SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
X Quarterly Report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
For the quarterly period ended September 30, 2001
--- Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from __________ to __________.
Commission file number 0-25936
USDATA Corporation
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2405152
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2435 N. Central Expressway, Richardson, TX 75080
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(Address of Principal Executive Offices)
(Zip Code)
Registrant's Telephone Number, Including Area Code: (972) 680-9700
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
Yes X No
--- ---
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 9, 2001
Number of Shares
Class Outstanding
Common Stock, Par Value $.01 Per Share 2,826,591 shares
USDATA CORPORATION AND SUBSIDIARIES
FORM 10-Q
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance
Sheets as of September 30, 2001 and December 31,
2000 3
Unaudited Condensed Consolidated Statements
of Operations and Comprehensive Loss
for the Three and Nine Months Ended
September 30, 2001 and 2000 4
Unaudited Condensed Consolidated Statements
of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
PART II. OTHER INFORMATION
Item 2. Changes In Securities and Use of Proceeds 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
USDATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,394 $ 673
Accounts receivable, net of allowance for doubtful
accounts of $257 and $224, respectively 2,617 4,073
Other current assets 537 678
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Total current assets 4,548 5,424
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Property and equipment, net 1,414 2,216
Computer software development costs, net 6,655 7,848
Software held for resale, net 525 824
Other assets 34 42
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Total assets $ 13,176 $ 16,354
========== ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 687 $ 1,711
Deferred revenue 970 1,218
Accrued compensation and benefits 719 808
Current portion of long-term debt 1,948 1,165
Other accrued liabilities 1,832 2,555
Net liabilities of discontinued operation 365 2,413
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Total current liabilities 6,521 9,870
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Long-term debt, less current portion 712 554
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Total liabilities 7,233 10,424
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Commitments and contingencies
Redeemable convertible preferred stock, Series A-1 and Series A-2,
$.01 par value, with a redemption and liquidation value of $2.56 per
share in 2000; authorized 16,000,000 shares for Series A-1 and
16,000,000 shares for Series A-2; 5,300,000 shares issued and
outstanding for each series of preferred stock in 2000 -- 27,142
Stockholders' equity (deficit):
Series A cumulative convertible preferred stock, $.01 par value;
liquidation preference $100; 100,000 shares authorized;
50,000 shares issued and outstanding in 2001 and 2000 5,868 5,568
Series B cumulative convertible preferred stock; $.01 par value;
liquidation preference $100; 800,000 shares authorized;
265,000 shares issued and outstanding in 2001 28,732 --
Series C-1 cumulative convertible preferred stock; $.01 par value;
liquidation preference $80; 125,000 shares authorized;
53,750 shares issued and outstanding in 2001 10,388 --
Common stock, $.01 par value, 8,000,000 shares
authorized; 3,264,838 issued in 2001 and 2000 33 33
Additional paid-in capital 13,498 24,022
Accumulated deficit (44,057) (41,910)
Treasury stock at cost, 438,247 shares in 2001
and 463,402 shares in 2000 (7,522) (7,961)
Accumulated other comprehensive loss (997) (964)
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Total stockholders' equity (deficit) 5,943 (21,212)
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Total liabilities, redeemable convertible preferred
stock and stockholders' equity (deficit) $ 13,176 $ 16,354
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
3
USDATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues:
Product license $ 2,753 $ 3,237 $ 9,052 $ 9,217
Services 508 1,038 1,520 2,364
---------- ---------- ---------- ----------
Total revenues 3,261 4,275 10,572 11,581
---------- ---------- ---------- ----------
Operating expenses:
Selling and product materials 2,216 3,459 6,974 10,697
Product development 453 2,225 1,406 6,434
General and administrative 867 2,029 2,877 5,035
Severance and other restructuring charges 1,061 -- 1,068 542
Write off of capitalized software 391 -- 391 --
---------- ---------- ---------- ----------
Total operating expenses 4,988 7,713 12,716 22,708
---------- ---------- ---------- ----------
Loss from operations (1,727) (3,438) (2,144) (11,127)
Interest expense, net (44) (33) (135) (291)
---------- ---------- ---------- ----------
Loss from continuing operations before preferred
stock dividends of subsidiary (1,771) (3,471) (2,279) (11,418)
Preferred stock dividends of subsidiary -- (112) -- (112)
---------- ---------- ---------- ----------
Loss from continuing operations (1,771) (3,583) (2,279) (11,530)
Income (loss) from discontinued operations 132 (5,848) 132 (17,540)
---------- ---------- ---------- ----------
Net loss (1,639) (9,431) (2,147) (29,070)
Dividends on preferred stock, preferred stock warrant
and beneficial conversion (1,330) (108) (10,128) (324)
---------- ---------- ---------- ----------
Net loss applicable to common stockholders $ (2,969) $ (9,539) $ (12,275) $ (29,394)
========== ========== ========== ==========
Net loss per common share:
Basic and diluted
Loss from continuing operations $ (1.10) $ (1.34) $ (4.40) $ (4.46)
Income (loss) from discontinued operations 0.05 (2.13) 0.05 (6.59)
---------- ---------- ---------- ----------
Net loss per common share $ (1.05) $ (3.47) $ (4.35) $ (11.05)
========== ========== ========== ==========
Comprehensive loss
Net loss $ (1,639) $ (9,431) $ (2,147) $ (29,070)
Foreign currency translation adjustment (15) 10 (33) (115)
---------- ---------- ---------- ----------
Comprehensive loss: $ (1,654) $ (9,421) $ (2,180) $ (29,185)
========== ========== ========== ==========
Weighted average shares outstanding:
Basic and diluted 2,826 2,747 2,818 2,660
========== ========== ========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
4
USDATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2001 2000
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Cash flows from operating activities:
Net loss $ (2,147) $ (29,070)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss from discontinued operations (132) 17,540
Depreciation and amortization 2,735 1,560
Non-cash stock compensation 87 --
Write off of capitalized software 391 --
Non-cash interest expense -- 313
Preferred stock dividends of subsidiary -- 112
Changes in operating assets and liabilities:
Accounts receivable, net 1,456 2,927
Other assets, net 149 (199)
Accounts payable and other accrued liabilities (1,547) 336
Accrued compensation and benefits (88) (33)
Deferred revenue (248) (726)
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Net cash provided by (used in) continuing operations 656 (7,240)
Net cash used in discontinued operations (1,916) (14,312)
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Net cash used in operating activities (1,260) (21,552)
---------- ----------
Cash flows from investing activities:
Capital expenditures (60) (882)
Capitalized software development costs (983) (1,985)
Refund of leasehold improvement costs 209 --
---------- ----------
Net cash used in continuing operations (834) (2,867)
Net cash used in discontinued operations -- (2,609)
---------- ----------
Net cash used in investing activities (834) (5,476)
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Cash flows from financing activities:
Proceeds from stock option exercises -- 383
Proceeds from stock warrant exercise -- 2,109
Proceeds from issuance of common stock 56 --
Proceeds from issuance of preferred stock, net 2,050 6,937
Proceeds from issuance of demand notes payable -- 26,750
Payments on demand notes payable -- (7,500)
Borrowing under revolving line of credit 1,657 --
Other borrowings 584 --
Payments on long-term debt (1,532) (65)
---------- ----------
Net cash provided by financing activities 2,815 28,614
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Net increase in cash and cash equivalents 721 1,586
Cash and cash equivalents, beginning of period 673 2,962
---------- ----------
Cash and cash equivalents, end of period $ 1,394 $ 4,548
========== ==========
Non-cash operating and financing activity:
Conversion of accrued liabilities to long-term notes payable $ 232 $ --
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
5
USDATA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
of USDATA Corporation and its subsidiaries (the "Company") for the three and
nine month periods ended September 30, 2001 and 2000 have been prepared in
accordance with accounting principles generally accepted in the United States of
America. Significant accounting policies followed by the Company were disclosed
in the notes to the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000. In the opinion
of the Company's management, the accompanying consolidated financial statements
contain adjustments, consisting of normal recurring adjustments, necessary to
present fairly the consolidated financial position of the Company at September
30, 2001 and the consolidated results of its operations and comprehensive loss,
and cash flows for the three and nine month periods ended September 30, 2001 and
2000. Operating results for the three and nine months ended September 30, 2001
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2001.
2. CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK WARRANT
CONVERTIBLE PREFERRED STOCK
On March 30, 2001, the Company secured an equity infusion of $1.5
million from SCP Private Equity Partners, L.P. ("SCP") through the issuance of
37,500 shares of Series C-1 Preferred Stock of the Company ("Series C-1
Preferred") and a warrant to purchase up to 75,000 shares of Series C-2
Preferred Stock. In addition, SCP has committed to purchase an additional 37,500
shares of Series C-1 Preferred ("Option Stock") at the purchase price of $40 per
share or $1.5 million. The Company may exercise its right to sell the Option
Stock on or before the expiration of nine months after March 30, 2001 ("Closing
Date"), but not before May 30, 2001, and the Company must be in compliance with
specified monthly targets as defined in the Series C Preferred Stock Agreement.
As an additional condition to this equity financing, SCP and Safeguard 2000
Capital, L.P. ("Safeguard 2000") agreed not to convert upon exercise of eMake
Corporation warrants to acquire Series A-1 and A-2 Preferred Stock,
respectively, which are convertible into the Company's Series B Convertible
Preferred Stock. SCP and Safeguard 2000 hold warrants exercisable for 5,300,000
shares and 5,300,000 shares, respectively, of eMake Corporation Series A-1 and
A-2 Preferred Stock which would have been convertible into a total of 265,000
shares of the Company's Series B Convertible Preferred Stock.
On July 20, 2001, the Company exercised its right to sell 16,250 shares
of the Option Stock to SCP. The Company received $635,596, net of transaction
costs, in exchange for issuing 16,250 shares of its Option Stock to SCP.
In conjunction with the Series C-1 and C-2 Preferred Stock purchase,
the Company executed a Certificate of Designation for Series C-1 Preferred Stock
and Series C-2 Preferred Stock which designated 125,000 shares of authorized
preferred stock as Series C-1 Preferred Stock and designated 125,000 shares of
authorized but unissued preferred stock as Series C-2 Preferred Stock. As of
September 30, 2001, 53,750 shares of Series C-1 Preferred Stock are issued and
outstanding.
The Company's Series C-1 Preferred Stock has a par value of $.01 per
share and a liquidation preference of $80 per share plus cumulative dividends
and interest. The preferred stock is convertible into the Company's common stock
at a conversion rate of 20 shares of common stock for each share of preferred
stock and the cumulative dividends are payable at $4.00 per share per annum in
the form of additional shares of Series C-1 Preferred. The Series C-1 Preferred
Stock ranks senior to all other classes and series of the Company's capital
stock with respect to dividend rights, rights on liquidation, dissolution and
winding up. The excess of the liquidation preference over the purchase price of
the preferred stock has been reflected as a $650 thousand and a $2.150 million
dividend on preferred stock for the three and nine months ended September 30,
2001, respectively, increasing the loss applicable to common
6
stockholders and decreasing additional paid-in capital.
Cumulative dividends of $100,000, $530,000 and $50,000 have been
recorded for the three months ended September 30, 2001 for the Series A
Preferred Stock, the Series B Preferred Stock and the Series C-1 Preferred
Stock, respectively. Cumulative dividends of $477,000, $1,413,000 and $88,000
have been recorded for the nine month period ended September 30, 2001 for the
Series A Preferred Stock, the Series B Preferred Stock and the Series C-1
Preferred Stock, respectively.
On January 31, 2001, SCP elected to exercise its right to acquire
132,500 shares of Series B Convertible Preferred Stock of the Company in
exchange for 5,300,000 shares of Series A-1 Redeemable Convertible Preferred
Stock of eMake Corporation. In addition, a subsidiary of Safeguard Scientifics,
Inc. elected to exercise its right to acquire 132,500 shares of Series B
Convertible Preferred Stock of the Company in exchange for 5,300,000 shares of
Series A-2 Redeemable Convertible Preferred Stock of eMake Corporation. As of
September 30, 2001, no series of eMake preferred stock remains outstanding.
WARRANT TO PURCHASE SERIES C-2 PREFERRED STOCK
The Series C-2 Preferred Stock warrant issued to SCP by the Company
grants SCP the right to purchase up to 75,000 shares of the Company's Series C-2
Preferred Stock at a purchase price of $40 per share. The Series C-2 Preferred
Stock has a par value of $.01 per share and a liquidation preference of $120 per
share plus cumulative dividends and interest and is convertible into the
Company's common stock at a conversion rate of 20 shares of common stock for
each share of preferred stock. The right to purchase the shares of Series C-2
Preferred Stock under the warrant are exercisable on any business day on or
before March 30, 2011, with the exception of 50,500 shares, which may not be
exercisable until the earlier of stockholder approval of the transactions under
the warrant or May 31, 2001. On exercise, the warrant provides the holder a
liquidation preference of three times the exercise price per share. The excess
of the liquidation preference of the Series C-2 Preferred Stock to be acquired
on warrant exercise over the warrant exercise price of $3.0 million has been
reflected as additional return to the Series C-1 preferred stockholder,
increasing loss applicable to common stockholders for the nine months ended
September 30, 2001 and decreasing additional paid-in capital by $6.0 million.
3. LOSS PER SHARE
Net loss per share of common stock is presented in accordance with the
provisions of SFAS No. 128, Earnings Per Share. Under SFAS No. 128, basic loss
per share excludes dilution for potentially dilutive securities and is computed
by dividing income or loss applicable to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted loss per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
Potentially dilutive securities are excluded from the computation of diluted
loss per share when their inclusion would be antidilutive. Options to acquire a
total of 237,891 common shares and options to acquire 352,058 common shares have
been excluded from the computation of diluted loss per share for the three and
nine months ended September 30, 2001 and 2000, respectively, as their inclusion
would be antidilutive.
4. STOCK SPLIT
On July 10, 2001, the Company's board of directors approved and
recommended that the stockholders approve an amendment to the Company's
Certificate of Incorporation to effect a one-for-five reverse stock split (the
"Reverse Split") of the Company's issued and outstanding Common Stock (the
"Existing Common"). On July 10, 2001, the holders of a majority of the
outstanding shares of Existing Common approved the amendment by written consent.
Approval by the board of directors and by the holders of a majority of the
outstanding shares of Common Stock is required under Delaware law to effect the
amendment. The amendment became effective upon the filing of the amendment to
the Company's Certificate of Incorporation with the Delaware Secretary of State
on August 20, 2001. The Reverse Split became effective August 21, 2001 the
("Effective Date").
Pursuant to the terms of the Reverse Split, each five shares of
Existing Common outstanding immediately prior to the Effective Date was
reclassified as, and exchanged for, one share of newly issued Common Stock, par
value $0.01 per share ("New Common"). No fractional shares of New Common were
issued. If the conversion resulted in a fraction of a share, then the Company
rounded up such fraction of a
7
share and the holder received a whole share for such fraction. The per share
amounts reported herein have been adjusted to give effect to the Reverse Split.
On August 2, 2001, the Company received notification from The Nasdaq
Stock Market, Inc. ("Nasdaq") indicating that since the Company's common stock
had failed to maintain a minimum market value of public float ("MVPF") of $5.0
million and a minimum bid price of $1.00 over a period of 30 consecutive trading
days, the Company was not in compliance with two of the Nasdaq listing
requirements. The Nasdaq indicated in their notification that if at anytime
before October 31, 2001, the MVPF of the Company's common stock is at least $5.0
million and the bid price is at least $1.00 for a minimum of 10 consecutive
trading days the Company would avoid a delisting determination. If the MVPF of
the Company's common stock is not at least $5.0 million at anytime before
October 31, 2001, the Company would then have the right to appeal the Nasdaq's
determination. On September 27, 2001, Nasdaq announced its implementation of a
moratorium on the minimum bid and public float requirements for continued
listing on Nasdaq and to suspend these requirements until January 2, 2002.
5. NOTES PAYABLE AND CURRENT PORTION OF LONG-TERM DEBT
At March 31, 2001, the Company was not in compliance with one of its
debt covenants under its revolving credit facility and subsequently received a
waiver from the lending bank for this covenant. As of May 3, 2001, the credit
facility was amended to ease compliance with this covenant retroactively to
December 2000 and for the remainder of the agreement ending January 31, 2002. As
of September 30, 2001, the Company was in compliance with all debt covenants,
and at September 30, 2001, $1.4 million was drawn under the revolving credit
facility and is included in current liabilities.
In December 2000, the Company entered into a development and
commercialization agreement with an original equipment manufacturer ("OEM") and
customer of the Company. On May 11, 2001, the agreement was amended to include a
loan agreement ("Loan") between the Company and the OEM in connection with a
co-coordinated development program to co-develop the next major release of the
Company's software product FactoryLink. The OEM will advance the Company up to
$467,500 in three separate advances. As of September 30, 2001, the Company
received all three advances totaling $467,500. The Loan bears interest at 10.5%
per annum and is repayable in eight equal quarterly installments of principal
and interest with the first installment due on April 15, 2002.
6. SEVERANCE AND OTHER RESTRUCTURING ACCRUALS
The following table summarizes by category the accrued liability
balances at September 30, 2001 related to the Company's 2000 restructuring
plans.
Amount Amount
Accrued at Cash Accrued at
(in thousands) 12/31/00 Accrual Payments 9/30/01
---------- ---------- ---------- ----------
Employee severance and other employee-related costs $ 410 $ -- $ (342) $ 68
Early lease termination and facility shutdown costs 141 -- (136) 5
Lease costs associated with vacated office space 988 1,061 (771) 1,278
Legal and other related costs 68 -- (35) 33
---------- ---------- ---------- ----------
$ 1,607 $ 1,061 $ (1,284) $ 1,384
========== ========== ========== ==========
The severance and restructuring accrued liabilities are included in
accrued compensation and benefits and other accrued liabilities in the
accompanying condensed consolidated balance sheets. The continuing deterioration
of the real estate market has affected the Company's ability to sublet
approximately 45,000 square feet of excess office space at the Company's
headquarter facilities. As a result, the Company accrued an additional $1.1
million in restructuring charges related to lease costs associated with vacated
office space in the third quarter of 2001.
In connection with the eMake Corporation discontinued operations, the
Company paid $548 thousand for severance and other employee-related costs, $183
thousand in early lease termination and
8
facility shutdown costs and $56 thousand in lease costs associated with vacated
office space. The remaining accrued liability balance at September 30, 2001
totals $15 thousand and is included in net liabilities of discontinued
operation. The remaining severance and restructuring accrued liabilities are
expected to be paid in full by December 31, 2001.
7. WRITE OFF OF CAPITALIZED SOFTWARE
As a result of strategy changes from two of the Company's suppliers,
the Company determined that the carrying amount of capitalized software
development costs related to two of its software products were not recoverable
and as a result deemed to be impaired during the third quarter of 2001. The
Company wrote off $355 thousand related to its Analyzer software product and $36
thousand related to its Connector software product.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board released
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended by SFAS No. 138, which is effective for the
Company beginning January 1, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments. The Statement requires that an entity
recognize all derivatives as either assets or liabilities in the financial
statements and measure those instruments at fair value, and it defines the
accounting for changes in the fair value of the derivatives depending on the
intended use of the derivative. The Company adopted the provisions of SFAS 133
effective January 1, 2001, and the adoption did not have any impact on the
Company's consolidated results of operations, financial position or cash flows
as the Company does not have any derivative instruments.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
a Replacement of FASB Statement No. 125." This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities and is effective after March 31, 2001. The
Company adopted SFAS 140 in the second quarter of 2001. The adoption of SFAS 140
did not have a material impact on the Company's consolidated financial
statements and related disclosures.
On June 30, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No.'s 141 and 142,
"Business Combinations" and "Goodwill and Other Intangibles," respectively. SFAS
No. 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. SFAS 142 requires that ratable
amortization of goodwill be replaced with periodic fair-value based tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. Additionally, under the provision of the new
accounting standard, an acquired intangible asset should be separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of the acquirer's intent
to do so. SFAS 141 is effective for all business combinations initiated after
June 30, 2001 and for all business combinations accounted for by the purchase
method for which the date of acquisition is after June 30, 2001. The provisions
of SFAS 142 will be effective for fiscal years beginning after December 15,
2001, and will thus be adopted by the Company, as required, in fiscal year 2002.
Adoption of SFAS No. 141 and No. 142 is not expected to have a material impact
on the Company's consolidated financial statements and related disclosures.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at
9
the end of each period through charges to operating expense. If the obligation
is settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The Company is required to adopt the
provisions of Statement No. 143 no later than the beginning of fiscal year 2003,
with early adoption permitted. The Company does not expect the adoption of this
statement to have a material effect on its consolidated results of operations or
financial position.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it
retains many of the fundamental provisions of that Statement. Statement No. 144
becomes effective for fiscal years beginning after December 15, 2001, with early
applications encouraged. The Company does not expect the adoption of this
statement to have a material effect on its consolidated results of operations or
financial position.
10
USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
USDATA Corporation (the "Company"), headquartered in Richardson, Texas
is a leading global provider of software and services that give enterprises the
knowledge and control needed to perfect the products they produce and processes
they manage. Based upon a tradition of flexible service, innovation and
integration, the Company's software currently operates in more than 60 countries
around the globe, including seventeen of the top twenty-five manufacturers. The
Company's software heritage is born out of manufacturing and process automation
solutions and has grown to encompass the industry's deepest product knowledge
and control solutions. With an eye towards the future of e-business, the Company
continues to create innovative solutions that will support the integration of
enterprise production and automation information into the supply chain. The
Company has six offices worldwide and a global network of distribution and
support partners.
Revenues have been generated primarily from licenses of the Company's
FactoryLink(R) and Xfactory(R) software and secondarily from technical support
and service agreements, training classes and product related services. The
support and service agreements are generally one-year, renewable contracts
entitling a customer to certain software upgrades and technical support. Revenue
from services represented approximately 16% and 14% of revenues during the three
and nine months ended September 30, 2001, compared to 24% and 20% for the three
and nine months ended September 30, 2000.
FactoryLink is a process knowledge and control solution used to develop
custom supervisory control and data acquisition ("SCADA") and human machine
interfaces ("HMI") for the supervision and control of a broad range of automated
processes. FactoryLink is a horizontal application tool set used by system
integrators and end customers to build automation and control applications for a
wide variety of industrial markets such as electronics assembly, semiconductor,
automotive, building automation, food and beverage, pharmaceuticals, metals,
mining, cement, oil and gas, electricity generation, transmission and
distribution and water and waste water transport. It allows customers to collect
and monitor data from disparate process control systems and acts as a hub for
real-time information that may be used by various decision makers interested in
the real-time status of the production process. In 2000, the Company released
its latest version, FactoryLink 7, which is designed to have a lower total cost
of ownership than other SCADA/HMI products on the market.
In April 2001, the Company released FactoryLink++, the newest addition
to its FactoryLink product. FactoryLink++ is designed specifically to help new
SCADA/HMI users to jump start application development, lower application
maintenance and reduce project risk. FactoryLink++ includes integrated modules,
concepts, methods and tools designed to help end users, integrators, original
equipment manufacturers and consultants get the maximum value out of the
FactoryLink software system.
Xfactory is a product knowledge and control solution designed to
capture and communicate real-time manufacturing data from the shop floor to the
people and systems who need it, when they need it. The information is intended
to help customers make better-informed decisions and reduce manufacturing costs
and lead times. Xfactory is designed to track all aspects of discrete
manufacturing production - maintaining historically accurate records as well as
real-time production information, defect tracking, complete product genealogy
and integration into enterprise software systems. Xfactory is intended to
benefit manufacturing customers by, reducing work in progress, lowering cost of
errors, and lowering cost of compliance with government regulations, while
limiting the amount of rework and increasing product revenue. The Xfactory suite
includes a process knowledge and control module based on the Company's
FactoryLink product.
11
The Company focuses its sales efforts through selected distributors
capable of providing the level of support and expertise required in the
real-time manufacturing and process control application market. The division
currently has channel support locations in the United States and Europe. The
Company's distributors have sales locations throughout North and South America,
Europe, the Far East and the Middle East.
RESULTS OF OPERATIONS
The following table presents selected financial information relating to
the financial condition and results of operations of the Company and should be
read in conjunction with the unaudited consolidated financial statements and
notes included herein. The table sets forth, for the periods indicated, the
Company's statement of operations as a percentage of total revenues.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Product license 84% 76% 86% 80%
Services 16% 24% 14% 20%
-------- -------- -------- --------
Total revenues 100% 100% 100% 100%
-------- -------- -------- --------
Operating expenses:
Selling and product materials 68% 81% 66% 92%
Product development 14% 52% 13% 56%
General and administrative 27% 47% 28% 43%
Severance and other restructuring charges 33% 0% 10% 5%
Write off of capitalized software 12% 0% 4% 0%
-------- -------- -------- --------
Total operating expenses 154% 180% 121% 196%
-------- -------- -------- --------
Loss from operations (54)% (80)% (21)% (96)%
Interest expense, net (1)% (1)% (1)% (3)%
-------- -------- -------- --------
Loss from continuing operations before preferred
stock dividends of subsidiary (55)% (81)% (22)% (99)%
Preferred stock dividends of subsidiary 0% (3)% 0% (1)%
-------- -------- -------- --------
Loss from continuing operations (55)% (84)% (22)% (100)%
Income (loss) from discontinued operations 4% (137)% 1% (151)%
-------- -------- -------- --------
Net loss (51)% (221)% (21)% (251)%
Dividends on preferred stock, preferred stock warrant
and beneficial conversion (41)% (3)% (96)% (3)%
-------- -------- -------- --------
Net loss applicable to common stockholders (92)% (224)% (117)% (254)%
-------- -------- -------- --------
Comparison of Three Months Ended September 30, 2001 and 2000
Total revenues for the quarter ended September 30, 2001 were $3.3
million compared to $4.3 million for the same period in 2000. Product licensing
revenue decreased $0.5 million primarily due to a 20% decline in Xfactory
licensing revenue when compared to the same period in 2000, partially offset by
a 10% increase in FactoryLink licensing revenue. The decline in Xfactory
licensing revenue is attributable to the deepening recession in the
manufacturing sector during the third quarter of 2001 causing product license
purchases to be delayed, downsized or canceled, however the automation sector
has remained relatively stable. In addition, services revenue decreased $0.5
million due to a one time billable project during the third quarter of 2000.
Selling and product materials expenses decreased $1.3 million from $3.5
million for the quarter ended September 30, 2000 to $2.2 million for the same
period in 2001. The decrease was primarily a result of decreased sales,
marketing and technical support services totaling $1.0 million attributed to the
Company's own cost reduction efforts in 2001 and to the cost reductions relative
to the 2000 restructurings. In addition, variable selling expenses decreased
$0.2 million due to the decrease in revenue. Selling and
12
product materials expenses as a percentage of revenues decreased to 68% for the
quarter ended September 30, 2001 from 81% for the same period in 2000.
Product development expenses, which consisted primarily of labor costs,
decreased $1.7 million from $2.2 million for the quarter ended September 30,
2000 to $0.5 million for the same period in 2001, net of amounts capitalized.
The decrease in 2001 is primarily related to the Company's own cost reduction
efforts in 2001, in addition to a reduction in personnel-related costs relative
to the 2000 restructurings. The Company capitalized $0.3 million and $0.6
million for the three months ended September 30, 2001 and 2000, respectively,
primarily related to the next major version of the FactoryLink product line.
General and administrative expenses decreased $1.1 million from $2.0
million for the quarter ended September 30, 2000 to $0.9 million for the same
period in 2001. The decrease is due to the Company's ongoing efforts in managing
it costs in 2001, as well as the quarter ended September 30, 2000 including $0.4
million in consulting fees associated with refining the Company's longer-term
business plan. General and administrative expenses as a percentage of revenues
decreased to 27% for the quarter ended September 30, 2001 from 47% for the same
period in 2000.
The continuing deterioration of the real estate market has affected the
Company's ability to sublet approximately 45,000 square feet of excess office
space at the Company's Richardson headquarter facilities. The excess office
space is a result of the restructuring plan implemented by the Company during
2000. As a result, the Company recorded a $1.1 million restructuring charge
during the three months ended September 30, 2001 related to lease costs
associated with vacated office space.
Due to strategy changes from two of the Company's suppliers, the
Company determined that the carrying amount of capitalized software development
costs related to two of its software products were not recoverable. As a result,
these assets were considered to be impaired during the third quarter of 2001.
The Company wrote off $355 thousand related to its Analyzer software product and
$36 thousand related to its Connector software product during the three months
ended September 30, 2001.
As a result of the factors discussed above, the Company recorded a loss
from continuing operations of $1.8 million for the quarter ended September 30,
2001, compared to a loss from continuing operations of $3.6 million for the same
period in 2000.
In February 2001, management of the Company determined that the market
adoption rate of the technology around the Company's subsidiary eMake
Corporation ("eMake") was not progressing in a manner to support the necessary
resources needed to continue eMake's newly developed operating plan. As a
result, the Company's Board of Directors approved a plan to terminate the
operations of eMake as part of a strategy to commit the Company's resources to
its core business. For the quarter ended September 30, 2000, the condensed
consolidated financial statements have been restated to present eMake as a
discontinued operation. The Company's loss from discontinued operations for the
quarter ended September 30, 2000 was $5.8 million. All of eMake operations were
curtailed as of March 30, 2001.
Comparison of Nine Months Ended September 30, 2001 and 2000
Total revenues for the nine months ended September 30, 2001 were $10.6
million compared to $11.6 million for the same period in 2000. Product licensing
revenue decreased $0.2 million primarily due to decreased licensing revenue from
Xfactory attributed to the deepening recession in the manufacturing sector
during the third quarter of 2001 causing product license purchases to be
delayed, downsized or canceled. This is partially offset by a 18% increase in
FactoryLink licensing revenue, as the automation sector has remained relatively
stable. Services revenue decreased $0.8 million due to a one time billable
project during the third quarter of 2000 in addition to lower renewals of
technical support and service agreements compared to 2000.
Selling and product materials expenses decreased $3.7 million from
$10.7 million for the nine months ended September 30, 2000 to $7.0 million for
the same period in 2001. The decrease was a result of decreased sales, marketing
and technical support services totaling $4.9 million attributed to the
13
Company's own cost reduction efforts in 2001 and to the cost reductions relative
to the 2000 restructurings, partially offset by a $1.3 million increase in
capitalized software amortization due to the release of Factorylink 7. Selling
and product materials expenses as a percentage of revenues decreased to 66% for
the nine months ended September 30, 2001 from 92% for the same period in 2000.
Product development expenses, which consisted primarily of labor costs,
decreased $5.0 million from $6.4 million for the nine months ended September 30,
2000 to $1.4 million for the same period in 2001, net of amounts capitalized.
The decrease in 2001 is primarily related to the Company's own cost reduction
efforts in 2001, in addition to a reduction in personnel-related costs relative
to the 2000 restructurings. The Company capitalized $1.0 million and $2.0
million for the nine months ended September 30, 2001 and 2000, respectively,
primarily related to the next major version of the FactoryLink product line.
General and administrative expenses decreased $2.1 million from $5.0
million for the nine months ended September 30, 2000 to $2.9 million for the
same period in 2001. The decrease is attributed to the Company's ongoing efforts
in managing it costs in 2001, as well as a settlement of amounts owed for
consulting services provided to the Company in 2000, of which $1.1 million was
recorded to general and administrative expenses for the nine months ended
September 30, 2000. Under the terms of a settlement arrangement, approximately
$0.3 million of previously accrued consulting expenses were forgiven in the
second quarter of 2001. General and administrative expenses as a percentage of
revenues decreased to 28% for the nine months ended September 30, 2001 from 43%
for the same period in 2000.
As a result of the factors discussed above, the Company recorded a loss
from continuing operations of $2.3 million for the nine months ended September
30, 2001, compared to a loss from continuing operations of $11.5 million for the
same period in 2000. The loss from discontinued operations for the nine months
ended September 30, 2000 was $17.5 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities from continuing operations provided
$0.7 million of cash for the nine months ended September 30, 2001, offset by
$1.9 million in cash used in discontinued operations, compared to using $7.2
million in continuing operations and $14.3 million in discontinued operations
for the same period in 2000. The net cash used in operating activities for the
nine months of 2001 was primarily due to a loss from operations of $2.1 million
and a $1.3 million decrease in accounts payable and other accrued liabilities,
partially offset by collections on accounts receivable of $1.5 million in 2001.
Cash used in investing activities for the nine months ended September
30, 2001 resulted from software development costs of $0.983 million and capital
expenditures of $60 thousand, offset by other investing activities of $0.2
million.
Cash provided by financing activities of $2.8 million is due to $2.1
million in proceeds from the issuance of the Company's Series C-1 Preferred
Stock, net of issuance costs (discussed below), borrowings from the Company's
revolving line of credit and other borrowings of $2.2 million, offset by
payments on long-term debt of $1.5 million, including repayments on the
revolving line of credit.
On March 30, 2001, the Company secured an equity infusion of $1.5
million from SCP Private Equity Partners, L.P. ("SCP") through the issuance of
37,500 shares of Series C-1 Preferred Stock of the Company and a warrant to
purchase up to 75,000 shares of Series C-2 Preferred Stock. In addition, SCP has
committed to purchase an additional 37,500 shares of Series C-1 Preferred
("Option Stock") at the purchase price of $40 per share or $1.5 million. The
Company may exercise its right to sell the Option Stock on or before the
expiration of nine months after March 30, 2001 ("Closing Date"), but not before
May 30, 2001, and the Company must be in compliance with specified monthly
targets as defined in the Series C Preferred Stock Agreement. As an additional
condition to this equity financing, SCP and Safeguard 2000 Capital, L.P.
("Safeguard 2000") both agreed to not convert upon exercise of eMake Corporation
warrants to acquire Series A-1 and A-2 Preferred Stock, respectively, which are
convertible into the Company's Series B Convertible Preferred Stock. SCP and
Safeguard 2000 hold warrants
14
exercisable for 5,300,000 shares and 5,300,000 shares, respectively, of eMake
Corporation Series A-1 and A-2 Preferred Stock which would have been convertible
into a total of 265,000 shares of the Company's Series B Convertible Preferred
Stock.
On July 20, 2001, the Company exercised its right to sell 16,250 shares
of the Option Stock to SCP. The Company received $635,596, net of transaction
costs, in exchange for issuing 16,250 shares of its Series C-1 Preferred Stock
to SCP. As of September 30, 2001, the Company has received a total of $2.1
million from SCP relative to this equity financing.
The Series C-2 Preferred Stock warrant issued to SCP by the Company
grants SCP the right to purchase up to 75,000 shares of the Company's Series C-2
Preferred Stock at a purchase price of $40 per share. The Series C-2 Preferred
Stock has a par value of $.01 per share and a liquidation preference of $120 per
share plus cumulative dividends and interest and is convertible into the
Company's common stock at a conversion rate of 20 shares of common stock for
each share of preferred stock. The right to purchase the shares of Series C-2
Preferred Stock under the warrant are exercisable on any business day on or
before March 30, 2011, with the exception of 50,500 shares, which may not be
exercisable until the earlier of stockholder approval of the transactions under
the warrant or May 31, 2001. On exercise, the warrant provides the holder a
liquidation preference of three times the exercise price per share. The excess
of the liquidation preference of the Series C-2 Preferred Stock to be acquired
on warrant exercise over the warrant exercise price of $3.0 million has been
reflected as additional return to the Series C-1 Preferred stockholder,
increasing loss applicable to common stockholders for the first nine months of
2001 and decreasing additional paid-in capital by $6.0 million.
The Company's working capital requirements have been funded through
internally generated funds, its $3.0 million revolving credit facility and up to
$3.0 million in equity financing from SCP (see description above). The revolving
credit facility bears interest at prime plus 1.5%, or 7.5% at September 30,
2001, and has a commitment fee of 1.5% per annum on the total $3.0 million. At
September 30, 2001, $1.4 million was drawn under the credit facility, which was
approximately the total amount available under the facility. Availability under
the credit facility is subject to a borrowing base calculation, which varies
each month depending on billings and cash collections. To date, the Company has
received $2.1 million in equity financings through the issuance of 53,750 shares
of its Series C-1 Preferred Stock to SCP. SCP has committed to purchase an
additional 21,250 shares of Series C-1 Preferred Stock at the purchase price of
$40 per share or $0.9 million, subject to certain financing conditions. The
Company currently anticipates that internally generated cash and the credit
facility will be sufficient to satisfy its operating cash needs for the
foreseeable future, however, based on the conditional financing arrangements,
there can be no assurance that the Company will be able to obtain any additional
debt or equity funding on terms acceptable to the Company, if at all. If
necessary, the Company will delay certain operations and capital expenditures
until adequate financing is obtained. In the event the Company is unable to
secure sufficient debt or equity financing, the Company's operations would be
materially adversely affected.
FORWARD LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 regarding revenues,
margins, operating expenses, earnings, growth rates and certain business trends
that are subject to risks and uncertainties that could cause actual results to
differ materially from the results described herein. Specifically, the ability
to grow product and service revenues may not continue and the Company may not be
successful in developing new products, product enhancements or services on a
timely basis or in a manner that satisfies customers needs or achieves market
acceptance. Other factors that could cause actual results to differ materially
are: competitive pricing and supply, market acceptance and success for service
offerings, short-term interest rate fluctuations, general economic conditions,
employee turnover, possible future litigation and related uncertainties on
future revenue and earnings as well as the risks and uncertainties set forth
from time to time in the Company's other public reports and filings and public
statements. Recipients of this document are cautioned to consider these risks
and uncertainties and to not place undue reliance on these forward-looking
statements. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by these cautionary statements.
15
USDATA CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk associated with changes in
interest rates relates to its variable rate bank note payable of $161,000 and
its revolving line of credit of $1,369,000. Interest rate risk is estimated as
the potential impact on the Company's results of operations or financial
position due to a hypothetical change of 50 basis points in quoted market
prices. This hypothetical change would not have a material effect on the
Company's results of operations and financial position.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with an equity financing on March 30, 2001, the Company
amended its Certificate of Incorporation designating two new series of preferred
stock, which have certain preferential rights to the holders of the Company's
common stock. The information contained in Footnote 2 to the Unaudited Condensed
Consolidated Financial Statements regarding the designation, rights, preferences
and privileges of the Series C-1 Preferred Stock and Series C-2 Preferred Stock
is hereby incorporated by reference.
On July 10, 2001, the Company's board of directors approved and
recommended the stockholders approve an amendment to the Company's Certificate
of Incorporation to effect a one-for-five reverse stock split (the "Stock
Split"). On July 10, 2001, the holders of a majority of the outstanding shares
of the Company's common stock approved the Stock Split, which became effective
on August 21, 2001. The information contained in Footnote 4 to the Unaudited
Condensed Consolidated Financial Statements regarding the Stock Split is hereby
incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 10, 2001, the Company's board of directors approved and
recommended the stockholders approve an amendment to the Company's Certificate
of Incorporation to effect a one-for-five reverse stock split (the "Stock
Split"). On July 10, 2001, the holders of a majority of the outstanding shares
of the Company's common stock approved the Stock Split, which became effective
on August 21, 2001. The information contained in Footnote 4 to the Unaudited
Condensed Consolidated Financial Statements regarding the Stock Split is hereby
incorporated by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (filed as part of this report).
Number Description
------ -----------
None
(b) Reports on Form 8-K
On July 19, 2001, the Company filed a current report on Form 8-K to
announce its intention to effect a one-for-five reverse stock split effective in
August 2001.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USDATA CORPORATION
Date: November 14, 2001 /s/ Robert A. Merry
-----------------------------------
Robert A. Merry
President, Chief Executive Officer
and Director
17