<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the quarterly period ended September 30, 2000
--- 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 October 31, 2000
Number of Shares
Class Outstanding
Common Stock, Par Value $.01 Per Share 14,007,182 shares
<PAGE> 2
USDATA CORPORATION AND SUBSIDIARIES
FORM 10-Q
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) at
September 30, 2000 and December 31,
1999 3
Condensed Consolidated Statements of
Operations and Comprehensive Loss (Unaudited)
for the Three and Nine Months Ended
September 30, 2000 and 1999 4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the Nine Months Ended
September 30, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE> 3
USDATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,548 $ 2,962
Accounts receivable, net of allowance for doubtful
accounts of $483 and $453, respectively 3,329 6,626
Other current assets 1,013 727
---------- ----------
Total current assets 8,890 10,315
---------- ----------
Property and equipment, net 3,897 2,162
Computer software development costs, net 8,442 6,645
Software held for resale, net 923 1,079
Cost in excess of fair value of tangible net assets purchased, net 3,966 4,742
Intangible and other assets 1,733 1,924
---------- ----------
Total assets $ 27,851 $ 26,867
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,038 $ 1,746
Deferred revenue 1,364 2,170
Accrued compensation and benefits 2,251 2,226
Stockholder notes payable -- --
Current portion of long-term debt 122 62
Other accrued liabilities 1,222 1,021
---------- ----------
Total current liabilities 6,997 7,225
---------- ----------
Long-term debt, less current portion 543 388
---------- ----------
Total liabilities 7,540 7,613
---------- ----------
Commitments and contingencies
Preferred stock, $.01 par value, 2,200,000 shares authorized: Series A
cumulative convertible redeemable preferred stock; 100,000 shares authorized;
50,000 shares issued and outstanding in 1999 -- 5,167
Redeemable convertible preferred stock, Series A-1 and Series A-2,
$.01 par value, with a redemption and liquidation value of $2.50 per share in
2000; 16,000,000 shares authorized for Series A-1 and 16,000,000 shares for
Series A-2; 5,300,000 shares issued and
outstanding for each series of preferred stock 26,612 --
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 2,200,000 shares authorized: Series A
cumulative convertible preferred stock; 100,000 shares authorized;
50,000 shares issued and outstanding in 2000 5,491 --
Common stock, $.01 par value, 40,000,000 shares
authorized; 16,324,189 issued in 2000 and 15,625,951
issued in 1999 163 156
Additional paid-in capital 24,293 21,952
Deferred compensation (466) (1,278)
Retained earnings(accumulated deficit) (26,871) 2,523
Treasury stock at cost, 2,318,007 shares in 2000
and 2,452,316 shares in 1999 (7,964) (8,434)
Accumulated other comprehensive loss (947) (832)
---------- ----------
Total stockholders' equity (deficit) (6,301) 14,087
---------- ----------
Total liabilities and stockholders' equity (deficit) $ 27,851 $ 26,867
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
USDATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Product license $ 3,266 $ 5,415 $ 9,401 $ 16,562
Services 1,224 1,304 3,058 2,929
---------- ---------- ---------- ----------
Total revenues 4,490 6,719 12,459 19,491
---------- ---------- ---------- ----------
Operating expenses:
Selling and product materials 7,049 4,398 22,315 12,139
Product development 2,891 613 7,897 1,838
General and administrative 3,094 1,615 8,010 4,482
Severance and other charges 237 -- 1,014 --
Non-cash stock compensation 146 264 812 264
Amortization of intangible assets 359 240 1,078 240
Purchased in process research and development -- 476 -- 476
---------- ---------- ---------- ----------
Total operating expenses 13,776 7,606 41,126 19,439
---------- ---------- ---------- ----------
Income (loss) from operations (9,286) (887) (28,667) 52
Other income (expense), net (33) 33 (291) 68
---------- ---------- ---------- ----------
Income (loss) before income taxes and preferred (9,319) (854) (28,958) 120
stock dividends of subsidiary
Income tax provision -- -- -- (100)
Preferred stock dividends of subsidiary (112) -- (112) --
---------- ---------- ---------- ----------
Net income (loss) (9,431) (854) (29,070) 20
Dividends on preferred stock (108) (63) (324) (63)
---------- ---------- ---------- ----------
Net income (loss) applicable to common stockholders $ (9,539) $ (917) $ (29,394) $ (43)
========== ========== ========== ==========
Comprehensive income (loss):
Net income (loss) $ (9,431) $ (854) $ (29,070) $ 20
Foreign currency translation adjustment 10 33 (115) (33)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (9,421) $ (821) $ (29,185) $ (13)
========== ========== ========== ==========
Net income (loss) per common share:
========== ========== ========== ==========
Basic and diluted $ (0.69) $ (0.08) $ (2.21) $ (0.00)
========== ========== ========== ==========
Weighted average shares outstanding:
Basic and diluted 13,734 12,098 13,300 11,590
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
USDATA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(29,070) $ 20
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 3,176 1,132
Non-cash stock compensation 812 264
Purchased in process research and development -- 476
Non-cash interest expense 313 --
Preferred stock dividends of subsidiary 112 --
Changes in assets and liabilities:
Accounts receivable, net 3,297 1,781
Other assets, net (408) (216)
Accounts payable and other accrued liabilities 798 (466)
Accrued compensation and benefits 339 (266)
Deferred revenue (806) (963)
-------- --------
Net cash provided by (used in) operating activities (21,437) 1,762
-------- --------
Cash flows from investing activities:
Capital expenditures (3,093) (340)
Acquisition -- (6,450)
Capitalized software development costs (2,383) (1,270)
-------- --------
Net cash used in investing activities (5,476) (8,060)
-------- --------
Cash flows from financing activities:
Proceeds from stock warrant exercise 2,109 --
Proceeds from stock option exercises 383 --
Proceeds from issuance of common stock -- 5,009
Proceeds from issuance of preferred stock 6,937 5,000
Proceeds from issuance of demand notes payable 19,250 --
Payments on long-term debt (65) (15)
-------- --------
Net cash provided by financing activities 28,614 9,994
-------- --------
Translation adjustments and effect of exchange rate changes on cash (115) (33)
-------- --------
Net increase in cash and cash equivalents 1,586 3,663
Cash and cash equivalents, beginning of period 2,962 1,980
-------- --------
Cash and cash equivalents, end of period $ 4,548 $ 5,643
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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USDATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements
of USDATA Corporation and its subsidiaries (the "Company") for the three and
nine month periods ended September 30, 2000 and 1999 have been prepared in
accordance with generally accepted accounting principles. Significant accounting
policies followed by the Company were disclosed in the notes to the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999. In the opinion of the Company's management,
the accompanying consolidated financial statements contain the adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
consolidated financial position of the Company at September 30, 2000 and the
consolidated results of its operations and comprehensive loss, and cash flows
for the periods ended September 30, 2000 and 1999. Operating results for the
three and nine months ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000.
2. STOCKHOLDER NOTES PAYABLE
On February 8, 2000 and March 24, 2000, the Company, through its
subsidiary eMake Corporation ("eMake"), entered into two convertible promissory
note agreements with a subsidiary of Safeguard Scientifics, Inc. ("Safeguard"),
the Company's primary stockholder, for $2.5 million each, totaling $5.0 million
in borrowings. The promissory notes had an interest rate of 12% per annum and
were due in full on February 8, 2001 and March 24, 2001, respectively. If the
notes payable were paid in full at maturity, interest would be forgiven. The
notes were paid in full on September 12, 2000, as described below, and accrued
interest of $322 thousand was forgiven.
On April 26, 2000, a subsidiary of Safeguard provided $5.0 million in
financing to the Company in exchange for a demand note due the earlier of one
year from the date of the note or 60 days following the date of demand for
payment. The note had an interest rate based on a specified bank prime rate plus
one percent.
On June 29, 2000; July 13, 2000 and July 28, 2000, a subsidiary of
Safeguard provided $1.5 million, $1.75 million and $2.5 million, respectively,
in financings to the Company's subsidiary eMake in exchange for three demand
notes each due the earlier of one year from the date of the note or 60 days
following the date of demand for payment. The notes had an interest rate based
on a specified bank prime rate plus one percent.
On August 14, 2000, SCP Private Equity Partners II, L.P. ("SCP")
provided $6.0 million in financing to the Company's subsidiary eMake in exchange
for a demand note due the earlier of one year from the date of the note or 60
days following the date of demand for payment. The note had an interest rate
based on a specified bank prime rate plus one percent. Concurrently, the Company
repaid the $2.5 million demand note dated July 28, 2000 plus accrued interest of
$13 thousand with proceeds from this demand note payable.
On September 12, 2000, the Company and eMake secured $26.5 million in
financing from Safeguard and SCP through the issuance of preferred stock (See
"Note 3"). In connection with this transaction, the company received $6,936,754
in cash and Safeguard and SCP cancelled the then outstanding notes payable
balance due them of $19,250,000 plus accrued interest of $313,246.
3. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS TO PURCHASE
PREFERRED STOCK
On August 7, 2000, the Company and eMake executed a Securities Purchase
Agreement to provide $26.5 million in financing in the form of eMake preferred
stock. The transaction was approved
6
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USDATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
by the Company's stockholders on September 11, 2000 and the transaction was
completed on September 12, 2000.
In this transaction, on September 12, 2000, SCP and Safeguard purchased
through a private placement 5,300,000 shares each, for a total of 10,600,000
shares, of eMake Corporation Series A-1 Convertible Preferred Stock and Series
A-2 Convertible Preferred Stock (collectively referred to as the "Series A
Preferred") and warrants to purchase up to an additional 5,300,000 shares each
of eMake Corporation Series A-1 and Series A-2 preferred stock, respectively.
The aggregate purchase price of $26,500,000 was comprised of $7,250,000 in cash
and cancellation of $19,250,000 of the notes payable described in Note 2. The
Company received $6,936,754 in cash, net of $313,246 due for accrued interest on
the outstanding notes payable.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Series A Preferred Stock has a par value of $.01 per share and a
liquidation preference of $2.50 per share plus cumulative dividends. The holders
of at least two-thirds of the outstanding shares of the Series A preferred stock
can require eMake to redeem all the shares at $2.50 per share at any time after
September 12, 2005. Dividends on the eMake Series A Preferred Stock are
cumulative and payable at a rate of $.05 per share per calendar quarter and in
preference to any dividends on eMake's common stock. The dividends are payable,
with respect to the eMake Series A-1 Preferred Stock, in additional shares of
eMake Series A-1 preferred stock and with respect to the eMake Series A-2
Preferred Stock, in additional shares of eMake Series A-2 preferred stock. The
eMake Series A-1 Preferred Stock is convertible into shares of eMake Corporation
Class A common stock at a conversion rate of $2.50 per share of common stock or
into shares of the Company's Series B preferred stock at the rate of one USDATA
preferred share for each 40 shares of eMake Series A-1 preferred share owned.
The eMake Series A-2 Preferred Stock is convertible into shares of eMake
Corporation Class B common stock at a conversion rate of $2.50 per share of
common stock or into shares of the Company's Series B preferred stock at the
rate of one USDATA preferred share for each 40 shares of eMake Series A-2
preferred share owned.
WARRANTS TO PURCHASE SERIES A-1 AND A-2 PREFERRED STOCK
The eMake Series A-1 and eMake Series A-2 preferred stock warrants
issued to SCP and Safeguard, respectively, grant to the holders the right to
purchase up to an additional 5,300,000 shares of eMake Series A-1 convertible
preferred stock and up to an additional 5,300,000 shares of eMake Series A-2
convertible preferred stock at an exercise price of $.01 per share. The amount
of eMake Series A Preferred Stock that can be acquired upon exercise is based on
the number of users licensed to use eMake's software from a server or client
workstation as of June 30, 2001 and varies from zero to a total of 5,300,000
shares of eMake Series A-1 Preferred Stock and 5,300,000 shares of eMake Series
A-2 Preferred Stock. The warrants are exercisable anytime after June 30, 2001
through the earliest of the following events: (a) June 1, 2006; (b) the
commencement of the liquidation or winding up of the business of eMake; (c) the
sale of all or substantially all of the assets and properties of eMake; (d) a
merger, consolidation or other similar transaction involving eMake in which
eMake is not the surviving entity or eMake is the surviving entity but after
which the holders of the outstanding voting securities of eMake before the
transaction hold less than 50% of eMake's outstanding voting securities after
the transaction; (e) the sale by eMake of its securities in a public offering;
(f) a decrease in the ownership percentage of USDATA's voting securities of
eMake to the extent that eMake would cease to be a consolidated subsidiary of
the Company; or (g) the exercise by SCP or Safeguard of its right to exchange
the last outstanding Series A share for shares of USDATA's Series B preferred
stock. These warrants expire on June 30, 2006.
7
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USDATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
4. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The board of directors is authorized, subject to certain limitations
and without stockholder approval, to issue up to 2.2 million shares of preferred
stock in one or more series and fix the rights and preferences of each series.
In 1999, the board of directors designated 100,000 shares of authorized
preferred stock as Series A convertible preferred stock, of which 50,000 shares
are issued and outstanding in 2000. In September 2000, the Company executed an
amendment to the Certificate of Designation for the Company's Preferred Stock
which changed the terms of the Series A preferred stock and designated 800,000
shares of authorized but unissued preferred stock as Series B convertible
preferred stock. The amended terms included that none of the Series A preferred
stock or Series B preferred stock are redeemable and that the cumulative
dividends are no longer interest bearing. The Series B preferred stock is
convertible into the Company's common stock at a conversion rate of $6.09.
5. LOSS PER SHARE
Net loss per share of common stock is presented in accordance with the
provisions of SFAS No. 128, Earnings Per Share. Under SFAS No. 128, basic income
(loss) per share excludes dilution for potentially dilutive securities and is
computed by dividing income or (loss) applicable to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted
income (loss) per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Potentially dilutive securities are excluded from the
computation of diluted income (loss) per share when their inclusion would be
antidilutive. Options to acquire a total of 1,760,290 shares have been excluded
from the computation of diluted loss per share for the three and nine months
ended September 30, 2000, as their inclusion would be antidilutive.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
(in thousands, except per share data) 2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss applicable to common stockholders $ (9,539) $ (917) $ (29,394) $ (43)
========== ========== ========== ==========
Weighted average common shares outstanding 13,734 12,098 13,300 11,590
Effect of dilutive securities:
Common stock options and warrants -- -- -- --
---------- ---------- ---------- ----------
Weighted average common shares and common
share equivalents (if dilutive) outstanding 13,734 12,098 13,300 11,590
========== ========== ========== ==========
Net loss per common share:
Basic and diluted $ (0.69) $ (0.08) $ (2.21) $ (0.00)
========== ========== ========== ==========
</TABLE>
6. SEVERANCE AND OTHER CHARGES
In June 2000, the Company implemented a reduction in its workforce of
approximately 6% and recorded a one-time charge of $777 thousand, primarily
consisting of employee severance and related benefits. Other charges included in
the $777 thousand are $85 thousand for vacated office space and $73 thousand for
legal and other related costs.
Severance costs were determined based upon employees' years of service
as well as level within the organization. The reduction in workforce included 16
employees, primarily from the selling group. Of the total amount expensed in the
second quarter, approximately $549 thousand was paid through September 30, 2000.
All affected employees were terminated as of June 30, 2000.
8
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USDATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
In addition, $144 thousand in non-cash charges were recorded related to
releasing shares from escrow, in accordance with the Smart Shop Software, Inc.
purchase agreement, which were held as collateral for certain employment-related
performance requirements. The $144 thousand is included in non-cash compensation
in the Company's 2000 Condensed Consolidated Statement of Operations.
In August 2000, the Company's subsidiary, eMake, implemented a
reduction in its workforce of approximately 32% and recorded a one-time charge
of $237 thousand, primarily consisting of employee severance and related
benefits of $150 thousand. Other charges included $44 thousand in estimated
lease termination costs to close two office facilities, which represents the
estimated amounts to be paid to terminate the lease contracts before the end of
their term, and $43 thousand in legal and other related costs.
Severance costs were determined based upon employees' years of service
as well as level within the organization. This reduction in workforce included
35 employees, primarily from the selling group. Of the total amount expensed in
the third quarter, approximately $151 thousand was paid through September 30,
2000. All affected employees were terminated as of September 30, 2000.
7. SEGMENT INFORMATION
The Company defines its operating segments based on two distinct
operating units - the USDATA Products Division, which includes its FactoryLink
and Xfactory product lines, and the Company's eMake Corporation subsidiary,
which develops and distributes Internet applications that deliver integrated
production solutions and real-time visibility across the supply chain. The
Company uses revenues and income (loss) from operations, which consists of
revenues less operating expenses, to measure segment operations.
The following summarizes information related to the Company's segments.
All significant intersegment activity has been eliminated. Assets are the owned
or allocated assets used by each operating segment.
9
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USDATA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
(in thousands) 2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
USDATA Products Division $ 4,275 $ 6,074 $ 11,582 $ 18,846
eMake Corporation 215 645 877 645
---------- ---------- ---------- ----------
$ 4,490 $ 6,719 $ 12,459 $ 19,491
========== ========== ========== ==========
Income (loss) from operations:
USDATA Products Division $ (3,438) $ 1,130 $ (10,584) $ 2,069
eMake Corporation (5,848) (2,017) (18,083) (2,017)
---------- ---------- ---------- ----------
(9,286) (887) (28,667) 52
Other income (expense), net (33) 33 (291) 68
---------- ---------- ---------- ----------
Income (loss) from operations before income taxes
and preferred stock dividends of subsidiary $ (9,319) $ (854) $ (28,958) $ 120
========== ========== ========== ==========
Depreciation and amortization:
USDATA Products Division $ 994 $ 235 $ 1,560 $ 750
eMake Corporation 650 382 1,616 382
---------- ---------- ---------- ----------
$ 1,644 $ 617 $ 3,176 $ 1,132
========== ========== ========== ==========
Total assets:
USDATA Products Division $ 19,735 $ 19,377
eMake Corporation 8,116 7,885
---------- ----------
$ 27,851 $ 27,262
========== ==========
</TABLE>
8. SUBSEQUENT EVENTS
During the fourth quarter of 2000, the Company is in the process of
implementing a restructuring plan designed to significantly reduce the Company's
and eMake's cost structure by reducing its workforce and other operating
expenses. The Company estimates the restructuring charge to be recorded in the
fourth quarter of 2000 to be in the range of $2 million to $3.5 million. In
conjunction with this restructuring, the Company is in the process of
re-evaluating eMake's business model. Based on the findings of this
re-evaluation and approval by the Company's Board of Directors, a business model
could be developed for the eMake business that effectively abandons certain
activities of eMake that required significant operating and capital expenditures
over the past 12 months. Specifically, the Company has recorded goodwill and
intangible assets of $4.0 million, net, and $1.5 million, net, related to its
1999 Smart Shop acquisition that may be deemed impaired if the Smart Shop
element of eMake is significantly curtailed as a result of the revised business
model. In addition, the Company has recorded $1.2 million, net, and $365
thousand, net, in capitalized website development costs and capitalized software
costs that could also be deemed impaired if the eMake portal project is
significantly changed or curtailed as a result of the revised business model.
The Company expects to complete its reevaluation of the eMake business model
before December 31, 2000.
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USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
OVERVIEW
USDATA Corporation (the "Company") is a global supplier of real-time
component-based production software and Internet-based production applications,
eBusiness and supply chain portals. These products and services are designed to
help customers manage their business in real time, reduce operating costs,
shorten cycle times, and improve quality in their manufacturing operations. Now
in its 25th year, the Company has a strong global presence with more than 45,000
installs located in more than 60 countries throughout the world, offices in the
U.S. and Europe and a global network of distribution and support partners.
The Company conducts its operations in two operating units, the USDATA
Products Division, and the Company's eMake Corporation subsidiary. Each unit has
its own sales, marketing, customer support and service, product development and
selected general management and administrative functions. Certain general and
administrative functions (such as corporate management, accounting, human
resources and information technology) provide services to both units with the
costs of these shared services allocated between the two units.
USDATA Products Division
The USDATA Products Division ("USDATA") is a global supplier of
component-based production software that is designed to help customers reduce
operating costs, shorten cycle times and improve product quality in their
manufacturing operations. USDATA's software enables manufacturers to access more
accurate and timely information - whether they are on the plant floor, in the
office, or around the globe. USDATA's solutions span a wide range of
manufacturing processes, from monitoring equipment to tracking product flow, and
are designed to integrate seamlessly with customers' existing manufacturing and
business software. This combination of product breadth and ease of integration
is intended to provide a total plant solution that defines new levels of
manufacturing performance and gives customers a distinct competitive advantage.
Revenues have been generated primarily from licenses of USDATA's
FactoryLink and Xfactory 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. Support and service
revenue for the three and nine months ended September 30, 2000 represented
approximately 13% and 15%, respectively, compared to 13% and 11%, respectively,
for the same periods in 1999.
Included in the FactoryLink family of products are versions 6.5 and
6.6, real-time information Windows NT and Windows 98/95 platforms, supporting
powerful client access environments and technologies and providing Year 2000
("Y2K") readiness. In addition, USDATA offers FactoryLink WebClient, which
provides the ability to view and control any FactoryLink server running
Microsoft Windows NT using a simple web browser.
In late June 2000, USDATA released FactoryLink 7, a multi-user,
real-time SCADA (Supervisory Control and Data Acquisition) product, developed to
run on the Windows 2000 and Windows NT operating systems. FactoryLink 7 was
designed specifically to give businesses access to a solution with the lowest
total cost of integration, installation, and support.
Xfactory is a manufacturing execution software ("MES") product that
incorporates Microsoft's newest technologies and is built on Microsoft's
Distributed Internet Applications ("DNA") architecture. Xfactory enables
manufacturing plants to more easily and quickly automate their production
processes and is the first visual object modeling MES. The Xfactory software
product enables customers to develop versatile and flexible MES applications for
production management, product tracking, product scheduling and genealogy
tracking for manufacturing and production processes.
11
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USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
In December 1999, USDATA released Xfactory version 1.4, which gives
manufacturers of all sizes the ability to track and improve production processes
"on the fly." Version 1.4 is intended to deliver unparalleled performance and
reliability for even the most demanding large-scale production processes.
In the latter part of 1999, the Company introduced the USDATA Connector
product. USDATA Connector links the plant floor to the supply chain and
higher-level business systems. USDATA Connector is designed to enable disparate
systems throughout the enterprise to operate as one and, in conjunction with the
Company's production suite of software, to provide visibility to the status of
the customers order at any point in the manufacturing process. In this regard,
USDATA Connector assists manufacturers in achieving a real-time supply chain
allowing them to better meet changing customer needs and increasing market
demands.
Also in late 1999, the Company introduced USDATA Analysis, the newest
module in Xfactory. USDATA Analysis turns production data into valuable
information available from any web browser. This product is the result of
USDATA's intuitive production modeling environment coupled with the capabilities
of TopTier Software's hyper-relational technology. USDATA Analysis integrates
the supply and demand chains by providing visibility to issues surrounding the
requirements of the shop floor and resource planning. As a result, the module is
intended to provide improved information to the supply chain, tighter inventory
control and increased profitability.
USDATA focuses its sales efforts through selected distributors capable
of providing the level of support and expertise required in the real-time
manufacturing and process control application market. The division currently has
four channel support locations in the United States and six internationally to
support its sales efforts through its network of distributors.
eMake Corporation
eMake Corporation ("eMake") was created to reinvent the way
manufacturers do business, by providing Internet-based, real-time production
applications, eBusiness and supply chain portals. eMake's services enables
customers to more efficiently manage their business in real time, using Internet
technologies to tap into a community of ideas, information and applications
uniquely tailored to fit the needs of the discrete make-to-order manufacturer.
eMake was formed in July 1999 by combining the Company's acquired Smart Shop
Software operations with a team of USDATA personnel with expertise in real time
production and Internet technologies. eMake's services are uniquely designed for
make-to-order manufacturers responding to changing orders, demanding customers,
shorter production cycles and increasing technology needs. eMake's services are
intended to provide a cost-effective, easy-to-implement business and production
solution with secure, real-time visibility through the Internet to customers,
suppliers and partners.
In mid-April 2000, eMake launched the first components of a suite of
Internet applications that include integrated product solutions and real-time
visibility across the supply chain. eMake's strategy is to leverage its
extensive manufacturing knowledge through Internet applications to help
companies maximize their back office production and create the eMake portal for
front office visibility into the production operations of the supply chain.
eMake's focus is on horizontal make-to-order solutions for smaller to medium
sized manufacturers with less than $50 million in annual revenue.
eMake has focused its sales efforts through the Internet, a direct
sales force, and telemarketing.
12
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USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
Subsequent to the end of the third quarter 2000 the Company is in the
process of implementing a restructuring plan designed to significantly reduce
the Company's and eMake's cost structure by reducing its workforce. See further
discussion in the Liquidity and Capital Resources section.
RESULTS OF OPERATIONS
The following table presents selected financial information relating to
the financial condition and results of operations of the Company and should be
read in conjunction with the consolidated financial statements and notes
included herein. The table sets forth, for the periods indicated, the Company's
statement of operations as a percentage of revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product license 73% 81% 75% 85%
Services 27% 19% 25% 15%
---- --- ---- ---
Total revenues 100% 100% 100% 100%
---- --- ---- ---
Operating expenses:
Selling and product materials 157% 65% 179% 62%
Product development 64% 9% 63% 10%
General and administrative 69% 24% 64% 23%
Severance and other charges 5% 0% 8% 0%
Non-cash compensation 3% 4% 7% 1%
Amortization of intangible assets 8% 4% 9% 1%
Purchased in process research and development 0% 7% 0% 3%
---- --- ---- ---
Total operating expenses 306% 113% 330% 100%
---- --- ---- ---
Income (loss) from operations (206)% (13)% (230)% 0%
Other income (expense), net (1)% 0% (2)% 0%
---- --- ---- ---
Income (loss) from operations before income taxes
and preferred stock dividends of subsidiary (207)% (13)% (232)% (0)%
Income tax provision 0% 0% 0% (1)%
Minority interest (2)% 0% (1)% 0%
---- --- ---- ---
Net income (loss) (209)% (13)% (233)% (1)%
Dividends on preferred stock (2)% (1)% (3)% (0)%
---- --- ---- ---
Net income (loss) applicable to common stockholders (211)% (14)% (236)% (1)%
==== === ==== ===
</TABLE>
Comparison of Three Months Ended September 30, 2000 and 1999
Total revenues for the quarter ended September 30, 2000, were $4.5
million, a decrease of $2.2 million or 33% compared to the same period in 1999.
The decrease was primarily a result of $2.1 million in lower software licensing
revenues. The Company believes that the decrease in software licensing revenues
was primarily due to a temporary industry-wide decline in new software
purchases. Although licensing revenues for the third quarter 2000 improved
slightly over second quarter 2000, it is substantially lower than licensing
revenues in the third quarter of 1999. While the Company anticipates an
improvement in USDATA revenues going forward, these market dynamics could affect
buying decisions for at least another two quarters, making revenues and
operating results more difficult to forecast.
Selling and product materials expenses increased $2.6 million from $4.4
million for the quarter ended September 30, 1999 to $7.0 million for the same
period in 2000. The increase was a result of an increase in eMake's selling and
product materials expenses of $2.6 million, increasing from $1.0 million in the
third quarter of 1999 to $3.6 million for the same period in 2000.
13
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USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
The increase is due to the incremental costs associated with expanding and
launching eMake during 2000. Selling and product materials expenses as a
percentage of revenues increased to 157% for the quarter ended September 30,
2000 from 65% for the same period in 1999 primarily resulting from the increase
in selling expenses from eMake in addition to the decrease in revenues.
Product development expenses, which consisted primarily of labor costs,
increased $2.3 million from $0.6 million for the quarter ended September 30,
1999 to $2.9 million for the same period in 2000. Compared to the third quarter
1999, the Company increased its engineering development activities related to
the FactoryLink and Xfactory product lines. The Company capitalized $0.6 million
of software development expenses for the quarter ended September 30, 2000,
primarily related to the next major release of FactoryLink. For the quarter
ended September 30, 1999, the Company capitalized $0.8 million of development
expenses primarily related to the latest release of FactoryLink, which was
released in late June 2000. In addition, eMake's product development expenses
increased $0.5 million from $0.2 million for the quarter ended September 30,
1999 to $0.7 million for the same period in 2000.
General and administrative expenses increased $1.5 million from $1.6
million for the quarter ended September 30, 1999 to $3.1 million for the same
period in 2000. The increase is primarily due to an increase in eMake's general
and administrative expenses of $0.6 million as well as incremental consulting
fees associated with refining the Company's longer-term business plan. During
the second quarter 2000, the Company appointed both a Chief Operating Officer
for the USDATA Products Division and a Chief Executive Officer for its eMake
subsidiary. These newly staffed positions contributed to the increase in general
and administrative expenses during the third quarter 2000. General and
administrative expenses as a percentage of revenues increased to 69% for the
quarter ended September 30, 2000 from 24% for the same period in 1999, primarily
due to the decrease in revenues in the third quarter of 2000 combined with the
fixed cost nature of a majority of general and administrative costs.
In August 2000, the Company's subsidiary eMake implemented a reduction
in its workforce of approximately 32% and recorded a charge of $0.2 million,
primarily consisting of employee severance and related benefits. Of the total
amount of severance expensed in the second quarter, approximately $0.1 million
was paid through September 30, 2000. At September 30, 2000, accrued severance
costs totaled $20 thousand which are expected to be paid in full by December
2000. Other charges included $44 thousand in estimated lease termination costs
to close two office facilities, which represents the estimated amounts to be
paid to terminate the lease contracts before the end of their term, and $43
thousand in legal and other related costs.
In connection with the acquisition of Smart Shop Software in 1999, the
Company recorded $0.5 million in charges for the quarter ended September 30,
2000 and 1999 related to non-cash compensation and amortization of acquired
intangible assets. In addition, during 1999 the Company recorded a $476 thousand
charge to write off acquired in process research and development costs.
The Company experienced a loss from operations of $9.3 million for the
quarter ended September 30, 2000 compared to a loss from operations of $0.9
million for the same period in 1999. The increase in loss from operations was
primarily the result of a decrease in revenues of $2.2 million, severance and
other charges of $0.2 million and eMake related costs associated with developing
technology, building the infrastructure, start-up, market development and
operating costs.
14
<PAGE> 15
USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
Comparison of Nine Months Ended September 30, 2000 and 1999
Total revenues for the nine months ended September 30, 2000, were $12.5
million, a decrease of $7.0 million or 36% compared to the same period in 1999.
The decrease was primarily a result of $7.1 million in lower software licensing
revenues, offset by a $0.1 million increase in technical support services. The
Company believes that the decrease in software licensing revenues was primarily
due to a temporary industry-wide decline in new purchases experienced in the
first nine months of 2000. Additionally, while FactoryLink 7 was released on
June 30, 2000, it was substantially later than originally planned and has
adversely affected revenues during 2000. While the Company anticipates an
improvement in USDATA revenues going forward, these market dynamics could affect
buying decisions for at least another two quarters, making revenues and
operating results more difficult to forecast.
Selling and product materials expenses increased $10.2 million from
$12.1 million for the nine months ended September 30, 1999 to $22.3 million for
the same period in 2000. The increase was a result of eMake's selling and
product materials expenses of $10.6 million, partially offset by a decrease in
USDATA's selling and product materials expenses of $0.4 million. The Company
attributes USDATA's decrease to its own cost reduction efforts. Selling and
product materials expenses as a percentage of revenues increased to 179% for the
nine months ended September 30, 2000 from 62% for the same period in 1999
primarily resulting from the increase in selling expenses from eMake.
Product development expenses, which consisted primarily of labor costs,
increased $6.1 million from $1.8 million for the nine months ended September 30,
1999 to $7.9 million for the same period in 2000. Compared to the nine months
ended September 30, 1999, the Company increased its engineering development
activities related to the FactoryLink, Xfactory and eMake product lines. The
Company capitalized $2.4 million and $1.3 million of software development costs
for the nine months ended September 30, 2000 and 1999, primarily related to the
next major version of the FactoryLink product line and development efforts
related to eMake during 2000.
General and administrative expenses increased $3.5 million from $4.5
million for the nine months ended September 30, 1999 to $8.0 million for the
same period in 2000. The increase is primarily due to eMake's general and
administrative expenses of $2.5 million as well as incremental consulting fees
associated with refining the Company's longer-term business plan. During the
second quarter 2000, the Company appointed both a Chief Operating Officer for
the USDATA Products Division and a Chief Executive Officer for its eMake
subsidiary. These newly staffed positions contributed to the increase in general
and administrative expenses for the nine months ended September 30, 2000.
General and administrative expenses as a percentage of revenues increased to 64%
for the nine months ended September 30, 2000 from 23% for the same period in
1999, primarily due to the decrease in revenues for the nine months ended
September 30, 2000 combined with the fixed cost nature of a majority of general
and administrative costs.
In June 2000, the Company implemented a reduction in its workforce of
approximately 6% and recorded a charge of $0.8 million, primarily consisting of
employee severance and related benefits. Of the total amount of severance
expensed in the second quarter, approximately $0.5 million was paid through
September 30, 2000. Other charges included $85 thousand for vacated office space
and $73 thousand in legal and other related costs.
In August 2000, the Company's subsidiary eMake implemented a reduction
in its workforce of approximately 32% and recorded a charge of $0.2 million,
primarily consisting of employee severance and related benefits. Of the total
amount of severance expensed in the second quarter, approximately $0.1 million
was paid through September 30, 2000. Other charges included $44 thousand in
estimated lease termination costs to close two office facilities, which
represents the estimated amounts to be paid to terminate the lease contracts
before the end of their term, and $43 thousand in legal and other related costs.
15
<PAGE> 16
USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
In connection with the acquisition of Smart Shop Software in 1999, the
Company recorded $1.9 million in charges for the nine months ended September 30,
2000 related to non-cash compensation and amortization of acquired intangible
assets compared to $0.5 million for the same period in 1999. In addition, during
1999 the Company recorded a $476 thousand charge to write off acquired in
process research and development costs.
As a result of the factors discussed above, the Company recorded net
loss from operations of $28.7 million for the nine months ended September 30,
2000, compared to income from operations of $52 thousand for the same period in
1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used $21.4 million of cash for the
nine months ended September 30, 2000 compared to providing $1.8 million for the
same period in 1999, primarily due to a loss from operations in the nine months
ended September 30, 2000, partially offset by improved collections on accounts
receivable in 2000 and an increase in accounts payable and other accrued
liabilities from 1999. Cash used in investing activities was $5.5 million for
the nine months ended September 30, 2000 resulting from capital expenditures of
$3.1 million and software development costs of $2.4 million. The capital
expenditures were primarily attributable to $2.2 million in costs for computer
equipment and software development related to the Internet applications for
eMake and $.9 million in computers, software and equipment for USDATA.
On February 8, 2000 and March 24, 2000, the Company, through its
subsidiary eMake Corporation ("eMake"), entered into two convertible promissory
note agreements with a subsidiary of Safeguard Scientifics, Inc. ("Safeguard"),
the Company's primary stockholder, for $2.5 million each, totaling $5.0 million
in borrowings. The promissory notes had an interest rate of 12% per annum and
were due in full on February 8, 2001 and March 24, 2001, respectively. If the
notes payable were paid in full at maturity, interest would be forgiven. The
notes were paid in full on September 12, 2000, as described below, and accrued
interest of $322 thousand was forgiven.
On April 26, 2000, a subsidiary of Safeguard provided $5.0 million in
financing to the Company in exchange for a demand note due the earlier of one
year from the date of the note or 60 days following the date of demand for
payment. The note had an interest rate based on a specified bank prime rate plus
one percent.
On June 29, 2000; July 13, 2000 and July 28, 2000, a subsidiary of
Safeguard provided $1.5 million, $1.75 million and $2.5 million, respectively,
in financings to the Company's subsidiary eMake in exchange for three demand
notes each due the earlier of one year from the date of the note or 60 days
following the date of demand for payment. The notes had an interest rate based
on a specified bank prime rate plus one percent.
On August 7, 2000, the Company and eMake executed a Securities Purchase
Agreement to provide $26.5 million in financing in the form of eMake preferred
stock. The transaction was approved by the Company's stockholders on September
11, 2000 and the transaction was completed on September 12, 2000.
On August 14, 2000, SCP Private Equity Partners II, L.P. ("SCP")
provided $6.0 million in financing to the Company's subsidiary eMake in exchange
for a demand note due the earlier of one year from the date of the note or 60
days following the date of demand for payment. The note had an interest
16
<PAGE> 17
USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
rate based on a specified bank prime rate plus one percent. Concurrently, the
Company repaid the $2.5 million demand note dated July 28, 2000 plus accrued
interest of $13 thousand with proceeds from this demand note payable.
On September 12, 2000, SCP and Safeguard purchased through a private
placement 5,300,000 shares each, for a total of 10,600,000 shares, of eMake
Corporation Series A-1 Convertible Preferred Stock and Series A-2 Convertible
Preferred Stock (collectively referred to as the "Series A Preferred") and
warrants to purchase up to an additional 5,300,000 shares each of eMake
Corporation Series A-1 and Series A-2 preferred stock, respectively. The
aggregate purchase price of $26,500,000 was comprised of $7,250,000 in cash and
cancellation of $19,250,000 of the notes payable described above. The Company
received $6,936,754 in cash, net of $313,246 due for accrued interest.
The eMake Series A Preferred Stock has a par value of $.01 per share
and a liquidation preference of $2.50 per share plus cumulative dividends. The
holders of at least two-thirds of the outstanding shares of the eMake Series A
preferred stock can require eMake to redeem all the shares at $2.50 per share at
any time after September 12, 2005. Dividends on the eMake Series A Preferred
Stock are cumulative and payable at a rate of $.05 per share per calendar
quarter and in preference to any dividends on eMake's common stock. The
dividends are payable, with respect to the eMake Series A-1 Preferred Stock, in
additional shares of eMake Series A-1 preferred stock and with respect to the
eMake Series A-2 Preferred Stock, in additional shares of eMake Series A-2
preferred stock. The eMake Series A-1 Preferred Stock is convertible into shares
of eMake Corporation Class A common stock at a conversion rate of $2.50 per
share of common stock or into shares of the Company's Series B preferred stock
at the rate of one USDATA preferred share for each 40 shares of eMake Series A-1
preferred share owned. The eMake Series A-2 Preferred Stock is convertible into
shares of eMake Corporation Class B common stock at a conversion rate of $2.50
per share of common stock or into shares of the Company's Series B preferred
stock at the rate of one USDATA preferred share for each 40 shares of eMake
Series A-2 preferred share owned.
The eMake Series A-1 and eMake Series A-2 preferred stock warrants
issued to SCP and Safeguard, respectively, grant to the holders the right to
purchase up to an additional 5,300,000 shares of eMake Series A-1 convertible
preferred stock and up to an additional 5,300,000 shares of eMake Series A-2
convertible preferred stock at an exercise price of $.01 per share. The amount
of Series A Preferred Stock that can be acquired upon exercise is based on the
number of users licensed to use eMake's software from a server or client
workstation as of June 30, 2001 and varies from zero to a total of 5,300,000
shares of eMake Series A-1 Preferred Stock and 5,300,000 shares of eMake Series
A-2 Preferred Stock. The warrants are exercisable anytime after June 30, 2001
through the earliest of the following events: (a) June 1, 2006; (b) the
commencement of the liquidation or winding up of the business of eMake; (c) the
sale of all or substantially all of the assets and properties of eMake; (d) a
merger, consolidation or other similar transaction involving eMake in which
eMake is not the surviving entity or eMake is the surviving entity but after
which the holders of the outstanding voting securities of eMake before the
transaction hold less than 50% of eMake's outstanding voting securities after
the transaction; (e) the sale by eMake of its securities in a public offering;
(f) a decrease in the ownership percentage of USDATA's voting securities of
eMake below the percentage required under generally accepted accounting
principles to include eMake in USDATA's consolidated financial statements; or
(g) the exercise by SCP or Safeguard of its right to exchange the last
outstanding Series A share for shares of USDATA's Series B preferred stock.
These warrants expire on June 30, 2006.
The development and launch of eMake, in addition to the lower revenues
and increased expenses of the USDATA Products Division, has significantly
increased the Company's operating expenses and cash requirements. In order for
the Company to continue its current plan to operate both the USDATA Products
Division and eMake subsidiary, additional public or private debt or equity
financing will be required. The Company is in process of seeking additional
financing to provide the cash required under its restructuring plan. However, no
assurance can be given that such debt or equity
17
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USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
financing will be available to the Company on terms and conditions acceptable to
the Company, if at all. If necessary, the Company can delay certain operations
and capital expenditures until adequate financing is obtained. If such delays
occur, the Company's future operations could be significantly curtailed.
As a result of the loss from operations and resulting negative cash
flow, the Company is in the process of implementing a restructuring plan
designed to reduce the Company's and eMake's cost structure by reducing its
workforce and other operating expenses. The Company estimates the restructuring
charge to be recorded in the fourth quarter of 2000 to be in the range of $2
million to $3.5 million. In conjunction with this restructuring, the Company is
in the process of re-evaluating eMake's business model. Based on the findings of
this re-evaluation and approval by the Company's Board of Directors, a business
model could be developed for the eMake business that effectively abandons
certain activities of eMake that required significant operating and capital
expenditures over the past 12 months. Specifically the Company has recorded
goodwill and intangible assets of $4.0 million, net, and $1.5 million, net,
related to its 1999 Smart Shop acquisition that may be deemed impaired if the
Smart Shop element of eMake is significantly curtailed as a result of the
revised business model. In addition, the Company has recorded $1.2 million, net,
and $365 thousand, net, in capitalized website development costs and capitalized
software costs that could also be deemed impaired if the eMake portal project is
significantly changed or curtailed as a result of the revised business model.
The Company expects to complete its reevaluation of the eMake business model
before December 31, 2000.
YEAR 2000
The Company has not encountered any material problems in its critical
systems or products subsequent to December 31, 1999 related to the Year 2000
("Y2K") issue and has not encountered any material problems with its third party
vendors and suppliers. The Company will continue to monitor new issues or
concerns relative to Y2K.
Although the Company to date has not experienced any significant
problems associated with Y2K, the Company cannot be certain that unexpected Y2K
compliance problems of its products, computer systems or the systems of its
vendors, customers and service providers, will not occur. Any such problems
could have a material adverse effect on the Company's business, financial
condition or operating results.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board released
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), as amended by SFAS No. 137, which is effective for
fiscal years beginning after June 15, 2000. Earlier application for certain
provisions of this standard is permitted. SFAS 133 establishes accounting and
reporting standards for derivative instruments. The Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
financial statements and measure those instruments at fair value, and it defines
the accounting for changes in the fair value of the derivatives depending on the
intended use of the derivative. SFAS 133 is not expected to have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.
In December 1999, the SEC staff issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue transactions and accounting for deferred costs
in the financial statements. The Company is required to adopt the provisions of
SAB 101 in the quarter ending December 31, 2000. Based on our current revenue
recognition policies, SAB 101 is not expected to materially impact our financial
position, results of operations, or cash flows.
18
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USDATA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 regarding revenues,
margins, operating expenses, earnings, growth rates and certain business trends
that are subject to risks and uncertainties that could cause actual results to
differ materially from the results described herein. Specifically, the ability
to grow product and service revenues may not continue and the Company may not be
successful in developing new products, product enhancements or services on a
timely basis or in a manner that satisfies customers needs or achieves market
acceptance. Other factors that could cause actual results to differ materially
are: competitive pricing and supply, market acceptance and success for service
offerings similar to eMake, short-term interest rate fluctuations, general
economic conditions, employee turnover, possible future litigation, the impact
of Y2K and the related uncertainties may have on future revenue and earnings as
well as the risks and uncertainties set forth from time to time in the Company's
other public reports and filings and public statements. Recipients of this
document are cautioned to consider these risks and uncertainties and to not
place undue reliance on these forward-looking statements. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
19
<PAGE> 20
USDATA CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk associated with changes in
interest rates relates to its variable rate bank note payable of $233,000.
Interest rate risk is estimated as the potential impact on the Company's results
of operations or financial position due to a hypothetical change of 50 basis
points in quoted market prices. This hypothetical change would not have a
material effect on the Company's results of operations and financial position.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (filed as part of this report).
Number Description
3.1 Certificate of Incorporation, as amended
10.1 Demand Note dated July 13, 2000
10.2 Demand Note dated July 28, 2000
10.3 Demand Note dated August 14, 2000
10.4 Securities Purchase Agreement, dated as of
August 4, 2000, by and among eMake Corporation,
USDATA Corporation, Safeguard 2000 Capital, L.P.
and SCP Private Equity Partners II, L.P.
10.5 Amended and Restated Investors' Rights Agreement,
dated as of September 12, 2000, by and among
USDATA Corporation, Safeguard Delaware, Inc.,
Safeguard 2000 Capital, L.P., SCP Private Equity
Partners II, L.P. and Safeguard Scientifics, Inc.
10.6 Exchange Agreement, dated as of September 12, 2000,
by and between USDATA Corporation and SCP Private
Equity Partners II, L.P.
27 Financial Data Schedule
(EDGAR Version only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the
Registrant during the three months ended September
30, 2000.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
USDATA CORPORATION
Date: November 14, 2000 /s/ Robert A. Merry
---------------------------------------
Robert A. Merry
President, Chief Executive Officer
and Director
Date: November 14, 2000 /s/ Robert L. Drury
---------------------------------------
Robert L. Drury
Vice President Finance, Chief Financial
Officer Treasurer and Secretary
(Principal Financial and Accounting
Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation, as amended
10.1 Demand Note dated July 13, 2000
10.2 Demand Note dated July 28, 2000
10.3 Demand Note dated August 14, 2000
10.4 Securities Purchase Agreement, dated as of August 4, 2000, by and among
eMake Corporation, USDATA Corporation, Safeguard 2000 Capital, L.P.
and SCP Private Equity Partners II, L.P.
10.5 Amended and Restated Investors' Rights Agreement, dated as of
September 12, 2000, by and among USDATA Corporation, Safeguard
Delaware, Inc., Safeguard 2000 Capital, L.P., SCP Private Equity
Partners II, L.P. and Safeguard Scientifics, Inc.
10.6 Exchange Agreement, dated as of September 12, 2000, by and between
USDATA Corporation and SCP Private Equity Partners II, L.P.
27 Financial Data Schedule
(EDGAR Version only)
</TABLE>
