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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
For the fiscal year ended December 31, 1997.
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 _
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. Yes __ No x
Aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 20, 1998: $302,339,223
Number of shares of Common Stock outstanding as of March 20, 1998:
18,981,777
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
12, 1998 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 12, 1998 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.
As used herein, except as otherwise indicated by the context, the
term "Datastream" is used to refer to the historical operations of
Datastream Systems, Inc. and its subsidiaries other than SQL Group,
B.V. and its respective subsidiaries, and the term "SQL" is used to
refer to the historical operations of SQL Group, B.V. and it
subsidiaries. The term "Company" is used to refer to the current
operations of the combined entity of Datastream and SQL following the
December 31, 1996 acquisition of SQL by Datastream. 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 are included
with those of Datastream's beginning January 1, 1997. Accordingly,
operations data provided for SQL prior to 1997 is given solely for
providing historical perspective about SQL prior to its acquisition by
Datastream.
Datastream develops, markets, sells and supports personal desktop
computer, file/server and client/server enterprise 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 1997, the
Company derived over 99% of its software unit sales from Windows-based
products, including MP2 Enterprise v5.0, which was awarded Plant
Engineering magazine's 1997 "Gold Product of the Year" in the General
and Maintenance Software category. The Company is an established
leader in the market for "computerized maintenance management systems"
("CMMS") based on unit sales, having sold almost 36,000 CMMS systems
(includes only 1997 unit sales by SQL). The Company'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 area of the market in
which it competes.
Datastream 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 of a subsidiary of
Wisconsin Power & Light. Datastream reincorporated as a Delaware
corporation in January 1995. Datastream'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 for a purchase price of $34 million, consisting
of $17 million in cash, $14 million in Datastream common stock issued
pursuant to Regulation S, $3 million in escrowed stock, and the
assumption of outstanding liabilities. SQL (which has offices in
Rotterdam, The Netherlands; Slough, England; and Paris and Grenoble,
France) develops, markets, sells and supports high-end, client/server
Enterprise Asset Management Software ("EAMS") 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 Datastream'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 MP5
(formerly R5 CAMMS) product. In 1988, SQL merged with an English
subsidiary of the Kvaerner Group. During 1994, SQL acquired a US
subsidiary of Hartford Steam Boiler, and during 1996, SQL acquired a
French partner from Sirlog, S.A., a leader in the French EAMS market.
SQL's executive offices are located at Groothandelsgebouw - Ingang E,
Conradstraat 18, Rotterdam, The Netherlands, and its telephone number
is 31 10 206 4700.
The company is currently negotiating and planning to close during the
first half of the second quarter of 1998 on the purchase of a European
based CMMS software producer. If the Company successfully closes
this acquisition, it plans to file a report on Form 8-K disclosing
further details shortly thereafter.
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" (CMMS)
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. The term "enterprise
asset management systems" (EAMS) generally refers to that segment of
the CMMS market that is oriented towards customers with very large
investments in high cost plants or facilities and/or where maintenance
is a mission-critical discipline. Companies that deploy EAMS
solutions tend to be large, multinational organizations having a
number of geographically dispersed locations. EAMS installations are
differentiated by enterprise scaled features such as a large fourth
generation relational database, global asset tracking capability,
configurable workflow, multiple concurrent language capability,
centralized inventory control and coordinated worldwide purchasing
functionality. Enterprises deploying EAMS solutions seek a
combination of technology, database capability and features that are
able to be implemented over corporate-wide area networks, corporate
intranets, or satellite-based communications systems.
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%. According to several industry research firms including
International Data Corporation (IDC) and Automation Research
Corporation, the maintenance management market is at the $600 million
mark today and is expected to exceed $1 billion by the year 2000. The
market spans Fortune 1000 corporations, process and discrete
manufacturers, government agencies, universities, hospitals and other
organizations which maintain high-value capital assets such as plants,
facilities, and production equipment. The Gartner Group has projected
a $1.0 billion global market for CMMS software and related services by
the year 2000 and a $1.4 billion market by the year 2002. A 1997
study by Hancock Information Group indicates that only approximately
50% of corporate and governmental users surveyed utilize CMMS packages
to track maintenance functions, and that almost 30% were still
performing these tasks either manually or on spreadsheets. Although
these figures are based on a random sample of only 1,550
companies/governmental agencies, management believes they reflect the
substantial potential for future growth in the use of CMMS.
The market for CMMS/EAMS 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(in which a typical transaction size, including
software and customization, integration, training and support services
range from $1,000 to $10,000), 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 higher end of the CMMS/EAMS
market (in which transaction sizes, including software and
customization, integration and support services, could range anywhere
from approximately $100,000 to several million dollars depending on
the size of the customer).
Certain competitors have greater financial, marketing, service and
support and technical resources than the Company. In addition, as the
PC network client/server market continues to develop, companies with
significantly greater resources than the Company may seek to introduce
products specifically designed to provide CMMS/EAMS 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/EAMS market by providing feature-rich software solutions to
the MRO industry and by being a value-price leader in each area of the
market in which it competes. To achieve this objective, the Company
intends 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 provided to its customers. In each
of the past five years, the Company was awarded Plant Engineering
magazine's Software "Gold Product of the Year" for its products-
SideArm for Windows, MP2 for Windows, the Personal Maintenance
Assistant, MaintainIt Pro, and MP2 Enterprise on SQL Server 5.0,
respectively. MP2 Enterprise on SQL Server 5.0 includes a failure
analysis tree, drag-and-drop work order scheduling, multi-site
inventory tracking, and enhanced performance due to a thin client
architecture. Unlike many software companies, Datastream provides free
updates of Company products to customers that subscribe to annual
maintenance and support contracts. During 1997, the Company released
final versions of MP2 Professional and Enterprise, Client/Server
products that utilize the Microsoft SQL Server database and also a
version for Oracle(TM)7; translated v4.6 into Portuguese (beta release);
released its MP2 for SQL products in four European languages (two
versions in beta); released MaintainIt Pro in an additional four
European languages; introduced RequestLink, an e-mail work order
request system compatible with all platforms, including internet
protocols; released MP2 Explorer, an add-on to MP2 that allows users
to tour a facility graphically; introduced an Oracle Financials
interface v1.0, an add-on that facilitates data interchanges between
MP2 Enterprise for Oracle databases with the Oracle Applications suite
of products; and released beta versions of PagerLink and WebLink, a
pager link that notifies maintenance workers by pager of new work
orders and a system add-on that extends basic MP2 Enterprise
functionality to users with intranet/internet access through a
standard internet browser without the need for proprietary software,
respectively.
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 lower end systems (which sell for an average of $200,
$3,200 and $12,200 for MaintainIt, MP2 Professional, and MP2
Enterprise, 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,
Datastream 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 1997, the Company 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, direct selling
efforts and distributor network, both domestically and internationally.
Leverage existing customer base. The Company plans to generate
additional software sales and professional services revenues from its
large installed base of customers. Certain customers may purchase
additional Datastream software and professional services because of
internal business growth, growing demands for uptime and reduced
costs, or proven product performance. Many MaintainIt customers are
smaller divisions of larger corporations, and these customers
represent an attractive prospect base into which the Company can sell
a broader enterprise solution. In addition, the Company's customer
base purchases billions of dollars on MRO purchase orders using the
Company's software. The Company believes that an opportunity exists
to direct this procurement activity to the Internet in a manner that
enhances customer and shareholder value.
Increase professional services, training and support revenues. As
the Company's customers migrate to more complex CMMS/EAMS systems
(particularly client/server systems), management expects that
opportunities will increase to maximize professional services,
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
1997, Datastream substantially increased the number of regional
training classes it offers and more than doubled the personnel in its
Professional Services Group, which provides consulting and advisory
services. The Company has continued to expand its 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 in 1996 has
extended the customer base by giving the Company access to larger,
more sophisticated customers. SQL's revenues grew by 29% during 1997
through continued acceptance of its high-end products and related
professional services. The Company offers Reliability Centered
Maintenance (RCM) services and is a licensee of Aladon Reliability
Centered Maintenance, 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 potentially redundant systems to ensure
failure risk is minimized. The Company emphasizes the importance of
product support concepts, which provide a recurring revenue stream and
continued long-term relationships with customers.
Penetrate international markets. International sales of the
Company's products increased to 36.0% of revenue for 1997 (from 13.4%
of 1996 revenues), primarily as a result of the acquisition of SQL.
Management believes that substantial international demand exists for
high-quality software products with industrial applications. To meet
this demand, the Company increased international sales in 1997 through
the engagement of distributors in Argentina, Austria, Brazil, Canada,
Chile, China, Denmark, Germany, Greece, Hong Kong, Indonesia, Korea,
Netherlands Antilles, Norway, The Philippines, Portugal, Slovakia,
Spain, Sweden, Switzerland, and Venezuela to complement those
previously engaged in Australia, Italy, Puerto Rico, Malaysia and
South Africa. During 1997, the Company introduced several of its
products in nine new languages, giving it access to multiple new
markets in Europe and Latin America. The Company has also partnered
with Daewoo Information Systems, a subsidiary of Daewoo Group, in a
joint worldwide development and distribution partnership for
computerized maintenance management systems. The agreement engages
Daewoo to convert the MP2 system from single byte to double byte
characters positioning the product for penetration of Asian markets.
Daewoo will use the MP2 system in their plants worldwide and will have
the exclusive right to sell Datastream products in Korea. 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. For financial information regarding the
Company's foreign and domestic operations, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Overview".
Establish new strategic alliances. The Company seeks to leverage
its position as the established unit sales leader in the CMMS/EAMS
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. The Company's
continued leadership in the CMMS/EAMS market is primarily a function
of continued customer acceptance of Datastream's products, 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 1,400 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. Direct sales to
Grainger during 1997 were approximately $440,000 and sales influenced
by Grainger were almost $2 million. In 1996, Datastream signed a
distribution agreement with J. Blackwood & Sons, Ltd. a $420 million
distributor of industrial equipment and components located in
Australia. These relationships and alliances provide additional and
expanded channels of distribution for sales of Datastream products.
In 1997, Datastream entered into an agreement with Datasphere
Technologies, Inc. to purchase for resale, market and distribute
copies of Datasphere's software, a package that allows users to
visually navigate a facility, using CAD diagrams, and drill down to
deeper layers of detail. Datastream granted Datasphere similar rights
to purchase for resale, market and distribute copies of Datastream's
software. The agreement provides for the sharing of certain revenues
when a customer buys both Datastream and Datasphere software.
Datastream is marketing the Datasphere software under the name MP2
Explorer. In 1997, Datastream also entered into a partnership with
Daewoo Information Systems that will give Datastream access to Korean
markets and engages Daewoo to convert Datastream's software from
single to double byte characters, thereby enabling the translation of
the software into Asian languages, which management believes will help
to expand the market for Datastream products. In 1997, Datastream
obtained certification from the Oracle Corporation that its MP5
product integrates seamlessly with the Oracle(R) Financials v10.7
product. This is an important step in further integrating Datastream
with leading Enterprise Resource Planning (ERP) providers. Datastream
has also achieved Microsoft Office and Microsoft BackOffice
certification for its MP2 Enterprise v5.0 SQL Server product and
became a Microsoft Certified Solutions Provider, strengthening its
links to the Microsoft operating system. In 1997, Datastream also
signed a strategic alliance agreement with PREDICT(R), a leading
provider of diagnostic tools and services for predictive maintenance
tasks. The forthcoming release of Voyager(TM), PREDICT's modular
software for monitoring equipment condition, will contain a copy of
Datastream's MaintainIt software. The combined package will integrate
the detection of machine wear with the scheduling of maintenance and
cost analysis. The Company is also a licensee of Aladon Reliability
Centered Maintenance (RCM), a functionality-based maintenance approach
developed by the airline industry in the early 1960's.
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 1997, the Company derived approximately 99% of its software unit
sales from its Windows-based products, MaintainIt, MaintainIt Pro, MP2
Professional, MP2 Enterprise and MP5. Datastream products have
garnered Plant Engineering magazine's "Gold Product of the Year" award
in the Software category in each of the last five years: MP2
Enterprise on SQL server 5.0 in 1997, 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, renaming it MP5.
Management believes that the addition of this product will give the
Company increased opportunities to penetrate into the high-end of the
CMMS/EAMS market.
The following chart describes the evolution of the Company's
CMMS/EAMS systems:
Initial
Package/Platform Description Release Date
---------------- ----------- ------------
MP2(R)(DOS).............. Predecessor of MP2 for Windows. June 1989
SideArm(R) (DOS)......... Predecessor of SideArm for December 1990
Windows.
SideArm(R) for Windows(R) Microsoft Windows operating September 1993
environment.
MP2(R) for Windows
(Now MP2 Professional).. Microsoft Windows operating April 1994
environment - file server
based.
MaintainIt(R) for Windows Microsoft Windows operating August 1995
environment - entry level
package.
Datastream Personal
Maintenance Assistant(R)
on Apple(R) Newton....... Newton operating system August 1995
environment.
MP2 for Windows
(Now MP2 Professional). Spanish language version. September 1995
(Spanish language)
MP2 for Windows
(client/server)........ User-interface and November 1995
(Now MP2 Professional) 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
(Now MP2 Professional) bit operating environment;
provides the same functions
as MP2 for Windows 16 bit
operating system.
Initial
Package/Platform Description Release Date
---------------- ----------- ------------
MP2 for Windows
(Now MP2 Professional). German language version. September 1996
(German language)
MaintainIt Pro(R)........ Microsoft Windows operating September 1996
environment on the
Microsoft Access database.
RequestLink(R)........... Internet/e-mail electronic September 1996
work order request system
for use with Lotus cc:Mail/
Notes, Microsoft Mail/Exchange,
or Internet mail (SMTP/POP3).
MP2 for Windows Client/
Server for Microsoft
SQL Server v5.0
(Now MP2 Professional). MP2 for Windows with enhanced December 1996
(Beta) user-interface and functionality.
Compatible with Microsoft SQL
databases that reside on Windows
NT database servers.
Oracle Financials 1.0
(Beta)................. Oracle Financials interface December 1996
for MP2 for Windows client/
server.
R5 CAMMS (Now MP5)....... High-end multi-language December 1996(1)
multi-platform, double-byte
client/server technology.
MP2 Enterprise v5.0...... SQL Server (March 1997) March 1997/
and Oracle (June 1997) June 1997
versions. Client/Server
environment.
MP2 Professional v5.0.... SQL Server product for March 1997
client/server environment
MP2 Professional v5.0.... French version May 1997
German version (beta) May 1997
Dutch version(beta) September 1997
Spanish version December 1997
MP2 Enterprise v5.0...... French version May 1997
German version (beta) May 1997
Dutch version(beta) September 1997
Spanish version December 1997
MP2 for Windows v4.6
(Portuguese language).... Portuguese language September 1997
(beta) version of the
file/server based MP2 for
Windows.
MP2 Explorer............. Graphics based add-on for October 1997(2)
(Beta) MP2 Enterprise v5.0.
Initial
Package/Platform Description Release Date
---------------- ----------- ------------
MaintainIt Pro........... Italian version October 1997
Spanish version October 1997
Danish version November 1997
Norwegian version November 1997
MP2 Enterprise v6.0 Oracle version. October 1997
Client/Server environment
Oracle Applications
Interface v2.0
(for MP2 Oracle v6.0)... Oracle Applications November 1997
(Beta) interface for MP2
Enterprise v6.0
Client/Server.
PagerLink............... Add-on that automatically November 1997
(Beta) pages maintenance workers.
WebLink................. Add-on allowing users to December 1997
(Beta) submit work order or
purchase order requests
using a standard internet
browser.
(1) Originally developed in 1994 by SQL,
which was acquired in December 1996 by
Datastream
(2) Developed by Datasphere Technologies,
Inc. and marketed by Datastream under a
distribution agreement.
The following is a more detailed description of the Company's
primary products:
MaintainIt and MaintainIt Pro 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. MaintainIt Pro
for Windows was released in September 1996 and contains all the
features of MaintainIt as well as location based indexing, and more
extensive graphs and report capabilities. MaintainIt Pro operates on
the Microsoft Access database. MaintainIt Pro is compatible with
Windows 95 and is offered in both single-user and networked versions.
MP2 Professional. MP2 Professional is designed for small or
medium sized facilities. It 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 Professional is available
on the user's screen through the help function.
MP2 Professional offers a large number of advanced capabilities
not available in MaintainIt or MaintainIt Pro. 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 Professional also offers
extensive graphic capabilities. A variety of optional add-on products
are also available for MP2 Professional including (i) a Custom Toolbox
that allows the user to transfer data from MP2 Professional 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.
MP2 Professional is available in 16-bit or 32-bit versions. It is
available for Paradox and Microsoft SQL Server databases. MP2
Professional is compatible with Windows 95 and Windows NT operating
systems.
In the file/server configuration, MP2 Professional 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.
Datastream continues to license and support the predecessor of MP2
Professional, called MP2, for use in DOS operating environments.
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/EAMS 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 Professional
(version 4.6) during the fourth quarter of 1995. The client/server
version of MP2 Professional 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 Professional is priced in the
$5,000 to $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
Professional, 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
Professional 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 the Company'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.
The latest client/server version of MP2 Professional is MP2
Professional v5.0. Created for the Microsoft(R) SQL Server database,
this product has a thin client leaving most of the work to the
server-- minimizing processing time, ensuring data integrity and
security, and reducing network traffic. The product features wizards,
context sensitive on-line help, customizable toolbars and Microsoft
BackOffice(TM) compatibility. The software offers comprehensive analysis
capabilities for inventory and work orders including graphing and
customizable reports. A labor module tracks labor costs by work order
and analyses productivity. The equipment module allows users to
specify whether a piece of equipment is out-of-service, list one or
more meters for each piece of equipment and view or update meter
readings, view a history of work orders for each equipment record and
create and view equipment relationships with the equipment component
view. The inventory module features three valuation methods: LIFO,
FIFO or weighted average, and caters to multiple sites with different
ordering information for each site. The system features a
comprehensive work order system and will automatically generate work
orders for repetitive and preventive maintenance tasks. The package
offers an integrated planning and scheduling solution, an integrated
purchasing module that creates quotes, requisitions and purchase
orders, a statistical preventive maintenance module and budget to
actual analysis. The security provided in the package is adaptable
and definable and can be set to maintain a complete audit trail of
transactions.
MP2 Enterprise v5.0. This product is designed to handle the
functional demands of medium to large enterprises and is available for
both Oracle and Microsoft SQL Server databases. It is built around
Microsoft Windows 95 or Windows NT and Microsoft Office(R) certified
interface, thin client "intranet ready" architecture and features full
email integration, Microsoft OLE (Object Linking and Embedding)
capability and a well-defined open API (Application Programming
Interface) architecture for easy integration to other corporate
systems. The package concentrates processing on the server to enhance
efficiency and is capable of handling both high volumes of
transactions and large numbers of concurrent users. The system is
designed for use over wide-area-networks linked to a central server.
In addition to the various features found in MP2 Professional, the
software offers a failure analysis tree, multi-site inventory
tracking, drag-and-drop work order scheduling and an open API
architecture.
MP5 (formerly R5 CAMMS). Through its acquisition of SQL in
December 1996, Datastream acquired the rights to SQL's R5 CAMMS
product. MP5 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. MP5
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 MP5 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. MP5 offers a widely scalable and
flexible platform, having been developed using the Oracle
Designer/Developer 2000 tool set. MP5 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, MP5 supports
OLE 2 integration with popular PC packages such as Microsoft.
Several add-on products were released in 1997 to expand the
capabilities of MP2 products. These include:
Weblink. Weblink helps a customer capitalize on their corporate
intranet investment and the global internet by easily extending basic
MP2 Enterprise functionality to each machine with intranet/internet
access using a standard internet browser.
PagerLink. This add-on automatically notifies any employee with a
text pager when MP2 Enterprise generates a work order on assigned
equipment. If the first page gets no response, the system
automatically escalates to another employee or supervisor.
MP2 Explorer. This product allows to graphically tour a facility
and graphically drill down to more detailed levels before linking to
MP2 Enterprise for full details on a specific asset identified.
Oracle Applications Interface. Software that provides for data
interchange capabilities between MP2 Enterprise for Oracle databases
with the Oracle Financials suite of products.
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.
MaintainIt Pro is available directly from the Company and through
catalogs for $995 in a single-user configuration; network versions are
available in a two- to three-user configuration for $1,495 and in a
four- to ten- user configuration for $1,995.
MP2 Professional (for Access) presently sells for $1,995 on a
single-user basis, $2,995 for two to three users, $3,995 for four to
ten users. MP2 Professional (for SQL servers) presently sells for
$4,995 for a single-user with an incremental $995 for each additional
user. Various modules of optional software are also available
including Weblink and RequestLink, which both sell for $1,995 for one
to five users and increase up to $4,995 for unlimited users. One-year
maintenance and support subscriptions for MP2 Professional range in
price from $795 for a single user to $2,495 for 50 or more users. In
1994, the Company introduced the MP2 "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 Professional, Barcode Software,
Custom Toolbox, Custom Work Orders and Purchase Orders, OSHA
regulations database and Network Software. Support for the MP2
Professional Bundle ranges from $1,595 for a single user to $2,795 for
50 or more users. Management believes that per-transaction revenues
have increased since the "Bundle" was introduced. The client/server
version of MP2 Professional 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 Professional file/server; pricing ranges from
$495 to $9,995 depending on the option and the number of users.
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.
MP2 Enterprise sells for $14,995 for a three-seat installation
with each seat thereafter selling for $1,995. Options offered with
MP2 Enterprise include all those offered with MP2 Professional;
pricing ranges from $495 to $9,995 depending on the option. One-year
maintenance and support subscriptions for MP2 Enterprise 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 and the number of users.
RequestLink and Weblink range in price from $995 for a five-user
file/server configuration to $4,995 for the unlimited-user
client/server version. Pagerlink (beta version) is available for
$1,995. MP2 Explorer sells for $9,995 for a five user version with an
added $1,495 for each additional user. Oracle Financials sells for
approximately $25,000 depending on the services delivered with the
software.
List price for the MP5 product is $78,000 for a five-module
standard configuration (base module plus asset, work, material and
purchasing management modules) supporting a minimum of eight users.
Additional modules are priced from $5,000 to $15,000, depending on the
module. Installation, consulting, training, and installation services
generally add from 75% 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 license. Systems supporting
additional users are priced higher.
All of the foregoing prices are subject to change.
Services
Approximately 55%, 57% and 54% of the Company's revenues for 1997,
1996 and 1995, respectively, were derived from sales of professional
and support services. Management believes that the need for expertise
in installing, customizing and using CMMS/EAMS 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. With increases in sales of the client/server
version of MP2 Professional and MP2 Enterprise and the increased
complexity and sophistication of the needs of the client/server
market, management believes that revenues from professional and
support services could continue to increase. However, 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 could accelerate the growth of
services revenues as a percentage of total revenues. SQL generated
approximately 62%, 67% and 59% of its revenues for 1997, 1996, and
1995, respectively, from sales of consulting and support services.
Fee-based consulting and advisory services are offered by the
Company's Professional Services Group. Professional service revenues
also include revenues from training, installation and customization
services offered by the Customization Group and system integration
services provided by its Integration Services Group. Support services
revenues include revenues from maintenance and support subscriptions.
Professional Services. The Professional Services Group provides
fee-based consulting and advisory services and configures and
implements CMMS/EAMS 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 Professional Services Group services are performed
in connection with installations of the Company's systems and the
Company's sales personnel actively seek to sell a five-day package of
consulting services as part of each license. The Company 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 potentially
redundant systems to ensure failure risk is minimized. There are
presently 171 field engineers assigned to the Company's Professional
Services Group. Most of these individuals have backgrounds in
manufacturing and operations. Eight of these employees are
RCM-licensed at present.
The Professional Services Group also offers fee-based training
services at its Greenville, South Carolina headquarters, at its
Irvine, California; Dallas, Texas and Chicago, Illinois training
facilities, and in frequent regional training seminars around the
country. The Company offered a total of 505 training seminars in 1997
and 419 training seminars in 1996. 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 Professional
Services Group 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 the system. If the Company
continues to install client/server systems in the marketplace,
management believes that revenues attributable to customization,
integration services and SWAT team services could also increase. In
1996, Datastream implemented a project management group to oversee
and manage large, project-oriented installations of its software.
Support Services. One-year maintenance and support subscriptions
range in cost from $79 for MaintainIt to $2,495 for a 50+-user,
networked MP2 Professional system to $19,620 for a similar 50 or more
user networked MP2 Enterprise 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, 5-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. As of March 20,
1998, the Company employed 65 personnel in support operations.
Toll-free customer support numbers are presently available in the
United States as well as most Western European nations, Canada and
Mexico. Management believes that a majority of the Company's customer
base presently subscribes to a Datastream maintenance and support
contract.
The Company provides support for the SQL 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 Greenville, South Carolina. Cost for a typical one-year
maintenance and support subscription is approximately 18% of the price
of the software installation. As of March 20, 1998, the Company
employed 13 personnel in support operations for the former SQL's
products.
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 virtually all
industries 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.
The Company (including SQL's 1997 unit sales only) has sold almost
36,000 units since inception and has grown its installed base by an
average of 70% annually during the last 5 years. 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 General Manufacturing
Bell Helicopter Textron Bic
General Dynamics Caterpiller
McDonnell Douglas Colgate Palmolive
NASA Cooper Industries
Levi Strauss & Co.
Automotive Shaw Industries
Kimberly Clark
Dana Corporation SONOCO
Eaton Polaroid
Echlin/Automotive Controls
Corp. Government
Harley Davidson
Lear Seating Corporation City of Baton Rouge, LA
Modine Diego Garcia Naval Air Base
Aaron's Automotive Products (Burns & Roe)
McClellan Air Force Base
Chemicals New York Department of
Corrections
Dow Chemical U.S. Army
DuPont U.S. Geological Survey
Glidden Company
Monsanto Healthcare
Morton International
Rhone Poulenc Gurwin Jewish Geriatric Center
ICI Greenville Hospital System
Witco Gwinnett Hospital System
Indian Health Service
Computers, Electronics, Electrical Memorial Sloan Kettering
and Communications Cancer Center
Mercy Medical Springfield
Advanced Micro Devices, Inc. St. Martha's Regional Hospital
Airtouch Cellular Tucson Medical
AT&T Global Information Solutions
AT&T Wireless Metals
Cox California PCS
Dell Computers Alcoa
Emerson Electric Alumax
Hewlett Packard American Steel
Pacific Bell Mobile Services Kaiser Aluminum
Texas Instruments Nucor Steel
Thermo Electron Meynolds Metals
US West Wireless
Petroleum
Food
Chevron
Cargill Fina Oil
Frito-Lay Mobil Chemical
Kraft Foods Texaco
Kroger Unocal
Pepsico
Pontiac Foods Pharmaceuticals
Procter & Gamble
Stroh Brewery Abbott Labs
Swiss Miss (Hunt Wesson) Kaiser Permanente
Ben & Jerry Parke Davis
Ruiz Food Products Warner-Lambert
General Facilities Hospitality
A&S Jordan Marsh Four Seasons Hotel--Philadelphia
American Greetings Holiday Inn
Atlantic Union College Marriott
BMG Music Registry Resort--Naples, FL
Cutler-Hammer, New York, New York Resort & Casino
Div. of Eaton Corp.
Family Dollar Shipping and Transport
Foster Wheeler
Gillette London Underground
Kmart Paris Metro
Maritz BC Transit
New York University Toronto GO Transit
Pillsbury Center Port of Rotterdam
Johnson Controls
Utilities
London Electricity
Denver Metro Wastewater
Gottenburg Energi
No customer has represented more than 1.5% of the Company's total
annual revenue in any of the last three fiscal years.
Sales and Marketing
The Company continues to increase its sales and marketing efforts
and staff. The Company markets its products and services through 209
sales and marketing professionals (as of March 20, 1998), including a
direct sales force of 96 telesales representatives with specific
geographic responsibilities and a direct outside sales force of 82
with specific geographic responsibilities. The Company 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 23 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 the Company's sales and marketing efforts is
its 96-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 the Company'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. The Company intends to
utilize the existing SQL infrastructure to expand its telesales force
in Europe.
During 1997, the Company greatly expanded its Corporate Accounts
direct sales force to call on larger accounts and to market its
enterprise-wide CMMS/EAMS solutions, including MP5, worldwide.
Internationally the Company uses a direct and telesales sales
force out of its offices in The Netherlands, United Kingdom, France,
Mexico as well as its Greenville, South Carolina headquarters. In
addition, the Company has a network of distributors located throughout
the balance of Europe, Latin America and the Pacific Rim.
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 20, 1998, the Company's product development department
consisted of 91 technical employees, including 56 software developers
(all of whom hold advanced programming or engineering degrees).
Datastream's 1997 product development focused on several areas:
MP2 Professional and MP2 Enterprise 5.0 SQL Server Editions were
released in March 1997. This product was the Company's first totally
client/server application supporting Microsoft SQL Server and was
written with a fully compiled object oriented language. The product
was certified Microsoft Office compatible and certified Microsoft
Backoffice compatible. Two versions of the product were developed: the
Enterprise version is the full featured version that includes a set of
Application Program Interfaces (API's) enabling users to interface
with MP2 from third party applications. The Professional version does
not include these API's. Enhanced features include failure analysis,
work order scheduling, location based work orders and enhanced
reporting capabilities
MP2 Enterprise v5.0 Oracle Edition was released in June 1997.
Identical to the SQL Server edition product, 5.0 Oracle supports the
Oracle database. An upgrade, MP2 Enterprise v5.1, was released in
November 1997. MP2 Enterprise v5.1 included several enhancements to
purchasing and inventory as well as the financial API's which allows
MP2 Enterprise v5.1 to directly export data to purchasing, accounting
or ERP applications.
MP2 Enterprise 6.0 went into beta testing in September 1997. This
major upgrade to the Company's Oracle Database product adds multi-site
functionality and a two-way financial interface. This feature allows
multiple physical sites to share a single database, with each site
only having access to it's own set of data. Enhanced security allows a
single person to have access privileges for data pertaining to a
single site or multiple sites. This is extremely helpful to
organizations that want to do all purchasing for all sites from a
central location but still want maintenance and inventory data to be
segregated and accessible only to the site from which it originates.
Also released for beta testing in September 1997 was the second
version of an interface to Oracle Applications. This interface is the
first to take advantage of the MOSIA architecture included in Oracle
6.0. The release of this product is scheduled for the 3rd quarter
1998.
Weblink 1.0 was released for beta in December 1997. This product
runs in a browser and allows any user to submit and monitor a
requisition or work order request.
During 1997, work progressed on an upgrade to the Company's MP2
Professional v4.6 file/server product. MP2 Professional 5.0 Access
will have the same graphical user interface and feature set as SQL 5.0
and Oracle 5.0 but will run on the Microsoft Access database.
The former SQL developers focused their 1997 efforts on improving
the functional quality of MP5 and adding to it the user interface that
is consistent across all products offered by Datastream. This allows
customers to upgrade software packages with a minimum of training and
inconvenience.
Current development efforts are focused on the version 7.0
client/server product. This product will be web-based and utilize a
component based, 3-tier architecture. Advantages of this technology
are low cost of ownership because the product will be able to be run
from a browser, increased scalability due to the 3-tier architecture
and better performance, especially over low speed wide area networks.
Datastream received Year 2000 certification for it's development
methods from the Information Technology Association of America (ITAA).
This means the Company has the correct controls in its development
process and methods to ensure the software produced is Year 2000
compliant. The following primary products are considered Year 2000
compliant: MaintainIt 2.0, MaintainIt 3.0, MaintainIt Pro 3.01, MP2
Professional 4.6 (16 and 32 bit versions), MP2 Professional 5.0, MP2
Enterprise (all version 5 series), MP2 Enterprise (all version 6
series) and MP5.
In addition to the new product development projects, several
existing products were translated into several foreign languages
during 1997.
Although management believes that the research and development
staff will be able to meet their development challenges, there can be
no assurance that the above or any other development projects 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
$2.31 million, $4.00 million and $6.65 million in 1995, 1996 and 1997,
respectively. Of these amounts, the amounts capitalized were
approximately $573,000, $2.61 million and $2.29 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 technological and market developments and to meet the
increasingly sophisticated needs of its customers. Furthermore,
approximately 99% of the Company's 1997 revenues were derived from
sales of the Windows versions of MP2, MaintainIt, MaintainIt Pro, MP2
Professional, MP2 Enterprise and MP5 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
Enterprise.
Competition
The current market for CMMS/EAMS software is both fragmented and
highly competitive. Management estimates that there are more than 200
vendors of CMMS/EAMS software products and anticipates that the market
will continue to attract new competitors in the future. Competition
at the high end of the market comes from large vendors such as Marcam
Corporation, Project Software and Development, Inc. (PSDI), The Indus
Group (which recently acquired The System Works (TSW)), and several
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/EAMS 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 product and has sought to expand sales of its middle-tier
client/server technology (aimed at Customers with revenues in the $250
million to $500 million range) 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
TSW. 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. The Company competes
internationally with both local or regional providers of CMMS/EAMS,
and with CMMS/EAMS vendors that operate on a global basis. Local and
regional competitors are generally smaller, but are more knowledgeable
of the specific markets in which they compete. Global competitors
such as PSDI and Indus participate actively in the European, Latin
American and Pacific Rim countries, entering these markets through
distributors, direct sales and service offices or through strategic
partnerships. Competition in these countries is frequently intense
and while the Company has been successful in integrating SQL so as to
compete from a local basis in Europe, and extending elsewhere through
distributorships, there is no guarantee that the company will continue
to prevail in these markets. 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, but
there is no assurance the Company will be successful in its efforts to
compete in the client/server market.
Throughout 1996 and 1997, the Company also expanded into new areas
of the low-end CMMS/EAMS 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.
The Company'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 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 Datastream 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,
the Company relies on a "shrink-wrap" license for protection against
unauthorized use of its 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, with or without merit, could be time-consuming and
expensive to defend. The loss of proprietary technology or a
successful claim against the Company 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 20, 1998, the Company employed 565 persons on a
full-time basis, including 209 sales and marketing personnel, 208
service and support representatives, 57 administrative personnel and
91 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.
Management considers relations between the Company and its employees
to be very good.
Trademarks
Datastream(R),MaintainIt(R), SideArm(R), MP2(R),Personal Maintenance
Assistant(R), RequestLink(R), The Maintenance Journal(R), The Leader in
Maintenance Software(R), EP2(R), Step-By-Step(R) and Partnership Between
Technology and Practice(R) are registered trademarks of the Company.
MP2 Weblink(TM),MP2 Explorer(TM),MP2 Professional(TM),MP2 Enterprise(TM),
MP2 Millenium(TM) and MP5(TM) are 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. Paradox(R) is
a registered trademark of Borland International, Inc. Windows(R),
Windows 95(R) and Windows NT(R) are registered trademarks of Microsoft
Corporation.
Item 2. Properties.
The Company conducts its principle operations out of a 125,000
square foot headquarters building located in Greenville, South
Carolina. The Company also has under lease approximately 12,000
square feet of space in Rotterdam, The Netherlands (lease expiration
November 2002), approximately 5,000 square feet of space in
Minneapolis, Minnesota (lease expiration October 1998), approximately
4,000 square feet of space in Slough, Great Britain (lease expiration
March 2000) and approximately 3,000 square feet of space in Irvine,
California (lease expiration January 2000), approximately 3,250 square
feet of space in Grenoble, France (lease expiration February 1999),
approximately 2,000 square feet of space in Paris, France (lease
expiration August 2001), approximately 1,500 square feet of space in
Chicago, Illinois (lease expiration December 1999), approximately
1,500 square feet of space in Dallas, Texas (lease expiration January
2000) and approximately 1,000 square feet of space in Monterrey,
Mexico (lease expiration January 2000).
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.
A Special Meeting of Stockholders was held on Monday, December 22,
1997 at which time such stockholders voted on, and approved, a
proposal to amend the Company's Amended and Restated Certificate of
Incorporation to increase from 15,000,000 to 40,000,000 the number of
shares of Common Stock the Company is authorized to issue. Indicated
below is the number of shares represented at the meeting and entitled
to vote and voting for, against or abstaining as to such matter.
Shares Shares Shares
For Against Abstained
7,811,432 335,326 7,540
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 declared a second
two-for-one stock split, effected in the form of a one-for-one share
dividend, effective January 30, 1998. 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/ask and low/bid prices for each quarter of the Company's last two
fiscal years. The prices below reflect the two-for-one stock splits
which occurred on September 12, 1995 and January 30, 1998.
Quarter Ended High/ask Low/bid
March 31, 1996 11.75 8.125
June 30, 1996 18.25 11.625
September 30, 1996 17.5 12.125
December 31, 1996 15.00 8.50
March 31, 1997 12.25 7.875
June 30, 1997 10.625 6.25
September 30, 1997 19.50 7.50
December 31, 1997 19.125 10.50
The closing price of a share of the Company's Common Stock on
March 20, 1998 was $20.125. As of March 20, 1998, the Company had 155
shareholders of record and approximately 6,000 beneficial owners of
its Common Stock.
Item 6. Selected Financial Data.
For the year ended December 31,
1993 1994 1995 1996 1997
---- ----- ----- ----- ----
(in thousands, except operating
and per share data)
Statement of Operations Data:
Total revenues................. $5,878 $10,374 $20,346 $32,466 $69,768
Total cost of revenues(1)...... 1,704 3,136 5,218 11,507 22,131
------- ------- ------- ------- -------
Gross profit................... 4,174 7,238 15,128 20,959 47,637
Total operating expenses (2)... 3,360 4,813 9,216 47,758 31,076
------- ------- ------- ------- -------
Operating income (loss)........ 814 2,425 5,912 (26,799) 16,561
Net other income............... 13 42 1,176 2,370 987
------- ------- ------- ------- -------
Income (loss) before income
taxes.......................... 827 2,467 7,088 (24,429) 17,548
Income taxes................... 320 915 2,742 3,581 6,110
------- ------- ------- ------- -------
Net income (loss)..............$ 507 $ 1,552 $ 4,346 $(28,010)$ 11,438
======= ======= ======== ======== ========
Basic net income (loss)
per share..................$ .05 $ .15 $ .33 $ (1.65)$ .62
======= ======= ======== ======== ========
Diluted net income (loss)
per share.................$ .05 $ .15 $ .30 $ (1.58)$ .59
======= ======= ======== ======== ========
Basic weighted average
common shares outstanding...... 10,366 10,366 13,004 16,977 18,397
Diluted weighted average
common shares outstanding...... 10,366 10,366 14,366 17,686 19,246
Operating Data:
Software units sold at
period-end (cumulative)........ 5,252 7,332 11,964 24,787 35,465
As of December 31,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Balance Sheet Data:
Working Capital............. $ 662 $1,569 $19,965 $13,633 $22,290
Total Assets................ 2,978 5,790 50,692 57,577 65,097
Long-term debt, less
current portion............. 68 46 22 2,893 603
Total stockholders' equity.. 564 916 46,034 33,125 47,108
(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, the
Company has been profitable in each of the last five years and has
experienced a compounded annual growth rate of 76% in revenues and
108% in earnings during that period.
The Company offers a complete family of CMMS/EAMS products to the
MRO industry. See "Business--Products". Generally these products
consist of 4 major categories based on price and functionality.
MaintainIt and MaintainIt Pro are off-the-shelf, entry-level solutions
for small to medium businesses. MP2 Professional is a full featured
integrated maintenance system for small to mid-size companies. MP2
Enterprise combines the benefits of PC servers and PC networks with a
Windows graphical user interface and SQL relational database. Through
the Company's acquisition of SQL in December 1996, the Company now
also offers SQL's MP5 (formerly R5 CAMMS), high-end EAMS product.
Datastream and SQL support their software products through
professional 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 1995, when international revenues reached 10.7% of total
revenues. International revenues increased to 13.4% of total revenues
in 1996, and 36.6% in 1997, primarily as a result of the acquisition
of SQL. Management expects that international revenues will continue
to increase as a percentage of total revenues, due to both SQL, and 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. The Company hedges
against a defined range of movements in the exchange rates between the
currencies in which it does virtually all its business. As the
Company begins to accept increased payments in foreign currency,
significant changes in the values of these foreign currencies relative
to the United States dollar may affect the Company's financial
condition and results of operations. In addition, gains and losses on
currency translations could contribute to fluctuations in the
Company's results of operations. See "-Safe Harbor Statement--Risks
Associated With International Sales".
The Company's principal areas of operation include the United
States and Europe. Information about the Company's operations in
different geographic locations in 1997 is as follows:
United
States Europe Total
------ ------ -----
(in thousands)
Total revenues $ 52,299 75.0% $ 17,470 25.0% $ 69,768 100%
Operating income $ 11,179 67.5% $ 5,383 32.5% $ 16,561 100%
Identifiable assets $ 56,697 87.1% $ 8,400 12.9% $ 65,097 100%
The United States operations include international revenues of
approximately $8,100,000 for the year ended December 31, 1997.
International revenues for the year ended December 31, 1995 and 1996
were approximately $2,180,000 and $4,354,000, respectively.
Many software companies experience seasonal variations in
revenues. The Company has experienced twenty-two 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. The acquisition of SQL has exposed the company
to seasonal revenue fluctuations in Europe, principally slower
business conditions in the first and third quarters of the year.
Datastream has historically experienced an increase in revenues in the
quarter (Q2 1997 and Q2 1996) during which the Company holds its
annual Technical User Group Conference. The next such conference is
presently scheduled to be held in June 1998 (although no assurance of
such an increase in 1998 can be given).
Because the Company consummated the acquisition of SQL on the last day
of fiscal 1996 and the transaction was accounted for as a purchase,
SQL's results of operations for fiscal 1996 are not included in the
Company's fiscal 1996 results. For 1996, SQL generated revenues of
approximately $17.3 million and a net loss of approximately $5.9
million. Although the Company has successfully integrated and
rationalized SQL's operations, the acquisition of SQL has impacted and
will continue to impact the reporting control and management
capabilities of the Company in 1998. 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, 1995, 1996 and 1997, 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
1995 1996 1997 95-96 96-97
(in thousands, except per share data)
Statement of Operations Data:
Revenues:
Product.................... $9,343 $14,018 $31,174 50.0% 122.4%
Professional services...... 6,660 12,326 26,438 85.1 114.5
Support.................... 4,343 6,122 12,156 41.0 98.6
------- ------- ------- ------ ------
Total revenues.......... 20,346 32,466 69,768 59.6 114.9
Cost of revenues:
Cost of product revenues... 1,136 1,879 3,133 65.5 66.7
Cost of professional-
services revenues....... 3,383 6,729 15,160 98.9 125.3
Cost of support revenues... 699 1,095 3,838 56.7 250.5
Write-off of capitalized
software................ - 1,804 - N/M N/M
------- ------- ------- ------ ------
Total cost of revenues.. 5,218 11,507 22,131 121.0 92.3
Gross Profit................... 15,128 20,959 47,637 38.5 127.3
Operating expenses:
Sales and marketing........ 5,216 9,399 18,617 80.2 98.1
Product development........ 1,741 1,390 4,364 (20.1) 213.9
General and administrative. 2,259 3,369 8,095 49.1 140.2
Write-off of in-process
research & development... - 33,600 - N/M N/M
------- ------- ------- ------ ------
Total operating expenses 9,216 47,758 31,076 418.2 (34.9)
------- ------- ------- ------ ------
Operating income(loss)........ 5,912 (26,799) 16,561 (553.3) 161.8
Net other income.............. 1,176 2,370 987 101.5 (58.4)
------- ------- ------- ------ ------
Income(loss) before income taxes 7,088 (24,429) 17,548 (444.7) 171.8
Income taxes.................. 2,742 3,581 6,110 30.6 70.6
------- ------- ------- ------ ------
Net income(loss) ............. $ 4,346 $(28,010) $ 11,438 (744.5) 140.8
======= ======= ======= ====== ======
Basic net income (loss)
per share................. $ .33 $ (1.65) $ .62 (600.0)% 137.6%
======= ======= ======= ====== ======
Diluted net income(loss)
per share................. $ .30 $ (1.58) $ .59 (627.0)% 137.3%
======= ======= ======= ====== ======
N/M -- Not meaningful
Year Ended December 31,
Statement of Operations Data: 1995 1996 1997
---- ---- ----
Revenues:
Product................................... 46.0% 43.2% 44.7%
Professional services..................... 32.7 38.0 37.9
Support................................... 21.3 18.8 17.4
------ ------ ------
Total revenues......................... 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues.................. 5.6 5.8 4.5
Cost of professional service revenues..... 16.6 20.7 21.7
Cost of support revenues.................. 3.4 3.4 5.5
Write off of capitalized software......... - 5.6 -
Total cost of revenues................. 25.6 35.5 31.7
------ ------ ------
Gross Profit.................................. 74.4 64.5 68.3
Operating expenses:
Sales and marketing....................... 25.6 28.9 26.7
Product development....................... 8.6 4.3 6.3
General and administrative................ 11.1 10.4 11.6
Write off of in-process research
and development - 103.5 -
Total operating expenses............... 45.3 147.1 44.6
----- ----- -----
Operating income(loss)........................ 29.1 (82.6) 23.7
Net other income.............................. 5.8 7.3 1.4
----- ----- -----
Income(loss) before income taxes.............. 34.9 (75.3) 25.1
Income taxes.................................. 13.5 11.0 8.7
----- ----- -----
Net income(loss).............................. 21.4% (86.3)% 16.4%
===== ===== =====
1997 Compared to 1996 and 1996 Compared to 1995
Total Revenues. Total revenues for 1997 increased 114.9% to
approximately $69.8 million from approximately $32.5 million in 1996,
due principally to the impact of the acquisition of SQL Group, BV on
December 31, 1996, introduction of foreign language versions of
Datastream's MP2 Professional and MaintainIt Pro in Europe through the
SQL channels, continued acceptance of the Company's products in the
global industrial automation market, expansion of the Company's sales,
professional and technical support service organizations, introduction
of MP2 Enterprise in March 1997, followed by translated versions
catering to several European languages, introduction of RequestLink in
late 1996 and the expansion of the sales and marketing functions to
support the Company's telesales and direct sales programs. The total
growth in revenues of 114.9% is comprised of a 49.9% increase in
Datastream's revenues, an additional growth of 36.0% attributable to
the acquisition of SQL and a 29.0% growth in SQL's revenues for fiscal
1997. 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, including the continued acceptance of the Company's
products in the industrial automation market, expansion of the
Company's sales, professional and technical support service
organizations, introduction of MP2 for Windows95/NT in June 1996,
introduction of MaintainIt Pro in September 1996, increased demand for
the client/server version of MP2 Professional in the industrial
automation market, and the addition of sales personnel and marketing
resources to support the Company's telesales and direct sales
programs. International revenues were approximately $25.4 million, or
36% of total revenues in 1997, compared to $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.
Product revenues increased 122.4% to approximately $31.2 million
in 1997 from approximately $14.0 million in 1996, and 50.0% to
approximately $14.0 million in 1996 from approximately $9.3 million
in 1995. These increases are due to expansion of the number of
software products being sold, 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
increased to 44.7% in 1997 from 43.2% in 1996 and decreased to 43.2%
in 1996 from 46.0% in 1995.
Professional Service revenues increased 114.5% to approximately
$26.4 million in 1997 from approximately $12.3 million in 1996 and
85.1% to approximately $12.3 million in 1996 from approximately $6.7
million in 1995. These increases generally reflect the impact of the
acquisition of SQL, increased installation, training and integration
services provided to support increased product sales. As a
percentage of revenues, revenues from professional services decreased
slightly to 37.9% in 1997 from 38.0% in 1996 and increased to 38.0% in
1996 from 32.7% in 1995.
Technical support service revenues increased 98.6% to
approximately $12.2 million in 1997 from approximately $6.1 million in
1996, and 41.0% to approximately $6.1 million in 1996 from
approximately $4.3 million in 1995. These increases reflect the
impact of the acquisition of SQL and an increase in the type and
variety of services provided to a larger installed customer base. As
a percentage of total revenues, revenues from technical support
services decreased to 17.4% in 1997 from 18.8% in 1996 and 21.3% in
1995.
Cost of Revenues. Cost of product revenues as a percentage of
total revenues decreased to 4.5% in 1997 from 5.8% in 1996 and
increased to 5.8% in 1996 from 5.6% in 1995. The decrease as a
percentage of revenues in 1997 from 1996 and 1995 principally
reflects decreased amortization of capitalized software costs as a
percentage of product costs, the smaller component of product cost
reflected in SQL's product revenues, decreased costs associated with
printing and replication of the Company's software products, and
volume discounts realized on shipping costs. The slight increase as a
percentage of revenues in 1996 from 1995 principally reflects
increased amortization of capitalized software costs as a percentage
of product costs.
Cost of professional services increased as a percentage of total
revenues to 21.7% in 1997 from 20.7% in 1996 and 16.6% in 1995. The
increase as a percentage of revenues in 1997 from 1996 was due
primarily to the acquisition of SQL which experiences lower
utilization of professional service personnel during the first and
third quarters resulting from seasonal business cycles in Europe. The
decrease as a percentage of revenues in 1996 from 1995 was due
primarily to decreased utilization of engineers during the second half
of the year resulting from increased hiring to support planned
services growth.
Cost of technical support services as a percentage of total
revenues was 5.5%, 3.4% and 3.4% in 1997, 1996 and 1995, respectively.
The increase from 1996 to 1997 as a percentage of revenues reflects
the impact of the acquisition of SQL which sells larger contracts
containing a larger component of technical support service cost.
Cost of revenue in 1996 included a one-time $1.8 million write-off
of capitalized software which became obsolete as a result of the
acquisition of SQL (see note 1(i) to the consolidated financial
statements). No such charges against income were taken in 1997.
Sales and Marketing Expenses. Sales and marketing expenses for
1997 increased 98.1% to approximately $18.6 million from approximately
$9.4 million in 1996, and increased 80.2% to approximately $9.4
million from approximately $5.2 million in 1995. As a percentage of
total revenues, these expenses were 26.7% in 1997, 28.9% in 1996 and
25.6% in 1995. The decrease as a percentage of revenues in 1997
from 1996 was due primarily to increased productivity of the sales and
marketing staff combined with increased market acceptance of the
Company's products. The increase as a percentage of revenues in 1996
from 1995 was due primarily to increased commissions and sales travel
expenses.
Product Development Expenses. Total expenditures on product
development, including capitalized expenses, increased to
approximately $6.7 million in 1997 from approximately $4.0 million in
1996 and from approximately $2.3 million in 1995. 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 $2.3 million, $2.6 million and $.6
million, respectively, in 1997, 1996 and 1995, which represented
34.4%, 65.2% and 24.8% 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
1998 because the majority of projects qualifying for capitalization
have been or will be released for revenue shipments in 1998. Net
product development expenditures were approximately $4.4 million, $1.4
million and $1.7 million in 1997, 1996 and 1995, respectively. Net
product development expenses as a percentage of revenues were 6.3%,
4.3% and 8.6% in 1997, 1996 and 1995, respectively. Amortization of
capitalized product development costs is charged to cost of product
sales and totaled approximately $1.5 million, $.5 million and $.3
million in 1997, 1996 and 1995, 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 140.2% to approximately $8.1 million in 1997 from
approximately $3.4 million in 1996, and 49.1% to approximately $3.4
million in 1996 from approximately $2.3 million in 1995, due primarily
to the acquisition of SQL which historically spent more on general and
administrative categories, 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 11.6% in
1997, 10.4% in 1996 and 11.1% in 1995.
Write-off of in-process research and development costs. The
company expensed $33.6 million of in-process research and development
acquired as part of the acquisition of SQL. Also in conjunction with
the acquisition of SQL in 1996, the Company wrote off approximately
$1.8 million of capitalized software which represented investments in
products rendered redundant or obsolete by the acquisition of the SQL
product line. These one-time charges resulted in the Company
reporting a loss in 1996 (see note (2) to the consolidated financial
statements).
Other Income/Expense. Other income decreased $1.4 million in 1997
from approximately $2.4 million in 1996, after having increased
approximately $1.2 million in 1996 from approximately $1.2 million in
1995. The decrease from 1996 to 1997 was primarily due to lower
interest earned on smaller investment balances which resulted after
remitting the cash portion of the purchase of SQL to its
shareholders. The increase from 1995 to 1996 was 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 1997
increased to 34.8% 1997 from (14.6%) in 1996, primarily due to the tax
treatment of the SQL acquisition and related costs. Without the
effect of the acquisition, the Company's effective tax rate for 1996
would have been 36.5% and the decrease from 1996 to 1997 could be
attributed principally to increased product development tax credits.
Likewise, the effective tax rate decrease from 38.7% in 1995 to 36.5%
in 1996, excluding the effects of the SQL acquisition, was due
primarily to increased development tax credits.
Net Income(loss). The Company's net income increased 140.8% in
1997 to approximately $11.4 million or $.62 basic earnings per share
($.59 diluted earnings per share) from a loss of approximately ($28.0)
million in 1996, and decreased 744.5% in 1996 to a loss of
approximately $(28.0) million or $(1.65) basic earnings per share
(($1.58) diluted earnings per share), from approximately $4.35
million, or $.33 basic earnings per share ($.30 diluted earnings per
share) in 1995. The increase in net income is due to the impact of
the acquisition of SQL and internal growth of revenues during 1997.
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 twenty-two 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. The acquisition of SQL has exposed the
company to seasonal revenue fluctuations in Europe, principally slower
business conditions in the first and third quarters of the year.
Datastream has historically experienced an increase in revenues in the
quarter (Q2 1997 and Q2 1996) during which the Company holds its
annual Technical User Group Conference. The next such conference is
presently scheduled to be held in June 1998 (although no assurance of
such an increase in 1998 can be given).
The following table presents certain unaudited quarterly financial
information for each of the eight quarters through the quarter
ended December 31, 1997. 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
1996 1997
---- ----
March June Sept. Dec. March June Sept. Dec.
31, 30, 30, 31, 31, 30, 30, 31,
Revenues:
Product............ $3,073 $3,259 $3,652 $4,034 $6,148 $6,851 $8,195 $9,980
Professional
services......... 2,489 2,813 3,070 3,954 5,783 6,909 6,187 7,559
Support............ 1,340 1,632 1,543 1,607 2,751 3,054 3,018 3,333
----- ----- ----- ----- ----- ----- ----- -----
Total revenues.... 6,902 7,704 8,265 9,595 14,682 16,814 17,400 20,872
Cost of revenues:
Cost of product
revenue.......... 361 491 473 554 844 695 746 848
Cost of professional
service rev...... 1,177 1,443 1,716 2,393 3,530 3,712 3,738 4,180
Cost of support
revenue.......... 265 261 258 311 687 1,090 1,134 927
Write off of
capitalized software - - - 1,804 - - - -
Total cost of
revenues......... 1,803 2,195 2,447 5,062 5,061 5,497 5,618 5,955
----- ----- ----- ----- ----- ----- ----- -----
Gross profit......... 5,099 5,509 5,818 4,533 9,621 11,317 11,782 14,917
Operating expenses:
Sales and marketing 2,128 2,234 2,269 2,768 4,273 4,694 4,605 5,045
Product development 417 301 358 314 834 1,036 1,180 1,314
General and
administrative... 628 867 805 1,068 2,236 1,773 1,522 2,564
Write off of
in-process research
and development.. - - - 33,600 - - - -
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............. 3,173 3,402 3,432 37,750 7,343 7,503 7,307 8,923
----- ----- ----- ----- ----- ----- ----- -----
Operating income(loss) 1,926 2,107 2,385(33,217) 2,278 3,814 4,475 5,994
Net other income..... 576 581 590 623 208 282 249 248
----- ----- ----- ----- ----- ----- ----- -----
Income(loss) before
income taxes....... 2,502 2,687 2,976(32,594) 2,486 4,096 4,724 6,242
Income taxes......... 963 1036 1,146 436 508 1,495 1,748 2,359
----- ----- ----- ----- ----- ----- ----- ------
Net income (loss)... $1,539 $1,651 $1,830$(33,030) $1,978 $2,601 $2,976 $3,883
====== ===== ====== ====== ===== ===== ===== =====
Basic net income
(loss) per share..... $ .09 $ .10 $ .11 $(1.95) $ .11 $ .14 $.16 $ .21
===== ===== ===== ===== ===== ===== ===== =====
Diluted net income
(loss) per share..... $ .09 $ .10 $ .11 $(1.88) $ .11 $ .14 $.15 $ .19
===== ===== ===== ===== ===== ===== ===== =====
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, 1997.
Quarter
Ended
1996 1997
---- ----
Mar Jun Sep Dec Mar Jun Sep Dec.
31, 30, 30, 31, 31, 30, 30, 31,
Revenues:
Product............ 44.5% 42.3% 44.2% 42.0% 41.9% 40.7 %47.1% 47.8%
Professional services 36.0 36.5 37.2 41.2 39.4 41.1 35.6 36.2
Support............ 19.5 21.2 18.6 16.8 18.7 18.2 17.3 16.0
---- ---- ---- ---- ---- ---- ---- ----
Total revenues.... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenue.. 5.2 6.4 5.7 5.8 5.7 4.1 4.3 4.1
Cost of professional
service revenue...... 17.1 18.7 20.8 24.9 24.0 22.1 21.5 20.0
Cost of support revenue.. 3.8 3.4 3.1 3.2 4.7 6.5 6.5 4.4
Write-off of capitalized
software. - - - 18.7 - - - -
---- ---- ---- ---- ---- ---- ---- ----
Total cost of revenue... 26.1 28.5 29.6 52.6 34.5 32.7 32.3 28.5
---- ---- ---- ---- ---- ---- ---- ----
Gross profit......... 73.8 71.5 70.4 47.4 65.5 67.3 67.7 71.5
Operating expenses:
Sales and marketing 30.8 29.0 27.5 28.9 29.1 27.9 26.5 24.2
Product development 6.0 3.9 4.3 3.3 5.7 6.2 6.8 6.3
General & administrative. 9.1 11.3 9.8 11.1 15.2 10.5 8.7 12.3
Write-off of in-process
Research & Development - - - 350.2 - - - -
---- ---- ---- ----- ---- ---- ---- ----
Total operating
expenses........... 46.0 44.2 41.5 393.5 50.0 44.6 42.0 42.8
---- ---- ---- ---- ---- ---- ---- ----
Operating income(loss) 27.9 27.3 28.9 (346.1) 15.5 22.7 25.7 28.7
Net other income..... 8.3 7.5 7.1 6.5 1.4 1.7 1.4 1.2
---- ---- ---- ---- ---- ---- ---- ----
Income(loss) before
income taxes......... 36.3 34.9 36.0 (339.6) 16.9 24.4 27.1 29.9
Income taxes......... 14.0 13.5 13.9 4.5 3.5 8.9 10.0 11.3
---- ---- ---- ---- ---- ---- ---- ----
Net income(loss)..... 22.3% 21.4% 22.2% 344.1% 13.5% 15.5% 17.1% 18.6%
==== ==== ==== ===== ==== ==== ===== ====
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 1995, 1996 and 1997 operating activities generated
cash totaling approximately $2.8 million, $6.2 million and $2.2
million, respectively, primarily related to increases in net income in
1995 and 1997, and increases in net income before acquisition related
charges in 1996.
In 1995, 1996 and 1997, the Company used cash from investing
activities of approximately $41.5 million, $2.1 million and $4.8
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 multi-currency bank line of credit that
provides for borrowings of 70% of accounts receivable less than 60
days aged up to $5.0 million. This line expires on December 15, 1998.
No borrowings were outstanding under the line of credit at December
31, 1997.
The acquisition of SQL was completed for $34 million, consisting
of $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 $978,000 of SQL's long-term debt remains,
of which approximately $346,000 is scheduled to be repaid by the end
of 1998.
The Company's principal commitments as of December 31, 1997
consisted of leases of operating equipment and its foreign office
facilities, 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 finance
current operating requirements, including capital expenditures,
acquisitions and year 2000 compliance costs for at least the next 12
months.
Impact of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (Statement No. 130). Statement No. 130 requires
companies to display, with the same prominence as other financial
statements, the components of comprehensive income. Statement No. 130
requires that an enterprise classify items of other comprehensive
income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of a statement of financial position. Statement No. 130 is effective
for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative
purposes is required. The Company's financial statements will include
the disclosure of comprehensive income in accordance with the
provisions of Statement No. 130 beginning the first quarter of 1998.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (Statement No. 131). Statement No. 131 requires
that an enterprise disclose certain information about operating
segments and is effective for financial statements for periods
beginning after December 15, 1997.
In October 1997, the Accounting Standards Executive Committee
issued Statement of Position 97-2, "Software Revenue Recognition" (SOP
97-2). SOP 97-2 is effective for financial statements for fiscal
years beginning after December 15, 1997. The Company does not expect
that adoption of SOP 97-2 will significantly affect its results of
operations.
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 1998.
"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/EAMS 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.
Management expects the Company to face increased competition across
all products lines in 1998. 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 1997 revenues were derived from sales of the Windows
versions of SideArm, MP2, MaintainIt, MaintainIt Pro, MP2
Professional, MP2 Enterprise and MP5 and related services and
support. Accordingly, the Company's financial performance will depend
on continued market acceptance of these products. 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 36.0% of the Company's 1997 revenues (from 13.4% in
1996), and management expects that an increasing portion of the
Company's total revenues will be derived from international operations
conducted in foreign currencies. The Company conducts virtually all
its business in US dollars, Dutch guilders, French Francs and British
pounds. The Company hedges exchange rate movements on either side of
a locked-in spot rate for movements within a range of 3.1% on the
dollar-pound rate and 7.5% on the dollar-guilder rate. Changes in the
value of these currencies relative to the dollar beyond the ranges
hedged by the Company 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. In addition, the deeper exposure to international markets
opens new areas with which the Company is not familiar and places the
Company in competition with new vendors. There is no assurance the
Company will be successful in its efforts to compete in these
international markets.
Fluctuations in Quarterly Results. Traditionally the Company has
operated with very little backlog, and a significant portion of
Datastream's revenues in any quarter were the result of a large number
of relatively small orders received during a period. Accordingly, the
Company was subject to fluctuations in the number of overall orders in
any given period, which in turn was 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. In
addition, the acquisition of SQL has given the Company access to the
market for high-end maintenance software solutions, which generally
take longer to implement and may result in a longer sales process.
The extended revenue recognition process may result in fluctuations in
quarterly results. 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. 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.
Risks Associated with the Year 2000. Many currently installed
computer systems and software products are coded to accept only two
digit entries in the date code field. These date code fields will
need to accept four digit entries to distinguish 21'st century dates
from 20'th century dates. As a result, in less than two years,
computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. There are
several aspects to the Year 2000 issue, as follows:
Impact on Revenue. The Company believes that the purchasing
patterns of customers and potential customers may be affected by Year
2000 issues in a variety of ways. Many companies are expending
significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase software products such as those
offered by the Company. Conversely, Year 2000 issues may cause other
companies to accelerate purchases of software to replace non-year 2000
compliant applications, causing a short-term increase in demand for
the Company's products. There is no assurance that such increase in
demand will be realized, or that companies will resume purchases of
the software offered by the Company if and when they resolve their
Year 2000 problems. Either of the foregoing could have a material
adverse effect upon the Company's business, operating results and
financial condition.
Year 2000 Compliance. The Company has obtained ITAA Year 2000
certification and believes that the current versions of its products
are year 2000 compliant. All Datastream products use four digit years
for all internal manipulations and representations. The Company
regularly runs regression tests on its software, including tests of
the year 2000 rollover. Based on the above, it is not expected that
the Company's products will be adversely affected by date changes in
the year 2000. However, there can be no assurance that the Company's
products contain and will contain all features and functionality
considered necessary by customers, distributors, resellers and systems
integrators to be Year 2000 compliant. Certain customers of the
Company may still be running earlier versions of two of the Company's
products, developed by the former SQL, which earlier versions are not
Year 2000 compliant. The Company has informed these customers of the
need to migrate to current products that management believes are Year
2000 compliant and/or has made available a software patch which
management believes will brings these products into Year 2000
compliance. The Company anticipates that generally throughout the
software industry substantial litigation may be brought against
software vendors of non-compliant operating environments. The Company
believes that any such claims against the Company, with or without
merit, could have a material adverse effect on the Company's business,
operating results and financial condition.
Internal Systems. The Company has also reviewed its internal
systems for Year 2000 compliance and is in the process of upgrading to
Year 2000 compliant versions from third party software vendors,
modifying certain systems, and planning to replace certain systems
with new third party software, which the Company expects to complete
prior to January 1, 2000. In addition to making its own systems Year
2000 ready, the Company has also begun to contact its keys suppliers
and customers to determine the extent to which the systems of such
suppliers and customers are Year 2000 compliant and the extent to
which the Company could be affected by the failure of such third
parties to be Year 2000 compliant. The company has created a Year
2000 Committee to coordinate the efforts to become fully Year 2000
compliant. Management does not believe that the cost to bring its
software products and internal systems into Year 2000 compliance will
have a material adverse effect on the Company's results of operations
or financial condition. However, delays in upgrading some systems to
Year 2000 compliance, or a failure to fully identify all Year 2000
dependencies in the Company's systems and in the systems of its
vendors, customers and financial institutions could have material
adverse consequences, including delays in the delivery or sale of
products.
Expenses related to Year 2000 Compliance. The company has not
incurred significant expense in becoming Year 2000 compliant as this
has been achieved as a part of regular upgrades to the internal
operating systems. Future costs related to Year 2000 compliance are
not expected to have a material adverse effect on the Company's
results of operations or financial condition.
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 7A. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to the general instructions to Rule 305 to SEC Regulation
S-K, quantitative and qualitative disclosures called for by this Item
7A and by Rule 305 of SEC Regulation S-K are inapplicable to the
Company at this time.
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-25 and page S-1 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
Directors-Director Nominees 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 Stockholders to be held on June 12, 1998.
Item 11. Executive Compensation.
The information required by this item is incorporated by reference
to information to be included under the captions "Election of
Directors-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
Stockholders to be held on June 12, 1998.
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 12, 1998.
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 12, 1998.
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, 1996 and 1997.
o Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.
o Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997.
o Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.
o Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
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.
3.1(a) Amendment to Amended and Restated Certificate of
Incorporation, dated January 12, 1997.
3.2** By-Laws.
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 as amended and restated
through May 7, 1997.
10.1(a) Amendment to 1995 Stock Option Plan (as amended and
restated through May 7, 1997), dated March 13, 1998.
10.2+ Stock Option Plan for Directors (as amended and
restated as of April 12, 1996).
10.2(a) Amendment to Stock Option Plan for Directors (as
amended and restated as of April 12, 1996), dated
March 13, 1998.
10.3** 401(k) Retirement Plan of the Registrant.
10.4++ Amended and Restated Employee Stock Purchase Plan.
11 Statement re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP.
24 Power of Attorney (include on signature page hereto).
27 Financial Data Schedule.
- ---------------
* Incorporated herein by reference to exhibit of the same number
to the Company's Current Report on 8-K filed January 10, 1997
(File No. 000-25590).
** Incorporated herein by reference to exhibit of the same number
in the from S-1 Registration Statement of the Registrant (Reg
No. 33-89498).
*** Incorporated herein by reference to Appendix A to the Company's
definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders, filed May 12, 1997 (File No. 000-25590).
+ Incorporated herein by reference to Appendix C to the Company's
definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders filed April 23, 1996 (File No. 000-25590).
++ Incorporated herein by reference to Appendix A to the Company's
definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders filed April 23, 1996 (File No. 000-25590).
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, 1996 and
1997, 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, 1997. 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, 1996 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended December
31, 1997, in conformity with generally accepted accounting principles.
Greenville, South Carolina
January 23, 1998
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1997
Assets 1996 1997
Current assets: ---- ----
Cash and cash equivalents $ 6,315,719 2,409,387
Accounts receivable, net of allowance
for doubtful accounts of $835,000 and
$1,589,910 in 1996 and 1997, respectively 11,725,928 21,968,539
Unbilled receivables 1,438,230 2,271,375
Investments 13,011,856 9,735,585
Prepaid expenses 586,647 614,447
Inventories 324,018 369,486
Deferred income taxes 395,000 796,000
Other assets 745,093 619,448
---------- ----------
Total current assets 34,542,491 38,784,267
Investments 4,547,220 6,637,286
Property and equipment, net 8,692,323 10,166,101
Goodwill, net of accumulated amortization
of $1,091,001 in 1997 7,636,748 6,545,747
Capitalized software development costs, net of
accumulated amortization of $1,197,177 and
$2,676,132 in 1996 and 1997, respectively 2,158,436 2,963,842
------------ ----------
Total assets $ 57,577,218 65,097,243
============ ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable 4,403,205 2,696,240
Other accrued liabilities 9,139,078 4,135,258
Income taxes payable 743,707 2,816,800
Current portion of long-term debt 1,507,274 346,197
Unearned revenue 5,116,007 6,499,953
---------- ----------
Total current liabilities 20,909,271 16,494,448
Long-term debt, less current portion 2,892,743 603,098
Deferred income taxes 650,000 892,000
---------- ----------
Total liabilities 24,452,014 17,989,546
========== ==========
Commitments
Stockholders' equity:
Preferred stock $1 par value, 1,000,000
shares authorized; none issued - -
Common stock, $.01 par value, 40,000,000
shares authorized; 18,253,578 and
18,585,518 shares issued and outstanding at
December 31, 1996 and 1997, respectively 182,536 185,855
Additional paid-in capital 55,756,166 58,049,212
Accumulated deficit (22,813,498)(11,375,601)
Foreign currency translation adjustment - 217,275
Unrealized gain on securities available-for-sale - 30,956
---------- ----------
Total stockholders' equity 33,125,204 47,107,697
---------- ----------
Total liabilities and stockholders' equity $57,577,218 65,097,243
========== ==========
See accompanying notes to consolidated financial statements.
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995, 1996 and 1997
1995 1996 1997
Revenues: ---- ---- ----
Product $ 9,342,978 14,018,478 31,174,408
Applications engineering 6,659,998 12,325,593 26,437,697
Support 4,343,008 6,122,332 12,156,190
---------- ---------- ----------
Total revenues 20,345,984 32,466,403 69,768,295
---------- ---------- ----------
Cost of revenues:
Cost of product revenues 1,135,779 1,879,258 3,132,996
Cost of applications
engineering revenues 3,382,730 6,729,072 15,160,409
Cost of support revenues 699,544 1,094,745 3,837,565
Write-off of capitalized software - 1,803,637 -
--------- ---------- ----------
Total cost of revenues 5,218,053 11,506,712 22,130,970
--------- ---------- ----------
Gross profit 15,127,931 20,959,691 47,637,325
Operating expenses:
Sales and marketing 5,216,009 9,398,675 18,616,981
Product development 1,740,895 1,390,325 4,364,234
General and administrative 2,259,172 3,369,338 8,094,762
Write-off of in-process
research and development - 33,600,000 -
--------- ---------- ----------
Total operating expenses 9,216,076 47,758,338 31,075,977
--------- ---------- ----------
Operating income (loss) 5,911,855 (26,798,647) 16,561,348
Other income (expense):
Interest and other income 1,181,974 2,374,158 1,220,256
Interest expense (5,770) (4,240) (233,395)
--------- --------- ---------
Net other income 1,176,204 2,369,918 986,861
--------- --------- ---------
Income (loss) before
income taxes 7,088,059 (24,428,729) 17,548,209
Income taxes 2,742,000 3,581,000 6,110,312
--------- ---------- ----------
Net income (loss) $ 4,346,059 (28,009,729) 11,437,897
========= =========== ==========
Basic net income (loss)
per share $ .33 (1.65) .62
========= =========== ==========
Diluted net income (loss)
per share $ .30 (1.58) .59
========= =========== ==========
Basic weighted average
number of common and common
equivalent shares
outstanding 13,004,474 16,977,134 18,396,920
========== ========== ==========
Diluted weighted average
number of common and
common equivalent shares
outstanding 14,365,756 17,685,522 19,245,948
========== ========== ==========
See accompanying notes to consolidated financial statements.
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1995, 1996 and 1997
Unrealized net
Foreign Gain (Loss) on
Additional Retained Currency Investments Total
Common Paid-In Earnings Translation Available Stockholders'
Stock Capital (Deficit) Adjustment for Sale, Net Equity
----- ------- ------- ---------- ------------- ------
Balance at December 31, 1994 69,400 - 850,172 - (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 40,000 13,520,213 - - - 13,560,213
Exercise of redeemable stock
warrants 34,424 2,031,125 - - - 2,065,549
Issuance of common shares in
public offering, net of
offering costs of $225,064 24,286 25,118,362 - - - 25,142,648
------ ---------- --------- ------ ------- ----------
Balance at December 31, 1995 168,110 40,669,700 5,196,231 - - 46,034,041
Net loss - - (28,009,729) - - (28,009,729)
Exercise of stock options 2,328 920,762 - - - 923,090
Tax benefit of options
exercised - 115,000 - - - 115,000
Stock issued for Employee
Stock Purchase Plan 76 62,726 - - - 62,802
Stock issued in acquisition 12,022 13,987,978 - - - 14,000,000
------- ---------- ---------- ------ ------- ----------
Balance at December 31, 1996 182,536 55,756,166 (22,813,498) - - 33,125,204
Net income - - 11,437,897 - - 11,437,897
Exercise of stock options 3,130 2,042,457 - - - 2,045,587
Tax benefit of options
exercised - 113,000 - - - 113,000
Stock issue for Employee
Stock Purchase Plan 189 137,589 - - - 137,778
Unrealized gains on securities
available-for-sale - - - - 30,956 30,956
Foreign currency translation
adjustment - - - 217,275 - 217,275
------- ---------- ---------- ------- ------ ----------
Balance at December 31, 1997 $185,855 58,049,212 (11,375,601) 217,275 30,956 47,107,697
======= ========== ========== ======= ====== ==========
See accompanying notes to consolidated financial statements.
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1996 and 1997
1995 1996 1997
Cash flows from operating activities:
Net income (loss) $ 4,346,059 (28,009,729) 11,437,897
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 355,263 948,460 2,285,278
Amortization of capitalized
software development costs 258,119 500,065 1,478,955
Amortization of goodwill - - 1,091,001
Foreign currency translation
adjustment - - 217,275
Accretion of investment
discount, net (337,045) (576,431) (49,497)
(Gain) loss on disposal of
equipment 54,788 19,378 45,037
Provision for doubtful accounts 149,075 590,525 754,910
Deferred income taxes 44,000 (42,000) (178,000)
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 (3,087,227) (4,420,619)(10,997,521)
Unbilled receivables - - (833,145)
Prepaid expenses (103,687) (190,238) (27,800)
Inventories (171,258) (73,087) (45,468)
Other assets (375,145) (23,836) 125,645
Accounts payable 78,944 642,429 (1,706,965)
Other accrued liabilities 336,179 529,394 (5,003,820)
Income taxes payable 25,843 (242,082) 2,186,093
Unearned revenue 1,233,298 1,117,436 1,383,946
Net cash provided by --------- --------- ---------
operating activities 2,807,206 6,173,302 2,163,821
========= ========= =========
Cash flows from investing activities:
Purchase of investments (41,105,386)(36,079,529)(12,317,057)
Proceeds from sale and maturities
of investments 4,801,648 56,751,813 13,602,714
Additions to property and equipment (4,647,262) (3,765,805) (3,862,735)
Proceeds from the sale of equipment 6,205 9,135 58,643
Capitalized software development costs (541,953) (2,609,521) (2,284,361)
Cash paid for acquisition, net of
cash acquired - (16,428,660) -
Net cash used in investing ---------- --------- ---------
activities (41,486,748) (2,122,567) (4,802,796)
========== ========= =========
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 - 1,038,090 2,045,587
Proceeds for stock issuances under
employee purchase plan - 62,802 137,778
Principal payments on long-term debt (26,667) (20,000) (3,450,722)
Net cash provided by
(used in) financing ---------- --------- ---------
activities 38,711,657 1,080,892 (1,267,357)
========== ========= =========
Net increase in cash and cash
equivalents 32,115 5,131,627 (3,906,332)
Cash and cash equivalents at beginning
of year 1,151,977 1,184,092 6,315,719
Cash and cash equivalents at end ----------- --------- ---------
of year $ 1,184,092 6,315,719 2,409,387
=========== ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 5,770 4,240 379,553
Income taxes $ 2,800,520 3,750,082 3,806,534
Supplemental disclosure of non-cash activities:
Unrealized net gain (loss) on
investments available for sale,
net of income taxes $ 3,487 - 30,956
See accompanying notes to consolidated financial statements.
DATASTREAM SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
(a)Organization and Basis of Presentation
Datastream Systems, Inc. (the "Company" or "Datastream")
develops, markets, sells and supports Microsoft and Oracle
based software products for the industrial automation
market. These products serve the desktop, file server,
client-server and enterprise-wide networking environments.
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 Canada, United Kingdom,
The Netherlands, France, Mexico, Brazil, Argentina,
Venezuela, Peru, 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.
(1) Summary of Significant Accounting Policies, Continued
(d)Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash
equivalents.
(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 debt and equity securities in one
of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near
term. Held-to-maturity securities are those securities in
which the Company has the ability and intent to hold until
maturity. All other securities not included in trading or
held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at
fair value. Held-to-maturity securities are recorded at
amortized cost, adjusted for the amortization or accretion
of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings.
Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of
stockholders' equity until realized. Equity securities
without readily determinable fair values are recorded at
cost. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific
identification basis.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be
other than temporary results in a reduction in carrying
amount to fair value. The impairment is charged to earnings
and a new cost basis for the security established. Premiums
and discounts are amortized or accreted over the life of the
related held-to-maturity security as an adjustment to yield
using the effective interest method. Dividend and interest
income are recognized when earned.
(1) Summary of Significant Accounting Policies, Continued
(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 are as follows:
Building 40 years
Computer equipment 3 to 5 years
Furniture and fixtures 5 years
Automobiles 5 years
(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.
(1) Summary of Significant Accounting Policies, Continued
During the years ended December 1995, 1996 and 1997, total
costs incurred (excluding amortization of capitalized
software development costs) for software development
activities were $2,314,003, $3,999,845 and $6,648,595,
respectively; total capitalized software development costs
were $573,108, $2,609,520 and $2,284,361, respectively; and
amortization of capitalized costs was $258,119, $500,065 and
$1,478,955, respectively.
In connection with the acquisition of SQL in 1996 (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 in 1996 which became
obsolete as a result of the SQL acquisition.
(j)Goodwill
Goodwill resulting from the acquisition of SQL (see note 2)
is being amortized using the straight-line method over its
estimated useful life of seven years.
The recoverability of goodwill is 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
Statement of Financial Accounting Standards No. 123 allows an
entity 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.
(1) Summary of Significant Accounting Policies, Continued
(m)Net Income (Loss) Per Share
During 1997, the Company implemented Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Basic
net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding. Diluted net income (loss) per share is computed
by dividing net income (loss) by the weighted average number
of common and potential common shares outstanding. Diluted
weighted average common and potential common shares include
common shares and stock options using the treasury stock
method. The implementation of Statement No. 128 had no
impact on the Company's results of operations.
(n) Stock Split
Effective January 30, 1998, 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 this stock split.
(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)Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (Statement No.
130). Statement No. 130 requires companies to display, with
the same prominence as other financial statements, the
components of comprehensive income. Statement No. 130
requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement
and display the accumulated balance of other comprehensive
income separately from retained earnings and additional
paid-in capital in the equity section of a statement of
financial position. Statement No. 130 is effective for
fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company's
financial statements will include the disclosure of
comprehensive income in accordance with the provisions of
Statement No. 130 beginning the first quarter of 1998.
(1) Summary of Significant Accounting Policies, Continued
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (Statement No. 131).
Statement No. 131 requires that an enterprise disclose
certain information about operating segments and is effective
for financial statements for periods beginning after December
15, 1997.
In October 1997, the Accounting Standards Executive Committee
issued Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2). SOP 97-2 is effective for financial
statements for fiscal years beginning after December 15,
1997. The Company does not expect that adoption of SOP 97-2
will significantly affect its results of operations.
(q)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 including estimates and
assumptions for allowance for doubtful accounts, allowance
for deferred tax assets, and useful lives of goodwill and
capitalized software development costs. 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 (1,202,210 shares valued at
$11.31 per share) and the assumption of net tangible liabilities
and costs incurred of $11.1 million. At December 31, 1996 and
1997, an additional $3 million of common stock (300,552 shares
at $11.31 per share) was being held in escrow pending the
resolution of certain matters. 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.
(2) Acquisition, Continued
During 1997, the Company paid approximately $1,320,000 to
involuntarily terminate and relocate employees of SQL and
approximately $305,000 to exit activities of SQL in Germany and
Italy.
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. 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.
1996
----
Total revenue $49,216,000
Operating loss (764,000)
Net loss (2,910,000)
Basic and diluted net loss per share (.15)
(3) Investment Securities
The amortized cost, gross unrealized gains, gross unrealized
losses and market value of investment securities at December 31,
1996 and 1997 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996 ---- ----- ------ -----
Held-to-maturity:
U.S. Treasury Securities $17,559,076 176,211 (4,668) 17,730,619
=========== ======= ======= ==========
December 31, 1997
Available-for-sale:
U.S. Treasury Securities $14,288,170 51,862 (1,905) 14,338,127
Cost basis:
Equity Securities 2,034,744 - - 2,034,744
---------- ------ ------- -----------
$ 16,322,914 51,862 (1,905) 16,372,871
========== ====== ======= ===========
(3) Investment Securities, Continued
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).
Proceeds from the sale of investment securities
available-for-sale during 1997 were approximately $670,000,
which approximated amortized costs.
During 1997, the Company entered into a preferred stock purchase
agreement with an unrelated software company (the "Investee").
Under the agreement, the Company purchased 221,910 shares of the
Investee's convertible preferred stock for a total purchase price
of approximately $2.0 million. The investment is being accounted
for under the cost method and is included in non-current
investments in the accompanying balance sheet. The fair value of
the shares is not readily determinable, therefore, no unrealized
gains or losses have been recorded.
The amortized cost and market value of investment securities
held-to-maturity at December 31, 1997, by contractual maturities
are shown below:
Amortized Market
Cost Value
---- -----
Due in one year or less $ 9,736,141 9,735,585
Due after one year through five years 4,552,029 4,602,542
Equity securities 2,034,744 2,034,744
---------- ----------
$ 16,322,914 16,372,871
========== ==========
(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, 1996 and 1997, 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, 1996 and 1997.
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:
1996 1997
---- ----
Land $ 465,981 500,981
Building 4,371,113 4,570,254
Computer equipment 4,719,340 7,479,403
Furniture and fixtures 930,226 1,358,281
---------- ----------
10,486,660 13,908,919
Accumulated depreciation 1,794,337 3,742,818
---------- ----------
$ 8,692,323 10,166,101
========== ==========
(6) Other Accrued Liabilities
Other accrued liabilities consisted of the following at December 31:
1996 1997
---- ----
Accrued salaries and commission $ 1,231,565 1,094,908
Sales and payroll taxes payable 1,449,468 1,470,362
Accrued acquisition costs 1,373,316 -
Acquisition related liabilities
(see note 2) 1,625,000 -
Warranty reserve 1,500,000 -
Other accrued liabilities 1,959,729 1,569,988
--------- ---------
$ 9,139,078 4,135,258
========= =========
(7) Long-term Debt
Long-term debt as of December 31, consists of the following:
1996 1997
Note payable in monthly payments of ---- ----
$1,667, plus interest at prime
plus .5% through March 1998;
collateralized by equipment $ 21,667 1,667
Subordinated note payable in
bi-annual payments of $123,750,
plus interest at 7% through
December 2000 765,136 371,250
(7) Long-term Debt, Continued
1996 1997
---- ----
Subordinated note payable in annual
payments of $97,030, plus
interest at 6.5% through December
2002 870,356 563,739
Subordinated note payable in annual
payment of $48,150, plus interest
at 6.5% paid in 1997 481,513 -
Subordinated note payable in annual
payments of $57,320, plus
interest at 10% paid in 1997 515,907 -
Subordinated note payable in annual
payments of 11,465, plus interest
at 10% paid in 1997 51,591 -
Subordinated note payable in annual
payments of $34,394, plus
interest at 10% paid in 1997 171,979 -
Note payable in bi-annual payments
of $204,643, plus interest at
5.3% paid in 1997 1,433,075 -
Note payable in annual payments of
$8,598, plus interest at 6.5%
paid in 1997 68,788 -
Subordinated note payable in annual
payments of $3,073, plus interest
at 6.5% through December 2002 20,005 12,639
--------- -------
4,400,017 949,295
Less current portion (1,507,274) (346,197)
--------- -------
Long-term debt, less current portion $ 2,892,743 603,098
========= =======
(7) Long-term Debt, Continued
The remaining annual maturities of long-term debt in the five
years subsequent to December 31, 1997 are as follows:
1998 $ 346,197
1999 223,853
2000 100,103
2001 100,450
2002 178,692
-------
Total $ 949,295
=======
(8) Line of Credit
The Company maintains a multicurrency line of credit that
provides for borrowings of 70% of accounts receivable less than
60 days aged up to $5,000,000. No borrowings were outstanding
under lines of credit at December 31, 1996 and 1997.
(9) Income Taxes
Income tax expense for the years ended December 31 is as follows:
Current Deferred Total
1995:
Federal $ 2,346,000 47,000 2,393,000
State 352,000 (3,000) 349,000
Foreign - - -
--------- ------ ---------
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
Foreign - - -
--------- ------ ---------
Total $ 3,623,000 (42,000) 3,581,000
========= ====== =========
1997:
Federal $ 4,729,219 (159,000) 4,570,219
State 503,000 (19,000) 484,000
Foreign 1,056,093 - 1,056,093
--------- ------- ---------
Total $ 6,288,312 (178,000) 6,110,312
========= ======= =========
(9) Income Taxes, Continued
Income tax expense differed from the amounts computed by
applying the Federal income tax rate of 34% as a result of the
following:
1995 1996 1997
---- ---- ----
Computed "expected" tax
expense (benefit) $ 2,410,000 (8,306,000) 5,966,391
Increase (decrease) in income
taxes resulting from:
State and local income taxes,
net of Federal income tax
benefits 230,000 251,000 319,440
In process research and
development - 11,424,000 -
Rate differential on foreign
source income - - (592,453)
Effect of graduated income
tax rates - - 75,482
Goodwill amortization - - 322,364
Other, net 102,000 212,000 19,088
--------- --------- ---------
Actual tax expense $ 2,742,000 3,581,000 6,110,312
========= ========= =========
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:
1996 1997
Deferred tax assets: ---- ----
Net operating loss carryforwards $1,705,000 1,891,000
Accrued expenses and allowances 395,000 797,000
--------- ---------
Total gross deferred tax assets 2,100,000 2,688,000
Less valuation allowance (1,705,000) (1,705,000)
--------- ---------
Net deferred tax assets $395,000 983,000
========= =========
Deferred tax liabilities:
Fixed assets, principally due to
differences in depreciation 189,000 341,000
Software development costs
capitalized for financial reporting 461,000 719,000
Unrealized gain on marketable
securities - 19,000
------- ---------
Total gross deferred tax liabilities 650,000 1,079,000
------- ---------
Net deferred tax liabilities $255,000 96,000
======= =========
The valuation allowance for deferred tax assets as of December
31, 1996 and 1997 was approximately $1,705,000 and relates to
net operating loss carryforwards of foreign subsidiaries, which
at this time are uncertain of recovery. Subsequently recognized
tax benefits relating to the valuation allowance for deferred
tax assets as of December 31, 1997 will be allocated to goodwill
and other noncurrent intangible assets.
At December 31, 1997 the Company has net operating loss
carryforwards for foreign income tax purposes of approximately
$4,800,000.
(10) 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
$79,000, $135,000, and $238,000 in 1995, 1996 and 1997,
respectively.
(11) 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 2,000,000 shares of the
Company's common stock. On December 26, 1996, the Company's
Board of Director's authorized an additional 1,000,000 shares to
be added to the 2,000,000 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, 1995 1,640,000 $ 5.86
Granted 308,734 12.32
Exercised (232,814) 3.98
Forfeited (97,712) 7.55
Balance at December 31, 1996 1,618,208 7.06
Granted 1,651,804 7.86
Exercised (313,018) 6.57
Forfeited (172,334) 8.52
Balance at December 31, 1997 2,784,660 $ 7.50
(11) Stock Compensation Plans, Continued
The following table summarizes information about stock options
outstanding under the 1995 Plan at December 31, 1997:
Options outstanding Options exercisable
----------------------- ---------------------
Weighted Average Weighted -
Remaining Average
Range of Number Contractual Number Exercise
Exercise Prices outstanding Life Exercisable Price
--------------- ----------- ---- ----------- -----
$1.93 - 3.85 494,276 7.1 237,608 3.75
3.85 - 5.77 100,000 2.1 40,000 4.13
5.77 - 7.70 668,508 8.6 4,165 7.31
7.70 - 9.63 1,342,284 8.8 248,523 9.44
9.63 - 11.55 21,624 5.9 8,303 10.01
11.55 - 13.48 135,968 8.6 78,136 12.12
13.48 - 15.40 22,000 8.8 19,334 15.25
--------- ------- ----
2,784,660 636,069 7.48
========= ======= ====
The per share weighted-average fair value of stock options
granted under the 1995 Plan during 1996 and 1997 was $5.12 and
$6.33 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average
assumptions: 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; 1997 - expected dividend yield of 0%,
expected volatility of 85.07%, risk-free interest rate of 6.55%,
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 200,000
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) 9,000 shares of Common Stock upon the
commencement of their service as a director and (ii) 2,000
shares of Common Stock annually in connection with each annual
meeting of stockholders. Automatic grants of options to
purchase 9,000 shares of common stock at $3.75 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).
(11) Stock Compensation Plans, Continued
A summary of activity in the Director's Plan during the periods
indicated are as follows:
Number ofWeighted-Average
Shares Exercise Price
Stock options outstanding:
Balance of December 31, 1995 36,000 3.75
Granted 4,000 9.75
Exercised (9,000) 3.75
------ ----
Balance at December 31, 1996 31,000 4.52
Granted 8,000 9.56
Exercised - -
------ ----
Balance at December 31, 1997 39,000 $ 5.56
====== ====
The following table summarizes information about stock options
outstanding under the Director's Plan at December 31, 1997:
Options outstanding Options exercisable
------------------------- ---------------------
Weighted Average Weighted -
Remaining Average
Range of Number Contractual Number Exercise
Exercise Prices outstanding Life Exercisable Price
--------------- ----------- ---- ----------- -----
$ 3.75 27,000 7.1 years 27,000 $ 3.75
9.56 - 9.75 12,000 8.7 4,000 9.75
3.75 - 9.75 39,000 7.6 31,000 4.52
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 1996 and 1997 was $3.37
and $5.31 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average
assumptions: 1996 - expected dividend yield of 0%, expected
volatility of 62.41%, risk-free interest rate of 7.56% , and an
expected life of 10 years; 1997 - expected dividend yield of 0%,
expected volatility of 85.07%, risk-free interest rate of 7.24%,
and an expected life of 10 years.
(11) Stock Compensation Plans, Continued
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 200,000 shares of common stock for future
issuance pursuant to the Purchase Plan. Under the Plan, the
Company sold 7,578 and 18,924 shares in 1996 and 1997,
respectively.
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 Purchase Plan under Statement No. 123, the Company's
net income would have been reduced to the pro forma amounts
indicated below:
1996 1997
---- ----
Net income (loss) As reported $(28,009,729) 11,437,897
Pro forma (29,807,110) 6,422,066
Basic:
Net income (loss) As reported $ (1.65) .62
per share Pro forma (1.76) .35
Diluted:
Net income (loss) As reported $(1.58) .59
per share Pro forma (1.69) .33
Pro forma net income reflects options granted in 1995, 1996 and
1997. 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.
(12) Public Offerings of Common Stock
On April 5, 1995, the Company closed its initial public offering
of 6,532,000 shares of common stock, 2,532,000 of which were
sold by existing shareholders, for $3.75 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 4,000,000 shares of common stock, 2,171,340 of which
were sold by existing shareholders, for $11.13 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 600,000 shares of common stock. The Company invested
the net proceeds from the over-allotment option in U.S.
Government securities.
(13) 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, 1997, the approximate future minimum lease
payments under noncancelable operating leases that expire at
various dates through 2001 are as follows:
1998 $ 769,897
1999 529,441
2000 367,839
2001 242,359
2002 187,949
Thereafter 87,986
---------
$ 2,185,471
=========
Rent expense for the years ended December 31, 1995, 1996 and
1997 totaled $174,193, $307,534 and $1,367,830, respectively.
As Lessor
---------
The Company leases a portion of its building and related
leasehold improvements to outside parties under noncancelable
operating leases.
(13) Leases, Continued
At December 31, 1997, the approximate future minimum rental
income under noncancelable operating leases that expire through
1998 is $219,000.
Rental income (included in other income in the accompanying
statement of operations) for the years ended December 31, 1996
and 1997 was $88,415 and $338,957, respectively. There was no
rental income for the year ended December 31, 1995.
(14) Segment and Geographic Information
The Company operates principally in one industry segment which
includes the development, marketing, selling and supporting of
Microsoft and Oracle based software products for the industrial
automation market.
The Company's principal areas of operation include the United
States and Europe. Information about the Company's operations
in different geographic locations is as follows:
United
States Europe Total
1997: ------ ------ -----
Total revenues $52,298,576 17,469,719 69,768,295
Operating income 11,178,505 5,382,843 16,561,348
Identifiable assets 56,696,883 8,400,360 65,097,243
The United States operations include international revenues of
approximately $8,100,000 for the year ended December 31, 1997.
International revenues for the years ended December 31, 1995 and
1996 were approximately $2,180,000 and $4,354,000, respectively.
(15) Reconciliation of Basic and Diluted Income (Loss) Per Share
Per Share
Income Shares Amount
------ ------ ------
1995:
Basic income per share $ 4,346,059 13,004,474 .33
Effect of dilutive securities: ===
Stock options - 1,361,282
--------- ---------- ---
Diluted income per share $ 4,346,059 14,365,756 .30
========= ========== ===
(15) Reconciliation of Basic and Diluted Income (Loss) Per Share,
Continued
Per Share
Income Shares Amount
------ ------ ------
1996:
Basic loss per share $ (28,009,729) 16,977,134 (1.65)
Effect of dilutive securities: ====
Stock options - 708,388
---------- ---------- ----
Diluted loss per share $ (28,009,729) 17,685,522 (1.58)
========== ========== ====
1997:
Basic income per share $ 11,437,897 18,396,920 .62
Effect of dilutive securities: ===
Stock options - 849,028
---------- ---------- ---
Diluted income per share $ 11,437,897 19,245,948 .59
========== ========== ===
Datastream Systems, Inc.
Allowance for Doubtful Accounts Receivable
Amounts
Balance at Charged to Balance at
Beginning Bad Debt End of
Description Of Year Expense Deductions Year
Allowance for doubtful accounts receivable:
Year ended December 31,
1995 $ 95,400 149,075 - 244,475
======= ======== ======== ========
Year ended December 31,
1996 $ 244,475 590,525 - 835,000
======= ======== ======== ========
Year ended December 31,
1997 $ 835,000 754,910 - 1,589,910
======= ======== ======== =========
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 30, 1998 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 30, 1998.
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
Number Description
2.1* SQL Systems Group, B.V. Share Purchase Agreement.
3.1** Amended and Restated Certificate of Incorporation.
3.1(a) Amendment to Amended and Restated Certificate of
Incorporation, dated January 12, 1997.
3.2** By-Laws.
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 as amended and restated
through May 7, 1997.
10.1(a) Amendment to 1995 Stock Option Plan (as amended and
restated through May 7, 1997), dated March 13, 1998.
10.2+ Stock Option Plan for Directors (as amended and
restated as of April 12, 1996).
10.2(a) Amendment to Stock Option Plan for Directors (as
amended and restated as of April 12, 1996), dated
March 13, 1998.
10.3** 401(k) Retirement Plan of the Registrant.
10.4++ Amended and Restated Employee Stock Purchase Plan.
11 Statement re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of KPMG Peat Marwick LLP.
24 Power of Attorney (included on signature page hereto).
27 Financial Data Schedule.
- ---------------
* Incorporated herein by reference to exhibit of the same number
to the Company's Current Report on 8-K filed January 10, 1997
(File No. 000-25590)
** Incorporated herein by reference to exhibit of the same number
in the from S-1 Registration Statement of the Registrant (Reg
No. 33-89498)
*** Incorporated herein by reference to Appendix A to the Company's
definitive Proxy Statement for the 1997 Annual Meeting of
Shareholders, filed May 12, 1997 (File No. 000-25590)
+ Incorporated herein by reference to Appendix C to the Company's
definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders filed April 23, 1996 (File No. 000-25590)
++ Incorporated herein by reference to Appendix A to the Company's
definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders filed April 23, 1996 (File No. 000-25590)
EXHIBIT 3.1(a)
ARTICLES OF AMENDMENT
TO
THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DATASTREAM SYSTEMS, INC.
Pursuant to Section 242 of the Delaware General Corporation
Law, the undersigned Corporation does hereby adopt the following
amendment to its Amended and Restated Certificate of Incorporation:
The first sentence of Article IV of the Amended and Restated
Certificate of Incorporation of Datastream Systems, Inc. be amended
to increase the total authorized capital stock of the Corporation
from 16,000,000 to 41,000,000, and increase the authorized Common
Stock of the Corporation from 15,000,000 to 40,000,000 so that, as
amended, the first sentence of Article IV shall read as follows:
IV.
The total number of shares of capital stock which the
Corporation is authorized to issue is forty-one million (41,000,000)
divided into two classes as follows:
(1) Forty million (40,000,000) shares of common stock,
$.01 par value per share ("Common Stock"); and
(2) One million (1,000,000) shares of preferred stock,
$1.00 par value per share("Preferred Stock").
The amendment to the Amended and Restated Certificate of
Incorporation of the Corporation set forth herein was duly adopted
by the Board of Directors of the Corporation on November 10, 1997,
and by the Stockholders of the Corporation at a special meeting of
the Stockholders of the Corporation held December 22, 1997.
IN WITNESS WHEREOF, the undersigned duly authorized officer of
the Corporation has executed these Articles of Amendment on behalf
of the Corporation, this 22nd day of December, 1997.
Datastream Systems, Inc.
By: /s/ Larry G. Blackwell
Name: Larry G. Blackwell
Title: President and Chief
Executive Officer
EXHIBIT 10.1(a)
FIRST AMENDMENT TO THE AMENDED AND RESTATED
DATASTREAM SYSTEMS, INC. 1995 STOCK OPTION PLAN
THIS FIRST AMENDMENT TO THE AMENDED AND RESTATED
DATASTREAM SYSTEMS, INC. 1995 STOCK OPTION PLAN (this "First
Amendment") is made effective as of the 13th day of March,
1998, by Datastream Systems, Inc., a Delaware corporation (the
"Company").
W I T N E S S E T H:
WHEREAS, the Company has adopted the Amended and Restated
Datastream Systems, Inc. 1995 Stock Option Plan (as Amended and
Restated through May 7, 1997) (the "Plan"); and
WHEREAS, Section 4.8 of the Plan authorizes the Board of
Directors of the Company to amend the Plan without stockholder
approval; and
WHEREAS, the Board of Directors of the Company now desires
to amend the Plan to permit certain transfers of non-qualified
stock options granted under the Plan.
NOW, THEREFORE, the Board of Directors of the Company
hereby amends the Plan as follows:
Section 3.1.11 of the Plan is hereby deleted in its
entirety and replaced with the following new Section 3.1.11:
"3.1.11 Nonassignability. Options shall not be
transferable or assignable except by will or by the
laws of descent and distribution. Such Options shall
be exercisable, during the Participant's lifetime,
only by the Participant; or in the event of the death
of the Participant, by the legal representatives of
the Participant's estate or if no legal
representative has been appointed, by the successor
in interest determined under the Participant's will.
Notwithstanding the two prior sentences, however, if
the applicable Stock Option Agreement so provides, a
Participant may assign all or any portion of an
Option granted to him that is not an incentive stock
option to (i) his spouse or lineal descendants,
(ii) one or more trusts for the benefit of his spouse
or lineal descendants, (iii) a partnership of which
his spouse or lineal descendants are the only
partners or (iv) a tax exempt organization as
described in Section 501(c)(3) of the Code, as may be
permitted under Securities Exchange Commission Rule
16b-3 as in effect from time to time. In that event,
the spouse, lineal descendant, trust, partnership or
tax exempt organization will be entitled to all of
the rights of the Participant with respect to the
assigned portion of such Option, and such Option will
continue to be subject to all of the terms and
conditions that governed the Option during the period
that it was held by the Participant; provided,
however, that such assignee may not further assign
the Option except by will or by the laws of descent
and distribution. Any such assignment will be
permitted only if the Participant does not receive
any consideration therefore. Additionally, in order
for an assignment by a Participant to be effective,
(i) at least 30 days prior to the date of assignment,
the Participant must notify the Company in writing of
the date of the assignment, the Option or portion
thereof to be assigned and the name, address,
telephone number and social security or employer
identification number of the assignee, (ii) at the
time of assignment, the Participant must execute an
appropriate written agreement that the Company
provides to evidence the assignment and to agree to
remit any applicable withholding the Company may
require and (iii) at the time of assignment, the
assignee pursuant to a written agreement that the
Company provides must agree to be bound by the same
terms and conditions that governed the Option during
the period it was held by the Participant."
Section 4.6 of the Plan is hereby deleted in its entirety
and replaced with the following new Section 4.6:
"4.6 Non-alienation of Benefits. Other than as
specifically permitted in Section 3.1.11, no benefit
under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or charge; and any attempt to do
so other than as specifically permitted thereunder
shall be void. No such benefit shall, prior to
receipt, be in any manner liable for or subject to
the debts, contracts, liabilities, engagements or
torts of the recipient."
Section 4.7 of the Plan is hereby deleted in its entirety
and replaced with the following new Section 4.7:
"4.7 Restrictions on Delivery and Sale of Shares;
Legends. Each Option is subject to the condition
that if at any time the Committee, in its discretion,
shall determine that the listing, registration or
qualification of the shares covered by such Option
upon any securities exchange or under any state or
federal law is necessary or desirable as a condition
of or in connection with the granting of such Option,
the assignment of such Option or the purchase or
delivery of shares thereunder, the delivery of any or
all shares pursuant to such Option may be withheld
unless and until such listing, registration or
qualification shall have been affected. If a
registration statement is not in effect under the
Securities Act of 1933, as amended (the "Securities
Act"), or any applicable state securities laws with
respect to the shares of stock purchasable or
otherwise deliverable under Options then outstanding,
the Committee may require, as a condition of
assignment or exercise of the Option or as a
condition to any other delivery of Stock pursuant to
an Option, that the Participant or other recipient of
an Option represent, in writing, that the shares
received pursuant to the Option are being acquired
for investment and not with a view to distribution
and agree that the shares will not be disposed of
except pursuant to an effective registration
statement, unless the Company shall have received an
opinion of counsel that such disposition is exempt
from such requirement under the Securities Act and
any applicable state securities laws. The Company
may include on certificates representing shares
delivered pursuant to an Option such legends
referring to the foregoing representations or
restrictions or any other applicable restrictions on
resale as the Company, in its discretion, shall deem
appropriate."
Except as specifically amended hereby, the Plan shall
continue to remain in full force and effect as before this
First Amendment, and this First Amendment shall be effective
with respect to any Options granted under the Plan, including
those granted before the effective date of this First Amendment.
IN WITNESS WHEREOF, the Board of Directors of the Company
has caused this First Amendment to be executed in the form and
as of the date set forth above.
DATASTREAM SYSTEMS, INC.
By: /s/ Larry G. Blackwell
Title: Chairman, President
and Chief Executive Officer
EXHIBIT 10.2(a)
FIRST AMENDMENT TO THE AMENDED AND RESTATED
DATASTREAM SYSTEMS, INC. STOCK OPTION PLAN FOR DIRECTORS
THIS FIRST AMENDMENT TO THE AMENDED AND RESTATED
DATASTREAM SYSTEMS, INC. STOCK OPTION PLAN FOR DIRECTORS (this
"First Amendment") is made effective as of the 13th day of
March, 1998, by Datastream Systems, Inc., a Delaware
corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Company has adopted the Amended and Restated
Datastream Systems, Inc. Stock Option Plan for Directors (as
Amended and Restated through April 12, 1996) (the "Plan"); and
WHEREAS, Section 11 of the Plan authorizes the Board of
Directors of the Company to amend the Plan; and
WHEREAS, the Board of Directors of the Company now desires
to amend the Plan to permit certain transfers of non-qualified
stock options granted under the Plan.
NOW, THEREFORE, the Board of Directors of the Company
hereby amends the Plan as follows:
Section 10 of the Plan is hereby amended by deleting
Paragraph (c) in its entirety and replacing it with the
following new Paragraphs (c) and (d):
"(c) Notwithstanding (a) and (b) of this Section 10,
a Director may assign all or any portion of a
non-qualified stock option granted to him to (i) his
spouse or lineal descendants, (ii) one or more trusts
for the benefit of his spouse or lineal descendants,
(iii) a partnership of which his spouse or lineal
descendants are the only partners or (iv) a tax
exempt organization as described in Section 501(c)(3)
of the Code, as may be permitted under Securities
Exchange Commission Rule 16b-3 as in effect from time
to time. In that event, the spouse, lineal
descendant, trust, partnership or tax exempt
organization will be entitled to all of the rights of
the Director with respect to the assigned portion of
such nonqualified option, and such non-qualified
option will continue to be subject to all of the
terms and conditions that governed the non-qualified
option during the period that it was held by the
Director; provided, however, that such assignee may
not further assign the non-qualified option except by
will or by the laws of descent and distribution. Any
such assignment will be permitted only if the
Director does not receive any consideration
therefore. Additionally, in order for an assignment
by a Director to be effective, (i) at least 30 days
prior to the date of assignment, the Director must
notify the Company in writing of the date of the
assignment, the non-qualified option or portion
thereof to be assigned and the name, address,
telephone number and social security or employer
identification number of the assignee, (ii) at the
time of assignment, the Director must execute an
appropriate written agreement that the Company
provides to evidence the assignment and to agree to
remit any applicable withholding the Company may
require and (iii) at the time of assignment, the
assignee pursuant to a written agreement that the
Company provides must agree to be bound by the same
terms and conditions that governed the non-qualified
option during the period it was held by the Director.
(d) A Director, his transferee upon his death and
his permitted assignee may not transfer any of the
Common Stock acquired pursuant to the exercise of an
Option until six months from the date of grant of the
Option."
Section 13 of the Plan is hereby deleted in its entirety
and replaced with the following new Section 13:
"13. Restrictions on Transfer of Non-Qualified
Option and Delivery and Sale of Shares; Legends.
Each option is subject to the condition that if at
any time the Committee, in its discretion, shall
determine that the listing, registration or
qualification of the shares covered by such option
upon any securities exchange or under any state or
federal laws necessary or desirable as a condition of
or in connection with the granting of such option,
the assignment of such option or the purchase or
delivery of shares thereunder, the delivery of any or
all shares pursuant to such option may be withheld
unless and until such listing, registration or
qualification shall have been effected. If a
registration statement is not in effect under the
Securities Act of 1933 or any applicable state
securities laws with respect to the shares of Common
Stock purchasable or otherwise deliverable under
options then outstanding, the Committee may require,
as a condition of assignment or exercise of any
option or as a condition to any other delivery of
Common Stock pursuant to an option, that the Director
represent, in writing, that the shares received
pursuant to the option are being acquired for
investment and not with a view to distribution and
agree that the shares will not be disposed of except
pursuant to an effective registration statement,
unless the Company shall have received an opinion of
counsel that such disposition is exempt from such
requirement under the Securities Act of 1933 and any
applicable state securities laws. The Company may
include on certificates representing shares issued
pursuant to an option such legends referring to the
foregoing representations or restrictions or any
other applicable restrictions on resale as the
Company, in its discretion, shall deem appropriate."
The Plan is hereby amended by adding the following new
Section 14:
"14. Non-alienation of Benefits. Other than as
specifically permitted in Section 10, no benefit
under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or charge; and any attempt to do
so other than as specifically permitted thereunder
shall be void. No such benefit shall, prior to
receipt, be in any manner liable for or subject to
the debts, contracts, liabilities, engagements or
torts of the recipient."
Except as specifically amended hereby, the Plan shall
continue to remain in full force and effect as before this
First Amendment, and the First Amendment shall be effective
with respect to any options granted under the Plan, including
those granted before the effective date of this First
Amendment, notwithstanding any provisions in the applicable
non-qualified stock option agreement to the contrary.
IN WITNESS WHEREOF, the Board of Directors of the Company
has caused this First Amendment to be executed in the form and
as of the date set forth above.
DATASTREAM SYSTEMS, INC.
By: /s/ Larry G. Blackwell
Title: Chairman, President and
Chief Executive Officer
EXHIBIT 11
Datastream Systems, Inc. and Subsidiaries
Computation of Historical Earnings Per Share
Income per share calculations:
Year ended December 31,
1995 1996 1997
---- ---- ----
Net income 4,346,059 (28,009,729) 11,437,897
========= =========== ==========
Weighted average number of common and common equivalent shares
are as follows:
Basic weighted average common
shares outstanding 13,004,474 16,977,134 18,396,920
Shares issued from assumed
exercise of options and
warrants (1) 1,361,282 708,388 849,028
Diluted weighted average
common shares outstanding 14,365,756 17,685,522 19,245,948
Per share data:
Basic net income per share 0.33 (1.65) 0.62
Diluted net income per share $ 0.30 (1.58) 0.59
(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.
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE COMPANY
o Datastream Systems International, Inc.
o SQL Systems Group, B.V.
o SQL 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 Datastream Systems (UK), Ltd.
o Sirlog, SA (Groupe Datastream)
o Datastream System, BV
o SQL Systems, Inc.
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Datastream Systems, Inc.:
We consent to incorporation by reference in the Registration
Statements on Form S-8 of Datastream Systems, Inc. of our
reports dated January 23, 1998, relating to the consolidated
balance sheets of Datastream Systems, Inc. and Subsidiaries as
of December 31, 1996 and 1997, 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, 1997, and related schedule, which reports appear in the
December 31, 1997 annual report on Form 10-K of Datastream
Systems, Inc.
Greenville, South Carolina KPMG Peat Marwick LLP
March 30, 1998