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.
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(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)
(703) 934-5205 (Issuer's Telephone Number)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
Name of each exchange
Title of each class on which registered
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None Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK-$.03 PAR VALUE
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(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 registrant's revenues for the fiscal year ending December 31, 1997 are
$10,644,000.
As of March 23, 1998, there were 4,390,509 common shares outstanding. As of
March 23, 1998, 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 $16,441,478.
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.
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PART I
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-KSB RELATING TO PRODUCT
DEVELOPMENT, REVENUE AND THE ADEQUACY OF WORKING CAPITAL 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 MATERIALY FROM CURRENT EXPECTATIONS. READERS ARE CAUTIONED
NOT TO PUT UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS
ANY INTENT OR OBLIGATION TO UPDATE PUBLICLY THESE FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ITEM 1. DESCRIPTION OF BUSINESS
Infodata Systems Inc. (the "Company") provides electronic document management
software and systems to corporate and government workgroups, departments and
enterprises. The Company's newest product Virtual File Cabinet(TM) ("VFC"(R))
has been designed to address what DataPrOpinion, an industry survey
publication, has called one of the biggest problems facing global
organizations: the fact that their critical assets are often contained in
documents stored in disparate and incompatible systems. According to
DataPrOpinion, "accessing and sharing that information among different
departments across the enterprise has been a nightmare."
VFC is a family of intranet-based software products that, together, will
enable users to easily retrieve, organize and share desktop files irrespective
of the location or type of document management system in which they are stored
with virtually no integration effort and without the need to replicate
documents. The VFC family of products consists of the VFC Document Web Server,
extensions and enablers, and the Company's AMBIA(R) products. The VFC Document
Web Server is the heart of VFC, and is required in order to utilize the VFC
extensions and enablers. This core package consists of software installed on a
server that establishes links to documents, organizes access to stored
information and acts as an independent document sharing system. The Company
has been shipping the VFC Document Web Server since the second quarter of
1997. Extensions are software components that are installed on an individual
user's computer to add functionality to the VFC Document Web Server. In
October 1997, the Company began shipping its first extension and expects to
introduce other extensions in the future. Enablers will provide the capability
to bridge multiple document management systems or repositories. The AMBIA
products that are part of the VFC family include Re:mark(R), Compose(R), and
Aerial(R). They have been available from the Company since its acquisition of
AMBIA in July 1997.
The Company's VFC technology has been endorsed or approved by leading industry
vendors, including Lotus Development Corporation ("Lotus"), PC DOCS, Inc. ("PC
DOCS"), Verity, Inc. ("Verity"), and NovaSoft Systems, Inc. ("NovaSoft"), and
has received numerous favorable industry trade analyst and press reviews. At
the April 1997 Association of Information and Imaging Management ("AIIM")
trade show, with more than 35,000 attendees and 325 exhibitors, Imaging World
Magazine identified VFC as "#l to Watch." VFC has been sold to large
organizations with significant document processing requirements, such as the
Department of Energy, AT&T Corp., State Street Bank and Trust Company, and the
U.S. Army Signal Corps.
In December 1997, the Company and Adobe Systems, Incorporated ("Adobe"), a
major software company with reported 1997 revenues of more than $900 million,
entered into an agreement to cross-license and co-market certain technologies.
Adobe is a significant presence in the Internet marketplace with, according to
Adobe, more than 20 million downloads of its Adobe Acrobat Reader viewing
product. Under the agreement, the Company expects to receive more than
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$700,000 in consulting fees for modifications to certain of its technology so
that it may be incorporated into certain Adobe products. Upon acceptance of
these modifications by Adobe, the Company will earn a license fee of
$1,000,000. Certain components of VFC that will be licensed to Adobe will be
incorporated in future Adobe products. In addition, certain Adobe products
will display a "VFC Button" that will provide a direct link to VFC or to VFC
marketing information if the user does not have VFC. Adobe will receive
royalties based on any VFC sales arising out of this marketing arrangement,
and will also receive commissions for any VFC sales that it makes directly.
For nearly thirty years, the Company has developed and sold its own products
and acted as a value-added reseller ("VAR") of client/server and
Internet/intranet document systems products. In the past three years, the
Company made two acquisitions to broaden its product and service offerings:
Merex Inc. ("Merex"), acquired in October 1995, and AMBIA Corporation
("AMBIA"), acquired in July 1997. Merex provided a staff experienced in
Internet and client-server document technologies, and AMBIA provided both an
experienced technical staff and products focusing on document creation,
collaboration, and presentation. The Company now provides a range of services,
including training, customer support, and consulting, to ensure that customers
achieve the full benefits of the Company's products.
INDUSTRY BACKGROUND
Document management products were originally introduced to solve problems
associated with the production of complex and mission-critical documentation,
such as new drug applications or aircraft operating manuals. These documents
are characterized not only by complex content, such as graphs and images as
well as text, but also by a heavily controlled or regulated process by which
documents are written and reviewed. These document management systems have
been expensive to procure and difficult to install and implement because they
require unique user interfaces for which specialized training is necessary.
Their usage is controlled centrally, with little flexibility for the end user.
Many people who work in office environments are familiar with the difficulties
of filing and retrieving documents from their hard drives or from network file
systems. Individuals are forced to remember artificial file names and folder
or directory locations because the documents generally are not organized in an
intuitive manner. Naming and storage requirements might apply only to an
individual's own workgroup or department, or they might apply across the
enterprise. Systems to address the needs of these users need to be simple to
deploy and easy to administer. They also need to be scalable to accommodate
wider deployment of applications and additional users.
With the increasing departmental, as opposed to enterprise-wide, use of
document management systems, it is not uncommon for different departments
within an enterprise to use different document management systems or to store
electronic documents in separate repositories that are tailored to the needs
of the individual department. For example, an organization's legal department
may use one document management system specialized for legal applications,
while the engineering department uses another for engineering drawings.
Without a bridge to link the two systems, the two departments are unable to
share information electronically.
Attempts to address these issues have included:
DEVELOPING WEB BROWSER ACCESS TO DOCUMENT MANAGEMENT SYSTEMS. Some vendors of
document management systems have introduced add-on Web browser products that
allow users to access files stored on that vendor's system. The Web-based user
interface is familiar to the user, but this solution does not permit
information to be shared across different document management systems.
POSTING DOCUMENTS ON THE COMPANY'S WEB SITE. Many organizations are using
their internal Web sites for electronic publication of commonly used documents
such as human resource policy manuals. The primary drawback is that "posting"
documents to the organization's Web site typically requires intervention of a
"Webmaster," whose responsibility is to maintain the Web site. The Webmaster
may become a bottleneck as the Web site grows. Also, documents posted to the
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Web site are usually not updated concurrently with the original document. For
example, when the human resources department updates its policy manual, there
is typically a delay before the new version is converted to the appropriate
format and approved for posting on the Web site.
USING GROUPWARE PRODUCTS. Groupware products are designed to foster
collaboration among members of workgroups. Examples include Lotus Notes,
Novell Groupwise 5, Netscape SuiteSpot and Microsoft Exchange. Although some
of these products incorporate some document management functionality, they
still create "islands" of information since users are able to access only that
information residing within the groupware product's own proprietary databases.
The Company created VFC to provide a reasonably priced, easy to implement
solution to the problems associated with the exchange and bridging of
information, irrespective of where it is stored, between parties that can
benefit from access to that information.
VIRTUAL FILE CABINET
VFC is a family of intranet-based software products that, together, will
enable users to easily retrieve, organize and share desktop files irrespective
of the location or type of document management system in which they are stored
with virtually no integration effort and without the need to replicate
documents.
The VFC family of products consists of:
o VFC DOCUMENT WEB SERVER. This is the heart of VFC, and is required in
order to utilize all other components of VFC. This core package consists
of software installed on a server that establishes links to documents,
organizes access to stored information and acts as an independent
document sharing system. The VFC Document Web Server interacts with the
user's desktop via a browser such as Netscape or Microsoft Internet
Explorer. The Company has been shipping the VFC Document Web Server
since the second quarter of 1997.
o EXTENSIONS. Extensions are software components that are installed on an
individual user's computer. Extensions add functionality to the VFC
Document Web Server. In October 1997, the Company began shipping Re:mark
as an extension to enable seamless electronic annotation of Adobe
Acrobat Portable Document Format ("PDF") documents. Other extensions are
expected to be introduced in the future.
o ENABLERS. Enablers will provide the capability to bridge multiple
document management systems or repositories.
o AMBIA PRODUCTS. Described below under Other Products.
VFC combines the following features:
o ADAPTABILITY TO INDIVIDUAL USERS AND GROUPS. Using VFC, an individual
can search all of the servers of an enterprise for electronic documents
or containers without leaving his or her office, then place the
documents into a private virtual office, where they can be organized
according to personal style and preferences. Departments or workgroups
can organize a space that is optimal for the group.
o INSTANT UPDATES OF DOCUMENTS. If the original document is updated, all
of the "virtual documents" residing in every virtual location are
updated at the same time. Thus, every user always has access to the most
current version of a document.
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o ELIMINATES WEBMASTER BOTTLENECK. Since users can easily post new
documents to the VFC Document Web Server without converting them to
special formats, such as HTML, intervention by a Webmaster is not
required and the delays typically associated with such intervention are
avoided.
o OPTIMIZES USE OF SYSTEM RESOURCES. Each document that is placed in the
virtual office is linked to the original. Each link in the user's
virtual office behaves and looks just like the original. No copy of the
document is made. This saves significant network and client resources
because only a single copy of a document needs to be maintained for it
to be available to everyone who needs it.
o MINIMAL IMPLEMENTATION COSTS. VFC is delivered ready to plug into a
user's network. No programmers or developers are needed, and users can
capture and share documents immediately. VFC is designed for rapid
implementation, requiring low overhead and a minimal amount of training.
o UNIVERSAL DESKTOP ACCESS. The intranet infrastructure behind VFC
provides the interface for the information-sharing functionality.
Essentially a private Web site, VFC is an intranet solution that
provides all the benefits of Web access, including hypertext linking and
cross-platform connection via a Web browser, and allows users to "jump"
to any location at the click of a mouse and view documents regardless of
their original format or where they are stored.
o EASY-TO-UNDERSTAND ORGANIZATIONAL SCHEME. Under the VFC document
management format, documents are stored in a hierarchy of icons depicted
as buildings, offices, file cabinets, folders and documents. This
hierarchy is meaningful to anyone familiar with a traditional office and
filing system.
o EASY-TO-USE SEARCH TOOLS. In addition to navigating through the virtual
office hierarchy to locate a document, users can employ the VFC search
tool to locate any document easily and quickly by specifying simple
search criteria such as the document's title or author or by searching
the document's content for words or phrases specified by the user.
o EFFECTIVE, FLEXIBLE SECURITY MECHANISMS. VFC can be managed centrally by
a single system administrator who can restrict access via password
protection and group permission. The administrator can also assign
administrative rights to certain individuals such as department heads or
workgroup leaders, who in turn can grant or restrict access to
individuals within their groups. An individual who has not been granted
read access to a particular document will not only be prevented from
opening and viewing the document, but also will not be informed of its
existence since it will not appear on a results list generated from a
search command.
o EASILY EXPANDABLE FUNCTIONALITY. Extensions will allow VFC to take
advantage of functionality in other software or systems. For example,
using the Company's Re:mark extension, users can collaborate and
simultaneously annotate documents viewed with the Adobe Acrobat Reader.
o ABILITY TO LINK DIVERSE DOCUMENT SYSTEMS. The VFC enabler bridging
technology, when introduced, will permit users to access documents
stored in multiple and disparate document management systems or
repositories from their personal VFC desktop as if all of the separate
systems and repositories were one.
OTHER PRODUCTS
RE:MARK. Re:mark is a plug-in product for Adobe Acrobat software that enables
users to mark up, redline and review documents electronically in a workgroup
setting. By annotating any document in PDF, Re:mark enables users to type text
on the document page, draw on the document, indicate approval of the document
itself or specific sections, attach any file anywhere in the document,
consolidate comments from multiple reviews, personalize comments and set
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annotation security. Redlining features include highlighting, strike-through
and "sticky notes." Annotations may be shared among users.
COMPOSE. Compose is a suite of plug-in tools for Adobe Acrobat Exchange that
automate and streamline a variety of document production tasks, such as the
creation of tables of contents, hyperlinks, document indexes, and other
document navigation features.
AERIAL. Aerial is a plug-in product that enables Adobe Acrobat to print any
document that needs to be formatted for printing on multiple pages that are
then pieced together to form one page, such as a large spreadsheet or a CAD
drawing. Aerial also enables Adobe Acrobat to format tables into spreadsheets,
and converts PDF to a text format that can be edited with Microsoft Word or
other word processors.
SIGNET(TM). Signet is a security solution for Web or CD-ROM publishers who
want to permit only authorized users to read their documents. Signet allows
publishers to control the time and circumstances of the expiration of users'
privileges.
INQUIRE(R)/TEXT. INQUIRE/Text is a full-text retrieval product used for
storing, indexing, retrieving, and managing large collections of documents on
IBM and IBM-compatible mainframes. INQUIRE/Text software is widely used by
major companies, utilities, hospitals, and government agencies for automating
document-centered applications such as on-line manuals, legislative tracking
and regulatory compliance, library management, litigation support, medical
records, and government and military intelligence. The system has been
installed at over 350 sites.
WEBINQUIRE(TM). WebINQUIRE is an extension product that provides Web browser
access to INQUIRE/Text collections. It enables users to utilize their
mainframe as an intranet superserver with all the search capabilities of
INQUIRE/Text. WebINQUIRE permits users to store documents created using
desktop software on a mainframe computer, retrieve documents from the
mainframe and edit them on their desktop using desktop applications, such as
Microsoft Excel and Microsoft Word. In addition, WebINQUIRE's search formats
and views can be easily customized. Although WebINQUIRE and other INQUIRE/Text
options carry a high gross margin, they are not expected to amount to a
significant percentage of the Company's future revenues.
In addition to its proprietary products described above, the Company, acting
as a VAR, also sells third party products such as Verity's Search `97
Information Server, Adobe software and Documentum software. This allows the
Company to provide document management solutions that are tailored to each
customer's needs.
In conjunction with product sales, the Company provides training, maintenance
and technical support services, including business analysis, requirements
definition, design and development. In some instances, the Company's services
are provided in connection with the sale of the Company's products and those
of third parties for whom it acts as a VAR. In other instances, product sales
are made in connection with the solutions provided by the Company's consulting
services.
STRATEGY
The Company's objectives are to establish VFC as the de facto industry
standard for document access and to become a leading provider of electronic
document management software and systems. To accomplish these objectives, the
Company intends to:
MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company's technology enables
organizations to effectively manage, share and store critical documents and
information across the enterprise. The Company intends to continue to develop
what it believes are innovative technologies and features to address the
specific document management needs of organizations. The Company plans to
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continue to develop new products and to improve its existing products.
ADD STRATEGIC RELATIONSHIPS. To facilitate the adoption of VFC as a de facto
industry standard, the Company plans to continue to form strategic
relationships with providers of document management software applications,
tools and services. The Company believes that strategic relationships, such as
that formed with Adobe, enhance the visibility of the Company's products and
leverage the Company's sales and marketing efforts by expanding the number of
salespeople marketing the Company's products without burdening the Company
with the need to identify and hire a large sales force. The Company believes
that the development of these relationships will enable the Company to devote
additional resources to product development and marketing activities.
EXPAND SALES AND MARKETING CAPABILITIES. The Company intends to expand its
sales and marketing capabilities by creating additional VAR and original
equipment manufacturer relationships, expanding its direct sales force,
offering training, and participating in trade shows. The Company intends to
continue the enhancement of its sales and marketing capabilities in the
future.
ACQUISITIONS. In October 1995, the Company acquired Merex, which provided
electronic document management solutions to business and government customers,
and in July 1997, the Company acquired AMBIA, a leading developer of Adobe
Acrobat add-on products and services. The acquisitions of both AMBIA and Merex
brought experienced management and staff, a diverse client base and an
established market reputation to the Company. The Company plans to continue to
pursue acquisitions of businesses, products and technologies that complement
the Company's existing business, although no such acquisitions are planned at
the current time.
SALES AND MARKETING
The Company conducts its sales and marketing efforts through several channels,
including a network of VARs, its own sales force, marketing alliances,
marketing communications and training programs. The Company's VARs and its
sales force receive direct support from the Company's technical staff.
Consulting services leads are provided to the Company by those vendors for
whom it acts as a VAR. The Company believes this diversity of sales and
marketing channels permits it to distribute its products and sell its services
in an efficient and effective manner, while reducing reliance on any one sales
channel.
VALUE-ADDED RESELLERS. The Company's primary sales channel for its products is
its VARs. The Company's VARs market and resell the Company's products and
offer training, installation, implementation and customization services to
their own contacts and to prospective customers identified by the Company. The
Company manages a program to train and certify all of its VARs. It also
conducts joint marketing campaigns, including direct mail and trade show
appearances, with its VARs. As of December 1997, the Company had relationships
with several VARs, including GE Capital IT Solutions and BTG Inc. VARs buy VFC
and other products from the Company at a discount from the suggested retail
price.
COMPANY SALES FORCE. The Company has a marketing and sales force of 14 people,
including field sales, telemarketing, channel liaisons, and sales management.
The channel liaisons work specifically with the Company's VARs. The
telemarketing staff qualifies prospective customers, schedules product
demonstrations, and refers prospective customers to a VAR or, if a VAR is not
in place in the particular territory, to the Company's sales force. The
Company's sales force also sells upgrades and add-on products, and refers
leads for services opportunities to VARs or to the Company's services
divisions.
MARKETING ALLIANCES. The Company itself is a VAR of products from other
software companies, including Adobe, Verity, Documentum Inc., and PC DOCS. The
Company incorporates these products into its document management solutions.
The Company earns a reseller commission ranging from 10% to 40% on sales of
these products.
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MARKETING COMMUNICATIONS. The Company generates awareness of, and interest in,
its products and consulting services through public relations, telemarketing,
periodic direct mail campaigns, seminars, trade shows and other marketing
efforts. In 1997, the Company conducted joint seminars with Adobe, cooperative
direct mail campaigns with several of its VFC VARs, and exhibited at trade
shows including Lotusphere, AIIM, Documation, Seybold, and Internet World
West.
TRAINING. The Company believes that training is an integral part of a complete
customer solution, and that people who attend training sessions offered by the
Company are potential customers for the Company's other products and services.
Consequently, in 1996, the Company established a training division to offer
customer training in the Adobe Acrobat and Verity Topic products. In 1997, the
Company added training for the Company's own products, including VFC, Re:mark,
Compose, INQUIRE/Text, as well as Adobe's Framemaker, Framemaker SGML, and
Photoshop products. The Company employs a full-time training staff and
maintains a state-of-the-art training facility at its headquarters office in
Fairfax, Virginia. The training division also offers courses at customer
locations. The Company is currently the authorized Verity East Coast Training
Center.
The Company sells its products under a variety of licensing arrangements. For
domestic sales of VFC, Re:mark, Compose, Aerial and Signet, a shrink-wrap
license is used to protect the Company's proprietary rights and limit
liability. For all other products, the Company enters into written agreements
with its customers containing similar provisions. The Company also employs
evaluation and beta test agreements that provide for the protection of the
Company's intellectual property. For consulting services, the Company enters
into written agreements with its customers that provide for indemnification,
limits on liability, payment terms, period of performance, and other terms and
conditions.
The Company is generally required to provide a significant level of education
to prospective purchasers of its software products and systems solutions
services regarding the use and benefits of the Company's products and
services, resulting in a lengthy sales cycle (typically between three and nine
months). Additionally, the implementation by customers of the Company's
products may involve a significant commitment of resources by such customers
over an extended period of time. For these and other reasons, the sales and
customer implementation cycles are subject to a number of significant delays
over which the Company has little or no control. Delay in the sale or customer
implementation of the Company's products and services could have a material
adverse effect on the Company's business and operations and cause the
Company's operating results to vary significantly from quarter to quarter.
Therefore, the Company believes that its quarterly operating results are
likely to vary in the future.
The sales cycle for initial sales of VFC has ranged from three to nine months.
The Company believes that the sales cycle for repeat sales may be shorter. VFC
is licensed at an introductory price of $4,995 per server. The Company plans
to increase the price of VFC in the first half of 1998. The Company also
provides support packages and extension products at an additional price. The
Company offers annual maintenance for VFC at a cost of 20% of the purchase
price.
CUSTOMERS
The Company targets both commercial and government markets. The Company's
products and consulting services are used by many major companies, including
Ford, Allen-Bradley, Boeing, Nabisco, AT&T, Chase, State Street Bank and Riggs
Bank, and by government organizations, including NASA, the Department of
Energy, the U.S. Army Signal Corps, the Government Accounting Office and
various agencies within the intelligence community. Sales to government
customers represented approximately 45% of revenues in 1996 and approximately
53% in 1997; however, no one customer accounted for more than 10% of the
Company's revenues in either period.
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The Company has repeat business from a number of its customers, and management
believes that there is a high degree of customer satisfaction with its
products, services and solutions. The Company's existing services, training,
and products provide a base of business that the Company expects will
complement VFC product sales. Developing custom solutions for customers keeps
the Company's technical professionals abreast of client needs, which
facilitates the conception and development of new products, such as VFC, and
the improvement of existing products.
Certain of the Company's contracts with government organizations are
competitively awarded after a formal bid and proposal competition among
qualified bidders. These government contracts may be either cost-reimbursement
contracts (both cost-plus-fixed-fee and cost-plus-award-fee), time and
materials contracts, and fixed price contracts. Cost-plus-fixed-fee contracts
provide for the reimbursement of incurred costs during contract performance,
to the extent that such costs are allowable and allocable, and the payment of
a fixed fee. The size of the fee is limited by federal guidelines to a set
proportion of the contract value. Cost-plus-award-fee contracts typically
provide for the reimbursement of costs and fee based upon a periodic
evaluation of the Company's performance against specified criteria. Under time
and materials contracts, the Company agrees to provide certain categories of
labor that satisfy established education and experience qualifications at a
fixed hourly rate. In these cases, the Company bears the risk that costs may
differ from the fixed hourly rate, and the Company realizes all of the
benefits or detriment resulting from decreases or increases in the cost of
performing the work. Under fixed-price contracts, the Company agrees to
perform certain work for a fixed price and, accordingly, realizes all the
benefit or detriment resulting from decreases or increases in the cost of
performing the work.
The Company's government contracts contain standard termination clauses that
permit the government to terminate the contracts at any time, without cause,
for the convenience of the government. The Company has not had any contracts
terminated for convenience. In addition, government contracts require
compliance with various procurement regulations. The adoption of new or
modified procurement regulations could materially adversely affect the Company
or increase its costs of competing for or performing government contracts. Any
violation of these regulations could result in the termination of the
contracts, imposition of fines, and/or debarment from award of additional
government contracts. Most government contracts are also subject to
modification or termination in the event of changes in funding, and the
Company's contractual costs and revenue are subject to adjustment as a result
of audits by the DCAA and other government auditors. The DCAA routinely audits
cost-reimbursement contracts to verify that costs have been properly charged
to the government. Further, government contract awards may be subject to
protest by competitors.
Many of the Company's government contracts require the Company and certain of
its employees to maintain security clearances complying with the requirements
of various government agencies.
RESEARCH AND DEVELOPMENT
The Company's research and development programs are intended to anticipate and
take advantage of new technologies, and to anticipate and respond to market
requirements. The Company believes that its future success will depend in
large part on its ability to maintain and enhance its leadership in document
management and related technologies and to develop new products that meet an
expanding range of customer requirements.
The market for the Company's products is characterized by rapid technological
developments, evolving industry standards, changes in customer requirements,
and frequent new product introductions and enhancements, which often lead to
product obsolescence. The Company believes that the speed of technological
advancement in its industry requires a significant investment in research and
development in order to maintain its competitive product position. The Company
will continue to invest substantially in product development as it believes
that its future success will depend upon its ability to develop and market new
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products and enhancements to existing products on a cost-effective and timely
basis. Software development expenses increased from $816,000 in 1996 to
$2,472,000 in 1997.
Due to the complexity and sophistication of the Company's software products,
the Company's products from time to time contain defects or "bugs" that can be
difficult to correct. Furthermore, as the Company continues to develop and
enhance its products, there can be no assurance that the Company will be able
to identify and correct defects in such a manner as will permit the timely
introduction of such products. Moreover, the Company may from time to time
discover defects only after its systems have been used by many customers.
There can be no assurance that, in the future, software defects will not cause
delays in product introductions and shipments, result in increased costs,
require design modifications, or impair customer satisfaction with the
Company's products. Any such event could have a material adverse effect on the
Company's business, operating results and financial conditions.
COMPETITION
The market for the Company's products and services is intensely competitive
and subject to rapid change caused by new product introductions and other
market activities of industry participants. The Company currently encounters
direct and indirect competition from a number of public and private companies
involved in groupware, document management, and collaboration software,
including Xerox, Open Text, Net-It Software, Hummingbird and Fulcrum
Technologies. The Company is aware that other companies have announced
products with some features similar to VFC. In addition, the Company may face
competition from new market entrants. Competitors may have longer operating
histories, significantly greater financial, marketing, service, support,
technical and other resources and name recognition and a larger installed
customer base than the Company. As a result, such competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sale of their products than the Company.
The Company also faces indirect competition from system integrators. The
Company relies on a number of system integration firms for implementation and
other services, as well as for recommendations of its products during the
evaluation stage of the purchasing process. Although the Company seeks to
maintain close relationships with these service providers, many of these third
parties have similar, and often more established, relationships with some of
the Company's competitors. It is also possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. In addition, the Company expects competition to increase as a result of
software industry consolidation.
The Company believes that the competitive factors affecting the market for its
products and services include vendor and product reputation, ability to
attract and retain quality personnel, product quality, performance and price,
the availability of products on multiple platforms, product salability,
product integration with other enterprise applications, product functionality
and features, product ease-of-use, and the quality of customer support
services and training. The relative importance of each of these factors
depends upon the specific customer involved. While the Company believes it
competes favorably in each of these areas, there can be no assurance that it
will continue to do so. Moreover, the Company's present or future competitors
may be able to develop products comparable or superior to those offered by the
Company, offer lower priced products or adapt more quickly than the Company to
new technologies or evolving customer requirements. In order to be successful,
the Company must respond to technological change, customer requirements and
competitors' current products and innovations. There can be no assurance that
the Company will be able to compete effectively in its market or that
competition will not have a material adverse effect on its business, operating
results and financial condition.
PROPRIETARY RIGHTS
The Company has a registered service mark to protect its proprietary rights in
the name Infodata and it has registered trademarks with respect to the marks
INQUIRE and AMBIA. The Company also has registered trademarks for its VFC,
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Aerial, Re:mark and Compose products. In addition, the Company has filed a
trademark application in order to protect its Virtual File Cabinet name. The
Company relies primarily on a combination of copyrights and trademarks, trade
secrets, confidentiality procedures and contractual provisions to protect its
proprietary rights. For example, the Company licenses rather than sells its
software. The licenses impose certain restrictions on the licensees' ability
to utilize the software. In addition, the Company seeks to avoid disclosure of
its trade secrets, including, but not limited to, (i) requiring those persons
with access to the Company's proprietary information to execute
confidentiality agreements with the Company and (ii) restricting access to the
Company's source codes. Trade secret and copyright laws afford only limited
protection. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy the Company's products or to obtain
and use information that the Company regards as proprietary. Although the
Company may apply for certain patents, the Company presently has no patents or
patent applications pending. Policing unauthorized use of the Company's
products is difficult, and while the Company may be unable to determine the
extent to which piracy of its software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to as great an
extent as the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not develop similar technology independently.
There can be no assurance that third parties will not claim infringement by
the Company with respect to current or future products. The Company expects
software product developers increasingly to be subject to infringement claims
as the number of products and competitors in the Company's industry segment
grows and the functionality of products in different industry segments
overlaps. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition. In addition,
the Company also relies on certain software that it licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. There
can be no assurance that such firms will remain in business, that they will
continue to support their products or that their products will otherwise
continue to be available to the Company on commercially reasonable terms.
EMPLOYEES
As of March 20, 1998, the Company had a total of 109 employees, of which 78
were technical professionals, 14 comprised the sales and marketing staff, and
the remainder were involved in management, administration, and accounting. The
Company's employees are not represented by any unions and the Company has not
experienced any work stoppages.
MANUFACTURING
The Company is currently in the process of conducting a review of the impact
of Year 2000 on its information systems, as well as reviewing its impact on
relationships with key customers and vendors. Based on this preliminary
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review, the information systems in place will be modified with the appropriate
upgrades provided by the original software vendors. Currently, the aggregate
costs associated with these upgrades have not been estimated.
The Company contracts for the manufacture of its software and packaging. The
Company believes that there are adequate sources of supply and manufacturing
capacity to address the Company's requirements.
YEAR 2000
The Company is currently in the process of conducting a review of the impact
of Year 2000 on its information systems, as well as reviewing its impact on
relationships with key customers and vendors. Based on this preliminary
review, the information systems in place will be modified with the appropriate
upgrades provided by the original software vendors. Currently, the aggregate
costs associated with these upgrades have not been estimated.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases professional office space for its headquarters and
operations in Fairfax, Virginia and recently expanded its space and extended
the term of its lease through July 31, 2003. Leased space now totals 25,950
square feet. Payments under the lease were approximately $370,000 in 1997, are
expected to be $492,000 in 1998, and will increase to approximately $599,000
by 2003.
The Company also maintains an office of approximately 3,400 square feet in
Mountain View, California. Payments under the lease were approximately $72,968
in 1997 (Infodata was responsible for approximately $37,000 in 1997). The
lease expires May 31, 1998 and the Company is discussing the possibility of
extending the lease with the landlord. The Company believes the lease will be
extended and that payments under the lease will approximate $130,000 in 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is presently not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An amendment to the Company's 1995 Stock Option Plan was approved (by a vote
of 1,657,437 shares for, 118,817 shares against, with 19,380 shares
abstaining) during a Special Meeting of Shareholders held at the Company's
corporate headquarters on November 5, 1997. The amendment to the 1995 Stock
Option Plan reserved 500,000 additional shares of the Company's common stock
for issuance to employees, officers, consultants, directors and others under
such Plan. Shareholders of record as of the close of business on September 25,
1997, were entitled to notice of, and to vote at, the meeting.
ITEM 4A. EXECUTIVE OFFICERS
The following information relates to Executive Officers of the Registrant as
of March 20, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
James A. Ungerleider 48 President and Chief Executive Officer
Harry Kaplowitz 54 Executive Vice President
Richard M. Tworek 41 Executive Vice resident
and Chief Technology Officer
Christopher P. Dettmar 44 Chief Financial Officer
Robert J. Loane 59 Senior Vice President
Razi Mohiuddin 36 Vice President
Curtis D. Carlson 33 Secretary
</TABLE>
James Ungerleider has been the President and Chief Executive Officer of the
Company since November 1997. From 1973 until joining the Company, Mr.
Ungerleider was associated with American Management Systems, Inc. (AMS) and
served as its Vice President, European Finance Industry Business Area from
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1991 to November 1997. Prior to joining AMS, Mr. Ungerleider was a senior
research scientist with the National Biomedical Research Foundation in
Washington, D.C. He has a BS in Electrical Engineering from Princeton
University and an MBA from the Harvard Business School.
Harry Kaplowitz, a founder of the Company, has been an Executive Vice
President of the Company since November 1997 and a director since 1980. From
1991 to January 1993, Mr. Kaplowitz served as Chairman of the Board of
Directors and from 1991 to November 1997 he served as President of the
Company. From 1980 to 1989, he served as Executive Vice President of the
Company. From 1973 to 1980, he was a Vice President of the Company. Mr.
Kaplowitz has a BS in Electrical Engineering from the Massachusetts Institute
of Technology and an MBA from the Wharton Graduate School.
Richard M. Tworek has been an Executive Vice President of the Company since
October 1995, a director since July 1996 and Chief Technology Officer since
April 1997. Mr. Tworek was the founder of Merex and served as its President
from April 1987 to October 1995. Mr. Tworek originated the VFC concept and is
responsible for its development. Mr. Tworek holds a BS in Mathematics from
Eastern Michigan University and an MS (equivalent) in Nuclear Engineering from
the U.S. Navy Nuclear Power School.
Christopher P. Dettmar has been Chief Financial Officer of the Company since
May 1997. From November 1993 to April 1997, he served as Vice President, Chief
Financial Officer and a Director of TWS, Inc. and its predecessor company,
Encompass, Inc., both of which are telecommunications service firms. From
November 1989 to November 1993, he served as Vice President, Chief Operating
Officer and a director of the Hunter Companies, an asset management and real
estate brokerage firm. From 1984 to 1989, Mr. Dettmar served as a regional
controller with Cincinnati Bell Information Systems and from 1979 to 1983, he
worked for Price Waterhouse & Co. He is a certified public accountant, holds a
BS in Commerce from the University of Virginia and an MBA from the
Pennsylvania State University.
Dr. Robert J. Loane has been Senior Vice President and Chief Scientist of the
Company since 1981. He is the principal architect and developer of the INQUIRE
family of products and in now involved with the architecture of future
products and provides consulting services to many of the Company's customers.
Dr. Loane has a PhD in Computer Sciences from Princeton University and a BEE
from Cornell University.
Razi Mohiuddin has been a Vice President of the Company since February 1998
and a manager of the Company's West Coast facilities since July 1997. From
1988 to July 1997, he served as Vice President of Software Partners, Inc., a
firm that developed products for online services, and was the parent of AMBIA,
and from 1995 to July 1997, Mr. Mohiuddin also served as Vice President,
Engineering, of AMBIA. In 1994, Mr. Mohiuddin co-founded ONSALE, Inc., a
publicly held Web-based service that specializes in selling computers and
consumer electronics using auctions, markdowns, and other close-out
techniques. Mr. Mohiuddin has a BS in Computer Science from the University of
Illinois, Chicago.
Curtis D. Carlson has been the Secretary of the Company since February 1998.
From 1991 until joining the Company in August 1994, Mr. Carlson was associated
with the Federal Systems Division of International Business Machines (IBM)
Corporation and served in the Business Practices and Contracts function
supporting the U.S. Navy and Radiation-Hardened Semiconductor business areas.
Since 1994, Mr. Carlson has been Chairman of the Board of Synergy One Federal
Credit Union. He has a BS in Finance from Rochester Institute of Technology
and is completing coursework at Virginia Polytechnic Institute and State
University for his MBA.
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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>
1997 1996
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $12.63 $6.75 $ 3.27 $1.93
Second Quarter 8.63 6.00 7.87 2.81
Third Quarter 10.38 7.00 10.12 4.25
Fourth Quarter 12.75 8.50 12.62 4.62
</TABLE>
The market quotations reflected above are inter-dealer prices, without retail
mark-up, markdown 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
1997 Consolidated Financial Statements, contained elsewhere in this report,
for information relating to cash dividends pertaining to Preferred Stock.
As of March 23, 1998, there were approximately 1,650 beneficial holders of
record.
On July 22, 1997, the Company issued an aggregate of 400,000 shares of Common
stock to Alan Fisher and Razi Mohiuddin, the former shareholders of AMBIA, as
consideration for the purchase of all of the outstanding shares of capital
stock of AMBIA, pursuant to an Agreement of Merger and Plan of Reorganization.
The Company relied on Section 4(2) of the Securities Act, as the basis for an
exemption from registration, because the transaction did not involve any
public offering.
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On October 11, 1995, the Company issued an aggregate of 210,000 shares to
Richard Tworek, Mary Margaret Styer and Andrew Fregly, the shareholders of
Merex, as consideration for the acquisition of Merex pursuant to an Asset
Purchase Agreement and Plan of Reorganization. The Company relied on Section
4(2) of the Securities Act as the basis for an exemption from registration,
because the transaction did not involve any public offering.
The Company has agreed to issue shares of Common Stock on a quarterly basis to
each of Richard Bueschel, Laurence Glazer, Robert Leopold, Millard Pryor, Jr.,
Isaac Pollak and Alan Fisher, the non-employee directors of the Company, as
payment of consulting fees for 1997 in the amount of $10,000 per non-employee
director. For the year ended December 31, 1997, each non-employee director was
entitled to 1,100 shares of Common Stock. Certificates evidencing such shares
and the number of shares to which the non-employee directors will be entitled
for the last quarter of 1997 were issued in January, 1998. The Company is
relying on Section 4(2) of the Securities Act as the basis for an exemption
from registration, because these shares will be issued by the Company solely
to its non-employee directors, and thus will not involve any public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPANY OVERVIEW
The Company provides electronic document management software and systems to
corporate and government workgroups, departments and enterprises. Prior to
1994, substantially all of the company's business was derived from the sale,
support, and maintenance of INQUIRE/Text, a full-text retrieval product used
for storing, indexing, retrieving and managing large collections of documents
on IBM and IBM-compatible mainframes. INQUIRE/Text revenue of all types
(licenses, maintenance and consulting) accounted for approximately 49% and 40%
of revenues for the years ended December 31, 1996, and 1997, respectively. The
Company expects INQUIRE/Text revenues to decrease over time due to the
decreasing reliance of users on mainframe hardware and the maturity of the
market. In 1994, the Company shifted its focus to providing a broader range of
document and information management solutions deliverable through
client/server and intranet technology. As a result, client/server, intranet
consulting revenues, third-party software product revenues, and VFC revenues
increased from 51% of the Company's revenues in 1996 to 60% in 1997.
In January 1997, the Company introduced VFC, and began to market VFC in the
second quarter of 1997. The Company anticipates that VFC will constitute an
increasing percentage of the Company's revenue for the foreseeable future. In
December 1997, the Company entered into an agreement with Adobe Systems, Inc.
to cross license and co-market certain technologies (the "Cross-License
Agreement"). The Company expects to receive more than $700,000 in consulting
fees pursuant to a consultant agreement ("Consulting Agreement") entered into
in connection with the Cross-License Agreement for modifications to certain of
its technologies so that it can be incorporated into future Adobe products. Of
the fees payable under the Consulting Agreement, $350,000 has been recognized
by the Company as of December 31, 1997. Of this, $225,000 was paid in 1997 and
$125,000 was paid in January 1998. Another $125,000 was paid by January 31,
1998, $125,000 becomes due upon Adobe's acceptance of the initial version of
the modifications, and the balance of $129,000 becomes due and payable upon
Adobe's acceptance of the final product. The Consulting Agreement may be
terminated by Adobe upon 30 days' written notice and payment of 10% of the
next unpaid installment of the consulting fee. Upon acceptance of the
modifications by Adobe, the Company will earn a license fee of $1,000,000.
Although the Company has received approximately 50% of the license fee under
the Cross-License Agreement, any license fees received by the Company are
subject to refund if the Company fails to deliver an acceptable final product
to Adobe. The Company will not recognize any revenue with respect to these
license fees until the product has been accepted and the fees are no longer
refundable, which is expected to occur in the second half of 1998. The Company
recognizes revenue from its product development services in both 1997 and 1998
on a percentage of completion basis. Certain components of VFC that will be
licensed to Adobe will be incorporated in future Adobe products. In addition,
certain Adobe products will display a "VFC Button" that will provide a direct
link to VFC or to VFC marketing information if the user does not have VFC.
Adobe will receive royalties based on any sales of VFC arising out of this
marketing arrangement, and will also receive commissions for any VFC sales
that it makes directly. The Company estimates that the total effort required
to develop the features to be included in the initial version of the modified
technology to be 133 person-weeks and the time to develop the initial and beta
versions will be 52 person-weeks over a six-month period. The Company has
assigned 12 engineers to develop the modifications. The Company has completed
a substantial portion of the modifications.
As of December 31, 1997, VFC has been sold to large organizations with
significant document processing requirements, such as the Department of
Energy, AT&T, State Street Bank and the U.S. Army Signal Corps. Due to limited
sales and support resources and the recent introduction of VFC, the Company
has focused on selling VFC to customers that have multiple servers that can
utilize VFC. The Company expects that these customers will help it in the
future both as references and through further sales within the customers'
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organizations. Evaluation copies of VFC software have been installed at a
number of large organizations. Most of these installations have resulted in
orders, although a few customers have returned the evaluation software without
placing an order. The sales cycle for initial sales of VFC has ranged from
three to nine months. The Company believes that the sales cycle for repeat
sales to customers may be shorter. VFC is licensed at an introductory price of
$4,995 per server. The Company plans to increase the price of VFC in the first
half of 1998. The Company also provides support packages and extension
products at an additional price. The Company offers annual maintenance for VFC
at a cost of 20% of the purchase price. As of December 31, 1997, annual
maintenance sales for VFC were immaterial.
On July 22, 1997, the Company acquired all of the common stock of AMBIA in
consideration for 400,000 shares of the Company's Common Stock with a fair
value of $7.75 per share, which was equivalent to the trading price of the
Company's Common Stock on such date. As a result of the acquisition,
outstanding options to purchase 390,000 shares of AMBIA common stock were
converted into options to acquire approximately 35,000 shares of the Company's
Common Stock at an exercise price of $1.69 per share. The fair value of the
options is recorded as part of the acquisition cost. The total acquisition
cost was approximately $3,461,000, including the direct costs of the
acquisition. Approximately $3,292,000 was allocated to goodwill, $25,000 was
allocated to acquired tangible assets and $144,000 was allocated to acquired
intangible assets, which did not include AMBIA's work force. The Company did
not allocate any amount to AMBIA's work force because of the Company's belief
that businesses located in Silicon Valley, such as AMBIA, experience high
personnel turnover. The acquired intangible assets and goodwill are being
amortized over two years and seven years, respectively. The acquisition was
treated as a purchase. For the year ended December 31, 1996 (AMBIA was
incorporated on May 1, 1996), AMBIA's revenues were $835,000, and its net loss
was $676,000. AMBIA is now a subsidiary of the Company.
At December 31, 1997, the Company had a net operating loss ("NOL") aggregating
approximately $8,447,000 available to affect future taxable income. Under
Section 382 of the Internal Revenue Code of 1986, as amended ("Code"),
utilization of prior NOLs is limited after an ownership change, as defined in
Section 382, to an amount equal to the value of the loss corporation's
outstanding stock immediately before the date of the ownership change
multiplied by the federal long-term tax-exempt rate in effect during the month
that the ownership change occurred. As a result of the AMBIA acquisition, the
Company is subject to limitations on the use of its NOL as provided under
Section 382. Accordingly, there can be no assurance the Company will be able
to utilize a significant amount of NOLs.
Any amounts paid by customers prior to the actual performance of services are
recorded as deferred revenue until earned, at which time they are recognized
in accordance with the type of contract. The margins realized on transactions
involving deferred revenue depend on the type of service rendered by the
Company. In general, most deferred revenue is generated by software
maintenance contracts. These contracts have high margins. Most of the
Company's maintenance revenue pertains to INQUIRE/Text, which is an older
software product. The Company's costs under maintenance contracts are low and
consequently, the gross margin is high. The balance of deferred revenue
generally relates to consulting services, which carry lower margins than
maintenance contracts.
The components of the Company's cost of revenue depend on the product or
service. For consulting, the most significant item is the direct labor cost of
the consultants. Other components include any subcontractor costs, any
non-labor direct costs such as travel and any associated indirect costs (e.g.,
office rent, administration, etc.) allocated to the consulting engagement.
Indirect costs are allocated based on head count and square footage of office
space. For third-party product sales, the cost of revenue includes the cost
incurred by the Company to acquire the product, shipping and delivery charges,
associated taxes, any customization work done by the Company, and any special
packaging costs incurred prior to shipment. The cost of maintenance revenue
includes the customer service and software engineering personnel supporting
the product and an allocation of associated indirect costs based on head count
and square footage of office space. For products that have been developed
internally, the Company includes shipping, delivery, packaging, production,
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the direct labor of personnel involved in delivering and installing the
product and any associated expenses involved with the installation.
Future operating results will depend upon many factors, including the demand
for the Company's products, the effectiveness of the Company's efforts to
integrate various products it has developed or acquired and to achieve the
desired levels of sales from such product integration, the level of product
and price competition, the length of the company's sales cycle, seasonality of
individual customer buying patterns, the size and timing of individual
transactions, the delay or deferral of customer purchases and implementations,
the budget cycles of the Company's customers, the timing of new product
introductions and product enhancements by the Company and its competitors, the
mix of sales by products, services and distribution channels, acquisitions by
competitors, the ability of the Company to develop and market new products and
control costs, and general domestic economic and political conditions.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
REVENUES
Total revenue increased by $1,084,000, or 11%, from $9,560,000 for the year
ended December 31, 1996 to $10,644,000 for the year ended December 31, 1997.
The Company derived revenues from consulting services, sales of third party
products, sales of INQUIRE/Text-related products and services and maintenance
related thereto, and sales of the Company's software products. Revenues from
consulting services and third party products, as well as training, increased
by $612,000, or 9%, from $6,765,000 for the year ended December 31, 1996 to
$7,377,000 for the year ended December 31, 1997, due to an increase in
third-party product sales and training. The VFC family of products which
includes the Company's VFC and AMBIA software products were introduced during
1997 and produced $644,000 in revenue during the third and fourth quarters of
1997, including $569,000 in AMBIA revenues. The first sale of these products
was recorded in July of 1997. Revenue generated primarily from
INQUIRE/Text-related products and maintenance decreased by $169,000, or 6%,
from $2,794,000 for the year ended December 31, 1996 to $2,625,000 for the
year ended December 31, 1997. The Company expects that INQUIRE/Text-related
revenues will continue to decline over time as customers move applications off
mainframes.
GROSS PROFIT
Gross profit increased by $379,000, or 9%, from $4,103,000 for the year ended
December 31, 1996 to $4,482,000 for the year ended December 31, 1997. The
increase in gross profit was due primarily to increased revenue, particularly
in the high margin VFC family of products. This was partially offset by the
decline in high margin INQUIRE/Text-related revenues.
Gross margin as a percent of revenues decreased by 1% from 43% for the year
ended December 31, 1996 to 42% for the year ended December 31, 1997. The
decrease was due to the growth of lower-margin third party product sales
during 1997.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $1,656,000, or 203%, from $816,000
for the year ended December 31, 1996 to $2,472,000 for the year ended December
31, 1997. The principal cause of the increase was the development of the VFC
family of products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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Selling, general and administrative expenses increased $2,630,000, or 92%,
from $2,869,000 for the year ended December 31, 1996 to $5,499,000 for the
year ended December 31, 1997. The increase was due primarily to increases in
the sales staff and in marketing expenditures related to the introduction of
the VFC family of products.
INTEREST INCOME AND EXPENSE
Interest income decreased $33,000, or 34%, from $96,000 for the year ended
December 31, 1996 to $63,000 for the year ended December 31, 1997. The
decrease was due to lower balances of cash, cash equivalents, and short term
investments during the year ended December 31, 1997. The Company invested in
short-term, highly liquid money market instruments only.
Interest expense increased $33,000, or 300%, from $11,000 for the year ended
December 31, 1996 to $44,000 for the year ended December 31, 1997. The
increase was due to the increased utilization of the line of credit during the
year ended December 31, 1997.
NET INCOME
Net income decreased $3,968,000, from $503,000 for the year ended December 31,
1996 to a net loss of $3,465,000 for the year ended December 31, 1997. The
decrease was due to the factors discussed above. As a result of preferred
stock dividends of $58,000 paid in 1996, net income available to holders of
common stock amounted to $445,000 or $0.23 per share basic and $0.22 per share
on a diluted basis for the year ended December 31, 1996. During 1996, all of
the outstanding preferred stock was converted into common stock. Therefore,
there were no preferred stock dividends in 1997. For the year ended December
31, 1997, the net loss allocated to holders of common stock was $3,465,000, or
$1.39 per share on both a basic and diluted basis.
ACCOUNTS RECEIVABLE
Accounts receivable increased $1,250,000, or 82%, from $1,522,000 as of
December 31, 1996 to $2,772,000 as of December 31, 1997. The reason for the
increase was due to the increase in sales during the fourth quarter of 1997
compared to the fourth quarter of 1996. Fourth quarter 1997 sales increased by
$1,408,000 over the fourth quarter of 1996.
ACCOUNTS PAYABLE
Accounts payable increased $1,155,000 or 353%, from $327,000 as of December
31, 1996 to $1,482,000 as of December 31, 1997. The increase was due to an
increase in expenses during the fourth quarter of 1997 of $1,191,000 compared
to the fourth quarter of 1996 and an increase in the aging of the accounts
payable.
NOTES PAYABLE
Notes payable increased $880,000, from $0 as of December 31, 1996 to $880,000
as of December 31, 1997. The increase was due to interim borrowings incurred
under a line of credit to help finance the development of the VFC family of
products until more permanent financing could be put in place in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash, cash equivalents and short-term
investments of $288,000 and a working capital deficit of $1,693,000. The
Company had borrowings of $880,000 as of December 31, 1997. The Company
maintains a line of credit with Merrill Lynch Business Financial Services,
Inc. for up to $1,000,000 based upon eligible receivables. Interest on this
debt is calculated at a per annum rate equal to the sum of 2.9% plus the
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30-day commercial paper rate. Currently, this per annum rate approximates
prime. The facility expires in July 1998. The line of credit is contingent
upon the Company continuing to meet certain general funding requirements,
including the absence of any material adverse change in the Company's business
or financial condition, the continued accuracy of the Company's
representations and warranties and the provision of annual and quarterly
financial information. The Company is currently in compliance with these
funding requirements. Subsequent to year-end 1997, the Company paid off the
line of credit in full.
Net cash used in operating activities for the year ended December 31, 1997 of
$2,579,000 was due to the Company's net loss for the period of $3,465,000, an
increase in accounts receivable of $1,249,000, partially offset by an increase
in accounts payable of $1,155,000, depreciation and amortization expense of
$323,000, goodwill amortization of $266,000, and an increase in deferred
revenue of $438,000.
Net cash provided by investing activities of $486,000 for the year ended
December 31, 1997 was derived primarily from the maturity of short-term
investments, offset by purchases of property and equipment.
Net cash provided by financing activities of $1,111,000 came from the proceeds
of short-term borrowing and the issuance of common stock through stock option
exercises offset by the payments of notes payable for the year ended December
31, 1997.
Net cash flow from operating activities for the year ended December 31, 1997
were not sufficient to fund the operations of the business. However, based
upon the Company's expectations of growth in future revenues from both its
consulting business and its VFC family of products, and based on the
successful financing consummated on February 20, 1998, management believes
that available and projected resources will be sufficient to meet its working
capital requirements through at least December 31, 1998.
Net cash provided by operating activities for the year ended December 31, 1996
of $1,140,000 was due primarily to the Company's net income, a decrease in
accounts receivable, significant non-cash expenses such as depreciation and
amortization, and an increase in accrued expenses, partially offset by a
decrease in deferred revenue. Net cash used in investing activities for the
year ended December 31, 1996 of $1,396,000 was due to the purchase of short
term investments and property and equipment. Net cash provided by financing
for the year ended December 31, 1996 of $46,000 was due to the issuance of
stock, offset by payments on capital lease obligation and preferred stock
dividends. At December 31, 1996, the Company had cash, cash equivalents, and
short-term investments of $2,213,000.
Effective February 17, 1998 and consummated February 20, 1998, the Company
sold 1,600,000 shares of common stock in an underwritten public offering for a
price of $5.00 per share, or a total of $8.0 million. The Company plans to use
the approximately $6.65 million of net proceeds from the offering to expand
the Company's sales and marketing activities, for research and development,
for the repayment of approximately $1.0 million of institutional debt and for
working capital and general corporate purposes.
Since December 31, 1997, the Company has continued to incur losses and
management's projections indicate that the Company will continue to generate
operating losses and negative cash flow through the third quarter of 1998. The
Company anticipates, based on its current plans for the proceeds from the
financing together with its operating cash flows, to meet anticipated cash
requirements through the end of 1999. The Company expects to operate on a
positive cash flow basis beginning in the fourth quarter of 1998, as a result
of increased sales of VFC. The Company estimates that VFC will account for
approximately 25% to 30% of the Company's revenues in 1998. However, there can
be no assurance that this will be the case. The Company expects that, on a per
product basis, the gross margin on VFC related sales will range from 60% to
75%, although there can be no assurance that this will be the case. Although
sales of VFC, including AMBIA products, accounted for less than $700,000 for
the year ended December 31, 1997, the first sale of VFC was not recorded until
the third quarter of 1997. The Company believes VFC sales will increase
through the end of the year 2000. There can be no assurance, however that VFC
-19-
<PAGE>
sales will increase, or if they increase, that they will continue to do so
through the year 2000 or that revenues from such sales will grow. The
Company's actual cash requirements may vary materially from those now planned
and will depend upon numerous factors, including the general market acceptance
of the Company's new and existing products and services, the growth of the
Company's distribution channels, the technological advances and activities of
competitors, and other factors. If the Company is not successful in developing
and marketing VFC, the Company's cash flow will be materially and adversely
affected, and the Company may need to implement certain cost control measures
or obtain additional financing. There can be no assurance such financing will
be available on reasonable terms or at all. If such financing is not available
the Company will be materially and adversely affected. Even if such financing
is available, it may involve significant dilution to the then holders of
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.
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 Item 9 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 Item 10 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 Item 11 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 Item 12 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.
-20-
<PAGE>
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.
(b) Index to Consolidated Financial Statements: PAGE
Report of Independent Public Accountants 25
Consolidated Statements of Operations - Each of the 26
two years in the period ended December 31, 1997
Consolidated Balance Sheets - December 31, 1997 and 1996 27-28
Consolidated Statements of Shareholders' Equity - Each of 29
the two years in the period ended December 31, 1997
Consolidated Statements of Cash Flows - Each of the two 30
years in the period ended December 31, 1997
Notes to Consolidated Financial Statements - December 31, 1997 31-40
and 1996
(b) REPORTS ON FORM 8-K.
On August 6, 1997, the Company filed a Current Report on Form 8-K, dated July
22, 1997, as amended on October 6, 1997, to report under Item 2 thereof the
Company's acquisition of 100% of the issued and outstanding capital stock of
AMBIA Corporation and to include, under Items 7(a) and 7(b) thereof, the
financial statements and pro forma financial information relating to such
acquisition transaction.
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
2.1 Plan and Agreement of Merger, dated as of March 10, 1995, by
and between Infodata Systems Inc. and Virginia Infodata
Systems Inc. (incorporated herein by reference to Exhibit
2.1 to the Company's Registration Statement on Form SB-2
(Registration No. 333-42611) dated December 18, 1997, as
amended).
2.2 Asset Purchase Agreement and Plan of Reorganization, dated
as of October 6, 1995, among the Company, Merex, Inc. and
Richard M. Tworek, Mary Margaret Styer and Andrew M. Fregly
(incorporated by reference to the Company's Current Report
on Form 8-K dated October 11, 1995).
2.3 Agreement of Merger and Plan of Reorganization, dated as of
July 22, 1997, by and among the Company, AMBIA Corporation,
Alan Fisher and Razi Mohiuddin, Software Partners, Inc. and
Ambia Acquisition Corporation (incorporated by reference to
the Company's Current Report on Form 8-K dated August 6,
1997 and Form 8-K/A dated October 6, 1997).
3.1 Articles of Incorporation (incorporated by reference to
Exhibit A of the Company's Proxy Statement dated April 10,
1995).
-21-
<PAGE>
3.2 Articles of Amendment of Articles of Incorporation of the
Company, dated as of August 12, 1996 (incorporated herein by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form SB-2 (Registration No. 333-42611) dated
December 18, 1997, as amended). 3.3 By-Laws (incorporated by
reference to Exhibit B to the Company's Proxy Statement
dated April 10, 1995).
4.1 Form of Underwriters' Purchase Option (incorporated herein
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form SB-2 (Registration No. 333-42611) dated
December 18, 1997, as amended).
10.1 Cross License Agreement, dated as of December 3, 1997, by
and between the Company and Adobe Systems Incorporated
(incorporated herein by reference to Exhibit 10.1 to the
Company's Registration Statement on Form SB-2 (Registration
No. 333-42611) dated December 18, 1997, as amended).
10.2 Office Building Lease, dated as of April 12, 1993, by and
between the Company and Monument Fairfax Associates for One
Monument Drive (incorporated by reference to Exhibit 10(dd)
to the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994).
10.3 Lease Agreement, dated as of July 20, 1993, between The
Landmark and Software Partners, Inc. for 2013 Landings
Drive, Mountain View, California (incorporated herein by
reference to Exhibit 10.3 to the Company's Registration
Statement on Form SB-2 (Registration No. 333-42611) dated
December 18, 1997, as amended).
10.4 Lease for Data Processing Service Agreement, dated as of
July 29, 1994, between the Company and Financial
Technologies Inc. (incorporated by reference to Exhibit
10(ee) to the Company's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994).
10.5 Executive Separation Agreement, dated as of October 20,
1986, between the Company and Harry Kaplowitz (incorporated
by reference to Exhibit 10(a) to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1993).
10.6 Executive Separation Agreement, dated as of October 20,
1986, between the Company and Robert Loane (incorporated by
reference to Exhibit 10(b) to the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1993).
10.7 Employment and Non-Compete Agreement, dated as of July 22,
1997, as amended, between the Company, AMBIA Corporation and
Razi Mohiuddin (incorporated herein by reference to Exhibit
10.7 to the Company's Registration Statement on Form SB-2
(Registration No. 333-42611) dated December 18, 1997, as
amended).
10.8 Employment and Non-Compete Agreement, dated as of October
11, 1995, as amended, between the Company and Richard M.
Tworek (incorporated herein by reference to Exhibit 10.8 to
the Company's Registration Statement on Form SB-2
(Registration No. 333-42611) dated December 18, 1997, as
amended).
-22-
<PAGE>
10.9 Letter Employment Agreement, dated as of November 5, 1997,
as amended, between the Company and James Ungerleider
(incorporated herein by reference to Exhibit 10.9 to the
Company's Registration Statement on Form SB-2 (Registration
No. 333-42611) dated December 18, 1997, as amended).
10.10 Note, Loan and Security Agreement, dated as of October 31,
1997, between the Company and Merrill Lynch Business
Financial Services Inc. (incorporated herein by reference to
Exhibit 10.10 to the Company's Registration Statement on
Form SB-2 (Registration No. 333-42611) dated December 18,
1997, as amended).
10.11 Loan and Registration Right Agreement, dated as of October
3, 1996, between the Company and Richard M. Tworek
(incorporated herein by reference to Exhibit 10.11 to the
Company's Registration Statement on Form SB-2 (Registration
No. 333-42611) dated December 18, 1997, as amended).
10.12 1995 Stock Option Plan (incorporated by reference to Exhibit
4(a) to the Company's Registration Statement on Form S-8,
dated as of June 13, 1995).
10.13 1997 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 4(a) to the Company's Registration
Statement on Form S-8 dated as of June 27, 1997).
10.14 Letter Agreement, dated as of December 14, 1997, extending
the Employment and Non-Compete Agreement between the Company
and Richard M. Tworek (incorporated herein by reference to
Exhibit 10.14 to the Company's Registration Statement on
Form SB-2 (Registration No. 333-42611) dated December 18,
1997, as amended).
10.15 Agreement on Confidential Information, Inventions and Ideas,
dated as of December 17, 1997, between the Company and James
Ungerleider (incorporated herein by reference to Exhibit
10.15 to the Company's Registration Statement on Form SB-2
(Registration No. 333-42611) dated December 18, 1997, as
amended).
10.16 Consulting Agreement, dated as of October 24, 1997, between
the Company and Adobe Systems Incorporated (incorporated
herein by reference to Exhibit 10.16 to the Company's
Registration Statement on Form SB-2 (Registration No.
333-42611) dated December 18, 1997, as amended).
21.1 Subsidiaries of the Company (incorporated herein by
reference to Exhibit 21.1 to the Company's Registration
Statement on Form SB-2 (Registration No. 333-42611) dated
December 18, 1997, as amended).
23.1 Consent of Arthur Andersen, L.L.P.
27.1 Financial Data Schedule
</TABLE>
-23-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act , the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: March 30, 1998
INFODATA SYSTEMS INC.
BY: /s/JAMES A. UNGERLEIDER
-----------------------
James A. Ungerleider
President and Chief Executive Officer
In accordance with the Exchange Act , 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>
/s/RICHARD T. BUESCHEL Chairman of the Board March 30, 1998
-------------------------
Richard T. Bueschel
/s/CHRISTOPHER P. DETTMAR Chief Financial Officer (Principal March 30, 1998
------------------------- Accounting and Financial Officer)
Christopher P. Dettmar
/s/ALAN S. FISHER Director March 30, 1998
-------------------------
Alan S. Fisher
/s/LAURENCE C. GLAZER Director March 30, 1998
-------------------------
Laurence C. Glazer
/s/HARRY KAPLOWITZ Executive Vice President and Director March 30, 1998
-------------------------
Harry Kaplowitz
/s/ROBERT M. LEOPOLD Director March 30, 1998
-------------------------
Robert M. Leopold
/s/ISAAC M. POLLAK Director March 30, 1998
-------------------------
Isaac M. Pollak
/s/MILLARD H. PRYOR, JR. Director March 30, 1998
-------------------------
Millard H. Pryor, Jr.
/s/RICHARD M. TWOREK Executive Vice President and Director March 30, 1998
-------------------------
Richard M. Tworek
/s/JAMES A. UNGERLEIDER President, Chief Executive Officer March 30, 1998
------------------------- and Director
James A. Ungerleider
</TABLE>
-24-
<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, 1997
and 1996, 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, 1997 and 1996, 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. /s/ARTHUR ANDERSEN LLP
March 6, 1998
-25-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
Year Ended December 31,
1997 1996
---- ----
<S> <C> <C>
Revenues....................................................... $10,644 $9,560
Cost of revenues............................................... 6,162 5,457
-------- -------
Gross profit............................................ 4,482 4,103
-------- -------
Operating expenses:
Research and development :................................... 2,472 816
Selling, general, and administrative......................... 5,499 2,869
-------- -------
7,971 3,685
Operating income........................................ (3,489) 418
-------- -------
Interest income................................................ 63 96
Interest expense............................................... (44) (11)
-------- -------
Income before income taxes..................................... (3,470) 503
Provision for income taxes..................................... (5) --
-------- -------
Net income..................................................... $(3,465) $ 503
======== =======
Preferred dividends............................................ -- 58
-------- -------
Net income available to common shareholders.................... $(3,465) $ 445
======== =======
Per share:
Net income available to common shareholders
Basic...................................................... $ (1.39) $ .23
======== =======
Diluted.................................................... $ (1.39) $ .22
======== =======
Weighted average shares outstanding ........................... 2,498 1,945
</TABLE>
The accompanying notes are an integral part of these statements.
-26-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 284 $1,266
Short-term investments.................................... 4 947
Accounts receivable, net of allowance of $43 in 1997......
and $80 in 1996......................................... 2,772 1,522
Other current assets...................................... 174 185
------- -------
Total current assets.......................... 3,234 3,920
------- -------
Property and equipment, at cost:
Furniture and equipment................................... 2,817 2,373
Less: accumulated depreciation and amortization........... (2,220) (1,897)
------- -------
597 476
Goodwill, net of accumulated amortization of $296 in 1997 and
$31 in 1996............................................... 3,371 274
Other assets.................................................... 309 137
Software development costs, net of accumulated
amortization of $2,094 in 1997 and $2,052 in 1996
(Note 3).................................................. 42 84
Total assets.................................................... $7,553 $4,891
======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
-27-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations.............. $ 26 $ 46
Current portion of note payable........................... 880 --
Accounts payable.......................................... 1,482 327
Accrued expenses.......................................... 928 823
Deferred revenue.......................................... 1,592 1,079
Current portion of deferred rent.......................... 19 33
-------- --------
Total current liabilities..................... 4,927 2,308
-------- --------
Capital lease obligations....................................... 6 33
Deferred revenue................................................ -- 75
Deferred rent................................................... -- 19
-------- --------
Total liabilities............................. 4,933 2,435
-------- --------
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock .......................................... -- --
Common stock, $.03 par value, 6,666,666 shares
authorized; 2,754,784 and 2,277,865 shares issued and
outstanding in 1997 and 1996, respectively............. 82 68
Additional paid-in capital................................ 12,670 9,055
Accumulated deficit....................................... (10,132) (6,667)
-------- --------
Total shareholders' equity...................................... 2,620 2,456
-------- --------
Total liabilities and shareholders' equity...................... $ 7,553 $ 4,891
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
-28-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<CAPTION>
Additional Total
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, 1995....... 131,500 $ 132 1,465,336 $44 $ 8,056 $ (6,467) $ 1,765
1:6 Common stock dividend.......... 241,063 7 636 (643) 0
Redemption of preferred shares for
common............................. (131,500) (132) 394,614 12 120 -- 0
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
Employee stock purchase plan ...... 3,952 -- 26 -- 26
AMBIA acquisition ................. 400,000 12 3,339 -- 3,351
Exercise of stock options ......... -- -- 72,967 2 239 -- 241
Other ............................. -- -- -- -- 11 -- 11
Net loss .......................... -- -- -- -- -- (3,465) (3,465)
--------- ----- ---------- ---- ------- --------- --------
Balance at December 31, 1997....... -- $ -- 2,754,784 $82 $12,670 $(10,132) $ 2,620
--------- ----- ---------- ---- ------- --------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
-29-
<PAGE>
INFODATA SYSTEMS INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
Year Ended December 31,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................................ $(3,465) $ 503
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization................................. 323 264
Software amortization......................................... 42 42
Goodwill and other intangible amortization.................... 266 48
Changes in operating assets and liabilities:
Accounts receivable........................................ (1,249) 379
Prepaid royalties and other current assets................. 11 (21)
Other assets .............................................. (172) --
Accounts payable .......................................... 1,155 (8)
Accrued expenses........................................... 105 175
Deferred revenue........................................... 438 (209)
Deferred rent.............................................. (33) (33)
-------- --------
Net cash (used in) provided by operating activities..... (2,579) 1,140
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net......................... (457) (357)
Business acquisition............................................. -- (23)
Loan to officer ................................................. -- (70)
Purchases of short-term investments.............................. -- (943)
Proceeds from maturity of short-term investments................. 943 29
Other............................................................ -- (32)
-------- --------
Net cash provided by (used in) investing activities..... 486 (1,396)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations............................ (47) (108)
Proceeds from short-term borrowings.............................. 1,627 --
Payments of notes payable........................................ (747) (2)
Preferred stock dividends........................................ -- (88)
Issuance of common stock......................................... 278 244
-------- --------
Net cash provided by financing activities........... 1,111 46
-------- --------
Net decrease in cash and cash equivalents................................. (982) (210)
Cash and cash equivalents at beginning of year............................ 1,266 1,476
-------- --------
Cash and cash equivalents at end of year.................................. $ 284 $ 1,266
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
-30-
<PAGE>
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., Infodata Research and Development Corporation, and AMBIA
Corporation. These entities are collectively referred to herein as the
"Company". All significant inter-company accounts and transactions have been
eliminated in consolidation.
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
During 1997 the Company released a new proprietary software product, Virtual
File Cabinet ("VFC"). The Company has incurred significant costs related to
this product. As a result of these costs, the Company had a working capital
deficit of approximately $1.7 million and had incurred a net loss of
approximately $3.5 million as of and for the year ended December 31, 1997. The
Company will continue to incur these costs in the future. To finance its
investment in VFC and to mitigate its liquidity risk, the Company sold 1.6
million shares of common stock in a public offering in February 1998. At $5.00
per share, the offering generated gross proceeds of $8 million (see Note 8).
Additionally, the Company has developed a plan to increase revenues through
sales of its VFC product line; however, there can be no assurance that the
Company will be able to adequately increase product sales. Therefore, the
Company has also developed a plan to implement certain cost control measures
during 1998. Also, the Company's operations are subject to certain other risks
and uncertainties, including uncertainty of future operating results,
fluctuations in quarterly results, change in mix of products, decline in
INQUIRE/Text sales and reliance on VFC, lengthy sales and implementation
cycles, rapid technological changes and product obsolescence, competition,
risks associated with sales channels, and dependence on government contracts
and security clearances.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue from software licenses upon delivery of the
software product to the customer or upon customer acceptance, if a trial
period exists. Revenues from post contract support, including revenue bundled
with the initial license fee, are recognized ratably over the period that
customer support services are provided. Software service revenue is recognized
as performed.
-31-
<PAGE>
Revenues from consulting and professional services 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 materials contracts. Revenues
from cost reimbursement contracts are recognized as costs are incurred. Any
amounts paid by customers prior to the actual performance of services are
recorded as deferred revenue until earned, at which time they are recognized
in accordance with the type of contract.
The American Institute of Certified Public Accountants has issued Statement of
Position ("SOP") 97-2, "Software Revenue Recognition", that supersedes SOP
91-1. SOP 97-2 provides additional guidance with respect to multiple elements,
returns, exchanges, and platform transfer rights; resellers; services; funded
software-development arrangements; and contract accounting. SOP 97-2 is to be
implemented for fiscal years beginning after December 15, 1997. The Company
believes that the adoption of SOP 97-2 will not have a material impact on the
Company's financial statements.
Revenues from foreign customers totaled approximately $382,000 and $361,000
for the years ended December 31, 1997 and 1996, respectively.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments with an original maturity of 90 days or less are
considered to be cash equivalents. At December 31, 1997 and 1996, the Company
had $0 and $768,000, 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. Available-for-sale securities are carried at fair
value, with unrealized gains and losses reported as a separate component of
stockholders' equity. There were no unrealized gains or losses for the years
ended December 31, 1997 and 1996. 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, 1997 and 1996, certificates of deposit included
in short-term investments totaled approximately $4,000 and $4,000,
respectively, which were restricted pursuant to certain capital lease
obligations.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest totaled $37,000 and $11,000 in 1997 and 1996,
respectively. Cash payments for income taxes totaled $0 and $4,000 in 1997 and
1996, 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 created by the Merex, Inc. acquisition is being amortized using the
straight-line method over a life of ten years. Goodwill created by the AMBIA
acquisition (see Note 2) is being amortized using the straight-line method
over seven years. On a periodic basis, the expected future undiscounted cash
flows are compared with the carrying value of goodwill to test for potential
-32-
<PAGE>
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, 1997, the Company does not
believe there has been an impairment of goodwill.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
EARNINGS PER SHARE
The Company implemented Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," at December 31, 1997. SFAS No. 128 replaces the
presentation of primary and fully diluted earnings per share with basic and
diluted earnings per share and requires a reconciliation of the numerator and
denominator of basic earnings per share to diluted earnings per share. The
1996 earnings per share amount has been restated in accordance with SFAS No.
128. The implementation of SFAS No. 128 did not have a material impact on the
Company's financial statements. Earnings per share have been computed using
the weighted average number of common shares outstanding.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1997 1996
Income Shares Per-share Income Shares Per-share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $(3,465) $503
Less: Preferred Dividends (58)
BASIC EPS
Income available to
Common stockholders (3,465) 2,498 (1.39) 445 1,945 $.23
EFFECT OF DILUTIVE SECURITIES
Common stock equivalents -- -- -- 217
Convertible Preferred shares -- -- 58 146
DILUTED EPS
Income available to
common stockholders +
assumed conversions $(3,465) 2,498 (1.39) $503 2,308 $.22
</TABLE>
The effect of options has not been considered for 1997 as it would have
been antidilutive.
SIGNIFICANT CUSTOMERS
Sales to U.S. government agencies totaled approximately $5,640,000 and
$4,255,000 in 1997 and 1996, respectively. As of December 31, 1997 and 1996,
accounts receivable due from U.S. government agencies were approximately
$1,304,000 and $655,000, respectively.
-33-
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of a
statement of financial positon. The Company plans to adopt SFAS No. 130 in the
first quarter of 1998. The Company does not expect SFAS No. 130 to have a
significant impact on its financial statements. SFAS No. 131 requires the
Company to report financial and descriptive information about its reportable
operating segments. The Company will adopt SFAS No. 131 at its year-end
December 31, 1998. The Company is currently evaluating the impact of SFAS No.
131 on its financial statements.
NOTE 2. BUSINESS ACQUISITION
On July 22, 1997, the Company consummated its purchase of substantially all of
the assets and the assumption of certain liabilities of AMBIA, Inc. ("AMBIA"),
in consideration for 400,000 shares of the Company's common stock (restricted
as to sale) with a fair value estimated by the Company's Board of Directors at
$7.75 per share. As a result of the acquisition, outstanding options to
purchase 390,000 shares of AMBIA common stock were converted into options to
acquire 34,665 shares of the Company's common stock at an exercise price of
$1.69 per share. The fair value of the options is recorded as part of the
acquisition cost. The total acquisition cost was approximately $3,461,000
including the direct costs of the acquisition. Approximately $25,000 was
allocated to acquired tangible assets, $144,000 to acquired intangible assets,
and $3,292,000 to goodwill. Subsequent to the acquisition, the Company
determined that the fair value of acquired accounts receivable was
approximately $96,000; as a result, goodwill was adjusted by $96,000 to
reflect the allocation of the purchase price to accounts receivable. The
acquired intangible assets and goodwill are being amortized over two years and
seven years, respectively. The acquisition was treated as a purchase and was
accomplished by means of a merger of a wholly-owned subsidiary of the Company
into AMBIA. AMBIA develops, markets and sells software products and consulting
services, which are complementary to those being developed, marketed and sold
by the Company.
The unaudited pro forma financial information presented below reflects the
acquisition of AMBIA as if the acquisition had occurred on January 1, 1996.
These results are not necessarily indicative of the future operating results
or of what would have occurred had the acquisition been consummated at that
time.
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
------------------ ------------------
December 31, 1996 December 31, 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Revenue.......................................... $10,395,000 $11,569,000
Net loss available to common shareholders........ (743,000) (3,581,000)
Net loss per share .............................. $ (0.32) $ (1.43)
</TABLE>
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,
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<PAGE>
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. There were no software development
costs capitalized for the years ended December 31, 1997 and 1996.
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 both 1996 and
1997.
NOTE 4. INCOME TAXES
At December 31, 1997, the Company had approximately $8,447,000 in net
operating loss carryforwards for income tax reporting purposes. The operating
loss carryforwards expire in varying amounts from 1998 through 2012. The
acquisition of AMBIA during 1997 could limit the extent to which the Company
may utilize these carryforwards in any one year. In addition, at December 31,
1997, the Company had $55,000 in investment tax credit carryforwards expiring
in 1998 through 2000.
The actual income tax expense attributable to pretax income for the year ended
December 31, 1997, and December 31, 1996, respectively, differed from the
amount computed by applying the Federal statutory rate of 34 percent as a
result of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Tax at statutory rate........................... $(1,178,000) $ 171,000
Change in Valuation Allowance................... 1,076,000 (192,000)
Nondeductible amortization...................... 92,000 16,000
Miscellaneous items............................. 10,000 5,000
------------ ----------
$ -0- $ -0-
============ ==========
</TABLE>
The significant components of net deferred tax (liabilities) assets are as
follows as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax liabilities:
Net software development costs.............. $ (16,000) $ (32,000)
Deferred tax assets:
Net operating loss carryforward............. 3,206,000 2,030,000
Investment tax credit and research and
development tax credits carryforward...... 55,000 125,000
Other....................................... 111,000 92,000
------------ -----------
3,372,000 2,247,000
Net deferred tax asset before valuation allowance 3,356,000 2,215,000
Valuation allowance............................. (3,356,000) (2,215,000)
------------ -----------
Net deferred tax asset.......................... $ -- $ --
============ ===========
</TABLE>
-35-
<PAGE>
Under the provisions of SFAS No. 109, "Accounting for Income Taxes," 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
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 per annum
rate equal to the sum of 2.9 percent plus the 30-day commercial paper rate.
Currently, this per annum rate approximates the prime rate. Advances on the
facility are based on eligible billed accounts receivable less than 90 days
old. The facility expires in July 1998. As of December 31, 1997, the Company
had borrowed $880,000 against this line of credit. The balance on the line of
credit was paid in full in February 1998.
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. There was no preferred stock issued and/or
outstanding in 1997.
OPTIONS AND WARRANTS
As a result of the acquisition of AMBIA, each outstanding option ("AMBIA Stock
Option") to purchase shares of AMBIA common stock under the former AMBIA
Equity Incentive Plan (as defined in the Merger Agreement) was converted into
an option ("Replacement Option") to acquire, on the same terms and conditions
as were applicable under such AMBIA Stock Option, 4/45 of a share of Common
Stock of the Company, at an exercise price of $1.69 per share with the same
expiration date as each such AMBIA Stock Option. Replacement Options to
purchase a total of 34,665 shares of the Company's Common Stock were granted
to replace the previously granted AMBIA Stock Options. Pursuant to the Merger
Agreement, each Replacement Option is to be treated as a non-qualified stock
option and, if possible, as granted pursuant to the terms and conditions of
the 1995 Plan and the AMBIA Stock Option agreement entered into by AMBIA and
the participant in the AMBIA Equity Incentive Plan. The 34,665 shares of the
Company's Common Stock underlying the outstanding Replacement Options are not
included in the 1,511,000 shares presently authorized under the 1995 Stock
Option Plan.
In April 1995, the Company's shareholders approved the adoption of the 1995
Stock Option Plan (the "1995 Plan"), which (i) consolidated the Company's 1991
Incentive Stock Option Plan and 1992 Non-Qualified Stock Option Plan and (ii)
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<PAGE>
provided for the automatic grant of stock options to the members of the
Compensation Committee of the Company's Board of Directors. A total of
1,511,000 shares of common stock have been authorized for issuance under
options granted and to be granted under the 1995 Plan at exercise prices which
will not be less than 100% of the fair market value of the underlying shares
on the date of grant of the option. 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 either the 1991 Incentive Stock Option Plan or the 1992
Non-Qualified Stock Option Plan. Options granted under the 1995 Plan are
exercisable until the earlier of five years from the date of grant or one
month after termination of employment. On December 31, 1997, options to
purchase 637,787 shares of common stock were exercisable.
During 1987, the Board of Directors adopted a Stock Warrant Purchase Plan. The
stock subject to this plan is authorized but unissued shares of common stock.
On January 1, 1997, the Stock Warrant Purchase Plan expired. As of December
31, 1997, outstanding warrants for the right to purchase 4,666 shares of
common stock were outstanding.
As of December 31, 1997, the Company had reserved a total of approximately
1,247,000 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>
Weighted Average
Number of Option Price Option Price
Shares Per Share Per Share
----------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 485,529 $1.085-$5.619 $2.989
Granted 359,653 $2.571-$7.875 $4.504
Exercised (176,852) $1.085-$4.655 $3.499
Expired/Canceled (13,196) $1.090-$5.125 $4.834
----------------------------------------------------------
Outstanding at December 31, 1996 655,134 $1.085-$7.875 $3.342
Granted 548,817 $7.063-$11.188 $9.116
Exercised (72,977) $1.085-$10.313 $3.322
Expired/Canceled (40,949) $1.690-$11.188 $5.299
----------------------------------------------------------
Outstanding at December 31, 1997 1,090,025 $1.085-$11.000 $5.956
EXERCISABLE, DECEMBER 31, 1996 396,103 $1.085-$7.875 $2.654
EXERCISABLE, DECEMBER 31, 1997 637,787 $1.085-$11.000 $4.620
</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.
-37-
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Net (loss) income available to common shareholders as reported...... $(3,465) $ 503
Pro forma compensation expense...................................... 0 134
-------- -------
Pro forma net (loss) income......................................... $(3,465) $ 369
</TABLE>
Per share:
Net (loss) income available to common shareholders:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Basic, as reported $(1.39) $ .23
Basic, pro forma $(1.39) $ .19
Diluted, as reported $(1.39) $ .22
Diluted, pro forma $(1.39) $ .16
</TABLE>
The weighted average fair value of options granted in 1997 and 1996 was $5.37
and $4.31, 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 1997 and 1996: no dividend yield, expected
volatility of 63.0 percent and expected life of five years. The risk-free
interest rate for 1997 and 1996 was 6.00 percent and 6.21 percent,
respectively.
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.
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 property and equipment. 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 payments of capital lease obligations as of December 31, 1997, are
as follows:
<TABLE>
<S> <C>
1998.............................................. $ 27,400
1999.............................................. 6,200
2000.............................................. --
---------
Total minimum payments................... 33,600
Less - Amounts representing interest.............. (1,100)
---------
Present value of minimum lease payments........... 32,500
Less - Current portion............................ (26,400)
---------
Long-term portion................................. $ 6,100
=========
</TABLE>
-38-
<PAGE>
OPERATING LEASES
In 1993, the Company entered into a lease for its corporate headquarters
facility in Fairfax, Virginia. This lease originally expired on July 31, 1998
("Base Lease") but was renewed in November 1997 and now expires on July 31,
2003. Under the terms of the Base 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 Base Lease.
During 1996, the Company incurred approximately $53,000 of rent expense
related to space and equipment for an off-site training facility under a
month-to-month lease. The Company incurred $84,000 of rent expense related to
the off-site training facility in 1997. The month-to-month lease was
terminated as of November 30, 1997.
On July 22, 1997, the Company assumed responsibility for leased office space
in Mountain View, California as a result of its acquisition of AMBIA
Corporation. This lease expires on May 31, 1998 and the Company is discussing
the possibility of extending the lease with the landlord. Payments under the
lease that were the responsibility of the Company were approximately $37,000
in 1997.
Future minimum rental payments under these leases are as follows:
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
1998 $622,000
1999 $741,000
2000 $763,000
2001 $676,000
2002 $618,000
2003 $378,000
</TABLE>
Effective September 1997, the Company entered into a one-year agreement with a
third party to procure outside mainframe-related data processing services. The
minimum commitment under this agreement amounts to $50,000 until termination
in August 1998.
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 $41,000 in 1997 and $32,000 in 1996. 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 1997 or 1996.
CONTINGENCIES
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, 1991, and in the opinion of
management, adjustments resulting from the completion of such audits are not
-39-
<PAGE>
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 $210,000 and
$195,000 in 1997 and 1996, respectively, for services rendered by certain
Directors of the Company. Amounts payable for these services to companies
employing these Directors were $17,500 and $12,500 at December 31, 1997 and
1996, respectively. Amounts receivable from a company employing a director
were $13,000 at December 31, 1996 and $0 at December 31, 1997.
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 9.5
percent at December 31, 1997) adjusted quarterly.
SUBSEQUENT FINANCING
On February 20, 1998, the Company consummated a stock offering that was
declared effective on February 17, 1998. The gross proceeds were $8,000,000,
which consisted of 1,600,000 shares priced at $5.00 per share. The expenses of
the stock offering (including the underwriters' fee, legal fees, accounting
fees, blue sky fees, registration costs, printing and engraving costs, and
other miscellaneous fees) were estimated to be $1,350,000. The resultant net
proceeds were estimated to be $6,650,000.
-40-
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this report.
Washington, D.C. /s/ARTHUR ANDERSEN, LLP
March 6, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000050420
<NAME> INFODATA SYSTEMS, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 284
<SECURITIES> 4
<RECEIVABLES> 2,815
<ALLOWANCES> 43
<INVENTORY> 0
<CURRENT-ASSETS> 3,234
<PP&E> 2,817
<DEPRECIATION> 2,220
<TOTAL-ASSETS> 7,553
<CURRENT-LIABILITIES> 4,927
<BONDS> 0
0
0
<COMMON> 82
<OTHER-SE> 2,538
<TOTAL-LIABILITY-AND-EQUITY> 7,553
<SALES> 10,644
<TOTAL-REVENUES> 10,644
<CGS> 6,162
<TOTAL-COSTS> 14,133
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> (3,470)
<INCOME-TAX> (5)
<INCOME-CONTINUING> (3,470)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,465)
<EPS-PRIMARY> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>
