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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934.
For the quarterly period ended June 30, 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
--------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2435 N. Central Expressway, Richardson, TX 75080
------------------------------------------------
(Address of Principal Executive Offices)
(Zip Code)
Registrant's Telephone Number, Including Area Code: (972) 680-9700
----------
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
----- ----
----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 10, 2001
Number of Shares
Class Outstanding
Common Stock, Par Value $.01 Per Share 14,132,953 shares
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USDATA CORPORATION AND SUBSIDIARIES
FORM 10-Q
THREE AND SIX MONTHS ENDED JUNE 30, 2001
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance
Sheets as of June 30, 2001 and December 31,
2000 3
Unaudited Condensed Consolidated Statements
Of Operations and Comprehensive Income
(Loss) for the Three and Six Months Ended
June 30, 2001 and 2000 4
Unaudited Condensed Consolidated Statements
Of Cash Flows for the Six Months Ended
June 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 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
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USDATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 870 $ 673
Accounts receivable, net of allowance for doubtful
accounts of $239 and $224, respectively 3,062 4,073
Other current assets 617 678
----------- -----------
Total current assets 4,549 5,424
----------- -----------
Property and equipment, net 1,630 2,216
Computer software development costs, net 7,311 7,848
Software held for resale, net 625 824
Other assets 64 42
----------- -----------
Total assets $ 14,179 $ 16,354
=========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,185 $ 1,711
Deferred revenue 1,143 1,218
Accrued compensation and benefits 300 707
Current portion of long-term debt 1,879 1,165
Other accrued liabilities 1,339 2,656
Net liabilities of discontinued operation 713 2,413
----------- -----------
Total current liabilities 6,559 9,870
----------- -----------
Long-term debt, less current portion 681 554
----------- -----------
Total liabilities 7,240 10,424
----------- -----------
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; 16,000,000 shares authorized 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 5,767 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 28,202 --
Series C-1 cumulative convertible preferred stock; $.01 par value;
liquidation preference $80; 125,000 shares authorized;
37,500 shares issued and outstanding in 2001 9,038 --
Common stock, $.01 par value, 40,000,000 shares
authorized; 16,324,189 issued in 2001 and 2000 163 163
Additional paid-in capital 14,893 23,892
Accumulated deficit (42,418) (41,910)
Treasury stock at cost, 2,249,134 shares in 2001
and 2,317,008 shares in 2000 (7,724) (7,961)
Accumulated other comprehensive loss (982) (964)
----------- -----------
Total stockholders' equity (deficit) 6,939 (21,212)
----------- -----------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity (deficit) $ 14,179 $ 16,354
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
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USDATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues:
Product license $ 3,317 $ 3,118 $ 6,299 $ 5,980
Services 526 643 1,012 1,326
---------- ---------- ---------- ----------
Total revenues 3,843 3,761 7,311 7,306
---------- ---------- ---------- ----------
Operating expenses:
Selling and product materials 2,474 3,670 4,758 7,238
Product development 463 2,817 953 4,209
General and administrative 838 1,821 2,010 3,006
Severance and other restructuring charges 7 542 7 542
---------- ---------- ---------- ----------
Total operating expenses 3,782 8,850 7,728 14,995
---------- ---------- ---------- ----------
Income (loss) from operations 61 (5,089) (417) (7,689)
Interest expense (30) (232) (91) (290)
Other income, net -- -- -- 32
---------- ---------- ---------- ----------
Income (loss) from continuing operations 31 (5,321) (508) (7,947)
Loss from discontinued operations -- (7,254) -- (11,692)
---------- ---------- ---------- ----------
Net income (loss) 31 (12,575) (508) (19,639)
Dividends on preferred stock, preferred stock warrant
and beneficial conversion (668) (108) (8,798) (216)
---------- ---------- ---------- ----------
Net loss applicable to common stockholders $ (637) $ (12,683) $ (9,306) $ (19,855)
========== ========== ========== ==========
Net loss per common share:
Basic and diluted
Loss from continuing operations $ (0.05) $ (0.41) $ (0.66) $ (0.63)
Loss from discontinued operations -- (0.55) -- (0.90)
---------- ---------- ---------- ----------
Net loss per common share $ (0.05) $ (0.96) $ (0.66) $ (1.53)
========== ========== ========== ==========
Comprehensive income (loss):
Net income (loss) $ 31 $ (12,575) $ (508) $ (19,639)
Foreign currency translation adjustment (5) (56) (18) (125)
---------- ---------- ---------- ----------
Comprehensive income (loss): $ 26 $ (12,631) $ (526) $ (19,764)
========== ========== ========== ==========
Weighted average shares outstanding:
Basic and diluted 14,075 13,154 14,072 13,013
========== ========== ========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
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USDATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
June 30,
--------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss $ (508) $ (19,639)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations -- 11,692
Depreciation and amortization 1,822 566
Non-cash stock compensation 87 --
Changes in operating assets and liabilities:
Accounts receivable, net 1,011 3,581
Other assets, net 42 (401)
Accounts payable and other accrued liabilities (1,629) 1,456
Accrued compensation and benefits (407) (640)
Deferred revenue (75) (155)
----------- -----------
Net cash provided by (used in) continuing operations 343 (3,540)
Net cash used in discontinued operations (1,700) (7,575)
----------- -----------
Net cash used in operating activities (1,357) (11,115)
----------- -----------
Cash flows from investing activities:
Capital expenditures (60) (541)
Capitalized software development costs (653) (1,420)
Refund of leasehold improvement costs 209 --
----------- -----------
Net cash used in continuing operations (504) (1,961)
Net cash used in discontinued operations -- (2,719)
----------- -----------
Net cash used in investing activities (504) (4,680)
----------- -----------
Cash flows from financing activities:
Proceeds from stock option exercises -- 332
Proceeds from stock warrant exercise -- 2,109
Proceeds from issuance of common stock 33 --
Proceeds from issuance of preferred stock, net 1,416 --
Borrowing under revolving line of credit 1,392 --
Other borrowings 431 --
Proceeds from note payable -- 11,500
Payments on long-term debt (1,214) (30)
----------- -----------
Net cash provided by financing activities 2,058 13,911
----------- -----------
Net increase (decrease) in cash and cash equivalents 197 (1,884)
Cash and cash equivalents, beginning of period 673 2,962
----------- -----------
Cash and cash equivalents, end of period $ 870 $ 1,078
=========== ===========
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.
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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 six
month periods ended June 30, 2001 and 2000 have been prepared in accordance with
generally accepted accounting principles. 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 June 30, 2001 and the
consolidated results of its operations and comprehensive income (loss), and cash
flows for the three and six month periods ended June 30, 2001 and 2000.
Operating results for the three and six months ended June 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
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
two months after the Closing Date, 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 USDATA Corporation 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 USDATA Corporation Series B convertible Preferred Stock.
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
June 30, 2001, 37,500 shares of Series C-1 Preferred stock are issued and
outstanding.
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.
CONVERTIBLE PREFERRED STOCK
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
June 30, 2001, no series of eMake preferred stock remains 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
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USDATA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
the Company's common stock at a conversion rate of 100 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 $1.5 million dividend on preferred stock, increasing the loss applicable to
common stockholders for the six months ended June 30, 2001 and decreasing
additional paid-in capital.
Cumulative dividends of $377,000, $883,000 and $38,000 have been
recorded for the six month period ended June 30, 2001 for the Series A Preferred
Stock, the Series B Preferred Stock and the Series C-1 Preferred Stock,
respectively.
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 100 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 six months ended June
30, 2001 and decreasing additional paid-in capital by $6.0 million.
3. LOSS PER SHARE
Net income (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 income (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 income (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 income (loss) per share when their
inclusion would be antidilutive. Options to acquire a total of 1,260,829 common
shares and options to acquire 1,773,858 common shares have been excluded from
the computation of diluted loss per share for the three and six months ended
June 30, 2001 and 2000, respectively, as their inclusion would be antidilutive.
4. 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 June 30, 2001, the Company is in compliance with all debt covenants, and at
June 30, 2001 $1.3 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
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USDATA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
agreement was amended to include a loan agreement ("Loan") between the Company
and the OEM in connection with a co-ordinated 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 June
30, 2001, the Company received two advances totaling $315,000. 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.
5. SEVERANCE AND OTHER RESTRUCTURING ACCRUALS
The following table summarizes by category the accrued liability
balances at June 30, 2001 related to the Company's 2000 restructuring plans.
Amount Amount
Accrued at Cash Accrued at
(in thousands) 12/31/00 Payments 6/30/01
---------- ---------- ----------
Employee severance and other employee-related costs $ 410 $ (335) $ 75
Early lease termination and facility shutdown costs 141 (108) 33
Lease costs associated with vacated office space 988 (615) 373
Legal and other related costs 68 (35) 33
---------- ---------- ----------
$ 1,607 $ (1,093) $ 514
========== ========== ==========
The severance and restructuring accrued liabilities are included in
accrued compensation and benefits and other accrued liabilities in the
accompanying condensed consolidated balance sheets. Additionally, in connection
with the eMake Corporation discontinued operations, the Company paid $534
thousand for severance and other employee-related costs, $58 thousand in early
lease termination and facility shutdown costs and $56 thousand in lease costs
associated with vacated office space. The remaining accrued liability balance at
June 30, 2001 totals $286 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.
6. 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.
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USDATA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
7. SUBSEQUENT EVENTS
On July 10, 2001, the Company's board of directors by written consent
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 Common Stock 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 will become effective upon the filing of the amendment
to the Company's Certificate of Incorporation with the Delaware Secretary of
State on or about August 20, 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 will be
reclassified as, and exchanged for, one share of newly issued Common Stock, par
value $0.01 per share ("New Common").
The closing bid price for the Existing Common has been less than $1.00
for more than 30 consecutive trading days, and the Company is thus not in
compliance with the requirements for continued listing on The Nasdaq National
Market. The Company has been in communication with the staff of The Nasdaq Stock
Market, Inc. ("Nasdaq") regarding this matter and has been granted an extension
of further delisting action by Nasdaq pending the completion of the Reverse
Split on or about August 20, 2001. The Company has determined that a Reverse
Split is necessary to meet and maintain the minimum bid price of $1.00. The per
share amounts reported herein have not been adjusted to give effect to the
proposed reverse stock split.
On August 2, 2001, the Company received notification from 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. The Company believes that
the Reverse Split effective on or about August 20, 2001 is likely to positively
affect the trading price of the shares of common stock and cause the Nasdaq's
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USDATA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
minimum bid price requirement to be met or exceeded for a minimum of 10
consecutive trading days on or about August 20, 2001. No assurance can be given
that either the price of the Company's common stock will increase or that the
staff of Nasdaq will determine that delisting of the common stock is no longer
appropriate.
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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 nine 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 14% of revenues during the three and six
months ended June 30, 2001, compared to 17% and 18% for the three and six months
ended June 30, 2000.
FactoryLink is a process 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 suite of software components 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 deliver
knowledge and control of product manufacturing, which result in reduced work in
progress, lower cost of errors, and lower cost of compliance with government
regulations, while limiting the amount of rework and increasing product revenue.
The Xfactory suite of products includes the Company's FactoryLink product.
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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 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues:
Product license 86% 83% 86% 82%
Services 14% 17% 14% 18%
---- ---- ---- ----
Total revenues 100% 100% 100% 100%
---- ---- ---- ----
Operating expenses:
Selling and product materials 64% 98% 65% 99%
Product development 12% 75% 13% 58%
General and administrative 22% 48% 28% 41%
Severance and other restructuring charges 0% 14% 0% 7%
---- ---- ---- ----
Total operating expenses 98% 235% 106% 205%
---- ---- ---- ----
Income (loss) from operations 2% (135)% (6)% (105)%
Interest expense (1)% (6)% (1)% (4)%
Other income, net 0% 0% 0% 0%
---- ---- ---- ----
Income (loss) from continuing operations 1% (141)% (7)% (109)%
Discontinued operations:
Loss from discontinued operations 0% (193)% 0% (160)%
---- ---- ---- ----
Net income (loss) 1% (334)% (7)% (269)%
Dividends on preferred stock, preferred stock warrant
and beneficial conversion (18)% (3)% (120)% (3)%
---- ---- ---- ----
Net loss applicable to common stockholders (17)% (337)% (127)% (272)%
---- ---- ---- ----
Comparison of Three Months Ended June 30, 2001 and 2000
Total revenues for the quarter ended June 30, 2001 were $3.8 million
compared to $3.8 million for the same period in 2000. Product licensing revenue
increased $0.2 million offset by a decrease in services revenue. The increase in
product licensing revenue was primarily related to FactoryLink 7, which was
released in June 2000, and FactoryLink's newest addition, FactoryLink++, which
was released in April 2001. While the Company anticipates an improvement in
revenues going forward, continued economic uncertainty could affect buying
decisions making revenues and operating results more difficult to forecast.
Selling and product materials expenses decreased $1.2 million from $3.7
million for the quarter ended June 30, 2000 to $2.5 million for the same period
in 2001. The decrease was primarily a result of decreased sales, marketing and
technical support services totaling $2.0 million attributed to the Company's
cost reduction efforts, partially offset by a $0.6 million increase in
capitalized software amortization due to the release of Factorylink 7 and a $0.1
million increase in product materials expenses. Selling and product materials
expenses as a percentage of revenues decreased to 64% for the quarter ended June
30, 2001 from 98% for the same period in 2000.
Product development expenses, which consisted primarily of labor costs,
decreased $2.3 million from $2.8 million for the quarter ended June 30, 2000 to
$0.5 million for the same period in 2001, net of
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amounts capitalized. The decrease in 2001 is primarily related to decreased
engineering development activities related to the FactoryLink and Xfactory
product lines in addition to the Company's own cost reduction efforts. The
decrease is also due to the capitalization of $0.5 million in software
development costs during the quarter ended June 30, 2001, compared to the
quarter ended June 30, 2000 when no such costs were capitalized.
General and administrative expenses decreased $1.0 million from $1.8
million for the quarter ended June 30, 2000 to $0.8 million for the same period
in 2001. The decrease is due to the Company's efforts in managing it costs in
2001, as well as a settlement of amounts owed for consulting services provided
to the Company in 2000. Under the terms of the settlement arrangement,
approximately $0.3 million of previously accrued consulting expenses were
forgiven. General and administrative expenses as a percentage of revenues
decreased to 22% for the quarter ended June 30, 2001 from 48% for the same
period in 2000.
As a result of the factors discussed above, the Company recorded income
from continuing operations of $31,000 for the quarter ended June 30, 2001,
compared to a loss from continuing operations of $5.3 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 June 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 June 30, 2000 was $7.3 million. All of eMake operations were
curtailed as of March 30, 2001.
Comparison of Six Months Ended June 30, 2001 and 2000
Total revenues for the six months ended June 30, 2001 were $7.3 million
compared to $7.3 million for the same period in 2000. Product licensing revenue
increased $0.3 million offset by a decrease in services revenue. The increase in
product licensing revenue was primarily related to FactoryLink 7, which was
released in June 2000, and FactoryLink's newest addition, FactoryLink++, which
was released in April 2001. The decrease in services revenue is primarily
attributed to lower renewals of technical support and service agreements
compared to 2000. While the Company anticipates an improvement in revenues going
forward, continued economic uncertainty could affect buying decisions making
revenues and operating results more difficult to forecast.
Selling and product materials expenses decreased $2.4 million from $7.2
million for the six months ended June 30, 2000 to $4.8 million for the same
period in 2001. The decrease was a result of decreased sales, marketing and
technical support services totaling $3.9 million attributed to the Company's own
cost reduction efforts, partially offset by a $1.3 million increase in
capitalized software amortization due to the release of Factorylink 7 and a $0.1
increase in product materials expenses. Selling and product materials expenses
as a percentage of revenues decreased to 65% for the six months ended June 30,
2001 from 99% for the same period in 2000.
Product development expenses, which consisted primarily of labor costs,
decreased $3.2 million from $4.2 million for the six months ended June 30, 2000
to $1.0 million for the same period in 2001, net of amounts capitalized. The
decrease in 2001 is primarily related to decreased engineering development
activities related to the FactoryLink and Xfactory product lines in addition to
the Company's own cost reduction efforts. The Company capitalized $0.7 million
and $1.4 million for the six months ended June 30, 2001 and 2000, primarily
related to the next major version of the FactoryLink product line.
General and administrative expenses decreased $1.0 million from $3.0
million for the six months ended June 30, 2000 to $2.0 million for the same
period in 2001. The decrease is attributed to the Company's efforts in managing
it costs in 2001, as well as a settlement of amounts owed for consulting
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services provided to the Company in 2000. Under the terms of the settlement
arrangement, approximately $0.3 million of previously accrued consulting
expenses were forgiven. General and administrative expenses as a percentage of
revenues decreased to 28% for the six months ended June 30, 2001 from 41% for
the same period in 2000.
As a result of the factors discussed above, the Company recorded a loss
from continuing operations of $0.5 million for the six months ended June 30,
2001, compared to a loss from continuing operations of $7.9 million for the same
period in 2000. The loss from discontinued operations for the six months ended
June 30, 2000 was $11.7 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used $1.4 million of cash for the
six months ended June 30, 2001 compared to $11.1 million for the same period in
2000. The net cash used in operating activities for the six months of 2001 was
primarily due to a loss from operations of $0.5 million and a $1.6 million
decrease in accounts payable and other accrued liabilities, partially offset by
collections on accounts receivable of $1.0 million in 2001.
Cash used in investing activities for the six months ended June 30,
2001 resulted from software development costs of $0.7 million and capital
expenditures of $0.06 million, offset by other investing activities of $0.2
million.
Cash provided by financing activities of $2.1 million is due to $1.4
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 $1.8 million, offset by
payments on long-term debt of $1.2 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
two months after the Closing Date, 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 USDATA Corporation 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 USDATA Corporation 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.
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 100 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
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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 six 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 10% at June 30, 2001, and
has a commitment fee of 1.5% per annum on the total $3.0 million. At June 30,
2001, $1.4 million was drawn under the credit facility and approximately $0.3
million was available. 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, the credit facility and the equity
financing 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 sufficient
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.
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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 $179,000 and
its revolving line of credit of $1,278,000. 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 5. OTHER INFORMATION
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. The Company believes that the Reverse Split effective on or about
August 20, 2001 is likely to positively affect the trading price of the shares
of common stock and cause the Nasdaq's minimum bid price requirement to be met
or exceeded for a minimum of 10 consecutive trading days on or about August 20,
2001. No assurance can be given that either the price of the Company's common
stock will increase or that the staff of Nasdaq will determine that delisting of
the common stock is no longer appropriate.
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
No reports on Form 8-K have been filed by the
Registrant during the three months ended June 30,
2001
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USDATA CORPORATION
Date: August 14, 2001 /s/ Robert A. Merry
----------------------------------------
Robert A. Merry
President, Chief Executive Officer
and Director
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