SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
[ ]
Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the transition period from __________ to __________.
Commission file number 0-25936
USDATA Corporation
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2405152
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2435 N. Central Expressway, Richardson, TX 75080
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(Address of Principal Executive Offices)
(Zip Code)
Registrant's Telephone Number, Including Area Code: (972) 680-9700
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.
Yes [X] No [ ]
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 11, 2002
Number of Shares
Class Outstanding
Common Stock, Par Value $.01 Per Share 3,089,331 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 SEPTEMBER 30, 2002
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance
Sheets as of September 30, 2002 and
December 31, 2001 3
Unaudited Condensed Consolidated Statements
of Operations and Comprehensive Loss
for the Three and Nine Months Ended
September 30, 2002 and 2001 4
Unaudited Condensed Consolidated Statements
of Cash Flows for the Three and Nine Months
Ended September 30, 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 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
USDATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,728 $ 1,844
Accounts receivable, net of allowance for doubtful
accounts of $108 and $279, respectively 1,789 2,573
Other current assets 686 557
-------------- --------------
Total current assets 4,203 4,974
-------------- --------------
Property and equipment, net 609 1,212
Computer software development costs, net 5,201 6,443
Software held for resale, net 1,496 426
Other assets 22 23
-------------- --------------
Total assets $ 11,531 $ 13,078
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 547 $ 694
Deferred revenue 987 1,248
Accrued compensation and benefits 353 468
Notes payable and current portion of long-term debt 1,642 1,837
Other accrued liabilities 1,263 1,702
Net liabilities of discontinued operation 300 339
-------------- --------------
Total current liabilities 5,092 6,288
-------------- --------------
Other noncurrent liabilities 1,599 --
Long-term debt, less current portion 258 590
-------------- --------------
Total liabilities 6,949 6,878
-------------- --------------
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 6,268 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 30,852 29,262
Series C-1 cumulative convertible preferred stock; $.01 par value;
liquidation preference $80 per share; 125,000 shares authorized; 75,000
shares issued and outstanding in 2002 and 53,750 shares
issued and outstanding in 2001 13,154 10,442
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 2002 and 2001 -- --
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 8,333 12,815
Accumulated deficit (46,216) (43,795)
Treasury stock at cost, 396,292 shares in 2002 and 438,247
shares in 2001 (6,787) (7,522)
Accumulated other comprehensive loss (1,055) (1,003)
-------------- --------------
Total stockholders' equity 4,582 6,200
-------------- --------------
Total liabilities and stockholders' equity $ 11,531 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Product license $ 1,649 $ 2,753 $ 6,087 $ 9,052
Services 383 508 1,256 1,520
-------- -------- -------- --------
Total revenues 2,032 3,261 7,343 10,572
-------- -------- -------- --------
Operating expenses:
Selling and product materials 2,072 2,216 6,016 6,974
Product development 393 453 1,174 1,406
General and administrative 606 867 2,138 2,877
Restructuring and other charges -- 1,061 356 1,068
Write off of capitalized software -- 391 -- 391
-------- -------- -------- --------
Total operating expenses 3,071 4,988 9,684 12,716
-------- -------- -------- --------
Loss from operations (1,039) (1,727) (2,341) (2,144)
Interest expense (32) (44) (97) (135)
Other income, net 5 -- 17 --
-------- -------- -------- --------
Loss from continuing operations (1,066) (1,771) (2,421) (2,279)
Income from discontinued operations -- 132 -- 132
-------- -------- -------- --------
Net loss (1,066) (1,639) (2,421) (2,147)
Dividends on preferred stock, preferred stock
warrant and beneficial conversion (2,384) (1,330) (3,752) (10,128)
======== ======== ======== ========
Net loss applicable to common stockholders $ (3,450) $ (2,969) $ (6,173) $(12,275)
======== ======== ======== ========
Net loss per common share:
Basic and diluted
Loss from continuing operations $ (1.20) $ (1.10) $ (2.17) $ (4.40)
Income from discontinued operations -- 0.05 -- 0.05
-------- -------- -------- --------
Net loss per common share $ (1.20) $ (1.05) $ (2.17) $ (4.35)
======== ======== ======== ========
Comprehensive loss:
Net loss $ (1,066) $ (1,639) $ (2,421) $ (2,147)
Foreign currency translation adjustment (9) (15) (52) (33)
-------- -------- -------- --------
Comprehensive loss $ (1,075) $ (1,654) $ (2,473) $ (2,180)
======== ======== ======== ========
Weighted average shares outstanding:
Basic and diluted 2,868 2,826 2,847 2,818
======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
4
USDATA CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $ (2,421) $ (2,147)
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 2,731 2,735
Non-cash stock expense 22 87
Write off of capitalized software -- 391
Changes in operating assets and liabilities:
Accounts receivable, net 784 1,456
Other assets, net 67 149
Accounts payable and other accrued liabilities (159) (1,547)
Accrued compensation and benefits (115) (88)
Deferred revenue (261) (248)
-------- --------
Net cash provided by continuing operations 783 788
Net cash used in discontinued operations (39) (2,048)
-------- --------
Net cash provided by (used in) operating activities 744 (1,260)
-------- --------
Cash flows from investing activities:
Capital expenditures (379) (60)
Capitalized software development costs (596) (983)
Deposit of acquisition costs (191) --
Refund of leasehold improvement costs -- 209
-------- --------
Net cash used in investing activities (1,166) (834)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 22 56
Proceeds from issuance of preferred stock, net 810 2,050
Borrowing under revolving line of credit 965 1,657
Other borrowings 139 584
Payments on long-term debt (1,630) (1,532)
-------- --------
Net cash provided by financing activities 306 2,815
-------- --------
Net increase (decrease) in cash and cash equivalents (116) 721
Cash and cash equivalents, beginning of period 1,844 673
-------- --------
Cash and cash equivalents, end of period $ 1,728 $ 1,394
======== ========
Non-cash operating, investing and financing activity:
Conversion of accrued liabilities to long-term
notes payable $ -- $ 232
Accrued liability related to software held for resale $ 1,120 $ --
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 and nine month periods ended September 30,
2002 and 2001 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, 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 September 30, 2002 and the consolidated results of our operations
and comprehensive loss, and cash flows for the three and nine month periods
ended September 30, 2002 and 2001. Operating results for the three and nine
months ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2002. Certain prior period
balances have been reclassified to conform to the current year presentation.
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 409,886 and 237,891 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. 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 2.8 million shares and 2.3 million shares
of common stock for 2002 and 2001, respectively. In addition, warrants to
purchase 2.0 million shares and 1.5 million shares of common stock for 2002 and
2001, respectively, were not included in the computation of diluted earnings per
share as 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. As of
September 30, 2002, $450,000 of the remaining amount due is included in other
accrued liabilities with the balance of $250,000 included in other non-current
liabilities.
On July 9, 2002, we acquired the rights to certain source code related
to value added products that are currently bundled into our FactoryLink(R)
software product for $560,000. Under the license agreement we were granted a
worldwide, non-exclusive, perpetual, irrevocable, assignable and transferable
license to use the source code, design documentation, user documentation, setups
and related materials. The $560,000 is payable over three years in annual
payments of $140,000 beginning in year 2002. The first payment was made on July
9, 2002 upon receipt of the source code. Each additional payment is due on
6
USDATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
each of the first, second and third anniversary of
the effective date, June 30, 2002. As of September 30, 2002, $140,000 of the
remaining amount due is included in other accrued liabilities with the balance
of $280,000 included in other non-current liabilities.
4. SERIES C PREFERRED STOCK PURCHASE AGREEMENT
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 (the "Series C Purchase Agreement"). In addition, SCP committed
to purchase an additional 37,500 shares of Series C-1 Preferred ("Option Stock")
at $40 per share ($1.5 million) contingent upon USDATA meeting specified monthly
target provisions. At December 31, 2001, when the original exercise period
expired, we had 21,250 shares remaining under the equity line.
On March 8, 2002, USDATA and SCP entered into a First Amendment to the
Series C Purchase Agreement (the "Agreement"). The Agreement extended the Option
Stock exercise period to December 31, 2002, deleted the specified monthly target
provisions and provided for warrant coverage equal to 50% of the remaining
Option Stock, for a total of 10,625 shares of Series C-2 Preferred. All other
terms of the Series C 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 of the Option Stock to SCP. We received $809,867 in
cash, net of transaction costs, in exchange for the shares. In connection with
issuing the remaining 21,250 shares of Option Stock to SCP, we issued a warrant
to SCP granting them the right to purchase up to an additional 10,625 shares of
Series C-2 Preferred at a purchase price of $40 per share. Currently, SCP holds
two warrants granting them the right to purchase in the aggregate 85,625 shares
of our Series C-2 Preferred at a purchase price of $40 per share.
5. OFFICE LEASE AGREEMENT AMENDMENT
We are party to an Office Lease Agreement, as amended (the "Lease"),
under which we were 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 excess leased office
space. 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 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 in excess office furniture, with a carrying value of approximately
$135,000. 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. By implementing the
provisions of the Fourth Amendment, we will realize a cash savings of
approximately $1.0 million in lease costs during 2002.
We will compute rent expense to be recognized under the Lease, as
amended, considering the increasing rent over the rent term and all amounts
previously accrued for as rent expense, including approximately $1.1 million
recorded in the third quarter of 2001 for unoccupied excess lease space,
7
USDATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
$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 remaining
accrual will be amortized over the remaining lease term as an offset to rent
expense, and the carrying value of the excess office furniture and value of the
Warrant will be amortized as an increase to rent expense. At September 30, 2002,
$239,000 of the remaining accrual was included in other current liabilities and
$933,000 was included in other non-current liabilities.
6. REVOLVING CREDIT FACILITY
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"). We were not in compliance with the
tangible net worth debt covenant for the months ended March 31, April 30, and
May 31, 2002. In addition, we did not comply with the earnings before interest,
taxes, depreciation and amortization ("EBITDA") debt covenant for the quarter
ended March 31, 2002. On April 15, 2002 and July 12, 2002, we received two
separate waivers from the Lending Bank waiving these defaults under the Credit
Facility. In connection with the April 15, 2002 waiver, the interest rate under
the Credit Facility was increased by 75 basis points to the prime rate plus
2.25% per annum. On July 12, 2002, the Lending Bank amended both debt covenants
going forward beginning in June 2002 to be consistent with our most recent
business plan. We complied with both debt covenants as of June 30, 2002, but due
to lower than expected revenue for the third quarter ended September 30, 2002,
we failed to comply with the EBITDA debt covenant for the third quarter of 2002.
On October 24, 2002, we received a third waiver from the Lending Bank waiving
this default under the Credit Facility.
At September 30, 2002 and December 31, 2001, $1,059,000 and $1,145,000,
respectively, were drawn under the Credit Facility and are included in current
liabilities. Based on the qualifying borrowing base arrangement under the Credit
Facility, total availability at September 30, 2002 was $557,000; therefore we
were overdrawn by $502,000. As a result, on October 1, 2002 and October 22, 2002
we paid $318,000 and $184,000, respectively, to reduce the borrowings on the
line. On October 29, 2002 we borrowed $164,000 based on the qualifying borrowing
base on that date. At October 31, 2002, $721,000 was borrowed under the line and
based on the qualifying borrowing base on that date, total remaining
availability was $58,000.
7. SUBSEQUENT EVENTS
On October 1, 2002, we acquired all the issued and outstanding stock of
Wizard Information Systems, Ltd ("Wizard"), pursuant to the terms of an
Acquisition Agreement for the Purchase of Wizard Information Systems Limited
("Acquisition Agreement"), dated October 1, 2002 ("Completion Date"), by and
among USDATA and John Adrian Wise and David John Moody (each a "Seller" and
together the "Sellers"). Wizard is a privately held company located in the
United Kingdom and is one of USDATA's largest European distributors. Wizard is
also an independent automation solutions provider founded in 1995 and has
offices in the United Kingdom, France and the Netherlands.
In connection with the Acquisition Agreement, we paid consideration of
$140,000 in cash, 220,752 unregistered shares of USDATA common stock (the
"Common Stock"), and 16,800 shares of USDATA Series B Preferred Stock (the
"Series B Preferred Stock"), each of which is convertible into 3.28 shares of
Common Stock. In addition, the Sellers are entitled to receive additional
consideration in the aggregate; (i) a maximum of 257,544 shares of unregistered
Common Stock and 19,600 shares of Series B Preferred Stock ("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 Common Stock and
19,600 shares of Series B Preferred Stock ("Retention Shares") contingent upon
continued employment with Wizard for three years, under the terms and conditions
of Executive Service Agreements entered into by and among Wizard and the
Sellers. The Performance Shares and Retention Shares, if earned, shall be issued
in equal installments on each of the first three anniversaries of the Completion
Date; and, to the extent not yet issued, shall be forfeited in the event that
the Seller's employment with USDATA terminates as set forth in the Acquisition
Agreement. As of September 30, 2002 we incurred $123,000 in transaction costs
associated
8
USDATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
with this acquisition. We will account for this acquisition under the purchase
method of accounting in the fourth quarter of 2002.
Pursuant to the Export Loan Agreement (the "Loan Agreement"), which
governs the Credit Facility between USDATA and the Lending Bank, USDATA will not
without the prior written consent of the Lending Bank (a) merge, consolidate or
otherwise combine with any other entity; (b) acquire all or substantially all of
the assets or capital stock of any other entity; (c) make any material changes
in its organizational structure or identity; or (d) enter into any agreement to
do any of the foregoing. We requested that the Lending Bank consent to the
acquisition of Wizard and waive the foregoing covenants insofar as they prohibit
the acquisition. On October 1, 2002, we received a Conditional Consent and
Waiver from the Lending Bank, subject to the following new debt covenant: (a)
USDATA shall have entered into a binding agreement to receive new equity
financing for not less than $1.0 million, on terms and conditions acceptable to
the Lending Bank, on or before October 31, 2002 and (b) USDATA shall receive the
funds from the new equity financing on or before November 15, 2002. On November
10, 2002, the foregoing deadlines were extended as follows: USDATA has until
December 31, 2002 to obtain a binding commitment to obtain new equity financing,
and we shall receive the funds no later than January 15, 2003. If we do not
obtain the new equity financing, we will be in default under the Credit
Facility.
9
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 they
produce and the processes they 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 has emerged from manufacturing and process automation
solutions and has grown to encompass vast 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 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 19% and 16% of revenues during the three
months ended September 30, 2002 and 2001, respectively, and 17% and 14% during
the nine months ended September 30, 2002 and 2001, respectively.
We experience seasonality in the sales of our software products. For
instance, many of our current and potential customers face budgetary pressures
to invest in software before the end of each fiscal year. As a result, we may
tend to report higher revenues during the fourth quarter of the year and lower
revenues during the first quarter of the year. These seasonal variations in
sales may lead to fluctuations in our quarterly operating results. Revenues from
our international customers continue to be significant and have been primarily
from sales and services related to our FactoryLink(R) software products.
International revenues are primarily derived from France, United Kingdom, Italy
and Canada and represent approximately 66% of total revenues for the nine months
ended September 30, 2002.
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
10
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 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. 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 recently implemented a plan to optimize our distribution strategy to
increase market coverage by focusing our sales efforts through selected
distributors, who provide the level of support and expertise needed in the
industrial automation market, systems integrators, original equipment
manufacturers and end customers. We have channel support locations in the United
States and Europe and our distributors have sales locations throughout North and
South America, Europe, the Far East and the Middle East.
Revenues declined 38% and 31% for the three and nine months ended
September 30, 2002, respectively, when compared to the same periods in 2001. As
a result, in November 2002 we will be implementing a 23% reduction in our
workforce in an effort to reduce costs. The reductions will primarily be in
general and administrative, quality assurance and documentation. The quality
assurance and documentation functions will be outsourced at a lower cost. A
portion of the cost savings from the general and administrative reductions will
be offset by newly established revenue producing functions.
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.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2002 2001 2002 2001
------ ------ ------ ------
Revenues:
Product license 81% 84% 83% 86%
Services 19% 16% 17% 14%
------ ------ ------ ------
Total revenues 100% 100% 100% 100%
------ ------ ------ ------
Operating expenses:
Selling and product materials 102% 68% 82% 66%
Product development 19% 14% 16% 13%
General and administrative 30% 27% 29% 27%
Restructuring and other charges 0% 33% 5% 10%
Write off of capitalized software 0% 11% 0% 4%
------ ------ ------ ------
Total operating expenses 151% 153% 132% 120%
------ ------ ------ ------
Loss from operations (51)% (53)% (32)% (20)%
Interest expense (1)% (1)% (1)% (1)%
Other income, net 0% 0% 0% 0%
------ ------ ------ ------
Loss from continuing operations (52)% (54)% (33)% (21)%
Income from discontinued operations 0% 4% 0% 1%
------ ------ ------ ------
Net loss (52)% (50)% (33)% (20)%
Dividends on preferred stock, preferred stock
warrant and beneficial conversion (117)% (41)% (51)% (96)%
------ ------ ------ ------
Net loss applicable to common stockholders (169)% (91)% (84)% (116)%
------ ------ ------ ------
Comparison of Three Months Ended September 30, 2002 and 2001
Total revenues for the quarter ended September 30, 2002 were $2.0
million, a decrease of $1.3 million when compared to $3.3 million in revenues
for the same period in 2001. Product licensing revenue decreased $1.2 million
and revenue from services decreased $125,000. The decrease in product licensing
revenue is primarily due to a decline in our base revenue from FactoryLink(R)
product sales. Of our open sales opportunities greater than $25,000 tracked
during the third quarter of 2002, 14% or $255,000 closed during the third
quarter of 2002 versus 18% or $453,000 for the same period in 2001. The decrease
in revenue is also attributed to the winding down of follow-on license and
services revenue related to projects that were sold during 2001 and due to a
general slowdown in the industrial economy, new projects are being sold at a
slower rate than in 2001. While new projects are being sold, the decline in base
revenue more than offsets the revenue from these new projects.
Selling and product materials expenses for the quarter ended September
30, 2002 were $2.1 million, a decrease of $144,000 when compared to $2.2 million
for the same period in 2001. The decrease is a result of decreased sales,
marketing and technical support services totaling $360,000 primarily attributed
to decreases in travel, consulting services and personnel (2 employees in
marketing and 1 in sales). In addition, variable cost of sales decreased
$19,000. Partially offsetting this decrease is a $235,000 increase in
capitalized software amortization. The increase in capitalized software
amortization includes $321,000 related to the two source code purchases
described in Note 3 in the Notes to Condensed Consolidated Financial Statements
and amortization related to releasing a portion of the newest member of the
FactoryLink(R) HMI/SCADA product, offset by amortization included in the first
eight months of 2001 related to capitalized software that was written off in
September 30, 2001. Selling and product materials expenses as a percentage of
revenues increased to 102% for the quarter ended September 30, 2002 from 68% for
the same period in 2001 due to the decrease in revenues.
Product development expenses for the quarter ended September 30, 2002,
net of amounts capitalized, were $393,000, a decrease of $60,000 when compared
to $453,000 for the same period in 2001.
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Product development expenses consist primarily of labor costs. The decrease in
2002 is due to lower engineering development activities related to the next
major release of our FactoryLink(R) product line. We capitalized $140,000 of
development costs during the quarter ended September 30, 2002 and $330,000 for
the same period in 2001. Product development expenses as a percentage of
revenues increased to 19% for the quarter ended September 30, 2002 from 14% for
the same period in 2001. Gross product development expenses as a percentage of
revenues increased slightly to 26% for the three months ended September 30, 2002
from 24% for the same period in 2001. In November 2002, we plan to reduce costs
in product development by outsourcing quality assurance and documentation, which
will result in a staff reduction of 6 full-time employees. We plan to reduce
software developers by 3 full-time employees; however, we will be re-allocating
2 internal resources back to product development, resulting in a net reduction
of 1 employee. We do not anticipate that this action will affect our development
efforts in keeping up with customer needs or technology as we will continue to
maintain an internal ability to monitor and manage the outsourcing of quality
assurance and documentation.
General and administrative expenses for the quarter ended September 30,
2002 were $606,000, a decrease of $261,000 when compared to $867,000 for the
same period in 2001. The decrease in general and administrative expenses is due
to decreases in salaries and benefits of $106,000 from staff reductions,
information technology of $60,000, legal and professional of $28,000, consulting
fees of $29,000 and other expenses of $38,000. Included in the decrease in
salaries and benefits is a $54,000 reversal in the third quarter of 2002 related
to accrued medical claims associated our self-insured health benefits plan. The
time limit for these potential claims has expired. General and administrative
expenses as a percentage of revenues increased to 30% for the quarter ended
September 30, 2002 from 27% for the same period in 2001 due to the decrease in
revenues. In November 2002, we will be implementing a 27% staff reduction in
general and administrative personnel and therefore anticipate lower general and
administrative expenses in the near future.
In the third quarter of 2001, we recorded a $1.1 million restructuring
charge related to lease costs associated with 44,400 square feet of excess
office space at our Richardson headquarter facilities. The excess office space
was a result of the restructuring plan implemented in the fourth quarter of
2000. The $1.1 million charge represented one full year of lease costs and was
accrued due to our inability to sublet this excess office space.
Due to strategy changes from two of our suppliers, we determined that
the carrying amount of capitalized software development costs related to two of
our software products were not recoverable. As a result, these assets were
considered to be impaired and were written off for a total of $391,000 during
the third quarter of 2001.
As a result of the factors discussed above, we recorded a loss from
operations of $1.0 million for the quarter ended September 30, 2002, compared to
a loss from operations of $1.7 million for the same period in 2001.
Comparison of Nine Months Ended September 30, 2002 and 2001
Total revenues for the nine months ended September 30, 2002 were $7.3
million, a decrease of $3.3 million when compared to $10.6 million in revenues
for the same period in 2001. Product licensing revenue decreased $3.0 million
and revenue from services decreased $264,000. The decrease in product licensing
revenue is primarily due to a decline in our base revenue from FactoryLink(R)
product sales. Of our open sales opportunities greater than $25,000 tracked
during the first nine months of 2002, an average of 10% or $955,000 closed
during the third quarter of 2002 versus an average of 29% or $1.9 million for
the same period in 2001. Also, 2001 included a $555,000 software license sale to
a single customer. The decrease in revenue is also attributed to the winding
down of follow-on license and services revenue related to projects that were
sold during 2001 and due to a general slowdown in the industrial economy, new
projects are being sold at a slower rate than in 2001. While new projects are
being sold, the decline in base revenue more than offsets the revenue from these
new projects.
Selling and product materials expenses for the nine months ended
September 30, 2002 were $6.0 million, a decrease of $958,000 when compared to
$7.0 million for the same period in 2001. The decrease
13
is a result of decreased sales, marketing and technical support services
totaling $1.1 million primarily attributed to decreases in travel, consulting
services and personnel (2 employees in marketing and 1 in sales). In addition,
variable cost of sales decreased $49,000. Partially offsetting this decrease is
a $145,000 increase in capitalized software amortization. The increase in
capitalized software amortization includes $396,000 related to the two source
code purchases described in Note 3 in the Notes to Condensed Consolidated
Financial Statements and amortization related to releasing a portion of the
newest member of the FactoryLink(R) HMI/SCADA product, offset by amortization
included in the first eight months of 2001 related to capitalized software that
was written off in September 30, 2001. Selling and product materials expenses as
a percentage of revenues increased to 82% for the nine months ended September
30, 2002 from 66% for the same period in 2001 due to the decrease in revenues.
Product development expenses for the nine months ended September 30,
2002, net of amounts capitalized, were $1.2 million, a decrease of $232,000 when
compared to $1.4 million for the same period in 2001. Product development
expenses consist primarily of labor costs. The decrease in 2002 is due to lower
engineering development activities related to the next major release of our
FactoryLink(R) product line. We capitalized $597,000 of development costs in the
nine months ended September 30, 2002 and $982,000 for the same period in 2001.
Although overall expenses decreased, we intend to continue to invest in product
development for both our software product lines to keep up with customer needs
and technology. Product development expenses, net of amounts capitalized, as a
percentage of revenues increased to 16% for the nine months ended September 30,
2002 from 13% for the same period in 2001. Gross product development expenses as
a percentage of revenues increased slightly to 24% for the nine months ended
September 30, 2002 from 23% for the same period in 2001. In November 2002, we
plan to reduce costs in product development by outsourcing quality assurance and
documentation, which results in a staff reduction of 6 full-time employees. We
plan to reduce software developers by 3 full-time employees; however, we will be
re-allocating 2 internal resources back to product development, resulting in a
net reduction of 1 employee. We do not anticipate that this action will affect
our development efforts in keeping up with customer needs or technology as we
will continue to maintain an internal ability to monitor and manage the
outsourcing of quality assurance and documentation.
General and administrative expenses for the nine months ended September
30, 2002 were $2.1 million, a decrease of $739,000 when compared to $2.9 million
for the same period in 2001. The decrease in general and administrative expenses
is due to 2001 including approximately $435,000 in consulting fees related to
operational assistance in executing the cost cutting initiatives resulting from
the 2000 restructuring plans in addition to further cost cutting initiatives to
be implemented throughout 2001. Information technology, salaries and benefits
and other expenses decreased $379,000, $248,000 and $9,000, respectively, as a
direct result of these cost cutting initiatives. The $739,000 decrease is net of
a settlement of amounts owed for consulting services incurred in 2000. Under the
terms of the settlement arrangement, $332,000 of accrued consulting expenses was
forgiven and the accrual was reversed in the second quarter of 2001. General and
administrative expenses as a percentage of revenues increased to 29% for the
nine months ended September 30, 2002 from 27% for the same period in 2001
primarily due to the decrease in revenues. In November 2002, we will be
implementing a 27% staff reduction in general and administrative personnel and
therefore anticipate lower general and administrative expenses in the near
future.
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 a $356,000 restructuring charge for the consultant
who assisted us in the negotiations. In the third quarter of 2001, we recorded a
$1.1 million restructuring charge related to this excess office space
representing one full year of lease costs.
As a result of the factors discussed above, we recorded a loss from
operations of $2.3 million for the nine months ended September 30, 2002,
compared to a loss from operations of $2.1 million for the same period in 2001.
14
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.
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, 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 September 30, 2002, we did not experience any charges to bad debt
expense, however, due to the general weakening of the economy, 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 September 30, 2002 was $108,000 or approximately 6% of total accounts
receivable.
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.
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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.
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 - 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 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
16
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
Our operating activities provided $744,000 of cash for the nine months
ended September 30, 2002, compared to using $1.3 million for the same period in
2001. The significant items contributing to cash provided by operations for the
nine months ended September 30, 2002 was a $784,000 decrease in accounts
receivable and $2.7 million added back for depreciation and amortization,
partially offset by a net loss of $2.4 million, a $159,000 decrease in accounts
payable and other accrued liabilities and a $261,000 decrease in deferred
revenue, due to lower invoiced maintenance and support revenue during the nine
months ended September 30, 2002. Contributing to cash used in operations for the
nine months ended September 30, 2001 was a net loss of $2.1 million, a $1.5
million decrease in accounts payable and accrued liabilities and $2.0 million in
net cash used in discontinued operations, partially offset by a $1.5 million
decrease in accounts receivable and $2.7 million for depreciation and
amortization.
Net cash used in investing activities was $1.2 million for the nine
months ended September 30, 2002, compared to using $834,000 for the same period
in 2001. The increase in cash used in investing activities is attributed to a
$319,000 increase in capital expenditures due to paying $340,000 related to the
two source code license agreements discussed in Note 3 in the Notes to Condensed
Consolidated Financial Statements, partially offset by a $21,000 decrease in
other capital expenditures. In addition, we deposited $140,000 with our attorney
in England to settle the cash portion of the purchase price for the Wizard
acquisition upon closing on October 1, 2002 and paid $51,000 in transactions
costs, and 2001 includes a $209,000 leasehold improvement refund received in the
first quarter. Offsetting the increase in cash used in investing activities for
the nine months ended September 30, 2002 was a decrease in capitalized software
development costs of $387,000.
Net cash provided by financing activities was $306,000 for the nine
months ended September 30, 2002, compared to net cash provided by financing
activities of $2.8 million for the same period in 2001. During 2002, we paid
$1.6 million related to our debt obligations, of which $1.1 million was for our
revolving line of credit, partially offset by borrowings under our line of
$965,000 and other borrowings of $139,000. In addition, we received $809,867 in
net proceeds related to issuing 21,250 shares of our Series C-1 Preferred to SCP
on September 30, 2002. Contributing to cash provided by financing activities
during 2001 was $2.1 million in net proceeds related to issuing 53,750 shares of
our Series C-1 Preferred, borrowing $1.7 million under our revolving line of
credit and $584,000 in other borrowings, partially offset by $1.5 million in
payments on our debt obligations.
Our working capital requirements for the nine months ended September
30, 2002 and 2001 have been funded through internally generated funds, net
borrowings under our $3.0 million revolving Credit Facility and our Series C
Preferred Stock equity financing arrangement with SCP. Details of the equity and
debt financings are discussed below.
At September 30, 2002, $1,059,000 was outstanding under the Credit
Facility and on September 30, 2002 we exercised our right to sell the remaining
21,250 shares of Series C-1 Preferred for net cash proceeds of $809,867. We are
currently seeking to obtain additional equity financing for not less than $1.0
million necessary to help fund our ongoing operations and to comply with the
terms and conditions of our Credit Facility. We believe such sources of funds
will be sufficient to satisfy our operating and debt service cash needs for the
foreseeable future, however, there can be no assurance that we
17
will be able to obtain sufficient funding on terms acceptable to us, if at all.
If necessary, we will delay certain operating 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
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 ($1.5 million) contingent upon specified monthly target provisions
through December 31, 2001.
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.
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 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 of the Option Stock 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 85,625 shares of our Series C-2
Preferred at a purchase price of $40 per share. As of September 30, 2002, 75,000
shares of Series C-1 Preferred are issued and outstanding and we have received
$2.9 million, net of transaction costs, in total proceeds.
As of September 30, 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; 75,000 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 85,625 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 $52.0 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 $16.0 million
in value prior to any distribution to common stockholders, the holders of Series
B Convertible Preferred Stock would be entitled to up to $30.0 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 renewed our revolving Credit Facility with
JPMorgan Chase (the "Lending Bank"). The Credit Facility provides for $3.0
million in revolving credit availability through January 31, 2003 and bears
interest at the prime rate plus 2.25% per annum, as amended. 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
18
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.
We were not in compliance with the tangible net worth debt covenant for
the periods ended March 31, April 30, and May 31, 2002. In addition, we did not
comply with the earnings before interest, taxes, depreciation and amortization
("EBITDA") debt covenant for the quarter ended March 31, 2002. On April 15, 2002
and on July 12, 2002, we received two separate waivers from the Lending Bank
waiving these defaults under the Credit Facility. In connection with the waiver
received on April 15, 2002, the interest rate under the facility increased by 75
basis points from the prime rate plus 1.5% per annum to the prime rate plus
2.25% per annum. On July 12, 2002, the Lending Bank amended both debt covenants
going forward beginning in June 2002 to be consistent with our most recent
business plan. As a result, we complied with both debt covenants as of June 30,
2002. However, due to lower than expected revenue for the third quarter ended
September 30, 2002, we were not in compliance with the EBITDA debt covenant for
the third quarter of 2002. On October 24, 2002, we received a third waiver from
the Lending Bank waiving this default under the Credit Facility.
At September 30, 2002 and December 31, 2001, $1,059,000 and $1,145,000,
respectively, were drawn under the Credit Facility and are included in current
liabilities. Based on the qualifying borrowing base arrangement under the Credit
Facility, total availability at September 30, 2002 was $557,000 therefore we
were overdrawn by $502,000. As a result, on October 1, 2002 and October 22,
2002, we paid $318,000 and $184,000, respectively; down on the line and on
October 29, 2002, we borrowed $164,000 based on the qualifying base on that
date. At October 31, 2002, $721,000 was borrowed under the line and based on the
qualifying borrowing base arrangement on that date, total remaining availability
was $58,000.
Pursuant to the Export Loan Agreement (the "Loan Agreement"), which
governs the Credit Facility between USDATA and the Lending Bank, USDATA will not
without the prior written consent of the Lending Bank (a) merge, consolidate or
otherwise combine with any other entity; (b) acquire all or substantially all of
the assets or capital stock of any other entity; (c) make any material changes
in its organizational structure or identity; or (d) enter into any agreement to
do any of the foregoing. We requested that the Lending Bank consent to the
acquisition of Wizard and waive the foregoing covenants insofar as they prohibit
the acquisition. On October 1, 2002, we received a Conditional Consent and
Waiver from the Lending Bank, subject to the following new debt covenants: (a)
USDATA shall have entered into a binding agreement to receive new equity
financing for not less than $1.0 million, on terms and conditions acceptable to
the Lending Bank, on or before October 31, 2002 and (b) USDATA shall receive the
funds from the new equity financing on or before November 15, 2002. On November
10, 2002, the foregoing deadlines were extended as follows: USDATA has until
December 31, 2002 to obtain a binding commitment to obtain new equity financing,
and we shall receive the funds no later than January 15, 2003.
The following table summarizes our contractual obligations related to
debt, capital leases and operating leases at September 30, 2002:
(in thousands) Commitment Per Period
-----------------------------------------------
Total 2002 2003 2004 Thereafter
------- ------ ------ ------ ----------
Revolving line of credit $ 1,059 $1,059 $ -- $ -- $ --
Long-term debt and other debt 657 229 357 71 --
Capital leases 184 15 62 64 43
Operating leases 7,045 204 812 818 5,211
------- ------ ------ ------ ----------
$ 8,945 $1,507 $1,231 $ 953 $ 5,254
======= ====== ====== ====== ==========
International Operations
Our international revenues represented approximately 67% of our total
revenue during 2001. For the nine months ended September 30, 2002, approximately
66% of total revenues were derived from our international customers. 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
19
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 The Nasdaq Stock Market
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 were provided 90 calendar days, or
until May 15, 2002, to regain compliance.
As of May 8, 2002, we had not regained compliance with the Rule and
applied to transfer our securities to The Nasdaq SmallCap Market. On June 11,
2002, our application was approved and our securities were transferred to The
Nasdaq SmallCap Market at the opening of business on June 12, 2002.
On July 23, 2002, we received a notice from The Nasdaq SmallCap Market
that for the 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 have 180 days, or until January 21, 2003, to regain
compliance. If, at anytime before January 21, 2003 our common stock closes at
$1.00 per share or more for a minimum of 10 consecutive trading days, we will
have regained compliance. On September 10, 2002, we received notice from The
Nasdaq SmallCap Market that the closing bid price of our common stock has been
at $1.00 per share or greater for at least 10 consecutive trading days.
Accordingly, we have regained compliance with the minimum $1.00 per share
requirement. There can be no assurance that we will be able to continue
compliance with this listing requirement in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 30, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") Nos. 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 for the periods ended September 30,
2002 or 2001.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the
20
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
will adopt this statement for fiscal year 2003 and do not expect its adoption 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 for the periods ended September 30, 2002 and
2001.
In April 2002, the FASB issued Statement No. 145, "Revision of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Statement No. 145 rescinds Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt" and an amendment of Statement No. 4,
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." Statement No. 145 also rescinds Statement No. 44, "Accounting for
Intangible Assets of Motor Carriers". Statement No. 145 amends Statement No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic affects that are similar to
sale-leaseback transactions. Statement No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Under
Statement No. 4, all gains and losses from extinguishment of debt were required
to be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. Statement No. 145 eliminates Statement No. 4, and,
thus the exception to applying Opinion 30 to all gains and losses related to
extinguishments of debt (other than extinguishments of debt to satisfy
sinking-fund requirements). As a result, gains and losses from extinguishment of
debt should be classified as extraordinary items only if they meet the criteria
in Opinion 30. Applying the provisions of Opinion 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual or infrequent or that meet the criteria for classification as an
extraordinary item. Statement No. 145 becomes effective for fiscal years
beginning after May 15, 2002, with early applications encouraged. Adoption of
this statement is not expected to have a material effect on our consolidated
results of operations or financial position.
In 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. The adoption of this
statement is not expected to have a material effect on the Company's financial
position 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 $80,000 and our revolving line
of credit of with a current outstanding balance of $1,059,000. 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 67% as of December 31, 2001 and approximately 70% as
of September 30, 2002). We primarily invoice and collect in U.S. dollars;
therefore, we are not exposed to any significant market risk relating to
currency rates.
21
ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of November 14, 2002 was conducted under
the supervision and with the participation of our management, including our
chief executive officer and chief financial officer. Based on that evaluation,
our management, including our chief executive officer and chief financial
officer, concluded that our disclosure controls and procedures were effective as
of November 14, 2002. There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to November 14, 2002.
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
None.
22
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: November 14, 2002 /s/ James E. Fleet
-----------------------------------------
James E. Fleet
Interim President, Chief Executive
Officer and Director
(Principal Executive Officer)
Date: November 14, 2002 /s/ Jennifer P. Dooley
-----------------------------------------
Jennifer P. Dooley
Chief Financial Officer
(Principal Financial and Accounting
Officer)
23
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 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: November 14, 2002
/s/ JAMES E. FLEET
-----------------------------------------
James E. Fleet
Interim Chief Executive Officer
(Principal Executive Officer)
24
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: November 14, 2002
/s/ JENNIFER P. DOOLEY
-----------------------------------------
Jennifer P. Dooley
Chief Financial Officer (Principal
Financial Officer)
25
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.