DATASTREAM SYSTEMS INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

¨	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 and former fiscal year, 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 ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: August 6, 2004: 19,961,303 shares, $0.01 par value.

Datastream Systems, Inc.

FORM 10-Q

Quarter ended June 30, 2004

Index


		Page No.
Part I.	Financial Information

	“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995	3

Item 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets - June 30, 2004 and December 31, 2003	4

	Consolidated Statements of Operations -

	For the three months ended June 30, 2004 and 2003	5
	For the six months ended June 30, 2004 and 2003	6

	Consolidated Statement of Stockholders’ Equity and Comprehensive Income - For the six months ended June 30, 2004	7

	Consolidated Statements of Cash Flows - For the six months ended June 30, 2004 and 2003	8

	Notes to the Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16

Item 4.	Controls and Procedures	16

Part II.	Other Information

Item 1.	Legal Proceedings	18

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	18

Item 3.	Defaults Upon Senior Securities	18

Item 4.	Submission of Matters to a Vote of Security Holders	18

Item 5.	Other Information	18

Item 6.	Exhibits and Reports on Form 8-K	19

Signatures		20

Exhibit Index		21

PART I. 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: a highly competitive market; our ability to keep pace with rapid technological changes and demands in our markets; volatility of our quarterly results due to increasing sales cycles; engagements that require longer implementations; reduced profitability due to our hosting services strategy; our ability to generate future revenue and profits from our Datastream 7i Buy strategy; significant delays in product development and our ability to be an innovator in the industry; third party relationships on which our success is substantially dependent; third party technologies on which our future success is substantially dependent; our ability to detect software bugs or errors to avoid a correction to or delay in the release of our products; our ability to manage our international operations; risks unique to government contracts that may have a detrimental impact on our operating results; deterioration of economic and political conditions; continued acceptance of the Internet for business transactions; recruiting and retaining key employees; our ability to adequately protect our proprietary rights; security risks and concerns that may deter use of the Internet for our applications; fluctuations in our stock price since our initial public offering; and our articles of incorporation and bylaws may inhibit a takeover that would be in the stockholders’ best interest. 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 including, but not limited to, the “Risk Factors” set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the fiscal year ended December 31, 2003, as well as other risks and uncertainties identified from time to time in our SEC reports, registration statements and public announcements

We do not have, and expressly disclaim, any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.

ITEM 1. Consolidated Financial Statements

Datastream Systems, Inc. and Subsidiaries

Consolidated Balance Sheets

(unaudited)


	June 30, 2004			December 31, 2003
Current assets:
Cash and cash equivalents	$	46,373,995		$	44,874,599
Accounts receivable, net of allowance for doubtful accounts of $720,321 and $995,421 in 2004 and 2003, respectively		16,816,245			17,422,089
Unbilled revenue		1,594,249			1,089,540
Prepaid expenses		1,691,064			1,331,413
Income tax receivable		782,824			706,030
Deferred income taxes, net		1,002,362			1,278,492
Other assets		1,212,460			1,442,348

Total current assets		69,473,199			68,144,511

Investment		501,983			501,983
Property and equipment, net		11,528,831			11,238,830
Deferred income taxes, net		2,893,429			4,049,011
Other long term assets		56,354			104,252

Total assets	$	84,453,796		$	84,038,587

Current liabilities:
Accounts payable	$	4,095,814		$	3,376,454
Other accrued liabilities		7,594,920			8,493,200
Unearned revenue		16,845,297			16,842,539

Total liabilities		28,536,031			28,712,193

Stockholders’ equity:
Preferred stock, $1 par value, 1,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value, 40,000,000 shares authorized; 21,560,503 shares issued and 19,966,303 outstanding at June 30, 2004 and 21,453,911 shares issued and 20,207,211 outstanding at December 31, 2003		215,605			214,539
Additional paid-in capital		90,394,243			89,674,896
Accumulated deficit		(22,012,769	)		(24,863,981	)
Other accumulated comprehensive loss		(1,402,486	)		(1,035,986	)
Treasury stock, at cost;
1,594,200 shares at June 30, 2004, 1,246,700 shares at December 31, 2003		(11,276,828	)		(8,663,074	)

Total stockholders’ equity		55,917,765			55,326,394

Total liabilities and stockholders’ equity	$	84,453,796		$	84,038,587

See accompanying notes to consolidated financial statements.

Datastream Systems, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

Three months ended June 30, 2004 and 2003


	June 30, 2004		June 30, 2003
Revenues:
Software product	$	6,544,443	$	6,271,635
Services and support		17,286,280		17,116,924

Total revenues		23,830,723		23,388,559

Cost of revenues:
Cost of product revenues		211,261		382,218
Cost of services and support revenues		7,276,509		7,550,852

Total cost of revenues		7,487,770		7,933,070

Gross profit		16,342,953		15,455,489

Operating expenses:
Sales and marketing		7,320,988		7,975,082
Product development		3,515,524		3,019,990
General and administrative		3,167,053		2,690,858

Total operating expenses		14,003,565		13,685,930

Operating income		2,339,388		1,769,559

Other income:
Interest income, net		117,539		114,941
Other income (expense), net		23,636		(1,470,628	)

Total other income (expense)		141,175		(1,355,687	)

Income before income taxes		2,480,563		413,872

Income tax expense		942,614		161,410

Net income	$	1,537,949	$	252,462

Basic net income per share	$	.08	$	.01

Diluted net income per share	$	.08	$	.01

Basic weighted average number of common shares outstanding		20,019,775		20,085,679

Diluted weighted average number of common shares outstanding		20,314,956		20,762,635

See accompanying notes to consolidated financial statements.

Datastream Systems, Inc. and Subsidiaries

Consolidated Statements of Operations

(unaudited)

Six months ended June 30, 2004 and 2003


	June 30, 2004		June 30, 2003
Revenues:
Software product	$	13,001,218	$	12,793,281
Services and support		33,916,345		33,379,510

Total revenues		46,917,563		46,172,791

Cost of revenues:
Cost of product revenues		699,029		602,948
Cost of services and support revenues		14,133,502		15,109,137

Total cost of revenues		14,832,531		15,712,085

Gross profit		32,085,032		30,460,706

Operating expenses:
Sales and marketing		14,650,290		15,226,354
Product development		6,907,897		5,890,310
General and administrative		6,313,735		6,260,282

Total operating expenses		27,871,922		27,376,946

Operating income		4,213,110		3,083,760

Other income:
Interest income, net		238,835		234,412
Other income (expense), net		43,229		(1,430,717	)

Total other income (expense)		282,064		(1,196,305	)

Income before income taxes		4,495,174		1,887,455

Income tax expense		1,643,962		677,255

Net income	$	2,851,212	$	1,210,200

Basic net income per share	$	.14	$	.06

Diluted net income per share	$	.14	$	.06

Basic weighted average number of common shares outstanding		20,111,735		20,051,459

Diluted weighted average number of common shares outstanding		20,461,822		20,472,336

See accompanying notes to consolidated financial statements.

Datastream Systems, Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity and Comprehensive Income

(unaudited)

Six months ended June 30, 2004


	Common Stock		Additional Paid-In Capital		Accumulated Deficit			Other Accumulated Comprehensive Loss			Treasury Stock			Total Stockholders’ Equity
Balance at December 31, 2003	$	214,539	$	89,674,896	$	(24,863,981	)	$	(1,035,986	)	$	(8,663,074	)	$	55,326,394

Comprehensive income
Net income		—		—		2,851,212			—			—			2,851,212
Foreign currency translation adjustment		—		—		—			(366,500	)					(366,500	)

Total comprehensive income															2,484,712

Exercise of stock options		973		590,287		—			—			—			591,260

Tax benefit of options exercised		—		66,650		—

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