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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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OR
[ ] 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
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(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, Texas 75080
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 680-9700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of class)
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
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of March 25, 1999, was approximately
$11,997,208 based on the sale price of the Common Stock on March 25, 1999, of $
3.12 as reported by the NASDAQ National Market System.
As of March 25, 1999, the registrant had outstanding 11,402,366 shares of
its Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held on June 18, 1999 are incorporated herein by reference in Part III, Items
10, 11, 12 and 13.
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USDATA CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
ITEM 1. BUSINESS
GENERAL
USDATA Corporation (the "Company") is a global supplier of real-time
manufacturing application development software that enables information
integration, decision support and supervisory control throughout the
manufacturing enterprise. The Company's component-based products help automate
manufacturing and process control, allowing customers to reduce operating costs,
shorten cycle times, and improve product quality. The Company provides this
knowledge through software products and services and delivers it through a
community of business partners. USDATA brings nearly a quarter-century of
expertise in manufacturing performance improvement to its partners and
end-users.
USDATA is committed to solving customer problems and increasing
productivity on the manufacturing floor through technological innovation. The
Company's products are noted for high-performance, ease-of-use and support of
enterprise computing environments. The Company's customers are in a wide variety
of industries including; chemical, oil and gas, food, beverage, automotive,
aerospace, telecommunications, electronics, transportation and other industries.
The Company's family of software products, marketed under the names of
FactoryLink(R) and Xfactory(TM) provide a powerful set of software tools and
applications designed for users who are technically competent but who may not be
experienced software programmers.
MANUFACTURING APPLICATION SOFTWARE
Overview
The Company develops, markets and supports FactoryLink(R) software
products for customers requiring enterprise-wide, open systems solutions for
supervising, monitoring and controlling manufacturing and production processes.
These software products enable customers to develop real-time component-based
computer applications that provide interactive, dynamic and graphical interfaces
to manufacturing and production processes. These applications collect,
consolidate and communicate information about an automated manufacturing
process, typically drawn from complex operating sources or from multiple sites
throughout an enterprise, and enable the user to interact with and control
plant-wide processes. The real-time information provided by the Company's
products enables customers to reduce operating costs, improve product quality
and increase overall throughput and productivity.
The Company's flagship software product, FactoryLink(R), is a
manufacturing process 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 real-time application server product that enables manufacturers to connect
to plant floor devices, consolidate and process data and communicate the data to
decision-makers throughout the manufacturing enterprise. FactoryLink(R) gives
manufacturers the accurate and timely production information they need to make
effective decisions throughout the enterprise. FactoryLink(R), as the plant
server, is the centerpiece of a real-time data distribution architecture.
In mid-1998 the Company introduced its newest software product,
Xfactory(TM), a manufacturing execution solution ("MES") product which
incorporates Microsoft's newest technologies and is built on Microsoft's
Distributed interNet Applications ("DNA") architecture. Xfactory(TM) enables
manufacturing plants to more easily and quickly automate their production
processes and is the first visual object modeling MES.
Background and Market Demand
Traditional Enterprise Resource Planning ("ERP") systems have
product-centric views of the manufacturing enterprise. These business systems
provide decision-makers with an excellent understanding of product attributes
including material costs, bill of materials, labor costs, etc. However, business
systems generally have no concept of the target process parameters for actually
producing finished goods or the actual process parameters and conditions that
occurred to generate specific lots of finished goods.
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Similarly, traditional control systems have an excellent
process-centric view of manufacturing. They understand how things are made,
target process parameters and material movement. However, process control
systems do not have any concept of the actual product made - lot numbers,
yield, quality attributes, costing information, etc.
To make effective and efficient production decisions, both types of
information - product and process must be used. This raises a fundamental issue
of how to create communication between the disparate worlds of business and
control systems when neither speaks the language of the other. USDATA's products
integrate business systems and process control systems for any production
focused enterprise.
FactoryLink(R)
FactoryLink(R) allows customers to collect and monitor data from
disparate process control systems. As such, it acts as hub for real-time
information to be used by various decision makers interested in real-time status
of the production process. In 1998, two new versions of FactoryLink(R) were
released enhancing the product's already solid reputation for reliability,
scalability and flexibility.
To simplify connecting to plant floor devices, the Company recently
added support for OLE for Process Control ("OPC") to FactoryLink(R), making it
an interoperable server that can collect and distribute data throughout a
multi-vendor manufacturing environment. FactoryLink(R)'s extensive database
connectivity and interfaces to MES and ERP products allow it to function as the
automation system hub, much broader than just HMI. Customers can now leverage
their existing investments in various HMIs and build an integrated system,
thereby eliminating existing islands of automation. The OPC standard was
developed by an industry body, with key involvement from the Company, to make
data integration easier. OPC provides a standard set of interfaces that hardware
and software vendors can use to communicate and enables data to be gathered from
plant floor devices in a standard way.
The FactoryLink(R) software enables a customer to:
o Create easy to use, real-time supervisory control applications that
provide dynamic graphical representations of manufacturing and other
automated processes;
o Design, test and build an automation application without computer
programming knowledge through the use of an interactive graphical
interface, pull-down menus, mouse-driven, point-and-click commands and
fill-in-the-blank configuration tables;
o Develop automation applications that are portable and scaleable from
low-end to high-end systems;
o Deploy completed applications easily and economically throughout an
enterprise that may use different types of computer hardware and
operating systems;
o Provide an upgrade path by allowing easy modification of applications
in response to customers' changing business needs; and
o Maintain completed applications in an efficient and cost effective
manner.
FactoryLink(R)'s architecture permits the user to pick and choose the
exact functionality required for a particular application. It allows the user to
design high performance, real-time systems capable of handling large amounts of
data. Techniques for exception processing, message compression and high-speed
data transfer achieve optimal functionality under this architectural
arrangement.
The Company has a long heritage in the industrial automation software
business and in 1998 released Year 2000 ready versions on all major
FactoryLink(R) platforms historically supported by the Company, including DOS,
UNIX, OS/2, Microsoft Windows, NT and Windows 95. To provide the Company's
customers with a convenient means to obtain information regarding Year 2000
readiness of its products, the Company maintains a Web site (www.usdata.com)
with the latest information regarding Year 2000 readiness for its products,
including a statement of what it means when a product is designated as Year 2000
ready.
Xfactory(TM)
Xfactory(TM) is an MES product which incorporates Microsoft's newest
technologies and is built on Microsoft's DNA architecture. Xfactory(TM) enables
manufacturing plants to more easily and quickly automate their production
processes and is the first visual object modeling MES. Xfactory(TM) bridges the
gap between the plant floor and ERP systems. The Company develops,
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markets and supports Xfactory(TM) software products for customers requiring
enterprise-wide, open systems solutions for production management and leveraging
business and planning systems. The Xfactory(TM) software product enables
customers to develop versatile and flexible MES applications for production
management, product tracking, product scheduling, and geneology tracking for
manufacturing and production processes. The information provided by the
Company's products enables customers to reduce operating costs, improve product
quality and increase overall throughput and productivity.
Xfactory(TM) software enables a customer to:
o Utilize a fixed data base scheme, where the objects themselves are
stored in the same database.
o Effectively convert the plant network into an intelligent event routing
entity, allowing the customer to effortlessly send and receive local
and remote event notifications.
o Maintain an object-oriented programming which allows base objects to
incorporate properties, events and methods. This has significantly
eased the demands of large-scale software development. Xfactory(TM)
successfully applies object modeling to the manufacturing plant itself
o Utilize a three-tiered architecture. Single client or client/server
systems cannot separate corporate data, client stations and business
rules and programs. Properly designed three-tiered architectures
provide many benefits: greater security, optimized client database
connections, centralized management, thin clients and distributed
processing for greater speed and throughput. Xfactory(TM) was designed
from the ground up to fully leverage this architecture. Xfactory(TM)
clients reside on Tier 1, components in the Microsoft Transaction
Server on Tier 2 and a client/server relational database on Tier 3.
o Reuse ActiveX components. Xfactory(TM) is totally component based and
100% Internet compatible. Xfactory(TM) components can be easily
incorporated into environments such as Visual Basic, C/C++, Microsoft
Office, Oracle Forms and SCADA packages, such as FactoryLink(R).
Marketing, Sales and Distribution
The Company's sales and support organization includes: channel
management personnel; a corporate business development group for lead
generation; technical resources; and authorized distributors worldwide that
acquire licenses for the Company's products at a discount for remarketing and
provide training, customer support and consulting services to end-users. The
Company's sales and support organization is therefore able to combine its
internal resources with the resources, expertise and customer base of qualified
third party distributors, remarketers and integrators. The Company's internal
sales and marketing organization consists of 57 persons as of December 31, 1998
and is based in Richardson, Texas. The Company has field sales locations in 6
other cities in the United States and in Belgium, England, Denmark, Germany,
France and Italy.
In 1998, a considerable amount of effort was expended in expanding the
Company's network of distributors, referred to as tier one partners ("TOPs").
Today, approximately 40 such TOPs deliver over 90% of USDATA's products to
system integrators and the ultimate end-users. This indirect strategy is
critical to the Company's success and future growth because each TOP functions
as a virtual extension of the Company's sales, service and support. Typically,
the business model of TOPS is primarily driven by industrial software revenues
and related products; TOPs generally have value-added products and services that
are additive to the Company's core products; and TOPs generally work
cooperatively with a community of local system integrators that actually perform
project work for the end-user.
In support of its channel sales efforts, the Company conducts
comprehensive marketing programs that include direct mail, public relations,
advertising, seminars, trade shows and ongoing customer communications programs.
The Company also seeks to stimulate interest in its products and to keep its
customers informed of advances in application development technology through
demonstrations, promotional seminars, publications, technical notes and
newsletters.
Customer Service
The Company believes a high level of customer service and technical
support is critical to customer satisfaction, especially since many of the
Company's customers use its products to develop complex, large-scale
applications on which the success of their organizations may depend. The Company
has established, and intends to continue to enhance and expand, an integrated,
highly-skilled channel service and technical support organization.
The Company provides first level, localized support through its highly
qualified and experienced TOPs. All support engineers are networked utilizing a
single knowledge based system to ensure quick and efficient transfer of data,
software corrections and up to date technical information. In addition to the
daily interaction between the Company's support personnel
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and the TOPs engineers, the Company also conducts regular training sessions to
enhance the technical knowledge and working relationship in this support
community. Annual software support agreements are available to customers in
various forms.
The Company also provides customer support for its products via the
Web, allowing users access to the latest software fixes, FAQ's (frequently asked
questions), detailed examples and most importantly, on-line trouble
shooting/problem submission. The Company has recently initiated a FactoryLink(R)
Certified Integration Partner Program. Members of this program have specific
vertical market and industry expertise, established relationships with prominent
hardware and software vendors and a track record of quality products and
successful application implementations.
The Company offers comprehensive training classes to customers and
third-party remarketers. Training classes are offered through in-house training
facilities in Richardson, Texas and in Brussels, Belgium and through its
authorized training TOPs throughout the world. The training curriculum is a
comprehensive program of application development training in a hands-on,
lab-based training environment. The Company can also provide on-site training
when required by customers.
Customers
Since the introduction of the FactoryLink(R) software product in 1986,
the Company has licensed more than 35,000 copies of the product worldwide for
use in the chemical, oil and gas, food, beverage, public utility,
pharmaceutical, pulp and paper, automotive, aerospace, electronics,
telecommunications, water treatment, transportation and numerous other
industries. Established end-users include Anheuser-Busch Companies, Inc., Ford
Motor Company, Goodyear Tire & Rubber Company, Hewlett-Packard Company, Michelin
Tire Corporation and Nestle Food Company. In the year ended December 31, 1998,
no single end-user of the Company's products accounted for greater than 10% of
total net sales.
Sales to foreign clients (primarily in Europe) continue to be a
significant source of revenue for the Company. For the year ended December 31,
1998, the Company realized net sales from its international operations of $12.9
million (56% of net sales), as compared with $9.9 million for the comparable 12
month period (44% of net sales). Virtually all of these international sales were
of the Company's FactoryLink(R) software products. See also Note 9 to Notes to
Consolidated Financial Statements for additional information on export sales.
The Company has maintained a long-term partner relationship with
Schneider Automation. Schneider and its predecessors have been purchasing for
resale a private label and OEM version of FactoryLink(R) from the Company since
1989 and, for the years ended December 31, 1998 and 1997 accounted for $4.1
million and $3.0 million or 18% and 13%, respectively, of total net sales.
Product Innovation and Development
The Company's product development efforts are focused on expanding the
Company's portfolio of software products as well as maintaining the
competitiveness of its current products, including development of future
releases, improvements in the ease of use of its products and creation of new
application modules and development tools as well as the development of new
products that enable manufacturing performance improvement. The independence of
its products from underlying hardware platforms, GUIs, RDBMSs, networks and
other technologies and standards gives the Company the flexibility to evaluate a
wide range of new opportunities to expand the current scope of its products. The
Company's development activities are driven by market requirements and to the
extent possible leverage known technologies and architectures.
During the years ended December 31, 1998 and 1997, the Company invested
approximately $5.4 million and $5.8 million, respectively, in product
development. In the years ended December 31, 1998 and 1997, the Company expended
13%, and 16%, respectively, of its total net sales on product development, net
of capitalized software. The Company anticipates that it will continue to commit
substantial resources to product development in the future. See Note 1 to the
Notes to Consolidated Financial Statements for additional information on how the
Company accounts for such costs.
Competition
The software markets in which the Company participates are intensely
competitive and are subject to rapid changes in technology and frequent
introductions of new computer platforms and software standards. As a result, the
Company must continue to enhance its current products and to develop new
products in a timely fashion to maintain and improve its position in this
industry. The Company competes generally on the basis of product features and
functions, product architecture, the ability to run on a variety of computer
platforms and operating systems, technical support and other related services,
ease of product integration with third party applications software, price and
performance.
The Company's FactoryLink(R) product competes with a number of software
suppliers, including Intellution, owned by Emerson Electric, GEF Automation,
owned by FEF-Fuanuc, Rockwell Software, owned by Rockwell Automation and
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Wonderware Corporation, owned by Siebe plc, as well as large PLC and DCS
manufacturers that provide similar software along with their hardware products.
The Company's Xfactory(TM) product competes with a number of software
suppliers, including GR Software, owned by Genrad Corporation, Consilium owned
by Applied Materials, Promis Systems owned by Brooks Automation, Camstar Systems
Inc., RWT Corporation, as well as smaller software companies that provide
similar software.
Additionally, certain businesses develop these types of systems
internally. Many of the Company's existing and potential competitors have longer
operating histories and significantly greater financial, technical, sales,
marketing and other resources than the Company. Certain of these organizations
may also have greater name recognition and a larger installed product base than
the Company. The Company's competitors could introduce products in the future
with more features and lower prices than the Company's product offerings. These
organizations could also bundle existing or new products with other products or
systems to compete with the Company. As the market for industrial automation and
process control software products develops, a number of companies with
significantly greater resources than the Company could attempt to increase their
presence in this market by acquiring or forming strategic alliances with
competitors of the Company.
BACKLOG
The Company typically ships software products within a short period of
time after acceptance of purchase orders. Accordingly, the Company typically
does not have a material backlog of unfilled orders for its software products,
and revenues in any quarter are substantially dependent on orders booked in the
quarter. Any significant weakening in customer demand would therefore have an
almost immediate adverse impact on the Company's operating results and on the
Company's ability to maintain profitability.
INTELLECTUAL PROPERTY
The Company holds a patent in the United States covering control
systems that employ the features embodied in its FactoryLink(R) product. The
Company has registered its "USDATA" and "FactoryLink(R)" trademarks and has
applied for registration of its Xfactory(TM) trademark with the U.S. Patent and
Trademark office, as well as in several foreign countries.
The Company regards its software as proprietary and attempts to protect
it with a combination of patent, copyright, trademark and trade secret law,
license agreements, nondisclosure and other contractual provisions and technical
measures. The Company requires employees to sign an agreement not to disclose
trade secrets and other proprietary information.
The Company's software products are licensed to end-users under a
perpetual non-transferable, nonexclusive license that stipulates which modules
can be used and how many concurrent controllers may use them. The Company relies
primarily on "shrink wrap" licenses for the protection of its products. A shrink
wrap license agreement is a printed and/or electronic license agreement included
with the packaged software that sets forth the terms and conditions under which
the purchaser can use the product and binds the purchaser by its acceptance and
purchase of the software to such terms and conditions. In addition, in some
instances the Company licenses its products under agreements that give licensees
limited access to the source code of the Company's products.
The Company believes that existing intellectual property laws and other
protective measures afford only limited practical protection for the Company's
software. Furthermore, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Shrink-wrap licenses typically are not signed by the licensee and
therefore may be unenforceable under the laws of certain jurisdictions.
Accordingly, despite precautions taken by the Company, it may be possible for
unauthorized third parties to copy or reverse-engineer certain portions of the
Company's products or to obtain and use information that the Company regards as
proprietary.
While the Company's competitive position could be threatened by its
inability to protect its proprietary information, the Company believes that,
because of the rapid pace of innovation within its industry, factors such as the
technological and creative skills of the Company's personnel are more important
to establishing and maintaining a technology leadership position within the
industry than are the various legal protections available for its technology.
As the number of software products in the industry increases and the
functionality of these products further overlaps, the Company believes that
software programs could increasingly become the subject of infringement claims.
Although the Company's products have never been the subject of an infringement
claim, there can be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertion will not
result in costly litigation or require the Company to obtain a license to use
the intellectual property rights of such parties. In addition, there can be no
assurance that such a license would be available on reasonable terms or at all.
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EMPLOYEES
As of December 31, 1998, the Company had approximately 120 full-time
employees. None of the Company's employees are subject to a collective
bargaining agreement, and the Company has not experienced any work stoppage. The
Company believes that its relations with its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected annually by the Board
of Directors and hold office until their successors are elected and qualified.
The following persons were executive officers of the Company at March 31, 1998:
Name Age Position
- ---- --- --------
Robert A. Merry 49 President and Chief Executive Officer
Robert L. Drury 52 Vice President, Chief Financial Officer and Treasurer
Robert A. Merry - Mr. Merry joined the Company in July of 1997 as
President and Chief Executive Officer. From 1992 through 1997, Mr. Merry served
as President, Process Manufacturing SBU of EDS Corporation. Prior to his service
at EDS, Mr. Merry served as Vice President, Sales and Marketing for DTM
Corporation, from 1991 to 1992 and as Vice President, North American Operations
for Execucom Systems Corporation from 1985 to 1991.
Robert L. Drury, - Mr. Drury joined the Company in December 1997 as
Vice President and Chief Financial Officer. He was subsequently elected
Treasurer and Secretary of the Company in February of 1998. From December 1992
until he joined the Company, Mr. Drury was Chief Financial Officer, Vice
President of Finance and Treasurer for Interphase Corporation in Dallas, Texas.
From 1988 to 1992, Mr. Drury was Chief Financial Officer at Ben Hogan Company in
Fort Worth, Texas. From 1983 to 1988, Mr. Drury was Corporate Controller at
Recognition Equipment, Inc. in Dallas, TX.
ITEM 2. PROPERTIES
The Company leases approximately 50,000 square feet of office space in
Richardson, Texas. The lease agreement for this office space expires in 2000.
The Company leases additional office space in major cities in the United States
and in Europe. The Company considers its leased real property adequate for its
current and reasonably foreseeable needs. The Company believes that suitable
additional or alternative space will be available as needed to accommodate the
expansion of corporate operations and additional sales offices.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal actions incidental to the
normal conduct of its business. The Company does not believe that the ultimate
resolution of these actions will have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, par value $.01 per share (the "Common
Stock"), has been listed on the Nasdaq National Market since June 16, 1995,
under the symbol "USDC". The following table sets forth, on a per share basis
for the periods shown, the range of high and low closing prices of the Company's
Common Stock compiled from published sources:
High Low
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1998:
Fourth Quarter 4.19 1.00
Third Quarter 5.25 2.81
Second Quarter 7.50 4.75
First Quarter 8.44 4.38
1997:
Fourth Quarter 5.31 3.88
Third Quarter 6.00 3.33
Second Quarter 6.00 3.00
First Quarter 9.00 3.63
As of December 31, 1998, there were approximately 3,100 beneficial
holders of record of the Company's Common Stock (which amounts do not include
the number of stockholders whose shares are held of record by brokerage houses
or clearing agencies but include each such brokerage house or clearing agency as
one stockholder).
DIVIDEND POLICY
To date, the Company has not paid any cash dividends on its Common
Stock. The Company currently intends to retain future earnings for use in its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. Future dividends, if any, will depend on, among other
things, the Company's results of operations, capital requirements, restrictions
in loan agreements and financial condition and on such other factors as the
Company's Board of Directors may, at its discretion, consider relevant.
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ITEM 6. SELECTED FINANCIAL DATA
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 financial statements and notes included herein.
Ten Month
Fiscal Year
Years Ended December 31, Ended December
----------------------------------------------- 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA
(in thousands, except per share data)
Net sales $ 22,861 $ 22,381 $ 23,885 $ 24,407 $ 18,019
Income (loss) from continuing operations $ (2,094) $ (3,907) $ (2,650) $ 760 $ 1,337
Net income (loss) $ (3,813) $ (3,690) $ (1,056) $ 1,626 $ 2,689
Income (loss) per share from continuing
operations:
Basic $ (0.19) $ (0.35) $ (0.24) $ 0.08 $ 0.13
Diluted $ (0.19) $ (0.35) $ (0.24) $ 0.08 $ 0.12
BALANCE SHEET DATA
(in thousands)
Total assets $ 16,401 $ 19,254 $ 21,717 $ 21,116 $ 9,087
Long term debt, including current portion -- -- -- -- 4,000
Stockholders' equity $ 10,295 $ 13,873 $ 16,648 $ 17,331 $ 2,024
Effective March 1, 1994, the Company changed its fiscal year-end from February
28 to December 31.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. YEARS ENDED DECEMBER 31, 1998, 1997 AND
1996.
USDATA Corporation (the "Company") is a global supplier of real-time
manufacturing application development software that enables information
integration, decision support and supervisory control throughout the
manufacturing enterprise. The Company's component-based products help automate
manufacturing and process control applications, allowing customers to reduce
operating costs, shorten cycle times, and improve product quality. The Company
provides this knowledge through software products and services and delivers it
through a community of business partners. The Company brings nearly a
quarter-century of expertise in manufacturing performance improvement to its
partners and end-users.
Net sales have been generated primarily from licenses of the
FactoryLink(R) family of products and secondarily from technical support and
service agreements, training classes, and product related integration services.
The support and services agreements are generally one-year, renewable contracts
entitling a customer to certain software upgrades and technical support. Support
and service revenue represented approximately 12%, 11%, and 9% of net sales
during the years ended December 31, 1998, 1997 and 1996, respectively.
During 1998, the Company released FactoryLink(R) 6.5 and 6.6, real-time
information Windows NT and Windows 95 platforms supporting powerful client
access environments and technologies and providing Year 2000 readiness. In
addition, the Company released during 1998, Year 2000 ready versions for all
other major platforms historically marketed by the Company. In early 1998 the
Company also began shipping FactoryLink(R) WebClient, which provides the ability
to view and control any FactoryLink(R) server running Microsoft Windows NT using
a simple Web browser.
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In mid-1998, the Company introduced its newest software product,
Xfactory(TM), a manufacturing execution software ("MES") product which
incorporates Microsoft's newest technologies and is built on Microsoft's
Distributed interNet Applications ("DNA") architecture. Xfactory(TM) enables
manufacturing plants to more easily and quickly automate their production
processes and is the first visual object modeling MES. The Xfactory(TM) 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.
During 1998, the Company successfully completed its transition to an
indirect sales model and now focuses its sales efforts through selected
distributors and VARs (value added-resellers) capable of providing the level of
support and expertise required in the real-time manufacturing and process
control application market. The Company had previously employed multiple
channels of distribution which combined the Company's direct sales and support
resources with qualified third-party remarketers. This change was an important
part of the Company's new strategic plan developed in the latter part of 1997.
The Company currently has seven channel support locations in the United States
and six internationally to support its sales efforts through its network of
distributors and VARs. Export sales are a significant element of the Company's
activities and, in the years ended December 31, 1998, 1997 and 1996, represented
56%, 44% and 50%, respectively, of total net sales.
Effective July 1, 1998, the Company sold its Auto ID hardware integration
and servicing business ("Systems Operations"). In conjunction therewith, during
the first quarter of 1998, the Company reported a loss of $1,250,000 related to
the disposal thereof and $469,000 related to operations through the date of
disposal.
RISKS AND UNCERTAINTIES
Except for the historical information contained herein, the matters
discussed in this Form 10-K, including the Managements's Discussion and
Analysis, are forward-looking statements that involve risks and uncertainties.
Potential risks and uncertainties include, but are not limited to, the
following:
Rapid Technological Change - The market for computer software in
general is characterized by rapid changes in computer hardware and software
technology and is highly competitive. The Company's future success will depend
upon its ability to enhance its current products and to develop and introduce
new products that keep pace with technological developments, respond to evolving
end-user requirements and achieve market acceptance. There can be no assurance
that the Company will be successful in developing new products or product
enhancements on a timely basis or in a manner that satisfies customers needs or
achieves market acceptance.
Dependence on Principal Product Families - The Company currently
derives substantially all its net sales from licenses of the Company's
FactoryLink(R) family of products and related support services. While the
Company has introduced Xfactory(TM) and plans on additionally broadening its
product families, it expects that FactoryLink(R) products will continue to
account for a substantial portion of its net sales.
Intense Competition - Some of the Company's current and potential
competitors have longer operating histories and significantly greater financial,
sales, marketing, technical and other competitive resources than the Company. In
addition, some of the Company's competitors have been or could be acquired by
larger, stronger companies, thus increasing their competitive resources. There
can be no assurance that such competitors will not be better positioned to adapt
more quickly than the Company to new technologies and changes in customer
requirements or to devote greater resources than the Company to the promotion
and sales of products. The Company's competitors may also increase their efforts
to gain and retain market share through competitive pricing.
Timing of Sales - The Company has historically operated with little
backlog because software products are shipped as orders are received. A
significant portion of the Company's operating expenses is relatively fixed in
nature and planned expenditures are based primarily on sales forecast. If net
sales do not meet the Company's expectations in any given quarter, operating
results may be adversely affected. In addition, the loss of a significant
customer, the addition of a large customer, or changes in seasonal patterns of
capital spending by customers of the Company would affect the Company's
financial results.
Dependence on Key Personnel - The Company believes its future success
depends to a significant extent upon the efforts and abilities of its senior
management, highly skilled employees, contractors and other senior personnel. In
particular, the marketplace for skilled, technical employees and contractors in
the Company's business is extremely competitive. Although the Company expects to
be able to attract and retain sufficient numbers of highly skilled employees and
contractors for the foreseeable future, the can be no assurance that the Company
will be able to do so.
10
11
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected statements of
income data as a percentage of net sales:
Years Ended December 31,
-------------------------------
1998 1997 1996
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 6.1 12.5 7.9
----- ----- -----
Gross profit 93.9 87.5 92.1
Operating expenses
Selling 70.2 72.6 75.9
Product development 12.5 16.0 19.2
General and administrative 21.5 26.7 15.9
----- ----- -----
Total operating expenses 104.2 115.3 111.0
----- ----- -----
Loss from operations (10.3) (27.8) (18.9)
Interest income .9 1.4 1.9
----- ----- -----
Loss before income taxes
from continuing operations (9.4) (26.4) (17.0)
Income tax benefit .3 9.0 5.9
----- ----- -----
Loss from
continuing operations (9.1) (17.4) (11.1)
Income (loss) from discontinued
operations (7.5) 1.0 6.7
----- ----- -----
Net loss (16.6)% (16.4)% (4.4)%
===== ===== =====
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Net sales for 1998 were $22.9 million, an increase of $.5 million or
2.1% compared to 1997. During 1998, the Company's software licensing revenues
increased 11% compared to 1997 and overall unit shipments of software licenses
increased at an even greater rate, particularly in products for the Microsoft
Windows NT and Windows 95 platforms while products for Unix and other operating
systems platforms declined compared to the prior year. The net result of this
product mix shift was reflected in lower overall average selling prices (ASPs)
for the Company's products which partially offset the positive impact of
increased unit shipments. However, during the latter part of 1998 the Company's
ASPs began to stabilize as over 90% of all unit shipments were for Windows NT
and Windows 95 platforms in 1998 compared to 80% in 1997. Revenues from product
related consulting declined substantially from 1997 reflecting the Company's
decision to refer nearly all such activity to its channel distribution partners.
North American sales decreased by 20% while European sales increased 31% in 1998
compared to 1997. North American sales and International sales were 44% and 56%
of total sales, respectively.
Gross profit increased to 93.9% in 1998 from 87.5% in 1997. This
improvement was primarily the result of the replacement of printed product
documentation with compact disk (CD) based product documentation and decreased
capitalized software development amortization costs resulting from all such
capitalized costs being fully amortized except for development costs related to
future unreleased products.
Selling expenses as percent of sales decreased to 70.2% in 1998 from
72.6% in 1997 or $.2 million. As a result of the Company's completion of its
transition to an indirect sales model, expenses for sales related activities
declined from 1997, more than offsetting the increase in marketing activities
resulting from the Xfactory(TM) product introduction, demonstration CD's, sales
collateral material, as well as seminars and travel related to training
activities for the Company's channel partners.
Product development expenses (exclusive of capitalized software
development cost), which consisted primarily of labor costs, decreased $.7
million or 19.9% in 1998 compared to 1997. Actual product development
expenditures including capitalized software development costs of $2.5 million in
1998 and $2.2 million in 1997, decreased $.3 million or 5.6% in 1998 compared to
1997. The development of the double-byte functionality supporting the Japanese,
Chinese and Korean languages in 1997 was one of the primary factors in the
higher level of spending in 1997 compared to 1998.
General and administrative costs decreased $1.1 million or 18.0% in
1998 compared to 1997. As a percent of sales, general and administrative
decreased to 21.5% in 1998 versus 26.7% in 1997. The decrease from 1997 was
primarily attributable to decreased provisions for bad debt expenses and
organizational restructuring expenses.
The Company experienced a loss from continuing operations of $2.1
million in 1998 versus a loss of $3.9 million in 1997. The decrease in the loss
from continuing operations was primarily generated by an increase of $1.9
million in gross profit due to improved gross profit margins in combination with
increased net sales, a decrease of $2.0 million in operating expenses,
11
12
and partially offset by a significant reduction in the tax benefit resulting
from the Company's inability to utilize tax net operating loss carrybacks in
1998 compared to 1997.
Discontinued operations incurred a loss of $1.7 million in 1998
resulting from the loss on disposal and the loss from operations until the date
of disposal compared to income of $.2 million in 1997. The loss on disposal and
from operations until the date of disposal in 1998 were both affected by
declining sales revenues compared to prior years.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales for 1997 were $22.4 million, a decrease of $1.5 million or 6.3%
compared to 1996. During 1997, the Company continued to experience growth in its
products for the Microsoft Windows NT and Windows 95 platforms while products
for Unix and other operating systems platforms declined compared to 1996. The
net result of this product mix shift is lower average selling prices for the
Company's products which adversely affected overall revenues in 1997. Product
sales for the Windows NT and Windows 95 markets represented approximately 80%
and 60% of software product sales for 1997 and 1996, respectively. North
American sales increased by 5% while International sales declined 18% in 1997
compared to 1996. International sales declined primarily related to the
Company's European operations, particularly in the United Kingdom, Belgium and
Germany. International sales were 44% and 50% of total sales for 1997 and 1996,
respectively.
Gross profit declined from 92.1% in 1996 to 87.5% in 1997. This decline was
primarily the result of increased amortization of capitalized software
development costs. In addition, while the cost of producing and distributing
software generally does not vary due to any specific operating system, gross
profit margins were adversely affected by the declining average selling prices
of the Company's products as discussed above.
During 1997, the Company effected an operating expense reduction program
including the elimination of certain non-essential positions. As a result of
this program, selling expenses as percent of sales decreased from 75.9% in 1996
to 72.6% in 1997 or $1.9 million.
Product development expenses (exclusive of capitalized software development
cost), which consisted primarily of labor costs, decreased $1.0 million or 22%
in 1997 compared to 1996. Actual product development expenditures, including
capitalized software development costs of $2.2 million in 1997 and $.9 million
in 1996, increased $.3 million or 5% in 1997 compared to 1996. The increase in
absolute dollars is primarily due to the development efforts on FactoryLink(R),
for both the Windows NT and Windows 95 platforms as well as the development of
the double-byte functionality supporting the Japanese, Chinese and Korean
languages.
General and administrative costs increased $2.2 million or 58% in 1997 compared
to 1996. As a percent of sales, general and administrative increased to 26.7% in
1997 versus 15.9% in 1996. The increase over 1996 was primarily attributable to
increased provisions for bad debt expense, organizational restructuring
expenses, and higher information technology expenses.
The Company experienced a loss from continuing operations of $3.9 million in
1997 versus a loss of $2.7 million in 1996. The increase in the loss from
continuing operations was primarily generated by a decline of $2.4 million in
gross profit due to lower overall net sales and decreased gross profit margins,
partially offset by reduced operating expenses.
Income from discontinued operations declined from $1.6 million in 1996 to $.2
million in 1997. The reduction in profitability was primarily driven by lower
revenues partially offset by lower operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1998, operating activities used $.1 million of
cash, compared to providing $1.6 million by operating activities in 1997. This
change primarily reflected increased accounts receivable due to higher levels of
fourth quarter revenues partially offset by improved collections of past due
accounts receivable. During 1998, the Company invested $.5 million in capital
equipment, primarily computers and networking equipment, $1.3 million for the
purchase of software products and $2.5 million in capitalized software
development costs. The Company anticipates that capital equipment expenditures
will be approximately $.5 million in 1999.
The Company currently anticipates that its available cash, together with cash
generated from operations, will be sufficient to satisfy its operating cash
needs in 1999. The Company is in the process of establishing a new credit
facility which could be used to fund operating and capital requirements should
the business expand more rapidly than expected. In addition, the Company could
consider seeking additional public or private debt or equity financing to fund
future growth opportunities or acquisitions. No assurance can be given, however,
that such credit facility or debt or equity financing will be available to the
Company on terms and conditions acceptable to the Company, if at all.
12
13
IMPACT OF YEAR 2000 ISSUE
The Company is currently addressing the Year 2000 ("Y2K") issue, which
results from the fact that many computer programs were previously written using
two digits rather than four to define the applicable year. Programs written in
this way may recognize a date ending in "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations.
During 1998 the Company completed its conversion to a new integrated
business software solution, which provides order processing, sales
administration, accounts receivable, accounts payable and general ledger
systems. However, the new software is not currently Y2K ready, therefore, during
the first half of 1999, the Company plans on upgrading to the most recent
version of this software, which is Y2K ready. Thereafter, the Company is
planning on conducting transaction based testing to confirm the system's ability
to handle transactions related to the Y2K. The Company has not estimated the
cost of completing this upgrade, but currently believes it will not be material.
The Company has recently upgraded to a new internal network server, both
hardware and software, which are both Y2K ready. Outside of its integrated
business software applications, the Company has very few systems that are
interfaced together and therefore believes that its exposure is relatively low
that a Y2K problem with any one system or application can adversely impact the
entire IT environment.
For primarily operational purposes, the Company has been upgrading PCs
and individual applications running thereon throughout 1998 and 1997. The
upgraded PCs and application software are Y2K ready and the Company believes it
has minimal exposure to any business interruption from out-of-date PC's, network
equipment or related software. In addition, the Company has a backup process in
place under which data from individual PCs are backed up to an IT controlled
server. Therefore, if any one application does not function due to Y2K issues,
the data can easily be moved to another desktop station that is Y2K ready.
Additionally, during 1998 the Company conducted an inventory of PC's, software
and network equipment to determine which of those might need to be replaced or
upgraded because of Y2K related issues.
The Company's primary products are manufacturing related software. The
Company has established a process for testing and certifying these software
products for Y2K readiness. During 1998, the Company released a Y2K ready
version of FactoryLink(R) for all major platforms supported by the Company. The
Company has used and plans on continuing to use its own internal development and
support resources to test and remediate its product software for Y2K readiness.
All new products of the Company introduced in 1998 are Y2K ready.
The Company has also established a special section on its World Wide Web
site devoted to Y2K readiness. The site clearly indicates what the Company means
when it states a product is Y2K ready, which specific products are Y2K ready and
what the upgrade path is, if required, to bring older versions of its products
up to Y2K readiness. Customers who are covered under the Company's service and
support agreements are eligible to receive Y2K versions of the Company's
products at no additional cost. The Company has instituted specific marketing
and pricing programs to identify and assist customers who are not covered under
the Company's service and support agreements in upgrading to Y2K ready versions
of its software products. Additionally, the Company has added specific language
to its standard product warranty addressing Y2K. The Company has not obtained,
nor does it anticipate obtaining, any insurance coverage for Y2K problems.
To date, the Company has not incurred any material expense directly
related to Y2K readiness for its internal IT and non-IT computer systems.
Activities and expenses associated with conversion to new or upgraded systems
have been driven primarily by operational considerations. The Company plans to
use its internal resources to address any Y2K readiness issues which are
currently planned or may yet arise. The Company has not separately tracked these
types of expense, but does not currently believe they have been or will be
material.
The Company has incurred costs in terms of time spent on research,
modification, testing and remediation for its manufacturing related software
products but has not determined the magnitude of such costs to date. Additional
internal resources will be utilized during 1999, however, the Company does not
currently expect such expenses to be material to its financial position or
results of operations.
The Company does not currently believe it is dependent on any significant
suppliers for which there may be Y2K readiness issues. Services such as banking
and insurance are conducted with companies that either are or will be Y2K ready.
13
14
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board released
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which is effective for fiscal years beginning after
June 15, 1999. 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 March 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. This pronouncement identifies the characteristics of
internal use software and provides guidance on new cost recognition principles.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. SOP
98-1 is not expected to have a material impact on the Company's consolidated
results of operations, financial position or cash flows.
In December 1998, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions" ("SOP 98-9"). SOP 98-9 amends paragraphs 11 and 12 of SOP 97-2,
Software Revenue Recognition, to require recognition of revenue using the
"residual method" when certain criteria are met. SOP 98-9 is effective for
transactions entered into in fiscal years beginning after March 15, 1999.
Earlier adoption is permitted. SOP 98-9 is not expected to have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the
Company begins on page F-1 of this report. Such information is hereby
incorporated by reference into this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10, Directors and Executive Officers
of the Registrant (except for the information regarding executive officers
called for by Item 401 of Regulation S-K which is included in Part I in
accordance with General Instruction G(3)), is hereby incorporated by reference
to the Registrant's definitive Proxy Statement for its Annual Meeting of
Stockholders presently scheduled to be held in June 1999, which shall be filed
with the Securities and Exchange Commission within 120 days of the end of the
Registrant's last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation and transactions with
management is set forth in the Proxy Statement, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial
owners and management is set forth in the Proxy Statement, which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information concerning relationships and related transactions is
set forth in the Proxy Statement, which information is incorporated herein by
reference.
14
15
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
Report of Independent Accountants for the Years Ended
December 31, 1998, 1997 and 1996 F-1
Consolidated Balance Sheets as of
December 31, 1998 and 1997 F-2
Consolidated Statements of Operations and Comprehensive Income
for the Years Ended
December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996 F-5
Notes to the Consolidated Financial Statements F-6
(a) (2) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts F-16
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and, therefore, have
been omitted.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
(c) EXHIBITS
Exhibit No. Description
3.1 Certificate of Incorporation of the Company.*
3.2 By-laws of the Company.*
4.1 Specimen stock certificate representing the Common
Stock.***
10.1 1982 Incentive Stock Option Plan.*
10.2 1992 Incentive and Nonstatutory Option Plan.*
10.3 1994 Equity Compensation Plan, as amended.*
10.4 Office Lease Agreement dated as of June 1992, by and
between Carter - Crowley Properties, Inc. and the
Company.*
10.8 Administrative Services Agreement between Safeguard
Scientifics, Inc. and the Company.***
10.9 First Amendment to Office Lease Agreement, dated as
of June 1992 by and between Carter-Crowley
Properties, Inc. and the Company.****
11.1 Statement regarding computation of earnings per
share.#
21.1 Subsidiaries of the Registrant.*
23.1 Consent of PricewaterhouseCoopers LLP.#
24.1 Power of Attorney (included on signature page).
15
16
27.1 Financial data schedule. (EDGAR version only).
- ------------
# Filed herewith
* Filed on April 12, 1995 as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-91124) and incorporated by reference
herein.
** Filed on June 1, 1995 as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 33-91124) and incorporated
by reference herein.
*** Filed on June 15, 1995 as an exhibit to Amendment No. 2 to the
Company's Registration Statement on Form S-1 (File No. 33-91124) and
incorporated by reference herein.
**** Filed on March 31, 1998 as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.
16
17
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF USDATA CORPORATION
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations and comprehensive income, of stockholders' equity and
of cash flows listed in the index appearing under Item 14 (a) (1) and (2) on
page 15 present fairly, in all material respects, the financial position of
USDATA Corporation and its subsidiaries (the "Company") at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Dallas, Texas
February 12, 1999
F1
18
USDATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1998 1997
- ---------------------------------------------- -------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 1,980 $ 5,204
Accounts receivable, net of allowance for doubtful
accounts of $1,150 and $1,158, respectively 6,095 4,573
Deferred income taxes 533 2,345
Other current assets 475 436
-------- --------
Total current assets 9,083 12,558
-------- --------
Property and equipment, net 1,825 2,416
Capitalized computer software development costs,
net of accumulated amortization of $2,521
and $2,161, respectively 4,127 1,938
Other assets 80 90
Software held for resale, net 1,286 --
Net assets of discontinued operations -- 2,252
-------- --------
Total assets $ 16,401 $ 19,254
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 755 $ 952
Deferred revenue 2,005 1,257
Accrued compensation and benefits 1,274 955
Other accrued liabilities 2,072 1,488
-------- --------
Total current liabilities 6,106 4,652
-------- --------
Deferred income taxes 0 729
-------- --------
Total liabilities 6,106 5,381
-------- --------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value, 2,200,000 shares
authorized; none issued or outstanding -- --
Common stock, $.01 par value, 22,000,000 shares
authorized; 14,343,550 issued in 1998 and 1997 143 143
Additional paid-in capital 16,534 16,365
Retained earnings 5,106 8,919
Treasury stock at cost, 3,106,184 shares in 1998
and 3,321,894 shares in 1997 (10,929) (11,554)
Other comprehensive income (559) --
-------- --------
Total stockholders' equity 10,295 13,873
-------- --------
Total liabilities and stockholders' equity $ 16,401 $ 19,254
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F2
19
USDATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31,
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1998 1997 1996
- ---------------------------------------------- -------- -------- --------
Net sales $ 22,861 $ 22,381 $ 23,885
Cost of sales 1,396 2,793 1,898
-------- -------- --------
Gross profit 21,465 19,588 21,987
-------- -------- --------
Operating expenses:
Selling 16,052 16,258 18,121
Product development 2,862 3,574 4,590
General and administrative 4,910 5,985 3,789
-------- -------- --------
Total operating expenses 23,824 25,817 26,500
-------- -------- --------
Loss from operations (2,359) (6,229) (4,513)
Interest income 198 310 448
-------- -------- --------
Loss from continuing operations before income taxes (2,161) (5,919) (4,065)
Income tax benefit 67 2,012 1,415
-------- -------- --------
Loss from continuing operations (2,094) (3,907) (2,650)
Discontinued operations:
Income (loss) from discontinued Systems Operations
(net of income taxes of $0, $112 and $858, respectively) (219) 217 1,594
Loss on disposal of discontinued Systems Operations,
including operating losses of $250 (1,500)
-------- -------- --------
Net loss $ (3,813) $ (3,690) $ (1,056)
======== ======== ========
Other comprehensive income, net of tax:
Foreign currency translation adjustment 559 0 0
-------- -------- --------
Comprehensive loss (4,372) (3,690) (1,056)
======== ======== ========
Earnings per share:
Basic:
Loss from continuing operations $ (0.19) $ (0.35) $ (0.24)
Income (loss) from discontinued operations (0.15) 0.02 0.14
-------- -------- --------
Net loss $ (0.34) $ (0.33) $ (0.10)
======== ======== ========
Diluted:
Loss from continuing operations $ (0.19) $ (0.35) $ (0.24)
Income (loss) from discontinued operations (0.15) 0.02 0.14
-------- -------- --------
Net loss $ (0.34) $ (0.33) $ (0.10)
======== ======== ========
Weighted average shares outstanding:
Basic 11,196 11,066 11,014
Diluted 11,196 11,066 11,014
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F3
20
USDATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(IN THOUSANDS) 1998 1997 1996
- -------------- ------- ------- -------
Cash flows from operating activities:
Net loss $(3,813) $(3,690) $(1,056)
------- ------- -------
Adjustments to reconcile net loss
to cash flow from operating activities:
Depreciation and amortization 1,448 2,633 1,318
Loss on disposal 1,719 -- --
Changes in assets and liabilities:
Accounts receivable (1,522) 2,280 (2,046)
Income tax receivable -- 1,050 (1,050)
Deferred income taxes 1,083 (1,023) (325)
Other - net 74 268 5
Accounts payable and accrued liabilities 387 72 939
Deferred revenue 748 (309) 453
Accrued compensation and benefits 319 342 (442)
Currency translation adjustment (559) -- --
------- ------- -------
Net cash provided by (used in) operating activities (116) 1,623 (2,204)
------- ------- -------
Cash flows from investing activities:
Capital expenditures (536) (1,263) (1,574)
Related party note receivable -- -- 7,040
Capitalized software development costs (2,549) (2,160) (884)
Software held for resale (1,345) -- --
Proceeds from sale of discontinued operation 300 -- --
------- ------- -------
Net cash provided by (used in) investing activities (4,130) (3,423) 4,582
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common shares 794 779 447
Payments on capital lease obligations (5) (56) (63)
------- ------- -------
Net cash provided by financing activities 789 723 384
------- ------- -------
Cash flows from discontinued operations 233 (117) 2,132
------- ------- -------
Net increase (decrease) in cash and cash equivalents (3,224) (1,194) 4,894
Cash and cash equivalents, beginning of period 5,204 6,398 1,504
------- ------- -------
Cash and cash equivalents, end of period $ 1,980 $ 5,204 $ 6,398
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ -- $ -- $ --
Income taxes $ 16 $ 25 $ 1,147
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F4
21
USDATA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other
Comprehensive
Common Stock Additional Subscription Income
---------------- Paid-in Receivable Retained Treasury Stock Currency
(in thousands) Shares Amount Capital from Officer Earnings Shares Amount Translation
- -------------- ------ ------ ------- ------------ -------- ------ ------ ------------
Balance, at
December 31, 1995 14,343 $ 143 $16,306 $ (1,021) $ 13,665 (3,450) $ (11,762)
Exercise of stock options (24) 162 471
Interest on subscription
receivable from officer (74)
Net loss (1,056)
-------- ------ ------- -------- -------- ------- --------- ------
Balance, at
December 31, 1996 14,343 143 16,282 (1,095) 12,609 (3,288) (11,291)
Exercise of stock options 83 240 696
Termination of subscription
receivable from officer 1,095 (274) (959)
Net loss (3,690)
-------- ------ ------- -------- -------- ------- --------- ------
Balance, at
December 31, 1997 14,343 143 16,365 -- 8,919 (3,322) (11,554)
Exercise of stock options 169 216 625
Net loss (3,813)
Other
comprehensive income (559)
Balance, at -------- ------ ------- -------- -------- ------- --------- ------
December 31, 1998 14,343 $ 143 $16,534 $ -- $ 5,106 (3,106) $ (10,929) $ (559)
======== ====== ======= ======== ======== ======= ========= ======
Total
Stockholders'
(in thousands) Equity
- -------------- -------------
Balance, at
December 31, 1995 $ 17,331
Exercise of stock options 447
Interest on subscription
receivable from officer (74)
Net loss (1,056)
--------
Balance, at
December 31, 1996 16,648
Exercise of stock options 779
Termination of subscription
receivable from officer 136
Net loss (3,690)
--------
Balance, at
December 31, 1997 13,873
Exercise of stock options 794
Net loss (3,813)
Other
comprehensive income (559)
Balance, at --------
December 31, 1998 $ 10,295
========
The accompanying notes are an integral part of the consolidated financial
statements.
F5
22
USDATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
USDATA Corporation (the "Company") is a global supplier of real-time
manufacturing application development software that enables information
integration, decision support and supervisory control throughout the
manufacturing enterprises. The Company's component-based products help automate
manufacturing and process control, allowing customers to reduce operating costs,
shorten cycle times, and improve product quality. The Company provides this
knowledge through software products and services and delivers it through a
community of business partners. The Company has channel support locations
throughout the United States and Europe. The Company's distributors have sales
locations throughout North and South America, Europe, the Far East and Middle
East.
The Company's family of software products, marketed under the name of
FactoryLink(R) and Xfaxtory(TM) provide a powerful set of software tools and
applications designed for users who are technically competent but who may not be
experienced software programmers.
RECLASSIFICATIONS AND BASIS OF PRESENTATION
Certain prior year balances have been reclassified to conform with the
1998 presentation.
USE OF ESTIMATES
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles which in certain cases require the use
of estimates made by the Company's management. Actual results may differ from
those estimates.
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
REVENUE RECOGNITION
Revenue from the licensing of software products is recognized upon
execution of a contract and delivery software. Revenue from software support
maintenance agreements is recognized ratably over the contract term, generally
not exceeding one year. Sales return rights are provided to certain customers,
under specified conditions. Sales are presented net of estimated returns, which
historically have not been significant.
Effective January 1, 1998, the Company adopted the Statement of
Position (SOP) on software revenue recognition (SOP 97-2) that was issued by the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants. The adoption did not have a material effect on the Company's
financial position or results of operations.
Included in total net sales for the year ended December 31, 1998, 1997,
and 1996 are software service revenues of approximately $2.8 million, $2.5
million and $2.3 million, respectively. Unearned revenue under these service
contracts is included in current liabilities as deferred revenue.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Maintenance and repairs are
charged to expense as incurred, and the costs of additions and betterments are
capitalized. Depreciation is provided in amounts which amortize costs over the
estimated useful lives of the related assets, generally three to five years
utilizing the straight-line method. Leasehold improvements are amortized over
the term of the respective leases or estimated useful life of the improvement,
whichever is shorter.
CAPITALIZED SOFTWARE
The Company capitalizes software development costs in accordance with the
Statement of Financial Accounting Standards ("SFAS") No. 86. Software
development costs incurred prior to establishing technological feasibility are
charged to operations and included in product development costs. Software
development costs incurred after
F6
23
USDATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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. Annual amortization, charged to cost
of sales, is the greater of 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 the straight-line method over the remaining
estimated economic life of the product. The total computer software development
costs capitalized for the years ended 1998, 1997 and 1996 were $2.5 million,
$2.2 million, and $.9 million, respectively. The total costs amortized and
charged to operations for the years ended 1998, 1997 and 1996 were $.4 million,
$1.4 million, and $.2 million respectively.
SOFTWARE HELD FOR RESALE
During 1998, the Company purchased the underlying code to computer
software licenses which are held for resale in the ordinary course of business.
The original purchase costs of such software were capitalized and are being
amortized utilizing the straight-line method over the estimated economic life of
three years. Accumulated amortization and amortization expense charged to cost
of sales approximated $59 thousand at December 31, 1998 for the year then ended.
STOCK-BASED COMPENSATION
In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which gives companies the option to adopt the fair value method
for expense recognition of employee stock options and other stock-based awards
or to continue to account for such items using the intrinsic value method as
outlined under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), with pro forma disclosure of net income as if
the fair value method had been applied. The Company has elected to continue to
apply APB 25 for stock options and other stock based awards and has disclosed
pro forma net income (loss) as if the fair value method had been applied.
INCOME TAXES
The Company follows SFAS No. 109, "Accounting for Income Taxes", which
requires an asset and liability approach that results in the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of assets
and liabilities.
ADVERTISING COSTS
The Company's policy for advertising costs is to expense such costs as
incurred. Advertising expenses for fiscal 1998, 1997 and 1996, were $1.0
million, $.4 million, and $2.8 million, respectively.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments reflected in
the consolidated balance sheet at December 31, 1998 approximate their respective
fair values.
EARNINGS PER SHARE
The Company has adopted SFAS No. 128, "Earnings per Share" which
specifies the computation, presentation and disclosure requirements for earnings
per share (EPS) for entities with publicly held common stock or potential common
stock. SFAS 128 simplifies the standards for computing EPS previously found in
Accounting Principles Board Opinion No. 15, "Earnings per Share" and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the statement of operations for all
entities with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
ADOPTION OF AN AUTHORITATIVE STATEMENT
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"), which requires
that an enterprise classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
F7
24
USDATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board released
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which is effective for fiscal years beginning after
June 15, 1999. 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 March 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. This pronouncement identifies the characteristics of
internal use software and provides guidance on new cost recognition principles.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998. SOP
98-1 is not expected to have a material impact on the Company's consolidated
results of operations, financial position or cash flows.
In December 1998, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions" ("SOP 98-9"). SOP 98-9 amends paragraphs 11 and 12 of SOP 97-2,
Software Revenue Recognition, to require recognition of revenue using the
"residual method" when certain criteria are met. SOP 98-9 is effective for
transactions entered into in fiscal years beginning after March 15, 1999.
Earlier adoption is permitted. SOP 98-9 is not expected to have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.
2. PROPERTY AND EQUIPMENT
The components of property and equipment at December 31, 1998 and 1997
were as follows (in thousands):
1998 1997
------- -------
Equipment $ 7,266 $ 6,854
Furniture and fixtures 384 414
Leasehold improvements 178 148
Vehicles 256 241
Assets under capital leases 185 185
------- -------
8,269 7,842
Accumulated depreciation
and amortization (6,444) (5,426)
------- -------
Net property and equipment $ 1,825 $ 2,416
======= =======
F8
25
USDATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES
The components of income (loss) before income taxes including
discontinued operations for the years ended December 31, 1998, 1997 and 1996
included the following (in thousands):
1998 1997 1996
------- ------- -------
United States $(3,888) $(5,591) $ (568)
Foreign 8 1 (1,045)
------- ------- -------
$(3,880) (5,590) $(1,613)
======= ====== =======
The components of income tax benefit (expense) for the years ended
December 31, 1998, 1997 and 1996 are (in thousands):
1998 1997 1996
------- ------- -------
Current:
Federal $ 1,482 $ 801 $ 10
State 174 (40)
Foreign (11)
------- ------- -------
1,656 801 (41)
------- ------- -------
Deferred:
Federal (1,518) 1,099 523
State (71) 75
------- ------- -------
(1,589) 1,099 598
------- ------- -------
Income tax benefit $ 67 $ 1,900 $ 557
======= ======= =======
The following is a reconciliation of the effective tax rate to the
federal statutory income tax rate for continuing and discontinued operations as
of December 31, 1998, 1997 and 1996 (in thousands):
1998 1997 1996
------- ------- -------
Income tax benefit at federal
statutory rate $ 1,316 $ 1,900 $ 548
Research and development
credit 201
State taxes, net of federal
benefit 68 22
Valuation allowance (1,521)
Other 3 (13)
------- ------- -------
Income tax (provision) benefit $ 67 $ 1,900 $ 557
======= ======= =======
F9
26
USDATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset as December 31, 1998 and
1997 were as follows (in thousand):
1998 1997
------- -------
Deferred taxes from continuing operations:
Deferred tax asset:
Net operating loss $ 2,698 $ 1,801
Allowance for doubtful accounts 430 394
Accrued benefits 153 104
Credits 506
Other 65 46
Valuation allowance (1,521) 0
------- -------
$ 2,331 $ 2,345
======= =======
Deferred tax liability:
Depreciation 253 70
Capitalized software 1,545 659
------- -------
$ 1,798 $ 729
======= =======
Net deferred taxes from continuing operations $ 533 $ 1,616
======= =======
Deferred taxes from discontinued operations:
Deferred tax asset:
Inventory reserves $ $ 238
Other 4
Allowance for doubtful accounts 85
------- -------
$ 0 $ 327
======= =======
Deferred tax liability:
Depreciation $ 0 $ 25
======= =======
At December 31, 1998 and 1997, the Company had net operating loss
carryovers of approximately $7.2 million and $5.3 million, respectively. The
1997 net operating loss was carried back to a previous year and generated a
refund of approximately $1.5 million. The Company has the ability to carryback
tax credits that were released as a result of the 1997 operating loss carryback.
The 1998 net operating loss carryover will expire after the year 2018. A portion
of the net deferred tax asset has been reserved due to the uncertainty regarding
the Company's ability to recognize the benefit of the asset in future years.
F10
27
USDATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. DISCONTINUED OPERATIONS
Effective July 1, 1998, the Company sold its Auto ID hardware
integration and servicing business ("Systems Operations"). In conjunction
therewith, during the first quarter of 1998, the Company reported a loss of
$1.25 million related to the disposal thereof and $469 thousand related to
operations through the date of disposal. As a result of this action, the
Company's revenues and operating expenses for the periods presented herein
reflect only the Software Operations with the net results of the Systems
Operations reported on its statements of operations under the caption
"Discontinued operations". Net sales related to the Systems Operations were $3.1
million, $12.9 million and $17.8 million for the years ended December 31, 1998,
1997 and 1996, respectively.
Assets and liabilities of the Systems Operations disposed of consisted
of the following at December 31, 1997 (in thousands):
1997
------
Accounts receivable, net of allowance of $250 and $181, respectively $1,923
Inventories 636
Property and Equipment, net 862
Other assets 145
Deferred income taxes 327
------
Total assets 3,893
------
Accounts payable 457
Deferred revenue 1,145
Accrued compensation 14
Deferred income taxes 25
------
Total liabilities 1,641
------
Net assets of discontinued operations $2,252
======
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The board of directors is authorized, subject to certain limitations
and without stockholder approval, to issue up to an aggregate 2.2 million shares
in one or more series of preferred stock and to fix the rights and preferences
of the shares of each series. No shares of preferred stock have been issued.
RESTRICTED STOCK GRANT
In February 1995, 273,910 shares of the Company's common stock were
purchased by an officer in the form of a restricted stock grant. The purchase
was funded by a $959,000 full recourse promissory note payable to the Company
with interest at 7.75% and payable in February 2003 or within 30 days of
termination of employment. The note was secured by Company stock. Effective June
30, 1997, the Company agreed to cancel the outstanding subscription receivable
due from the officer in exchange for the shares of restricted common stock. As a
result of this transaction, 273,910 shares of common stock were put into
treasury, the subscription receivable was eliminated and $.1 million of interest
income, previously recognized, was written off to general and administrative
expense.
EQUITY COMPENSATION PLANS
In 1994, the Company adopted the 1994 Equity Compensation Plan (the
1994 Plan), which provides for stock options to be granted to employees,
independent contractors and directors. The 1994 Plan provides for the issuance
of up to 1,500,000 shares of common stock pursuant to the grant of incentive
stock options (ISO), non-qualified stock options (NSO), stock appreciation
rights (SARs) and restricted stock awards. Options issued under the 1994 Plan
generally vest over a four-year period and are exercisable up to eight years
from the date of grant at a price per share equal to the fair market value of
the underlying stock on the date of grant. The 1994 Plan also authorizes an
automatic grant of options to purchase 15,000 shares of common stock to certain
eligible directors upon initial election to the board of directors and a further
grant of options to purchase 3,000 shares of common stock following the
F11
28
USADATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
completion of each two-year period of service. Options granted to directors have
an eight-year term and vest over four years. At December 31, 1998, there were
295,000 shares available for future grant under the 1994 Plan.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option grants under these plans, which are described
above. Accordingly, no compensation cost has been recognized for its stock
option plans. If compensation cost for the Company's stock option plans had been
determined based on the fair market value of the options at the grant dates for
awards under those plans consistent with the method provided by SFAS 123, the
Company's net loss and related per share amounts would have been reflected by
the following pro forma amounts for the years ended December 31, 1998, 1997 and
1996 (in thousands):
1998 1997 1996
---- ---- ----
Net loss As reported $ (3,813) $ (3,690) $ (1,056)
Pro forma (4,536) (3,908) (1,220)
Basic net loss per share As reported (0.34) (0.33) (0.10)
Pro forma (0.40) (0.35) (0.11)
Diluted net loss per share As reported (0.34) (0.33) (0.10)
Pro forma (0.40) (0.35) (0.11)
The per share weighted-average value of stock options issued by the
Company during 1998, 1997 and 1996 was $3.07, $2.70 and $6.93 respectively, on
the date of grant. The following assumptions were used by the Company to
determine the fair value of stock options granted using the Black Scholes
option-pricing model:
1998 1997 1996
---- ---- ----
Dividend yield 0 0 0
Expected volatility 75% 64% 60%
Risk-free rate of return 4.4% to 5.8% 5.9% to 6.5% 5.8% to 6.5%
Expected life 5 years 5 years 5 years
The Pro forma net loss reflects only options granted in 1998, 1997 and
1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period.
F12
29
USDATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Option activity under the Company's Plans is summarized below (in thousands,
except share prices):
1998 1997 1996
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
------------------- ---------- -------- -------------------
Shares Price Shares Price Shares Price
------ -------- ------- -------- ------ --------
Outstanding at beginning of period 1,233 $ 4.37 1,129 $ 4.82 1,220 $ 3.76
Options granted 404 4.72 800 4.38 216 12.11
Options exercised, expired and canceled (475) 4.80 (696) 5.12 (307) 5.74
----- -------- ----- -------- ----- --------
Outstanding at end of period 1,162 $ 4.23 1,233 $ 4.37 1,129 $ 4.82
----- -------- ----- -------- ----- --------
Options exercisable at year-end 296 316 339
Shares available for future grant 295 440 10
The following summarizes information about the Company's stock options
outstanding at December 31, 1998 (in thousands, except share prices):
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Weighted Avg.
Remaining
Number Contractual Life Weighted Avg. Number Weighted Avg.
Range of Exercise Prices Outstanding (in years) Exercise Price Exercisable Exercise Price
- ------------------------ ----------- --------------- -------------- ----------- --------------
$2.50 - $3.69 159 4.4 $ 3.51 118 $ 3.51
$3.88 - $4.25 485 7.0 3.90 97 3.91
$4.44 - $7.50 518 7.2 4.76 81 4.81
-------- ------
1,162 6.7 $ 4.23 296 $ 4.00
======== ======
6. LINE OF CREDIT
In June 1997, the Company's previous $5 million revolving credit
facility expired. The Company did not have any borrowings under this facility
during 1998.
7. RETIREMENT PLAN
The Company maintains a discretionary defined contribution plan (401(k)
Plan) covering substantially all employees. During the years ended December 31,
1998, 1997 and 1996, the Company made contributions of approximately $89
thousand, $.1 million and $.1 million, respectively, to this plan.
8. RELATED PARTY TRANSACTIONS
Safeguard Scientifics, Inc. "Safeguard" owns approximately 28% of the
Company's outstanding common stock, on a fully diluted basis. Effective January
1, 1995, the Company and Safeguard entered into an administrative service
agreement whereby Safeguard provides the Company with business and
organizational strategy, legal and investment management, and merchant and
investment banking services. The agreement provides for the payment of an
administrative service fee of $30 thousand per month. The initial agreement
expired on December 31, 1995, and is renewed annually on a year to year basis.
General and administrative expense on the consolidated statement of operations
includes $.4 million of such administrative service fees for the years ended
December 31, 1998, 1997 and 1996. Additionally, during 1998, the Company paid
$75 thousand to Safeguard for consulting services not covered by this agreement.
F13
30
USDATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The manager of the Company's European operations is also the managing
director of the Company's largest distributor in the United Kingdom. Effective
February 1996, the Company entered into a distribution agreement with this
distributor to which, in general, the Company sells products at discounts from
list price representative of discounts given to similar distributors.
Consolidated net sales includes $1.1 million, and $.5 million, to this
distributor for the years ended December 31, 1998 and 1997, respectively. The
Company has also entered into a shared facility arrangement, in which certain
office space and equipment are shared between the distributor and Company's
European Headquarters. Additionally, the distributor charges the Company for
certain technical support and marketing advisory services.
In August 1995, the Company and Safeguard entered into an agreement
whereby the Company loaned to Safeguard a portion of its excess cash from the
proceeds of its initial public offering. The loan was fully repaid on March 8,
1996. During the year ended December 31, 1996, the Company earned $43 thousand
of interest income from this unsecured lending arrangement.
9. EXPORT SALES
Included in the consolidated statements of operations are export sales
aggregating $12.9 million, $9.9 million and $12.0 million for the years ended
December 31, 1998, 1997 and 1996, respectively. These sales were made primarily
in Europe and, to a lesser extent, Canada, Latin America and Asia.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space, equipment and automobiles under
non-cancelable capital and operating lease agreements which expire at various
dates through the year 2002. Certain capital leases contain bargain purchase
options which may be exercised at the end of the lease term. Assets recorded
under capital leases, primarily equipment, were $185 thousand and $185 thousand
at December 31, 1998 and 1997, respectively and the related accumulated
amortization was $185 thousand and $177 thousand at December 31, 1998 and 1997,
respectively. Amortization of capital lease assets of $8 thousand, $59 thousand,
and $68 thousand was included in depreciation expense for the years ended
December 31, 1998, 1997 and 1996, respectively. Minimum future payments under
capital lease obligations are not significant.
Future minimum lease payments at December 31, 1998 under operating
leases were as follows (in thousands):
1999 $ 760
2000 526
2001 95
2002 95
2003 87
Thereafter --
-------
Total minimum lease commitments $ 1,563
=======
Total rent expense charged to earnings was approximately $1.0 million,
$1.3 million and $1.2 million during the years ended December 31, 1998, 1997 and
1996, respectively.
OTHER
The Company has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business. Management
believes that the ultimate resolution of such contingencies will not have a
materially adverse effect on the financial position or results of operations of
the Company.
F14
31
USDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except share data)
First Second Third Fourth
1998 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Net sales $ 5,640 $ 5,806 $ 4,890 $ 6,525
------- ------- ------- -------
Gross profit 5,272 5,453 4,669 6,071
------- ------- ------- -------
Loss from continuing operations (446) (353) (1,844) 549
Loss from discontinued operations (1,719) -- -- --
------- ------- ------- -------
Net Income (loss) $(2,165) $ (353) $(1,844) $ 549
======= ======= ======= =======
Earnings per share (Basic and Diluted):
Loss from continuing operations $ (0.04) $ (0.03) $ (0.16) $ 0.05
Income from discontinued operations (0.16) -- -- --
------- ------- ------- -------
Net Loss $ (0.20) $ (0.03) $ (0.16) $ 0.05
======= ======= ======= =======
Weighted average shares outstanding (Basic and Diluted) 11,100 11,211 11,233 11,237
Stock prices (in dollars)
High $ 8.44 $ 7.50 $ 5.25 $ 4.19
Low $ 4.38 $ 4.75 $ 2.81 $ 1.00
======= ======= ======= =======
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
- ---- ------- ------- ------- -------
Net sales $ 5,917 $ 5,508 $ 4,844 $ 6,112
------- ------- ------- -------
Gross profit 5,384 5,005 4,334 4,865
------- ------- ------- -------
Loss from continuing operations (878) (679) (1,391) (959)
Income from discontinued operations 41 77 53 46
------- ------- ------- -------
Net Loss $ (837) $ (602) $(1,338) $ (913)
======= ======= ======= =======
Earnings per share (Basic and Diluted):
Loss from continuing operations $ (0.08) $ (0.06) $ (0.13) $ (0.09)
Income from discontinued operations - 0.01 0.01 0.01
Net Loss $ (0.08) $ (0.05) $ (0.12) $ (0.08)
======= ======= ======= =======
Weighted average shares outstanding (Basic and Diluted) 11,085 11,380 10,852 10,950
Stock prices (in dollars)
High $ 9.00 $ 6.00 $ 6.00 $ 5.31
Low $ 3.63 $ 3.00 $ 3.33 $ 3.88
Earnings per share calculations for each period are based on the
weighted average number of shares outstanding in each period; therefore, the sum
of the earnings per share amounts for the quarters does not necessarily equal
the year-to-date earnings per share.
F15
32
USDATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
USDATA Corporation and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended December 31, 1998, 1997 and 1996
Balance at
beginning of Charged to Balance at end
Description year expense Deductions of year
- ----------- ------------ ---------- ---------- --------------
December 31, 1996
Allowance for doubtful accounts $ 273,000 $ 163,000 $ (12,000) $ 424,000
December 31, 1997
Allowance for doubtful accounts $ 424,000 $ 951,000 $ (217,000) $1,158,000
December 31, 1998
Allowance for doubtful accounts $1,158,000 $ 252,000 $ (260,000) $1,150,000
F16
33
USDATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Richardson, State of Texas, on the 31st day of March, 1999.
USDATA Corporation
By:
--------------------
Robert A. Merry
President and
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of USDATA Corporation,
hereby severally constitute and appoint Robert A. Merry and Robert L. Drury, and
each of them singly, our true and lawful attorneys, with full power to them and
each of them singly, to sign for us in our names in the capacities indicated
below, amendments to this report, and generally to do all things in our names
and on our behalf in such capacities to enable USDATA Corporation to comply with
the provisions of the Securities Exchange Act of 1934, as amended, and all
requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Signature
- ----------------------------- President and Chief Executive March 31, 1999
Robert A. Merry Officer (Principal Executive Officer)
- ----------------------------- Vice President and Chief Financial March 31. 1999
Robert L. Drury Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)
- ----------------------------- Chairman of the Board March 31, 1999
Max D. Hopper
- ----------------------------- Director March 31, 1999
Gary J. Anderson, M.D.
- ----------------------------- Director March 31, 1999
Stephen J. Andriole, Ph.D.
- ----------------------------- Director March 31, 1999
James W. Dixon
- ----------------------------- Director March 31, 1999
Jack L. Messman
- ----------------------------- Director March 31, 1999
Arthur R. Spector
F-17
34
USDATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT 11.1 - COMPUTATION OF PER SHARE EARNINGS
(in thousands, expect per share data)
YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
Net earnings (loss):
Continuing operations $ (2,094) $ (3,907) $ (2,650)
Discontinued operations (1,719) 217 1,594
---------- ---------- ----------
Net loss $ (3,813) $ (3,690) $ (1,056)
========== ========== ==========
Weighted average common shares outstanding 11,196 11,066 11,014
Common share equivalents -- -- --
---------- ---------- ----------
Weighted average common shares and common share equivalents
(if dilutive) outstanding 11,196 11,066 11,014
========== ========== ==========
Net income (loss) per common share:
Basic:
Continuing operations $ (0.19) $ (0.35) $ (0.24)
Discontinued operations (0.15) 0.02 0.14
---------- ---------- ----------
Net loss $ (0.34) $ (0.33) $ (0.10)
========== ========== ==========
Diluted:
Continuing operations $ (0.19) $ (0.35) $ (0.24)
Discontinued operations (0.15) 0.02 0.14
---------- ---------- ----------
Net loss $ (0.34) $ (0.33) $ (0.10)
========== ========== ==========
F18
35
USDATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Richardson, State of Texas, on the 31st day of March, 1999.
USDATA Corporation .
By: /s/ Robert A. Merry
--------------------
Robert A. Merry
President and
Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of USDATA Corporation,
hereby severally constitute and appoint Robert A. Merry and Robert L. Drury, and
each of them singly, our true and lawful attorneys, with full power to them and
each of them singly, to sign for us in our names in the capacities indicated
below, amendments to this report, and generally to do all things in our names
and on our behalf in such capacities to enable USDATA Corporation to comply with
the provisions of the Securities Exchange Act of 1934, as amended, and all
requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Signature
/s/ Robert A. Merry President and Chief Executive March 31, 1999
- ------------------------------ Officer (Principal Executive Officer)
Robert A. Merry
/s/ Robert L. Drury Vice President and March 31, 1999
- ------------------------------ Chief Financial Officer, Treasurer
Robert L. Drury and Secretary (Principal Financial
and Accounting Officer)
/s/Max D. Hopper Chairman of the Board March 31, 1999
- ------------------------------
Max D. Hopper
/s/ Gary J. Anderson, M.D. Director March 31, 1999
- ------------------------------
Gary J. Anderson, M.D.
/s/ Stephen J. Andriole, Ph.D. Director March 31, 1999
- ------------------------------
Stephen J. Andriole, Ph.D.
/s/ James W. Dixon Director March 31, 1999
- ------------------------------
James W. Dixon
/s/ Jack L. Messman Director March 31, 1999
- ------------------------------
Jack L. Messman
/s/ Arthur R. Spector Director March 31, 1999
- ------------------------------
Arthur R. Spector
F19
36
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
3.1 Certificate of Incorporation of the Company.*
3.2 By-laws of the Company.*
4.1 Specimen stock certificate representing the Common Stock.***
10.1 1982 Incentive Stock Option Plan.*
10.2 1992 Incentive and Nonstatutory Option Plan.*
10.3 1994 Equity Compensation Plan, as amended.*
10.4 Office Lease Agreement dated as of June 1992, by and between Carter -
Crowley Properties, Inc. and the Company.*
Full Service Distributor Agreement, dated as of June 1, 1991, by and
between the Company and Printronix, Inc.*
Employment Agreement, dated as of November 8, 1994, between the Company
and Bob B. Midyett, Jr.*
Promissory Note, dated February 20, 1995, by William G. Moore, Jr. to
the Company.*
10.8 Administrative Services Agreement between Safeguard Scientifics, Inc.
and the Company.***
10.9 First Amendment to Office Lease Agreement, dated as of June 1992 by and
between Carter-Crowley Properties, Inc. and the Company.****
11.1 Statement regarding computation of earnings per share.#
21.1 Subsidiaries of the Registrant.*
23.1 Consent of PricewaterhouseCoopers LLP.#
24.1 Power of Attorney (included on signature page).
27.1 Financial data schedule. (EDGAR version only).
- ------------
# Filed herewith
* Filed on April 12, 1995 as an exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-91124) and incorporated by reference
herein.
** Filed on June 1, 1995 as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 33-91124) and incorporated
by reference herein.
*** Filed on June 15, 1995 as an exhibit to Amendment No. 2 to the
Company's Registration Statement on Form S-1 (File No. 33-91124) and
incorporated by reference herein.
**** Filed on March 31, 1998 as an exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997.