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, 2003
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
--- ---
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 14, 2003
Number of Shares
Class Outstanding
Common Stock, Par Value $.01 Per Share 3,708,518 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, 2003
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance
Sheets as of March 31, 2003 and
December 31, 2002 3
Unaudited Condensed Consolidated Statements
of Operations and Comprehensive Loss
for the Three Months Ended March 31, 2003
and 2002 4
Unaudited Condensed Consolidated Statements
of Cash Flows for the Three Months Ended
March 31, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications 22
2
USDATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31,
2003 2002
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ASSETS
Current assets:
Cash and cash equivalents $ 1,639 $ 978
Accounts receivable, net of allowance for doubtful
accounts of $108 and $82, respectively 2,299 2,331
Other current assets 776 582
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Total current assets 4,714 3,891
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Property and equipment, net 440 510
Computer software development costs, net 546 1,093
Software held for resale, net 1,131 1,313
Customer relationships, net 1,180 1,301
Other assets 71 76
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Total assets $ 8,082 $ 8,184
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 790 $ 941
Deferred revenue 1,450 1,559
Accrued compensation and benefits 605 698
Notes payable and current portion of long-term debt 801 1,327
Other accrued liabilities 1,575 1,699
Net liabilities of discontinued operation 192 193
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Total current liabilities 5,413 6,417
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Other noncurrent liabilities 1,501 1,550
Long-term debt, less current portion 91 107
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Total liabilities 7,005 8,074
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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 2003 and 2002 6,467 6,368
Series B cumulative convertible preferred stock; $.01 par value;
liquidation preference $100 per share; 800,000 shares authorized;
281,800 shares issued and outstanding in 2003 and 2002 33,660 33,096
Series C-1 cumulative convertible preferred stock; $.01 par value;
liquidation preference $80 per share; 125,000 shares authorized;
112,500 shares issued and outstanding in 2003 and 75,000 shares
issued and outstanding in 2002 18,154 13,229
Series C-2 cumulative convertible preferred stock; $.01 par value;
liquidation preference $120 per share; 125,000 shares authorized;
0 shares issued and outstanding in 2003 and 2002 -- --
Common stock, $.01 par value, 40,000,000 shares authorized;
4,104,810 shares issued in 2003 and 3,485,624 shares issued in 2002 41 35
Additional paid-in capital 2,550 6,653
Deferred stock compensation (350) (481)
Accumulated deficit (51,521) (50,905)
Treasury stock at cost, 396,292 shares in 2003 and 2002 (6,787) (6,787)
Accumulated other comprehensive loss (1,137) (1,098)
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Total stockholders' equity 1,077 110
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Total liabilities and stockholders' equity $ 8,082 $ 8,184
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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,
--------------------------
2003 2002
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Revenues:
Product license $ 2,541 $ 2,146
Services 621 456
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Total revenues 3,162 2,602
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Operating expenses:
Selling and product materials 1,481 1,300
Product development 328 325
General and administrative 1,021 683
Depreciation and amortization 935 805
Restructuring and other charges -- 356
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Total operating expenses 3,765 3,469
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Loss from operations (603) (867)
Interest expense (18) (32)
Other income, net 5 7
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Net loss (616) (892)
Dividends on preferred stock, preferred stock
warrant and beneficial conversion (4,089) (684)
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Net loss applicable to common stockholders $ (4,705) $ (1,576)
========== ==========
Net loss per common share:
Basic and diluted $ (1.30) $ (0.56)
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Comprehensive loss:
Net loss $ (616) $ (892)
Foreign currency translation adjustment (39) (17)
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Comprehensive loss $ (655) $ (909)
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Weighted average shares outstanding: {a}
Basic and diluted 3,612 2,836
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{a} As of March 31, 2003, total shares outstanding on an as converted basis
was 9,981,000 shares,
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,
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2003 2002
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Cash flows from operating activities:
Net loss $ (616) $ (892)
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 935 805
Non-cash stock compensation 157 --
Exchange of source code for note payable (see Note 3) (512) --
Changes in operating assets and liabilities:
Accounts receivable, net 32 630
Other assets, net (86) (92)
Accounts payable and other accrued liabilities (296) 100
Accrued compensation and benefits (93) (47)
Deferred revenue (109) (23)
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Net cash provided by (used in) continuing operations (588) 616
Net cash used in discontinued operations -- (26)
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Net cash provided by (used in) operating activities (588) 590
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Cash flows from investing activities:
Capital expenditures (14) (11)
Capitalized software development costs -- (251)
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Net cash used in investing activities (14) (262)
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Cash flows from financing activities:
Proceeds from issuance of preferred and common stock, net 1,466 11
Other borrowings -- 138
Payments on revolving line of credit and debt (203) (655)
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Net cash provided by (used in) financing activities 1,263 (506)
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Net increase (decrease) in cash and cash equivalents 661 (178)
Cash and cash equivalents, beginning of period 978 1,844
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Cash and cash equivalents, end of period $ 1,639 $ 1,666
============ ============
Supplemental disclosures of non-cash operating, investing and financing
activities:
Exchange of source code for note payable (see Note 3) $ (512)
Accrued liability related to software held for resale $ -- $ 900
Furniture and equipment transfer in lease negotiation $ -- $ 135
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See accompanying notes to unaudited condensed consolidated financial statements.
5
USDATA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of USDATA
and our subsidiaries for the three month periods ended March 31, 2003 and 2002
have been prepared in accordance with accounting principles generally accepted
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, 2002.
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,
2003 and the consolidated results of our operations and comprehensive loss, and
cash flows for the three month periods ended March 31, 2003 and 2002. Operating
results for the three months ended March 31, 2003 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2003.
Certain prior period balances have been reclassified to conform to the current
year presentation.
Based upon anticipated levels of operations, we anticipate that our
ongoing working capital requirements will continue to be funded through
internally generated funds, our net borrowings from our working capital line of
credit and the $1.5 million equity financing we received on January 15, 2003. We
anticipate that such sources of funds will be sufficient to satisfy our
operating and debt service cash needs throughout 2003 and for the foreseeable
future; however there can be no assurance that these funds will be sufficient.
Our working capital line of credit requires us to maintain compliance with
certain financial covenants each quarter. Certain of these covenants require us
to maintain increasingly higher amounts of earnings before interest, taxes,
depreciation and amortization ("EBITDA") and tangible net worth during 2003. In
order to meet such requirements throughout 2003, we will be required to achieve
sales levels, which are above those that have currently been attained. There is
no assurance we will be able to reach such sales levels and maintain compliance
with the financial covenants contained in the working capital line of credit.
Based on the conditional financing arrangements of our working capital line of
credit, there can be no assurance we will be able to obtain any additional
funding on acceptable terms, if at all. In the event of a default under our
working capital line and in the event the lending bank does not waive the
default, our operations could be materially adversely affected. In that event,
we would be required to delay or abandon certain operating activities and
capital expenditures, which would further adversely affect our operations.
STOCK BASED COMPENSATION
We apply the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations, in accounting for stock
options and other stock based awards under our stock option plan. The difference
between the quoted market price as of the date of the grant and the contractual
purchase price of shares is charged to operations over the vesting period. No
compensation cost has been recognized for fixed stock options with exercise
prices equal to the market price of the stock on the dates of grant and shares
acquired by employees under the USDATA 1994 Equity Compensation Plan. Pro forma
net income and earnings per share disclosures as if we recorded compensation
expense based on the fair value for stock-based awards have been presented in
accordance with the provisions of SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, and are as follows for the three month
periods ended March 31, 2003 and 2002:
Three Months Ended
March 31,
------------------------------
(in thousands, except per share data) 2003 2002
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Net loss:
As reported $ (4,705) $ (1,576)
Stock-based employee compensation cost included in reported net income,
net of related tax effects 33 --
Total stock-based employee compensation expense determined under fair
value-based method for all awards, net of related tax effects (133) (150)
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Proforma net loss $ (4,805) $ (1,726)
============ ============
Basic and diluted net loss per common share
As reported $ (1.30) $ (0.56)
Pro forma $ (1.33) $ (0.61)
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6
USDATA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"), which requires that the fair value of the 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 associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We
adopted this statement on January 1, 2003. The adoption of SFAS No. 143 did not
have any material effect on our consolidated results of operations or financial
position.
June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities. Adoption of
this statement is required for exit or disposal activities initiated after
December 31, 2002, with earlier application encouraged. We adopted this
statement on January 1, 2003. The adoption of this statement did not have a
material effect on our consolidated results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We do not expect FIN 46 to have
a material effect on our financial condition or results of operations.
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 reflect 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 244,608 and 445,180 shares of common stock for 2003
and 2002, respectively, were not included in the computation of diluted earnings
per share as their inclusion would be antidilutive. The computation of diluted
earnings per share of common stock also excludes common shares that would be
issued upon conversion of outstanding shares of Series A, B and C-1 Preferred
Stock convertible into an aggregate of 3,701,626 shares and 2,326,105 shares of
common stock for 2003 and 2002, respectively. In addition, warrants to purchase
Series C-1 Preferred Stock and Series C-2 Preferred Stock, which are convertible
into an aggregate of 2,197,500 shares of common stock for 2003 and 1,500,000
shares of common stock for 2002 and warrants to purchase 293,902 shares of
common stock were not included in the computation of diluted earnings per share
as their inclusion would be antidilutive.
7
USDATA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. NOTES PAYABLE AND CURRENT PORTION OF LONG-TERM DEBT
We maintain a revolving credit facility with JPMorgan Chase Bank (the
"Lending Bank") to provide us with working capital assistance relating to timing
of our cash flow (the "Credit Facility). The Credit Facility originated on
January 15, 2001 and on January 15, 2002, it was amended to extend the Credit
Facility to January 31, 2003 and increase the commitment fee from 1.0% to 1.5%
per annum on the total commitment of up to $3.0 million. Effective January 31,
2003, we renewed the Credit Facility through January 31, 2004, increased the
interest rate to the prime rate plus 3.0% and increased the commitment fee from
1.5% to 2.0% per annum on the total commitment of up to $3.0 million. At March
31, 2003, the interest rate was 5.75%. The Credit Facility is collateralized by
certain of our foreign accounts receivable, and is guaranteed by Export-Import
Bank of the United States ("EXIM Bank"). EXIM Bank guarantees 90% of the
principal and interest. At March 31, 2003 and December 31, 2002, $622,000 and
$663,000, respectively, was borrowed under the Credit Facility and is included
in current liabilities. Based on the qualifying borrowing base arrangement,
total remaining availability at March 31, 2003 and December 31, 2002 was $88,000
and $97,000, respectively. Due to the nature of the qualifying borrowing base
arrangement, our borrowing capability varies each month depending on billings
and cash collections.
In December 2000, we entered into a development and commercialization
agreement with an OEM and one of our customers. On May 11, 2001, the agreement
was amended to include a loan agreement ("Loan") between a wholly-owned
subsidiary of USDATA and the OEM in connection with a coordinated development
program to co-develop what was to be the next major release of our software
product FactoryLink(R), or S2K. During 2001, the OEM advanced to USDATA $467,500
in three separate advances. 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. In October 2002, we contacted the
OEM and requested delaying the loan payments, as a result of their significantly
lower than forecasted purchases from USDATA. A key provision of the development
and commercialization agreement was that our software products were to be a
preferred solution of the OEM and that they were to actively promote and sell
our software products. On March 17, 2003, we entered into an amendment to the
development and commercialization agreement, whereby USDATA granted to the OEM a
license to the S2K source code as it existed on that date in satisfaction of the
$446,000 outstanding balance of the Loan, accrued interest of $33,000 and
accrued royalties of $61,000, partially offset by satisfaction of the $14,000
outstanding accounts receivable from the OEM, in exchange for the source code.
USDATA retains the intellectual property rights to the existing S2K software
product. In addition, we have an obligation to provide 192 hours of support over
the next twelve months. The net settlement of $526,000 less $14,000 deferred
revenue related to our support obligation is included in software license
revenue for the three-month period ended March 31, 2003.
4. SERIES C PREFERRED STOCK PURCHASE AGREEMENT
On January 14, 2003, we entered into a Series C Preferred Stock
Purchase Agreement with SCP Private Equity Partners II, L.P. ("SCP"), pursuant
to which SCP acquired on January 15, 2003, for an aggregate purchase price of
$1.5 million, (1) 37,500 shares of Series C-1 Preferred; (2) a warrant to
purchase 18,750 shares of Series C-2 Preferred at an initial exercise price of
$40.00 per shares, subject to adjustment upon the occurrence of certain events;
and (3) 619,186 shares of USDATA common stock. We received $1.5 million in cash,
net of transaction costs. As of March 31, 2003, SCP beneficially owned
approximately 74% of our common stock.
5. NON-CASH STOCK COMPENSATION
We entered into an agreement with Phoenix Management Services, Inc.
("Phoenix") on October 24, 2002 to provide us with an interim chief executive
officer at a fixed fee of $35,000 per month and performance incentives comprised
of warrants to purchase 5,000 shares of our Series C-1 Preferred Stock ("Series
C-1 Preferred") and 5,000 shares of our Series C-2 Preferred Stock ("Series C-2
Preferred") at an exercise price of $40.00 per share.
8
USDATA CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As long as Phoenix's engagement has not been terminated prior to the
following dates, the warrants are deemed earned according to the following
schedule: 1) 1,500 C-1 shares on January 15, 2003, 2) 1,500 C-1 shares and 2,500
C-2 shares on February 1, 2003, and 3) 2,000 C-1 shares and 2,500 C-2 shares on
May 1, 2003. The warrants are exercisable for 10 years. We have recorded
$113,000 of non-cash stock compensation during the three months ended March 31,
2003 related to these warrants. The compensation cost represents the fair value
of warrants earned during the period determined using a Black Scholes option
pricing model with the following assumptions: dividend yield of 0%, volatility
of 150%, risk free interest rates of 3.96% to 4.01%, and contractual lives of 10
years.
Non-cash stock compensation also includes $33,000 during the three
months ended March 31, 2003 related to retention shares and performance shares
granted in connection with the October 1, 2002 acquisition of Wizard Information
Systems Limited.
6. NASDAQ COMPLIANCE NOTICES
On November 12, 2002, we received a notice from The Nasdaq SmallCap
Market ("Nasdaq") that for the then last 30 consecutive trading days, the price
of our common stock had closed below the minimum $1.00 per share requirement for
continued inclusion under Marketplace Rule 4310(c)(4). In accordance with
Marketplace Rule 4310(c)(8)(D), we had 180 days, or until May 12, 2003, to
regain compliance. As of May 12, 2003, the bid price of our common stock had not
closed at $1.00 per share or more; therefore, we have not regained compliance
with Marketplace Rule 4310(c)(8)(D).
On April 21, 2003, we received a letter from Nasdaq notifying us that
we do not comply with Marketplace Rule 4310(c)(2)(B) the ("Rule"), which
requires companies listed on Nasdaq to have a minimum of $2.5 million in
stockholders' equity, or $35.0 million market value of listed securities, or
$500,000 of net income from continuing operations for the most recently
completed fiscal year or two of the three most recently completed fiscal years.
Based on our Annual Report on Form 10K for the year ended December 31, 2002, we
did not meet any of the three requirements under the Rule.
Based on not meeting the minimum $1.00 per share requirement for
continued listing and based on not meeting the minimum requirements under the
Rule described above, we expect to get written notification in the second
quarter of 2003 and we expect our securities will be delisted from Nasdaq.
Trading of our stock will then be conducted on an electronic bulletin board
established for securities that do not meet the Nasdaq listing requirement or in
quotations published by the National Quotation Bureau, Inc. that are commonly
referred to as the "pink sheets". As a result it could be more difficult to
sell, or obtain an accurate quotation as to the price of our common stock.
9
USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
USDATA is an independent, global supplier of industrial automation
software tools, applications and consulting services designed to provide
businesses with the knowledge and control needed to perfect the products they
produce and the processes they manage. During the 1980s, USDATA evolved its
software research and engineering to focus on supervisory control and data
acquisition ("SCADA"). As a result, we developed FactoryLink(R), our main
industrial automation software product, which has become one of the
manufacturing and process industry's most widely used automation products.
FactoryLink(R) was launched in 1986 and to date has shipped more than 79,000
copies to more than 110 countries around the world.
As manufacturing continued to evolve, so did the need to create new
solutions that would assist companies to better manage their production
processes. In 1998, we launched Xfactory(R). Building on its expertise on the
shop floor, our Xfactory(R) product is designed to track all aspects of discrete
manufacturing production in real time. Xfactory(R) maintains historically
accurate records, provides defect tracking, and complete product genealogy. Data
gathered and analyzed by this powerful product gives companies the insight
needed to improve production performance and meet the changing requirements of
customers dynamically, while generating enhanced competitive advantage.
FactoryLink(R) is a process knowledge and control solution used to
develop custom SCADA and human machine interface ("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. In 2000, we released FactoryLink(R) 7, which is designed to
have a lower total cost of ownership than other SCADA/HMI products on the market
and in April 2001 we released FactoryLink(R)++, which enhanced the core product
with some ease-of-use features and redundancy for seamless application fail
over. In January 2003, we announced our release of FactoryLink(R) 7.1, which
utilizes Microsoft.NET Framework technology to provide enhanced connectivity and
ease-of-use in implementing distributed systems in Windows XP and Windows 2000
operating environments.
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 information of the production process, defect tracking, and complete
product genealogy. 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. In November 2001, we announced our worldwide release
of the 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.
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
10
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 20% and 18% of revenues during the three
months ended March 31, 2003 and 2002, respectively.
We focus our sales efforts through selected distributors capable of
providing the level of support and expertise required in the industrial
automation market, systems integrators, OEM's and end customers. We have channel
support locations in the United States and Europe and we have a global network
of distribution and support partners. Our distributors have sales locations
throughout North and South America, Europe, Asia Pacific 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, 2002 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.
11
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,
-------------------------------
2003 2002
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Revenues:
Product license 80% 82%
Services 20% 18%
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Total revenues 100% 100%
------------ ------------
Operating expenses:
Selling and product materials 47% 50%
Product development 10% 12%
General and administrative 32% 26%
Depreciation and amortization 30% 31%
Restructuring and other charges 0% 14%
------------ ------------
Total operating expenses 119% 133%
------------ ------------
Loss from operations (19)% (33)%
Interest expense 0% (1)%
Other income, net 0% 0%
------------ ------------
Net loss (19)% (34)%
Dividends on prefered stock, preferred stock
warrant and beneficial conversion (129)% (26)%
------------ ------------
Net loss applicable to common stockholders (148)% (60)%
============ ============
Comparison of Three Months Ended March 31, 2003 and 2002
Total revenues for the three months ended March 31, 2003 were $3.2
million, an increase of $560,000 when compared to $2.6 million in revenues for
the same period in 2002. Product license revenue was $2.5 million and services
revenue was $621,000. Wizard Information Systems, Inc. ("Wizard"), our
distributor acquired on October 1, 2002, contributed $559,000 to product license
revenue and $288,000 to services revenue during the first quarter of 2003.
Included in product license revenue for the three months ended March 31, 2003
was $512,000 related to granting a source code license to an OEM in satisfaction
of a loan, accrued interest and accrued royalties owed to the OEM. See Note 3 in
the Unaudited Notes to Condensed Consolidated Financial Statements for details.
Product license revenue excluding the source code license grant was $2.0
million, a $117,000 decrease when compared to $2.1 million for the three months
ended March 31, 2002.
Selling and product materials expenses for the three months ended March
31, 2003 were $1.5 million, an increase of $181,000 when compared to $1.3
million for the same period in 2002. The increase is due to $459,000 in selling
and product materials expenses from Wizard offset by an $87,000 decrease in
sales expenses and a $191,000 decrease in variable cost of sales. The decrease
in variable cost of sales is primarily attributed to the two source code license
agreements entered into by USDATA in the first and second quarters of 2002,
which eliminated the royalty expense related to these source code purchases.
Selling and product materials expenses as a percentage of revenues decreased to
47% for the three months ended March 31, 2003 from 50% for the same period in
2002.
Product development expenses for the three months ended March 31, 2003,
net of amounts capitalized, were $328,000 compared to $325,000 for the same
period in 2002. Product development expenses consist primarily of labor costs.
We did not capitalize product development costs during the first quarter of
2003, as there were no projects in development for the three months ended March
31, 2003 that had progressed to the stage of technological feasibility. We
capitalized $251,000 of development costs
12
during the first quarter of 2002 primarily related to product development cost
for SCADA2Knowledge ("S2K"). During the fourth quarter of 2002, we determined
that the carrying amount of the capitalized software developments costs for S2K
were not recoverable, and as a result, we wrote off the entire balance of $3.3
million in December 2002. Net product development expenses as a percentage of
revenues decreased to 10% for the three months ended March 31, 2003 from 12% for
the same period in 2002. Gross product development expenses as a percentage of
revenues decreased to 10% for the three months ended March 31, 2003 from 22% for
the same period in 2002.
General and administrative expenses for the three months ended March
31, 2003 were $1.0 million, an increase of $338,000 when compared to $683,000
for the same period in 2002. The increase in general and administrative expenses
is primarily due to including $163,000 in general and administrative expenses
from Wizard and due to including non-cash stock compensation expense of $33,000
in connection with the acquisition of Wizard and $113,000 in connection with the
engagement of Phoenix Management Services, Inc. ("Phoenix"). See below for a
complete description of the non-cash stock compensation expenses. General and
administrative expenses as a percentage of revenues increased to 32% for the
three months ended March 31, 2003 from 26% for the same period in 2002.
In connection with the acquisition of Wizard the sellers are entitled
to receive additional common stock and Series B Preferred Stock as follows: (i)
a maximum of 257,544 shares of unregistered USDATA common stock and 19,600
shares of Series B Preferred ("Performance Shares") contingent upon Wizard
achieving a certain target gross revenue level by March 31, 2003, and (ii) a
maximum of 257,544 shares of USDATA common stock and 19,600 shares of Series B
Preferred ("Retention Shares") contingent upon continued employment with Wizard
for three years, under the terms and conditions of an Executive Service
Agreement entered into by and among Wizard and the Sellers. The Performance
Shares and Retention Shares, if earned, shall be granted in equal installments
on each of the first three anniversaries of the Completion Date; and, to the
extent not yet granted, shall be forfeited in the event that the Seller's
employment with USDATA terminates as set forth in the Acquisition Agreement. The
Performance Shares and Retention Shares, if earned, will be recognized as
non-cash compensation expense in our statement of operations. We recorded
$33,000 in non-cash stock compensation in connection with the earned portion of
the Retention Shares and Performance shares during the three months ended March
31, 2003.
Effective October 29, 2002, our board of directors appointed an interim
president and chief executive officer for USDATA to serve until such time as a
permanent president and chief executive officer is selected. Our interim
president and chief executive officer is with Phoenix, an operationally focused
turnaround management firm headquartered in Philadelphia, Pennsylvania. Pursuant
to an engagement letter between Phoenix and USDATA, Phoenix shall receive
$35,000 per month, plus expenses. In addition, Phoenix shall be granted warrants
to purchase up to 5,000 shares of our Series C-1 Preferred Stock and 5,000
shares of our Series C-2 Preferred Stock, all of which were be granted by May 1,
2003. In February 2003, we issued warrants to purchase 3,000 shares of Series
C-1 Preferred Stock and 2,500 shares of Series C-2 Preferred Stock (see Note 5
in the Notes to the Unaudited Condensed Consolidated Financial Statements.
Warrants to purchase the remaining 2,000 shares of Series C-1 Preferred Stock
and 2,500 shares of Series C-2 Preferred Stock were issued on May 1, 2003. We
recorded $113,000 in non-cash compensation expense in connection with the earned
portion of the warrants for the three months ended March 31, 2003.
Depreciation and amortization expenses for the three months ended March
31, 2003 were $935,000, an increase of $130,000 when compared to $805,000 for
the same period in 2002. The increase is due to 2003 including $120,000
amortization expense for customer relationships in connection with the
acquisition of Wizard and a $112,000 increase in amortization expense related to
the two source code license agreements entered into by USDATA in the first and
second quarters of 2002. This is offset by a $102,000 decrease in depreciation
expense due to computer equipment being fully depreciated.
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
13
the Fourth Amendment, we recorded a $356,000 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 $603,000 for the three months ended March 31, 2003, compared to a
loss from operations of $867,000 for the same period in 2002.
CRITICAL ACCOUNTING POLICIES
Our discussions and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States of America. In preparing our financial statements, management is
required to make estimates, assumptions and judgments, that, among other things,
affect the reported amounts of assets and liabilities, of revenues and expenses
and disclosures of contingent assets and liabilities as of the date of the
financial statements. 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. We use authoritative pronouncements,
historical experience and other assumptions as the basis for making estimates.
Actual results could differ from those estimates. The following is a brief
discussion of the more critical accounting policies and methods that we use in
the preparation of our consolidated financial statements.
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 accounting principles generally accepted
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, software development costs, software held for resale,
customer relationships 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
three years ended December 31, 2002, we did not experience significant charges
to bad debt expense; however, there can be no assurance that this trend will
continue. Actual amounts could differ significantly from management's estimates.
The allowance for doubtful accounts at March 31, 2003 was $108,000 or
approximately 4% of total accounts receivable.
Management assesses the recoverability of property and equipment and
intangible assets (capitalized software development costs, software held for
resale and customer relationships) 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
14
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, Modification
of SOP 97-2, With Respect to Certain Transactions ("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.
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 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 - 90 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
15
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.
LIQUIDITY AND CAPITAL RESOURCES
We used $588,000 in cash from our operating activities for the three
months ended March 31, 2003 compared to our operating activities providing
$590,000 in cash for the same period in 2002. For the three months ended March
31, 2003, our net loss was $616,000, accounts payable and other accrued
liabilities decreased $296,000, accrued compensation decreased $93,000, deferred
revenue decreased $109,000 and other assets decreased $86,000. In addition, we
reduced cash from operating activities by the $512,000 in non-cash stock
compensation. This is offset by a $32,000 decrease in accounts receivable and
adding back $935,000 in depreciation and amortization and $157,000 in non-cash
stock compensation. 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 $92,000 decrease in other
assets and $26,000 net cash used in discontinued operations
Net cash used in investing activities was $14,000 for the three months
ended March 31, 2003 compared to using $262,000 for the same period in 2002. The
decrease in cash used in investing activities is primarily attributed to a
$251,000 decrease in capitalized software development costs.
Net cash provided by financing activities was $1.3 million for the
three months ended March 31, 2003, compared to net cash used in financing
activities of $506,000 for the same period in 2002. During 2003, we received
$1.5 million in net proceeds related to issuing 37,500 shares of our Series C-1
Preferred to SCP Private Equity Partners II, L.P. ("SCP") on January 15, 2003.
In addition, we paid $203,000 related to our debt obligations, of which $41,000
was for our working capital line of credit. Contributing to cash used in
financing activities during 2002 was $655,000 in cash payments for our debt
obligations, of which $333,000 related to our working capital line of credit,
partially offset by other borrowing of $138,000 and $11,000 in proceeds from
issuance of our common stock.
Our working capital requirements over the past 15 months have been
funded through internally generated funds, net borrowings under our $3.0 million
working capital line of credit and our equity financings from SCP. The details
of these financing arrangements are described below.
16
Equity Financings
On March 8, 2002, USDATA and SCP entered into a First Amendment to the
Series C Preferred Stock Purchase Agreement (the "Agreement") dated March 30,
2001. The Agreement extended the period in which USDATA could exercise its right
to sell the remaining 21,250 shares of Series C-1 Preferred Stock ("Series C-1
Preferred") 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.
On September 30, 2002, we exercised our right to sell the remaining
21,250 shares to SCP. We received $809,867 in cash, net of transaction costs, in
exchange for the shares. In accordance with the Agreement, we issued a warrant
to SCP granting them the right to purchase up to 10,625 shares of Series C-2
Preferred at a purchase price of $40 per share. Currently, SCP has the right to
purchase a total of 104,375 shares of our Series C-2 Preferred at a purchase
price of $40 per share.
On January 14, 2003, USDATA and SCP entered into a Series C Preferred
Stock Purchase Agreement, pursuant to which SCP acquired on January 15, 2003,
for an aggregate purchase price of $1.5 million, (1) 37,500 shares of Series C-1
Preferred; (2) a warrant to purchase 18,750 shares of Series C-2 Preferred at an
initial exercise price of $40.00 per shares, subject to adjustment upon the
occurrence of certain events; and (3) 619,186 shares of USDATA common stock. We
received $1.486 million in cash, net of transaction costs.
For the three and fifteen months ended March 31, 2003, we have received
$1.5 million and $2.3 million in cash, net of transaction costs, in total equity
financing proceeds.
As of March 31, 2003, we have issued 50,000 shares of our Series A
Preferred with a liquidation preference of $100 per share, plus cumulative
dividends; 281,800 shares of our Series B Preferred with a liquidation
preference of $100 per share, plus cumulative dividends; 112,500 shares of our
Series C-1 Preferred with a liquidation preference of $80 per share, plus
cumulative dividends; and four warrants for the purchase of 106,875 shares of
our Series C-2 Preferred with a liquidation preference of $120 per share, plus
cumulative dividends.
The Series C-1 and C-2 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 $56.2 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-1 Preferred and C-2 Preferred would be entitled to up to $17.7
million in value prior to any distribution to common stockholders, Series A
Preferred stockholders and Series B Preferred stockholders, the holders of
Series B Preferred would be entitled to up to $32.2 million in value prior to
any distribution to common stockholders and Series A Preferred stockholders, and
the holders of Series A Preferred would be entitled to up to $6.3 million in
value prior to any distribution to common stockholders.
Debt Financings
We maintain a revolving credit facility with JPMorgan Chase Bank (the
"Lending Bank") to provide us with working capital assistance relating to timing
of our cash flow (the "Credit Facility). The Credit Facility originated on
January 15, 2001 and on January 15, 2002, it was amended to extend the Credit
Facility to January 31, 2003 and increase the commitment fee from 1.0% to 1.5%
per annum on the total commitment of up to $3.0 million. Effective January 31,
2003, we renewed the Credit Facility through January 31, 2004, increased the
interest rate to the prime rate plus 3.0% and increased the commitment fee from
1.5% to 2.0% per annum on the total commitment of up to $3.0 million. At March
31, 2003, the interest rate was 5.75%. The Credit Facility is collateralized by
certain of our foreign accounts receivable,
17
and is guaranteed by Export-Import Bank of the United States ("EXIM Bank"). EXIM
Bank guarantees 90% of the principal and interest. At March 31, 2003 and
December 31, 2002, $622,000 and $663,000, respectively, was borrowed under the
Credit Facility and is included in current liabilities. Based on the qualifying
borrowing base arrangement, total remaining availability at March 31, 2003 and
December 31, 2002 was $88,000 and $97,000, respectively. Due to the nature of
the qualifying borrowing base arrangement, our borrowing capability varies each
month depending on billings and cash collections.
The EBITDA and tangible net worth covenants to be met for the first,
second, third and fourth quarters of 2003, respectively, are as follows: (a)
EBITDA - ($564) thousand, ($50) thousand, ($25) thousand and $1.3 million; and
(b) tangible net worth - ($3.4) million, ($3.7) million, ($3.9) million and
($2.5) million. We met both covenants during the first quarter of 2003.
The following table summarizes our contractual obligations related to
debt, capital leases and operating leases at March 31, 2003:
(in thousands) Commitment Per Period
-------------------------------------------------------------
Total 2003 2004 2005 Thereafter
-------- -------- -------- -------- ----------
Working capital line of credit $ 622 $ 622 $ -- $ -- $ --
Long-term debt and other debt 116 116 -- -- --
Capital leases 153 46 64 43 --
Operating leases 6,974 684 922 938 4,430
-------- -------- -------- -------- --------
$ 7,865 $ 1,468 $ 986 $ 981 $ 4,430
======== ======== ======== ======== ========
Based upon anticipated levels of operations, we anticipate that our
ongoing working capital requirements will continue to be funded through
internally generated funds, our net borrowings from our Credit Facility and the
$1.5 million equity financing we received on January 15, 2003. We anticipate
that such sources of funds will be sufficient to satisfy our operating and debt
service cash needs throughout 2003 and for the foreseeable future; however there
can be no assurance that these funds will be sufficient. Our Credit Facility
requires us to maintain compliance with certain financial covenants each
quarter. Certain of these covenants require us to maintain increasingly higher
amounts of EBITDA and tangible net worth during 2003. In order to meet such
requirements throughout 2003, we will be required to achieve sales levels, which
are above those that have currently been attained. There is no assurance we will
be able to reach such sales levels and maintain compliance with the financial
covenants contained in the Credit Facility. Based on the conditional financing
arrangements of our Credit Facility, there can be no assurance we will be able
to obtain any additional funding on acceptable terms, if at all. In the event of
a default under our Credit Facility and in the event the Lending Bank does not
waive the default, our operations could be materially adversely affected. In
that event, we would be required to delay or abandon certain operating
activities and capital expenditures, which would further adversely affect our
operations.
International Operations
Our international revenues represented approximately 81% of our total
revenue for the three months ended March 31, 2003. Revenues from these
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. For the three months ended March 31, 2003,
international revenues were primarily derived from France for $583,000, United
Kingdom for 822,000, Italy for 80,000, Germany for $133,000, and Canada for
$186,000.
NASDAQ COMPLIANCE NOTICES
On November 12, 2002, we received a notice from The Nasdaq SmallCap
Market ("Nasdaq") that for the then last 30 consecutive trading days, the price
of our common stock had closed below the minimum
18
$1.00 per share requirement for continued inclusion under Marketplace Rule
4310(c)(4). In accordance with Marketplace Rule 4310(c)(8)(D), we had 180 days,
or until May 12, 2003, to regain compliance. As of May 12, 2003, the bid price
of our common stock had not closed at $1.00 per share or more; therefore, we
have not regained compliance with Marketplace Rule 4310(c)(8)(D).
On April 21, 2003, we received a letter from Nasdaq notifying us that
we do not comply with Marketplace Rule 4310(c)(2)(B) the ("Rule"), which
requires companies listed on Nasdaq to have a minimum of $2.5 million in
stockholders' equity, or $35.0 million market value of listed securities, or
$500,000 of net income from continuing operations for the most recently
completed fiscal year or two of the three most recently completed fiscal years.
Based on our Annual Report on Form 10K for the year ended December 31, 2002, we
did not meet any of the three requirements under the Rule.
Based on not meeting the minimum $1.00 per share requirement for
continued listing and based on not meeting the minimum requirements under the
Rule described above, we expect to get written notification in the second
quarter of 2003 and we expect our securities will be delisted from Nasdaq.
Trading of our stock will then be conducted on an electronic bulletin board
established for securities that do not meet the Nasdaq listing requirement or in
quotations published by the National Quotation Bureau, Inc. that are commonly
referred to as the "pink sheets". As a result it could be more difficult to
sell, or obtain an accurate quotation as to the price of our common stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB's Emerging Issues Task Force ("EITF")
reached a consensus on Issue No. 00-21, "Accounting for Revenue Arrangements
with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. The provisions of EITF Issue No.
00-21 will apply to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. We do not expect EITF Issue No. 00-21 to have a
material effect on our financial condition or results of operations.
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 $44,000 and our working
capital line of credit of $622,000. 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 (approximately 81% for the three months ended March 31, 2003). We
primarily invoice and collect in U.S. dollars; therefore, we are not exposed to
any significant market risk relating to currency rates.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this quarterly report on Form
10Q for the period ended March 31, 2003, we carried out an evaluation, under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to us (including our consolidated subsidiaries) required to be included
in our periodic filings with the Securities and Exchange Commission. No
significant changes in our internal controls or other factors that could affect
these controls have occurred subsequent to the date of such evaluation.
19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits (filed as part of this report).
99.1 Certificate of Chief Executive Officer of the Company
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certificate of Chief Financial Officer of the Company
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
On March 28, 2003, we filed a current report on Form 8-K to
announce our operating results for the fourth quarter and year ended December
31, 2002.
20
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, 2003 /s/ James E. Fleet
--------------------------------------------
James E. Fleet
Interim President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: May 15, 2003 /s/ Jennifer P. Dooley
--------------------------------------------
Jennifer P. Dooley
Chief Financial Officer
(Principal Financial and Accounting Officer)
21
CERTIFICATIONS
I, James E. Fleet, certify that:
1. I have reviewed this quarterly report on Form 10-Q of USDATA Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ James E. Fleet
------------------------------------------
James E. Fleet
Interim Chief Executive Officer (Principal
Executive Officer)
22
I, Jennifer P. Dooley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of USDATA Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Jennifer P. Dooley
---------------------------------
Jennifer P. Dooley
Chief Financial Officer (Principal
Financial Officer)
23
EXHIBIT INDEX
99.1 Certification of Chief Executive Officer of the Company pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer of the Company pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
24