ITEM 1. Business.
Company Overview
We provide asset performance management software and services to enterprises worldwide, including more than 60 percent of the Fortune 500. Through asset performance management, customers can maintain, manage, and improve the performance of their capital asset infrastructure, such as manufacturing equipment, fleet, and facilities. This saves time and money by optimizing maintenance resources, improving equipment and staff productivity, increasing inventory efficiency, and reducing warranty-related costs. Our analytical tools enable better decision making to help improve future asset performance and profitability. Our strategy is to provide software and services that help targeted customers improve their profitability through better management of their assets. We execute against this strategy by continuing to invest in people and products that deliver a unique offering to the marketplace.
Datastream Systems, Inc. was incorporated on January 8, 1986 in the state of South Carolina and re-incorporated on December 21, 1994 in the state of Delaware.
Available Information
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available through our website, www.datastream.net, free of charge as soon as reasonably practicable after electronically filing or furnishing such material with the SEC. For more information, please visit www.datastream.net.
Products
Datastream 7i. Datastream 7i™ provides customers with the tools they need for effective asset performance management. As an Internet-based product, Datastream 7i applies to virtually any size operation, from the large, multi-national enterprise requiring global solutions to the single, small shop with basic requirements. Datastream 7i is optimal in large, asset-intensive environments and is also well suited for multinational organizations that require high transaction volumes in multiple currencies and languages.
Datastream 7i is an “n-tier” application, comprised primarily of the client, application server, and database server, completely designed and built using standard Internet protocols and technologies. The client for Datastream 7i can be any standard Java-enabled Web browser such as Internet Explorer 6.x. The client interacts directly with the second tier application server, which manages all business logic and workflow of the system. The Datastream 7i application server component, based on J2EE and Oracle technologies, interacts with the third-tier database server, which is responsible for storing all customer data.
Datastream 7i incorporates VeriSign digital certificates for authentication and 128-bit SSL encryption to protect data being transmitted from the server to the client. S-HTTP is also supported. Datastream 7i offers electronic record generation and storage, electronic signature, back-end tamper monitoring, preventive maintenance and inspection revision control, and an extensive auditing and reporting suite. As a result, Datastream 7i offers compliance tools for customers in the most stringent regulatory environments, such as those required by the U.S. Department of Energy and the U.S. Food and Drug Administration.
Datastream 7i is an open system that facilitates integration with third-party systems via standard integration tools. The product is standards compliant, supporting conventions such as Java, J2EE, Forms, Web services, XML, LDAP, and SOAP.
Total Datastream 7i revenues, including product revenues and service and support revenues, were approximately 60% of our total revenues in 2005, 52% of our total revenues in 2004 and 48% of our revenues in 2003.
MP2. MP2® is designed for more traditional small- to medium-sized organizations dependent on more established technology architectures, such as those found in client server and file server environments. MP2, available in both file server and client server versions, is able to generate over 4,000 standard reports providing analysis down to specific location, piece of equipment, and employee. Add-on features to MP2 include MP2 Messenger™, Pocket MP2™, Pagerlink™, and MP2 Weblink®. MP2 is available for Microsoft Access, Microsoft SQL Server, and Oracle databases. The client server version of MP2 manages most of the processing at the server, which expedites performance, ensures data integrity and security and reduces network traffic.
Professional Services
We offer seven types of value-added professional services to customers: (i) consulting and advisory services to provide solutions to customer-specific applications problems, such as asset management or preventive maintenance; (ii) technical services, which provide on-site installation and systems integration services; (iii) configuration services, which enhance the functionality of a customer’s system; (iv) spare parts purchasing and management services; (v) product and customer support services; (vi) project management; and (vii) customer training. As of January 31, 2006, we employed approximately 226 service and support personnel worldwide, of which approximately 150 were professional service personnel and 76 were support personnel.
Product and customer support services include unlimited, toll-free international access to our support staff, product updates and upgrades, a searchable Internet site for common questions and requests, an Internet-based support tool for self-help, e-mail support and an Internet-based file download service. We also offer a premium support service, under which a customer receives a dedicated analyst for direct level support, faster response and issue resolution commitments, and tailored customer management programs to meet specific customer needs. We provide support for our international customers via a tiered approach: first-level support is provided by a network of partners in conjunction with the local office, with back-up expertise offered through the European technical center in Grenoble, France and the North American technical center in Greenville, South Carolina. Support-related revenue is an important source of recurring revenue and profitability.
Hosting Services
Our customers have the option of accessing the functionality of Datastream 7i through hosting services that we provide for a monthly fee. This offering allows customers to access product functionality without the complexities and costs of managing such applications internally. Customers typically purchase the license for Datastream 7i and pay a hosting fee that covers the price of hosting.
Our hosted offering is housed on a highly reliable, fault-tolerant platform located in a UUNet data center. The data center is a generation 3 UUNet facility providing hardened security, direct access to the UUNet backbone through multiple paths, redundant power, and redundant HVAC. Our hosted offering is SAS 70 type II compliant.
Sales and Marketing
We sell our products and services through approximately 137 sales professionals (as of January 31, 2006), which included a direct sales force of approximately 51 professionals and a telesales force of approximately 23 professionals. We also have approximately 16 staff in renewal sales and 47 sales personnel who represent pre-sales engineers, management, research, and lead qualification. We use internal and third-party systems to help manage our sales, marketing and customer support processes.
Our marketing department consists of approximately 22 employees (as of January 31, 2006) and is responsible for marketing through public relations, industry analyst relations, customer reference programs, trade shows and seminars, strategic partnerships and direct mail. The marketing department is also responsible for web site design, product marketing, collateral development and providing input for our product development efforts.
Internationally, we market our software and services from offices in Argentina, Brazil, Chile, China, France, Germany, Italy, Mexico, the Netherlands, Singapore, and the United Kingdom. In addition, we have a network of affiliates located throughout the balance of Europe, Latin America and the Asia Pacific. For financial information about our segment and operations in different geographic locations, see Note 10 of our Consolidated Financial Statements in this Annual Report.
Product Development
Our ability to design, develop, test and support new product technology and enhancements in a timely manner is essential to our future success. As of January 31, 2006, our product development group consisted of 93 people, focused on four key functions: development, quality assurance, documentation, and localization. The Development group consisted of approximately 45 software developers, most of whom hold advanced programming or engineering degrees. We also utilize development contractors for certain product development projects. During the years ended December 31, 2005, 2004 and 2003, we spent $13.8 million, $14.0 million, and $12.4 million, respectively, on product development.
Customers
For over twenty years, we have provided asset management software and services to the marketplace. We have over 6,500 customers, including more than 60 percent of the Fortune 500, whom we actively support. We have sold systems in over 140 countries and in nearly every industry. We sell to our customers and prospective customers through a combination of direct
sales, telesales and international distributors in virtually every major industry. Although we have customers in nearly every industry, we have focused on the government, healthcare, manufacturing, oil and gas, pharmaceutical, transportation, and public utility industries.
No customer has represented more than 5% of our total annual revenues in any of the last three fiscal years.
Alliances and Partners
We have established marketing agreements with various partners, such as IBM Global Services, Oracle Corporation, Microsoft Corporation, Cognos, DataDirect, I-NetSoftware, and webMethods.
We have established formal relationships with over 200 active industrial parts and office product vendors such as Applied Industrial, Fastenal, Grainger, Motion Industries, Office Depot, MSC Industrial Direct and WESCO. These supplier partners are electronically connected to the Datastream 7i Buy trading network, which connects buyers with these industrial parts suppliers, and our supplier partners serve to streamline and optimize the supply chain of spare parts required by our application customers.
We have reseller partners internationally to address regions or markets of the world where it is not economical to have a direct presence. Revenues sold through this channel represent less than 5% of total revenues for each of the last three years.
Competition
Our market for application software is intensely competitive. The principal methods of competition in this market include product performance, functionality, price and services. We compete with enterprise resource planning (ERP) vendors such as IFS, Oracle and SAP, who offer enterprise-wide management systems with asset management modules. We also compete with traditional providers of asset management software such as Indus International and MRO Software. Certain of our existing competitors have greater financial, marketing, service and support and technical resources than Datastream.
Internationally, we compete with both local and global software vendors. Local and regional competitors are generally smaller, but are more knowledgeable of the specific markets in which they compete. Global competitors target international markets through distributors, direct sales and service offices or through strategic partnerships. Competition in these countries is frequently intense and there can be no assurance that we will be successful in these markets.
We must make continued investments in product development, particularly the development of Internet-based products, to meet competitive pressures. There can be no assurance that we will have sufficient resources to make these investments or that we will be able to make the technical advances necessary to continue to compete effectively in the future.
Intellectual Property
Our success is heavily dependent upon the technological and creative skills of our personnel and how successfully we can safeguard our efforts in developing and enhancing our software and related technology through the protection of our intellectual property rights, brand name, and associated goodwill. We depend upon our ability to develop and protect our proprietary technology and intellectual property rights to distinguish our software from competitive products. For example, we take measures to avoid disclosure of our trade secrets, including requiring employees and certain consultants, customers, prospective customers, and others with whom we have business relationships to execute confidentiality agreements that prohibit the unauthorized use and disclosure of our trade secrets and other proprietary materials and information. We also enter into license agreements with our customers, business partners and resellers that limit the unauthorized access to, use and distribution of our software, documentation and other proprietary information. These license agreements impose restrictions on the use of our technology, including prohibiting the reverse engineering or decompiling of our software, impose restrictions on the licensee’s ability to utilize the software and provide for specific remedies in the event of a breach of these restrictions. We also restrict access to the source code for our products. While some of our license agreements require us to place the source code for licensed software in escrow for the benefit of the licensee, these agreements generally provide these licensees with a limited, non-exclusive license to use this code in the event we cease to do business without a successor or there is a bankruptcy proceeding by or against us. Certain agreements may also provide that a licensee may access and use the escrowed source code if we fail to provide specified software support.
We claim exclusive title to and ownership of the software we develop. We also seek to protect our software, documentation and other proprietary information under the trade secret, copyright and trademark laws. We assert copyright in our software, documentation and other qualifying works of authorship. We also assert trademark rights in and to our name, product names, logos and other markings that are designed to permit customers to identify our goods and services and differentiate them from other sources. We regularly file for and have been granted trademark protection from the U.S. Patent and Trademark Office and in other countries for qualifying marks.
Despite our efforts to protect our intellectual property rights, there can be no assurance that these protections will be adequate to protect our intellectual property rights or that our competitors will not independently develop software products that are superior to our products. Existing copyright laws provide us limited protection in prohibiting competitors from independently producing software products that are substantially similar to our products. We do not hold any patents or have any patent applications pending.
Although we employ both statutory and contractual protections against unauthorized use of our proprietary technology, we may not be able to detect such unauthorized use or take appropriate steps to enforce our intellectual property rights effectively. In addition, certain contractual provisions, including restrictions on use, copying, transfer and disclosure of licensed programs, may be unenforceable under the laws of certain jurisdictions. Our international operations expose us to certain additional intellectual property risks in that the laws of some countries do not protect our proprietary rights to the same extent as do the laws of the United States. Policing the unauthorized use of our intellectual property rights is difficult and expensive, particularly given the global nature and reach of the Internet. The unauthorized reproduction or other misappropriation of our proprietary technology could enable third parties to benefit from the technology we have developed without paying for it and could materially harm our business.
We attempt to avoid infringing known proprietary rights of third parties in our product development efforts and believe that our products, trademarks, service marks and other proprietary rights do not infringe the proprietary rights of third parties. However, there can be no assurance that such parties will not assert infringement claims against us. In addition, we license from third parties certain technology that is incorporated into our software, and we bundle technology from third parties with our software. Any claims of infringement or misuse of intellectual property, even those without merit, made against us arising out of our own or third party technology would be time-consuming and expensive to defend. The loss of proprietary technology or a successful claim against us could have a material adverse effect on our financial condition and results of operations.
Datastream®, Datastream 7i™, Datastream 7i Buy™, Databridge™, MP2®, MP2 WebLink®, Pocket MP2™, PathwaysSM, MP2 Messenger™ and PagerLink™ are our trademarks or service marks and are used in this report to denote our products and services. Other product and company names mentioned herein may be trademarks of their respective owners.
Seasonality
We typically see weaker service revenues in the third and fourth quarters of our calendar year due to lower utilization from Europe in the summer and fewer available billable days in the November and December months due to holidays and customer site shutdowns. The first and third quarters have traditionally been weaker for license sales, but this has become harder to predict given larger deal sizes and less predictable sales cycles associated with Datastream 7i. This seasonality may cause our results to vary from quarter to quarter.
Employees
As of January 31, 2006, we employed 578 personnel, including 159 sales and marketing personnel, 226 service and support representatives, 93 employees involved in product development, 10 employees involved with Datastream 7i Buy, and 90 administrative personnel. This includes both full-time and part-time employees. None of our 578 employees are represented by a labor organization and we are not a party to any collective bargaining agreement. We consider relations with our employees to be good.
Segment and Geographic Information
U.S. revenues in 2005, 2004 and 2003 were approximately $63 million, $54 million and $55 million, respectively. International revenues totaled approximately $39 million, $40 million and $36 million in 2005, 2004 and 2003, respectively. See “Risk Factors - If we fail to manage our international operations, our business could be adversely affected” for a discussion of risks attendant to our foreign operations. See Note 10 to the Consolidated Financial Statements contained herein for information regarding our business segments and operations in different geographical regions.
ITEM 1A.
ITEM 1A. Risk Factors.
The following is a summary of certain risks and uncertainties identified by us in the conduct of our business and is not meant to be exhaustive. These Risk Factors should also be read in conjunction with other cautionary statements that we make in this Annual Report as well as other risks and uncertainties identified from time to time in our other SEC reports, registrations statements and public announcements. See also “‘Safe Harbor’ Statement under the Private Securities Litigation Reform Act of 1995” at the beginning of this Annual Report.
Our market continues to be highly competitive.
Our market continues to be highly competitive. We expect competition to intensify as new companies enter the asset performance management market and existing ones expand their product lines. Certain competitors, including enterprise resource planning, or ERP, companies such as Oracle and SAP, currently have greater financial, marketing, technical, and service and support resources than we do. In addition, many prospective customers have already made significant commitments to ERP competitors, which could materially and adversely affect our ability to succeed in our market. To the extent such competitors increase their focus on asset management or maintenance, repair and operations procurement, we could be at a competitive disadvantage. Further, slowing U.S. and world economies could result in a decrease in spending by corporations on information technology and software. This could lead to even greater competition in our markets. We cannot assure you that we will be able to successfully compete against current and future competitors, especially if customers or prospective customers decrease their level of spending on asset performance management products in a slowing economy. If we fail to compete successfully, our results of operations would be materially and adversely affected.
If we do not keep pace with rapid technological changes and demands in our markets, we will not remain competitive.
Our business is characterized by rapidly changing technology, evolving industry standards, changes in customer requirements and frequent new product introductions. Our future success depends greatly on our ability to enhance our existing line of Datastream 7i™ products. Our success also depends on our ability to develop and introduce, on a timely and cost-effective basis, new products and product features to meet our customers’ changing needs, and in particular, those concerning Web-based applications. Industry requirements for product development in our market continue to evolve at a rapid pace. Our ability to successfully and efficiently develop products that meet these evolving requirements will require high levels of innovation, as well as an accurate anticipation of technological and market trends. In addition, certain competitors may be able to devote greater financial, marketing, technical and other resources to identify and meet the evolving industry requirements. We cannot assure you that we will be able to successfully identify, develop, and market new products or product enhancements that meet or exceed evolving industry requirements or achieve market acceptance. If we do not successfully identify, develop, and market new products or product enhancements, it could have a material and adverse effect on our results of operations.
Increasing sales cycles and other factors may result in volatility of our quarterly results.
Traditionally, a significant portion of our revenues in any quarter had been the result of a large number of relatively small orders received during the period. Over the last several years, we have seen an increase in the size of our average orders and a decrease in the number of such orders. We expect the average size of our license sales transactions to continue to increase in the coming years. An increase in average deal size also typically increases the length of the average sales cycle. Potential customers spend significant time and resources determining which software to purchase. This requires us to spend substantial time, effort and money educating and convincing prospective customers to purchase our software. A customer’s decision to license our software generally involves evaluation by a number of the customer’s personnel in various functional and geographic areas. Due to these and other factors, our sales cycle may be extended. Since the sales cycle can be unpredictable and can be affected by events beyond our control, we cannot always accurately forecast the timing or amount of specific sales, and sales may vary from quarter to quarter. Further, we typically realize a significant portion of our revenue from sales of software licenses in the last month of a quarter, frequently even in the last days of a quarter. This makes it difficult to gauge the level of license revenue we will have in any single quarter until near to, or after, its conclusion. Failure to close even a small number of large software license contracts may have a significant impact on revenues for any quarter and could, therefore, result in significant fluctuations in quarterly revenues and operating results. Because of these issues, we caution that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance or results.
In addition, the market for our asset management software has changed over the last several years, and we expect that it will continue that trend as technology advances continue. As our average license sale size has grown, we have shifted the primary focus of our sales and marketing efforts upon the enterprise-wide deployment of our Datastream 7i solution. We expect to experience a decline in the large number of relatively small orders that had been a staple of our marketing and sales efforts in years past. We have restructured our sales and marketing organizations to facilitate this move to the higher-end transactional model. There can be no guarantee, however, that we will ultimately be successful in making this transition. Also, the overall demand for enterprise asset management software may grow more slowly than we anticipate (or even decrease) in upcoming quarters. We have reported fluctuations in software license revenue in each of the last several years, as we make this transition to predominately higher-end transactions. This may be an indication of the extent of market penetration into the asset management software market, as well as a retrenchment in the way companies purchase enterprise software. To the extent that a slow down in the market for enterprise asset management software develops, it could have a materially adverse affect on our business, results of operations and financial condition.
Other factors which could contribute to a fluctuation in our quarterly results include but are not limited to the following:
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changes in our pricing policies or those of our competitors;
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changes in our licensing models or those of our competitors:
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changes in customer budgets;
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the introduction of new products or product enhancements by us and our competitors;
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changes in our sales and marketing organization;
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technological changes in computer systems and environments;
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variability in new licenses obtained;
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loss of customers;
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changes in the proportion of revenues attributable to licensing fees versus services;
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changes in the level of operating expenses;
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delay or deferral of customer implementations of our software;
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deferral of certain product and/or service revenue to subsequent reporting periods to comply with revenue recognition accounting requirements;
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foreign currency exchange rates; and
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other economic conditions generally or in our industry.
Due to these factors, our operating results could fail to meet the expectations of investors. If that happens, the price of our common stock could decline materially.
Our engagements typically require longer implementations and other professional services engagements.
Our implementations generally involve an extensive period of delivery of professional services, including the configuration of the solutions, together with customer training and consultation. In addition, existing customers for other professional services projects often retain us for those projects beyond an initial implementation. A successful implementation or other professional services project requires a close working relationship between us, the customer and often third party consultants and systems integrators who assist in the process. These factors may increase the costs associated with completion of any given sale, increase the risks of collection of amounts due during implementations or other professional services projects, and increase risks of delay of such projects. Delays in the completion of an implementation or any other professional services project may require that the revenues associated with such implementation or project be recognized over a longer period than originally anticipated, or may result in disputes with customers, third party consultants or systems integrators regarding performance as originally anticipated. Such delays in the implementation may cause material fluctuations in our operating results. In addition, customers may defer implementation projects or portions of such projects and such deferrals could have a material adverse effect on our business and results of operations.
Our hosting services strategy may reduce profits.
We cannot assure you that our hosting service customers will remain customers over a sustained period of time. In addition, our hosting service business model depends heavily on managed services provided by a third party and the economics of scale that are enabled with a shared application platform. A successful hosting service offering must be accessible to customers continually, without disruptions. We cannot provide assurances that the technical infrastructure employed by hosting service customers or prospective hosting service customers is sufficiently robust to prevent disruptions in Internet services beyond our control or that of our managed services provider at our hosting center. If our third party service provider fails to provide consistent access of the applications to our customers, it may have a material adverse effect on our business. Further, we cannot assure that the infrastructure of the Internet, or the complementary services necessary to provide these
continual and expanding services will be adequate to meet our needs and the needs of our customers in providing our hosting service on a competitive basis. Such connectivity and related issues could adversely affect the growth and customer acceptance of our hosting service business model. In addition, while our traditional business model charges an up-front license fee for access to our software applications, some of the offerings available through our hosting service charge a significantly lower monthly fee for rights to the same applications over a defined term. Certain customers may choose this monthly payment model as opposed to an up-front license fee. Customers of a variety of application software companies are increasingly making available this more flexible approach to accessing software applications. As a result, this subscription model, if widely adopted by our customers, could defer revenue to future periods and significantly lower revenue and profits in the near term.
Our electronic procurement strategy may not generate future revenue and profits.
Our Datastream 7i Buy application enables our customers to direct procurement of maintenance, repair and operational supplies and services to a select group of suppliers via the Internet. The market for products comparable to Datastream 7i Buy is competitive and there can be no assurances that we will successfully generate sufficient subscription revenue from this initiative. Also, the success of Datastream 7i Buy is substantially dependent on our relationships with certain suppliers and service providers, and we charge suppliers a transaction fee for each transaction executed through the Datastream 7i Buy network. There can be no assurances that this transaction fee model will be profitable or sustainable in the long term. In addition, our third party suppliers and service providers may reassess their commitment to Datastream 7i Buy or decide to compete directly with us for our customers’ procurement in the future. The market for Internet-based procurement of maintenance, repair and operations supplies has experienced considerable change over the past several years and the customer demand for this area has been significantly reduced. As we continue to market and sell the Datastream 7i Buy solution, particularly internationally, we may need to augment our technical infrastructure to meet the requirements of customers for procurement solutions locally. If we are not successful in any of these areas, it could have a material adverse affect on our results of operations.
Significant delays in product development would harm our reputation as an innovator and result in a decrease in our revenues.
If we experience significant product development delays, our position in the market would be harmed, and our revenues could be substantially reduced, which would adversely affect our operating results. Historically, we have issued significant new releases of our software applications approximately annually, with minor interim releases issued more frequently. As a result of the complexities inherent in our solutions, major new product enhancements and new products often require long development and test periods before they are released. On occasion, we have experienced delays in the scheduled release date of new or enhanced products, and we cannot assure you that these delays will not occur in the future. Delays may occur for many reasons, including an inability to hire a sufficient number of developers, discovery of bugs and errors, localization of such products for international use or a failure of our current or future products to conform to industry requirements. Any such delay, or the failure of new products or enhancements in achieving market acceptance, could materially impact our business and reputation and result in a decrease in our revenues.
Our future success is substantially dependent on third party relationships.
An element of our strategy is to establish and maintain alliances with other companies, such as system integrators, resellers, consultants, and suppliers of products and services for maintenance, repair and operations. These relationships enhance our status in the marketplace, which generates new business opportunities and marketing channels and, in certain cases, additional revenue and profitability. To effectively generate revenue out of these relationships, each party must coordinate and support the sales and marketing efforts of the other, often including making a sizable investment in such sales and marketing activity. Our inability to establish and maintain effective alliances with other companies could impact our success in the marketplace, which could materially and adversely impact our results of operations. In addition, as we cannot control the actions of these third party alliances, if these companies suffer business downturns or fail to meet their objectives, we may experience a resulting diminished revenue and decline in results of operations.
In addition, we may face additional competition from these systems integrators and third-party software providers who develop, acquire or market products competitive with our products. Our strategy of marketing our products directly to customers and indirectly through systems integrators and other technology companies may result in distribution channel conflicts. Our direct sales efforts may compete with those of our indirect channels and, to the extent different systems integrators target the same customers, systems integrators may also come into conflict with each other. Any channel conflicts that develop may have a material adverse effect on our relationships with systems integrators or hurt our ability to attract new systems integrators to market our products.
We maintain a strategic relationship with IBM under which we have undertaken to integrate our respective products and to market the IBM versions of our products in preference to other versions. Our license revenue may be affected by the success and acceptance of the IBM products relative to those of IBM’s competitors. We may experience difficulties in gaining market acceptance of the IBM version of our products, and difficulties in integrating and coordinating our products and sales efforts with those of IBM. In addition, customers or prospects that have not adopted the IBM technology platform may view our alliance with IBM negatively, and competitive alliances may emerge among other companies that are more attractive to our customers and prospective customers.
Our future success is substantially dependent on third party technologies.
We rely heavily on third parties that supply us with certain technologies that are crucial to our success. In particular, our line of Internet-based applications is highly dependent on Oracle technology, including Oracle database technology and development tools. Similarly, we are also dependent on Microsoft SQL Server and Internet Explorer. If such technology does not achieve continued market acceptance or if Oracle or other competitors were to develop application software that successfully competed with our application software, it could have a material adverse effect on the acceptance of our products, and thus our results of operations.
We also expect to depend on third party technology that facilitates the crucial integration of our products with other systems of our clients. The market for integration solutions and technology to implement enterprise-wide Web Services is rapidly changing and intensely competitive. We expect that competition will remain intense as the number of entrants increases and new and varied technologies emerge. We cannot assure you that third parties will continue to develop new versions of products that successfully facilitate this integration. We also cannot assure you that that the third party technology licenses we depend upon or suitable alternatives will continue to be available to us on commercially reasonable terms, if at all. As we continue to introduce new products that incorporate new technologies, we may continue to license technology from additional third parties. Any failure to obtain any of these technology upgrades or licenses could result in delays or reductions in the introduction of new products, features or functions, or prolong internal development cycles, any of which could materially and adversely impact our results of operations.
Additionally, in recent years a non-commercial software model has evolved that presents a growing challenge to our commercial software model. Under the non-commercial software model, open source software produced by loosely associated groups of unpaid programmers and made available for license to end users without charge is distributed at nominal cost by firms that earn revenue on complementary services and products. These firms do not have to bear the full costs of research and development for the open source software. While we believe our products provide customers with significant advantages in functionality and security, and generally have a lower total cost of ownership than open source software, the popularization of the non-commercial software model continues to pose a significant challenge to our business model. To the extent this non-commercial software model gains acceptance in our markets, sales of our products may decline, which may adversely affect our revenue and operating margins.
Our business could be substantially harmed if we have to correct or delay the release of products due to software bugs or errors.
Our software products may contain undetected errors or bugs when first introduced or as new versions are released. Further, software we license from third parties and incorporate into our products may contain errors, bugs or viruses. Errors, bugs or viruses may cause a loss of or delay in market acceptance, recalls of hardware products incorporating the software or loss of data. Such defects and errors could result in any of the following:
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adverse customer reactions;
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negative publicity regarding our business and our products;
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harm to our reputation;
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loss of or delay in market acceptance;
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loss of revenue or required product changes;
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diversion of development resources and increased development expenses;
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increased service and warranty costs;
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legal action by our customers; and
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increased insurance costs.
If we fail to manage our international operations, our business could be adversely affected.
We generate our international sales through our international sales subsidiaries, as well as through a variety of indirect sales and marketing channel alliances. Our business, and our ability to maintain and expand our operations internationally, is subject to the risks inherent in international business activities, including, in particular:
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difficulty in staffing and managing an organization spread over several continents;
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greater difficulty in safeguarding our intellectual property;
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acceptance of localized versions of our products;
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cultural differences in the conduct of business;
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maintaining uniform administrative controls in each country in accounting for customer contractual commitments in accordance with current U.S. accounting standards;
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general economic and political conditions in each country;
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fluctuating economic and political conditions affecting geographic regions;
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foreign currency exchange rate fluctuations;
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negative effects relating to hostilities, war or terrorist acts around the world;
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unexpected changes in regulatory or tax requirements that restrict repatriation of earnings to the U.S.;
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increased trade restrictions;
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changes in tariff rates;
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longer accounts receivable payment cycles in certain countries;
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product compliance with local language and business customs;
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unexpected changes in regulatory requirements; and
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the burden of compliance with a wide variety of foreign laws and regulations.
Any one or more of the foregoing factors could have a material adverse effect on our ability to expand internationally, which could materially and adversely affect our results of operations. Our success internationally depends, in part, on our ability to anticipate these risks and manage the difficulties they present.
In the past, we acquired several international businesses. As a result of these acquisitions, we are more deeply involved with international markets that are less familiar. We cannot assure that we will successfully compete in these international markets. We anticipate that our future results of operations may be subject to quarterly variations as a result, in part, of the seasonal revenue fluctuations in Europe, Asia and Latin America, principally consisting of slower business conditions in the first and third quarters of the year.
Further, we conduct virtually all of our business in US Dollars, European Euros, Japanese Yen, United Kingdom Pounds Sterling, Singapore and Australian Dollars, Argentinean, Chilean and Mexican Pesos, Brazilian Real, and Chinese Renminbi. Changes in the value of these currencies relative to the dollar could negatively impact our financial condition. We do not engage in hedging transactions, and an unfavorable foreign exchange rate at the time of conversion to US Dollars could adversely affect the US Dollar equivalent value of the foreign denominated cash.
In trying to increase our sales in certain vertical markets, we may face difficulties and risks unique to those markets that may have a detrimental impact on our business or operating results.
We have made significant development, marketing and sales efforts to meet the needs of customers in particular industries or market segments, such as life sciences, government and facilities management. In the event our efforts do not progress as we intend or our solutions or technologies are not successful in these discrete vertical markets, we may increase our rate of spending above the level we have in the past or have previously projected. Such increased level of effort and expenditures could have a material adverse effect on our financial condition or results of operations.
We continue to expand our customer base to include more entities and agencies within the federal, state, local and foreign government sector. Developing new business in the public sector often requires companies to develop relationships with different agencies or entities, as well as with other government contractors. If we are unable to develop or sustain these relationships, we may be unable to procure new contracts within the timeframe we expect, and our business and financial results may be adversely affected. Contracting with government entities often requires businesses to participate in a highly competitive bidding process to obtain new contracts. We may be unable to bid competitively if our software or services are improperly priced, or if we are incapable of providing our software and services at a competitive price. The bidding process is an expensive and time-consuming endeavor that may result in a financial loss for us if we fail to win a contract on which we submitted a bid. Further, some government agencies may also require some or all of our personnel to obtain a security clearance or may require us to add features or functionality to our software. If our key personnel are unable to obtain or retain this clearance or if we cannot or do not provide required features or functionality, we may be unsuccessful in our bid for some government contracts.
Contracts with governmental entities also frequently include provisions not found in the private sector and are often governed by laws and regulations that do not affect private contracts. These differences may permit the public sector customer to take actions not available to customers in the private sector. This may include termination of current contracts for convenience or due to a default, or recourse to bond or other security we have provided in connection with the bid or contract. Our federal government can also suspend operations if Congress does not allocate sufficient funds, and the government may allow our competitors to protest our successful bids. If any of these events occur, they may negatively affect our business and financial results. If we are unable to keep pace with regulatory changes applicable to our applications, it could impact the results of our operations. The federal government may terminate its contractual relationships with us if we come under foreign government control or influence, may require that we disclose our pricing data during the course of negotiations, and may require us to prevent access to classified data. If the federal government requires us to meet any of these demands, it could result in increased costs or an inability to take advantage of certain opportunities that may present themselves in the future. In addition, federal government agencies may audit our performance and our pricing, and review our compliance with rules and regulations. If they find that we have improperly allocated costs, they may require us to refund those costs or may refuse to pay us for outstanding balances related to the improper allocation. An unfavorable audit could result in a reduction of revenue, and may result in civil or criminal liability if the audit uncovers improper or illegal activities. This could harm our business, financial results and reputation.
Deterioration of economic and political conditions could adversely affect operations.
We have operational presence in the United States, as well as throughout Europe, Latin America, and the Pacific Rim, and we are subject to the economic and political uncertainties that may be associated with the threat of terrorism, generally, or with military action taken by the United States or its allies, in particular. These risks include:
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the possibility that our customers may cancel, defer or limit purchases as a result of such threat or the responses to it; and
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the possibility that air travel delays or cancellations and restrictions imposed by companies could adversely affect our licensing efforts or our services revenue, as they result in our inability to visit customer sites or customers’ inability to visit our offices.
Additionally, apart from the economy as a whole, declining economic conditions in particular industries or in the vertical markets to which we have focused our efforts may have a significant effect on our operating results. For example, the downward turn in the automotive industry has had a negative impact on the revenue produced from our Datastream 7i Buy operations. As the large auto makers cut back on production, their tier one suppliers also reduce purchasing, resulting in less indirect spending through our Datastream 7i Buy portal. A similar trend in the public sector, manufacturing, pharmaceutical or food production markets in which we have invested focus and capital would likely have a similar negative impact on our operating results.
Security risks and concerns may deter the use of the Internet for our applications.
A significant barrier to communications is the secure transmission of confidential information over public networks. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems or those of other web sites that protect proprietary information. If any well-publicized compromises of security were to occur, it could have the effect of substantially reducing the use of the Internet for our market. While we have taken precautionary measures to protect our facilities, an unauthorized person circumventing our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems or those of our customers or suppliers, which could disrupt Datastream 7i Buy or make it inaccessible to customers or suppliers. We may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by breaches. To the extent that our activities may involve the storage and transmission of proprietary information, such as credit card numbers, security breaches could expose us to a risk of loss or litigation and possible liability. Our security measures may be inadequate to prevent security breaches, and our business would be harmed if we do not prevent them.
Our common stock is not listed on any exchange or quoted on the Nasdaq National Market; therefore, a public market in our common stock may not be sustained, which may make it difficult for stockholders to sell shares of our common stock at or near ask prices or at all.
Our common stock is currently quoted on the Pink Sheets by eligible market makers in our common stock. Because there is no established public trading market for our common stock, it may be difficult for stockholders to either dispose of or obtain quotations as to the price of our common stock. In addition, we have no control over how actively market makers quote our common stock on the Pink Sheets, and we cannot assure investors that they will be able to liquidate their investment in us without considerable delay, if at all. We cannot assure stockholders that a broader or more active public trading market for our common stock will develop or be maintained, or that current trading levels on the Pink Sheets will be maintained. Failure to develop or maintain an active trading market could negatively affect the price of our common stock.
If we fail to maintain an effective system of disclosure controls and procedures and internal controls, we may not be able to accurately report our financial results on a timely basis. As a result, market makers in our common stock could be deterred from quoting our common stock on the Pink Sheets, current and potential stockholders could lose confidence in our financial reporting, and the trading price of our common stock could fall.
While our management concluded that our internal control over financial reporting was effective as of December 31, 2005, we cannot be certain that (1) we have effectively corrected all prior existing internal control deficiencies; (2) we will not identify one or more additional deficiencies or material weaknesses in our internal control over financial reporting during future fiscal years; or (3) we will implement and maintain effective internal controls over financial reporting in the future. Failure to maintain adequate controls of this type could adversely impact the accuracy and future timeliness of our financial reports filed pursuant to the Securities Exchange Act of 1934. If we cannot provide reliable and timely financial reports, our business and operating results could be harmed, investors and market makers in our common stock could lose confidence in our reported financial information, market makers in our common stock could be deterred from quoting our common stock on the Pink Sheets, and the trading price of our common stock could fall.
Compliance with new accounting, reporting and audit requirements may strain our limited administrative, financial and executive resources and affect our ability to attract and retain key personnel.
The corporate governance and reporting reforms contained in the Sarbanes-Oxley Act of 2002 and related regulatory constraints have dramatically increased our general and administrative expenses and may continue to do so. Increases of this magnitude can be more easily absorbed by companies that have greater financial and administrative resources than we do. The delays and expenses caused by our efforts to meet the new regulatory landscape contributed to our non-compliance with Nasdaq listing requirements. These added public company expenses may put us at a competitive disadvantage with larger companies better suited to absorb such expenses and with smaller, private companies unencumbered by these public company expenses.
We have historically used stock options and other long-term incentives as a key component of our employee compensation structure. We believe that with stock options, we have been able to align our employees’ interests with those of our stockholders and have provided employees with incentives both to maximize long-term stockholder value and to continue employment with us. With the FASB’s issuance of SFAS No. 123 (revised 2004), Share-Based Payments or SFAS 123(R) in December 2004 (See Note 1 to the Consolidated Financial Statements in this Annual Report), beginning in 2006, we are required to recognize compensation costs related to new and unvested share-based payment transactions as current expenses in our financial statements. This regulation could have a negative impact on our earnings. To the extent that SFAS 123(R) make it more difficult or expensive to grant stock options to our employees under our stock option plans, this new regulation will increase compensation costs, decrease our operating margins, change our equity compensation strategy, or complicate our ability to motivate and retain key employees, each of which could adversely affect our results of operations.
Completion of the merger with Infor is subject to various conditions and the merger may not occur even if we do obtain stockholder approval.
Completion of the merger is subject to various risks, including but not limited to those set forth below. The list is not intended to be an exhaustive list of the risks related to the merger and should be read in conjunction with the other information in our definitive proxy statement dated February 21, 2006.
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Stockholders holding at least a majority of the shares of our outstanding common stock entitled to vote might not vote to adopt the merger agreement;
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The right of the Infor parties to terminate the merger agreement if we experience an event that has, or is reasonably likely to have, a material adverse effect on us, as that term is defined in the merger agreement;
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Our failure or the failure of the Infor parties to obtain the required regulatory approvals regarding the merger;
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The enactment of a law or issuance of an order by a governmental authority prohibiting the merger or other transactions contemplated by the merger agreement;
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The pendency of a nonfrivolous suit or action, or any governmental proceeding, challenging or seeking to restrain the merger or the ability of the Infor parties to acquire our common stock;
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Holders of more than 10% of our outstanding common stock might elect to exercise their appraisal rights under Delaware law;
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The failure of any other conditions in the merger agreement; and
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The failure of the Infor parties to obtain the financing contemplated by their debt and equity commitment letters entered into at the time of execution of the merger agreement.
As a result of these risks, there can be no assurance that the merger will be completed even if we obtain stockholder approval. If our stockholders do not adopt the merger agreement or if the merger is not completed for any other reason, we expect that our current management, under the direction of our current board of directors, will continue to manage Datastream.
Failure to complete the merger could negatively impact the market price of our common stock and operation of our business.
If the merger with Infor is not completed for any reason, we will be subject to a number of material risks, including:
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the market price of our common stock will likely decline to the extent that the current market price of our stock reflects a market assumption that the merger will be completed;
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costs related to the merger, such as legal fees and certain investment banking fees, and, in specified circumstances, termination fees and expense reimbursements, must be paid even if the merger is not completed; and
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the diversion of management’s attention from our day-to-day business and the unavoidable disruption to our employees and our relationships with distributors, customers and suppliers, during the period before completion of the merger, may make it difficult for us to regain our financial and market position if the merger does not occur.
If our merger agreement is terminated and our board of directors seeks another merger or business combination, then our stockholders cannot be certain that we will be able to find an acquirer willing to pay an equivalent or better price than the price agreed to be paid under the merger agreement.
We must recruit and retain key employees in order to be successful, and we may lose key personnel as a result of uncertainties associated with the merger with Infor.
Our continued success depends on the services of several of our key executive, sales and marketing and technical employees. Our business generally requires a significant level of expertise to effectively develop and market our products and services. The loss of the services of these personnel, particularly those of Larry G. Blackwell, our founder, Chairman and Chief Executive Officer, or our inability to attract and retain other qualified management, sales and marketing and technical employees, could have a material adverse effect on our business and results of operations. We have at times experienced, and continue to experience, difficulty in recruiting qualified personnel. Recruiting qualified personnel is an intensely competitive and time-consuming process. Such competition has resulted in demands for increased compensation from qualified applicants. Due to such competition, we have experienced, and expect to continue to experience, turnover in personnel. If we are unable to offer competitive salaries and bonuses, our key technical, sales, professional and executive personnel may be unwilling to continue service for us, which could adversely affect our business, financial condition and results of operations.
If we lose any member of our executive management team and are unable to secure a suitable replacement, or they are unable to work together effectively, our business, financial condition, and results of operations could suffer. We do not maintain any key-man life insurance policy with respect to any member of our executive management team.
In addition, because of our pending merger with Infor, our current and prospective employees may be uncertain about their future roles and relationships with us following completion of the merger. This uncertainty may adversely affect our ability to attract and retain key management, sales, marketing and technical personnel.
If we fail to adequately protect our proprietary rights, it could harm our competitive position and decrease our revenues.
Our success and ability to compete is dependent in part on our proprietary technology. We rely on a combination of trade secret, copyright and trademark laws, software licenses, nondisclosure agreements and technical measures to establish and protect our proprietary technology. We generally enter into confidentiality and/or license agreements with our key employees, consultants, distributors and strategic affiliates as well as with our customers and potential customers seeking proprietary information. We also limit access to and distribution of our software, documentation and other proprietary information. We cannot assure you that the steps we have taken in this regard, however, will be adequate to deter misappropriation or independent third party development of our technology. Further, we cannot assure you that third parties will not assert infringement or misappropriation claims against us in the future with respect to our current or future products. Any such claims or litigation, even those without merit, could be time consuming, result in costly litigation, diversion of management’s attention and cause product shipment delays or require us to enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to us, if at all, which could have a material adverse effect on our business, financial condition and results of operations. Adverse determinations in such claims or litigation also could have a material adverse effect on our business, financial condition and results of operations. Litigation to defend and enforce our intellectual property rights could result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations, regardless of the final outcome of such litigation. We may be subject to additional risks as we enter into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of our rights may be ineffective in such countries, which could have a material adverse effect on our results of operations.
The merger agreement with the Infor parties, our certificate of incorporation, our bylaws and Delaware law may inhibit a change in control, which may not be in the best interests of our stockholders.
We have agreed to be acquired by Infor, subject to a number of conditions, including the approval of our stockholders. The merger agreement includes provisions that would make it more difficult for a competing party to acquire us. These provisions include our agreements not to solicit other offers and not to provide information to a potential bidder unless our board of directors determines that a superior proposal could be made by the person to whom we provide the information, as well as our agreement to pay a termination fee to Infor if we terminate the merger agreement and complete another transaction. In addition, our certificate of incorporation and bylaws may inhibit a change in control, even when a change in control may be in the interests of our stockholders. For example, our board of directors is empowered to issue preferred stock without stockholder action. The existence of this “blank-check” preferred stock could render more difficult or discourage an effort to obtain control of our company by means of a tender offer, merger, proxy contest or otherwise. Our certificate of incorporation also divides the board of directors into three classes, as nearly equal in size as possible, with staggered three-year terms. The classification of the board of directors could make it more difficult for a third party to acquire control of us because only one-third of the board is up for election each year. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions may also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a price above the then-current market price for our common stock. We are also subject to provisions of the Delaware General Corporation Law that relate to business combinations with interested stockholders, which can serve to inhibit a takeover.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2.
ITEM 2. Properties.
We conduct our principal product development, support, sales, marketing, and general and administrative operations out of a headquarters building owned by the Company and located in Greenville, South Carolina. We also lease office space in Norcross, Georgia for product development purposes. Additionally, we lease office space for sales and administrative purposes in approximately 15 locations in Europe, Asia Pacific and Latin America, and we own an office building in Dessau, Germany.
ITEM 3.
ITEM 3. Legal Proceedings.
We are occasionally involved in legal proceedings or other claims arising out of our operations in the normal course of business. The ultimate liability on such proceedings or other claims in excess of applicable insurance is not expected, individually or in the aggregate, to have a material adverse effect on our operations, financial condition or cash flows.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
PART II.
ITEM 5.
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock, $.01 par value per share (the “Common Stock”), was traded on the Nasdaq National Market under the symbol DSTME through July 6, 2005. Effective with the opening of business on July 7, 2005, our Common Stock was delisted from the Nasdaq National Market, and there is currently no established public trading market for our Common Stock. Our Common Stock is currently quoted on the Pink Sheets under the symbol “DSTM.PK”. The Pink Sheets is a centralized quotation service that collects and publishes market maker quotes for over-the-counter securities in real time. Over-the-counter market quotations, like those on the Pink Sheets, reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The chart below sets forth the high and low closing prices for each quarter of our last two completed fiscal years.
We had approximately 183 stockholders of record as of February 28, 2006.
We have never declared or paid any cash dividends on our Common Stock. However, we declared a two-for-one stock split, effected in the form of a one-for-one share dividend, effective September 12, 1995. We declared a second two-for-one stock split, effected in the form of a one-for-one share dividend, effective January 30, 1998. We do not anticipate paying any cash dividends in the foreseeable future.
ITEM 6.
ITEM 6. Selected Financial Data.
(1) See Note 11 to the Consolidated Financial Statements for discussion of calculation of basic and diluted weighted average common shares outstanding.
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in “Item 1A. Risk Factors.” and elsewhere in this report.
We provide asset performance management software and services to enterprises worldwide, including more than 60 percent of the Fortune 500. Through asset performance management, customers can maintain, manage, and improve the performance of their capital asset infrastructure, such as manufacturing equipment, fleet, and facilities.
Overview
We have been profitable since 2002 as a result of the strength of our flagship product and cost reduction initiatives, and we expect to continue to be profitable in 2006. Growth in profits for a software company is strongly tied to license revenues. License revenues typically result in subsequent service and support revenues. Growth in profits is also strongly tied to product quality, functionality and performance, and we can achieve this only by continuing to invest in our product offering.
When we sell to a customer, we typically commit to an arrangement consisting of application licenses, services and support. We will also sell services to host the licensed application. We have seen an upward trend in average deal size in the past several years, as we have migrated to selling larger enterprise deals. An increase in average deal size typically increases the length of an average sales cycle. Potential customers spend significant time and resources determining which software to purchase. This requires us to spend substantial time, effort and money educating and convincing prospective customers to purchase our software. A customer’s decision to license our software generally involves evaluation by a number of the customer’s personnel in various functional and geographic areas. Due to these and other factors, our sales cycle may continue to be extended. Since the sales cycle can be unpredictable and can be affected by events beyond our control, we cannot always forecast the timing or amount of specific sales, and sales may vary from quarter to quarter. We expect to continue to experience a decline in the large number of relatively small orders that have been a staple of our marketing and sales efforts in the past.
We typically see weaker service revenues in the third and fourth quarters of our calendar year due to lower utilization from Europe in the summer and fewer available billable days in November and December due to holidays and customer site shutdowns. The first and third quarters have traditionally been weaker for license sales, but this has become harder to predict given larger deal sizes and less predictable sales cycles associated with Datastream 7i. This seasonality may cause our results to vary from quarter to quarter.
International revenues, which includes Canadian revenues, were approximately $39 million, $40 million, and $36 million in 2005, 2004 and 2003, respectively. These revenues represent approximately 38%, 42%, and 40% of total revenues in 2005, 2004, and 2003, respectively.
Recent Developments
Merger with Infor
On January 4, 2006, we entered into an Agreement and Plan of Merger, or the merger agreement, with wholly owned subsidiaries of Infor Global Solutions AG, or Infor. We refer to these subsidiaries of Infor as the Infor subsidiaries. The merger agreement provides that, upon the terms and subject to the conditions set forth therein:
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An indirect wholly owned subsidiary of Infor will merge with and into us, and we will become an indirect wholly owned subsidiary of Infor; and
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Upon consummation of the merger, each share of our common stock issued and outstanding immediately prior to the effective time of the merger (as defined in the merger agreement), other than shares held by stockholders who have properly perfected their appraisal rights and by us or Infor’s subsidiaries, will be converted into the right to receive $10.26 in cash, without interest or dividends and less any applicable withholding taxes.
Furthermore, at the effective time of the merger, each holder of an outstanding stock option to acquire our common stock will, in settlement thereof, receive for each share subject to each such option that is vested and exercisable as of the effective time, an amount in cash equal to the difference between $10.26 and the per share exercise price of such option, to the extent such difference is a positive number and subject to any applicable withholding taxes. Upon receipt of this consideration, each such option will be canceled.
After the merger, our common stock will cease to be quoted on the Pink Sheets Electronic Quotation System, and there will be no public market for our common stock. Following the merger, we also expect to deregister our shares of common stock with the SEC and cease to be a public reporting company. Accordingly, we will no longer be required to file periodic and current reports with the SEC.
The consummation of the merger is subject to certain conditions contained in the merger agreement that if not waived, must have occurred or be true, including the adoption of the merger agreement by our stockholders. If those conditions have not occurred or are not true, either we or the Infor subsidiaries would not be obligated to effect the merger. The merger agreement contains certain termination rights for both us and the Infor subsidiaries, and further provides that, upon termination of the merger agreement under specified circumstances, either party may be required to pay the other party a termination fee of up to $6,500,000. The merger agreement also provides that in certain instances where the termination fee is not owed, we may be required to reimburse an Infor subsidiary for up to $3,000,000 of its transaction related expenses. The merger is expected to occur within five business days after all conditions specified in the merger agreement have been satisfied or waived, or April 14, 2006, whichever is later.
In connection with the execution of the merger agreement, certain of our executive officers entered into voting agreements on January 4, 2006, with the Infor subsidiaries, pursuant to which such executive officers agreed to vote their respective shares of our common stock in favor of the adoption of the merger agreement and, in the event they do not act in accordance with their obligations thereunder, granted the Infor subsidiaries a proxy to vote their shares at any stockholder meeting convened to consider the merger agreement.
The foregoing descriptions of the merger and the merger agreement do not purport to be complete and are qualified in their entirety by reference to the merger agreement, which was filed as Exhibit 2.1 to our Current Report on Form 8-K filed January 5, 2006 with the SEC.
Additional Information and Where to Find It
In connection with the proposed merger, we filed a definitive proxy statement with the SEC on February 21, 2006, which was subsequently mailed to our stockholders on February 22, 2006 in connection with the special meeting of stockholders scheduled for March 28, 2006. Stockholders are urged to carefully read the definitive proxy statement, including amendments and supplements thereto, as it will contain important information that stockholders should consider before making a decision about the merger agreement. The definitive proxy statement and other documents that we file with the SEC are available free of charge at the SEC’s website, www.sec.gov, or by directing a request to Datastream Systems, Inc., 50 Datastream Plaza, Greenville, South Carolina 29605, Attention: Investor Relations.
Datastream and our directors and executive officers may be deemed to be participants in the solicitation of proxies from stockholders in connection with the proposed acquisition. Information about our directors and executive officers and their ownership of our stock is set forth in this Annual Report on Form 10-K under “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Investors may obtain additional information regarding the interests of such participants in the acquisition by reading the definitive proxy statement.
Accelerated Vesting of Stock Options
On December 30, 2005, the Compensation Committee of the Board of Directors approved the accelerated vesting of unvested stock options held by our active employees. Outstanding stock options to acquire our common stock exist under a number of our stock option plans. As a result, a total of 1,081,698 options to purchase our common stock, which otherwise would have vested from time to time at future dates, became fully vested and immediately exercisable as of December 30, 2005. The accelerated options have exercise prices ranging from $5.97 to $10.50 and a weighted average exercise price of $7.28. The total number of accelerated options includes 509,999 options held by our executive officers, with exercise prices ranging from $5.97 to $10.50 and a weighted average exercise price of $7.18.
The primary purpose of accelerating the vesting of these options was to eliminate the recognition of non-cash compensation expense associated with these options that we would have been required to recognize in our future consolidated statements of income upon our adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123R. SFAS 123R will generally require that the fair value of all share-based payments to employees, including stock option awards, be recognized as compensation expense in our statements of income. We were required to adopt the expense
recognition provisions of SFAS 123R effective January 1, 2006. In order to limit the personal benefit to the option holders of fully vesting their stock options, the Compensation Committee of the Board of Directors imposed restrictions on the sale or transfer of the shares received by an option holder upon the exercise of an accelerated option until the date on which such options would have vested and become exercisable, without giving effect to such acceleration.
We recorded a non-cash compensation charge of approximately $47,000 (pre-tax) as a result of the accelerated vesting related to the intrinsic value, on the acceleration date, of those options that would have been forfeited had the vesting not been accelerated. In determining the forfeiture rates, we reviewed our prior turnover experience of employees who held vested and unvested options at the time of their termination. The compensation charge will be adjusted in future periods as actual forfeitures are realized.
Change in Auditors
On September 29, 2005, we dismissed KPMG LLP as our independent registered public accounting firm. The Audit Committee of our Board of Directors made the decision to dismiss KPMG and that decision was approved, ratified and adopted by our Board of Directors. On October 3, 2005, we engaged BDO Seidman, LLP, or BDO, as our new independent registered public accounting firm for the fiscal year ending December 31, 2005, and to perform procedures related to the financial statements included in our quarterly reports on Form 10-Q, beginning with the quarter ended March 31, 2005. The Audit Committee made the decision to engage BDO and that decision was approved, adopted and ratified by our Board of Directors. See “Item 4.01 Changes in Registrant’s Certifying Accountant” in our Current Report on Form 8-K/A filed with the SEC on October 6, 2005.
Delisting
As previously disclosed in our press release and filings with the SEC, the Nasdaq Listing and Hearing Review Council, or the Listing Council, reversed the prior decision of the Nasdaq Listing Qualifications Panel, or the Panel, to grant us additional time to file our Form 10-K for the fiscal year ended December 31, 2004 and Form 10-Q for the quarter ended March 31, 2005. In reversing the Panel’s prior decision, the Listing Council instructed the Panel to delist our common stock. Effective with the open of business on July 7, 2005, our common stock was delisted from the Nasdaq National Market, and there is no longer an established public trading market for our common stock. Our common stock is currently quoted on the Pink Sheets under the symbol “DSTM.PK”. The Pink Sheets is a centralized quotation service that collects and publishes market maker quotes for over-the-counter securities in real time.
Restatement
In the first quarter of 2005, we completed a restatement of our financial statements for the fiscal years ended December 31, 2001, 2002 and 2003 and for the quarters ended March 31, and June 30, 2004 and filed an amendment to our Form 10-K for the 2003 fiscal year and to our Forms 10-Q for the first two quarters of 2004 to reflect those restatements. The net effect of the adjustments related to the restatements was an increase in earnings of $0.06 per share or approximately $1,081,000 for the fiscal year ended 2001 and a decrease to earnings per share of $0.01 or approximately $376,000 in 2003. There was no impact to earnings per share for the approximate adjustment of $23,000 for the year ended December 31, 2002.
Results of Operations
The following paragraphs set forth our statement of operations data for the three years ended December 31, 2005, 2004, and 2003, 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.
2005 Compared to 2004 Compared to 2003
(in thousands, except percentage data)
Revenues:
Product Revenue
Product revenues consist of all software product sales including Datastream 7i, and legacy products such as MP2. We have one reportable segment and sell products out of fourteen different sales offices worldwide.
Product revenue increased in 2005 as compared to 2004 as the result of strong product sales in the United States and Canada somewhat offset by a decline in international software revenue. An increase in 7i product revenues by approximately $3.0 million more than offset a decline in legacy product revenues of approximately $0.5 million. Software revenue in the United States and Canada increased by approximately $4.2 million, or 27%, to $19.5 million in 2005 versus $15.3 million in 2004. This increase in the United States and Canada resulted from the execution of large dollar software product contracts in 2005. International product revenue decreased to approximately $9.3 million in 2005 from approximately $11.1 million in 2004 primarily as the result of fewer large dollar contracts in Europe. We are unable to accurately estimate whether these trends will continue.
The increase in 2004 product revenue compared to 2003 product revenue was primarily the result of higher European sales. Europe had three large dollar contracts in 2004 that accounted for the increase over 2003 software revenue. The United States and Canada, Asia and Latin America had 2004 product revenue approximately equal to or slightly higher than 2003 product revenue. In terms of products, an increase in 7i product revenues by approximately $2.3 million more than offset a decline in legacy product revenues of approximately $1.0 million.
Professional Services and Support Revenue
Professional services revenue includes consulting fees for product implementation and training. Support revenue includes fees charged to customers for technical, customer and application hosting services associated with the support of our products.
Professional services and support revenues increased 7.0% to $72.7 million in 2005 from $68.0 million in the prior year. Services and support revenues, which are generally delivered after a license is sold, increased approximately $4.3 million in the United States and Canada and correlated to higher software product revenues in the United States and Canada in 2005 as compared to 2004. International services and support revenues in 2005 were somewhat higher than 2004 services and support revenue as increases in Asia and Latin America were offset by a decline in Europe. We are unable to accurately estimate whether these trends will continue.
Professional services and support revenues increased 3.7% to $68.0 million in 2004 from $65.6 million in the prior year. Services and support revenues, which are generally delivered after a license is sold, increased approximately $2.8 million in Europe and correlated to higher software product revenues in Europe in 2004 versus 2003. The United States and Canada, Asia and Latin America had combined services and support revenue slightly lower in 2004 as compared to 2003.
Cost of Revenues:
N/M - Not meaningful
Cost of Product Revenues
Costs of product revenues include the cost to purchase and duplicate software diskettes, the cost to print training manuals, costs associated with third party licensing or royalties, products or commissions, shipping charges and miscellaneous inventory charges.
Cost of Professional Services and Support Revenues
The cost of professional services includes employee wages, service contractor fees, travel expenses and other costs incurred to provide consulting services, training to customers, and, increasingly, hosting costs, all of which are generally delivered after a license is sold. The cost of support revenues consists of employee-related costs to provide on-going support.
The cost of professional services increased in 2005 as compared to 2004 and was primarily the result of higher service revenue costs in the United States and Canada commensurate with an increase in services revenues. We are unable to accurately estimate whether these trends will continue. The cost of professional services was approximately the same in 2004 as compared to 2003.
Support costs change as a function of support revenues. Support costs were approximately flat as a percentage of support revenues over the three-year period ended December 31, 2005.
Operating Expenses:
Sales and Marketing
Sales and marketing expenses include salary and related expenses, printed advertising, web advertising, conference and trade shows, direct mail marketing, and publicity expense.
Our sales and marketing expenses increased from 2004 to 2005 principally due to higher commissions and sales bonuses related to increased sales order volumes in 2005 as compared to 2004. Sales and marketing expenses declined in 2004 as compared to 2003 primarily due to a decrease in personnel and employee related expenses. We are unable to accurately estimate whether these trends will continue.
Product Development
Product development costs consist of employee related expenses, contract labor expenses, and the allocation of general expenses related to the development of our products.
The decrease in 2005 as compared to 2004 resulted from a slight reduction in independent contractors engaged by the Company. The increase in 2004 as compared to 2003 was the result of continued investments in Datastream 7i functionality. We are unable to accurately estimate whether these trends will continue.
General and Administrative
(1) During the fourth quarter of 2005, we announced an initiative to improve profitability in Europe by changing the staffing structure. We did not have comparable expenses in prior periods.
N/M - Not meaningful
N/A - Not applicable
General and administrative expenses increased to $17.1 million in 2005 from $15.1 million in 2004. The increase in 2005 was due primarily to the following non recurring expenses:
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We incurred approximately $1.0 million in expenses in connection with the process surrounding a potential business combination transaction that led to the merger agreement with Infor.
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Restatements to the consolidated financial statements and efforts to regain financial reporting compliance resulted in approximately $0.5 million in expenses in 2005 associated with accounting and related fees. Direct costs for compliance related to the Sarbanes-Oxley Act of 2002 during 2005 totaled $1.0 million, an increase of $0.6 million from 2004, and we believe indirect costs, associated with management and personnel time were similarly incurred as these activities significantly impacted almost every function within the Company.
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We reorganized our offices in Europe and in Latin America and the non-recurring costs associated with those activities were approximately $1.3 million of which approximately $0.8 million were general and administrative expenses.
General and administrative expenses include the cost of our finance, human resources and information services. General and administrative expenses increased 35.6% to $15.1 million in 2004 from $11.1 million in 2003. The increase in 2004 was primarily the result of the following:
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Our restatement of our consolidated financial statements resulted in approximately $1.1 million in increased accounting and professional expenses.
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Start up costs for compliance related to the Sarbanes-Oxley Act of 2002 totaled $0.4 million during 2004, and we believe indirect costs associated with management and personnel time were similarly incurred, as these activities significantly impacted almost every function within the Company.
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Taxes and related penalties increased approximately $0.3 million in 2004 for non-compliance issues in China. The Chinese authorities renewed our license in June of 2005, and we did not incur and we do not anticipate any additional taxes or penalties related to this matter.
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Other significant costs include an estimated $0.6 million incurred in remeasuring currencies other than the U.S. dollar for reporting purposes and bad debt expense increased $0.5 million due to customer accounts deemed uncollectible during 2004.
We believe that costs associated with accounting matters will decrease in 2006.
Other Income/Expense
Other income (expense) includes costs incurred that are not related to our normal course of business operations. Typically, this is interest income (expense) and gains (losses) on assets and liabilities not used in the normal course of business.
In 2005, other income (expense) includes an impairment charge of approximately $0.5 million related to an investment. (See “Liquidity and Capital Resources” and Note 2 to the Consolidated Financial Statements in this Annual Report.) The loss in 2003 was the result of a write-down of a long-term investment of approximately $1.5 million for this same investment The income in 2004 primarily consisted of interest income.
Income Taxes
Our effective income tax rate was 34.4% in 2005, 36.7% in 2004, and 34.8% in 2003. Income tax expense increased in each year primarily because pre-tax income rose in each year. See Note 6 to the Consolidated Financial Statements in this Annual Report for the reconciliation from the federal income tax rate to the actual tax expense.
Quarterly Results
The following table presents certain unaudited quarterly financial information for each of the eight quarters through the quarter ended December 31, 2005. In the opinion of management, this information has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this Annual Report and all necessary adjustments have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with our audited consolidated financial statements and notes thereto. Our 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.
Liquidity and Capital Resources
We fund our operating activities primarily with cash generated from operations. Our primary uses of cash are employee compensation and related expenses, marketing expenditures, overhead items such as rent and utilities, and capital expenditures such as computers, servers, network systems and building improvements. Our primary sources of cash are collections of license, service and support revenues. We ended 2005 with $58.1 million in cash and cash equivalents and short-term investments, an $8.1 million increase from $50.0 million in 2004. We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Cash provided by operations was approximately $10.6 million for the year ended December 31, 2005. We generated positive cash from operations primarily through increased profits and expenses that did not require cash outlays, such as depreciation. In 2005, we generated approximately $15.0 million in cash from investing activities primarily related to proceeds from the sale of short-term investments. Cash generated in financing activities was approximately $0.6 million from proceeds from the exercise of stock options and stock issuances under the employee purchase plan.
Cash provided by operations was approximately $10.2 million for the year ended December 31, 2004. We generated positive cash from operations primarily through increased profits and expenses that did not require cash outlays, such as depreciation, and through customer prepayments for support and hosting services. In 2004, we used approximately $10.3 million in cash in investing activities primarily related to the purchases of short-term investments as well as building improvements and purchases of technical assets such as computers, servers and network systems. Cash used in financing activities was approximately $2.7 million as $3.5 million in purchases of treasury stock through our share repurchase plan was somewhat offset by proceeds from the exercise of stock options and stock issuances under the employee purchase plan.
Cash provided by operations was approximately $12.6 million for the year ended December 31, 2003. We generated positive cash from operations primarily through increased profits and expenses recognized that did not require cash outlays, such as depreciation, collections of accounts receivable from earned and unearned revenue and the invoicing and collection of unbilled revenues. Increases in cash were offset by various timing differences due to the payment of liabilities expensed in 2002 and tax payments of approximately $1.2 million. The increased collections of accounts receivable in 2003 compared to 2002 was due to improved process management and better customer satisfaction. Unbilled revenue decreased upon the completion of several larger service projects. In 2003, we used approximately $4.6 million in investing activities primarily related to building improvements and purchases of technical assets such as computers, servers and network systems. Cash provided from financing activities was approximately $0.8 million from the receipt of approximately $2.2 million in proceeds from the exercise of stock options and from stock issuances under employee purchase plan, offset by $1.4 million in purchases of treasury stock through our share repurchase plans.
We believe that our capital expenditures for property and equipment in 2006 will be approximately 3% of total revenues. However, the actual capital expenditures for property and equipment in 2006 may change as business conditions fluctuate. Our research and development costs are likely to be higher in 2006 but may change as business conditions fluctuate.
Our single cost method investment consisted of an investment in a privately owned company that provides business-to-business capital asset auctions and valuation services. In 2003, the investment was evaluated for impairment based on a notice received that it intended to obtain additional financing. We concluded that the financing would be dilutive to ownership at an implied valuation below carrying value. Accordingly, we decreased the long-term investment to its estimated fair market value from $2.0 million to $0.5 million and recorded a charge of approximately $1.5 million through other income (expense), net. Based on the degree of ownership dilution and future prospects, we considered the impairment to be other than temporary. During 2004, we made an additional investment of approximately $35,000 in order to avoid material dilution to our ownership position.
The investment was evaluated for impairment at December 31, 2005 in accordance with our policy of annual review. We concluded that the investment lacked liquidity and would require additional financing that would fully dilute our ownership position. Accordingly, we recorded a charge of approximately $0.5 million through other income (expense), net. Based on the change in management, poor operating results and lackluster future prospects, we considered the impairment to be other than temporary. See Note 2 to the Consolidated Financial Statements in this Annual Report.
On August 15, 2003, we announced that our Board of Directors had authorized a plan to repurchase up to 1,000,000 shares of our outstanding common stock. Subject to availability, the repurchases were made from time to time in the open market or otherwise at prices that we deemed appropriate. The repurchased shares are classified as treasury shares on the balance sheet and are reported at cost. The shares may be used, when needed, for general corporate purposes, including the grant of stock options. We repurchased 482,500 shares for approximately $3,493,000 during the first three quarters of 2004 and no shares during the fourth quarter of 2004. No shares were purchased during 2005. This plan expired August 15, 2005. The aggregate number of shares repurchased under all historical repurchase plans was 1,729,200 as of December 31, 2005.
We maintain a Singapore line of credit for SGD 315,000 (approximately $189,000), which is secured by fixed deposits bearing an average rate of 2.5%. Performance bond obligations reduced the line of credit availability by approximately SGD 136,000 (approximately $80,000) as of December 31, 2005. The line of credit expires in August 2006.
As of December 31, 2005, we had no material commitments for debt or capital expenditures. We believe that our current cash balances and cash flow from operations will be sufficient to meet working capital and capital expenditure needs for at least the next 12 months.
Off-Balance Sheet Arrangements
As of December 31, 2005, we did not have any off-balance sheet arrangements as defined by Item 303(a)(4) of the SEC’s Regulation S-K.
Aggregate Contractual Obligations
Our commitments as of December 31, 2005 consist of obligations under our operating leases, purchase obligations, and the Singapore line of credit.
The following table summarizes our contractual commitments as of December 31, 2005:
Indemnification Obligations
We account for guarantees in accordance with Financial Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Our sales agreements with customers generally contain infringement indemnity provisions. Under these agreements, we agree to indemnify, defend and hold harmless the customer in connection with patent, copyright or trade secret infringement claims made by third parties with respect to the customer’s authorized use of the our products and services. The indemnity provisions generally provide for our control of defense and settlement and cover costs and damages finally awarded against the customer, as well as our modification of the product so it is no longer infringing or, if it cannot be corrected, return of the product for a pro-rated refund. The sales agreements with customers sometimes also contain indemnity provisions for death, personal injury or property damage caused by our personnel or contractors in the course of performing services to customers. Under these agreements, we agree to indemnify, defend and hold harmless the customer in connection with death, personal injury and property damage claims made by third parties with respect to actions of our personnel or contractors. The indemnity provisions generally provide for our control of defense and settlement and cover costs and damages finally awarded against the customer. The indemnity obligations contained in sales agreements generally have a limited life and monetary award. We have not previously incurred costs to settle claims or pay awards under these indemnification obligations. We account for these indemnity obligations in accordance with SFAS No. 5, Accounting for Contingencies, and record a liability for these obligations when a loss is probable and reasonably estimable. We have not recorded any liabilities for these agreements as of December 31, 2004 or 2005.
We warrant to our customers that our software products will perform in all material respects in accordance with the standard published specifications in effect at the time of delivery of the licensed products to the customer generally for 90 days after delivery of the licensed products. Additionally, we warrant to our customers that services will be performed consistent with generally accepted industry standards or specific service levels through completion of the agreed upon services. If necessary, we will provide for the estimated cost of product and service warranties based on specific warranty claims and claim history. However, we have not incurred significant recurring expense under product or service warranties. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2004 or 2005.
Under our Bylaws, we indemnify our directors, officers and employees for certain events or occurrences while the director, officer or employee is, or was serving, at our request in such capacity. The indemnification applies to all pertinent events and occurrences to the extent and under the circumstances permitted under Delaware law. We have entered into indemnification agreements dated September 15, 2005 with each of the following directors, executive officers and key employees: Larry G. Blackwell, Richard T. Brock, Ira D. Cohen, Robert C. Davis, James C. Ryan, Jr., James R. Talton, Jr., C. Alex Estevez, Javier Buzzalino, John M. Sterling III, Bradley T. Stevens, J. Patrick Ovington, and Lora Ramsey (each an “Indemnitee”). Each indemnification agreement generally requires us to indemnify each Indemnitee, to the fullest extent permitted by the laws of the State of Delaware, against any claim, action, or proceeding, and against any and all expenses, damages, liabilities, judgments, and settlements, by reason of the Indemnitee’s status as our current or former director, officer, employee or agent. In addition, the indemnification agreements provide that we advance the expenses incurred by the Indemnitee, upon written request by the Indemnitee. We may also participate in the defense, or lead the defense of any indemnifiable claim, with counsel reasonably satisfactory to the Indemnitee. In general, if an Indemnitee is successful in defense of an indemnifiable claim, we are obliged to indemnify the Indemnitee. Otherwise, the Indemnitee’s right to indemnification would be made by disinterested directors or independent legal counsel, as applicable. The agreements provide that we may overcome the presumption that an Indemnitee is entitled to indemnification by clear and convincing evidence. In addition, under the agreements, we are required to continue directors’ and officers’ liability insurance coverage for an Indemnitee for five years after the Indemnitee ceases to be a director, officer or employee. The maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited. We have, however, director and officer insurance coverage that limits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification obligations in excess of applicable insurance coverage is minimal.
We agreed to indemnify and hold KPMG LLP (“KPMG”) harmless against and from any and all legal costs and expenses incurred by KPMG in successful defense of any legal action or proceeding that arises as a result of KPMG’s consent to the inclusion of its audit report on the Company’s past financial statements included in this annual report.
Critical Accounting Estimates and Policies
In the preparation of our financial statements we make estimates and assumptions that can significantly affect the reported amounts of net income and the value of certain assets and liabilities. Our critical accounting estimates are those that are material due to the level of subjectivity and judgment necessary to account for matters that are either highly uncertain or highly susceptible to change and have a material effect on our financial condition or operating performance. We believe critical accounting estimates related to revenue recognition and income taxes encompass critical judgments and our accounting policies provide a basis upon which management considers significant judgments and uncertainties; however, each of these judgments and estimates may potentially result in materially different results under different assumptions and conditions. For a discussion on the application of these and other accounting policies, see Note 1 to the Consolidated Financial Statements in this Annual Report.
Revenue Recognition
We follow guidance of AICPA Statement of Position (“SOP”) 97-2, Software Revenue Recognition, to account for our software license arrangements, or SOP 97-2. The majority of our software license arrangements include additional elements such as professional services, post contract support and/or hosting services and therefore, are considered multiple element arrangements. In addition, arrangements entered into with the same customer within a close proximity of time (usually within three months) are evaluated together to determine if they collectively are a multiple element arrangement.
We account for multiple element arrangements by allocating the total contract fee to the various elements based on vendor-specific objective evidence of fair value (“VSOE”) of each element of the arrangement with the exception of the license element. We account for the license element according to the residual method provided by AICPA SOP 98-9 Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions (“SOP 98-9”). VSOE is determined for all undelivered elements, including services and post contract support and hosting. If any undelivered element does not have VSOE then all revenue from the arrangement is deferred until sufficient evidence exists or until all elements of the arrangement have been delivered.
Product Revenues - We recognize product revenues when a non-cancelable license agreement has been signed, the product has been delivered, the fees are fixed or determinable, collectibility is probable and VSOE exists for all undelivered elements in an arrangement. Fees are generally considered fixed or determinable upon receipt of a signed license agreement. Management sets payment terms depending on market and customer specific conditions. If payment terms on license fees extend beyond a period of time that is out of our historical collection period, then revenue is recognized as payments are due. Our products are off-the-shelf products because they can be used by our customers with little or no customization.
Professional Services - Our professional service offerings are primarily related to providing installation, implementation, integration, training and project management services. These services are sold principally on a time and materials basis or in limited cases at a fixed price. Time and material projects are distinguished from fixed price agreements in that the price of the services is quoted based on days incurred on the project or some other measure of time such as hours, weeks or months. A fixed price service contract is defined as any contract entered into for a pre-determined total price regardless of the number of days actually needed to complete the project. Time and material service revenue is recognized as the services are performed. Fixed price services are recognized based on the proportional performance method. The measure of performance is based on the relationship between the hours incurred to date versus the total estimated hours to complete (an input method). The resulting percentage complete is used to determine the percentage of revenue of the contract to be recognized. We do not use the output method because it is difficult to establish and reasonably estimate outputs. We believe that the input method is better in our case because we have a history of accurate estimates, we update estimates frequently (at least quarterly), we regularly monitor and recognize variances, and we have the ability to track costs. Losses on fixed price contracts are recognized during the period in which the loss first becomes evident. Contract losses are determined to be the amount by which the estimated total costs of the contract exceed the total fixed price of the contract.
Our service elements are not essential to the functionality of our software and are accounted for separately as evidenced by the following:
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Services provided together with our products do not include significant customizations to the features or functionality of the software.
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Complex interfaces are not necessary for the software to function in the customer’s environment.
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The timing of the payment for the software does not coincide with the performance of the services.
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Customer payment for the license is not dependent upon milestones or customer acceptance.
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These services are available from other vendors.
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These services do not carry significant degrees of risk or unique acceptance criteria.
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We are experienced providers of the services.
We have not historically entered into multiple element arrangements in which the services were considered essential to the functionality of the software.
Support and Hosting Revenues - We recognize support revenues, which consist of fees for ongoing support and product updates, ratably over the term of the contract support period, typically one year. The amount of support revenue invoiced but not yet recognized is recorded as unearned revenue in the accompanying consolidated balance sheets.
Certain of our customers purchase our hosting services. A customer must generally purchase a perpetual license for our product before a customer can utilize our hosting services. Our hosted customers with perpetual licenses have the contractual right to take possession of the software at any time during the hosted period and either host the product internally or contract with a third party vendor. The customer has the right to choose not to renew their hosting arrangement with us upon its expiration and deploy the software internally or contract with another party unrelated to us to host the software. For the vast majority of our hosted products, the customer could self-host and any penalties to do so are not material as defined in EITF 00-03, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware, and the arrangement is accounted for under SOP 97-2. We account for the license element according to the residual method provided by SOP 98-9 upon delivery of the license element to the customer. We recognize the portion of the arrangement fee allocated to the hosting element ratably over the term of the arrangement.
In certain limited instances, the hosted customer may incur significant penalties upon electing to terminate our hosting services. In those instances, we recognize all revenues related to the sale over the period of the expected life of the product since the customer has paid a nonrefundable upfront fee (software license).
Reseller Arrangements - The majority of our sales through resellers are generated from our European, Asian and Latin American operations. We recognize revenue from resellers on the accrual basis only if financial stability can be determined, payment is not contingent on end user payment to the reseller and other criteria of SOP 97-2 are met. If financial stability cannot be determined and properly documented or if payment from the distributor is contingent, then revenue is recognized upon cash receipt.
In accordance with Emerging Issues Task Force Issue 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, we evaluate sales through our resellers and sales of third party products on a case-by-case basis to determine whether the transaction should be recorded gross or net, including but not limited to assessing whether or not the Company 1) acts as principal in the transaction, 2) takes title to the products, 3) has risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns, and 4) acts as an agent or broker with compensation on a commission or fee basis.
Product Warranties and Returns - Our standard agreements do not contain product return rights. We provide a standard warranty of 30 days from the date of sale. We continually evaluate our obligations with respect to warranties, returns and refunds. We do not maintain any reserves with respect to warranty based on the history of performance of our software. We may, in certain circumstances, grant discounts for product sales. The discounts are recognized as a reduction of product revenue. Our allowance for doubtful accounts includes an insignificant amount for product returns and refunds.
Income Taxes
We account for income taxes under the asset and liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. We recognize deferred income taxes, net of valuation allowances, for the estimated future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and net operating loss and tax credit carryforwards. 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. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. As of December 31, 2005 and 2004, we had approximately $4.0 million and $4.4 million, respectively, in deferred tax assets, net of valuation allowances.
Management evaluates the realizability of our deferred tax assets on a regular basis for each taxable jurisdiction. In making this assessment, management considers whether it is more likely than not that some portion or all of our deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers all available evidence, both positive and negative, in making this assessment. Positive evidence supporting the realizability of our deferred tax assets includes: our strong earnings history prior to operating losses realized in 2001, the ability to carry back losses to prior years, positive results in recent years, projections of future taxable income in 2006 and beyond, the existence of significantly appreciated net assets and the availability of prudent and feasible tax planning strategies to accelerate taxable amounts. Our pre-tax operating loss in 2001 represents negative evidence with respect to the realizability of our deferred tax assets. However, this loss included infrequent litigation settlements, non-taxable goodwill amortization and impairment charges, and losses, which are not expected to recur, related to our investment in the e-commerce market.
In order to realize the majority of our deferred tax assets, we will need to generate future federal taxable income of approximately $8.0 million prior to the expiration of the net operating loss and tax credit carryforwards commencing in 2020. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 2005.
In the future, if we determine that we expect to realize deferred tax assets in excess of the recorded net amounts, a reduction in the deferred tax asset valuation allowance would decrease income tax expense in the period such determination is made. Alternatively, if we determine that we no longer expect to realize a portion of our net deferred tax assets, an increase in the deferred tax asset valuation allowance would increase income tax expense in the period such determination is made.
The above is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which are in Item 8 of this Annual Report on Form 10-K which contain a summary of significant accounting policies and other disclosures required by accounting principles generally accepted in the United States of America.
Recent Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements in this Annual Report.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Exchange Risk
The principal market risk to which we are exposed that may adversely impact results of operations and financial position is fluctuations in foreign exchange rates.
Fluctuations in Foreign Exchange Rates. We have sales offices located throughout the world, and approximately 39% of our revenues were generated outside of the United States in the year ended December 31, 2005. Significant revenues (i.e., greater than 5% of total revenues) were derived in France (approximately 10%) and the Netherlands (approximately 5%), with the balance derived primarily from ten other countries (Argentina, Brazil, Chile, China, Germany, Italy, Mexico, Singapore, United Kingdom and Uruguay) in which we maintain subsidiary or branch operations.
Many of our foreign sales were denominated in the currencies of the local country. It is possible that our future financial results could be directly affected by changes in foreign currency exchange rates, and the prices of our products would become more expensive in a particular foreign market if the value of the U.S. dollar rises in comparison to the local currency, which may make it more difficult to sell our products in that market. Local currency revenues generated by our foreign subsidiaries are used to pay local currency expenses.
Our foreign subsidiaries use their respective local currencies as their functional currency. At any point in time, our foreign operations hold financial assets and liabilities that are denominated in the local currency. These financial assets and liabilities consist primarily of cash, short-term investments, third party and intercompany receivables and payables. At December 31, 2005, cash and short-term investments denominated in foreign currencies was approximately $10.9 million. As a result we are exposed to movements in foreign currency exchange rates in foreign countries. Historically, exchange rate exposure has been minimal; however, management is evaluating alternatives to reduce the risk associated with fluctuations in the value of the U.S. dollar in the foreign exchange markets.
The translation of the balance sheets of our non-U.S. operations from local currencies into U.S. dollars is sensitive to changes in foreign currency exchange rates. Consequently, we performed a test to determine if changes in currency exchange rates would have a significant effect on the translation of the balance sheets of our non-U.S. operations into U.S. dollars. These translation gains or losses would be recorded as unrealized translation adjustments (“UTA”) within stockholders’ equity. The hypothetical increase or decrease in UTA is calculated by multiplying the net assets of these non-U.S. operations by a 10 percent change in the currency exchange rates, with all other variables held constant. The results of this sensitivity test are presented in the following paragraph.
As of December 31, 2005, a 10 percent unfavorable change in the exchange rate of the U.S. dollar against the prevailing market rates of our foreign currency translation exposures would have reduced stockholders’ equity by approximately $1.3 million. These hypothetical adjustments in UTA are based on the difference between the December 31, 2005 exchange rates and the assumed rates. This sensitivity analysis assumes a parallel shift in the foreign currency exchange rates. Exchange rates rarely move in the same direction. The assumption that exchange rates change in a parallel fashion may overstate the impact of changing exchange rates on assets and liabilities denominated in a foreign currency.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data.
(a) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act and for assessing the effectiveness of our internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles in the United States.
Our internal control over financial reporting is supported by written policies and procedures that:
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Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
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Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations from our management and directors; and
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Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2005. In making this assessment, our management used the criteria set forth in Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operating effectiveness of our internal control over financial reporting. Based on this assessment, our management concluded that, as of December 31, 2005, our internal control over financial reporting was effective.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable, and not absolute, assurance that the objectives of the control system are met and may not prevent or detect all misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
BDO Seidman LLP, an independent registered public accounting firm, audited management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005. BDO Seidman LLP issued an audit report thereon, which is included at Item 8(b) of this Annual Report on Form 10-K.
(b) Report of Independent Registered Public Accounting Firm
Datastream Systems, Inc.
Greenville, South Carolina
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control, that Datastream Systems, Inc. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Datastream Systems, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal Control-Integrated Framework issued by COSO. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the criteria established in Internal Control-Integrated Framework issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Datstream Systems, Inc. as of December 31, 2005 and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the year then ended and our report dated February 27, 2006 expressed an unqualified opinion.
/s/ BDO SEIDMAN, LLP
Charlotte, North Carolina
February 27, 2006
(c) Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Datastream Systems, Inc.
Greenville, SC 29605
We have audited the accompanying consolidated balance sheet of Datastream Systems, Inc. as of December 31, 2005 and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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. at December 31, 2005, and the results of its operations and its cash flows for the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Datastream Systems, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 27, 2006 expressed an unqualified opinion thereon.
/s/ BDO SEIDMAN, LLP
Charlotte, North Carolina
February 27, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Datastream Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Datastream Systems, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Datastream Systems, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 12, 2005, not included herein, expressed an unqualified opinion on management’s assessment of, and an adverse opinion on the effective operation of, internal control over financial reporting as of December 31, 2004.
/s/ KPMG LLP
Greenville, South Carolina
September 12, 2005
Datastream Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2005 and 2004
See accompanying notes to consolidated financial statements.
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2005, 2004, and 2003
See accompanying notes to consolidated financial statements.
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Years Ended December 31, 2005, 2004, and 2003
See accompanying notes to consolidated financial statements.
Datastream Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2005, 2004, and 2003
See accompanying notes to consolidated financial statements.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and 2003
(1) Summary of Significant Accounting Policies
(a) Nature of Business
Datastream Systems, Inc. and Subsidiaries (the “Company” or “Datastream”) provides asset performance management software and services to enterprises worldwide, including approximately 60 percent of the Fortune 500. Datastream’s solutions combine asset management functionality with advanced analytics to deliver a platform for optimizing enterprise asset performance.
Datastream was founded in 1986. In addition to its U.S. operations, the Company has offices in Argentina, Brazil, Chile, China, France, Germany, Italy, Mexico, The Netherlands, Singapore, and the United Kingdom.
(b) Basis of Presentation
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 follows the guidance of AICPA Statement of Position (“SOP”) 97-2, Software Revenue Recognition to account for its software license arrangements (“SOP 97-2”). The majority of the Company’s software license arrangements include additional elements such as professional services, post contract support and/or hosting services and therefore, are considered multiple element arrangements. In addition, arrangements entered into with the same customer within a close proximity of time (usually within three months) are evaluated together to determine if they collectively are a multiple element arrangement.
The Company accounts for multiple element arrangements by allocating the total contract fee to the various elements based on vendor-specific objective evidence of fair value (“VSOE”) of each element of the arrangement with the exception of the license element. The license element is accounted for according to the residual method provided by SOP 98-9-Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions (“SOP 98-9”). VSOE is determined for all undelivered elements, including services and post contract support and hosting. If any undelivered element does not have VSOE then all revenue from the arrangement is deferred until sufficient evidence exists or until all elements of the arrangement have been delivered.
Product Revenues - The Company recognizes product revenues when a non-cancelable license agreement has been signed, the product has been delivered, the fees are fixed or determinable, collectibility is probable and VSOE exists for all undelivered elements in an arrangement. Fees are generally considered fixed or determinable upon receipt of a signed license agreement. Management sets payment terms depending on market and customer specific conditions. If payment terms on license fees extend beyond a period of time that is out of the Company’s historical collection period, then revenue is recognized as payments are due. The products are off-the-shelf products because they can be used by customers with little or no customization.
Professional Services - The professional service offerings are primarily related to providing installation, implementation, integration, training and project management services. These services are sold principally on a time and materials basis or in limited cases at a fixed price. Time and material projects are distinguished from fixed price agreements in that the price of the services is quoted based on days incurred on the project or some other measure of time such as hours, weeks or months. A fixed price service contract is defined as any contract entered into for a pre-determined total price regardless of the number of days actually needed to complete the project. Time and material service revenue is recognized as the services are performed. Fixed price services are recognized based on the proportional performance method. The measure of performance is based on the relationship between the hours incurred to date versus the total estimated hours to complete (an input method). The resulting percentage complete is used to determine the percentage of revenue of the contract to be recognized. The output method is not used because it is difficult to establish and reasonably estimate outputs. The Company believes that the input method is better because of a history of accurate estimates. Estimates are
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
updated frequently (at least quarterly), variances regularly monitored and recognized, and the Company has the ability to track costs. Losses on fixed price contracts are recognized during the period in which the loss first becomes evident. Contract losses are determined to be the amount by which the estimated total costs of the contract exceed the total fixed price of the contract.
The service elements are not essential to the functionality of the software and are accounted for separately as evidenced by the following:
•
Services provided together with products do not include significant customizations to the features or functionality of the software.
•
Complex interfaces are not necessary for the software to function in the customer’s environment.
•
The timing of the payment for the software is not coincident with the performance of the services.
•
Customer payment for the license is not dependent upon milestones or customer acceptance.
•
These services are available from other vendors.
•
These services do not carry significant degrees of risk or unique acceptance criteria.
•
The Company is an experienced provider of the services.
The Company infrequently enters into any multiple element arrangements in which the services were considered essential to the functionality of the software.
Support and Hosting Revenues - The Company recognizes support revenues, which consist of fees for ongoing support and product updates, ratably over the term of the contract support period, typically one year. The amount of support revenue invoiced but not yet recognized is recorded as unearned revenue in the accompanying consolidated balance sheets.
Certain customers purchase our hosting services. A customer must generally purchase a perpetual license for the product before a customer can utilize hosting services. Hosted customers with perpetual licenses have the contractual right to take possession of the software at any time during the hosted period and either host the product internally or contract with a third party vendor. The customer has the right to choose not to renew its hosting arrangement upon its expiration and deploy the software internally or contract with another party unrelated to us to host the software. For the vast majority of the hosted products, the customer could self-host and any penalties to do so are not material as defined in EITF 00-03, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware. The arrangement is accounted for under SOP 97-2. The Company accounts for the license element according to the residual method upon delivery of the license element to the customer. The portion of the arrangement fee allocated to the hosting element is recognized ratably over the term of the arrangement.
In certain limited instances, the hosted customer may incur significant penalties upon electing to terminate hosting services. In those instances, all revenues related to the arrangement are recognized over the longer of the contractual life or the period of the expected life of the hosting arrangement since the customer has paid a nonrefundable upfront fee (software license).
Reseller Arrangements - The majority of sales through resellers are generated from our European, Asian and Latin American operations. Revenue from resellers is recognized on the accrual basis only if financial stability of the reseller can be determined, payment is not contingent on end user payment to the reseller, and other criteria of SOP 97-2 are met. If financial stability cannot be determined and properly documented or if payment from the distributor is contingent, then revenue is recognized upon cash receipt.
In accordance with Emerging Issues Task Force Issue 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, the Company evaluates sales through its resellers and sales of third party products on a case-by-case basis to determine whether the transaction should be recorded gross or net, including but not limited to assessing
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
whether or not the Company 1) acts as principal in the transaction, 2) takes title to the products, 3) has risks and rewards of ownership, such as the risk of loss for collection, delivery, or returns, and 4) acts as an agent or broker with compensation on a commission or fee basis.
Product Warranties and Returns - The standard agreements do not contain product return rights. A standard warranty of 30 days from the date of sale is provided. The Company continually evaluates obligations with respect to warranties, returns and refunds. Reserves are not maintained with respect to warranty based on the performance history of our software. The Company may, in certain circumstances, grant discounts for product sales. The discounts are recognized as a reduction of product revenue. The allowance for doubtful accounts includes an insignificant amount for product returns and refunds.
Guarantees - The Company accounts for guarantees in accordance with Financial Accounting Standards Board Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Company’s sales agreements with customers generally contain infringement indemnity provisions. Under these agreements, the Company agrees to indemnify, defend and hold harmless the customer in connection with patent, copyright or trade secret infringement claims made by third parties with respect to the customer’s authorized use of the Company’s products and services. The indemnity provisions generally provide for the Company’s control of defense and settlement and cover costs and damages finally awarded against the customer, as well as the Company’s modification of the product so it is no longer infringing or, if it cannot be corrected, return of the product for a pro-rated refund. The sales agreements with customers sometimes also contain indemnity provisions for death, personal injury or property damage caused by the Company’s personnel or contractors in the course of performing services to customers. Under these agreements, the Company agrees to indemnify, defend and hold harmless the customer in connection with death, personal injury and property damage claims made by third parties with respect to actions of the Company’s personnel or contractors. The indemnity provisions generally provide for the Company’s control of defense and settlement and cover costs and damages finally awarded against the customer. The indemnity obligations contained in sales agreements generally have a limited life and monetary award. The Company has not previously incurred costs to settle claims or pay awards under these indemnification obligations. The Company accounts for these indemnity obligations in accordance with SFAS No. 5, Accounting for Contingencies, and records a liability for these obligations when a loss is probable and reasonably estimable. The Company has not recorded any liabilities for these agreements as of December 31, 2005 or 2004.
(d) Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
(e) Short-Term Investments
Short-term investments at December 31, 2005 consisted of foreign issued debt securities. Short-term investments at December 31, 2004 consisted of auction-rate securities. The interest rates on auction-rate securities are typically reset to market prevailing rates every 35 days or less, and in all cases every 90 days or less, but the securities have longer stated maturities, ranging from 2032 to 2043. Investments with maturities beyond one year may be classified as short term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. Short-term investments are classified as available for-sale. Due to the frequent market interest rate reset, changes in the fair value are insignificant.
(f) Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments and for estimated credits to be issued. In determining the allowance for doubtful accounts, the Company reviews the rolling twelve month average of account write-offs, customer specific account risks, accounts receivable aging, and geographic specific factors that may impact international accounts. These factors combine to establish the allowance for doubtful accounts balance. Accounts are considered past due once their contractual due date has passed. Account balances are charged off against the allowance or directly to bad debt expense after all means of collection have been exhausted and the potential for recovery is considered remote.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
(g) 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.
(h) Investment Security
The Company’s investment security is carried at cost. It is not traded on the open market and does not have a readily determinable fair value.
A decline in the value of any investment below its carrying value that is deemed to be other than temporary results in a reduction in the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. The Company did not earn dividend or interest income on its investment in the years ended December 31, 2005, 2004 or 2003. See Note 2 to the Consolidated Financial Statements in this Annual Report.
(i) Property, Equipment and Internally Developed Software
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets for financial reporting and using the accelerated and modified accelerated cost recovery systems for income tax reporting purposes. Leasehold improvements are amortized over the shorter of the lease terms or the estimated useful lives.
In accordance with Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”), the Company capitalized approximately $0.3 million and $0.1 million in costs related to the development of internal use software for its website, enterprise resource planning system, and systems management applications during the years ended December 31, 2005 and 2004, respectively. The Company amortizes the costs of computer software developed for internal use on a straight-line basis over its estimated useful life of three years. The carrying value of internal use software is included in property and equipment on the Consolidated Balance Sheets.
The estimated useful lives generally assigned are as follows:
(j) Research & Development Costs
Research and development expenses include payroll, employee benefits and other employee-related costs associated with product development. We have determined that technological feasibility for our software products is reached shortly before the products are generally released. Costs incurred after technological feasibility is established are not material, and accordingly, we expense all research and development costs when incurred. During the years ended December 31, 2005, 2004 and 2003, total costs incurred and expensed for software development activities were approximately $13,795,000, $13,979,000, and $12,421,000, respectively.
(k) Stock Option Plans
The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, as amended, to account for its stock-based employee compensation plans. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, Accounting for Stock-
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
Based Compensation, as amended by Statement 148, Accounting for Stock-Based Compensation-Transition and Disclosure, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148.
The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.
For purposes of computing pro forma net income, the Company estimates the fair value of each option grant and employee stock purchase plan purchase right on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable; characteristics not present in the Company’s option grants or employee stock purchase plan rights. Additionally, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price.
The assumptions used to value the option grants and the employee stock purchase plan were as follows:
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
(l) Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with SFAS No. 109, Accounting for Income Taxes. The Company recognizes deferred income taxes, net of valuation allowances, for the estimated future tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and net operating loss and tax credit carryforwards. 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. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes.
(m) Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing net income by the weighted average number of common and potential common shares outstanding, provided no anti-dilution exists. Diluted weighted average common and potential common shares include common shares and stock options using the treasury stock method.
(n) Foreign Currency Translation
The financial statements of subsidiaries outside the United States are measured using the local currency as the functional currency. Remeasurement gains and losses for transactions which are denominated in a currency other than a foreign subsidiary’s local currency are recognized in the consolidated statements of income. The Company recorded net remeasurement losses of approximately $73,000 and $506,000 the years ended December 31, 2005 and 2004, respectively, and a net remeasurement gain of approximately $248,000 in the year ended December 31, 2003.
Translation of the foreign operations to United States dollars occurs using the current exchange rate for balance sheet accounts and an average exchange rate for results of operations. Translation gains and losses are recognized as a component of equity in “Accumulated Other Comprehensive Loss.”
(o) Total Comprehensive Income
Total comprehensive income consists of net income and net unrealized foreign currency translation adjustments and is presented in the consolidated statements of stockholders’ equity and comprehensive income.
(p) Advertising Costs
The Company expenses advertising costs in the period incurred. Advertising expense was approximately $1,638,000, $1,393,000, and $1,697,000 in 2005, 2004 and 2003, respectively.
(q) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 allowances for doubtful accounts receivable and unbilled revenue, revenue recognition, deferred income tax assets, valuation of investments, and the fair value of stock options for disclosure purposes. Actual results could differ from those estimates.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
(r) Contingencies
The Company evaluates whether or not a contingency exists in accordance with Financial Accounting Standard (FAS) 5, Accounting for Contingencies. An estimated loss from a loss contingency is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. If no accrual is made for a loss contingency because the loss has not been deemed probable or the amount cannot be reasonably estimated then disclosure of the contingency is made when there is at least a reasonable possibility that a material loss may have been incurred. Estimated gains from gain contingencies are not recorded until realized; however, disclosure of the event leading to the potential gain contingency may be required.
(s) Reclassifications
Certain amounts in the 2004 and 2003 financial statements have been reclassified to conform to the 2005 presentation. These reclassifications had no impact on stockholders’ equity or net income as previously reported.
(t) Recent Accounting Pronouncements
In June 2005, the Financial Accounting Standards Board issued FAS No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement generally requires retrospective application to prior periods’ financial statements of changes in accounting principle. Previously, Opinion No. 20 required that most voluntary changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. FAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of this statement to have a material impact on our results of operations, financial position or cash flow.
In June 2005, the EITF reached a consensus on Issue No. 05-06, “Determining the Amortization Period for Leasehold Improvements” (EITF 05-06). EITF 05-06 provides guidance for determining the amortization period used for leasehold improvements acquired in a business combination or purchased after the inception of a lease, collectively referred to as subsequently acquired leasehold improvements). EITF 05-06 provides that the amortization period used for the subsequently acquired leasehold improvements to be the lesser of (a) the subsequently acquired leasehold improvements’ useful lives, or (b) a period that reflects renewals that are reasonably assured upon the acquisition or the purchase. EITF 05-06 is effective on a prospective basis for subsequently acquired leasehold improvements purchased or acquired in periods beginning after the date of the FASB’s ratification, which was on June 29, 2005. The adoption of EITF 05-06 did not have a material impact on the Company’s consolidated results of operations, financial position or cash flow.
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 provides guidance relating to the identification and recognition of legal obligations to perform an asset retirement activity. FIN 47 requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The company was required to adopt the provisions of FIN 47 by December 31, 2005. The adoption of FIN 47 did not have a material impact on the Company’s results of operations, financial position or cash flows.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123 (Revised 2004), Share-Based Payment (“SFAS 123R”) which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. SFAS 123R supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options,
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
using a fair-value based method and the recording of such expense in the Company’s consolidated statements of income. The accounting provisions of SFAS 123R are effective for annual periods beginning after June 15, 2005. The Company is required to adopt SFAS 123R in the first quarter of 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See Note 1(k) above for the pro forma net income and pro forma net income per share amounts for years 2003 through 2005, as if the Company had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. The Company is evaluating the requirements under SFAS 123R and does not expect the adoption to have a significant impact on the Company’s consolidated statements of income and net income per share. The Company accelerated vesting of outstanding options in anticipation of this requirement. See Note 8 to the Consolidated Financial Statements in this Annual Report.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1 “Application of FASB Statement No. 109, ‘Accounting for Income Taxes’, to the Tax Deduction on Qualified Production Activities by the American Jobs Creation Act of 2004” (“FSP FAS No. 109-1”) and FASB Staff Position No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations Act of 2004” (“FSP FAS No. 109-2”). The American Jobs Creation Act of 2004 (“AJCA”) provides several incentives for U.S. multinational corporations and U.S. manufacturers, subject to certain limitations. The incentives include an 85% dividends received deduction for certain dividends from controlled foreign corporations that repatriate accumulated income abroad, and a deduction for domestic qualified production activities taxable income. The adoption of this Staff Position did not have a material impact on the Company’s results of operations, financial position or cash flow.
(2) Investment Security
The Company’s single cost method investment consisted of an investment in a privately owned company. In 2003, the investment was evaluated for impairment based on a notice received that it intended to obtain additional financing. Datastream concluded that the financing would be dilutive to ownership at an implied valuation below the $2.0 million carrying value. Accordingly, Datastream decreased its long-term investment to its estimated fair market value from $2.0 million to $0.5 million and recorded a charge of approximately $1.5 million through other income (expense), net. Based on the degree of ownership dilution and future prospects, the Company considered the impairment to be other than temporary. During 2004, the Company made an additional investment of approximately $35,000 in order to avoid material dilution to its ownership position.
The investment was evaluated for impairment at December 31, 2005 in accordance with the Company’s policy of annual review. The Company concluded that the investment lacked liquidity and would require additional financing that would fully dilute its ownership position. Accordingly, Datastream recorded a charge of approximately $0.5 million through other income (expense), net. Based on the change in management, poor operating results and lackluster future prospects, the Company considered the impairment to be other than temporary.
(3) Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties.
At December 31, 2005 and 2004, the carrying value of financial instruments such as cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximated their fair values, based upon the short maturities of these instruments.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
(4) Property and Equipment, net
Property and equipment, net consisted of the following at December 31:
(5) Other Accrued Liabilities
Other accrued liabilities consisted of the following at December 31:
(6) Income Taxes
The components of income before income taxes consist of the following, for the years ended December 31:
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
Income tax expense for the years ended December 31 is as follows:
During the period 2003 to 2005, various individuals exercised certain nonqualified and incentive stock options granted by the Company. The exercise of these stock options or the subsequent disqualified disposition of the underlying stock of the Company generated income tax deductions and related income tax benefits for the Company that are recorded directly to additional paid-in capital in accordance with APB Opinion No. 25. Such amounts were approximately $35,000, $85,000, and $237,000, for 2005, 2004 and 2003, respectively.
Income tax expense differed from the amounts computed by applying the federal income tax rate of 34 percent for 2005 and 35 percent for 2004 and 2003 as a result of the following:
(1) The federal income tax rate of 34 percent is considered applicable for 2005 based on estimates made during 2005 of current and future taxable incomes.
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.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
Significant components of the Company’s deferred income tax assets and liabilities are as follows:
Net deferred tax assets comprises current and non-current elements, which include U.S. and foreign amounts, as follows:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers all available evidence, both positive and negative, such as projected future taxable income and tax planning strategies in making this assessment.
The valuation allowances for deferred tax assets at December 31, 2005 and 2004 are as follows:
The net change in the valuation allowance for deferred income tax assets for the years ended December 31, 2005, December 31, 2004, and December 31, 2003 was an increase of approximately $3,269,000, an increase of approximately $680,000, and a decrease of approximately $1,611,000, respectively. Of the increase in the valuation allowance for 2005, approximately $3,119,000 is related to increases to the Company’s deferred tax assets of approximately $3,198,000. As these increases are substantially offset by increases in related valuation allowances, the result is a net impact of $79,000.
The Company increased the value of its gross deferred tax assets primarily due to additional foreign net operating loss carryforwards resulting from the completion of a tax audit in 2005, and to an upward revision to the value of certain state tax credits. As noted above, these increases are substantially offset by increases in related valuation allowances.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
The Company’s deferred tax asset for net operating losses and tax credit carryforwards are as follows:
The majority of the U.S. credits expire in varying amounts beginning in 2020, while the majority of the state tax credits and net operating loss carryforwards expire between 2013 and 2016. The foreign net operating loss carryforwards have no expiration date. There is a greater likelihood of not realizing the full future tax benefits of these tax credits and net operating loss carryforwards and accordingly, the Company has recorded valuation allowances related to the deferred tax assets.
In order to realize the U.S. federal deferred tax assets, the Company will need to generate future taxable income of approximately $8.0 million prior to the expiration of the federal tax credits. The Company will need to generate future taxable income of approximately $17.0 million prior to the expiration of the state net operating loss carryforwards in order to realize the benefit of this asset. The Company will need to generate future taxable income of approximately $233.0 million prior to the expiration of the state tax credits in order to realize the benefit of this asset.
Federal taxable income in the United States for the year ended December 31, 2005 was approximately $7.4 million and for the year ended December 31, 2004 was approximately $4.4 million.
As of December 31, 2005, the Company has approximately $4.5 million of unremitted foreign earnings, which are deemed to be permanently invested.
(7) Employee Savings and Retirement Plan
Effective September 1, 1992, the Company established a 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 his or her compensation. The Plan provided for voluntary employee contributions of up to 15% of their total compensation until April 1, 2001, after which time employees could contribute up to 20% of their total compensation.
The Company’s contributions to the Plan totaled approximately $616,000, $600,000, and $365,000 in 2005, 2004 and 2003, respectively.
(8) Stock Compensation Plans
The Company has several stock compensation plans. The plans are described below.
Options granted under the 1995 Stock Option Plan (“the 1995 Plan”) vest incrementally over a period of one to three years and expire either five or ten years from the date of grant, depending on the terms of the option agreement. Options under the 1995 Plan are granted with an exercise price at least equal to the fair market value of the underlying shares at the grant date. Incentive options granted to a participant who is an over 10% owner are not granted at less than 110% of the fair market value of the underlying shares at the grant date.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
Options granted pursuant to the Datastream Systems, Inc. 1997 European Stock Option Plan (“ the EU Plan”) have varying vesting periods up to five years from the date of grant, depending on the applicable laws of the foreign jurisdiction and the terms of the option agreement. Options granted under the EU Plan expire ten years after the date of grant and are granted at the fair market value of the underlying shares at the date of grant.
Options granted under the Datastream Systems, Inc. 1998 Stock Option Plan (“the 1998 Plan”) vest incrementally over a period of one to five years and expire either five or ten years from the date of grant, depending on the terms of the option agreement. Options under the 1998 Plan are granted with an exercise price at least equal to the fair market value of the underlying shares at the grant date. Incentive options granted to a participant who is an over 10% owner are not granted at less than 110% of the fair market value of the underlying shares at the grant date.
Options granted pursuant to Datastream Systems, Inc. 1998 Singapore Stock Option Plan, the 1998 German Stock Option Plan, the 1998 Australian Stock Option Plan, and the 1999 Argentinean Stock Option Plan vest incrementally over a period of one to five years, depending on the terms of the option agreement, and expire ten years from the date of grant. Options are granted at the fair market value of the underlying shares at the grant date.
Acceleration of Unvested Options
On December 30, 2005, the Compensation Committee of the Board of Directors of the Company approved the accelerated vesting of unvested stock options held by active employees of the Company or its affiliates for all of the aforementioned stock option plans (collectively, the “Stock Option Plans”).
As a result, a total of 1,081,698 options to purchase common stock of the Company, which otherwise would have vested from time to time at future dates, became fully vested and immediately exercisable as of December 30, 2005. The accelerated options have exercise prices ranging from $5.97 to $10.50 and a weighted average exercise price of $7.28. The total number of accelerated options includes 509,999 options held by executive officers of the Company, with exercise prices ranging from $5.97 to $10.50 and a weighted average exercise price of $7.18.
The primary purpose of accelerating the vesting of these options was to eliminate the recognition of non-cash compensation expense associated with these options that the Company would have been required to recognize in its future consolidated statements of income upon its adoption of SFAS 123R. SFAS 123R will generally require that the fair value of all share-based payments to employees, including stock option awards, be recognized as compensation expense in the Company’s statements of income. The Company is required to adopt the expense recognition provisions of SFAS 123R effective January 1, 2006.
In order to limit the personal benefit to the option holders of fully vesting their stock options, the Compensation Committee of the Board of Directors imposed restrictions on the sale or transfer of the shares received by an option holder upon the exercise of an accelerated option until the date on which such option would have vested and become exercisable, without giving effect to such acceleration.
A non-cash compensation charge of approximately $47,000 (pre-tax) was recognized as a result of the accelerated vesting related to the intrinsic value, on the acceleration date, of those options that would have been forfeited had the vesting not been accelerated. In determining the forfeiture rates, the Company reviewed the impact of one-time events that are not expected to recur and whether options were held by executive officers of the Company. The compensation charge will be adjusted in future periods as actual forfeitures are realized.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
As of December 31, 2005, there were 1,160,861 options available for grant under the Stock Option Plans. A summary of activity in the aforementioned Stock Option Plans during the periods indicated is as follows:
The following table summarizes information about stock options outstanding under the plans noted above at December 31, 2005:
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
Stock Option Plan for Directors
Under the Directors’ Plan, which expired on February 7, 2005, eligible directors receive options to purchase, at the fair market value of a share on the date of grant, (i) 15,000 shares of Common Stock upon the commencement of their service as a director and (ii) 10,000 shares of Common Stock annually as of the first business day of each fiscal year.
A summary of activity in the Directors’ Plan during the periods indicated are as follows:
The following table summarizes information about stock options outstanding under the Director’s Plan at December 31, 2005:
On December 30, 2005, the Compensation Committee of the Board of Directors of the Company approved the award of an annual lump sum fee in the amount of $20,000 (the “Annual Fee”) for service as a non-employee director of the Company, to be paid annually on or about the first business day of January, and effective in 2006. The Annual Fee is paid in addition to the annual retainer fees and attendance fees already in place for service to the Company as a non-employee director. The Annual Fee is intended to replace the previous annual grant of stock options to non-employee directors pursuant to the Amended and Restated Stock Option Plan for Directors that was established in 1995 and that expired in 2005.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
Warrants
In connection with entering into a software development and licensing agreement, Datastream issued a warrant during the first quarter of 2002 to purchase up to 50,000 shares of common stock of the Company. The warrant was exercisable on the date of issuance and remained exercisable for three years from the date of issuance. The exercise price per share was $6.95, which was the market price of the Company’s common stock on the date of issuance of the warrant. The warrant agreement allowed for net share settlement at the option of the warrant holder and provided “piggy back” registration rights for the underlying common stock. The warrant was not exercised and expired on February 13, 2005. 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 other assets. The Company recorded amortization of the asset as a reduction of revenue over the three years the warrant was exercisable.
Employee Stock 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 and the Company’s stockholders have reserved 400,000 shares of common stock for future issuance pursuant to the Purchase Plan. Under the Plan, the Company sold 15,373, 18,118, and 32,319 shares in 2005, 2004 and 2003, respectively. The Purchase Plan was suspended January 4, 2006.
(9) Leases
The Company leases office space, automobiles and equipment under agreements which have been classified as operating leases for financial reporting purposes. At December 31, 2005, the approximate future minimum lease payments under noncancelable operating leases that expire at various future dates are as follows:
Rent expense for the years ended December 31, 2005, 2004 and 2003, was approximately $2,013,000, $2,139,000 and $2,255,000, respectively.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
(10) Segment and Geographic Information
The Company has identified one business segment for reporting purposes, Asset Performance Management. The Company manages the Asset Performance Management business over geographical regions. The principal areas of operation include the United States and Canada, Europe, Latin America and Asia. Financial information concerning the Company’s operations in different geographical regions is as follows:
In 2003, the Company changed the methodology used to determine the intercompany pricing between the US Operations and the foreign affiliates from a comparable uncontrolled transaction method (“CUT Method”) to a comparable profits method (“CPM Method”). The CUT Method evaluates whether the amount charged for a controlled transfer of intangible property is consistent with an arm’s length transaction by reference to the amount charged in a comparable uncontrolled transaction. The CPM Method evaluates the arm’s length character of a controlled transaction based upon objective measures of profitability derived from uncontrolled taxpayers that engage in similar business activities under similar circumstances.
In 2003, the Company applied additional control procedures to the foreign affiliate operations. More specifically, the Company provided significant direction to the foreign affiliates regarding markets and customers to target. The Company assisted the foreign affiliates in managing capital and other resources, and centralized in the U.S. certain management and administrative functions formerly performed by the foreign affiliates. As a result of these operational changes, the foreign subsidiaries made fewer operating decisions and undertook fewer risks than they did before the Company instituted these changes. As a result, a new transfer pricing method was applied.
In accordance with section 482 of the U.S. Internal Revenue Code and the regulations thereunder, the Company engaged a third party in 2003 to determine a new arm’s length pricing method to apply to the foreign affiliates. The objective measures of profitability used in the CPM Method are commonly used by companies in the software/hardware distribution business all over the world. The result was a change from an intercompany charge for the licensing of the software to a set profitability margin based on comparable company profits.
The impact of these changes on operating income in 2003 was a decrease in North American operating income of approximately $1,145,000 and an increase in operating income of approximately $197,000, $567,000 and $381,000 in Europe, Latin America and Asia, respectively.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
During 2005, the Company, while retaining the CPM Method, consistent with the results of its review of comparable company profits, reduced the intercompany charge for the licensing of software.
The impact of this reduction in the intercompany charge on operating income in 2005 was a decrease in North American operating income of approximately $714,000 and an increase in operating income of approximately $452,000, $125,000 and $137,000 in Europe, Latin America and Asia, respectively.
(11) Reconciliation of Basic and Diluted Income per Share
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing net income 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. The reconciliation of basic and diluted income per share is as follows:
Antidilutive shares totaling approximately 2,369,000, 2,718,000 and 2,648,000 were excluded from the diluted net income per share calculations for the years ended December 31, 2005, 2004 and 2003, respectively.
(12) Commitments and Contingencies
The Company is occasionally involved in claims arising out of its operations in the normal course of business. The ultimate liability on such claims in excess of applicable insurance is not expected, individually or in the aggregate, to have a material adverse effect on the Company’s operations, financial condition or cash flows.
Datastream Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005, 2004, and
(13) Subsequent Event
On January 4, 2006, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with wholly owned subsidiaries of Infor Global Solutions AG (“Infor”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein:
•
An indirect wholly owned subsidiary of Infor will merge with and into the Company, and the Company will become an indirect wholly owned subsidiary of Infor; and
•
Upon consummation of the merger, each share of the Company’s common stock issued and outstanding immediately prior to the effective time of the merger (as defined in the Merger Agreement), other than shares held by stockholders who have properly perfected their appraisal rights and by the Company or Infor’s subsidiaries, will be converted into the right to receive $10.26 in cash, without interest or dividends and less any applicable withholding taxes.
Furthermore, at the effective time of the merger, each holder of an outstanding stock option to acquire the Company’s common stock will, in settlement thereof, receive for each share subject to each such option that is vested and exercisable as of the effective time, an amount in cash equal to the difference between $10.26 and the per share exercise price of such option, to the extent such difference is a positive number and subject to any applicable withholding taxes. Upon receipt of this consideration, each such option will be canceled.
After the merger, the Company’s common stock will cease to be quoted on the Pink Sheets Electronic Quotation System, and there will be no public market for the Company’s common stock. Following the merger, the Company also expects to deregister its shares of common stock with the SEC and to cease to be a public reporting company. Accordingly, the Company will no longer be required to file periodic and current reports with the SEC.
The consummation of the merger is subject to certain conditions contained in the Merger Agreement that if not waived, must have occurred or be true, including the adoption of the Merger Agreement by the Company’s stockholders. If those conditions have not occurred or are not true, either the Company or the Infor subsidiaries would not be obligated to effect the merger. The Merger Agreement contains certain termination rights for both the Company and the Infor subsidiaries, and further provides that, upon termination of the Merger Agreement under specified circumstances, either party may be required to pay the other party a termination fee of up to $6,500,000. The Merger Agreement also provides that in certain instances where the termination fee is not owed, the Company may be required to reimburse an Infor subsidiary for up to $3,000,000 of its transaction related expenses. The merger is expected to occur within five business days after all conditions specified in the Merger Agreement have been satisfied or waived, or April 14, 2006, whichever is later.
In connection with the execution of the Merger Agreement, certain of the Company’s executive officers entered into voting agreements on January 4, 2006, with the Infor subsidiaries, pursuant to which such executive officers agreed to vote their respective shares of the Company’s common stock in favor of the adoption of the Merger Agreement and, in the event they do not act in accordance with their obligations thereunder, granted the Infor subsidiaries a proxy to vote their shares at any stockholder meeting convened to consider the Merger Agreement.
Corporate, general, and administrative expenses for the year ended December 31, 2005 include approximately $1.0 million of costs incurred in connection with the process surrounding a potential business combination transaction that led to the Merger Agreement with Infor.
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A.
ITEM 9A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 and Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2005 to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Because of its inherent limitations, a control system can provide only reasonable, and not absolute, assurance that the objectives of the control system are met and that all control issues within our company have been detected. In addition, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.
We maintain a disclosure committee to assist the Chief Executive Officer and Chief Financial Officer in performing the evaluation discussed above. The members of this committee include our executive officers, senior members of our finance and accounting staff and our internal counsel.
(b) Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control Over Financial Reporting and the attestation report of BDO Seidman LLP, our independent registered public accounting firm, on management’s assessment of internal control over financial reporting are included under “Item 8. Financial and Supplementary Data.” of this Annual Report and are incorporated by reference into this Item 9A of the Annual Report.
(c) Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our fourth fiscal quarter ended December 31, 2005, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, except for changes implemented in the fourth fiscal quarter ended December 31, 2005, as noted below:
•
We have significantly increased the monitoring controls of our international locations by our corporate location including the review of all key account reconciliations and a secondary review of all technical accounting matters.
•
All key technical matters undergo secondary reviews to ensure the proper application of accounting literature including: 1) a secondary review of fixed price service revenue calculations, 2) the determination whether services provided on individual contracts were essential to the functionality of software arrangements, 3) a secondary review of all significant multiple element arrangements, and 4) the appropriateness of the calculations of vendor-specific objective evidence standards in accordance with Company policy.
•
We are engaged in on-going risk assessments including: 1) risk assessment of geographical financial results by management, 2) increased visits to international locations by management, and 3) assessments of potential risks by management during site visits at international locations to ensure all financial reporting risks are identified in a timely manner.
•
We have implemented procedures to formally document the collectibility of key customer accounts prior to recognizing revenue.
•
We have implemented proper procedures to review any new reseller arrangements in non-U.S. locations including a proper legal and accounting review prior to revenue recognition.
ITEM 9B.
ITEM 9B. Other Information.
None.
PART III.
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant.
Directors
LARRY G. BLACKWELL
Age: 65
Dr. Blackwell, our founder, has served as Chairman of the Board and Chief Executive Officer from our inception in 1986. He also served as our President from our inception until January 2005. Prior to our founding, he was President of a subsidiary of Wisconsin Power & Light. He also co-founded and formerly served as Chairman of the Board of EDI Technology Companies, an environmental process engineering consulting company. Dr. Blackwell served four years as an officer in the Navy and holds a Bachelor of Science degree in Engineering from the University of Mississippi, a Master of Science degree from the Georgia Institute of Technology and a Ph.D. in Environmental Systems Engineering from Clemson University. Dr. Blackwell is a registered Professional Engineer in Illinois, Pennsylvania and South Carolina and has received numerous business and engineering honors, including Inc. magazine’s 1994 “Entrepreneur of the Year” for the State of South Carolina and Innovision Technology Awards’ 2002 Charles Townes Individual Achievement Award.
RICHARD T. BROCK
Age: 58
Mr. Brock has served as one of our directors since August 1993. In 1984, Mr. Brock founded the predecessor of Firstwave Technologies, Inc., a publicly held provider of sales and marketing automation software, for which he has served in various capacities, including Chief Executive Officer and President, since 1984. Mr. Brock currently serves as Chairman and Chief Executive Officer of Firstwave Technologies. He is also a founding partner of Brock Capital Partners, a privately-held venture capital fund. He also founded and formerly served as Chief Executive Officer of Management Control Systems, Inc. Mr. Brock is a nationally recognized developer, author and speaker on sales, marketing and service automation and business development strategy. Mr. Brock received a Bachelor of Science degree in Accounting from Spring Hill College and a Masters in Business Administration from Louisiana State University. He is also a Certified Public Accountant.
IRA D. COHEN
Age: 54
Mr. Cohen has been one of our directors since February 1995. Since 1988, Mr. Cohen has served as a Managing Director of Updata Capital, Inc., an investment banking firm he co-founded that focuses on mergers and acquisitions in the information technology industry. Mr. Cohen also co-founded Updata Software, Inc., and served as its Chief Financial Officer from 1986 to 1988. In addition, Mr. Cohen is a Principal with two related venture funds: Updata Venture Fund and Updata Partners III. Mr. Cohen is also a director of several privately held companies. He holds a Bachelor of Science degree in Accounting from City University of New York, Herbert H. Lehman College, and he is a registered Certified Public Accountant in New York and New Jersey.
ROBERT C. DAVIS
Age: 61
Mr. Davis has served as one of our directors since April 2003. He currently serves as Chairman of Capital Insights, LLC, a boutique venture capital firm, and has served in that capacity since 1998. He has also acted as a private tax and business consultant to various entities in Washington D.C., North Carolina and South Carolina since 1991. From 1977 to 1991, Mr. Davis served as the Partner-in-Charge of Tax Practice at KPMG Peat Marwick in Washington D.C., and from 1972 to 1977, he held the same position at KPMG Peat Marwick’s office in Greenville, South Carolina. From 1966 to 1972, Mr. Davis served as an Audit Staff Accountant and Tax Manager at KPMG Peat Marwick in Raleigh, North Carolina. Mr. Davis, a retired Certified Public Accountant, received a Bachelor of Science degree in Business Administration from the University of North Carolina at Chapel Hill.
JAMES C. RYAN, JR.
Age: 67
Mr. Ryan has served as one of our directors since March 2004. Since January 1984 he has served as the President of Smoky Hill Corporation, a South Carolina based investment company, and from July 1981 until July 2001 he served as President of American Petroleum Management Corporation, a manager of international energy investment funds. Mr. Ryan is also the retired President and Chief Executive Officer of Evergreen Resources Inc. (EVG), a publicly traded energy company based in Denver, Colorado. Mr. Ryan served as the President and Chief Executive Officer of EVG until June 1995 and as a director of that company until 1996. Mr. Ryan received a Bachelor of Science degree from Williams College in Geology.
JAMES R. TALTON, JR.
Age: 63
Mr. Talton has served as one of our directors since March 2001. He currently serves as Chairman of the Board of Directors for Impact Design Build, Inc., a real estate development company, and has served in that capacity since January 2000. From July 1999 to January 2000, Mr. Talton served as a Vice President for Impact. Mr. Talton also serves as a director for Waste Industries USA Inc. and several privately held companies. From July 1986 until July 1999, Mr. Talton served as the Managing Partner of KPMG Peat Marwick’s Raleigh, North Carolina office. From October 1979 until June 1986, he served as Managing Partner of KPMG Peat Marwick’s Greenville, South Carolina office. Mr. Talton, a retired Certified Public Accountant, received a Bachelor of Science degree in Accounting from East Carolina University.
The Audit Committee. The Audit Committee appoints and oversees our independent registered public accounting firm, reviews and makes recommendations regarding the annual audit of our financial statements and assists the Board in overseeing our financial reporting process and internal accounting procedures and controls. The Audit Committee also establishes and maintains procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the confidential anonymous submission by our employees of concerns regarding questionable accounting or auditing matters. In 2005, the Audit Committee consisted of Messrs. Cohen (Chairman), Davis and Talton, and held 15 meetings. For 2006, the Audit Committee consists of Messrs. Cohen (Chairman), Davis and Talton. The Audit Committee operates under a written charter initially adopted June 9, 2000 and amended and restated on March 16, 2001, March 15, 2002 and March 2, 2004. A copy of the Audit Committee’s Amended and Restated Charter as of March 2, 2004 was attached to the Proxy Statement for the 2004 Annual Meeting of stockholders. All members of our Audit Committee in 2005 and 2006 met and meet the independence requirements for audit committee membership set forth in the Nasdaq Marketplace Rules and the rules of the SEC. The Board of Directors has determined that Messrs. Cohen, Talton and Davis are audit committee financial experts as that term is defined in the SEC rules.
Executive Officers
The Board of Directors undertook its annual review and designation of our executive officers for Section 16 and other corporate governance purposes. At such time, the Board of Directors identified Dr. Blackwell, C. Alex Estevez, Javier Buzzalino, John M. Sterling, III and Bradley T. Stevens as our executive officers. Our executive officers serve at the discretion of the Board of Directors. See “Directors,” above, for information about Dr. Blackwell.
C. ALEX ESTEVEZ
President, Chief Financial Officer and Secretary
Age: 35
Mr. Estevez was named our President in January 2005 and has served as our Chief Financial Officer and Secretary since April 1999. Prior to that time, he served as our Vice President of Corporate Development from June 1998 until April 1999 and as the Director of Planning from June 1997 to June 1998. Prior to joining us, Mr. Estevez worked in the investment banking technology group at Raymond James & Associates from September 1992 through June 1995, where he focused on technology-based mergers and acquisitions and equity offerings, including our initial public offering. Mr. Estevez holds an A.B. degree from Harvard College and received a Masters of Management in Finance and Strategy from the J.L. Kellogg Graduate School of Management, Northwestern University.
JAVIER BUZZALINO
Senior Vice President of Development
Age: 44
Mr. Buzzalino has served as our Senior Vice President of Development since March 2003. Prior to that time, he was Vice President of Product Development since May 2000 and Vice President of iProcure Development from January 2000 to May 2000. Prior to joining us, Mr. Buzzalino worked for Fluor Daniel, Inc., an engineering, procurement and construction corporation, where he served as Systems Manager from 1997 to 2000, Systems Architect from 1996 to 1997, and Senior Developer from 1991 to 1995. Mr. Buzzalino also served as Large Accounts Manager for IBM from 1987 to 1990 and as a Developer for First National Bank of Boston from 1986 to 1987. Mr. Buzzalino holds an advanced degree in Civil Engineering from the University of Buenos Aires and a Masters in Business Administration from Clemson University. Mr. Buzzalino is a Certified Professional Engineer of Canada.
JOHN M. STERLING, III
Executive Vice President, Worldwide Sales
Age: 44
Mr. Sterling has served as our Executive Vice President of Worldwide Sales since October 2003. Prior to that time, he served as Executive Vice President, Telesales from October 2000 until October 2003. He led our electronic commerce initiatives from February 1999 until October 2000. Before being named Vice President of Electronic Commerce, Mr. Sterling served as our Vice President of International Operations from September 1997 to January 1999, overseeing our international operations. Prior to holding such position, Mr. Sterling served as our Managing Director of European Operations from February through August 1997. Mr. Sterling also served as our Vice President of Sales from 1986 to January 1997. Before joining us, Mr. Sterling was a Regional Sales Manager for Silicon Valley Products in San Mateo, California. Mr. Sterling holds a Bachelor of Science degree in Political Science from The Citadel.
BRADLEY T. STEVENS
Senior Vice President, Global Operations
Age: 43
Mr. Stevens has served as the Company’s Senior Vice President of Global Operations since January 2005 and previously served as Vice President of North American Operations from October 2003 until January 2005. Prior to that time, he served as Vice President of Marketing from March 2002 until October 2003. Before joining the Company, Mr. Stevens served as Senior Vice President of Marketing at NxView Technologies, a rich media start-up company, from April 2000 through February 2002 and held several positions at IBM Corporation from August 1995 to March 2000, including Marketing Manager in Global Industries and Marketing Strategy Manger for the IBM Personal Systems Group. Mr. Stevens holds a Bachelor of Science degree in Economics and a Masters in Business Administration from the University of Illinois.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers and persons who own beneficially more than 10% of our Common Stock to file reports of ownership and changes in ownership of such stock with the SEC and the National Association of Securities Dealers, Inc. Directors, executive officers and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all such forms they file. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, our directors, executive officer and greater than 10% stockholders complied during 2005 with all applicable Section 16(a) filing requirements.
Code of Conduct and Ethics
Our Board of Directors has approved a Code of Conduct and Ethics that applies to our employees, directors and officers (including our principal executive officer, principal financial officer and principal accounting officer). The Code of Conduct and Ethics is available on our website at http://www.datastream.net/company/investor.asp.
ITEM 11.
ITEM 11. Executive Compensation.
Compensation of Directors
In 2005, non-management directors received four quarterly retainers of $2,500 each, attendance fees for attending ($500) and for chairing ($1,000) meetings of the Board of Directors and its committees, attendance fees of $250 for attending short telephonic meetings and meetings of sub-committees of the Board of Directors, and were reimbursed for expenses incurred in connection with attendance at meetings of the Board of Directors or committees thereof. We also adopted the Amended and Restated Stock Option Plan for Directors in 1995, which, as amended in 2004, provided for a grant of an option to purchase 15,000 shares of Common Stock to non-management directors when they joined the board and thereafter an annual grant of 10,000 options. In January 2005, this annual grant was for an option to purchase 10,000 shares of Common Stock. The Amended and Restated Stock Option Plan for Directors expired on February 7, 2005, and no further grants may be made under that plan.
On December 30, 2005, our Compensation Committee approved the award of an annual lump sum fee in the amount of $20,000, or the Annual Fee, for service as a non-employee director of our company, to be paid annually on or about the first business day of January, and effective in 2006. The Annual Fee is paid in addition to the annual retainer fees and attendance fees already in place for service as a non-employee director. The Annual Fee is intended to replace the previous annual grant of stock options to non-employee directors pursuant to the Amended and Restated Stock Option Plan for Directors that expired in 2005.
Executive Compensation Tables
Table I - Summary Compensation Table
The following table presents certain information required by the SEC relating to various forms of compensation awarded to, earned by or paid to our Chief Executive Officer and our four most highly paid executive officers during fiscal 2005. We refer to those individuals in this Annual Report as the Named Executive Officers.
(1) Includes $14,000 in 2005 (2004: $13,000; 2003: $12,000) deferred at the election of Dr. Blackwell pursuant to our 401(k) plan.
(2) Includes $14,000 in 2005 (2004: $11,996; 2003: $12,000) deferred at the election of Mr. Estevez pursuant to our 401(k) plan.
(3) Includes $14,000 in 2005 (2004: $13,000; 2003: $12,000) deferred at the election of Mr. Buzzalino pursuant to our 401(k) plan.
(4) Includes $11,648 in 2005 deferred at the election of Mr. Sterling pursuant to our 401(k) plan.
(5) Includes $14,000 in 2005 (2004: $13,000; 2003: $12,000) deferred at the election of Mr. Stevens pursuant to our 401(k) plan.
(6) Includes $37,736 in relocation payments, $3,060 in premiums paid by us for Mr. Stevens’ participation in the executive health plan and $3,675 in lease payments for a company car used by Mr. Stevens.
(7) Reflects matching contributions to our 401(k) plan paid by us on behalf of the Named Executive Officer.
TABLE II - Option/SAR Grants in Fiscal 2005
This table presents information regarding options granted to our Named Executive Officers during 2005 to purchase shares of our Common Stock. We have no outstanding stock appreciation rights (SARs) and granted no SARs during 2005. In accordance with SEC rules, the table shows the hypothetical gains or option spreads that would exist for the respective options based on assumed rates of annual compound stock price growth of 5% and 10% from the date the options were granted over the full option term.
(1) Potential realizable value is based on the assumption that the price of the Common Stock appreciates at the rate shown (compounded annually) from the date of grant to the expiration date. These numbers are presented in accordance with the requirements of the SEC and do not reflect our estimate of future stock price performance.
(2) Prior to December 30, 2005, options vested in 33% increments on the first through third anniversaries of the date of grant. On December 30, 2005, the Compensation Committee of the Board of Directors approved the accelerated vesting of unvested stock options held by our active employees. See Note 8 to the Consolidated Financial Statements in this Annual Report.
TABLE III - Aggregate Option Exercises in Fiscal 2005
and Fiscal 2005 Year-End Option Values
The following table shows the number of options exercised during 2005 and the number of shares of Common Stock subject to exercisable and unexercisable stock options held by our Named Executive Officers as of December 31, 2005. The table also reflects the values of such options based on the positive spread between the exercise price of such options and $8.66, which was the closing sales price of our Common Stock as quoted on the Pink Sheets under the symbol “DSTM.PK” on December 30, 2005 (the last trading day of our fiscal year). The Pink Sheets is a centralized quotation service that collects and publishes market-maker quotes for over-the-counter securities in real time. Over-the-counter market quotations, like those on the Pink Sheets, reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
(1) On December 30, 2005, the Compensation Committee of the Board of Directors approved the accelerated vesting of unvested stock options held by our active employees or those of our affiliates for all stock option plans. See Note 8 to the Consolidated Financial Statements in this Annual Report.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the Board of Directors in 2005 were Messrs. Brock and Talton. In 2006, the Compensation Committee of the Board of Directors consists of Messrs. Brock (Chairman) and Talton. During fiscal 2005, the Compensation Committee did not include any member of the Board of Directors who previously or at that time served as an officer or employee of, or a consultant to, Datastream. Our Chief Executive Officer, Dr. Blackwell, is not a member of the Compensation Committee, but typically participates in its deliberations by making recommendations to the Compensation Committee concerning the performance of our executive officers, excluding himself, and recommendations concerning proposed adjustments to their compensation. No executive officer serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board of Directors or Compensation Committee.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Equity Compensation Plan Information
The following table gives information as of December 31, 2005 about the Common Stock that may be issued under all of our existing equity compensation plans.
(1) Includes our 1995 Stock Option Plan, 1998 Stock Option Plan, Amended and Restated Stock Option Plan for Directors, and Employee Stock Purchase Plan.
(2) Includes (a) our 1997 European Stock Option Plan (Dutch, United Kingdom and French sub-plan versions), (b) our 1998 Singapore Stock Option Plan, (c) our German Stock Option Plan, (d) our Australian Stock Option Plan, and (e) our Argentinean Stock Option Plan.
(3) Includes 114,988 shares available for future issuance as of December 31, 2005 under our Employee Stock Purchase Plan, which was suspended January 4, 2006.
Description of Plans Not Approved by Stockholders
Our Board of Directors has adopted the following stock option plans for certain of our or our subsidiaries’ employees in certain foreign jurisdictions: (1) the 1997 European Stock Option Plan (Dutch, United Kingdom and French Sub-plan versions); (2) the German Stock Option Plan; (3) the Australian Stock Option Plan; (4) the Argentinean Stock Option Plan; and (5) the 1998 Singapore Stock Option Plan. We refer to these stock option plans as the Foreign Stock Option Plans. Each of the Foreign Stock Option Plans is administered by the Compensation Committee of the Board of Directors. All outstanding stock options under the Foreign Stock Option Plans, pursuant to the terms of each plan, would fully vest upon a change of control of our company.
Prior to December 30, 2005, options granted pursuant to our 1997 European Stock Option Plan had varying vesting patterns up to five years from the date of grant, depending on the applicable laws of the foreign jurisdiction and the terms of the option agreement. Options granted under this plan expire ten years after the date of grant and are granted at the fair market value of the underlying shares at the date of grant.
Prior to December 30, 2005, options granted pursuant to our 1998 Singapore Stock Option Plan vested incrementally over a period of one to three years, depending on the terms of the option agreement, and expire ten years from the date of grant. Options are granted at the fair market value of the underlying shares at the grant date. Options granted pursuant to our German Stock Option Plan, Australian Stock Option Plan and Argentinean Stock Option Plan vested incrementally over a period of one to five years, depending on the terms of the option agreement, and expire ten years from the date of grant. Options are granted at the fair market value of the underlying shares at the grant date.
Beneficial Ownership of Common Stock
The following table sets forth information concerning (i) those persons known by our management to own beneficially more than 5% of our outstanding Common Stock, (ii) our directors, (iii) our Named Executive Officers and (iv) all of our current directors and executive officers as a group. Such information is provided as of February 28, 2006. The number of shares of Common Stock issued and outstanding as of February 28, 2006 was 20,047,720. According to rules adopted by the SEC, a person is the “beneficial owner” of securities if he or she has or shares the power to vote them or to direct their investment or has the right to acquire beneficial ownership of such securities within 60 days through the exercise of an option, warrant or right, the conversion of a security or otherwise. Except as otherwise noted, the indicated owners have sole voting and investment power with respect to shares beneficially owned. An asterisk in the percent of class column indicates beneficial ownership of less than 1% our outstanding Common Stock.
+ Unless otherwise indicated, the address of each of the beneficial owners identified is 50 Datastream Plaza, Greenville, South Carolina 29605.
(1) Includes 221,920 shares of common stock subject to options exercisable on or within 60 days after February 28, 2006. In connection with the merger agreement, Mr. Blackwell has entered into a voting agreement with Parent and Merger Sub pursuant to which Mr. Blackwell has agreed, among other things, to vote his shares of Datastream common stock in favor of adoption of the merger agreement. In the event that Mr. Blackwell fails to act in accordance with his voting obligations under the voting agreement, the voting agreement grants Parent and Merger Sub an irrevocable proxy to vote Mr. Blackwell’s shares in accordance with those voting obligations.
(2) Includes 247,167 shares of common stock subject to options exercisable on or within 60 days after February 28, 2006.
(3) Includes 470,600 shares of common stock subject to options exercisable on or within 60 days after February 28, 2006. In connection with the merger agreement, Mr. Estevez has entered into a voting agreement with Parent and Merger Sub pursuant to which Mr. Estevez has agreed, among other things, to vote his shares of Datastream common stock in favor of adoption of the merger agreement. In the event that Mr. Estevez fails to act in accordance with his voting obligations under the voting agreement, the voting agreement grants Parent and Merger Sub an irrevocable proxy to vote Mr. Estevez’s shares in accordance with those voting obligations.
(4) Includes 392,432 shares of common stock subject to options exercisable on or within 60 days after February 28, 2006 and 4,800 shares of common stock held by Mr. Sterling’s children. In connection with the merger agreement, Mr. Sterling has entered into a voting agreement with Parent and Merger Sub pursuant to which Mr. Sterling has agreed, among other things, to vote his shares of Datastream common stock in favor of adoption of the merger agreement. In the event that Mr. Sterling fails to act in accordance with his voting obligations under the voting agreement, the voting agreement grants Parent and Merger Sub an irrevocable proxy to vote Mr. Sterling’s shares in accordance with those voting obligations.
(5) Includes 225,000 shares of common stock subject to options exercisable on or within 60 days after February 28, 2006.
(6) Includes 36,000 shares of common stock subject to options exercisable on or within 60 days after February 28, 2006.
(7) Includes 30,000 shares of common stock subject to options exercisable on or within 60 days after February 28, 2006.
(8) Includes 26,000 shares of common stock subject to options exercisable on or within 60 days after February 28, 2006 and 200 shares of common stock held by his spouse.
(9) Includes 22,000 shares of common stock subject to options exercisable on or within 60 days after February 28, 2006.
(10) Includes 34,000 shares of common stock subject to options exercisable on or within 60 days after February 28, 2006 and 300 shares of common stock, held by his spouse. Mr. Talton disclaims beneficial ownership of the shares held by his spouse.
(11) Includes 1,705,119 shares of common stock subject to options exercisable on or within 60 days after February 28, 2006.
(12) The business address of Magellan Holdings, Inc. is 1000 Windward Concourse Parkway, Suite 100, Alpharetta, Georgia 30005. Magellan may be deemed to have acquired beneficial ownership of 3,751,431 shares of Datastream common stock through the execution of separate voting agreements dated January 4, 2006 with each of Larry G. Blackwell, C. Alex Estevez and John M. Sterling, III. Pursuant to those voting agreements, each of these executive officers has agreed, among other things, to vote his shares of Datastream common stock in favor of adoption of the merger agreement. In the event that one of these executive officers fails to act in accordance with his voting obligations under the voting agreement, the voting agreement grants Magellan an irrevocable proxy to vote that executive officer’s shares in accordance with his voting obligations. As a result of these voting agreements, Magellan may be deemed to share voting power over the shares of Datastream common stock beneficially owned by Messrs. Blackwell, Estevez and Sterling as to matters that are the subject of the voting agreements, but Magellan does not have any dispositive power over such shares of Datastream common stock, or voting power with respect to other matters.
(13) The business address of Eagle Asset Management, Inc. is 880 Carillon Parkway, St. Petersburg, Florida 33716. The number of shares reported was derived from a Schedule 13F filed by Eagle Asset Management with the Securities and Exchange Commission on February 13, 2006. Eagle Asset Management reports that it has sole voting power over 3,052,355 shares and sole dispositive power over 3,125,985 shares.
(14) The business address of Brown Capital Management, Inc. is 1201 N. Calvert Street, Baltimore, Maryland 21202. The number of shares reported was derived from a Schedule 13G executed by Brown Capital Management on December 31, 2005 and filed with the Securities and Exchange Commission on February 6, 2006. According to the Schedule 13G, all of the shares of the common stock are owned by various investment advisory clients of Brown Capital Management, Inc. Brown Capital Management reports that it has sole voting power over 1,679,450 shares and sole dispositive power over 2,221,800 shares. According to its Schedule 13G, no individual client of Brown Capital Management holds more than five percent of the class.
(15) The business address of Roumell Asset Management, LLC is 3 Bethesda Metro Center, Suite 700, Bethesda, Maryland 20814. The number of shares reported was derived from a Schedule 13G executed by Roumell Asset Management on February 6, 2006 and filed with the Securities and Exchange Commission on February 7, 2006. Roumell Asset Management reports that it has sole voting power and sole dispositive power over the 1,056,241 shares.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions.
None
ITEM 14.
ITEM 14. Principal Accountant Fees and Services.
The firm of BDO Seidman, LLP served as our independent registered public accounting firm for the fiscal year ended December 31, 2005. KPMG LLP served as our independent registered public accounting firm for the fiscal year ended December 31, 2004.
Audit Fees.
The aggregate fees, including expenses reimbursed, billed by BDO Seidman, LLP to us for professional services rendered for the audit of our consolidated financial statements and those of our subsidiaries for fiscal 2005, the reviews of our quarterly financial statements during fiscal 2005 and other reviews and consultations on matters reflected in the financial statements, such as consents, review of SEC filings and statutory audits in non-U.S. locations, were $655,000.
The aggregate fees, including expenses reimbursed, billed by KPMG LLP to us for professional services rendered for the audit of our consolidated financial statements and those of our subsidiaries for fiscal 2004, the reviews of the Company’s quarterly financial statements during fiscal 2004 and other reviews and consultations on matters reflected in the financial statements, such as consents, review of SEC filings and statutory audits in non-U.S. locations, were $1,604,000 for fiscal 2004.
Audit-Related Fees.
The aggregate fees for BDO Seidman, LLP audit-related services, including business/accounting technical advice, were $5,100 for fiscal 2005.
The aggregate fees for KPMG LLP audit-related services, including business/accounting technical advice, were $0 for fiscal year 2004.
Tax Services Fees.
The BDO Seidman, LLP aggregate fees for all tax services other than those included in “audit” and “audit-related” fees, including tax compliance audits, tax planning and tax advice, were $0 for fiscal 2005.
The KPMG LLP aggregate fees for all tax services other than those included in “audit” and “audit-related” fees, including tax compliance audits, tax planning and tax advice, were $69,000 for fiscal 2004.
All Other Fees.
The aggregate fees, including expenses reimbursed, billed by BDO Seidman, LLP to us for services rendered to us and our subsidiaries, other than the services described above, were $0 for fiscal year 2005.
The aggregate fees, including expenses reimbursed, billed by KPMG LLP to us for services rendered to us and our subsidiaries, other than the services described above, were $0 for fiscal year 2004.
Audit Committee Pre-Approval. The Audit Committee pre-approves all audit and non-audit services performed by our independent registered public accounting firm and all related fees to assure that the provision of such services does not impair the auditor’s independence. The independent registered public accounting firm is prohibited from performing any non-audit services in contravention of SEC Rules. The Audit Committee has delegated its pre-approval authority to its Chairman, but not to management. The Chairman of the Audit Committee is required to report any significant pre-approval decisions to the full Audit Committee at its scheduled meeting immediately following such decisions.
The Audit Committee has considered and determined that the provision of services during 2005 by BDO Seidman, LLP that were unrelated to the audit of the financial statements and to the review of our interim financial statements during 2005 is compatible with maintaining BDO’s independence.
PART IV.
ITEM 15.
ITEM 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this Report:
1. Financial Statements:
The following consolidated financial statements of Datastream Systems, Inc. for the three years ended December 31, 2005 are submitted in Part II, Item 8 of this report:
Consolidated Balance Sheets - December 31, 2005 and 2004
Consolidated Statements of Income- For the three years ended December 31, 2005
Consolidated Statements of Stockholders’ Equity and Comprehensive Income- For the three years ended December 31, 2005
Consolidated Statements of Cash Flows - For the three years ended December 31, 2005
Notes to Consolidated Financial Statements - December 31, 2005
2. Financial Statement Schedules:
The following consolidated financial statement schedule of Datastream Systems, Inc. is included in Item 15(c):
II - Valuation and Qualifying Accounts and Reserves
All schedules for which provision is made in the applicable accounting regulation of the SEC, but which are excluded from this report, are not required under the related instructions or are inapplicable, and therefore have been omitted.
3. Exhibits:
(1) Incorporated herein by reference to exhibit of the same number in the Company’s Registration Statement on Form S-1 (File No. 33-89498).
(2) Incorporated herein by reference to exhibit of the same number in Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 000-25590).
(3) Incorporated by reference herein to exhibit of the same number in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 000-25590).
(4) Incorporated herein by reference to Exhibit 99.1 in the Company’s Current Report on Form 8-K filed on December 12, 2001 (File No. 000-25590).
(5) Incorporated herein by reference to Appendix A to the Company’s definitive Proxy Statement for the Company’s 1997 Annual Meeting of Stockholders, filed May 12, 1997 (File No. 000-25590).
(6) Incorporated herein by reference to exhibit of the same number in Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 000-25590).
(7) Incorporated herein by reference to exhibit of the same number in Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002 (File No. 000-25590).
(8) Incorporated herein by reference to Appendix A to the Company’s definitive Proxy Statement for the Company’s 2003 Annual Meeting of Stockholders, filed April 28, 2003 (File No. 000-25590).
(9) Incorporated herein by reference to Exhibit 99.1 in Company’s form S-8 Registration Statement, filed June 17, 1998 (File No. 000-25590).
(10) Incorporated herein by reference to exhibit of the same number in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-25590).
(11) Incorporated herein by reference to exhibit of the same number in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 000-25590).
(12) Incorporated herein by reference to exhibit of the same number in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No. 000-25590).
(13) Incorporated herein by reference to exhibit of the same number in the Company’s Current Report on Form 8-K dated January 4, 2006 and filed on January 5, 2006 (File No. 000-25590).
(14) Incorporated herein by reference to Exhibit 4.1 in the Company’s Current Report on Form 8-K dated January 4, 2006 and filed on January 5, 2006 (File No. 000-25590).
(15) Incorporated herein by reference to “Non-Employee Director Compensation” set forth under Item 1.01 of the Company’s Current Report on Form 8-K dated December 30, 2005 and filed on January 5, 2006 (File No. 000-25590).
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(c) of this report.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Datastream Systems, Inc.
Greenville, SC 29605
The audit referred to in our report dated February 27, 2006 relating to the consolidated financial statement of Datastream Systems, Inc. which is contained in Item 8 of this Form 10-K included the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based upon our audit.
In our opinion such financial statement schedule presents fairly, in all material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
Charlotte, North Carolina
February 27, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Datastream Systems, Inc.:
Under date of September 12, 2005, we reported on the consolidated balance sheet of Datastream Systems, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2004, which are included herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related accompanying financial statement schedule - Allowance for Doubtful Accounts Receivable and Unbilled Revenue - for each of the years in the two-year period ended December 31, 2004. The financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Greenville, South Carolina
September 12, 2005
Datastream Systems, Inc.
Schedule II
Allowance for Doubtful Accounts Receivable and Unbilled Revenue
(a) Description
The deferred tax valuation allowance rollforward is included in Note 6 of the “Notes to Financial Statements” filed in Item 8 of this report.
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 3, 2006
By:
/s/ C. Alex Estevez
C. Alex Estevez
President and Chief Financial Officer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the signature page to this Report constitutes and appoints Larry G. Blackwell and C. Alex Estevez 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 Report, 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 3, 2006.
Signature
Title
/s/ Larry G. Blackwell
Larry G. Blackwell
Chairman of the Board and
Chief Executive Officer
(principal executive officer)
/s/ C. Alex Estevez
C. Alex Estevez
President and Chief Financial Officer and Secretary
(principal financial and accounting officer)
/s/ Richard T. Brock
Richard T. Brock
Director
/s/ Ira D. Cohen
Ira D. Cohen
Director
/s/ Robert C. Davis
Robert C. Davis
Director
/s/ James C. Ryan, Jr.
James C. Ryan, Jr.
Director
/s/ James R. Talton, Jr.
James R. Talton, Jr.
Director
EXHIBIT INDEX
(1) Incorporated herein by reference to exhibit of the same number in the Company’s Registration Statement on Form S-1 (File No. 33-89498).
(2) Incorporated herein by reference to exhibit of the same number in Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 000-25590).
(3) Incorporated by reference herein to exhibit of the same number in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 000-25590).
(4) Incorporated herein by reference to Exhibit 99.1 in the Company’s Current Report on Form 8-K filed on December 12, 2001 (File No. 000-25590).
(5) Incorporated herein by reference to Appendix A to the Company’s definitive Proxy Statement for the Company’s 1997 Annual Meeting of Stockholders, filed May 12, 1997 (File No. 000-25590).
(6) Incorporated herein by reference to exhibit of the same number in Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 000-25590).
(7) Incorporated herein by reference to exhibit of the same number in Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002 (File No. 000-25590).
(8) Incorporated herein by reference to Appendix A to the Company’s definitive Proxy Statement for the Company’s 2003 Annual Meeting of Stockholders, filed April 28, 2003 (File No. 000-25590).
(9) Incorporated herein by reference to Exhibit 99.1 in Company’s form S-8 Registration Statement, filed June 17, 1998 (File No. 000-25590).
(10) Incorporated herein by reference to exhibit of the same number in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 000-25590).
(11) Incorporated herein by reference to exhibit of the same number in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 000-25590).
(12) Incorporated herein by reference to exhibit of the same number in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (File No. 000-25590).
(13) Incorporated herein by reference to exhibit of the same number in the Company’s Current Report on Form 8-K dated January 4, 2006 and filed on January 5, 2006 (File No. 000-25590).
(14) Incorporated herein by reference to Exhibit 4.1 in the Company’s Current Report on Form 8-K dated January 4, 2006 and filed on January 5, 2006 (File No. 000-25590).
(15) Incorporated herein by reference to “Non-Employee Director Compensation” set forth under Item 1.01 of the Company’s Current Report on Form 8-K dated December 30, 2005 and filed on January 5, 2006 (File No. 000-25590).
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 15(c) of this report.