5
Cost of applications-......
engineering revenues.... 1,857 3,383 6,729 82.2 98.9
Cost of support revenues... 457 699 1,095 53.0 56.5
Write-off of capitalized
software................ - - 1,804 - N/M
------ ------ ------ ----- -----
Total cost of revenues.. 3,136 5,218 11,507 66.4 121.0
Gross Profit................... 7,238 15,128 20,959 109.0 38.5
Operating expenses:
Sales and marketing........ 2,736 5,216 9,399 90.6 80.2
Product development........ 830 1,741 1,390 109.8 (20.1)
General and administrative. 1,247 2,259 3,369 81.2 49.1
Write-off of in-process
research & development.. - - 33,600 - N/M
----- ----- ------- ----- -----
Total operating expenses 4,813 9,216 47,758 91.5 418.2
----- ------ ----- -----
Operating income(loss)......... 2,425 5,912 (26,799) 143.8 (553.3)
Net other income............... 42 1,176 2,370 2,700.0 101.5
----- ----- ------- ------- -----
Income(loss) before income taxes 2,467 7,088 (24,429) 187.3 (444.7)
Income taxes................... 915 2,742 3,581 199.7 30.6
----- ----- ----- ----- ------
Net income(loss) ..............$ 1,552 $ 4,346 $(28,010) 180.0 (744.5)
====== ====== ======= ===== =======
Net income(loss) per share.....$ .30 $ .61 $ (3.16) 103.3% (618.0)%
======= ======= ========= ====== ========
Year Ended December 31,
Statement of Operations Data: 1994 1995 1996
---- ---- ----
Revenues:
Product................................... 46.9% 46.0% 43.2%
Applications engineering.................. 29.7 32.7 38.0
Support................................... 23.4 21.3 18.8
------ ------ -----
Total revenues......................... 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues.................. 7.9 5.6 5.8
Cost of applications engineering revenues. 17.9 16.6 20.7
Cost of support revenues.................. 4.4 3.4 3.4
Write off of capitalized software......... - - 5.6
Total cost of revenues................. 30.2 25.6 35.5
---- ---- ----
Gross Profit.................................. 69.8 74.4 64.5
Operating expenses:
Sales and marketing....................... 26.4 25.6 28.9
Product development....................... 8.0 8.6 4.3
General and administrative................ 12.0 11.1 10.4
Write off of in-process research
and development - - 103.5
Total operating expenses............... 46.4 45.3 147.1
---- ---- -----
Operating income(loss)........................ 23.4 29.1 (82.6)
Net other income.............................. .4 5.8 7.3
----- ----- -----
Income(loss) before income taxes.............. 23.8 34.9 (75.3)
Income taxes.................................. 8.8 13.5 11.0
----- ----- ----
Net income(loss).............................. 15.0% 21.4% (86.3)%
==== ==== = ======
1996 Compared to 1995 and 1995 Compared to 1994
Total Revenues. Total revenues for 1996 increased 59.6% to approximately
$32.5 million from approximately $20.3 million in 1995, due principally to a
number of factors. These factors include continued acceptance of the Company's
products in the industrial automation market, expansion of the Company's sales,
applications engineering and technical support service organizations,
introduction of MP2 for Windows95/NT in June 1996, introduction of MaintainItPro
in September 1996, increased demand for the client/server version of MP2 for
Windows in the industrial automation market, and the addition of sales personnel
and marketing resources to support the Company's telesales and direct sales
programs. Total revenues for 1995 increased 96.1% to approximately $20.3 million
from approximately $10.4 million in 1994, due principally to introduction of the
client/server version of MP2 for Windows in September 1995, increased demand for
MP2 for Windows in the industrial automation market, and introduction of
MaintainIt in September 1996. International revenues were approximately $4.4
million , or 13.4% of total revenues in 1996, compared to approximately $2.2
million, or 10.7% of total revenues, in 1995 and $1.8 million, or 7.2% of
revenues in 1994. Management anticipates that international revenues will
continue to increase as a percentage of total revenues as a result of the
expansion of Datastream's international sales efforts and sales of SQL's product
to its customer base, which is predominantly international in nature.
Product revenues increased 50.0% to approximately $14.0 million in 1996 from
approximately $9.3 million in 1995, and 92.3% to approximately $9.3 million in
1995 from approximately $4.9 million in 1994. These increases are due to growth
in the number of software units sold, and an increase in the average selling
price of the systems sold. As a percentage of revenues, revenues from software
products decreased to 43.2% in 1996 from 46.0% in 1995 and 46.9% in 1994.
Applications engineering revenues increased 85.1% to approximately $12.3
million in 1996 from approximately $6.7 million in 1995, and 116.0% to
approximately $6.7 million in 1995 from approximately $3.1 million in 1994.
These increases generally reflect increased installation, training and
integration services provided to support increased product sales. As a
percentage of revenues, revenues from applications engineering services
increased to 38.0% in 1996 from 32.7% in 1995 and 29.7% in 1994. Management
expects this trend to continue, partly as a result of sales of high-end CMMS
systems by SQL.
Technical support services increased 41.0% to approximately $6.1 million in
1996 from approximately $4.3 million in 1995, and 78.7% to approximately $4.3
million in 1995 from approximately $2.4 million in 1994. These increases reflect
an increase in the type and variety of services offered as well as additional
services provided to a larger installed customer base. As a percentage of total
revenues, revenues from technical support services decreased to 18.8% in 1996
from 21.3% in 1995 and 23.4% in 1994.
Cost of Revenues. Cost of product revenues as a percentage of total revenues
increased to 5.8% in 1996 from 5.6% in 1995, and decreased to 5.6% in 1995 from
7.9% in 1994. The increase as a percentage of revenues in 1996 from 1995
principally reflects increased amortization of capitalized software costs as a
percentage of product costs. The decrease as a percentage of revenues in 1995
from 1994 principally reflects decreased costs associated with printing and
replication of the Company's software products and volume discounts realized on
shipping costs. Cost of product revenues is expected to decrease as a percentage
of revenues in 1997 for two reasons related to the acquisition of SQL, the
write-off of approximately $1.8 million in capitalized software rendered
obsolete or redundant upon the acquisition of SQL and the smaller component of
product cost reflected in SQL's product revenues.
Cost of applications engineering services increased as a percentage of total
revenues to 20.7% in 1996 from 16.6% in 1995 and decreased to 16.6% in 1995 from
17.9% in 1994. The increase as a percentage of revenues in 1996 from 1995 was
due primarily to lower utilization of application engineers during the second
half of the year resulting from increased hiring to support planned services
growth. The decrease as a percentage of revenues in 1995 from 1994 was due
primarily to increased utilization of engineers providing services and fewer
sales of third party hardware, offset in part by higher customer-reimbursed
travel expenses. Cost of application engineering services revenues is expected
to increase as a percentage of revenues in 1997 due to the acquisition of SQL.
Cost of technical support services as a percentage of total revenues was
3.4%, 3.4% and 4.4% in 1996, 1995 and 1994, respectively. The decrease from 1994
to 1995 as a percentage of revenues reflects the cost efficiencies achieved from
providing support services to a larger customer base, and improved quality of
the software and associated documentation. Cost of technical support services
revenues is expected to increase as a percentage of revenues in 1998 due to the
acquisition of SQL.
Cost of revenue includes a $1.8 million write-off of capitalized software,
5.6% of total revenues, which became obsolete as a result of the acquisition of
SQL (see note 1(i) to the consolidated financial statements) .
Sales and Marketing Expenses. Sales and marketing expenses for 1996
increased 80.2% to approximately $9.4 million from approximately $5.2 million in
1995, and 90.6% to 5.2 million in 1995 from approximately $2.7 million in 1994.
As a percentage of total revenues, these expenses were 28.9% in 1996, 25.6% in
1995 and 26.4% in 1994. The increase as a percentage of revenues in 1996 from
1995 was due primarily to increased commissions and sales travel expenses. The
decrease as a percentage of revenue in 1995 from 1994 was due primarily to
increased productivity of the Company's sales and marketing staffs combined with
increased market acceptance of the Company's products.
Product Development Expenses. Total expenditures on product development,
including capitalized expenses, increased to approximately $4.0 million in 1996
from approximately $2.3 million in 1995, and from approximately $1.2 million in
1994. The increases were primarily due to the hiring of additional employees and
third party consultants to work on the Company's file/server, client/server,
MaintainIt/Pro and foreign language products. The Company capitalized software
expense of approximately $2.6 million, $.6 million, and $.4 million,
respectively, in 1996, 1995 and 1994, which represented 65.2%, 24.8% and 33.1%
of total expenditures for product development in the respective periods.
Capitalization of software expense is expected to decrease as a percentage of
total development expense in 1997 because the majority of projects qualifying
for capitalization have been released or will be released for revenue shipments
in early 1997. Net product development expenditures were approximately $1.4
million, $1.7 million and $.8 million in 1996, 1995 and 1994, respectively. Net
product development expenses as a percentage of revenues were 4.3%, 8.6% and
8.0% in 1996, 1995 and 1994, respectively. Amortization of capitalized product
development costs is charged to cost of product sales and totaled approximately
$.5 million, $.3 million and $.2 million in 1996, 1995 and 1994, respectively.
Management believes that these capitalized software assets will be recoverable
out of future product sales.
General and Administrative Expenses. General and administrative expenses
include the cost of the Company's finance, human resources and information
services. General and administrative expenses increased 49.1% to approximately
$3.4 million in 1996 from $2.3 million in 1995, and increased 81.2% to
approximately $2.3 million in 1995 from approximately $1.3 million in 1994, due
primarily to increased administrative personnel required to support the
Company's growth, increased reserves and increased expenses associated with
being a public company. As a percentage of total revenues, general and
administrative expenses were 10.4% in 1996, 11.1% in 1995 and 12.0% in 1994. The
steady decline from 1994 to 1996 indicates that the Company has managed a larger
revenue base without commensurate increases in general and administrative
expenses.
Write-off of in-process research and development costs. The company expensed
$33.6 million of in-process research and development acquired in as part of the
acquisition of SQL. This one-time charge resulted in the Company reporting a
loss in 1996 (see note (2) to the consolidated financial statements).
Other Income/Expense. Other income/expense increased $1.2 million in 1996 to
approximately $2.4 million from approximately $1.2 million in 1995, and
approximately $42,000 in 1994, due to the interest earned on higher investment
balances realized upon completion of two public offerings of Common Stock in
April 1995 and October 1995, respectively.
Income Taxes. The Company's effective income tax rate for 1996 decreased to
(14.6)% due to the tax treatment of the acquisition related costs. Without the
effect of the acquisition, the Company's effective tax rate for 1996 would have
decreased to 36.8% due principally to increased product development tax credits.
The Company's effective income tax rate increased to 38.7% for 1995 from 37.1%
for 1994, due principally to decreased product development tax credits in 1995.
Net Income(loss). The Company's net income decreased 86.3% in 1996 to a loss
of approximately $(28.0) million or $(3.16) per share, from approximately $4.35
million, or $.61 per share in 1995, and increased 180.0% in 1995 to
approximately $4.35 million, or $.61 per share, from approximately $1.55
million, or $.30 per share, in 1994. The loss in 1996 is directly attributable
to the one-time write-off of costs associated with the acquisition of SQL.
Before accounting for the one time charges associated with the acquisition, the
Company's net income increased 64% to $7.1 million in 1996.
Quarterly Results
General. Many software companies experience seasonal variations in revenues.
The Company has experienced eighteen consecutive quarters of increasing total
revenues. Although this growth does not reflect seasonal variations in the
Company's operating results, the Company believes that its future results of
operations may be subject to quarterly variations. Datastream has historically
experienced an increase in revenues in the quarter (Q2 1996 and Q3 1995) during
which the Company holds its annual Technical User Group Conference. The next
such conference is presently scheduled to be held in May 1997 (although no
assurance of such an increase in 1997 can be given).
The following table presents certain unaudited quarterly financial
information for each of the eight quarters through the quarter ended December
31, 1996. In the opinion of management, this information has been prepared on
the same basis as the audited financial statements appearing elsewhere in this
Form 10-K Report and all necessary adjustments (consisting only of normal
recurring adjustments) have been included in the amounts stated below to present
fairly the unaudited quarterly results when read in conjunction with the audited
financial statements of the Company and notes thereto. The Company's quarterly
results have in the past been subject to fluctuations, and thus the operating
results for any quarter are not necessarily indicative of results for any future
period. All amounts shown (except per share amounts) are expressed in thousands.
Quarter
Ended
1995 1996
----- ----
March June Sept. Dec. March June Sept. Dec.
31, 30, 30, 31, 31, 30, 30, 31,
Revenues:
Product............ $1,597 $2,308 $2,432 $3,006 $3,073 $3,259 $3,652 $4,034
Applications
engineering.... 1,268 1,358 1,926 2,108 2,489 2,813 3,070 3,954
Support............ 884 985 1,195 1,279 1,340 1,632 1,543 1,607
----- ----- ----- ----- ----- ----- ----- -----
Total revenues.... 3,749 4,651 5,553 6,393 6,902 7,704 8,265 9,595
Cost of revenues:
Cost of product
revenues......... 201 247 341 347 361 491 473 554
Cost of applications
engineering revenues 584 751 957 1,091 1,177 1,443 1,716 2,393
Cost of support
revenues............ 138 160 173 228 265 261 258 311
Write off of
capitalized software - - - - - - - 1,804
Total cost of
revenues............ 923 1,158 1,471 1,666 1,803 2,195 2,447 5,062
----- ----- ----- ----- ----- ----- ----- -----
Gross profit......... 2,826 3,493 4,082 4,727 5,099 5,509 5,818 4,533
Operating expenses:
Sales and marketing 1,069 1,119 1,296 1,732 2,128 2,234 2,269 2,768
Product development 228 426 465 622 417 301 358 314
General and
administrative.... 540 569 497 653 628 867 805 1,068
Write off of
in-process research
and development - - - - - - - 33,600
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............. 1,837 2,114 2,258 3,007 3,173 3,402 3,432 37,750
----- ----- ----- ----- ----- ----- ----- -----
Operating income(loss) 989 1,379 1,824 1,720 1,926 2,107 2,385(33,217)
Net other income..... 94 200 271 611 576 581 590 623
----- ----- ----- ----- ----- ----- ----- -----
Income(loss) before
income taxes.........1,083 1,579 2,095 2,331 2,502 2,687 2,976(32,594)
Income taxes......... 428 637 836 841 963 103 1,146 436
----- ----- ----- ----- ----- ----- ----- ------
Net income (loss).... $ 655 $ 942 $1,259 $1,490 $1,539 $1,651 $1,830$(33,030)
----- ----- ----- ----- ----- ----- ----- --------
655 942 1,259 1,490 1,539 1,651 $1,830$(33,030)
===== ===== ===== ===== ===== ===== ===== ========
Net income(loss) per
share................ $ .13 $ .13 $ .17 $ .17 $ .18 $ .19 $ .21 $ (3.74)
===== ===== ===== ===== ===== ===== ===== ========
The table below sets forth the percentage relationship of certain items to
total revenues with regard to the Company's results of operations for each of
the eight quarters through the quarter ended December 31, 1996.
Quarter
Ended
1995 1996
----- ----
March June Sept Dec March June Sept Dec.
31, 30, 30, 31, 31, 30, 30, 31,
Revenues:
Product............ 42.6% 49.6% 43.8% 47.0% 44.5% 42.3% 44.2% 42.0%
Applications 33.8 29.2 34.7 33.0 36.0 36.5 37.2 41.2
engineering......
Support............
23.6 21.2 21.5 20.0 19.5 21.2 18.6 16.8
---- ---- ---- ---- ---- ---- ---- ----
Total revenues.... 100.0100.0 100.0100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product 5.4 5.3 6.1 5.4 5.2 6.4 5.7 5.8
revenues.............
Cost of
applications 15.5 16.2 17.2 17.1 17.1 18.7 20.8 24.9
engineering
revenues..........
Cost of support
revenues............. 3.7 3.4 3.1 3.6 3. 8 3.4 3.1 3.2
Write-off of
capitalized software. - - - - - - - 18.7
---- ---- ---- ---- ---- ---- ---- ----
Total cost of
revenues............. 24.6 24.9 26.5 26.1 26.1. 28.5 29.6 52.6
---- ---- ---- ---- ---- ---- ---- ----
Gross profit......... 75.4 75.1 73.5 73.9 73.8 71.5 70.4 47.4
Operating expenses:
Sales and marketing 28.5 24.0 23.3 27.1 30.8 29.0 27.5 28.9
Product development 6.1 9.2 8.4 9.7 6.0 3.9 4.3 3.3
General and
administrative....... 14.4 12.2 9.0 10.2 9.1 11.3 9.8 11.1
Write-off of
in-process research
and - - - - - - - 351.2
---- ---- ---- ---- ---- ---- ---- ----
development
Total operating
expenses............. 49.0 45.4 40.7 47.0 46.0 44.2 41.5 394.5
---- ---- ---- ---- ---- ---- ---- -----
Operating income(loss) 26.4 29.7 32.8 26.9 27.9 27..3 28.9(347.1)
Net other income.....
2.5 4.3 4.9 9.6 8.3 7.5 7.1 6.5
---- ---- ---- ---- ---- ---- ---- ----
Income(loss) before 28.9 34.0 37.7 36.5 36.3 34.9 36.0(340.6)
income taxes.........
Income taxes.........
11.4 13.7 15.1 13.1 14.0 13.5 13.9 4.5
---- ---- ---- ---- ---- ---- ---- ----
Net income(loss).....
17.5% 20.3% 22.6% 23.4% 22.3% 21.4% 22.2% (345.1)%
==== ==== ==== ==== ==== ==== ===== ======
44
Liquidity and Capital Resources
Since its inception, the Company has financed its operations through a
combination of private equity financing, bank loans and lines of credit, and,
beginning in 1988, through cash flows from operations. In 1994, 1995 and 1996
operating activities generated cash totaling approximately $2.5 million, $2.8
million and $6.2 million, respectively, primarily related to increases in net
income, in 1994 and 1995 and increases in net income before acquisition related
charges in 1996.
In 1994, 1995 and 1996, the Company used cash from investing activities of
approximately $1.5 million, $41.5 million and $2.1 million primarily related to
the purchase of short-term investments, additions to property, plant and
equipment and additions to capitalized software development costs. The Company
completed its initial public offering in April 1995, raising net proceeds of
approximately $13.6 million, and a second public offering in October 1995,
raising net proceeds of approximately $25.1 million. The proceeds of these
offerings were invested in U.S. government securities.
The Company maintains a bank line of credit that provides for borrowings of
70% of accounts receivable less than 60 days aged up to $1.0 million. This line
expires on May 31, 1997. No borrowings were outstanding under the line of credit
at December 31, 1996.
The acquisition of SQL was completed for $31 million, $17 million in cash,
$14 million in stock issued pursuant to Regulation S, $3 million in escrowed
stock, and assumption of outstanding liabilities. Following the acquisition, SQL
long-term debt totaling approximately $2.7 million was repaid by the Company and
additional working capital infusions of approximately $2.5 million were required
to sustain SQL's operations and pay current liabilities. Approximately $1.7
million of SQL's long-term debt remains, of which approximately $800,000 is
scheduled to be repaid by the end of 1997.
The Company's principal commitments as of December 31, 1996 consisted
primarily of leases on its headquarters facilities and operating equipment, 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 and the proceeds of its public offerings will be
sufficient to meet its working capital and capital expenditure needs for at
least the next 12 months.
Inflation
The Company believes that inflation has not had a material impact on the
Company's operating results and does not expect inflation to have a material
impact on the Company's operating results in 1996.
"Safe Harbor" Statement
The following "Safe Harbor Statement" is made pursuant to the Private
Securities Litigation Reform Act of 1995. Certain of the statements contained in
the body of this Report are forward-looking statements (rather than historical
facts) that are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. With respect to such forward-looking statements, the Company seeks
the protections afforded by the Private Securities Litigation Reform Act of
1995. The list set forth below is intended to identify certain of the principal
factors that could cause actual results to differ materially from those
described in the forward-looking statements included elsewhere herein. These
factors are not intended to represent a complete list of all risks and
uncertainties inherent in the Company's business, and should be read in
conjunction with the more detailed cautionary statements included elsewhere
herein.
Competition. The current market for CMMS software is both fragmented and
highly competitive, and management expects competition to intensify as new
companies enter the market and existing ones expand their product lines. The
Company has entered into new markets at the low end of the market and, more
importantly, at the high end of the market through both its introduction of an
internally developed client/server product line and through the acquisition of
SQL systems. Management expects the Company to face increased competition across
all products lines in 1997. The Company's future performance is partially
dependent upon the Company's ability to respond to technological changes,
evolving standards and its competitors' innovations. Certain competitors have
greater financial, marketing, service and support and technical resources than
Datastream and SQL.
Effects of Technological Change and Risks of Product Development. The
Company's industry is characterized by rapidly changing technology, frequent new
product introductions and evolving industry standards. Datastream's future
success will depend upon its ability to enhance its current products and develop
new ones that address technological and market developments. Certain of the
Company's software research and development efforts are technologically
challenging, and there can be no assurance that these efforts will be successful
or that the resulting products will achieve market acceptance.
Dependence on a Limited Number of Products. Approximately 99% of the
Company's 1995 revenues were derived from sales of the Windows versions of
SideArm, MP2, MaintainIt and MP2 for Windows client/server and related services
and support. Accordingly, the Company's financial performance will depend on
continued market acceptance of these products and of the client/server version
of MP2 for Windows. Any factor adversely affecting sales of the Company's
products, such as delays in development, significant software flaws, negative
product evaluations or incompatibility with significant hardware platforms could
have a material adverse effect on the Company's results of operations.
Risks Associated with International Sales. International sales increased to
13.4% of the Company's 1996 revenues (from 10.7% in 1995), and management
expects that an increasing portion of the Company's total revenues will be
derived from international operations conducted in foreign currencies. Changes
in the value of these currencies relative to the dollar could affect
Datastream's results of operations and financial position, and gains and losses
on currency translations could contribute to fluctuations in the Company's
results of operations.
Fluctuations in Quarterly Results. The Company generally operates with very
little backlog, and a significant portion of Datastream's revenues in any
quarter results from a large number of relatively small orders received during
that period. Accordingly, the Company is subject to fluctuations in the number
of overall orders in any given period, which is in turn influenced by the
overall level of economic and industrial activity. Datastream establishes
expense levels based in part on its expectations as to future net sales. If the
Company's revenues are below expectations, operating results may be materially
adversely affected. No assurance can be given that the Company will be able to
maintain profitability on a quarterly or annual basis in the future.
Impact of SQL Acquisition The acquisition of SQL has impacted and will
continue to impact the reporting, control and management capabilities of the
Company in 1997. While management believes it fully understands and can address
the challenges encountered during the integration process, a number of aspects
of SQL's business cause management to recognize that it cannot provide assurance
concerning the Company's ability to maintain revenue or earnings growth in the
future at the same levels that have been achieved historically. These aspects
include the global scope of SQL operations, the fact this is the Company's first
major acquisition, the differences encountered in the high-end markets in which
SQL competes, the seasonality of SQL's revenues, and the fact that a
disproportionate share of SQL's sales occur at the end of each quarter and that
the dollar amount of an SQL transaction is substantially greater than the
historical dollar amount of an average Datastream transaction.
As noted above, this brief summary of certain of the principal factors that
may potentially influence the Company's results of operations and financial
conditions is not intended to be exhaustive, and should be read in conjunction
with other cautionary statements made herein and in the Company's publicly-filed
reports.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary financial information required by
this item are filed as part of this Report on Form 10-K on pages F-1 through
F-16 and pages S-1 through S-2 immediately preceding the signature page to this
Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item is incorporated by reference to
information to be included under the caption "Election of Director-Director
Nominee Biographical Information," "-Executive Officers" and "-Compliance with
Section 16(a) of the Securities Exchange Act of 1934" of the Company's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
on June 13, 1997.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to
information to be included under the captions "Election of Director-Additional
Information Concerning the Board of Directors" and "Executive
Compensation-Executive Compensation Tables" in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held
on June 13, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated by reference to
information to be included under the caption "Beneficial Ownership of Common
Stock" in the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on June 13, 1997.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to
information to be included under the caption "Executive
Compensation-Compensation Committee Interlocks and Insider Participation" in the
Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on June 13, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)The following documents are filed as part of this Report:
1. Financial Statements
o Independent Auditors' Report.
o Consolidated Balance Sheets as of December 31, 1995 and 1996.
o Consolidated Statements of Operations for the Years Ended December
31, 1994, 1995 and 1996.
o Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996.
o Consolidated Statements of Cash Flows for the Years Ended December
31, 1994, 1995 and 1996.
o Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
o Independent Auditors' Report.
o Allowance for Doubtful Accounts Receivable.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
3. Exhibits:
Exhibit
Number Description
2.1* SQL Systems Group, B.V. Share Purchase Agreement
3.1* Amended and Restated Certificate of Incorporation of
the Registrant.
3.2* By-laws of the Registrant.
4.1* See Exhibits 3.1 and 3.2 for provisions of the
Amended and Restated Certificate of Incorporation and
By-Laws of the Registrant defining rights of holders of
Common Stock of the Registrant.
4.2* Specimen Stock Certificate.
10.1+ 1995 Stock Option Plan of the Registrant and form of Stock
Option Agreement (as amended and restated effective September
12, 1995).
10.2* Stock Option Plan for Directors and form of Stock Option
Agreement.
10.3* License Agreement Pertaining to Grainger Approved Access
Software dated December 27, 1994, between the Registrant
and W. W. Grainger, Inc.
10.3(a)+ Addendum to License Agreement dated March 15, 1995,
between the Registrant and W. W. Grainger, Inc.
10.4* 401(k) Retirement Plan of the Registrant.
10.5 Employee Stock Purchase Plan of the Registrant (as amended
and restated effective October 12, 1995).
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
24** Power of Attorney.
- ---------------
* Incorporated herein by reference to exhibit of the same number in the
Form S-1 Registration Statement of the Registrant (Reg. No. 33-89498).
+ Incorporated herein by reference to exhibit of the same number in the
Form S-1 Registration Statement of the Registrant (Reg. No. 33-96834).
** See the signature page hereto.
NOTE: Exhibits 10.1, 10.2, 10.4 and 10.5 are identified as "management
contracts" under Item 601 of Regulation S-K.
Independent Auditors' Report
The Board of Directors
Datastream Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Datastream
Systems, Inc. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Datastream Systems,
Inc. and subsidiaries, as of December 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Greenville, South Carolina KPMG Peat Marwick LLP
March 28, 1997
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1996
Assets 1995 1996
------ ---- ----
Current assets:
Cash and cash equivalents $ 1,184,092 6,315,719
Accounts receivable, net of allowance
for doubtful accounts
of $244,475 and $835,000 in 1995 and
1996, respectively 4,589,254 11,725,928
Investments held to maturity 17,335,907 13,011,856
Accrued interest receivable 309,375 221,827
Prepaid expenses 162,779 586,647
Inventories 250,931 324,018
Deferred income taxes 181,000 395,000
Other assets 110,127 1,961,496
Total current assets 24,123,465 34,542,491
Investments held to maturity 20,319,024 4,547,220
Property and equipment, net 5,297,062 8,692,323
Goodwill - 7,636,748
Capitalized software development costs, net of accumulated
amortization of $987,261 and $1,197,177 in 1995 and
1996, respectively 952,618 2,158,436
---------- ---------
Total assets $ 50,692,169 57,577,218
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 199,428 4,403,205
Other accrued liabilities 431,484 9,139,078
Income taxes payable 699,201 743,707
Current portion of long-term debt 20,000 1,507,274
Unearned revenue 2,808,348 5,116,007
--------- ---------
Total current liabilities 4,158,461 20,909,271
Long-term debt, less current portion 21,667 2,892,743
Deferred income taxes 478,000 650,000
--------- ---------
Total liabilities 4,658,128 24,452,014
---------- ----------
Commitments
Stockholders' equity:
Preferred stock $1 par value, 1,000,000 shares
authorized; none issued - -
Common stock, $.01 par value, 15,000,000 shares
authorized; 8,405,488 and 9,126,789 shares
issued and outstanding at December 31, 1995
and 1996, respectively 84,055 91,268
Additional paid-in capital 40,738,355 55,832,034
Retained earnings (deficit) 5,211,631 (22,798,098)
---------- -----------
Total stockholders' equity 46,034,041 33,125,204
---------- ----------
Total liabilities and stockholders' equity $ 50,692,169 57,577,218
See accompanying notes to consolidated financial statements.
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
Revenues:
Product $ 4,858,647 9,342,978 14,018,478
Applications engineering 3,083,692 6,659,998 12,325,593
Support 2,431,244 4,343,008 6,122,332
Total revenues 10,373,583 20,345,984 32,466,403
---------- ---------- -----------
Cost of revenues:
Cost of product revenues 821,845 1,135,779 1,879,258
Cost of applications
engineering revenues 1,856,936 3,382,730 6,729,072
Cost of support revenues 457,103 699,544 1,094,745
Write-off of capitalized software - - 1,803,637
Total cost of revenues 3,135,884 5,218,053 11,506,712
---------- ---------- -----------
Gross profit 7,237,699 15,127,931 20,959,691
Operating expenses:
Sales and marketing 2,736,403 5,216,009 9,398,675
Product development 829,625 1,740,895 1,390,325
General and administrative 1,246,723 2,259,172 3,369,338
Write-off of in-process research
and development - - 33,600,000
---------- ---------- -----------
Total operating expenses 4,812,751 9,216,076 47,758,338
---------- ---------- -----------
Operating income (loss) 2,424,948 5,911,855 (26,798,647)
Other income (expense):
Interest and other income 48,230 1,181,974 2,374,158
Interest expense (6,114) (5,770) (4,240)
Net other income 42,116 1,176,204 2,369,918
---------- ---------- -----------
Income (loss) before income taxes 2,467,064 7,088,059 (24,428,729)
Net income (loss) $ 1,552,064 4,346,059 (28,009,729)
========== ========== ===========
Net income (loss) per share $ .30 .61 (3.16)
========== ========== ===========
Weighted average number of common and
common equivalent
shares outstanding 5,183,036 7,182,878 8,842,761
See accompanying notes to consolidated financial statements.
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1994, 1995 and 1996
Unrealized Net
Gain (Loss) on Total
Additional Retained Investments Stock-
Common Paid-In Earnings Available holders'
Stock Capital (Deficit) for Sale, Net Equity
Balance at December 31, 1993 $ 34,700 19,300 501,511 8,237 563,748
Net income - - 1,552,064 - 1,552,064
Increase in the redemption value
of common stock warrants - - (1,188,003) - (1,188,003)
Unrealized net loss on investments
available for sale, net of
income tax - - - (11,724) (11,724)
------- ------- -------- -------- ---------
Balance at December 31, 1994 34,700 19,300 865,572 (3,487) 916,085
Net income - - 4,346,059 - 4,346,059
Unrealized net gain on investments
available for sale, net of
income tax - - - 3,487 3,487
Issuance of common shares in initial
public offering, net of offering
costs of $387,787 20,000 13,540,213 - - 13,560,213
Exercise of redeemable stock
warrants 17,212 2,048,337 - - 2,065,549
Issuance of common shares in
public offering, net of offering
costs of $225,064 12,143 25,130,505 - - 25,142,648
------- ---------- ------ ------ ----------
Balance at December 31, 199 84,055 40,738,355 5,211,631 - 46,034,041
Net loss - - (28,009,729) - (28,009,729)
Exercise of stock options 1,164 921,926 - - 923,090
Tax benefit of options
exercised - 115,000 - - 115,000
Stock issued for Employee Stock
Purchase Plan 38 62,764 - - 62,802
Stock issued in acquisition 6,011 13,993,989 - - 14,000,000
------ ---------- -------- ----- ----------
Balance at December 31, 1996 $ 91,268 55,832,034 (22,798,098) - 33,125,204
======== ========== ========== === ==========
See accompanying notes to consolidated financial statements.
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1994, 1995 and 1996
1994 1995 1996
---- ---- ----
Cash flows from operating activities:
Net income (loss) $1,552,064 4,346,059 (28,009,729)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation 207,268 355,263 948,460
Amortization of capitalized software
development costs 160,379 258,119 500,065
Accretion of investment discount, net - (337,045) (576,431)
(Gain) loss on disposal of equipment (6,450) 54,788 19,378
Provision for doubtful accounts 30,000 149,075 590,525
Deferred income taxes 115,000 44,000 (42,000)
Write-off of in-process
research and development - - 33,600,000
Write-off of capitalized software - - 1,803,637
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable (706,943) (3,087,227) (4,420,619)
Accrued interest receivable (18,393) (290,982) 87,548
Prepaid expenses (38,360) (103,687) (190,238)
Inventories (69,991) (171,258) (73,087)
Other assets 23,871 (84,163) (111,384)
Accounts payable (79,231) 78,944 642,429
Other accrued liabilities (30,684) 336,179 529,394
Income taxes payable 612,382 25,843 (242,082)
Unearned revenue 702,278 1,233,298 1,117,436
--------- --------- ----------
Net cash provided by
operating activities 2,453,190 2,807,206 6,173,302
--------- --------- ---------
Cash flows from investing activities:
Purchase of investments (1,031,924)(41,105,386) (36,079,529)
Proceeds from sale and maturities
of investments 596,265 4,801,648 56,751,813
Additions to property and equipment (720,411 (4,647,262) (3,765,805)
Proceeds from the sale of equipment 15,750 6,205 9,135
Capitalized software development costs (388,498) (541,953) (2,609,521)
Cash paid for acquisition, net of cash acquired - - (16,428,660)
--------- ---------- ----------
Net cash used in investing activities (1,528,818) (41,486,748) (2,122,567)
========= ========== =========
Cash flows from financing activities:
Net proceeds from initial public
offering of common stock - 13,560,213 -
Net proceeds from secondary
public offering of stock - 25,142,648 -
Proceeds from exercise of stock warrants - 35,463 -
Proceeds from exercise of stock options
and related tax benefit - - 1,038,090
Proceeds for stock issuances under
employee purchase plan - - 62,802
Principal payments on long-term debt (43,183) (26,667) (20,000)
Principal payments on capital
lease obligations (2,639) - -
Net cash provided by (used in)
financing activities (45,822) 38,711,657 1,080,892
--------- ---------- ----------
Net increase in cash and cash equivalent 878,550 32,115 5,131,627
Cash and cash equivalents at beginning of year 273,427 1,151,977 1,184,092
-------- --------- ----------
Cash and cash equivalents at end of year $ 1,151,977 1,184,092 6,315,719
========= ========= ==========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 6,115 5,770 4,240
Income taxes $ 111,743 2,800,520 3,750,082
======= ========= =========
Supplemental disclosure of non-cash activities:
Unrealized net gain (loss) on investments available
for sale, net of income taxes $ (11,724) 3,487 -
========= ========= =========
See accompanying notes to consolidated financial statements.
(1) Summary of Significant Accounting Policies
(a) Organization and Basis of Presentation
Datastream Systems, Inc. (the "Company" or "Datastream") develops,
markets, sells and supports Microsoft Windows-based personal computer
software for the industrial automation market. Datastream's software
enables users to schedule preventive maintenance, record equipment
maintenance histories, organize and control spare parts inventories,
schedule equipment and parts inventory purchases and deploy maintenance
personnel. In addition to its U.S. operations, the Company has direct
sales or distribution offices in the United Kingdom, Latin America,
Malaysia, Australia and South Africa.
On December 31, 1996, the Company acquired SQL Group, B.V. (SQL) (see
note 2).
(b) Consolidation Policy
The consolidated financial statements include the accounts of
Datastream Systems, Inc. and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated.
(c) Revenue Recognition
The Company's revenue, which consists primarily of fees for product
sales, applications engineering and support, is recognized in
accordance with AICPA Statement of Position 91-1, "Software Revenue
Recognition" as there are no significant vendor obligations remaining
and collection of the related receivable is probable. The Company
accounts for insignificant vendor obligations by accruing such costs
and recognizing them ratably on completion of performance. Revenue from
product sales is recognized upon shipment of the product and
fulfillment of acceptance terms, if any. Revenue from applications
engineering is recorded as services are provided. Revenue from support
is deferred and recognized ratably over the terms of the support
agreements, generally one year. In instances where the support is
included with the product sale, the support fee is unbundled and
recognized ratably over the support period.
The Company continually evaluates its obligations with respect to
warranties, returns and refunds. Based on historical trends and
management's evaluation of current conditions, any potential
obligations that are inherent in the accounts receivable balance are
adequately provided for through the allowance for doubtful accounts.
The Company may in certain circumstances grant discounts when a
purchase order is received. The discounts are recognized in the product
revenue at the time of shipment.
(d) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(1) Summary of Significant Accounting Policies, Continued
(e) Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. The Company has not experienced significant losses related
to receivables from individual customers or groups of customers in a
particular industry or geographic area. As a result, management
believes no additional credit risk beyond the amounts provided for
estimated future collection losses is inherent in the Company's
accounts receivable.
(f) Investment Securities
The Company classifies its investment securities as held-to-maturity
securities, trading securities or available for sale securities, as
appropriate.
Since the Company's investments in 1995 and 1996 consisted of short and
long-term government securities which the Company intends to hold to
maturity, the portfolio has been classified as held-to-maturity,
current and noncurrent, depending upon the specific maturity date and
is carried at amortized cost. Interest income is recorded on an accrual
basis.
Previously, the Company's investment securities were short-term or held
in a managed account and were sold periodically. As such they were
classified as available for sale and were recorded as current assets.
Investments designated as available for sale are recorded at market
value. Changes in the market value of investments available for sale
are included in stockholders' equity as unrealized holding gains or
losses net of the related tax effect. Unrealized losses on investments
available for sale, reflecting a decline in value judged to be other
than temporary, are charged to income in the statement of income.
Realized gains or losses on investments available for sale are computed
on the specific identification basis.
(g) Inventories
Inventories are stated at the lower of cost (first-in, first-out) basis
or market (net realizable value). Substantially all of the Company's
inventory is software related product.
(h) Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
under the straight-line method over the estimated useful lives for
financial reporting and under the accelerated and modified accelerated
cost recovery systems for income tax reporting. The estimated useful
lives generally assigned by the Company are as follows:
Building 40 years
Computer equipment 3 to 5 years
Furniture and fixtures 5 years
Automobiles 5 years
(1) Summary of Significant Accounting Policies, Continued
(i) Capitalized Software Development Costs
Capitalized software development costs consist principally of salaries
and certain other expenses related to development and modifications of
software products and are capitalized in accordance with the provisions
of Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed". Capitalization of such costs begins only upon establishment
of technological feasibility, which is defined by the Company as
completion of a working model of the software and ends when the
resulting product is available for sale.
Amortization of capitalized software development costs is provided on a
product-by-product basis and begins when the product is available for
sale. Annual amortization is the greater of the amount computed using
the ratio of current product revenue to the total of current and
anticipated product revenue or the straight-line basis over the
remaining estimated economic life of the software, which is not more
than three years. The ongoing assessment of the realizability of these
costs requires considerable judgment as to anticipated future product
revenues, related estimated economic life, and changes in hardware and
software technology. Amortization of software development costs is
included in cost of product revenues in the accompanying statements of
income.
During the years ended December 1994, 1995 and 1996, total costs
incurred (excluding amortization of capitalized software development
costs) for software development activities were $1,240,786, $2,314,003
and $3,999,845, respectively; total capitalized software development
costs were $411,161, $573,108 and $2,609,520, respectively; and
amortization of capitalized costs was $160,379, $258,119 and $500,065,
respectively.
In connection with the acquisition of SQL (see note 2), the Company
acquired software technology valued at $900,000. In addition, the
Company wrote-off $1,803,637 of its existing capitalized software which
became obsolete as a result of the SQL acquisition.
(j) Goodwill
Goodwill resulting from the acquisition of SQL (see note 2) will be
amortized using the straight-line method over its estimated useful life
of seven years.
The recoverability of goodwill will be periodically reviewed when
events or circumstances warrant. Impairment, determined when the
carrying value of an asset cannot be recovered over its remaining
useful life from undiscounted future cash flows, will be measured and
recognized when the fair value is less than the asset's carrying
amounts.
(k) Stock Option Plan
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." Statement No. 123 is effective for
fiscal years beginning after December 15, 1995. Statement No. 123
requires that an entity recognize in its financial statements the
costs (determined by a fair value based method) related to its
employee stock-based compensation plans, such as stock option and
stock purchase plans.
(1) Summary of Significant Accounting Policies, Continued
Alternatively, Statement No. 123 also allows an entity to continue
to apply the provisions of APB Opinion No. 25 and provide pro forma
net income and, if earnings per share is presented, pro forma
earnings per share disclosures for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined
in Statement No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of Statement No. 123.
(l) Income Taxes
The Company records income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
(m) Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing net income (loss)
by the weighted average number of common and common equivalent shares
outstanding. Weighted average common and common equivalent shares
include common shares, stock options using the treasury stock method,
and the assumed exercise of the outstanding warrants to purchase common
stock.
(n) Stock Split
On February 7, 1995, the Company's stockholders approved an approximate
32-for-one stock split, effected in the form of a stock dividend.
Effective September 12, 1995, the Company's Board of Directors declared
a two for one stock split effected in the form of a stock dividend. All
share, per share and conversion amounts relating to common stock,
warrants and stock options included in the accompanying financial
statements and notes have been restated to reflect these stock splits.
(o) Foreign Currency Translation
The financial statements of subsidiaries outside the United States are
generally measured using the local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the
rates of exchange at the balance sheet date. Revenues and expenses are
translated at the average rate of exchange during the period.
(p) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(2) Acquisition
On December 31, 1996, the Company acquired all of the capital stock and
equity interests of SQL for a total purchase price of $42.1 million. The
purchase price consisted of $17,000,000 in cash, $14,000,000 of common
stock (601,105 shares valued at $22.62 per share) and the assumption of net
tangible liabilities and costs incurred of $11.1 million. At December 31,
1996, an additional $3 million of common stock (150,276 shares at $22.62
per share) was being held in escrow pending the resolution of certain
matters, which are expected to be determined during 1997. The value of any
subsequently issued shares will be allocated to goodwill and amortized over
its remaining useful life. SQL is a computerized maintenance management
software vendor in Europe. The acquisition has been accounted for using the
purchase method. The purchase price has been allocated to the tangible and
intangible assets purchased and the liabilities assumed based on the fair
values on the date of acquisition as follows:
Total purchase price $ 31,000,000 Net tangible liabilities assumed and
costs incurred:
Current assets 5,851,534
Furniture, fixtures, and equipment 606,428
Current liabilities (11,668,049)
Acquisition costs (965,000)
Acquisition related liabilities (1,625,000)
Long-term debt, less current portion (3,336,661)
----------
(11,136,748)
Excess cost over fair value of net tangible
liabilities assumed and costs incurred $ 42,136,748
==========
Excess cost over fair-value of net tangible liabilities assumed has
been allocated to:
Software technology $ 900,000
Goodwill 7,636,748
In-process research and development 33,600,000
----------
$ 42,136,748
The in-process research and development of $33,600,000 represents the fair
value of in-process development projects that had not reached technological
feasibility and had no probable alternative future uses, which the Company
expensed at the date of the acquisition.
In conjunction with the acquisition, the Company recorded acquisition
related liabilities of approximately $1,625,000 to cover the anticipated
cost of combining its existing business with the business of SQL. The
liabilities are included in the purchase price allocation and consist of
the costs of a plan to involuntarily terminate and relocate employees of
SQL and the costs of a plan to exit certain activities of SQL.
(2) Acquisition, Continued
The following unaudited pro forma information presents the results of
operations of the Company as though the aforementioned acquisition occurred
as of the beginning of the year in which the acquisition occurred and the
immediately preceding year. The pro forma adjustments (i) reflect increased
amortization expense related to the acquired assets and reduced interest
income related to investments used as part of the consideration, and (ii)
exclude the non-recurring charges for in-process research and development
and the write-off of capitalized software.
1995 1996
---- ----
Total revenue $ 35,299,000 49,216,000
Operating income (loss) 4,285,000 (764,000)
Net income (loss) 2,523,000 (2,910,000)
Earnings per share (loss) .32 (.30)
(3) Investment Securities
The amortized cost, gross unrealized gains, gross unrealized losses and
market value of held-to-maturity securities at December 31, 1995 and 1996
are as follows:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1995
Held-to-maturity:
U.S. Treasury Securities $37,654,931 173,489 (1,616) 37,826,804
=========== ======= ======= ==========
December 31, 1996
Held-to-maturity:
U.S. Treasury Securities $17,559,076 176,211 (4,668) 17,730,619
=========== ======= ======= ==========
In December 1996, the Company sold investments classified as
held-to-maturity with an amortized cost of $10,155,487 and recognized a
gain of $24,218. The proceeds from this sale and the proceeds from maturing
held-to-maturity investments represented the cash consideration for the
Company's acquisition of SQL (see note 2).
(3) Investment Securities, Continued
The amortized cost and market value of investments held-to-maturity at
December 31, 1996, by contractual maturities are shown below:
Amortized Market
Cost Value
Due in one year or less $ 13,011,856 13,167,113
Due after one year through five years 4,547,220 4,563,506
----------- ----------
$ 17,559,076 17,730,619
Proceeds from the sale of available for sale securities were $15,462 and
$236,379 in 1994 and 1995, respectively, and gross realized gains included
in income were insignificant in both years.
(4) Fair Value of Financial Instruments
The fair value of financial instruments is the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
At December 31, 1995 and 1996, the carrying value of financial instruments
such as cash and cash equivalents, accounts receivable, and accounts
payable approximated their fair values, based upon the short maturities of
these instruments.
The fair value of the Company's long-term debt is estimated using
discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The carrying
value of such instruments approximated their fair value at December 31,
1995 and 1996.
The fair values of investment securities presented in note 3 are based on
quoted market prices at the reporting date for those or similar
investments.
(5) Property and Equipment
Property and equipment consisted of the following at December 31:
1995 1996
Land $ 450,000 465,981
Building 3,009,509 4,371,113
Computer equipment 2,152,780 4,719,340
Furniture and fixtures 562,073 930,226
---------- ----------
6,174,362 10,486,660
Accumulated depreciation 877,300 1,794,337
---------- ----------
$ 5,297,062 8,692,323
========== ==========
(6) Other Accrued Liabilities
Other accrued liabilities consisted of the following at December 31:
1995 1996
Accrued salaries and commission $ 265,000 1,231,565
Sales and payroll taxes payable 22,761 1,449,468
Accrued acquisition costs - 1,373,316
Acquisition related liabilities (see note 2) - 1,625,000
Warranty reserve - 1,500,000
Other accrued liabilities 143,723 1,959,729
--------- ----------
$ 431,484 9,139,078
========= ==========
(7) Long-term Debt
Long-term debt as of December 31, 1995 and 1996 consists of the following:
1995 1996
Note payable in monthly payments of
$1,667, plus interest at prime plus
.5% through March 1998;
collateralized by equipment $ 41,667 21,667
Subordinated note payable in bi-annual
payments of $127,300, plus interest
at 7% through December 2000 - 765,136
Subordinated note payable in annual
payments of $108,795, plus interest
at 6.5% through December 2002 - 870,356
Subordinated note payable in annual
payment of $48,150, plus interest at
6.5% through December 2002 - 481,513
Subordinated note payable in annual
payments of $57,320, plus interest
at 10% through August 2004 - 515,907
Subordinated note payable in annual
payments of 11,465, plus interest at
10% through April 2000 - 51,591
Subordinated note payable in annual
payments of $34,394, plus interest
at 10% through April 2000 - 171,979
(7) Long-term Debt, Continued
1995 1996
Note payable in bi-annual payments of $204,643, plus interest at 5.3%
through October 1999; collateralized
by receivables and stock - 1,433,075
Note payable in annual payments of $8,598, plus interest at 6.5% through
July 2004; collateralized by
intellectual property rights - 68,788
Subordinated note payable in annual
payments of $3,572, plus interest at
6.5% through December 2002 - 20,005
--------- ----------
41,667 4,400,017
Less current portion (20,000) (1,507,274)
--------- ----------
Long-term debt, less current portion $ 21,667 2,892,743
========= ==========
At December 31, 1996, approximately $4,379,000 of total long-term debt
represented debt assumed in the SQL acquisition (see note 2). In January
and February of 1997, approximately $2,725,000 of the assumed debt was
repaid by the Company. After giving effect to the repayments made in
January and February of 1997 that were before scheduled maturity, the
remaining annual maturities of long-term debt in the five years subsequent
to December 31, 1996 are as follows:
1997 $ 715,017
1998 241,334
1999 239,667
2000 239,667
2001 239,667
----------
Total $ 1,675,352
==========
(8) Line of Credit
The Company maintains a $1,000,000 unsecured bank line of credit payable on
demand. Borrowings bear interest at the bank's prime rate. No borrowings
were outstanding under the line of credit at December 31, 1995 and 1996.
(9) Income Taxes
Income tax expense for the years ended December 31, 1994, 1995 and 1996 is
as follows:
Current Deferred Total
1994:
Federal $ 659,000 95,000 754,000
State 141,000 20,000 161,000
--------- -------- ---------
Total $ 800,000 115,000 915,000
========= ======== =========
1995:
Federal 2,346,000 47,000 2,393,000
State 352,000 (3,000) 349,000
--------- -------- ---------
Total $ 2,698,000 44,000 2,742,000
========= ======== =========
1996:
Federal $ 3,230,000 (30,000) 3,200,000
State 393,000 (12,000) 381,000
--------- -------- ---------
Total $ 3,623,000 (42,000) 3,581,000
========= ======== =========
Income tax expense differed from the amounts computed by applying the
Federal income tax rate of 34% as a result of the following:
1994 1995 1996
---- ---- ----
Computed "expected" tax expense (benefit)$ 839,000 2,410,000 (8,306,000)
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net of
Federal income tax benefits 106,000 230,000 251,000
In process research and development - - 11,424,000
Credit for increasing research
activities (71,000) - -
Other, net 41,000 102,000 212,000
-------- --------- ----------
Actual tax expense 915,000 2,742,000 3,581,000
======== ========= ==========
(9) Income Taxes, Continued
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
1995 1996
Deferred tax assets:
Accrued expenses and allowances $ 181,000 395,000
------- -------
Deferred tax liabilities:
Tax over book depreciation 123,000 189,000
Software development costs capitalized for
financial reporting 355,000 461,000
------- -------
Total deferred tax liabilities 478,000 650,000
------- -------
Net deferred tax liabilities $ 297,000 255,000
======= =======
Management believes that a valuation allowance is not necessary based upon
the level of historical taxable income and the projections for future
taxable income over the periods during which the temporary differences are
deductible.
(10) Redeemable Common Stock Warrants
At December 31, 1994, the Company had outstanding common stock warrants
which granted to the warrants holder the right to purchase a specified
number of shares equal to approximately 33.25% of the total common shares
then outstanding. Such shares totaled 1,730,038 at $.058825 per share at
December 31, 1994.
Prior to the initial public offering (note 13), the warrants holder had the
option to require the Company to purchase, at a price determined in
accordance with provisions of the agreement, any part or all of either the
warrants or common stock issued upon any exercise of the warrants. At
December 31, 1994, the aggregate cost to repurchase the warrants or common
shares sold under the warrants, net of the proceeds of the exercise of the
warrants, was $2,030,086.
In conjunction with the initial public offering, the warrants holder of all
redeemable common stock warrants exercised such warrants, at a price of
.058825, by the exchange of 8,842 shares of common stock at the initial
public offering price, and the payment of approximately $35,500 in cash.
(11) Employee Savings and Retirement Plan
Effective September 1, 1992, the Company established a 401(k) Retirement
Plan under Section 401(k) of the Internal Revenue Code. The Plan is funded
in part from employee voluntary contributions with the Company's
contribution equal to one-half of the employee's contribution up to 3% of
their compensation. The Plan provides for voluntary employee contributions
of up to 15% of their total compensation.
The Company's contributions to the Plan totaled approximately $60,000,
$79,000, and $135,000 in 1994, 1995 and 1996, respectively.
(12) Stock Compensation Plans
1995 Stock Option Plan
On September 12, 1995, the Company amended and restated the Datastream
Systems, Inc. 1995 Stock Option Plan (the "1995 Plan") to provide for the
grant of both incentive and non-qualified options to purchase up to
1,000,000 shares of the Company's common stock. On December 26, 1996, the
Company's Board of Director's authorized an additional 750,000 shares to be
added to the 1,000,00 share limit available under the 1995 Plan, subject to
stockholder approval. Such options will vest incrementally over a period of
one to five years and will expire either five or ten years from the date of
grant, depending on the terms of the option. Options are not to be granted
at less than the fair market value of the underlying shares at the grant
date. Incentive options granted to a participant who is an over 10% owner
shall not be granted at less than 110% of the fair market value of the
underlying shares at the grant date.
A summary of activity in the 1995 Plan during the periods indicated is as
follows:
Number of Weighted-Average
Shares Exercise Price
Stock options outstanding:
Balance at December 31, 1994 - $ -
Granted 843,900 11.62
Terminated (23,700) 8.12
--------
Balance at December 31, 1995 820,200 11.72
Granted 119,650 24.63
Exercised (111,907) 7.95
Forfeited (53,556) 15.10
--------
Balance at December 31, 1996 774,387 $ 13.49
======== =======
(12) Stock Compensation Plans, Continued
The following table summarizes information about stock options outstanding
under the 1995 Plan at December 31, 1996:
Options outstanding Options exerciseable
--------------------------- ---------------------------
Weighted Average Weighted -
Range of Number Remaining Number Average
Exercise Prices outstanding Contractual Life Exerciseable Exercise Price
$ 7.50 - 8.25 392,886 8.1 years 69,554 $ 7.61
18.75 - 20.77 287,751 8.7 88,627 18.89
23.25 - 30.50 93,750 9.6 - -
-------- --------
7.50 - 30.50 774,387 8.5 158,181 13.93
======== ========
No options were exercisable at December 31, 1995.
The per share weighted-average fair value of stock options granted under
the 1995 Plan during 1995 and 1996 was $9.00 and $10.24 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1995 - expected dividend yield of 0%,
expected volatility of 62.41%, risk-free interest rate of 7.07% , and an
expected life of 10 years; 1996 - expected dividend yield of 0%, expected
volatility of 62.41%, risk-free interest rate of 7.01%, and an expected
life of 10 years.
Stock Option Plan for Directors
In February 1995, the Company established the Stock Option Plan for
Directors (the "Directors Plan") which provides for the grant of
non-qualified stock options to purchase up to 100,000 shares of Common
Stock to directors who are not employees of the Company. Under the Plan,
eligible directors automatically receive options to purchase, at the fair
market value of a share on the date of grant, (i) 4,500 shares of Common
Stock upon the commencement of their service as a director and (ii) 500
shares of Common Stock annually in connection with each annual meeting of
stockholders. Automatic grants of options to purchase 4,500 shares of
common stock at $7.50 per share were made to each of the Company's four
non-management directors upon consummation of the Company's initial public
offering (see note 13).
A summary of activity in the Director's Plan during the periods indicated
are as follows:
Number of Weighted-Average
Shares Exercise Price
Stock options outstanding:
Balance at December 31, 1994 - $ -
Granted 18,000 7.50
--------
Balance of December 31, 1995 18,000 7.50
Granted 2,000 19.50
Exercised (4,500) 7.50
--------
Balance at December 31, 1996 15,500 $ 8.98
======== ======
(12) Stock Compensation Plans, Continued
The following table summarizes information about stock options outstanding
under the Director's Plan at December 31, 1996:
Options outstanding Options exerciseable
------------------------ -------------------------
Weighted Average Weighted -
Range of Number Remaining Number Average
Exercise Prices outstanding Contractual Life Exerciseable Exercise Price
$ 7.50 13,500 8.1 years 13,500 $ 7.50
19.50 2,000 9.0 - -
-------- --------
7.50 - 19.50 15,500 8.2 13,500 7.50
======== ========
No options were exercisable at December 31, 1995.
The per share weighted-average fair value of stock options granted under
the Director's Plan during 1995 and 1996 was $5.88 and $6.74 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1995 - expected dividend yield of 0%,
expected volatility of 62.41%, risk-free interest rate of 7.56% , and an
expected life of 10 years; 1996 - expected dividend yield of 0%, expected
volatility of 62.41%, risk-free interest rate of 5.63%, and an expected
life of 10 years.
Employee Stock Purchase Plan
On September 12, 1995, the Company established the Datastream Systems, Inc.
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan
permits eligible employees to elect to contribute up to 15% of their
regular compensation through payroll deductions, toward the purchase of
common stock at 85% of the fair market value of a share on either the date
the right is granted (the first day of each semi-annual period) or the date
it is exercised (the last day of such period), whichever is lower. The
Purchase Plan is intended to comply with Section 423 of the Internal
Revenue Code of 1986, as amended. The Board of Directors has reserved
100,000 shares of common stock for future issuance pursuant to the Purchase
Plan. Under the Plan, the Company sold 3,789 shares in 1996. No shares were
sold under the Plan in 1995.
Under Statement No. 123, compensation expense for the Purchase Plan is
determined based on the discount percentage at which the stock is
purchased.
The Company applies APB Opinion No. 25 in accounting for its three Plans
and, accordingly, no compensation cost has been recognized for its stock
options or for stock purchased under the Purchase Plan in the financial
statements. Had the Company determined compensation cost based on the fair
value at the grant date for stock options or based on the discount
percentage under the Plan Purchase under Statement No. 123, the Company's
net income would have been reduced to the pro forma amounts indicated
below:
(12) Stock Compensation Plans, Continued
1995 1996
---- ----
Net income (loss) As reported $ 4,346,059 $(28,009,729)
Pro forma 3,452,499 (29,807,110)
Net income (loss) As reported $ .61 $ (3.16)
per share Pro forma .48 (3.37)
Pro forma net income reflects only options granted in 1995 and 1996.
Compensation cost related to the 1995 Plan is reflected over the options'
vesting period of one to five years. No options were granted prior to 1995.
(13) Public Offerings of Common Stock
On April 5, 1995, the Company closed its initial public offering of
3,266,000 shares of common stock, 1,266,000 of which were sold by existing
shareholders, for $7.50 per share. The Company invested the net proceeds
from the offering in U.S. Government securities.
On October 4, 1995, the Company closed its second public offering of
2,000,000 shares of common stock, 1,085,670 of which were sold by existing
shareholders, for $22.25 per share. The Company invested the net proceeds
from the offering in U.S. Government securities. In conjunction with the
second offering, on October 17, 1995, the Company closed on the
over-allotment option of 300,000 shares of common stock. The Company
invested the net proceeds from the over-allotment option in U.S. Government
securities.
(14) Leases
As Lessee
The Company leases office space, automobiles and equipment under agreements
which have been classified as operating leases for financial reporting
purposes.
At December 31, 1996, the approximate future minimum lease payments under
noncancelable operating leases that expire at various dates through 2001
are as follows:
1997 $ 945,289
1998 410,585
1999 206,262
2000 94,009
2001 93,955
---------
$ 1,750,100
Rent expense for the years ended December 31, 1994, 1995 and 1996 totaled
$123,615, $174,193, and $307,534, respectively.
(14) Leases, Continued
As Lessor
The Company leases a portion of its building and related leasehold
improvements to outside parties under noncancelable operating leases.
At December 31, 1996, the approximate future minimum rental income under
noncancelable operating leases that expire through 1998 are as follows:
1997 $ 350,921
1998 161,448
---------
$ 512,369
Rental income (included in other income in the accompanying statement of
operations) amounted to $88,415 for the year ended December 31, 1996. There
was no rental income in the years ended December 31, 1994 and 1995.
(15) Foreign Revenues
Foreign revenues for the year ended December 31, 1994, 1995 and 1996 were
approximately $750,000, $2,180,000, and $4,354,000, respectively.
Independent Auditors' Report
The Board of Directors
Datastream Systems, Inc.:
Under date of March 28, 1997, we reported on the consolidated balance sheets of
Datastream Systems, Inc. and Subsidiaries as of December 31, 1995 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996, which are included herein. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
accompanying consolidated financial statement schedule listed in Item 14(a)2.
The consolidated financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statement schedule based on our audits.
In our opinion, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Greenville, South Carolina KPMG Peat Marwick LLP
March 28, 1997
Datastream Systems, Inc.
Allowance for Doubtful Accounts Receivable
Balance at Amounts Balance at
Beginning of Charged to End of
Description Year Bad Debt Expense Deductions Year
Allowance for doubtful accounts receivable:
Year ended December 31,
1994 $ 65,400 30,000 - 95,400
====== ======== ======== ========
Year ended December 31,
1995 $ 95,400 149,075 - 244,475
====== ======== ======== ========
Year ended December 31,
1996 $ 244,475 590,525 - 835,000
====== ======== ======== ========
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Datastream Systems, Inc.
Date: March 29, 1996 By: /s/ Larry G. Blackwell
-----------------------------
Larry G. Blackwell
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on
the signature page to this Registration Statement constitutes and appoints Larry
G. Blackwell and Daniel H. Christie and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits hereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, and grants unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and grants or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities
indicated on March 29, 1996.
Signature Title
/s/ LARRY G. BLACKWELL Chairman of the Board, President and
------------------ Chief Executive Officer (principal
Larry G. Blackwell executive officer)
/s/ DANIEL H. CHRISTIE Chief Financial Officer (principal
------------------ financial and accounting officer)
Daniel H. Christie
/s/ KENNETH D. TRACY Director
------------------
Kenneth D. Tracy
/s/ RICHARD T. BROCK Director
------------------
Richard T. Brock
/s/ JOHN M. STERLING, JR Director
------------------
John M. Sterling, Jr.
/s/ IRA D. COHEN Director
------------------
Ira D. Cohen
EXHIBIT INDEX
Exhibit Page No. of
Number Description SEC Original
2.1* SQL Systems Group, B.V. Share Purchase Agreement N/A
3.1* Amended and Restated Certificate of Incorporation
of the Registrant. N/A
3.2* By-laws of the Registrant. N/A
4.1* See Exhibits 3.1 and 3.2 for provisions of the
Amended and Restated Certificate of Incorporation
and By-Laws of the Registrant defining rights of
holders of Common Stock of the Registrant. N/A
4.2* Specimen Stock Certificate. N/A
10.1U 1995 Stock Option Plan of the Registrant and
form of Stock Option Agreement (as amended and
restated effective September 12, 1995). N/A
10.2* Stock Option Plan for Directors and form of Stock N/A
Option Agreement.
10.3* License Agreement Pertaining to Grainger Approved
Access Software dated December 27, 1994, between
the Registrant and W. W. Grainger, Inc. N/A
10.3(a)U Addendum to License Agreement dated March 15, 1995, N/A
between the Registrant and W. W. Grainger, Inc.
10.4* 401(k) Retirement Plan of the Registrant. N/A
10.5 Employee Stock Purchase Plan of the Registrant
(as amended and restated effective
October 12, 1995). N/A
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
24** Power of Attorney. N/A
- ---------------
* Incorporated herein by reference to exhibit of the same number in the
Form S-1 Registration Statement of the Registrant (Reg. No. 33-89498).
U Incorporated herein by reference to exhibit of the same number in the
Form S-1 Registration Statement of the Registrant (Reg. No. 33-96834).
** See the signature page hereto.
NOTE: Exhibits 10.1, 10.2, 10.4 and 10.5 are identified as "management
contracts" under Item 601 of Regulation S-K
EXHIBIT 11
Datastream Systems, Inc. and Subsidiaries
Computation of Historical Earnings Per Share
Income per share calculations:
Year ended December 31,
1994 1995 1996
---- ---- ----
Net income $ 1,552,064 4,346,059 (28,009,729)
========= ========= ============
Weighted average number of common and common equivalent shares are as follows:
Weighted average common
shares outstanding 3,469,962 6,502,237 8,490,631
Shares issued from assumed
exercise of options and
warrants (1) 1,713,074 680,641 352,130
Weighted average number
of common and common
equivalent shares
outstanding 5,183,036 7,182,878 8,842,761
Per share data:
Net income per share $ 0.30 0.61 (3.16)
(1) Shares issued from assumed exercise of options and warrants include the
number of incremental shares which would result from applying the treasury stock
method for options and warrants. (APB 15, paragraph and Staff Accounting
Bullentin No. 38)
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE COMPANY
o Datastream Systems International, Inc.
o Datastream Systems de Mexico, S. de R.L. de C.V.
o SQL Systems Group, B.V.
o SQQL Rapier France, SA
o SQL Systems Deutschland, GmbH
o SQL Rapier France, Sarl
o SQL Products, BV
o SQL Products, NV
o Asystum Participations, BV
o SQL System Participaties, BV
o SQL Systems (UK), Ltd.
o Sirlog, SA
o SQL Systems, BV
o SQL Systems, Inc.
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
DataStream Systems, Inc.:
We consent to incorporation by reference in the Registration Statement on Form
S-8 of DataStream Systems, Inc. of our reports dated March 28, 1997, relating to
the consolidated balance sheets of DataStream Systems, Inc. and Subsidiaries as
of December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996, and related schedule, which reports
appear in the December 31, 1996 annual report on Form 10-K of DataStream
Systems, Inc.
Greenville, South Carolina KPMG Peat Marwick LLP
April 8, 1997