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 March 31, 2002
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from to .
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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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 10, 2002
Number of Shares
Class Outstanding
Common Stock, Par Value $.01 Per Share 2,836,138 shares
Unless the context indicates otherwise, the terms "USDATA," "the Company,"
"we," "our," and "us" refer to USDATA Corporation.
USDATA CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2002
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance
Sheets as of March 31, 2002 and December 31,
2001 3
Unaudited Condensed Consolidated Statements
of Operations and Comprehensive Loss for the
Three Months Ended March 31, 2002 and 2001 4
Unaudited Condensed Consolidated Statements
of Cash Flows for the Three Months Ended
March 31, 2002 and 2001 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
USDATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,666 $ 1,844
Accounts receivable, net of allowance for doubtful
accounts of $122 and $279, respectively 1,943 2,573
Other current assets 635 557
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Total current assets 4,244 4,974
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Property and equipment, net 899 1,212
Computer software development costs, net 6,148 6,443
Software held for resale, net 1,255 426
Other assets 38 23
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Total assets $ 12,584 $ 13,078
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 563 $ 694
Deferred revenue 1,225 1,248
Accrued compensation and benefits 421 468
Notes payable and current portion of long-term debt 1,481 1,837
Other accrued liabilities 1,433 1,702
Net liabilities of discontinued operation 313 339
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Total current liabilities 5,436 6,288
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Other noncurrent liabilities 1,417 --
Long-term debt, less current portion 428 590
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Total liabilities 7,281 6,878
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Commitments and contingencies
Stockholders' equity:
Series A cumulative convertible preferred stock, $.01 par value;
liquidation preference $100 per share; 100,000 shares authorized;
50,000 shares issued and outstanding in 2002 and 2001 6,068 5,968
Series B cumulative convertible preferred stock; $.01 par value;
liquidation preference $100 per share; 800,000 shares authorized;
265,000 shares issued and outstanding in 2002 and 2001 29,792 29,262
Series C-1 cumulative convertible preferred stock; $.01 par value;
liquidation preference $80 per share; 125,000 shares authorized;
53,750 shares issued and outstanding in 2002 and 2001 10,496 10,442
Common stock, $.01 par value, 40,000,000 shares authorized;
3,264,872 shares issued in 2002 and 2001 33 33
Additional paid-in capital 11,977 12,815
Accumulated deficit (44,687) (43,795)
Treasury stock at cost, 428,734 shares in 2002 and 438,247
shares in 2001 (7,356) (7,522)
Accumulated other comprehensive loss (1,020) (1,003)
------------ ------------
Total stockholders' equity 5,303 6,200
------------ ------------
Total liabilities and stockholders' equity $ 12,584 $ 13,078
============ ============
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
MARCH 31,
-------------------
2002 2001
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Revenues:
Product license $ 2,146 $ 2,982
Services 456 486
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Total revenues 2,602 3,468
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Operating expenses:
Selling and product materials 1,993 2,284
Product development 379 490
General and administrative 741 1,172
Restructuring and other charges 356 --
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Total operating expenses 3,469 3,946
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Loss from operations (867) (478)
Interest expense (32) (61)
Other income, net 7 --
------- -------
Net loss (892) (539)
------- -------
Dividends on preferred stock, preferred stock
warrant and beneficial conversion (684) (8,130)
------- -------
Net loss applicable to common stockholders $(1,576) $(8,669)
======= =======
Net loss per common share:
Basic and diluted $ (0.56) $ (3.08)
======= =======
Comprehensive loss:
Net loss $ (892) $ (539)
Foreign currency translation adjustment (17) (13)
------- -------
Comprehensive loss $ (909) $ (552)
======= =======
Weighted average shares outstanding:
Basic and diluted 2,836 2,814
======= =======
See accompanying notes to unaudited condensed consolidated financial statements.
4
USDATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------
2002 2001
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Cash flows from operating activities:
Net loss $ (892) $ (539)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Furniture and equipment transfer in lease negotiation 135 --
Depreciation and amortization 805 898
Changes in operating assets and liabilities:
Accounts receivable, net 630 1,299
Other assets, net (92) 78
Accounts payable and other accrued liabilities 100 (937)
Accrued compensation and benefits (47) (370)
Deferred revenue (23) 18
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Net cash provided by continuing operations 616 447
Net cash used in discontinued operations (26) (1,168)
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Net cash provided by (used in) operating activities 590 (721)
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Cash flows from investing activities:
Capital expenditures (11) (60)
Capitalized software development costs (251) (151)
Refund of leasehold improvement costs -- 209
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Net cash used in investing activities (262) (2)
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Cash flows from financing activities:
Proceeds from issuance of common stock 11 33
Proceeds from issuance of preferred stock, net -- 1,434
Borrowing under revolving line of credit -- 842
Other borrowings 138 114
Payments on long-term debt (655) (1,008)
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Net cash provided by (used in) financing activities (506) 1,415
------- -------
Net increase (decrease) in cash and cash equivalents (178) 692
Cash and cash equivalents, beginning of period 1,844 673
------- -------
Cash and cash equivalents, end of period $ 1,666 $ 1,365
======= =======
Non-cash operating, investing and financing activity:
Conversion of accrued liabilities to long-term
notes payable $ -- $ 232
Accrued liability incurred to acquire software held for resale $ 900 $ --
Furniture and equipment transfer in lease negotiation $ 135 $ --
======= =======
See accompanying notes to unaudited condensed consolidated financial statements.
5
USDATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of USDATA
and our subsidiaries for the three-month periods ended March 31, 2002 and 2001
have been prepared in accordance with generally accepted accounting principles
in the United States of America. Significant accounting policies followed by
USDATA were disclosed in the notes to the consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2001.
In the opinion of our management, the accompanying consolidated financial
statements contain the adjustments, consisting of normal recurring adjustments,
necessary to present fairly our consolidated financial position at March 31,
2002 and the consolidated results of our operations and comprehensive loss, and
cash flows for the periods ended March 31, 2002 and 2001. Operating results for
the three months ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.
2. NET LOSS PER SHARE OF COMMON STOCK
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 available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
(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 earnings (loss) per share when their inclusion would be antidilutive to
the results of continuing operations.
Options to purchase 445,180 and 261,456 shares of common stock for 2002
and 2001, respectively, were not included in the computation of diluted earnings
per share as their impact would be antidilutive. In addition, warrants to
purchase 1.7 million shares of common stock and 2.3 million shares of common
stock that may be received by the holders of our convertible preferred stock
were not included in the computation of diluted earnings per share because their
inclusion would be antidilutive.
3. SOFTWARE HELD FOR RESALE
We entered into a source code license agreement with the developer of
the client graphics used within our FactoryLink(R) software product on March 20,
2002 (the "Effective Date"). We have a nonexclusive right to reproduce, modify
and incorporate the licensed software into other computer software. In addition,
the licensed software shall be marketed, distributed and sublicensed under one
or more of our and/or third party's trademarks, trade names or service marks.
The purchase price of the licensed software was $900,000 payable over three
years as follows: (a) $200,000 within 10 business days of the Effective Date;
(b) $200,000 six months after the Effective Date; (c) $250,000 on March 20,
2003; and (d) $250,000 on March 20, 2004. We capitalized the original purchase
price of $900,000 of the licensed software as software held for resale. $650,000
is included in other current liabilities with the balance of $250,000 included
in other non-current liabilities.
4. SERIES C-1 PREFERRED STOCK PURCHASE AGREEMENT AMENDMENT
On March 30, 2001, we entered into a Series C Preferred Stock Purchase
Agreement with SCP Private Equity Partners II, L.P. ("SCP") whereby we issued
through a private placement 37,500 shares of our Series C-1 Convertible
Preferred Stock ("Series C-1 Preferred) and a warrant to purchase up to 75,000
shares of Series C-2 Convertible Preferred Stock ("Series C-2 Preferred") to SCP
for $1.5 million. In addition, SCP committed to purchase an additional 37,500
shares of Series C-1 Preferred ("Option Stock") at $40 per share or $1.5
million. SCP and Safeguard 2000 Capital, L.P. ("Safeguard 2000") each hold
warrants exercisable for 5,300,000 shares and 5,300,000 shares, respectively, of
our discontinued operation eMake Corporation's ("eMake") Series A-1 and A-2
Preferred Stock, which are convertible into a total of 265,000 shares of our
Series B Convertible Preferred Stock. As an additional condition to this equity
6
USDATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
financing, SCP and Safeguard 2000 agreed not to convert to our Series B
Convertible Preferred Stock upon exercise of their eMake warrants to acquire
Series A-1 and A-2 Preferred Stock, respectively.
On March 8, 2002, USDATA and SCP entered into a First Amendment to the
Series C Preferred Stock Purchase Agreement (the "Agreement"). The Agreement
extended the Option Stock exercise period from December 31, 2001 to December 31,
2002, deleted the specified monthly target provisions and provided for
additional warrant coverage equal to 50% of the remaining Option Stock, or
10,625 shares. All other terms of the original Series C Preferred Stock Purchase
Agreement were unchanged. The Agreement was unanimously approved by the
disinterested members of our Board of Directors on March 8, 2002. As of March
31, 2002, we have not exercised our right to sell any shares of the Option Stock
to SCP and have $850,000 available under this equity arrangement.
5. OFFICE LEASE AGREEMENT AMENDMENT
We are party to an Office Lease Agreement, as amended (the "Lease"),
under which we are the tenant of approximately 79,382 rentable square feet. On
March 19, 2002, we entered into a Fourth Amendment to the Lease (the "Fourth
Amendment") with Crescent Real Estate Funding VIII, L.P. (the "Landlord") to
reduce our lease payment commitment obligations and our unused lease premises.
Pursuant to the Fourth Amendment, the Landlord reacquired approximately 44,400
rentable square feet, reducing our headquarters' space to 34,982 rentable square
feet ("Existing Premises"). We sublease approximately 14,802 square feet of the
Existing Premises. The Fourth Amendment extended the lease term four months to
December 31, 2010, and increased the base rental rate per square foot on the
Existing Premises by $1.00 each year beginning in 2003 and ending in 2005. In
year 2006, the base rental rate per square foot increases by $1.75 from year
2005 and remains constant through year 2010. In addition, we owed $444,000 at
March 31, 2002 to the Landlord representing rents due on the excess leased space
for five months. The Landlord agreed to waive any claim to such amount owed
contingent upon timely payment of all rent required to be paid on the Existing
Premises. The $444,000 will be reduced by $51,000 per year over the remaining
term of the lease. We also transferred to the Landlord our right, title and
interest on excess office furniture, with a carrying value of approximately
$135,000 on March 31, 2002. In connection with the Fourth Amendment, we issued a
Warrant, dated March 19, 2002, to the Landlord for the purchase of up to 243,902
shares of our common stock at an exercise price per share of $2.05, the closing
market price on the date of the Warrant. The Warrant is exercisable by the
Landlord, in whole or in part, at any time commencing on March 19, 2002 and
ending on March 18, 2007. In addition, under the Fourth Amendment, we released
certain rights, such as our right to terminate the Lease in 2005, certain
preferential rights to lease additional space and the right to extend the lease.
The Fourth Amendment provides a cash savings to us of approximately $1.0 million
in lease costs during 2002.
We will compute rent expense to be recognized under the amended
arrangement considering the increasing rent over the rent term and all amounts
previously accrued for rent expense, including approximately $1.1 million
recorded in the third quarter of 2001 for unoccupied lease space, $135,000 for
the excess office furniture transferred to the Landlord and $383,000 for the
value of the Warrant issued on March 19, 2002. The $1.1 million accrual will be
accounted for as a lease incentive and amortized over the remaining lease term
as an offset to rent expense and the carrying value of the excess office
furniture will be amortized as an increase to rent expense.
6. REVOLVING CREDIT FACILITY
We maintain a revolving credit facility with JPMorgan Chase Bank to
provide us with working capital assistance relating to timing of our cash flow.
At March 31, 2002, we were not in compliance with two debt covenants under our
revolving credit facility: (1) the tangible net worth covenant and (2) earnings
before interest, taxes, depreciation and amortization ("EBITDA") covenant.
Subsequently, on April 15, 2002, we received a waiver from the lending bank for
these covenants and increased the tangible net worth covenant going forward,
primarily to take into account the restructuring charge recorded in the first
quarter of 2002. In addition, as of April 15, 2002, the interest rate increased
by 75 basis points to prime plus 2.25% per annum. At March 31, 2002 and December
31, 2001, $812,000 and $1.1 million, respectively, was
7
USDATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
drawn on the credit facility and is included in current liabilities. Based on
the qualifying borrowing base arrangement under the credit facility, total
remaining availability at April 26, 2002 was $418,000.
7. SEVERANCE AND OTHER RESTRUCTURING ACCRUALS
The following table summarizes by category the accrued liability
balances at March 31, 2002 related to our 2000 restructuring plans.
Reverse
Amount accrued lease 2002 Amount
Accrued at Restructuring costs over Cash Accrued at
(in thousands) 12/31/01 charge lease term Payments 3/31/02
-------------- ---------- ------------- ------------- -------- ----------
Employee-related costs $ 59 $ -- $ -- $ (5) $ 54
Lease costs associated with vacated office space 1,114 -- (23) -- 1,091
Other related costs 17 356 (17) 356
------- ------- ------- ------- -------
$ 1,190 $ 356 $ (23) $ (22) $ 1,501
======= ======= ======= ======= =======
In the third quarter of 2001, we accrued $1.1 million in restructuring
charges representing an additional year of lease costs associated with the
vacated office space resulting from our 2000 restructuring plans. On March 19,
2002, we entered into a Fourth Amendment to the Lease, described in Note 5,
whereby the Landlord removed this excess office space under the facility lease.
The $1.114 million balance at December 31, 2001 will be accounted for as a lease
incentive and amortized off over the remaining lease term as an offset to rent
expense. In connection with the Fourth Amendment, we recorded $356,000 in
restructuring charges for the consultant who assisted us in the negotiations.
One-third of the consulting fee was paid in April 2002 and the remaining
two-thirds is payable monthly through September 2005.
The employee related costs are included in accrued compensation and
benefits and the current portion of lease costs associated with vacated office
space of $144,000 and other related costs of $68,000 are included in other
accrued liabilities in the accompanying condensed consolidated balance sheets.
The non-current portion of $1.2 million is included in other non-current
liabilities.
8
USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
USDATA is a global provider of software and services that give
enterprises the knowledge and control needed to perfect the products we produce
and the processes we manage. Based upon a tradition of flexible service,
innovation and integration, our software currently operates in more than 60
countries around the globe, including 17 of the top 25 manufacturers. Our
software heritage is born out of manufacturing and process automation solutions
and has grown to encompass the industry's product knowledge and control
solutions. We continue to innovate solutions that will support the integration
of enterprise production and automation information into the supply chain. We
have six offices worldwide and a global network of distribution and support
partners.
Our software products are designed to enable manufacturers access to
more accurate and timely information - whether they are on the plant floor, in
the office, or around the globe. Our solutions span a wide range of
manufacturing processes, from monitoring equipment to tracking product flow, and
are designed to integrate with customers' existing manufacturing and business
software, as well as, help customers manage their business in real time, reduce
operating costs, shorten cycle times and improve quality in their manufacturing
operations. This combination of product breadth and ease of integration is
intended to provide a total plant solution intended to improve manufacturing
performance and give customers a competitive advantage.
Revenues have been generated primarily from licenses of our
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 18% and 14% of revenues during the three
months ended March 31, 2002 and 2001, respectively.
FactoryLink(R) 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(R) is a horizontal application tool set used by
systems 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.
Our latest releases of FactoryLink(R) include FactoryLink(R) 7, which
is designed to have a lower total cost of ownership than other SCADA/HMI
products on the market and FactoryLink(R)++. FactoryLink(R)++ is designed
specifically to help new SCADA/HMI users to jump start application development,
lower application maintenance and reduce project risk. FactoryLink(R)++ includes
integrated modules, concepts, methods and tools designed to help end users,
integrators, original equipment manufacturers and consultants achieve the
maximum value out of the FactoryLink(R) software system.
Xfactory(R) 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(R) 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
9
genealogy and integration into enterprise software systems. Xfactory(R) 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(R) suite includes a process knowledge and control module based on
our FactoryLink(R) product. In November 2001, we announced the worldwide release
of our newest version of Xfactory(R). Xfactory (R) 2.0 is intended to enhance
real-time visibility and decision-making, performance monitoring, analysis and
reporting and data management.
We focus our sales efforts through selected distributors capable of
providing the level of support and expertise required in the industrial
automation market. We currently have channel support locations in the United
States and Europe. Our distributors have sales locations throughout North and
South America, Europe, the Far East and the Middle East.
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 we 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 our 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. See "Business" in Part I, Item 1 of our Annual Report on Form 10-K
for the period ended December 31, 2001 for a discussion of other important
factors that could affect the validity of any such forward-looking statement.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by these
cautionary statements.
RESULTS OF OPERATIONS
The following table presents selected financial information relating to
our financial condition and results of operations and should be read in
conjunction with the consolidated financial statements and notes included
herein. The table sets forth, for the periods indicated, our statement of
operations as a percentage of revenues.
THREE MONTHS ENDED
MARCH 31,
------------------
2002 2001
---- ----
Revenues:
Product license 82% 86%
Services 18% 14%
---- ----
Total revenues 100% 100%
---- ----
Operating expenses:
Selling and product materials 77% 66%
Product development 15% 14%
General and administrative 28% 34%
Restructuring charge 13% 0%
---- ----
Total operating expenses 133% 114%
---- ----
Loss from operations (33)% (14)%
Interest expense (1)% (2)%
Other income, net 0% 0%
---- ----
Net loss (34)% (16)%
---- ----
Dividends on preferred stock, preferred stock
warrant and beneficial conversion (26)% (234)%
---- ----
Net loss applicable to common stockholders (60)% (250)%
==== ====
10
Total revenues for the quarter ended March 31, 2002 were $2.6 million,
a decrease of $866,000 when compared to $3.5 million in revenues for the same
period in 2001. Product licensing revenue decreased $836,000 and revenue from
services decreased $30,000. The decrease in product licensing revenue is
primarily due to longer cycle times for sales to close when compared to the
first quarter of 2001. Purchases of software licenses continue to be delayed or
downsized. This is attributed to the continuing uncertain economic environment,
which showed no evidence of a sustainable recovery in the industrial automation
market. This continued economic uncertainty could affect buying decisions going
forward making revenue and operating results more difficult to forecast.
Selling and product materials expenses for the quarter ended March 31,
2002 were $2.0 million, a decrease of $291,000 when compared to $2.3 million for
the same period in 2001. The decrease is a result of decreased sales, marketing
and technical support services totaling $277,000 primarily attributed to
decreases in travel, consulting services and personnel (2 employees in marketing
and 1 in sales). In addition, capitalized software amortization decreased in the
first quarter of 2002 when compared to 2001 due to software being fully
amortized or written off after March 31, 2001. Selling and product materials
expenses as a percentage of revenues increased to 77% for the quarter ended
March 31, 2002 from 66% for the same period in 2001 due to the decrease in
revenues.
Product development expenses for the quarter ended March 31, 2002, net
of amounts capitalized, were $379,000, a decrease of $111,000 when compared to
$490,000 for the same period in 2001. Product development expenses consist
primarily of labor costs. The decrease in 2002 is related to an increase in
capitalized software development costs in engineering development activities
related to the FactoryLink product line. We capitalized $251,000 of development
costs in the quarter ended March 31, 2002 and $151,000 for the same period in
2001. Product development expenses as a percentage of revenues increased
slightly to 15% for the quarter ended March 31, 2002 from 14% for the same
period in 2001.
General and administrative expenses for the quarter ended March 31,
2002 were $741,000, a decrease of $431,000 when compared to $1.172 million for
the same period in 2001. The decrease in general and administrative expenses is
due to the first quarter of 2001 including approximately $200,000 in consulting
fees related to providing us with operational assistance in executing the cost
cutting initiatives resulting from the 2000 restructuring plans in addition to
further cost cutting and revenue generating initiatives to be implemented
throughout 2001. Information technology expenses decreased by over $200,000 as a
direct result of these cost cutting initiatives. General and administrative
expenses as a percentage of revenues decreased to 28% for the quarter ended
March 31, 2002 from 34% for the same period in 2001.
On March 19, 2002, we entered into a Fourth Amendment to our Office
Lease Agreement with Crescent Real Estate Funding VIII, L.P. (the "Landlord")
which provides for, among other things, the Landlord removing approximately
44,400 square feet of rentable excess office space. In connection with the
Fourth Amendment, we recorded $356,000 in a non-recurring restructuring charge
for the consultant who assisted us in the negotiations.
As a result of the factors discussed above, we recorded a loss from
operations of $867,000 for the quarter ended March 31, 2002, compared to a loss
from operations of $478,000 for the same period in 2001.
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements, management is required to make
estimates and assumptions that, among other things, affect the reported amounts
of assets and liabilities and reported amounts of revenues and expenses. These
estimates are most significant in connection with our most critical accounting
polices, namely our accounting policies that are most important to the portrayal
of our financial condition and results and require management's most difficult,
subjective or complex judgments. These judgments often result from the need to
make estimates about the effects of matters that are inherently uncertain. The
following is a brief discussion of the more critical accounting policies and
methods that we use.
11
Significant Estimates and Assumptions
Our management has made a number of estimates and assumptions related
to the reporting of assets and liabilities in preparation of the consolidated
financial statements in conformity with generally accepted accounting principles
in the United States of America. The most significant estimates relate to the
allowance for doubtful accounts, the determination of the recoverability of
property and equipment, capitalized software development costs, software held
for resale, and the valuation of deferred tax assets.
In determining the adequacy of the allowance for doubtful accounts,
management considers a number of factors, including the aging of the receivable
portfolio, customer payment trends, financial condition of the customer,
economic conditions in the customer's country and industry conditions. For the
period ended March 31, 2002, we did not experience any charges to bad debt
expense, however, due to the general weakening of the economy during 2001 and
into 2002, there can be no assurance that this trend will continue. Actual
amounts could differ significantly from management's estimates.
Management assesses the recoverability of property and equipment,
capitalized software development costs and software held for resale by
determining the estimated future cash flows related to such assets. Management
reviews these assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is generally measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is equal to the amount by which the carrying amounts
of the assets exceed the fair values of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value, less costs to sell.
Management's estimates of future cash flows are based in part upon
prior performance, industry conditions, economic conditions, technology trends
and customer relationships. Changes in these factors or other factors could
result in significantly different cash flow estimates and an impairment charge.
In assessing the realizability of deferred income tax assets,
management considers whether it is more likely than not that the deferred income
tax assets will be realized. The ultimate realization of deferred income tax
assets is dependent on the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred income tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment.
Based on the level of historical taxable income and projections for future
taxable income over the periods in which the deferred income tax assets are
deductible, management has fully reserved all deferred tax assets to the extent
such assets exceed deferred tax liabilities.
Revenue Recognition
We earn revenue primarily from license fees, maintenance fees and
professional services sold through direct sales or through our channel partners.
The license arrangements, do not provide for a right of return, and are
primarily non-transferable and non-exclusive perpetual licenses. We offer two
types of maintenance fees: one that provides the customer the right to telephone
support and to receive error and bug fix releases and one that provides upgrade
version releases of the product during the maintenance term.
We recognize revenue in accordance with Statement of Position 97-2,
Software Revenue Recognition ("SOP 97-2"), as amended by SOP 98-9, and we
generally recognize revenue when all of the following criteria are met as set
forth in paragraph 8 of SOP 97-2: (1) persuasive evidence of an arrangement
exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4)
collectibility is probable. Each of the four criteria above is defined as
follows:
Persuasive evidence of an arrangement exists. It is customary practice
to have a written contract, which is signed by both the customer and us or, in
situations where a contract is not required, a customer purchase order has been
received.
12
Delivery has occurred. Our software may be either physically or
electronically delivered to the customer. Delivery is deemed to have occurred
upon the delivery of the electronic code or the shipment of the physical product
based on standard contractual committed shipping terms, whereby risk of loss
passes to the customer when shipment is picked up by the carrier. If undelivered
products or services exist in an arrangement that is essential to the
functionality of the delivered product, delivery is not considered to have
occurred until these products or services are delivered as described above.
The fee is fixed or determinable. Our customers generally pay a
per-license fee that is based on the number of servers on which the software is
installed, the size of the application that they will develop for the software,
the options provided for those servers, and the number of client workstations
that access with the server. Additional license fees are due when the total
number of subscribers using our products increases beyond the specified number
for which a license was purchased or when additional options are added. License
fees are generally due within 30-45 days from product delivery in the United
States and within 30 - 60 days from product delivery internationally.
Collectibility is probable. Collectibility is assessed on a
customer-by-customer basis. We typically sell to customers with high credit
ratings and solid payment practices. New customers are subjected to a credit
review process, in which we evaluate the customers' financial position and
ultimately their ability to pay. If it is determined from the outset of an
arrangement that collectibility is not probable based upon our credit review
process, revenue is recognized as cash payments are received.
We allocate revenue on software arrangements involving multiple
elements to each element based on the relative fair value of each element. Our
determination of fair value of each element in multiple element arrangements is
based on vendor-specific objective evidence ("VSOE"). We limit our assessment of
VSOE to the price charged when the same element is sold separately. We have
analyzed all of the elements included in our multiple-element arrangements and
determined that we have sufficient VSOE to allocate revenue to maintenance and
support services and professional service components of our license
arrangements. We sell our professional services separately, and have established
VSOE on this basis. VSOE for maintenance and support services is based on the
customer's annual renewal rates for these elements. Accordingly, assuming all
other revenue recognition criteria are met, revenue from licenses is recognized
on delivery using the residual method in accordance with SOP 98-9, and revenue
from maintenance and support services is recognized ratably over the respective
term.
Professional services generally are not essential to the functionality
of the software. Our software products are fully functional upon delivery and
implementation and do not require any significant modification or alteration.
Customers purchase these professional services to facilitate the adoption of our
technology and dedicate personnel to participate in the services being
performed, but they may also decide to use their own resources or appoint other
professional service organizations to provide these services. Software products
are typically billed separately and independently from professional services,
which are generally billed either on a time-and-materials or a
milestone-achieved basis. We generally recognize revenue from professional
services as the services are performed.
Capitalized Software Development
Software development costs incurred prior to establishing technological
feasibility are charged to operations and included in product development costs.
Software development costs incurred after establishing technological
feasibility, and purchased software costs, are capitalized and amortized on a
product-by-product basis when the product is available for general release to
customers. We establish technological feasibility when we have completed all
planning, designing, coding and testing activities necessary to determine that
the final product meets its design specifications, specifically when we have
completed a detail program design and are ready to begin coding. Annual
amortization, which is charged to selling and product materials, is the greater
of (i) the amount computed using the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues for
that product, or (ii) the straight-line method over the remaining estimated
economic life of the product. We amortize capitalized software development and
purchased software costs using the straight-line method over the remaining
estimated economic life of the product, generally three years.
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LIQUIDITY AND CAPITAL RESOURCES
Our operating activities provided $590,000 of cash during the first
quarter ended March 31, 2002, compared to using $721,000 for the same period in
2001. Contributing to cash provided by operations during the first quarter of
2002 was a $630,000 decrease in accounts receivable and a $100,000 increase in
accounts payable, partially offset by a decrease in other assets and net cash
used in discontinued operations. Contributing to cash used in operations during
the first quarter of 2001 was a $370,000 decrease in accrued compensation and
benefits, primarily due to severance payments related to the 2000 restructuring
plans, a $937,000 decrease in accounts payable, a net loss of $539,000 and $1.2
million in net cash used in discontinued operations. This was partially offset
by net collections on accounts receivable of $1.3 million and 898,000 for
depreciation and amortization.
Net cash used in investing activities was $262,000 for the quarter
ended March 31, 2002, compared to using $2,000 for the same period in 2001. The
increase in cash used in investing activities is partially due to a $100,000
increase in capitalized software development cost from $151,000 for the first
quarter ended 2001 to $251,000 for the same period in 2002. In addition, we
received a $209,000 leasehold improvement refund in the first quarter of 2001.
Offsetting the increase in cash used in investing activities was a $49,000
decrease in capital expenditures from $60,000 for the first quarter ended 2001
to $11,000 for the same period in 2002.
Net cash used in financing activities was $506,000 for the quarter
ended March 31, 2002, compared to net cash provided by financing activities of
$1.4 million for the same period in 2001. During 2002, we paid down $655,000 on
our debt obligations, of which $333,000 related to our revolving line of credit,
partially offset by other borrowings of $138,000. Contributing to cash provided
by financing activities during the first quarter of 2001 was $1.4 million in net
proceeds related to issuing 37,500 shares of our Series C-1 Convertible
Preferred Stock and borrowing $842,000 from our revolving line of credit, offset
by $1.0 million in payments on our debt obligations.
Our working capital requirements have been funded through internally
generated funds, the $3.0 million revolving line of credit and various equity
and debt financings from SCP and Safeguard Scientifics, Inc. We currently
anticipate that our ongoing working capital requirements will continue to be
funded through internally generated funds, our revolving credit facility and
$850,000 available under the equity financing arrangement with SCP discussed
below. We believe such source of funds will be sufficient to satisfy our
operating and debt service cash needs for the foreseeable future. However, based
on the conditional financing arrangements, there can be no assurance that we
will be able to obtain any additional debt funding on terms acceptable to us, if
at all. If necessary, we will delay certain operations and capital expenditures
until adequate financing is obtained. In the event we are unable to secure
sufficient debt or equity financing and our cash flows from operations are not
sufficient to meet future cash requirements, our operations would be materially
adversely affected.
Equity Financings
On March 30, 2001, we entered into a Series C Preferred Stock Purchase
Agreement with SCP whereby we issued through a private placement 37,500 shares
of our Series C-1 Preferred and a warrant to purchase up to 75,000 shares of
Series C-2 Preferred to SCP for $1.5 million. In addition, SCP committed to
purchase an additional 37,500 shares of Series C-1 Preferred ("Option Stock") at
$40 per share or $1.5 million. SCP and Safeguard 2000 Capital, L.P. ("Safeguard
2000") hold warrants exercisable for 5,300,000 shares and 5,300,000 shares,
respectively, of eMake Series A-1 and A-2 Preferred Stock, which are convertible
into a total of 265,000 shares of our Series B Convertible Preferred Stock. As
an additional condition to this equity financing, SCP and Safeguard 2000 agreed
not to convert upon exercise of eMake warrants to acquire Series A-1 and A-2
Preferred Stock, respectively.
On July 20, 2001, we exercised our right to sell 16,250 shares of the
Option Stock to SCP. We received $635,596 in cash, net of transaction costs, in
exchange for the shares. As of March 31, 2002, 53,750 shares of Series C-1
Preferred are issued and outstanding, and we have received $2.1 million, net of
transaction costs, in total proceeds.
14
On March 8, 2002, USDATA and SCP entered into a First Amendment to the
Series C Preferred Stock Purchase Agreement (the "Agreement"). The Agreement
extended the Option Stock exercise period from December 31, 2001 to December 31,
2002, deleted the specified monthly target provisions and provided for
additional warrant coverage equal to 50% of the remaining Option Stock, or
10,625 shares. All other terms of the original Series C Preferred Stock Purchase
Agreement were unchanged. The Agreement was unanimously approved by the
disinterested members of our Board of Directors on March 8, 2002. As of March
31, 2002, we have not exercised our right to sell any shares of the remaining
Option Stock and have $850,000 available under this equity arrangement.
As of March 31, 2002, we have issued 50,000 shares of our Series A
Convertible Preferred Stock ("Series A Preferred") with a liquidation preference
of $100 per share, plus cumulative dividends; 265,000 shares of our Series B
Convertible Preferred Stock ("Series B Preferred") with a liquidation preference
of $100 per share, plus cumulative dividends; 53,750 shares of our Series C-1
Preferred with a liquidation preference of $80 per share, plus cumulative
dividends; and a warrant for the purchase of 75,000 shares of our Series C-2
Preferred (and collectively, with the Series C-1 Preferred, the "Series C
Preferred") with a liquidation preference of $120 per share, plus cumulative
dividends.
The Series C Preferred ranks senior to all other classes and series of
our capital stock with respect to dividend rights, rights on liquidation,
dissolution and winding up, and the Series B Preferred ranks senior to the
holders of the Series A Preferred with respect to dividend rights, rights on
liquidation, dissolution and winding up. In the event of any liquidation,
merger, acquisition, dissolution or winding up of USDATA, whether voluntary or
involuntary, the preferred stockholders shall be entitled to preferential
distribution of up to approximately $50.0 million in value, prior and in
preference to any distribution of any of our assets or surplus funds to the
holders of our common stock. For example on an as-converted basis, the holders
of Series C Convertible Preferred Stock would be entitled to up to $15.0 million
in value prior to any distribution to common stockholders, the holders of Series
B Convertible Preferred Stock would be entitled to up to $29.0 million in value
prior to any distribution to common stockholders, and the holders of Series A
Convertible Preferred Stock would be entitled to up to $6.0 million in value
prior to any distribution to common stockholders.
Debt Financings
On January 15, 2002, we successfully renewed our revolving credit
facility ("Credit Facility") with JPMorgan Chase. The Credit Facility provides
for $3.0 million in revolving credit availability through January 31, 2003 and
bears interest at prime rate plus 1.5%, or 6.25% at March 31, 2002. The Credit
Facility has a commitment fee of 1.5% per annum on the total commitment of up to
$3.0 million, is collateralized by certain of our foreign accounts receivable
and is guaranteed by Export-Import Bank of the United States for 90% of
principal and interest. Availability under the credit facility is subject to a
borrowing base calculation, which varies each month depending on billings and
cash collections. In addition, we must be in compliance with certain debt
covenants.
At March 31, 2002, we were not in compliance with two debt covenants
under our Credit Facility: (1) the tangible net worth covenant and (2) earnings
before interest, taxes, depreciation and amortization ("EBITDA") covenant.
Subsequently, on April 15, 2002, we received a waiver from JPMorgan Chase for
these covenants and increased the tangible net worth covenant going forward,
primarily to take into account the restructuring charge recorded in the period
ended March 31, 2002. In addition, as of April 15, 2002, the interest rate
increased to prime plus 2.25% per annum. At March 31, 2002, $812,000 was drawn
on the Credit Facility and is included in current liabilities. Based on the
qualifying borrowing base arrangement under the credit facility, total remaining
availability at April 26, 2002 was $418,000.
The following table summarizes our contractual obligations related to
debt, capital leases and operating leases at March 31, 2002:
15
Commitment Per Period
-------------------------------------------------
(in thousands) Total 2002 2003 2004 Thereafter
-------------- ------ ------ ------ ------ ----------
Revolving line of credit $ 812 $ 812 $ -- $ -- $ --
Long-term debt and other debt 881 529 281 71 --
Capital leases 216 40 66 66 44
Operating leases 7,393 599 792 798 5,204
------ ------ ------ ------ ------
$9,302 $1,980 $1,139 $ 935 $5,248
====== ====== ====== ====== ======
International Operations
Our international revenues represented approximately 67% of our total
revenue during 2001. Revenues from international operations are subject to
various political and economic risks including, but not limited to, the
following: political instability; economic instability; currency controls;
currency devaluations; exchange rate fluctuations; potentially unstable channels
of distribution; increased credit risks; export control laws that might limit
the markets we can enter; inflation; changes in laws related to foreign
ownership of businesses abroad; foreign tax laws; trade disputes among nations;
changes in cost of capital; changes in import/export regulations, including
enforcement policies; "gray market" resales; tariffs and freight rates. Such
risks and other factors beyond our control in any nation where we conduct
business could have a material adverse effect on our operations.
NASDAQ COMPLIANCE NOTICES
On February 14, 2002, we received a letter from Nasdaq notifying us
that over the previous 30 consecutive trading days, our common stock had not
maintained a minimum market value of publicly held shares ("MVPHS") of $5.0
million as required for continued listing on The Nasdaq National Market under
Marketplace Rule 4450(a)(2) (the "Rule"). In accordance with Nasdaq Marketplace
Rule 4450(e)(1), we will be provided 90 calendar days, or until May 15, 2002, to
regain compliance. If, at any time before May 15, 2002, the MVPHS of our common
stock is $5.0 million or greater for a minimum of 10 consecutive trading days,
we will have achieved compliance with the Rule. There can be no assurance that
we will be able to achieve compliance with the Rule. If we are unable to regain
compliance with the Rule by May 15, 2002, we can either appeal Nasdaq's decision
to a Nasdaq Listing Qualifications Panel or submit an application to transfer to
the Nasdaq SmallCap Market.
As of May 8, 2002, we had not regained compliance with the Rule and
applied to transfer our securities to the Nasdaq SmallCap Market. The initiation
of the delisting proceedings will be stayed pending Nasdaq's review of our
application. There can be no assurance that Nasdaq will approve our application
for listing on the Nasdaq SmallCap Market.
RECENT ACCOUNTING PRONOUNCEMENTS
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 Intangible Assets,"
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 are effective for fiscal years beginning after December 15, 2001,
and we have adopted the provisions, as required, in fiscal year 2002. Adoption
of SFAS No. 141 and No. 142 did not have a material impact on our consolidated
results of operations or financial position.
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
16
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 the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, we will recognize a gain or loss on settlement. We are
required to adopt the provisions of Statement No. 143 no later than the
beginning of fiscal year 2003, with early adoption permitted. We do not expect
the adoption of this statement to have a material effect on our 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
became effective for fiscal years beginning after December 15, 2001. Adoption of
this statement did not have a material effect on our consolidated results of
operations or financial position.
17
USDATA CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk associated with changes in interest rates
relates to our variable rate bank note payable of $121,000 and our revolving
line of credit of $812,000. Interest rate risk is estimated as the potential
impact on our 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 our results of operations and financial
position.
A significant portion of our revenues is derived from foreign
operations (67% at December 31, 2001). We primarily invoice and collect in U.S.
dollars. Risk resulting from foreign currency exposure is therefore minimal.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (filed as part of this report).
None.
(b) Reports on Form 8-K
On March 14, 2002, we filed a current report on Form 8-K to announce
that we had received a letter from The Nasdaq Stock Market, Inc. notifying us
that over the 30 previous consecutive trading days, our common stock has not
maintained a minimum market value of publicly held shares of $5.0 million as
required for continued listing on the Nasdaq National Market.
18
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: May 15, 2002 /s/ Robert A. Merry
--------------------------------------------
Robert A. Merry
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: May 15, 2002 /s/ Jennifer P. Dooley
--------------------------------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
19