U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-10416
INFODATA SYSTEMS INC.
----------------------------------------------------
(Exact name of small business issuer as specified in its charter)
VIRGINIA 16-0954695
(State of Incorporation) (I.R.S. Employer Identification No.)
12150 MONUMENT DRIVE, FAIRFAX, VIRGINIA 22033
(Address of registrant's principal executive office)
REGISTRANT'S TELEPHONE NUMBER (703) 934-5205
--------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK-$.03 PAR VALUE
---------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]
The revenues for the fiscal year ending December 31, 1996 are $9,560,000.
As of March 21, 1997, there were 2,299,188 common shares outstanding. As of
March 21, 1997, the aggregate market value (computed by reference to the
average bid and asked prices on such date) of voting common shares held by
non-affiliates was approximately $17,531,000.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III of the Form 10-KSB is incorporated by
reference from the registrant's definitive proxy statement or amendment hereto
which will be filed not later than 120 days after the end of the fiscal year
covered by this report.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
Infodata Systems Inc. (the "Company" or "Infodata") specializes in providing
complex document information systems, which include integration services and
software products, to commercial organizations and governmental agencies,
especially the intelligence community. All of these organizations share a
common problem - managing complex, unstructured information across the
enterprise. Products include the recently announced Virtual File Cabinet (TM)
(VFC(TM)), an Intranet-based software product that establishes a single point
of access and organization for critical documents across the intranet
regardless of the repository or document source; MxImage, an integrated
client/server imaging, cataloging, and storage management system; and
WebINQUIRE(TM), a web browser interface to the Company's mainframe text
retrieval product, INQUIRE(R)/Text. The Company, in conjunction with its own
service offerings, is also a value-added reseller of partner products under
agreements with Adobe Systems, Inc., Documentum, Inc., Lotus Development
Corporation, Netscape Communication Corporation, PC DOCS Inc., Verity, Inc.
and others.
The Company has been a leader in providing electronic document management
solutions. Prior to 1994, substantially all of the Company's business was
derived from the sale, support, and maintenance of INQUIRE/Text, which was the
leading independent full-text retrieval product in the IBM and IBM-compatible
mainframe marketplace.
In 1994, Infodata successfully shifted its focus to providing a broader range
of document management solutions deliverable through client/server technology.
The Company's shift into the client/server arena accelerated with the
acquisition of the business and certain assets of Merex, Inc., (" Merex") in
October, 1995 (see Note 2 to the consolidated financial statements of the
Company). Merex, a document systems solutions and integration firm, brought
experienced management and staff, a diverse client base, and an established
market reputation to Infodata.
Infodata's mainframe experience and recent successes in the client/server
arena, and Merex's project experience in client/server document management
technology, combine to produce an organization uniquely focused on solving
complex information/document management problems. Management believes that
Infodata's desktop-to-mainframe know-how also positions the Company to exploit
the mainframe's resurgence as a server in the client/server environment,
including Intranets and the Internet.
MAJOR NEW INTRANET PRODUCT
The Company's strategy is to develop products for the $700 million* content
management segment of the burgeoning Intranet market. Zona Research projects
the Intranet market will reach $8 billion in 1998. As DataPro reported, "One
of the biggest challenges facing global organizations has been the fact that
their critical assets are often contained in documents stored in disparate and
incompatible systems. Accessing and sharing that information among different
departments across the enterprise has been a nightmare. Infodata now has a
viable solution based on industry standards, including HTTP, Java, ODMA, and
CORBA."
*According to CAP Ventures, a leading Internet marketing and research firm.
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<PAGE>
VFC is a cost-effective, Web-based system for accessing, organizing, and
sharing information across the corporate Intranet regardless of the repository
or document source. VFC was announced in January 1997. Industry analyst and
press reviews have been overwhelmingly favorable. Endorsements from Lotus, PC
DOCS Inc., Verity Inc., and Adobe Systems, leaders in groupware, document
management, full text retrieval, and desktop publishing, respectively, are
helping to establish VFC as a de facto standard for sharing documents across
an enterprise.
Infodata's strategy is twofold: First, the Company plans to establish an early
customer base by both expanding the direct sales force and by creating VAR
(Value Added Reseller) and OEM (Original Equipment Manufacturer)
relationships. Second, Infodata is committed to maintaining its technological
leadership with the VFC family of products. To implement this strategy,
Infodata will be increasing marketing and software development expenses during
1997. Significant marketing expenses will be incurred for public relations,
seminars, direct mail, telemarketing, and trade shows.
Software development expenses increased in 1996 to $816,000 as compared to
$187,000 in 1995, largely due to VFC development. These expenses will continue
to rise in 1997 as the Company implements additional VFC functionality for
future versions.
While the Company believes it has sufficient capital to launch VFC, it is
exploring additional funding in the future to build upon the expected success
of VFC.
SERVICES AND CORE BUSINESS
The Company divides its services and core business as follows:
Client/Server Consulting Services - this group of professionals provides needs
analyses, requirements definition, design, development, and support services
for document systems solutions contracts. It markets to commercial and Federal
(non-intelligence community) clients. The Company is also a reseller of a
variety of third party products which may be included in solutions. These
include products from Documentum, Verity, PC DOCS, Adobe, Netscape, and Lotus
Notes. Sales of both services and third party products in this segment of the
Company's business grew over 200% in 1996 over 1995, and represented 38% of
the Company's 1996 revenues, up from 16% in 1995.
Intelligence Systems - this group provides similar services to Consulting
Services, but to agencies of the U.S. Government which are part of the
intelligence community. The Company's software engineers in this business
segment hold high-level security clearances and often work on-site at secure
government facilities. This group works with similar third party software
products as well as the Company's INQUIRE/Text system. Sales of services and
third party products to this segment grew 22% in 1996 over 1995, and
represented 30% of 1996 revenues, down slightly from 33% in 1995. In the last
two years, the Company has secured significant, competitively awarded
contracts for client/server document management solutions to different
components of the intelligence community.
INQUIRE Systems - this segment consists of sales of INQUIRE/Text upgrades,
optional features, services, and maintenance. INQUIRE maintenance represented
25% of the Company's business in 1996, down from 40%. A decline is expected
each year as customers either migrate off mainframe platforms altogether, or
opt not to sign up for maintenance contracts because they plan to make no
enhancements to existing applications, even though the applications will
continue to operate. Each year, some customers who previously opted out of
maintenance contracts return, as the applications in fact need updating (for
example, for Year 2000 compliance). In late 1996, the Company introduced
WebINQUIRETM, a web browser interface to INQUIRE/Text, with initial sales
recorded in the first quarter of 1997. Although WebINQUIRE and other options
are not expected to amount to a significant percentage of the Company's
revenues, they carry a high gross margin.
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<PAGE>
Training - in 1996, the Company established a training division to offer
customer training initially in the Adobe Acrobat and Verity Topic products. In
1997, the Company added training for Adobe's Framemaker product. Management
expects that, in addition, VFC training has potential to become an important
contributor to training revenues over the next several years.
Infodata has a high rate of repeat business which management believes is a
result of the high degree of customer satisfaction with its services and
solutions. The Company's services, training, and product businesses provide a
base of business which will complement the VFC product sales segment.
Developing custom solutions for customers keeps our technical professionals
grounded in the real world, facilitating the conception and development of new
products such as VFC.
Forward-looking statements contained in the Form 10-KSB relating to product
development and revenue and net income growth are based on current
expectations that involve uncertainties and risks associated with new products
including, but not limited to, market conditions, successful product
development and acceptance, the introduction of competitive products, economic
conditions, and the timing of orders for products. The Company's actual
results may differ materially from current expectations.
The Company employed a total of 70 full time employees and one part time
employee at December 31, 1996.
Infodata's principal offices are located at 12150 Monument Drive, Fairfax, VA
22033. Its telephone number is 703-934-5205 and fax number is 703-934-7154.
Infodata's Internet e-mail address is [email protected] and the Company
maintains a World Wide Web home page at http://www.infodata.com.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 25,000 square feet of professional office
space located at its Headquarters Office in Fairfax, Virginia (see Note 8 to
the Consolidated Financial Statements contained elsewhere in this report).
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 4A. EXECUTIVE OFFICERS
The following information relates to Executive Officers of the Registrant as
of March 21, 1997:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Harry Kaplowitz 53 President and Director
Robert J. Loane 58 Senior Vice President
Richard M. Tworek 40 Executive Vice President and Director
</TABLE>
Mr. Kaplowitz is a founder of the Company and was elected Vice President in
1973, Executive Vice President and Director in 1980. In 1989, he was promoted
to President and Chief Operating Officer of the Company's INQUIRE Group. In
1990, he was named President of the Company. From January 1991 to January
1993, he served as Chairman of the Board of Directors of the Company.
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<PAGE>
Dr. Loane joined the Company in 1968, was elected Vice President in 1978 and
Senior Vice President in 1980. He is the Company's Chief Scientist.
Mr. Tworek joined the Company in October, 1995 and was elected Senior Vice
President. In 1996, he was named Executive Vice President and Director of the
Company. He was the founder and president of Merex, Inc. Since 1989, Merex
designed and implemented large, complex client/server document systems and
offered its own products as part of the solution.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Infodata's Common Stock has been quoted on the NASDAQ SmallCap Market under
the symbol "INFD" since September 16, 1994. The Company's Common Stock was
previously traded on the NASDAQ National Market. Market makers of the
Company's Common Stock include Herzog, Heine; Mayer and Schweizter Inc.; and
Patterson Travis Inc.
The table below shows the range of closing bid prices for the Common Stock for
the quarters indicated.
<TABLE>
<CAPTION>
1996 1995
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $3.27 $1.93 $2.57 $1.29
Second Quarter 7.87 2.81 1.82 1.45
Third Quarter 10.12 4.25 2.57 1.39
Fourth Quarter 12.62 4.62 2.03 1.50
</TABLE>
The market quotations reflected above are inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.
The Company has not paid cash dividends on its Common Stock and presently has
no intention to do so. It believes that execution of its operating plan
requires the Company to retain available funds to support future business
activities. Payment of cash dividends on Common Stock in the future will be
dependent upon the earnings and financial condition of the Company, and other
factors which the Board of Directors may deem appropriate. See Note 7 to the
1996 Consolidated Financial Statements, contained elsewhere in this report,
for information relating to cash dividends pertaining to Preferred Stock.
As of March 21, 1997, there were approximately 639 shareholders of record.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
SUMMARY
Over the last three years, the Company's business shifted from sales of its
proprietary mainframe software product, INQUIRE(R)/Text, to providing document
management and access solutions in the client/server and more recently the
intranet environment. Client/server and intranet consulting revenues increased
from 23% of the Company's revenues in 1995 to 51% in 1996. During 1996, the
Company began development of a family of intranet products called Virtual File
Cabinet(TM) (VFC(TM)) and incurred substantial research and development
expenses.
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<PAGE>
REVENUES
Total revenues increased $2,511,000 (36%) for the year ended December 31, 1996
compared to the prior year. Client/server related revenues increased
$3,270,000 (204%) over the prior year, in part reflecting a full year of
revenues from Merex, Inc. ("Merex"), which was acquired by the Company in
October 1995. Revenues from third party client/server related product sales
increased $898,000 (357%) over the prior year as well. INQUIRE/Text related
revenues decreased by $773,000 (14%) from the prior year, with the bulk of the
decrease attributable to the decline in maintenance contracts.
The Company expects that INQUIRE/Text related revenues will continue to
decline over time as the product ages.
GROSS PROFIT
Gross profit increased to $4,103,000 (43% margin ) from $2,883,000 (41%
margin) at December 31, 1996 and 1995, respectively. The increase in the gross
profit margin was due primarily to increased commercial client/server
consulting during 1996, offset in part by the decline in high margin
INQUIRE/Text maintenance revenues.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense was $816,000 and $187,000 for the years ended
December 31, 1996 and 1995, respectively. The principal cause of the increase
was the development of the Company's new VFC software product announced in
January 1997. The Company expects research and development expense will
increase in 1997 and beyond as new products and product enhancements are
developed.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $2,869,000 and $2,657,000
for the years ended December 31, 1996 and 1995, respectively. The increase was
due primarily to an increase in the sales staff for the planned release of
VFC. The Company expects sales and marketing expenses to increase
significantly in 1997 as various releases of VFC are launched.
INTEREST INCOME AND EXPENSE
Interest income was $96,000 and $119,000 for the years ended December 31, 1996
and 1995, respectively. The decrease was primarily due to a lower average
market yield on cash and cash equivalents in 1996 compared to 1995. The
company invested only in short term, highly liquid money market instruments.
Interest expense decreased to $11,000 in 1996 from $24,000 in the prior year.
The expense is primarily related to capital equipment leases which expire
through 1998.
NET INCOME
Net income was $503,000 and $131,000 for the years ended December 31, 1996 and
1995, respectively. The increase in earnings was due to the factors discussed
above. The Company expects substantial but sequentially declining operating
losses in the first three quarters of 1997 as a result of significant
increases in both research and development expense and sales and marketing
expense, as the new Virtual File Cabinet family of products is released. R&D
expenses will increase because succeeding versions of VFC and related products
will be introduced to maintain technological leadership. Sales and marketing
expenses will increase as the direct sales force is deployed to obtain initial
sales, and as reseller channels are established.
As a result of preferred stock dividends of $58,000 and $120,000 paid in 1996
and 1995, respectively, net income available to holders of common stock
amounted to $445,000, or $.20 per share ($.18 fully diluted), and $11,000, or
$.01 per share, respectively. During 1996, all of the outstanding preferred
stock was converted into common stock and, therefore, no preferred stock
dividends will be paid in 1997.
-6-
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants (the "AICPA") recently
approved for exposure a draft Statement of Position (the "Exposure Draft")
that would supersede SOP 91-1, Software Revenue Recognition. The Exposure
Draft provides additional guidance with respect to multiple elements, returns,
exchanges, and platform transfer rights, resellers, services, funded
software-development arrangements, and contract accounting. If approved, the
Exposure Draft would need to be implemented for years beginning after December
15, 1996. The Company believes that the proposed changes will not have a
material adverse financial impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operating activities of $1,140,000 in
1996 compared to $208,000 for the prior year. The increase was due to the
increase in net income discussed earlier and a decrease in accounts
receivables at December 31, 1996.
Cash used in investing activities was $1,396,000 for the year ended December
31, 1996 compared to $87,000 for the prior year. The primary cause for the
increase was the purchase of short-term investments and purchase of fixed
assets, consisting primarily of computers and computer equipment. The Company
had no commitments for material capital expenditures as of December 31, 1996.
Cash provided by financing activities was $46,000 for the year ended December
31, 1996 compared to cash used in financing activities of $370,000 for the
prior year. The primary source of cash provided by financing activities in
1996 was from issuance of common stock under the Company's stock option plan.
Working capital was $1,612,000 and $1,220,000 at December 31, 1996 and 1995,
respectively. The current ratio increased to 1.70 from 1.52 over the same
period. The Company's long term liabilities at December 31, 1996 were $52,000
relating primarily to capital leases.
Cash, cash equivalents and short-term investments totaled $2,213,000 at
December 31, 1996 compared to $1,509,000 for the prior year period. The
Company believes cash and cash equivalents on hand and cash flows from
operating activities will be sufficient to fund operations for the next twelve
months. In addition, the Company maintains a line of credit with Merrill Lynch
Business Financial Services, Inc. for up to $1,000,000 based upon eligible
receivables at a rate which approximated prime at December 31, 1996. No
borrowings were made in 1996 and no balance is currently outstanding.
In the longer term, the Company believes it has adequate financial flexibility
to increase its borrowing capacity and access the financial markets to
accommodate its growth strategy.
On May 17, 1996, the Company distributed a one-for-six stock dividend on its
common stock. On August 26, 1996, it effected a two-for-one stock split in the
form of a 100 percent stock dividend on its common stock. During 1996, all of
the Company's outstanding shares of preferred stock were converted into common
stock.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements required hereunder are listed under Item
13(a) below.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Pursuant to General Instruction E(3) of Form 10-KSB, the information called
for by this Item regarding directors is hereby incorporated by reference from
the Company's definitive proxy statement or amendment hereto to be filed
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report. Information regarding the Company's executive
officers is set forth under Item 4a of this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Pursuant to General Instruction E(3) of Form 10-KSB, the information called
for by this Item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 11. SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction E(3) of Form 10-KSB, the information called
for by this Item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction E(3) of Form 10-KSB, the information called
for by this Item is hereby incorporated by reference from the Company's
definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS. The financial statements and exhibits required by
Item 7 and this Item 13 of Form 10-KSB are listed below.
<TABLE>
Index to Consolidated Financial Statements:
PAGE
----
<S> <C>
Report of Independent Public Accountants 12
Consolidated Statements of Operations - Each of the 13
two years in the period ended December 31, 1996 and 1995
Consolidated Balance Sheets - December 31, 1996 and 1995 14-15
Consolidated Statements of Shareholders' Equity - Each of 16
the two years ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows - Each of the two 17
years in the period ended December 31, 1996 and 1995
Notes to Consolidated Financial Statements - December 31, 1996 18-27
and 1995
</TABLE>
(b) Reports on Form 8-K.
None.
-8-
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
3(a) Certificate of Incorporation (incorporated herein by reference
to exhibit A to the Registrant's proxy statement dated April
10, 1995)
(b) By-Laws (incorporated herein by reference to exhibit B to the
registrant's proxy statement dated April 10, 1995)
10(a) Executive Separation Agreement between the Registrant and Harry
Kaplowitz (incorporated herein by reference to exhibit 10(a) to
the Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1993)
(b) Executive Separation Agreement between the Registrant and
Robert Loane (incorporated herein by reference to exhibit 10(b)
to the Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1993)
(c) Incentive Stock Option Plan (incorporated herein by reference
to exhibit 10(d) to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1993)
(d) Non-Qualified Stock Option Plan (incorporated herein by
reference to exhibit 10(z) to the registrant's annual report on
Form 10-KSB for the fiscal year ended December 31, 1994)
(e) Stock Warrant Purchase Plan (incorporated herein by reference
to exhibit 10(cc) to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1994)
(f) Office Building Lease, dated April 12, 1993, for One Monument
Drive (incorporated herein by reference to exhibit 10(dd) to
the registrant's annual report on Form 10-KSB for the fiscal
year ended December 31, 1994)
(g) Lease for Data Processing Services Agreement, dated July 29,
1994, between the Registrant and Financial Technologies, Inc.
relating to data processing services (incorporated herein by
reference to exhibit 10(ee) to the Registrant's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1994)
(h) Commercial Note dated February 23, 1995 between the Registrant
and Crestar Bank (incorporated herein by reference to exhibit
10(ff) to the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994)
(i) 1995 Stock Option Plan (incorporated herein by reference to
exhibit D to the Registrant's proxy statement dated April 10,
1995)
(j) Employment Agreement between Registrant and Richard M. Tworek
dated October 11, 1995
(k) Asset Purchase Agreement and Plan of Reorganization, dated as
of October 6, 1995, among Infodata Systems Inc., Merex, Inc.,
Richard M. Tworek, Mary Margaret Styer and Andrew M. Fregly
(incorporated herein by reference to the Registrant's Form 8-K
dated October 11, 1995)
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<PAGE>
21 Subsidiaries of the Registrant (incorporated herein by
reference to exhibit 21 to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1995)
27 Financial Data Schedule
</TABLE>
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<PAGE>
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.
INFODATA SYSTEMS INC.
BY: /s/HARRY KAPLOWITZ Date: March 28, 1997
------------------
Harry Kaplowitz
President
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
Richard T. Bueschel Chairman of the Board March 28, 1997
- ---------------------
Richard T. Bueschel
Laurence C. Glazer Director March 28, 1997
- ---------------------
Laurence C. Glazer
Harry Kaplowitz President and Director March 28, 1997
- ---------------------
Harry Kaplowitz
Robert M. Leopold Director March 28, 1997
- ---------------------
Robert M. Leopold
Isaac Pollak Director March 28, 1997
- ---------------------
Isaac Pollak
Millard Pryor Director March 28, 1997
- ---------------------
Millard Pryor
Richard Tworek Executive VP and Director March 28, 1997
- ---------------------
Richard Tworek
</TABLE>
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<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Infodata Systems Inc.:
We have audited the accompanying consolidated balance sheets of Infodata
Systems Inc. (a Virginia corporation) and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Infodata Systems Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Washington, D.C. Arthur Andersen LLP
March 5, 1997
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<PAGE>
<TABLE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
Revenues............................................ $9,560 $7,049
Cost of revenues.................................... 5,457 4,166
------- -------
Gross profit................................... 4,103 2,883
------- -------
Operating expenses:
Research and development.......................... 816 187
Selling, general, and administrative.............. 2,869 2,657
------- -------
3,685 2,844
Operating income............................... 418 39
------- -------
Interest income................................... 96 119
Interest expense.................................. (11) (24)
------- -------
Income before income taxes........................ 503 134
Provision for income taxes........................ -- 3
------- -------
Net income........................................ $ 503 $ 131
======= =======
Preferred dividends................................ 58 120
------- -------
Net income available to common shareholders........ $ 445 $ 11
======= =======
Per share:
Net income available to common shareholders per
common and equivalent share-
Primary....................................... $ .20 $ .01
======= =======
Fully Diluted................................. $ .18 $ .01
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
<TABLE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<CAPTION>
ASSETS
DECEMBER 31,
1996 1995
------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $1,266 $1,476
Short-term investments.................................... 947 33
Accounts receivable, net of allowance of $80 in 1996
and $30 in 1995.......................................... 1,522 1,901
Prepaid royalties......................................... -- 18
Other current assets...................................... 185 146
------- -------
Total current assets................................ 3,920 3,574
------- -------
Property and equipment, at cost:
Furniture and equipment................................... 2,373 2,046
Less accumulated depreciation and amortization............ (1,897) (1,633)
------- -------
476 413
Goodwill, net of amortization of $31 in 1996 and $6 in 1995.... 274 264
Other assets.................................................... 137 68
Software development costs, net of accumulated
amortization of $2,052 in 1996 and $2,010 in 1995 (Note 3)..... 84 126
------- -------
Total assets.................................................... $4,891 $4,445
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
-14-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
DECEMBER 31,
1996 1995
------ ------
<S> <C> <C>
Current liabilities:
Current portion of capital lease obligations................ $ 46 $ 106
Current portion of note payable............................. -- 2
Accounts payable............................................ 327 335
Accrued expenses............................................ 823 677
Deferred revenue............................................ 1,079 1,171
Preferred dividend payable.................................. -- 30
Current portion of deferred rent............................ 33 33
------- -------
Total current liabilities.............................. 2,308 2,354
------- -------
Capital lease obligations....................................... 33 82
Deferred revenue................................................ 75 192
Deferred rent................................................... 19 52
------- -------
Total liabilities...................................... 2,435 2,680
------- -------
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, $1.00 par value, 500,000
shares authorized; none and 131,500 issued
and outstanding ($0 and $1,523 involuntary
liquidation preference) in 1996 and 1995,
respectively............................................. -- 132
Common stock, $.03 par value, 6,666,666
shares authorized; 2,277,865 and 1,465,336
shares issued and outstanding in 1996 and
1995, respectively....................................... 68 44
Additional paid-in capital............................... 9,055 8,056
Accumulated deficit...................................... (6,667) (6,467)
------- -------
Total shareholders' equity...................................... 2,456 1,765
------- -------
Total liabilities and shareholders' equity...................... $4,891 $4,445
</TABLE>
The accompanying notes are an integral part of these statements.
-15-
<PAGE>
<TABLE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<CAPTION>
Additional
Preferred Stock Common Stock Paid-In Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994......... 133,500 $ 134 1,204,748 $37 $7,768 $(6,478) $1,461
Conversion of preferred stock
for common stock................... (2,000) (2) 5,146 -- 2 -- --
Issuance of shares for business
acquisition........................ -- -- 210,000 6 230 -- 236
Issuance of shares for services.... -- -- 8,000 -- 9 -- 9
Exercise of stock options.......... -- -- 37,442 1 47 -- 48
Dividends on preferred stock....... -- -- -- -- -- (120) (120)
Net income......................... -- -- -- -- -- 131 131
--------- ----- ---------- ---- ------- -------- --------
Balance at December 31, 1995....... 131,500 132 1,465,336 44 8,056 (6,467) 1,765
1:6 Common stock dividend.......... 241,063 7 636 (643) --
Redemption of preferred shares for
common............................. (131,500) (132) 394,614 12 120 --
Fractional share redemption........ -- -- -- -- -- (2) (2)
Exercise of stock options.......... -- -- 176,852 5 243 -- 248
Dividends on preferred stock....... -- -- -- -- -- (58) (58)
Net income......................... -- -- -- -- -- 503 503
--------- ----- ---------- ---- ------- -------- --------
Balance at December 31, 1996....... -- $ -- 2,277,865 $68 $9,055 $(6,667) $2,456
--------- ----- ---------- ---- ------- ------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
-16-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
INFODATA SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 503 $ 131
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation and amortization................................................... 264 275
Software amortization........................................................... 42 373
Goodwill and other intangible amortization...................................... 48 10
Cancellation of note payable.................................................... -- (85)
Write-down of leased assets..................................................... -- 20
Changes in operating assets and liabilities:
Accounts receivable........................................................ 379 (464)
Prepaid royalties and other current assets................................. (21) 124
Accounts payable........................................................... (8) 94
Accrued expenses........................................................... 175 (12)
Deferred revenue........................................................... (209) (226)
Deferred rent.............................................................. (33) (32)
-------- --------
Net cash provided by operating activities............................. 1,140 208
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs capitalized.......................................... -- (3)
Purchases of property and equipment, net........................................ (357) (84)
Business acquisition............................................................ (23) (47)
Loan to officer ................................................................ (70) --
Purchases of short-term investments............................................. (943) --
Proceeds from maturity of short-term investments................................ 29 47
Other........................................................................... (32) --
-------- --------
Net cash used in investing activities................................. (1,396) (87)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations........................................... (108) (122)
Payments of notes payable....................................................... (2) (21)
Retirement of acquisition-related note payable.................................. -- (155)
Preferred stock dividends....................................................... (88) (120)
Issuance of common stock........................................................ 244 48
-------- --------
Net cash provided by (used in) financing activities................... 46 (370)
-------- --------
Net decrease in cash and cash equivalents.............................................. (210) (249)
Cash and cash equivalents at beginning of year......................................... $ 1,476 $ 1,725
-------- --------
Cash and cash equivalents at end of year............................................... $ 1,266 $ 1,476
======== ========
</TABLE>
The accompanying notes are an integral part of these statements
-17-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Infodata Systems Inc. and its wholly owned subsidiaries, Infodata Systems
International Inc. and Infodata Research and Development Corporation. These
entities are collectively referred to herein as the "Company". All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to 1995 balances to conform to the
current-year presentation.
NATURE OF BUSINESS
The Company provides complete Electronic Document Management System ("EDMS")
solutions through the sale of products and software integration services.
Sales to the U.S. government represent a significant portion of the Company's
revenue.
RISKS AND UNCERTAINTIES
The Company is in the process of releasing a new proprietary software product,
the Virtual File Cabinet ("VFC"). In doing so, the Company has incurred
significant costs related to this product and will continue to incur these
costs in the future. Although management expects to generate revenues on this
product in the future, no sales were made during 1996. Also, there can be no
assurance of VFC revenues in the future. Management has identified potential
contingency plans to mitigate the Company's future liquidity risk and believes
that such plans would be effective.
The Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities, the disclosure of contingent liabilities,
and the reporting of revenues and expenses to prepare these financial
statements in conformity with Generally Accepted Accounting Principles. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Software Licenses--The Company recognizes revenue from sales of software
licenses upon delivery of the software product to the customer or upon
customer acceptance if a trial period exists.
Post Contract Customer Support and Software Services--Revenues from post
contract support, including revenue bundled with the initial license fee, are
recognized ratably over the period customer support services are provided.
Software services revenue is recognized as performed.
Consulting and Professional Service Contracts--Revenues from consulting and
professional service contracts are recognized on the percentage-of-completion
method for fixed-price contracts and on the basis of hours incurred at
contract rates for time-and-material contracts. Revenues from cost
reimbursement contracts are recognized as costs are incurred.
-18-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
The American Institute of Certified Public Accountants (the "AICPA") recently
approved for exposure a draft Statement of Position (the "Exposure Draft")
that would supersede SOP 91-1, Software Revenue Recognition. The Exposure
Draft provides additional guidance with respect to multiple elements, returns,
exchanges, and platform transfer rights; resellers; services; funded
software-development arrangements; and contract accounting. If approved, the
Exposure Draft would need to be implemented for years beginning after December
15, 1996. The Company believes that the proposed changes will not have a
material adverse financial impact on the Company.
Revenues from foreign customers totaled approximately $361,000 and $594,000
for the years ended December 31, 1996 and 1995, respectively.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments with an original maturity of 90 days or less at
time of purchase are considered to be cash equivalents. At December 31, 1996
and 1995, the Company had $768,000 and $1,269,000, respectively, of cash
equivalents invested in commercial paper. Short-term investments available for
sale at December 31, 1996, totaled approximately $943,000 and consisted of
commercial paper and U.S. Treasury Bills with maturities greater than 90 days
for which carrying value approximated market value. There were no similar
short-term investments at December 31, 1995. Available-for-sale securities are
carried at fair value, with unrealized gains and losses reported as a separate
component of stockholders' equity. Realized gains and losses and declines in
value judged to be other than temporary on available-for-sale securities are
included in other income.
Additionally, at December 31, 1996 and 1995, certificates of deposit included
in short term investments totaled approximately $4,000 and $33,000,
respectively, which were restricted pursuant to certain capital lease
obligations.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest totaled $11,000 and $22,000 in 1996 and 1995,
respectively. Cash payments for income taxes totaled $4,000 and $7,000 in 1996
and 1995, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is depreciated using the straight-line method.
Computers and related equipment are depreciated over three years and furniture
and equipment are depreciated over six years. Leasehold improvements are
amortized over the shorter of the useful life of the asset or the lease term.
GOODWILL
Goodwill is amortized using the straight-line method over a life of ten years.
On a periodic basis, the expected future undiscounted cash flows are compared
with the carrying value of goodwill to test for potential impairment. The
amount of goodwill impairment, if any, would be measured based on the
projected discounted cash flows using a discount rate reflecting the Company's
average cost of funds. As of December 31, 1996, the Company does not believe
there has been an impairment of goodwill.
-19-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
Additional goodwill incurred in 1996 totaled approximately $42,000, which
resulted from final adjustments relating to the Merex acquisition in October
1995.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
NET INCOME PER COMMON SHARE
For the years ended December 31, 1996 and 1995, the weighted-average number of
common and common equivalent shares used in the calculation of primary net
income per share was approximately 2,162,000 and 1,694,000. On a fully diluted
basis for the year ended December 31, 1996, the weighted-average number of
common and common equivalent shares was approximately 2,718,000. Net income
for the years ended December 31, 1996 and 1995, has been decreased for
preferred stock dividends of $58,000 and $120,000, respectively, to arrive at
net income available to common shareholders.
SIGNIFICANT CUSTOMERS
Sales to U.S. government agencies totaled approximately $4,255,000 and
$2,586,000 in 1996 and 1995, respectively. As of December 31, 1996 and 1995,
accounts receivable due from U.S. government agencies amounted to
approximately $655,000 and $678,000, respectively.
NOTE 2. BUSINESS ACQUISITION
On October 11, 1995, the Company consummated its purchase of substantially all
the assets and the assumption of certain liabilities of Merex, Inc. ("Merex"),
in consideration for 210,000 shares of the Company's common stock (restricted
as to sale) with a fair value estimated by the Company's Board of Directors at
$1.125 per share. The final acquisition cost was approximately $361,000,
including direct costs of acquisition. Approximately $60,000 was allocated to
identified acquired intangibles, $312,000 to goodwill, including purchase
accounting adjustments of approximately $25,000 relating to termination of the
Merex office lease, and $35,000 relating to SEC registration costs the company
is obligated to pay on behalf of the former Merex shareholders. Merex was
engaged in the business of marketing and delivering of electronic document
management solutions to businesses and U.S. government agencies.
The unaudited pro forma financial information presented below reflects the
acquisition of Merex as if the acquisition had occurred on January 1, 1995.
These results are not necessarily indicative of future operating results or of
what would have occurred had the acquisitions been consummated at that time.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
(Unaudited)
<S> <C>
Revenue...................................... $ 8,888
Net income................................... 89
Less - Preferred dividend.................... (120)
Net loss available to common shareholders.... (31)
Net loss per share........................... $ (0.02)
</TABLE>
-20-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
NOTE 3. SOFTWARE DEVELOPMENT COSTS
Capitalization of software development costs begins upon the establishment of
technological feasibility. Capitalization ceases when the products are
available for general release to customers. The establishment of technological
feasibility and the continuing assessment of recoverability of capitalized
software development costs require considerable judgment by management with
respect to certain external factors, including, but not limited to,
anticipated future gross revenue, estimated economic life, and changes in
software and hardware technologies. Amortization expense is determined on an
individual product basis and is computed as the greater of the amount
calculated on a revenue basis or straight-line basis over the economic life of
the product, generally three to five years. Amortization of software
development costs is included in cost of revenues in the accompanying
consolidated statements of operations.
Capitalized costs totaled $0 and $3,000 for the years ended December 31, 1996
and 1995, respectively.
Periodically, the Company reviews the estimated lives of and amounts assigned
to software development costs. In light of changing technology, the Company
makes revisions to estimated lives and adjusts amounts assigned as
appropriate. On December 31, 1995, the Company extended the remaining
amortization period to expire in 1998 to reflect the continued longevity of
the INQUIRE product as reflected by the substantial revenue stream associated
with maintenance renewals. The impact of such revision in estimated remaining
useful life increased net income by approximately $22,000 in 1996.
NOTE 4. INCOME TAXES
At December 31, 1996, the Company had approximately $5,347,000 in net
operating loss carryforwards for income tax reporting purposes. The operating
loss carryforwards expire in varying amounts from 1998 through 2011. In
addition, at December 31, 1996, the Company had $70,000 in research and
development tax credit carryforwards expiring in 1997 and $55,000 in
investment tax credit carryforwards expiring in 1997 through 2000.
The actual income tax expense attributable to pretax income for the year ended
December 31, 1996, and December 31, 1995, respectively, differed from the
amount computed by applying the Federal statutory rate of 34 percent as a
result of the following:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Tax at statutory rate........................... $ 171,000 $ 46,000
Benefit of operating loss carryforwards......... -- (55,000)
Benefit of stock options exercised.............. (192,000) --
Nondeductible amortization...................... 16,000 3,000
Miscellaneous items............................. 5,000 6,000
Alternative Minimum Tax......................... -- 3,000
---------- ----------
$ 0 $ 3,000
========== ==========
</TABLE>
The 1995 provision for income taxes relates solely to the currently payable
Federal alternative minimum tax.
-21-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
The significant components of net deferred tax (liabilities) assets are as
follows as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Deferred tax liabilities:
Net software development costs..................... $ -- $ (48,000)
(32,000)
Other.............................................. -- (10,000)
----------- -----------
(32,000) (58,000)
Deferred tax assets:
Net operating loss carryforward.................... 2,030,000 1,974,000
Investment tax credit and research and
development tax credits carry forward............ 125,000 207,000
Other.............................................. 92,000 55,000
----------- -----------
2,247,000 2,236,000
Net deferred tax asset before valuation allowance..... 2,215,000 2,178,000
Valuation allowance................................... (2,215,000) (2,178,000)
----------- -----------
Net deferred tax asset................................ $ -- $ --
=========== ===========
</TABLE>
Under the provisions of SFAS No. 109, the tax effect of the net operating loss
and investment tax credit carryforwards, together with net temporary
differences, represents a net deferred tax asset against which management has
fully reserved due to the uncertainty of future taxable income. The
carryforwards will be benefited for financial reporting purposes when utilized
to offset future taxable income.
NOTE 5. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments are defined as cash, evidence of an ownership interest
in an entity, or a contract that imposes an obligation to deliver cash or
other financial instruments to a second party. The carrying amounts of current
assets and current liabilities approximate fair value due to the short
maturity of these instruments.
NOTE 6. NOTES PAYABLE
During 1993, the Company entered into an agreement with Open Text Corporation
("OTC"), whereby the Company acted as a reseller of OTC's text retrieval
software. Under the terms of the agreement, the Company incurred a note
payable for certain non-refundable royalties. Due to the Company's concern
with OTC's product performance and timely delivery of new releases and the
attendant customer dissatisfaction, the Company terminated the reseller
agreement during the second quarter of 1995 and negotiated cancellation of the
remaining balance of the note during the third quarter of 1995.
In November 1996, the Company entered into a working capital line of credit
with Merrill Lynch Business Financial Services Inc. This loan facility
provides the Company with up to a $1,000,000 line of credit at a
-22-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
per annum rate equal to the sum of 2.9 percent plus the 30-day commercial
paper rate. Currently, this per annum rate approximates prime. Advances on the
facility are based on eligible billed accounts receivable less than 90 days
old. The facility expires in November 1997. As of December 31, 1996, the
Company has made no borrowings under this line of credit.
NOTE 7. SHAREHOLDERS' EQUITY
PREFERRED STOCK
During 1996, all the outstanding shares of preferred stock were converted into
common stock, and all dividends in arrears were satisfied by issuance of an
equivalent number of common shares.
At December 31, 1995, 131,500 shares of convertible preferred stock were
outstanding. The preferred shares had the following provisions:
o Cumulative, preferential dividends paid quarterly if declared by the
Board of Directors at an annual rate of 9 percent ($.90 per share).
o The option to convert one share of preferred stock for 1.111 common
shares.
o Full voting rights, to the extent of common shares that would be
held upon conversion. Pre-emptive rights relating to future stock
offerings.
o Preference in the distribution of corporate assets up to $10.00 per
share plus cumulative unpaid dividends.
o All the preferred stock was redeemable at the option of the Company
at a price of $10.00 per share.
Dividends on preferred stock were paid upon declaration by the Board of
Directors. Cash dividends of $58,000 ($0.45 per preferred share) and $120,000
($0.90 per preferred share) were declared during 1996 and 1995, respectively.
OPTIONS AND WARRANTS
In April 1995, the Company's shareholders approved the adoption of the 1995
Stock Option Plan (the "1995 Plan") which consolidates and is the successor to
the Company's Incentive Stock Option Plan approved by shareholders in 1991 and
the Non-Qualified Stock Option Plan approved in 1992 (together, the
"Predecessor Plans"). Options have been granted to employees as well as to
members of the Board of Directors. The 1995 Plan also provides for the
automatic granting of a fixed number of options each year to members of the
Compensation Committee of the Company's Board of Directors and increases the
total number of shares authorized for issuance upon the exercise of options
from the 777,779 shares previously authorized to 1,011,000 shares.
Under the 1995 Plan, options may be granted at prices not less than 100
percent of the fair market value of the common stock at the date of grant.
Options vest over varying years of service. Vested options are exercisable
until the earlier of ten years from the date of grant or three months after
termination of employment for options granted under the Predecessor Plans,
five years from the date of grant or one month after termination of employment
for options issued under the 1995 Plan. At December 31, 1996, options to
purchase 397,000 shares of common stock were exercisable.
-23-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
As of December 31, 1996, warrants remained outstanding for the right to
purchase 15,556 shares of common stock issued to certain former members of the
Board of Directors and to certain non-affiliated parties.
These warrants, which are exercisable for seven years from date of grant, are
exercisable upon grant. Warrants to purchase an additional 7,777 shares of
common stock are authorized for future issuance.
As of December 31, 1996, the Company has reserved a total of approximately
1,042,000 shares of common stock for future issuance upon the exercise of
stock options and exercise of stock warrants.
A summary of option and warrant activity under the 1995 Plan and the
Predecessor Plans is presented below:
<TABLE>
<CAPTION>
NUMBER OF EQUIVALENT SHARES
INCENTIVE NON-QUALIFIED WARRANTS
STOCK STOCK
OPTIONS OPTIONS
<S> <C> <C> <C>
Outstanding at December 31, 1994 526,146 87,112 15,556
Granted.................................... 29,166 14,000 --
Exercised.................................. (43,681) -- --
Expired or canceled........................ (142,770) -- --
--------- --------- --------
Outstanding at December 31, 1995........... 368,861 101,112 15,556
Granted.................................... 246,655 92,998 --
Exercised.................................. (52,322) (124,530) --
Expired or canceled........................ (13,196) -- --
--------- --------- --------
Outstanding at December 31, 1996 549,998 69,580 15,556
========= ========= ========
Exercise price............................. $1.08 to $7.87 $1.31 to $5.03 $2.17 to $2.73
</TABLE>
The Company adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation", effective for the Company's December 31, 1996,
financial statements. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, compensation cost
has been recognized for its stock plans based on the intrinsic value of the
stock option at date of grant (i.e., the difference between the exercise price
and the fair value of the Company's stock). Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method of SFAS No. 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income as reported................................$ 503 $ 131
Pro forma compensation expense........................ 134 3
Pro forma net income..................................$ 369 $ 128
</TABLE>
<PAGE>
-24-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
<TABLE>
Per share:
Net income available to common shareholders per
common and equivalent share:
<S> <C> <C>
Primary, as reported.......................... $ .20 $ .01
Primary, pro forma............................ $ .14 $ .01
Fully diluted, as reported.................... $ .18 $ .01
Fully diluted, pro forma... .................. $ .13 $ .01
</TABLE>
The weighted average fair value of options granted in 1996 and 1995 was $4.31
and $1.61, respectively. The fair value of each option is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1996 and 1995: no dividend yield, expected
volatility of 63.0 percent, risk-free interest rate of 6.21 percent and
expected life of five years.
Because SFAS No. 123 has not been applied to options granted prior to January
1, 1995, the resulting pro forma compensation cost may not be representative
of that to be expected in future years.
On March 15, 1996, the Board of Directors declared a one for six common stock
dividend payable to shareholders of record as of April 17, 1996, and
distributed on May 17, 1996. Accordingly, the fair market value (based upon
quoted market prices, as adjusted) of the additional 241,063 shares issuable,
which totaled $643,000, was charged to accumulated deficit and the respective
amount was credited to common stock and additional paid-in-capital.
On July 30, 1996, the Company's Board of Directors approved a two-for-one
common stock split in the form of a 100 percent stock distribution. The
distribution was made on August 26, 1996, to common shareholders of record as
of August 12, 1996. The stated par value per share of common stock was not
changed from $.03 and the number of authorized shares of common stock
increased from 3,333,333 to 6,666,666 shares. Accordingly, the par value of
the additional shares issued was transferred from additional paid-in capital
to common stock, and all share and per share amounts have been restated to
retroactively reflect the stock split.
NOTE 8. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE OBLIGATIONS
The Company leases certain fixed assets under long-term capital lease
agreements. These assets are included in the accompanying consolidated balance
sheets as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Property and equipment.................................$549,000 $580,000
Less - Accumulated depreciation and amortization......(474,000) (403,000)
--------- ---------
$ 75,000 $177,000
========= =========
</TABLE>
-25-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
Depreciation and amortization of these assets is computed using the
straight-line method over the shorter of the useful lives of the assets or the
term of the lease obligation.
The future maturities of capital lease obligations as of December 31, 1996,
are as follows:
1997...................................... $ 51,000
1998...................................... 28,000
1999...................................... 6,000
----------
Total minimum payments....... 85,000
Less - Amounts representing interest......... (6,000)
----------
Present value of minimum lease payments...... 79,000
Less - Current portion....................... (46,000)
----------
Long-term portion............................ $ 33,000
==========
OPERATING LEASES
Effective August 1, 1993, the Company entered into a lease for its corporate
headquarters facility in Fairfax, Virginia. This lease expires July 31, 1998.
Under the terms of the lease, the landlord provided various incentives, which
have been deferred and classified as deferred rent in the accompanying
consolidated balance sheets. These amounts will be amortized over the life of
the lease. During 1996 and 1995, the Company incurred an annual rent expense
of $290,000 and $297,000 for office facilities. Commitments under the Fairfax,
Virginia office facilities lease amount to approximately $300,000 annually.
During 1996, the company incurred $52,500 of rent expense related to space and
equipment for an off-site training facility under a month-to-month lease.
Effective September 1994, the Company entered into a three-year agreement with
a third party to procure outside mainframe-related data processing services.
The new agreement is non-cancelable over the first two years and becomes
cancelable beginning in the third year, with a penalty equal to $4,000 times
the number of months remaining in the third year. The minimum commitment under
this agreement amounts to $32,000 until termination in August 1997.
EMPLOYEE BENEFIT PLAN
In 1988, the Company established an employee benefit plan (the "Benefit Plan")
which qualifies under Section 401(k) of the Internal Revenue Code. The Benefit
Plan allows salaried employees to contribute a part of their compensation
toward their retirement on a tax deferred basis. Required Company
contributions equate to 10 percent of the employee's contribution to the
Benefit Plan and totaled approximately $32,000 in 1996 and $23,000 in 1995. In
addition to the aforementioned contributions, the Company, at the sole
discretion of its Board of Directors, may make profit-sharing contributions to
the Benefit Plan; no contributions were made in 1996 or 1995.
-26-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996 and 1995
CONTINGENCIES
A customer has asserted that the Company did not perform on a contract and
seeks a $90,000 refund. The Company vigorously denies the assertion and
management believes that based upon the current facts it is not probable that
a loss will occur. Accordingly, no accrual has been made for this claim at
December 31, 1996.
Costs charged to cost type U.S. government contracts are subject to annual
audit by the Defense Contract Audit Agency or other duly authorized
representatives of the Federal government. No audits have been completed for
any periods commencing after September 30, 1987, and in the opinion of
management, adjustments resulting from the completion of such audits are not
expected to have a material impact on the Company's financial position or
results of future operations.
RELATED-PARTY TRANSACTIONS
The Company incurred management consulting fees of approximately $195,000 and
$168,000 in 1996 and 1995, respectively, for services rendered by certain
Directors of the Company. Amounts payable for these services to companies
employing these Directors were $12,500 and $15,000 at December 31, 1996 and
1995, respectively. Amounts receivable from a company employing a director was
$13,000 at December 31, 1996.
In October 1996, the Company executed a note receivable from an officer and
shareholder for $70,000 due in full on September 30, 1999 with quarterly
interest payments at an annual rate of 1 percent over prime (approximately
9.25 percent at December 31, 1996) adjusted quarterly.
The Company issued 8,000 shares of restricted common stock to a Director for a
total compensation expense of $9,000 in consideration for services rendered
during 1995.
-27-
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