10-Q/A 1 d10qa.htm FORM 10-Q/A Form 10-Q/A
Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
FORM 10Q/A
 
(Mark One)
        x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2002
 
OR
 
        ¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  
                 SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________________ to _____________________            
 
COMMISSION FILE NUMBER: 000-25590
 
DATASTREAM SYSTEMS, INC.
 
Incorporated pursuant to the laws of the State of Delaware
 
 
Internal Revenue Service — Employer Identification No. 57-0813674
 
50 DATASTREAM PLAZA, GREENVILLE, SC 29605
 
(864) 422-5001
 
 
NOT APPLICABLE
(Former Name, Former Address, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes     x         No     ¨            
 
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of the issuer’s common stock as of the latest practicable date: November 13, 2002: 20,083,844 shares, $0.01 par value.
 
 

Table of Contents
EXPLANATORY NOTE
 
This Form 10-Q/A represents a resubmission of the Company’s Report on Form 10-Q filed on November 14, 2002 (the “Report”). The Report, as received by the Securities and Exchange Commission (the “SEC”) on November 14, 2002, contained errors due to faulty EDGAR software. This Form 10-Q/A represents the Company’s resubmission of its Report in the form intended to be filed with the SEC on November 14, 2002.

Table of Contents
 
Datastream Systems, Inc.
 
FORM 10-Q/A
 
Quarter ended September 30, 2002
 
Index
 
        
Page No.
Part I.
       
      
3
Item 1.
       
      
4
      
5
        
      
6
      
7
      
8
        
      
9
      
10
Item 2.
     
13
Item 3.
     
15
Item 4.
     
15
Part II.
     
16
Item 1.
     
16
Item 2.
     
16
Item 3.
     
16
Item 4.
     
16
Item 5.
     
16
Item 6.
     
16
  
17
  
18

2

Table of Contents
 
PART I.     CONSOLIDATED FINANCIAL INFORMATION
 
“SAFE HARBOR” STATEMENT UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
 
From time to time, we make oral and written statements that may constitute “forward looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995 for forward looking statements made from time to time, including, but not limited to, the forward looking statements made in this Quarterly Report on Form 10-Q (the “Report”), as well as those made in other filings with the SEC.
 
Forward looking statements can be identified by our use of forward looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue” or other similar words. Such forward looking statements are based on our management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward looking statements. In the preparation of this Report, where such forward looking statements appear, we have sought to accompany such statements with meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those described in the forward looking statements. Such factors include, but are not limited to: the increasing competitiveness of the market for our solutions; our ability to keep pace with rapid technological changes and demands in our markets in order to remain competitive; increasing sales cycles and other factors that may result in volatility of our quarterly results; our ability to successfully implement an application service provider business model; the stability of certain of our strategic relationships, including those with iProcure network suppliers and technology providers; our ability to develop products timely to be an innovator in the industry; increasing competition in markets for our products; our ability to protect our proprietary technology; risks associated with security that may deter the use of the Internet for conducting electronic commerce; risks associated with managing international operations including, but not limited to, exposure to foreign exchange fluctuations and our ability to successfully compete in foreign markets; retaining our key personnel; and changes in economic conditions generally, both domestic and international. The preceding list of risks and uncertainties, however, is not intended to be exhaustive, and should be read in conjunction with other cautionary statements that we make herein including, but not limited to, the “Risk Factors” set forth in the Company’s Form 10-K for the fiscal year ended December 31, 2001, as well as other risks and uncertainties identified from time to time in our SEC reports, registration statements and public announcements.
 
We do not have, and expressly disclaim, any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.

3

Table of Contents
ITEM 1.     Consolidated Financial Statements
 
Datastream Systems, Inc. and Subsidiaries
 
Consolidated Balance Sheets
 
Assets
(unaudited)
 
    
December 31, 2001
   
September 30, 2002
Current assets:
              
Cash and cash equivalents
   
$
25,396,939
   
$
32,420,017
Accounts receivable, net of allowance for doubtful accounts of $1,868,072 and $1,797,663, respectively
   
 
17,483,350
   
 
17,242,072
Unbilled revenue, net of allowance of $320,000 and $100,000 respectively
   
 
2,675,670
   
 
2,060,128
Prepaid expenses
   
 
1,270,568
   
 
1,116,548
Inventories
   
 
17,765
   
 
4,811
Income tax receivable
   
 
1,098,919
   
 
308,905
Deferred income taxes
   
 
981,488
   
 
981,488
Other assets
   
 
1,728,295
   
 
1,495,163
    
  
Total current assets
   
 
50,652,994
   
 
55,629,132
Investments
   
 
2,000,000
   
 
2,000,000
Property and equipment, net
   
 
12,031,550
   
 
10,394,989
Deferred income taxes
   
 
6,664,009
   
 
5,912,137
Other long term assets
   
 
68,750
   
 
93,241
    
  
Total assets
   
$
71,417,303
   
$
74,029,499
    
  
 
See accompanying notes to consolidated financial statements.
 

4

Table of Contents
 
Datastream Systems, Inc. and Subsidiaries
 
Consolidated Balance Sheets (Continued)
 
Liabilities and Stockholders’ Equity
(unaudited)
 
    
December 31, 2001
     
September 30, 2002
  
Current liabilities:
                  
Accounts payable
   
$
2,432,947
 
   
$
2,449,073
 
Other accrued liabilities
   
 
8,019,997
 
   
 
8,341,070
 
Current portion of long-term debt
   
 
9,995
 
   
 
—  
 
Unearned revenue
   
 
12,330,840
 
   
 
14,779,242
 
    
  
Total liabilities
   
 
22,793,779
 
   
 
25,569,385
 
Stockholders’ equity:
                  
Preferred stock, $1 par value, 1,000,000 shares authorized;
   
 
—  
 
   
 
—  
 
none issued
                  
Common stock, $.01 par value, 40,000,000 shares authorized; 21,000,668 shares issued at December 31, 2001, 21,082,444 shares issued at September 30, 2002
   
 
210,006
 
   
 
210,825
 
Additional paid-in capital
   
 
86,501,216
 
   
 
87,130,287
 
Accumulated deficit
   
 
(30,602,457
)
   
 
(29,918,729
)
Accumulated other comprehensive loss
   
 
(1,303,570
)
   
 
(2,167,708
)
Treasury stock, at cost;
                  
859,000 shares at December 31, 2001,
                  
953,500 shares at September 30, 2002
   
 
(6,181,671
)
   
 
(6,794,561
)
    
  
Total stockholders’ equity
   
 
48,623,524
 
   
 
48,460,114
 
    
  
Total liabilities and stockholders’ equity
   
$
71,417,303
 
   
$
74,029,499
 
    
  
 
See accompanying notes to consolidated financial statements.

5

Table of Contents
Datastream Systems, Inc. and Subsidiaries
 
Consolidated Statements of Operations
(unaudited)
Three months ended September 30, 2001 and 2002
 
    
September 30, 2001
     
September 30, 2002
Revenues:
                
Product
   
$
5,038,672
 
   
$
6,040,013
Service and support
   
 
15,138,354
 
   
 
15,935,403
    
  
Total revenues
   
 
20,177,026
 
   
 
21,975,416
Cost of revenues:
                
Cost of product revenues
   
 
356,420
 
   
 
234,916
Cost of service and support revenues
   
 
7,911,842
 
   
 
8,128,439
    
  
Total cost of revenues
   
 
8,268,262
 
   
 
8,363,355
    
  
Gross profit
   
 
11,908,764
 
   
 
13,612,061
Operating expenses:
                
Sales and marketing
   
 
8,093,162
 
   
 
8,347,083
Product development
   
 
3,065,161
 
   
 
2,647,870
General and administrative
   
 
2,632,367
 
   
 
2,216,055
Goodwill amortization
   
 
755,416
 
   
 
—  
Impairment of goodwill and other long-lived assets
   
 
9,955,330
 
   
 
—  
    
  
Total operating expenses
   
 
24,501,436
 
   
 
13,211,008
    
  
Operating income (loss)
   
 
(12,592,672
)
   
 
401,053
Other income, net
   
 
322,671
 
   
 
123,156
    
  
Income (loss) before income taxes
   
 
(12,270,001
)
   
 
524,209
Income tax expense (benefit)
   
 
(408,914
)
   
 
183,476
    
  
Net income (loss)
   
$
(11,861,087
)
   
$
340,733
    
  
Basic net income (loss) per share
   
$
(.58
)
   
$
            .02
    
  
Diluted net income (loss) per share
   
$
(.58
)
   
$
            .02
    
  
Basic weighted average number of common shares outstanding
   
 
20,465,969
 
   
 
20,155,027
    
  
Diluted weighted average number of common and potential common shares outstanding
   
 
20,465,969
 
   
 
20,517,169
    
  
 
See accompanying notes to consolidated financial statements.
 

6

Table of Contents
Datastream Systems, Inc. and Subsidiaries
 
Consolidated Statements of Operations
(unaudited)
Nine months ended September 30, 2002
 
 
    
September 30, 2001
     
September 30, 2002
Revenues:
                
Product
   
$
18,947,113
 
   
$
18,670,826
Service and support
   
 
48,775,891
 
   
 
47,715,128
    
  
Total revenues
   
 
67,723,004
 
   
 
66,385,954
Cost of revenues:
                
Cost of product revenues
   
 
1,158,615
 
   
 
860,455
Cost of service and support revenues
   
 
25,974,895
 
   
 
23,870,626
    
  
Total cost of revenues
   
 
27,133,510
 
   
 
24,731,081
    
  
Gross profit
   
 
40,589,494
 
   
 
41,654,873
Operating expenses:
                
Sales and marketing
   
 
27,477,305
 
   
 
25,193,322
Product development
   
 
9,814,163
 
   
 
7,949,168
General and administrative
   
 
7,553,214
 
   
 
7,731,330
Goodwill amortization
   
 
2,266,247
 
   
 
—  
Impairment of goodwill and other long-lived assets
   
 
9,955,330
 
   
 
—  
    
  
Total operating expenses
   
 
57,066,259
 
   
 
40,873,820
    
  
Operating income (loss)
   
 
(16,476,765
)
   
 
781,053
Other income, net
   
 
634,220
 
   
 
268,043
    
  
Income (loss) before income taxes
   
 
(15,842,545
)
   
 
1,049,096
Income tax expense (benefit)
   
 
(1,076,473
)
   
 
365,368
    
  
Net income (loss)
   
$
(14,766,072
)
   
$
683,728
    
  
Basic net income (loss) per share
   
$
(.72
)
   
$
.03
    
  
Diluted net income (loss) per share
   
$
(.72
)
   
$
.03
    
  
Basic weighted average number of common shares outstanding
   
 
20,491,407
 
   
 
20,152,443
    
  
Diluted weighted average number of common and potential common shares outstanding
   
 
20,491,407
 
   
 
20,607,078
    
  
 
See accompanying notes to consolidated financial statements.
 

7

Table of Contents
 
Datastream Systems, Inc. and Subsidiaries
 
Consolidated Statement of Stockholders’ Equity and Comprehensive Loss
(unaudited)
Nine months ended September 30, 2002
 
    
Common
Stock
   
Additional
Paid-In
Capital
   
Accumulated
(Deficit) Earnings
     
Accumulated
Other
Comprehensive Loss
     
Treasury Stock
     
Total
Stockholders’
Equity
  
Balance at December 31, 2001
   
$210,006
   
$86,501,216
   
$(30,602,457
)
   
$(1,303,570
)
   
$(6,181,671
)
   
$48,623,524
 
Comprehensive loss
                                      
Net income
   
—  
   
—  
   
683,728
 
   
—  
 
   
—  
 
   
683,728
 
Foreign currency translation adjustment
   
—  
   
—  
   
—  
 
   
(864,138
)
          
(864,138
)
                                   
Total comprehensive loss
                                  
(180,410
)
                                   
Exercise of stock options
   
476
   
254,824
   
—  
 
   
—  
 
   
—  
 
   
255,300
 
Stock issued for employee stock purchase plan
   
343
   
176,556
   
—  
 
   
—  
 
   
—  
 
   
176,899
 
Amortization of compensatory stock options
   
—  
   
83,906
   
—  
 
   
—  
 
   
—  
 
   
83,906
 
Acquisition of 94,500 shares
   
—  
   
–
   
—  
 
   
—  
 
   
(612,890
)
   
(612,890
)
Warrants issued
   
—  
   
113,785
   
—  
 
   
—  
 
   
—  
 
   
113,785
 
    
  
  
  
  
  
Balance at September 30, 2002
   
$210,825
   
$87,130,287
   
$(29,918,729
)
   
$(2,167,708
)
   
$(6,794,561
)
   
$48,460,114
 
    
  
  
  
  
  
 
See accompanying notes to consolidated financial statements.
 
 

8

Table of Contents
 
Datastream Systems, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended September 30, 2001 and 2002
 
    
September 30,
2001
     
September 30,
2002
  
Cash flows from operating activities:
                  
Net (loss) income
   
$
(14,766,072
)
   
$
683,728
 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
                  
Depreciation
   
 
3,619,876
 
   
 
3,062,209
 
Goodwill amortization
   
 
2,266,247
 
   
 
—  
 
Other amortization
   
 
206,250
 
   
 
89,294
 
Provision for doubtful accounts
   
 
(697,661
)
   
 
(290,409
)
Stock based compensation
   
 
60,378
 
   
 
83,906
 
Issuance of shares in legal settlement
   
 
1,250,000
 
   
 
—  
 
Impairment of goodwill and other long-lived assets
   
 
9,955,330
 
   
 
—  
 
Changes in operating assets and liabilities:
                  
Accounts receivable
   
 
7,318,703
 
   
 
311,687
 
Unbilled receivable
   
 
(619,617
)
   
 
835,542
 
Income taxes receivable
   
 
8,908,633
 
   
 
790,014
 
Prepaid expenses
   
 
(48,617
)
   
 
154,020
 
Inventories
   
 
109,665
 
   
 
12,954
 
Deferred income taxes
   
 
(1,852,000
)
   
 
751,872
 
Other assets
   
 
(321,475
)
   
 
233,132
 
Accounts payable
   
 
(750,655
)
   
 
16,126
 
Other accrued liabilities
   
 
(2,787,833
)
   
 
321,073
 
Unearned revenue
   
 
1,138,668
 
   
 
2,448,402
 
    
  
Net cash provided by operating activities
   
 
12,989,820
 
   
 
9,503,550
 
    
  
Cash flows from investing activities:
                  
Additions to property and equipment
   
 
(2,283,623
)
   
 
(1,425,648
)
    
  
Net cash used in investing activities
   
 
(2,283,623
)
   
 
(1,425,648
)
    
  
Cash flows from financing activities:
                  
Proceeds from exercise of stock options
   
 
591,844
 
   
 
255,300
 
Proceeds from issuances of shares under employee stock purchase plan
   
 
366,338
 
   
 
176,899
 
Cash paid to acquire treasury stock
   
 
(1,620,288
)
   
 
(612,890
)
Principal payments on long-term debt
   
 
(16,479
)
   
 
(9,995
)
    
  
Net cash provided by financing activities
   
 
(678,585
)
   
 
(190,686
)
    
  
Foreign currency translation adjustment
   
 
(489,595
)
   
 
(864,138
)
Net increase in cash and cash equivalents
   
 
9,538,017
 
   
 
7,023,078
 
Cash and cash equivalents at beginning of period
   
 
15,487,515
 
   
 
25,396,939
 
    
  
Cash and cash equivalents at end of period
   
$
25,025,532
 
   
$
32,420,017
 
    
  
 
See accompanying notes to consolidated financial statements.
 
 

9

Table of Contents
 
Datastream Systems, Inc. and Subsidiaries
 
Notes to Consolidated Financial Statements
 
1.    Basis of Presentation
 
The interim financial information included herein is unaudited. Certain information and footnote disclosures normally included in the financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, such unaudited information reflects all adjustments, consisting only of normal recurring accruals and other adjustments as disclosed herein, necessary for a fair presentation of the unaudited information. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Form 10-K for the year ended December 31, 2001 filed with the SEC on March 29, 2002. Other than as indicated herein, there have been no significant changes from the financial data published in those reports.
 
Results for interim periods are not necessarily indicative of results expected for the full year.
 
2.    Segment and Geographic Information
 
The Company has identified one business segment for reporting purposes. The Company manages the segment business over geographical regions. The principal areas of operation include the United States, Europe, Latin America and Asia. Financial information concerning the Company’s operations in different geographical regions is as follows:
 
For the three months ended September 30, 2001 and 2002 (US dollars):
 
    
United States
     
Europe
     
Latin America
     
Asia
     
Total
  
September 30, 2001:
                                   
Total revenues
   
13,086,464
 
   
4,120,203
 
   
1,788,242
 
   
1,182,117
 
   
20,177,026
 
Impairment charge
   
(9,955,330
)
   
—  
 
   
—  
 
   
—  
 
   
(9,955,330
)
Operating loss
   
(11,551,206
)
   
(450,513
)
   
(320,144
)
   
(270,809
)
   
(12,592,672
)
Total assets
   
48,728,875
 
   
11,004,111
 
   
4,766,185
 
   
3,759,969
 
   
68,259,140
 
                                    
September 30, 2002:
                                   
Total revenues
   
13,699,689
 
   
5,338,152
 
   
1,429,494
 
   
1,508,081
 
   
21,975,416
 
Operating income (loss)
   
(89,558
)
   
515,726
 
   
(10,087
)
   
(15,028
)
   
401,053
 
Total assets
   
51,526,223
 
   
13,889,109
 
   
3,202,211
 
   
5,411,956
 
   
74,029,499
 
 
For the nine months ended September 30, 2001 and 2002 (US dollars):
 
    
United States
     
Europe
     
Latin America
     
Asia
     
Total
  
September 30, 2001:
                                   
Total revenues
   
44,362,474
 
   
14,083,845
 
   
5,485,948
 
   
3,790,737
 
   
67,723,004
 
Impairment charge
   
(9,955,330
)
   
—  
 
   
—  
 
   
—  
 
   
(9,955,330
)
Operating loss
   
(15,256,142
)
   
(573,863
)
   
(363,172
)
   
(283,588
)
   
(16,476,765
)
Total assets
   
48,728,875
 
   
11,004,111
 
   
4,766,185
 
   
3,759,969
 
   
68,259,140
 
                                    
September 30, 2002:
                                   
Total revenues
   
42,143,504
 
   
14,935,505
 
   
4,807,505
 
   
4,499,440
 
   
66,385,954
 
Operating income (loss)
   
385,662
 
   
(17,362
)
   
340,357
 
   
72,396
 
   
781,053
 
Total assets
   
51,526,223
 
   
13,889,109
 
   
3,202,211
 
   
5,411,956
 
   
74,029,499
 

10

Table of Contents
 
The United States revenues include international revenues of approximately $404,000 and $617,000 for the third quarters of 2001 and 2002, respectively and approximately $2,098,000 and $1,905,000 for the first nine months of 2001 and 2002, respectively.
 
3.    Reconciliation of Basic and Diluted Net Income Per Share
 
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common and potential dilutive common shares outstanding. Diluted weighted average common and potential dilutive common shares include common shares and stock options using the treasury stock method, except when those shares result in antidilution. At September 30, 2001, basic loss per share equaled diluted loss per share. The reconciliation of basic and diluted income per share as of September 30, 2002 is as follows:
 
    
Income
   
Shares
   
Per Share Amount
For the three months ended:
                   
September 30, 2002:
                   
Basic net income per share
   
$
340,733
   
20,155,027
   
$
.02
                
Effect of dilutive securities:
                   
Stock options
   
 
—  
   
362,142
       
    
  
      
Diluted net income per share
   
$
340,733
   
20,517,169
   
$
.02
    
  
  
For the nine months ended:
                   
September 30, 2002:
                   
Basic net income per share
   
$
683,728
   
20,152,443
   
$
.03
                
Effect of dilutive securities:
                   
Stock options
   
 
—  
   
454,635
       
    
  
      
Diluted net income per share
   
$
683,728
   
20,607,078
   
$
.03
    
  
  
 
Antidilutive shares totaling 3,318,203 and 3,058,762 were excluded from the diluted net income calculation for the three and nine months ended September 30, 2002, respectively.
 
4.    Recent Accounting Pronouncements
 
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS 141), and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment. The effective date of SFAS 142 was January 1, 2002.
 
As reported in the Company’s third quarter 2001, significant events occurred which triggered the impairment of its goodwill under FAS 121. Therefore, no amortization has been recorded since that time and adoption of SFAS 142 did not impact the Company. Goodwill amortization for the three months and nine months ended September 30, 2001 was $755,416 and $2,266,247, respectively. If SFAS 142 had been effective in those periods, operating loss would have been reduced by the amount of amortization.
 
In August 2001, FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. SFAS 144 essentially combines the requirements of SFAS 121 and Accounting Principles Board Opinion (APBO) No. 30 into one single accounting standard. The effective date of SFAS 144 was January 1, 2002.
 
        The FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, in July 2002. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

11

Table of Contents
5.    Commitments and Contingencies
 
The Company is occasionally involved in legal proceedings and other claims arising out of its operations in the normal course of business. None of such current claims are expected, individually or in the aggregate, to have a material adverse effect on the Company.

12

Table of Contents
 
ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This Report contains certain forward-looking statements with respect to the Company’s operations, industry, financial condition and liquidity. These statements reflect the Company’s assessment of a number of risks and uncertainties. The Company’s actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth in this Report. An additional statement made pursuant to the Private Securities Litigation Reform Act of 1995 and summarizing certain of the principal risks and uncertainties inherent in the Company’s business is included in Part I of this Report under the caption “‘Safe Harbor’ Statement Under the Private Securities Litigation Reform Act of 1995”. Readers of this Report are encouraged to read such statement carefully.
 
Overview
 
Datastream is a leading provider of asset lifecycle management solutions. These solutions enable businesses, government agencies and other organizations to maximize the performance and profitability of assets. One important component of this lifecycle is the procurement of spare parts used to maintain assets. Datastream’s iProcure solution automates this process by connecting suppliers with buyers of industrial spare parts through the Internet. Combined, these offerings create a complete, scaleable asset lifecycle management solution representing a unique value proposition to the market.
 
Results of Operations
 
Total Revenues.    Total revenues of $21,975,416 in the third quarter of 2002 increased 9% from $20,177,026 in the third quarter of 2001. Total revenues decreased 2% to $66,385,954 for the first nine months of 2002 from $67,723,004 for the first nine months of 2001, due principally to unfavorable market conditions and longer sales cycles incurred with the transition to Datastream 7i. International revenues were approximately $8,892,000 (40% of total revenues) in the third quarter of 2002 and approximately $7,495,000 (37% of total revenues) in the third quarter of 2001. International revenues were approximately $26,147,000 (39% of total revenues) for the first nine months of 2002 and approximately $25,460,000 (38% of total revenues) for the first nine months of 2001. See Note 2 to consolidated financial statements.
 
Product revenues increased 20% to $6,040,013 (27% of total revenues) in the third quarter of 2002 from $5,038,672 (25% of total revenues) in the third quarter of 2001, as a result of increased sales of Datastream 7i, which has a higher license fee than the MP2 product family, partially offset by lower license sales in the MP2 product family. Product revenues decreased 1% to $18,670,827 (28% of total revenues) in the first nine months of 2002 from $18,947,113 (28% of total revenues) in the first nine months of 2001. The decrease was a result of unfavorable market conditions and longer sales cycles incurred with the transition to Datastream 7i.
 
Service and support revenues increased 5% to $15,935,403 (73% of total revenues) in the third quarter of 2002 from $15,138,354 (75% of total revenues) in the third quarter of 2001. The increase is due to the impact of support renewal contracts entered into during the third quarter of 2002 and is offset by decreased software license revenues in prior quarters resulting in a decrease in installation, training and services revenue. Service and support revenues decreased 2% to $47,715,130 (72% of total revenues) in the first nine months of 2002 from $48,775,891 (72% of total revenues) in the first nine months of 2001.
 
Cost of Revenues.    Cost of revenues increased 1% to $8,363,355 (38% of revenues) in the third quarter of 2002, as compared to $8,268,262 (41% of total revenues) in the third quarter of 2001. The increase in cost of revenues is due to an increase in third party contract service expenses. Cost of revenues decreased 13% to $24,731,081 (36% of total revenues) in the first nine months of 2002 from $27,133,510 (40% of total revenues) in the first nine months of 2001 due to cost savings in the support department as a result of improved utilization and improved organizational efficiency in the first half of 2002.
 
Sales and Marketing Expenses.    Sales and marketing expenses increased 3% to $8,347,083 (38% of total revenues) in the third quarter of 2002 from $8,093,162 (40% of total revenues) in the third quarter of 2001. The increase is due an increase in sales commissions. Sales and marketing expenses decreased 8% to $25,193,322 (38% of total revenues) in the first nine months of 2002 from $27,477,305 (41% of total revenues) in the first nine months of 2001 as a result of the consolidation of sales activities and reduction of certain marketing activities in the first half of 2002.
 
Product Development Expenses.    Total product development expenditures decreased 14% to $2,647,870 (12% of total revenues) in the third quarter of 2002 from $3,065,161 (15% of total revenues) in the third quarter of 2001. Total product development expenditures decreased 19% to $7,949,168 (12% of total revenues) in the first nine months of 2002 from $9,814,163 (14% of total revenues) in the first nine months of 2001. The decrease in total product development expense resulted from cost savings realized upon consolidation of the MP2, MP5i and iProcure development teams and a reduction in outside contract labor costs.
 
General and Administrative Expenses.    General and administrative expenses decreased 16% to $2,216,055 (10% of total revenues) in the third quarter of 2002 from $2,632,367 (13% of total revenues) in the third quarter of 2001, due to reduced professional service fees, a reduction in bad debt expense and a benefit from foreign currency transactions.

13

Table of Contents
General and administrative expenses increased 2% to $7,731,330 (12% of total revenues) in the first nine months of 2002 from $7,553,214 (11% of total revenues) in the first nine months of 2001.
 
Goodwill Amortization.    The Company wrote off the remaining balance of goodwill in the third quarter of 2001, therefore, no amortization expense was incurred in 2002.
 
Impairment of goodwill and other long-lived assets.    During the third quarter of 2001, the company wrote off $9,785,330 of impaired goodwill and $170,000 for an impaired building.
 
Other income, net.    Other income, net decreased to $123,156 in the third quarter of 2002 from $322,671 in the third quarter of 2001. The decrease was due to a decrease in return on investments during the third quarter of 2002 due primarily to a reduction in yields on cash equivalent investment instruments. Other income, net decreased to $268,043 in the first nine months of 2002 from $634,220 in the first nine months of 2001.
 
Tax Rate.    The Company’s effective tax rate was 35% for the third quarter of 2002 as compared to 3% for the third quarter of 2001. The Company’s effective tax rate was 35% for the first nine months of 2002 as compared to 7% for the first nine months of 2001. The increase in the effective tax rate is due to the elimination of goodwill and related amortization, which significantly reduced the Company’s permanent book/tax differences.
 
Net income (loss).    Net income (loss) improved to $340,733 (2% of total revenues) in the third quarter of 2002 from $(11,861,087) ((59%) of total revenues) in the third quarter of 2001. Net income (loss) improved to $683,728 (1% of total revenues) for the first nine months of 2002 from $(14,766,072) ((22%) of total revenues) for the first nine month of 2002. The improvement is attributed to the absence of goodwill amortization and related impairment charges which occurred during the third quarter of 2001.
 
Liquidity and Capital Resources
 
The Company has funded its operating activities primarily from cash generated from operations. The Company ended its third quarter of 2002 with $32,420,017 in cash and cash equivalents.
 
On July 23, 2002 the Company announced that its board of directors had authorized the repurchase of up to 500,000 shares of Datastream’s outstanding common stock. This plan expires on July 23, 2003. As of September 30, 2002, the Company has repurchased 953,500 shares (94,500 shares in 2002) under separate stock repurchase plans. The repurchased shares may be used, when needed, for general corporate purposes, including grants of employee stock options. The shares are classified as treasury stock on the balance sheet and are reported at cost.
 
In connection with entering into a software development and licensing agreement with GE Fanuc North America, Inc. (“GE Fanuc”), on February 13, 2002, Datastream issued a warrant to GE Fanuc to purchase up to 50,000 shares of common stock of the Company. The warrant was exercisable on the date of issuance and remains exercisable for three years from the date of issuance. The exercise price per share is $6.95, which was the market price of the Company’s common stock on the date of issuance of the warrant. The warrant agreement allows for net issuance at the option of GE Fanuc and provides “piggy back” registration rights for the underlying common stock.
 
The Company has accounted for the warrant using the guidance of Emerging Issues Task Force (EITF) 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and EITF 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products. As a result, on the date of issuance the Company recorded the fair value of the warrant as a credit to Additional Paid-In Capital and a debit to prepaid commissions. The Company will record amortization of the prepaid commissions as a reduction of revenue over the three years the warrant is exercisable. The impact to the financial condition of the Company will be immaterial over the three year period.
 
As of September 30, 2002, the Company had no long-term debt commitments and no material commitments for capital expenditures. The Company believes that its current cash balances, cash flows from operations and investments available for sale will be sufficient to meet its working capital and capital expenditure needs for at least the next 12 months.

14

Table of Contents
 
Critical Accounting Polices
 
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. The Company’s critical accounting policies include revenue recognition, income taxes, impairment of goodwill and other long lived assets, functional currencies for the purpose of consolidation and allowance for doubtful accounts. For a detailed discussion on the application of these and other accounting policies, see the Company’s Form 10-K filed for the year ended December 31, 2001.
 
ITEM 3.     Quantitative and Qualitative Disclosures about Market Risk
 
The Company did not experience any material changes in market risk in the third quarter of 2002.
 
ITEM 4.     Controls and Procedures
 
 
(a)
 
Evaluation of Disclosure Controls and Procedures.    Within 90 days prior to the filing of this Report, (the “Evaluation Date”), our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of the Evaluation Date, our disclosure controls and procedures provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported in the time periods specified in the SEC’s rules and forms.
 
 
(b)
 
Changes in Internal Controls.    Since the Evaluation Date, there have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date.

15

Table of Contents
 
PART II.     OTHER INFORMATION
 
Item 1.     Legal Proceedings
 
The Company is occasionally involved in legal proceedings and other claims arising out of its operations in the normal course of business. None of such current claims are expected, individually or in the aggregate, to have a material adverse affect on the Company.
 
Item 2.     Changes in Securities and Use of Proceeds
 
None
 
Item 3.     Defaults Upon Senior Securities
 
None
 
Item 4.     Submission of Matters to a Vote of Stockholders
 
None
 
Item 5.     Other Information
 
None
 
Item 6.     Exhibits and Reports on Form 8-K
 
 
(a)
 
Exhibits
 
None
 
 
(b)
 
Reports on Form 8-K
 
Datastream filed a Current Report on Form 8-K on July 24, 2002 to report the Company’s announcement of a stock repurchase plan.

16

Table of Contents
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
       
Datastream Systems, Inc.
Date:    November 18, 2002
      
/s/    C. ALEX ESTEVEZ        
           
C. Alex Estevez
Chief Financial Officer (principal
financial and accounting officer)

17

Table of Contents
 
CERTIFICATIONS
 
I, Larry G. Blackwell, certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Datastream Systems, Inc.;
 
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4.
 
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a.
 
Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b.
 
Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c.
 
Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
5.
 
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a.
 
All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
 
 
b.
 
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6.
 
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date:    November 14, 2002
 
/s/    LARRY G. BLACKWELL     
Larry G. Blackwell
President and Chief Executive Officer
Datastream Systems, Inc.

18

Table of Contents
 
CERTIFICATIONS
 
I, C. Alex Estevez, certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of Datastream Systems, Inc.;
 
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4.
 
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a.
 
Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
 
b.
 
Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c.
 
Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
5.
 
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a.
 
All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b.
 
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6.
 
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses._
 
Date:    November 14, 2002
 
/s/    C. ALEX ESTEVEZ
C. Alex Estevez
Chief Financial Officer
Datastream Systems, Inc.

19